JPMorgan Chase Directors Win Dismissal of Breach of Fiduciary Duty Claims Over Alleged Zelle Payments Fraud

Paul, Weiss won the dismissal of a derivative claim alleging that our clients, the independent directors of JPMorgan Chase & Co. (JPM), breached their fiduciary duties by ignoring alleged “red flags” regarding purported violations on the Zelle payments platform of the Electronic Fund Transfer Act (EFTA) and related regulations. Chancellor Kathaleen McCormick of the Delaware Court of Chancery granted our motion to dismiss with prejudice.

Zelle is a digital banking peer-to-peer payment platform owned by JPM and several other large banks that allows customers to electronically transfer money to other customers. The shareholder plaintiff alleged that JPM’s subsidiary Chase violated and continues to violate the EFTA, as implemented by the Federal Reserve’s Regulation E, by failing to comply with its reimbursement obligations for unauthorized electronic funds transfers on the Zelle platform. Regulation E is meant to protect banking customers using electronic fund transfers. The plaintiff sought to assert a derivative claim under Delaware law—referred to as a Caremark claim—on behalf of JPM against its CEO and independent directors for allegedly breaching their fiduciary duty of loyalty by disregarding their oversight responsibilities concerning this alleged non-compliance with the EFTA and Regulation E. The plaintiff’s claim was based principally on news articles concerning certain customers who claimed to have experienced unauthorized transfers and a Senate Committee investigation regarding multiple large banks’ reimbursement practices for the Zelle platform—all of which the plaintiff claimed were “red flags” that should have alerted the directors to Chase’s alleged failure to comply with the EFTA and Regulation E.

In its decision, the court ruled that the plaintiff had failed to make a demand on the JPM board before filing suit and had failed to allege facts sufficient to show that such a demand would have been futile. The court rejected the plaintiff’s contention that demand was futile because a majority of JPM’s directors faced a substantial likelihood of liability from the plaintiff’s Caremark claim. In so ruling, the court held that the plaintiff had failed to adequately plead any facts suggesting that Chase operated in violation of the EFTA or Regulation E, or any facts suggesting that JPM’s directors were made aware of or failed to respond to any such alleged non-compliance. The court dismissed the derivative suit with prejudice and denied the plaintiff’s request for leave to replead.

The Paul, Weiss team included litigation partner Audra Soloway, who argued the motion to dismiss, and counsel Dan Mason.