Case Title: Espinoza v. Dimon, et al.

Citation: 

Docket Number: 425, 2015

State: delaware

Court: Delaware Supreme Court

Date: 2015-09-15T00:00:00Z

Document:
IN THE SUPREME COURT OF THE STATE OF DELAWARE 
 
ERNESTO ESPINOZA, derivatively 
on behalf of JPMorgan Chase & Co., 
 
Plaintiff-Appellant, 
 
 
v. 
 
JAMES DIMON, DOUGLAS L. 
BRAUNSTEIN, MICHAEL J. 
CAVANAGH, ELLEN V. FUTTER, 
JAMES S. CROWN, DAVID M. 
COTE, LABAN P. JACKSON, JR., 
CRANDALL C. BOWLES, JAMES 
A. BELL, LEE R. RAYMOND, 
STEPHEN B. BURKE, WILLIAM 
C. WELDON, INA R. DREW, 
DAVID C. NOVAK, 
 
Defendants-Appellees, 
 
and 
 
JPMORGAN CHASE & CO.,  
 
 Nominal Defendant-Appellee. 
 
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§  No. 425, 2015 
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§  Certification of Question of Law 
§  from the United States Court of  
§  Appeals for the Second Circuit   
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§  Docket No. 14-754 
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Submitted: August 13, 2015 
 
 
 
 
Decided: 
September 15, 2015 
 
Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN and 
SEITZ, Justices, constituting the Court en Banc.  
 
Upon Certification of Question of Law from the United States Court of Appeals for 
the Second Circuit:  CERTIFIED QUESTION GRANTED. 
 
STRINE, Chief Justice: 
 
 
1 
 
This Court has received the request from our distinguished colleagues on the 
United States Court of Appeals for the Second Circuit to answer the following 
question: 
If a shareholder demands that a board of directors investigate both an 
underlying wrongdoing and subsequent misstatements by corporate 
officers about that wrongdoing, what factors should a court consider 
in deciding whether the board acted in a grossly negligent fashion by 
focusing its investigation solely on the underlying wrongdoing?1 
 
 
The inspiration for this question is a contention by the plaintiffs in this case 
that they made a demand that the board of JPMorgan Chase & Co. investigate two 
related issues regarding a high-profile situation, what the Second Circuit has called 
the ―London Whale debacle.‖2  
 
According to the Second Circuit, these issues were: 1) the failure of 
JPMorgan‘s risk management policies to prevent the trading that resulted in 
corporate losses; and 2) supposed false and misleading statements made by 
JPMorgan management in the wake of the emergence of the problem.  According 
to the plaintiffs, the investigative committee of the JPMorgan board only made 
findings as to the former issue3 although the defendants in their brief take issue 
with that, by arguing that what management knew when it made disclosures was 
                                                 
1 Espinoza ex rel. JPMorgan Chase & Co. v. Dimon, __ F.3d __, 2015 WL 4747068, at *11 (2d 
Cir. Aug. 12, 2015). 
2 Id. at *1 (―This derivative action is one of many to arise out of the ‗London Whale‘ trading 
debacle, which cost JPMorgan Chase billions.‖). 
3 Brief and Special Appendix for Plaintiff-Appellant at 36, Espinoza ex rel. JPMorgan Chase & 
Co. v. Dimon, __ F.3d __, 2015 WL 4747068 (2d Cir. Aug. 12, 2015). 
2 
 
the subject of several pages of the report.4  What does appear undisputed is that the 
committee was comprised entirely of independent directors, was advised by 
experts of its own choosing, and conducted a detailed investigation, involving the 
review of massive amounts of materials and the conduct of many witness 
interviews, culminating in the issuance of a detailed report explaining why it 
recommended refusal of the demand.5 
 
We appreciate our colleagues‘ concern about applying principles of 
Delaware law with fidelity and their willingness to ask for our input.6  In fact, we 
were honored to answer two prior requests from our colleagues on the Second 
Circuit within the past year.7  In that same spirit, we accept our colleagues‘ current 
request for certification and we will try to be as helpful as we can, consistent with 
the careful and precise manner in which the tool of answering certified questions of 
law should be employed.  The Delaware Supreme Court rule that governs our 
                                                 
4 Brief for Defendants-Appellees at 35, Espinoza ex rel. JPMorgan Chase & Co. v. Dimon, __ 
F.3d __, 2015 WL 4747068 (2d Cir. Aug. 12, 2015). 
5 Espinoza, __F.3d at __, 2015 WL 4747068, at *2–3. 
6 The Delaware Constitution grants our Court jurisdiction to consider certified questions of law.  
Del. Const. art. IV, § 11(8) (granting the Delaware Supreme Court jurisdiction ―[t]o hear and 
determine questions of law certified to it by . . . a Court of Appeals of the United States . . . 
where it appears to the Supreme Court that there are important and urgent reasons for an 
immediate determination of such questions by it.  The Supreme Court may, by rules, define 
generally the conditions under which questions may be certified to it and prescribe methods of 
certification.‖). 
7 See NAF Holdings, LLC v. Li & Fung (Trading) Ltd., __ A.3d __, 2015 WL 3896792 (Del. 
June 24, 2015); Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan 
Chase Bank, N.A., 103 A.3d 1010 (Del. 2014).  
3 
 
consideration of certified questions of law is Rule 41.8  Because this tool can cause 
more harm than benefit if not used with precision, Rule 41(b) contemplates that a 
certification will pose a specific question of law, based on a stipulated set of facts.9  
This approach allows us to focus on a relevant question of Delaware law against 
the backdrop of established facts, which are not the subject of dispute among the 
parties.  The certification request before us is not tailored in that way.  As a result, 
we will endeavor to be as helpful as we can be without risking giving overbroad 
and potentially misleading guidance because of the absence of stipulated facts, 
against which a precisely tailored question is framed.  Indeed, in providing an 
answer, we feel obliged to decline to answer the question as formulated or to try to 
reformulate the question more narrowly.  Instead, we provide these thoughts and 
an explanation of why we do not go further.   
In our view, Delaware law on the relevant topic is settled, and requires that 
the decision of an independent committee to refuse a demand should only be set 
aside if particularized facts are pled supporting an inference that the committee, 
despite being comprised solely of independent directors, breached its duty of 
loyalty, or breached its duty of care, in the sense of having committed gross 
                                                 
8 See Supr. Ct. R. 41(a)(ii) (allowing a United States Court of Appeals to certify a question of 
law to the Delaware Supreme Court). 
9 See Supr. Ct. R. 41(b) (―A certification will not be accepted if facts material to the issue 
certified are in dispute.‖); DONALD J. WOLFE, JR. & MICHAEL A. PITTENGER, CORPORATE AND 
COMMERCIAL PRACTICE IN THE DELAWARE COURT OF CHANCERY § 14.07, at 14-14 (Matthew 
Bender & Co. 2013) (―The question must truly be one of law, as Rule 41(b) expressly prohibits 
certification if facts material to the issue are disputed.‖).   
4 
 
negligence.10   The burden to plead gross negligence is a difficult one, particularly 
when, as seems to be undisputed here, the independent committee did a time-
consuming investigation with the advice of its own advisors, and prepared a 
detailed written report of its investigation. 
 
Under Delaware law, the determination of what constitutes gross negligence 
in the circumstances by definition requires a review of the relevant circumstances 
facing the directors charged with acting.11  In the typical case, our Court, albeit 
acting under a de novo standard of review, would have the benefit of a 
determination by our Court of Chancery as to whether the plaintiff pled facts that 
support an inference that the independent board committee acted with gross 
negligence.  If the contention of gross negligence was founded on the proposition 
that the committee ignored a material aspect of the demand letter, we would have 
                                                 
10 ―[T]o survive a motion to dismiss, the plaintiff stockholder asserting wrongful refusal of a 
demand must allege with particularity in the complaint facts that give rise to a reasonable doubt 
as to the good faith or reasonableness of that investigation.‖  WOLFE & PITTENGER, supra note 9, 
§ 9.02[b][3], at 9-108; see also Levine v. Smith, 591 A.2d 194, 207 (Del. 1991); Spiegel v. 
Buntrock, 571 A.2d 767, 777 (Del. 1990) (―[W]hen a board refuses a demand, the only issues to 
be examined are the good faith and reasonableness of its investigation.‖); Mt. Moriah Cemetery 
ex rel. The Dun & Bradstreet Corp. v. Moritz, 1991 WL 50149, at *4 (Del. Ch. Apr. 4, 1991), 
aff’d, 599 A.2d 413 (Del. 1991) (internal citations omitted) (―In deciding whether directors have 
made an informed decision, the standard is gross negligence.  Thus, the alleged deficiencies in 
the [committee‘s] investigation must rise to the level of gross negligence if the directors‘ 
decision is to be condemned as uninformed.‖); Thorpe v. CERBCO, Inc., 611 A.2d 5, 11 (Del. 
Ch. 1991). 
11 See Brehm v. Eisner, 746 A.2d 244, 259 (Del. 2000); Aronson v. Lewis, 473 A.2d 805, 812 
(Del. 1984); 1 R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, THE DELAWARE LAW OF 
CORPORATIONS & BUSINESS ORGANIZATIONS § 4.15[A], at 4-111 (3d ed. 2014) (observing that in 
the decision-making context, which is governed by a gross negligence standard, ―the inquiry is 
necessarily fact-specific‖).  
5 
 
the benefit of the Court of Chancery‘s typically learned and thoughtful 
consideration of that issue, and its assessment of the contextual importance of that 
issue in the overall scope of what the committee was charged with investigating.  
We would also be obliged to read the entire record relevant to the question before 
us, informed by adversarial briefing focusing us on what the parties view as most 
critical. 
 
We are uncomfortable giving further guidance to a respected sister court 
about the factors that apply to an inherently contextual analysis on an abstract 
question such as the one posed.  Although the decision framing the question 
provides some context, it appears from the briefs of the parties to the Second 
Circuit that the plaintiffs spent very little of their opening brief on this question and 
we have no responsible way of determining the relative importance of the 
supposed misstatements in the context of the overall London Whale debacle.  The 
only way for us to actually reformulate the question would be for us to essentially 
have the appeal decided by us, rather than by our colleagues on the Second 
Circuit.  Because it appears undisputed that there are no facts supporting an 
inference of disloyalty of any kind, the resolution of this case turns solely on a 
settled legal inquiry under our law—whether the trial court erred in dismissing the 
complaint because the plaintiffs had not pled facts supporting an inference of gross 
negligence.    
6 
 
 
We fear the risk of providing abstract guidance about a contextual 
application of principles of gross negligence when we do not have the leeway to 
decide the actual case, and where the question asked of us is so general.  To make 
it more specific would necessarily make us make our own materiality decisions 
about the two categories to which the plaintiffs point, and their relationship.  The 
only way we could do that is to review the complete record before the district 
court.  In an important sense, however, we hope that our reply may be of limited 
aid to our colleagues.  As the referral opinion makes clear, determining whether 
plaintiffs have pled gross negligence on the part of a committee charged with 
investigating a demand requires a ―classic line-drawing exercise.‖12  We agree with 
that.  What we do not discern is any gap in our law that we can responsibly fill by 
answering the question as phrased, or coming up with a reformulated one.  No 
doubt it is conceivable that an investigative committee that was charged with 
investigating two materially important and materially distinct subjects could be 
deemed grossly negligent if it did an indisputably careful job investigating one, and 
did no job at all of investigating the other.  But, in this case, we cannot even fairly 
frame an abstract question, because it is neither clear to us that the supposedly 
distinct category the plaintiffs allege went uninvestigated (a disputed issue between 
the parties itself) was either distinct from the category that was indisputably 
                                                 
12 Espinoza, __F.3d at __, 2015 WL 4747068, at *10. 
7 
 
investigated, and whether it was material, when viewed in the overall context of 
the ―debacle.‖  That is, the only way to determine the materiality of the issue that 
the plaintiffs contend went unaddressed, and whether and to what extent the 
committee‘s alleged failure to consider it supports an inference of gross 
negligence, is to tangle with the full record before the district court.  In other 
words, this is not a situation where the parties and the referring court have agreed 
on a sufficiently precise set of agreed facts that frame a specific legal question we 
can answer more thoroughly in this context, without hazarding erroneous guidance 
that would risk prejudicing not only the parties in this case, but others who rely 
upon our law.  The Clerk of the Court is directed to transmit this opinion to the 
Second Circuit.