Court Opinion

ID: 2665574
Source: CourtListenerOpinion
Date Created: 2014-04-04 07:53:44.823789+00
Date Added: 2024-06-11T13:24:47.166612
License: Public Domain

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               Civil Case No. 08-1093 (RJL)
 Conservator for the Federal National
 Mortgage Association v. Raines, et al.
  A nes)

                              MEMO~M ORDER
                              (July z:j, 20 I 0) [#77, 83, 87]

       Before the Court are two motions, both of which seek dismissal of this case but for

very different reasons. The first motion, which was filed by the plaintiff Federal Housing

Finance Agency ("FHFA") as the conservator for the Federal National Mortgage

Association ("Fannie Mae"), requests voluntary dismissal without prejudice or, in the

alternative, a 180-day stay. FHFA claims that it needs more time to decide whether the

prosecution of this case would advance the statutory purpose of the conservatorship to

preserve and protect the assets of Fannie Mae. Three of the defendants-Franklin D.

Raines, J. Timothy Howard, and Leanne G. Spencer (collectively, "the individual

defendants")-responded with a motion of their own asking for dismissal with prejudice

on the ground that FHFA has failed to prosecute the case with sufficient diligence. For

the following reasons, FHFA's motion is GRANTED, and the individual defendants'

motion is DENIED.

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                                     BACKGROUND

       This case, formerly captioned as Agnes v. Raines, is one of four shareholder

derivative actions still pending against a long list of former and then-current officers and

directors of Fannie Mae, as well as other third parties. 1 The case was originally

commenced by L. Jay Agnes on June 25,2008. (See Compi. [#1]         ~   1). His Complaint

alleged, among other things, claims arising from Fannie Mae's accounting practices

("accounting claims") and claims arising from Fannie Mae's participation in the

subprime financing of home mortgages ("subprime claims"). (See id.). Just over two

months later, on September 8, 2008, Fannie Mae, with authorization from its recently-

appointed conservator FHFA, moved to stay all cases related to the Fannie Mae multi-

district litigation. (Mot. for Stay of All Proceedings [#4]). The Court approved the stay

for 45 days. (Order Granting Stay of All Proceedings [#8]). On January 22, 2009, the

Court granted FHF A's Motion to Intervene as Conservator for Fannie Mae, (Minute

Order entered Jan. 22, 2009), and on June 25,2009, the Court granted FHFA's motion to

substitute itself for the shareholder derivative plaintiff, (Mem. Order [#61]). The Court

also ordered FHF A to submit within 30 days a proposed order to sever the plaintiffs

accounting claims from the subprime claims. (Jd.). After the Court denied FHFA's

motion for an extension of time, FHF A submitted the proposed order on July 27, 2009.

(Notice of Filing [#73]). Several days later, on August 4,2009, the Court entered an

order severing the accounting claims from the subprime claims and granting FHF A leave

      IThe other cases were originally captioned as Kellmer v. Raines (Civ. No. 07-
1173), Middleton v. Raines (Civ. No. 07-1221), andArthurv. Mudd (Civ. No. 07-2130).
FHF A seeks to dismiss each of these cases without prejudice.

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to file within 30 days an amended complaint containing the accounting claims and a

separate amended complaint containing the subprime claims. (Order [#74]). Rather than

filing the amended complaints, FHFA moved to dismiss the case without prejudice under

Federal Rules of Civil Procedure 23.1(c) and 41(a). In the alternative, FHFA requested a

180-day stay so that it may have additional time to determine whether the continued

prosecution of the case comports with the statutory purpose of the conservatorship. In

response, the individual defendants moved to dismiss the case with prejudice under Rule

41 (b) on the ground that FHF A has failed to prosecute the lawsuit diligently. 2

                                       DISCUSSION

       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. 4l(a)(2). These dismissals

are generally "granted in the 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). Unlike Rule 41(a)(2), Rule 41(b)

provides for involuntary dismissal if the plaintiff "fails to prosecute" its case. Fed. R.

Civ. P. 41 (b). Local Civil Rule 83.23 further provides that "[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. Whether the Court should deny FHFA's Motion for

       2For his part, plaintiff Agnes, along with another derivative plaintiff in a related
case, James Kellmer, filed a Motion for Leave of Court to Appear as Amici Curiae. This
motion is DENIED.

                                              3
Approval of Voluntary Dismissal without Prejudice and grant the individual defendants'

Motion to Dismiss the Accounting-Related Claims with Prejudice for Failure to

Prosecute thus depends on whether the individual 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.

       To say the least, I am not convinced that FHFA has failed to exercise reasonable

diligence in prosecuting its derivative claims. FHF A 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). Indeed, FHFA

has responded to all of the Court's orders in a reasonable fashion, and it certainly has not

disobeyed any Court order. Furthermore, FHFA's motion comes less than a mere three

months after FHF A officially replaced the original plaintiff. It is also significant that no

dispositive motions have been filed, 3 nor is the case on the eve of trial.

         3 In this respect, this case is different from Kellmer v. Raines (Civ. No. 07-1173)

and Middleton v. Raines (Civ. No. 07-1221), in which the Court denied FHFA's Motion
for Approval of Voluntary Dismissal partly because Fannie Mae had already filed a
dispositive motion to dismiss, which the individual defendants had joined. Although the
individual defendants have not yet had an opportunity to file a motion to dismiss in this
case, the Court is mindful that, should FHF A refile Agnes's accounting-related claims,
the individual defendants intend to move for dismissal based on claim preclusion. (See
Defs.' Response to Status Report and Notice of Filing by FHFA [#75] at 4). To the
extent that the Court dismissed Kellmer on claim preclusion grounds, ifFHFA were to
file this case again in the future, it would likely meet a similar fate.

                                               4
       The real issue, therefore, is not whether FHF A's conduct until now has been

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 defendants contend that in moving for voluntary dismissal FHF A has

stubbornly refused to make known its intention whether or not it will proceed with its

derivative action against the individual defendants 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 FHF A was obligated to make. If so, then the Court may properly

deem FHF A's motion as an obstinate refusal to prosecute and thereby dismiss the case

with prejudice.

       The individual defendants' suggestion that the Court required FHF A to decide

once and for all whether it would prosecute the derivative claims and that it refused to do

so is not correct. I did not direct FHFA to state whether it intended to proceed with the

derivative action or face dismissal with prejudice. To the contrary, I merely granted

FHFA leave to file an amended complaint within 30 days. (Order [#74]        ~   2). FHFA

opted not to file an amended complaint and instead filed a motion for voluntary

dismissal, as it was permitted to do under Rule 41(a)(2). That is hardly the sort of

egregiously dilatory conduct that constitutes failure to prosecute and that justifies the

harsh penalty of involuntary dismissal with prejudice. Indeed, given Congress's decision

                                              5
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 )(12), FHFA's decision to withdraw its claims with the option of bringing them

later is not wholly unreasonable. By extending the limitations period, Congress

acknowledged that FHF A might need more time to decide whether and how to pursue the

claims it inherited as Fannie Mae's newly-appointed conservator. Furthermore, because

the Court never warned FHF A that failure to file an amended complaint could result in

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, "while failing to give [FHFA] notice of its inclination to impose this

extreme remedy." Andes v. Versant Corp., 788 F.2d 1033, 1037 (4th Cir. 1986). In

short, I will not penalize FHF A so harshly for deferring a decision that I never expressly

required FHF A to make.

       Even were I to conclude that FHFA's decision to seek voluntary dismissal

constituted dilatory conduct, the individual defendants, nevertheless, have failed to show

that they would suffer the sort of prejudice that would justify dismissal on the merits.

The defendants point to three consequences that, they believe, constitute severe prejudice.

They claim that further delay will prolong the hardship under which they have labored

since allegations of wrongdoing first arose over five years ago. They also claim that

FHFA's refusal to announce whether it intends to pursue the derivative action will disrupt

their discovery strategy in the consolidated Fannie Mae litigation. Lastly, they claim that

dismissal without prejudice will undermine the efficiencies sought to be achieved by

                                              6
consolidating the Fannie Mae cases and that, should FHF A decide to relitigate this
                                                                                             4
derivative action, more depositions of individuals already deposed will have to be taken.

There is little doubt that these consequences are burdensome to the individual defendants.

Nevertheless, they do not cause the sort of prejudice that would justify the extraordinary

remedy that the defendants seek. Surveying the case law, our Circuit Court has observed

that dismissals without prejudice are generally granted "unless the defendant would

suffer prejudice other than the prospect of a second lawsuit or some tactical

disadvantage." Conafay, 793 F.2d at 353. Here, the individual defendants do not claim

anything more than that they will be inconvenienced by future relitigation of this case

(should it come to pass) and that their discovery strategy in the consolidated Fannie Mae

litigation will be disrupted. Because the individual defendants have not shown that they

would suffer something more prejudicial than the burden of a second lawsuit or of some

tactical disadvantage or inconvenience, the individual defendants' Motion to Dismiss

with Prejudice for Failure to Prosecute is DENIED, and FHFA's Motion for Approval of

Voluntary Dismissal without Prejudice is GRANTED.

                                           ***
      Accordingly, it is hereby

      ORDERED that FHFA's Motion for Approval of Voluntary Dismissal without

Prejudice [#77] is GRANTED; it is further

      4 The individual defendants' argument that further delay will cause memories to
fade and evidence to go stale is ultimately unavailing given that Congress has made the
considered judgment to extend the limitations period for any claims brought by FHF A as
Fannie Mae's conservator.

                                            7
       ORDERED that Defendants Franklin D. Raines's, J. Timothy Howard's, and

Leanne G. Spencer's Motion to Dismiss the Accounting-Related Claims with Prejudice

for Failure to Prosecute [#83] is DENIED; it is further

       ORDERED that the Motion of Shareholders James Kellmer and Jay Agnes for

Leave of Court to Appear as Amici Curiae [#87] is DENIED; and it is further

      ORDERED that the case is DISMISSED without prejudice.

      SO ORDERED.
                                                          I

                                                 2w.J'~I~
                                                RICHARDJ.
                                                United States District Judge

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