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Marchand v. Barnhill

Supreme Court of Delaware

June 18, 2019

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.

         Submitted: April 24, 2019

          Corrected: June 19, 2019

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[Copyrighted Material Omitted]

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          Court Below: Court of Chancery of the State of Delaware, C.A. No. 2017-0586-JRS

         Upon appeal from the Court of Chancery. REVERSED and REMANDED.

         Robert 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.

         Paul A. 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.

         Srinivas M. Raju, Esquire, and Kelly L. Freund, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for Appellees, Greg Bridges and Paul W. Kruse.

         Before STRINE, Chief Justice; VALIHURA, VAUGHN, SEITZ, and TRAYNOR, Justices, constituting the Court en Banc.


         STRINE, Chief Justice:

          Blue Bell Creameries USA, Inc., one of the country’s 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 Bell’s failure to contain listeria’s 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.

         Based on these unfortunate events, a stockholder brought a derivative suit against two key executives and against Blue Bell’s 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 Bell’s food-making operations, and that the directors breached their duty of loyalty under Caremark. [1]

         The defendants moved to dismiss the complaint for failure to plead

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demand futility.[2] 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 Bell’s] Board could impartially consider a demand."[3] Although the complaint alleged facts sufficient to raise a reasonable doubt as to the impartiality of a number of Blue Bell’s directors, the plaintiff ultimately came up one short in the Court of Chancery’s judgment: the plaintiff needed eight directors for a majority, but only had seven.

         As to 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."[4] Although the plaintiff argued that Blue Bell’s 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 ."[5]

          In this opinion, we reverse as to both holdings.

         We 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 Bell’s CEO, and his subordinate Greg Bridges, Blue Bell’s Vice President of Operations, due to Rankin’s longstanding business affiliation and personal relationship with the Kruse family.[6] According to the complaint, Rankin worked at Blue Bell for decades and owes his entire career to Ed Kruse, the current CEO’s 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 Bell’s 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 Rankin’s 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 human’s ability to exercise impartial judgment."[7] Rankin’s apparently deep business and personal ties to the Kruse family raise a reasonable doubt as to whether Rankin could "impartially or

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objectively assess whether to bring a lawsuit against the sued party."[8]

         As to 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 Bell’s food safety performance or compliance. Under Caremark and this Court’s opinion in Stone v. Ritter ,[9] directors have a duty "to exercise oversight" and to monitor the corporation’s operational viability, legal compliance, and financial performance.[10] A board’s "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.[11]

         As a 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 Bell’s central compliance issues is food safety. Despite this fact, the complaint alleges that Blue Bell’s 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 exist[ed]."[12]

         I. Background[13]

          A. Blue Bell’s History and Operating Environment

          i. History

         Founded 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.[14] By 1919, Blue Bell’s predecessor was struggling financially. Blue

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Bell’s 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.[15]

         E.F. Kruse led the company until his unexpected death in 1951.[16] Upon his death, his sons, Ed F. Kruse and Howard Kruse, took over the company’s management. Rapid expansion continued under Ed and Howard’s leadership.[17] In 2004, Ed Kruse’s son, Paul Kruse, took over management, becoming Blue Bell’s President and CEO.[18] Ten years later, in 2014, Paul Kruse also assumed the position of Chairman of the Board, taking the position from his retiring father.[19]

          ii. The Regulated Nature of Blue Bell’s Industry

         As a 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.[20] 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."[21]

         Specifically, FDA regulations require food manufacturers to conduct operations "with adequate sanitation principles"[22] and, in line with that obligation, "must prepare ... and implement a written food safety plan."[23] As part of a manufacturer’s 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.[24]

         Not 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 safety.[25]

          B. Plaintiff’s Complaint

          With that context out of the way, we briefly summarize the plaintiff’s well-pled factual allegations and the reasonable inferences drawn from them.

         The complaint starts by observing that, as a single-product food company, food ...

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