NU Online News Service, Feb. 3, 3:23 p.m. EST

Bank of America cannot be held liable to Allstate Insurance Company over residential mortgage-backed securities purchased by Allstate from Countrywide Financial Corporation.

Allstate has alleged that Countrywide and a number of former officers and directors are liable for misrepresentations regarding the quality of about $700 million in RMBS that Allstate purchased from Countrywide between 2005 and 2007.

The case before Judge Mariana R. Pfaelzer, in the United States District Court, Central District of California, concerned the issue of whether Bank of America, which acquired Countrywide in July 2008, should remain in the case.

Allstate had argued that a series of transactions that saw Countrywide's assets merged into Bank of America “make the Bank of America defendants liable under successor and vicarious liability theories.” The insurer also argued that a series of transactions in the deal made up either an actual or constructive fraudulent transfer.

The decision explains, “Actual fraudulent transfer occurs when the transferor acts with the 'actual intent to hinder, delay or defraud any creditor.' …Constructive fraudulent transfer occurs when the transferor does not receive 'reasonably equivalent value' in exchange for the transaction and the transferor is insolvent at the time of the transaction or knows that it will shortly become insolvent.”

Pfaelzer finds, “Allstate has pleaded no facts from which the court could infer that the compensation in the…transactions was not reasonably equivalent. Neither has Allstate pleaded any facts from which the court could infer that the transactions were designed to disadvantage creditors.”

Regarding Allstate's argument that Bank of America should be liable under successor liability, the decision states, “An exception to the well-settled rule against successor liability is triggered with the 'purchaser expressly or implicitly agrees to assume liability. Nothing in the [amended complaint] indicates that Bank of America has expressly or implicitly agreed to assume Countrywide's RMBS liability.”

Lawrence Grayson, a Bank of America spokesman, says, “We are pleased with the court's ruling.”

Maryellen Thielen, a spokes person for Allstate, says, As an initial matter, it should be kept clear what today's decision does not do. It does not affect Allstate's claim that it was defrauded by Countrywide. That claim was upheld by the same court in October, and we look forward to moving ahead with discovery and resolution on the merits. 

“Even if it is upheld on appeal, today's decision only affected whether 'Bank of America,' in addition to 'Countrywide,' will have to pay should Allstate's claim reach judgment in its favor.”

Thielen adds, ”We respectfully disagree with the court's opinion. In October, the court broke with others that have reviewed this issue, on far less detailed pleadings than Allstate provided, and stated that Allstate must include additional allegations in its complaint regarding Bank of America's intent to hinder creditors in order to hold Bank of America liable for the Countrywide's prior bad acts. 

“The Amended Complaint attempted to establish—before discovery, and thus necessarily based only on what information Bank of America has allowed to become public—that Bank of America acted with fraudulent intent when it stripped Countrywide of all of its operating assets at the same time it was known that Countrywide was facing massive liabilities for its role in the mortgage meltdown. 

“Allstate believes that the larger context in which the asset transfers took place itself helps makes it a more than plausible inference that Bank of America was trying to use these complex transfers to unfairly shield itself from Countrywide's liabilities. We are disappointed that the court did not agree. We further note recent posturing that Bank of America may place Countrywide into bankruptcy proceedings, and welcome the independent assessment a bankruptcy court would apply to Bank of America's asset-stripping successor liability.”

Allstate filed a series of suits against financial firms throughout 2011 regarding mortgage-backed securities. Defendants include Goldman Sachs, Citigroup, Deutsche Bank, JP Morgan, Morgan Stanley and Credit Suisse.