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Judge Pfaelzer Order Dismissing BofA in Maine State Retirement System v. Countrywide, et al.

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Judge Mariana Pfaelzer's ruling in United States District Court for the Central District of California that Bank of America should be dismissed as a party because the plaintiffs had not adequately alleged that BofA was liable for Countrywide's debts as a successor-in-interest. You can read more about this opinion, including analysis and context, at
   -1- 12345678910111213141516171819202122232425262728 LINK: 175 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA MAINE STATE RETIREMENT SYSTEM,   individually and on behalf of all others similarly situated,   Plaintiff, v. COUNTRYWIDE FINANCIAL CORPORATION, et al., Defendants. Case No. 2:10-CV-0302 MRP (MANx)  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 Case 2:10-cv-00302-MRP -MAN Document 255 Filed 04/20/11 Page 1 of 15 Page ID #:11614   -2- 12345678910111213141516171819202122232425262728 (“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 srcination  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. §77 o , 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 an Case 2:10-cv-00302-MRP -MAN Document 255 Filed 04/20/11 Page 2 of 15 Page ID #:11615   -3- 12345678910111213141516171819202122232425262728 Agreement 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. 1   A court may take judicial notice of the existence of another court’s opinion, which is not subject to reasonable dispute over its authenticity. Fed. R. Evid. 201(b);  Lee v. City of  Los Angeles , 250 F.3d 668, 690 (9th Cir. 2001). Case 2:10-cv-00302-MRP -MAN Document 255 Filed 04/20/11 Page 3 of 15 Page ID #:11616   -4- 12345678910111213141516171819202122232425262728 Plaintiffs bring suit against Bank of America for violation of Section 15 of the Securities Act, 15 U.S.C. § 77 o , 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. C HOICE OF L AW  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. W RIGHT ,   M ILLER  ,  AND C OOPER  ,   F EDERAL P RACTICE &   P ROCEDURE  § 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). Case 2:10-cv-00302-MRP -MAN Document 255 Filed 04/20/11 Page 4 of 15 Page ID #:11617
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