California Federal Court Denies Motions To Dismiss Countrywide ERISA Class Action

In a series of orders in March and April (available here), a federal judge in California denied motions to dismiss a class action lawsuit alleging violations of ERISA against Countrywide and several of its directors. The complaint on behalf of the Countrywide employees invested in the employees' ERISA pension plan alleges that Countrywide and its directors "imprudently allow[ed] the investment of the Plan's assets in Countrywide stock," which the plaintiff says "was unduly risky given the company's involvement in marketing and extending subprime mortgage loans," and alleged that Countrywide failed to disclose material facts to plan participants about "serious mismanagement, improper business practices and potentially unlawful conduct" such as making subprime loans without adequate consideration of a borrower's ability to repay the loan, opearting with inadequate liquidity given the volatility caused by the subprime lending, and insider sales of Countrywide stock.

In the first order, the court denied the director defendants' motion to dismis, concluding that the complaint alleged adequate facts that, if proven, would demonstrate that the directors "knew or should have known about Countrywide's deteriorating financial condition, yet failed to investigate the merits of each investment." (See March 17, 2008 Order.)

In the second order, the court denied Countrywide's motion to dismiss. Countrywide argued that it had no duty to diversify so it did not breach fiduciary duties by investing plan assets heavily in its own stock, and also that there is a presumption (the so-called Moench presumption, after the case Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995)) that investments in employer stock are presumed to be prudent. The court held that the complaint's allegations went beyond alleging a violation of a duty to diversify. Rather, the court found the complaint "clearly indicate[s] that Plaintiff's claim is based on allegations, such as mismanagement, that extend well beyond any stated duty of Countrywide to diversify its Plan investments." The court also held that the Moench presumption did not apply at the pleading stage, and that Countrywide would have to raise the argument later in the case, presumably on summary judgment. The court also held that plaintiffs satisfied Rule 9(b)'s heightened pleading requirements for alleging a fraud by omission claim. (See March 18, 2008 Order)

The third order denied the motion to dismiss of two former directors as to plaintiff's breach of duty to monitor claim against them. (See April 9, 2008 Order).

Finally, on April 16th the court granted plaintiff's motion for class certification.