Blaustein v. Lord Baltimore Capital Corp., C.A. No. 6685-VCN (May 31, 2012).

Issue Presented:

Whether the plaintiff, relying on an oral promise made prior to execution of shareholders’ agreement, would be allowed to withdraw the full pro rata value of their ownership interests in Lord Baltimore Capital Corp. when the signed agreement did not include that provision.

Short Answer:  No. Motion to Dismiss granted as to Count I and III


The dispute centers around an investment made by Plaintiff Susan M. Blaustein and others in Lord Baltimore Capital Corporation  a Delaware corporation.  Defendant Louis B. Thalheimer  is a stockholder and Chief Executive Officer of Lord Baltimore, as well as Chairman of its board of directors.  Plaintiff argued that she and others were induced into transferring certain holdings to Lord Baltimore by statements made by Thalheimer that, with certain restrictions not at issue, she would be allowed to withdraw the full pro rata value of the ownership interests in Lord Baltimore.   However, when plaintiff attempted to withdraw the interests, she was told by Thalheimer that she could do so at 50% of their pro rata share of the then-current value of Lord Baltimore assets.   Blaustein filed a complaint claiming promissory estoppel, breach of the implied covenant of good faith and fair dealing and breach of fiduciary duty by Thalheimer, as a co-venturer.

Apparently Blaustein had inquired on several occasions as to whether the commitment to allow her to have the stock positions repurchased on a full value basis  could be memorialized in a shareholders’ agreement. Thalheimer responded that such commitment could not be memorialized in writing because doing so might jeopardize the tax benefits Lord Baltimore’s shareholders stood to receive from Lord Baltimore’s status as an “S” corporation.  However, Thalheimer nevertheless orally assured Blaustein that he understood their long-term investment goals and that the commitment to permit them to withdraw from Lord Baltimore and receive the then-current value of their proportionate stock ownership interest would be honored.

While the signed shareholders’ agreement did not provide that Blaustein had a right to withdraw from Lord Baltimore and receive the then-current value of the proportionate stock ownership interest, it did address stock repurchases in Section 7(d):

Notwithstanding any other provision of this Agreement, the Company may repurchase Shares upon terms and conditions agreeable to the Company and the Shareholder who owns the Shares to be repurchased provided that the repurchase is approved either (i) by a majority, being at least four, of all of the Directors of the Company then authorized (regardless of the number attending the meeting of the Board of Directors) at a duly called meeting of the Board of Directors or (ii) in writing by Shareholders who, in the aggregate, own of record or beneficially 70% or more of all Shares then issued and outstanding.


Under Delaware law, the Court stated that “a party cannot assert a promissory estoppel claim based on promises that contradict the terms of a valid, enforceable contract.”  Section 7(d) of the shareholders’ agreement set out conditions to Lord Baltimore’s repurchase of shares of its stock. The Court found that the plaintiff, who did not challenge the validity of Section 7(d) (or any other part of the shareholders’ agreement, sought to deny the rest of Lord Baltimore’s shareholders the benefits of Section 7(d) by requiring the Company to repurchase her shares at a specific price without any approval requirement.

The plaintiff argued that she reasonably relied on Thalheimer’s promise, however, the Court found that the alleged promise was inconsistent with the process set forth in Section 7(d), which required that either a majority of the Board or a super-majority of Lord Baltimore’s shares vote to approve a given repurchase.  Because the plaintiff was attempting to use promissory estoppel to avoid the process mandated by the shareholders’ agreement, the Court rejected that argument and dismissed Count 1.

Count II alleged that the defendants breached the implied covenant of good faith and fair dealing. The Court noted that:

[i]n order to plead successfully a breach of an implied covenant of good faith and fair dealing, the plaintiff must allege a specific implied contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff.  [T]he implied covenant only applies where a contract lacks specific language governing an issue and the obligation the court is asked to imply advances, and does not contradict, the purposes reflected in the express language of the contract. Therefore, one generally cannot base a claim for breach of the implied covenant on conduct authorized by the agreement.

Because the obligation that Lord Baltimore repurchase Blaustein’s stock for a specific price (i.e., the pro rata fair market value) would contradict Section 7(d) of the shareholders’ agreement, the Court found that there was no implied covenant in the shareholders’ agreement requiring Lord Baltimore to repurchase Susan’s stock at a specific price, and, to that extent, Count II was dismissed.  However, the plaintiff did allege that any repurchase must be approved either by a majority of the directors or a super majority of Lord Baltimore’s shareholders, and so the Court found that the plaintiff had adequately pled that there might be an implied covenant in the shareholders’ agreement requiring the Board to consider repurchases and that implied covenant had been breached. Therefore, to that extent, the Court found that Count II would not be dismissed.

Finally, in rejecting plaintiff’s claims in Count III regarding Thalheimer’s breach of his co-venturer fiduciary duties, the Court stated that:

[i]t is unlikely, however, that a Delaware corporation, such as Lord Baltimore, would also be considered to be a joint venture….  Nevertheless, even assuming that Lord Baltimore is a joint venture, co-venturers may contract for rights that they would not otherwise have at common law. With regard to repurchases, there is no co-venturer fiduciary duty that requires a joint venture to repurchase a co-venturer’s stock at a specific price or through a specific procedure…. If the way in which a repurchase occurred was a breach of fiduciary duty, for example, because it was done unfairly or in bad faith, then a cause of action might lie, but a plaintiff cannot claim that a repurchase process is unfair or being done in bad faith when it is she who seeks to avoid the procedure to which all of the co-venturers agreed. 

Practice Tip:

When entering into a contract, it is imperative that all provisions be included in the contract because the Court will look to that contract as “the primary determinant of their rights and duties to each [party].” This is especially true for sophisticated parties represented by counsel (as the parties here were).