Topic: Implied Covenant of Good Faith and Fair Dealing

Chancery Court Denies In Part Motion to Dismiss Breach of Contract and Breach of Fiduciary Duties Claims

By Shoshannah Katz and Priya Chadha

In Feldman v. Soon-Shiong, et al. (C.A No. 2017-0487-AGB), the Delaware Court of Chancery denied in part and granted in part a motion to dismiss claims involving, among other things, breach of contract and breach of the fiduciary duty of loyalty, following a defendant’s withdrawal of $47 million from a company bank account.

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Court of Chancery Dismisses Breach of Fiduciary Duty Claim as Duplicative of Breach of Contract Claim

By: Scott Waxman and Zack Sager

In MHS Capital LLC v. Goggin, the Delaware Court of Chancery granted a motion to dismiss a breach of fiduciary duty claim against the manager of a Delaware limited liability company because all of the manager’s conduct that could have formed the basis of such claim was covered by the duties of the manager delineated in the limited liability company agreement.  The Court also analyzed and dismissed claims for, among other things, fraud, breach of the implied contractual covenant of good faith and fair dealing, unjust enrichment, and misappropriation of trade secrets.

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COURT OF CHANCERY HOLDS THERE MUST BE A GAP IN AGREEMENT FOR AN IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

By: Scott E. Waxman and Douglas A. Logan

In Christopher Miller, et al., v. HCP & Company, et al., memorandum opinion 180201, the Court of Chancery granted a motion to dismiss because the underlying Limited Liability Company Agreement did not contain a “gap” for an implied covenant of good faith and fair dealing to fill. Rather, the Court of Chancery held that the Limited Liability Company Agreement contained negotiated investor favorable provisions regarding good faith and fair dealing, thus undercutting any argument that the Court of Chancery should read an implied covenant into the operating agreement.

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Court of Chancery Denies Motion to Dismiss Claim Alleging that General Partner Breached Contractual Duty of Good Faith

By: Scott Waxman and Zack Sager

In Morris vs. Spectra Energy Partners (DE) GP, LP, the Court of Chancery of the State of Delaware found that a limited partner adequately pled that the general partner of a master limited partnership breached its contractual duty to act in good faith in connection with a conflicted transaction between the master limited partnership and the indirect parent of the general partner.  The Court also dismissed claims for breach of the implied contractual covenant of good faith and fair dealing and tortious interference with a partnership agreement.

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Chancery Court Dismisses Only Certain Counterclaims Against Baseball’s Derek Jeter

By: Merrick Hatcher and Joshua Haft

In a mixed ruling, the Chancery Court denied, in part, baseball legend Derek Jeter’s motion to dismiss claims that he breached his fiduciary duty as a director of undergarment manufacturer RevolutionWear, that he violated the implied covenant of good faith and fair dealing, and that he fraudulently induced a contract with RevolutionWear and fraudulently concealed restrictions in his endorsement contract with Nike that precluded Jeter from fulfilling his promise to allow RevolutionWear to announce his role as a founder, substantial owner, and director.

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Chancery Court Enforces Good Faith Standard of Care in Limited Partnership Agreement

By Eric Feldman and Priya Chadha

In Brinckerhoff v. Enbridge Energy Co., Inc., et al., C.A. No. 11314-VCS (April 29, 2016), the Delaware Court of Chancery reiterated its adherence to the principle stated in the Delaware Revised Uniform Limited Partnership Act (“DRULPA”) of giving “maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements” as well as to the ability under DRULPA of parties to a limited partnership agreement to define their respective standards of care and scope of duties and liabilities, including to eliminate default fiduciary duties, and dismissed the plaintiff’s claims.

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Conflict Transaction Cleansed By Master Limited Partnership’s Special Committee

By Scott E. Waxman and Annamarie C. Larson

In Employees Retirement System of the City of St. Louis v. TC Pipelines GP, Inc., et al, (C.A. No. 11603-VCG), Vice Chancellor Glasscock granted the defendant’s motion to dismiss claims relating to the purchase of pipeline assets from the general partner’s parent.  The Court of Chancery held that the transaction was “fair and reasonable” to the master limited partnership because it was approved by a special committee and that the general partner did not breach the implied covenant of good faith and fair dealing.  In this case, the Court of Chancery reaffirmed parties’ abilities to contract freely when forming alternative entities such as a master limited partnership and confirmed that judicial review of such contractual terms is very limited.

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Chancery Court Grants in Part and Denies in Part a Motion to Dismiss in Fraud and Earnout Dispute

By: Jamie Bruce and John Sun

In Haney v. Blackhawk, C.A. No. 10851-VCN (Del. Ch. Feb. 26, 2016), the Delaware Court of Chancery granted in part and denied in part Blackhawk Network Holdings, Inc.’s (“Blackhawk”) motion to dismiss certain claims brought by Greg Haney (“Haney”) in his capacity as representative of the selling stockholders of CardLab, Inc. (“CardLab”). Haney brought claims against Blackhawk in connection with Blackhawk’s acquisition of CardLab in 2014 including, inter alia, for fraudulent inducement and breach of the implied covenant of good faith and fair dealing.

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Delaware Court of Chancery Declines to Dismiss Claims for Breach of Contract and Breach of Fiduciary Duties

By Nick Froio and Zack Sager

In CMS Investment Holdings, LLC v. Castle, the Delaware Court of Chancery declined to dismiss claims for breach of contract, breach of fiduciary duties, aiding and abetting breach of fiduciary duties, and civil conspiracy, among others.

In Castle, the Plaintiff, CMS Investment Holdings, LLC, was a member of, and holder of Class A units in, RP Holdings Group, LLC, a Delaware limited liability company (the “Company”). The business of the Company (i.e., providing non-legal administrative services in connection with mortgage foreclosures) was created by the principal Defendants (i.e., five individuals who practiced law in Colorado and Arkansas). The Defendants held Class B and C units in the Company and ran the business in their various capacities as employees, officers, and managers of the Company. The Plaintiff’s complaint alleged that the Defendants, along with several of their affiliated entities, intentionally failed to make distributions to the Plaintiff, as a Class A unitholder, in favor of the Defendants in violation of the Company’s limited liability company agreement (the “LLC Agreement”). The Plaintiff also alleged that the Defendants purposefully took actions to block the Company from receiving much-needed debt refinancing, facilitated the Company‘s decline into insolvency, secretly negotiated with its creditors, and then, through their affiliated entities, purchased on favorable terms a major part of the Company’s business back from the Company in receivership.

The Plaintiff brought direct claims against the Defendants alleging (1) breach of the LLC Agreement and the implied contractual covenant of good faith and fair dealing, (2) breach of fiduciary duties, (3) aiding and abetting breaches of fiduciary duties, (4) civil conspiracy, and (5) violation of the Delaware Uniform Fraudulent Transfers Act. The Defendants filed a motion to dismiss for failing to state a claim upon which relief could be granted.

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Chancery Court Denies Specific Performance of Retrospective Drag-Along Right Based on Prospective Terms of Contract and Declines to Decide Whether a Common Stockholder Can Contractually Waive Statutory Appraisal Rights Ex Ante

By Michelle Repp and Marisa DiLemme

Halpin v. Riverstone National, Inc. concerns a group of minority stockholders seeking appraisal despite a “drag-along” provision in a Stockholders Agreement. The Chancery Court found that the “drag-along” provision was not enforceable in this merger situation because the stockholders received notice of the merger only after the transaction had been consummated and the Stockholders Agreement only gave a prospective “drag-along” right, not retrospective.

In Halpin, five minority common stockholders (the “Minority Stockholders”) of Riverstone National, Inc., a Delaware corporation (“Riverstone”), sought appraisal of their shares after a June 2014 merger of Riverstone with a third party. The merger was approved by the written consent of Riverstone’s 91% controlling stockholder, CAS Capital Limited (“CAS”), on May 29, 2014. Riverstone counterclaimed against the Minority Stockholders and sought summary judgment in its favor on the appraisal claims based on a stockholders agreement (the “Stockholders Agreement”) between Riverstone and the Minority Stockholders entered into in 2009 that included a drag-along obligation of the Minority Stockholders. The Chancery Court, ruling on the parties’ cross-motions for summary judgment, granted the Minority Stockholders’ motion and denied Riverstone’s motion.

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Chancery Court Finds No “Gap” to be Filled, No Implied Covenant Claim in Earn-Out Dispute

By Nick Froio and Lauren Garraux

Chancery Court grants defendant’s motion to dismiss alternative claims of breach of the implied covenant of good faith and fair dealing, fraudulent inducement and negligent misrepresentation in earn-out dispute, holding that merger agreement set the standard to determine whether non-payment of earn-out was improper.

Fortis Advisors LLC v. Dialog Semiconductor PLC, C.A. No. 9522-CB (January 30, 2015) involves a dispute over whether earn-out payments are owed to the former equityholders of iWatt, Inc. (“iWatt”) pursuant to an Agreement and Plan of Merger dated as of July 1, 2013 (the “Merger Agreement”) whereby Dialog Semiconductor PLC (“Dialog”) acquired iWatt. Under the Merger Agreement, Dialog was to pay earn-out payments of up to $35 million depending on the post-merger revenues of Dialog’s Power Conversion Business Group, of which iWatt became a part post-closing. In addition, the terms of the Merger Agreement required that Dialog use its “commercially reasonable best efforts” to achieve and pay the earn-out payments in full. Revenues, however, fell short of the threshold amount to trigger the earn-out payments.

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NAMA Holdings LLC v. Related WMC LLC, et al., C.A. No. 7934-VCL (November 17, 2014) (Laster, V.C.)

By Joshua Haft and Scott Waxman

In NAMA Holdings, LLC v. Related WMC LLC, The Related Companies, L.P., and WMC Venture, LLC, the plaintiff, NAMA Holdings, LLC (“NAMA”) filed claims against Related WMC LLC (“Related Sub”) for breach of the implied covenant of good faith and fair dealing and against The Related Companies, L.P. (“Related Parent”) and World Market Center Venture, LLC (“WMCV”) for tortious interference with contract. The case originated from a suit filed by Related Sub and WMCV seeking a declaration that they complied with certain of their contractual obligations under the WMCV operating agreement, in which the Delaware Chancery Court granted partial summary judgment in favor of Related Sub and WMCV. In this Memorandum Opinion, the Delaware Chancery Court issued its post-trial decision after a trial on NAMA’s claims for breach of the implied covenant of good faith and fair dealing by Related Sub and tortious interference with contract by Related Parent and WMCV.

The plaintiff’s claims arose out of the development of a retail shopping mall in Las Vegas, Nevada called the World Market Center (the “Center”). In order to develop the Center, Alliance Network, LLC (“Alliance Network”) was formed by Prime Associates Group, LLC, which was owned by Shawn Samson and Jack Kashani, Crescent Nevada Associates, LLC, owned by relatives of Kashani, and NAMA. NAMA contributed 70% of the capital for Alliance Network, but after a dispute over additional needed capital, the project was restructured such that WMCV was formed by Alliance Network and Related Parent, a New York City real estate firm. WMCV had two members, Network World Market Center, LLC, a wholly owned subsidiary of Alliance Network (“Network”), and Related Sub.

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