Gerber v. Enterprise Products Holdings, LLC
67 A. 3d 400 (2013)
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Rule of Law:
A contractual provision in a limited partnership agreement that creates a conclusive presumption of good faith based on reliance on an expert opinion does not bar a claim for breach of the implied covenant of good faith and fair dealing, as the act of relying on a flawed or unresponsive expert opinion may itself be arbitrary and unreasonable.
Facts:
- Enterprise GP Holdings, L.P. ('EPE') was a limited partnership with Enterprise Products Holdings, LLC ('Enterprise Products GP') acting as its general partner, all controlled by Dan L. Duncan.
- In 2007, EPE purchased an asset, Teppco GP, from a Duncan affiliate for EPE LP units valued at $1.1 billion.
- In 2009, EPE was caused to sell Teppco GP to an affiliated entity, Enterprise Products LP, for approximately $100 million in a transaction known as the '2009 Sale.'
- The Audit, Conflict, and Governance Committee ('ACG Committee') of Enterprise Products GP's board approved the 2009 Sale after receiving a fairness opinion from Morgan Stanley.
- The Morgan Stanley opinion assessed the fairness of the total consideration for the 2009 Sale combined with a separate transaction, but expressly disclaimed any opinion on the fairness of the consideration for the 2009 Sale standing alone.
- In 2010, EPE merged into a subsidiary of Enterprise Products LP (the '2010 Merger'), with a primary purpose of extinguishing potential legal claims held by EPE related to the 2007 and 2009 transactions.
- For the 2010 Merger, Morgan Stanley provided another fairness opinion but did not independently value the legal claims that the merger was designed to eliminate.
- EPE's Limited Partnership Agreement ('LPA') eliminated traditional fiduciary duties and created protective safe harbors, including one that established a 'conclusive presumption' of good faith if the general partner relied on an expert opinion.
Procedural Posture:
- Joel A. Gerber, on behalf of two classes of unitholders, filed suit in the Delaware Court of Chancery against Enterprise Products Holdings, LLC, and other affiliated defendants.
- The complaint alleged breaches of contractual duties and the implied covenant of good faith and fair dealing in connection with the 2009 Sale and the 2010 Merger.
- The defendants filed a motion to dismiss the complaint in its entirety for failure to state a claim upon which relief can be granted.
- The Court of Chancery granted the defendants' motion and dismissed the complaint.
- Gerber, as plaintiff-appellant, appealed the Court of Chancery's dismissal to the Delaware Supreme Court.
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Issue:
Does a provision in a Limited Partnership Agreement creating a 'conclusive presumption' of good faith for a general partner who relies on an expert opinion bar a claim that the general partner breached the non-waivable implied covenant of good faith and fair dealing?
Opinions:
Majority - Jacobs, Justice
No. A provision in a Limited Partnership Agreement creating a 'conclusive presumption' of good faith does not bar a claim for breach of the implied covenant of good faith and fair dealing. The court distinguished between the LPA's contractual duty of 'good faith' (a subjective belief that an action is in the partnership's best interests) and the implied covenant of good faith and fair dealing. The implied covenant, which cannot be contractually eliminated under Delaware statute, attaches to every provision of the agreement, including safe harbors like the conclusive presumption clause. The analysis for the implied covenant is retrospective, asking what the parties would have agreed to at the time of contracting had they considered the issue. Relying on an expert opinion that is fundamentally flawed—for example, one that does not address the fairness of the specific transaction at issue or fails to value a key asset being eliminated—is an arbitrary and unreasonable act that frustrates the limited partners' reasonable expectations. Therefore, the act of invoking the conclusive presumption provision can itself be a breach of the implied covenant, allowing the court to review the underlying conduct.
Analysis:
This decision significantly clarifies the limits of contractual exculpation in Delaware limited partnership agreements. It establishes that while parties have broad freedom to eliminate traditional fiduciary duties, the non-waivable implied covenant of good faith and fair dealing serves as a crucial backstop against abuse. The ruling prevents general partners from using procedural safe harbors, such as reliance on expert opinions, as an absolute shield when that reliance is itself arbitrary or unreasonable. This precedent ensures that even in a contractually-defined relationship, fiduciaries cannot mechanistically comply with protective provisions in a way that subverts the fundamental bargain and harms limited partners, thereby preserving a measure of judicial oversight.
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