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Wenske v. Blue Bell Creameries, Inc.

Court of Chancery of Delaware

August 28, 2019

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: July 15, 2019

          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 of Potter Anderson & Corroon LLP, Wilmington, Delaware, Attorneys for Defendants 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 and Patricia Ryan.

          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.

          Paul A. Fioravanti, Jr., Esquire and John G. Day, Esquire of Prickett, Jones & Elliott, P.A., Wilmington, Delaware and Hugh C. Connor II, Esquire, Michael D. Anderson, Esquire and Caleb B. Bulls, Esquire of Kelly Hart & Hallman, LLP, Fort Worth, Texas, Attorneys for Defendant Blue Bell Creameries, Inc. and Blue Bell Creameries, U.S.A., Inc.

          Joseph B. Cicero, Esquire and Gregory E. Stuhlman, Esquire of Chipman Brown Cicero & Cole, LLP, Wilmington, Delaware, Attorneys for Nominal Defendant Blue Bell Creameries, L.P.

          Michael J. Maimone, Esquire and Joseph C. Schoell, Esquire of Drinker Biddle & Reath LLP, Wilmington, Delaware, Attorneys for Special Litigation Committee of Blue Bell Creameries, L.P.

          OPINION

          SLIGHTS, VICE CHANCELLOR

         This derivative action arises from alleged failures by Defendant, Blue Bell Creameries, Inc. ("BBGP"), as sole general partner of Nominal Defendant, Blue Bell Creameries, LLP ("Blue Bell" or the "Partnership"), to operate the Partnership in compliance with the governing standards set forth in the Partnership's Limited Partnership Agreement (the "LPA"). The consequences of these failures, it is alleged, were widespread contamination at Blue Bell's ice cream production facilities, a listeria outbreak infecting scores of Blue Bell customers, a temporary shutdown of Blue Bell's operations and hundreds of millions of dollars of lost profits. Defendants moved to dismiss Plaintiffs' claims under Court of Chancery Rules 12(b)(6) and 23.1. The Court denied the motion to dismiss Plaintiffs' showcase breach of contract claim against BBGP upon concluding Plaintiffs had adequately pled demand futility with respect to BBGP.[1]

         Nearly a year after the Court denied the motion to dismiss, BBGP created a committee of its board of directors that, in turn, formed a special litigation committee to "manage and control" the Partnership's claims against BBGP. Not surprisingly, the special litigation committee has moved to stay this derivative action to allow it time to conduct its investigation and make its determination. This is standard operating procedure for special litigation committees formed after derivative litigation has commenced. It is also standard for this court to grant such requests, within reason, when properly made.

         But this request is not proper. The Court already has determined that BBGP, the lone general partner, has "a disabling interest for pre-suit demand purposes."[2]BBGP has since purported to delegate its authority to manage the litigation asset to a committee of allegedly independent agents who are not general partners. As a matter of agency law, a principal who delegates authority to an agent will be deemed to maintain control over that agent's conduct, regardless of whether the principal actually exercises control. Any conflict that disables the principal disables the agent. Because BBGP, as principal, is not fit to decide how to manage the Partnership's claims against the Defendants (including the claims against BBGP itself), its purported special litigation committee, as agent, is likewise disabled. Consequently, the motion to stay must be denied because it has been brought by a special litigation committee with no authority to bring it.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         Plaintiffs, Mary Giddings Wenske and the Thomas Hunter Giddings, Jr. Trust U/W/O Thomas H. Giddings dated 05/23/2000, are limited partners of Blue Bell. BBGP is Blue Bell's sole general partner. On October 2, 2017, Plaintiffs brought a derivative action against BBGP, Blue Bell USA ("BBUSA") (which wholly owns BBGP) and individual directors of BBGP and BBUSA. As noted, Defendants moved to dismiss under Rule 23.1, which the Court denied, in part, upon finding that demand upon BBGP was excused because BBGP, as an entity, faced a substantial likelihood of liability for breach of the LPA.[3]

         On April 8, 2019, BBGP's board of directors (the "Board") appointed two new directors.[4] Soon after, the Board designated these new directors as sole members of a Special Board Committee (the "Special Committee") empowered to form a special litigation committee of non-Board members (the "SLC"). The SLC, in turn, is empowered to investigate all matters at issue in the derivative litigation and determine whether it is in the best interests of Blue Bell and its limited partners to pursue the claims.[5] According to the SLC Resolutions, the SLC draws its authority to act for the Partnership from Section 6.11(c) of the LPA and Section 17-403(c) of the Delaware Revised Uniform Partnership Act ("DRULPA").[6]Section 6.11(c) of the LPA permits BBGP to:

act through any of its duly appointed officers or a duly appointed attorney or attorneys-in-fact. Each attorney or attorney-in-fact shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty that is permitted or required to be done by the General Partner hereunder.[7]

         On May 8, 2019, the Special Committee appointed William P. Carmichael, Boris J. Steffan and Michael A. Weidinger, Esq. to serve on the SLC as "true and lawful agents and attorneys-in-fact . . . to be engaged directly by Blue Bell as agents of Blue Bell exercising the full authority of [BBGP] to manage and control the business and affairs of Blue Bell with respect to the Derivative Lawsuit . . . ."[8] The SLC's determinations are to be "final and binding upon [BBGP], and shall not be subject to review or approval by the Board of Directors of [BBGP]."[9]

         The SLC now requests a stay of this derivative litigation to afford it time to investigate the claims and make its determination.[10]

         II. ANALYSIS

         Special litigation committees serve an important function; they "promote confidence in the integrity of corporate decision making by vesting the company's power to respond to accusations of serious misconduct by high officials in an impartial group of independent directors."[11] A well-functioning, well-advised special litigation committee, "whose fairness and objectivity cannot reasonably be questioned," can serve to "assuage concern among stockholders" that the company's litigation assets are being managed properly.[12] For this reason and others, the proper use of the special litigation committee device is to be encouraged.

         Once the board forms a special committee, this court typically (but not always) grants a stay of litigation to afford the committee time to determine whether the derivative action should be prosecuted.[13] With that said, before this court will bless a special litigation committee's existence, and make accommodations to allow it to work, the court must first be satisfied the committee has been properly constituted. This threshold question has been called here.

         A. Special Litigation Committees in the Alternative Entity Context

         Under the seminal Zapata v. Maldonado, even a conflicted corporate board can wrest control of a derivative claim from a stockholder by establishing a committee of independent directors to investigate the claim and determine whether to prosecute it.[14] Zapata rests on a cornerstone of our corporate law. The board of directors of a Delaware corporation is vested by statute with the authority to manage the business and affairs of the corporation.[15] This authority includes the authority to delegate decision making to committees comprised of fewer than all members of the board.[16] Thus, when the board confronts a conflict of interest among some of its members, the board may make decisions on the subject of the conflict by appointing a committee of independent directors empowered to act for the entire board.[17]

         The Zapata special litigation committee framework, as a general matter, can serve its intended purpose in the partnership context.[18] The constitutive documents of the typical limited partnership will vest the general partners with broad authority to manage and control the business and affairs of the limited partnership.[19] Under 6 Del. C. §§ 17-1001-03, this authority can include the right to determine whether to prosecute derivative actions.[20] And, under 6 Del. C. § 17-403(c), unless otherwise restricted in the partnership agreement, the general partner has "the power and authority to delegate" management rights to "agents, officers, and employees of the general partner or the limited partnership."[21] But, just as the special litigation committee of a corporate board must be independent to be effective under Zapata, so too must the special litigation committee of the general partner of a limited partnership be independent if it is to perform its mandate properly and with binding effect.[22]

         In assessing board level conflicts in the corporate context, this court "counts heads" among the individual members of the board to assess whether a majority of its members are, or are not, conflicted.[23] Accordingly, because "the problem [of a conflicted board] is one of member disqualification, not the absence of power in the board," a special litigation committee of independent board ...


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