Implied Covenant of Good Faith and Fair Dealing – Page 2

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

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.

Conflict Transaction Cleansed By Master Limited Partnership’s Special Committee

Jun 15 2016

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.

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

Mar 22 2016

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.

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

Jul 08 2015

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.

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

Mar 05 2015

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.

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

Feb 04 2015

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.

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

Nov 24 2014

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.

Black Horse Capital, LP, et al. v. Xstelos Holdings, Inc., et al., C.A. No. 8642-VCP (September 30, 2014) (Parsons, V.C.)

Oct 08 2014

By David Edgar and Joshua Haft

In Black Horse Capital, LP, et al. v. Xstelos Holdings, Inc., et al., the plaintiffs, including Cheval Holdings, Ltd. (“Cheval Holdings”), Black Horse Capital, LP, Black Horse Capital Master Fund Ltd. (together with Black Horse Capital, LP, “Black Horse”), and Ouray Holdings I AG, filed a breach of contract action arising out of a transaction in which the plaintiffs and defendants, Jonathan M. Couchman, Xstelos Holdings, Inc., and Xstelos Corp. (formerly known as Footstar Inc. and Footstar Corp. (“Footstar”)) jointly acquired a pharmaceuticals company, CPEX Pharmaceuticals, Inc. (“CPEX”), which is now wholly owned by defendant FCB I Holdings, Inc. (“FCB Holdings”), an entity jointly owned by Footstar and Cheval Holdings. Immediately following the closing of the acquisition, FCB Holdings was owned 80.5% by Footstar and 19.5% by Cheval Holdings.

The plaintiffs’ claims arose out of an alleged oral promise in December 2010 by the defendants to transfer to the plaintiffs certain assets of CPEX, specifically an additional 60% ownership interest in the drug product known as SER-120 and referred to as “Serenity” by the court. The transfer was to occur after the closing of the CPEX acquisition in exchange for the plaintiffs funding a disproportionately large bridge loan to FCB Holdings (the “Serenity Agreement”). On January 3, 2011, each of Black Horse and Footstar entered into separate bridge loan commitment letters with FCB Holdings and CPEX in the amounts of $10 million and $3 million, respectively. In April 2011, the bridge loans were made to FCB Holdings and the CPEX acquisition closed. In connection with the CPEX acquisition, the bridge loans, and the other related transactions, the parties entered into customary transaction documents. Although the alleged oral promise of the Serenity Agreement was made prior to the parties entering into the transaction documents, none of the transaction documents executed in connection with the loan or the merger referenced the Serenity Agreement. Furthermore, the transaction documents also contained customary integration clauses. By December 2012, the transfer of assets contemplated by the Serenity Agreement had not occurred and relations between the parties deteriorated to the point where the plaintiffs filed this action in June 2013.

Lehman Brothers Holdings Inc., et al. v. Spanish Broadcasting System, Inc. No. 8321-VCG (Glasscock, V.C.)

Feb 28 2014

By Wilson Chu and Mark Hammes

In this action for breach of contract, Plaintiff institutional investors held cumulative preferred stock of Spanish Broadcasting System (“SBS”), a Delaware corporation, with dividends payable quarterly if so declared by the board of directors. If the dividends were unpaid for four consecutive quarters, a voting rights trigger in the shares’ Certificate of Designation (“Certificate”) allowed the holders of the preferred stock to call a special meeting and elect two additional directors to SBS’s board. In addition, the Certificate prohibited SBS from incurring additional debt after such a triggering event.

During 2009, SBS began to fail to make dividend payments. Plaintiffs alleged a triggering event occurred no later than July 2010. Plaintiffs did not at that time assert their rights under the Certificate, nor did they when SBS incurred additional debt in publicly announced transactions during 2011 and 2012. Plaintiffs brought suit for breach of contract and breach of the covenant of good faith and fair dealing. SBS argued that no triggering event occurred until after the debt transactions, and raised defenses including laches and acquiescence.

American Capital Acquisition Partners, LLC, et al. v. LPL Holdings, Inc., et al. No. 8490-VCG (February 3, 2014) (Glasscock, V.C.)

Feb 05 2014

By David Bernstein

In 2011, LPL Holdings, Inc. (“LPL”) acquired Concord Capital Partners, Inc. (“Concord”) from American Capital Acquisition Partners, LLC (“American Capital”) under a purchase agreement (the “Purchase Agreement”) that provided for a contingent addition to the purchase price that could be as much as $15 million based upon the 2013 gross margin of Concord (which was renamed “Concord-LPL”). Conford-LPL also entered into employment contracts with senior executives of Concord, which provided for bonuses based upon Concord-LPL’s reaching specified revenue targets in 2011, 2012 and 2013. At the time of the acquisition, LPL discussed with American Capital and Concord’s senior executives the synergies that could be achieved by using LPL’s computerized custody system to provide custody services for Concord-LPL trust accounts. In fact, the LPL computer system could not process those accounts, and LPL did not modify the system to enable it to process them. As a result, Concord-LPL did not generate gross margins sufficient to entitle American Capital to the contingent additional payments and did not generate sufficient revenues to reach the specified targets in the employment contracts. American Capital and the former Concord senior executives sued LPL, alleging that LPL had committed fraud in stating that LPL could, or would become able to, process Concord-LPL’s trust accounts, and had breached the implied covenant of good faith and fair dealing in (a) not doing what was necessary to enable the LPL computer system to be used to process those accounts and (b) diverting business away from Concord-LPL to another company to avoid having to make additional payments to American Capital under the Purchase Agreement and provide bonuses to Concord’s senior executives under the employment contracts.

Catagory:Implied Covenant of Good Faith and Fair Dealing