Jack L. MARCHAND II, Plaintiff Below, Appellant,
John W. BARNHILL, Jr., Greg Bridges, Richard Dickson, Paul A. Ehlert, Jim E. Kruse, Paul W. Kruse, W.J. Rankin, Howard W. Kruse, Patricia I. Ryan, Dorothy McLeod MacInerney and Blue Bell Creameries USA, Inc., Defendants Below, Appellee.
April 24, 2019
Corrected: June 19, 2019
[Copyrighted Material Omitted]
Below: Court of Chancery of the State of Delaware, C.A. No.
appeal from the Court of Chancery. REVERSED and REMANDED.
J. Kriner, Jr., Esquire (Argued), and Vera G. Belger,
Esquire, CHIMICLES SCHWARTZ KRINER & DONALDSON-SMITH LLP,
Wilmington, Delaware; Michael Hawash, Esquire, and Jourdain
Poupore, Esquire, HAWASH CICACK & GASTON LLP, Houston, Texas,
Attorneys for Appellant, Jack L. Marchand II.
Fioravanti, Jr., Esquire (Argued), and John G. Day, Esquire,
PRICKETT, JONES & ELLIOT, P.A., Wilmington, Delaware,
Attorneys for Appellees, John W. Barnhill, Jr., Richard
Dickson, Paul A. Ehlert, Jim E. Kruse, W.J. Rankin, Howard W.
Kruse, Patricia I. Ryan, Dorothy McLeod MacInerney, and
nominal defendant Blue Bell Creameries USA, Inc.
M. Raju, Esquire, and Kelly L. Freund, Esquire, RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for
Appellees, Greg Bridges and Paul W. Kruse.
STRINE, Chief Justice; VALIHURA, VAUGHN, SEITZ, and TRAYNOR,
Justices, constituting the Court en Banc.
Bell Creameries USA, Inc., one of the countrys largest ice
cream manufacturers, suffered a listeria outbreak in
early 2015, causing the company to recall all of its
products, shut down production at all of its plants, and lay
off over a third of its workforce. Blue Bells failure to
contain listerias spread in its manufacturing
plants caused listeria to be present in its products
and had sad consequences. Three people died as a result of
the listeria outbreak. Less consequentially, but
nonetheless important for this litigation, stockholders also
suffered losses because, after the operational shutdown, Blue
Bell suffered a liquidity crisis that forced it to accept a
dilutive private equity investment.
on these unfortunate events, a stockholder brought a
derivative suit against two key executives and against Blue
Bells directors claiming breaches of the defendants
fiduciary duties. The complaint alleges that the
executives— Paul Kruse, the President and CEO, and Greg
Bridges, the Vice President of Operations— breached
their duties of care and loyalty by knowingly disregarding
contamination risks and failing to oversee the safety of Blue
Bells food-making operations, and that the directors
breached their duty of loyalty under Caremark.
defendants moved to dismiss the complaint for failure to
demand futility. The Court of Chancery granted the
motion as to both claims. As to the claim against management,
the Court of Chancery held that the plaintiff "failed to
plead particularized facts that raise a reasonable doubt as
to whether a majority of [Blue Bells] Board could
impartially consider a demand." Although the
complaint alleged facts sufficient to raise a reasonable
doubt as to the impartiality of a number of Blue Bells
directors, the plaintiff ultimately came up one short in the
Court of Chancerys judgment: the plaintiff needed eight
directors for a majority, but only had seven.
the Caremark claim, the Court of Chancery held that
the plaintiff did not plead any facts to support "his
contention that the [Blue Bell] Board utterly failed to
adopt or implement any reporting and compliance
systems." Although the plaintiff argued that
Blue Bells board had no supervisory structure in place to
oversee "health, safety and sanitation controls and
compliance," the Court of Chancery reasoned that
"[w]hat Plaintiff really attempts to challenge is not
the existence of monitoring and reporting controls, but the
effectiveness of monitoring and reporting controls in
particular instances," and "[t]his is not a valid
theory under ... Caremark ."
this opinion, we reverse as to both holdings.
first hold that the complaint pleads particularized facts
sufficient to create a reasonable doubt that an additional
director, W.J. Rankin, could act impartially in deciding to
sue Paul Kruse, Blue Bells CEO, and his subordinate Greg
Bridges, Blue Bells Vice President of Operations, due to
Rankins longstanding business affiliation and personal
relationship with the Kruse family. According to the
complaint, Rankin worked at Blue Bell for decades and owes
his entire career to Ed Kruse, the current CEOs father, who
hired Rankin as his administrative assistant in 1981 and
promoted him five years later to the position of CFO, a
position Rankin maintained until his retirement in 2014. In
2004, while serving as CFO, Rankin was elected to Blue Bells
board, and has served since then. Moreover, the complaint
alleges that the Kruse family showed its appreciation for
Rankin not only by supporting his career, but also by leading
a campaign that raised over $450,000 to name a building at
the local university after Rankin. Despite the defendants
contentions that Rankins relationship with the Kruse family
was just an ordinary business relationship from which Rankin
would derive no strong feelings of loyalty toward the Kruse
family, these allegations are "suggestive of the type of
very close personal [or professional] relationship that, like
family ties, one would expect to heavily influence a humans
ability to exercise impartial judgment." Rankins
apparently deep business and personal ties to the Kruse
family raise a reasonable doubt as to whether Rankin could
objectively assess whether to bring a lawsuit against the
the Caremark claim, we hold that the complaint
alleges particularized facts that support a reasonable
inference that the Blue Bell board failed to implement any
system to monitor Blue Bells food safety performance or
compliance. Under Caremark and this Courts opinion
in Stone v. Ritter , directors have a duty
"to exercise oversight" and to monitor the
corporations operational viability, legal compliance, and
financial performance. A boards "utter failure to
attempt to assure a reasonable information and reporting
system exists" is an act of bad faith in breach of the
duty of loyalty.
monoline company that makes a single product— ice
cream— Blue Bell can only thrive if its consumers
enjoyed its products and were confident that its products
were safe to eat. That is, one of Blue Bells central
compliance issues is food safety. Despite this fact, the
complaint alleges that Blue Bells board had no committee
overseeing food safety, no full board-level process to
address food safety issues, and no protocol by which the
board was expected to be advised of food safety reports and
developments. Consistent with this dearth of any board-level
effort at monitoring, the complaint pleads particular facts
supporting an inference that during a crucial period when
yellow and red flags about food safety were presented to
management, there was no equivalent reporting to the board
and the board was not presented with any material information
about food safety. Thus, the complaint alleges specific facts
that create a reasonable inference that the directors
consciously failed "to attempt to assure a reasonable
information and reporting system
Blue Bells History and Operating Environment
in 1907 in Brenham, Texas, Blue Bell Creameries USA, Inc.
("Blue Bell"), a Delaware corporation, produces and
distributes ice cream under the Blue Bell
banner. By 1919, Blue Bells predecessor was
struggling financially. Blue
Bells board turned to E.F. Kruse, who took over the company
that year and turned it around. Under his leadership, the
company expanded and became profitable.
Kruse led the company until his unexpected death in
1951. Upon his death, his sons, Ed F.
Kruse and Howard Kruse, took over the companys management.
Rapid expansion continued under Ed and Howards
leadership. In 2004, Ed Kruses son, Paul Kruse,
took over management, becoming Blue Bells President and
CEO. Ten years later, in 2014, Paul Kruse
also assumed the position of Chairman of the Board, taking
the position from his retiring father.
ii. The Regulated Nature of Blue Bells Industry
U.S. food manufacturer, Blue Bell operates in a heavily
regulated industry. Under federal law, the Food and Drug
Administration ("FDA") may set food quality
standards, require food manufacturing facilities to register
with the FDA, prohibit regulated manufacturers from placing
adulterated food into interstate commerce, and hold companies
liable if they place any adulterated foods into interstate
commerce in violation of FDA rules. Blue Bell is
"required to comply with regulations and establish
controls to monitor for, avoid and remediate contamination
and conditions that expose the Company and its products to
the risk of contamination."
FDA regulations require food manufacturers to conduct
operations "with adequate sanitation
principles" and, in line with that obligation,
"must prepare ... and implement a written food safety
plan." As part of a manufacturers food
safety plan, the manufacturer must include processes for
conducting a hazard analysis that identifies possible food
safety hazards, identifies and implements preventative
controls to limit potential food hazards, implements process
controls, implements sanitation controls, and monitors these
preventative controls. Appropriate corporate officials must
monitor these preventative controls.
only is Blue Bell subject to federal regulations, but it must
also adhere to various state regulations. At the time of the
listeria outbreak, Blue Bell operated in three
states, and each had issued rules and regulations regarding
the proper handling and production of food to ensure food
that context out of the way, we briefly summarize the
plaintiffs well-pled factual allegations and the reasonable
inferences drawn from them.
complaint starts by observing that, as a single-product food
company, food ...