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Federal Housing Finance Agency v. SFR Investments Pool 1, LLC

United States District Court, D. Nevada

March 27, 2018




         Before the court is the Motion for Order Enforcing Subpoena Duces Tecum (ECF No. 1) by Petitioner, the Federal Housing Finance Agency (“FHFA”), filed in its capacity as Conservator for the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation (“Fannie Mae” and “Freddie Mac, ” jointly, the “Enterprises”). Also before the court are Respondent SFR Investments Pool 1, LLC's (“SFR”) Motion to Quash Subpoena (ECF No. 15) and FHFA's Cross-Motion for Order Requiring SFR to Comply With Subpoena (ECF No. 17). The court has considered the parties' Motions, Responses (ECF Nos. 16, 21), and Replies (ECF Nos. 20, 23). These Motions are referred to the undersigned pursuant to 28 U.S.C. § 636(b)(3) and LR IB 1-7(m) of the Local Rules of Practice.


         In response to the crisis in the housing and mortgage market, Congress enacted the Housing and Economic Recovery Act of 2008 (“Recovery Act”), Pub. L. No. 110-289, 122 Stat. 2654 (codified in various sections of 12 U.S.C.). See 12 U.S.C. § 4501; Perry Capital LLC ex rel. Inv. Funds v. Mnuchin, 864 F.3d 591, 598 (D.C. Cir. 2017). The Recovery Act created FHFA, 12 U.S.C. § 4511, and placed the Enterprises into conservatorship “for the purpose of reorganizing, rehabilitating, or winding up [their] affairs, ” id. § 4617(a). “The Recovery Act endows FHFA with extraordinarily broad flexibility to carry out its role as conservator.” Perry Capital, 864 F.3d at 606. FHFA may issue administrative subpoenas pursuant to its statutory authority in 12 U.S.C. §§ 4617(b)(2)(I) and 4588.

         I. Procedural History

         FHFA and the Enterprises are involved in extensive litigation in the District of Nevada to protect their interests in liens encumbering properties that have been the subjects of homeowners' association (“HOA”) foreclosure sales under Nevada law. Through the litigation, FHFA became aware that SFR and/or its affiliates acquired multiple properties through, or subsequent to, HOA foreclosure sales. To further its litigation efforts, FHFA asked its counsel to investigate and identify all properties that SFR, its affiliates, and other similarly situated entities acquired that were the subjects of HOA sales that took place when Enterprise liens encumbered the properties. Counsel analyzed instruments recorded with Nevada county clerks' offices and data compiled by the State of Nevada's Office of the Ombudsman for Owners in the Common-Interest Communities and Condominium Hotels, but determined that those records and data were incomplete and inadequate to identify all affected properties.

         Pursuant to 12 U.S.C. §§ 4588(c) and 4617(b)(2)(I), FHFA issued and served a subpoena duces tecum (the “Subpoena”) to SFR in late November 2016. See Mot. Ex. 1 (ECF No. 1-2), Subpoena.[1] An exhibit attached to the Subpoena identified 89 properties for which FHFA, the Enterprises, or the Enterprises' loan servicers are already litigating claims against SFR or an affiliate, along with an additional 35 properties that are the subjects of other litigation. Those 124 properties were expressly excluded from the Subpoena's scope. At SFR's request, FHFA extended the response deadline 30 days. Counsel for SFR responded to the Subpoena via letter with objections and declined to produce the information or documents requested. See Mot. Ex. 4 (ECF No. 1-2), Jan. 27, 2017 Letter from Jacqueline Gilbert to Michael Johnson.

         On March 31, 2017, FHFA commenced this action petitioning the court for an order requiring SFR to comply with the Subpoena. SFR filed its Motion to Quash, on May 31, 2017, which prompted FHFA's Response and Cross-Motion. After the moving papers were fully briefed, the parties filed multiple Notices (ECF Nos. 25, 26, 29, 30) of new authority and responses.

         II. The Parties' Positions

         A. Petitioner FHFA

         FHFA's motions assert the agency needs the information and documents sought by the Subpoena to investigate potential threats to its and the Enterprises' interests in liens encumbering properties in Nevada common interest communities and to determine what steps are necessary to protect those interests. See Mot. Ex. 3 (ECF No. 1-2), Decl. of Alfred Pollard, FHFA General Counsel. The scope of the court's review in a subpoena enforcement action is narrow. Federal courts only evaluate whether: (1) Congress has granted the agency authority to investigate; (2) procedural requirements have been followed; and (3) the evidence is relevant and material to the agency's investigation. Ninth Circuit case law states that an affidavit by an agency official is sufficient to establish a prima facie showing of these requirements. The Subpoena readily meets those three criteria, and FHFA's general counsel submitted a declaration establishing a prima facie showing. Thus, FHFA has met the prerequisites for enforcement.

         First, FHFA points out that Congress granted the agency broad flexibility and authority to carry out its role as the Enterprises' conservator, including subpoena power. The agency may exercise its expansive grants of permissive, discretionary authority” as it “determines is in the best interests of the Enterprises or FHFA. Perry Capital 848 F.3d at 607 (citing 12 U.S.C. § 4617(b)(2)(J)). FHFA's broad powers necessarily include the power to investigate any potential threats to the Enterprises' assets. FHFA argues the Subpoena was issued for the purpose of preserving the Enterprises' assets-a power expressly provided in the Recovery Act.

         Second, FHFA followed all necessary procedural requirements when issuing the Subpoena. FHFA reviewed publically available information to identify all Enterprise liens that may be at risk. That information was inadequate and incomplete; thus, FHFA determined subpoenas were necessary to conserve and preserve Enterprise assets. The agency's director approved issuance of a subpoena as required by § 4617(b)(2)(I)(ii), and FHFA then issued the Subpoena and caused it to be served on SFR.

         Third, the information and documents sought in the Subpoena are relevant and material to FHFA's investigation. FHFA argues that the information sought in the Subpoena is not in the possession of the FHFA or the Enterprises, and the Subpoena is the only practical and reliable way for the agency to obtain the information. Public record searches are inadequate for multiple reasons. For instance, only SFR knows whether some or all of its property purchases were recorded under d/b/a names, names of affiliates, or names of other nominees. In addition, even as to properties recorded in SFR's own name, public records frequently contain slight variation, erroneous, or abbreviated entries that make name searching impractical and unreliable (i.e., “SFR Investments Pool 1 LLC, ” “S F R Investments Pool L L C, ” “S F R Investments Pool I L L C”). FHFA not in a position to reliably interpret available public records because the agency lacks knowledge of SFR's d/b/a and assumed names, the names of SFR's affiliates and nominees, and whether SFR or an affiliate or nominee (as opposed to an unaffiliated party) is the entity referred to in property records that include similar but non-identical names.

         Because FHFA has satisfied the three requirements for enforcement, an order enforcing the Subpoena is appropriate.

         B. Respondent SFR

         SFR objects to the Subpoena and asks the court to quash it in its entirety. SFR challenges the Subpoena because it requests information that is: (1) not relevant to FHFA's stated purpose, (2) not sufficiently definite, (3) already in FHFA's possession or control, (4) outside of the statute of limitations, and (3) overly broad and unduly burdensome since the information is publicly available. Mot. to Quash (ECF No. 15).

         SFR asserts the Subpoena request lacks relevance because none of FHFA's properties are actually threatened. FHFA claims its interest cannot be extinguished through NRS Chapter 116 sales without its consent; thus, none of its property is threatened. SFR argues any evidence of ownership should be in FHFA's possession; thus, none of the information FHFA seeks from SFR could ever prove the agency's ownership interest.

         The information requested is not sufficiently definite because the Subpoena seeks a blanket of information over a blanket period of time. The Subpoena does not pinpoint the properties, by address or assessor's parcel number (i.e., APN), in which FHFA claims an interest that might be jeopardized. Rather, the Subpoena asks SFR to tell FHFA what properties it may claim an interest. Without a definite articulation of what properties are in possible jeopardy, SFR claims that all the information sought by the Subpoena is overreaching.

         The Subpoena requests records outside the statute of limitations provided in 12 U.S.C. § 4617(b)(12). SFR argues the appropriate limitations period is three years because tort actions must be filed within two years under Nevada law and the longer federal statutory period would apply. Because the Subpoena requests information as far back as September 18, 2009, SFR claims FHFA requests information outside the statute of limitations. Assuming FHFA could cure all the other defects with the Subpoena, the agency would only be entitled to information from March 30, 2014, to March 30, 2017.

         SFR claims the Subpoena requests information that is already in FHFA's control. Citing United States v. Powell, 379 U.S. 48, 57-58 (1964), SFR states that an agency issuing an administrative subpoena must show the information sought is not already in its possession. Because the Enterprises have servicing contracts with sub-servicers that require those sub-servicers to maintain records pertaining to each loan, and FHFA succeeded to the Enterprises' contractual rights, SFR maintains that FHFA already has all the records requested within its custody and control. Furthermore, FHFA possesses adequate means to gather the information it seeks from public sources. Thus, even if the sub-servicers failed to fulfill their duties to maintain the Enterprises' records, the Subpoena should still be quashed because FHFA could obtain the information is publicly available.

         SFR further asserts the Subpoena is oppressive and unduly burdensome. SFR is not a large corporation. It is a small business comprised of approximately eight employees. In contrast, the resources and manpower of FHFA, its Enterprises, and authorized servicers far exceed that of the SFR. In addition, none of the information sought by the Subpoena is readily accessible. With the exception of the deed received after purchasing a property, SFR does not possess any of the public records instruments leading up to a HOA foreclosure sale. SFR does not obtain those documents until it is forced into litigation. Compliance with the Subpoena would be difficult and time consuming. As a matter of law, the information the FHFA seeks can only be obtained in the public record. If required to produce these documents, SFR would need to research, order, and pay for public records for over 600 properties, which is something FHFA is capable of and better equipped to do itself. SFR would be forced to hire and pay third-parties or locate and obtain the requested records, as well as outside counsel, imposing an extreme hardship on SFR. See Reply Ex. 1 (ECF No. 20-1), Decl. of Christopher Hardin at 3-4, ¶ 15. The Subpoena is therefore unnecessary, vexatious, and designed to harass SFR.

         SFR estimates its cost of compliance with the Subpoena is approximately $312, 000. See Reply Ex. 2 (ECF No. 20-2), Decl. of Howard Kim at 4, ¶ 10. SFR owns approximately 650 parcels of real property. Mr. Kim bills at a rate of $450 per hour. Based on an average time of one hour per property, he estimates he will bill SFR $450 per property for a total of $292, 500 (650 x $450). Additionally, he estimates SFR would spend approximately $19, 500 in costs obtaining documents from the Clark County Recorder. The cost may be lower depending on whether SFR already possesses requested documents relating to each property, but cross-referencing SFR's files against the county recorder's records will result in a proportionately higher time billing.

         C. FHFA's ...

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