The fraud exception, which has never been used, applies to a Delaware law that otherwise requires continuous ownership of a company's stock in order to pursue derivative claims on behalf of the corporation. Derivative claims are brought by shareholders on behalf of a company, usually against officers and directors.
A California judge ruled in 2008 that the Bank of America acquisition eliminated the Countrywide shareholders' standing to pursue their derivative claims, because they no longer had an ownership interest in Countrywide.
In approving a settlement of a lawsuit that was filed by other Countrywide shareholders after the buyout was announced, a Delaware vice chancellor similarly noted in 2009 that the deal extinguished derivative claims against Countrywide officers and directors.
But attorneys for the former shareholders argued Wednesday that in upholding the vice-chancellor's decision in 2010, the Delaware Supreme Court suggested that the fraud exception rule could allow their claims to proceed.
In its 2010 ruling, the Supreme Court said that while there was no claim that the buyout itself was improper, the facts leading up to it could not be ignored.
"Delaware law recognizes a single, inseparable fraud when directors cover massive wrongdoing with an otherwise permissible merger," the justices said. "... An otherwise pristine merger cannot absolve fiduciaries from accountability for fraudulent conduct that necessitated that merger."
That ruling led the California appeals court to question whether the former shareholders could proceed under Delaware's fraud exception rule by alleging that the deal was "necessitated by, and is inseparable from" the fraud alleged in their derivative claims.
Attorneys representing Countrywide argued that the 2010 decision did not establish any new legal right, and that Delaware courts have consistently held that the fraud exception applies only when the sole purpose of a merger is to eliminate shareholders' derivative standing.
But Stuart Grant, an attorney for the former Countrywide shareholders, seized on the 2010 ruling to argue that his clients should be allowed to proceed with their lawsuit.
"Countrywide had no choice here," Grant said. "They had driven themselves into such a problem that they were either going to have to go into bankruptcy or merge themselves out of it."
Countrywide, once the country's largest lender, played a major role in the collapse of the housing market because of its heavy reliance on subprime mortgages. Facing serious financial challenges, it was acquired by Bank of America in 2008 in an all-stock deal valued at about $4 billion.
In 2010, Bank of America agreed to pay $600 million to settle class-action lawsuits claiming that Countrywide officials concealed mounting financial risks as they loosened lending standards during the housing boom. That same year, former Countrywide CEO Angelo Mozilo agreed to pay $67.5 million to settle accusations by the Securities and Exchange Commission that he had misled investors and engaged in insider trading.