Asbestos Workers Philadelphia Pension Fund v. Bell
137 A.D.3d 680
N.Y. App. Div.2016Background
- Derivative suit brought by institutional and individual JPMorgan shareholders challenging board and officer conduct relating to securitization and sale of subprime and troubled residential mortgages (RMBS); no pre-suit demand was made.
- Plaintiffs alleged the board knew mortgages would fail, used RMBS sales to remove toxic assets without adequate reserves, and made JP Morgan appear healthier in the short term while expecting large future losses.
- Plaintiffs also alleged that in January 2007 the board abdicated oversight by delegating authority to a management committee to sell toxic RMBS, and extended that delegation twice.
- Defendants were 11 current/former directors (mostly outside directors) and two former officers; JPMorgan is a Delaware corporation.
- Supreme Court dismissed the complaint for failure to make a pre-suit demand and for insufficiently pleaded demand futility; Appellate Division affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether claims are direct or derivative | Claims include abdication of board duty but still injure the corporation; plaintiffs frame some claims as direct to avoid demand rule | Claims are derivative because recovery would inure to the corporation and thus pre-suit demand is required | Court: Claims are derivative (Tooley governs); demand required |
| Whether pre-suit demand was excused under Aronson (challenged board action) | Board acted in bad faith and authorized improper RMBS sales; delegation to management was not a valid exercise of business judgment | Outside directors were disinterested/independent; decisions were business judgments and hindsight criticisms are insufficient | Court: Aronson not satisfied; plaintiffs failed to plead particularized facts raising reasonable doubt as to independence or that actions were not valid business judgment |
| Whether demand futility is established under Rales/Caremark (board inaction/lack of oversight) | Board abdication and failure to monitor constitute sustained/systematic failure to exercise oversight, excusing demand | Plaintiffs failed to plead particularized facts showing sustained or systematic oversight failure or a substantial likelihood of director liability | Court: Rales/Caremark not satisfied; oversight/dereliction allegations insufficiently particularized to excuse demand |
| Whether directors faced a substantial likelihood of liability (impacting independence) | Potential for personal liability for wrongdoing means directors could not impartially consider a demand | Delaware charter exculpation (Section 102(b)(7)) and lack of particularized facts showing scienter/bad faith reduce likelihood of liability | Court: No particularized allegations of scienter; exculpation and pleading deficiencies defeat claim of lack of independence |
Key Cases Cited
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (tests whether claim is derivative or direct)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (two-pronged test for demand futility challenging board action)
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (clarifies Aronson and business-judgment presumption)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (test for demand futility when challenging board inaction)
- In re Caremark Int'l, Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996) (standard for oversight liability; sustained or systematic failure required)
- In re Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. 2006) (business-judgment rule and good-faith pleading requirements)
- In re Citigroup Inc. Shareholder Derivative Litig., 964 A.2d 106 (Del. Ch. 2009) (demand futility and scienter/particularity in financial-institution RMBS context)