Court of Chancery Finds that the Implied Contractual Covenant of Good Faith and Fair Dealing Requires Delaware LLC to Exercise Discretion in Good Faith

By: Scott Waxman and Zack Sager

In Coca-Cola Beverages Florida Holdings, LLC v. Goins, the Court of Chancery granted in part and denied in part a motion to dismiss a claim for breach of the implied contractual covenant of good faith and fair dealing, and, in so doing, found that the discretion afforded to a Delaware limited liability company under an agreement was required to be exercised in good faith.  In addition, the Court analyzed a motion to dismiss claims for breach of contract, unjust enrichment, quantum meruit, and fraud.

Reginald Goins and Troy Taylor desired to own a Coca-Cola bottling franchise (the “Franchise”).  In January of 2015, Taylor formed a Delaware limited liability company to serve as a holding company for the Franchise (“Cardinal”) and another Delaware limited liability company to conduct the operations of the Franchise (“Beverages”).  In July of 2016, Taylor formed another Delaware limited liability company (“Holdings”), which owned all of the equity in Beverages.  In August of 2016, Goins entered into a Restricted Unit Agreement (the “RUA”) with Holdings pursuant to which Goins would acquire units in Holdings if, among other things, the Franchise reached certain sales and other benchmarks.  Eventually,  Goins was fired from Beverages, and Holdings purported to purchase Goins’ vested units in Holdings for zero dollars, such amount determined by Taylor, as the manager of Holdings, to be the fair market value of such units.  Holdings also informed Goins that his unvested units would be forfeited for no consideration.  Goins proceeded to file a lawsuit in Florida against Taylor, Cardinal, Beverages, and Holdings (the “Taylor Parties”), and the Taylor Parties filed this action in Delaware.  Goins brought multiple counterclaims against the Taylor Parties who, in turn, filed a motion to dismiss these claims for failing to stating a claim for relief under Court of Chancery Rule 12(b)(6).

Count I of the counterclaim asserted that Holdings and Taylor breached the RUA and the limited liability company agreement of Holdings (the “LLC Agreement”) in two respects: first, by acting in bad faith in determining the value of Goins’ vested units, and second, by failing to accurately determine the number of vested units Goins had acquired under the RUA.  Count I failed to state a claim for relief under the LLC Agreement because Goins failed to identify any provision thereof that was breached.  Count I also failed to state a claim for relief under the RUA with respect to the number of vested units that Goins was entitled to receive.  According to the Court, this issue was not addressed by an express provision of the RUA, and was the basis for Goins’ claim for breach of the implied contractual covenant of good faith and fair dealing.

The Court, however, declined to dismiss Goins’ breach of contract claim with respect to determining the value of his vested units under the RUA.  While Holdings had the right under the RUA to repurchase Goins’ vested units for “fair market value” after his termination, the RUA expressly required the manager of Holdings to determine fair market value “in good faith.”  According to the Court, Goins’ counterclaim alleged facts from which it was reasonably conceivable that Goins would be entitled to obtain recovery from Holdings for acting in bad faith with respect to the valuation of his vested units.

Count II asserted that Holdings and Taylor breached the implied contractual covenant of good faith and fair dealing in the RUA by failing to accurately determine the number of vested units that Goins was entitled to receive.  Per the terms of the RUA, Taylor, as the manager of Holdings, had full discretionary authority and power to construe Holdings’ rights and obligations under the RUA, including to determine whether various vesting benchmarks were met.  According to the Court, however, the implied covenant required this discretion to be exercised in good faith.  Goins alleged, among other things, that certain sales, profit, and other benchmarks set forth in the RUA were met, thus entitling Goins to more units than what Holdings had conceded.  The Court found that there were allegations sufficient to support a reasonably conceivable claim that Holdings breached the implied contractual covenant of good faith and fair dealing by not vesting in Goins more units.

Counts IV through VI asserted claims for unjust enrichment, quantum meruit, and fraud arising from Goins waiving a bonus he was entitled to receive under his employment agreement with Beverages.  The Court dismissed the unjust enrichment and quantum meruit claims because typically such claims cannot proceed where an express contract controls the dispute.  The Court then held that that Goins’ allegations were insufficient to support a claim for fraud.