DV Realty Advisors, LLC v. Policeman’s Annuity and Benefit Fund of Chicago, No. 547, 2012 (Del. Aug. 26, 2013).
Issue Addressed: This Delaware Supreme Court decision once again visited the issue of good faith in the context of an alternative entity agreement and upheld a decision of the Court of Chancery that found that the definition of good faith as used in the limited partnership agreement was satisfied, although the Delaware high court employed a different reasoning to reach the same result.
Brief Overview:
The decision on remand by the Court of Chancery published on Nov. 27, 2013 in this matter is also highlighted on these pages. The original trial court opinion was also summarized on these pages. This Supreme Court decision is the latest in a series of Delaware Supreme Court decisions in 2013 that discussed different nuances and different aspects of the definition of good faith in an alternative entity agreement. The prior decisions, all of which have been highlighted on these pages, include Allen v. Encore Energy Partners, L.P., 2013 WL 3803977 (Del. July 22, 2013); Gerber v. Enter. Prods. Holds., LLC, 67 A.3d 400 (Del. 2013); Norton v. K-Sea Transp. P’rs L.P., 67 A.3d 354 (Del. 2013); Brinckerhoff v. Enbridge Energy Co., 67 A.3d 369 (Del. 2013).
The specific provision of the limited partnership agreement in this case allowed for the removal of the general partner if a sufficient number of limited partners consented “in good faith” and determined that such removal was necessary for the best interests of the limited partnership.
The agreement did not define good faith and the Court of Chancery noted that good faith could include objective as well as subjective elements. The Court of Chancery used the definition of good faith found in the Uniform Commercial Code at § 1-201 (20) of Title 6 of the Delaware Code. The Delaware Supreme Court disagreed with the use of that definition.
The Supreme Court reasoned that good faith involves both a mixed question of law and fact, but the ultimate determination that the party acted in good faith is a legal one.
The Court reviewed prior decisions that explained the different meaning of the concept of good faith in the context of the implied covenant of good faith and fair dealing, as compared to the fiduciary duty concepts of good faith. See Gerber v. Enter. Prods., Holds., LLC.
Delaware’s high court looked to ancient Greece to support its analysis. In particular, the Court cited at footnote 20 to the centuries-old tome: Aristotle’s Nicomachean Ethics, Book V, for the observation by Aristotle that we “often gain knowledge of (a) a characteristic by the opposite characteristic, and (b) of characteristics by those things in which they are exhibited.” As applied in this situation, the Court explained that good faith and bad faith are illustrative examples of opposite characteristics and because each is often used in more than one sense, it informs our understanding of the other.
The Court reasoned that the good faith standard in the context of the agreement in this case is a purely subjective one.
Even though the Court of Chancery applied incorrectly both a subjective and objective definition of good faith, an application of the subjective standard of good faith only to the evidence in the record results in the same conclusion that the removal of the general partner satisfied the good faith standard in the agreement involved in this case.