In Re: Fannie mae/freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations ( 2023 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
BERKLEY INSURANCE CO., et al.,
Plaintiffs,
v. Case No. 1:13-cv-1053-RCL
FEDERAL HOUSING FINANCE
AGENCY, et al.,
Defendants.
In re Fannie Mae/Freddie Mac Senior
Preferred Stock Purchase Agreement Class Case No. 1:13-mc-1288-RCL
Action Litigations
This Order relates to: CLASS ACTION
ALL CASES
MEMORANDUM OPINION
Some parties just won't take no for an answer. Ever since this Court issued its summary
judgment decision prior to the first trial in these cases, see Fairholme Funds, Inc. v. FHFA
("Fairholme I"), Nos. 13-cv-1053, 13-mc-1288, 2022 WL 4745970 (D.D.C. Oct. 3, 2022),
plaintiffs have sought to tum back the clock on the orderly process of litigation in order to avoid
its consequences. Now plaintiffs in both No. 13-cv-1053 ("the Berkley Plaintiffs") and No. 13-
mc-1288 ("the Class Action Plaintiffs") once again seek, in effect, to reopen expert discovery; and
the Berkley Plaintiffs also seek leave to argue for a measure of damages the Court has already held
to be unavailable as a matter oflaw.
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Before the Court are Plaintiffs' Motion to Serve Supplemental Expert Reports ("Supp.
Expert Rep. Mot."), Berkley ECF No. 291, Class ECF No. 276, 1 and the Berkley Plaintiffs' Motion
to Present Evidence and Arguments Concerning Reliance Damages ("Reliance Damages Mot."),
Berkley ECF No. 296. For the reasons that follow, the Court will DENY both motions.
I. BACKGROUND
The factual and procedural background of this matter are recounted at length in multiple
prior opinions. See Fairholme I, 2022 WL 4745970, at *1-3; Fairholme Funds, Inc. v. FHFA, No.
1:13-cv-1053-RCL, 2018 WL 4680197, at *1--4 (D.D.C. Sept. 28, 2018); Perry Capital LLC v.
Lew, 70 F. Supp. 3d 208, 214-19 (D.D.C. 2014). The Court will therefore summarize the relevant
background only as necessary to resolve the motions at hand.
These suits grow out of the "Net Worth Sweep," an agreement between the Federal
Housing Finance Agency ("FHF A"), as conservator for the government-sponsored entities
("GSEs") Fannie Mae and Freddie Mac, and the U.S. Department of the Treasury ("Treasury")
requiring the GSEs to pay 100 percent of their net profits in excess of a predetermined capital
reserve to Treasury as compensation for Treasury's bailout of the GS Es following the 2008
financial crisis. Both sets of plaintiffs filed their complaints in 2013. See Berkley ECF No. 1, Class
ECF No. 1. After years of extensive litigation, the parties filed cross-motions for summary
judgment in April 2022, Berkley ECF Nos. 145, 146, Class ECF Nos. 143, 144, and a month later,
the Court set a trial date for October 17, 2022, see Berkley ECF No. 167, Class ECF No. 160.
In its summary judgment opinion, the Court held that plaintiffs' primary theory ofharm-
that the Net Worth Sweep deprived them of dividends that they otherwise would have received-
1
The Court will use "Berkley ECF No." to refer to docket numbers in No. 13-cv-1053 and "Class ECF No." to refer
to docket numbers in No. 13-mc-1288.
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was barred as a matter of law because it relied on the impermissibly speculative assumption that
Treasury would have allowed FHFA to pay down Treasury's Liquidation Preference2 in the GSEs
enough that the GSEs would have been able to pay dividends to other shareholders. See Fairholme
I, 2022 WL 4745970, at *9-10. The Court also held that one of plaintiffs' proposed remedies,
rescission and restitution, was barred by a provision of the Recovery Act, or "HERA," prohibiting
nonmonetary remedies for the FHFA's actions as conservator. See id. at *11-12. However, the
Court allowed an alternative theory of harm to proceed to trial, one based on the loss in share value
that the Net Worth Sweep allegedly caused by effectively eliminating the dividend rights that came
with those shares. See id. at * 11.
Shortly after the Court issued its summary judgment decision, both sets of plaintiffs filed
a motion for leave to amend their pretrial statement, serve a supplemental expert report, and adjust
the trial schedule, Berkley ECF No. 203, Class ECF No. 195, as well as a motion for clarification
and/or partial reconsideration, Berkley ECF No. 204, Class ECF No. 196. The Court denied both
motions. See Fairholme Funds v. FHFA ("Fairholme II"), Nos. 13-cv-1053-RCL, 13-mc-1288-
RCL, 2022 WL 11110548 (D.D.C. Oct. 11, 2022). The first of those motions, and the Court's
decision denying it, involved two of the same requests at issue in the present motions: (1) to serve
a supplemental expert report by existing expert witness Dr. Joseph Mason, and (2) to present
evidence and arguments concerning reliance damages. The Court denied both requests, in part
because they came on the eve of trial. As to the former request, the Court further reasoned that
plaintiffs had no excuse for failing to develop Dr. Mason's testimony earlier. Id. at *2-3. And as
to the latter request, the Court also concluded that reliance damages were unavailable as a matter
2
The Liquidation Preference is "a priority right before all other stockholders to receive distributions from assets in
the event of a liquidation." Fairholme I, 2022 WL 4 745970, at *2.
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of Delaware and Virginia law, which govern the claims in these cases, since the sum sought-$48
billion-far exceeded ascertainable expectation damages. Id. at *3-4.
The Court held the jury trial as scheduled, beginning on October 17, 2022. See Minute
Entry (Oct. 17, 2022). After three weeks, the jury hung, and the Court declared a mistrial. See
Minute Entry (Nov. 7, 2022).
On February 7, 2023, the Court set a second jury trial to begin on July 24, 2023. See Minute
Order (Feb. 7, 2023). Thereafter, plaintiffs in both cases filed a motion to serve supplemental
expert reports by Dr. Mason and another existing expert, Dr. Bala Dharan. Defendants filed an
opposition ("Supp. Expert Rep. Opp'n"), Berkley ECF No. 293, Class ECF No. 283, and plaintiffs
filed a reply ("Supp. Expert Rep. Reply"), Berkley ECF No. 294, Class ECF No. 284. That motion
is now ripe for review.
Subsequently, the Berkley Plaintiffs, but not the Class Action Plaintiffs, filed a motion for
leave to present evidence and arguments concerning reliance damages, asking "the Court to
reconsider its prior ruling precluding the Berkley Plaintiffs from seeking reliance damages in this
case----or, in the alternative, to clarify that the basis for precluding such damages is solely the
Court's ruling that they are unavailable as a matter oflaw, not any issue of timeliness or prejudice
to defendants." Reliance Damages Mot. at 2. Defendants filed an opposition ("Reliance Damages
Opp'n"), Berkley ECF No. 298, and the Berkley Plaintiffs filed a reply ("Reliance Damages
Reply"), Berkley ECF No. 299. That motion is also ripe for review.
II. LEGAL STANDARDS
A. Supplemental Expert Reports and Reopening Expert Discovery
Federal Rule of Civil Procedure 26(e)(l) provides as follows:
A party who has made a disclosure under Rule 26(a)-or who has
responded to an interrogatory, request for production, or request for
admission-must supplement or correct its disclosure or response:
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(A) in a timely manner if the party learns that in some
material respect the disclosure or response is incomplete or
incorrect, and if the additional or corrective information has
not otherwise been made known to the other parties during
the discovery process or in writing; or
(B) as ordered by the court.
Although that rule is phrased in terms of parties' obligations, courts have interpreted it to place
certain limits on parties' ability to voluntarily serve supplemental discovery materials. "Courts do
not allow supplemental or amended [expert] reports simply at the whim of a party;" in general,
"they are permitted: '(I) upon court order; (2) when the party learns that the earlier information is
inaccurate or incomplete; or (3) when answers to discovery requests are inaccurate or
incomplete.'" Barnes v. District ofColumbia, 289 F.R.D. 1, 6-7 (D.D.C. 2012) (quoting Minebea
Co., Ltd. v. Papst, 231 F.R.D. 3, 6 (D.D.C. 2005)).
When a party seeks to serve an expert report that is not merely supplemental, that is
effectively a request to reopen expert discovery, and thus it "falls under [Federal Rule of Civil
Procedure] 16(b) ... because it asks to modify the discovery deadlines contained in a scheduling
order." Cf id. at 14. That rule provides in relevant part that "[a] schedule may be modified only
for good cause and with the judge's consent." Fed. R. Civ. P. 16(b)(4). Furthermore, once a court
enters a final pretrial order, it may modify that order "only to prevent manifest injustice." Fed. R.
Civ. P. 16(e).
B. Reconsideration, Clarification, and the Law of the Case Doctrine
Motions for reconsideration of a prior order are governed by Federal Rule of Civil
Procedure 60(b ). Rule 60(b) motions are discretionary and allow the court to relieve a party or
attorney "from a final judgment, order, or proceeding" for one of a list of enumerated reasons,
such as "mistake, inadvertence, surprise, or excusable neglect"; "newly discovered evidence that,
with reasonable diligence, could not have been discovered in time to move for a new trial under
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Rule 59(b)"; or "fraud ... , misrepresentation, or misconduct by an opposing party." Fed. R. Civ.
P. 60(b)(l)--(3); see Jordan v. U.S. Dep't of Labor, 331 F.R.D. 444, 448-49 (D.D.C. 2019). "In
addition to the enumerated grounds for relief listed in Rule 60(b)(l) through (5), Rule 60(b)(6)
permits relief based on 'any other reason that justifies relief"' Walsh v. Hagee, 316 F.R.D. 2, 4
(D.D.C. 2015) (quoting Fed. R. Civ. P. 60(b)(6)). "This catchall provision has been interpreted to
apply when a party demonstrates 'extraordinary circumstances."' Marino v. Drug Enft Admin.,
685 F.3d 1076, 1079 (D.C. Cir. 2012) (quoting Pioneer Inv. Servs. Co. v. BrunswickAssocs. L.P.,
507 U.S. 380,393 (1993)).
"Although no Federal Rule of Civil Procedure specifically governs 'motions for
clarification,' these motions are generally recognized and allowed by federal courts .... The
general purpose of a classic 'motion for clarification is to explain or clarify something ambiguous
or vague[.]'" Barnes, 289 F.R.D. at 13 n.6 (brackets in original) (citing United States v. Philip
Morris USA Inc., 793 F. Supp. 2d 164, 168-69 (D.D.C. 2011) and quoting Resolution Trust Corp.
v. KPMG Peat Marwick, No. 92-cv-1373, 1993 WL 211555, at *2 (E.D. Pa. June 8, 1993)).
Also relevant to resolution of the Berkley Plaintiffs' motion is the law of the case doctrine.
That doctrine "refers to a family of rules embodying the general concept that a court involved in
later phases of a lawsuit should not re-open questions decided ... by that court or a higher one in
earlier phases." Wye Oak Technology, Inc. v. Republic ofIraq, 24 F.4th 686, 697 (D.C. Cir. 2022)
(ellipsis in original) (internal quotation marks omitted) (quoting Crocker v. Piedmont Aviation,
Inc., 49 F.3d 735, 739 (D.C. Cir. 1995)).
III. DISCUSSION
The Court will deny both of the present motions for many of the same reasons it denied
similar relief on the eve of the first trial, as well as one additional reason: Although the trial date
is further away this time, it would be unfair to allow plaintiffs to effectively reopen expert
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discovery and/or inject an additional damages theory unavailable at the first trial simply because
they managed to convince a jury to at least hang.
A. Plaintiffs May Not Serve Supplemental Expert Reports
Not content to play with the evidentiary hand they were dealt for the first trial, plaintiffs
seek to draw a few new cards, in the form of supplemental expert reports by Dr. Dharan and Dr.
Mason. In plaintiffs' words, Dr. Dharan's proposed report adds four points to the opinions laid out
in his previous reports and his trial testimony:
First, Dr. Dharan provides additional analysis regarding the
payment-in-kind (PIK) option that he addressed in his initial expert
repo1t and testified about at trial . . .. Second Dr. Dharan identifies
supplemental support in response to [defense expert] Dr. Attari ' s
event study by showing the absence of concern among GSE bond
and MBS investors, a topic that Dr. Dharan addressed in his Rebuttal
Report . . . . Third, Dr. Dharan refets to multiple documents
admitted [at] trial as well as additional documents produced by
FHFA and Treasury, supporting his preexisting opinion that the Net
Worth Sweep was not reasonably needed to address any concerns
over circular draws eroding the Treasury Commitment .... Fourth
Dr. Dharan supplements his trial testimony about "the outsized role
played by non-cash accounting adjustments on the GSEs financial
performance between 2008 and 2021 particularly 2008 to 2013 , 'in
support of which he presented data (at trial) showing the impact tbat
DTA valuation allowances and loan loss reserves (non-cash
accounting adjustments) had on the GSEs' reported comprehensive
mcome.
Supp. Expert Rep. Mot. at 4-7 (emphases and citations omitted). Dr. Mason's proposed report
addresses a single topic: his opinion that any loss in stock value caused by the announcement of
the Net Worth Sweep was not mitigated by a subsequent recovery in stock price. See id. at 8-11.
As an initial matter, the proposed reports are not merely supplemental in nature. That is,
plaintiffs do not assert that they seek to supplement or correct anything in the initial expert reports
that was "incomplete or incorrect." Fed. R. Civ. P. 26(e)(l)(A). Rather, they seek to bolster both
experts' existing testimony. In effect, plaintiffs are really asking the Court to reopen expert
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discovery so that they can shore up points of their experts' opinions that they did not anticipate
would feature as heavily at trial as they did. The motion is thus governed by Rule 16, not Rule
26(e).
As both parties note, neither the D.C. Circuit nor any court in this district has decided
whether a request to reopen discovery between a trial and a retrial is governed by Rule 16(b)(4)'s
"good cause" standard or Rule 16(e)'s "manifest injustice" standard. See Supp. Expert Rep. Opp'n
at 14; Supp. Expert Rep. Reply at 7. This Court need not decide that question, because plaintiffs
fail to meet even the lower bar of good cause.
Plaintiffs' stated "good cause" justification for Dr. Dharan's proposed report is that it
"responds to various new opinions offered by Dr. Attari at trial, other testimony offered by
Defendants' fact witnesses at trial, and inaccurate closing argument and misleading cross-
examination offered by Defendants' counsel." Supp. Expert Rep. Reply at 8 (double emphasis in
original). But that is not good cause to serve an entirely new report. To the extent that Dr. Dharan
wishes to opine on expert testimony or other evidence that defendants may present at trial,
plaintiffs are free to re-call him in their rebuttal case. Assuming it is otherwise admissible, such
testimony would be entirely permissible under Rule 703, which allows an expert to apply his
previously disclosed methodology to evidence "present[ed] at the trial," without filing a report
outlining that specific opinion in advance. Fed. R. Evid. 703 Advisory Committee Note; see Hill
v. Reederei F Laeisz G.MB.H, Rostock, 435 F.3d 404, 423 (3d Cir. 2006). And plaintiffs make
no meaningful attempt to show good cause for Dr. Mason's proposed report, merely arguing that
it would not prejudice defendants because it was disclosed far enough in advance of trial and
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relates to an opinion discussed in his prior report. See Supp. Expert Rep. Mot. at 8-12; Supp.
Expert Rep. Reply at 16. 3
More broadly, the interim period between a first and second trial is not, absent extenuating
circumstances, a proper time to reopen expert discovery. "Federal trial courts enjoy wide discretion
in handling pretrial discovery matters," Childers v. Slater, 197 F.R.D. 185, 187 (D.D.C. 2000),
and "[i]f a new trial is granted, .... [d]ecisions respecting the admission of additional witnesses
and proof should be guided by considerations of fairness and justice to all parties," Wright &
Miller, 11 Fed. Prac. & Proc., Civ. § 2803 (3d ed. Apr. 2023 update). This Court will not exercise
its discretion in a manner that disrupts the orderly process oflitigation and subverts basic principles
of fairness to the nonmoving party. Generally speaking, "[a] new trial means just that; it does not
also include new discovery." Allied Erecting and Dismantling Co., Inc. v. US. Steel Corp., No.
4:12-cv-1390, 2021 WL 3847782, at *4 (N.D. Ohio Aug. 27, 2021). It would be patently unfair to
defendants if the Court simply allowed plaintiffs, who generally bear the burden of proof in civil
suits, a second chance to bolster a record on which they were unable to secure a unanimous verdict
the first time around.
While plaintiffs cite some cases in which courts have allowed parties to serve supplemental
or additional expert reports after the close of discovery, all but one of them are inapposite. Some
did not involve a retrial. See Barnes 289 F.R.D. at 4-5; Richardson v. Korson, 905 F. Supp. 2d
193, 195-96 (D.D.C. 2012); Dormu v. District of Columbia, 795 F. Supp. 2d 7, 15-16 (D.D.C.
2011), Nnadili v. Chevron US.A., Inc., Nos. 02-cv-1620-ESH-AK, 03-1593-ESH-AK, 2005 WL
6271043, at *1 (D.D.C. Aug. 11, 2005). Others involved special considerations or limitations not
3The Court reserves decision as to whether to reconsider its ruling at the first trial sustaining defendants' objection to
Dr. Mason's testimony regarding a "recovery" in stock price, which was arguably based on an application of
previously disclosed methodology to other testimony presented at trial.
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at issue here. See Mondis Tech. Ltd. v. LG Electronics, Inc., No. 15-cv-4431-SRC, 2020 WL
1933979, at *5 (D.N.J. Apr. 22, 2010) (after vacating jury's damages award and ordering retrial,
allowing plaintiff to serve new expert report "based solely on the evidence presented at the
previous trial"); Hoffman v. Tonnemacher, No. 04-cv-5714-AWI, 2006 WL 3457201, at *3-4
(E.D. Cal. Nov. 30, 2006) (allowing new expert to testify at retrial when expert who testified at
first trial became unavailable); Yong ex rel. Yong v. The Nemours Foundation, 432 F. Supp. 2d
439, 441-42 (D. Del. 2006) (allowing plaintiffs to call new expert witness at retrial in lieu of expert
witness who sought to testify on same subject at first trial but was disqualified from doing so).
The only case plaintiffs cite in which a court in a similar posture allowed additional_ expert
discovery between a trial and a retrial is an unpublished, out-of-circuit decision that also required
the nonmoving party to pay attorneys' fees occasioned by the additional discovery. See White v.
McDermott, No. 3:08-cv-634-JBA, 2010 WL 4876025, at *2-3 (D. Conn. Nov. 19, 2020). At least
one other court has distinguished and declined to follow that case. See Allied Erecting and
Dismantling Co., Inc., No. 4:12-cv-1390, 2021 WL 5850693, at *5 (N.D. Ohio Dec. 9, 2021). This
Court will do the same. Plaintiffs have not offered to pay defendants' way through the additional
discovery, and at any rate, as just explained, the Court concludes in its discretion that it would be
unfair to defendants to turn back the clock at this juncture.
For these reasons, the motion for leave to serve supplemental expert reports will be denied.
B. The Berkley Plaintiffs May Not Seek Reliance Damages
Finally, the Berkley Plaintiffs' motion for leave to seek reliance damages at the retrial-
which the Class Action Plaintiffs do not join-merits little discussion. The Court denied the same
request just before the first trial, when plaintiffs sought leave to amend their pretrial statement,
reasoning that granting the request would prejudice defendants because it came on the eve of trial,
and that reliance damages were barred as a matter of Delaware and Virginia law. See Fairholme
II, 2022 WL 11110548, at *3-4. Although the first reason no longer applies, the Court stands by
the second and adds another.
The Berkley Plaintiffs' request is, in effect, nothing more than one for reconsideration of
the Court's prior ruling on the availability of reliance damages. Defendants point out that "the
Berkley Plaintiffs' motion does 'not even cite, much less apply, the stringent standard for
reconsideration of a court's prior order'" under Rule 60(b ). Reliance Damages Opp'n at 1 (quoting
Fairholme II, 2022 WL 11110548, at *6). True though that may be, the Berkley Plaintiffs are
technically correct that, because they are not seeking reconsideration of the "order" that denied
them a chance to amend their first pretrial statement, Rule 60(b) does not apply. See Reliance
Damages Reply at 3; Fed. R. Civ. P. 60(b).
Nevertheless, the Court stands by its prior holding that reliance damages are unavailable
as a matter of law, which is the law of this case. See Wye Oak, 24 F.4th at 697. The Berkley
Plaintiffs acknowledge that the law of the case "doctrine would apply, at most, to the merits of
seeking reliance damages," Reliance Damages Mot. at 4 (emphasis removed), and they make no
effort to explain why the Court should depart from that doctrine here, except to rehash the same
arguments they made before. The Court stands by its prior reasoning and reaffirms that reliance
damages are unavailable here as a matter of Delaware and Virginia law because "plaintiffs
asserting contract claims cannot recover reliance damages so far in excess of ascertainable
expectation damages that they would necessarily place those plaintiffs in a better position than
they would have been in had the contract been performed." Fairholme II, 2022 WL 11110548, at
*4.
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Furthermore, even if the Court had reason to reconsider its prior holding on the merits, it
would exercise its inherent "trial-management discretion" to preclude the injection of a new
damages measure between the first and second trials, based on fairness concerns similar to those
discussed above with respect to the proposed supplemental expert reports. Cf id. at *3. Again,
"[i]f a new trial is granted, .... [d]ecisions respecting the admission of additional witnesses and
proof should be guided by considerations of fairness and justice to all parties," Wright & Miller,
11 Fed. Prac. & Proc., Civ. § 2803. Even assuming there would be no need to take additional
discovery, it would be fundamentally unfair to defendants to require the presentation of evidence
and arguments on an entirely new and substantial issue at the second trial simply because the jury
hung at the first. That is particularly true where the issue "was alluded to once four [now five]
years ago and never developed during discovery." Fairholme II, 2022 WL 11110548, at *3.
For these reasons, the Court will deny the Berkley Plaintiffs' motion for leave to seek
reliance damages.
IV. CONCLUSION
For the foregoing reasons, the Court will DENY Plaintiffs' Motion to Serve Supplemental
Expert Reports, and the Court will DENY the Berkley Plaintiffs' Motion to Present Evidence and
Arguments Concerning Reliance Damages. A separate Order shall issue this date.
Date: June ___!:_, 2023
Royce C. Lamberth
United States District Judge
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