Timothy Pagliara v. Federal National Mortgage Association

Citation: Not availableDocket: 12105-VCMR

Court: Court of Chancery of Delaware; May 31, 2017; Delaware; State Appellate Court

Original Court Document: View Document

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

A motion to dismiss or substitute the plaintiff is pending in the case Timothy Pagliara v. Federal National Mortgage Association, Civil Action No. 12105-VCMR. The court grants the motion to dismiss. Timothy J. Pagliara, a preferred stockholder of Fannie Mae, filed a Verified Complaint concerning the corporate governance practices of Fannie Mae, which is governed by Delaware law. Fannie Mae, established to enhance liquidity in the mortgage market, transitioned to being privately owned and publicly traded between 1968 and 1970 while remaining under federal regulation. In 2002, Fannie Mae was directed to adhere to Delaware General Corporation Law following the filing of its certificate of incorporation in Delaware.

The Housing and Economic Recovery Act of 2008 (HERA) was enacted to stabilize the mortgage market, resulting in the Federal Housing Finance Agency (FHFA) taking over Fannie Mae. On September 7, 2008, Fannie Mae was placed into conservatorship, and the U.S. Treasury Department entered a Preferred Stock Purchase Agreement, acquiring one million shares of Senior Preferred Stock with a liquidation preference of $1,000 per share, among other benefits, including a warrant for 79.9% of Fannie Mae's common stock.

Following Fannie Mae's return to profitability, the Third Amendment to the Agreement was made on August 17, 2012, changing the Treasury's 10% dividend to a “net worth sweep,” allowing the Treasury to receive a significant portion of Fannie Mae's net worth indefinitely. By the time of Pagliara’s Complaint, this arrangement resulted in an increase of $78.2 billion in dividends to the Treasury Department.

On January 19, 2016, Pagliara's counsel served a Section 220 demand on Fannie Mae to obtain documents related to potential misconduct involving the approval of the Third Amendment, associated dividend payments, and other investments. Fannie Mae, through the FHFA, rejected this demand on January 27, 2016. Pagliara filed a Complaint on March 14, 2016, which Fannie Mae subsequently removed to federal court on March 25, 2016. The case was remanded to state court on March 8, 2017, and Fannie Mae filed a motion to dismiss or to substitute the FHFA as plaintiff on March 31, 2017. 

The court first addressed the motion to dismiss for lack of personal jurisdiction under Rule 12(b)(2), noting that the plaintiff bears the burden to establish a prima facie case for jurisdiction. Pagliara’s Complaint was found to sufficiently allege personal jurisdiction over Fannie Mae in Delaware, as it indicated that Fannie Mae filed a certificate of incorporation in Delaware in 2002 and highlighted relevant bylaw provisions. The court noted that despite Fannie Mae's argument that the certificate referred to a different entity and was voided in 2004 for non-payment of taxes, Delaware law allows for personal jurisdiction over corporations without a valid certificate of incorporation. The court deemed that Pagliara was entitled to jurisdictional discovery but acknowledged both parties' requests to proceed without it, leading to the conclusion that jurisdictional discovery would be deemed futile. Consequently, the court proceeded to examine the Rule 12(b)(6) motion to dismiss for failure to state a claim.

Pagliara's complaint against Fannie Mae is dismissed based on issue preclusion, as the central issue regarding his right to inspect Fannie Mae’s books and records has already been resolved against him in a previous case, Pagliara v. Federal Home Loan Mortgage Corporation. Fannie Mae's motion to dismiss under Court of Chancery Rule 12(b)(6) is supported by the principle that a case may only be dismissed if the plaintiff cannot recover under any conceivable circumstances. The court must accept well-pleaded facts as true, but not conclusory allegations without factual support. 

Federal law governs the preclusive effect of federal judgments, with the law of the state where the federal court is located determining the effects when state law is the substantive law. In this context, federal preclusion law applies since the evaluation of Fannie Mae’s defense involves federal law under HERA Section 4617(b)(2)(A)(i). The U.S. Supreme Court often references the Restatement (Second) of Judgments for the elements of issue preclusion: the issue must be actually litigated, determined by a valid judgment, and essential to that judgment. An exception exists for legal issues when claims are substantially unrelated or when an intervening legal change necessitates a new determination.

The Eastern District of Virginia's ruling precludes Pagliara from relitigating whether HERA Section 4617(b)(2)(A)(i) transferred stockholders' rights to seek records to the FHFA, as this issue was fully litigated with Pagliara having the opportunity to argue against the motion. Pagliara’s appeal of this judgment was voluntarily dismissed. He contends that the “pure legal question” exception applies, arguing that the subsequent D.C. Circuit decision in Perry Capital LLC v. Mnuchin altered the legal landscape. However, Perry Capital addressed a distinct issue concerning the sufficiency of stockholder claims against Fannie Mae and Freddie Mac, not the right to inspect records, reinforcing the preclusive effect of the prior judgment.

The D.C. Circuit upheld the lower court's ruling in Perry Capital, determining that Section 4617(b)(2)(A)(i) of HERA transfers stockholders' rights to bring derivative claims to the FHFA, regardless of any conflict of interest, resulting in the dismissal of stockholders' derivative claims. Although Fannie Mae stockholders retain the right to bring direct claims, such as a Section 220 claim, the Eastern District of Virginia found that Pagliara needed an underlying right to support his claim for books and records. The court ruled that Section 4617(b)(2)(A)(i) divested stockholders of the right to seek these records, rendering the derivative-versus-direct distinction irrelevant in this context.

Pagliara's case was distinguished from Perry Capital as it was the only case cited concerning a stockholder action for books and records. However, the court disagreed with Pagliara’s assertion that Perry Capital's ruling did not apply, emphasizing that the Eastern District's findings were not materially different from prior rulings. The district court had previously addressed only the jurisdictional aspect of Pagliara's Section 220 claim, indicating that not all stockholder rights were preempted by Section 4617(b)(2)(A). The court clarified that a federal defense does not establish federal jurisdiction over state-law claims.

The court rejected Pagliara's argument that the holding regarding Section 4617(b)(2)(A)(i) was non-essential, confirming that it was a primary basis for judgment, while the determination about proper purpose under Virginia law was an alternative finding. Ultimately, the court concluded that Pagliara does not have the right to inspect corporate records and dismissed the Complaint, granting Defendant’s Rule 12(b)(6) motion to dismiss.