Espinoza v. Dimon
124 A.3d 33
Del.2015Background
- Plaintiffs (derivative action) asked JPMorgan’s board to investigate two related matters arising from the "London Whale" losses: (1) failures in risk management that allowed the trading losses, and (2) allegedly false or misleading public statements by management about the losses.
- The board formed an entirely independent special committee, retained its own advisors, conducted an extensive document review and many witness interviews, and issued a detailed report recommending refusal of the demand.
- The Second Circuit certified a question to the Delaware Supreme Court asking what factors courts should consider when an independent committee investigates only the underlying wrongdoing but not alleged subsequent misstatements.
- Delaware Supreme Court accepted certification but declined to answer the broad, fact-unspecified question as posed, explaining Rule 41(b) requires certified questions be framed against stipulated or undisputed facts.
- The Court emphasized settled Delaware law: a plaintiff alleging wrongful refusal of a demand must plead particularized facts giving rise to a reasonable doubt as to the good faith or reasonableness of the investigation—i.e., facts supporting an inference of disloyalty or gross negligence by the committee.
- Because there were no pleaded facts suggesting disloyalty and the inquiry whether the committee’s omission (if any) amounted to gross negligence is context-specific, the Court declined to provide abstract guidance without the full factual record.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an independent committee that investigates underlying wrongdoing but not alleged misstatements can be grossly negligent | Plaintiffs (Espinoza) argued the demand sought investigation of both topics; omission of the misstatements investigation supports inference of gross negligence | Defendants (Dimon/JPMorgan) argued the committee addressed management’s knowledge in its report and performed a thorough investigation, so no gross negligence | Court declined to answer abstractly; explained law requires particularized facts showing disloyalty or gross negligence and the question was too fact-specific to resolve on certification |
| Standard for reviewing refusal of demand | Plaintiffs contended committee’s refusal was unreasonable if it ignored a material part of the demand | Defendants contended the committee’s independent, adversary-informed investigation establishes reasonableness | Held: Under Delaware law, plaintiffs must plead particularized facts raising a reasonable doubt about good faith or reasonableness (i.e., disloyalty or gross negligence) |
| Whether gross negligence is a contextual inquiry | Plaintiffs implied an omission can be grossly negligent depending on materiality and distinctness | Defendants argued the committee’s comprehensive process precludes gross negligence absent specific allegations | Held: Gross negligence determination is inherently fact-specific and requires review of the record; abstract guidance not appropriate here |
| Proper use of certified-question procedure | Plaintiffs relied on Second Circuit’s framing to obtain Delaware guidance | Defendants argued the question was overbroad and factual disputes precluded certification | Held: Certification requires undisputed material facts; Court refused to reframe the question or provide broad, contextual guidance without stipulated facts |
Key Cases Cited
- Levine v. Smith, 591 A.2d 194 (Del. 1991) (pleading particularized facts required to challenge a board’s investigatory good faith)
- Spiegel v. Buntrock, 571 A.2d 767 (Del. 1990) (when a board refuses a demand, inquiry focuses on good faith and reasonableness of its investigation)
- Thorpe v. CERBCO, Inc., 611 A.2d 5 (Del. Ch. 1991) (decision-making context governed by gross negligence standard for informed decisions)
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (gross negligence standard requires case-specific analysis of directors’ decisionmaking)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (foundational Delaware law addressing board decisionmaking standards)