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Arkansas Teacher Retirement System v. Countrywide Financial Corp.

Supreme Court of Delaware

September 10, 2013

ARKANSAS TEACHER RETIREMENT SYSTEM, et al., Plaintiffs Below, Appellants,
v.
COUNTRYWIDE FINANCIAL CORPORATION, et al., Defendants Below, Appellees.

Submitted: July 3, 2013.

Page 889

Certification of a Question of Law from the United States Court of Appeals for the Ninth Circuit, No. 10-56340, D.C. No. 07-CV-06923-MRP-MAN.

Upon A Certified Question of Law from the United States Court of Appeals for the Ninth Circuit.

Stuart M. Grant, Esquire (argued), Michael J. Barry, Esquire and Diane Zilka, Esquire, Grant & Eisenhofer P.A., Wilmington, Delaware, and Blair A. Nicholas, Esquire and Niki L. Mendoza, Esquire, Bernstein Litowitz Berger & Grossmann LLP, San Diego, California, and Lester L. Levy, Esquire, Carl L. Stine, Esquire, Robert Plosky, Esquire, Wolf Popper LLP, New York, New York, for appellants, Arkansas Teacher Retirement System, Fire & Police Pension Association of Colorado, Louisiana Municipal Police Employees' Retirement System, Central Laborers Pension Fund and Public Employees' Retirement System of Mississippi.

Thomas A. Beck, Esquire, and Richard P. Rollo, Esquire, Richards, Layton & Finger, P.A., Wilmington, Delaware, and Brian E. Pastuszenski, Esquire (argued), Goodwin Procter LLP, Boston, Massachusetts, Daniel P. Roeser, Esquire, Goodwin Procter LLP, New York, New York, and Jason L. Krajcer, and Teodora E. Manolova, Esquire, Goodwin Procter LLP, Los Angeles, California, for appellee, Countrywide Financial Corporation.

Andrew H. Sauder, Esquire, DLA Piper LLP, Wilmington, Delaware, Shirli Fabbri Weiss, Esquire, DLA Piper LLP, San Diego, California, and David A. Priebe, Esquire, DLA Piper LLP, East Palo Alto, California, on behalf of appellee, Eric P. Sieracki.

William M. Lafferty, Esquire and Shannon E. German, Esquire, Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware, for defendants-appellees, Angelo R. Mozilo, David Sambol, Henry G. Cisneros, Robert J. Donato, Jeffrey J. Cunningham, Martin R. Melone, Robert T. Parry, Oscar

Page 890

P. Robertson, Keith P. Russell and Stanford L. Kurland.

Daniel P. Lefler, Esquire, and David Siegal, Esquire, Irell & Manella LLP, Los Angeles, California, for Angelo R. Mozilo.

Michael C. Tu, Esquire, and Frank M. Scaduto, Esquire, Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, for David Sambol.

Christopher G. Caldwell, Esquire, Eric S. Pettit, Esquire and Jeanne A. Fugate, Esquire, Caldwell Leslie & Proctor, Los Angeles, California, for Stanford L. Kurland.

Jordan Eth, Esquire, and D. Anthony Rodriguez, Esquire, Morrison & Foerster, LLP, San Francisco, California, for Henry G. Cisneros, Robert J. Donato, Jeffrey M. Cunningham, Martin R. Melone, Robert T. Parry, Oscar P. Robertson, Keith P. Russell.

Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and RIDGELY, Justices, constituting the Court en Banc.

HOLLAND, Justice:

This is a proceeding under Article IV, Section 11(8) of the Delaware Constitution and Supreme Court Rule 41. The following question of law was certified to and accepted by this Court from the United States Court of Appeals for the Ninth Circuit (" Ninth Circuit" ):

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.

We answer that question in the negative. In explaining our answer, we ratify and reaffirm the continuous ownership rule and the fraud exception recognized by our holding in Lewis v. Anderson. [1]

Stipulated Facts

This shareholder derivative action has been appealed to the Ninth Circuit from the orders of the United States District Court for the Central District of California (" District Court" ), which granted the defendant-appellee's motion for judgment on the pleadings and denied plaintiffs-appellants' motion for reconsideration. Five institutional investors brought this shareholder derivative action on behalf of the former Countrywide Financial Corporation (" Countrywide" ), asserting state and federal derivative claims for breach of fiduciary duty and securities law violations against former Countrywide officers and directors. While the suit was pending in the District Court, Countrywide merged into a wholly-owned subsidiary of Bank of America Corporation (" BofA" ) in a stock-for-stock transaction that divested the plaintiffs of their Countrywide shares. Nominal defendant, Countrywide then moved for judgment on the pleadings, arguing that the merger terminated the plaintiffs' standing to pursue derivative claims on Countrywide's behalf. The District 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, this Court decided Arkansas Teacher Retirement System v. Caiafa,[2] which arose ...


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