Miller v. HCP Trumpet Investments, LLC
N/A (Slip Opinion) (2018)
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Rule of Law:
The implied covenant of good faith and fair dealing in a Delaware LLC's operating agreement cannot be used to impose corporate law fiduciary duties, such as Revlon-type auction requirements, when the agreement has expressly disclaimed all fiduciary duties.
Facts:
- Christopher Miller co-founded Trumpet Search LLC and, along with a trust, was a member of the company.
- Trumpet Search LLC was governed by an operating agreement.
- The operating agreement explicitly disclaimed all fiduciary duties for the company's Board of Managers.
- The agreement specified that the Board must still act in accordance with the implied contractual obligation of good faith and fair dealing.
- The agreement also granted the Board 'sole discretion' to determine the manner of a company sale.
- The Trumpet Board of Managers agreed to sell the entire company to a third party, MTS Health Investors, LLC.
- In arranging the sale to MTS, the Board did not conduct an open-market auction or a similar process to solicit competing bids.
Procedural Posture:
- Christopher Miller and the C & L Miller Revocable Trust (the Millers) filed a complaint against HCP Trumpet Investments, LLC, and others in the Delaware Court of Chancery.
- The complaint alleged a breach of the implied covenant of good faith and fair dealing arising from the sale of Trumpet Search LLC.
- The Court of Chancery, a court of first instance, granted the defendants' motion to dismiss the complaint for failure to state a claim.
- The Millers, as Appellants, appealed the dismissal to the Supreme Court of the State of Delaware.
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Issue:
Does the implied covenant of good faith and fair dealing impose Revlon-type duties on the board of a Delaware LLC to conduct an open-market sale process when the LLC's operating agreement expressly eliminates all fiduciary duties?
Opinions:
Majority - By the Court (Per Curiam)
No. The implied covenant of good faith and fair dealing cannot be used to impose affirmative duties equivalent to corporate fiduciary duties that were expressly eliminated by the operating agreement. The court reasoned that the implied covenant serves to fill gaps in a contract, not to override its express terms. Here, the operating agreement's 'clear elimination of fiduciary duties' is fundamentally inconsistent with the Millers' argument that the implied covenant should be used to impose Revlon duties, which are a form of fiduciary duty specific to the corporate change-of-control context. While granting the Board 'sole discretion' does not eliminate the implied covenant, the covenant cannot be used to create new, affirmative obligations that contradict the explicit disclaimer of fiduciary duties. The court noted that the Millers failed to make more specific, targeted claims of bad faith, instead relying on the broad, and ultimately incorrect, argument that the implied covenant subsumed Revlon duties.
Analysis:
This decision reinforces the contractarian nature of Delaware LLCs, emphasizing that the operating agreement is paramount. It clarifies the narrow role of the implied covenant of good faith and fair dealing as a gap-filler, which cannot be used to re-insert broad fiduciary principles that the parties have contractually disclaimed. The ruling serves as a guide for future litigants, signaling that claims for breach of the implied covenant in the LLC context must be targeted and specific, rather than attempts to import entire doctrines from corporate law. This holding solidifies the distinction between the non-waivable implied covenant and waivable fiduciary duties, providing certainty for parties drafting LLC agreements.
