Countrywide Wins Approval to Settle Shareholder Suit

By Mike Cherney

Law360, New York (August 25, 2009) -- A Delaware Chancery Court judge has approved a settlement between Countrywide Financial Corp. and its shareholders, who alleged executives at the nation's former largest residential mortgage underwriter breached their fiduciary duty in connection with Bank of America Corp.'s $4 billion takeover of the company.

Vice Chancellor John Noble held Aug. 24 that it was not unfair for the shareholders to settle the class action without monetary compensation and dismissed an objection by SRM Global Fund LP, a shareholder that said it was owed at least $65 million.

The plaintiffs initially had accused Countrywide executives of soliciting shareholder approval of the merger using false and misleading statements from BofA. The lawsuit also accused BofA, which was part of the settlement, of aiding and abetting the breach of those fiduciary duties, according to the ruling.

In the proposed settlement, Countrywide provided additional disclosures to its shareholders ahead of the shareholders' vote on the Bank of America merger, which eventually was approved and closed in July 2008. The court previously had dismissed several other objections to the settlement agreement.

"There is no evidence that the price paid by BOA was anything other than fair," Vice Chancellor Noble wrote. "There is no evidence of any other potential acquirer. It appears from the record that, but for the BofA acquisition, the Countrywide shareholders would have fared even more poorly."

Richard Drubel, an attorney who represented SRM Global, said his client was studying the ruling and declined to comment further. An attorney for Countrywide could not be reached for comment.

At issue in the case was that the settlement provided for the release of federal securities law claims arising from statements made by BofA CEO Kenneth Lewis. Vice Chancellor Noble said SRM Global had failed to show that Lewis had made any false statements, which would be required for a federal securities lawsuit.

"Based on the limited record before the court, the Lewis statements seem mere optimistic puffery, not actionable under federal securities law," Vice Chancellor Noble wrote.

"The court finds SRM's purported federal securities law claims based on the Lewis statements to be yet another likely unavailing attempt to mitigate losses resulting from Countrywide's collapse," the judge added.

Lewis told the Delaware State Chamber of Commerce in January 2008 that Countrywide “had a very impressive liquidity plan [and] backup lines in place,” according to the ruling. Three days earlier Countrywide and BofA had announced their merger plan, which offered shareholders a fraction of Countrywide's market value a year before.

SRM also said it was improper for the court to allow the release of federal securities law claims in the class action because they would be based on facts different from those in the fiduciary duty case. The court disagreed.

"Although temporal distinctions might be drawn, the events nevertheless remain a part of the same common nucleus of facts," Vice Chancellor Noble wrote.

The original proposed settlement included the release of common-law fraud claims, but the judge previously had ruled that the release of those claims could not be included in the settlement. The settlement was modified and resubmitted for approval, according to the ruling.

Countrywide is represented by Richards Layton & Finger PA, Wachtell Lipton Rosen & Katz and Goodwin Proctor LLP.

SRM Global is represented by Bouchard Margules & Friedlander PA, Boies Schiller & Flexner LLP and Korein Tillery LLC

Bank of America is represented by Young Conaway Stargatt & Taylor LLP and O’Melveny & Myers LLP.

The case is In re Countrywide Corp. Shareholders Litigation, case number 3464, in the Court of Chancery for the State of Delaware.