IMG Holding LLC v. James Dimon and JPMorgan Chase & Co.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IMG HOLDING LLC, derivatively on )
behalf of JPMORGAN CHASE & )
CO., )
)
Plaintiff, )
)
v. ) C.A. No. 2023-0522-KSJM
)
JAMES DIMON, STEPHEN B. )
BURKE, LINDA B. BAMMANN, )
TODD A. COMBS, JAMES S. )
CROWN, ALICIA B. DAVIS, )
TIMOTHY P. FLYNN, ALEX )
GORSKY, MELLODY HOBSON, )
MICHAEL A. NEAL, PHEBE N. )
NOVAKOVIC, and VIRGINIA )
M. ROMETTY, )
)
Defendants, )
)
and )
)
JPMORGAN CHASE & CO., )
)
Nominal Defendant. )

ORDER RESOLVING DEFENDANTS’ MOTION TO DISMISS1

1. Plaintiff IMG Holding LLC (“Plaintiff”) owns stock in JPMorgan Chase

& Co. (“JPM”), a multinational financial services company.

2. Along with several other large banks, JPM owns Zelle, a digital banking

platform that allows customers to electronically transfer money with relative ease to

other consumers. Zelle is regulated by the federal Electronic Fund Transfer Act (the

1 The facts are drawn from the Verified Complaint and documents it incorporates by

reference. C.A. No. 2023-0522-KSJM, Docket (“Dkt.”) 1 (“Compl.”).
“EFTA”) and Regulation E, which clarifies responsibilities under the EFTA. 2 Under

the EFTA and Regulation E, a bank must reimburse customers for unauthorized

electronic transfers within certain time frames or face civil and criminal penalties for

noncompliance.

3. Zelle is susceptible to fraud. Hackers have found a way to send

themselves funds from someone else’s Zelle account to their own. Once money is sent

through Zelle, it is generally not recoverable by the sender. National media outlets

reported on instances of Zelle fraud. The Complaint cites to five news articles

published between May 2021 and June 2022 that reported on Zelle fraud and four

specific customer experiences.

4. In 2022, the United States Senate Committee on Banking, Housing, and

Urban Affairs (the “Senate Committee”) opened an investigation into unauthorized

electronic transfers on Zelle and industry-wide non-compliance with the EFTA and

Regulation E. The Senate Committee sent a letter to Zelle leadership on April 25,

2022, regarding the news articles.

5. The Senate Committee then sent a letter to JPM’s CEO James Dimon

on July 7, 2022, requesting details and statistics on Zelle fraud claims. The Senate

Committee asked questions regarding JPM’s compliance with the EFTA and

Regulation E. On September 22, 2022, JPM provided responses to the Senate

Committee. Plaintiff describes these responses as “incomplete.” 3 That same day,

2 15 U.S.C. § 1693 et seq.; 12 C.F.R. § 1005.1 et seq.

3 Compl. ¶ 69.

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Dimon testified before the Senate Committee, which included Senator Elizabeth

Warren. Dimon promised to provide the Senate Committee with additional details

unaddressed in JPM’s September 22, 2022 written response. Plaintiff alleged that

after the hearing, JPM chose not to provide those details.

6. Senator Warren issued a report on Zelle fraud and industry non-

compliance with the EFTA and Regulation E on October 3, 2022 (the “Warren

Report”). The Warren Report stated that “fraud and theft are rampant on Zelle[,]”

“[b]anks are not repaying customers who contest ‘unauthorized’ Zelle payments –

potentially violating federal law,” and PNC Bank, U.S. Bank, Truist, and Bank of

America “reimbursed customers for only 47% of the dollar amount of cases in which

customers reported unauthorized payments on Zelle[.]” 4 The Warren Report did not

include JPM in the last statistic.

7. The Warren Report stated that JPM failed to respond adequately to the

Senator’s July 7, 2022 letter request. National media outlets covered the report. On

October 26, 2022, Senator Warren asked the Consumer Financial Protection Bureau

(the “CFPB”) to take action on Zelle fraud and cited JPM’s failure to furnish the

Senate Committee with more information. The CFPB had separately released a

report on Zelle fraud in May 2022 (the “CFPB Report”). The CFPB Report referred

to “some financial institutions,” but did not mention JPM specifically. 5

4 Id. ¶ 80.

5 Id. ¶ 45.

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8. On November 9, 2022, Plaintiff sent JPM a demand to inspect books and

records pursuant to 8 Del. C. § 220 (the “Demand”). Plaintiff’s stated purpose was to

investigate possible breaches of fiduciary duty in connection with potential EFTA

violations. JPM did not respond initially due to an internal misrouting. Plaintiff

filed an enforcement action on December 6, 2022. JPM then produced certain

documents responsive to the Demand. In this litigation, Plaintiff alleges that JPM

did not respond to the Demand in full, but Plaintiff voluntarily dismissed its

enforcement action on May 12, 2023, after receiving JPM’s production. 6

9. Plaintiff filed this action on May 12, 2023, asserting a single count for

breach of fiduciary duty under Caremark 7 against the JPM Board of Directors (the

“Board”): Dimon, Stephen B. Burke, Linda B. Bammann, Todd A. Combs, James S.

Crown, Alicia B. Davis, Timothy P. Flynn, Alex Gorsky, Mellody Hobson, Michael A.

Neal, Phebe N. Novakovic, and Virginia M. Rometty (“Defendants”). 8 Defendants

moved to dismiss the Complaint on August 1, 2023, pursuant to Court of Chancery

Rules 23.1 and 12(b)(6). 9 The parties fully briefed the motion, and the court held oral

argument on January 31, 2024. 10

6 Id. ¶¶ 40, 99; C.A. No. 2022-1123-KSJM, Dkt. 12, Notice of Voluntary Dismissal.

7 In re Caremark Int’l Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).

8 Compl. ¶¶ 50–54.

9 Dkt. 13 (“Defs.’ Opening Br.”).

10 Dkt. 20 (“Pl.’s Answering Br.”); Dkt. 25 (“Defs.’ Reply Br.”).

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10. “A cardinal precept of [Delaware law] is that directors, rather than

shareholders, manage the business and affairs of the corporation.” 11 “In a derivative

suit, a stockholder seeks to displace the board’s authority over a litigation asset and

assert the corporation’s claim.” 12 Because derivative litigation impinges on the

managerial freedom of directors in this way, a stockholder only can pursue a cause of

action belonging to the corporation if (i) the stockholder demanded that the directors

pursue the corporate claim and they wrongfully refused to do so or (ii) demand is

excused because the directors are incapable of making an impartial decision

regarding the litigation.” 13 The demand requirement is a substantive principle under

Delaware law. 14

11 Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (citing 8 Del. C. § 141(a)), overruled

on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). In Brehm, 746 A.2d
at 253–54, the Delaware Supreme Court overruled seven precedents, including
Aronson, to the extent those precedents reviewed a Rule 23.1 decision by the Court of
Chancery under an abuse of discretion standard or otherwise suggested a deferential
appellate review. See id. at 253 & n.13 (overruling in part on this issue Scattered
Corp. v. Chi. Stock Exch., Inc., 701 A.2d 70, 72–73 (Del. 1997); Grimes v. Donald, 673
A.2d 1207, 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp., 611 A.2d 950, 952
(Del. 1992); Levine v. Smith, 591 A.2d 194, 207 (Del. 1991); Grobow v. Perot, 539 A.2d
180, 186 (Del. 1988); Pogostin v. Rice, 480 A.2d 619, 624–25 (Del. 1984); and Aronson,
473 A.2d at 814). The Brehm Court held that going forward, appellate review of a
Rule 23.1 determination would be de novo and plenary. 746 A.2d at 253–54. The
seven partially overruled precedents otherwise remain good law.
12 United Food & Com. Workers Union & Participating Food Indus. Empls. Tri-State

Pension Fund v. Zuckerberg, 250 A.3d 862, 876 (Del. Ch. 2020), aff’d, 262 A.3d 1034
(Del. 2021).
13 Id.

14 Id.; see Ct. Ch. R. 23.1(a).

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11. Rule 23.1 is the “procedural embodiment of this substantive principle.” 15

It provides that a stockholder plaintiff must “state with particularity: . . . any effort

by the derivative plaintiff to obtain the desired action from the entity; and . . . the

reasons for not obtaining the action or not making the effort.” 16 A stockholder

choosing to allege demand futility must meet the “heightened pleading

requirements,” 17 alleging “particularized factual statements that are essential to the

claim.” 18 A plaintiff is “entitled to all reasonable factual inferences that logically flow

from the particularized facts alleged, but conclusory allegations are not considered as

expressly pleaded facts or factual inferences.” 19

12. In Zuckerberg, the Delaware Supreme Court adopted the “universal

test” for demand futility that blends elements of the two precursor tests: Aronson 20

and Rales. 21 When conducting a demand futility analysis under Zuckerberg,

Delaware courts ask, on a director-by-director basis:

(i) whether the director received a material personal
benefit from the alleged misconduct that is the subject of
the litigation demand;

(ii) whether the director faces a substantial likelihood of
liability on any of the claims that would be the subject of
the litigation demand; and

15 Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993).

16 Ct. Ch. R. 23.1(a)(1).

17 Zuckerberg, 250 A.3d at 876.

18 Brehm, 746 A.2d at 254.

19 Id. at 255.

20 473 A.2d 805 (Del. 1984).

21 634 A.2d 927 (Del. 1993).

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(iii) whether the director lacks independence from someone
who received a material personal benefit from the alleged
misconduct that would be the subject of the litigation
demand or who would face a substantial likelihood of
liability on any of the claims that are the subject of the
litigation demand. 22

13. “If the answer to any of the questions is ‘yes’ for at least half of the

members of the demand board, then demand is excused as futile.” 23 While the

Zuckerberg test displaced the prior tests from Aronson and Rales, cases properly

applying Aronson and Rales remain good law. 24

14. When Plaintiff filed this action, Defendants comprised the entirety of

the Board. To adequately allege demand futility, Plaintiff must plead particularized

facts creating reason to doubt that at least six of the twelve Defendants were incapable

of impartially considering a demand.

15. To meet its burden, Plaintiff advances arguments under the second

Zuckerberg test, contending that all members of the demand board face a substantial

likelihood of liability from Plaintiff’s Caremark claim. 25 Where, as here, a plaintiff’s

basis for arguing demand futility centers on a substantial likelihood of liability

resulting from the derivative claims at issue, the demand analysis effectively folds

22 United Food & Com. Workers Union & Participating Food Indus. Empls. Tri-State

Pension Fund v. Zuckerberg, 262 A.3d 1034, 1059 (Del. 2021) (quoting Zuckerberg,
250 A.3d at 890); accord Ct. Ch. R. 23.1.
23 Zuckerberg, 262 A.3d at 1041 (“The Court of Chancery’s refined articulation of the

Aronson standard helps to address these issues. Nonetheless, this refined standard
is consistent with Aronson, Rales, and their progeny. Thus, cases properly applying
those holdings remain good law.”).
24 Id.

25 Compl. ¶¶ 113–14.

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into an analysis of the strength of the underlying claims. In this case, therefore, the

Zuckerberg analysis hinges on whether Plaintiff has adequately alleged its Caremark

claim.

16. A Caremark claim “seeks to hold directors accountable for the

consequences of a corporate trauma.” 26 To adequately allege such a claim, a plaintiff

must allege that the board had some level of involvement in the trauma. 27 Caremark

describes the test as requiring that the directors “knew or . . . should have known”

about the risk leading to the trauma. 28 Stone clarified that liability under Caremark

requires a showing of bad faith—“that the directors knew that they were not

discharging their fiduciary obligations.” 29 At the pleading stage, the plaintiff must

allege facts from which the court can reasonably infer that a fiduciary acted in bad

faith. 30

17. Stone identified two subspecies of Caremark claims. To state a

Caremark claim, a plaintiff must allege particularized facts that establish either

(1) “the directors utterly failed to implement any reporting or information system or

26 La. Mun. Police Empls.’ Ret. Sys. v. Pyott, 46 A.3d 313, 340 (Del. Ch. 2012), rev’d

on other grounds, 74 A.3d 612 (Del. 2013); see also Horman v. Abney, 2017 WL
242571, at *5 (Del. Ch. Jan. 19, 2017) (“Caremark claims inevitably arise in the midst
of or directly following ‘corporate trauma’ of some sort or another.”).
27 Pyott, 46 A.3d at 340.

28 Caremark, 698 A.2d at 971.

29 Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006); see also Pyott, 46 A.3d at 340–41

(discussing the “actual knowledge” requirement of Caremark as clarified by Stone).
30 Marchand v. Barnhill, 212 A.3d 805, 820–21 (Del. 2019) (quoting Desimone v.

Barrows, 924 A.2d 908, 935 (Del. Ch. 2007)).

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controls, or [(2)] having implemented such a system or controls, consciously failed to

monitor or oversee its operations thus disabling themselves from being informed of

risks or problems requiring their attention.” 31 These two subspecies are colloquially

referred to as information-systems claims and red-flags claims. 32

18. Plaintiff asserts a red-flags claim, alleging that the Board ignored red

flags concerning JPM’s failure to comply with the EFTA and Regulation E.

19. A plaintiff can plead a “red flags” Caremark claim by alleging

“particularized facts that the board knew of red flags but consciously disregarded them

in bad faith.” 33 The intuitive notion underlying the red-flags theory is that

“sophisticated and well-advised individuals like corporate directors do not customarily

concede violations of positive law,” and so a plaintiff must plead facts and

circumstances sufficient for a court to infer this conduct. 34 “[A] Caremark plaintiff can

plead that ‘the directors were conscious of the fact that they were not doing their jobs,’

and that they ignored ‘red flags’ indicating misconduct in defiance of their duties.” 35

31 Stone, 911 A.2d at 370 (emphasis in original).

32 See In re McDonald’s Corp. S’holder Deriv. Litig., 289 A.3d 343, 363–64 (Del. Ch.

2023) (labeling first species of claims as “information-system” claims and second
species as “red-flag” claims).
33 City of Detroit Police & Fire Ret. Sys. on Behalf of NiSource, Inc. v. Hamrock, 2022

WL 2387653, at *20 (Del. Ch. June 30, 2022) (quoting Teamsters Local 443 Health
Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *17 (Del. Ch. Aug. 24, 2020)).
34 Id. (quoting South v. Baker, 62 A.3d 1, 14–15 (Del. Ch. 2012)); see also In re Gen.

Motors, Deriv. Litig., 2015 WL 3958724, at *16 (Del. Ch. June 26, 2015) (observing
that red flags “are a proxy for pleading knowledge”).
35 Id. (quoting David B. Shaev Profit Sharing Acct. v. Armstrong, 2006 WL 391931,

at *5 (Del. Ch. Feb. 13, 2006)).

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A plaintiff must allege that a board “had notice of serious misconduct and simply failed

to investigate . . . even if the committee or board was well constituted and was

otherwise functioning.” 36

20. Plaintiff alleges that JPM violated and continues to violate the EFTA

and Regulation E by failing to resolve unauthorized electronic transfer claims and

provisionally credit consumer accounts within 10 business days; 37 by failing to resolve

unauthorized electronic transfer claims within 45 days; 38 and by failing to reimburse

victims of unauthorized electronic fund transfers after more than 45 days. 39 Plaintiff’s

red-flags theory is that the Board knew of these violations from the media and the

Warren and CFPB Reports, and that the Board failed to respond, thus constituting

bad faith.

21. Plaintiff’s theory is not supported by the allegations in the Complaint.

The Complaint relies on and repeats statements from the four media reports. The

anecdotes in the articles do not describe any failures by JPM to investigate or

reimburse customers properly. Quite the opposite—the media reports reflect that

JPM investigated and acted on the claims. 40 It is hard to tell whether the transfers

36 Id.

37 Compl. ¶ 36 (alleging a violation of 15 U.S.C. § 1693f(a)).

38 Id. ¶ 37 (alleging a violation of 15 U.S.C. § 1693f(c)).

39 Id. ¶ 38 (alleging a violation of 15 U.S.C. § 1693f(c)).

40 See Defs.’ Opening Br., Exs. F–H (full versions of the articles cited by Plaintiff).

The articles are incorporated into the complaint. See Morrison v. Berry, 191 A.3d 268,
275, n. 20 (Del. 2018) (“[w]hen a plaintiff expressly refers to and heavily relies upon
documents in her complaint, these documents are considered to be incorporated by
reference into the complaint; this is true even where the documents are not expressly

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discussed in the media reports were “unauthorized” for purposes of the EFTA and

Regulation E. And the media reports do not describe any delay that would constitute

non-compliance with the time frames established by the EFTA or Regulation E.

22. The Warren and CFPB Reports similarly fail to demonstrate that JPM

violated federal regulations. The general allegations of these Reports are directed to

the banking industry at large. Aspects of the Reports specific to certain banks

omitted information pertaining to JPM. It is hard to build a case of bad faith against

the JPM Board based on these documents. Were the court to so infer, then by logical

extension, Plaintiff’s theory would support a viable Caremark claim against any bank

implicated by the general allegations made in the Reports. That is not tenable.

23. To avoid this outcome, Plaintiff points to the fact that JPM did not

produce information requested by the Senate Committee. Plaintiff seeks and adverse

inference from this conduct, arguing that “[o]ne can easily infer that JPM refused to

provide the documents that Dimon had promised . . . because those documents would

have demonstrated that JPM was failing to reimburse its customers for unauthorized

electronic transactions in compliance with the Act[.]” 41 Although at the dismissal

stage all inferences are taken in favor of Plaintiff, this is a stretch too far. JPM’s

incorporated into or attached to the complaint.” (internal citations omitted)). The
articles show that JPM reimbursed customers, investigated claims as per their
policies, and declined to reimburse a customer where the investigation found no
evidence of fraud. Far from showing an absence of compliance under the EFTA, these
articles raise an inference that JPM has working EFTA policies and practices. The
court cannot reasonably infer that JPM was violating federal law on a widespread,
systematic basis where the documents on which Plaintiff relies show that JPM was
compliant.
41 Compl. ¶ 78.

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September 22, 2022 letter provided detailed information on JPM’s practices and its

policies. 42

24. Plaintiff further argues that the court should infer that JPM violated

federal law, and that Defendants knew about it and consciously failed to act in bad

faith, because “the documents [JPM] produced in response to [the Section 220 demand]

contain no reference whatsoever” to the Regulation E deadlines. 43 But the documents

produced in response to the Demand show that, on October 17, 2022, the Board

discussed efforts to address fraud on Zelle and reimbursements. 44 And the policies

and procedures themselves show that JPM had processes for dealing with

unauthorized transfers. 45

25. Moreover, Plaintiff had an opportunity to press for greater scope of

inspection but failed to do so. Plaintiff tries to spin this in its favor, arguing that JPM

must have engaged in widespread misconduct because it failed to produce documents

that Plaintiff requested in the Demand. Alternatively, Plaintiff argues that the bank

must not have had access to documents necessary to assess its compliance, and so it

“has not attempted to monitor its compliance with [] statutory deadlines, and . . . has

hit the snooze button on this wake-up call to begin monitoring its compliance with the

42 Defs.’ Opening Br., Ex. J.

43 Pl.’s Answering Br. at 13.

44 Defs.’ Opening Br., Ex. O.

45 Defs.’ Opening Br., Exs. L–N. That the Regulation E procedures do not specifically
refer to the time limits is not enough for the court to infer a red flag. Compl. ¶¶ 111,
115.

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deadlines in [EFTA] and Regulation E.” 46 JPM, however, took the reasonable position

that certain of the documents requested were outside the scope of the Section 220

inspection, and so did not provide what Plaintiff asked for. 47 The court did not have a

chance to resolve that issue at the Section 220 phase because Plaintiff voluntarily

dismissed its action. In essence, Plaintiff is asking the court to grant an adverse

inference against Defendants because they did not produce documents that Plaintiff

decided not to pursue. That does not work.

26. Thus, neither the allegations nor any inferences therefrom constitute

red flags sufficient to support a Caremark claim.

27. For these reasons, Plaintiff has failed to show a substantial likelihood of

liability under Caremark for any of the defendants. Consequently, demand was not

futile, and the case is dismissed under Rule 23.1.

28. In its answering brief, Plaintiff requested leave to replead should the

court dismiss this action. 48 Because Plaintiff filed an answering brief, dismissal of the

complaint is “with prejudice . . . unless the Court, for good cause shown, shall find that

dismissal with prejudice would not be just under all the circumstances.” 49 Plaintiff

has not shown any good cause, and so the action is dismissed with prejudice. 50

46 Pl.’s Answering Br. at 15.

47 Compl. ¶ 41.

48 Pl.’s Answering Br. at 29–33.

49 Ct. Ch. R. 15(aaa).

50 Plaintiff’s argument is that Defendants might ignore red flags in the future. That
is not good cause.

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29. Plaintiff also moved for leave to file a supplemental brief based on JPM’s

February 16, 2024 annual report. 51 The request is based on one paragraph in the

annual report that makes note of JPM responding to government inquiries regarding

some Zelle transfers. This admission does not change the court’s analysis. Plaintiff’s

motion for leave to file a supplemental brief is denied. The defendants’ motion to

dismiss is granted.

/s/ Kathaleen St. J. McCormick
Chancellor Kathaleen St. J. McCormick
Dated: April 16, 2024

51 Dkt. 33.

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