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The impact on litigation.  The last question is how these revelations will impact ongoing litigation.  The documents were released in connection with the Fairholme takings claim in the Federal Court of Claims.  The sound theory of that case is that government had confiscated shareholder property when it stripped them of their dividend rights, their liquidation preferences, and their voting rights—the three attributes that give shares their value. Similarly, Jerome Corsi at InfoWars stated: “New Docs Support Fannie Mae and Freddie mac Shareholders in Court: Apologist [John Carney] Ignores Evidence They Illegal Confiscated Fannie and Freddie Earnings.”

That claim is made out by an examination of the relevant documents. If these cases are treated as direct expropriation of funds, governed by the per se rule in Loretto v. Teleprompter  Manhattan CATV Corp.  the bad faith of the government should not matter.  But, if, as thus far has been the case, the NWS is evaluated under the more flexible doctrine of Penn Central Transportation Company v. City of New York this evidence fills any gap in the plaintiff’s case. Penn Central requires an explicit examination of the government reasons for imposing the sweep.  The Treasury’s bad faith of the government overrides any potential government justification for making these shareholders bear a disproportionate share of funding general government activities.  In the language of Penn Central, the NWS “has interfered with distinct investment-backed expectations,” without reference to any traditional police power concerns with health and safety.  As Justice Holmes quipped in Pennsylvania Coal v. Mahon “a strong public desire to improve the public condition is not enough to warrant achieving the desire by a shorter cut than the constitutional way of paying for the change.”  The government has meet its financial needs from general revenues, not by picking the pocket of the private shareholders. The takings claim therefore should be solidified by the release of these documents.

The documents revealed in the takings litigation should also influence the treatment of the various breach of fiduciary and contract claims in Perry Capital v. Lew, and in Perry Capital v. Mnuchin.  Both the trial court in Lew and the D.C. Circuit on appeal in Mnuchin let the government win on summary judgment, without the benefit of any discovery at all.  A correct reading of these documents shows that they gave summary judgment for the wrong party, the government.  But now that Mnuchin is back to the District Court on remand, it should take those documents into account in making its decision on the validity of the plaintiff’s surviving contract claims.

The first time around, the Circuit Court badly mangled the proper tests for determining expectation damages. Its decision to divide outstanding shares into different subclasses destroys the underlying market, which can function only if all shares have identical attributes.  Hence it was a huge mistake to insist that shareholder claims be fractionated so that individual shareholder expectations somehow depend whether the shares were purchased before or after the NWS was into place.  The correct answer in all cases is that shareholder expectations are fixed at the time of initial issuance and purchase of these shares, such that any resales or other transfers of those shares do not affect the nature of the contract claims.

The D.C. Circuit’s revised opinion of July 17, 2017 backs off that categorical error.  Nonetheless it still goes astray because of its failure to affirmatively state as a matter of law the correct rule that treats all shares identically.   Instead its states the relevant inquiry on remand is “whether the Third Amendment violated the reasonable expectations of the parties.”  The government knew at the time of the NWS that it was claiming more than it was entitled to.  That fact should shape the reasonable expectations of the private parties who are entitled to think that the government will not consciously abuse its power by collusive transactions that were intended to strip the shareholders of all value in a sham transaction.  The NWS benefited the government, and only the government.  The District Court cannot decide this case in an informational vacuum, but must take this information into account in determining the reasonable shareholder expectations. The abuse of NWS is as relevant to the contract claims as it is to the takings claims.  Judge Lamberth should not ignore undisputed evidence, which points to the total viability of the contract claims that the D.C. Circuit has asked him to reevaluate on remand.

Richard A. Epstein  is the Laurence A. Tisch professor of Law at NYU, senior fellow at the Hoover Institution, and senior lecturer at the University of Chicago Law School.