Swinney v. Keebler Co.

Keebler Company (defendant) acquired a controlling interest in the candy-making firm Meadors, Inc. and then sold that interest to Atlantic Services, Inc. (Atlantic) (defendant), a company with no experience in the candy business. The acquisition process was marked by its unusual speed, Atlantic’s apparent lack of interest in Meadors’s candy operations, and Atlantic’s focus on Meadors’s financial condition, including whether Meadors’s assets could be used to pay for the purchase. On the other hand, some signs indicated that Atlantic intended to go on operating Meadors at a profit. After the sale, Atlantic looted Meadors’s assets and eventually sold what remained to Flora Mir Distributing Company, Inc. (Flora Mir) (defendant). This disastrous series of sales left John Swinney (plaintiff) holding worthless Meadors debentures. Swinney sued Keebler, Atlantic, and Flora Mir. In evaluating Swinney’s complaint, the federal district court relied heavily on the leading case, Insuranshares Corp. v. Northern Fiscal Corp., in which the target company’s lawyers had alerted management to the little-known buyer’s questionable motives: the company’s president converted company assets into cash that the buyer could use to pay for its purchase, and a previous buyer had used a similar scheme to loot the company just five years earlier. The Insuranshares court held that these circumstances imposed a positive duty on the company’s controlling shareholder to break off sale talks unless a reasonable investigation proved that fraud was neither intended nor likely to result from the sale. Based on Insuranshares, the court in Swinney’s case ruled that Keebler had violated its fiduciary duty to Meadors and its debenture holders. Keebler appealed to the Fourth Circuit.