Virginia Federal District Court Dismisses Shareholder Derivative Action Related To Credit Card Issuer’s Settlements With OCC, CFPB


On June 21, the U.S. District Court for the Eastern District of Virginia dismissed a shareholder derivative action against a national bank’s officers and directors that was based on the bank’s settlements with the CFPB and OCC over allegedly deceptive marketing of ancillary products. In re Capital One Derivative S’holder Litig., No. 1:12-cv-1100 (E.D. Va. June 21, 2013). The shareholders, relying on Delaware law, alleged that the officers and directors breached their fiduciary duty of loyalty, committed corporate waste, and were unjustly enriched by failing to prevent the allegedly deceptive sales practices at the bank’s third-party call centers which led to the consent orders. The court held that the shareholders did not adequately allege corporate waste because the bank’s settlement payments were not “transfers of assets with no corporate purpose” but instead achieved final resolution of the investigations. The unjust enrichment claim failed because the shareholders did not allege any facts indicating a relationship between the officers and directors’ compensation and the settlements with the agencies. With respect to the duty of loyalty claim, the shareholders alleged two theories: (i) that the officers and directors failed to implement controls that would have prevented the alleged misconduct, and (ii) that defendants ignored numerous “red flags” that should have alerted them to the alleged misconduct.  First, the controls theory failed because the shareholders could not satisfy the demanding Caremark standard, which requires an utter failure to implement any controls. Second, most of the alleged red flags were either not actually red flags at all or there were no allegations that the individual officers and directors were aware of them. However, as to a small number of the alleged red flags, the court found the claims sufficiently plausible to allow the shareholders an opportunity to amend their complaint to add additional facts.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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