Court Opinion

ID: 4253822
Source: CourtListenerOpinion
Date Created: 2018-03-12 21:08:05.941266+00
Date Added: 2024-06-11T14:43:48.359707
License: Public Domain

COURT OF CHANCERY
                                     OF THE
    SAM GLASSCOCK III          STATE OF DELAWARE                   COURT OF CHANCERY COURTHOUSE
     VICE CHANCELLOR                                                        34 THE CIRCLE
                                                                     GEORGETOWN, DELAWARE 19947

                             Date Submitted: March 8, 2018
                             Date Decided: March 12, 2018

    Stuart M. Grant, Esquire                      Stephen P. Lamb, Esquire
    Nathan A. Cook, Esquire                       Meghan M. Dougherty, Esquire
    Rebecca A. Musarra, Esquire                   Paul, Weiss, Rifkind, Wharton
    Grant & Eisenhofer P.A.                       & Garrison LLP
    123 Justison Street                           500 Delaware Ave., Suite 200
    Wilmington, DE 19801                          Wilmington, DE 19899

                                                  Donald J. Wolfe, Jr., Esquire
                                                  T. Brad Davey, Esquire
                                                  Tyler J. Leavengood, Esquire
                                                  Jay G. Stirling, Esquire
                                                  Potter Anderson & Corroon LLP
                                                  1313 N. Market Street, 6th Floor
                                                  Wilmington, DE 19899

                 Re: Oklahoma Firefighters Pension & Retirement System v. Michael L.
                 Corbat et al., Civil Action No. 12151-VCG

Dear Counsel:

         On December 18, 2017, I dismissed the Plaintiffs’ Complaint in this action

under Court of Chancery Rule 23.1 for failure to make presuit demand. 1 The

Complaint alleged that the Defendants—directors and officers of nominal defendant

Citigroup, Inc.—breached their fiduciary duties by failing to prevent Citigroup and

1
 Okla. Firefighters Pension & Ret. Sys. v. Corbat, 2017 WL 6452240, at *26–27 (Del. Ch. Dec.
18, 2017). I assume familiarity with my December 18 opinion, and I recite only those facts
necessary to understand my decision here.
several of its subsidiaries from violating a variety of laws and regulations. 2 The

Plaintiffs’ theory of liability was that the Defendants knew of red flags pointing to

corporate misconduct and chose to ignore them. 3 The purported red flags related to

four separate corporate traumas suffered by the company, including a $140 million

fine imposed in July 2015 for failure to comply with anti-money laundering

(“AML”) laws. 4 I held that demand was not excused as to the Plaintiffs’ Caremark5

claim because the Complaint failed to adequately allege that any of Citigroup’s

directors faced a substantial likelihood of liability for bad-faith inaction in the face

of the purported red flags. 6

       On January 17, 2018, the Plaintiffs moved to reopen the judgment under Court

of Chancery Rules 60(b)(2) and 60(b)(6), and to amend their Complaint pursuant to

Court of Chancery Rule 15(aaa). They argue that newly discovered evidence

supports a finding that demand is excused as to Citigroup’s failure to ensure

compliance with AML laws. Specifically, on December 27, 2017 7—a little over a

week after this Court dismissed the Complaint—Citibank entered into a consent

order with the Office of the Comptroller of the Currency (“OCC”).8 The OCC found

2
  Id. at *3–13.
3
  Id. at *1–2.
4
  Id. at *7.
5
  In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).
6
  Corbat, 2017 WL 6452240, at *26–27.
7
  The consent order was publicly announced on January 4, 2018.
8
  Proposed Am. Compl. ¶ 76.
                                                2
that Citibank had failed to comply with the 2012 OCC consent order, which required

Citibank to improve its internal controls relating to compliance with AML laws. 9

The OCC further found that Citibank had violated several AML laws, and it imposed

a $70 million fine on the bank. 10 The 2017 consent order contains no admission of

wrongdoing by Citibank, and it does not address whether the Citibank or Citigroup

board knowingly allowed the violations to occur. 11

       Rule 60(b)(2) provides that a court “may relieve a party . . . from a final

judgment, order, or proceeding” on the basis of “newly discovered evidence.” 12 To

obtain relief under Rule 60(b)(2), the movant must show that

       [1] the newly discovered evidence has come to his knowledge since the
       [judgment]; [2] that it could not, in the exercise of reasonable diligence,
       have been discovered for use [before the judgment]; [3] that it is so
       material and relevant that it will probably change the result . . . ; [4] that
       it is not merely cumulative or impeaching in character; and [5] that it is
       reasonably possible that the evidence will be produced at the trial. 13

Rule 60(b) advances “two important values: the integrity of the judicial process and

the finality of judgments.” 14 “The rule exists to serve the first; its administration

9
  Id.
10
   Id.
11
    Defs.’ Answering Br. Ex. 2, art. II, § 1 (“The Bank, without admitting or denying any
wrongdoing, consents and agrees to issuance of the accompanying Consent Order for a Civil
Money Penalty . . . by the Comptroller.” (emphasis added)).
12
   Ct. Ch. R. 60(b)(2).
13
   Levine v. Smith, 591 A.2d 194, 202 (Del. 1991) (citation omitted), overruled on other grounds
by Brehm v. Eisner, 746 A.2d 244 (Del. 1998).
14
   Credit Lyonnais Bank Nederland, N.V. v. Pathe Commc’ns Corp., 1996 WL 757274, at *1 (Del.
Ch. Dec. 20, 1996).
                                               3
must acknowledge the second.” 15 Thus, Delaware law is clear that reopening a

judgment based on new evidence is disfavored. 16 The decision whether to grant

relief under Rule 60(b)(2) is committed to the sound discretion of the Court. 17

       For purposes of my analysis, I assume (without so finding) that the 2017 OCC

consent order represents newly discovered evidence that was in existence before

judgment was entered in this case. Nonetheless, the Plaintiffs have failed to meet

their “heavy burden” 18 of showing that the existence of the latest consent order

would probably alter my conclusion that demand is not futile as to the AML

allegations. Thus, I decline to reopen the judgment.

       To satisfy the materiality prong of the Rule 60(b)(2) test, the Plaintiffs must

show that, if I were to consider the new evidence in the context of a renewed motion

to dismiss for failure to make presuit demand, I would more likely than not conclude

that demand was in fact excused as to the Defendants’ failure to ensure compliance

with AML laws. 19 To establish demand futility, a plaintiff must allege particularized

15
   Id.
16
   Norberg v. Sec. Storage Co. of Wash., 2002 WL 31821025, at *2 (Del. Ch. Dec. 9, 2002); see
also MCA, Inc. v. Matushita Elec. Indus. Co., Ltd., 785 A.2d 625, 635 (Del. 2001) (“Because of
the significant interest in preserving the finality of judgments, Rule 60(b) motions are not to be
taken lightly or easily granted.”).
17
   Vianix Del. LLC v. Nuance Commc’ns, Inc., 2011 WL 487588, at *4 (Del. Ch. Feb. 9, 2011).
18
   Concord Steel, Inc. v. Wilmington Steel Processing Co., Inc., 2010 WL 3931097, at *7 (Del. Ch.
Oct. 7, 2010).
19
   See Grobow v. Perot, 1988 WL 127094, at *2 (Del. Ch. Nov. 25, 1988) (granting a Rule 60(b)(2)
motion where the new allegations would likely change the outcome of a renewed Rule 23.1
motion). As the Plaintiffs point out, the Court in Grobow stated that it could not “conclude as a
matter of law that the new evidence, as reflected in the proposed amended pleading, would not
change the outcome on a renewed motion to dismiss under Rule 23.1.” Id. That language appears
                                                4
facts “creat[ing] a reasonable doubt that, as of the time the complaint is filed, the

board of directors could have properly exercised its independent and disinterested

business judgment in responding to a demand.” 20 Such reasonable doubt exists

where the complaint’s allegations “reveal board inaction of a nature that would

expose [at least half of the directors who would consider a demand] to ‘a substantial

likelihood’ of personal liability.” 21 Where, as here, demand futility is premised on

purported Caremark liability, the question is whether the plaintiff has alleged

particularized facts suggesting that at least half of the directors in place when the

complaint was filed had acted in bad faith by consciously disregarding their

oversight duties. 22 As our Supreme Court has recognized, “directors’ good faith

exercise of oversight responsibility may not invariably prevent employees from

violating criminal laws, or from causing the corporation to incur significant financial

liability, or both.” 23

to suggest that Rule 60(b)(2)’s materiality prong is satisfied so long as there is a reasonable
possibility that the newly discovered evidence would change the outcome. But the Court’s holding
did not depend on such a broad reading of the applicable standard; instead, it rested on the finding
that the new allegations were “sufficiently ‘. . . material and relevant . . . [to] . . . probably change
the result,’ because a reasonable doubt would be created as to the applicability of the business
judgment rule.” Id. (alterations in original). Thus, I do not read Grobow as departing from the
well-established principle that newly discovered evidence is material under Rule 60(b)(2) only if
it would probably change the result.
20
   Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993).
21
   Horman v. Abney, 2017 WL 242571, at *6 (Del. Ch. Jan. 19, 2017) (quoting Rales, 634 A.2d at
936).
22
   E.g., Corbat, 2017 WL 6452240, at *14–15.
23
   Stone v. Ritter, 911 A.2d 362, 373 (Del. 2006).
                                                   5
       Here, the Plaintiffs argue that the 2017 OCC consent order supports a finding

of demand futility as to the AML allegations. That consent order is the fourth one

relating to AML compliance that Citigroup or its subsidiaries have entered into since

2012. In July 2010, the OCC issued Citibank a Part 30 order24 directing it to improve

its AML compliance measures. 25 Then, in April 2012, the OCC issued a consent

order against Citibank, directing it to address continuing weaknesses in the bank’s

AML controls. 26 About four months later, Banamex USA (“BUSA”), a Citigroup

subsidiary, entered into a consent order with the Federal Deposit Insurance

Corporation (“FDIC”) and the California Department of Financial Institutions; this

order also involved AML compliance issues.27 The next year, in March 2013, the

Federal Reserve System issued yet another consent order, this time requiring

Citigroup to implement adequate AML controls. 28 Approximately two years later,

the FDIC and the California Department of Business Oversight imposed a $140

million fine on BUSA for AML oversight failures. 29 In my December 18 opinion, I

held that demand was not excused as to these allegations because the Complaint

failed to plead with particularity that the Citigroup board consciously chose to do

24
   A Part 30 order refers to an order issued under 12 C.F.R. § 30.2, which “establishes procedures
for requiring submission of a compliance plan and issuing an enforceable order pursuant to” the
law requiring the OCC “to establish safety and soundness standards.”
25
   Corbat, 2017 WL 6452240, at *5.
26
   Id.
27
   Id.
28
   Id. at *6.
29
   Id. at *7.
                                                6
nothing about AML compliance over this five-year period; instead, the picture that

emerged was of a board that made a good-faith (albeit unsuccessful) effort to secure

compliance. 30

       The Plaintiffs now urge me to infer bad-faith inaction from the continuing

failure to achieve compliance with both the terms of the 2012 OCC consent order

and the requirements of various AML laws, as implied by the 2017 OCC consent

order. But that latest OCC consent order does not give rise to a reasonable inference

of intentional dereliction of duties. It does not state that the Citigroup or Citibank

board knowingly failed to ensure compliance, or even that the directors of those

companies were grossly negligent in their efforts in that area. Nor does it negate the

Citigroup board’s significant efforts to achieve AML compliance from 2010 to 2015.

Instead, it simply reveals that Citibank was not in compliance for a longer period of

time than the operative pleading suggested. That additional information would be

unlikely to alter my conclusion that demand is not futile as to the Defendants’ failure

to secure compliance in the AML arena. 31 Bad results alone do not imply bad faith.

30
   Id. at *16 (“[F]ar from doing nothing in response to red flags, the Citigroup board and its various
committees oversaw significant efforts to comply with the consent orders and ensure that adequate
AML controls were implemented.”).
31
   See id. at *17 (noting that a substantial likelihood of Caremark liability could not be established
via allegations that “the Citigroup board could have done a better job addressing the issues
highlighted by . . . the consent orders”). At oral argument on the motion to reopen the judgment,
counsel for the Plaintiffs suggested that I could infer directorial bad faith from the size of the fine
imposed by the OCC. The $70 million fine, which was imposed for violations from September
30, 2015, to December 27, 2017, equates to a penalty of $85,470 a day. That puts Citibank in the
third tier of the statutory regime for civil monetary penalties under 12 U.S.C. § 1818(i)(2)(C),
                                                  7
Thus, the Plaintiffs have failed to satisfy Rule 60(b)(2)’s materiality prong, and I

decline to reopen the judgment based on newly discovered evidence.

        The Plaintiffs also seek relief under Rule 60(b)(6). That rule is a catchall

provision allowing the Court to vacate a judgment for “any other reason justifying

relief.” 32   To obtain relief under Rule 60(b)(6), the movant must establish

“extraordinary circumstances that justify reopening the case.”33 Thus, “[a] movant

under Rule 60(b)(6) is required to make an even stronger showing than that required

under the other five subsections of the rule.” 34 Because the Plaintiffs have failed to

carry their burden under Rule 60(b)(2), they cannot obtain relief under Rule 60(b)(6).

Moreover, because I decline to reopen the judgment, I need not address the

Plaintiffs’ request to amend their Complaint under Rule 15(aaa).

        To the extent the foregoing requires an Order to take effect, IT IS SO

ORDERED.

                                                      Sincerely,

                                                      /s/ Sam Glasscock III

                                                      Sam Glasscock III

which covers “any insured depository institution which . . . knowingly” commits a range of
punishable actions. The problem, however, is that the Plaintiffs have given me no reason to infer
that the actors at Citibank responsible for knowing violations include at least half of the Citigroup
directors who would consider a demand.
32
   Ct. Ch. R. 60(b)(6).
33
   T.R. Investors, LLC v. Genger, 2012 WL 5471062, at *3 (Del. Ch. Nov. 9, 2012) (internal
quotation marks and citation omitted).
34
   High River Ltd. P’ship v. Forest Labs., Inc., 2013 WL 492555, at *9 (Del. Ch. Feb. 5, 2013).
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