June 3, 2014
Discovery War in GSE Litigation
The United States filed a motion for a protective order in the Fairholme Funds case in the Court of Federal Claims (the Fairholme Takings case). You may not be familiar with protective orders. By way of background, Federal Rule of Civil Procedure 26(c) states that “The court may, for good cause, issue an order to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense . . ..”
The federal government can request a protective order, like any other party. But there may be some unique policies at issue when the federal government makes such a request. For instance, the federal government may assert a variety of privileges to limit discovery. These may include the deliberative process qualified privilege. This privilege is asserted to protect communications about the government’s decisions. Another example would be the qualified government privilege for official information. This privilege would be asserted to maintain the confidentiality of official government records. These are just two examples – there are a whole other range of privileges that the government might assert. A court’s protective order analysis involving the federal government thus might take into account a variety of legitimate objectives that would not apply in a dispute between two private parties.
Here, the United States is seeking to limit discovery requests that “seek documents that relate in their entirety to the future termination of the conservatorships, with no end date” and “documents that relate (in part) to the future profitability of the Enterprises, again with no end date.” (2) The government argues that
Disclosure of these documents is contrary to the strictures of the Housing and Economic Recovery Act of 2008 (HERA), which bars a court from taking “any action to restrain or affect the exercise of powers or functions” of the Federal Housing Finance Agency (FHFA) as conservator. 12 U.S.C. § 4617(f). The declaration of FHFA Director Melvin Watt explains that disclosure would “have extraordinarily deleterious consequences on the Conservator’s conduct of the ongoing and future operations of the conservatorships.” Decisions about when and how to terminate the conservatorships and the future profitability of the Enterprises are at the heart of FHFA’s responsibilities as conservator, and Court-mandated disclosure of information bearing on such matters would jeopardize the stewardship of the Enterprises. (2, footnotes and some citations omitted)
While some of the government’s language in the motion seems hyperbolic, the court should certainly focus on the deliberative process privilege that the government asserts. Defining its scope will have implications far beyond this case, no matter that this case is incredibly important itself.
As to this case itself, it is interesting to see how even procedural disputes in the GSE lawsuits implicate the current operations of the GSEs as well as their post-conservatorship future. There is no question that the plaintiffs are very aware of their effect on the broader debates about the housing finance system as they press their individual claims in court. It is not yet clear to me how much the Court will weigh those considerations in its decision regarding the reach of the deliberative process privilege.
June 3, 2014 | Permalink | No Comments
June 2, 2014
More on GSE Litigation
Inside Mortgage Finance did a longer story on the GSE litigation that profiled my take on it, Expert: GSE Shareholder Suits at ‘Early Stage’ of a Long Process; Litigation No Barrier to Dissolution, Says Group.
Look for the various lawsuits filed by private owners of Fannie Mae and Freddie Mac stock against the federal government to take a “very long time to be decided,” as the courts may take up to a year to resolve just the introductory motions, according to a legal expert. Beyond that, the litigation over shares in the two government-sponsored enterprises could stretch out to the U.S. Supreme Court.
Brooklyn Law School Professor David Reiss, speaking during a Bloomberg Industries webinar last week, noted that lawsuits stemming from the savings and loan debacle of 20 years ago give a sense of the possible timeframe, but litigation brought by disenfranchised Fannie and Freddie investors against the government offers an entirely different and deeper set of legal complexities.
“These are factually and legally complex cases and don’t trust anyone who thinks this is a slam dunk for any one of the parties,” said Reiss. He added that neither the government nor shareholders of the two government-sponsored enterprises can cut a deal and settle for anything short of total victory.
“I think we have plaintiffs that are going to go all the way on this because they have a lot at stake and they have a lot of resources to pursue their claims. You have a government that doesn’t have an incentive to settle like a normal private party does. They’re not worried about litigation costs or time, so I foresee this going on for a very, very long time,” said Reiss.
More than a dozen lawsuits filed against the government – led by hedge funds Perry Capital and Fairholme Capital Management – are pending in federal district court in Washington, DC, and in the Court of Federal Claims. The shareholder plaintiffs allege that the Treasury’s 2012 change in the dividend structure of its preferred stock leaves no funds to pay dividends to junior shareholders.
The government in its pending motion to dismiss gives some clear indication as to the tactics it will take to derail the various shareholder suits, Reiss explained. The government’s brief states that not a single plaintiff is entitled to recover anything – either on their individual or derivative claims – in light of the extensive powers that the Housing and Economic Recovery Act vests in the Federal Housing Finance Agency in its capacity as conservator to the GSEs.
“Until we have some motions to dismiss decided, we’re not really going to know how wide a scope these cases will have,” he said. “Only when we having a ruling on a summary judgment motion, will we have a sense of the real issues in contention. I will say that we are at an absolutely early stage.”
With the “entire range of private, administrative and constitutional principles” due to be called into question through the litigation, Reiss said there’s a great deal of uncertainty how the courts will decide the issue, including whether the Supreme Court will hear the inevitable appeal by plaintiffs or the defendant.
Although the pending shareholder litigation and investors’ claims of a government taking “must be taken seriously,” there’s no barrier – either from a legal or safety and soundness standpoint – preventing Fannie and Freddie from being dissolved, the Heritage Foundation argued in an issue brief.
“Protecting property rights, however, does not mean that taxpayers and consumers must continue to be put at risk by these government-sponsored housing giants,” said Heritage. “The ongoing lawsuits need not impede and should not distract Congress from the critical task of dissolving these economically dangerous institutions.”
Each of the GSE charters explicitly grants Congress the power to dissolve the corporations free of any conditions. After dissolution, Heritage notes that creditors would be paid off, with any remaining assets divided among shareholders, taking into account the priorities of different classes of shares.
“Because the United States is a defendant in the lawsuits, the litigation can proceed independently of the GSEs’ dissolution,” said Heritage. “If shareholders prevail on their takings claim, or any other monetary claim, they would still be able to receive full restitution for any legitimate claims.”
June 2, 2014 | Permalink | No Comments
Ohio Appellate Court Affirms Judgment in Favor of Arch Bay Holdings
The court in deciding Arch Bay Holdings, LLC v. Brown, 2013-Ohio-5453 (Ohio Ct. App., Montgomery County, 2013) found that the lower court did not err in confirming the sheriff’s sale, thus the judgment of the Montgomery County Common Pleas Court was affirmed.
Daniel Lee Brown appealed the lower court’s final order confirming a post-foreclosure sheriff’s sale of his residence and distributing the proceeds. First, he contended that the lower court erred in finding that appellee – Arch Bay Holdings – had standing to foreclose. Second, Brown claimed that the trial court erred in dismissing his counterclaims. Third, he asserted that the trial court erred in confirming the sheriff’s sale where no appraisal was performed.
Upon review, this court promptly disposed of Brown’s arguments about the lower court’s dismissal of his counterclaims and Arch Bay’s standing to foreclose. This court also determined that arguments about the counterclaims were barred by res judicata because Brown could have raised them in the prior appeal, which he filed after the trial court dismissed the counterclaims and filed a decree of foreclosure. Further, this court reviewed the evidence and upheld the lower court’s finding that Arch Bay had standing because it possessed the note and mortgage when it filed suit. Thus this court affirmed the lower court’s ruling.
May 30, 2014 | Permalink | No Comments
Reiss on GSE Litigation
Inside Mortgage Finance profiled me in Legal Expert: GSE Shareholder Plaintiffs, U.S. Want ‘Total’ Victory (behind a paywall). It reads,
Look for the various GSE shareholder lawsuits against the federal government to take a “very long time to be decided” with the courts taking up to a year to resolve just the introductory motions and an ultimate appeal to the U.S. Supreme Court.
That’s the view of one legal expert speaking during a recent Bloomberg Industries webinar on Fannie Mae and Freddie Mac litigation. Brooklyn Law School Professor David Reiss noted there are some parallels to the savings and loan lawsuits brought by owners against the federal government 20 years ago. But the attorney stressed that the litigation from the Fannie and Freddie investors against the government offers an entirely different and deeper set of legal complexities.
“These are factually and legally complex cases and don’t trust anyone that thinks this is a slam dunk for any one of the parties,” predicted Reiss. He added that neither the government nor GSE shareholders can cut a deal and settle for anything short of total victory.
In its motion to dismiss, the government argues that the plaintiffs – hedge funds that have speculated in the junior preferred – are not entitled to recover anything, either on their individual or derivative claims, in light of the extensive powers that the Housing and Economic Recovery Act granted to the Federal Housing Finance Agency in its capacity as conservator.
With the “entire range of private, administrative and constitutional principles” due to be called into question in this litigation, Reiss said there’s a great deal of uncertainty over how the courts will decide the issue, including whether the Supreme Court will hear the inevitable appeal by plaintiffs or defendant.
May 30, 2014 | Permalink | No Comments
May 29, 2014
Ohio Appeals Court Denies Assignment Error Claim Brought by Appellee
The court in deciding United States Bank Nat’l Ass’n v. McHugh, 2013-Ohio-5473 (Ohio Ct. App., Lucas County, 2013) concluded that the trial court properly denied mortgagors’ motion under Civ.R. 60(B)(2).
Appellants argued that appellee lacked standing and was not the real party in interest. They also alleged that they were entitled to relief pursuant to their discovery of new evidence in the form of a pooling service agreement that confirmed appellee’s lack of standing.
Appellee opposed appellants’ motion on the basis that it was barred by res judicata, untimely, and failed to establish grounds for relief pursuant to Civ.R. 60(B)(2).
After considering the parties’ arguments, the court denied appellants’ motion. In its judgment entry, the court determined that the evidence relied upon by appellants in supporting their Civ.R. 60(B) motion was available to them prior to summary judgment and, therefore, was not newly discovered evidence. Further, the court found that appellants failed to demonstrate the existence of a meritorious defense as required under the Ohio Supreme Court. Finally, the court concluded that appellants’ motion was not filed within a reasonable time pursuant to Civ.R. 60(B).
May 29, 2014 | Permalink | No Comments
May 30, 2014
Georgia Court Dismisses TILA and RESPA Claims Brought by Plaintiff
By Ebube Okoli
The court in deciding Mitchell v. Deutsche Bank Nat’l Trust Co., 2013 U.S. Dist. (N.D. Ga. Sept. 25, 2013) granted the motion to dismiss proffered by the defendant.
The first enumerated cause of action in Plaintiffs’ complaint was a claim for fraud. Plaintiffs argued that their original mortgage lender, Accredited, engaged in a practice of filing false prospectus supplements with the Securities and Exchange Commission. Plaintiffs’ complaint also included a claim for wrongful foreclosure.
Next, the plaintiffs asserted that Deutsche Bank and MERS had “unclean hands” as they failed to make certain disclosures required by TILA. Plaintiffs also asserted that the defendants or their predecessors in interest violated RESPA in a number of ways. Plaintiffs’ complaint also included a claim for fraud in the inducement. Moreover, the plaintiffs’ complaint raised a claim for quiet title under O.C.G.A. § 23-3-40 and O.C.G.A. § 23-3-60 et seq. Lastly, the plaintiffs’ complaint raised a claim for fraudulent assignment.
Ultimately the court concluded that the plaintiffs’ complaint failed to state a viable claim for relief. Accordingly, this court granted the defendants’ motion to dismiss the plaintiffs’ complaint.
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May 30, 2014 | Permalink | No Comments