     14-3245
     Wayne County Employees’ Retirement System v. Dimon et al.

                          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.

 1            At a stated term of the United States Court of Appeals
 2       for the Second Circuit, held at the Thurgood Marshall United
 3       States Courthouse, 40 Foley Square, in the City of New York,
 4       on the 16th day of October, two thousand fifteen.
 5
 6       PRESENT: DENNIS JACOBS,
 7                RAYMOND J. LOHIER, JR.,
 8                              Circuit Judges.
 9                GEOFFREY W. CRAWFORD,*
10                              District Judge.
11
12       - - - - - - - - - - - - - - - - - - - -X
13       WAYNE COUNTY EMPLOYEES’ RETIREMENT
14       SYSTEM,
15                Plaintiff-Appellant,
16
17                    -v.-                                               14-3245
18
19       JAMES S. DIMON et al.,
20                Defendants-Appellees.
21       - - - - - - - - - - - - - - - - - - - -X
22



                *
               The Honorable Geoffrey W. Crawford, United States
         District Judge for the District of Vermont, sitting by
         designation.
                                                  1
 1   FOR APPELLANT:             JOSEPH D. DALEY, ROBBINS GELLER
 2                              RUDMAN & DOWD LLP, San Diego,
 3                              California.
 4
 5   FOR APPELLEES:             DARYL A. LIBOW (with Richard C.
 6                              Pepperman, II & Christopher
 7                              Michael Viapiano on the brief)
 8                              SULLIVAN & CROMWELL LLP,
 9                              Washington, DC.
10
11        Appeal from a judgment of the United States District
12   Court for the Southern District of New York (Daniels, J.).
13
14        UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
15   AND DECREED that the judgment of the district court be
16   AFFIRMED.
17
18        Wayne County Employees’ Retirement System (“Wayne
19   County”) appeals from the judgment of the United States
20   District Court for the Southern District of New York
21   (Daniels, J.), dismissing its complaint pursuant to Rule
22   23.1 of the Federal Rules of Civil Procedure. We assume the
23   parties’ familiarity with the underlying facts, the
24   procedural history, and the issues presented for review.
25
26        Although Rule 23.1 is a “rule of pleading that creates
27   a federal standard as to the specificity of facts alleged,”
28   the “adequacy of those efforts is to be determined by state
29   law.” RCM Sec. Fund, Inc. v. Stanton, 928 F.2d 1318, 1330
30   (2d Cir. 1991). Since JPMorgan Chase (“JPMorgan”) is a
31   Delaware corporation, this appeal is governed by Delaware
32   law.
33
34        Wayne County contends that it has properly pled demand
35   futility because a majority of JPMorgan’s Board of Directors
36   (“Board”) consciously disregarded pertinent indicators of
37   business risk and thereby failed to properly exercise their
38   oversight duties. These allegations plead Board inaction
39   and are therefore analyzed under Rales v. Blasband, 634 A.2d
40   927, 933-34 (Del. 1993). Wayne County’s complaint directly
41   implicates the theory of liability articulated in In re
42   Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 968
43   (Del. Ch. 1996). See Stone ex rel. AmSouth Bancorporation
44   v. Ritter, 911 A.2d 362, 370 (Del. 2006) (“We hold that
45   Caremark articulates the necessary conditions predicate for
46   director oversight liability: (a) the directors utterly
47   failed to implement any reporting or information system or

                                  2
 1   controls; or (b) having implemented such a system or
 2   controls, consciously failed to monitor or oversee its
 3   operations thus disabling themselves from being informed of
 4   risks or problems requiring their attention.”).
 5   Accordingly, “[w]here directors fail to act in the face of a
 6   known duty to act, thereby demonstrating a conscious
 7   disregard for their responsibilities, they breach their duty
 8   of loyalty by failing to discharge that fiduciary obligation
 9   in good faith.” Id.; see also In re Citigroup Inc. S’holder
10   Derivative Litig., 964 A.2d 106, 123 (Del. Ch. 2009) (“Thus,
11   to establish oversight liability a plaintiff must show that
12   the directors knew they were not discharging their fiduciary
13   obligations or that the directors demonstrated a conscious
14   disregard for their responsibilities such as by failing to
15   act in the face of a known duty to act. The test is rooted
16   in concepts of bad faith; indeed, a showing of bad faith is
17   a necessary condition to director oversight liability.”).1
18
19        The standards governing the pleading of Caremark claims
20   are exacting. See Caremark, 698 A.2d at 971 (“[O]nly a
21   sustained or systematic failure of the board to exercise
22   oversight—such as an utter failure to attempt to assure a
23   reasonable information and reporting system exists—will
24   establish the lack of good faith that is a necessary
25   condition to liability.”). And that considerable threshold
26   is raised when, as here, the claims involve a failure to
27   monitor business risk, as opposed to legal risk. See
28   Citigroup, 964 A.2d at 131 (“While it may be tempting to say
29   that directors have the same duties to monitor and oversee
30   business risk, imposing Caremark-type duties on directors to
31   monitor business risk is fundamentally different.”). Thus,
32   “[a]ssuming excessive risk-taking at some level becomes the
33   misconduct contemplated by Caremark, the plaintiff would
34   essentially have to show that the board . . . consciously
35   disregarded red flags signaling that the company’s employees
36   were taking facially improper, and not just ex-post ill-
37   advised or even bone-headed, business risks. Such bad-faith
38   indifference would be formidably difficult to prove.” In re
39   Goldman Sachs Grp., Inc. S’holder Litig., No. 5215-VCG, 2011
40   WL 4826104 at *22 n.217 (Del. Ch. Oct. 12, 2011). “Even a
41   showing of gross negligence by a majority of the Board will


         1
            The exculpation clause in the JPMorgan Charter is
     irrelevant here because it does not immunize actions taken
     in bad faith, which is a prerequisite for director oversight
     liability.
                                  3
 1   not suffice.” In re SAIC Inc. Derivative Litig., 948 F.
 2   Supp. 2d 366, 381 (S.D.N.Y. 2013), aff’d Welch v.
 3   Havenstein, 553 F. App’x 54 (2d Cir. 2014). In short, a
 4   Caremark claim is “possibly the most difficult theory in
 5   corporation law upon which a plaintiff might hope to win a
 6   judgment.” Caremark, 698 A.2d at 967.
 7
 8        Wayne County’s pleading does not satisfy the
 9   requirements for alleging a Caremark claim predicated on
10   failed oversight of business risk. The complaint cites
11   instances in which warning signs of excessive risk reached
12   members of the Board, and identifies members of the Board
13   who received particular warnings. But Wayne County cannot
14   sustain its burden by relying on red flags that reached a
15   single Board member or a minority of the Board: “Delaware
16   law does not permit the wholesale imputation of one
17   director’s knowledge to every other for demand excusal
18   purposes.” Desimone v. Barrows, 924 A.2d 908, 943 (Del. Ch.
19   2007).
20
21        The complaint does allege that some warnings reached
22   the majority of the Board; but the most urgent signs were
23   given in a single quarter in which an audit report was
24   prepared and delivered, and the severe loss followed the
25   audit report by a few days or a couple weeks. Thus, even if
26   there were red flags warning of facially improper business
27   risk, the warning signs were not received, let alone
28   ignored, over a sustained period of time. Wayne County has
29   not pled a “sustained or systematic failure of the [B]oard
30   to exercise oversight.” Caremark, 698 A.2d at 971.
31
32        Nor may we substantively evaluate the magnitude of
33   business risk JPMorgan was facing with the benefit of
34   hindsight. See Goldman Sachs, 2011 WL 4826104 at *22 (“If
35   an actionable duty to monitor business risk exists, it
36   cannot encompass any substantive evaluation by a court of a
37   board’s determination of the appropriate amount of risk.
38   Such decisions plainly involve business judgment.”).
39
40        Finally, Wayne County’s argument that the district
41   court erred in denying it leave to amend its complaint must
42   also be rejected given that the length and fulness of this
43   complaint does not appear to have been abbreviated, or
44   foreshortened.
45
46
47

                                  4
1        For the foregoing reasons, and finding no merit in
2   Wayne County’s other arguments, we hereby AFFIRM the
3   judgment of the district court.
4
5                              FOR THE COURT:
6                              CATHERINE O’HAGAN WOLFE, CLERK
7




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