Defendants J. P. Morgan Chase & Co. (JP Morgan) and JP Morgan's board of directors^[FN1] (The Board) (together with JP Morgan, JP Morgan defendants) move to dismiss the complaint pursuant to CPLR 3211 (a) (7) and Delaware Chancery Court Rule 23.1 based on plaintiff's failure to make a pre-litigation demand on the Board of JP Morgan.

Plaintiff seeks to hold the JP Morgan defendants liable for granting JP Morgan's Asset and Loan Securitization Committee (A & LS Committee) unlimited authority to securitize and sell off JP Morgan's bad loans, knowing that the subprime assets involved were toxic. Plaintiff also seeks to hold the JP Morgan defendants liable for authorizing JP Morgan's acquisition of Bear Stearns and Washington Mutual, and assuming all of their RMBS, thereby exposing JP Morgan to greater risk.

JP Morgan is incorporated in Delaware and is authorized to conduct business in the state of New York, with its principle place of business in New York City. JP Morgan is a bank-holding company that owns and controls a number of corporations engaged in banking and securities transactions.

JP Morgan is heavily involved in the origination, securitization, and sale of securitized mortgages to public investors.

Plaintiff's complaint alleges that, by granting the A & LS Committee the power to securitize and sell off JP Morgan's riskiest subprime assets, the Board violated its fiduciary duty of loyalty to the shareholders. Plaintiff asserts that in September 2006, the Board of JP Morgan met and expressed concern about poor financial results, costs related to mortgage servicing rights, and subprime mortgage products. Plaintiff alleges that JP Morgan was seeking to create the perception that it was more conservative than its industry peers with regard to the credit underwriting of subprime mortgages.

According to Plaintiff, in an effort to shift the risk off of JP Morgan's balance sheet, the Board moved the subprime mortgage loans into RMBS to be sold off to investors. The defendant directors authorized this conduct on January 16, 2007 when they issued a resolution giving JP Morgan's A & LS Committee broad authority to take action regarding securitizing receivables. The resolution further stated that the authorized powers "may be taken by any one member [of the A & LS Committee] thereof acting individually..." A & LS Committee Resolution Exh. 1 at 5458.Furthermore, Plaintiff asserts that the resolution instructed the A & LS Committee members that they need not consult with the Board in regard to any of their actions pertaining to the RMBS. Plaintiff asserts that the JP Morgan defendants' actions raise a reasonable doubt as to whether they have exercised independent business judgment, and on this basis believe that a demand on the Board is excused as futile. Furthermore, Plaintiff alleges that JP Morgan has suffered and will continuously suffer losses arising from third party claims for breach of contract and fraud in connection with both the RMBS issued by JP Morgan and Washington Mutual and Bear Stearns, that JP Morgan acquired.

Collateral estoppel does not apply in the present case because, although similar, the facts at issue here are not identical to the factual allegations in the prior two attempts by JP Morgan shareholders to bring a derivative action against the Board arising out of RMBS premised on pre-suit demand futility.

Collateral estoppel is a narrow doctrine, requiring "that an issue in the present proceeding be identical to that necessarily decided in a prior proceeding" (Soldiers', Sailors', Marines' and Airmen's Club, Inc. v Carlton Regency Corp., 30 Misc 3d 352, 356 (Sup Ct, NY County 2010)).

Collateral estoppel applies to prevent repetitive, overlapping derivative lawsuits that attempt to get around the demand requirement (See e.g. Carroll v McKinnel, 19 Misc 3d 1106[A] [Sup Ct, NY County 2008]). Defendants assert that this is the third attempt by shareholders of JP Morgan to plead that a pre-suit demand is futile, and point out that similar allegations have been rejected in both Siegel (103 AD3d 598)and City of Roseville Employees' Retirement System v James Dimon, et al. (Index No. 650294/2012, (Sup Ct NY County, 2012)).

However, the JP Morgan defendants acknowledge in their brief that Plaintiff here is asserting "slightly differing factual allegations from the earlier dismissed complaints" (Defs' Br. At 6). In Siegel (103 AD3d 598), the shareholders challenged the Board's actions with regard to RMBS, but made no factual allegations that the Board granted unfettered authority to the A & LS Committee.

Meanwhile, City of Roseville (650294/2012) dealt purely with the issue of mortgage foreclosure robo-signing, which is not at issue here. The factual allegations are not identical to the prior shareholder derivative actions and thus, collateral estoppel is inapplicable to bar this action.

As a threshold matter, the Court determines that Delaware law governs Plaintiff's claims. Under the internal affairs doctrine, corporations are governed by the law of the state in which they are incorporated (Hart v General Motors Corp., 129 AD2d 179, 183-184 [1st Dept], app denied 70 NY2d 608 [1987]).

JP Morgan is incorporated in the State of Delaware. Accordingly, Delaware law governs Plaintiff's claims for breaches of fiduciary duty, abuse of control, gross mismanagement, corporate waste, and unjust enrichment.

Under Delaware Chancery Court Rule 23.1, in a derivative action brought by one or more shareholders, the complaint must allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors, and the reasons for the plaintiff's failure to obtain the action or for not making the effort.

The requirement of pre-suit demand recognizes the business and affairs of the corporation (Kaplan v Peat, Marwick, Mitchell & Co., 540 A2d 726, 731 [Del 1988]), and assures that the shareholder affords the corporation the opportunity to address an alleged wrong [*4]without litigation (Aronson v Lewis, 473 A2d 805, 807, 814, 819 [Del 1984], overruled on other grounds by Brehm v Eisner, 746 A2d 244, 253 [Del 2000]). Stockholders' rights to prosecute a derivative suit on their own are thus limited to situations where the stockholder: (I) has demanded that the directors pursue the corporate claim and they have wrongfully refused to do so, or (ii) where demand is excused because the directors are incapable of making an impartial decision regarding such litigation (Rales v Blasband, 34 A2d 927, 932 [Del 1993]).

As previously stated, Plaintiff did not make a demand on the JP Morgan Board and therefore the first prong of the Aronson Test (473 A2d 805) is not relevant to the analysis below. Further discussion is then focused solely on the second prong, whether demand was futile.

Failure to make a demand is excused when the demand would be futile (Aronson, 473 A2d at 807). Under Delaware Chancery Court Rule 23.1(a), shareholders must allege with factual particularity their reasons for choosing not to make a demand on the board. At the pleading stage, the burden for demand futility is "more onerous" than the burden a plaintiff must satisfy when confronted with a motion to dismiss (Levine v Smith, 591 A2d 194 [Del 1991]).

Conclusory allegations are not considered as expressly pleaded facts or factual inferences (Brehm, 746 A2d 244).

The trial court, using its discretion, must determine whether the complaint alleges particularized facts which create a reasonable doubt that (1) the directors are disinterested and independent; and (2) the challenged transaction was otherwise the valid exercise of business judgment (Aronson, 473 A2d at 814). By contrast, where the complaint challenges a board's failure to act, demand is futile if the court determines that the particularized factual allegations of the complaint create a reasonable doubt that the board is independent or disinterested in responding to the demand (Rales, 634 A2d at 934).

Plaintiff is challenging both the affirmative action by the board to securitize and sell off JP Morgan's loans, in addition to the purchase of toxic loans as a result of JP Morgan's acquisition of Bear Stearns and Washington Mutual. Furthermore, Plaintiff is challenging the Board for allegedly providing the A & LS committee with unfettered authority to securitize and sell off JP Morgan's riskiest subprime assets and the failure by the Board to act after it was known that the loans being originated and sold off were toxic. Directors' disinterestedness and independence are elements of both tests, and thus, are material to the analysis of demand futility.

A. Disinterestedness and Independence

The allegations set forth by Plaintiff are insufficient to raise a reasonable doubt as to the disinterestedness or independence of the JP Morgan board members. "Directorial interest exists whenever divided loyalties are present, or a director either has received, or is entitled to receive, a personal financial benefit from the challenged transaction which is not shared equally by the stockholders" (Pogostin v Rice, 480 A2d 619, 624 [Del 1984]).

To sufficiently assert director dependence, Plaintiff must allege particularized facts creating a reasonable doubt that a director is not "beholden" to an interested director to the extent that his or her "discretion would be sterilized" (Beam ex. rel. Martha Stewart Living Omnimedia, Inc. v Stewart, 845 A2d 1040, 1050 [Del 2004] (quoting Aronson, at 816). A disinterested director "can neither appear on both sides of a transaction nor expect to derive any personal financial benefit from [the challenged transaction] in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally" (Aronson, 473 A2d at 812). [*5]

Plaintiff alleges that the Board delegated unfettered and unlimited authority to the A & LS Committee to securitize all of JP Morgan's subprime assets and sell them off to investors. The alleged reasoning for doing so was to create an illusion that JP Morgan was unaffected by the recent recession. Additionally, Plaintiff alleges that JP Morgan continued to reaffirm the A & LS Committee's authority to continue packaging and selling off these loans knowing that subprime assets were involved, that the loans were currently experiencing high default rates, and that the liability would likely return in the form of repurchase claims, litigation, and government investigation which JP Morgan is facing today.

Plaintiff makes conclusory allegations without providing particularized facts that the Board was either dependent or interested in the aforementioned transactions. Ten of the eleven JP Morgan board members are non- management and outside directors with the exception of James Dimon. Plaintiff alleges these directors had a lust for profit and therefore ran this scheme to defraud investors, but they fail to provide facts to support these conclusory allegations. Plaintiff also claims that there was a failure by the Board to provide oversight to the A & LS Committee once authority was delegated to them. Again, these accusations are without a particularized factual basis.

Plaintiff fails to cast a reasonable doubt that the transactions, viewed substantively, were not the result of valid exercise of business judgment (Aronson, 473 A2d at 812-814). There is a rebuttable presumption that "the directors of a corporation acted on an informed basis [in making a business decision], in good faith and in the honest belief that the action taken was in the best interest of the company" (Id.). In order to rebut the presumption, plaintiff must "plead particularized facts sufficient to raise (1) a reason to doubt that the action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the decision" (In re Walt Disney Co., 825 A2d 275, 286 [Del Ch Ct 2003]). "If, under the facts pled in the complaint, any reasonable person might conclude that the deal made sense, then the judicial inquiry ends" (Harbor Finance Partners v Huizenga, 751 A2d 879, 892-93 [Del Ch 1999]).

As to all claims, Plaintiff provides merely conclusory allegations, while failing to plead particularized facts sufficient to indicate that the JP Morgan defendants were uninformed in making their decision, that their actions were taken in bad faith, or that no reasonable business person of ordinary business judgment could believe that the transactions at issue were advisable for JP Morgan. Furthermore, the JP Morgan articles of incorporation adopted Section 102(b)(7) of the Delaware General Corporation Law, which exculpates the directors from liability arising out of the purported claims.

Accordingly, it is

ORDERED that the motion to dismiss the complaint is granted, and the complaint is dismissed in its entirety; and it is further

ORDERED that the Clerk is directed to enter judgment accordingly.

DATED: March 28, 2014

ENTER:

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J.S.C. [*6]