Ms. Mary Giddings Wenske v. Blue Bell Creameries, Inc. ( 2018 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
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. : C.A. No. 2017-0699-JRS
:
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. :
MEMORANDUM OPINION
Date Submitted: April 18, 2018
Date Submitted: July 6, 2018
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 and Travis R. Dunkelberger, Esquire of Potter
Anderson & Corroon LLP, Wilmington, Delaware, Attorneys for Defendants Blue
Bell Creameries, Inc., 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, Patricia Ryan, and Nominal
Defendant Blue Bell Creameries, L.P.
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
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. A driver operating a motor vehicle at 70 miles per hour on Route One in
Dover, Delaware is driving in excess of the posted 65 miles per hour speed limit.
The conduct is wrong—actionable as a matter of law—because it violates the
standard for safe travel as determined by Delaware’s General Assembly and
Department of Transportation. That same driver operating the same vehicle at the
same speed on Interstate 81 outside of Lexington, Virginia, however, will garner no
attention from the State Trooper waiting behind the overpass. The speed limit there
is 70 miles per hour. The conduct is not wrong under the applicable standard and is
not, therefore, actionable.
Delaware entity law is no different. A manager’s act or omission may not be
actionable under equitable fiduciary standards applicable in the corporate context
but may be actionable in the alternative entity context when measured under a
heightened contractual standard. This case presents that dynamic in the context of
the duty of oversight. In our corporate law, “director liability based on the duty of
oversight ‘is possibly the most difficult theory . . . upon which a plaintiff might hope
to win a judgment.’”1 “The presumption of the business judgment rule, the
1
In re Citigroup, Inc. S’holder Deriv. Litig., 964 A.2d 106, 125 (Del. Ch. 2009) (quoting
In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996)).
1
protection of an exculpatory § 102(b)(7) provision, and the difficulty of proving a
Caremark claim together function to place an extremely high burden on a plaintiff
to state a claim for personal director liability for a failure to see the extent of a
company’s business risk.”2 In the alternative entity context, however, those
impediments either do not exist as a matter of law or can be eliminated by contract.
Indeed, the standard by which the managers of an alternative entity must monitor
and address operational risk will largely depend upon what the parties say about
those standards in the operative entity agreement.3
This is a limited partner derivative action. Plaintiffs are limited partners of
Blue Bell Creameries, L.P. (“Blue Bell” or the “Company”), a Delaware limited
partnership in the business of manufacturing ice cream products. Blue Bell is
managed by its general partner, Blue Bell Creameries, Inc. (“BB GP”), a wholly-
owned subsidiary of Blue Bell Creameries USA, Inc. (“BB USA”). In early 2015,
the Food & Drug Administration (“FDA”) and several state health agencies found
2
Id.
3
Of course, if the entity agreement is silent in this regard, the traditional fiduciary duties
of loyalty and care apply by default to the entity’s managers. See, e.g., Feeley v.
NHAOCG, LLC, 62 A.3d 649, 662 (Del. Ch. 2012) (stating that general partners,
managers and managing members “owe default fiduciary duties”); see also 6 Del. C.
§ 18–1104 (“In any case not provided for in [the LLC Act], the rules of law and equity,
including the rules of law and equity relating to fiduciary duties and the law merchant,
shall govern.”).
2
Listeria monocytogenes bacteria in Blue Bell ice cream products.4 By April 2015,
Blue Bell had recalled all of its products and shut down all of its production
operations. Soon thereafter, the Company fired or suspended more than half of its
workforce and ceased paying distributions to its limited partners. Ultimately, it was
“fined by government authorities for its poor safety policies and practices related to
the [Listeria] outbreak.”5
Plaintiffs have brought this action on behalf of Blue Bell against
BB GP, BB USA and certain directors and officers of BB GP and BB USA
(the “Individual Defendants”). Their Verified Derivative Complaint
(the “Complaint”) sets forth four counts:
 Count I, against BB GP, for breach of Blue Bell’s limited
partnership agreement (the “LPA”);
 Count II, against BB USA, “as controller, principal, and joint
venturer” of BB GP, and the Individual Defendants, as “controllers” of
BB GP, “for causing BB GP to breach the LPA”6;
4
Listeria monocytogenes is a pathogenic bacterium that causes listeriosis, a serious
infection that kills approximately 260 people per year in the United States. Verified
Derivative Compl. (“Compl.”) ¶ 2; 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.”).
5
Compl. ¶ 2.
6
Compl., p. 37 & ¶ 66 (capitalization altered).
3
 Count III, against BB USA and the Individual Defendants, for
aiding and abetting BB GP’s breach of its “contractual fiduciary duties” under
the LPA7;
 Count IV, against BB USA and the Individual Defendants, “for
breach of common law fiduciary duties” owed to Blue Bell.8
Defendants have moved to dismiss the Complaint under Court of Chancery
Rules 23.1 and 12(b)(6).
For the reasons that follow, Defendants’ motion is DENIED as to Count I of
the Complaint, and GRANTED as to Counts II, III and IV, which are dismissed with
prejudice pursuant to Court of Chancery Rule 12(b)(6). As explained below,
Plaintiffs have pled a set of facts that allow a reasonable inference that BB GP
breached the LPA by failing to manage Blue Bell “in accordance with sound
business practices in the industry” as required by LPA § 6.01(e). They have also
pled demand futility with respect to Count I and have thus earned the right to take
discovery in support of that claim. They have not, however, advanced any viable
legal theory under which BB USA or the Individual Defendants may be liable for
BB GP’s alleged breach of the LPA. Nor have they pled a viable breach of fiduciary
duty claim against BB USA or the Individual Defendants.
7
Compl., pp. 34, 37.
8
Compl. ¶ 80.
4
I. FACTUAL BACKGROUND
The facts are drawn from the allegations in the Complaint, documents integral
to the Complaint or incorporated therein by reference and those matters of which the
Court may take judicial notice. For purposes of this motion to dismiss, I accept as
true the Complaint’s well-pled factual allegations and draw all reasonable inferences
in Plaintiffs’ favor.
A. The Parties
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 nominal
defendant, Blue Bell, a Delaware limited partnership headquartered in Brenham,
Texas.9 Blue Bell manufactures a variety of ice cream products that are distributed
throughout the southern United States. The Company has three production plants:
one located in Brenham, Texas (the “Texas Plant”), one in Broken
Arrow, Oklahoma (the “Oklahoma Plant”) and one in Sylacauga, Alabama
(the “Alabama Plant”).10
9
Compl., pmbl. & ¶¶ 7–8.
10
Compl. ¶ 2.
5
Defendant BB GP, a Delaware corporation, is Blue Bell’s general partner, and
a wholly-owned subsidiary of BB USA.11 Under Blue Bell’s LPA, BB GP is vested
with the exclusive authority to manage Blue Bell’s business and affairs.12
Defendant BB USA is a Delaware corporation that serves as a holding
company. Its only assets are (1) its 100% ownership interest in BB GP, and
(2) approximately 2,823 Class A limited partnership interests in Blue Bell.
The Individual Defendants are:
 Howard Kruse, a BB USA director, and BB GP’s CEO and
President from 1993 to 2004;
 Paul Kruse, a director of BB USA and BB GP, and BB GP’s CEO
and President from 2004 to 2017;
 Jim Kruse, a director of BB USA and BB GP, and the current
chairman of each corporation’s board of directors;
 Richard Dickson, a director of BB USA and BB GP, and the
current President of BB USA and BB GP;
 Greg Bridges, a BB USA director, and BB USA’s Executive
Vice President of Plant Operations;
 William Rankin, a director of BB USA and BB GP, and BB GP’s
Chief Financial Officer;
11
Compl. ¶¶ 9–10.
12
LPA §§ 6.01(a), 6.10.
6
 Diana Markwardt, the “Vice President of Office Operations at
Blue Bell” and an “Associate Director” of BB USA and BB GP13; and
 BB USA directors John Barnhill, Jr., Paul Ehlert, Patricia Ryan
and Dorothy McLeod MacInerney.
B. The 2015 Product Recall
As of 2014, Blue Bell was the third largest ice cream manufacturer in the
United States. Its products were sold to consumers in twenty-three states, and it
generated revenues of over $850 million annually.14 In January 2015, South
Carolina state health inspectors discovered Listeria monocytogenes bacteria in a
routine sampling of Blue Bell products.15 Soon thereafter, FDA and state health
agencies in Texas and Kansas found Listeria contamination in other Blue Bell ice
cream products.16 The contamination was not contained; the Centers for Disease
Control identified ten people who contracted listeriosis as a result of the
contamination, three of whom died.17
13
Compl. ¶ 18.
14
Compl. ¶ 2.
15
Compl. ¶ 43.
16
Id.
17
Compl. ¶¶ 2, 43.
7
These revelations 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.18
The Company thereafter fired or furloughed two-thirds of its workforce and ceased
paying distributions to its limited partners.19 Blue Bell was “fined by government
authorities for its poor safety policies and practices related to the [Listeria]
outbreak,”20 and “[a] criminal DOJ investigation also ensued.”21
Contemporaneous FDA inspections of Blue Bell’s Texas and Oklahoma
Plants revealed a multitude of food safety hazards at those facilities.22 FDA
investigators inspecting the Texas Plant in March, April and May 2015 observed,
among other things:
 “[f]ailure to manufacture and package foods under conditions
and controls necessary to minimize the potential for growth of
microorganisms,”23 such that certain of Blue Bell’s ice cream products were
contaminated by Listeria monocytogenes;
18
Compl. ¶¶ 43–44. The reaction among consumers was hardly surprising given that
many of Blue Bell’s customers were children, schools and hospitals. Compl. ¶ 3.
19
Compl. ¶ 7.
20
Compl. ¶ 2.
21
Id.
22
See FDA Form 483 (Inspectional Observations) Concerning FEI # 1682009, issued
May 1, 2015 (“FDA Observations (Texas Plant)”); FDA Form 483 (Inspectional
Observations) Concerning FEI # 1000118167, issued Apr. 23, 2015
(“FDA Observations (Oklahoma Plant)”).
23
FDA Observations (Texas Plant) at 1.
8
 that “[t]he procedure used for cleaning and sanitizing [plant]
equipment ha[d] not been shown to provide adequate cleaning and sanitizing
treatment”24;
 that “[t]he plant [was] not constructed in such a manner as to
prevent condensate from contaminating food and food-contact surfaces,” and
condensate was, in fact, “dripping directly into ice cream products” in four
separate instances25; and
 “[f]ailure to clean food-contact surfaces as frequently as
necessary to protect against contamination of food.”26
FDA inspections of the Oklahoma Plant in March and April 2015 yielded
similar observations, including:
 “[f]ailure to manufacture and package foods under conditions
and controls necessary to minimize the potential for growth of
microorganisms and contamination”27;
 “[f]ailure to perform microbial testing where necessary to
identify sanitation failures and possible food contamination”28;
 “fail[ure] to demonstrate [that Blue Bell’s] cleaning and
sanitizing program [wa]s effective in controlling recurring [Listeria]
contamination[]”29;
24
Id. at 2.
25
Id. at 2–3.
26
Id. at 3. Such observations, however, “do not represent a final [FDA] determination
regarding [the inspectee’s] compliance” with applicable federal law. Id. at 1.
27
FDA Observations (Oklahoma Plant) at 1.
28
Id. at 2.
29
Id. at 3.
9
 that “[t]he plant [was] not constructed in such a manner as to
prevent condensate [drip] from contaminating food, food-contact surfaces,
and food-packaging materials”30; and
 that “[a]ll reasonable precautions [we]re not taken to ensure that
production procedures d[id] not contribute contamination from any source.”31
Moreover, it is alleged that Blue Bell was already aware of contamination
issues at the Oklahoma Plant and, therefore, did not need the FDA to tell
management there was a problem.32 Indeed, Blue Bell had discovered Listeria
bacteria in the Oklahoma Plant “on at least 5 separate occasions in 2013 and on 10
more occasions in 2014, including multiple positive samples on a Pint Packing
Chute and multiple positive samples from [a half-gallon] filler machine.”33 Despite
these discoveries, Blue Bell “never conducted . . . [a] root cause analysis to
determine the source of the [Listeria bacteria], did not increase the frequency or
scope of its Listeria testing protocol, did not disassemble any equipment, and did
not take any effective action to [mitigate] the continuing and growing Listeria threat,
much less eradicate it.”34
30
Id. at 6.
31
Id. at 8.
32
The Complaint does not identify health-related issues at the Alabama Plant.
33
Compl. ¶ 42.
34
Id.
10
Following the 2015 product recall, Blue Bell’s revenues fell by more than
half.35 The Company was required to pay substantial fines, penalties and personal
injury settlements. And distributions to limited partners were cut from $4,000 per
unit, paid quarterly, to $0 per unit.36 As noted, the United States Department of
Justice also opened a criminal investigation, although it ultimately did not bring any
charges.37
C. Blue Bell’s Limited Partnership Agreement
Blue Bell is governed by the LPA, which vests BB GP with the exclusive
authority to manage the Company’s business and affairs.38 Of particular relevance
here are Sections 6.01(e) and 6.11(d). Section 6.01(e) provides, in pertinent part:
[BB GP] shall use its best efforts to conduct [Blue Bell’s] business in a
good and businesslike manner, and in accordance with sound business
practices in the industry. [BB GP] shall not be liable . . . to any Partner
or [to Blue Bell] for any losses sustained or liabilities incurred [due to]
errors in judgment of [BB GP], excluding those that are attributable to
[BB GP’s] gross negligence, bad faith [or] breach of any material
provision of [the LPA] or willful misconduct.39
35
Compl. ¶ 7.
36
Compl. ¶¶ 2, 63, 70, 77, 85.
37
Compl. ¶ 2.
38
LPA §§ 6.01(a) (“[BB GP] shall have the exclusive right and full authority to manage,
conduct, control and operate [Blue Bell’s] business”), 6.10 (“No Limited Partner . . .
may take part in the management . . . of [Blue Bell’s] business and affairs.”).
39
LPA § 6.01(e) (emphasis supplied). The LPA does not elaborate on what constitute
“sound business practices in [Blue Bell’s] industry,” id., nor does it define or otherwise
11
And Section 6.11(d) provides, in full:
Any standard of care and duty imposed by [the LPA] or under the
[Delaware Revised Uniform Limited Partnership Act] or any applicable
law, rule or regulation shall be modified, waived or limited, to the
extent permitted by law, as required to permit [BB GP] to act under
[the LPA] or any other agreement contemplated by [the LPA] and to
make any decision under the authority prescribed in [the LPA], so long
as the action is reasonably believed by [BB GP] to be in, or not
inconsistent with, [Blue Bell’s] best interests.40
D. “Sound Business Practices” in Blue Bell’s Industry
According to the Complaint, “sound business practices” in Blue Bell’s
industry—the dairy industry—“require controlling or eliminating condensation in
the plant environment, properly cleaning and sanitizing plant surfaces, adequately
testing for contamina[nts] such as Listeria . . . and determining and correcting the[]
cause [of bacterial contamination] if discovered.”41 In support of that proposition,
the Complaint cites:
 “[f]ederal and state food safety laws, regulations,
recommendations and guidelines,”42 including—
indicate the meaning of the operative terms “best efforts” or “sound” as they appear in
LPA § 6.01(e).
40
LPA § 6.11(d).
41
Compl., p. 14.
42
Compl. ¶ 3.
12
the FDA regulations codified at 21 C.F.R. Part 110,43 which
implement certain provisions of the Federal Food, Drug and Cosmetic Act
(“FDCA”)44;
 the FDA Food Safety Modernization Act (“FSMA”)45 and the
regulations implementing the FSMA46; and
 a 2008 FDA guidance document entitled “Guidance for Industry:
Control of Listeria monocytogenes in Refrigerated or Frozen Ready-To-
Eat Foods - Draft Guidance”47; and
 “dairy industry organization food safety . . . guidelines,”
including guidelines issued by the Dairy Practices Council (“DPC”) and the
International Dairy Foods Association (“IDFA”).48
1. Applicable Federal Laws, Regulations and Guidelines
Under the FDCA, food manufacturers such as Blue Bell may not introduce
“adulterated” food “into interstate commerce.”49 FDA regulations establish various
43
Id.
44
52 Stat. 1040 (1938) (codified as amended at 21 U.S.C. §§ 301–399h (2012)).
45
Pub.L. 111–353, 124 Stat. 3885 (2011) (codified in relevant part at 21 U.S.C. § 350g).
46
Compl. ¶ 36 (quoting 21 U.S.C. § 350g(n)(1)(A) and referring to “FSMA
requirements”).
47
Compl. ¶ 35 (citing U.S. Dept. of Health and Human Servs. (FDA), Guidance for
Industry: Control of Listeria monocytogenes in Refrigerated or Frozen Ready-To-Eat
Foods - Draft Guidance (the “2008 FDA Guidance”), available online at
https://www.regulations.gov/document?D=FDA-2008-D-0096-0002).
48
Compl. ¶¶ 3, 29–33.
49
21 U.S.C. § 331(a). The FDCA is administered by the FDA, a federal agency within
the Department of Health and Human Services. Id. § 393. Food is “adulterated” within
the meaning of the FDCA if it “bears or contains any poisonous or deleterious substance
which may render it injurious to health,” id. § 342(a)(1), or “has been prepared, packed,
13
criteria for determining whether food is “adulterated” within the meaning of the
FDCA, including criteria for “good manufacturing practice” in producing, packing
and storing human food. Relevant here are the FDA regulations codified at
21 C.F.R. Part 110, which provide, in pertinent part:
 Food processing plants must “[b]e constructed in such a manner
that . . . drip or condensate from fixtures, ducts and pipes does not contaminate
food, food-contact surfaces, or food-packaging materials.”50
 “All plant equipment . . . shall be so designed . . . as to be
adequately cleanable . . . and shall be adequately maintained.”51
 “All operations in the . . . manufacturing, packaging, and storing
of food shall be conducted in accordance with adequate sanitation
principles.”52 In this regard:
“[a]ll reasonable precautions shall be taken to ensure that
production procedures do not contribute contamination from any
source”53;
“[e]quipment and utensils and finished food containers shall be
maintained in an acceptable condition through appropriate cleaning and
sanitizing, as necessary”54; and
or held under insanitary conditions whereby it may have become contaminated with
filth . . . [or] been rendered injurious to health.” Id. § 342(a)(4).
50
21 C.F.R. § 110.20(b)(4).
51
Id. § 110.40(a).
52
Id. § 110.80. The term “adequate,” as used in 21 C.F.R. Part 110, “means that which
is needed to accomplish the intended purpose in keeping with good public health
practice.” Id. § 110.3(b).
53
Id. § 110.80.
54
Id. § 110.80(b)(1).
14
 “[a]ll food manufacturing . . . shall be conducted under such
conditions and controls as are necessary to minimize the potential for the
growth of microorganisms, or for the contamination of food.”55
Also relevant are FDA regulations promulgated under the FSMA, which
provide, in pertinent part, that owners and operators of food processing facilities
“must identify and implement preventive controls to provide assurances that any
[food safety] hazards . . . will be significantly minimized or prevented. . . .”56
“Preventative controls include . . . procedures, practices, and processes 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” (“sanitation controls”).57 And
“sanitation controls must include, as appropriate to the facility and the food,
procedures, practices, and processes for the . . . cleanliness of food-contact surfaces,
including food-contact surfaces of utensils and equipment.”58
In addition to promulgating regulations, FDA also periodically issues
“guidance documents,” which “represent FDA’s current thinking on a topic.”59
55
Id. § 110.80(b)(2).
56
21 C.F.R. § 117.135(a)(1); Compl. ¶ 36 (referencing “FSMA requirements”).
57
21 C.F.R. § 117.135(c)(3).
58
Id. § 117.135(c)(3)(i).
59
U.S. Dep’t of Health & Human Servs. (FDA), Food Guidance & Regulation,
https://www.fda.gov/Food/GuidanceRegulation/default.htm (last updated Jan. 30,
2018); D.R.E. 202(b)–(c). It should be noted that general policy statements in agency
15
Relevant here is a 2008 FDA guidance document entitled “Guidance for Industry -
Control of Listeria monocytogenes in Refrigerated or Frozen Ready-To-Eat Foods -
Draft Guidance,”60 which provides that:
 “Food contact surfaces should be tested for Listeria at least every
week and that non-food-contact surfaces should be tested every two weeks”61;
 “If [a food processing] plant only tests representative samples, it
must ensure that it samples all food contact surfaces at least once each month
and that the smallest producers take samples from at least five sites of food
contact surfaces in each production line”62; and
 “If [a plant] detect[s] Listeria species or L. monocytogenes on a
critical surface or area or in food, [the plant should] follow a corrective action
plan, . . . determine the source of the contamination, . . . [and] [c]onduct
additional sampling and testing to determine whether the contamination has
been eliminated.”63
2. Relevant Industry Organization Guidelines
Per the Complaint, in addition to complying with state and federal food safety
laws and regulations, “sound business practices” in the dairy industry require Blue
guidance documents do not have the force of law. See Pac. Gas & Elec. Co. v. Fed.
Power Comm’n, 506 F.2d 33, 38 (D.C. Cir. 1974) (“[A] general statement of
policy . . . does not establish a ‘binding norm.’”) (citation omitted).
60
See Compl. ¶ 35 (citing 2008 FDA Guidance). It appears that the 2008 FDA Guidance
is a draft guidance document. See 2008 FDA Guidance at 1 (“This draft guidance,
when finalized, will represent [FDA’s] current thinking on this topic.”).
61
Compl. ¶ 35 (citing 2008 FDA Guidance at 28–29).
62
Compl. ¶ 35 (citing 2008 FDA Guidance at 28).
63
Compl. ¶ 35 (quoting 2008 FDA Guidance at 30) (internal quotation marks omitted).
16
Bell to adhere to food safety guidelines issued by the DPC and the IDFA.64 The
DPC is “a nonprofit organization of education, dairy industry and regulatory
personnel[] [that] issues written guidelines for the dairy industry that are widely
followed.”65 The IDFA is “an industry organization whose members represent more
than 85% of the ice cream, frozen desserts, milk, cultured products, and cheese
products produced and marketed in the U.S. . . .”66
The Complaint identifies several DPC food safety guidelines that are relevant
to Blue Bell’s manufacturing operations.67 Most notable are the DPC’s 1998
“Guidelines for Frozen Dessert Processing,” DPC 61, which state that:
[P]rocessing methods applicable to frozen desserts offer excellent
opportunities for contamination by pathogenic organisms. . . . Listeria
has been frequently isolated from floor drains and other areas where
pooling of water or other processing wastes occur. . . . Keeping floors,
walls and ceilings clean, relatively dry and free from condensate is
imperative. . . . As a starting point, an initial microbiological survey
should be made of the processing facility, and plans should be
implemented that focus on continuous improvement to the
64
Compl. ¶¶ 3, 29–33.
65
Compl. ¶ 29.
66
Compl. ¶ 33.
67
Compl. ¶¶ 29–32. These guidelines are (1) DPC, DPC 56, Dairy Product Safety
(Pathogenic Bacteria) for Fluid Milk and Frozen Dessert Plants (1994) (“DPC 56”);
(2) DPC, DPC 8, Good Manufacturing Practices for Dairy Processing Plants (1995)
(“DPC 8”); (3) DPC, DPC 60, Trouble Shooting Microbial Defects in Dairy Processing
Plants (“DPC 60”); and (4) DPC, DPC 61, Guidelines for Frozen Dessert Processing
(1998) (“DPC 61”).
17
environment. . . . [F]requent microbiological surveys are very important
to the processing plant environment.68
DPC 61 also emphasizes that (1) “[e]ffective plant sanitation through the
development and implementation of written [sanitation SOPs] is essential to improve
food safety,” and (2) “[e]ffective audit and verification procedures are essential
components of comprehensive sanitation programs, including environmental
sampling and evaluating the cleanliness of food contact surfaces.” 69
Also relevant to Blue Bell’s plant operations, per the Complaint, are the
guidelines in the IDFA’s 2002 Hazard Analysis and Critical Control Point
(“HACCP”) plant manual.70 There, the IDFA recommends, among other things,
“that [plant] equipment be easily cleanable and maintained in a manner that prevents
contamination of food[;] that floors, walls, and ceilings in the plant be clean and free
from condensate[;] that impervious materials be used in processing areas whenever
possible to minimize harborages for pathogenic materials[;] that potential areas of
post-pasteurization contamination should be determined and corrected[;] and that
68
Compl. ¶ 32 (quoting DPC 61).
69
Id. (quoting DPC 61).
70
Compl. ¶ 33 (citing the IDFA’s 2002 HACCP plant manual).
18
‘[a]ny coliform level detected during environmental sampling should generate a
review of plant practices.’”71
E. Procedural History
Plaintiffs commenced this derivative action on October 2, 2017. Defendants
moved to dismiss the Complaint under Court of Chancery Rules 23.1 and 12(b)(6)
on November 20, 2017. According to Defendants, the Complaint fails to plead
demand futility under Rule 23.1 because Defendants do not face a substantial
likelihood of liability on any of the Complaint’s four Counts. Specifically, they
argue: (1) as to Count I, the LPA embodies a permissive governance scheme that
requires Plaintiffs to plead bad faith in order to state a claim for breach of
LPA § 6.01(e) and the Complaint falls short of that mark; (2) Delaware law
recognizes no theory of controller or “joint venturer” liability as pled in Count II;
(3) likewise, Delaware law recognizes no claim for aiding and abetting a breach of
contract as pled in Count III; and (4) the LPA disclaims fiduciary duties so there can
be no breach of fiduciary duty as pled in Count IV.
The Court heard oral argument on Defendants’ motion to dismiss on April 5,
2018. Thereafter, with the Court’s permission, Plaintiffs filed a sur-reply brief in
which they address Defendants’ arguments respecting the agency and joint venture
71
Compl. ¶ 33 (quoting the IDFA’s 2002 HACCP plant manual).
19
theories of liability advanced in Count II of the Complaint.72 This is the Court’s
decision on Defendants’ motion.
II. LEGAL ANALYSIS
The motion to dismiss presents two issues: (1) whether the Complaint states
any claim(s) upon which relief can be granted; and (2) whether a pre-suit demand
on Blue Bell’s general partner, BB GP, is excused with respect to such claim(s).
For reasons explained below, I conclude that (1) Count I of the Complaint
states a viable breach of contract claim; namely, that BB GP breached
Section 6.01(e) of the LPA; (2) Counts II–IV do not state any viable claim(s) and,
therefore, must be dismissed pursuant to Court of Chancery Rule 12(b)(6); and
(3) based on the Complaint’s particularized factual allegations, pre-suit demand on
BB GP with respect to Count I would have been futile and is therefore excused.
A. Does the Complaint Plead Viable Claims Under Rule 12(b)(6)?
“The standards governing a motion to dismiss for failure to state a claim are
well settled: (i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are ‘well-pleaded’ if they give the opposing party notice of the
claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving
72
Pls.’ Sur-Reply Br. in Opp’n to Defs.’ Mot. to Dismiss. Plaintiffs’ sur-reply brief
contends that Plaintiffs have sufficiently pled that (1) “BB[ ]USA is liable as BB[ ]GP’s
principal,” id. at 1; and (2) “BB[ ]USA is liable as a joint venturer with BB[ ]GP.”
Id. at 6.
20
party; and [(iv)] dismissal is inappropriate unless the plaintiff would not be entitled
to recover under any reasonably conceivable set of circumstances susceptible of
proof.”73
1. Count I - Breach of Contract
Under Delaware law, a breach of contract claim comprises three elements:
(1) the existence of a contract; (2) a breach of an obligation imposed by that contract;
and (3) resultant damages.74 Here, Count I charges that BB GP failed to “use its best
efforts to conduct [Blue Bell’s] business . . . in accordance with sound business
practices in the industry,”75 in violation of LPA § 6.01(e), and that, as a result of that
violation, “Blue Bell lost a substantial portion of its value . . . [and was] forced to
pay personal injury settlements, fines and penalties.”76
According to the Complaint, “sound business practices in [Blue Bell’s]
industry” require “controlling or eliminating condensation in the plant environment,
properly cleaning and sanitizing plant surfaces, adequately testing for
contamina[nts] such as Listeria . . . and determining and correcting the[] cause
73
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal
quotation omitted).
74
VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003).
75
Compl. ¶ 58 (quoting LPA § 6.01(e)).
76
Compl. ¶ 63. The Complaint styles Count I as a claim for “breach of contractual
fiduciary duties.” Compl., p. 34 (capitalization altered). As explained below, however,
Count I is properly characterized as a breach of contract claim.
21
[of bacterial contamination] if discovered.”77 The Complaint goes on to explain, in
substantial detail, how BB GP (allegedly) failed to use its best efforts to
(1) “control[] or eliminat[e] condensation” in Blue Bell’s Texas and Oklahoma
Plants; (2) “properly clean[] and sanitiz[e] . . . surfaces” in those facilities;
(3) “adequately test[] for” Listeria bacteria in the Oklahoma Plant; and
(4) “determin[e] and correct[] the[] cause” of Listeria contamination in that
facility.78
According to Defendants, despite the Complaint’s detailed references to the
“sound business practices in the industry” from which BB GP allegedly deviated,
Count I nevertheless fails to state a claim for three reasons:
 First, Defendants argue that Plaintiffs’ interpretation of LPA
§ 6.01(e) is incorrect, in that Section 6.01(e) cannot be read to incorporate the
DPC and IDFA guidelines cited in the Complaint.79 Thus, even if BB GP
made no effort to conduct Blue Bell’s business in accordance with those
guidelines, BB GP’s omission in that regard would not constitute a breach of
LPA § 6.01(e).
 Second, Defendants more broadly submit that LPA § 6.01(e)
“does not provide any guidance as to . . . what constitutes ‘sound business
practices in the industry,’”80 and that “[t]he absence of such guidance . . .
77
Compl., p. 14.
78
See Compl. ¶¶ 37–47.
79
Defs.’ Opening Br. in Supp. of Their Joint Mot. to Dismiss (“DOB”) 30–32.
80
DOB at 32.
22
renders Plaintiffs’ interpretation [of that provision] impossible to enforce and
therefore unreasonable.”81
 Finally, Defendants contend that, in light of the language in LPA
§ 6.11(d), “the only reasonable interpretation of [LPA § 6.01(e)] is that it
requires [BB GP] to make a good faith effort to ‘conduct [Blue Bell’s]
business . . . in accordance with sound business practices in the industry’”82—
whatever those practices might be—and that Plaintiffs have not well pled that
BB GP lacked good faith in connection with its oversight of Blue Bell’s
operations.
For the reasons set forth below, I am satisfied that Defendants’ interpretation
of the LPA is unreasonable as a matter of law and that Count I states a viable
derivative claim for breach of contract against BB GP.
a. The LPA Is a Binding Contract that Imposes a “Best Efforts”
Oversight Obligation on BB GP
The LPA is a contract, and BB GP, as Blue Bell’s general partner, is bound
by it.83 The parties do not dispute that LPA § 6.01(e) imposes an obligation on
BB GP. They do dispute, however, what that obligation entails. The parties’
disagreement in this regard reduces to two issues: (1) the proper interpretation of
81
Id.
82
Id. at 37 (quoting LPA § 6.01(e)).
83
Norton v. K-Sea Transp. P’rs L.P., 67 A.3d 354, 360 (Del. 2013) (“Limited partnership
agreements are a type of contract.”); 6 Del. C. § 17–101(12) (“A partner of a limited
partnership . . . is bound by the partnership agreement whether or not the partner . . .
executes the partnership agreement.”).
23
LPA § 6.01(e)’s “best efforts” clause; and (2) whether LPA § 6.11(d) “modifies”
LPA § 6.01(e). I address each issue in turn.
Under Delaware law, limited partnership agreements, like other contracts,
must be construed in “accordance with their terms to give effect to the parties’
intent.”84 “The proper construction of [the operation of] any contract . . . is purely a
question of law,”85 as is the proper interpretation of specific contractual language.86
When interpreting contractual language, the court must ascertain “what a reasonable
person in the position of the parties [at the time of contracting] would have thought
[that language] meant.”87 In that regard, the interpreting court will give words “their
plain meaning unless it appears that the parties intended a special meaning.”88 And,
in the case of an undefined term, the interpreting court may consult the dictionary,
if that is deemed useful, when determining the term’s plain meaning.89
84
Norton, 67 A.3d at 360.
85
Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196
(Del. 1992).
86
See Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006)
(“[T]he proper interpretation of language in a contract is a question of law.”).
87
Rhone-Poulenc, 616 A.2d at 1196; see Lorillard Tobacco Co. v. Am. Legacy Found.,
903 A.2d 728, 739 (Del. 2006).
88
Norton, 67 A.3d at 360 (citing AT&T Corp. v. Lillis, 953 A.2d 241, 252 (Del. 2008)).
89
See Lorillard Tobacco, 903 A.2d at 738 (“Under well-settled case law, Delaware courts
look to dictionaries for assistance in determining the plain meaning of terms which are
not defined in a contract.”).
24
Here, LPA § 6.01(e) provides, in pertinent part, that “[BB GP] shall use its
best efforts to conduct [Blue Bell’s] business . . . in accordance with sound business
practices in the industry.” To ascertain the meaning of this clause, the Court must
assess the import of its key constituent terms; namely, “best efforts,” “sound” and
“industry.” The clause’s syntax makes clear that the “industry” referred to is Blue
Bell’s industry—the dairy industry.90 The LPA nowhere indicates, however, what
meaning the parties attach to the key terms “best efforts” and “sound” as they appear
in LPA § 6.01(e). It is appropriate, therefore, to consult the dictionary to ascertain
the plain meaning of those terms.91
According to conventional dictionary definitions, the term “best efforts”
means “[d]iligent attempts to carry out an obligation,”92 and the term “sound” means
“based on thorough knowledge and experience” or, alternatively, “agreeing with
90
In LPA § 6.01(e)’s “best efforts” clause, “Blue Bell’s business” is the object of the verb
“conduct,” and that verb is modified by the adverbial phrase “in accordance with sound
business practices in the industry.” It follows, then, that the relevant “industry” is the
industry in which Blue Bell does business—namely, the dairy industry. See Compl. ¶ 2
(“Blue Bell is an ice cream manufacturer based in Brenham, Texas.”).
91
See Lorillard Tobacco, 903 A.2d at 738; USA Cable v. World Wrestling Fed’n Entm’t,
Inc., 766 A.2d 462, 474 (Del. 2000) (An undefined term “with no ‘gloss’ in the
[relevant] industry . . . should be [interpreted] in accordance with its ordinary dictionary
meaning.”).
92
Best Efforts, BLACK’S LAW DICTIONARY (10th ed. 2014).
25
accepted views.”93 In light of these dictionary definitions, I am satisfied that
LPA § 6.01(e)’s plain meaning is that BB GP must endeavor diligently to conduct
Blue Bell’s business in accordance with practices that (1) are based on thorough
knowledge of and experience with the dairy industry; or (2) agree with accepted
views within that industry.
With this interpretation in mind, the phrase “sound business practices in the
industry” in LPA § 6.01(e) may reasonably be understood to encompass (1) food
safety practices prescribed by federal and state statutes, regulations and guidance
documents applicable to dairy industry participants; and (2) food safety practices
recommended by recognized trade organizations within the dairy industry, including
the DPC and the IDFA. As explained below, each of these sources offers readily
available guidance regarding “sound business practices” in the dairy industry.
In the first instance, common sense suggests that “sound business practices”
in a given industry require compliance with statutes, regulations, etc. applicable to
businesses in that industry. After all, a business that operates (or is operated) without
regard for applicable laws, regulations and agency guidance risks being sued, fined
or otherwise sanctioned into oblivion—and out of business. It follows, then, that the
93
Sound, MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY (11th ed. 2009); see USA
Cable, 766 A.2d at 474 (using MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY to
define “regularly”).
26
phrase “sound business practices in the industry” in LPA § 6.01(e) may reasonably
be understood to encompass food safety practices prescribed by statutes, regulations
and agency guidelines applicable to dairy product manufacturers such as Blue Bell.
That phrase may also reasonably be understood to encompass food safety
practices recommended in DPC and IDFA guidelines. The DPC’s membership
comprises “[academic], dairy industry and regulatory personnel,” and its food safety
guidelines are “widely followed” in the dairy industry.94 And the IDFA’s members
“represent more than 85% of the ice cream, frozen desserts, milk, cultured products,
and cheese products produced and marketed in the U.S. . . .”95 It is reasonable to
infer, therefore, that the food safety recommendations in DPC and IDFA guidelines
reflect thorough knowledge of (and experience with) dairy industry food safety
issues as expressed by leaders in that industry.
In light of the foregoing, Plaintiffs’ interpretation of the phrase “sound
business practices in the industry” in LPA § 6.01(e) is reasonable. That is, the phrase
may reasonably be understood to encompass the food safety practices prescribed by
the statutes, regulations and guidelines referenced in the Complaint. This
interpretation is consistent with the plain meaning of the phrase’s constituent words,
94
Compl. ¶ 29.
95
Compl. ¶ 33.
27
as well as the syntax of the clause in which the phrase appears. And, based on this
interpretation of LPA § 6.01(e), one may reasonably infer that “sound business
practices in the [dairy] industry” require BB GP to “control[] or eliminat[e]
condensation in the plant environment, properly clean[] and sanitize[] plant surfaces,
adequately test[] for contamina[nts] such as Listeria . . . and determine[] and
correct[] the[] cause [of bacterial contamination] if discovered.”96
Insofar as the phrase “sound business practices in the industry” in
LPA § 6.01(e) might be susceptible of some other reasonable interpretation,
Defendants have not articulated one and the Court cannot discern one.97 Instead,
96
Compl., p. 14. To be sure, the content of “sound business practices in the [dairy]
industry” presents a question of fact. LPA § 6.01(e); cf. Desert Equities, Inc. v. Morgan
Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1206 (Del. 1993)
(“Reasonableness is a question of fact to be determined by the finder of fact.”). The
plain meaning of the phrase “sound business practices in the industry” in LPA § 6.01(e),
however, controls the parameters of that factual inquiry—and so delineates how the
underlying question may (or must) be answered. See Lorillard Tobacco, 903 A.2d
at 739 (Judicial interpretation of contractual language is “constrained by a combination
of the parties’ words and the plain meaning of those words where no special meaning
is intended.”); Allied Capital, 910 A.2d at 1030 (The “evident meaning” of clear
contractual language should be given “binding effect.”). Based on Plaintiffs’
reasonable interpretation of LPA § 6.01(e)’s “best efforts” clause, and the Complaint’s
well-pled allegations, one may reasonably infer that “sound business practices in the
[dairy] industry” require “controlling or eliminating condensation in the plant
environment, properly cleaning and sanitizing plant surfaces, adequately testing for
contamina[nts] such as Listeria . . . and determining and correcting the[] cause
[of bacterial contamination] if discovered.” Compl. ¶ 27.
97
With that said, at this stage, I express no view regarding whether LPA § 6.01(e) is
susceptible of other reasonable interpretations (and thus, ambiguous).
28
Defendants’ approach here is to attack Plaintiffs’ construction of LPA § 6.01(e) and
then to argue that because the provision cannot mean what Plaintiffs say it means,
they have failed to state a claim for breach of the LPA as a matter of law.
Specifically, Defendants argue that:
 LPA § 6.01(e) “does not provide any guidance as to . . . what
constitutes ‘sound business practices in the industry,’”98 such that BB GP has
“no way to determine what industry standards it is bound by”99; and
 “[t]he absence of such guidance in [LPA § 6.01(e)] renders
Plaintiffs’ interpretation [of that provision] impossible to enforce and
therefore unreasonable.”100
As discussed above, the plain meaning of LPA § 6.01(e)’s operative language
supports an inference that “sound business practices in the [dairy] industry”101
include (1) food safety practices prescribed by federal laws, regulations and
guidelines applicable to dairy product manufacturers such as Blue Bell; and (2) food
safety practices recommended in DPC and IDFA guidelines. It cannot be said,
therefore, that LPA § 6.01(e) provides no guidance as to “what constitute[] ‘sound
business practices in the [dairy] industry.’”102
98
DOB at 32.
99
Id.
100
Id.
101
LPA § 6.01(e).
102
DOB at 32 (quoting LPA § 6.01(e)).
29
Nor can it be said that BB GP has no way to determine what industry standards
it is bound to follow. BB GP can readily consult statutes, regulations and agency
guidance documents, along with DPC and IDFA food safety guidelines, just as
Plaintiffs have done here. And while it is possible that BB GP, despite its best
efforts, might overlook one or more relevant statutes, regulations or guidelines, the
extent to which such an omission would be consistent with best efforts is a question
of fact. At this juncture, Plaintiffs have pled sufficient facts from which it can
reasonably be inferred that BB GP failed to use its best efforts as required by
LPA § 6.01(e).
Defendants’ argument that LPA § 6.11(d)’s contractual “good faith” standard
negates (or “modifies”) BB GP’s “best efforts” obligation under LPA § 6.01(e) is
untenable as a matter of law. To be sure, “the Delaware Revised Uniform Limited
Partnership Act [‘DRULPA’] gives ‘maximum effect to the principle of freedom of
contract . . . . ’”103 Accordingly, DRULPA provides that a Delaware limited
partnership may within its limited partnership agreement “expand, restrict, or
eliminate any fiduciary duties that a partner or other person might otherwise owe”
103
Norton, 67 A.3d at 360 (quoting 6 Del. C. § 17–1101(c)).
30
to the limited partnership or another partner.104 And Blue Bell’s LPA does just that
in LPA § 6.11(d), which provides:
[a]ny standard of care and duty imposed by this Agreement or under
[DRULPA] or any applicable law, rule or regulation shall be modified,
waived or limited, to the extent permitted by law, as required to permit
[BB GP] to act under this Agreement or any other agreement
contemplated by this Agreement and to make any decision under the
authority prescribed in this Agreement, so long as the action is
reasonably believed by [BB GP] to be in, or not inconsistent with, [Blue
Bell’s] best interests.”105
Our Supreme Court has confirmed that language such as appears in
LPA § 6.11(d) “unconditionally eliminate[s] all common law standards of care and
fiduciary duties, and substitute[s] a contractual good faith standard of care.”106 This
contractual good faith standard, however, only “operates in the spaces of the LPA
104
Id. (citing 6 Del. C. § 17–1101(d) (“To the extent that, at law or in equity, a partner or
other person has duties (including fiduciary duties) to a limited partnership or to another
partner or to another person that is a party to or is otherwise bound by a partnership
agreement, the partner’s or other person’s duties may be expanded or restricted or
eliminated by provisions in the partnership agreement.”)).
105
LPA § 6.11(d).
106
Brinckerhoff v. Enbridge Energy Co., Inc., 159 A.3d 242, 253 (Del. 2017)
(“Brinckerhoff V”). In Brinkerhoff V, the operative contractual language read:
Any standard of care and duty imposed by this Agreement or under
[DRULPA or] any applicable law, rule or regulation shall be modified,
waived or limited as required to permit the General Partner to act under
this Agreement or any other agreement contemplated by this Agreement
and to make any decision pursuant to the authority prescribed in this
Agreement, so long as such action is reasonably believed by the General
Partner to be in the best interests of the Partnership. Id.31
without express standards.”107 It does not displace or otherwise “modify” BB GP’s
affirmative contractual obligation under LPA § 6.01(e) to “use its best efforts to
conduct [Blue Bell’s] business . . . in accordance with sound business practices in
the [dairy] industry.”108 In other words, as relates to BB GP’s obligation to conduct
Blue Bell’s business in accordance with sound business practices in the dairy
industry, LPA § 6.01(e) fully occupies the space. There is no room or need for
LPA § 6.11(d) to modify BB GP’s “best efforts” obligation under LPA § 6.01(e).109
b. Plaintiffs Have Well Pled that BB GP Breached LPA § 6.01(e)
Based on the Complaint’s well-pled allegations, and the FDA inspection
reports incorporated into the Complaint by reference, it is reasonably conceivable
that BB GP failed to use its best efforts to operate Blue Bell’s Texas and Oklahoma
107
Id. at 254.
108
LPA § 6.01(e). See Brinkerhoff V, 159 A.3d at 254 (under “settled rules of contract
interpretation, . . . the court [must] prefer specific provisions over more general ones.”);
see also DCV Hldgs., Inc. v. ConAgra, Inc., 889 A.2d 954, 961 (Del. 2005) (“Specific
language in a contract controls over general language, and where specific and general
provisions conflict, the specific provision ordinarily qualifies the meaning of the
general one.”) (internal citations omitted).
109
See Brinkerhoff V, 159 A.3d at 254–56 (“Even though Section 6.6(e) imposes an
affirmative obligation on [the general partner], the Court of Chancery held that
Section 6.10(d)’s contractual good faith standard ‘modifies’ Section 6.6(e), and
requires [the limited partner plaintiff] to first show that [the general partner] lacked
good faith in approving the transaction. We are at a loss to understand how it does.
Section 6.6(e) imposes an affirmative obligation on [the general partner] when
contracting with Affiliates. Section 6.10(d), on the other hand, is a general standard of
care that operates in the spaces of the LPA without express standards. . . . ”) (footnotes
omitted).
32
Plants “in accordance with sound business practices in the [dairy] industry,” in
breach of LPA § 6.01(e).110 First, the Complaint alleges, and FDA investigators
observed, a multitude of food safety hazards at each facility in March and April
2015, including:
 “[f]ailure to manufacture and package foods under conditions
and controls necessary to minimize the potential for growth of
microorganisms,” such that certain ice cream products manufactured at those
facilities prior to April 2015 were contaminated by Listeria monocytogenes111;
 inadequate “procedure[s] . . . for cleaning and sanitizing of
[plant] equipment,” as evidenced, in part, by recurring Listeria contamination
in each facility112; and
 “[t]he plant[s] [were] not constructed in such a manner as to
prevent condensate from contaminating food and food-contact surfaces,” such
that condensate dripped directly into ice cream products.113
110
LPA § 6.01(e).
111
Compl. ¶ 38; see FDA Observations (Texas Plant) at 1 (identifying three lots of Blue
Bell ice cream products manufactured at the Texas Plant between August 2014 and
March 2015 that were contaminated by Listeria monocytogenes); FDA Observations
(Oklahoma Plant) at 1 (identifying three lots of Blue Bell ice cream products
manufactured at the Oklahoma Plant between April 2014 and March 2015 that were
contaminated by Listeria monocytogenes).
112
Compl. ¶ 38; see FDA Observations (Texas Plant) at 2 (discussing Blue Bell’s failure
to control recurring Listeria contamination at the Texas Plant in February and March
2015); FDA Observations (Oklahoma Plant) at 3–4 (stating that “[Blue Bell] failed to
demonstrate [its] cleaning and sanitizing program [was] effective in controlling
recurring microbiological contamination [in the Oklahoma Plant]” and identifying
sixteen instances of Listeria contamination in the Oklahoma Plant from March 2013 to
January 2015).
113
Compl. ¶ 38; FDA Observations (Texas Plant) at 2–3 (stating that FDA investigators
inspecting the Texas Plant in March and April 2015 “observed condensate and drip
throughout the facility” and reporting four separate instances of “condensate . . .
dripping directly into ice cream products”); FDA Observations (Oklahoma Plant) at 6–
33
Second, the Complaint alleges that, despite Blue Bell’s discovery of “Listeria
[bacteria] in [its Oklahoma Plant] on at least 5 separate occasions in 2013 and on 10
more occasions in 2014,” Blue Bell “never conducted . . . [a] root cause analysis to
determine the source of the [Listeria bacteria], did not increase the frequency or
scope of its Listeria testing protocol, did not disassemble any equipment, and did
not take any effective action to [mitigate] the continuing and growing Listeria threat,
much less eradicate it.”114 These failures, according to the Complaint, led directly
to the discovery of Listeria in Blue Bell ice cream products by government health
inspectors.115
Based on these factual allegations, and the FDA observations referenced in
the Complaint, one may reasonably infer that BB GP failed to use its best efforts to
operate Blue Bell’s Texas and Oklahoma Plants in accordance with “sound business
practices in the [dairy] industry,”116 per Plaintiffs’ reasonable interpretation of that
7 (reporting that FDA investigators inspecting the Oklahoma Plant in March 2015
observed similar condensation issues).
114
Compl. ¶ 42.
115
Compl. ¶ 43.
116
LPA § 6.01(e). The relevant “industry standards” are discussed at length above, and
include: (1) food safety practices prescribed by the FDA regulations codified at
21 C.F.R. Parts 110 and 117; and (2) food safety practices recommended in the IDFA’s
2002 HACCP plant manual and in DPC 8, DPC 56, DPC 60 and DPC 61.
34
phrase. That being so, the Complaint adequately pleads that BB GP breached an
obligation owed to Blue Bell under LPA § 6.01(e).
c. Plaintiffs Have Well Pled Resulting Damages to Blue Bell
Finally, the Complaint well pleads that Blue Bell was damaged by BB GP’s
(alleged) breach of LPA § 6.01(e). Specifically, the Complaint alleges that “Blue
Bell lost a substantial portion of its value . . . [and was] forced to pay personal injury
settlements, fines and penalties” as a result of that breach.117 These allegations more
than satisfy Delaware’s notice pleading standard.118
d. Count I is Properly Characterized as a Breach of Contract Claim
Before leaving Count I, it is appropriate to clarify precisely what is pled there,
as such clarification will be useful when the parties take discovery, engage in further
motion practice or possibly try the claim. The Complaint styles Count I as a claim
for “breach of contractual fiduciary duties.”119 A “contractual fiduciary duty” is a
fiduciary duty (1) the scope of which is established by contract; or (2) compliance
117
Compl. ¶ 63.
118
See Savor, 812 A.2d at 896–97 (“[E]ven vague allegations are “well-pleaded” if they
give the opposing party notice of the claim.”); Anglo Am. Sec. Fund, L.P. v. S.R. Global
Int’l Fund, L.P., 829 A.2d 143, 156 (Del. Ch. 2003) (“Proof of [alleged] damages and
of their certainty need not be offered in the complaint in order to state a claim
[for breach of contract].”). I note that the LPA contains two exculpatory provisions
(in LPA §§ 6.01(e) and 6.08). I address these two provisions in the demand excusal
analysis.
119
Compl., p. 34.
35
with which is measured by a contractual standard.120 When a limited partnership
agreement eliminates the general partner’s common law fiduciary duties to the entity
and its limited partners, however, the general partner cannot—and does not—owe
contractual fiduciary duties to such parties.121
Here, LPA § 6.11(d) “unconditionally eliminate[s] all common law standards
of care and fiduciary duties” owed by BB GP.122 Thus, BB GP’s performance
obligation under LPA § 6.01(e) is not a “contractual fiduciary duty”; it is a purely
contractual duty.123 Accordingly, Count I is properly characterized as a breach of
contract claim, rather than a claim for breach of contractual fiduciary duties.
2. Count II – Veil Piercing, Agency or Joint Venture Liability
Count II of the Complaint charges that BB USA and the Individual Defendants
caused BB GP to breach LPA § 6.01(e) and “are[,] [therefore,] jointly and severally
liable for [that] breach[]”124 for the following reasons:
120
See Allen v. El Paso Pipeline GP Co., L.L.C., 2014 WL 2819005, at *19 (Del. Ch.
June 20, 2014).
121
See id.; see also Brinkerhoff V, 159 A.3d at 252–53 (“DRULPA permits the LPA drafter
to disclaim fiduciary duties, and replace them with contractual duties.”).
122
Brinkerhoff V, 159 A.3d at 253.
123
See id. at 252–53.
124
Compl. ¶ 67.
36
 BB USA and the Individual Defendants exercised “complete
dominion and control over BB GP” at all relevant times, such that the Court
should disregard BB GP’s separate legal existence for liability purposes.125
 BB USA “acted as principal in an agency relationship with
BB GP to operate and manage Blue Bell.”126
 “Alternatively, BB USA and BB GP acted together in a joint
venture to operate and manage Blue Bell.”127
As explained below, Count II fails to state a claim because (1) the Complaint’s
well-pled allegations do not suggest that piercing BB GP’s corporate veil is
warranted; and (2) Delaware law does not recognize a theory whereby the
beneficiary of a contractual covenant can be liable for breach of contract by
“causing” the promisor to breach that covenant.128
a. Plaintiffs Have Not Pled a Basis for Veil-Piercing
While they stop short of saying the words, Plaintiffs’ allegation that BB USA
and the Individual Defendants exercised “complete dominion and control over
125
Id.
126
Id.
127
Id.
128
See Gerber v. EPE Hldgs., LLC, 2013 WL 209658, at *11 (Del. Ch. Jan. 18, 2013)
(“Delaware law does not recognize a claim for aiding and abetting a breach of
contract.”); cf. NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1, 35 (Del. Ch. 2009)
(“A breach of contract is not an underlying wrong that can give rise to a civil conspiracy
claim.”). The Court notes that Count II does not allege (or even suggest) that BB USA
or the Individual Defendants tortiously interfered with BB GP’s performance of its
contractual obligation under LPA § 6.01(e). Accordingly, this Memorandum Opinion
expresses no view as to whether a derivative tortious interference claim against
BB USA or the Individual Defendants (or both) might have been viable.
37
BB GP” suggests that Plaintiffs are seeking to pierce the corporate veil of BB GP.129
Under Delaware law, “[p]iercing the corporate veil under the alter ego theory
‘requires that the corporate structure cause fraud or similar injustice.’”130
“Effectively, the corporation must be a sham and exist for no other purpose than as
a vehicle for fraud.”131 The allegations in this Complaint fall far short of striking
that mark. The Complaint does not allege—or even suggest—that BB GP exists
solely as a vehicle for fraud. Accordingly, Plaintiffs’ veil-piercing theory of liability
fails as a matter of law.
b. Plaintiffs Have Not Pled Agency Liability
Plaintiffs’ attempt to hold BB USA liable for BB GP’s alleged breach of the
LPA based on an agency theory fails because Delaware law recognizes no theory
under which a principal can be vicariously liable for its agent’s non-tortious breach
of contract.132 Here, while Plaintiffs allege that BB USA “acted as principal in an
129
See Wallace ex rel. Cencom Cable Income P’rs II, Inc., L.P. v. Wood, 752 A.2d 1175,
1184 (Del. Ch. 1999) (“The degree of control required to pierce the veil [of a corporate
general partner] is ‘exclusive domination and control . . . to the point that [the General
Partner] no longer ha[s] legal or independent significance of [its] own.’”) (quoting Hart
Hldg. Co. Inc. v. Drexel Burnham Lambert Inc., 1992 WL 127567, at *11 (Del. Ch.
May 28, 1992)).
130
Cencom Cable, 752 A.2d at 1184 (quoting Outokumpu Eng’g Enter., Inc. v. Kvaerner
Enviropower, Inc., 685 A.2d 724, 729 (Del. 1996)).
131
Id.132
The Complaint fails to plead any facts that would allow an inference that BB USA
authorized BB GP to enter into the LPA on its behalf much less to commit BB USA to
manage Blue Bell in accordance with a specified standard of conduct.
38
agency relationship with BB GP to operate and manage Blue Bell,”133 they do not
contend that BB GP’s (alleged) breach of LPA § 6.01(e) was tortious vis-à-vis Blue
Bell. Thus, Plaintiffs’ agency law theory of BB USA’s liability fails as a matter of
law.
See RESTATEMENT (THIRD) OF AGENCY § 6.05 (2006) (recognizing that principal
cannot be held liable for agent’s breach of contract when principal did not authorize
agent to contract on its behalf). Moreover, there is no basis in our law to hold BB USA
vicariously liable for BB GP’s breach of contract. Cf. NACCO, 997 A.2d at 35(“A breach of contract is not an underlying wrong that can give rise to a civil conspiracy
claim.”); Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 892 (Del. Ch. 2009) (“[U]nless
the breach also constitutes an independent tort, a breach of contract cannot constitute
an underlying wrong on which a claim for civil conspiracy could be based[.]”). In
Delaware, “[c]ivil conspiracy [liability] is vicarious liability” premised upon agency
law. Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *11 (Del. Ch.
Aug. 26, 2005); see also Parfi Hldg. AB v. Mirror Image Internet, Inc., 794 A.2d 1211,
1238 (Del. Ch. 2001) (“Civil conspiracy . . . provides a mechanism to impute liability
to those not a direct party to the underlying [wrong].”). Thus, under Delaware law, “a
conspirator is jointly and severally liable for the acts of co-conspirators . . . in
furtherance of the conspiracy,” Nicolet, Inc. v. Nutt, 525 A.2d 146, 150 (Del. 1987), on
the rationale that co-conspirators are properly “considered agents of each other when
acting in furtherance of th[eir] [common unlawful objective].” In re Am. Int’l Gp., Inc.,
965 A.2d 763, 815 (Del. Ch. 2009), aff’d sub nom. Teachers’ Ret. Sys. of Louisiana v.
PricewaterhouseCoopers LLP, 11 A.3d 228 (Del. 2011). With these principles in mind,
the clear implication of the NACCO and Kuroda decisions is that Delaware law
recognizes no theory of vicarious liability for a non-tortious breach of contract. That
is, if “[c]ivil conspiracy [liability] is vicarious liability,” Albert, 2005 WL 2130607, at
*11, and a non-tortious “breach of contract . . . can[not] give rise to a civil conspiracy
claim,” NACCO, 997 A.2d at 35; Kuroda, 971 A.2d at 892, it follows that a non-tortious
breach of contract cannot give rise to vicarious liability.
133
Compl. ¶ 67. The Court’s analysis here assumes, without deciding, that an agency
relationship exists between BB GP and BB USA.
39
c. Plaintiffs Have Not Pled Joint Venture Liability
Finally, Plaintiffs’ claim that BB USA is liable as BB GP’s joint venturer is
preempted by the LPA, which governs all aspects of BB USA and BB GP’s
relationship with respect to Blue Bell. Under Delaware law, a joint venture is created
where there is:
(1) a community of interest in the performance of a common purpose;
(2) joint control or right of control; (3) a joint proprietary interest in
the subject matter; (4) a right to share in the profits; and (5) a duty to
share in the losses which may be sustained.134
Here, BB GP and BB USA are bound together by contract, i.e., by the LPA.135
And, as made clear in the LPA, BB GP is vested with the exclusive authority to
manage Blue Bell’s business and affairs.136 Thus, the LPA itself reveals that BB GP
134
Sunrise Ventures, LLC v. Rehoboth Canal Ventures, LLC, 2010 WL 975581, at *2 (Del.
Ch. Mar. 4, 2010) (internal quotation and citation omitted). While a joint venture
requires “some sort of contractual relationship between the parties, [the existence of
such a relationship] may be implied or proven by facts and circumstances showing that
such an enterprise was in fact entered into.” J. Leo Johnson, Inc. v. Carmer, 156 A.2d
499, 502 (Del. 1959).
135
See Norton, 67 A.3d at 360 (“Limited partnership agreements are a type of contract.”);
6 Del. C. § 17–101(12) (“A partner of a limited partnership . . . is bound by the
partnership agreement whether or not the partner . . . executes the partnership
agreement.”).
136
LPA §§ 6.01(a) (“[BB GP] shall have the exclusive right and full authority to manage,
conduct, control and operate [Blue Bell’s] business”), 6.10 (“No Limited Partner . . .
may take part in the management . . . of [Blue Bell’s] business and affairs.”).
40
and BB USA, in fact, did not intend to “act[] together in a joint venture to operate
and manage Blue Bell.”137
Given the LPA’s clear terms with respect to BB GP’s management function,
Plaintiffs are left to argue that the conduct of BB USA and BB GP, respectively,
somehow amended the LPA to (1) divest BB GP of the exclusive authority to
manage Blue Bell’s business and affairs; and (2) instead repose that authority in
BB GP and BB USA jointly. The Complaint’s well-pled factual allegations,
however, do not permit a reasonable inference that such an amendment ever took
place.138 Accordingly, Plaintiffs’ joint venture theory of BB USA’s liability fails as
matter of law.
3. Count III - “Aiding and Abetting”
Count III charges that BB USA and the Individual Defendants aided and
abetted BB GP’s (alleged) breach of LPA § 6.01(e). Because BB GP’s performance
obligation under LPA § 6.01(e) is purely contractual in nature, the claim advanced
in Count III is, in substance, a claim for aiding and abetting a breach of contract.
Delaware law, however, “does not recognize a claim for aiding and abetting a breach
137
Compl. ¶ 67.
138
Moreover, under LPA § 16.02, the LPA could not have been amended without a writing
evidencing the amendment.
41
of contract.”139 Consequently, Count III fails to state a claim upon which relief may
be granted and must be dismissed.
4. Count IV - Breach of Fiduciary Duty
Count IV alleges that BB USA and the Individual Defendants owed common
law fiduciary duties to Blue Bell and breached those duties by failing to “exercise
due care and loyalty in connection with the operation of Blue Bell’s facilities.”140
The claim advanced in Count IV is premised on the rule established in In re
USACafes, L.P. Litigation,141 under which a corporate general partner’s fiduciary
duties to the limited partnership may extend to the general partner’s controllers, if
such persons exercise control over the limited partnership’s property.142 The
USACafes rule, however, has limited—if any—application where, as here, the
limited partnership agreement entirely eliminates the general partner’s common law
fiduciary duties to the limited partnership and its limited partners. In such a case,
139
Gerber, 2013 WL 209658, at *11 (citing Zimmerman v. Crothall, 2012 WL 707238,
at *19 (Del. Ch. Mar. 12, 2012)).
140
Compl. ¶ 80.
141
600 A.2d 43 (Del. Ch. 1991).
142
See id. at 48–49 (“I understand the principle of fiduciary duty, stated most generally, to
be that one who controls property of another may not, without . . . agreement,
intentionally use that property in a way that benefits the [controller] to the detriment of
the property or its beneficial owner. . . . The theory underlying fiduciary duties is
consistent with recognition that a director of a corporate general partner bears . . . a duty
[of loyalty] towards the limited partnership. That duty, of course, extends only to
dealings with the partnership’s property or affecting its business . . . .”).
42
the corporate general partner owes no fiduciary duties that may be “extended” to its
controllers.143 Thus, where the limited partnership agreement entirely eliminates the
general partner’s common law fiduciary duties, it is highly doubtful that the general
partner’s controllers owe any fiduciary duties to the limited partnership. Insofar as
they do, however, those duties require only that the controllers refrain from self-
dealing; i.e., that they “not . . . use control over the [limited] partnership’s property
to advantage [themselves] at the expense of the partnership.”144
Here, because LPA § 6.11(d) “unconditionally eliminate[s] all common
law . . . fiduciary duties” owed by BB GP,145 I am satisfied that neither BB USA nor
the Individual Defendants owe any fiduciary duties directly to Blue Bell (or its
limited partners)—even if they exercise control over Blue Bell’s property.
Assuming, arguendo, that they do owe such duties, however, those duties require
only that BB USA and the Individual Defendants not engage in self-dealing with
143
See Brinkerhoff V, 159 A.3d at 252–53 (“DRULPA permits the LPA drafter to disclaim
fiduciary duties, and replace them with contractual duties. If fiduciary duties have been
validly disclaimed, the limited partners cannot rely on traditional fiduciary principles
to regulate the general partner’s conduct.”) (footnotes omitted).
144
USACafes, 600 A.2d at 49; see also Feeley, 62 A.3d at 671–72 (expressly declining to
extend USACafes to duty of care claims); Bay Ctr. Apts. Owner, LLC v. Emery Bay
PKI, LLC, 2009 WL 1124451, at *10 (Del. Ch. Apr. 20, 2009) (“In practice, the cases
applying USACafes have not ventured beyond the clear application stated in USACafes:
‘the duty not to use control over the partnership’s property to advantage the corporate
director at the expense of the partnership.’”) (quoting USACafes, 600 A.2d at 49).
145
Brinkerhoff V, 159 A.3d at 253.
43
respect to Blue Bell.146 Yet the Complaint does not well plead that BB USA or any
of the Individual Defendants “use[d] control over [Blue Bell’s] property to
advantage [themselves] at the expense of [Blue Bell].”147 Nor do the Complaint’s
well-pled factual allegations permit a reasonable inference to that effect.
Consequently, it is not reasonably conceivable that Count IV states a claim upon
which relief may be granted.
B. Whether Demand is Excused as to Count I of the Complaint
“Before limited partners may bring a derivative claim in [t]he Court of
Chancery, Delaware law requires the[m] . . . to make a demand on the general partner
to bring the action or explain why they made no demand.”148 If no pre-suit demand
is made, the derivative complaint must allege particularized facts establishing that
such a demand would have been futile and is therefore excused.149 Plaintiffs did not
146
See USACafes, 600 A.2d at 49.
147
Id.148
Seaford Funding Ltd. P’ship v. M & M Assocs. II, L.P., 672 A.2d 66, 69 (Del. Ch. 1995)
(citing 6 Del. C. § 17–1001 and Litman v. Prudential–Bache Props., Inc., 611 A.2d 12,
17 (Del. Ch. 1992) (“Litman I”)).
149
See 6 Del. C. § 17–1003 (“In a derivative action, the complaint shall set forth with
particularity the effort, if any, of the plaintiff to secure initiation of the action by a
general partner or the reasons for not making the effort.”); Forsythe v. ESC Fund Mgmt.
Co. (U.S.), 2007 WL 2982247, at *5 (Del. Ch. Oct. 9, 2007) (“Delaware courts look to
pleading standards developed in the corporate context to determine whether a limited
partner has alleged particularized facts satisfying [Section 17–1003’s] requirements.”);
Litman v. Prudential-Bache Props., Inc., 1993 WL 5922, at *2–3 (Del. Ch. Jan. 4, 1993)
(“Litman II”).
44
make any pre-suit demand on Blue Bell’s general partner, BB GP. Thus, the Court
must determine whether the Complaint’s particularized factual allegations establish
that such a demand would have been futile and is therefore excused. Because
Count I is the only count of the Complaint that states a viable claim, the Court’s
demand excusal analysis focuses on Count I.
1. The Test for Demand Excusal
“[C]orporate standards apply to limited partnerships in the ‘demand excused’
analysis,” and “[d]emand futility issues in the partnership context are the same as in
the corporate context.”150 Thus, where a limited partner sues a general partner
derivatively “because [the general partner] failed to do something,”151 the test for
demand excusal is “whether or not the particularized factual allegations of [the]
derivative . . . complaint create a reasonable doubt that, as of the time the complaint
is filed, the [general partner] could have properly exercised its independent and
disinterested business judgment in responding to a demand.”152 A general partner
150
Seaford Funding, 672 A.2d at 70 (citing Litman II, 1993 WL 5922, at *2–3).
151
Rales v. Blasband, 634 A.2d 927, 934 n.9 (Del. 1993).
152
Id. at 934; Forsythe, 2007 WL 2982247, at *5 (Where the complaint challenges a failure
to act when action is “necessary,” “the [Rales] test will be applied in the context of a
demand on the general partner of a limited partnership.”). Plaintiffs argue that Rales is
not the appropriate test for demand excusal because the Complaint “alleges specific
actions [not identified] that failed to conform to the LPA’s best efforts” covenant. Pls.’
Answering Br. in Opp’n to Defs.’ Mot. to Dismiss (“Pls.’ Ans. Br.”) at 56 n.29.
I disagree. Count I is a classic oversight claim packaged as a breach of contract.
Reduced to its essence, Count I alleges that BB GP failed to act in accordance with its
45
has “a disabling interest for pre-suit demand purposes” when it faces a “substantial
likelihood” of liability in connection with the derivative claim(s) asserted against
it.153 And, in the case of a corporate general partner, the demand excusal inquiry
focuses on the general partner itself (as an entity), rather than on its board of
directors.154
2. BB GP Faces a Substantial Likelihood of Liability for Breach of
LPA § 6.01(e)
After carefully reviewing the Complaint, I am satisfied that its particularized
factual allegations regarding food safety hazards at Blue Bell’s Texas and Oklahoma
Plants prior to the 2015 product recall satisfy the “substantial likelihood” of liability
standard as to Count I, such that BB GP has “a disabling interest for pre-suit demand
purposes . . . .”155 Those particularized factual allegations thus “create a reasonable
doubt that, as of the time the [C]omplaint [was] filed, [BB GP] could have properly
management obligations to oversee plant operations as imposed by LPA § 6.01(e). This
type of claim implicates the Rales paradigm. See In re Goldman Sachs Gp., Inc.
S’holder Litig., 2011 WL 4826104, at *18 (Del. Ch. Oct. 12, 2011) (holding that “Rales
standard applies” to claims that board failed to monitor operations).
153
Ryan v. Gifford, 918 A.2d 341, 355 (Del. Ch. 2007) (quoting In re Baxter Int’l, Inc.
S’holders Litig., 654 A.2d 1268, 1269 (Del. Ch. 1995)).
154
See, e.g., Gotham v. Hallwood Realty P’rs, L.P., 1998 WL 832631, at *5 (Del. Ch.
Nov. 10, 1998) (“I hold that [the limited partner plaintiff] must plead the futility of
presuit demand [on] . . . the corporation acting as general partner.”).
155
Ryan, 918 A.2d at 355.
46
exercised its independent and disinterested business judgment in responding to a
demand” respecting Count I.156
In brief review, the plain meaning of the phrase “sound business practices in
the [dairy] industry” in LPA § 6.01(e) includes food safety practices that (1) are
“based on thorough knowledge [of] and experience [with]” dairy industry matters;
or (2) “agree[] with accepted views” on food safety in the dairy industry. 157
Accordingly, that phrase may reasonably be understood to incorporate the food
safety practices prescribed by the laws, regulations and guidelines cited in the
Complaint.
With this interpretation in mind, one may reasonably infer that LPA § 6.01(e)
obligates BB GP to use its best efforts to:
 “control[] or eliminat[e] condensation” in Blue Bell’s production
158
plants ;
 “properly clean[] and sanitiz[e] plant surfaces”159;
 “adequately test[] for contamina[nts] such as Listeria” in Blue
Bell’s food products and production plants160; and
156
Rales, 634 A.2d at 934.
157
Sound, MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY.
158
Compl., p. 14.
159
Id.160
Id.47
 “determin[e] and correct[] the[] cause [of bacterial
contamination] if discovered.”161
The Complaint’s particularized factual allegations regarding Listeria contamination
and other food safety hazards at Blue Bell’s Texas and Oklahoma Plants prior to the
2015 product recall are sufficient to establish a “substantial likelihood” for demand
excusal purposes that BB GP failed to discharge its “best efforts” obligation under
LPA § 6.01(e) in connection with its operation of those facilities.
3. The LPA’s Exculpatory Provisions Do Not Alter the Demand
Futility Analysis
In cases where a limited partnership agreement exempts the general partner
from liability under certain circumstances, “the risk of liability does not disable [the
general partner] from considering a demand fairly unless particularized pleading
permits the court to conclude that there is a substantial likelihood that [the general
partner’s] conduct falls outside the exemption.”162 Here, the LPA contains two
exculpatory provisions—in LPA § 6.01(e) and LPA § 6.08. As explained below,
however, these provisions do not unambiguously exculpate BB GP’s alleged breach
161
Id.
162
Baxter, 654 A.2d at 1270; cf. In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1032
(Del. Ch. 2012) (“Because the directors on the Board are protected by the § 102(b)(7)
provision exculpating them for personal liability stemming from a breach of the duty
of care, the complaint must be dismissed against the directors unless the plaintiffs have
successfully pled non-exculpated claims for breach of the duty of loyalty against
them.”).
48
of LPA § 6.01(e)’s “best efforts” clause. They cannot provide, therefore, a basis for
overcoming otherwise properly pled allegations supporting demand futility with
respect to Count I.163
Section 6.01(e)’s exculpatory clause provides, in pertinent part, that:
[BB GP] shall not be liable or responsible to any Partner or [to Blue
Bell] for any losses sustained or liabilities incurred in connection with
or attributable to errors in judgment of [BB GP], excluding those that
are attributable to [BB GP’s] . . . breach of any material provision of
this Agreement . . . . 164
The “best efforts” covenant in Section 6.01(e) is clearly a “material provision” of
the LPA; it addresses how BB GP shall manage Blue Bell’s business.165 BB GP’s
163
I note that Defendants have not invoked these exculpatory provisions expressly as a
basis to defeat Plaintiffs’ demand futility pleading. By failing to raise these provisions,
Defendants have waived any arguments or defenses based on them. See Emerald P’rs
v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (issues not briefed are deemed waived).
I address them, nevertheless, for the sake of completeness.
164
LPA § 6.01(e) (emphasis supplied).
165
“What [contract] terms are material is determined on a case-by-case basis, depending
on the subject matter of the agreement and on the contemporaneous evidence of
what terms the parties considered essential.” Eagle Force Hldgs., LLC v. Campbell,
2018 WL 2351326, at *16 (Del. May 24, 2018). Here, the LPA’s purpose is to spell
out the organization and governance of Blue Bell; thus, the LPA addresses, among other
things, how Blue Bell shall be managed—and how management shall operate the
Company’s business. In this connection, LPA § 6.01(a) vests BB GP with the
“exclusive right and full authority to manage, conduct, control and operate [Blue Bell’s]
business,” and LPA § 6.01(e)’s “best efforts” covenant prescribes, in part, how BB GP
shall conduct Blue Bell’s business. Both provisions, therefore, are essential
(or material) to the LPA’s overall design. Moreover, LPA § 6.01(e)’s bespoke
character indicates that the parties to the LPA considered that particular provision to be
a key component of Blue Bell’s governance scheme.
49
breach of that covenant, therefore, is not exculpated under Section 6.01(e)’s
exculpatory clause.
The second potentially applicable exculpatory clause, LPA § 6.08, provides
that:
[n]o Indemnitee [including BB GP] shall be liable to [Blue Bell] or to
the Partners for any losses sustained or liabilities incurred as a result of
any act or omission of such Indemnitee, if: (a) the act or omission is
specifically authorized under this Agreement or the [DRULPA], or (b)
the conduct of the Indemnitee did not constitute actual fraud, gross
negligence, willful misconduct or a breach of fiduciary duty to
[Blue Bell] or the Partners and if the Indemnitee acted in good faith and
in a manner it believed to be in, or not opposed to, [Blue Bell’s] best
interest.”166
By its terms, LPA § 6.08(a) does not exculpate acts or omissions that are not
authorized by the LPA, e.g., an omission by BB GP that constitutes a breach of LPA
§ 6.01(e)’s “best efforts” clause. And, unlike LPA § 6.08(a)’s express reference to
“omissions,” LPA § 6.08(b) does not appear to address omissions at all. 167 Rather,
it appears that exculpation under LPA § 6.08(b) is available only where an
Indemnitee (here, BB GP) has “acted in good faith.”168
166
LPA § 6.08 (emphasis supplied).
167
See, e.g., EBG Hldgs. LLC v. Vredezicht’s Gravenhage 109 B.V., 2008 WL 4057745,
at *10 (Del. Ch. Sept. 2, 2008) (“[T]he parties to the Amended LLC Agreement, by
expressly including Affiliates . . . within the ambit of [the agreement’s] indemnification
[provision] while referring only to parties in the jurisdiction provision, manifested an
intent not to include Affiliates under [the indemnification provision.]”).
168
For their part, Plaintiffs argue that LPA § 6.08(b) does not apply because they have
well-pled that Defendants acted with gross negligence and failed to act in good faith.
50
LPA § 6.08(b)’s second, conditional clause is joined to the provision’s first
clause by the conjunction “and,” suggesting that the second clause states a separate
requirement for exculpation under LPA § 6.08(b); namely, that the Indemnitee must
have “acted in good faith and in a manner it believed to be in, or not opposed to,
[Blue Bell’s] best interest.”169 Nonfeasance, or a thoughtless failure to act, would
therefore not appear to be exculpable under LPA § 6.08(b). After all, one cannot act
in good faith if one does not think to act in the first instance.
At best for BB GP, a construction of LPA § 6.08(b) that encompasses
omissions “may be reasonable, [but] it is certainly not the only reasonable
interpretation.”170 “Although it could have,” the exculpatory clause does not
expressly “eliminate or modify the ability of [limited partners] to bring a suit on
behalf of the [limited partnership] or modify the prerequisites for bringing such a
Pls.’ Ans. Br. 9–10. While that may well be so, I need not reach those issues given that
LPA § 6.08(b) does not appear to apply to Count I as pled in any event.
169
LPA § 6.08(b); see, e.g., Thomas v. Mayor & Council of City of Wilmington, 391 A.2d
203, 205 (Del. 1978) (Where “requirements [for exculpation] are stated in the
conjunctive . . . both [requirements] must be shown before an [indemnitee] is entitled
to [exculpation].”).
170
Kahn v. Portnoy, 2008 WL 5197164, at * 10 (Del. Ch. 2008) (holding that the invocation
of a potentially ambiguous exculpatory provision within a limited liability company
operating agreement was not sufficient to defeat otherwise well-pled allegations of
demand futility).
51
suit.”171 Accordingly, I cannot conclude that LPA § 6.08 operates to negate the
Complaint’s otherwise well-pled allegations of demand futility.
III. CONCLUSION
For the foregoing reasons, Defendants’ motion to dismiss is DENIED as to
Count I of the Complaint and GRANTED as to Counts II, III and IV, which are
dismissed with prejudice under Chancery Rule 12(b)(6) for failure to state a claim.
IT IS SO ORDERED.
171
Id. at * 11.
52