A stockholder lawsuit against the directors of Blue Bell Creameries – filed in the wake of a 2015 outbreak of listeria in the company’s ice cream products – was revived this week by the Delaware Supreme Court.
In a unanimous opinion written by the court’s chief justice, Leo E. Strine, the Delaware high court rejected a lower court ruling that the original complaint was not specific enough to raise reasonable doubts concerning the loyalties and obligations of Blue Bell’s board of directors.
“We hold that the (original) 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,” Strine wrote.
The case was returned to the Delaware Chancery Court for trial.
The 2015 outbreak resulted in three deaths and a total recall of Blue Bell’s once-iconic ice cream products. It also precipitated a major financial crisis for the privately-traded company which resulted in a reconfiguration of the company board.
The lawsuit, filed in 2017 by Corpus Christi investor Jack L. Marchand II, claimed that mismanagement by Blue Bell’s top executives and negligent oversight by the company’s closely-related directors led to the crisis. But in 2018, a Delaware Chancery Court dismissed the case, saying Marchand’s complaint, in essence, had charged that board oversight had been merely ineffective – not that it had been lacking, as required in Delaware courts.
Not so, said Strine in this week’s ruling. Although responsibility for the company’s food safety program rested with management, the chief justice noted that prior to the February 2015 recall, “yellow and red flags” in the company’s food safety program had appeared as early as 2009 but received virtually no formal discussion or response by the board.
Marchand’s Texas lawyer, Michael Hawash of Houston, deferred questions to Marchand’s Delaware attorneys who did not return calls. Likewise, Blue Bell’s Delaware attorneys did not respond to inquiries.
Founded in 1907 as the Brenham Creamery Company, Blue Bell ranked among the top producers of ice cream products in the world before the listeria outbreak. The company has since rebounded. According to Statista, 12-week sales of Blue Bell (ending last August 12) amounted to $134.6 million.
The national recall of Blue Bell products in response to the bacterial outbreak – which investigators attributed to sloppy manufacturing hygiene at company plants in Texas, Oklahoma and Alabama – created a liquidity problem that required an immediate infusion of cash.
In response, Blue Bell struck a deal with Moo Partners, a fund controlled by Fort Worth investor Sid Bass that had an affiliation with one of Blue Bell’s directors. Moo Partners provided Blue Bell with a $125 million credit facility and purchased a $100 million warrant for an estimated 42 percent of Blue Bell, or $50,000 per share. Moo demanded an expansion of the board of directors that, in effect, gave Moo control of one-third of its votes.
Marchand’s original complaint argued that significant interrelations among Blue Bell’s board members precluded any significant action against those managers directly responsible: company president and CEO, Paul W. Kruse, and vice president of operations, Greg Bridges.
Blue Bell directors had argued that the company met basic food safety requirements set by the U.S. Food and Drug Administration and that by doing so, in response to various inspections, it showed that the board had lived up to its basic responsibilities.
But Tuesday’s ruling said that mere company compliance with federal regulations does not demonstrate that sufficient monitoring was taking place at the board level.
“At best, Blue Bell’s compliance with these requirements shows only that management was following, in a nominal way, certain standard requirements of state and federal law. It does not rationally suggest that the board implemented a reporting system to monitor food safety or Blue Bell’s operational performance,” Strine says.
In dismissing Marchand’s complaint against management, the lower court also ruled that Marchand had failed to show that director W.J. Rankin, a potential swing vote in such an action, had conflicts of interest that might preclude a vote to sanction management.
But this week’s opinion, citing Marchand’s complaint, noted that Rankin had been a high-ranking Blue Bell employee for decades, and that members of the Kruse family – Blue Bell’s principal stockholders – had raised over $450,000 in a campaign to name a building at a local university after Rankin.
“Rankin’s apparently deep business and personal ties to the Kruse family raise a reasonable doubt as to whether Rankin could impartially or objectively assess whether to bring a lawsuit against (Kruse and Bridges),” the Supreme Court opinion said.
“(Marchand) has met his onerous pleading burden and is entitled to discovery to prove his claim.”