Jack L. Marchand II v. John W. Barnhill, Jr. (Blue Bell Creameries USA, Inc.)

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JACK L. MARCHAND II, :
:
Plaintiff, :
:
v. : C.A. No. 2017-0586-JRS
:
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, and DOROTHY :
MCLEOD MACINERNEY, :
:
Defendants, :
:
and :
:
BLUE BELL CREAMERIES USA, INC., :
:
Nominal Defendant. :
MEMORANDUM OPINION
Date Submitted: June 13, 2018
Date Decided: September 27, 2018
Robert J. Kriner, Jr., Esquire and Vera G. Belger, Esquire of Chimicles &
Tikellis LLP, Wilmington, Delaware and Michael Hawash, Esquire and Jourdain
Poupore, Esquire of Hawash Cicack & Gaston LLP, Houston, Texas, Attorneys for
Plaintiff.
Timothy R. Dudderar, Esquire and Travis R. Dunkelberger, Esquire of Potter
Anderson & Corroon LLP, Wilmington, Delaware, Attorneys for Defendants
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 of Richards, Layton &
Finger, P.A., Wilmington, Delaware, Attorneys for Defendants Greg Bridges and
Paul W. Kruse.
SLIGHTS, Vice Chancellor
In a companion case, I opened my decision denying a motion to dismiss the
complaint by observing, in essence, that standards matter. 1 In Wenske, the general
partner of a limited partnership allegedly engaged in wrongdoing that led to
“corporate trauma.” The standard governing the general partner’s conduct was a
bespoke contractual standard embedded within the limited partnership agreement.2
In this case, the standard by which to measure the conduct of corporate managers,
who are alleged to have engaged in essentially the same wrongdoing that led to the
same “corporate trauma,” is a well-settled common law fiduciary standard first
articulated by former Chancellor Allen in In re Caremark Int’l Inc. Deriv. Litig.3
As noted, in Wenske, I determined that the plaintiffs, holders of publicly traded
limited partnership units, had adequately pled a derivative claim against the general
partner for breach of the limited partnership agreement. In this case, for reasons
explained below, I dismiss the complaint because I am satisfied this stockholder
plaintiff has failed adequately to plead that demand upon the board of the company—
1
See Wenske v. Blue Bell Creameries, Inc., 2018 WL 3337531, at *1 (Del. Ch. July 6,
2018) (“Whether conduct is right or wrong in the eyes of the law, actionable or not
actionable, depends in large part upon the standard by which the conduct is measured.”).
2
Id. at *5 (“[The general partner] shall use its best efforts to conduct [the partnership’s]
business in a good and businesslike manner, and in accordance with sound business
practices in the industry.”) (emphasis omitted).
3
In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).
on behalf of which he purports to prosecute his derivative claims—should be
excused.
To understand how this unique circumstance has unfolded, it is necessary to
understand the structure and relationship of the entities involved. Plaintiff is a
stockholder of Blue Bell Creameries USA, Inc. (“BB USA”), a Delaware
subchapter S corporation that serves as the holding company for the well-known
Blue Bell ice cream enterprise. BB USA wholly owns Blue Bell Creameries, Inc.
(“BB GP”), the general partner and exclusive manager of Blue Bell Creameries, L.P.
(“BB LP” or “Blue Bell”), the enterprise’s operating subsidiary. BB USA owns
69.643% of the partner’s equity in Blue Bell and that ownership interest comprises
all of its assets and liabilities.
Blue Bell produces and distributes Blue Bell ice cream. In early 2015, the
Food & Drug Administration (“FDA”) and several state health agencies found
Listeria monocytogenes bacteria in many of Blue Bell’s ice cream products.4
By April 2015, Blue Bell had recalled all of its products and shut down all of its
operations. Soon after, Blue Bell fired more than one-third of its workforce and
4
Listeria monocytogenes is a pathogenic bacterium that causes listeriosis, a serious
infection that kills approximately 260 people per year in the United States. See U.S. Dep’t
of Health & Human Servs. (CDC), Listeria (Listeriosis),
https://www.cdc.gov/listeria/index.html (last updated June 29, 2017). D.R.E. 202(b)–(c)
(The Court may take judicial notice of facts “capable of accurate and ready determination
by resort to sources whose accuracy cannot reasonably be questioned.”).
2
ceased paying distributions to its limited partners.5 Faced with a growing liquidity
crisis, BB USA was forced to seek emergency outside financing on “massively
dilutive” terms.6
In Wenske, limited partners brought derivative claims against BB GP,
BB USA and members of the BB USA board of directors (the “BB USA Board”)
alleging, among other claims, breach of fiduciary duty and breach of Blue Bell’s
limited partnership agreement relating to the Blue Bell Listeria crisis. For reasons
stated at some length in a Memorandum Opinion, I dismissed the breach of fiduciary
duty claims and the claims against BB USA and members of the BB USA Board.7
I declined, however, to dismiss the breach of contract claim against BB GP upon
concluding that the complaint adequately pled the general partner had not “use[d] its
best efforts to conduct [the partnership’s] business in a good and businesslike
manner, and in accordance with sound business practices in the industry.” 8
In this action, Plaintiff, a BB USA stockholder, purports to bring derivative
claims on behalf of BB USA against two BB USA corporate officers (the “Officer
5
Compl., pmbl., ¶¶ 6, 70.
6
Compl. ¶ 81.
7
Wenske, 2018 WL 3337531, at *2.
8
Id. at *13–14 (citing multiple industry standards that governed Blue Bell’s sanitary
practices and concluding that the complaint pled a reasonably conceivable basis to
conclude that those standards had not been met).
3
Defendants”), and all BB USA directors except one (the “Director Defendants”)
(collectively, the “Defendants”), for breach of fiduciary duty. Specifically, the
Verified Derivative Complaint (the “Complaint”) sets forth two counts9:
 Count I, against Paul Kruse and Greg Bridges, in their capacity as BB USA
officers, for “breach[ing] their fiduciary duties of loyalty and care” to
BB USA by failing to “take any steps to correct or control . . . essential
issues regarding [the] health and safety of [Blue Bell’s] products[,] despite
their knowledge that Listeria was present in [Blue Bell’s] products” and
manufacturing facilities.10
 Count II, against BB USA directors (other than Bill Reimann), for
“breach[ing] their fiduciary duties of loyalty” to BB USA “by the[ir]
willful failure to govern the management of [BB LP] and to institute
fundamental controls over managerial operations,”11 including “controls to
monitor for, avoid and remediate contamination and conditions exposing
[BB LP] to contamination.”12
Defendants have moved to dismiss the Complaint under Court of Chancery
Rules 23.1 and 12(b)(6). For the reasons that follow, I dismiss the Complaint under
Rule 23.1. As for Count I, even assuming Plaintiff has pled a viable fiduciary claim
against the Officer Defendants, an assumption that may or may not be valid, Plaintiff
has failed to plead particularized facts to raise a reasonable doubt that a majority of
9
The Complaint was prepared with the benefit of documents obtained by Plaintiff under
8 Del. C. § 220.
10
Compl. ¶¶ 143–44.
11
Compl. ¶ 148.
12
Compl. ¶ 149.
4
the BB USA Board members could have impartially considered a pre-suit demand
to prosecute Count I. As for Count II, Plaintiff has failed to state a Caremark claim
against the Director Defendants and, consequently, has failed to plead particularized
facts to raise a reasonable doubt that a majority of the otherwise disinterested
BB USA Board could have exercised their business judgment in responding to a
demand.
I. BACKGROUND
The facts are drawn from the allegations in the Complaint, documents
incorporated by reference or integral to that pleading and judicially noticeable
facts.13 For purposes of this Motion to Dismiss, I accept as true the Complaint’s
well-pled factual allegations and draw all reasonable inferences in Plaintiff’s favor.
A. The Parties and Relevant Non-Parties
Plaintiff, Jack Marchand II, is a stockholder of nominal defendant, BB USA,
a Delaware corporation headquartered in Brenham, Texas.14 He is alleged to have
held twenty-nine shares of BB USA common stock at all relevant times.
13
Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (quoting In re
Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 69 (Del. 1995)) (noting that on a motion
to dismiss, the Court may consider documents that are “incorporated by reference” or
“integral” to the complaint).
14
Compl. ¶¶ 6–7.
5
As noted, BB USA serves as a holding company. Its only assets are: (1) 2,823
Class A limited partnership units in non-party Blue Bell, a Delaware limited
partnership; and (2) a 100% ownership interest in non-party BB GP. BB GP is a
Delaware corporation and BB LP’s general partner, vested by contract with the
exclusive authority to manage Blue Bell’s business affairs.15 As of 2015, Blue Bell
operated three manufacturing plants located in Brenham, Texas, Broken Arrow,
Oklahoma and Sylacauga, Alabama.16
Defendant, Paul Kruse, has served as a BB USA director since 1983, and
previously served as BB USA’s President and Chief Executive Officer from 2004 to
2017.17 He is the son of Ed Kruse and the nephew of Howard Kruse (both previous
15
Compl. ¶ 8. The Complaint refers to BB USA as the “Company” or “Blue Bell,”
see Compl., pmbl., and alleges, among other things, that “[t]he Company and its Board
members are subject to heavy regulations at the federal and state levels because Blue Bell
is a producer and distributor of food products.” Compl. ¶ 149. BB USA, however, does
not manufacture or distribute anything; it is a holding company. See Compl. ¶ 8 (“Blue
Bell’s ownership interests in [BB] LP [and BB GP] constitute all of the assets and liabilities
of the Company.”). BB LP is the only operating entity within the Blue Bell enterprise.
For the sake of clarity, therefore, I have elected not to adopt the Complaint’s naming
conventions.
16
Compl. ¶ 25.
17
Compl. ¶¶ 14, 41. Paul Kruse also served as Chairman of BB USA’s Board from 2014
to 2017. Id.
6
CEOs of BB USA), making him the third generation of his family to lead the Blue
Bell enterprise.18
Defendant, Greg Bridges, has served as a BB USA director since 2011, and
currently serves as BB USA’s “Vice President of Operations.”19 It appears he is also
a BB GP officer and, as such, oversees “all aspects of [Blue Bell’s] plant
operations.”20 Bridges is the son of Howard and Ed Kruse’s sister, Mildred. As
Vice President of Operations, Bridges reported to his cousin, Paul Kruse
(as BB USA CEO and Chairman of the BB USA Board), at all times relevant to the
Complaint.21
Defendant, Howard Kruse, began serving as a BB USA director in 1985.
He previously served as BB USA President from 1986 to 2004, and CEO from 1993
to 2004.22 He is the uncle of Directors Paul Kruse and Bridges.
18
Id. “In all, members of the Kruse family appear to control at least 42.5% of the Company
stock.” Compl. ¶ 14. Ed Kruse is deceased; he died in 2015. Compl. ¶ 10.
19
Compl. ¶ 10.
20
Id.
21
Id.
22
Compl. ¶ 16.
7
Defendant, Jim Kruse, has served as a BB USA director since 2004.23 He is
the current Chairman of the BB USA Board, having succeeded Paul Kruse in that
role.24 He is the son of Howard Kruse, the nephew of Ed Kruse and cousin of
Bridges and Paul Kruse.25
Defendant, Richard Dickson, has been a BB USA director since 2010 and
currently serves as BB USA’s President.26 It appears that Dickson also previously
served in various operational roles at BB GP, including “plant manager of [BB LP’s]
Broken Arrow, Oklahoma [production] plant.”27 Prior to becoming President in
2017, Dickson was “in charge of all areas of sale and promotion.”28
Defendant, John Barnhill, Jr., has served as a BB USA director since 1974.
He “grew up in Brenham” and “officially joined Blue Bell in 1960” when Blue Bell’s
then-CEO, Ed Kruse, “recruited him to be [BB USA’s] sole Houston salesman.”29
23
Compl. ¶ 13.
24
Id.
25
Compl. ¶¶ 10, 13–14, 16.
26
Compl. ¶ 11.
27
Id.
28
Id.
29
Compl. ¶ 9.
8
“Barnhill worked his way up to Vice President in 1986, [and] retir[ed] as a
[BB USA] officer in 2000.”30
Defendant, Patricia Ryan, began serving as a BB USA director in 1997.31 It is
alleged that Ryan “begged Ed Kruse to write his memoir for years.”32
Defendant, Dorothy McLeod MacInerney, has served as a BB USA director
since 1994.33 MacInerney is the author of a book that features a comprehensive
history of the Blue Bell business.34 She also wrote a biography of Ed Kruse entitled
Ed F. Kruse of Blue Bell Creameries.35
30
Id.
31
Compl. ¶ 17.
32
Id.
33
Compl. ¶ 18.
34
The book, released in 2006, is entitled Blue Bell Ice Cream: A Century at the Little
Creamery in Brenham, Texas 1907-2007. Id. In the book’s foreword, Paul Kruse wrote,
“[a]nd a sincere word of appreciation goes to [MacInerney] for contributing her unending
work in putting this story together so that it might be shared.” Id.
35
Id. “In the acknowledgement section of this book, [MacInerney] thanks Ed and Paul
Kruse for ‘giving [her] the honor and privilege to learn more about Blue Bell Creameries
and the Kruse family.’ She also state[s that] she [is] ‘grateful for their support, time, and
encouragement in the process of writing down this inspiring and worthwhile story.’” Id.
9
Defendant, Paul Ehlert, began his service as a BB USA director in 2002.36
According to the Complaint, “[t]he Ehlert and Kruse families are both old Brenham
families who have remained close throughout the years.”37
Defendant, W.J. Rankin, has served as a BB USA director since 2004, and
previously served as BB USA Chief Financial Officer from 1986 to 2014.38 It is
alleged that, in 2010, Rankin “joined with Ed Kruse and Friends [undefined] to
present a $450,000 check to the Blinn College Foundation for the newly constructed
agricultural facility on the Brenham campus” that was named the “W.J. Rankin
Agricultural Complex” in Rankin’s honor.39
Non-party, Bill Reimann, began serving as a BB USA director in 2015 (after
the Listeria issues were discovered at Blue Bell) when Moo Partners, L.P. (“Moo”),
a private equity fund affiliated with Sid Bass,40 invested significantly in Blue Bell
(an investment that flowed up to BB USA) in response to the Blue Bell liquidity
36
Compl. ¶ 12.
37
Id. In this connection, it is alleged that “Ehlert’s uncle . . . was an old friend of [Ed and
Howard Kruse’s father] and served as a pallbearer at his funeral” in 1951. See Compl.
¶¶ 12, 22.
38
Compl. ¶ 15.
39
Id.
40
Compl. ¶ 73.
10
crisis.41 Reimann, who is also Rankin’s brother-in-law, serves as Moo’s Vice
President.42 In conjunction with Moo’s investment, BB USA’s certificate of
incorporation was amended to grant Moo the right to appoint one director designee
to the BB USA Board who would control one-third of the Board’s total voting
power.43 Reimann is Moo’s Board designee.44
B. Health Agency Inspections Reveal Unsanitary Conditions
The Complaint draws facts from FDA and state health agency inspection
reports, as well as internal company reports, to paint a checkered—albeit
incomplete—history of various sanitary issues at Blue Bell’s three production plants
from 2009 through the Listeria monocytogenes crisis in early 2015. These reports
are integral to the Complaint and so I discuss them in some detail below.
The Complaint cites reports of unsanitary conditions at Blue Bell plants dating
back to 2009. A report of an FDA inspection of the Brenham plant, dated July 24,
2009, noted two instances of uncontained condensation, “one from a pipe carrying
liquid caramel . . . dripping into three gallon cartons waiting to be filled, and one
41
Compl. ¶ 19.
42
Compl. ¶¶ 15, 19.
43
Compl. ¶ 19.
44
See Compl. ¶¶ 19, 86.
11
dripping into ice cream sandwich wafers.”45 In response, that same day, Blue Bell
installed “stainless steel shrouds with sanitary welds around the fillers of all ice
cream sandwiches” to address the issue, and the FDA “verified” the fix.46 In a
follow-up letter to the FDA, Paul Kruse emphasized that “condensation is treated by
Blue Bell as a serious concern.”47
In a May 12, 2010 inspection report, the FDA noted a condensation drip,
“ripped and open containers of ingredients, inconsistent hand-washing and glove use
and a spider and its web near the ingredients.”48 The report also verified that the
earlier condensation issues from July 2009 had been corrected.49
A February 29, 2012 report noted that “no significant objectionable conditions
[were observed,] [no] FDA 483 [for violations] was . . . issued” and “[n]o voluntary
corrections were implemented during the inspection.”50 Similarly, an FDA report
45
Compl. ¶¶ 48–49.
46
Oct. 30, 2017 Transmittal Aff. of Daniyal Iqbal in Supp. of Defs.’ Opening Br. in Supp.
of Their Joint Mot. to Dismiss (“Oct. 30 Iqbal Aff.”), Ex. G (July 24, 2009 FDA Inspection
Report of Brenham Facility) at 8.
47
Compl. ¶ 49.
48
Compl. ¶ 51. See also Defs.’ Mot. to Dismiss Opening Br. (“Defs.’ Opening Br.”) 17;
Oct. 30 Iqbal Aff., Ex. I (“May 12, 2010 FDA Inspection Report of Brenham Facility”).
49
May 12, 2010 FDA Inspection Report of Brenham Facility 1–2.
50
Oct. 30 Iqbal Aff., Ex. B (“Feb. 29, 2012 FDA Inspection Report of Brenham Facility”)
at 11. Other FDA reports from around this same time provide an overview of Brenham’s
procedures and systems for training, operations, quality control, reporting and sanitation.
12
dated April 4, 2012 states, “[a]t the conclusion of the inspection, there were no
observations noted and a[n] FDA 483 was not issued.”51
The Alabama Department of Public Health (“ADPH”) issued various
inspection reports about the Sylacauga plant’s operations during 2010 to 2014.
A March 29, 2010 inspection report noted “equipment left on the floor and a ceiling
in disrepair in the container forming room.”52 On July 11, 2011, ADPH observed
“drips from a ceiling unit and pipelines, standing water, open tank lids and
unprotected measuring cups.”53 During its March 14, 2012 inspection, ADPH issued
instructions “to clean various rooms and items, make repairs and [alter] fruit
processing to prevent contamination.”54 In March 2013, the agency “ordered
cleaning and repairs and observed an uncapped fruit tank”; “[s]imilar findings” were
noted during a July 24, 2014 inspection.55
See, e.g., Oct. 30 Iqbal Aff., Ex. D (“Apr. 4, 2012 FDA Inspection Report of Brenham
Facility”) at 4–7.
51
Apr. 4, 2012 FDA Inspection Report of Brenham Facility 2.
52
Compl. ¶ 50.
53
Compl. ¶ 52.
54
Compl. ¶ 54.
55
Id.
13
Of Blue Bell’s three plants, the Complaint suggests that the Broken Arrow
facility was most prone to negative reporting from regulators regarding unsanitary
conditions.56 For instance, in a March 28, 2012 report, the FDA observed a “[f]ailure
to manufacture foods under conditions and controls necessary to minimize
contamination” and “[f]ailure to handle and maintain equipment, containers and
utensils used to hold food in a manner that protects against contamination.”57
In response, that same report noted that Blue Bell attributed the first issue to one
employee, “acknowledged the employee’s behavior [was] unacceptable, and
then . . . pointed out the behavior to the line supervisor, who immediately corrected
the employee.”58 With respect to the second problem—product labeling issues and
observations of residue on packaging—Blue Bell again “acknowledged that all
containers should be labeled,” and that “buckets would be visually checked for filth
56
According to a March 30, 2011 FDA inspection report, Blue Bell identified Paul Kruse
and Bridges as the “responsible Company officers” for FDA issues at this and other Blue
Bell plants. Compl. ¶ 47.
57
Compl. ¶ 53.
58
Oct. 30 Iqbal Aff., Ex. C (“Mar. 28, 2012 FDA Inspection Report of Broken Arrow
Facility”) at 12. BB LP also addressed its response to correct these issues in a follow-up
letter to the FDA. See Oct. 30 Iqbal Aff., Ex. J (“Apr. 9, 2012 Letter to the FDA”).
14
and residue.”59 The report concluded by noting an issue from the previous inspection
in March 2011 (i.e., “no soap at hand sink”) was “verified to be corrected.”60
In addition to FDA inspections, Blue Bell monitored operations at Broken
Arrow on its own during this time period. Internal Blue Bell tests for Listeria spp.
found presumptively positive tests dating back to 2013.61 A later FDA report noted
the findings were on “non-food contact areas” and “surfaces.”62 Follow-up sampling
taken in January and April 2014 and tested by Blue Bell’s “third party laboratory”
also yielded positive results for Listeria spp.63 On three occasions in April 2014,
internal company tests revealed “positive coliform [results] far above the known
regulatory limit” of 20 CFUs/mL.64 Subsequent samples showed elevated coliform
levels twice in January 2015, and five times in February 2015.65
59
A.K. Marsh. 28, 2012 FDA Inspection Report of Broken Arrow Facility 12.
60
Id. at 13.
61
Compl. ¶¶ 96, 101, 102, 106 & Ex. B at 3–4.
62
Compl., Ex. B at 3.
63
Compl. ¶¶ 96, 101, 102.
64
Compl. ¶ 96 & Ex. B at 3–4. The samples taken on April 15, 22 and 25 showed coliform
levels of 33 CFUs/mL, 34 CFUs/mL and 105 CFUs/ML, respectively. See Compl., Ex. B
at 4.
65
Compl. ¶ 96 & Ex. B at 3–4. The Complaint notes one positive result in January 2015,
but the FDA report notes elevated results on both January 12 and January 21, 2015.
Compare Compl. ¶ 96, with Compl., Ex. B at 3–4. The Complaint, however, does not draw
a connection between elevated coliform levels and the Listeria crisis. Instead, it appears
15
Plaintiff alleges the minutes of BB USA’s monthly Board meetings in 2014
show “a lack of reporting from management to the Board regarding contamination”
and no “report or discussion regarding Listeria or positive test results.”66
Specifically, “there is no reference to Listeria or the lab reports in the minutes” for
January, February or March 2014, and neither the Listeria nor coliform test results
were reported or discussed in April 2014.67 While the April 29, 2014 minutes do
reference a report Bridges delivered to the BB USA Board regarding “Broken Arrow
and Sylacauga plant operations,” they provide no further details regarding the
specific topics addressed in the report. 68
Other BB USA Board meeting minutes from 2014 show regular reports from
Paul Kruse and Bridges on plant and manufacturing operations, although there are
no specific mentions of sanitary conditions.69 The reports, instead, addressed
matters such as new equipment at the Brenham facility, a “new hardening and
that the references to positive coliform tests are intended to support an inference of
generally unsanitary conditions at Blue Bell facilities.
66
Compl. ¶¶ 44, 46, 101, 108. Plaintiff obtained BB USA’s Board minutes beginning in
January 2014. See Compl. ¶ 101.
67
Compl. ¶¶ 101, 102, 108.
68
Compl. ¶ 102.
69
June 13, 2018 Transmittal Aff. of Vera Belger in Supp. of Pl.’s Supplemental Letter in
Opp’n to Defs.’ Mot. to Dismiss (“June 13 Belger Aff.”), Ex. C (“Apr. 29, 2014 BB USA
Board Meeting Mins.”) at 3.
16
palletizing area,” “newly hired personnel” and “a good report from the TCEQ.”70
The June 26, 2014 BB USA Board meeting minutes state that Bridges reported on
several items, including production, “training grants,” an oven overhaul to “help out
with production volumes and product quality” and, notably, that “[B]oard members
will be touring the new palletizing and cold storage area after next month’s
meeting.”71 According to Plaintiff, minutes from the September 30, 2014 BB USA
Board meeting state that Bridges reported “[t]he recent Silliker audit went well,” but
do not state that a formal report was delivered to the Board or that the Board
discussed the matter in any detail.72 The Board meeting on October 29, 2014
featured a similar report from Bridges that “[BB LP] scored well on recent third
party audits,” but the minutes contain “no reference to the identities of the auditors
or the [content] of the audits, and no evidence of Board discussions of the particular
audit reports or information.”73
70
Apr. 29, 2014 BB USA Board Meeting Mins. 3. I assume “TCEQ” refers to the Texas
Commission on Environmental Quality.
71
June 13 Belger Aff., Ex. E (“June 26, 2014 BB USA Board Meeting Mins.”) at 3.
72
Compl. ¶¶ 104–05. Silliker served as Blue Bell’s third-party auditor for sanitation issues
in 2014. See Oral Argument on Defs.’ Mot. to Dismiss. Tr. at 71:10–17 (D.I. 40).
73
Compl. ¶¶ 105, 108.
17
C. The 2015 Product Recall and Company Fallout
In 2014, Blue Bell was the best-selling ice cream brand in the United States
based on its comparative sales area.74 Its products were sold to consumers in twenty-
three states; it generated revenues in excess of $700 million annually; and it paid a
quarterly dividend to stockholders of $4,000 per share.75
On January 30, 2015, the Brenham plant “ceased production” to “undergo
routine cleaning and overhauling.”76 A few days later, the South Carolina
Department of Health and Environmental Control discovered Listeria
monocytogenes bacteria in a routine sampling of Blue Bell products.77 The Texas
Department of State Health Services notified Blue Bell of a similar finding on
February 13, 2015.78 Prior to notification of the contamination, internal company
tests at Brenham showed positive results for Listeria monocytogenes in January and
February 2015.79 The BB USA Board held a special meeting after the annual
74
Compl. ¶ 24.
75
Compl. ¶¶ 24–25.
76
Compl., Ex. A at 2–3.
77
Compl., pmbl., ¶¶ 59, 109.
78
Compl., pmbl., ¶¶ 59, 61, 96, 109.
79
Compl. ¶¶ 59, 96.
18
stockholders meeting on February 19, 2015.80 The minutes reflect “no report or
discussion of Listeria, any product contamination, facilities problems or any product
recall.”81
Although the precise date is unclear from the Complaint, on or about
February 23, Blue Bell initiated a “recall of products.” The recall is mentioned in
the minutes of the Board’s regular monthly meeting on February 25,82 where Paul
Kruse reported to the other directors that “[t]he FDA is working with Texas health
inspectors regarding [Blue Bell’s] recent recall of products. More information is
developing and should be known within the next days or weeks.” 83 Soon after, the
FDA and state health agencies in Texas and Kansas found Listeria contamination in
other Blue Bell ice cream products.84 Unfortunately, the contamination was not
contained—the Centers for Disease Control and Prevention identified ten people
who contracted listeriosis as a result of the contamination, three of whom died.85
80
Compl. ¶ 109.
81
Id.
82
Compl. ¶ 110.
83
Id.
84
Compl. ¶¶ 61–63.
85
Compl. ¶ 63.
19
Revelations of the listeriosis cases and resulting deaths and injuries devastated
Blue Bell’s business. By April 2015, Blue Bell had shut down all of its production
operations and instituted a recall of all products.86 On April 10, 2015, the BB USA
Board members were informed of a potential Department of Justice investigation
into the contamination.87 Contemporaneous FDA inspections of Blue Bell’s
manufacturing plants revealed a multitude of food safety hazards at those facilities.88
FDA investigators inspecting the Texas Plant in March, April and May 2015
observed, among other things:
 “[f]ailure to manufacture foods under conditions and controls necessary to
minimize the potential for growth of microorganisms”;
 that “[t]he procedure used for cleaning and sanitizing of [plant] equipment
ha[d] not been shown to provide adequate cleaning and sanitizing”;
 that “[t]he plant [was] not constructed in such a manner as to prevent
condensate from contaminating food and food-contact surfaces”;
 “[f]ailure to clean food-contact surfaces as frequently as necessary to
protect against contamination of food”;
 “[f]ailure to wear beard covers in an effective manner”; and
 “[f]ailure to maintain buildings in repair sufficient to prevent food from
[be]coming adulterated.”89
86
Compl. ¶¶ 65–68.
87
Compl. ¶ 119.
88
Compl. ¶¶ 65–68 & Exs. A at 1–4, B at 1–10 & C at 1–3.
89
Compl. ¶ 65.
20
FDA inspections of the Oklahoma Plant in March and April 2015 yielded similar
negative reports, including:
 “[f]ailure to manufacture and package foods under conditions and controls
necessary to minimize the potential growth of microorganisms and
contamination”;
 “[f]ailure to perform microbial testing where necessary to identify
sanitation failures and possible food contamination”;
 that “[t]he procedure use[d] for cleaning and sanitizing of [plant]
equipment and utensils ha[d] not been shown to provide adequate cleaning
and sanitizing treatment”;
 “[f]ailure to provide running water at a suitable temperature for cleaning
of equipment, utensils and food-packaging materials”;
 that “[t]he plant [was] not constructed in such a manner as to prevent drip
and condensate from contaminating food, food-contact surfaces, and food
packaging materials”;
 that “[e]mployees did not wash and sanitize hands thoroughly in an
adequate hand-washing facility after each absence from the work station
and at any time their hands may have become soiled or contaminated”; and
 “[f]ailure to store cleaned and sanitized portable equipment in a location
and manner which protects food-contact surfaces from contamination.”90
The FDA report on the Alabama Plant, dated April 30, 2015, detailed much of the
same:
 “[f]ailure to maintain food contact surfaces to protect food from
contamination by any source, including unlawful indirect food additives”;
 that “[t]he design and materials of equipment and utensils [did] not allow
proper cleaning”;
 that “[a]ll reasonable precautions [were] not taken to ensure that
production procedure [did] not contribute contamination from any source”;
 that “[e]mployees did not wash and sanitize hands thoroughly in an
adequate hand-washing facility at any time their hands may have become
soiled or contaminated”; and
90
Compl. ¶ 66.
21
 that “[n]onfood-contact equipment in manufacturing areas [was] not
constructed so that it [could have been] kept in clean condition.” 91
In addition to multiple lawsuits brought against Blue Bell by injured
consumers,92 the recall and complete shutdown of production caused Blue Bell to
lay off 37% of its 3,900-person workforce and prompted BB USA to warn its
shareholders that it was on the brink of collapse.93 With all Blue Bell production
operations shut down, Blue Bell (and BB USA) faced an impending liquidity crisis;
Blue Bell needed funding for working capital of approximately $125 million.94
Blue Bell management promptly sought outside financing, first from
JP Morgan Chase,95 and then from Moo. Moo’s proposal was to provide Blue Bell
with a $125 million credit facility and $100 million cash in exchange for a warrant
to acquire Blue Bell partnership interests at $50,000 per unit.96 On May 18, 2015,
the BB USA Board determined that the Moo proposal was not “the best available
option for the Partnership” and authorized management to proceed with an offering
91
Compl. ¶ 67.
92
Compl. ¶¶ 87–93.
93
Compl. ¶¶ 69–71.
94
Compl. ¶ 71.
95
Compl. ¶ 72.
96
Compl. ¶ 74.
22
of convertible securities to existing stockholders and unitholders.97 After
considering a decreased revenue forecast, a drop in value, competing sponsorship
proposals and an unsuccessful offering of convertible securities, however, the Board
returned to Moo and entertained a revised proposal.98
Moo’s revised proposal provided for the same levels of financing and included
a provision granting Moo a warrant to purchase 42% of BB USA’s stock for $50,000
per share and rights of first refusal respecting any issuances or sales of BB USA
stock.99 The revised proposal also called for an amendment to BB USA’s certificate
of incorporation to grant Moo the right to appoint one BB USA Board designee, who
would be entitled to one-third of the Board’s total voting power.100 At its July 7,
97
Compl. ¶¶ 72, 74.
98
Compl. ¶¶ 75–82.
99
Compl. ¶¶ 81, 86; see Defs.’ Opening Br. 28. See also Pl.’s Answering Br. in Opp’n to
Defs.’ Mot. to Dismiss (“Pl.’s Answering Br.”) 14 (The Moo proposal included
“$125 million of senior secured debt with detachable warrants exercisable through January
2018 to purchase a 1/3 interest in the Company’s outstanding stock and a 10% interest in
Blue Bell Creameries, L.P. for $100 million. This warrant price equated to $50,000 per
share.”) (internal citations omitted).
100
See Compl. ¶ 19. See also Pl.’s Answering Br. 14 (“The financing also required an
amendment to the Company’s Certificate of Incorporation to provide a Company Board
seat to Moo Partners with 1/3 of the total Board voting power on matters submitted to the
Board. With the current 11 directors on the Board, this 1/3 constitutes five of 15 votes.”)
(internal citation omitted).
23
2015 meeting, “the Board adopted a resolution accepting the [revised] Moo
financing proposal and installing Reimann on the Board.”101
D. Federal and State Regulation of Blue Bell
Under the Federal Food, Drug and Cosmetic Act (“FDCA”),102 managers of
food manufacturers like Blue Bell must ensure, among other things, that all
employees who manufacture and process food are “qualified” to do so and that the
manufacturing facilities develop and implement a “food safety plan” that includes
“hazard analysis,” preventative controls and oversight and management of
preventative controls.103 FDA regulations implement the FDCA. Among the FDA
101
Compl. ¶ 86.
102
52 Stat. 1040 (1938) (codified as amended at 21 U.S.C. §§ 301–399h (2012)).
103
21 C.F.R. § 117.126. See also 21 U.S.C. § 331 (prohibiting the introduction of
adulterated food into interstate commerce); 21 U.S.C. § 342 (defining adulterated food);
21 U.S.C. § 350d (requiring facilities engaged in manufacturing, processing, packing, or
holding food for human consumption to register with the Secretary of Health and Human
Services and to assure that the FDA will be permitted to inspect such facility); 21 U.S.C.
§ 350c (authorizing the Secretary of Health and Human Services to regulate the
establishment and maintenance of records); 21 U.S.C. § 374 (authorizing the FDA to
inspect food manufacturing facilities and permitting operators to use an accredited
person—as defined under § 374(g)(3)—to conduct inspections of the establishment). The
FDCA is administered by the FDA, a federal agency within the Department of Health and
Human Services. See 21 U.S.C. § 393.
24
regulations relevant here are those codified at 21 C.F.R. Parts 110 and 117, which
provide, in pertinent part104:
 “All operations in the . . . manufacturing, packaging, and storing of food shall
be conducted in accordance with adequate sanitation principles. Appropriate
quality control operations shall be employed to ensure that food is suitable for
human consumption and that food-packaging materials are safe and suitable.
Overall sanitation of the plant shall be under the supervision of one or more
competent individuals assigned responsibility for this function.”105
 The “operator . . . in charge of a facility”106 “must prepare . . . and implement
a written food safety plan,”107 which must include provisions for:
o “conduct[ing] a hazard analysis to identify and evaluate based on
experience, illness data, scientific reports, and other information,
known or reasonably foreseeable hazards for each type of food
manufactured, processed, packed, or held at your facility to determine
whether there are any hazards requiring a preventive control”108;
o “identify[ing] and implement[ing] preventative controls to provide
assurances that any hazards requiring a preventative control will be
significantly minimized or prevented and the food manufactured,
processed, packed, or held by [the] facility will not be adulterated under
section 402 of the [FDCA]”109;
104
D.R.E. 202(a)(2) (The court “shall take judicial notice of the . . . statutes of the United
States, and every state, territory and jurisdiction of the United States.”).
21 C.F.R. § 110.80 (“Compliance with this requirement may be verified by any effective
105
means . . . .”).
106
Id. § 117.3.
107
Id. § 117.126.
108
Id. § 117.130(a)(1) (the hazard analysis must identify and evaluate hazards including,
pathogens, chemical hazards, facility conditions and processing procedures).
109
Id. § 117.135(a)(1).
25
o implementing “[p]rocess controls . . . to ensure the control of
parameters during operations such as heat processing, acidifying,
irradiating, and refrigerating foods”110;
o implementing “[s]anitation controls . . . to ensure that the facility is
maintained in a sanitary condition adequate to significantly minimize
or prevent hazards such as environmental pathogens, biological hazards
due to employee handling, and food allergen hazards”111;
o “establish[ing] a written recall plan for the food . . . that describe[s] the
steps to be taken, and assign[s] responsibility for taking those steps”112;
o “monitor[ing] the preventative controls with adequate frequency to
provide assurance that they are consistently performed”113;
o “verify[ing] that preventative controls are consistently implemented
and are effectively and significantly minimizing or preventing the
hazards . . . includ[ing] . . . product testing”114;
o “document[ing] the monitoring of preventative controls”115; and
110
21 C.F.R. § 117.135(c)(1).
111
Id. § 117.135(c)(3); id. § 117.35 (requiring physical facilities “be maintained in a clean
and sanitary condition and kept in repair adequate to prevent food from becoming
adulterated,” and requiring verification of compliance by any effective means). See also
id. § 117.10(a) (“Personnel must be instructed to report such health conditions to their
supervisors.”).
112
Id. § 117.139(a)–(b).
113
21 C.F.R. § 117.145(b).
114
Id. § 117.165(a)(2), (b)(2) (product testing must be scientifically valid, identify test
microorganisms, and specify procedures).
115
Id. § 117.145(c)(1).
26
o the documentation to be “[r]eview[ed] . . . by (or under the oversight
of) a preventative controls qualified individual.”116
Under 21 U.S.C. § 333, persons responsible for introduction of adulterated food
products into interstate commerce are subject to civil and criminal penalties.117
The Texas Health and Safety Code, Chapter 431 and related rules, govern the
manufacturing and distribution of products, including ice cream, at the Brenham
plant.118 In Oklahoma, the Broken Arrow plant is regulated by the Food Safety Rules
under Title 35, chapter 37.119 And in Alabama, the Sylacauga plant is governed
under the Rules of State Board of Health, Chapter 420-3-22 for Food Establishment
Sanitation, by the Bureau of Environmental Services.120
Despite the far-reaching regulatory schemes that governed Blue Bell’s
operations at the time of the Listeria contamination, the Complaint contains no
allegations that Blue Bell failed to implement the monitoring and reporting systems
required by the FDCA, FDA regulations or state statutes (or that it was ever cited
116
Id. § 117.165(a)(4).
117
See also Compl. ¶¶ 28–29.
118
Compl. ¶ 34. See, e.g., Tex. Health & Safety Code Ann. §§ 431.042–431.043
(permitting the Texas Department of State Health Services to inspect facilities and examine
records).
119
Compl. ¶ 34. See, e.g., Okla. Stat. tit. 63, § 1-1115 (authorizing facility inspections).
120
Compl. ¶ 34. See, e.g., Ala. Admin. Code r. 420-3-22.08 (requiring food establishments
to hold a permit and authorizing facility inspections by the State Health Officer).
27
for such a failure). Instead, the Complaint stands on the general allegations that “the
Defendants breached their fiduciary duties by willfully failing to govern
management and to institute any system of corporate controls and reporting at the
Company regarding health and safety compliance.”121
E. This Litigation
Following Blue Bell’s Listeria crisis, Plaintiff demanded and obtained books
and records from BB USA under 8 Del. C. § 220. He then commenced this
derivative action on August 14, 2017. Defendants moved to dismiss the Complaint
on October 30, 2017. Following the hearing on the motion, the Court requested
supplemental submissions from the parties addressing certain issues relating to board
oversight duties at the holding company level with respect to the operations of an
indirect subsidiary.122 The Court received the supplemental submissions on June 13,
2018.
II. ANALYSIS
The Motion presents several interesting issues, many of which appear to be of
first impression. Among them: (1) what are the fiduciary obligations of directors of
a holding company with respect to oversight of the company’s indirect operating
121
Compl. ¶ 140.
122
D.I. 42.
28
subsidiary, particularly when the subsidiary, by contract, is managed exclusively by
a separate entity?; (2) do corporate officers owe Caremark duties?; and (3) if not,
what are the fiduciary duties owed by an officer in a derivative case involving
“corporate trauma” and by what standard are those duties to be measured? While
these issues may well need to be addressed at some point, this is not the case to
address them. Before reaching the merits of Plaintiff’s derivative claims, the Court
must first determine whether Plaintiff has met his burden to plead with particularity
a basis for the Court to find demand futility. He has not. Having so concluded,
I need not reach Defendants’ arguments under Rule 12(b)(6). The analysis begins
and ends with demand futility under Rule 23.1.
“[A] cardinal precept of the General Corporation Law of the State of Delaware
is that directors, rather than shareholders, manage the business and affairs of the
corporation.”123 Plaintiff’s claims against the Officer Defendants and Director
Defendants allege harm suffered by BB USA. As such, all parties agree that the
claims are derivative. Because stockholder derivative suits “by [their] very
nature . . . impinge on the managerial freedom of directors,”124 our law requires that
a stockholder satisfy the threshold demand requirements of Court of Chancery
123
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (citing 8 Del. C. § 141(a)), overruled
on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
124
Id.
29
Rule 23.1 before he may assume control of a claim belonging to the corporation.
To do so, the plaintiff must demand that the board of directors pursue the claim or,
alternatively, demonstrate that a demand on the board would be futile such that the
demand requirement should be excused.125 When a derivative plaintiff elects not to
make a demand upon the board, Rule 23.1 places a heightened pleading burden on
that plaintiff to meet “stringent requirements of factual particularity that differ
substantially from the permissive notice pleadings” permitted by Court of Chancery
Rule 8 and facilitated by Court of Chancery Rule 12(b)(6)’s reasonable
conceivability standard.126
This Court employs one of two tests when determining whether demand on
the board would be futile. The first applies when a plaintiff challenges a decision of
the board of directors to take affirmative action.127 The second, established in Rales
v. Blasband,128 applies where, as here, a plaintiff challenges board inaction such as
when a board is alleged to have consciously disregarded its oversight
125
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1044
(Del. 2004).
126
Brehm, 746 A.2d at 254.
127
Aronson, 473 A.2d at 814.
128
634 A.2d 927 (Del. 1993).
30
responsibilities.129 Under the Rales test, the court “must determine whether or not
the particularized factual allegations of a derivative stockholder complaint create a
reasonable doubt that, as of the time the complaint is filed, the board of directors
could have properly exercised its independent and disinterested business judgment
in responding to a demand.”130 One basis upon which the court might question the
board’s independence and disinterestedness under Rales is when the complaint
pleads particularized facts regarding board inaction of a nature that would expose
the board to “a substantial likelihood” of personal liability.131 When engaged in this
inquiry, the court must be mindful that “the mere threat of personal liability . . . is
insufficient.”132
“On a motion to dismiss pursuant to Rule 23.1, the Court considers the same
documents, similarly accepts well-pled allegations as true, and makes reasonable
inferences in favor of the plaintiff—all as it does in considering a motion to dismiss
129
Wood v. Baum, 953 A.2d 136, 140 (Del. 2008) (“The [Rales] test applies where the
subject of a derivative suit is not a business decision of the Board but rather a violation of
the Board’s oversight duties.”). The parties do not dispute that Rales states the demand
futility test applicable here. See Defs.’ Opening Br. 30; Pl.’s Answering Br. 27.
130
Rales, 634 A.2d at 934.
131
Id. at 936 (quoting Aronson, 473 A.2d at 815). See also In re Citigroup Inc. S’holder
Deriv. Litig., 964 A.2d 106, 121 (Del. Ch. 2009) (“Demand is not excused solely because
the directors would be deciding to sue themselves”).
132
Aronson, 473 A.2d at 815.
31
under Rule 12(b)(6).”133 Given the heightened pleading requirements of Rule 23.1,
however, “conclusory allegations of fact or law not supported by allegations of
specific fact may not be taken as true.”134 Because the Complaint cites documents
that Plaintiff obtained through his Section 220 demand, I may consider aspects of
those documents under the incorporation-by-reference doctrine to determine
whether the Complaint contains sufficient allegations to demonstrate demand
futility.135 I may also consider matters subject to judicial notice, including state and
federal statutes and regulations.136
A. Demand Is Not Excused as to Count I
Count I purports to state a “derivative claim for breach of fiduciary duties of
loyalty and care for knowingly disregard [sic] of contammination [sic] risks and
failure to oversee Blue Bell’s operation and compliance” against Paul Kruse (as BB
USA CEO) and Bridges (as BB USA Vice President of Operations).137 At first
133
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 883 A.2d 961, 976
(Del. Ch. 2003) (citing White v. Panic, 783 A.2d 543, 549 (Del. 2001)), aff’d, 845 A.2d
1040 (Del. 2004).
134
Grobow v. Perot, 539 A.2d 180, 187 (Del. 1988).
135
See Reiter v. Fairbank, 2016 WL 6081823, at *5–6 (Del. Ch. Oct. 18, 2016);
Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016).
136
D.R.E. 201, 202.
137
Compl., Count I.
32
glance, one might surmise that Plaintiff is attempting to state a Caremark claim
against corporate officers. In their Motion, Defendants vigorously maintain that a
Caremark theory of liability does not work with respect to corporate officers.138
Plaintiff apparently now agrees that Caremark is not implicated by Count I and,
instead, characterizes Count I as a claim for breach of the duty of care arising out of
the Officer Defendants’ alleged failure to discharge their “direct acknowledged
responsibility for the management of the Company’s operations and the detection,
prevention and correction of contamination-related problems.”139 In response,
Defendants argue that the claim fails either because the officers are entitled to the
presumptions of the business judgment rule or because Delaware law, in this
circumstance, would require Plaintiff to allege that the officers acted in bad faith,
which the Complaint fails to do.140
138
Defs.’ Opening Br. 45 (citing Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d
362, 365 (Del. 2006) (“[W]e hold that Caremark articulates the necessary conditions for
assessing director oversight liability.”) (emphasis supplied); In re Citigroup Inc. S’holder
Deriv. Litig., 964 A.2d at 125 (“The Delaware Supreme Court made clear in Stone that
directors of Delaware corporations have certain responsibilities to implement and monitor
a system of oversight . . . .”) (emphasis supplied)). See also Canadian Commercial
Workers Indus. Pension Plan v. Alden, 2006 WL 456786, at *7 (Del. Ch. Feb. 22, 2006)
(“[N]either logic nor precedent suggests [that a fiduciary] ha[s] a separate enforceable duty
to oversee his own actions . . . .”).
139
Pl.’s Answering Br. 36.
140
Defs.’ Reply Br. in Further Supp. of Their Joint Mot. to Dismiss (“Defs.’ Reply Br.”)
16–19 (citing Michael Follett, Gantler v. Stephens: Big Epiphany or Big Failure? A Look
at the Current State of Officers’ Fiduciary Duties and Advice for Potential Protection,
35 Del. J. Corp. L. 563, 576 (2010) (suggesting that officers are protected by the business
33
As best I can tell, our courts have yet to decide the nature and scope of a
corporate officer’s fiduciary duties in the context of alleged oversight failures. For
its part, the academy has engaged in a thorough debate of officer liability issues and,
in the midst of the debate, several commentators have expressed surprise that the
Delaware courts have yet to provide any specific direction.141 While I certainly
appreciate the need for guidance in this important area of our law, no new guidance
will be forthcoming here. For reasons explained below, Plaintiff cannot pass through
the demand futility filter. Under these circumstances, any analysis of the officer
liability issues would be pure dicta.142
Plaintiff maintains that the Officer Defendants face a “substantial likelihood
of liability” and that a majority of the BB USA Board members have such close ties
judgment rule); Caspian Select Credit Master Fund Ltd. v. Gohl, 2015 WL 5718592, at *12
(Del. Ch. Sept. 28, 2015) (holding that a corporate officer may “be liable for inaction, but
only if the plaintiff can satisfy the ‘extremely high standard’ of ‘show[ing] a lack of good
faith as evidenced by sustained or systematic failure . . . to exercise reasonable oversight.’”)
(emphasis supplied).
141
See, e.g., Lyman P.Q. Johnson, Corporate Officers and the Business Judgment Rule,
60 Bus. Law. 439 (2005) (applying principles of agency and making a persuasive case that
officer conduct should be evaluated under a negligence paradigm); Lawrence A.
Hamermesh & A. Gilchrest Sparks III, Corporate Officers and the Business Judgment
Rule: A Reply to Professor Johnson, 60 Bus. Law. 865 (2005) (also making a persuasive
case that Delaware courts should approach officer liability in much the same manner they
approach director liability). In both articles, the commentators note that Delaware courts
have yet to provide definitive guidance on these issues.
142
See State ex rel. Smith v. Carey, 112 A.2d 26 (Del. 1955) (holding that courts ordinarily
should avoid expressing obiter dicta).
34
to the Officer Defendants, particularly Paul Kruse, that they would be incapable of
impartially considering a demand to bring a fiduciary duty claim against them on
behalf of BB USA. For purposes of this demand futility analysis only, I will assume,
without deciding, that the Officer Defendants face a substantial likelihood of liability
on Count I. Even so, Plaintiff’s allegations of conflicts against a majority of the
BB USA Board fall well short of the particularity mark set by Rule 23.1.
Consequently, demand as to Count I is not excused.143
At the time Plaintiff filed his Complaint, BB USA’s “demand” Board
comprised eleven members: Barnhill, Bridges, Dickson, Ehlert, Rankin, Reimann,
Ryan, MacInerney, Paul Kruse, Howard Kruse and Jim Kruse.144 BB USA’s
certificate of incorporation provides that the total votes possessed by this eleven-
member Board is fifteen.145 Moo’s designee (Reimann) is entitled to exercise five
of the fifteen votes and each of the other directors is entitled to exercise one vote.146
143
I acknowledge that the BB USA Board might be disabled from considering a demand
with respect to Count I if a majority of its members faced a substantial likelihood of liability
as to Count II, particularly given that both Counts rest on the same factual predicates. For
the reasons discussed below, however, I am satisfied that Plaintiff has failed to state a
Caremark claim in Count II.
144
Harris v. Carter, 582 A.2d 222, 228 (Del. Ch. 1990) (Allen, C.) (holding that demand
futility is determined by an assessment of the board as comprised at the time the complaint
was filed).
145
Compl. ¶¶ 19, 81.
146
Compl. ¶ 19, 115. See 8 Del. C. §141(d) (“If the certificate of incorporation provides
that 1 or more directors shall have more or less than 1 vote per director on any matter, every
35
Accordingly, for demand excusal purposes, a majority of the Board consists of a
collection of BB USA directors holding a majority of the Board’s voting power
(i.e., at least eight votes).147 Plaintiff concedes that Reimann and Ryan are
independent.148 As noted, together these directors possess six of the fifteen total
Board votes. Plaintiff also concedes that, to avoid dismissal, he must have pled with
particularity facts that raise a reasonable doubt regarding the independence of at least
eight of the remaining directors.149 As pled, the Complaint falls short of this target.
The inquiry for director independence is contextual and asks whether a
director’s decision was “based on the merits of the subject before the board rather
than on extraneous considerations or influences.”150 “To show lack of independence,
the plaintiff must allege that a director is so beholden to an interested director that
his or her discretion would be sterilized.”151 Specifically, the relationship between
reference in this chapter to a majority or other proportion of the directors shall refer to a
majority or other proportion of the votes of the directors.”).
147
It follows, then, that Reimann and any three other BB USA directors constitute a
majority of the Board, as do any eight BB USA directors other than Reimann.
148
Pl.’s Answering Br. 33.
149
Pl.’s Answering Br. 28, 33.
Chester Cty. Empls.’ Ret. Fund v. New Residential Inv. Corp., 2016 WL 5865004, at *9
150
(Del. Ch. Oct. 7, 2016); Orman v. Cullman, 794 A.2d 5, 25 n.50 (Del. Ch. 2002).
151
Chester Cty., 2016 WL 5865004, at *9.
36
the challenged director and the interested director must be “so close that one could
infer that the non-interested director would be more willing to risk his or her
reputation than risk the relationship with the interested director.”152 With these
standards in mind, the Court’s function is to “count heads.”153
1. Bridges, Howard Kruse and Jim Kruse
Directors Bridges, Howard Kruse and Jim Kruse are members of Paul Kruse’s
immediate or extended family. Defendants concede, for purposes of their Motion,
that these directors “could not disinterestedly consider a suit against Paul Kruse due
to their family ties.”154
2. MacInerney
The Kruse family apparently makes for interesting reading; or, at least, two
members of the BB USA Board thought so. According to the Complaint, Ryan
152
Robotti & Co., LLC v. Liddell, 2010 WL 157474, at *12 (Jan. 14, 2010). See also In re
infoUSA, Inc. S’holders Litig., 953 A.2d 963, 985 (Del. Ch. 2007) (“To demonstrate that a
given director is beholden to a dominant director [or officer], plaintiffs must show that the
beholden director receives a benefit ‘upon which the director is so dependent or is of such
subjective material importance that its threatened loss might create a reason to question
whether the director is able to consider the corporate merits of the challenged transaction
objectively.’”).
153
In re Ezcorp, Inc. Consulting Agmt. Deriv. Litig., 2016 WL 301245, at *34 (Del. Ch.
Jan. 25, 2016) (“To determine whether the Board could properly consider a demand, a court
counts heads.”).
154
Defs.’ Opening Br. 34.
37
“begged Ed Kruse to write his memoir.”155 The Complaint does not say whether that
book was ever written. MacInerney, on the other hand, did write a book about the
Kruse family and then another about Blue Bell.156 The Complaint alleges that “[t]he
acknowledgments in [both] books demonstrate [MacInerney] is entranced by the
Kruse family and Blue Bell and cannot consider their actions impartially.”157 It also
alleges that Paul Kruse wrote the foreword for one of the books in which he
expressed “a sincere word of appreciation” to MacInerney for writing the book.158
While Defendants strongly contest Plaintiff’s contention that MacInerney is
not independent, the allegations regarding her unique ties to Paul Kruse present a
close call. Specifically, one might have reason to doubt whether MacInerney’s
fascination with, and apparently close connection and access to, Paul Kruse and his
family will not “heavily influence [her] ability to exercise impartial judgment.”159
When the court has reason to doubt, the court is obliged to conclude that the
155
Compl. ¶¶ 17, 136.
156
Compl. ¶¶ 18, 137.
157
Id.
158
Id.
159
Sandys v. Pincus, 152 A.3d 124, 130 (Del. 2016).
38
complaint adequately pleads a lack of independence for purposes of demand
futility.160
3. Dickson and Barnhill
Dickson currently serves as the President of BB USA and has worked for
BB USA since 1981. “Before being named President in 2017, he served as general
sales manager, plant manager of the Broken Arrow, Oklahoma plant, and then as VP
of Sales and Marketing at the Company, a position he was appointed to in 2010.”161
According to the Complaint, Dickson is “indebted to the Kruse family for his
career.”162
Barnhill has either worked for or been affiliated with Blue Bell for his entire
work life (nearly sixty years). Here again, the Complaint alleges that Barnhill “owes
his career to the Kruse family and has close personal relationships with several
members of the Kruse family,” including with Jim Kruse who currently serves as
President of a bank founded by Barnhill.163
160
In re Coopers Co., Inc. S’holders Deriv. Litig., 2000 WL 1664167, at *7 (Del. Ch.
Oct. 31, 2000).
161
Compl. ¶ 11.
162
Compl. ¶ 130.
163
Compl. ¶ 128.
39
Defendants contend the allegations regarding Dickson and Barnhill amount to
nothing more than conclusory allegations that these directors are friendly with the
Kruse family and have long-term relationships with the Blue Bell enterprise, a group
of entities not dominated or controlled by the Kruse family. 164 Citing Beam,
Defendants argue, “[m]ere allegations that [directors] move in the same business and
social circles, or a characterization that they are close friends, is not enough to negate
independence for demand excusal purposes.”165
I agree with Defendants that the Complaint’s allegations with respect to
Dickson and Barnhill are relatively thin. But, at this stage, I must draw reasonable
inferences in favor of Plaintiff, not Defendants.166 In doing so, I count these two
directors on Plaintiff’s side of the ledger.167
164
Defs.’ Opening Br. 36–37.
165
Beam, 845 A.2d at 1051–52.
166
Del. Cty. Empls.’ Ret. Fund v. Sanchez, 124 A.3d 1017, 1022 (Del. 2015).
167
See In re Freeport-McMoran Sulphur, Inc. S’holder Litig., 2005 WL 1653923, at *12
(Del. Ch. June 30, 2005) (“Latiolais had worked for the Common Directors for almost
twenty years and had become a wealthy individual in their employ. To argue that Latiolais
was independent of the Common Directors because he formally severed ties with some
Freeport entities does not take into account the nature and extent of his overwhelming,
career-long involvement with Freeport entities, including the entire span of MOXY’s life.
Delaware law recognizes that such extensive ties can operate as an exception to the general
rule that past relationships do not call into question a director's independence.”).
40
4. Ehlert
Ehlert has never worked for any Blue Bell entity. He is President of an
insurance company in Brenham that has no alleged ties to Blue Bell or the Kruse
family.168 The most the Complaint can muster to challenge the presumption that
Ehlert is independent is to allege that the Kruse and Ehlert families are “old Brenham
families who have remained close throughout the years.” 169 This court routinely
finds conclusory allegations like these fail to meet Rule 23.1’s particularity standard
and fail to raise a reason to doubt a director’s independence.170 This case is no
exception.
5. Rankin
Rankin worked for Blue Bell for 28 years, serving as CEO from 1986 through
2014. It is alleged that, “[d]ue to donations [totaling approximately $450,000] from
the Kruse family,” the “Agricultural Complex” at Blinn College was dedicated in
Rankin’s name. While the Complaint provides no more specifics regarding the
168
Compl. ¶ 12.
169
Compl. ¶¶ 12, 131.
170
Beam, 845 A.2d at 1051–52 (allegations that directors “move in the same business and
social circles, or a characterization that they are close friends, is not enough to negate
independence.”); In re Martha Stewart Living Omnimedia, Inc. S’holder Litig., 2017
WL 3568089, at *20 (Del. Ch. Aug. 18, 2017) (same); In re J.P. Morgan Chase & Co.
S’holder Litig., 906 A.2d 808, 821 n.45 (Del. Ch. 2005) (same), aff’d, 906 A.2d 766 (Del.
2006).
41
donation (i.e., who gave how much), and makes no attempt to characterize the
materiality of the gesture, and thus likely falls short of Rule 23.1’s particularity
requirement,171 I need not reach that conclusion because the Complaint contains
other allegations that provide full comfort that Rankin is independent of Paul Kruse
and his family. Specifically, at paragraph 115, the Complaint describes at length a
Board initiative, sponsored by the concededly independent Reimann, whereby the
positions of CEO, President and Chairman of the Board, each occupied by Paul
Kruse, would be divided into separate positions to be filled by different people. The
BB USA Board initially voted to approve the split. When Paul Kruse objected and
threatened to resign, the Board voted to rescind its previous vote and reunify the
positions (to be occupied, again, by Paul Kruse). Two directors opposed rescission
of the previous vote—Reimann and Rankin.172 Given this history, Plaintiff’s
conclusory allegation that Rankin lacks independence falls flat.
171
See In re J.P. Morgan, 906 A.2d at 822 n.48 (holding that allegations regarding a
sizeable “philanthropic relationship” were insufficient to overcome presumption of
independence when the complaint lacked allegation that would allow a meaningful
assessment of materiality).
172
Compl. ¶ 115. Rankin’s vote to prevent Paul Kruse from holding the CEO, President
and Chairman positions came after the allegedly disabling contribution to Blinn College.
See Compl. ¶ 15 (“In June 2010, Rankin joined with Ed Kruse and Friends to present a
$450,000 check to the Blinn College Foundation for the newly constructed agricultural
facility . . . named the W.J. ‘Bill’ Rankin Agricultural Complex in honor of Rankin.”);
Compl. ¶ 115 (“The minutes of the February 25, 2016 meeting evidence . . . [Rankin]
[v]oting no on the motion” to rescind the Board decision to separate the position of
Chairman from the positions of President and CEO).
42
*****
Even after affording all reasonable inferences to Plaintiff, I am satisfied he
has failed to plead particularized facts that raise a reasonable doubt as to whether a
majority of the BB USA Board could impartially consider a demand.173 The
Complaint offers no reason to doubt that Reimann, Ryan, Ehlert and Rankin are
independent of the Officer Defendants and would have been capable of impartially
considering a demand. All told, these directors control eight of the Board’s fifteen
votes. Demand, as to Count I, is not excused.
B. Demand Is Not Excused as to Count II
As Chancellor Allen first observed in Caremark, and has been oft-repeated by
this court, proving liability for a failure to monitor corporate affairs is “possibly the
most difficult theory in corporation law upon which a plaintiff might hope to win a
judgment.”174 A decade after Chancellor Allen’s seminal decision, our Supreme
Court embraced the Caremark standard and clarified that in order to impose personal
173
As noted above, I have made the close calls in favor of Plaintiff notwithstanding that
Defendants have made persuasive arguments that all of the non-Kruse family directors are
independent.
Caremark, 698 A.2d at 967. See also Globis P’rs, L.P. v. Plumtree Software, Inc., 2007
174
WL 4292024, at *7 (Del. Ch. Nov. 20, 2007); Desimone v. Barrows, 924 A.2d 908, 939
(Del. Ch. 2007); Guttman v. Huang, 823 A.2d 492, 506 n.33 (Del. Ch. 2003) (each quoting
Caremark).
43
liability on directors for a failure of oversight, the Plaintiff must prove “the directors
knew that they were not discharging their fiduciary obligations.”175
At the pleadings stage, a plaintiff must allege particularized facts that satisfy
one of the necessary conditions for director oversight liability articulated in
Caremark: either (1) “the directors utterly failed to implement any reporting or
information system or controls”; or (2) “having implemented such a system or
controls, [the directors] consciously failed to monitor or oversee its operations thus
disabling themselves from being informed of risks or problems requiring their
attention.”176 These standards “draw heavily upon the concept of director failure to
act in good faith.”177 As our Supreme Court explained in In re Walt Disney Co.
Deriv. Litig., the “intentional dereliction of duty” or “conscious disregard for one’s
responsibilities,” which “is more culpable than simple inattention or failure to be
informed of all facts material to the decision,” reflects that directors have acted in
bad faith and cannot, by default, avail themselves of defenses grounded in a
presumption of good faith.178 In order to plead a claim under Caremark, therefore,
a plaintiff must plead facts that allow a reasonable inference the directors acted with
175
Stone, 911 A.2d at 370.
176
Id.
177
Id. at 369.
178
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 66 (Del. 2006).
44
“scienter” which, in turn, “requires [not only] proof that a director acted
inconsistent[ly] with his fiduciary duties,” but “most importantly, that the director
knew he was so acting.”179
Our law recognizes that “directors’ good faith exercise of oversight
responsibility may not invariably prevent employees from violating criminal laws,
or from causing the corporation to incur significant financial liability, or both.”180
Accordingly, “Delaware courts routinely reject the conclusory allegation that
because [a corporate trauma] occurred, internal controls must have been deficient,
and the board must have known so.”181 Rather, a plaintiff must plead with
particularity “a sufficient connection between the corporate trauma and the
board.”182
179
In re Massey Energy Co., 2011 WL 2176479, at *22 (Del. Ch. May 31, 2011) (emphasis
in original). See also Reiter, 2016 WL 6081823, at *7 (“The need to demonstrate scienter
to establish liability under an oversight theory follows not only from Caremark itself, but
from the existence of charter provisions exculpating directors from liability for breaches of
the duty of care that have become ubiquitous in corporate America.”).
180
Stone, 911 A.2d at 373.
181
Desimone, 924 A.2d at 940.
182
La. Mun. Police Empls.’ Ret. Sys. v. Pyott, 46 A.3d 313, 340 (Del. Ch. 2012), rev’d on
other grounds, 74 A.3d 612 (Del. 2013).
45
1. Caremark’s First Prong
Surprisingly, Plaintiff’s principal argument is that the Director Defendants
failed in their oversight duty under Caremark’s first prong by failing to implement
any reporting or information systems or controls at BB USA.183 Of course, in the
same pleading, Plaintiff describes at length the intense regulatory scrutiny under
which Blue Bell operated and the internal systems for detecting and reporting
unsanitary conditions that these regulators required to be in place.184 Importantly,
the Complaint makes no allegation that Blue Bell failed to implement these
mandated monitoring and reporting systems. To the contrary, documents
incorporated by reference in the Complaint reveal that Blue Bell distributed a
sanitation manual with standard operating and reporting procedures, and
promulgated written procedures for processing and reporting consumer
183
Of course, in this regard, Plaintiff’s burden is to plead facts that support an inference
that BB USA “utterly failed to implement any reporting or information system or controls.”
See Stone, 911 A.2d at 370. See also In re Gen. Motors Co. Deriv. Litig., 2015 WL
3958724, at *14–15 (Del. Ch. June 26, 2015) (finding the “utterly failed” standard not met
where “the Plaintiffs complain that [Defendant] could have, should have, had a better
reporting system, but not that it had no such system.”) (emphasis in original).
184
See, e.g., 21 U.S.C. §§ 331, 342(a), 350c, 350d, 374; FDA Manufacturing, Packing, or
Holding Human Food Rule, 21 C.F.R. §§ 110.80, 117.1, 117.126, 117.130(a)(1),
117.135(c), 117.139, 117.145, 117.165; Tex. Health & Safety Code Ann. § 431.001 et seq.;
Okla. Stat. tit. 63, § 1-1115; Ala. Admin. Code r. 420-3-22.08. See also Compl. ¶ 34.
46
complaints.185 Blue Bell engaged a third-party laboratory and food safety auditor to
test for the presence of dangerous contaminates in its facilities. 186 And the
Complaint acknowledges that Bridges, as Vice President of Plant Operations, “was
responsible for all Company operations . . . [and] reported directly to Paul Kruse [the
CEO and Chairman of the BB USA Board].”187 Both Bridges and Paul Kruse, in
turn, provided regular reports regarding Blue Bell operations to the BB USA Board,
including reports from the TCEQ and Silliker (a third-party food safety auditor).188
185
The FDA inspection reports detail Blue Bell’s procedures and systems for training,
operations, quality control, reporting and sanitation. See, e.g., July 24, 2009 FDA
Inspection Report of Brenham Facility 3; May 12, 2010 FDA Inspection Report of
Brenham Facility 7; Feb. 29, 2012 FDA Inspection Report of Brenham Facility 4, 7–8, 10–
11 (“All new employees undergo initial training in GMP, hand washing and sanitation, and
food handling . . . . New refresher videos and coursework are provided [periodically] . . . .
Training is documented . . . . The firm also provides employees with . . . internal training
for each department [and] . . . food safety training . . . . The firm also receives training . . .
on food protection. [. . .] [Critical Control Points] have monitoring, verification/validation
and recordkeeping associated with them. . . . There are employees in Quality Control who
oversee testing, certificates of analysis and incoming product evaluations. . . .
Environmental swabs are taken . . . . The firm has a sanitation manual with [standard
operating procedures] . . . . The firm has a procedure for documenting and investigating
complaints. [. . .] The firm conducts mock recalls . . . .”); Oct. 30 Iqbal Aff., Ex. K
(“Mar. 30, 2011 FDA Inspection Report of Broken Arrow Facility”) at 3–4; Mar. 28, 2012
FDA Inspection Report of Broken Arrow Facility 5; Apr. 4, 2012 FDA Inspection Report
of Brenham Facility 4–7.
186
Compl. ¶¶ 96, 100, 101, 104–05. See also Mar. 28, 2018 Transmittal Aff. of Daniyal
Iqbal in Further Supp. of Defs.’ Joint Mot. to Dismiss (“Mar. 28 Iqbal Aff.”), Ex. C at 3
(“The recent Silliker audit went well.”).
187
Compl. ¶ 47.
188
Apr. 29, 2014 BB USA Board Meeting Minutes; Compl. ¶¶ 104–05.
47
From his Answering Brief, it appears Plaintiff’s theory under Caremark’s first
prong is that the BB USA Board utterly failed in its oversight duty because it “had
no audit or other supervisory structure or committee with responsibility for oversight
of health, safety and sanitation controls and compliance.”189 In support of this
argument, Plaintiff cites two cases where our courts have noted the lack of an audit
committee at the board level “might” be evidence of a failure of oversight in a case
where accounting irregularities cause some form of corporate trauma.190 Plaintiff,
of course, cites no authority for the proposition that a board of directors must create
a committee to monitor and manage every aspect of risk the corporation might face,
particularly when there is undisputed evidence that risk management measures have
been taken in the company’s operational theater and the Board received reports
regarding operations at regular intervals.191
189
Pl.’s Answering Br. 20.
190
See David B. Shaev Profit Sharing Account v. Armstrong, 2006 WL 391931, at *5
(Del. Ch. Feb. 13, 2006) (addressing Caremark claim in the wake of the Enron and
WorldCom accounting disasters and noting allegations that the board utterly failed to
“assure the existence of reasonable information and reporting systems . . . might take the
form of facts that show the company entirely lacked an audit committee.”) (emphasis
supplied), aff’d, 911 A.2d 802 (Del. 2006) (TABLE); In re China Agritech, Inc. S’holder
Deriv. Litig., 2013 WL 2181514, at *18 (Del. Ch. May 21, 2013) (quoting Shaev when
addressing a Caremark claim arising from “business fraud”).
191
Compl. ¶¶ 47, 104–05, 110–11 (acknowledging reports of operational issues from Paul
Kruse to other members of the Board). See Stone, 911 A.2d at 373 (finding adequate the
board’s oversight practice of “relying on periodic reports from [employees at the
operational level of the company]”).
48
What 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.192 This is not a valid theory under the first prong of
Caremark.193 To state a first prong Caremark claim, Plaintiff was obliged to plead
particularized facts to support his contention that the BB USA Board “utterly” failed
to adopt or implement any reporting and compliance systems.194 The Complaint
pleads no such facts.
2. Caremark’s Second Prong
To establish demand futility under Caremark’s second prong, the Complaint
must “plead [particularized facts] that the board knew of evidence of corporate
misconduct—the proverbial ‘red flag’—yet acted in bad faith by consciously
192
See, e.g., Compl. ¶¶ 66, 96, 100, 112, 121.
193
See Caremark, 698 A.2d at 971 (“only a sustained or systematic failure of the board to
exercise oversight—such as an utter failure to attempt to assure a reasonable information
and reporting system exists—will establish the lack of good faith that is a necessary
condition to liability.”).
194
See Stone, 911 A.2d at 373 (admonishing that “good faith in the context of oversight
must be measured by the directors’ actions to assure a reasonable information and reporting
system exists and not by second-guessing after the occurrence of employee conduct that
results in an unintended adverse outcome”). In Stone, the Supreme Court appears quite
deliberately to have inserted the adverb “utterly” as a modifier to the phrase “failed to
implement any reporting or information system or controls.” Stone, 911 A.2d at 370.
“Utterly” means “carried to the utmost point or highest degree; absolute, total.” Utterly,
MERRIAM-WEBSTER ONLINE DICTIONARY, https://www.merriam-webster.com/dictionary
/utterly (last visited Sept. 9, 2018).
49
disregarding its duty to address that misconduct.”195 In this context, bad faith means
“the directors were conscious of the fact that they were not doing their jobs, and that
they ignored red flags indicating misconduct in defiance of their duties.”196
I confess I am unable to discern whether Plaintiff actually intends to advance
a second-prong Caremark claim. The Complaint identifies no specific red flag that
was waving before the BB USA Board. Indeed, it appears Plaintiff’s point is that
the BB USA Board did not see the Listeria crisis coming, but would have with proper
oversight.197 This is not a Caremark claim.198 There were monitoring and reporting
195
Reiter, 2016 WL 6081823, at *8 (citing Pyott, 46 A.3d at 341).
196
Armstrong, 2006 WL 391931, at *5. See also In re Citigroup Inc. S’holders Litig., 2003
WL 21384599, at *2 (Del. Ch. June 5, 2003) (noting that a director cannot be put on
“inquiry notice by something he or she never saw or heard”); Reiter, 2016 WL 6081823,
at *7 (holding that a plaintiff must demonstrate scienter to plead a Caremark claim).
197
Pl.’s Answering Br. 44. Plaintiff does contend, in his Answering Brief, that the Board
failed to “assert an active role in the management of the emerging listeria catastrophe”
after being apprised of the issue by CEO Kruse on February 25, 2015. Id. at 42–43. The
Complaint, however, pleads no facts that would support a finding of any misconduct by
the Board in this regard, much less a finding of bad faith. South v. Baker, 62 A.3d 1, 15
(Del. Ch. Sept. 25, 2012) (holding that plaintiff must allege that “the board consciously
failed to act after learning about evidence of illegality”) (emphasis supplied). See also Pl.’s
Answering Br. 44 (“The Complaint alleges that the absence of ‘red flags’ known by the
directors . . . was due to the lack of any Board system of controls . . . .”).
198
See Stone, 911 A.2d at 373 (allegations that “there ultimately may have been failures
by employees to report deficiencies to the Board [provide] no basis for an oversight claim
seeking to hold the directors personally liable for such failures by the employees”); In re
Citigroup, 2003 WL 21384599, at *2 (noting that a director cannot be put on “inquiry
notice by something he or she never saw or heard”); Armstrong, 2006 WL 391931, at *5
(holding that bad faith means “the directors were conscious of the fact that they were not
doing their jobs, and that they ignored red flags indicating misconduct in defiance of their
duties” and that it is not enough to plead that “some hypothetical, especially zealous, board
50
systems in place. At best, Plaintiff has pled that those systems did not work as
intended. While unfortunate, this is not a basis to impose personal liability upon the
directors.
III. CONCLUSION
In deciding that Plaintiff has failed to plead derivative claims against both the
Officer Defendants and Director Defendants, I am mindful that not three months
ago, in Wenske, I determined that other plaintiffs had stated viable claims against
BB GP for failing to prevent the same Listeria crisis that prompted the claims here.
But that case was different. The plaintiffs were situated differently (limited partners
of BB LP); the defendant was situated differently (the general partner of the
operating limited partnership); and the claim was vastly different (a breach of
contract claim based on a provision in the LPA that incorporated a standard much
more akin to negligence than fiduciary duty). Standards matter. In Wenske, the
plaintiffs pled facts supporting a reasonable inference that the general partner had
breached the LPA. Here, Plaintiff has failed to plead particularized facts that any of
might have discovered and stopped the conduct complained of” in order to impose
oversight liability); In re Gen. Motors, 2015 WL 3958724, at *14 (concluding that the
complaint did not allege particularized facts showing “that the Board had knowledge that
[General Motors’] system was inadequate or that the Board consciously remained
uninformed on this issue”).
51
the Director Defendants breached their scienter-laden fiduciary duty of oversight or
that a majority of the BB USA Board members could not impartially consider a
demand to bring claims against the Officer Defendants.
Because Plaintiff has failed to plead particularized facts that demonstrate pre-
suit demand on the BB USA Board would have been futile with respect to his breach
of fiduciary duty claims, the Motion to Dismiss the Complaint with prejudice must
be GRANTED.
IT IS SO ORDERED.
52