The Wall Street Journal-20080111-Deal May Bring Legal Troubles
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Deal May Bring Legal Troubles
If Bank of America Corp. ends up purchasing Countrywide Financial Corp., it could inherit a flood of legal trouble.
The Calabasas, Calif., mortgage lender is facing a barrage of borrower suits and investigations by federal and state agencies for alleged lending and loan-servicing abuses as well as shareholder suits stemming from its financial decline. Countrywide didn't return a request seeking comment. Bank of America declined to comment.
In the event of a takeover, an acquiring company typically assumes the responsibility to address pending litigation. It can take steps to limit the risks associated with litigation, although "it's very difficult to eliminate all risk," said Andrew Sandler, a partner with Skadden, Arps, Slate, Meagher & Flom LLP.
Halliburton Co. had to pay billions of dollars to settle asbestos- related claims at Dresser Industries, a company it acquired in 1998. Germany's Bertelsmann AG has paid tens of millions of dollars to settle copyright litigation in connection with its 2000 investment in Napster, the music file-sharing network.
An acquisition could make resolving the litigation even more difficult because plaintiffs in pending suits might try to take advantage of the Charlotte, N.C., bank's deep pockets. If Countrywide were instead to file for bankruptcy-court protection, the potential to collect damages would be considerably diminished.
Bank of America could take steps to reduce or manage the risk, including lowering the purchase price to account for the potential litigation costs or holding back a portion of the purchase price as a reserve that would cover any litigation-related expenses.
It is sometimes possible to structure a deal to leave the liabilities with the selling entity. When Citigroup Inc. bought portions of ACC Capital Holdings, the parent company of Ameriquest, it structured the deal as an asset purchase to limit any potential liabilities related to ACC. With an asset purchase, the acquirer may buy specific assets of the target company, such as its loans or mortgage-servicing platform, rather than buying the company itself.
If Bank of America bought Countrywide's assets, Countrywide would shoulder legal liabilities and could use proceeds from the asset sale to settle litigation. That approach could have unfavorable tax implications, however, and there is no guarantee that the threat of litigation for Bank of America would disappear.
The bulk of the actions against Countrywide are individual claims connected to foreclosure cases across the country, with assertions ranging from violations of federal lending laws during loan origination to duping elderly borrowers into taking out high-interest loans to mishandling loan payments, according to Ira Rheingold, executive director of the National Association for Consumer Advocates, whose members represent homeowners facing foreclosure lawsuits.
There are a number of other suits that could blossom into costly headaches for the company. In California, shareholders filed six suits this past fall against the company, Chief Executive Officer Angelo Mozilo and other executives in federal court, claiming they issued false and misleading statements about the company's health. The suits have been consolidated, and the company hasn't responded.
The attorneys general of Illinois and California have subpoenaed Countrywide as part of investigations of mortgage-lending practices. Countrywide says it is cooperating. The Florida attorney general is also investigating possible civil-fraud violations.
Attorneys from the U.S. Trustee Program, a division of the Justice Department that oversees the bankruptcy-court system, have taken aim at Countrywide in at least six states, including Florida and Pennsylvania. U.S. Trustee lawyers are probing alleged misrepresentations the company and its lawyers made to courts about what homeowners owed and the handling of their payments during bankruptcy, among other issues. The company has denied the allegations that it acted in bad faith.
The company is also defending against at least a dozen suits seeking class-action status that were filed by borrowers alleging abuses.
