Court Opinion

ID: 3167452
Source: CourtListenerOpinion
Date Created: 2016-01-06 16:00:33.390546+00
Date Added: 2024-06-11T12:14:06.465865
License: Public Domain

14-4516-cv
Cent. Laborers’ Pension Fund v. Dimon

                                  UNITED STATES COURT OF APPEALS
                                     FOR THE SECOND CIRCUIT

                                        SUMMARY ORDER
Rulings by summary order do not have precedential effect. Citation to a summary order filed
on or after January 1, 2007, is permitted and is governed by Federal Rule of Appellate
Procedure 32.1 and this Court’s Local Rule 32.1.1. When citing a summary order in a
document filed with this Court, a party must cite either the Federal Appendix or an
electronic database (with the notation “summary order”). A party citing a summary order
must serve a copy of it on any party not represented by counsel.

       At a stated term of the United States Court of Appeals for the Second Circuit, held at
the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York,
on the 6th day of January, two thousand sixteen.

PRESENT:           JOSÉ A. CABRANES,
                   BARRINGTON D. PARKER,
                                Circuit Judges.*

CENTRAL LABORERS’ PENSION FUND AND
STEAMFITTERS LOCAL 449 PENSION FUND,
DERIVATIVELY ON BEHALF OF JPMORGAN CHASE &
CO.,

                             Plaintiffs-Appellants,

                             v.                               No. 14-4516-cv

JAMES DIMON, LINDA B. BAMMANN, JAMES A. BELL,
CRANDALL C. BOWLES, STEPHEN B. BURKE, JAMES S.
CROWN, TIMOTHY P. FLYNN, LABAN P. JACKSON,
MICHAEL A. NEAL, LEE R. RAYMOND, WILLIAM C.
WELDON, WALTER V. SHIPLEY, AND ROBERT I. LIPP,

                             Defendants-Appellees,

    *
     Judge Raymond J. Lohier was initially assigned to this matter and subsequently recused himself.
Pursuant to this Court’s Internal Operating Procedure E, after a matter has been assigned to a three-
judge panel, if for any reason a panel judge ceases to participate in consideration of the matter, the
two remaining judges may decide the matter if they are in agreement.

                                                      1
JPMORGAN CHASE & CO., A DELAWARE
CORPORATION,

                      Nominal Defendant-Appellee.

FOR PLAINTIFFS-APPELLANTS:                              DOUGLAS WILENS (Samuel H. Rudman,
                                                        David A. Rosenfeld, Mark S. Reich, Alan
                                                        I. Ellman, and Benny C. Goodman III, on
                                                        the brief), Robbins Geller Rudman &
                                                        Dowd LLP, Boca Raton, FL, Melville,
                                                        NY, and San Diego, CA.

                                                        John T. Long, Cavanagh & O’Hara,
                                                        Springfield, IL.

FOR DEFENDANTS-APPELLEES:                               JOHN F. SAVARESE (Emil A. Kleinhaus, on
                                                        the brief), Wachtell, Lipton, Rosen & Katz,
                                                        New York, NY, for defendants-appellees
                                                        James Dimon, Walter V. Shipley, Robert
                                                        I. Lipp, and nominal defendant-appellee
                                                        JPMorgan Chase & Co.

                                                        Stuart J. Baskin and Jaculin Aaron,
                                                        Shearman & Sterling LLP, New York,
                                                        NY, for defendants-appellees Linda B.
                                                        Bammann, James A. Bell, Crandall C.
                                                        Bowles, Stephen P. Burke, James S.
                                                        Crown, Timothy P. Flynn, Laban P.
                                                        Jackson, Michael A. Neal, Lee R.
                                                        Raymond, and William C. Weldon.

     Appeal from a judgment of the United States District Court for the Southern District of
New York (Paul A. Crotty, Judge).

     UPON DUE CONSIDERATION WHEREOF, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the judgment of the District Court is AFFIRMED.

         Plaintiffs Central Laborers’ Pension Fund and Steamfitters Local 449 Pension Fund appeal
from the District Court’s July 23, 2014 judgment dismissing their derivative action, which action
plaintiffs had filed against defendants James Dimon, Chief Executive Officer of nominal defendant
JPMorgan Chase & Co. (“JPMorgan”) and Chairman of its Board of Directors (the “Board”); ten
other members of the Board; and two former corporate officers and advisers. See Cent. Laborers’
Pension Fund v. Dimon, No. 14-CV-1041 (PAC), 2014 WL 3639185 (S.D.N.Y. July 23, 2014).

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        Plaintiffs’ action arises out of the infamous Ponzi scheme orchestrated by Bernard L.
Madoff (“Madoff”) through the investment advisory unit of Bernard L. Madoff Investment
Securities LLC (“BMIS”). See Pls.’ Br. 2. Plaintiffs allege that “JPMorgan served as the primary
banker for BMIS for more than 20 years, with billions of dollars of investor funds flowing through
the BMIS account,” and that, “through its various business operations, [JPMorgan] gained
considerable insight into Madoff’s operations, but ignored glaring ‘red flags’ of suspicious and illicit
misconduct associated with Madoff and the BMIS account.” Id. at 2–3. According to plaintiffs,
“rather than put a stop to Madoff’s fraud, JPMorgan turned a blind eye to it, allowing [JPMorgan] to
maintain a lucrative relationship with this large and important customer.” Id. at 3. Plaintiffs claim
“that responsibility for JPMorgan’s criminal conduct lies with defendants,” id., in part because “the
Board[ ] breach[ed] [its] fiduciary duty of loyalty [by] fail[ing] to properly oversee [JPMorgan’s]
operations,” id. at 4.

         The District Court dismissed plaintiffs’ complaint on the ground that they “failed to allege
with particularity facts sufficient to excuse [their] failure to make demand upon the Board prior to
filing” their action, as required by Rule 23.1 of the Federal Rules of Civil Procedure. Cent. Laborers’
Pension Fund, 2014 WL 3639185, at *1. We assume the parties’ familiarity with the underlying facts,
the procedural history of the case, and the issues on appeal.

         Before proceeding to the merits, we address amicus’s contention that, because “the district
court should have dismissed the present case for lack of subject matter jurisdiction,” we too lack
jurisdiction on appeal. See Amicus Br. 1. Amicus advances two arguments in support of this position.
“First, the single jurisdiction[-]conferring federal claim was so insubstantial as to deprive the
[District] [C]ourt of jurisdiction. In the alternative, because the [District] [C]ourt dismissed
plaintiff[s’] sole federal law cause of action at the pleadings stage, [it] should have refrained from
exercising supplemental jurisdiction over the state law breach of fiduciary duty action.” Id.

          In amicus’s first argument, he asserts that, because the District Court determined that
plaintiffs failed to adequately plead elements of their federal claim under Section 14(a) of the
Securities Exchange Act of 1934—a determination, it should be noted, that plaintiffs do not
challenge in the instant appeal—the claim was “insufficient to conjure up federal jurisdiction.” Id. at
8. It is true that “[s]imply raising a federal issue in a complaint will not automatically confer federal
question jurisdiction. Rather, we ask whether the cause of action alleged is so patently without merit as
to justify the court’s dismissal for want of jurisdiction.” Perpetual Sec., Inc. v. Tang, 290 F.3d 132, 137
(2d Cir. 2002) (alterations and internal quotation marks omitted) (quoting Duke Power Co. v. Carolina
Envtl. Study Grp., 438 U.S. 59, 70 (1978)); see also Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 629 n.3
(2009) (“Federal courts lack subject-matter jurisdiction when an asserted federal claim is so
insubstantial, implausible, foreclosed by prior decisions of this Court, or otherwise completely
devoid of merit as not to involve a federal controversy.” (internal quotation marks omitted)).
Plaintiffs’ Section 14(a) claim, however, clears this “low bar,” and federal question jurisdiction

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therefore was not lacking. Cf. Shapiro v. McManus, 136 S. Ct. 450, 455–56 (2015) (rejecting the Fourth
Circuit standard that, “where the pleadings do not state a claim, then by definition they are
[jurisdictionally] insubstantial”; noting that the Supreme Court has “long distinguished between failing
to raise a substantial federal question for jurisdictional purposes . . . and failing to state a claim for
relief on the merits”; and holding that “the failure to state a proper cause of action calls for a
judgment on the merits and not for a dismissal for want of jurisdiction” (internal quotation marks
omitted)).

         Regarding amicus’s second argument, “[w]hen, as in this case, a federal court dismisses all
claims over which it had original jurisdiction, it must reassess its jurisdiction over the [rest of the]
case by considering several related factors—judicial economy, convenience, fairness, and comity.”
Motorola Credit Corp. v. Uzan, 388 F.3d 39, 56 (2d Cir. 2004). Here, judicial economy was well-served
by the District Court’s discretionary exercise of jurisdiction over plaintiffs’ related state-law claims—
as detailed below, such claims are clearly deficient under Delaware law. Accordingly, the District
Court properly exercised supplemental jurisdiction under 28 U.S.C. § 1367.

        Turning, then, to the merits, “dismissals under Rule 23.1 are reviewed de novo.” Espinoza ex
rel. JPMorgan Chase & Co. v. Dimon, 797 F.3d 229, 236 (2d Cir. 2015). Upon independent review of
the relevant law and facts, we conclude that the District Court did not err in dismissing plaintiffs’
complaint.

        “A shareholder seeking to assert a claim on behalf of the corporation must first exhaust
intracorporate remedies by making a demand on the directors to obtain the action desired.”
Espinoza, 797 F.3d at 234 (alterations and internal quotation marks omitted). “However, demand
may be excused where a shareholder is able to show that demand would be futile.” Scalisi v. Fund
Asset Mgmt., L.P., 380 F.3d 133, 138 (2d Cir. 2004). Accordingly, Rule 23.1 provides that a complaint
in a derivative action must “state with particularity . . . any effort by the plaintiff to obtain the
desired action from the directors . . . ; and . . . the reasons for not obtaining the action or not making
the effort.” Fed. R. Civ. P. 23.1(b)(3).

        “Although Rule 23.1 sets forth the pleading standard for federal court, the substance of the
demand requirement is a function of state law . . . .” Espinoza, 797 F.3d at 234. This includes “[t]he
specifics of what constitutes futility,” which “is provided by the state of incorporation of the entity
on whose behalf the plaintiff is seeking relief.” Scalisi, 380 F.3d at 138. Therefore, because JPMorgan
is a Delaware corporation, Delaware law guides our inquiry.

        With respect to what constitutes futility under Delaware law, Delaware’s highest court has
asserted that, “where[, as here,] the subject of a derivative suit is . . . a violation of the Board’s
oversight duties . . . [,] the plaintiff [must] allege particularized facts establishing a reason to doubt
that the board of directors could have properly exercised its independent and disinterested business
judgment in responding to a demand.” Wood v. Baum, 953 A.2d 136, 140 (Del. 2008) (internal

                                                     4
quotation marks omitted) (quoting Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993)). “[A] reasonable
doubt that a majority of directors is incapable of considering demand should only be found where a
substantial likelihood of personal liability exists.” Wood, 953 A.2d at 141 n.11 (internal quotation
marks omitted) (quoting Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984)).

        Plaintiffs take issue with the District Court’s interpretation of the pertinent Delaware law
regarding the standard for determining whether “a substantial likelihood of personal liability exists.”
The District Court held that, because “[p]laintiffs’ claim for breach of fiduciary duty is a Caremark
claim”—i.e., a claim based on the Board’s alleged “failure to monitor,” a theory of liability explored
in the seminal case of In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch.
1996)—it “require[s] proof that . . . the directors utterly failed to implement any reporting or
information system or controls . . . .” Cent. Laborers’ Pension Fund, 2014 WL 3639185, at *3 (emphasis
supplied) (internal quotation marks omitted) (quoting Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006)).1
But plaintiffs claim only “that JPMorgan’s controls were . . . inadequate,” not that they did not exist.
Cent. Laborers’ Pension Fund, 2014 WL 3639185, at *3 (emphasis supplied). Therefore, the District
Court reasoned, plaintiffs “cannot maintain a Caremark action.” Id.

        Plaintiffs argue that the District Court erred in requiring them to plead that defendants
“utterly failed to implement any reporting or information system or controls,” and that instead, they
should have been required to plead only defendants’ “utter failure to attempt to assure a reasonable
information and reporting system exist[ed].” Pls.’ Br. 28 (first emphasis supplied) (internal quotation
marks omitted).

        Plaintiffs’ argument, however, has a fundamental shortcoming—the standard that the
District Court applied was taken verbatim from Stone v. Ritter, a Delaware Supreme Court decision
that the District Court was obligated to follow. See 911 A.2d at 370 (describing the “necessary
conditions predicate for director oversight liability [as follows]: . . . the directors utterly failed to
implement any reporting or information system or controls . . . .” (emphasis supplied)). Further, this
standard appears in the portion of Stone that the Delaware Supreme Court described as its
“hold[ing].” 911 A.2d at 370. And the standard’s plain language could not be any clearer—“any”
simply does not mean “reasonable.”

    1
      As the District Court correctly explained, a Caremark claim can also be supported by proof that,
“having implemented such a system or controls, [the directors] consciously failed to monitor or
oversee its operations thus disabling themselves from being informed of risks or problems requiring
their attention.” Central Laborers’ Pension Fund, 2014 WL 3639185, at *3 (internal quotation marks
omitted) (quoting Stone, 911 A.2d at 370). But this alternative basis is not at issue in this appeal. See
Pls.’ Br. 17 n.6; Defs.’ Br. 14 n.2; Pls.’ Reply Br. 21.

                                                    5
        To be sure, the language that plaintiffs contend the District Court should have used is taken
from Caremark. See 698 A.2d at 971 (“[O]nly a sustained or systematic failure of the board to exercise
oversight—such as an utter failure to attempt to assure a reasonable information and reporting system
exists—will establish the lack of good faith that is a necessary condition to liability.” (emphasis
supplied)). But Caremark was decided by the Delaware Court of Chancery, a trial court from which
appeals are generally taken as of right to the Delaware Supreme Court. See Travelers Ins. Co. v. Henry,
470 F.3d 56, 62 (2d Cir. 2006) (“[F]ederal courts must follow the holdings of the highest state court
in applying state law . . . .”); cf. Fieger v. Pitney Bowes Credit Corp., 251 F.3d 386, 399 (2d Cir. 2001)
(holding that, while “it is helpful to consider the decisions of [a] state’s trial . . . courts,” those
decisions should be “disregarded” if “a federal court . . . is convinced by other persuasive data that
the highest court of the state would decide otherwise” (internal quotation marks omitted)).
Additionally, the Delaware Court of Chancery decided Caremark before the Delaware Supreme
Court decided Stone. See Outten v. State, 650 A.2d 1291, 1296 (Del. 1994) (holding that, as between
two potentially applicable decisions, “[t]he more recent case . . . control[led] th[e] issue”).

        What is more—and perhaps most damaging to plaintiffs’ argument—in setting out the
standard to which plaintiffs here object, Stone was actually interpreting Caremark. See Stone, 911 A.2d at
370 (“We hold that Caremark articulates the necessary conditions predicate for director oversight liability: . . . the
directors utterly failed to implement any reporting or information system or controls . . . .” (emphasis
supplied)). The District Court was no less bound by Stone’s interpretation of Caremark than it would
have been by Stone’s announcement of an entirely new standard.

         Our conclusion is buttressed by two additional factors. First, it is not clear to us that, under
the facts of this case, replacing the Stone standard with the language from Caremark would have made
any difference in the disposition of plaintiffs’ action. Plaintiffs emphasize the word “reasonable,” but
ignore the word “attempt.” It seems implausible that defendants could have “utter[ly] fail[ed] [even]
to attempt to assure a reasonable information and reporting system exist[ed],” Caremark, 698 A.2d at
971 (emphasis supplied), given that “JPMorgan designated an executive located in New York as the
head of JPMorgan’s [anti-money laundering] program, which included individuals based in the
United States and other countries responsible for filing suspicious activity reports in the relevant
jurisdictions.” Cent. Laborers’ Pension Fund, 2014 WL 3639185, at *3 (alterations and internal
quotation marks omitted).

        Second, the notion that the District Court incorrectly interpreted Stone is severely
undermined by a recent decision of the Delaware Court of Chancery—decided less than two weeks
after defendants submitted their appellate brief—in which that court stated the following:

         The Complaint does not allege a total lack of any reporting system at [the defendant
         company]; rather, the Plaintiffs allege the reporting system should have transmitted
         certain pieces of information . . . . In other words, [the defendant] had a system for

                                                          6
        reporting risk to the Board, but in the Plaintiffs’ view it should have been a better
        system.

        Contentions that the Board did not receive specific types of information do not
        establish that the Board utterly failed to attempt to assure a reasonable information
        and reporting system exists, particularly in the case at hand where the Complaint not
        only fails to plead with particularity that [the defendant] lacked procedures to comply
        with its . . . reporting requirements, but actually concedes the existence of
        information and reporting systems. . . .

        In other words, the Plaintiffs complain that [the defendant] could have, should have,
        had a better reporting system, but not that it had no such system.

        Stated more generally, in criticizing the Board’s risk oversight and its delegation
        thereof, throughout the Complaint, the Plaintiffs concede that the Board was
        exercising some oversight, albeit not to the Plaintiffs’ hindsight-driven
        satisfaction. . . . That is short of pleading that the Board utterly failed to implement
        any reporting or information system or controls, sufficient to raise a reasonable
        doubt of the directors’ good faith.

In re General Motors Co. Derivative Litig., No. CV 9627-VCG, 2015 WL 3958724, at *14–15 (Del. Ch.
June 26, 2015) (emphasis in original) (internal quotation marks omitted); accord TVI Corp. v. Gallagher,
No. CV 7798-VCP, 2013 WL 5809271, at *15–16 (Del. Ch. Oct. 28, 2013) (“Plaintiffs have pled no
specific facts to support an inference that Defendant directors utterly failed to implement any
reporting or information system or controls. To the contrary, Plaintiffs acknowledge that the Board
maintained an audit committee and created an ad hoc investigative committee on at least one
occasion . . . . I conclude that Plaintiffs have failed to state a . . . claim for failure to exercise
oversight.”).

        For all of the foregoing reasons, we conclude that plaintiffs cannot prevail on their Caremark
claim—a claim that the Delaware Supreme Court has described as “possibly the most difficult
theory in corporation law upon which a plaintiff might hope to win a judgment,” Stone, 911 A.2d at
372 (internal quotation marks omitted)—and that the District Court therefore properly dismissed
their complaint.

                                          CONCLUSION

       We have considered all of plaintiffs’ other arguments on appeal and found them to be
without merit. Accordingly, we AFFIRM the District Court’s July 23, 2014 judgment.

                                                        FOR THE COURT:
                                                        Catherine O’Hagan Wolfe, Clerk

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