Allstate Insurance v. Countrywide Financial Corp.

Citations: 842 F. Supp. 2d 1216; 2012 WL 335730; 2012 U.S. Dist. LEXIS 15199Docket: Case No. 2:11-CV-05236-MRP (MANx)

Court: District Court, C.D. California; February 1, 2012; Federal District Court

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The Court addressed the motion to dismiss filed by the Bank of America Defendants in a securities action involving Allstate Insurance Company and its affiliates, who purchased residential mortgage-backed securities (RMBS) from Countrywide Financial Corporation (CFC) and its subsidiaries. Allstate alleges misrepresentations about the quality of these RMBS purchased between 2005 and 2007. The specific issue before the Court is whether the Bank of America Defendants—Bank of America Corporation, NB Holdings Corporation, and BAC Home Loans Servicing, LP—should remain in the case following Bank of America's acquisition of CFC in July 2008.

The Court previously dismissed Bank of America Corp. and NB Holdings Corp. in an earlier ruling but allowed Allstate to amend its complaint. The amended complaint added BAC Home Loans Servicing, LP as a defendant and introduced new claims and factual details. The Bank of America Defendants moved to dismiss three counts of the amended complaint: Cause of Action Nine (Successor and Vicarious Liability), Cause of Action Ten (Intentional Fraudulent Conveyance), and Cause of Action Eleven (Constructive Fraudulent Conveyance). The Court found these claims insufficient and dismissed them with prejudice.

The background includes details of the merger process, which was a reverse triangular merger in which Bank of America acquired CFC, making it a wholly-owned subsidiary. Following the merger, several asset sales occurred, including significant transactions involving the sale of residential mortgage loans and securities between Countrywide and various Bank of America entities, all finalized in early July 2008.

On July 2, 2008, Countrywide Commercial Real Estate Finance sold a pool of commercial mortgage loans to NB Holdings Corp. for $238 million, leading to Countrywide receiving over $30 billion in cash and promissory notes through the LD1 transactions. In October 2008, Countrywide requested permission from the OCC to sell its remaining assets to Bank of America, which was approved on November 6, 2008. Subsequently, on November 7, 2008, Countrywide engaged in the LD100 transactions, selling nearly all of its remaining mortgage business assets to Bank of America for a $1.76 billion promissory note. Additionally, CFC sold its equity in Countrywide Bank, FSB to Bank of America for a $3.6 billion promissory note and the assumption of $16.6 billion in public debt. Allstate contends that these transactions (the Red Oak Merger, LD1, and LD100) establish the Bank of America Defendants' liability through successor and vicarious liability theories, and claims that the LD1 and LD100 transactions amounted to actual or constructive fraudulent conveyances.

In determining the applicable law for Allstate's claims, the Court has ruled that Delaware law governs the successor liability claims, while Illinois law applies to the fraudulent conveyance claims. The case was transferred from the Southern District of New York, necessitating the application of New York's substantive law and choice-of-law rules. A true conflict was identified between Illinois and New York laws regarding fraudulent transfers, as Illinois follows the UFTA and New York adheres to the UFCA, with key differences in their definitions of fraudulent transfers. The Court decided that Illinois law applies to Allstate's claims due to the location of the injury, as two plaintiffs are incorporated in Illinois and hold the majority of the relevant RMBS.

Regarding the standard for a Rule 12(b)(6) motion to dismiss, the Court stated that such a motion should be granted if the complaint, assuming all allegations are true, fails to state a claim for relief. While the Court must accept the plaintiffs' allegations as true and draw reasonable inferences in their favor, it is not obligated to accept conclusory statements or unreasonable inferences.

A court evaluates a complaint in its entirety, considering relevant judicially noticeable matters, rather than isolating specific allegations. Allstate's claims include constructive and actual fraudulent transfer, assumption of liabilities, fraud, and de facto merger, with interrelated elements. The court finds that Allstate's failure to adequately plead essential elements of fraudulent transfer—specifically, lack of reasonably equivalent consideration and fraudulent intent—negatively impacts its fraud and de facto merger claims. Consequently, Allstate fails to establish any basis for successor liability.

Under Illinois law, fraudulent transfer can be classified as either actual (intent to hinder, delay, or defraud creditors) or constructive (transferor receives no reasonably equivalent value while insolvent). Even if actual intent is proven, a transfer may still be deemed fraudulent if reasonably equivalent value is received. The court emphasizes the importance of solvency and adequacy of consideration as significant indicators in assessing intent.

Constructive fraudulent transfer requires two elements: reasonably equivalent value and insolvency. The court does not examine insolvency since Allstate does not adequately plead reasonably equivalent value. Factors determining reasonably equivalent value include the balance of what was transferred versus what was received, market values, arm's length transactions, and the good faith of the transferee. Non-monetary values such as goodwill and operational capacity are also considered, with fair market value being a crucial element. 

While the question of reasonably equivalent value is generally factual, a complaint must provide sufficient factual content to support a plausible claim for relief. The court applies principles from *Iqbal* and *Twombly*, emphasizing that legal conclusions and mere consistency with liability are insufficient; instead, the allegations must allow for a reasonable inference of liability. The court thus disregards legal conclusions in the amended complaint and focuses on factual support for those conclusions.

Legal conclusions presented in the amended complaint (AC) regarding Bank of America’s transactions with Countrywide are deemed irrelevant. Allstate claims that Bank of America failed to provide fair consideration for assets acquired through the Consolidation Plan due to bad faith intent to defraud Countrywide’s creditors. It is asserted that Bank of America purchased these assets at depressed prices in the LD1 and LD100 Transactions, reflecting substantial discounts linked to Countrywide's contingent liabilities. The AC alleges that the transactions led to Countrywide's insolvency and constituted fraudulent conveyances, as they lacked fair consideration and reasonable value. The prices paid were significantly below the book value, with Bank of America acquiring assets for only 27% of Countrywide's book value during the Red Oak Merger. However, the AC primarily consists of legal conclusions rather than well-pleaded facts that would support the claims. Once these legal assertions are removed, the remaining content only provides a basic outline of the transactions without evidence of alternative market values or justification for disregarding the benefits derived from asset sales, such as debt repayment and working capital enhancement.

Allstate presents key facts regarding Countrywide's financial status: it had $172 billion in assets before asset sales, $10.7 billion as of March 31, 2011, and sold most assets for approximately $53 billion. Allstate highlights the substantial decrease in asset value and notes that the remaining assets do not generate revenue, suggesting liability. However, these facts are equally compatible with non-culpable behavior, as corporate finance principles allow for revenue-producing assets to be sold at their net present value. The mere sale of assets and loss of revenue does not indicate inadequate consideration; Countrywide could still be a "shell" regardless of any potential overpayment by Bank of America in the transactions. 

Moreover, the comparison of Countrywide's gross assets from 2008 to 2011 is less relevant, as it fails to account for liabilities, preventing a clear understanding of creditor impacts. Bank of America argues that the asset reduction is largely offset by liabilities it assumed in the transactions, though the accuracy of this claim is disputed. The Court states that for Allstate's claims to survive a motion to dismiss, there must be sufficient facts to suggest Bank of America received less than reasonably equivalent consideration, which Allstate fails to establish. Consequently, Allstate's claim for constructive fraudulent conveyance is dismissed.

In terms of actual fraudulent transfer, the focus is on the transferor's intent rather than the transfer's effects. Under Illinois law, a transfer is deemed fraudulent if made with actual intent to hinder, delay, or defraud creditors, regardless of the adequacy of consideration or the transferor's insolvency at the time. Given the difficulty of proving intent, courts often rely on "badges" of fraud, which are codified in Illinois' fraudulent transfer statute.

Key considerations in evaluating the transfer or obligation include: (1) whether it was made to an insider, (2) if the debtor maintained possession or control post-transfer, (3) the visibility of the transfer, (4) if legal action was pending against the debtor at the time of the transfer, (5) whether it involved nearly all of the debtor’s assets, (6) any absconding by the debtor, (7) asset removal or concealment, (8) the adequacy of consideration received, (9) the debtor's insolvency status, (10) timing relative to substantial debt incurrence, and (11) transfer of essential assets to a lienor who then transferred them to an insider. In this case, badges two, three, six, seven, and eleven are not seriously argued to be present. The court determined that Allstate failed to allege sufficient facts indicating that Countrywide received inadequate consideration, thus badge eight is also absent. 

Badges four, nine, and ten are linked, with Allstate claiming their presence due to Countrywide’s alleged contingent liabilities. Bank of America disputes the extent of these liabilities, asserting they were not evident at the time of certain transactions (LD1 and LD100). While RMBS lawsuits against Countrywide began in late 2007, most were filed later, in 2010. The court emphasizes the need to disregard speculation and legal conclusions when evaluating claims of insolvency. Allstate’s assertions lack factual support, particularly regarding the presence of these badges. The only evidence cited is the Luther complaint from 2007, which does not sufficiently indicate Countrywide's insolvency during the relevant transactions, particularly as the claims lacked standing. Moreover, Allstate’s insolvency argument is contradicted by its own allegation that Bank of America acquired Countrywide at a 27% discount to its book value, suggesting an acknowledgment of contingent liabilities but insufficient to imply insolvency.

Allstate acknowledges that Countrywide had a positive book value at the time of the Red Oak Merger, with Bank of America believing Countrywide's assets exceeded its liabilities, despite the existence of contingent liabilities. Countrywide continues to operate, possessing assets worth $10.7 billion, indicating it was likely not insolvent during the LD1 and LD100 transactions. The court finds badges nine and ten of fraud absent, with badge four present but given minimal weight. Badges two and five, indicating the transfers were made to insiders and involved substantially all of Countrywide's assets, are present. Illinois law allows for a flexible interpretation of fraud indicators, suggesting even one significant badge could imply intent to harm creditors. However, the court notes that Allstate's claims lack sufficient factual support to move from a mere possibility of liability to a plausible claim, leading to the dismissal of Allstate's fraudulent transfer claims with prejudice.

Regarding the assumption of liabilities, the court finds no evidence that Bank of America expressly or implicitly agreed to assume Countrywide's RMBS liabilities. Allstate's cited paragraphs suggest Bank of America acknowledges Countrywide's liabilities but do not indicate any legal assumption of those debts. The court views Bank of America's statements about paying for Countrywide's debts as reflecting a present intent to voluntarily cover some obligations, rather than an explicit assumption of liability. Additionally, Bank of America’s reserve increases are not clearly linked to Countrywide’s specific liabilities.

Using litigation reserves as evidence of a company's liability is deemed paradoxical and unfounded. Bank of America’s voluntary settlements regarding Countrywide do not imply a legal obligation for further payments. The Court dismisses Allstate's claims related to the assumption of liabilities by Bank of America with prejudice. 

Allstate argues Bank of America is liable due to a de facto merger with Countrywide, but Delaware law applies this doctrine restrictively. Four factors must be met to establish a de facto merger, including adequate consideration and compliance with asset transfer statutes. Allstate’s vague references to potential mergers (Red Oak, LD1, LD100) do not satisfy these criteria. The Delaware Chancery Court previously found the Red Oak Merger price to be fair and compliant with statutes, while no evidence suggests creditor harm from this merger. 

Allstate has not provided sufficient allegations regarding the LD1 and LD100 transactions being unfair or disadvantageous to creditors. Claims of violations under the Delaware Uniform Fraudulent Transfer Act (UFTA) and Section 271 of the Delaware General Corporation Law lack substantiation, as Section 271 allows asset sales with written consent, and Allstate has not demonstrated unfair consideration to prove a breach of fiduciary duty.

Transaction approval under Section 271 requires that it not be "legally unfair." The court found no basis to infer unfair consideration, paralleling its dismissal of Allstate's fraudulent transfer claim. Allstate argued for collapsing three transactions into one, citing a supposed unified intent to defraud, but Delaware generally adheres to the doctrine of independent legal significance, as seen in Hariton v. Arco Electronics, where an asset sale followed by dissolution did not constitute a de facto merger.

Allstate referenced In re Hechinger to argue for collapsing transactions based on the parties’ knowledge and intent. However, Allstate failed to allege fraudulent intent or establish the transactions as part of a single integrated plan. The Red Oak Merger did not affect Countrywide's assets directly, and the subsequent asset sales were the primary transactions that potentially harmed creditors, yet Allstate did not provide evidence of fraudulent intent related to these sales.

The court noted that, under In re Tribune, a three-factor test is employed to determine if multiple transactions constitute one integrated transaction: (1) whether all parties were aware of the multiple transactions; (2) whether each transaction could occur independently; and (3) whether transactions were conditioned on each other. Allstate met the first factor by alleging Bank of America’s awareness of asset sales during the merger, and the second factor was arguably satisfied due to Bank of America’s need to address debt covenants post-merger. However, the third factor was not met, as the merger could stand independently of the asset sales, with some requiring third-party approval, indicating no interdependence.

Collapsing the three transactions is deemed inappropriate by the Court. Even if this were allowed, Allstate has not adequately pleaded the necessary factors for a de facto merger analysis. The asset sales are the only components of the combined transaction that could have caused direct harm to Allstate. Allstate's failure to plead the absence of reasonably equivalent value or fraudulent intent regarding these asset sales negates factors one and four of the analysis. Factors two and three are likewise negated since Allstate did not claim that any laws were violated by the transactions. Consequently, the Court grants the motion to dismiss Allstate's successor liability claims with prejudice. Counts nine, ten, and eleven are dismissed with prejudice. 

The document notes that NB Holdings and BAC Home Loans Servicing, LP are subsidiaries of Bank of America Corporation. The Court adopts the terminology used by Allstate to describe the asset sales as "LD1 transactions," which occurred on Legal Days one through three. Allstate's argument regarding the loss of revenue-generating assets by Countrywide is acknowledged but deemed insufficient, as it fails to demonstrate a plausible diminution in value of the entity. Additionally, statements cited by Allstate do not specifically identify claims against Countrywide or indicate that Bank of America believed these claims could bankrupt Countrywide. Allstate is required to provide factual justification for its claims rather than merely describing Countrywide's contingent liabilities as "massive." This is a challenging burden at the pleading stage, especially as Allstate seeks to substantiate over $10.7 billion in liabilities that are not reflected on any balance sheet.

The complexity of RMBS (Residential Mortgage-Backed Securities) litigation is heightened by the prevalence of time-barred claims. Courts have indicated that a limited number of "badges of fraud" alone are insufficient to substantiate claims of actual fraudulent transfer, although multiple badges may imply fraudulent intent. The applicable statute identifies badges of fraud as factors for judicial consideration. The court emphasizes that the strength of inference drawn from these badges is more critical than their quantity. Allstate's fraud claims against Countrywide hinge on previously dismissed fraudulent transfer allegations, leading to their dismissal for consistent reasons. Under Delaware law, directors owe fiduciary duties primarily to the corporation and its shareholders, with creditors able to initiate derivative actions only when the corporation nears insolvency. The court notes that de facto merger law assesses legal violations rather than the standing of specific plaintiffs. Allstate's cited cases do not pertain to de facto mergers and involve distinct issues related to leveraged buyouts (LBOs) and insolvency. The relationship between LBO transaction stages is intricate, with insolvency potentially arising from early steps in the process. The court tentatively considers whether the legal frameworks from the cited LBO cases may apply, while Allstate concedes that a separate transaction (Red Oak) is not pertinent to their claims, focusing instead on the control it provided over the board that approved contested transactions.