BoA ruling

1

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

AMERICAN EUROPEAN INSURANCE :

COMPANY, JEAN MARIE CINOTTO, :

JOHN H. COTTRELL, RICHARD :

DELMAN, DORIS GASTINEAU, AND :

RUTGERS CASUALTY INSURANCE :

COMPANY, :

:

Plaintiffs, :

:

v. : Civil Action

: No. 7436-CS

BRIAN T. MOYNIHAN, CHARLES O. :

HOLLIDAY, JR., SUSAN S. BIES, :

WILLIAM P. BOARDMAN, FRANK P. :

BRAMBLE, SR., VIRGIS W. :

COLBERT, CHARLES K. GIFFORD, :

D. PAUL JONES, JR., MONICA C. :

LOZANO, THOMAS J. MAY, DONALD :

E. POWELL, CHARLES O. :

ROSSOTTI, ROBERT W. SCULLY, :

:

Defendants. :

and :

:

BANK OF AMERICA CORPORATION, :

:

Nominal Defendant. :

Chancery Courtroom No. 12A

New Castle County Courthouse

500 North King Street

Wilmington, Delaware

Monday, February 4, 2013

10:00 a.m.

- - -

BEFORE: HON. LEO E. STRINE, JR., Chancellor.

- - -

THE COURT'S RULING ON MOTION TO DISMISS

------------------------------------------------------

CHANCERY COURT REPORTERS

500 North King Street

Wilmington, Delaware 19801

(302) 255-0521

2


APPEARANCES:

BLAKE A. BENNETT, ESQ.

Cooch and Taylor, P.A.

-and-

JASON S. COWART, ESQ.

MATTHEW L. TUCCILLO, ESQ.

of the New York Bar

Pomerantz, Grossman, Hufford,

Dahlstrom & Gross, LLP

for Plaintiffs

DANIEL A. DREISBACH, ESQ.

Richards, Layton & Finger, P.A.

-and-

CHARLES S. DUGGAN, ESQ.

of the New York Bar

Davis Polk & Wardwell LLP

for Defendants

PAUL J. LOCKWOOD, ESQ.

ELISA M. CANNIZZARO, ESQ.

Skadden, Arps, Slate, Meagher & Flom LLP

for Nominal Defendant

- - -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

3


THE COURT: Thank you.

It has sometimes been said that

members of this Court and me in particular burden the

world with too many words on cases. I think we do

that in part because we like to give people fully

reasoned decisions. And sometimes as trial judges you

want to make sure that your bases are covered because

people sometimes revive arguments that they dropped.

And sometimes above, you can't even tell -- sometimes

when you're a trial judge, during the course of a

case, you can't actually tell what a litigant's theory

is, it seems to shift so much. So you do it. But

mindful of the concern sometimes about this Court

writing too much, I'm not going to write in this case

because I believe that Stone v. Ritter, Caremark, and

its progenies make clear what I have to do.

The plaintiffs have taken on a rather

difficult burden for themselves, which is they wish to

sue under the most difficult theory in our law, which

is to say that an independent board of directors

without any evident financial motivation knowingly

caused a corporation to violate positive law in order

to make profits for the stockholders.

I take very seriously the notion that

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

4


Delaware corporations cannot violate the positive law,

and there is probably no judge who has written more

about it as a judge than I have. That's why when I

hear comparisons of the circumstance here to certain

other cases, I tend to get quizzical, because I don't

think that they're comparable.

I also admit to taking a bit of

umbrage that this is somehow a personhood challenge to

the integrity of Delaware law; that Delaware's concern

about compliance with the law will be hollow if this

particular complaint is dismissed. I don't view it

that way.

This particular complaint is the

tactical and strategic choice of a group of plaintiffs

and their lawyers, and that, under our law, is what

has to be dealt with. I did not write this complaint.

No member of my Supreme Court will have written this

complaint. And this complaint was constructed in

precisely the manner that the Delaware Supreme Court

has admonished time and time again plaintiffs not to

use.

Is a referee here? No. Have the

plaintiffs had plenty of time to seek books and

records? Yes. Is this an injunction action? No. Is

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

5


a Caremark claim difficult? Yes. If you read

Caremark itself, is that clear? Yes. If you didn't

think Caremark was the law, could you read Stone v.

Ritter? Yes. Would Stone v. Ritter make clear that

it's a difficult claim? Yes. If Stone v. Ritter

wasn't clear, and you were uncertain of whether you

were reading it right, if you read subsequent

decisions of the Court of Chancery after Stone v.

Ritter, would it be clear that it's a difficult claim?

Yes. Would it be absolutely clear that seeking books

and records in most circumstances is critical to

meeting that burden? Yes. Did the plaintiffs heed

any of that advice? No.

At bottom, this complaint has to raise

an inference that independent directors knowingly

caused Bank of America to take actions that would lead

to violations of law; that they chose to take those

legal shortcuts in order to generate profits. This,

in the context of a complaint that pleads that after

the Countrywide acquisition -- an acquisition that I

think it's fairly pled is one that turned out to be a

dumb decision, but also, when you read the pleading,

there is no motivation for it to have been a dumb

decision. It was a risky decision that went wrong.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

6


Plaintiffs don't plead that the Bank

of America, the incumbent directors or management,

wanted to go wrong. Mr. Lewis probably thinks of

Countrywide every day and it makes him cringe, given

how many years he put into the institution. But they

buy into this thing, and it turns out to be horrible.

Did they do nothing? No. Let's look

at -- this is what's so strange about this complaint.

The complaint touts what they did. They brought in a

bunch of what the complaint says are highly qualified

people with experience in enterprise risk management

and other things.

Now, let's pause on this. That's what

I know. I know about Mr. Holliday and what he did

because I live in the state of Delaware, and he was

the chairman and CEO of a major corporation. The

plaintiffs do not burden the Court with any

information about the financial wherewithal of these

directors, what their prior experiences were, whether

they are stockholders or not of Bank of America.

None. An intentional tactical pleading decision to

leave out any human information about the board

members' motivation, but that tactical decision has

ramifications.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

7


The plaintiffs concede, essentially,

that they can't get demand excusal under the first

prong of Aronson because they have no gain. There is

no independence issue here. And it's not even clear

as to Mr. Moynihan that the plaintiffs plead any

rational reason why Mr. Moynihan, given his background

and given how he got there, why, in the face of

federal and state regulators, he would be engaging in

a knowingly conscious decision to violate the law.

But let's assume that he's management.

All the other directors are not. And a majority of

them are brought in during the midst of this and put

on the committees. Do they come in and do nothing?

No. By the plaintiffs' admission, and they don't

cover the whole time period, there are hundreds of

meetings. Hundreds.

Do I know about when any of those

meetings occurred? No. Do I know what information

was presented to any of those committees? No. What I

am told is that although there was an increasing

deployment of resources to deal with a mounting pile

of mortgages going unpaid, that that amount of

resources was something that the board had to have

known and its committees had to have known would be

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

8


insufficient to allow the company to address them in a

lawful manner.

The plaintiffs, of course, have all

the experience in the world that I do not, apparently,

of managing a foreclosure crisis or dealing with the

securities innovations that occurred, the

securitization innovations that occurred with

mortgages.

I happen to be a judge. I don't

think, even drawing plaintiff-friendly inferences,

that there is any magic ratio of the number of

employees that you add to the number of mortgages that

go bad. I also think there is nothing in the

complaint that shows what the board was presented in

real time with respect to the numbers or what it would

do.

I think the plaintiffs do not plead

that the bank made mistakes in the sense of actually

trying to foreclose upon loans that were being paid.

There were clearly missteps with respect to loans that

were not being repaid but which were then subject,

during points of time on the chronology, became

subject to a duty on the part of the bank to offer

certain modification options to the borrowers.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

9


We're not talking in here of a

situation where the bank is, again, taking somebody

who is current on their loans and trying to do

something to them. These are all admittedly loans

that were in default and how you work them out.

What I'm supposed to draw from this is

that even though there are hundreds of board meetings,

even though there are, by the plaintiffs' admission,

10,000 employees added during this period, offices

opened to deal with it, that because it was not

enough, ultimately, that these independent directors

who, again, under this complaint, have no plausible

motive to cause Bank of America to violate the law, no

longstanding relationship with Mr. Moynihan -- even if

Mr. Moynihan had a motivation, which is not pled in

any adequate way, they had no relationship with

Mr. Moynihan that would cause them to put their

personal reputation and good name and financial

well-being at risk to do this -- that they were going

through all this as just some sort of pretense in

order to allow Bank of America to skate by?

I'm supposed to draw

plaintiff-friendly inferences, but there has to be

some rationality. And I use the word "rationality"

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

10


because that is the Supreme Court test. Why would

Mr. Holliday or any of these other people rationally

decide to knowingly engage in a course of action

leading to law violations on the part of Bank of

America in order to increase its profits?

Is it because it would be good for any

of them personally, financially? No. The plaintiffs

plead nothing about that. In fact, their pleading of

nothing suggests that there is only one inference:

That would have been catastrophically stupid. Because

none of the independent directors had anything

rational to gain that would compare to the potential

loss of their net wealth if they became the target of

50 AGs and the federal government, much less

plaintiffs' lawyers. Put aside plaintiffs' lawyers.

The federal government and 50 Attorneys General are on

the scene.

So I'm going to step on the board into

a high-salience compliance context. I'm going to get

on the key committees. I've been a very successful

person who probably has had a vacation home before

Mr. Lockwood. I have grandchildren and others I want

to take care of. And what I do is because I love

stockholders like the plaintiffs, I'm going to

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

11


essentially put my good name, reputation, on the line

by knowingly engaging in a pattern of activity that

would cause the corporation to violate the law. It

makes no sense.

Now, is there a way that one could

plead out this case where it might make sense? Sure.

What would that take? It would take actually taking

the time to seriously investigate what the role of

these directors was, to take a look at the information

flow they received, and to match it with what was

going on, and then to level the serious accusation of

a criminal state of mind, which I believe is the only

fair way to put the accusations at this level.

But what the plaintiffs chose to do

here was simply to take the known and evident fact

that this was a business decision that went

catastrophically wrong, which was the acquisition of

Countrywide.

The plaintiff, the most -- I wrote,

actually, something on a paragraph, and it was

Paragraph 35, which is in some ways, you know, the

most sad, which is when you look at the balance of

loans on Bank of America's books before and after the

acquisition of Countrywide.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

12


Well, this complaint is expressly not

about whether the acquisition of Countrywide was a

breach of fiduciary duty. And I think -- and in part,

that's because I don't think anybody could ever

contend that the board of directors of Bank of America

wanted it to fail.

This was, again, not a suicide -- it

might have turned out to be suicidal in the sense

that -- but that would mean like it turned out to be

suicidal when you went up on the roof yourself to fix

something and you fell off and died. It wasn't

because you actually intended to commit suicide. It's

because of the fact that your act had a negative

consequence for yourself. In which case, going

through fast food drive-through windows is sort of an

accumulation over a lifetime of suicidal acts; right?

But this one, it turned out really badly, and it kept

getting worse.

Well, the fact that it kept getting

worse, that is obvious. And when the plaintiffs stand

up and say, Well, we pointed to the fact that this was

a catastrophe, yes, you have. I accept that it was a

catastrophe. I accept that a board had a duty to act

on it. I accept that the board had a duty to have the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

13


company try to come into compliance with the law and,

in good faith, try to comply with the law.

What breaks down, then, is when the

board meets 100 times in a two-year span, includes a

bunch of qualified directors and sets up structures in

order to accomplish these facts, brings on by measure

over five figures of new employees, opens new offices,

and it turns out not to be enough and they have to do

more, that that means that the people who came on who

have no motive to violate the law that makes any

sense, that they were knowingly law-breakers. That's

where it breaks down fundamentally.

And indulging every inference that I

have to give to the plaintiffs, the leap that they

have to make in the face of this exculpatory charter

provision, and that is one that I take into account --

there are Supreme Court decisions that say I can and I

must; that's the whole point of the statute -- I can't

draw that inference on this complaint.

And if anyone has fault here, the

plaintiffs chose to not seek books and records about

the relevant board committees at the relevant time.

As a result, they make unspecified non-particularized

allegations. And that's the thing. We're in a

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

14


particularized pleadings state. They know nothing

about what the board knew at the time and they allege

nothing.

And they're supposed to make me draw

the inference that the board wasn't getting any --

what the board was reporting on was the general

catastrophe. And from that, the board must have known

that they weren't doing enough. No, I can't draw that

inference because it doesn't compute. It's not

consistent with the increase in resources, and it's

not consistent with the challenge that the plaintiffs'

own complaint admits.

As I said, I questioned good counsel

and he was very patient with my questions about

things, but one of the real challenges of bringing on

new employees is that you have to train them. You're

trying in real time to deal with things. You can't

just snap your fingers and open new offices. You

can't snap your fingers and have qualified people who

set up processes.

Some of these challenges are

acquisition integration challenges. Again, this is a

business court. Even the best of acquisitions often

involve discoveries about people doing processes

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

15


different. One of the issues here is you're acquiring

Countrywide. You're dealing with loans that they

wrote and securitizations they engaged in, trying to

get a handle on the paperwork of them.

The other thing that the plaintiffs do

here is they make these two years seem as if they were

a decade, as if people got to sit around and just

plot. We're talking in real time addressing a real

catastrophe.

So the bottom line here is very simple

and that's why I'm not going to write on it. The

facts about a catastrophe are not matched to any

rationally pled facts, particularized facts, about the

role of the board, the role of the particular

committees, and the role of the particular individuals

who were sued and accused of a criminal state of mind.

And because of that lack of connection, there is no

way that anyone can rationally draw an inference that

these defendants knowingly caused the corporation to

engage in the course of conduct that would result in

violations of the law.

And because one cannot draw that

inference, there is no cause of action stated against

them under Caremark and Stone v. Ritter. As a result,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

16


demand is not excused under the second prong of

Aronson. And I don't even believe, you know, I don't

even believe that under 12(b)(6) a claim is stated.

So I'm going to dismiss but I'm going

to dismiss without prejudice as to any plaintiffs

other than the plaintiffs before the Court.

Why am I going to do that? Because I

want to make clear that I'm dealing with the complaint

that I have. I don't think it's fair for the company

and the defendants to be whipsawed by these particular

plaintiffs with a books and records action, because

these particular plaintiffs have known for a long time

of the utility of a books and records action. They

chose the tactical course that they did.

What I'm concerned about is because I

don't know what a books and records action would have

found. I'm dealing with the complaint that's brought

before me. It may be -- again, from this complaint,

it would be hard to conjure up a reason why the

directors who are targeted by this suit would have

ever had the powerful motive that the plaintiffs

charge them with. It's hard to tell, because the

plaintiffs, what they say about them is these are

experienced accomplished people who stepped into a

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

17


high-salience enforcement compliance dynamic in a very

high profile way and stepped right onto the relevant

hot-button committees. Again, it's not clear to me

why they would have wanted to jump in there and then

begin to play hinky with regulators and with the law.

It doesn't make any sense to me based on this

complaint.

But, you know, one of the things as

you get older and I think it's good advice, as a

parent, I always tell my kids, "There are two words as

you get older you should say less: Always and never."

And in order to protect the best interests of the

stockholders of Bank of America, I don't think it's

fair to foreclose a future group of plaintiffs who

might actually use the books and records, and might

actually show that based on an information flow to the

committee, the committees in question, that they,

frankly, knowingly engaged in a course of conduct that

they knew would essentially result in a continuing

pattern of law violation in order to profit the

company. That's the theory of these plaintiffs.

These plaintiffs chose not to do the

most obvious thing that would have filled out and been

required to plead that cause of action, and I don't

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

18


think that the company should have to face them again.

In particular, I mention that under 15(aaa), one of

the options when the motion was filed was for the

plaintiffs to take a deep breath, read Stone v.

Ritter, and after they read Stone v. Ritter, read it

again, then compare it to the other cases, and then

realize that they've pled nothing about the

motivations of the directors; that they've given the

Court no information about why these directors would

do this; that they plead a substantial level of

compliance activity by the board, including the

formation of relevant committees to address it.

They don't allege that those

committees were then formed and didn't act. They

allege that those committees met. They don't allege

that the full board wasn't engaged. In fact, they say

that the board was meeting all the time. But never

bothered to actually make any allegations about what

the directors knew in real time, to take into account

what they knew in real time in making allegations.

That was the plaintiffs' choice.

So this is -- again, I'm not going to

burden the world with a written decision. This comes

down to plain and simple. It's difficult to plead a

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

19


Caremark claim. See Stone v. Ritter. The Delaware

Supreme Court and this Court have encouraged

plaintiffs doing it to use the books and records tool

to make sure that they can actually plead real

particularized facts to meet the demand excusal

standard. The plaintiffs here didn't use the books

and records.

The plaintiffs here plead no rational

motive. There is no rational inference to be drawn

that the board members acted with the high state of

mind required to state a Caremark or Stone v. Ritter

claim. And there isn't actually even enough to

survive -- to create a 12(b)(6) inference, even under

the liberal Central Mortgage standard.

And for those reasons, I'm going to

dismiss the complaint with prejudice as to the named

plaintiffs, without prejudice as to any other Bank of

America stockholders who might make similar claims in

the future. And I'll ask counsel to work on an

implementing order.

Thank you all.

(Court adjourned at noon.)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

20

CERTIFICATE

I, JEANNE CAHILL, Official Court

Reporter for the Court of Chancery of the State of

Delaware, do hereby certify that the foregoing pages

numbered 3 through 19 contain a true and correct

transcription of the proceedings as stenographically

reported by me at the hearing in the above cause

before the Chancellor of the State of Delaware, on the

date therein indicated.

IN WITNESS WHEREOF I have hereunto set

my hand this 4th day of February, 2013.

/s/ Jeanne Cahill

-------------------------

Official Court Reporter

of the Chancery Court

State of Delaware

Certificate Number: 160-PS

Expiration: Permanent

BoA ruling

Documents

Transcript of BoA ruling