## Facts

- Meadors, Inc., a Delaware candy manufacturer based in South Carolina, issued 7% subordinated debentures held by plaintiffs and other debenture holders.
- Keebler Company (formerly United Biscuit Company of America) acquired all Meadors stock in 1963 and integrated Meadors operations into Keebler’s sales and branding (including a trademark license).
- In February 1968, Keebler agreed to sell all Meadors stock to Atlantic Services, Inc. for $230,000; closing documents included a trademark license and a bill of sale transferring certain machinery and equipment to Meadors.
- The district court found Atlantic funded the purchase price using money withdrawn from Meadors and withdrew additional funds at closing, resulting in substantial depletion of Meadors’s cash.
- About four months later, Atlantic sold Meadors stock to Flora Mir Distributing Co., Inc., described as an inactive subsidiary with insignificant assets.
- Meadors’s assets were later dissipated, and Meadors defaulted on interest and principal payments on the debentures.
- Debenture holders brought a class action seeking payment or damages against Meadors, Keebler, and later purchasers; after a bifurcated trial, the district court entered judgment (including principal, interest, and attorneys’ fees) against defendants other than Meadors, largely on a theory that Meadors had been looted in connection with the control transfers.
- Only Keebler appealed; other defendants were in Chapter XI proceedings.

## Issues

1. Whether a controlling shareholder selling corporate control breaches a fiduciary duty by failing to investigate or prevent a purchaser’s potential looting of the corporation.
2. Whether the circumstances known to Keebler at the time of sale imposed a heightened duty to inquire into Atlantic’s intentions and financing.
3. Whether, if Keebler were liable, damages could include debenture principal, interest, and attorneys’ fees and expenses.

## Decision

- The Fourth Circuit reversed the judgment against Keebler.
- The court held the record did not place Keebler within the narrow set of “special circumstances” that can impose a duty on a selling controller to investigate a buyer for a looting scheme.
- The court concluded Keebler lacked actual knowledge, and the circumstances were insufficient to require Keebler to foresee and prevent Atlantic’s later misconduct.
- Because Keebler was not liable, the damages award (including attorneys’ fees) could not stand as to Keebler.

## Legal Principles

- A controlling shareholder generally may sell a controlling block, including at a premium, absent fraud, self-dealing, or other disqualifying conduct.
- A duty to investigate a buyer’s intentions before selling control arises only in exceptional circumstances strongly indicating the buyer plans to loot or seriously harm the corporation.
- Later looting by a purchaser does not, by itself, establish that the seller breached a fiduciary duty; liability depends on what the seller knew or reasonably should have known at the time of the sale.
- Courts are reluctant to impose a rule that effectively makes a selling controller a guarantor against a purchaser’s subsequent diversion of corporate assets.

## Conclusion

The Fourth Circuit set aside the judgment against Keebler, holding that the circumstances surrounding Keebler’s sale of Meadors did not trigger an exceptional duty to investigate the buyer for a looting plan, and therefore Keebler was not responsible for the debenture holders’ losses caused by the purchaser’s later dissipation of corporate assets.


Swinney v. Keebler Co., 480 F.2d 573 (4th Cir. 1973)