Dorfman v. Griffin

MITCHELL DORFMAN, derivativelyand on behalf of MGP INGREDIENTS, INC., Plaintiff, v. AUGUSTUS C. GRIFFIN, et al., Defendants,andMGP INGREDIENTS, INC., Nominal Defendant.

Case No. 20-2239-DDC-JPO

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS

March 31, 2021

MEMORANDUM AND ORDER

Too much whiskey is the crux of this lawsuit. And, in this case's context, that's a bad thing.¹ The matter comes before the court on defendants' Motion to Dismiss (Doc. 19), which they've supplemented with of a Memorandum in Support (Doc. 20). Plaintiff filed a Response in Opposition to defendants' motion (Doc. 26). And defendants fired back with a Reply (Doc. 29).

But that's not all. Defendants also filed a Motion for Judicial Notice in Support of their Motion to Dismiss (Doc. 21). Last August, and again in October, plaintiff secured an extension of time to respond to defendants' Motion to Dismiss and Motion for Judicial Notice (Docs. 23,25). However, plaintiff's Response addresses only their Motion to Dismiss. So, the court considers defendants' Motion for Judicial Notice unopposed.

For reasons explained below, the court grants defendants' Motion for Judicial Notice (Doc. 21). The court also grants defendants' Motion to Dismiss (Doc. 19), but only in part. The court explains its reasoning, below.

I. Procedural History and General Background

A. Procedural History

Plaintiff Mitchell Dorfman owns common stock in MGP Ingredients, Inc. ("MGP"). Doc. 17 at 10 (Am. Compl. ¶ 31). He's suing a handful of MGP's current and former directors and officers on behalf of himself and other MGP shareholders.² His action is a derivative lawsuit.

A derivative lawsuit "is a suit by a shareholder to enforce a corporate cause of action," which, in turn, requires that "the corporation is a necessary party to the suit." Price v. Gurney, 324 U.S. 100, 105 (1945). That's why MGP appears—at least ostensibly—as both a plaintiff and nominal defendant in this lawsuit. See Doc. 17 at 1 (Am. Compl.). If this case survives defendants' Motion to Dismiss, Mr. Dorfman is "allowed to act in protection of [MGP's] interest somewhat as a 'next friend' might do for an individual," on the theory that "wrongdoing officers . . . possess the control which enables them to suppress any effort by the corporate entity to remedy such wrongs." Koster v. (American) Lumbermens Mut. Cas. Co., 330 U.S. 518, 522-23 (1947).

Plaintiff filed his original Complaint (Doc. 1) in the spring of 2020. About two months later, in July, defendants filed a Motion to Dismiss (Doc. 11) and a Motion for Judicial Notice (Doc. 13). Then, in August, plaintiff filed his Amended Complaint (Doc. 17). Accordingly, the court dismissed as moot both of defendants' motions, but without prejudice (Doc. 18). Later that month, defendants refiled their Motion to Dismiss (Doc. 19) and Memorandum in Support (Doc. 20). They also refiled their Motion for Judicial Notice (Doc. 21), which incorporates by reference the arguments provided in their earlier Memorandum in Support of their Motion for Judicial Notice (Doc. 14). The parties engaged in motions practice—filing responses and replies—and this matter is now ready for resolution.

Plaintiff's lawsuit is all about brown liquor—American whiskey, to be exact. His Amended Complaint alleges that certain current and former directors and officers at MGP violated federal and state laws by "breach[ing] their fiduciary duties [and] personally making and/or causing the Company to make to the investing public a series of materially false and misleading statements regarding the Company's business, operations, and prospects." Doc. 17 at 7 (Am. Compl. ¶ 18). Plaintiff identities five pieces of information that defendants allegedly failed to disclose:

(1) the Company was facing heightened competition in the market for aged whiskey, including from former customers and from new, large distillers; (2) as a result, consumer demand for the Company's products, including its aged whiskey, as well as the Company's overall position in a market now saturated with strong competitors were far weaker than what Defendants represented to the public; (3) due to the foregoing, the Company would struggle to find customers interested in the Company's aged whiskey inventory, and would ultimately fail to make any significant sales of its aged whiskey at the prices that the Individual Defendants repeatedly touted; (4) also due to the foregoing, the Company would build up a surplus of unsold aged whiskey, which would lower the value of the Company's inventory and further impair the Company's ability to achieve sales on favorable terms; and (5) the Company failed to maintain internal controls.

Id. "As a result of the foregoing," he alleges, "the Company's public statements were materially false and misleading at all relevant times."³ Id.

These misstatements, plaintiff alleges, summon liability under the Securities Exchange Act of 1934, related rules from the Securities and Exchange Commission ("SEC"), and via several common law claims (though he never specifies which state's common law he has in mind).⁴

B. General Background

The following facts come from the allegations set forth in plaintiff's Amended Complaint (Doc. 17). The court accepts as true "all particularized allegations of fact" and gives plaintiff "all reasonable inferences logically flowing from them." City of Cambridge Ret. Sys. v. Ersek, 921 F.3d 912, 918 (10th Cir. 2019).

American whiskey is a big industry. "In 2019," plaintiff explains, "26 million cases of whiskey were sold" in the United States. Doc. 17 at 28 (Am. Compl. ¶ 89). And the big business of American whiskey is the heart and soul of this action. MGP plays in the big leagues. It's is a full-fledged, publicly owned corporation with a footprint so large that its assets are valued in terms of publicly traded stocks. MGP Ingredients, Inc. (MGPI), NASDAQ,https://www.nasdaq.com/market-activity/stocks/mgpi (last visited Feb. 16, 2021); see also Doc. 17 at 10 (Am. Compl. ¶ 32) ("MGP's shares trade on the NASDAQ Global Select Market ('NASDAQ') under the ticker symbol 'MGPI.'").

Still, MGP might be an unknown force to readers who aren't cocktail connoisseurs or industry insiders. That's because MGP's efforts, until recently, emphasized so-called "sourced whiskey" for companies who don't produce the spirit themselves. Doc. 17 at 2 (Am. Compl. ¶ 3) ("Prior to 2015, the Company's whiskey offerings predominantly consisted of unaged rye whiskeys, which the Company's customers would barrel and age themselves."). In plaintiff's view, MGP dominated the American whiskey market by producing unaged whiskey for its business consumers. These businesses source their whiskey through MGP and then slap their own branded label on it. Id.; see also id. at 31 n.3 (citing Eric Felten, Your 'Craft' Whiskey is Probably From a Factory Distillery in Indiana, DAILY BEAST (May 20, 2019), https://www.thedailybeast.com/your-craft-whiskey-is-probably-from-a-factory-distillery-in-indiana (explaining MGP's whiskey production facility is "a one-stop shop for marketers who want to bottle their own brands of spirits without having to distill the product themselves").

MGP wasn't always a power player in the whiskey industry. "Historically," says plaintiff, "the Company's distillery business was primarily dependent on producing and selling vodka, gin, and other grain neutral spirits . . . as well as food grade and industrial alcohol to be used as ingredients in food, personal care products, and pharmaceuticals." Doc. 17 at 28 (Am. Compl. ¶ 88). So, how and why did things change for MGP?

Plaintiff says it all started with a boom—a "whiskey boom." Id. at 29 (Am. Compl. ¶ 91). He describes the 21st century as a period of "resurgence" for American whiskey. Id. at 28 (Am. Compl. ¶ 89). During the 19th and 20th centuries, he says, "demand for whiskey in theU.S. was relatively low compared to other hard liquors." Id. Today, says plaintiff, it's soaring. Id. In line with consumer demand, innovators sought to capitalize on the "craft cocktail movement." Id. at 28-30 (Am. Compl. ¶¶ 89-92).

Breaking into the American whiskey market isn't easy. Among other obstacles, "whiskey must be aged in barrels for two or more years before it is ready to drink, which substantially increases the amount of time it takes for distillers to bring newly manufactured whiskey to market." Id. at 29 (Am. Compl. ¶ 91). According to plaintiff, these details make commercial whiskey production easier said than done. Id. ("This aspect of the whiskey-distilling process has made it difficult for businesses seeking to enter the whiskey market in the 2010's to capitalize on the ongoing 'whiskey boom.'").

Around 2011, plaintiff asserts, MGP's leadership spotted a lucrative opportunity with whiskey. Id. at 30 (Am. Compl. ¶ 93). In the same year, MGP purchased a whiskey distillery located in Lawrenceburg, Indiana. Id. It's a small town nestled alongside the Ohio River where that waterway and its tributaries define the boundaries between Indiana, Kentucky, and Ohio. In Lawrenceburg, MGP "began using [its] facility to produce unaged whiskey distillate." Id. (Am. Compl. ¶ 94). And, the Company began selling a significant amount of its inventory to smaller whiskey shops who hadn't yet managed to produce their own batches—non-distiller producers ("NDPs"). Id. (Am. Compl. ¶ 95). Since these market newcomers wanted to capitalize on consumer trends faster than they could produce the product, MGP's sourced whiskey was a "stopgap, while their own whiskeys aged." Id. at 3 (Am. Compl. ¶ 3).

A few years later, in 2015, MGP announced major strategic developments. Central to this case, MGP declared that it would begin "expanding the Company's whiskey business by building up a stock of aged whiskey—as opposed to unaged distillate—to sell to customers." Id.at 32 (Am. Compl. ¶ 97) (emphasis added). Company leadership decided that MGP ought to sell its own brand of the brown liquor...