City of Detroit Police & Fire Ret. Sys. v. Hamrock

Decision Date30 June 2022
Docket NumberC. A. 2021-0370-KSJM
PartiesCITY OF DETROIT POLICE AND FIRE RETIREMENT SYSTEM, Derivatively On Behalf of NiSource, Inc. Plaintiff, v. JOSEPH HAMROCK, ARISTIDES S. CANDRIS, CAROLYN Y. WOO, DEBORAH A. HENRETTA, ERIC L. BUTLER, KEVIN T. KABAT, MICHAEL E. JESANIS, PETER A. ALTABEF, THEODORE H. BUNTING, JR., WAYNE S. DEVEYDT, RICHARD L. THOMPSON, Defendants, and NISOURCE, INC., Nominal Defendant.
CourtCourt of Chancery of Delaware

Submitted: February 3, 2022

Carmella P. Keener, COOCH AND TAYLOR, P.A., Wilmington Delaware; Daniel S. Sommers, Joshua Handelsman, COHEN MILSTEIN SELLERS & TOLL PLLC, Washington, D.C.; Richard A. Speirs, Amy Miller, COHEN MILSTEIN SELLERS & TOLL PLLC, New York, New York; Rusty E. Glenn, SHUMAN, GLENN &amp STECKER, Denver, Colorado; Brett D. Stecker, SHUMAN, GLENN & STECKER, Ardmore, Pennsylvania; Ronald A. King, CLARK HILL PLC; Counsel for Plaintiff City of Detroit Police and Fire Retirement System.

Gregory P. Williams, Raymond J. DiCamillo, Katharine L. Mowery, Matthew D. Perri, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Walter C. Carlson, Nilofer Umar, Neil H. Conrad, Caroline A. Wong, SIDLEY AUSTIN LLP, Chicago, Illinois; Counsel for Individual Defendants Joseph Hamrock, Aristides S. Candris, Carolyn Y. Woo, Deborah A. Henretta, Eric L. Butler, Kevin T. Kabat, Michael E. Jesanis, Peter A. Altabef, Theodore H. Bunting, Jr., Wayne S. DeVeydt, Richard L. Thompson and Nominal Defendant NiSource Inc.

MEMORANDUM OPINION

McCORMICK, C.

Nominal Defendant NiSource, Inc. is an energy holding company with natural gas and electricity businesses. Its natural gas subsidiaries operate more than 50,000 miles of pipeline, serving millions of customers in several states. Tragedy struck when NiSource's former gas distribution subsidiary in Massachusetts, Bay State Gas Company d/b/a Columbia Gas of Massachusetts ("CMA"), attempted to replace an old cast-iron pipe with a modernized polyethylene pipe in Lawrence, Massachusetts. A CMA construction crew disconnected the old pipe without first relocating regulator-sensing lines to the new pipe. The regulator perceived a drop in pressure, triggering the flow of high-pressure gas into the low-pressure distribution system. The system became over-pressurized, resulting in fires and explosions that caused one fatality, injuries to 22 people, and damage to 131 structures (the "Greater Lawrence Explosions").

Wielding documents obtained under Section 220 of the Delaware General Corporation Law, the stockholder plaintiff filed suit derivatively on behalf of NiSource to hold certain current and former NiSource directors liable for the corporate trauma resulting from the Greater Lawrence Explosions. The defendants have moved to dismiss the complaint for failure to plead demand futility.

The plaintiff argues the defendants cannot impartially consider a demand because they face a substantial likelihood of liability under In re Caremark International Inc. Derivative Litigation.[1] The plaintiff advances three theories.

The plaintiff first argues that the defendants face a substantial likelihood of liability under Caremark for utterly failing to implement any reporting or monitoring system to oversee pipeline safety, which was "mission critical" for NiSource's gas businesses. The plaintiff's own allegations, however, demonstrate that the NiSource board of directors did establish a system for monitoring and reporting on pipeline safety issues. That system included a committee tasked with overseeing safety issues, which did, in fact, monitor and report on pipeline safety compliance.

The plaintiff next argues that this case is analogous to In re Massey Energy Co.,[2]where the court observed that a board breached its oversight obligations under Caremark by violating positive law in pursuit of profit. The plaintiff does not allege, however, that NiSource engaged in the degree of lawlessness at issue in Massey. The complaint identifies several NiSource board committees that monitored compliance and took concrete steps to align NiSource's operations with regulations and industry standards. Despite repeated regulatory violations, it is not reasonably conceivable that NiSource was "in the business" of unlawful conduct.

The plaintiff last argues that the NiSource board ignored "red flags" regarding NiSource's repeated violations of pipeline safety laws. This theory has more heft, but it too fails to establish a substantial likelihood of liability. The "red flags" are simply too general or disconnected from the root causes of the Greater Lawrence Explosions to place a reasonable observer on notice of the corporate trauma that ensued.

Because of this, the plaintiff fails to adequately allege that the defendants faced a substantial likelihood of liability under Caremark. Demand is not excused, and this decision grants the defendants' motion to dismiss.

I. FACTUAL BACKGROUND

The facts are drawn from the Verified Amended Shareholder Derivative Complaint (the "Amended Complaint") and documents it incorporates by reference, including documents produced to the plaintiff pursuant to 8 Del. C. § 220.[3] In particular, these facts draw heavily from the September 24, 2019 Pipeline Accident Report of the National Transportation Safety Board ("NTSB"), which was attached to the Amended Complaint.[4]

A. NiSource, Its Board, And Its Board-Level Monitoring System

NiSource is a Delaware corporation with its principal place of business in Merrillville, Indiana. NiSource's gas subsidiaries operate approximately 53,700 miles of pipeline and deliver natural gas to 3.2 million customers across Indiana, Kentucky, Maryland, Ohio, Pennsylvania, and Virginia. NiSource also used to operate in Massachusetts through its subsidiary, CMA.

The business and affairs of NiSource are managed by a twelve-person board of directors (the "Board"). Eleven of the twelve directors are non-employee directors with no connection to NiSource apart from their Board service.[5] The twelfth director is NiSource's President and CEO, Joseph Hamrock.[6]

The Board has several committees tasked with monitoring and assessing "the Company's strategic, compliance, operational and financial risks,"[7] including the Audit Committee, the Risk Management Committee, and the Environmental, Safety and Sustainability ("ES&S") Committee. In addition, each Board committee is charged with overseeing risks associated with their respective areas of responsibility.

Safety risks were mainly within the purview of the ES&S Committee. The Board charged the ES&S Committee with "overseeing the programs, performance and risks relative to environmental, safety and sustainability matters."[8] The ES&S Committee's authority and responsibilities included, among other things, reviewing "the Company's programs, policies, practices and performance with respect to employee, contractor and public safety," reviewing "major legislation, regulation and other external influences pertaining to responsibilities of the Committee, and assess the impact on the Company," and reviewing "the Company's programs, policies, practices and performance with respect to environmental, health and safety compliance auditing."[9] The ES&S Committee was a functioning committee. The ES&S Committee held five formal meetings in each of 2016, 2017, and 2018.[10] Multiple senior executives attended and reported at each meeting.[11] The ES&S Committee regularly provided a report of its activities during Board meetings.[12]

B. The Regulatory Framework And Safety Standards

NiSource is subject to federal regulations governing both natural gas companies and pipeline operators.

The Pipeline Safety Act establishes minimum safety standards for natural gas companies.[13] Under the Pipeline Safety Act, the U.S. Department of Transportation (the "DOT") is charged with promulgating federal regulations governing natural gas companies.

Pipeline operators are a subspecies of gas operators and are subject to an additional layer of federal regulations. The Pipeline and Hazardous Materials Safety Administration Act established the Pipeline and Hazardous Materials Safety Administration (the "PHMSA"), a federal agency within the DOT.[14] The PHMSA promulgates federal pipeline safety standards intended to provide for the safe, reliable, and environmentally sound operation of the U.S. pipeline transportation network. These regulations are codified in Part 192 of Title 49 of the Code of Federal Regulations ("Part 192").

Part 192 sets forth minimum federal safety standards for transporting gas by pipeline, including extensive recordkeeping requirements.[15] Section 603 of Part 192 requires that a gas operator maintain certain records.[16] Subsection 605(a) requires gas operators to "prepare and follow" an operation and maintenance manual ("O&M Manual") "for each pipeline."[17] Subsection 605(b) requires the O&M Manual to detail procedures for "starting up and shutting down any part of the pipeline in a manner designed to assure operation within the . . . limits prescribed" so as to ensure "safety during maintenance and operations."[18] Section 605(b) further requires that the O&M Manual include procedures for "[m]aking construction records, maps, and operating history available to appropriate operating personnel."[19]

In addition to federal regulations, state regulatory agencies implement and enforce pipeline safety requirements for intrastate pipelines, and those state standards may be more stringent than federal standards. In Massachusetts, state law requires compliance with the federal standards imposed by PHMSA.[20]

The pipeline industry also looks to non-governmental entities for safety standards. In 2015, the American Petroleum Institute issued a recommended...

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