United States: Court Of Chancery Dismisses Complaint Seeking To Enforce A Stockholder's Section 220 Demand To Inspect The Books And Records Of Fannie Mae On Issue Preclusion Grounds

Last Updated: August 1 2017
Article by David L. Forney and David Valenti

In Pagliara v. Federal National Mortgage Association, C.A. No. 12105-VCMR (Del. Ch. May 31, 2017) the Court of Chancery dismissed a complaint brought by a preferred stockholder of Federal National Mortgage Association ("Fanny Mae") seeking to enforce his rights under Section 220 of the Delaware General Corporation Law to obtain documents ("Section 220 Demand") to investigate certain actions of Fannie Mae on issue preclusion grounds. The Court of Chancery ruled that a prior judgment of the Eastern District of Virginia was preclusive on the dispositive issue of whether Fannie Mae stockholders retained the right to obtain the corporate books and records of Fannie Mae under the Housing and Economic Recovery Act of 2008 (the "HERA").

By the early 2000s, Fannie Mae, which was originally designed by the federal government to improve the mortgage market, was largely privately owned and publicly traded but remained subject to federal regulation. In 2008, at the height of the U.S. housing crisis, Congress passed the HERA to stabilize the housing market. The HERA replaced Fannie Mae's regulator with the newly created Federal Housing Finance Agency (the "FHFA") and authorized the FHFA to put Fannie Mae into conservatorship. After being placed into conservatorship, Fannie Mae entered into a preferred stock purchase agreement (the "SPA") with the U.S. Department of Treasury (the "Treasury").

Under the SPA, Fannie Mae, among other things, issued one million shares of its Senior Preferred Stock, which had a senior liquidation preference of $1,000 per share and was entitled to a 10% cumulative cash dividend, to the Treasury. In 2012, Fannie Mae and the Treasury amended the SPA to replace the Treasury's 10% cash dividend with a "net worth sweep," such that Fannie Mae would distribute the bulk of its quarterly net worth to the Treasury for an indefinite period of time (the "Amendment"). As a result of the Amendment, the Treasury's dividends allegedly increased by $78.2 billion.

In January 2016, plaintiff Timothy J. Pagliara ("Plaintiff"), a preferred stockholder of Fannie Mae, made a Section 220 Demand on Fannie Mae, seeking documents and records to investigate whether the decisions to approve the Amendment constituted misconduct. Fannie Mae rejected Plaintiff's requests. In March 2016, Plaintiff filed suit and Fannie Mae removed the action to the United States District Court for the District of Delaware. In March 2017, the United States District Court for the District of Delaware remanded the case and Fannie Mae filed a motion to dismiss under (i) Court of Chancery Rule 12(b)(2) for lack of personal jurisdiction, and (ii) Rule 12(b)(6) for failure to state a claim. The Court of Chancery found that Plaintiff's complaint sufficiently alleged a prima facie case for personal jurisdiction based on the filing of the certificate of incorporation. The Court of Chancery then addressed Fannie Mae's Rule 12(b)(6) motion to dismiss.

Fannie Mae argued that Plaintiff's compliant should be dismissed on issue preclusion grounds because the dispositive issue in this case — whether Plaintiff has the right to inspect Fannie Mae's books and records — was previously decided against Plaintiff in Pagliara v. Federal Home Loan Mortgage Corporation, 203 F.Supp. 3d 378 (E.D. Va. 2016) (the "Virginia Case"). In the Virginia Case, the United States District Court for the Eastern District of Virginia held that a provision of the HERA transferred the rights of the stockholders to seek the books and records of the Federal Home Loan Mortgage Corporation ("Freddie Mac"), a regulated entity under the HERA like Fannie Mae, to the FHFA. Plaintiff had similarly sought books and records from Freddie Mac under Virginia corporate law. The court in the Virginia Case was faced with the question of whether Freddie Mac stockholders retained their right to examine books and records, and whether the relevant provision of the HERA divested stockholders of that right.

The Court of Chancery, applying federal law, noted that a party to a prior proceeding is precluded from litigating an issue when (i) the "issue of fact or law has been actually litigated" in the prior proceeding, (ii) the issue has been "determined by a valid and final judgment," and (iii) "the determination is essential to the judgment." An exception, however, may apply if the issue is one of law, and (i) the two actions involve claims that are substantially unrelated, or (ii) a new determination is warranted in order to take into account an intervening change in the legal context or to avoid an inequitable administration of the law. The Court of Chancery found that the Virginia Case is preclusive because (i) Plaintiff had a full opportunity to oppose the motion to dismiss in the Virginia Case, and his counsel appeared and argued the motion to dismiss; (ii) the decision was reduced to a final judgment, which Plaintiff appealed and then voluntarily dismissed; and (iii) the interpretation of the relevant provision of the HERA was essential to the Virginia court's decision.

Notably, the Court of Chancery rejected both of Plaintiff's arguments asserting that an exception to issue preclusion applies in this case. First, Plaintiff asserted the dispositive issue in this case is a pure legal question, and a subsequent case, Perry Capital LLC v. Mnuchin, 848 F.3d 1072 (D.C. Cir. 2017) (the "D.C. Case"), rejected the Virginia Case and altered the legal context. The Court of Chancery, however, disagreed, noting that the D.C. Case considered a different issue — the legal sufficiency of stockholder direct and derivative claims against Fannie Mae and Freddie Mac arising out of the Amendment. Next, Plaintiff asserted that the prior order by the United States District Court for the District of Delaware in the present case changed the legal context. The Court of Chancery also rejected this argument, noting that the United States District Court for the District of Delaware considered only certain jurisdictional issues relevant to the case, not the merits. Lastly, the Court of Chancery stated that the claims in the Virginia Case and the current action were not substantially unrelated. Rather, in both actions Plaintiff sought books and records for the purposes of examining misconduct related to Treasury investments in Fannie Mae and Freddie Mac. The two claims are not substantially unrelated because (i) Fannie Mae and Freddie Mac are both regulated entities under HERA, and (ii) the primary holding of the United States District Court for the Eastern District of Virginia in the Virginia Case was that the relevant provision of the HERA bars a stockholder from examining books and records.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions