Federal Housing Finance Agency v. Marron

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
In re Federal National Mortgage
Association Securities, Derivative, and MDL No. 1668
"ERISA" Litigation
Federal Housing Finance Agency as
Conservator for the Federal National Civil Case No. 05-37 (RJL)
Mortgage Association v. Marron, et al.
Kellmer II
MEMORANDUM OPINION
7'------
(July 20, 2010)
Before the Court are four motions arising from two nearly identical derivative
lawsuits brought originally by plaintiff shareholder James Kellmer. The two lawsuits
were originally captioned as Kellmer v. Marron, Civ. No. 05-0037 (D.D.C., filed Jan. 10,
2005) ("Kellmer IF'), and Kellmer v. Raines, Civ. No. 07-1173 (D.D.C., filed June 29,
2007) ("Kellmer IIF'). I dismissed Kellmer II as part of a consolidated action in which
Kellmer's derivative suit was joined with other shareholder derivative suits. See In re
Fannie Mae Derivative Litig., 503 F. Supp. 2d 9 (D.D.C. 2007). My decision to dismiss
the consolidated action has been affirmed by our Circuit Court. See Pirelli Armstrong
Tire Corp. Retiree Med. Benefits Trust v. Raines, 534 F.3d 779 (D.C. Cir. 2008). Instead
of appealing my consolidation order and subsequent dismissal of his case, Kellmer filed
the complaint in Kellmer III, which is substantially the same as the complaint in Kellmer
II. Kellmer also moved for clarification of the order dismissing the consolidated case or,
alternatively, for relief from the judgment pursuant to Federal Rule of Civil Procedure
60(b). The nominal defendant Federal National Mortgage Association ("Fannie Mae")
opposed Kellmer's motion and moved to dismiss the Kellmer III complaint for lack of
subject matter jurisdiction or, in the alternative, for claim preclusion. Three of the
defendants in Kellmer III-Franklin D. Raines, J. Timothy Howard, and Leanne G.
Spencer (collectively, "the individual defendants")-joined Fannie Mae's Motion to
Dismiss. Since these motions were filed, the Court has replaced Kellmer as the derivative
shareholder plaintiff with the Federal Housing Finance Agency ("FHF A"), the statutory
conservator of Fannie Mae. FHFA initially adopted Kellmer's response to the Motion to
Dismiss but has since moved for voluntary dismissal of Ke lim er III without prejudice.
Not surprisingly, the individual defendants opposed FHFA's Motion for Approval of
Voluntary Dismissal and have moved to dismiss Kellmer III with prejudice for failure to
prosecute.
Having considered the parties' arguments, the Court finds that the individual
defendants would suffer prejudice if the Court were to grant FHF A's motion now that the
individual defendants have justifiably relied on Fannie Mae's fully briefed Motion to
Dismiss, which, if granted, would dispose of the case against them. Accordingly,
FHFA's Motion for Approval of Voluntary Dismissal is DENIED. At the same time, the
individual defendants' Motion to Dismiss with Prejudice for Failure to Prosecute is also
2
DENIED because they have failed to show that FHFA's conduct is egregiously dilatory.
Finally, regarding the merits of Fannie Mae's pending Motion to Dismiss, the Court
concludes that Kellmer II was properly dismissed in light of the Court's earlier
consolidation order and that Kellmer III is barred by the doctrine of claim preclusion.
Thus, Kellmer's Motion for Clarification or, in the Alternative, for Relief from Judgment
is DENIED, and Fannie Mae's Motion to Dismiss, which was joined by the individual
defendants, is GRANTED.
BACKGROUND
Both Kellmer II and Kellmer III arise from allegations that Fannie Mae engaged in
improper accounting practices. These allegations are exhaustively explained in my
previous opinions. See, e.g., In re Fannie Mae Derivative Litig., 503 F. Supp. 2d at 11-
14. Beginning in September 2004, ten plaintiffs, including Kellmer, commenced
shareholder derivative actions against former and then-current officers and directors of
Fannie Mae. Id. at 13 & n.3. 1 Various parties promptly moved to consolidate these
actions. Although Kellmer did not oppose consolidation, he did oppose filing a
consolidated complaint, and he sought to have his counsel appointed as one of the co-lead
counsel. (PI. Kellmer's Formal Position [Civ. No. 05-37, Dkt. # 7] at 10, 5, 4). He
argued that it was necessary to distinguish his derivative suit, the only one in which a
IKellmer also brought a books and records action against Fannie Mae under
Delaware law. See Kellmer v. Fed. Nat 'I Mortgage Ass 'n, Civ. No. 04-2084 (D.D.C.,
filed Dec. 1,2004) ("Kellmer 1').
3
shareholder made a demand on Fannie Mae's board of directors under Federal Rule of
Civil Procedure 23.1, from the other derivative suits, in which the shareholders declined
to make such a demand on the theory that doing so would have been futile. (Id. at 4).
In February 2005, I granted the motions to consolidate and appointed Pirelli
Armstrong Tire Corporation Retiree Medical Benefits Trust and Wayne County
Employees' Retirement System as co-lead plaintiffs. (Feb. 14,2005 Mem. Op. and Order
[Civ. No. 05-37, Dkt. #25] at 3-4). I explicitly addressed Kellmer's argument that
"demand made" and "demand futile" cases should not be consolidated into one action but
decided nevertheless "that this distinction is insufficient to necessitate separate actions at
this point in the litigation." (Id. at 4-5). As a result, I issued Pretrial Order No.1, which
consolidated Kellmer II and the other shareholder derivative actions "for all purposes
through final judgment." (Pretrial Order No.1 [Civ. No. 05-37, Dkt. #26] at 4). I also
ordered that the dockets for the individual cases be closed, (id.), and that the co-lead
plaintiffs file a consolidated complaint that would "supersede all existing complaints filed
in this action," (id. at 7).
Pursuant to that Order, the co-lead plaintiffs filed an initial consolidated complaint
in September 2005, which they later amended in September 2006. The Amended
Complaint asserts two types of claims: (1) "breach of fiduciary duties and gross
mismanagement arising out of the company's misapplication ofFAS 91 and 133
(,accounting-related claims')," (Am. CompI. [Civ. No. 04-1783, Dkt. #127] Counts I-IV);
4
and (2) "claims for corporate waste and unjust enrichment relating to the Board's
approval of certain executives' compensation ('compensation-related claims')," (Am.
Compi. [Civ. No. 04-1783, Dkt. #127] Counts V-VIII). In re Fannie Mae Derivative
Litig., 503 F. Supp. 2d at 13-14. The co-lead plaintiffs proceeded on a theory that it
would have been futile to make a successful pre-suit demand on Fannie Mae's board as
required by Rule 23.1. The defendants moved to dismiss the consolidated complaint
claiming, among other things, that the co-lead plaintiffs failed to allege sufficient facts to
establish futility.
In February 2007, before I ruled on the defendants' Motion to Dismiss, Kellmer
sought to intervene in the case. (Kellmer's Mot. to Intervene [Civ. No. 04-1783, Dkt.
#175] at 3). He argued that "a dismissal of the present action may bind Mr. Kellmer and
thus preclude him from asserting his claims though he, unlike the named representative
plaintiffs, properly made a pre-suit demand upon Fannie Mae's Directors pursuant to Rule
23.1 FRCP." (Id. at 6). Both the co-lead plaintiffs and the defendants opposed this
request. In his reply, Kellmer advocated that the Court defer ruling on his Motion to
Intervene and only consider it if the Court intended to grant the Motion to Dismiss on the
ground that pre-suit demand was not futile. (Kellmer's Reply in Support of Mot. to
Intervene [Civ. No. 04-1783, Dkt #183] at 1).
Ultimately, on May 31, 2007, the Court dismissed the consolidated derivative
complaint because the plaintiffs failed "to make the requisite Rule 23.1 demand upon the
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Board of Directors of Fannie Mae prior to filing this derivative suit." In re Fannie Mae
Derivative Litig., 503 F. Supp. 2d at 14. My Memorandum Opinion specifically lists
Kellmer 11 as among the cases that had been consolidated, (id. at 13 & n.3), and as
indicated in the accompanying Order, the consolidated case was dismissed as to all
defendants, (id. at 24).2
Before the deadline for filing an appeal expired, the co-lead plaintiffs filed a
Notice of Appeal as to "ALL ACTIONS." (Notice of Appeal [Civ. No. 04-1783, Dkt.
#201 D. Kellmer neither filed his own appeal nor requested that the Court consider his
pending Motion to Intervene. Instead, a day after the co-lead plaintiffs docketed their
appeal, Kellmer filed a new lawsuit ("Kellmer 111'). (See Compl. [Civ. No. 07-1173, Dkt.
# 1D. By Kellmer's own admission, the claims in that lawsuit "relate back in all respects
to the original filing" in Kellmer 11. (ld.,-r 9). He commenced the new lawsuit in part
because the Clerk's Office had marked the docket in Kellmer 11 as "CLOSED." (ld.). In
the Complaint, Kellmer contends that the Court's Order dismissing the consolidated
action did not, and could not, dismiss his case because, unlike the other cases, he had
properly made a demand on Fannie Mae's board. (ld.,-r 8). Reiterating the same
argument, Kellmer moved on September 20, 2007, for clarification or for relief from the
judgment in Kellmer 11 pursuant to Federal Rule of Civil Procedure 60(b). (See PI.
2 Although the Memorandum Opinion and Order were not filed on the docket in
Kellmer 11, Kellmer's attorneys were added to the docket for the consolidated case, and as
a result, they received notice of the dismissal.
6
Kellmer's Mot. for Clarification, or, in the Alternative, for Relief from J. [Civ. No. 05-37,
Dkt. #27]). Fannie Mae, joined by the individual defendants, opposed the motion and at
the same time moved to dismiss the complaint in Kellmer III. (Fannie Mae's Omnibus
Mot. to Dismiss and Opp'n to Mot. for Relief from J. [Civ. No. 07-1173, Dkt. #24]; Ind.
Defs.' Mot. to Dismiss and Opp'n to Mot. for Relief from J. [Civ. No. 07-1173, Dkt.
#28]). They argued that the Court lacked subject matter jurisdiction while its decision in
Kellmer II was on appeal in our Circuit Court. Even though the filing of a notice of
appeal "confers jurisdiction on the court of appeals and divests the district court of
control over those aspects of the case involved in the appeal," the district court regains
jurisdiction after the court of appeals issues its mandate. United States v. Defries, 129
F.3d 1293,1302 (D.C. Cir. 1997). Now that the Circuit Court has upheld dismissal of the
consolidated action and has issued its mandate, this Court has regained jurisdiction thus
rendering the defendants' jurisdictional argument moot. Still standing, however, is the
defendants' alternative argument that Kellmer III should be dismissed on the ground of
claim preclusion.
Subsequent developments in the case arising from FHFA's appointment as Fannie
Mae's conservator have raised questions about whether this Court should still decide the
defendants' pending Motion to Dismiss. On September 6, 2008, months after the Circuit
Court upheld my decision to dismiss the consolidated derivative action, Fannie Mae, with
authorization from FHFA, moved to stay all cases related to the Fannie Mae multi-district
7
litigation. (Mot. for Stay of All Proceedings [Civ. No. 07-1173, Dkt. #61]). The Court
approved the stay for 45 days. (Order Granting Stay of All Proceedings [Civ. No. 07-
1173, Dkt. #65]). On January 22,2009, the Court granted FHFA's Motion to Intervene as
Conservator for Fannie Mae. (Minute Order entered in Civ. No. 07-1173 on Jan. 22,
2009). Several months later, on June 25, the Court granted FHFA's motion to substitute
itself for Kellmer and ordered FHFA to notify the Court of its position on the defendants'
pending Motion to Dismiss in Kellmer III. (Mem. Order [Civ. No. 07-1173, Dkt. #82] at
6-7). FHFA did so on July 27,2009, announcing "for the present" that it would "adopt[]"
the pleadings filed by Kellmer. (Status Report on the Mots. to Dismiss in Middleton and
Kellmer's Shareholder Derivative Compls. [Civ. No. 07-1173, Dkt. #88] at 2). FHFA
soon altered course. Claiming that it needed more time to decide whether prosecuting
Kellmer III would advance the statutory purpose of the conservatorship to preserve and
protect Fannie Mae's assets, FHFA moved on September 25 to dismiss the case without
prejudice under Federal Rules 23.l(c) and 41(a).3 Alternatively, FHFA requested a 180-
day stay. In response, the individual defendants filed a Motion to Dismiss with prejudice
under Rule 41(b) on the ground that FHFA has failed to prosecute the lawsuit diligently.
3Kellmer III is one of four shareholder derivative actions still pending before this
Court as part of the Fannie Mae multi-district litigation. The other cases were originally
captioned as Middleton v. Raines (Civ. No. 07-1221), Arthur v. Mudd (Civ. No. 07-2130),
and Agnes v. Raines (Civ. No. 08-1093). FHFA seeks to dismiss each of these cases
without prejudice.
8
DISCUSSION
I. Individual Defendants' Motion For Involuntary Dismissal With Prejudice
Last to be filed, but first to be addressed, is the individual defendants' Motion to
Dismiss with Prejudice for Failure to Prosecute. Rule 41(b) provides for involuntary
dismissal if the plaintiff "fails to prosecute" its case. Fed. R. Civ. P. 41(b). Typically,
dismissal is without prejudice. Under Local Civil Rule 83.23, "[a]n order dismissing a
claim for failure to prosecute shall specify that the dismissal is without prejudice, unless
the Court determines that the delay in prosecution of the claim has resulted in prejudice to
an opposing party." LcvR 83.23 (emphasis added). Thus, whether the Court should
dismiss the case with prejudice depends on whether the defendants can show that FHF A
"has not manifested reasonable diligence in pursuing the cause," Bomate v. Ford Motor
Co., 761 F.2d 713,714 (D.C. Cir. 1985), and that the resulting delay has caused them
prejudice.
The individual defendants have not shown to the Court's satisfaction that FHFA
has failed to exercise reasonable diligence under the circumstances in prosecuting
Kellmer's derivative claims. FHFA did not formally replace the original derivative
plaintiff until as late as June 2009, and since then, its conduct has not been so "dilatory or
contumacious" as to justify the stiff penalty of dismissal with prejudice. See Bristol
Petroleum Corp. v. Harris, 901 F.2d 165, 167 (D.C. Cir. 1990). FHFA has responded to
all of the Court's orders in a timely and reasonable fashion. It certainly has not disobeyed
9
any Court order. Furthermore, FHFA's Motion for Approval of Voluntary Dismissal
comes less than a mere three months after FHF A officially replaced the original plaintiff
and well before the eve of trial.
The real issue, therefore, is not whether FHF A's conduct until now has been
egregiously dilatory (it has not) but whether FHFA's decision to dismiss its claims with
the option of bringing them again in the future is itself so dilatory as to warrant dismissal
with prejudice. The individual defendants contend that in moving for voluntary dismissal
FHF A has stubbornly refused to announce whether or not it intends to proceed with
Kellmer's derivative action and that this intentional delay justifies involuntary dismissal
with prejudice. It goes without saying that a decision to move for voluntary dismissal
cannot-by itself-be a basis for granting involuntary dismissal. Were that so, then
voluntary dismissal under Rule 41(a)(2) would be a nullity. The question then is whether
FHFA's motion to dismiss without prejudice is an unwarranted deferral of a decision that
this Court has required FHFA to make. Ifso, then the Court may properly deem FHFA's
motion as an obstinate refusal to prosecute and thereby dismiss the case with prejudice.
Although I directed FHFA to submit a status report stating its position on the
defendants' pending Motion to Dismiss, I never gave FHF A the choice to proceed with
Kellmer's derivative claims or face the prospect of involuntary dismissal with prejudice.
It would "upset[] notions of fundamental fairness" for this Court, "in response to
[FHFA's] request for dismissal without prejudice," to dismiss the case with prejudice,
10
"while failing to give [FHF A] notice of its inclination to impose this extreme remedy."
Andes v. Versant Corp., 788 F.2d 1033,1037 (4th Cir. 1986). Having never warned
FHF A that a refusal to pursue Kellmer's claims in this litigation could result in dismissal
on the merits, I will not grant the individual defendants' Motion for Dismissal with
Prejudice under Rule 41 (b).
II. FHFA's Motion For Voluntary Dismissal Without Prejudice
Whether the Court should grant the individual defendants' motion for involuntary
dismissal is, however, a separate question from whether the Court should grant FHFA's
motion for voluntary dismissal. Denying the former does not mean that the Court should
grant the latter. Under the Federal Rules, a derivative action may be "voluntarily
dismissed ... only with the court's approval." Fed. R. Civ. P. 23.1(c). Voluntary
dismissal by court order is without prejudice unless the court states otherwise. Fed. R.
Civ. P. 41(a)(2). Before granting a motion for voluntary dismissal, the Court must satisfY
itself: (1) that the motion is sought in good faith, and (2) that the defendants will not
suffer "legal prejudice" if the case is dismissed. In re Vitamins Antitrust Litig., 198
F.R.D. 296, 304 (D.D.C. 2000). "Legal prejudice" is determined by considering four
factors: (1) the defendants' effort and expense in preparation for trial; (2) excessive delay
or lack of diligence on the plaintiffs' part in prosecuting the action; (3) the adequacy of
the plaintiffs' explanation for voluntary dismissal; and (4) the stage of the litigation at the
time the motion to dismiss is made. Id. Voluntary dismissal is generally "granted in the
11
federal courts unless the defendant would suffer prejudice other than the prospect of a
second lawsuit or some tactical disadvantage." Conafay v. Wyeth Labs., 793 F.2d 350,
353 (D.C. Cir. 1986).
Notwithstanding that courts typically grant voluntary dismissal, this Court is not
convinced that FHF A's motion is justified at this juncture. Even though the Court has no
reason to believe that FHF A is acting in bad faith, it has plenty of reason to believe that
the individual defendants will suffer legal prejudice if the Court grants FHFA's Motion
for Approval of Voluntary Dismissal without first resolving the defendants' dispositive
Motion to Dismiss, which had been pending for nearly two years before FHF A filed its
motion. To be sure, the individual defendants' efforts preparing for trial do not support a
finding of legal prejudice because the preparations made in this case can be used in other
cases that are part of the Fannie Mae multi-district litigation. Furthermore, the Court has
already determined that FHF A has been sufficiently diligent under the circumstances in
prosecuting Kellmer's claims. Notwithstanding that the first two of the four factors for
determining legal prejudice weigh in favor of FHF A's motion, the Court finds that
FHFA's explanation for requesting voluntary dismissal, coupled with the fact that the
defendants had already filed dispositive motions in this case, is enough to tip the balance
against FHF A's motion.
Before addressing FHF A's rationale for seeking voluntary dismissal, the Court
must first address FHF A's claim that it is entitled to prevail on its motion because the
12
Housing and Economic Recovery Act of2008 ("HERA"), 12 U.S.C. §§ 4501 et seq.,
precludes judicial review of FHF A's chosen course of action. FHF A contends that, as the
conservator of Fannie Mae, it is vested with the sole authority under HERA to protect and
preserve the assets of Fannie Mae and that its decision to seek voluntary dismissal is the
best means for accomplishing that end. Furthermore, according to FHF A, that decision is
not judicially reviewable by virtue of a provision in HERA that specifically provides:
"[N]o court may take any action to restrain or affect the exercise of powers or functions
of the Agency as a conservator." 12 U.S.c. § 4617(f).
FHFA construes this provision much too broadly. A careful reading reveals that
the Court is barred only from interfering with the powers or functions of FHF A "as a
conservator." All that means is that I cannot affect FHF A's power and authority to
manage Fannie Mae or to act on its behalf. It does not mean, however, that I am barred
from treating FHF A the same as any other litigant when FHF A invokes the authority of
this Court. Nothing in the language of Section 4617(1) purports to suspend the operation
of the Federal Rules as applied to FHFA. Nor does any language in that provision entitle
FHF A to different treatment as a litigant than Fannie Mae or its shareholders would have
received had FHFA not been appointed Fannie Mae's conservator. There being no
convincing basis for casting aside the usual standards governing motions for voluntary
dismissal under Rule 41(a)(2), this Court will not simply rubber stamp FHFA's motion.
13
Because FHF A is subject to the same rules as any other plaintiff seeking voluntary
dismissal, the Court will scrutinize the merits ofFHFA's request as it would any other.
FHF A claims that dismissal without prejudice "is necessary to allow for the Conservator
to thoroughly and effectively evaluate whether continued prosecution of the claims would
further the statutory purpose of the conservatorship to preserve and protect these assets."
(FHFA's Mem. in Support of Mot. for Approval of Voluntary Dismissal without
Prejudice [Civ. No. 07-1173, Dkt. #95] at 2). In light of Congress's decision to extend
the statute of limitations as long as three years for tort claims and six years for contract
claims from the date of the conservator's appointment, see 12 U.S.C. § 4617(b)(l2),
FHF A's explanation for withdrawing Kellmer's derivative claims is not wholly
unreasonable. By extending the limitations period, Congress seems to have contemplated
that FHF A might need more time to decide whether and how to pursue any claims it
inherited as Fannie Mae's newly-appointed conservator.
While FHFA's reason for seeking voluntary dismissal is not unreasonable, it is not
particularly compelling. As the regulatory body that oversees Fannie Mae, FHFA and its
predecessor the Office of Federal Housing Enterprise Oversight are already quite familiar
with the facts underlying Kellmer's derivative claims. Moreover, even though FHFA did
not substitute itself for Kellmer until three months before it moved for voluntary
dismissal, it intervened as Fannie Mae's conservator a full five months earlier. Thus,
FHF A was a party in the case for eight months before it filed its motion to dismiss
14
without prejudice. Given that FHF A had at least eight months to contemplate how this
case should proceed, the Court is not particularly persuaded by FHF A's request for more
time.
In addition to FHFA's less-than-compelling explanation for seeking non-suit, its
decision to move for voluntary dismissal nearly two years after the defendants had filed
their dispositive Motion to Dismiss weighs heavily against granting dismissal without
prejudice. One factor that courts have recognized as a basis for denying a motion for
voluntary dismissal under Rule 41 (a)(2) is the existence of an already-pending motion for
summary judgment. See, e.g., Pace v. S. Express Co., 409 F .2d 331, 334 (7th Cir. 1969);
Conafay, 793 F.2d at 352. The Court sees little reason not to extend that rule to a
defendant's fully briefed motion to dismiss, so long as that motion is already pending and
would actually dispose of the case on the merits. Defendants have a reasonable
expectation that when they file a motion that could resolve the case against
them-whether that motion is for dismissal or for summary judgment-the courts will
address it. Allowing plaintiffs to move successfully for voluntary dismissal after the
motion is ripe would deprive defendants of their reasonable expectation in a resolution of
their pending motion. Thus, it is fair to conclude that granting a motion for voluntary
dismissal that was filed after the defendants had already filed their dispositive motion
would indeed prejudice the defendants. As such, were the Court to grant FHFA's Motion
for Approval of Voluntary Dismissal, which FHF A had filed nearly two years after the
15
defendants' pending Motion to Dismiss, the individual defendants would suffer prejudice.
Voluntary dismissal in favor of FHF A is, therefore, not appropriate at this time.
III. Kellmer's Motion For Clarification Or For Relief From Judgment
Having declined to dismiss Kellmer 111 under Rule 41, I will consider the merits of
the pending Motion to Dismiss filed by Fannie Mae and joined by the individual
defendants. First, however, I will address Kellmer's Motion for Clarification or for
Relief from Judgment in Kellmer 11.4
Kellmer contends that this Court erred to the extent that it dismissed his claims as
part of the consolidated derivative action. I dismissed the consolidated action because the
plaintiff shareholders failed to make the requisite pre-suit demand on Fannie Mae's board
of directors pursuant to Rule 23.1. According to Kellmer, that rationale does not apply to
his claims because he, unlike the other shareholder derivative plaintiffs, had made the
required pre-suit demand. Consequently, he asks this Court for an order clarifying that it
did not actually dismiss his claims but that it dismissed only those claims where the
shareholder failed to make a demand on Fannie Mae's board.
4Even though FHFA, as Fannie Mae's conservator, has taken Kellmer's place as
the shareholder derivative plaintiff, the Court will treat Kellmer's pleadings as adopted by
FHFA. Now that the Court has rejected FHFA's Motion for Approval of Voluntary
Dismissal, the Court relies on FHFA's earlier representation that it would adopt
Kellmer's pleadings. (See Status Report on the Mots. to Dismiss in Middleton and
Kellmer's Shareholder Derivative Compls. [Civ. No. 07-1173, Dkt. #88] at 2).
16
There is no need for clarification because it is quite clear that this Court did indeed
dismiss Kellmer's case as part of the consolidated action. In granting consolidation, I
specifically determined that the distinction between "demand made" and "demand futile"
cases is insufficient to necessitate separate actions. (Feb. 14,2005 Mem. Op. and Order
[Civ. No. 05-37, Dkt. #25] at 4-5). As a result, I entered an order consolidating Kellmer
II with other shareholder derivative actions "for all purposes through final judgment."
(Pretrial Order No.1 [Civ. No. 05-37, Dkt. #26] at 3-4). I also directed that the dockets
for the individual cases be closed, (id. at 4), and that the plaintiffs file a consolidated
complaint that would "supersede all existing complaints filed in this action," (id. at 7).
When the plaintiffs, acting through co-lead counsel, filed their consolidated complaint,
they proceeded on a "demand futile" theory, not on a "demand made" theory. In re
Fannie Mae Derivative Litig., 503 F. Supp. 2d at 14. Not convinced by the theory
advocated by the plaintiffs in their consolidated complaint, I dismissed their case for
failure to make a pre-suit demand as required by Rule 23.1. Id. My Memorandum
Opinion specifically lists Kellmer II as among the cases that had been consolidated, id. at
13 & n.3, and the accompanying Order indicates that the consolidated case was dismissed
as to all defendants, id. at 24. Because it is clear from the my rulings and the procedural
history of this case that I dismissed Kellmer II as part of the consolidated action,
Kellmer's request for clarification is wholly unnecessary.
17
Undaunted, Kellmer raises an alternative argument, claiming that he is entitled to
relief from the judgment under Rule 60(b). The Rule provides in relevant part that "the
court may relieve a party or its legal representative from a final judgment, order, or
proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable
neglect; ... (4) the judgment is void; ... or (6) any other reason that justifies relief."
Fed. R. Civ. P. 60(b). In deciding a motion brought under this Rule, a district court has
substantial discretion. See Richardson v. Nat'l R.R. Passenger Corp., 49 F.3d 760, 765
(D.C. Cir. 1995). A court "must balance the interest in justice with the interest in
protecting the finality of judgments." Summers v. Howard Univ., 374 F.3d 1188, 1193
(D.C. Cir. 2004).
None of Kellmer's arguments convince me that the interest injustice outweighs
the interest in protecting the finality of the judgment in this case, especially now that our
Circuit Court has affirmed the judgment. At bottom, Kellmer's motion boils down to one
simple argument: The judgment violates due process and is manifestly unjust as applied
to him because it dismissed his case on grounds that were wholly inapplicable to the
demand-made theory he was advocating. By Kellmer's own admission, he does not
challenge the Court's decision to consolidate the derivative cases; rather, he challenges
the Court's decision to render judgment against him based on a consolidated complaint
filed by counsel for the co-lead plaintiffs that failed to advance his distinctive, demand-
made theory. (Kellmer's Reply [Civ. No. 07-1173, Dkt. #36] at 3). Kellmer contends
18
that he cannot be divested of his right to advance that theory by merging his case with
demand-futile cases. See Cablevision Sys. Dev. Co. v. Motion Picture Ass'n ofAm., Inc.,
808 F.2d 133,135 (D.C. Cir. 1987) ('''[C]onsolidation is permitted as a matter of
convenience and economy in administration, but does not merge the suits into a single
cause, or change the rights of the parties, or make those who are parties in one suit parties
in another.'" (quoting Johnson v. Manhattan Railway Co., 289 U.S. 479,496-97 (1933)).
Kellmer's argument would have much greater force if the right he asserts were
truly his own. In a shareholder derivative action, the "plaintiff shareholder sues on behalf
of the corporation," not on his own behalf. Henik ex reI. LaBranche & Co., Inc. v.
LaBranche, 433 F. Supp. 2d 372,380 (S.D.N.Y. 2006); see also Daily Income Fund, Inc.
v. Fox, 464 U.S. 523, 528 (1984) (stating that "a derivative action allows a stockholder to
step into the corporation's shoes and to seek in its right the restitution he could not
demand in his own" (internal quotation marks omitted)). Because the collection of
derivative suits brought on behalf of Fannie Mae arose from the same operative facts and
involved the same legal claims, this Court consolidated them and appointed co-lead
plaintiffs that it believed would fairly and adequately represent the interests of all
shareholders, including Kellmer, in enforcing Fannie Mae's rights pursuant to Rule 23.1.
In prosecuting the consolidated action, the co-lead plaintiffs opted to forego Kellmer's
demand-made theory and instead relied on a demand-futility theory to establish their
standing to bring the derivative claims.
19
That Kellmer disagrees with that decision does not entitle him to relief from the
judgment. All the shareholders must live with the strategic choices of the representative
shareholders ultimately charged with prosecuting the derivative action on behalf of the
corporation and its shareholders. A derivative action, whether brought by one or more, or
by all, of the shareholders "'is really the action of all the stockholders, as it is necessarily
commenced in their behalf and for their benefit, '" and "'it inevitably follows that there
can be but one adjudication on the rights of the corporation.'" Henik, 433 F. Supp. 2d at
380 (quoting Dana v. Morgan, 232 F. 85, 89 (2d Cir. 1916)). As a practical matter,
because all shareholder derivative plaintiffs act on behalf of the corporation and because
the corporation cannot be at odds with itself, there is a particular need for the
consolidation of derivative suits based on the same claims and for the appointment of a
representative shareholder plaintiff to prosecute those claims. And where there is a
disagreement between the representative shareholder and other shareholders, one side
must necessarily give way. It is not, therefore, unfair or prejudicial to Kellmer to subject
him to the same fate as all the other shareholders who must also subordinate their wishes
to those of the representative shareholders. Nevertheless, even if Kellmer did suffer
prejudice, the Court finds that the interest in remedying the harm does not overcome the
interest in preserving the finality of a judgment that Kellmer did not appeal and that has
since been affirmed by the Circuit Court.
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IV. Defendants' Motion To Dismiss
All that now remains to be decided is the Motion to Dismiss Kellmer III filed by
Fannie Mae and joined by the individual defendants. The complaint in that case is
substantially the same as the complaint in Kellmer II. Indeed, Kellmer even admits that
the claims in the new lawsuit "relate back in all respects to the original filing." (See
CompI. [Civ. No. 07-1173, Dkt. #1] ~ 9). The individual defendants argue, as a result,
that Kellmer III is barred by the doctrine of claim preclusion. Kellmer argues, however,
that his derivative claims, which are predicated on a demand-futility theory, are not
precluded because the Court never actually adjudicated them. In a replay of his argument
for relief from the judgment in Kellmer 11, Kellmer contends that the Court resolved only
the demand-futile claims, not his demand-made claim. This argument is not any more
persuasive the second time around.
Kellmer's obvious attempt to relitigate the very claims that the Court dismissed in
Kellmer 11 is foreclosed by the doctrine of claim preclusion. Under that doctrine, a "final
judgment on the merits of an action precludes the parties or their privies from relitigating
issues that were or could have been raised in that action." Federated Dep 't Stores v.
Moitie, 452 U.S. 394, 398 (1981). The elements for establishing claim preclusion are
well known: "[A] subsequent lawsuit will be barred if there has been prior litigation (1)
involving the same claims or cause of action, (2) between the same parties or their
privies, and (3) there has been a final, valid judgment on the merits, (4) by a court of
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competent jurisdiction." Capitol Hill Group v. Pillsbury, Winthrop, Shaw, Pittman, LLC,
569 F.3d 485, 490 (D.C. Cir. 2009). There seems to be no dispute regarding these
elements except that Kellmer contends that there is not a final judgment on the merits of
his demand-made claims. This argument, however, does not withstand even passing
scrutiny. For reasons that have already been explored, it is clear from the record that the
Court dismissed Kellmer's derivative claims on the merits in Kellmer II. That the Court
did not entertain litigation on his demand-made theory, however, does not make the
relitigation of his claims in Kellmer III proper. "[C]laim preclusion precludes the
relitigation of claims, not just arguments." Natural Res. De! Council v. EPA, 513 F.3d
257,261 (D.C. Cir. 2008) (emphasis in original). Its purpose is to prevent the relitigation,
not only of matters or arguments that were in fact litigated, but of matters or arguments
that could have been litigated but were not. Id. Because Kellmer's demand-made theory
could have been litigated as part of the consolidated action that disposed of Kellmer II,
the fact that it was not actually litigated cannot revive Kellmer's derivative claims.
Accordingly, those claims are precluded. 5
5Kellmer also argues that Kellmer III is viable as an "independent action" for
obtaining relief from "a judgment, order, or proceeding" pursuant to Rule 60( d)(1). As
Kellmer points out, this rule is designed "to prevent a grave miscarriage of justice."
United States v. Beggerly, 524 U.S. 38,47 (1998). For reasons already given, the Court's
dismissal of Kellmer' s derivative claims in Kellmer II is hardly a miscarriage of justice,
much less a grave miscarriage of justice. Thus, just as the Court rejected Kellmer's Rule
60(b) motion for relief from judgment, the Court also rejects this maneuver to obtain the
same relief.
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CONCLUSION
For the foregoing reasons, the individual defendants' Motion to Dismiss with
Prejudice for Failure to Prosecute and FHFA's Motion for Approval of Voluntary
Dismissal are both DENIED. In addition, Kellmer's Motion for Clarification or, in the
Alternative, for Relief from Judgment is also DENIED. Finally, the long-pending Motion
to Dismiss filed by Fannie Mae and joined by the individual defendants is GRANTED.
An appropriate Order consistent with this ruling is attached herewith.
~
``
RICHARD. E N
United States District Judge
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