IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IMG HOLDING LLC, derivatively on behalf of JPMORGAN CHASE & CO.,
Plaintiff ,

v. JAMES DIMON, STEPHEN B. BURKE, LINDA B. BAMMANN, TODD A. COMBS, JAMES S. CROWN, ALICIA B. DAVIS, TIMOTHY P. FLYNN, ALEX GORSKY, MELLODY HOBSON, MICHAEL A. NEAL, PHEBE N. NOVAKOVIC, and VIRGINIA M. ROMETTY,
Defendants , and JPMORGAN CHASE & CO.,
Nominal Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) C.A. No. 2023

- 0522

- KSJM

ORDER RESOLVING DEFENDANTS’ MOTION TO DISMISS 1
1. Plaintiff IMG Holding L L C (“Plaintiff”) owns stock in JP Morgan Chase & Co. (“JPM”), a multinational financial services company.
2. Along with several other large banks, JPM owns Zelle, a digital banking platform that allows customers to electronically transfer money with relative ease to other consumers. Zelle is regulated by the federal Electronic Fund Transfer Act ( the

1 The facts are drawn from the Verified Complaint and documents it incorporate s by reference. 

### C.A. No. 2023

- 0522

- KSJM , Docket (“Dkt.”) 1 ( “ Compl. ” ).2 “EFTA”) and Regulation E , which clarifies responsibilities under the EFTA

. 2 Under
the EFTA and Regulation E, a bank must reimburse customer s for unauthorized
electronic transfers within certain time frames or face civil and criminal penalties for noncompliance

. 3. Zelle is susceptible to fraud . H ackers have found a way to send
themselves funds from someone else’s Zelle account to their o w n. Once money is sent through Zelle , it is generally not recoverable by the sender. N ational media outlets reported on instances of Zelle fraud. The Co mplaint cites to five news articles published between May 2021 and June 2022 that reported on Zelle fraud and four specific customer experiences

. 4. In 2022, the United States Senate Committee on Banking, Housing, and Urban Affairs (the “Senate Committee”) opened an investigation into unauthorized electronic transfers on Zelle and industry

- wide non - compliance with the EFTA and Regulation E. The Senate Committee sent a letter to Zelle leadership on April 25,
2022 , r egarding the news articles

. 5. The Senate Committee then sent a letter to JPM ’s CEO James Dimon on July 7, 2022, requesting details and statistics on Zelle fraud claims . T he Senate Committee asked questions regarding JPM’s compliance with the EFTA and Regulation E. On September 22, 2022, JPM provided responses to the Senate
Committee . Plaintiff describes these responses as “incomplete.” 3 That same day ,

2 15 U.S.C. § 1693 et seq. ; 12 C.F.R. § 1005.1 et seq.
3 Compl. ¶ 69

.3 Dimon testified before the Senate Committee, which includ e d Senator Elizabeth
Warren

. Dimon promised to provide the Senate Committee with additional details
unaddressed in JPM’s September 22, 2022 written response. Plaintiff alleged that

a fter the hearing, JPM chose not to provide those details.
6. Senator Warren issued a report on Zelle fraud and industry non

compliance with the EFTA and Regulation E on October 3, 202 2 ( the “Warren Report”). The Warren Report stated that “fraud and theft are rampant on Zelle [,]”

“ [b] anks are not repaying customers who contest ‘unauthorized’ Zelle payments

– potentially violating federal law , ” and PNC Bank, U.S. Bank, Truist, and Bank of
America “reimbursed customers for only 47% of the dollar amount of cases in which customers reported unauthorized payments on Zelle [

. ] ” 4 The Warren Report did not
include JPM in the last statistic.
7. The Warren Report stated that JPM failed to respond adequately to the Senator’s July 7, 2022 letter request. National media outlets covered the report. On October 26, 2022, Senator Warren asked the Consumer Financial Protection Bureau ( the “ CFPB ” ) to take action on Zelle fraud and cited JPM’s failure to furnish the
Senate Committee with more information

. T he CFPB had separately released a report on Zelle fraud in May 2022 (the “CFPB Report”)

. The CFPB Report referred to “some financial institutions,” but did not mention JPM specifically. 5

4 Id

. ¶ 80

. 5 Id

. ¶ 4 5.4 8. On November 9, 2022, P laintiff sent JPM a demand to inspect books and
records pursuant to 8 Del. C. § 220 (the “Demand”)

. P laintiff’s stated purpose was to investigate possible breaches of fiduciary duty in connection with potential EFTA
violations. JPM did not respond initially due to an internal misrouting

. P laintiff
filed an enforcement action o n December 6, 2022 . JPM then produced certain documents responsive to the D emand . In this litigation, P laintiff alleges that JPM
did not respond to the Demand in full, but Plaintiff voluntarily dismissed its
enforcement action on May 12, 2023 , after receiving JPM’s production

. 6
9. P laintiff filed this action on May 12, 2023, asserting a single count for breach of fiduciary duty under Caremark 7 against the JPM Board of Directors (the “Board”) : Dimon, Stephen B. Burke, Linda B. B ammann, Todd A. Combs, James S. Crown, Alicia B. Davis, Timo th y P. Flynn, Alex Gorsky, Mellody Hobson, Michael A. Neal, Phebe N. Novakovic, and Virginia M. Rometty (“Defendants”)

. 8 D efendants
moved to dismiss the C omplaint on August 1, 2023 , pursuant to Court of Chancery Rules 23.1 and 12(b)(6). 9 The parties fully briefed the motion, and the court held oral argument on January 31, 2024. 10

6 Id

. ¶ ¶ 40 , 99 ; C.A. No. 2022

- 1123

- KSJM, D kt. 12, Notice of Voluntary Dismissal.
7 In re Caremark Int ’l Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).
8 Compl. ¶ ¶ 50

– 5 4.
9 Dkt. 13 (“Defs.’ Opening Br.”)

. 10 Dkt. 20 (“Pl. ’s Answering Br.”); Dkt. 25 (“Defs.’ Reply Br

. ”).5 10. “A cardinal precept of [Delaware law] is that directors, rather than shareholders, manage the business and affairs of the corporation.” 11 “ In a derivative suit, a stockholder seeks to displace the board ’ s authority over a litigation asset and assert the corporation ’ s claim .” 12 Because derivative litigation impinges on the managerial freedom of directors in this way, a stockholder only can pursue a cause of action belonging to the corporation if (i) the stockholder demanded that the directors pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused because the directors are incapable of making an impartial decision regarding the litigation.” 13 The demand requirement is a substantive principle under
Delaware law. 14

11 Aronson v. Lewis , 473 A.2d 805, 811 (Del. 1984) (citing 8 Del. C. § 141 (a)), overruled on other grounds by Brehm v. Eisner , 746 A.2d 244 (Del. 2000). In Brehm , 746 A.2d at 253

– 54, the Delaware Supreme Court overruled seven precedents , including Aronson , to the extent those precedents reviewed a Rule 23.1 decision by the Court of Chancery under an abuse of discretion standard or otherwise suggested a deferential appellate review. See id. at 253 & n.13 (overruling in part on this issue Scattered Corp. v. Chi. Stock Exch., Inc. , 701 A.2d 70, 72

– 73 (Del. 1997); Grimes v. Donald , 673 A.2d 1207, 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp. , 611 A.2d 950, 952 (Del. 1992); Levine v. Smith , 591 A.2d 194, 207 (Del. 1991); Grobow v. Perot , 539 A.2d 180, 186 (Del. 1988); Pogostin v. Rice , 480 A.2d 619, 624

– 25 (Del. 1984); and Aronso n , 473 A.2d at 814 ). The Brehm Court held that going forward, appellate review of a Rule 23.1 determination would be de novo and plenary. 746 A.2d at 253

– 54. The seven partially overruled precedents otherwise remain good law.
12 United Food & Com

. Workers Union & Participating Food Indus. Empls. Tri

- State Pension Fund v. Zuckerberg , 250 A.3d 862, 876 (Del. Ch. 2020) , aff’d , 262 A.3d 1034 ( Del. 2021).
13 Id.

14 Id. ; see Ct. Ch. R. 23.1(a).6 11. Rule 23.1 is the “procedural embodiment of this substantive principle.” 15 It provides that a stockholder plaintiff must “ state with particularity:

. . . any effort by the derivative plaintiff to obtain the desired action from the entity; and

. . . the reasons for not obtaining the action or not making the effort .” 16 A s tockholder choosing to allege demand futility must meet t he “heightened pleading requirements,” 17 alleging “particularized factual statements that are essential to the
claim.” 18 A plaintiff is “entitled to all reasonable factual inferences that logically flow from the particularized facts alleged, but conclusory allegations are not considered as expressly pleaded facts or factual inferences.” 19
12. In Zuckerberg , the Delaware Supreme Court adopted the “universal test” for demand futility that blends elements of the two precursor tests: Aronson 20
and Rales

. 21 When conducting a demand futility analysis under Zuckerberg , Delaware courts ask, on a director

- by

- director basis: (i ) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand; (ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and

15 Rales v. Blasband , 634 A.2d 927, 932 (Del. 1993).
16 Ct. Ch. R. 23.1(a)(1).
17 Zuckerberg , 250 A.3d at 876.
18 Brehm , 746 A.2d at 254.
19 Id. at 255.
20 473 A.2d 805 (Del. 1984).
21 634 A.2d 927 (Del. 1993).7 (iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand. 22
13. “ If the answer to any of the questions is ‘ yes ’ for at least half of the members of the demand board, then demand is excused as futile. ” 23 While the Zuckerberg test displaced the prior tests from Aronson and Rales , cases properly applying Aronson and Rales remain good law. 24
14. When P laintiff filed this action, Defendants comprised the entirety of
the Board

. To adequately allege demand futility, P laintiff must plead particularized facts creating reason to doubt that at least six of the twelve Defendants were incapable of impartially considering a demand.
15. To meet its burden, P l aintiff advances arguments under the second Zuckerberg test, contending that all members of the d emand b oard face a substantial
likelihood of liability from Plaintiff’s Caremark claim

. 25 Where, as here, a plaintiff’s basis for arguing demand futility centers on a substantial likelihood of liability resulting from the derivative claims at issue, the demand analysis effectively folds

22 United Food & Com. Workers Union & Participating Food Indus. Empls. Tri

- State Pension Fund v. Zuckerberg , 262 A.3d 1034, 1059 (Del. 2021) (quoting Zuckerberg , 250 A.3d at 890); accord Ct. Ch. R. 23.1.
23 Zuckerberg , 262 A.3d at 1041 (“The Court of Chancery’s refined articulation of the Aronson standard helps to address these issues. Nonetheless, this refined standard is consistent with Aronson , Rales , and their progeny. Thus, cases properly applying those holdings remain good law.”).
24 Id.
25 Compl. ¶ ¶ 113

– 1 4.8 into an analysis of the strength of the underlying claims. In this case, therefore, the Zuckerberg analysis hinges on whether P laintiff has adequately alleged its Caremark
claim.
16. A Caremark claim “seeks to hold directors accountable for the

consequences of a corporate trauma.” 26 To adequately allege such a claim, a plaintiff must allege that the board had some level of involvement in the trauma. 27 Caremark describes the test as requiring that the directors “knew or . . . should have known” about the risk leading to the trauma. 28 Stone clarified that liability under Caremark requires a showing of bad faith

— “that the directors knew that they were not discharging their fiduciary obligations.” 29 At the pleading stage , the plaintiff must allege facts from which the court can reasonably infer that a fiduciary acted in bad
faith

. 30
17. Stone identified two subspecies of Caremark claims. To state a
Caremark claim, a plaintiff must allege particularized facts that establish either (1) “the directors utterly failed to implement any reporting or information system or

26 La

. Mun. Police Empls .’ Ret. Sys. v . Pyott, 46 A.3d 313, 340 (Del. Ch. 2012), rev’d on other grounds , 74 A.3d 612 (Del. 2013) ; see also Horman v. Abney , 2017 WL 242571, at *5 (Del. Ch. Jan. 19, 2017) (“ Caremark claims inevitably arise in the midst of or directly following ‘corporate trauma’ of some sort or another.”)

. 27 Pyott , 46 A.3d at 340.
28 Caremark , 698 A.2d at 971

. 29 Stone v. Ritter , 911 A.2d 362, 370 (Del. 2006); see also Pyott , 46 A.3d at 340

– 41 (discussing the “actual knowledge” requirement of Caremark as clarified by Stone ).
30 Marchand v. Barnhill , 212 A.3d 805, 820

– 21 (Del. 2019) (quoting Desimone v. Barrows , 924 A.2d 908, 935 (Del. Ch. 2007) ).9 controls, or [(2)] having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.” 31 These two subspecies are colloquially
referred to as information

- s ystem s claims and red

- flags claims. 32
18. P laintiff asserts a red

- flags claim , alleging that the Board ignored red flags concerning JPM’s failure to comply with the EFTA and Regulation E

. 19. A plaintiff can plead a “red flags” Caremark claim by alleging “particularized facts that the board knew of red f lags but c on sciously disregarded them
in bad faith.” 33 The intuitive notion underlying the red

- flags theory is that “sophisticated and well

- advised individuals like corporate directors do not customarily concede violations of positive law,” and so a plaintiff must plead facts and
circumstances sufficient for a court to infer this conduct. 34 “[A] Caremark plaintiff can plead that ‘the directors were conscious of the fact that they were not doing their jobs,’ and that they ignored ‘red flags’ indicating misconduct in defiance of their duties.” 35

31 Stone , 911 A.2d at 370 (emphasis in original).
32 See In re McDonald ’ s Corp. S’ holder Deriv. Litig., 289 A.3d 343, 363

– 6 4 (Del. Ch. 2023) (labeling first species of claims as “information

- system” claims and second species as “red

- flag” claims).
33 City of Detroit Police & Fire Ret. Sys. on Behalf of NiSource, Inc. v. Hamrock, 2022 WL 2387653, at *20 (Del. Ch. June 30, 2022) (quoting Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *17 (Del. Ch. Aug. 24, 2020) ).
34 Id. (quoting South v. Baker , 62 A.3d 1, 14

– 15 (Del. Ch. 2012) ) ; see also In re Gen. Motors , Deriv. Litig., 2015 WL 3958724, at *16 (Del. Ch. June 26, 2015) (observing that red flags “are a proxy for pleading knowledge”).
35 Id. (quoting David B. Shaev Profit Sharing Acct. v. Armstrong, 2006 WL 391931, at *5 (Del. Ch. Feb. 13, 2006 )).10 A plaintiff must allege that a board “had notice of serious misconduct and simply failed to investigate

. . . even if the committee or board was well constituted and was otherwise functioning.” 36
20. P laintiff alleges that JPM violated and continue s to violate the EFTA and Regulation E by failing to resolve unauthorized electronic transfer claims and provisionally credit consumer accounts within 10 business days ; 37 by failing to resolve unauthorized electronic transfer claims within 45 days; 38 and by failing to reimburse victims of unauthorized electronic fund transfers after more than 45 days

. 39 P laintiff’s
red

- flags theory is that the Board knew of these violations from the media and the
Warren and CFPB Reports , and that the B oard failed to respond , thus constituting
bad faith

. 21. P laintiff’s theory is not supported by the allegations in the Complaint

. The Complaint relies on and repeats statements from t he four media reports. T he
anecdot es in the articles do not describe any failures by JPM to investigate or reimburse customers properly. Quite the opposite

— the media reports reflect that JPM investigated and acted on the claims. 40 It is hard to tell whether the transfers

36 Id.
37 Compl. ¶ 36 ( alleging a violation of 15 U.S.C. § 1693f(a) ).
38 Id

. ¶ 37 ( alleging a violation of 15 U.S.C. § 1693f(c) ).
39 Id

. ¶ 38 ( alleging a violation of 15 U.S.C. § 1693f(c)).
40 See Def s.’ Opening Br., Ex s. F

– H (full version s of the articles cited by P laintiff). The articles are incorporated into the c o mplaint

. See Morrison v. Berry, 191 A.3d 268, 275, n. 20 (Del. 2018) (“[ w]hen a plaintiff expressly refers to and heavily relies upon documents in her complaint, these documents are considered to be incorporated by reference into the complaint; this is true even where the documents are not expressly11 discussed in the media reports were “ unauthorized ” for purposes of the EFTA and Regulation E. And the media reports do not describe any delay that would constitute

non - compliance with the time frames established by the EFTA or Regulation E.
22. T he Warren and CFPB R eports similarly fail to demonstrate that JPM violated federal regulations

. The general allegations of these Reports are directed to the banking industry at large. Aspects of the Reports specific to certain banks
omitted information pertaining to JPM

. It is hard to build a case of bad faith against the JPM Board based on these documents. Were the court to so infer, then by logical
extension , Plaintiff’s theory would support a viable Caremark claim against any bank implicated by the general allegations made in the Re ports. That is not tenable.
23. To avoid this outcome , P laintiff points to the fact that JPM did not produce information requested by the Senate Committee. Plaintiff seeks and adverse inference from this conduct, arguing that “[o]ne can easily infer that JPM refused to provide the documents that Dimon had promised . . . because those documents would have demonstrated that JPM was failing to reimburse its customers for unauthorized electronic transactions in compliance with the Act [

. ] ” 41 Although at the dismissal stage all inferences are taken in favor of P laintiff, this is a stretch too far. JPM’s

incorporated into or attached to the complaint.” (internal citations omitted ) ). The articles show that JPM reimbursed customers, invest igated claims as per their policies , and declined to reimburse a customer where the investigation found no evidence of fraud. Far from showing an absence of compliance under the EFTA, these articles raise an inference that JPM has working EFTA policies and practices. The court cannot reasonably infer that JPM was violating federal law on a widespread, systematic basis where the documents on which P laintiff relies show that JPM w as compliant.

41 Compl. ¶ 78.12 September 22, 2022 letter provided detailed information on JPM’s practices and its policies. 42
24. P laintiff further argues that the court should infer that JPM violated federal law, and that Defendants knew about it and consciously failed to act in bad faith, because “the documents [JPM] produced in response to [the Section 220 demand] contain no reference whatsoever” to the Regulation E deadlines. 43 But t he d ocuments produced in response to the Demand show that, on October 17, 2022 , the B oard
discussed efforts to address fraud on Zelle and reimbursement s . 44 And the policies and procedures themselves show that JPM had processes for dealing with
unauthorized transfers

. 45
25. Moreover, P laintiff had an opportunity to press for greater scope of inspection but failed to do so. P laintiff tries to spin this in its favor, arguing that JPM

must have engaged in widespread misconduct because it failed to produce documents
that P laintiff requested in the Demand. Alternatively, P laintiff argues that the bank
must not have had access to documents necessary to assess its compliance, and so it “has not attempted to monitor its compliance with [] statutory deadlines, and . . . has
hit the snooze button on this wake

- up call to be gin monitoring its compliance with the

42 Defs.’ Opening Br., Ex. J.
43 Pl. ’ s A nswering Br. at 13.

44 Defs.’ Opening Br., Ex. O.
45 Defs.’ Opening Br., Exs

. L

– N. That the Regulation E procedures do not specifically refer to the time limits is not enough for the court to infer a red flag. Compl. ¶¶ 111, 115.13 deadlines in [EFTA] and Regulation E.” 46 JPM , however, took the reasonable position that certain of the documents requested were outside the scope of the Section 220 inspection , and so did not provide what P laintiff asked for

. 47 The court did not have a
chance to resolve that issue at the Section 220 phase because P laintiff voluntarily
dismissed its action. In essence, Plaintiff is asking the court to grant an adverse
inference against D efendants because they did not produce documents that P laintiff
decided not to pursue

. That does not work.
26. Thus, neither the allegations nor any inferences therefrom constitute red flags sufficient to support a Caremark claim.
27. For these reasons, P laintiff has failed to show a substantial likelihood of liability under Caremark for any of the defendants. Consequently, demand was not futile, and the case is dismissed under Rule 23.1.
28. In its a nswering b rief, P laintiff request ed leave to replead should the
court dismiss this action. 48 Because P laintiff filed an answering brief, dismissal of the complaint is “with prejudice . . . unless the Court, for good cause shown, shall find that
dismissal with prejudice would not be just under all the circumstances.” 49 P laintiff has not shown any good cause, and so the action is dismissed with prejudice. 50

46 Pl.’s Answering Br. at 15.
47 Compl. ¶ 41.
48 Pl.’s Answering Br. at 29

– 33.
49 Ct. Ch. R. 15(aaa).
50 P laintiff’s argument is that D efendants might ignore red flag s in the future. That is not good cause.14 29. P laintiff also moved for leave to file a supplemental brief based on JPM’s February 16, 2024 annual report. 51 The request is based on one paragraph in the annual report that makes note of JPM responding to government inquiries regarding
some Zelle transfers. This admission does not change the court’s analysis

. Plaintiff’s motion for leave to file a supplemental brief is denied. T he defendants’ motion to
dismiss is granted

.

/s/ Kathaleen St. J. McCormick Chancellor Kathaleen St. J. McCormick Dated: April 16 , 2024

51 Dkt. 33.