Jessica M. Karmasek Sep. 12, 2013, 9:00pm

DOVER, Del. (Legal Newsline) -- The Delaware Supreme Court ruled this week that former Countrywide Financial Corp. shareholders can't pursue a federal lawsuit filed against the mortgage lender's directors and officers before it was acquired by Bank of America Corp.

On Tuesday, the state's high court answered in the negative a question of law from the U.S. Court of Appeals for the Ninth Circuit.

The question submitted was:

"Whether, under the 'fraud exception' to Delaware's continuous ownership rule, shareholder plaintiffs may maintain a derivative suit after a merger that divests them of their ownership interest in the corporation on whose behalf they sue by alleging that the merger at issue was necessitated by, and is inseparable from, the alleged fraud that is the subject of their derivative claims."

Justice Randy Holland, who authored the court's 20-page opinion, explained that the court, in coming to its decision, ratified and reaffirmed the continuous ownership rule and the fraud exception recognized by its holding in Lewis v. Anderson.

"In Anderson, this Court held that for a shareholder to have standing to maintain a derivative action, the plaintiff 'must not only be a stockholder at the time of the alleged wrong and at the time of commencement of suit but... must also maintain shareholder status throughout the litigation,'" Holland wrote.

The plaintiffs, all former Countrywide shareholders, filed the derivative action in the U.S. District Court for the Central District of California in October 2007. In their suit, they assert state and federal derivative claims for breach of fiduciary duty and securities law violations.

Soon after, on Jan. 11, 2008, Countrywide agreed to merge with a subsidiary of Bank of America in a stock-for-stock transaction valued at about $4 billion.

On July 1, 2008, following approval by Countrywide's shareholders, the merger closed.

All outstanding Countrywide shares were exchanged for BOA shares, and all Countrywide shareholders at the time of the merger became shareholders of BOA.

Countrywide was merged into BOA's acquisition subsidiary, which remained a wholly-owned subsidiary of BOA without any public shareholders.

Countrywide, following the merger, moved for judgment on the pleadings, arguing that the move terminated the plaintiffs' standing to pursue derivative claims on Countrywide's behalf.

The federal court granted the defendant's motion, finding that the plaintiffs could not satisfy the "continuous ownership" requirement for shareholder derivative standing under Federal Rules of Civil Procedure 23.1 and Delaware law.

Thereafter, the Delaware Supreme Court decided Arkansas Teacher Retirement Systems v. Caiafa, which arose from the same underlying facts and involved the same parties.

Following that intervening decision, the plaintiffs moved for reconsideration of the federal court's order.

The plaintiffs argued that, in Arkansas Teacher, the state's high court clarified the scope of the "fraud exception" to Delaware's continuous ownership rule and confirmed that the plaintiffs have post-merger derivative standing in this case.

The federal court denied that motion, and the plaintiffs appealed to the Ninth Circuit.

The appeal was argued before the Ninth Circuit; however, it remains undecided pending the state Supreme Court's answer to its certified question of law.

From Legal Newsline: Reach Jessica Karmasek by email at

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