Chancery Upholds Agreement that Waives All Fiduciary Duties and Presumes Good Faith to Bar Claims for Breach of Implied Duty of Good Faith and Fair Dealing

Gerber v. Enterprise Products Holdings, LLC, et al., C.A. No. 5989-VCN (Del. Ch., Jan. 6, 2012), read 44-page opinion here. Professor Larry Hamermesh provides scholarly insights on the case here.

Issue Addressed.

This decision speaks to the limitations imposed by 6 Del. C. § 17-1101 on Delaware courts to address sanctionable conduct by partners and members of alternate entities that have contracted away their fiduciary duties.

This summary was prepared by Jill Agro of Eckert Seamans.

Background.

The plaintiff in this action was a limited partner of EPE, a limited partnership entangled in a complex and incestuous web of business affiliations. In 2009, EPE sold one of its limited liability assets, Teppco GP, to Enterprise Products. Subsequently, in 2010, EPE merged into Enterprise Products. The plaintiff challenges both of these transactions in his purported class action complaint against Enterprise Products, Enterprise Products GP (EPE’s general partner prior to the merger), and the individuals that controlled Enterprise Products GP, EPE, and Enterprise Products. Importantly, prior to initiating this action, the plaintiff filed a derivative claim against Enterprise Products on behalf of EPE and its limited partners.

Plaintiff alleged three categories of claims: (1) breaches of the express and implied duties under EPE’s limited partnership agreement (the “LPA”); (2) tortious interference with the LPA and unjust enrichment; and (3) aiding and abetting breaches of express and implied duties under the LPA.

Analysis

Since plaintiff no longer had any ownership interest in EPE (due to the merger), the Court examined whether the plaintiff’s claims were direct or derivative.  The Court provided a substantive discussion on the exception to the rule that a merger deprives the merged entity’s former equity holders of standing to pursue derivative claims when “a principal purpose of a merger is the inequitable termination of derivative claims” against the surviving entity in a merger. To qualify for this exception, the plaintiff must show that: (1) the surviving company obtained ownership of previously asserted derivative claims against itself; (2) the termination of the derivative claims was inequitable; and (3) the principal purpose of the merger was to extinguish the derivative claims.

The Court concluded that the situation presented in the complaint fell within the very narrow exception to the rule, and that plaintiff properly asserted his claims directly.

Next, the Court considered whether the complaint failed to state a claim pursuant to the defendants’ motion to dismiss. The defendants argued that they had not breached any fiduciary duty imposed under the LPA, which included a detailed provision allowing the parties to engage in potentially (and actually) conflicted transactions as long as certain procedures were followed.

Delaware permits alternate entities to contract away their fiduciary duties pursuant to 6 Del. C. § 17-1101, and EPE’s LPA took full advantage of that ability. The LPA effectively eliminated any fiduciary duties typically owed to partners of a limited liability partnership, and further, sufficiently set forth the procedures required to fulfill the standard of good faith to rebut a claim of breach of the implied covenant of good faith and fair dealing.

Specifically, the LPA set forth four alternative standards of review for establishing good faith. One of those standards stated that good faith is conclusively presumed where the general partner relies on the fairness opinion of an independent consultant. Since EPE’s general partner had relied on a fairness opinion prepared by Morgan Stanley, the Court was forced to presume that EPE’s actions were done in good faith.

Noticeably unpleased with being forced to presume good faith, the Court framed the following issue: “[C]an a plaintiff plead that a defendant breached the implied covenant when the defendant is conclusively presumed by the terms of a contract to have acted in good faith?” And as unsatisfying as the answer seemed to the Court, the answer was no.

Throughout this decision, the Court commented about the lack of protection Delaware law affords the public investors of alternate entities. The Court graciously accepted the role assigned to the Court by the General Assembly via 6 Del. C. § 17-1101, but noted that “[t]he facts of this case take the reader and the writer to the outer reaches of conduct allowable under 6 Del. C. § 17-1101.”

Conclusion

Ultimately, since there was no sanctionable breach of fiduciary duty or breach of the implied covenant, the resulting claims of aiding and abetting and tortious interference were all dismissed for failure to state a claim.