Arkansas Teacher Retirement System, Fire & Police Pension Association of Colorado v. Angelo R. Mozilo

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
ARKANSAS TEACHER RETIREMENT
SYSTEM, FIRE & POLICE PENSION
ASSOCIATION OF COLORADO;
LOUISIANA MUNICIPAL POLICE
EMPLOYEES’ RETIREMENT SYSTEM;
CENTRAL LABORERS PENSION FUND;
PUBLIC EMPLOYEES RETIREMENT
SYSTEM OF MISSISSIPPI,
Plaintiffs-Appellants,
v.
ANGELO R. MOZILO; DAVID
SAMBOL; HENRY G. CISNEROS;
ROBERT J. DONATO; JEFFREY M.
CUNNINGHAM; MARTIN R. MELONE;
ROBERT T. PARRY; OSCAR P.
ROBERTSON; KEITH P. RUSSELL;
STANFORD L. KURLAND; CARLOS M.
GARCIA; ERIC P. SIERACKI;
COUNTRYWIDE FINANCIAL
CORPORATION, Nominal Defendant,
Defendants-Appellees,
No. 10-56340
D.C. No.
2:07-cv-06923-
MRP-MAN
ORDER
CERTIFYING A
QUESTION OF
LAW
PURSUANT TO
DELAWARE
SUPREME
COURT RULE 41

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ARKANSAS TEACHER RETIREMENT SYSTEM V. MOZILO 2
The Honorable Gloria M. Navarro, District Judge for the U.S. District *
Court for the District of Nevada, sitting by designation.
This summary constitutes no part of the opinion of the court. It has * *
been prepared by court staff for the convenience of the reader.
HARLEY W. SNYDER; MICHAEL E.
DOUGHERTY; BANK OF AMERICA
CORPORATION,
Defendants,
and
ROBERT L. GARBER,
Third-party-plaintiff.
Filed January 10, 2013
Before: Stephen Reinhardt and Sidney R. Thomas, Circuit
Judges, and Gloria M. Navarro, District Judge.*
Order;
Certificate of Questions of Law
SUMMARY**
Certification of Question to State Supreme Court
The panel certified a question of law to the Supreme
Court of the State of Delaware.

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ARKANSAS TEACHER RETIREMENT SYSTEM V. MOZILO 3
The panel found that this shareholder derivative action
involved a dispositive question of Delaware law, the answer
to which was not clear from controlling precedent in
Delaware judicial decisions. The panel certified the
following question to the Supreme Court of the State of
Delaware:
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.
COUNSEL
Blair A. Nicolas, Niki L. Mendoza, Bernstein Litowitz Berger
& Grossmann LLP, San Diego, California; Stuart M. Grant,
Grant & Eisenhoffer P.A., Wilmington, Delaware, for
Plaintiffs-Appellants.
Brian E. Pastuszenski, Stuart M. Glass, Goodwin Procter
LLP, Boston, Massachusetts; Joshua S. Lipshutz, Goodwin
Procter LLP, San Francisco, California, for Nominal
Defendant-Appellee.
Michael C. Tu, Orrick, Herrington & Sutcliffe LLP, Los
Angeles, California; Michael D. Torpey, Orrick, Herrington
& Sutcliffe LLP, San Francisco, California, for Defendant-
Appellee David Sambol.

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ARKANSAS TEACHER RETIREMENT SYSTEM V. MOZILO 4
David Siegel, Irell & Manella LLP, Los Angeles, California,
for Defendant-Appellee Angelo Mozilo.
Jordan Eth, D. Anthony Rodriguez, Morrison & Foerster
LLP, San Francisco, California, for Defendants-Appellants
Henry G. Cisneros, Jeffrey M. Cunningham, Robert J.
Donato, Martin R. Melone, Robert T. Parry, Oscar P.
Robertson, and Keith P. Russell.
David Priebe, DLA Piper LLP (US), East Palo Alto,
California, for Defendant-Appellant Eric P. Sieracki.
ORDER
For the reasons set forth in the contemporaneously-issued
certificate, we find that this case involves a dispositive
question of Delaware law, the answer to which is not clear
from controlling precedent in Delaware judicial decisions.
We therefore certify a question of law to the Supreme Court
of the State of Delaware. See Del. Supr. Ct. R. 41.
The Clerk of this Court shall forward a certified copy of
this order and the certificate to the Supreme Court of
Delaware, and is directed to provide a certified copy of the
record (or any part thereof) if requested by the Supreme Court
of Delaware to aid its consideration of this matter.
The case is withdrawn from submission and further
proceedings in this court are stayed pending final action by
the Supreme Court of Delaware. The parties shall notify the
Clerk of this Court within one week after the Supreme Court
of Delaware accepts or rejects certification, and again within
one week if the Supreme Court of Delaware renders an

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ARKANSAS TEACHER RETIREMENT SYSTEM V. MOZILO 5
opinion. The panel retains jurisdiction over future
proceedings.
CERTIFICATE OF QUESTIONS OF LAW
Pursuant to Delaware Supreme Court Rule 41, we make
the following findings:
1. The nature and stage of the proceedings are:
This shareholder derivative action has been appealed from
the orders of the U.S. District Court for the Central District of
California granting Defendant-Appellee’s motion for
judgment on the pleadings and denying Plaintiffs-Appellants’
motion for reconsideration. The appeal was argued and
submitted on November 8, 2012 at Pasadena, California.
2. The following facts are undisputed:
In this shareholder derivative action, five institutional
investors have sued 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 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 destroyed
the plaintiffs’ standing to pursue derivative claims on
Countrywide’s behalf. The district court granted the

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ARKANSAS TEACHER RETIREMENT SYSTEM V. MOZILO 6
defendant’s motion, finding that the plaintiffs cannot satisfy
the “continuous ownership” requirement for shareholder
derivative standing under Fed. R. Civ. P. 23.1 and Delaware
law.
Following the Supreme Court of Delaware’s intervening
decision in Ark. Teacher Ret. Sys. v. Caifa, 996 A.2d 321
(Del. 2010) (“Arkansas Teacher”), which arose from the
same underlying facts and involved the parties to this appeal,
the plaintiffs moved for reconsideration of the district court’s
order. The plaintiffs argued that, in Arkansas Teacher, the
Supreme Court of Delaware clarified the scope of the “fraud
exception” to Delaware’s continuous ownership rule and
affirmed that the plaintiffs have post-merger derivative
standing in this case. The district court denied that motion,
and the plaintiffs appealed.
On appeal, the parties agree that Delaware law governs
the plaintiffs’ derivative standing, though they vigorously
dispute the meaning of Arkansas Teacher and its effect on
this case. The plaintiffs argue that, because they allege “a
single, inseparable fraud” by which the defendant
Countrywide “directors cover[ed] massive wrongdoing with
an otherwise permissible merger,” id. at 323, they maintain
post-merger derivative standing under the fraud exception to
the continuous ownership rule, as interpreted in Arkansas
Teacher. The defendant asserts that Arkansas Teacher
merely reaffirmed the traditional scope of the fraud
exception, as articulated in Lewis v. Anderson, 477 A.2d 1040
(Del. 1983), and its progeny. Under that rule, defendants
argue, the fraud exception to the continuous ownership
requirement applies only when the plaintiffs allege that the

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ARKANSAS TEACHER RETIREMENT SYSTEM V. MOZILO 7
merger was executed “merely” to destroy derivative standing
and lacked any legitimate business purpose. The parties
agree that the panel’s decision on this issue of state law will
determine the outcome of this appeal.
3. The question of law set forth below should be certified
to the Supreme Court of the State of Delaware for the
following reasons:
The contours of shareholder derivative standing affect the
internal affairs of corporations organized under state law,
insofar as derivative standing rules allocate power to control
corporate litigation between the board and shareholders. As
such, disputes regarding shareholder derivative standing
implicate significant issues of state public policy best
resolved by reference to clear rules of state law.
We also observe that, to date, the state and federal courts
that have interpreted the scope of the fraud exception to
Delaware’s continuous ownership rule in light of Arkansas
Teacher have reached divergent results. See Villari v. Mozilo,
208 Cal. App. 4th 1470 (2012); In re Massey Energy Co.
Derivative and Class Action Litig., 2011 WL 2176479 (Del.
Ch. May 26, 2011); In re Bear Stearns Cos., Inc. Securities,
Derivative, and ERISA Litig., 763 F. Supp. 2d 423 (S.D.N.Y.
2011). A definitive ruling on this issue from the Supreme
Court of Delaware would resolve this split of authority and
promote accurate application of Delaware law in other
jurisdictions.

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ARKANSAS TEACHER RETIREMENT SYSTEM V. MOZILO 8
4. The important and urgent reasons for an immediate
determination by the Supreme Court of the question
certified are:
As described above, the plaintiffs’ post-merger derivative
standing is the dispositive issue in this appeal. A ruling from
the Supreme Court of Delaware on the certified question
stated below will facilitate the prompt and accurate
disposition of this case and clarify the law in an area that
implicates important state interests and is likely to recur in
the federal Court of Appeals.
5. If certification is accepted, it is recommended that
Plaintiffs-Appellants Arkansas Teacher Retirement
System et al. be appellant for purposes of the caption
on any filing in the Supreme Court of Delaware and
that nominal Defendant-Appellee Countrywide
Financial Corporation be appellee for purposes of the
caption on any filing in the Supreme Court of
Delaware with respect to the question certified.
NOW, THEREFORE, IT IS ORDERED that the following
question of law is certified to the Supreme Court of the State
of Delaware for disposition in accordance with Rule 41 of the
Supreme Court:
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.

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ARKANSAS TEACHER RETIREMENT SYSTEM V. MOZILO 9
In accordance with Supreme Court Rule 41, we recommend
that briefs shall be filed in the Supreme Court in the
following order:
Plaintiffs-Appellants Arkansas Teacher Retirement
System, et al., followed by Nominal Defendant-Appellee
Countrywide Financial Corporation.

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