Tag Archives: Perry Capital

Reiss on Cases To Watch In 2014

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Law360 quoted me in Real Estate Cases To Watch In 2014. The story reads in part,

The real estate market’s recovery from the financial crisis of the past few years has created a host of new issues — from contract disputes to eminent domain litigation — for government lenders, developers and investors to litigate in 2014.

Real estate finance attorneys are paying close attention to an expected rise in judicial scrutiny of banks’ ownership of loans, while also closely watching the multitude of cases that have been brought against the U.S. government and its handling of profits made by Fannie Mae and Freddie Mac.

At the same time, development attorneys are tuned in to how an increase in construction in gateway cities might soon lead to more litigation over land use and eminent domain.

Here are some of the most important cases and trends real estate attorneys are watching closely:

Challenges to Allocation of Fannie and Freddie Profits

A collection of cases making their way through the Washington, D.C., federal court and the Court of Federal Claims challenge the government’s taking of all of the profits from Fannie Mae and Freddie Mac and directing them toward the U.S. Department of the Treasury.

Two of the most-watched cases were brought by hedge funds Perry Capital LLC and Fairholme Capital Management LLC, the latter of which has since offered to purchase the government-sponsored entities’ insurance businesses.

Perry Capital accused the Treasury in July of illegally speeding up the GSEs’ liquidation, entitling the government to all of their mounting profits and essentially “extinguishing” privately held securities, according to the complaint filed in Washington federal court.

Fairholme made a similar claim in the Court of Federal Claims two days later, alleging that the government had acted unconstitutionally when it altered its bailout deal for the GSEs to keep the companies’ profits for itself.

“The universe of cases impacting the current operation of Fannie and Freddie is very important from a policy perspective, and it’s also an interesting battle between hedge funds and the government,” said David Reiss, a professor at Brooklyn Law School.

There will likely be a flurry of motions to dismiss and requests for summary judgment on all sides in these cases 2014, but from the perspective of a real estate attorney, the policy implications will be more interesting than the precedential value of any decisions, he said.

A hearing on defendants’ dispositive motions and plaintiffs’ cross motions has been set for June 23 in the Washington cases.

Perry Capital is represented by Theodore B. Olson, Janet Weiss, Douglas Cox, Matthew McGill, Nikesh Jindal and Derek Lyons of Gibson Dunn. The case is Perry Capital LLC v. Lew et al., case number 1:13-cv-01025, in the U.S. District Court for the District of Columbia.

Fairholme is represented by Charles J. Cooper, Vincent J. Colatriano, David H. Thompson and Peter A. Patterson of Cooper & Kirk PLLC. That case is Fairholme Funds Inc. v. U.S., case number 1:13-cv-00465, in the U.S. Court of Federal Claims.

Reiss on Fannie and Freddie Buyout

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Law360 quoted me in Fairholme Changes The Game For Fannie And Freddie (behind a paywall).  It reads in part,

Fairholme Capital Management LLC’s plan to buy Fannie Mae’s and Freddie Mac’s insurance businesses will likely turn out to be more symbolic gesture than successful deal, experts say, but the hedge fund’s bold move could increase interest in privatization of the entities and potentially encourage other bidders to join the fray.

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Some experts believe this emphasis on the ownership stakes of Fairholme and other hedge funds will be a major turnoff for the White House, the Federal Housing Finance Agency and the Treasury.

“It’s a very good idea, but the question is, will it keep the government and taxpayers off the hook? And will it bring in sufficient private capital to provide a vibrant residential mortgage market?” said David Reiss, a real estate finance professor at Brooklyn Law School. “Of course they’re looking to maximize their return, so the question has to be, what’s the angle that they’re playing?”

The angle, experts and analysts say, is likely connected to claims Fairholme and other hedge funds have made recently against the federal government, accusing it of devaluing their shares of Fannie and Freddie in order to reap all the GSEs’ mounting profits.

Fairholme and Perry Capital LLC both sued the government over its management of Fannie and Freddie this summer.

In July, Perry Capital accused the Treasury of wrongfully altering stock purchasing agreements with Fannie and Freddie, which allegedly allowed it to illegally speed up the liquidation of the companies and reap more than $200 billion over the next decade.

Two days later, Fairholme and insurance holding company W.R. Berkley Corp. sued the federal government, alleging it had acted unconstitutionally when it altered its bailout deal for the GSEs to keep the companies’ profits for itself.

Fairholme’s proposal assumes that their shares have the value they claim they have in their lawsuit, Reiss said. If the deal were to move forward, valuation of Fairholme’s stake could be a major sticking point.

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“It begins the conversation as to whether you can have effectively a buyout of the federal government from Fannie and Freddie, which is a healthy thing, I think,” Reiss said.

Fannie/Freddie Take Down 3: Washington Federal v. The U.S. of A.

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This should catch us up on the Fannie/Freddie preferred stock Takings litigation (see here and here for two other suits).  Washington Federal et al. v. United States was filed June 10, 2013 and is a class action complaint. The theories are pretty similar in the three cases. I had earlier written about the importance of narrative in these Takings cases. Having lived through this history myself and having read the “first draft” of history carefully in the pages of the New York Times, the Wall Street Journal and many trade periodicals, I am somewhat taken aback by this revisionist history. For instance, the complaint states that the companies were not “likely to incur losses that would deplete all or substantially all of” their capital. (38) News to me!

But what is most striking about the complaint is this notion that if the government had just taken this action (allowing the companies to buy more subprime mortgages) or not taken that action (strong arming the board to accept the conservatorship) or not deferring taking this other action (waiting to raise the guarantee fee), then everything would have worked out for the companies and their shareholders.  Maybe so, but it sure will be hard to categorize each of the government’s actions as either totally okay or completely inappropriate for the companies’ health in the context of the financial crisis. This leaves the plaintiffs with some tough work ahead. They are going to need to show a judge just how to categorize each of those facts and ensure that the categorization does not interfere with their theory of the case.

All of this raises a bigger, more interesting question. What role should these types of lawsuits play after a crisis has passed? Some would say that they are an outrage — second-guessing what are leaders did to avert financial ruin. Others might say that this is an efficient way to respond to crises: allow the government to do what it needs to do during the crisis, but use litigation to make an accounting to all of the stakeholders once the situation has stabilized. I don’t have a fully thought out view on this, but I am struck by the dangers of each approach. The first allows for various kinds of scapegoating (as Hank Greenberg argues in the AIG bailout litigation) while the second allows for the kind of revisionism that favors the wealthy and powerful (as with these Takings suits by powerful investors who bought Fannie and Freddie preferred shares on the cheap as a sort of long shot bet on what the two companies will look like going forward). Tough to choose between the two . . ..

Federal Government’s a Fairholme-weather Friend?

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Following up on my posts (here and here) about other suits against the federal government over its amendment of the terms of the distribution of dividends and other payments by Fannie Mae and Freddie Mac, I now look at Fairholme Funds, Inc. et al. v. FHFA et al., filed July 10, 2013.  The suit alleges very similar facts to those found in Fairholme Funds, Inc. v. United States, filed July 9, 2013, but the claims for relief are more similar to those found in Perry Capital, LLC v. Lew et al.

Here are some of the key claims made by the plaintiffs (owners of Fannie and Freddie preferred shares):

  • While the FHFA is the conservator of the two companies, it is acting acting like a receiver by “winding down” Fannie and Freddie’s “affairs and liquidating” their assets, while conservatorship should aim to return a company “to normal operation.” (15) The goal of the conservator, claim the plaintiffs, is to return the company “to a safe, sound and solvent condition.” (15, quoting Conservatorship and Receivership, 76 Fed. Reg. 35, 724, 35, 730(June 20, 2011)) As a result, plaintiffs argue that the Net Worth Sweep (which gives to the federal government substantially all of Fannie and Freddie’s profit) “is squarely contrary to FHFA’s statutory responsibilities as conservator of Fannie and Freddie” because it does not put them in “a sound and solvent condition” and it does not “conserve the assets and property” of the two companies. (25, quoting 12 U.S.C. section 4617(b)(2)(D))
  • “Neither Treasury nor FHFA made any public record of their decision-making processes in agreeing to the Net Worth Sweep.” (29) The plaintiffs argue that the FHFA’s “authority as conservator of” Fannie and Freddie “is strictly limited by statute.” (31, citing 12 U.S.C. section 4617(b)(2)(D)) As a result, the FHFA’s actions were “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” (33, quoting the APA, 5 U.S.C. section 706(2)(A))
  • The plaintiffs’ relationship with Treasury as Fannie and Freddie’s controlling shareholders is governed by state corporate law and thus Treasury owes “fiduciary duties to minority shareholders.” (38)
  • “Implicit in every contract is a covenant of good faith and fair dealing. The implied covenant requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain.” (41) Plaintiffs argue that their contractual rights pursuant to their preferred shares have been breached by FHFA’s consent to the Net Worth Sweep.

The validity of these claims should not be assessed superficially. The courts will need to read HERA in the context of the APA and the amendment to the terms of the government’s preferred shares in the context of the contractual obligations found in the private preferred shares. The court will also need to assess the extent to which state corporate law governs the actions of the federal government when it is acting in the multiple capacities of lender, investor, regulator and conservator.  Let the memoranda in support and in opposition to motions to dismiss come forth and enlighten us as to how it should all play out . . ..