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Registry rejects appeal aimed at enforcing a shareholder's claim under 220 to review Fannie Mae's books and records on the issue of grounds for exclusion.

At Pagliara v. Federal National Mortgage Association, C.A. No. 12105-VCMR (Del. Ch. May 31, 2017), the Clerk's Court rejected a lawsuit filed by a preference shareholder of the Federal National Mortgage Association ("Fanny Mae") who sought to assert his right under Section 220 of the Delaware General Corporation Law to obtain documentation ("Section 220 Demand") to examine certain acts of Fannie Mae for reasons of exclusion.

Chancery Court held that a previous ruling by the Eastern District of Virginia on the decisive question of whether Fannie Mae shareholders had the right to receive Fannie Mae's company accounts and record keeping under the Housing and Economic Recovery Act of 2008 (the "HERA") was exclusive.

In the early 2000s, Fannie Mae, initially conceived by the federal administration to enhance the mortgage markets, was largely private and public auctioned, but continued to be regulated by the federal state. HERA superseded the regulatory authority of Fannie Mae by the new Federal Housing Agency (the "FHFA") and authorised the latter to take Fannie Mae into guardianship.

Following the conversion into a conservatory, Fannie Mae concluded a contract for the sale of preferential stocks (the "SPA") with the U.S. Department of Treasury (the "Treasury"). As part of the SPA, Fannie Mae has, among other things, outstanding one million units of its Senior Preferred Stock, which had a preferential settlement of $1,000 per unit and were eligible for a 10% accumulated gross dividend.

Fannie Mae and the Ministry of Finance changed the SPA in 2012 to substitute a "net word sweep" for the 10% Treasury payout, so that Fannie Mae would pay most of its net assets to the Ministry of Finance indefinitely (the "change"). As of January 2016, Timothy J. Pagliara ("the plaintiff"), a Fannie Mae preference shareholder, established a Section 220 Demand on Fannie Mae to search for documentation and record to examine whether the decision to authorize the amendment constitutes mishandling.

Mr Fannie Mae dismissed the plaintiff's claims. The plaintiff lodged a complaint in March 2016 and Fannie Mae dismissed the complaint in the United States District Court for the District of Delaware. The United States District Court for the District of Delaware dismissed the case in March 2017 and Fannie Mae applied for dismissal under (i) Court of Chancery Rules 12(b)(2) for want of individual competence and (ii) Rules 12(b)(6) for want of complaint.

Courts found that the plaintiff's claim adequately accused a plausible claim for individual responsibility on the basis of the submission of the articles of association. Fannie Mae's Rule 12(b)(6) request for refusal was then dealt with by the Registry Court. Mr. Fannie Mae reasoned that the plaintiff's compliance should be rejected on reasons of exclusion of issues, as the dispositional question in this case - whether the plaintiff has the right to view the accounts and record of Mr. Fannie Mae - had previously been determined against the plaintiff in Pagliara v. Federal Home Loan Mortgage Corporation, 203 F.Supp. ยบ3278 ("Virginia Case") (E.D.Va. 2016).

The United States District Court for the Eastern District of Virginia ruled in the Virginia case that a rule of HERA conferred on FAA the right of shareholders to inspect the accounts and record of Federal Home Loan Mortgage Corporation ("Freddie Mac"), a controlled unit under HERA such as Fannie Mae.

The plaintiff had also searched Freddie Mac's accounts and notes for Virginia company rights. In the Virginia Case Courts, the issue was whether the shareholders of Freddie Mac had maintained their right to inspect accounts and record and whether HERA's corresponding provisions exempted the shareholders from that right.

In application of federal statute, the Clerk's Court held that a litigant in a previous case is prohibited from conducting a dispute if (i) the "question of fact or statute was actually resolved in the previous case", (ii) the question "was decided by a ruling that was effective and final", and (iii) "the decision is material to the ruling.

" However, an exemption may be granted where a point of law is involved and (i) the two proceedings concern essentially disconnected rights, or (ii) a new provision is justified in order to take due advantage of an interim amendment in the legislative framework or to prevent unequal case-law.

Chancery found that the Virginia case was exclusive because (i) the plaintiff had the full chance to resist the request for dismissal in the Virginia case and his attorney attended and reasoned that the request for dismissal had been filed; (ii) the ruling was limited to a definitive verdict against which the plaintiff filed an appeal and then deliberately rejected; and (iii) the HERA's reading of the applicable provisions was material to the Virginia court's ruling.

In particular, the Registry dismissed the applicant's two allegations that there was an exemption from exclusion in this case. The plaintiff first argued that the discretionary matter in this case was a purely juridical matter, and a succeeding case, Perry Capital LLC v. Mnuchin, 848 F.3d 1072 (D.C. Cir. 2017) (the "D.C. Case"), dismissed the Virginia Case and changed the juridical text.

However, the Chancery Court did not agree and found that the D.C. case addressed a different matter - the legality of shareholders' immediate and derived rights against Fannie Mae and Freddie Mac resulting from the amendment. The applicant subsequently claimed that the previous order of the United States District Court for the District of Delaware had altered the legislative framework in the present case.

Chancery also dismissed this allegation and found that the United States District Court for the District of Delaware held that the case only raised certain legal questions and did not consider the substance of the case. Finally, the Chancery Court declared that the Virginia claim and the ongoing lawsuit were not substantially independent of each other.

Rather, in both cases the plaintiff requested accounts and notes to investigate malpractice related to Treasury investment in Fannie Mae and Freddie Mac. They are not substantially independent as (i) Fannie Mae and Freddie Mac are both regulatory units under HERA, and (ii) the United States District Court for the Eastern District of Virginia's principal interest in the Virginia Case was that HERA's provisions prohibit a shareholder from reviewing accounts and documents.

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