Starrels v. First National Bank of Chicago

Bernstein (plaintiff) filed a complaint in connection with a shareholder derivative and class action suit contending that the directors and officers of First Chicago Corporation (FCC) and First National Bank of Chicago (FNBC) (defendants) egregiously mismanaged the corporations’ affairs. The complaint did not claim that the directors were interested in the transactions. Rather, the complaint listed transactions, which Bernstein alleged were not the product of proper business judgment. Bernstein alleged that FNBC and FCC entered into a series of loans and a contract that resulted in losses exceeding $100,000,000. Bernstein alleged that the FNBC did not require collateral for some of these loans. The complaint also criticized FCC’s decision to purchase a Brazilian bank and to guarantee the Brazilian bank’s deposits, as this investment resulted in significant losses to FCC. Specifically, Bernstein alleged that the directors failed to take steps to fully comprehend the Brazilian bank’s financial situation. The complaint noted that the FCC apparently made this investment to facilitate lending to multinational corporations in local currency. Additionally, the complaint alleged impropriety in the awarding of bonuses to top management. Further, the complaint alleged that the officers and directors made many of the transactions without regard for adequate approval or review auditing procedures. The district court found that Bernstein failed to comply with the demand requirement for a shareholder derivative suit and dismissed the complaint with prejudice. Bernstein appealed, arguing that a demand was excused because it would have been futile.