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Wenske v. Blue Bell Creameries, Inc.

Court of Chancery of Delaware

November 13, 2018

MS. MARY GIDDINGS WENSKE, INDIVIDUALLY AND AS TRUSTEE OF THE THOMAS HUNTER GIDDINGS, JR. TRUST U/W/O THOMAS H. GIDDINGS DATED 5/23/2000, Plaintiffs,
v.
BLUE BELL CREAMERIES, INC., BLUE BELL CREAMERIES, U.S.A., INC., PAUL W. KRUSE, JIM E. KRUSE, HOWARD W. KRUSE, GREG BRIDGES, RICHARD DICKSON, WILLIAM J. RANKIN, DIANA MARKWARDT, JOHN W. BARNHILL, JR., PAUL A. EHLERT, DOROTHY MCLEOD MACINERNEY, PATRICIA RYAN, Defendants. and BLUE BELL CREAMERIES, L.P., Nominal Defendant.

          Date Submitted: October 10, 2018

          Jessica Zeldin, Esquire of Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware and Scott G. Burdine, Esquire and David E. Wynne, Esquire of Burdine Wynne LLP, Houston, Texas, Attorneys for Plaintiffs.

          Timothy R. Dudderar, Esquire and Travis R. Dunkelberger, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware, Attorneys for Defendants Blue Bell Creameries, Inc., Blue Bell Creameries, U.S.A., Inc., Jim E. Kruse, Howard W. Kruse, Richard Dickson, William J. Rankin, Diana Markwardt, John W. Barnhill, Jr., Paul A. Ehlert, Dorothy McLeod MacInerney, Patricia Ryan, and Nominal Defendant Blue Bell Creameries, L.P.

          Srinivas M. Raju, Esquire and Kelly L. Freund, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, Attorneys for Defendants Greg Bridges and Paul W. Kruse.

          MEMORANDUM OPINION

          SLIGHTS, VICE CHANCELLOR

         On July 6, 2018, I issued a Memorandum Opinion (the "Opinion") in this limited partnership derivative action denying, in part, Defendants' motion to dismiss the operative Complaint.[1] I dismissed Count II of the Complaint, however, upon concluding Plaintiffs had not stated a claim against the parent company of the operating subsidiary based on vicarious liability, veil-piercing, or joint venture liability theories.[2] Plaintiffs move to reargue that aspect of the Opinion (the "Motion"), contending that I "misapprehended long-standing Delaware law regarding agency liability of a parent entity for its subsidiary's breach of contract."[3]

         The Motion is improper because it either repeats arguments already made or makes new arguments that should have been raised in opposition to the underlying motion to dismiss. Nevertheless, I have revisited the old arguments and considered the new ones. Having done so, I remain satisfied that my dismissal of Count II is entirely consistent with settled Delaware law.[4] Accordingly, the Motion must be denied.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         Plaintiffs are limited partners of Blue Bell Creameries, L.P. ("BB LP"), a national producer and seller of ice cream products. BB LP is the operating subsidiary of an enterprise of Blue Bell entities that also includes Blue Bell Creameries USA, Inc. ("BB USA"), a Delaware subchapter S corporation, and Blue Bell Creameries, Inc. ("BB GP"). BB USA wholly owns BB GP; and BB GP is the exclusive manager and general partner of BB LP. BB USA owns 69.643% of the partner's equity in BB LP and its BB GP and BB LP ownership interests comprise all of BB USA's assets and liabilities.

         In early 2015, the discovery of Listeria monocytogenes bacteria in Blue Bell ice cream products forced BB LP to recall all of its products and shut down all of its operations.[5] The resulting "trauma" prompted Plaintiffs to bring this derivative action on behalf of BB LP against BB GP, BB USA and members of the BB USA board of directors alleging, among other claims, breach of fiduciary duty and breach of BB LP's limited partnership agreement (the "LPA").[6]

         In the Opinion, I dismissed the claims against BB USA and members of its board of directors (Count II) but allowed the claims against BB GP, as BB LP's general partner and (by contract) exclusive manager, [7] to proceed to discovery on Plaintiffs' breach of contract claim.[8] As noted, Plaintiffs seek to reargue the dismissal of Count II.

         II. ANALYSIS

         The Court will deny a motion for reargument "unless the Court has overlooked a decision or principle of law that would have a controlling effect or the Court has misapprehended the law or the facts so that the outcome of the decision would be affected."[9] "Where the motion merely rehashes arguments already made by the parties and considered by the Court when reaching the decision from which reargument is sought, the motion must be denied."[10] Likewise, reargument will be denied when the motion raises arguments that should have been made in connection with the underlying decision.[11]

         As the briefing and arguments progressed on Defendants' motion to dismiss, it appeared that Plaintiffs' theory of liability against BB USA and its fiduciaries reduced to the question of whether BB USA could be held vicariously liable for BB GP's alleged breach of the LPA.[12] Specifically, Plaintiffs pressed the argument that BB USA may be vicariously liable for BB GP's breach of contract merely because BB USA allegedly dominates and controls BB GP.[13] They press that same argument even more vigorously in the Motion.[14] But they also expand their agency argument in the Motion by emphasizing their disagreement with Defendants' and the Court's characterization of BB USA as merely a holding company, [15] and by attempting to clarify that they are also prosecuting a "direct agency" theory of liability.[16]

         In the Opinion, I held:

• "Plaintiffs' attempt to hold BB USA liable for BB GP's alleged breach of the LPA based on an agency theory fail[ed] because Delaware law recognizes no theory under which a principal can be vicariously liable for its agent's non-tortious breach of contract, "[17] and Plaintiffs did not well-plead that "BB GP's (alleged) breach of LPA § 6.01(e) was tortious vis-à-vis Blue Bell"[18];

         • Plaintiffs failed to plead a basis to "pierce the veil" of BB GP to get to BB USA under an "alter ego" theory because there were no well-pled allegations that BB GP was operated or structured to perpetrate a fraud or injustice[19]; and

• "Plaintiffs' claim that BB USA [was] liable as BB GP's joint venturer [was] preempted by the LPA, which governs all aspects of BB USA and BB GP's relationship with respect to Blue Bell."[20] The LPA vests BB GP with the exclusive authority to manage Blue Bell's business and affairs, thus revealing that "BB GP and BB USA, in fact, did not intend to 'act[] together in a joint venture to operate and manage Blue Bell.'"[21]

         Having carefully reviewed the Opinion and the Motion, I remain satisfied that there was nothing novel or misapprehended with respect to these conclusions. Each applied settled Delaware law.

         A. BB USA Is Not Vicariously Liable For BB GP's Breach of Contract

         It is hornbook law that, ordinarily, only parties to a contract may be liable for breach of that contract.[22] Agency law does not negate or otherwise alter that fundamental tenet of contract law.[23] Under the doctrine of vicarious liability, a principal may be liable for torts committed by an agent acting within the scope of the agency relationship, i.e., where the agent's tortious conduct is undertaken pursuant to the agency relationship.[24] Delaware, however, has not extended the doctrine of vicarious liability to breach of contract claims. Indeed, this court's decisions in NACCO Indus., Inc. v. Applica Inc. and Kuroda v. SPJS Hldgs., L.L.C. (both cited in the Opinion)[25] make clear that Delaware does not depart from the general proposition that the law will not impose vicarious liability upon the principal for its agent's non-tortious breach of contract.[26]

         Because Plaintiffs' arguments in response to Defendants' motion to dismiss, while unclear, appeared to argue that BB USA was vicariously liable for BB GP's breach of the LPA, [27] I addressed that argument and squarely rejected it.[28] That holding did not misapprehend Delaware law.[29]

         B. The Complaint Did Not Well Plead that BB USA Is Directly Liable for BB GP's Breach of Contract

         Although it was not clear that Plaintiffs were making a "direct agency" argument, I addressed that theory in the Opinion and determined, "[t]he Complaint fails to plead any facts that would allow an inference that BB USA authorized BB GP to enter into the LPA on its behalf much less to commit BB USA to manage Blue Bell in accordance with a specified standard of conduct."[30] Plaintiffs challenge that conclusion as well.

         Plaintiffs' direct agency argument ignores the fact that for liability to attach under customary agency, "an arrangement [must] exist[] between the two corporations so that one acts on behalf of the other and within usual agency principles, [and] the arrangement must be relevant to the plaintiff's claim of wrongdoing."[31] As explained in the Restatement (Third) of Agency (followed in Delaware)[32]: "When an agent acting with actual authority makes a contract on behalf of an undisclosed principal, (1) unless [specifically] excluded by the contract, the principal is a party to the contract; (2) the agent and the third party are parties to the contract; and (3) the principal, if a party to the contract, and the third party have the same rights, liabilities, and defenses against each other as if the principal made the contract personally, subject to [certain exceptions and limitations not relevant here]."[33]

         This "direct agency" theory of contractual liability has no application here because: (1) BB USA is expressly not a party to the LPA; (2) LPA §§ 6.01(a) & (e) and 6.10, by their terms, impose no contractual obligation on BB USA and, instead, make clear that BB GP is exclusively charged with managing BB LP[34]; and (3) nothing in the Complaint suggests that BB USA authorized BB GP to bind BB USA to the LPA generally, much less to the "best efforts" covenant in LPA § 6.01(e). Simply stated, the Complaint pleads no facts that support a reasonable inference that BB USA directed BB GP to enter into the LPA on its behalf or to commit BB USA to manage BB LP in accordance with a specified standard of conduct.[35]

         C. The Complaint Did Not Well-Plead a Basis to Pierce BB GP's Corporate Veil on a Domination and Control Theory

         Plaintiffs' veil-piercing argument is essentially a continuation of their direct agency argument.[36] Specifically, Plaintiffs contend that "BB USA dominated and directed both the management and day-to-day actions of its subsidiary, BB GP, including its breach of key provisions under the governing LPA."[37] While Plaintiffs characterize the Court's treatment of their veil-piercing arguments as "novel, "[38] the true novelty would be to disregard the separateness of parent and subsidiary simply because a plaintiff would prefer to hold both liable for the subsidiary's breach of contract. Our law does not countenance this result. Indeed, "the separate legal existence of juridical entities is fundamental to Delaware law."[39] Thus, there exists a presumption of corporate separateness, even when a parent wholly owns its subsidiary and the entities have identical officers and directors.[40]

         When Plaintiffs and other limited partners invested in BB LP, they contracted with BB GP, not BB USA.[41] That contract, the LPA, vested the exclusive authority to manage BB LP in BB GP. It also stated the bases upon which BB GP may be held liable to the limited partners for breach of the LPA. Under these circumstances, Plaintiffs' conclusory allegations of "domination and control" cannot overcome the presumption of separateness and the express provisions, and limitations, of the LPA.[42]

         Although not referenced in the Motion, paragraph 83 of the Complaint best captures the gravamen of Plaintiffs' domination and control theory:

BB GP controls [BB LP] through the LPA. BB USA controls [BB LP] through its 100% ownership of BB GP and through its officers that also act as officers of, and operate, [BB LP]. BB USA also appointed all of the directors of BB GP.[43]

         In essence, Plaintiffs rest their domination and control veil-piercing claim on allegations that: (1) BB USA is 100% owner of BB GP and, in that capacity, appointed all of BB GP's directors; (2) BB USA and BB GP have overlapping officers and directors; and (3) BB GP manages BB LP. These allegations fall short of the factual predicate required to justify piercing the veil on an agency theory.

         A parent corporation is not liable for the acts of its subsidiary merely because it owns (and votes) a majority of the subsidiary's stock or shares common shareholders, directors or officers with the subsidiary.[44] Nor will conclusory allegations that the parent's management exclusively dominated and controlled the subsidiary's management suffice to state a claim for veil-piercing.[45]

         The allegations in the Complaint that are referenced in the Motion fare no better.[46] These allegations either reiterate the point that BB USA wholly owns BB GP and shares officers and directors with its subsidiary, or they restate conclusory allegations of domination and control (especially regarding structural, as opposed to operational, issues) relating to BB GP's management of BB LP. These allegations cannot overcome the presumption of separateness.[47]

         D. The Opinion Needlessly Addressed a "Fraud" Theory of Veil-Piercing

         Piercing the corporate veil is appropriate in instances where "the corporate structure caused fraud or similar injustice."[48] In such instances, "[e]ffectively, the corporation must be a sham and exist for no other purpose than as a vehicle for fraud."[49] Determining whether to disregard the corporate form on these grounds requires a fact intensive inquiry, which may involve any of the following factors: "(1) whether the company was adequately capitalized for the undertaking; (2) whether the company was solvent; (3) whether corporate formalities were observed; (4) whether the controlling ...


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