1 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE AMERICAN EUROPEAN INSURANCE COMPANY, JEAN MARIE CINOTTO, JOHN H.

COTTRELL, RICHARD DELMAN, DORIS GASTINEAU, AND RUTGERS CASUALTY INSURANCE COMPANY, Plaintiffs, v. BRIAN T. MOYNIHAN, CHARLES O. HOLLIDAY, JR., SUSAN S. BIES, WILLIAM P. BOARDMAN, FRANK P. BRAMBLE, SR., VIRGIS W. COLBERT, CHARLES K. GIFFORD, D. PAUL JONES, JR., MONICA C. LOZANO, THOMAS J. MAY, DONALD E. POWELL, CHARLES O. ROSSOTTI, ROBERT W. SCULLY, Defendants. and BANK OF AMERICA CORPORATION, Nominal Defendant. : : : : : : : : : : : : : : : : : : : : : : : : : : :

Civil Action No. 7436-CS

Chancery Courtroom No. 12A New Castle County Courthouse 500 North King Street Wilmington, Delaware Monday, February 4, 2013 10:00 a.m. BEFORE: - HON. LEO E. STRINE, - THE COURT'S RULING ON JR., Chancellor. MOTION TO DISMISS

-----------------------------------------------------CHANCERY COURT REPORTERS 500 North King Street Wilmington, Delaware 19801 (302) 255-0521

2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 - - 15 16 17 18 19 20 21 22 23 24 CHANCERY COURT REPORTERS APPEARANCES: BLAKE A. BENNETT, ESQ. Cooch and Taylor, P.A. -andJASON S. COWART, ESQ. MATTHEW L. TUCCILLO, ESQ. of the New York Bar Pomerantz, Grossman, Hufford, Dahlstrom & Gross, LLP for Plaintiffs DANIEL A. DREISBACH, ESQ. Richards, Layton & Finger, P.A. -andCHARLES S. DUGGAN, ESQ. of the New York Bar Davis Polk & Wardwell LLP for Defendants PAUL J. LOCKWOOD, ESQ. ELISA M. CANNIZZARO, ESQ. Skadden, Arps, Slate, Meagher & Flom LLP for Nominal Defendant

3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 THE COURT: Thank you.

It has sometimes been said that members of this Court and me in particular burden the world with too many words on cases. I think we do

that in part because we like to give people fully reasoned decisions. And sometimes as trial judges you

want to make sure that your bases are covered because people sometimes revive arguments that they dropped. And sometimes above, you can't even tell -- sometimes when you're a trial judge, during the course of a case, you can't actually tell what a litigant's theory is, it seems to shift so much. So you do it. But

mindful of the concern sometimes about this Court writing too much, I'm not going to write in this case because I believe that Stone v. Ritter, Caremark, and its progenies make clear what I have to do. The plaintiffs have taken on a rather difficult burden for themselves, which is they wish to sue under the most difficult theory in our law, which is to say that an independent board of directors without any evident financial motivation knowingly caused a corporation to violate positive law in order to make profits for the stockholders. I take very seriously the notion that CHANCERY COURT REPORTERS

4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Delaware corporations cannot violate the positive law, and there is probably no judge who has written more about it as a judge than I have. That's why when I

hear comparisons of the circumstance here to certain other cases, I tend to get quizzical, because I don't think that they're comparable. I also admit to taking a bit of umbrage that this is somehow a personhood challenge to the integrity of Delaware law; that Delaware's concern about compliance with the law will be hollow if this particular complaint is dismissed. that way. This particular complaint is the tactical and strategic choice of a group of plaintiffs and their lawyers, and that, under our law, is what has to be dealt with. I did not write this complaint. I don't view it

No member of my Supreme Court will have written this complaint. And this complaint was constructed in

precisely the manner that the Delaware Supreme Court has admonished time and time again plaintiffs not to use. Is a referee here? No. Have the

plaintiffs had plenty of time to seek books and records? Yes. Is this an injunction action? CHANCERY COURT REPORTERS No. Is

5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 a Caremark claim difficult? Yes. If you read Yes. If you didn't

Caremark itself, is that clear?

think Caremark was the law, could you read Stone v. Ritter? Yes. Would Stone v. Ritter make clear that Yes. If Stone v. Ritter

it's a difficult claim?

wasn't clear, and you were uncertain of whether you were reading it right, if you read subsequent decisions of the Court of Chancery after Stone v. Ritter, would it be clear that it's a difficult claim? Yes. Would it be absolutely clear that seeking books

and records in most circumstances is critical to meeting that burden? any of that advice? Yes. No. Did the plaintiffs heed

At bottom, this complaint has to raise an inference that independent directors knowingly caused Bank of America to take actions that would lead to violations of law; that they chose to take those legal shortcuts in order to generate profits. This,

in the context of a complaint that pleads that after the Countrywide acquisition -- an acquisition that I think it's fairly pled is one that turned out to be a dumb decision, but also, when you read the pleading, there is no motivation for it to have been a dumb decision. It was a risky decision that went wrong. CHANCERY COURT REPORTERS

6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 I know. Plaintiffs don't plead that the Bank of America, the incumbent directors or management, wanted to go wrong. Mr. Lewis probably thinks of

Countrywide every day and it makes him cringe, given how many years he put into the institution. But they

buy into this thing, and it turns out to be horrible. Did they do nothing? No. Let's look

at -- this is what's so strange about this complaint. The complaint touts what they did. They brought in a

bunch of what the complaint says are highly qualified people with experience in enterprise risk management and other things. Now, let's pause on this. That's what

I know about Mr. Holliday and what he did

because I live in the state of Delaware, and he was the chairman and CEO of a major corporation. plaintiffs do not burden the Court with any information about the financial wherewithal of these directors, what their prior experiences were, whether they are stockholders or not of Bank of America. None. An intentional tactical pleading decision to The

leave out any human information about the board members' motivation, but that tactical decision has ramifications. CHANCERY COURT REPORTERS

7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 The plaintiffs concede, essentially, that they can't get demand excusal under the first prong of Aronson because they have no gain. no independence issue here. There is

And it's not even clear

as to Mr. Moynihan that the plaintiffs plead any rational reason why Mr. Moynihan, given his background and given how he got there, why, in the face of federal and state regulators, he would be engaging in a knowingly conscious decision to violate the law. But let's assume that he's management. All the other directors are not. And a majority of

them are brought in during the midst of this and put on the committees. No. Do they come in and do nothing?

By the plaintiffs' admission, and they don't

cover the whole time period, there are hundreds of meetings. Hundreds. Do I know about when any of those meetings occurred? No. Do I know what information No. What I

was presented to any of those committees?

am told is that although there was an increasing deployment of resources to deal with a mounting pile of mortgages going unpaid, that that amount of resources was something that the board had to have known and its committees had to have known would be CHANCERY COURT REPORTERS

8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 insufficient to allow the company to address them in a lawful manner. The plaintiffs, of course, have all the experience in the world that I do not, apparently, of managing a foreclosure crisis or dealing with the securities innovations that occurred, the securitization innovations that occurred with mortgages. I happen to be a judge. I don't

think, even drawing plaintiff-friendly inferences, that there is any magic ratio of the number of employees that you add to the number of mortgages that go bad. I also think there is nothing in the

complaint that shows what the board was presented in real time with respect to the numbers or what it would do. I think the plaintiffs do not plead that the bank made mistakes in the sense of actually trying to foreclose upon loans that were being paid. There were clearly missteps with respect to loans that were not being repaid but which were then subject, during points of time on the chronology, became subject to a duty on the part of the bank to offer certain modification options to the borrowers. CHANCERY COURT REPORTERS

9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 We're not talking in here of a situation where the bank is, again, taking somebody who is current on their loans and trying to do something to them. These are all admittedly loans

that were in default and how you work them out. What I'm supposed to draw from this is that even though there are hundreds of board meetings, even though there are, by the plaintiffs' admission, 10,000 employees added during this period, offices opened to deal with it, that because it was not enough, ultimately, that these independent directors who, again, under this complaint, have no plausible motive to cause Bank of America to violate the law, no longstanding relationship with Mr. Moynihan -- even if Mr. Moynihan had a motivation, which is not pled in any adequate way, they had no relationship with Mr. Moynihan that would cause them to put their personal reputation and good name and financial well-being at risk to do this -- that they were going through all this as just some sort of pretense in order to allow Bank of America to skate by? I'm supposed to draw plaintiff-friendly inferences, but there has to be some rationality. And I use the word "rationality"

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10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 because that is the Supreme Court test. Why would

Mr. Holliday or any of these other people rationally decide to knowingly engage in a course of action leading to law violations on the part of Bank of America in order to increase its profits? Is it because it would be good for any of them personally, financially? plead nothing about that. No. The plaintiffs

In fact, their pleading of

nothing suggests that there is only one inference: That would have been catastrophically stupid. none of the independent directors had anything rational to gain that would compare to the potential loss of their net wealth if they became the target of 50 AGs and the federal government, much less plaintiffs' lawyers. Put aside plaintiffs' lawyers. Because

The federal government and 50 Attorneys General are on the scene. So I'm going to step on the board into a high-salience compliance context. on the key committees. I'm going to get

I've been a very successful

person who probably has had a vacation home before Mr. Lockwood. I have grandchildren and others I want And what I do is because I love

to take care of.

stockholders like the plaintiffs, I'm going to CHANCERY COURT REPORTERS

11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 essentially put my good name, reputation, on the line by knowingly engaging in a pattern of activity that would cause the corporation to violate the law. makes no sense. Now, is there a way that one could plead out this case where it might make sense? What would that take? Sure. It

It would take actually taking

the time to seriously investigate what the role of these directors was, to take a look at the information flow they received, and to match it with what was going on, and then to level the serious accusation of a criminal state of mind, which I believe is the only fair way to put the accusations at this level. But what the plaintiffs chose to do here was simply to take the known and evident fact that this was a business decision that went catastrophically wrong, which was the acquisition of Countrywide. The plaintiff, the most -- I wrote, actually, something on a paragraph, and it was Paragraph 35, which is in some ways, you know, the most sad, which is when you look at the balance of loans on Bank of America's books before and after the acquisition of Countrywide. CHANCERY COURT REPORTERS

12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Well, this complaint is expressly not about whether the acquisition of Countrywide was a breach of fiduciary duty. And I think -- and in part,

that's because I don't think anybody could ever contend that the board of directors of Bank of America wanted it to fail. This was, again, not a suicide -- it might have turned out to be suicidal in the sense that -- but that would mean like it turned out to be suicidal when you went up on the roof yourself to fix something and you fell off and died. It wasn't It's

because you actually intended to commit suicide. because of the fact that your act had a negative consequence for yourself. In which case, going

through fast food drive-through windows is sort of an accumulation over a lifetime of suicidal acts; right? But this one, it turned out really badly, and it kept getting worse. Well, the fact that it kept getting worse, that is obvious. And when the plaintiffs stand

up and say, Well, we pointed to the fact that this was a catastrophe, yes, you have. catastrophe. on it. I accept that it was a

I accept that a board had a duty to act

I accept that the board had a duty to have the CHANCERY COURT REPORTERS

13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 company try to come into compliance with the law and, in good faith, try to comply with the law. What breaks down, then, is when the board meets 100 times in a two-year span, includes a bunch of qualified directors and sets up structures in order to accomplish these facts, brings on by measure over five figures of new employees, opens new offices, and it turns out not to be enough and they have to do more, that that means that the people who came on who have no motive to violate the law that makes any sense, that they were knowingly law-breakers. where it breaks down fundamentally. And indulging every inference that I have to give to the plaintiffs, the leap that they have to make in the face of this exculpatory charter provision, and that is one that I take into account -there are Supreme Court decisions that say I can and I must; that's the whole point of the statute -- I can't draw that inference on this complaint. And if anyone has fault here, the plaintiffs chose to not seek books and records about the relevant board committees at the relevant time. As a result, they make unspecified non-particularized allegations. And that's the thing. We're in a That's

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14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 particularized pleadings state. They know nothing

about what the board knew at the time and they allege nothing. And they're supposed to make me draw the inference that the board wasn't getting any -what the board was reporting on was the general catastrophe. And from that, the board must have known No, I can't draw that It's not

that they weren't doing enough.

inference because it doesn't compute.

consistent with the increase in resources, and it's not consistent with the challenge that the plaintiffs' own complaint admits. As I said, I questioned good counsel and he was very patient with my questions about things, but one of the real challenges of bringing on new employees is that you have to train them. trying in real time to deal with things. You're

You can't You

just snap your fingers and open new offices.

can't snap your fingers and have qualified people who set up processes. Some of these challenges are acquisition integration challenges. business court. Again, this is a

Even the best of acquisitions often

involve discoveries about people doing processes CHANCERY COURT REPORTERS

15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 different. Countrywide. One of the issues here is you're acquiring You're dealing with loans that they

wrote and securitizations they engaged in, trying to get a handle on the paperwork of them. The other thing that the plaintiffs do here is they make these two years seem as if they were a decade, as if people got to sit around and just plot. We're talking in real time addressing a real

catastrophe. So the bottom line here is very simple and that's why I'm not going to write on it. The

facts about a catastrophe are not matched to any rationally pled facts, particularized facts, about the role of the board, the role of the particular committees, and the role of the particular individuals who were sued and accused of a criminal state of mind. And because of that lack of connection, there is no way that anyone can rationally draw an inference that these defendants knowingly caused the corporation to engage in the course of conduct that would result in violations of the law. And because one cannot draw that inference, there is no cause of action stated against them under Caremark and Stone v. Ritter. CHANCERY COURT REPORTERS As a result,

16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 demand is not excused under the second prong of Aronson. And I don't even believe, you know, I don't

even believe that under 12(b)(6) a claim is stated. So I'm going to dismiss but I'm going to dismiss without prejudice as to any plaintiffs other than the plaintiffs before the Court. Why am I going to do that? Because I

want to make clear that I'm dealing with the complaint that I have. I don't think it's fair for the company

and the defendants to be whipsawed by these particular plaintiffs with a books and records action, because these particular plaintiffs have known for a long time of the utility of a books and records action. chose the tactical course that they did. What I'm concerned about is because I don't know what a books and records action would have found. I'm dealing with the complaint that's brought It may be -- again, from this complaint, They

before me.

it would be hard to conjure up a reason why the directors who are targeted by this suit would have ever had the powerful motive that the plaintiffs charge them with. It's hard to tell, because the

plaintiffs, what they say about them is these are experienced accomplished people who stepped into a CHANCERY COURT REPORTERS

17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 high-salience enforcement compliance dynamic in a very high profile way and stepped right onto the relevant hot-button committees. Again, it's not clear to me

why they would have wanted to jump in there and then begin to play hinky with regulators and with the law. It doesn't make any sense to me based on this complaint. But, you know, one of the things as you get older and I think it's good advice, as a parent, I always tell my kids, "There are two words as you get older you should say less: Always and never."

And in order to protect the best interests of the stockholders of Bank of America, I don't think it's fair to foreclose a future group of plaintiffs who might actually use the books and records, and might actually show that based on an information flow to the committee, the committees in question, that they, frankly, knowingly engaged in a course of conduct that they knew would essentially result in a continuing pattern of law violation in order to profit the company. That's the theory of these plaintiffs. These plaintiffs chose not to do the most obvious thing that would have filled out and been required to plead that cause of action, and I don't CHANCERY COURT REPORTERS

18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 think that the company should have to face them again. In particular, I mention that under 15(aaa), one of the options when the motion was filed was for the plaintiffs to take a deep breath, read Stone v. Ritter, and after they read Stone v. Ritter, read it again, then compare it to the other cases, and then realize that they've pled nothing about the motivations of the directors; that they've given the Court no information about why these directors would do this; that they plead a substantial level of compliance activity by the board, including the formation of relevant committees to address it. They don't allege that those committees were then formed and didn't act. allege that those committees met. that the full board wasn't engaged. They

They don't allege In fact, they say But never

that the board was meeting all the time.

bothered to actually make any allegations about what the directors knew in real time, to take into account what they knew in real time in making allegations. That was the plaintiffs' choice. So this is -- again, I'm not going to burden the world with a written decision. down to plain and simple. This comes

It's difficult to plead a

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19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 CHANCERY COURT REPORTERS motive. Caremark claim. See Stone v. Ritter. The Delaware

Supreme Court and this Court have encouraged plaintiffs doing it to use the books and records tool to make sure that they can actually plead real particularized facts to meet the demand excusal standard. The plaintiffs here didn't use the books

and records. The plaintiffs here plead no rational There is no rational inference to be drawn

that the board members acted with the high state of mind required to state a Caremark or Stone v. Ritter claim. And there isn't actually even enough to

survive -- to create a 12(b)(6) inference, even under the liberal Central Mortgage standard. And for those reasons, I'm going to dismiss the complaint with prejudice as to the named plaintiffs, without prejudice as to any other Bank of America stockholders who might make similar claims in the future. And I'll ask counsel to work on an

implementing order. Thank you all. (Court adjourned at noon.)

20 CERTIFICATE

I, JEANNE CAHILL, Official Court Reporter for the Court of Chancery of the State of Delaware, do hereby certify that the foregoing pages numbered 3 through 19 contain a true and correct transcription of the proceedings as stenographically reported by me at the hearing in the above cause before the Chancellor of the State of Delaware, on the date therein indicated. IN WITNESS WHEREOF I have hereunto set my hand this 4th day of February, 2013.

/s/ Jeanne Cahill ------------------------Official Court Reporter of the Chancery Court State of Delaware

Certificate Number: 160-PS Expiration: Permanent