Stewart v. BF Bolthouse Holdco, LLC, C.A. No. 8119-VCP (Del. Ch. Aug. 30, 2013).

Issue Addressed:  Whether a claim would be allowed to proceed for contractual bad faith when former employees had their units in an LLC repurchased for $0.00 based on the valuation formula in the relevant agreement and despite a subsequent purchase of the company at a much higher valuation.

Brief Overview:  This opinion is helpful for purposes of analyzing a contractual bad faith claim.  The court relied on its prior opinion in Clean Harbors, Inc. v. Safety-Kleen, Inc., 2011 WL 6793718 (Del. Ch. Dec. 9, 2011).  In that opinion, applied to this case, the court explained that for a contractual bad faith claim to survive a motion to dismiss the pleading standard is “minimal” and its purpose is to “give the defendants notice of the claim being made against it”.  For such a claim, the plaintiff must allege “facts related to the alleged act taken in bad faith, and a plausible motivation for it.”

The court found the standard satisfied here because the complaint explicitly alleged that the defendants determined the fair market value of the LLC units in bad faith while exercising the option to purchase those units.  Those allegations of bad faith are supported by valuations near the time of the relevant valuation date pursuant to the agreement that were substantially higher than the $0.00.

The court observed that it is not necessary that one claim wrongful inducement or trickery or deception in order to to establish bad faith.

The court also noted that the Delaware Supreme Court has found that a breach of fiduciary duty can be the basis for a breach of contract claim where an LLC has contractually adopted the fiduciary duty standard.  See fn. 35, citing Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d. 1206-1213 (Del. Ch. 2012).  In the facts of this case, there was a contractual duty of loyalty under the LLC agreement and the court concluded that there was a sustainable claim that the bad faith conduct was a breach of that duty of loyalty.  The redemption of shares to further the economic self interests of directors has been held in the past to be a violation of their fiduciary duty of loyalty.  See fn. 55 – 57.

The court also relied on the recent Supreme Court decision in Gerber v. Enterprise Product Holdings LLC, 67 A.3d 400 (Del. 2013), for the distinction between contractual duty of good faith and the implied duty of good faith.  Whereas the conventional duty of good faith looks to the situation of the parties at the time of the wrong, the implied duty of good faith relates to what the parties would have agreed to themselves at the time of contracting, had they considered the issue in their original bargaining position.  See fn. 80-81.