Securities Class Action Claims Pending in California Paralleled Class Action Claims in Delaware and Colorado River Factors Supported Stay of California Class Action California Federal Court Holds
Several class action lawsuits were filed against Countrywide Financial Corp. and others alleging violations of various state and federal securities laws, including class action complaints that were filed in the United States District Court for the Central District of California. In re Countrywide Financial Corp. Derivative Litig., ___ F.Supp.2d ___ (C.D. Cal. March 28, 2008) [Slip Opn., at 2-3]. Last Friday, the California district court addressed three separate motions that “generally relate to the series of cases before [it] and other courts involving Countrywide…, Bank of America…, and several current and former Countrywide directors and officers.” Id., at 1. The district court summarized four separate categories of class action lawsuits that had been filed in state and federal courts against Countrywide prior to the announced merger with Bank of America, see id., at 3-6, as well as the various state and federal class action complaints filed immediately after the announced merger, see id., at 7-8. One of the pre-merger series of class action lawsuits “consolidated under Arkansas Teachers, No. CV-07-06923,” were filed in the California federal court “alleging that Countrywide directors engaged in an extensive pattern of misconduct in disregard of their fiduciary duties to the corporation,” id., at 6, and plaintiffs a 200-page amended consolidated class action complaint after the announcement of the merger to add class action claims against Bank of America, id., at 8-9.
The district court first addressed the defense motion to stay Arkansas Teachers in favor of litigation pending in Delaware. In re Countrywide, at 9. The court concluded that “the federal and state class action merger claims are substantially similar,” id., at 10-11; accordingly, “the ‘parallelism requirement for a [Colorado River Water Conservation Dist. V. United States, 424 U.S. 800 (1976)] stay is easily met due to the striking similarity of the class action claims in Arkansas Teachers and Freedman,” id., at 11. The federal court next held that partial stays are permissible under Colorado River, id., at 12-13, and that it would issue such a stay in this case because “while the class action claims are sufficiently parallel, the Delaware case does not contain the derivative claims present in this case,” id., at 11-12. The court’s Colorado River analysis may be found at pages 14 through 16 of the slip opinion.
The court next addressed plaintiffs’ request for imposition of a constructive trust and for a preliminary injunction – in essence, plaintiffs sought to preserve their derivative claims throughout the merger process, concerned that their standing to prosecute those claims “may be extinguished upon Bank of America’s acquisition of Countrywide.” In re Countrywide, at 17. The district court was unconvinced. While it agreed that Bank of America may succeed to any derivative claims upon its acquisition of Countrywide, id., at 18, the court found that plaintiffs had not established that the extraordinary relief would preserve the status quo, id., at 18-19, nor had they shown “a significant threat of irreparable injury,” id., at 20-23. Finally, the federal court rejected plaintiffs’ request for expedited discovery in connection with their motion for imposition of a constructive trust and for a preliminary injunction, see id., at 23, holding that the automatic stay required by the Private Securities Litigation Reform Act (PSLRA) during the pendency of any motion to dismiss “applies to stay the derivative claims” and that plaintiffs had “not demonstrated the need for an exception to the PSLRA stay,” id., at 24. The court’s analysis of the stay request may be found at pages 24 through 26 of the slip opinion.