United States District Court, E.D. California
IN RE JPMORGAN CHASE DERIVATIVE LITIGATION This Document Relates to All Actions.
have brought a derivative suit against a corporation's
directors for their allegedly deceitful and
financially-destructive role in the 2008 housing collapse.
Defendants are current and former JPMorgan Chase & Co.
(“JPMorgan”) directors. Plaintiffs are
California-based shareholders. Plaintiffs argue defendants
breached their fiduciary duties, committed securities
violations, and unjustly enriched themselves through
defendants' creation and sale of subprime residential
mortgage-backed securities (“RMBS”). The court
granted defendants' first motion to dismiss. Order Oct.
23, 2014, ECF No. 69 (“Prior Order”). Defendants
have moved to dismiss plaintiffs' amended complaint, or
alternatively, to transfer the case to New York. Id.
Mot., ECF No. 123.
court heard the motion on December 15, 2016. Alexandra
Summer, Francis Bottini, Jr., Mark Molumphy and Kelsey
Fischer appeared for plaintiffs. Mins., ECF No. 139. Stuart
Baskin, Alethea Sargent and Emily Griffen appeared for
defendants Bell, Bowles, Burke, Crown, Flynn, Futter,
Jackson, Novak, Raymond and Weldon. Id. Gary Kubek
and Christopher Banks appeared for nominal defendant JPMorgan
and defendants Dimon, Harrison and Lipp. Id. As
explained below, the court GRANTS defendants' motion to
dismiss in part and TRANSFERS the remaining claims to the
Southern District of New York.
complain that defendants fraudulently and carelessly
mishandled JPMorgan's residential mortgage-backed
securities business. First Am. Compl. ¶¶ 1, 2, ECF
No. 122 (“FAC”). Understanding plaintiffs'
claims in full at this point requires a brief review of the
mortgage industry in which JPMorgan operates.
Residential Mortgage-Backed Securities and the 2008
mortgage-backed securities or RMBS are bonds backed by
payments homeowners make on their mortgage loans. See
Id. ¶ 10. JPMorgan uses a process known as
“securitization” to bundle hundreds of mortgage
loans into RMBS, which they then market and sell to
investors. Id. JPMorgan groups or tiers their RMBS
based on a risk rating. Risky or subprime RMBS form the
lower, cheaper tiers, while safer RMBS form the more
expensive tiers. Id. ¶¶ 44-45. RMBS are
considered subprime or risky when they are backed by
mortgagers with impaired credit records, while safer RMBS are
backed by more reliable mortgagers. Id. Investors
choose a tier in which to invest and then their profits
mirror the payments mortgagers make. The values of the RMBS
fluctuate depending on whether homeowners pay down their
mortgage principal early, refinance their mortgages or
the housing market collapsed in 2008, RMBS investors
experienced significant fluctuation in returns on investment
because foreclosures increased and home prices and interest
rates plummeted. Id. ¶ 10. The downturn exposed
flaws in JPMorgan's RMBS protocol and enflamed investors
who felt defrauded and misled. Plaintiffs here contend the
named directors played a key role in JPMorgan's
misconduct in issuing RMBS. Id. ¶¶ 3, 9,
188, 291, 315, 388-89.
Criminal Investigation into JPMorgan's RMBS
fraud allegations prompted the United States Department of
Justice (“DOJ”) and various federal and state
agencies to investigate whether JPMorgan's RMBS practices
violated criminal laws. Id. ¶ 17. On November
15, 2013, JPMorgan announced a $4.5 billion settlement with
21 major institutional investors, and four days later
announced a $13 billion settlement with the Department of
Justice and other government agencies. Id. ¶ 5.
Approximately $300 million of the settlement funds were
allocated to investors from California. Id.. This
settlement hinged on JPMorgan's RMBS conduct between 2005
and 2007: JPMorgan admitted it falsely marketed and sold
compromised RMBS to investors without warning them the RMBS
did not meet the corporation's internal securitization
standards. Id. ¶¶ 6, 238, 300, 331. The
settlement did not resolve an ongoing criminal investigation
against JPMorgan originating in this district, the Eastern
District of California. FAC ¶¶ 5, 49, 189, 366.
Shareholder Derivative Suits
case, three JPMorgan shareholders sue JPMorgan's
directors for their alleged involvement in RMBS activity from
2005 to 2007, focusing particularly on this activity's
impact in California. Id. at 65-88. This suit is one
of many derivative suits attacking JPMorgan's mishandling
of RMBS during the financial crisis, which point to the
resulting billion dollar settlements as proof of damages.
Courts uniformly have dismissed these derivative suits at the
outset, at least in part, for not meeting Federal Rule of
Civil Procedure 23.1(b)'s pleading
23.1(b)(3) requires that shareholders bringing derivative
suits specifically plead what efforts they undertook to have
a corporation's board of directors file the suit on the
corporation's behalf; in other words, did shareholders
make a pre-suit demand on the board that was rejected?
Alternatively, the Rule requires that shareholders plead the
specific reasons they have not asked the board to bring their
claims; to show why a demand on the board would have been
futile. Fed.R.Civ.P. 23.1(b)(3)(A), (B) (providing that the
complaint must “(3) state with particularity-(A) any
effort by the plaintiff to obtain the desired action from the
directors or comparable authority and, if necessary, from the
shareholders or members; and (B) the reasons for not
obtaining the action or not making the effort.”);
Potter v. Hughes, 546 F.3d 1051, 1062 (9th Cir.
2008). A derivative suit cannot proceed without showing
either demand refusal or excusal. Fed.R.Civ.P. 23.1(b)(3).
separate derivative suit brought in the Southern District of
New York, and dismissed there, is particularly relevant here.
See Steinberg v. Dimon, 2014 WL 3512848 (S.D.N.Y.
July 16, 2014). Defendants argue Steinberg's
judgment precludes plaintiffs from re-litigating similar
claims and issues here. Mot. at 4-8. In Steinberg, a
shareholder derivatively sued fifteen JPMorgan directors in
New York for breaching their fiduciary duties, wasting
corporate assets, unjustly enriching themselves, and
violating section 14(a) of the Securities Exchange Act of
1934, 15 U.S.C. § 78n(a) (“Securities Act”).
See Baskin Decl., Ex. D (Steinberg Compl.), ECF No.
124-4. The New York district court dismissed the complaint
for insufficiently pleading demand futility under Rule 23.1.
Steinberg, 2014 WL 3512848 at *5.
contend defendants exposed JPMorgan to financial risk and
ruin through the corporation's subprime mortgage business
by destabilizing internal standards and controls,
fraudulently marketing RMBS, and concealing material
information from investors. FAC ¶ 10.
Plaintiffs bring three California state claims and one
federal claim. They made no pre-suit demand on JPMorgan's
board and allege doing so would have been futile.
Id. ¶ 296 (“making a demand would be a
futile and useless act as the majority of JPMorgan's
directors are not able to conduct an independent and
objective investigation of the alleged wrongdoing”).
state law claims allege: (1) Defendants breached their
fiduciary duties by putting their own pecuniary interests
above the company's; (2) defendants wasted corporate
assets by compensating executives and directors for illegal
conduct; and (3) defendants unjustly enriched themselves.
Id. ¶¶ 357, 370, 373. Plaintiffs'
fourth federal claim alleges certain named defendants
violated section 14(a) of the Securities Act by issuing false
and misleading 2011 and 2012 proxy statements that lured
shareholders into blindly reinstating leadership incumbents
and approving risky proposals. Id. ¶¶
377-95. Plaintiffs name defendants Bowles, Burke, Cote,
Crown, Dimon, Futter, Jackson, Raymond and Weldon in
connection with both proxy statements, defendants Gray and
Novak regarding only the 2011 proxy statement, and defendant
Bell regarding only the 2012 proxy statement. Id.
Prior Dismissal and Amended Complaint
court dismissed plaintiffs' prior complaint in 2014, with
leave to amend. See Prior Order; First Consolidated
Compl., ECF No. 29; Defs.' First Mot. Dismiss, ECF No.
48. The court found defendants lacked sufficient ties to
California to sustain personal jurisdiction as to
plaintiffs' state claims and that plaintiffs' federal
claim failed under Rule 12(b)(6). Prior Order at 24. After
two years of jurisdictional discovery, plaintiffs filed the
operative first amended complaint. See Order
Granting Discovery, ECF No. 92; FAC (filed April 28,
2016). Although the amended complaint raises the
same four claims as stated in the original complaint, it
offers more detail about JPMorgan's California-specific
RMBS business, FAC at 65-88, bolsters plaintiffs'
theories and explanation as to why JPMorgan's proxy
statements were misleading, and changes the relief sought
under its federal claim, compare Compl. ¶¶
304-08, with FAC ¶¶ 377- 95. Defendants
now revive their initial jurisdictional arguments in seeking
to dismiss the amended complaint. Plaintiffs oppose,
Opp'n, ECF No. 132, and defendants reply, ECF No. 133.
ORDER OF ANALYSIS
raise multiple jurisdictional inquiries and so the court must
first consider the proper order of analysis. Potter,
546 F.3d at 1055; see also Ruhrgas AG v. Marathon Oil
Co., 526 U.S. 574, 584 (1999) (explaining although
“subject-matter jurisdiction necessarily precedes a
ruling on the merits, the same principle does not dictate a
sequencing of jurisdictional issues”) (citation
omitted). A federal court must independently ensure it has
subject matter jurisdiction over every claim and personal
jurisdiction over every party. The parties do not dispute the
court's subject matter jurisdiction here: The federal
claim presents a federal question and the state law claims
satisfy diversity jurisdiction. FAC ¶ 18.
parties do dispute the court's personal jurisdiction over
defendants with respect to the state law claims. Mot. at
14-19; Opp'n at 22-24. Because JPMorgan is neither
incorporated in California nor principally located here, FAC
¶ 23, defendants argue plaintiffs have not shown each
defendant has sufficient contacts with California to trigger
this court's personal jurisdiction over them.
California's personal jurisdiction standard requires that
each defendant have at least some minimum contacts with
California to warrant haling them into court here.
Schwarzenegger v. Fred Martin Motor Co., 374 F.3d
797, 800 (9th Cir. 2004) (citing Fed.R.Civ.P. 4(k)(1)(A)).
Defendants' argument based on absence of contacts is
warranted as to the state claims, as discussed below.
federal claim, however, derives from the federal Securities
Act, which confers “personal jurisdiction over the
defendant in any federal court” provided “[the]
defendant has minimum contacts with the United States . . .
.” Sec. Investor Prot. Corp. v. Vigman, 764
F.2d 1309, 1316 (9th Cir. 1985) (citing 15 U.S.C. §
78(a)(a)); Touche Ross & Co. v. Redington, 442
U.S. 560, 577 (1979). JPMorgan is a Delaware corporation with
its principal place of business in New York, and the
individual defendants are citizens of the United States, FAC
¶¶ 23, 27-40; Vigman, 764 F.2d at 1316.
Personal jurisdiction adheres as to the federal claim.
plaintiffs' federal claim withstands dismissal, and if
plaintiffs' state claims factually relate to their
federal claim, the court has discretion to exercise pendent
personal jurisdiction over the defendants as to all claims in
this suit without separately analyzing defendants'
relationships with California. See Action Embroidery
Corp. v. Atl. Embroidery, Inc., 368 F.3d 1174, 1181 (9th
PENDENT PERSONAL JURISDICTION
plaintiffs' state claims “arise out of the same
nucleus of operative facts” as the federal claim that
granted the court personal jurisdiction, the court may
exercise personal jurisdiction over defendants with respect
to the entire case. This discretionary pendent personal
jurisdiction doctrine derives from “considerations of
judicial economy, convenience and fairness to
litigants.” Id. (internal citation and
quotation marks omitted). Claims are sufficiently factually
related to trigger the doctrine when a plaintiff
“‘would ordinarily be expected to try them all in
one judicial proceeding.'” Rep. of the Phil. v.
Marcos, 862 F.2d 1355, 1359 (9th Cir. 1988) (quoting
United Mine Workers v. Gibbs, 383 U.S. 715, 725
(1966)). That claims advance different theories of liability
does not diminish their factual relatedness. See,
e.g., CollegeSource, Inc. v. AcademyOne,
Inc., 653 F.3d 1066, 1070-73 (9th Cir. 2011) (finding
pendent personal jurisdiction where federal and state claims
all based on corporation's misappropriating college
the court previously found plaintiffs' state and federal
claims sufficiently factually related to trigger pendent
personal jurisdiction. See Prior Order at 23.
Plaintiffs' amended complaint maintains the same factual
basis for their claims and defendants raise no new arguments
to challenge their factual relatedness. Compare
Compl. ¶¶ 191-212, with FAC ¶¶
263-84. Plaintiffs' state law claims are rooted in
allegations that defendants dragged JPMorgan into the risky
RMBS business, manufactured a culture of security law
violations, poorly managed JPMorgan's employees, and
ultimately forced JPMorgan into a position of having to agree
to multi-billion-dollar settlements. See FAC
¶¶ 356-76. Plaintiffs' federal claim is based
in allegations that JPMorgan's proxy statements
mischaracterized its leadership's risk management and
internal controls. Id. ¶¶ 377-95.
Plaintiffs say, in essence, the proxy statements were
misleading because they did not disclose the wrongs
plaintiffs allege in their state law claims. Id.
Plaintiffs' state and federal claims derive from the same
basic factual allegations.
the interest of judicial economy warrants exercising pendent
personal jurisdiction over defendants as to plaintiffs'
state law claims, jurisdiction fundamentally is not
established. If plaintiffs' federal claim cannot proceed,
any pendent personal jurisdictional hook vanishes.
noted, defendants move to dismiss plaintiff's federal
claim, arguing that a New York district court's dismissal
of a related shareholder derivative suit precludes the claim
here as a matter of law. Mot. at 13 (citing
Steinberg, 2014 WL 3512848, at *5).
doctrines of claim preclusion and issue preclusion define
whether a prior judgment has a preclusive effect. Under claim
preclusion, “[a] final judgment on the merits of an
action precludes the parties or their privies from
relitigating issues that were or could have been raised in
that action.” Federated Dep't Stores, Inc. v.
Moitie, 452 U.S. 394, 398 (1981) (internal citation
omitted). Conversely, issue preclusion bars “successive
litigation of an issue of fact or law actually litigated and
resolved in a valid court determination essential to the
prior judgment, ” even if the issue recurs by way of a
different claim. New Hampshire v. Maine, 532 U.S.
742, 748-49 (2001). By “preclud[ing] parties from
contesting matters that they have had a full and fair
opportunity to litigate, ” these two doctrines protect
against “the expense and vexation attending multiple
lawsuits, conserve judicial resources, and foster
reliance on judicial action by minimizing the possibility of
inconsistent decisions.” Montana v. United
States, 440 U.S. 147, 153-54 (1979).
Steinberg court dismissed the derivative suit before
it, finding the plaintiff there inadequately pled demand
futility. Before assessing whether claim or issue preclusion
applies, this court thus examines the demand futility
requirements in shareholder derivative suits as relevant
Proving Demand Futility Under Delaware Law
Federal Rule of Civil Procedure 23.1(b), a plaintiff may
bring a shareholder derivative suit only if she
“allege[s] with particularity the efforts, if any, made
by the plaintiff to obtain the action the plaintiff desires
from the directors.” Potter, 546 F.3d at 1056.
Failure to so allege is excusable only if demand would have
been futile. Fed.R.Civ.P. 23.1.
assess whether demand is futile, the court applies the law of
the state in which the corporation is incorporated. See
Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 109 n.10
(1991). JPMorgan is incorporated in Delaware. FAC ¶ 23.
Delaware law provides two different demand futility
inquiries, depending on if the suit challenges board conduct
and judgment in general, as compared to an affirmative board
decision See Wood v. Baum, 953 A.2d 136, 140 (Del.
2008). If a derivative suit challenges a decision
the corporate board made, the court evaluates demand futility
under the two-pronged Aronson test. See Aronson
v. Lewis, 473 A.2d 805, 815 (Del. 1984), overruled
on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.
2000). Under this test, the court first evaluates the
directors' independence and disinterestedness and then
focuses on the substance of the challenged transaction and
the directors' approval of it. See Id. at 814.
derivative claim does not challenge a particular decision the
board made as a whole, Rales governs. See
Rattner v. Bidzos, 2003 WL 22284323, at *8 (Del. Ch.
2003) (citing Rales v. Blasband, 634 A.2d 927, 934
(Del. 1993)). Under Rales, a court must determine
whether the plaintiffs' particularized factual
allegations raise a reasonable doubt, at the time the
plaintiffs filed suit, about the board's ability to
properly exercise its independent and disinterested business
judgment in responding to a demand. Id. (citing
Rales, 634 A.2d at 934). If the derivative
plaintiffs satisfy this burden, demand is excused as futile.
Id. So, under Delaware law, when shareholders allege
board misconduct but do not identify a specific board
decision, the court considers the claim's merit to assess
whether it raises a reasonable doubt that a majority of the
board of directors were “incapable of making an
impartial decision regarding the pursuit of the
litigation.” Wood, 953 A.2d at 140. One way to
raise reasonable doubt is to show a majority of the board
faced a “substantial likelihood” of personal
liability from the legal action that has been brought.
Rales, 634 A.2d at 936 (citation omitted). In making
this assessment, courts focus on strength of the underlying
claim's merits: The higher the chance of success on the
claim the more likely demand as to that claim is futile.
determine if the Steinberg court's Rule 23.1(b)
dismissal precludes plaintiffs from litigating a claim or
issue in this court, the court must decide initially whether
federal or state preclusion rules govern.
Choice of Law for Preclusion Analysis
which preclusion law governs depends on the nature of the
potentially precluding judgment. If a federal court sitting
in diversity jurisdiction issued the arguably precluding
opinion, then the preclusion rules of the state in which that
court sits would apply. Taylor v. Sturgell, 553 U.S.
880, 891 (2008) (citing Semtek Int'l Inc. v. Lockheed
Martin Corp., 531 U.S. 497, 507-08 (2001)). But if the
prior case rested on a federal question, then federal courts
apply the “federal rule[s]” of res judicata,
which the United States Supreme Court has ultimate authority
to declare. Semtek, 531 U.S. at 508; Heiser v.
Woodruff, 327 U.S. 726, 733 (1946) (“It has been
held in non-diversity cases since Erie R. Co. v.
Tompkins, that the federal courts will apply their own
rule of res judicata.”); First Pacific Bancorp,
Inc. v. Helfer, 224 F.3d 1117, 1128 (9th Cir. 2000)
(“When considering the preclusive effect of a federal
court judgment, we apply the federal [preclusion]
law.”) (citation omitted).
federal common law determines Steinberg's
preclusive effect because Steinberg addressed a
federal question. That Steinberg also involved state
law claims does not change this court's conclusion
because the Steinberg court considered those claims
on the basis of supplemental jurisdiction only. Steinberg
Compl. ¶ 9.
Federal Issue Preclusion
preclusion or collateral estoppel prevents parties from
relitigating the same issues actually adjudicated in an
earlier judgment. This narrow doctrine applies only
“[w]hen an issue of fact or law is actually litigated
and determined by a valid and final judgment, and the
determination is essential to the judgment.” B
& B Hardware, Inc. v. Hargis Indus., Inc., 135 S.Ct.
1293, 1303 (2015) (citation and quotations marks omitted).
contend that because the members of the board of directors
sued here are the same board members upon whom Steinberg
attempted to show demand was futile, the Steinberg
court's Rule 23.1(b) dismissal bars plaintiffs from
re-litigating demand futility as to their federal claim.
Because plaintiffs must prove demand futility before
proceeding on their federal claim, concluding that issue
preclusion applies would defeat their claim. The parties
dispute only whether the demand futility question in
Steinberg was “identical” to the demand
futility question raised here.
Federal Common Law on Identicality of ...