The Delaware Court of Chancery has denied a request for an immediate appeal in a derivative lawsuit against Regions Financial Corporation and its bank, Regions Bank. The case, brought by shareholder Katherine Richards Brewer, centers around allegations of illegal overdraft practices and the actions (or inactions) of the company’s board of directors.
The Heart of the Matter: Overdraft Fees and a Whistleblower
The core of the lawsuit revolves around a claim known as a “Caremark” claim. In essence, this type of claim alleges that the company’s board of directors failed to adequately oversee the company’s operations, leading to harm. In this case, the harm is alleged to be the $191 million Regions paid as a result of a Consumer Financial Protection Bureau (CFPB) investigation into the bank’s overdraft practices.
The situation began in early 2019, when a whistleblower, who was then Regions’ deputy general counsel, alerted management to the bank’s allegedly illegal methods for processing overdraft fees. The whistleblower claimed that he was let go in part for raising concerns about the fees. In November 2019, the whistleblower sent a draft complaint to the Regions’ Board of Directors claiming that he was fired for “blowing the whistle” on the illegal overdraft fees. This was a red flag. The board hired an attorney to investigate, but didn’t change the practices until July 2021.
The CFPB found that Regions could have stopped charging the fees as early as 2019 but chose to continue the practice, potentially to avoid losing the revenue generated by the fees. The CFPB’s findings, which led to a consent order requiring Regions to pay $191 million, stated that Regions was aware the practice was illegal. Regions denied the findings when entering the consent order.
The Shareholder Lawsuit
Brewer, a Regions shareholder, filed a derivative action, seeking to recover the $191 million from the company’s fiduciaries (those with a duty to act in the company’s best interest) who allegedly caused the bank to adopt and continue the illegal overdraft practices.
The defendants, including current and former members of the board of directors, moved to dismiss the complaint, but the court denied the motion. The court found that Brewer had presented enough facts to suggest that the board members faced a “substantial likelihood of liability” due to their alleged failure to address the overdraft fee issue. This meant that the demand for the board to take action was considered “futile,” allowing Brewer to pursue the lawsuit on behalf of the company.
The Interlocutory Appeal: A Request for Early Review
The defendants then sought to file an interlocutory appeal. An interlocutory appeal is an appeal of a ruling made by a trial court before the case is fully resolved. They argued that the Court of Chancery’s decision to deny their motion to dismiss contained legal errors that warranted immediate review by the Delaware Supreme Court.
Under Delaware Supreme Court Rule 42, an interlocutory appeal is only granted in exceptional circumstances. The court must decide a “substantial issue of material importance” that merits immediate appellate review. If this threshold is met, the court then considers several factors to determine if the benefits of an immediate appeal outweigh the costs.
The Court’s Decision: No Immediate Appeal
In the order, Chancellor Kathaleen St. J. McCormick determined that the issues in the case did meet the “substantial issue” requirement. The court’s ruling on the motion to dismiss involved key legal questions.
However, the court ultimately denied the application for interlocutory appeal. It conducted a multi-factor analysis, looking at the potential benefits and costs of an immediate appeal. The court found that the balance did not favor allowing the appeal at this stage.
The defendants primarily focused on three of the eight factors outlined in Rule 42. They argued that the Court of Chancery’s ruling departed from established legal precedent. Specifically, they claimed the court incorrectly applied the “reasonably conceivable” standard when assessing the board’s potential liability and that it failed to properly apply the presumption of good faith when evaluating the board’s actions.
The court rejected these arguments. It found that the court’s interpretation of the law was consistent with existing Delaware precedent. It also pointed out that the defendants’ arguments were based on a misunderstanding of the court’s prior opinion.
The court also considered whether an immediate appeal could potentially end the litigation. The court noted that because the trial court had not resolved all claims, an appeal would not necessarily terminate the case.
The court’s decision emphasized the importance of avoiding disruptions to the normal course of litigation and the potential waste of resources associated with interlocutory appeals.
Looking Ahead
With the denial of the interlocutory appeal, the lawsuit will now proceed in the Court of Chancery. The defendants will continue to have the opportunity to present their arguments and evidence. The case could potentially end early if the evidence favors the defendants, or it could proceed to trial.