James Kellmer v. Franklin Raines ( 2012 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 16, 2012 Decided March 30, 2012
No. 09-5253
JAMES KELLMER, DERIVATIVELY ON BEHALF OF FANNIE
MAE, A/K/A FEDERAL NATIONAL MORTGAGE ASSOCIATION,
APPELLANT
v.
FRANKLIN D. RAINES, ET AL.,
APPELLEES
Consolidated with 09-7073, 10-5390, 10-5395, 10-5423,
10-5424
Appeals from the United States District Court
for the District of Columbia
(No. 1:07-cv-01173)
Matthew E. Miller argued the cause for appellants James
Kellmer, et al. On the briefs was Jonathan W. Cuneo. Robert
J. Cynkar, David W. Stanley, and William H. Anderson
entered appearances.
Howard N. Cayne argued the cause for appellee/appellant
Federal Housing Finance Agency. With him on the brief was
David B. Bergman. Joseph J. Aronica and David A. Felt,
2
Attorney, Federal Housing Finance Agency, entered
appearances.
Richard Miles Clark argued the cause for appellees
Franklin D. Raines, et al. On the brief were Kevin M. Downey,
Joseph M. Terry, Steven M. Salky, Eric R. Delinsky, James D.
Wareham, James E. Anklam, and David S. Krakoff. Holly A.
Pal and Alex G. Romain entered appearances.
Before: ROGERS, TATEL, and BROWN, Circuit Judges.
Opinion for the Court filed by Circuit Judge TATEL.
TATEL, Circuit Judge: For the second time, we have
before us a shareholder derivative suit flowing from the
Fannie Mae accounting debacle. The district court entered
three orders now on appeal. It substituted Fannie Mae’s
conservator, the Federal Housing Finance Agency (FHFA),
for plaintiff shareholders—an order we now affirm. It denied
FHFA’s motion for voluntary dismissal—an order we now
reverse and remand with instructions to dismiss the complaint
without prejudice. Finally, it granted Fannie Mae’s motion to
dismiss on the grounds of claim preclusion—an order we now
vacate as moot.
I.
After Fannie Mae announced one of the largest corporate
earnings restatements in history, several shareholders filed a
derivative suit on behalf of the company, alleging (among
other things) that the company’s directors had failed to
prevent the accounting irregularities. For reasons having
nothing to do with the issues before us today, the district court
dismissed that suit, and we affirmed in Pirelli Armstrong Tire
3
Corp. Retiree Medical Benefits Trust v. Raines, 534 F.3d 779(D.C. Cir. 2008).
Setting the stage for this appeal, one of those
shareholders, James Kellmer, together with several others,
including Arthur Middleton and L. Jay Agnes, filed new
derivative actions, again asserting claims against the
company’s directors regarding the accounting irregularities.
The district court consolidated all three actions. Fannie Mae,
citing Pirelli and joined by several directors, then moved to
dismiss Kellmer v. Raines on the ground of claim preclusion.
It moved to dismiss Middleton v. Raines for lack of standing,
but never moved to dismiss the third case, Agnes v. Raines.
In the meantime, Congress passed the Housing and
Economic Recovery Act of 2008 (HERA), establishing a new
federal housing agency, FHFA, that became Fannie Mae’s
conservator. FHFA intervened in all three actions and moved
to substitute itself for the shareholders, arguing that HERA
endowed it with sole authority to litigate claims belonging to
Fannie Mae. The district court agreed and granted the motion.
In re Fannie Mae, MDL No. 1668, No. 08-1093, slip. op. at 6
(D.D.C. June 25, 2010). Then, FHFA, explaining that it
needed more time to evaluate whether proceeding with the
suit would further the conservatorship’s statutory purposes,
moved for voluntary dismissal without prejudice or, in the
alternative, for a 180-day stay of the litigation. The district
court denied the motion in Kellmer and Middleton, but
granted it in Agnes. In re Fannie Mae, MDL No. 1668, No.
07-1173, slip. op. at 23 (D.D.C. July 27, 2010) (“Kellmer”);
In re Fannie Mae, MDL No. 1668, No. 07-1221, slip. op. at
18 (D.D.C. July 27, 2010) (“Middleton”); In re Fannie Mae,
MDL No. 1668, No. 08-1093, slip. op. at 7 (“Agnes”) (D.D.C.
July 27, 2010). Finding Kellmer’s claims precluded by Pirelli,
the district court then granted Fannie Mae’s motion to dismiss
4
the Kellmer action with prejudice. See Kellmer, No. 07-1173,
slip. op. at 23. The district court also granted Fannie Mae’s
motion to dismiss the Middleton action with prejudice for lack
of standing. See Middleton, No. 07-1221, slip. op. at 18.
The losing parties now appeal. Shareholders Kellmer and
Agnes (but not Middleton) appeal the substitution order.
FHFA appeals the denial of its motion for voluntary dismissal
without prejudice and argues that Fannie Mae’s motions to
dismiss with prejudice should have been denied as moot.
Shareholder Kellmer appeals the district court’s dismissal of
his case with prejudice.
II.
We begin with Kellmer and Agnes’s challenge to the
district court’s order substituting FHFA as plaintiff. The
district court held that under HERA, only FHFA could pursue
a derivative action against Fannie Mae’s directors. In re
Fannie Mae, No. 08-1093, slip. op. at 6. Challenging this
decision, shareholders argue that where, as here, the
conservator has yet to commit to the litigation or take other
action, nothing in HERA deprives them of their common law
right to maintain a derivative action. We review this question
of law de novo. See United States v. Cook, 594 F.3d 883, 886
(D.C. Cir. 2010).
Shareholders make many arguments, delving deep into
pre-HERA common law and expounding HERA’s legislative
history. But to resolve this issue, we need only heed Professor
Frankfurter’s timeless advice: “ ‘(1) Read the statute; (2) read
the statute; (3) read the statute!’ ” See Henry J. Friendly, Mr.
Justice Frankfurter and the Reading of Statutes, in
Benchmarks 196, 202 (1967). HERA provides that FHFA
“shall, as conservator or receiver, and by operation of law,
5
immediately succeed to . . . all rights, titles, powers, and
privileges . . . of any stockholder.” 12 U.S.C. § 4617(b)(2)(A).
This language plainly transfers shareholders’ ability to bring
derivative suits—a “right[], title[], power[], [or]
privilege[]”—to FHFA. The Fourth Circuit has reached the
same conclusion, La. Mun. Police Emps. Ret. Sys. v. FHFA,
434 F. App’x 188, 191 (4th Cir. 2011) (per curiam), as have
all three circuits to have interpreted HERA’s predecessor, the
Financial Institutions Reform Recovery and Enforcement Act
of 1989 (FIRREA), which contains virtually identical
language, see 12 U.S.C. § 1821(d)(2)(A) (FDIC “shall, as
conservator or receiver, and by operation of law, succeed
to . . . all rights, titles, powers, and privileges . . . of any
stockholder”). All of these courts have found that, absent a
manifest conflict of interest by the conservator not at issue
here, the statutory language bars shareholder derivative
actions. See Lubin v. Skow, 382 F. App’x 866, 871 (11th Cir.
2010) (per curiam); Pareto v. FDIC, 139 F.3d 696, 700–01
(9th Cir. 1998); see also First Hartford Corp. Pension Plan &
Trust v. United States, 194 F.3d 1279, 1295 (Fed. Cir. 1999)
(“as a general proposition, the FDIC’s statutory receivership
authority [under FIRREA] includes the right to control the
prosecution of legal claims on behalf of the insured
depository institution now in its receivership”). Indeed, we
ourselves so held in Pirelli, albeit in an unpublished order
having only “persuasive authority,” In re Grant, 635 F.3d
1227, 1232 (D.C. Cir. 2011). See Pirelli Armstrong Tire
Corp. Retiree Med. Benefits Trust v. Raines, No. 07-7108
(D.C. Cir. Dec. 24, 2008) (order granting FHFA’s motion to
substitute itself in place of shareholder derivative plaintiffs).
Undaunted, shareholders contend that the ability to sue
derivatively survives HERA because “the ability to assert [the
corporation’s] rights in a derivative action is not a legal ‘right’
at all—it is an ‘equitable remedy.’ ” Shareholders’ Br. 33. But
6
regardless of its origins, a shareholder’s ability to sue
derivatively given certain conditions is fairly described as a
“right[]” or “power[]” of owning stock. In any event, as the
Ninth Circuit explained with respect to FIRREA, “Congress
also covered privileges just to be sure that nothing was
missed. . . . Congress has transferred everything it could to the
[conservator], and that includes a stockholder’s right, power,
or privilege to demand corporate action or to sue directors or
others when action is not forthcoming.” Pareto, 139 F.3d at
700; see also In re Freddie Mac, 643 F. Supp. 2d 790, 795
n.11 (E.D. Va. 2009) (rejecting as unpersuasive plaintiffs’
“assert[ion] that the ability to bring a derivative suit is not a
right, but an equitable remedy”), aff’d, La. Mun. Police Emps.
Ret. Sys., 434 F. App’x 188.
We turn next to FHFA’s challenge to the district court’s
denial of its motions for voluntary dismissal without prejudice
in Kellmer and Middleton. Our review is for abuse of
discretion. See New Mexico ex rel. Energy & Minerals Dep’t
v. Dep’t of the Interior, 820 F.2d 441, 443 (D.C. Cir. 1987).
“[B]y definition,” a district court “abuses its discretion when
it makes an error of law.” Koon v. United States, 518 U.S. 81,
100 (1996). That, according to FHFA, is exactly what
happened here, and we agree.
In order to deny a motion for voluntary dismissal, a
district court “must find that dismissal will inflict clear legal
prejudice on a defendant.” Conafay v. Wyeth Labs., 841 F.2d
417, 419 (D.C. Cir. 1988) (“Conafay II”) (per curiam)
(holding that district court abused its discretion in denying
plaintiff’s motion for voluntary dismissal). Here, the district
court found that voluntary dismissal would “deprive
[directors] of their reasonable expectation in a resolution of
their pending” motions to dismiss. Kellmer, No. 07-1173, slip.
op. at 15; Middleton, No. 07-1221, slip. op. at 14. To be sure,
7
granting voluntary dismissal would deprive directors of an
opportunity for a favorable final disposition. But “los[ing] an
opportunity for a favorable final disposition of the case . . . is
not important as long as [defendant] suffers no legal prejudice
from dismissal.” Conafay II, 841 F.2d at 420. And in this
case, directors suffered no legal prejudice whatsoever. Were
FHFA to refile its complaint following a voluntary dismissal,
directors’ argument for dismissing the case with prejudice,
based on the purely legal ground of claim preclusion, would
remain fully available. See Conafay v. Wyeth Labs., 793 F.2d
350, 353 (D.C. Cir. 1986) (“Conafay I”) (“In federal practice,
voluntary dismissals sought in good faith are ordinarily
granted if the only harm suffered by the defendant is the
expense of preparing a responsive pleading, since he can be
made whole if dismissal is conditioned upon reimbursement
by the plaintiff.” (internal quotation marks omitted)).
Directors argue that the district court acted within its
discretion because it also gave significant weight to FHFA’s
“less-than-compelling explanation,” Kellmer, No. 07-1173,
slip. op. at 15; Middleton, No. 07-1221, slip. op. at 13, in
reaching its decision. Not so. The district court itself made
clear that the pendency of Fannie Mae’s motion to dismiss
was dispositive: despite FHFA’s purportedly weak
explanation, the district court granted its motion for voluntary
dismissal in Agnes, different from Kellmer and Middleton
only in that no motion to dismiss with prejudice was pending.
See Agnes, No. 08-1093, slip. op. at 4 & n.3 (“this case is
different from Kellmer . . . and Middleton” in that “no
dispositive motions have been filed”). In any event, directors’
arguments about the weakness of FHFA’s explanation are
irrelevant given that they have failed to show legal prejudice.
See Conafay II, 841 F.2d at 419.
8
Because we conclude that the district court should have
dismissed Kellmer and Middleton without prejudice, we agree
with FHFA that Fannie Mae’s motion to dismiss should have
been denied as moot. We thus have no occasion to reach the
merits of the claim preclusion question.
III.
We affirm the district court’s substitution of FHFA in
place of shareholders in Kellmer and Agnes; reverse its denial
of FHFA’s motion for voluntary dismissal in Kellmer and
Middleton, and remand with instructions to dismiss these
actions without prejudice; and vacate as moot the order
granting Fannie Mae’s motions to dismiss Kellmer and
Middleton.
So ordered.