On July 24, the U.S. Court of Appeals for the District of Columbia Circuit affirmed a district court judgment holding that the FHFA violated the implied covenant of good faith and fair dealing owed to shareholders of Fannie Mae and Freddie Mac (the “Enterprises”) when it adopted a 2012 dividend arrangement known as the Net Worth Sweep. The FHFA had been appointed conservator of the Enterprises during the 2008 housing crisis under the Housing and Economic Recovery Act, which authorized the agency to take actions it determined were in the best interests of the regulated entities or of the agency itself. Under a 2008 agreement, the Enterprises paid the Treasury a fixed-rate quarterly dividend in exchange for capital, but in August 2012 the FHFA and the Treasury replaced that arrangement with a requirement that the Enterprises pay the Treasury a quarterly dividend equal to the amount by which their net worth exceeded their capital reserve, eliminating the possibility of future shareholder dividends. Shareholders sued for damages, and a jury found the FHFA had breached the implied covenant, awarding $612.4 million, which the district court increased to a final judgment of $812 million after adding prejudgment interest.

On appeal, the FHFA argued: (i) that the implied covenant claim was barred by the U.S. Supreme Court’s 2021 decision in Collins v. Yellen (previously covered by InfoBytes here); (ii) that no gap existed in the shareholder agreements for the implied covenant to fill; (iii) that the claim was really a non-cognizable claim for anticipatory breach; (iv) that the shareholders failed to prove harm; and (v) that shareholders who purchased their shares after the Net Worth Sweep was announced lacked standing. The D.C. Circuit rejected each argument, holding: (i) that the Supreme Court’s earlier ruling addressed only a statutory claim for injunctive relief and did not foreclose a contract claim for damages; (ii) that the statute’s broad grant of discretion to the FHFA left room for the implied covenant to apply; (iii) that the breach was present rather than anticipatory; (iv) that the jury had a sufficient basis to find harm; and (v) that the claims traveled with the shares under Delaware and Virginia law. On cross-appeal, the court also upheld the denial of a subset of plaintiffs’ bids for $48 billion in restitution, finding it would improperly interfere with the FHFA’s authority as conservator, and for reliance damages, which were unavailable given ascertainable expectation damages.