On February 20, the Supreme Court denied the petitions for a writ of certiorari filed by institutional investors seeking to overturn the D.C. Circuit’s decision on the Treasury Department’s “net worth sweep” in Perry Capital LLC et al. v. Mnuchin et al., No. 14-5243 (D.C. Cir. Feb. 21, 2017). The litigation involves suits against the Treasury Department and the Federal Housing Finance Agency (“FHFA”) by investors in securities of Fannie Mae and Freddie Mac. In 2012, Treasury and FHFA amended loan agreements that required the mortgage guarantors to pay a quarterly dividend equal to their entire net worth minus a small capital reserve – the “net worth sweep” – that is never applied to their debt. As a result, they will not return profits to their investors. These investors in turn sued, claiming that Treasury and the FHFA violated the Administrative Procedures Act, exceeded their statutory authority, effectuated a Fifth Amendment Taking, violated fiduciary duties to investors, and breached the terms of a class of investors’ stock certificates for Fannie Mae and Freddie Mac securities. The D.C. Circuit affirmed in most respects the dismissal of these claims by Judge Royce Lamberth, see Perry Capital LLC et al. v. Lew et al., 70 F. Supp. 3d 208 (D.D.C. 2014), reversing and remanding only with respect to certain dividend rights held by the investors under their stock certificates.
Although the Supreme Court’s decision forecloses the bulk of the investors’ claims, it leaves them with two potential – albeit uphill – avenues of relief. First, in the D.C. district court, the investors now have the ability to proceed with efforts to value certain of their contractual rights and pursue monetary damages for their abrogation. This may prove difficult because the putative class of investors bought shares at very different times during the class period, and there will be substantial expert disagreement regarding valuation and the impact of intervening sales on any damage claims. Further, because the contracts at issue were with Fannie Mae and Freddie Mac – which are non-governmental, regulated entities – the Government did not previously, and presumably will not now, assert the “sovereign” defenses to contract claims that it unsuccessfully raised in U.S. v. Winstar Corp. et al., 518 U.S. 839 (1996). For the same reason, the favorable Winstar cases – which held that the Government acted in a fashion that breached its own contracts with private parties – presumably will not now apply to benefit the investors. Although they will likely contend that the Government interfered with their contracts (as in Winstar), those contracts were not actually with the Government (unlike Winstar).
Second, certain investors have long had parallel monetary claims for Takings and “illegal exactions” pending in the U.S. Court of Federal Claims. These cases have effectively been stayed pending the D.C. Circuit proceedings, but the investors have had some success in compelling discovery that appears to show the Government lied about the rationale for the “net worth sweep.” The court has not ruled on the legal significance, if any, of such evidence. It is also possible that the court will conclude the investors are entitled to no monetary damages because Fannie Mae and Freddie Mac would have gone bankrupt but for the Government’s loan agreements (and later “net worth sweep”), in which case the investors would have lost the value of their investments anyway. Their path will be further complicated by the D.C. Circuit’s decision, which, although not binding on the Court of Federal Claims, may have persuasive weight. Additional discovery battles seem likely as well.
In sum, although the net worth sweep litigation was not a clean sweep for the Government, the investors face a daunting litigation gauntlet in their pursuit of compensation. Whichever way the merits are decided by the respective trial courts, the odds seem good that the U.S. Supreme Court will ultimately have another opportunity to “clean up” with a final decision.
Jason A. Levine is a litigation partner in the Washington, D.C. office of Vinson & Elkins LLP. He does not represent any parties or amici involved in the Perry Capital litigation. The views expressed herein are his own.