Me. State Ret. Sys. v. Countrywide Fin. Corp.

• Decision Date: 20 April 2011
• Docket Number: Case No. 2:10-CV-0302 MRP (MANx)
• Parties: MAINE STATE RETIREMENT SYSTEM, individually and on behalf of all others similarly situated, Plaintiff, v. COUNTRYWIDE FINANCIAL CORPORATION, et al., Defendants.
• Court: U.S. District Court — Central District of California

MAINE STATE RETIREMENT SYSTEM, individually andon behalf of all others similarly situated, Plaintiff, v. COUNTRYWIDE FINANCIAL CORPORATION, et al., Defendants.

Case No. 2:10-CV-0302 MRP (MANx)

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

April 20, 2011

LINK: 175

ORDER DISMISSING BANK OF AMERICA CORPORATION AND NB HOLDINGS CORPORATION

I. INTRODUCTION

Plaintiffs filed this putative class action individually and "on behalf of a class of all persons or entities who purchased or otherwise acquired beneficial interests in" certain mortgage backed securities ("MBS") in the form of certificates issued in 427 separate offerings (the "Offerings") between January 25, 2005 and November 29, 2007 "pursuant and/or traceable to the Offering Documents" and were damaged thereby. Consolidated Amended Complaint ("AC") ¶¶ 1, 186. The claims are brought against the Countrywide Defendants pursuant to Sections 11, 12 and 15 of the Securities Act of 1933. The operative complaint refers to Countrywide Financial Corporation ("CFC"), Countrywide Securities Corporation ("CSC"), Countrywide Home Loans ("CHL"), and Countrywide Capital Markets ("CCM") as the "Countrywide Defendants." Plaintiffs also purport to include Bank of America and NB Holdings Corporation ("NB Holdings") in this category. Plaintiffs contend the Countrywide Defendants made materially untrue or misleading statements or omissions regarding Countrywide's loan origination practices in public offering documents associated with 427 separate offerings. Also named as defendants are Countrywide special-purpose issuing trusts, several current or former Countrywide officers and directors, and a number of banks that served as underwriters on one or more of the offerings at issue.

All of the defendants filed motions to dismiss the AC. After the motions were fully briefed, the Court heard extensive oral argument on October 18, 2010. The Court dismissed the action without prejudice on the basis of standing and the statute of limitations on November 4, 2010. The Court reserved judgment on the remaining issues until after Plaintiffs had cured the chief pleading deficiencies the Court identified in that Order. See Maine State Ret. Sys. v. Countrywide Fin. Corp., 722 F. Supp. 2d 1157 (C.D. Cal. 2010).

On December 6, 2010, Plaintiffs filed a Second Amended Complaint ("SAC") which reduced the offerings in the case to 14 separate public offerings between October 2005 and December 2006 and set forth the alleged bases for tolling. Docket No. 227. The Court held an additional hearing on March 23, 2011, at which the motion to dismiss filed by Bank of America and NB Holdings, Docket No. 175, was discussed. Bank of America and NB Holdings argued the Securities Act Section 15 control person liability claims, 15 U.S.C. §77o, should be dismissed against them. The Court adjudicates that motion in this Order. The motion to dismiss is GRANTED for the reasons that follow.

II. BACKGROUND

In July 2008, Defendant CFC merged into a wholly-owned Bank of America subsidiary named Red Oak Merger Corporation, pursuant to the terms of anAgreement and Plan of Merger, dated as of January 11, 2008. SAC ¶ 38. The transaction was a stock-for-stock de jure merger and was approved as fair by the Delaware Supreme Court sitting en banc. Id.; Arkansas Teacher Ret. Sys., et al. v. Caiafa, 996 A.2d 321 (Del. 2010).¹ Red Oak Merger Corporation was subsequently renamed Countrywide Financial Corporation ("CFC"), which remained a subsidiary of Bank of America. Docket No. 176-3 (Close Decl. Ex. 2 [CFC Form 10-Q dated August 11, 2008] at 27). Four months later, on November 7, 2008, "substantially all of Countrywide's assets were transferred to Bank of America . . . along with certain of Countrywide's debt securities and related guarantees." SAC ¶ 38. The SAC further alleges that CFC ceased filing its own financial statements at that time and its assets and liabilities are now included in Bank of America's financial statements. SAC ¶ 38.

According to the SAC, the Countrywide brand was retired shortly after the merger and currently CFC's former website redirects the user to the Bank of America website. SAC ¶ 38. In addition, Bank of America has assumed CFC's liabilities, having paid to resolve other litigation arising from misconduct such as predatory lending allegedly committed by CFC. SAC ¶ 38. Finally, Plaintiffs allege "many of the same locations, employees, assets and business operations that were formerly CFC continue under the Bank of America Home Loans brand." SAC ¶ 38.

Defendant NB Holdings, a wholly-owned subsidiary of Bank of America, is alleged to be one of the shell entities used to effectuate the Bank of America-CFC merger, and a successor in interest to Defendant CHL. SAC ¶ 39. Plaintiffs claim that on July 3, 2008, CHL completed the sale of substantially all of its assets to NB Holdings. SAC ¶ 39.

Plaintiffs bring suit against Bank of America for violation of Section 15 of the Securities Act, 15 U.S.C. § 77o, for the acts of its subsidiary CFC. SAC ¶ 240. A parent corporation ordinarily is not liable for the acts of its subsidiary. U.S. v. Bestfoods, 524 U.S. 51, 61 (1998). Plaintiffs argue, however, that Bank of America is a successor in interest to CFC, CSC, CCM and CHL. SAC ¶ 241. Plaintiffs contend the asset transfer that occurred between Bank of America and its subsidiary CFC in November 2008, when viewed in conjunction with the July 2008 de jure merger, actually constituted a de facto merger. SAC ¶ 38.

Plaintiffs bring suit against NB Holdings for violation of Section 15 of the Securities Act, as a successor in interest to Defendant CHL. SAC ¶¶ 39, 241. The allegations against NB Holdings are not clear. Indeed, the Court can only guess at the factual or legal basis for the conclusory allegation that "by virtue of their control, ownership, offices, directorship, and specifics acts," CFC, CSC, CCM and CHL—and Bank of America and NB Holdings as their successors in interest—"had the power and influence and exercised the same to cause the Issuer Defendants to engage in the acts described herein." SAC ¶ 241.

III. APPLICABLE LAW

A. CHOICE OF LAW

Successor liability is governed by state law under the Erie doctrine. As to matters governed by state law, a federal court must follow the choice of law rules of the state in which it is sitting to determine which state's law to apply. WRIGHT, MILLER, AND COOPER, FEDERAL PRACTICE & PROCEDURE § 4506 (2010); Paracor Fin. Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1164 (9th Cir. 1996). This rule applies even if the court's jurisdiction is based on a federal question. SEC v. Elmas Trading Corp., 683 F. Supp. 743, 748 (D. Nev. 1987) (citing numerous examples where a federal court applied state choice of law rules to state law issues pendent to federal question claims).

Defendants cite In re Lindsay for the proposition that the Court should apply federal choice of law rules in federal question cases. 59 F.3d 942, 948 (9th Cir. 1993). However, three years after In re Lindsay, the Ninth Circuit articulated specifically:

In a federal question action where the federal court is exercising supplemental jurisdiction over state claims, the federal court applies the choice-of-law rules of the forum state—in this case, California.

Paracor Fin., Inc., 96 F.3d at 1164 (citing Elmas, 683 F. Supp. at 747-49; In re Nucorp Energy Sec. Litig., 772 F.2d 1486, 1491-92 (9th Cir. 1985)). Thus, California choice of law rules govern here with respect to the state law issue of successor liability.

California generally applies the "governmental interest" approach to choice of law analysis. Love v. Assoc. Newspapers, Ltd., 611 F.3d 601, 610 (9th Cir. 2010); Kearney v. Salomon Smith Barney, Inc., 39 Cal. 4th 95, 107-08 (Cal. 2006). Under this approach,

(1) the court examines the substantive laws of each jurisdiction to determine whether the laws differ as applied to the relevant transaction, (2) if the laws do differ, the court must determine whether a true conflict exists in that each of the relevant jurisdictions has an interest in having its law applied, and (3) if more than one jurisdiction has a legitimate interest, the court [must] identify and apply the law of the [jurisdiction] whose interest would be more impaired if its law were not applied. Only if both [jurisdictions] have a legitimate but conflicting interest in applying its own law will the court be confronted with a "true conflict" case.

Love, 611 F.3d at 610 (quoting Downing v. Abercrombie & Fitch, 265 F.3d 994, 1005 (9th Cir. 2001)) (alteration in Love). "As a default, the law of the forum state will be invoked, and the burden is with the proponent of foreign law to show thatthe foreign rule of decision will further the interests of that state." CRS Recovery, Inc. v. Laxton, 600 F.3d 1138, 1142 (9th Cir. 2010). Plaintiffs argue the Court should apply the governmental interest approach in this case and conclude that California law applies. Plaintiffs reason that Defendants have failed to meet their burden of establishing first that there is true conflict between Delaware and California law and next that Delaware has a greater interest in having its law applied. The Court disagrees on both counts.

First, the Court concludes there is a true conflict between Delaware and California law. Although both states recognize de facto merger, Delaware courts use the doctrine of de facto merger sparingly, "only in very limited contexts." Binder v. Bristol-Myers Squibb, Co., 184 F. Supp. 2d 762, 769 (N.D. Ill. 2001); BALOTTI AND FINKELSTEIN, DEL. L. OF CORP. AND BUS. ORG. § 9.3 (2010). Some treatises have gone so far as to conclude that "Delaware has rejected the de facto merger doctrine." AARON RACHELSON, CORPORATE ACQUISITIONS, MERGERS AND DIVESTITURES § 4:6 (2011). But see Heilbrunn v. Sun Chemical Corp., 150 A.2d 755, 757 (Del. 1959) ("The doctrine of de facto merger has been recognized in Delaware."). Because Delaware respects a...