In Brewer v. Turner (Sept. 29, 2025) (“Regions”), the Delaware Court of Chancery declined, at the pleading stage of litigation, to dismiss a Caremark claim brought against directors of Regions Financial Corporation, which operates Regions Bank. The plaintiff sought a return to the company, from the directors personally, of the $191 million the company paid under a consent settlement with the Consumer Protection Financial Board (CPFB) in connection with the Bank’s allegedly illegal overdraft checking practices. The court, finding that the directors face a substantial likelihood of liability under Caremark for a failure of their fiduciary duties of oversight, rejected Regions’ demand futility defense.

Key Points

• The court viewed a whistleblower complaint from a disgruntled former executive as a “red flag” under Caremark. We note that, in previous Caremark cases, the court often has not viewed a whistleblower complaint as a red flag, as it does not evidence that the company actually engaged in any wrongdoing. In Regions, however, the court emphasized that the whistleblower complaint came from the company’s former Deputy General Counsel—and, although there were reasons to doubt his credibility, his job had involved assessing legal risk. We note also that the complaint was detailed and specific as to the alleged illegal conduct. Also, there were other events, each of which standing alone did not rise to the level of a red flag, but in combination with the whistleblower complaint supported a view that Regions’ Board of Directors was on notice that the overdraft practices were illegal.
• The court viewed the Board’s “delay” in ending the illegal practices as indicating “bad faith” under Caremark. We note that, in previous Caremark cases, the court often has stressed that Caremark liability arises if a board consciously ignored a red flag—but, when a board instead responded to a red flag, legal challenges with respect to the substance or timing of the response will not be successful. In Regions, the Board did not ignore the whistleblower complaint—the Board discussed the complaint and the practices detailed in it, and hired a law firm to investigate the practices. Eighteen months after receiving the whistleblower complaint, the company ended the illegal practices. The court emphasized, however, that it was reasonably conceivable (the standard at the pleading stage) that—as the whistleblower complaint asserted and the CFPB found—the Board delayed ending the illegal practices to provide the company time to develop a plan to replace the revenue it knew would be lost when the illegal practices ended.
• The court viewed the consent settlement with the CPFB as a “corporate trauma” sufficient to give rise to Caremark liability. Caremark provides a route to holding directors accountable for the consequences of a failure of oversight of the corporation’s key risks when the failure led to a corporate trauma. Often, Caremark cases have involved corporate traumas relating to human health and safety (for example, airplanes falling from the sky, in Boeing; or contaminated ice cream poisoning consumers, in Blue Bell) or extreme financial losses. In Regions, the court accepted without discussion that the $191 million fee paid to the CFPB rose to the level of a corporate trauma sufficient to give rise to Caremark liability. The court stated that, as Regions offered retail banking services, it was reasonably conceivable that overdraft practices were “a central compliance risk” for the company.
• The decision reinforces the broader approach that the court seems to have been taking with respect to potential Caremark liability. While historically Caremark claims were almost invariably dismissed at the pleading stage (given, in particular, the required element of bad faith by directors), in recent years Caremark claims have survived the pleading stage in a number of cases. In Regions, as noted above, the court, arguably, took a somewhat expansive view as to when a whistleblower complaint may constitute a “red flag”; when a board’s “delay” in responding to a red flag that the board is not consciously ignoring may constitute “bad faith”; and when events may be deemed to rise to the level of a “corporate trauma.” That said, the court generally has let Caremark claims survive only where it views the overall factual context as egregious or extreme. In Regions, the distinguishing factor appears to have been that, in the court’s view, the Board, after being on notice of possibly illegal practices, may have purposefully continued the illegal practices (for a year and a half), based on concerns about the impact of ending the practices on the company’s profits.
• The new DGCL amendments may discourage Caremark claims. We note that the amendments narrow stockholders’ access to books and records under Section 220 demands to investigate possible corporate wrongdoing. Accordingly, it may now be more difficult than in the past for stockholders to bring Caremark claims, which typically have been based on information discovered in books and records produced in response to Section 220 demands.

Background. The Audit Committee and Risk Committee of Regions’ Board each had oversight responsibility for Regions’ practices relating to overdraft checking. When the CFPB increased its regulatory scrutiny of overdraft practices at banks, Regions formed a Consumer Transparency Working Group to look at Regions’ overdraft practices. In early November 2019, the Board received a draft complaint from its Former Deputy General Counsel, Jeffrey A. Lee (the “Lee Complaint”). In the Lee Complaint, Lee accused Regions of reverse discrimination against him when the company promoted a woman over him to become General Counsel; stated that he had been viewed by the CEO as a “troublemaker”; asserted that he had been fired for raising issues about the legality of Regions’ overdraft practices; and detailed how Regions’ overdraft practices were illegal. Regions reached a confidential settlement with Lee within two weeks after receiving the Lee Complaint.

In September 2020, the CFPB served Regions with a Civil Investigative Demand concerning the Company’s overdraft practices. In July 2021, Regions terminated its illegal overdraft practices. The CFPB concluded that Regions violated the CFPB’s overdraft regulations from at least August 2018 to July 2021. In September 2022, Regions entered into a Consent Order settlement with the CFPB, pursuant to which it paid $141 million (the amount of the illegal overcharges) and a $50 million civil penalty.

The plaintiff brought a derivative lawsuit in the Court of Chancery, claiming that the Board breached its fiduciary oversight duties under Caremark with respect to the company’s overdraft practices. The suit seeks to recover, from the directors personally, the $191 million the company paid under the CFPB Consent Order. Chancellor Kathaleen St. J. McCormick, at the pleading stage, held that demand on the board was futile, as a majority of the directors faced a substantial likelihood of liability under Caremark. The Chancellor concluded that the Lee Complaint was a “red flag” that provided the Board with notice of the illegal overdraft practices, and that it was reasonably conceivable that the Board “consciously ignored” the red flag when it “delayed” ending the illegal practices.

Discussion

The Caremark claim. Under Caremark, a board’s duty of oversight requires directors (i) to make a good faith effort to ensure that the corporation has proper reporting systems in place (so-called Information System Claims), and (ii) to take action in response to “red flags” that indicate potential corporate wrongdoing that may lead to a corporate trauma (so-called Red Flags Claims). In Regions, the plaintiff asserted a Red Flags Claim, alleging that Regions’ board had consciously ignored the Lee Complaint and continued to permit the company to engage in overdraft checking fees practices that were contrary to the requirements set forth in regulations promulgated by the CFPB. The plaintiff claimed that—as Lee had asserted and the CFPB had found—Regions delayed ending its illegal practices so that it could develop a plan to replace the revenue that would be lost when it ended the illegal practices.

The court viewed the Lee Complaint as a “red flag.” Red flags, for Caremark purposes, are events that put a board on notice of an impending corporate trauma. Because bad faith is a required element of a Caremark claim, the court has focused on how clear the warning signs were and how directly they were tied to the trauma the corporation suffered—that is, as the court states in Regions, the court considers whether a red flag was “sufficiently connected to the corporate trauma at issue to elevate the board’s inaction in the face of the red flag to the level of bad faith.” Notably, in Caremark cases, the court often has found that a company’s receipt of a whistleblower complaint—or, similarly, notice of a lawsuit, or a subpoena—was not a red flag, as they do not evidence that the company actually engaged in wrongdoing. In this case, however, even though there were reasons to doubt the whistleblower’s credibility (i.e., he was a disgruntled former employee, who had been viewed by the CEO as “a troublemaker,” and he was primarily making an “unusual” complaint about reverse discrimination against him), the court found that his Complaint was a red flag of illegal conduct by the company. The court emphasized that Lee’s job had “included identifying legal risks”; that the Complaint had been sent to the Audit Committee; and that, “[g]iven Lee’s former position at the Company, it is reasonable to infer that the Board was made aware of the [Complaint] and its contents.” We note also that the Complaint was detailed and specific—it related that Lee had advised management, as early as March 2018, that Regions’ overdraft practices did not comply with federal regulations; and it explained specifically how the company’s practices violated statutes and CFPB guidance on overdraft practices.

The court viewed the Board’s delay in responding to the red flag as “bad faith.” Notably, in previous Caremark cases, the court has emphasized that a response by a board to a red flag need not have been effective nor timely in the plaintiff’s view. In other words, the critical issue has been whether the board responded—the nature and timing of the response being within the board’s purview to decide. Regions highlights that there are limits on this concept. The Regions directors argued that, although they did not act on the plaintiff’s preferred timeline, they had hired a law firm to investigate the overdraft practices; as reflected in meeting minutes, they had discussed the Lee Complaint, the CFPB’s guidelines on overdraft fees, and the company’s overdraft practices; and the Board had expanded the scope of the Working Group’s work to include the overdraft fees issue. However, the court wrote: “Everyone knows that delay can be intentional and a tactic to avoid the consequences of acting appropriately”; and “Consciously delaying actions [to stop conduct] that a Board knows to be illegal supports an inference of bad faith.”

The court rejected the Regions directors’ argument that their hiring a law firm to investigate the matter proved a lack of bad faith. The Board minutes reflected that the law firm delivered a report and recommendations, but the minutes produced to the plaintiff in her Section 220 demand were “largely redacted,” so it was unknown what the findings and recommendations were. The court wrote: “Hiring a law firm to advise [on] regulatory risk is a good thing…[but] merely hiring an attorney to look into something [is not] sufficient to avoid an inference of bad faith under Caremark….”

The court viewed the Board as having made a conscious decision to continue the illegal practices. The Lee Complaint asserted, and the CFPB found, that the Board sought to delay terminating the illegal practices so that it could develop a plan to offset the loss of revenue that would occur when the practices were ended. The court, at the pleading stage, found this reasonably conceivable. The court pointed to Lee’s allegations that the Customer Transparency Working Group was not empowered to stop the illegal overdraft practices; and that management had hired an outside consultant whom it charged with not just reviewing the overdraft practices but also with developing a plan for how Regions could increase its fee revenue even if it stopped collecting the illegal fees.

It is unclear why the court did not evaluate the claims under Massey. The court has evaluated under the Massey prong of the Caremark doctrine claims that directors and officers purposely caused the corporation to break the law in pursuit of greater profits. The court has emphasized in these cases that “the law does not charter lawbreakers” (Massey Energy, 2011), and that Massey claims will survive where the corporation engaged in “recidivous law breaking” (Facebook, 2023). In Regions, the plaintiff asserted claims under both Massey and Caremark, but the court did not analyze the Massey claim, stating only, without explanation, that “Plaintiff’s strongest theory is Caremark.”

Practice Points

• Although the substance and timing of a board’s response to a red flag of illegal corporate conduct is up to the board to decide, unreasonable delay in actually ending illegal practices may give rise to Caremark liability. A board, having received a red flag warning of illegal conduct, should not only discuss and investigate the company’s legal compliance, but should seek to end the illegal conduct promptly. If a law firm is hired to investigate, the board should be made aware of the firm’s conclusions, consider its recommendations, and implement the recommendations or take other action to end any illegal practices, all on a timely basis. While the substance and timing of a board’s response are within its purview to decide, the board should be making a good faith effort to end illegal practices within an appropriate timeframe. Delay to consider how to offset revenue losses that will result from ending illegal practices is not likely to be accepted by the court as an appropriate reason to delay ending the illegal practices. Reasonably prompt action will be warranted particularly when the board becomes aware that the legal noncompliance has been ongoing for an extended period of time; involves multiple violations or ongoing noncompliance; may result in significant fines or penalties or other significant corporate harm; and/or relates to the company’s central compliance risks.
• When determining whether a whistleblower complaint (or notice of litigation or subpoena) is a red flag for Caremark purposes, a company should consider the overall context. Regions highlights that complaints should be taken seriously when the information comes from an executive who had legal compliance responsibilities, and particularly where the information is detailed and specific with respect to the alleged legal noncompliance. (We note that in one recent case (Garfield v. Allen, 2022), the court suggested that plaintiffs can themselves generate red flags that put directors on notice by delivering a demand letter to the board prior to bringing litigation. The court emphasized that this outcome is problematic from a policy standpoint, since it opens space for plaintiffs to create their own claims by sending demand letters. But, the court stressed, from a doctrinal perspective, where the red flags come from does not matter—all that matters is that directors knew of a serious problem and consciously ignored it.)
• If Caremark claims are asserted, the board should consider establishing a special litigation committee (SLC) to determine if it is in the company’s best interests to pursue the derivative litigation. The court recently considered for the first time the validity of an SLC in the Caremark context (Chou 2023). The court had found that the directors of AmerisourceBergen faced a substantial likelihood of liability under Caremark based on their apparently having consciously ignored multiple red flags of illegal conduct that led to corporate trauma. The board then added a new director, who was independent, and appointed him to be the sole member of an SLC to determine whether it was in the company’s best interests to pursue the derivative case. The one-person SLC determined that the Board’s actions did not merit pursuing the litigation. The court, applying the standard Zapata framework, then concluded that the SLC was independent and its investigation was reasonable, and dismissed the case.

• A board must oversee the company’s “central compliance risks.” The potential for Caremark liability is heightened when legal noncompliance (“violation of positive law”) is involved. A board should identify what the “central compliance risks” facing the company are, and should maintain a focus on seeking to ensure compliance in those areas. Although management may have day-to-day responsibility in these areas, identifying the central compliance risks and monitoring the compliance is a board-level responsibility. Notably, what the central risks are may change over time (for example, legal compliance with respect to cybersecurity is a newly added central risk for many companies).

• If a board hires a law firm to investigate alleged misconduct following receipt of a red flag, the board should consider and follow-up on the law firm’s report. Merely hiring a law firm does not provide “absolution,” the court wrote in Regions. The board’s or committee’s minutes should record that the law firm delivered a report or recommendations, the board or committee considered the report, and what actions the company took in response. (See also Chou (2020), which presented a similar situation, where a law firm was hired in response to a red flag, but the board did not record what the law firm found nor what actions the board took in response.)

• A board or board committee should consider preparing more fulsome (rather than cursory) meeting minutes relating to responses to red flags, and should avoid over-redaction when producing books and records. More fulsome minutes would reflect the full consideration accorded, and actions taken in response, to a red flag with respect to legal noncompliance—or the reasons why the board did not consider an event to be a red flag. Where the minutes mention only that the topic was discussed, or where they are heavily redacted when produced, they will not necessarily support an argument that the board’s response was not inappropriately delayed.

• In light of the new DGCL amendments, Boards should reconsider their practices with respect to Section 220 demands. Books and records as now defined by the DGCL amendments should be maintained, so that they can be produced in response to Section 220 demands, lessening the likelihood of having to produce other documents. Also, companies must be ready to meet the new 5-business-day time period for producing the books and records; and should consider taking advantage of the restrictions that can be imposed with respect to the confidentiality, use and distribution of documents that are produced. Companies should keep in mind the amendments’ requirement that the stockholder’s demand be prepared with “reasonable particularity”; and the new, higher burdens that the amendments impose for obtaining books and records.

• We note that both exculpation and D&O insurance not be available to directors or officers for Caremark liability. Given that Caremark claims generally require a finding that the director’s or officer’s failure to act rose to the level of bad faith, directors and officers should be mindful that a successful Caremark claim against them may not be covered by any Section 102(b)(7) exculpatory provisions that may be contained in the corporation’s charter and may not be covered by any D&O insurance policies that the corporation may carry.