Reiter v. Fairbank, No. CV 11693-CB (Del. Ch. Oct. 18, 2016)

In this derivative action, the Court of Chancery dismissed plaintiff’s claims that the directors of Capital One Financial Corporation (“Capital One”) failed to provide adequate oversight over Capital One’s compliance with the Bank Secrecy Act and other anti-money laundering laws (“BSA/AML”). The Court ruled that plaintiff failed to show a demand on the board would be futile.  Specifically, it found that the complaint lacked specific facts from which the Court could reasonably be inferred that the director defendants acted in bad faith.

Plaintiff was a purported stockholder of Capital One. The complaint alleged that the directors consciously failed to act amidst red flags and “evidence of illegality” that suggested weaknesses in Capital One’s BSA/AML compliance program regarding its check cashing business, thus exposing Capital One to liability for money laundering.  Plaintiff asserted an oversight claim for breach of fiduciary duty of loyalty (Count I), and a claim for unjust enrichment (Count II) against the Capital One board.  Plaintiff contended that demand on the board would have been futile because all ten members of the board faced a “substantial likelihood” of personal liability for the underlying derivative claims.

The director defendants moved to dismiss under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted, and under Rule 23.1 for failure to make a demand on the board prior to filing the action.

The Court did not reach defendant’s arguments to dismiss plaintiff’s claims under Rule 12(b)(6) because it held demand was not excused under Rule 23.1. At the outset of its analysis, the Court noted that because plaintiff “extensively” cited and quoted from documents outside of the complaint, the Court may apply the incorporation-by-reference doctrine and rely on the same documents for purposes of its analysis.

The Court then turned its analysis to Count I where plaintiff alleged the directors breached their fiduciary duties of loyalty because they consciously failed to act. It found Count I to be the “quintessential Caremark oversight claim,” and held that demand was not excused under the demand futility test established in Rales v. Blasband, 634 A.2d 927 (Del. 1993) because plaintiff failed to plead particularized facts from which it reasonably may be inferred that the director defendants acted in bad faith—“the core inquiry in a Caremark oversight claim.”

Specifically, the Court found that none of the reports plaintiff relied on as best evidence of red flags showed Capital One or any of its employees violated the BSA/AML. To the contrary, the reports “explained to the directors in considerable detail on a regular basis the initiatives management was taking to address those problems and to ameliorate the AML compliance risk.”  In short, the Court could not reasonably infer a majority of the directors acted in bad faith and thus demand was not excused as to Count I.  Because demand was not excused as to Count I, it followed that demand as to Count II (claiming unjust enrichment against defendants for director remuneration) similarly would not have been futile.

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