Blue Bell Creameries was dealt a loss recently when a federal judge in Texas determined its insurers don’t have to defend Blue Bell or its executives in shareholder derivative litigation stemming from the company’s deadly listeria outbreak in 2015.
U.S. District Judge Robert Pitman issued a 16-page order Monday detailing his reasoning for granting Discover Property & Casualty Company and The Travelers Indemnity Company of Connecticut a summary judgment win.
The insurers argued that because the shareholders are alleging Blue Bell and its top brass breached their fiduciary duties, the officers and directors couldn’t have been acting “with respect to their duties” with the company when they allegedly breached those duties, meaning they aren’t covered under the policy.
Blue Bell argued that the alleged oversights and failures of the executives aren’t serious enough to preclude them from coverage as “insureds” under the policy, because the claims are more akin to negligence or recklessness.
Judge Pitman wrote that even Blue Bell’s own briefing concedes that the shareholder lawsuit alleges the company and its officers “knowingly disregarded contamination risk and safety compliance” and “willfully failed to exercise” their authority.
“But to suggest that the alleged acts constitute execution of defendants’ ordinary obligations in managing the company belies reason,” Judge Pitman held. “The court cannot accept defendants’ contention that they were acting with respect to their duties when it is alleged that they breached those very duties, and consequently concludes that defendants are not ‘insureds’ under the 2015 policy.”
The issue in this case, Judge Pitman noted, has not been squarely addressed by Texas courts, but he cited a 1995 ruling from the Eighth Court of Appeals in Farr v. Farm Bureau Insurance Co. of Nebraska in support of his decision. In that case, the appellate court held that the commercial general liability policy at-issue was meant to protect corporate officers who are “properly carrying out their duties” and “not the officer who acts in a manner that is antagonistic toward the corporation’s business interests.”
According to court documents, a shareholder filed suit against Blue Bell and its officers and directors Aug. 14, 2017, alleging the company breached its fiduciary duty to its shareholders when it “knowingly disregarded listeria contamination risk and continued the company’s production and distribution of ice cream.” The suit alleges the company’s board of directors did the same when they “willfully failed to exercise its fundamental authority and duty to govern company management and establish standards and controls for company compliance.”
That lawsuit alleges the actions of Blue Bell and its directors cost shareholders damages totaling “at least hundreds of millions of dollars.” Had the company and its officers and directors heeded U.S. Food and Drug Administration reports from as early as 2009 putting the company on notice of food safety issues, the shareholders argue, the deadly listeria outbreak that caused a companywide recall of ice cream products may not have happened.
On April 1, 2021, Blue Bell notified its insurers that it was seeking coverage of the defense costs in the shareholder derivative lawsuit and this lawsuit from the insurers was subsequently filed June 3, 2021, asking the court for a declaration that the insurers had no duty to defend the suit under the general commercial liability policies at issue.
The officers and directors named as defendants in the lawsuit are John W. Barnhill Jr., Greg A. 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.
Discover and Travelers are represented by Amanda Laviage Goldstein, J. Stephen Barrick, James R. Old and Courtney E. Ervin of Hicks Thomas.
Blue Bell is represented by Douglas A. Daniels of Daniels & Tredennick and Jesse Jonas Bair, Timothy Wilson Burns and Jeff J. Bowen of Burns Bowen Bair.
Last week, a federal jury in Austin failed to reach consensus in a criminal trial against former CEO Paul Kruse stemming from the outbreak and Judge Pitman declared a mistrial. The government has not said publicly whether it will retry the case.
Judge Pitman also presided over a criminal case against Blue Bell and in September 2020 handed down what was at the time the largest-ever criminal penalty in a food safety case: $17.25 million.
The cause number is 1:21-cv-00487.