Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-10-05390/USCOURTS-caDC-10-05390-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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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, 

USCA Case #10-5390 Document #1366414 Filed: 03/30/2012 Page 1 of 8
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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 

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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 

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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, 

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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 

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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, 

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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.

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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.

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