Case MFW Doc 152 Filed 12/05/14 Page 1 of 16 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

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1 Case MFW Doc 152 Filed 12/05/14 Page 1 of 16 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: WASHINGTON MUTUAL INC., et al., Debtors Chapter 11 Case No (MFW) WMI LIQUIDATING TRUST, Plaintiff, Adv. Pro. No (MFW) v. FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, et al., Defendants. DEFENDANT BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM S REPLY IN SUPPORT OF ITS MOTION TO DISMISS CROSS-CLAIMS Dated: December 5, 2014 Katherine H. Wheatley Associate General Counsel Board of Governors of the Federal Reserve System 20th & C Streets, N.W. Washington, D.C (202) (phone) (202) (fax) kit.wheatley@frb.gov Counsel for Board of Governors of the Federal Reserve System

2 Case MFW Doc 152 Filed 12/05/14 Page 2 of 16 TABLE OF CONTENTS PRELIMINARY STATEMENT... 1 ARGUMENT... 4 I. The Court Lacks Subject Matter Jurisdiction Over the Cross-Claims Against the Board Because There Is No Applicable Waiver of Sovereign Immunity... 4 II. The Cross-Claimants Have Not Stated a Claim Against the Board Because There Is No Actual Controversy Between the Board and the Cross-Claimants... 8 III. The Cross-Claimants Should Not Be Given Leave to Amend Their Cross-Claims CONCLUSION i

3 Case MFW Doc 152 Filed 12/05/14 Page 3 of 16 TABLE OF CITATIONS Cases Aetna Life Ins. Co. v. Haworth, 300 U.S. 227 (1937)... 8, 9 Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984)... 8 Com. of Pa. ex rel. Zimmerman v. PepsiCo, Inc., 836 F.2d 173 (3d Cir. 1988)... 5 Geronimo v. Obama, 725 F. Supp. 2d 182 (D.D.C. 2010)... 5 In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (3d Cir. 1997) Jaffee v. United States, 592 F.2d 712 (3d Cir. 1979)... 6, 7, 10 Johnsrud v. Carter, 620 F.2d 29 (3d Cir. 1980)... 6, 10 Massarsky v. Gen. Motors Corp., 706 F.2d 111 (3d Cir. 1983) MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007)... 9 N. Side Lumber Co. v. Block, 753 F.2d 1482 (9th Cir. 1985)... 5 Orff v. United States, 545 U.S. 596 (2005)... 5 Robinson v. Salazar, 838 F. Supp. 2d 1006 (E.D. Cal. 2012)... 5 Schonberg v. Fed. Election Comm n, 792 F. Supp. 2d 20 (D.D.C. 2011)... 5 Shane v. Fauver, 213 F.3d 113 (3d Cir. 2000) ii

4 Case MFW Doc 152 Filed 12/05/14 Page 4 of 16 Smiley v. Citibank (S. Dakota), N.A., 517 U.S. 735 (1996)... 8 Treasurer of New Jersey v. U.S. Dep t of Treasury, 684 F.3d 382 (3d Cir. 2012)... 5 WMI Liquidating Trust v. FDIC, No CV (D.D.C., filed October 29, 2014)... 4 Statutes 5 U.S.C passim 12 U.S.C. 1813(k) U.S.C. 1828(1) U.S.C. 1828(c)(2)(B) U.S.C. 1828(g)(1)... 7, 8 12 U.S.C. 1828(g)(2) U.S.C. 1828(i)(2)(A) U.S.C. 1828(k)(4)(C) U.S.C. 1828(m)(3)(A) U.S.C. 1828(z)(2) U.S.C. 5412(b) (2010) U.S.C U.S.C. 2201(a)... 8 Rules Fed. R. Civ. P. 12(b)(1)... 1 Fed. R. Civ. P. 12(b)(6)... 1 iii

5 Case MFW Doc 152 Filed 12/05/14 Page 5 of 16 Regulations 12 C.F.R. Part C.F.R (d)... 8 iv

6 Case MFW Doc 152 Filed 12/05/14 Page 6 of 16 Defendant Board of Governors of the Federal Reserve System (the Board ), by and though its undersigned counsel, hereby submits this Reply to the Opposition of Cross-Claim Plaintiffs Susan Allison, Robert Batt, Jeffrey Jones, Michelle McCarthy, Randy Melby, Scott Shaw, Patricia Schulte, and Stephen Kenneth Stearns to Motion of Defendant Board to Dismiss the Cross-Claims (the Opposition ) [D.I. 89]. This Reply also addresses the joinder to the Opposition and additional assertions of Todd H. Baker, Sean Becketti, Anthony Joseph Bozzuti, Alfred Brooks, Thomas W. Casey, Gregory C. Camas, Deborah D. Horvath, Rajiv Kapoor, Marc Malone, John P. McMurray, Thomas E. Morgan, Stephen J. Rotella, David Schneider, Genevieve Smith, Radha Thompson, Ann Tierney, and Robert J. Williams, Jr. (collectively, the Cross-Claimants ) (the Baker Opposition ) [D.I. 109]. PRELIMINARY STATEMENT As explained in the Board s Motion to Dismiss Cross-Claims pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) (the Motion ) [D.I ], the Court lacks subject matter jurisdiction over the Cross-Claimants cross-claims because the Board s sovereign immunity has not been waived. Furthermore, the Cross-Claimants have not pled that an actual controversy exists between them and the Board. For these reasons, the Board respectfully requests that the Court grant its Motion. Despite their arguments to the contrary, the Cross-Claimants cannot rely on the waiver of sovereign immunity in the Administrative Procedure Act ( APA ), 5 U.S.C. 702, because it is limited, by its express terms, to suits stating a claim that an agency acted or failed to act. The cross-claims did not allege that the Board acted or failed to act in any way. For the first time in their Opposition, the Cross-Claimants allege that the Board has failed to act, albeit in several areas where the Board has no authority to act, or where the Board has no control over the relief 1

7 Case MFW Doc 152 Filed 12/05/14 Page 7 of 16 that the Cross-Claimants seek. Because there is no proper waiver of sovereign immunity pled in the cross-claims, this Court lacks subject matter jurisdiction. Moreover, the Cross-Claimants did not plead that an actual controversy exists between them and the Board, as required by the Declaratory Judgment Act, 28 U.S.C. 2201, because no such controversy exists now nor can it ever exist between the Board and the Cross-Claimants. The Board has no control over the relief that the Cross-Claimants demand an interpretation regarding a statute and regulations that are strictly within the FDIC s authority to provide binding interpretations. The plaintiff in this action is WMI Liquidating Trust ( Plaintiff or WMILT ), a trust appointed as receiver for the assets of Washington Mutual, Inc. ( WMI ), which filed for bankruptcy on September 26, WMI was the parent company of Washington Mutual Bank ( WMB ), a savings bank that failed and was placed into FDIC receivership on September 25, WMB, as a savings bank, was regulated at the federal level by the Office of Thrift Supervision ( OTS ). WMI, as a savings and loan holding company, was also regulated at the federal level by the OTS. The Board played no role in the supervision of either of these entities. 1 As explained in the Board s Motion, Congress has delegated sole authority to limit or prohibit golden parachute payments to the FDIC. The golden parachute statute grants no interpretive authority over golden parachutes to the Board. Pursuant to its statutory authority, the FDIC has issued regulations, 12 C.F.R. Part 359 (the Regulations ), that define the term golden parachute payment, and generally prohibit such payments. The Regulations do, 1 Following the passage of the Dodd-Frank Act in 2010, federal supervision of savings and loan holding companies passed to the Board after the OTS was dissolved in Dodd-Frank Wall Street Reform and Consumer Protection Act 312, 12 U.S.C. 5412(b) (2010). 2

8 Case MFW Doc 152 Filed 12/05/14 Page 8 of 16 however, establish a procedure for insured depository institutions or depository institution holding companies to file an application seeking approval to make payments that constitute golden parachute payments as defined in the Regulations. If such an application is filed and approved by both the FDIC and the applicant s primary federal regulator which, in the case of depository institution holding companies is the Board it may be made even though it would otherwise be prohibited. The FDIC issued an opinion letter to Plaintiff that payments made pursuant to specific agreements and/or plans are, in fact, golden parachute payments under the Regulations, and therefore may not be paid without prior regulatory approval. In response to the FDIC s opinion letter, Plaintiff filed a golden parachute application with the FDIC and the Board seeking approval to make payments to 32 of the 90 claimants named as individual defendants in this action. Many other claimants, however, have declined to file applications based on their belief that the payments are not golden parachutes, and that as a result neither the FDIC nor the Board has jurisdiction to approve or deny those payments. On October 15, 2014, the FDIC denied Plaintiff s request to make golden parachute payments to the 30 individuals. 2 Contrary to the incorrect assertion in the Baker Opposition, the Board played no part in this decision, either as the primary decision maker or in concurring with the FDIC s denial. 3 Due to the regulatory scheme created by the FDIC in the Regulations, both the FDIC and the Board must approve the payment request before Plaintiff is permitted to make the golden parachute payments. The Board did not take any action on the application, and, 2 The application was previously amended to withdraw two individuals from the request. 3 Baker Opposition at 3. 3

9 Case MFW Doc 152 Filed 12/05/14 Page 9 of 16 because the FDIC did not approve the request, no Board action is necessary, as no action it might take would permit Plaintiff to make the golden parachute payments. On October 29, 2014, Plaintiff filed suit against the FDIC in the United States District Court for the District of Columbia, seeking review of the FDIC s determinations under the Administrative Procedure Act (the APA Action ). WMI Liquidating Trust v. FDIC, No CV (D.D.C., filed October 29, 2014). This suit requests that the D.C. District Court issue an order that Plaintiff is subject to the golden parachute statute and regulations, and also that the court set aside the FDIC s denial barring Plaintiff from making such golden parachute payments. The FDIC then filed a Motion to Stay Proceedings in this Court [D.I. 115] in order to allow the APA Action to move forward. Because no justiciable case or controversy exists between the Cross-Claimants and the Board that would support this action, and because no waiver of the Board s sovereign immunity applies to the facts presented, the Cross-Claimants cross-claims against the Board fail as a matter of law. ARGUMENT I. The Court Lacks Subject Matter Jurisdiction Over the Cross-Claims Against the Board Because There Is No Applicable Waiver of Sovereign Immunity The Cross-Claimants made no allegations in their cross-claims that the Board acted or failed to act. As they have not pled such facts, they cannot rely on the sovereign immunity waiver in Section 702. While some cases cited by the Cross-Claimants suggest that Section 702 s waiver of sovereign immunity may be utilized in non-apa cases, these cases do not support its use in the Cross-Claimants cross-claims against the Board. None of the cases the Cross-Claimants cite involved facts similar to those presented here, in which there is no allegation that the Board has acted or failed to act in any way or even has the authority to act. 4

10 Case MFW Doc 152 Filed 12/05/14 Page 10 of 16 Any waiver of the government s sovereign immunity must be strictly construed in favor of the sovereign. Treasurer of New Jersey v. U.S. Dep t of Treasury, 684 F.3d 382, 396 (3d Cir. 2012) (quoting Orff v. United States, 545 U.S. 596, (2005)). Although in their Opposition the Cross-Claimants now attempt to allege facts that the Board has failed to act, [i]t is axiomatic that the complaint may not be amended by the briefs in opposition to a motion to dismiss. Com. of Pa. ex rel. Zimmerman v. PepsiCo, Inc., 836 F.2d 173, 181 (3d Cir. 1988) (internal citations and quotation marks omitted). The Cross-Claimants Opposition incorrectly suggests that Section 702 s waiver of sovereign immunity is limitless. Although the requirement in Section 704 of the APA that there be agency action or final agency action prior to judicial review may not apply in this proceeding, the plain language of the waiver contained in Section 702 requires an allegation that an agency or [its] officer[s] or employee[s] acted or failed to act. Robinson v. Salazar, 838 F. Supp. 2d 1006, 1042 (E.D. Cal. 2012) (internal quotation marks omitted). If a claim does not make an allegation that an agency acted or failed to act, the declaratory relief claim[] fails to fit within the waiver of immunity. Id. Section 702 does not waive immunity if there is no allegation that an agency acted or failed to act. N. Side Lumber Co. v. Block, 753 F.2d 1482, 1484 (9th Cir. 1985) ( [W]e have been able to identify from the record in this case no claim of an official action or failure to act within the meaning of 5 U.S.C In the absence of such a claim, 702 does not waive immunity. ); Schonberg v. Fed. Election Comm n, 792 F. Supp. 2d 20, 27 (D.D.C. 2011) ( Nowhere in his complaint does [plaintiff] identify an agency that, or an officer of the United States who, acted or failed to act in a way that implicates the constitutionality of [challenged statutes]. ); Geronimo v. Obama, 725 F. Supp. 2d 182, 186 5

11 Case MFW Doc 152 Filed 12/05/14 Page 11 of 16 (D.D.C. 2010) (plaintiffs complaint deficient because [i]t cites no agency action, inaction or involvement at all ). The Cross-Claimants attempt to create a failure to act by referring to the Board s failure to assert or reject authority over WMILT 4 is unavailing. The Board s exclusive role under the golden parachute statute and regulations is to process golden parachute applications that are properly submitted. Any question of whether the statute or regulations apply to an entity is solely the determination of the FDIC. The Board has not acted because it has no role to play at this stage of the proceedings. 5 The Cross-Claimants argue that the Board s inaction has left their right to payment in limbo. 6 However, the FDIC s determination that the proposed payments by WMILT are golden parachute payments has provided a clear statement on the legal status of the payments, and the fact that the FDIC has now denied WMILT s request constitutes a final determination of that issue which the Board is powerless to affect. The Cross-Claimants reliance on Johnsrud v. Carter, 620 F.2d 29 (3d Cir. 1980), is misguided. That case does not hold that Section 702 waives sovereign immunity when there are no allegations in the initial claim that a government agency acted or failed to act. In Johnsrud, the plaintiff s amended complaint sought a warning from the defendants regarding health risks following a nuclear power accident, and the plaintiff alleged that the government had failed to act because it did not previously fulfill its duty to provide such a warning. Id. at 30. Jaffee v. United States, 592 F.2d 712 (3d Cir. 1979), is similarly distinguishable from the Cross- 4 Opposition at 7. 5 Although WMILT did file a golden parachute application, the FDIC denied WMILT s request to make golden parachute payments before the Board acted on the application. Any future action on that application by the Board would be moot because both agencies must approve a golden parachute payment in order for it to be made, and since the FDIC has denied the request, any action by the Board would be without effect. 6 Opposition at 7. 6

12 Case MFW Doc 152 Filed 12/05/14 Page 12 of 16 Claimants cross-claims. In Jaffee, the plaintiff was a former member of the U.S. Army who was ordered to stand near the explosion site of a nuclear bomb, and who later brought suit against the Army, among other government entities. Id. at The plaintiff alleged governmental wrongdoing by asserting that the government violated his constitutional rights by failing to provide a warning on health risks following the explosion, and the court determined that Section 702 did waive sovereign immunity upon the pleading of those facts. Id. at 714. Unlike the Cross-Claimants cross-claims against the Board, which do not allege that the Board has the authority to act or failed to act in a relevant way, the plaintiff in Jaffee clearly alleged in his complaint that a government agency acted or failed to act in a way that harmed the plaintiff. 7 The Cross-Claimants also argue that the Board has a role to play in the golden parachute statute, Section 18(k) of the Federal Deposit Insurance Act ( FDI Act ), 12 U.S.C. 1828(k)(4)(C), because the statute provides that an entity identified only as the Board may exempt any payment made pursuant to a bona fide deferred compensation plan or arrangement from the definition of golden parachute payment. However, it is evident from the context that the word Board here refers to the Board of Directors of the FDIC, not the Board of Governors of the Federal Reserve System. Section 18 of the FDI Act does not define the term Board, nor does the FDI Act generally. In other parts of Section 18, the Board of Governors of the Federal Reserve System, the defendant in this case, is referred to by its full name. 8 By contrast, the 7 The Cross-Claimants incorrectly state that the Board s argument is that there is no failure to act because the Cross- Claimants have not filed a letter with the Board seeking approval to make golden parachute payments. Opposition at 8. The Board s argument, as stated above, is that Section 702 does not provide a waiver of sovereign immunity because the cross-claims contain no allegation that the Board acted or failed to act. In addition, the Board has not failed to act because it has no authority to provide the interpretation of the FDIC s regulations sought by the Cross- Claimants. 8 See 12 U.S.C. 1828(c)(2)(B), (g)(1), (i)(2)(a), (z)(2). 7

13 Case MFW Doc 152 Filed 12/05/14 Page 13 of 16 FDIC Board of Directors is referred to throughout Section 18 merely as the Board of Directors. 9 Moreover, all of the other provisions of Section 18(k) that refer to a specific government agency refer to the FDIC. The Board of Governors does not interpret the statutory language in Section 18(k) as providing it any authority to exempt particular plans from the golden parachute rules, and has never acted to do so in any manner. By contrast, the FDIC apparently agrees that Board in this context refers to the FDIC s board of directors, as the FDIC has issued a regulation defining bona fide deferred compensation plan or arrangement as called for in section 18(k). See 12 C.F.R (d). To the extent the use of the word Board in section 18(k) is ambiguous, the Court should defer to the interpretations of the Board of Governors and the FDIC that the provision refers to the FDIC and not the Board of Governors. See Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 844 (1984); Smiley v. Citibank (S. Dakota), N.A., 517 U.S. 735, 739 (1996). II. The Cross-Claimants Have Not Stated a Claim Against the Board Because There Is No Actual Controversy Between the Board and the Cross-Claimants The Cross-Claimants fail to state a claim under the Declaratory Judgment Act, 28 U.S.C. 2201(a), because they do not allege an actual controversy between the Cross-Claimants and the Board. An action pursuant to the Declaratory Judgment Act must allege a controversy that is definite and concrete, touching the legal relations of parties having adverse legal interests. Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 241 (1937). As the Cross-Claimants have made no allegations in their cross-claims that amount to an actual controversy between them and the Board, this case should be dismissed under Rule 12(b)(6). 9 See 12 U.S.C. 1828(g)(1), (g)(2), (l), (m)(3)(a); see also 12 U.S.C. 1813(k) (defining Board of Directors as the Board of Directors of the FDIC). 8

14 Case MFW Doc 152 Filed 12/05/14 Page 14 of 16 The Cross-Claimants have not alleged adverse legal interests between themselves and the Board, as required for a justiciable controversy. Aetna Life Ins. Co., 300 U.S. at The Board has taken no position on the interpretation of the FDIC s regulations, as the interpretation question is a matter for the FDIC alone. Any other statement by the Cross- Claimants that their legal interests are adverse to the Board s is merely speculation, which is inadequate, as a matter of law, to establish the existence of a substantial, immediate controversy which is capable of judicial resolution. Id. The Cross-Claimants attempt to create an actual controversy by stating that the Board has taken no overt position and implying that the Board s views are the same as the FDIC s, which are in conflict with the Cross-Claimants position. 10 But, the Board has taken no position on the interpretation issue because that question is solely for the FDIC and the Board lacks the authority to resolve that issue. Although other parties may dispute whether these payments are in fact golden parachutes, creating an actual controversy between those parties and the FDIC, the Board is uninvolved with that disagreement. Although the FDIC has warned WMILT that it may face potential civil money penalties should it make certain payments, the Cross-Claimants do not face a similar threat. The FDIC s letter was directed only at WMILT s potential liability for violating the golden parachute regulations. The Cross-Claimants do not face a similar imminent threat of harm, nor have they been required to modify their conduct because of the coercive effect of potential government action, and therefore they may not use this argument to prove that an actual controversy exists. See MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 129 (2007). In any event, there is no 10 Opposition at 10. 9

15 Case MFW Doc 152 Filed 12/05/14 Page 15 of 16 imminent threat against the Cross-Claimants from the Board because the question of whether certain proposed payments are golden parachute payments is the subject of ongoing litigation where the FDIC is the defendant. III. The Cross-Claimants Should Not Be Given Leave to Amend Their Cross-Claims This Court may properly deny leave to amend where the amendment would not withstand a motion to dismiss, or the amendment would be futile. See Massarsky v. Gen. Motors Corp., 706 F.2d 111, 125 (3d Cir. 1983). Futility means that the complaint, as amended, would fail to state a claim upon which relief could be granted. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997). In assessing futility, a court applies the same standard of legal sufficiency as applies under Rule 12(b)(6). Shane v. Fauver, 213 F.3d 113, 115 (3d Cir. 2000). Even if the Cross-Claimants did amend their cross-claims, Section 702 still would not waive sovereign immunity. The cases cited by the Cross-Claimants demonstrate that plaintiffs must bring their claims against the agency responsible for the conduct which is the subject of the declaratory relief they seek. See Jaffee, 592 F.2d at 719 (agency that acted or failed to act under Section 702 was United States Army, which allegedly did not warn former soldiers); Johnsrud, 620 F.2d at 32 n.8 ( [O]n remand, the plaintiffs may wish to more specifically designate the responsible agency and amend their complaint accordingly. ). The plaintiffs in Johnsrud initially named the President and the United States as defendants, and were told by the appellate court to amend their complaint to name an agency that was responsible for the conduct that was the subject of the declaratory judgment action. See Johnsrud, 620 F.2d at 32 n.8. The Cross-Claimants seek a declaratory judgment that WMILT is not a covered company under the golden parachute statute, but the FDIC alone is responsible for that interpretation question. The 10

16 Case MFW Doc 152 Filed 12/05/14 Page 16 of 16 Board is not currently responsible for the conduct that is the subject of the Cross-Claimants request for declaratory relief, nor will it ever be responsible, and therefore the Cross-Claimants cannot say that the Board acted or failed to act with regard to their cross-claims. In addition, the Cross-Claimants will not be able to state a claim because no actual controversy exists between them and the Board. The Cross-Claimants cannot allege any adverse legal interest between themselves and the Board, because, although the Cross- Claimants disagree with the FDIC s interpretation of FDIC regulations, the Board has no authority to interpret the FDIC s regulations. While the Cross-Claimants may dispute the FDIC s interpretation of its own regulations, this dispute is completely unrelated to the Board s only role under the golden parachute statute and regulations as an agency that approves or denies golden parachute applications submitted by institutions it regulates. CONCLUSION For the foregoing reasons, and the reasons stated in the Board s Motion to Dismiss Cross- Claims, the Board respectfully requests that the cross-claims be dismissed in their entirety as to the Board. Dated: December 5, 2014 Respectfully submitted, /s/ Katherine H. Wheatley Katherine H. Wheatley Associate General Counsel Board of Governors of the Federal Reserve System 20th & C Streets, N.W. Washington, D.C (202) (phone) (202) (fax) kit.wheatley@frb.gov 11 Counsel for Board of Governors of the Federal Reserve System