Over the past couple of blog posts, we have considered the guilty pleas by Blue Bell Creameries to charges that they distributed adulterated ice cream products and paid a criminal fine and forfeiture amount totaling $17.25 million and agreed to pay an additional $2.1 million to resolve civil False Claims Act allegations regarding ice cream products manufactured under insanitary conditions and sold to federal facilities. We also reviewed the criminal charges against former President and Chief Executive Officer (CEO) of the company, Paul Kruse, as laid out in the Information filed against him. As bad as both of these sets of allegations and agreed facts are, I can only say they pale in comparison with the total failure of the Blue Bell Board of Directors in its role in this catastrophe.

As sickening as it was to read about the company’s failures and the deliberate actions, alleged to have been taken by Kruse, the Board failures are even worse. For a major US company, indeed according to the Delaware Supreme Court, as the top ice cream manufacturer in the US, it is alleged that the Board completely abrogated its duty around the single largest safety issues it faced – food safety. That abrogation allowed a listeria outbreak, “causing the company to recall all of its products, shut down production at all of its plants, and lay off over a third of its workforce. Blue Bell’s failure to contain listeria’s spread in its manufacturing plants caused listeria to be present in its products and had sad consequences. Three people died as a result of the listeria outbreak. Less consequentially, but nonetheless important for this litigation, stockholders also suffered losses because, after the operational shutdown, Blue Bell suffered a liquidity crisis that forced it to accept a dilutive private equity investment.”

The failures at the Board were around both governance and actual duties of a Board as originally set out in the Caremark decision, as modified by Stone v. Ritter. Yet perhaps the key reason for the Board’s failure was its lack of impartiality or flipped around, over half of the Board members had a massive conflict of interest that they owed their entire livelihoods and most particularly their Board seats to the CEO and Chairman of the Board, Kruse. The failures of the Board were so egregious and its conflicts so massive that I am going to split my review of the Board’s role into two blog posts. Today, we consider the lack of Board independence and tomorrow, its corporate governance failures under Caremark and Stone v. Ritter.

Since 1919, Blue Bell has been run by the same family in Brenham TX; the Kruse family. Paul Kruse became a Director of Blue Bell in 1983, took over as President/CEO in 2004 and assumed the Chairman of the Board title in 2014 after the retirement of his father, who held the Chair since the 1950s. Over one half of the Board members had previously worked for one or both of the Kruse’s. The plaintiffs alleged that Plaintiff maintains “a majority of the BB USA Board members have such close ties to the Officer Defendants, particularly Paul Kruse, that they would be incapable of impartially considering a demand to bring a fiduciary duty claim against him on behalf of the company.”

What did the trial court find? In the trial court’s Opinion, it noted that three of the Directors Bridges, Howard Kruse and Jim Kruse were members of Paul Kruse’s immediate or extended family. Even the Defendants admitted, that these directors “could not disinterestedly consider a suit against Paul Kruse due to their family ties.”

Another Board member, Dorothy MacInerney, wrote a book about the Kruse family and then another book about Blue Bell. The Complaint alleged that Paul Kruse wrote the foreword for one of the books in which he expressed “a sincere word of appreciation” to MacInerney for writing the book. As the trial court noted, “one might have reason to doubt whether MacInerney’s fascination with, and apparently close connection and access to, Paul Kruse and his family will not “heavily influence [her] ability to exercise impartial judgment.” When the court has reason to doubt, the court is obliged to conclude that the complaint adequately pleads a lack of independence for purposes of demand futility.”

Board member Richard Dickson had worked for Bluebell since 1981. The trial court noted that “Before being named President in 2017, he served as general sales manager, plant manager of the Broken Arrow, Oklahoma plant, and then as VP of Sales and Marketing at the Company, a position he was appointed to in 2010.” According to the Complaint, Dickson is “indebted to the Kruse family for his career.” Board member, John “Barnhill has either worked for or been affiliated with Blue Bell for his entire work life (nearly sixty years). Here again, the Complaint alleges that Barnhill “owes his career to the Kruse family and has close personal relationships with several members of the Kruse family,” including with Jim Kruse who currently serves as President of a bank founded by Barnhill.” He also lacked impartiality.

Finally, as to Board member WJ Rankin, the trial court noted he had worked for Blue Bell for 28 years, serving as CEO from 1986 through 2014. It is alleged that, “[d]ue to donations [totaling approximately $450,000] from the Kruse family,” the “Agricultural Complex” at Blinn College was dedicated in Rankin’s name. The trial court found this was not a conflict and Rankin could remain impartial but the Delaware Supreme Court reversed this finding, stating “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 the sued party.”” The Supreme Court reinstated the plaintiffs entire claim for lack of impartiality.

As the Board was under the control of Kruse, not only did they abrogate their Caremark duties, they acted as sycophants. After there were public notifications of the listeria outbreak “Blue Bell’s board met and adopted a resolution “express[ing] support for Blue Bell’s CEO, management, and employees and encourag[ing] them to ensure that everything Blue Bell manufacture[s] and distributes is a wholesome and good testing [sic] product that our consumers deserve and expect.””

The Blue Bell Board did not meet the most basic requirement of any Board, which is not to be under the thumb of the CEO. The reason is simple, if you are under the CEO’s thumb you will not take any steps to govern the corporation to protect anyone but the CEO. That was certainly the role of the Board at Blue Bell.

A final piece of evidence? In February 2016, the Board voted to strip Kruse from his joint role as CEO and Chairman of the Board. However, Kruse threw a fit and “threatened to resign as President and CEO if the split occurred, the board held another vote in which all members, except Reimann and Rankin, voted to restore the position of CEO and Chairman of the board.”

Tomorrow the Caremark failures.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2020