Brinckerhoff v. Enbridge Energy Company, Inc.
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PETER BRINCKERHOFF, INDIVIDUALLY : AND AS TRUSTEE OF THE PETER R. : BRINCKERHOFF REV. TR U A DTD : 10/17/97, and on behalf of all others similarly : situated, : : Plaintiff, : : v. : C.A. No. 11314-VCS : ENBRIDGE ENERGY COMPANY, INC.; : ENBRIDGE, INC.; ENBRIDGE ENERGY : MANAGEMENT, L.L.C.; JERREY A. : CONNELLY; REBECCA B. ROBERTS; : DAN A. WESTBROOK; J. RICHARD BIRD; : J. HERBERT ENGLAND; C. GREGORY : HARPER; D. GUY JARVIS; MARK A. MAKI; : JOHN K. WHELEN; ENBRIDGE PIPELINES : (ALBERTA CLIPPER) L.L.C. and ENBRIDGE : ENERGY, LIMITED PARTNERSHIP, : : Defendants. :
MEMORANDUM OPINION
Date Submitted: November 18, 2015 Date Decided: April 29, 2016 Jessica Zeldin, Esquire of Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware, and Jeffrey H. Squire, Esquire, Lawrence P. Eagel, Esquire, and David J. Stone, Esquire of Bragar Eagel & Squire, P.C., New York, New York, Attorneys for Plaintiff.
Thomas W. Briggs, Jr., Esquire and Richard Li, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, and Kevin C. Logue, Esquire, Kevin P. Broughel, Esquire, and Inna Coleman, Esquire of Paul Hastings LLP, New York, New York, Attorneys for Defendants Enbridge Energy Company, Inc., Enbridge Energy Management, L.L.C., Jeffrey A. Connelly, Rebecca B. Roberts, Dan A. Westbrook, Enbridge Energy Limited Partnership, and Nominal Defendant Enbridge Energy Partners, L.P.
Raymond J. DiCamillo, Esquire, J. Scott Pritchard, Esquire, and Shawna C. Bray, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, and Michael H. Steinberg, Esquire of Sullivan & Cromwell LLP, Los Angeles, California, and Laura K. Oswell, Esquire of Sullivan & Cromwell LLP, Palo Alto, California, Attorneys for Defendants Enbridge Inc., J. Richard Bird, J. Herbert England, C. Gregory Harper, D. Guy Jarvis, Mark A. Maki, John K. Whelen, and Enbridge Pipelines (Alberta Clipper) L.L.C.
SLIGHTS, Vice Chancellor Plaintiff is an investor in a master limited partnership, Enbridge Energy
Partners, L.P. (“EEP” or the “Partnership”). He has brought class and derivative
claims against the general partner and its controller, affiliates and directors
alleging, inter alia, that they breached, variously, the operative limited partnership
agreement, the implied covenant of good faith and fair dealing and default
fiduciary duties by causing the Partnership to reacquire a substantial asset from the
general partner in a conflicted transaction, at an unfair price and on terms unfair to
the unaffiliated unitholders. In bringing these claims Plaintiff invites the Court to
return to familiar quarters—familiar not only because this is the latest in a “series”
of cases where an investor in a master limited partnership alleges that the
managing general partner engaged in conduct not sanctioned by the operative
limited partnership agreement or common law duties,1 but also because the very
agreement to be construed here was recently interpreted by this Court and our
Supreme Court in connection with a related dispute involving most of these same
parties.
The asset in question is an interest in a crude oil pipeline the general partner
acquired from the Partnership only six years prior to the transaction at issue here.
Plaintiff challenged that sale and, thus, caused the Court to review the various
1 See In re Encore Energy P’rs LP Unitholder Litig., 2012 WL 3792997, at *1 (Del. Ch. Aug. 31, 2012) (collecting cases in the “series”).
1 defendants’ roles in approving the transaction against the standards of conduct
established by a limited partnership agreement identical in all material respects to
the agreement sub judice. This Court dismissed Plaintiff’s complaint after
concluding that the limited partnership agreement effectively replaced all fiduciary
duties with a contractual governance scheme and that Plaintiff had failed to plead a
violation of the only contractual standard by which the defendants’ conduct could
be measured: bad faith.2
In this action, Plaintiff seeks an order (1) directing Defendants to account to
EEP and the public unitholders for damages incurred and profits and benefits
Defendants obtained as a result of the alleged wrongs; and (2) directing Defendants
to pay money damages, disgorgement, and restitution to EEP and the public
unitholders or their successors, assigns, and transferees (the “Class”) for all value
gained as a result of the alleged wrongs; or alternatively, (3) rescinding the
transaction, reforming the terms of the transaction, reforming the Seventh
Amended and Restated Agreement of Limited Partnership of Enbridge Energy
2 Brinckerhoff v. Enbridge Energy Co., 2011 WL 4599654, at *8–9 (Del. Ch. Sept. 30, 2011) (“Brinckerhoff I”), aff’d, 67 A.3d 369 (Del. 2013) (“Brinckerhoff III”). See also Brinckerhoff v. Enbridge Energy Co., 2012 WL 1931242 (Del. Ch. May 25, 2012) (“Brinckerhoff II”) (addressing Plaintiff’s rescission and reformation claims).
2 Partners, L.P. (the “7th LPA”),3 or awarding rescissory damages to the Partnership
and the Class.4
Defendants have moved to dismiss the Complaint under Court of Chancery
Rule 12(b)(6) for failure to state claims upon which relief can be granted. They
also seek dismissal of Plaintiff’s derivative claims under Court of Chancery
Rule 23.1 for failure to plead facts that would excuse demand. In their
Rule 12(b)(6) motions, Defendants repeat most of the contractual arguments they
advanced successfully in Brinckerhoff I. These arguments, which are grounded in
the now-settled tenet that a limited partnership agreement may eliminate the
fiduciary duties owed by the general partner to the partnership and its limited
partners in favor of contractual duties, resonate with equal effect in this case.
For the reasons that follow, I conclude that the general partner complied in
all respects with the provisions of the limited partnership agreement, just as it did
in Brinckerhoff I, and that it and the other defendants cannot be held liable for
money damages unless Plaintiff has well-pled that they acted in bad faith. He has
not. Nor has Plaintiff pled sustainable claims for breach of the implied covenant of
good faith and fair dealing, breach of residual fiduciary duties or entitlement to
3 Pl.’s Answering Br. in Opposition to Defs.’ Mots. to Dismiss Compl. (“Pl.’s Answering Br.”) Ex. A (“7th LPA”) § 5.2(i). 4 Verified Class Action and Derivative Compl. (“Compl.” or the “Complaint”), prayers for relief.
3 reformation or rescission. Accordingly, Defendants’ motions to dismiss must be
granted.
I. BACKGROUND
The facts are drawn from the Complaint, the operative limited partnership
agreements, other documents that are integral to the Complaint and matters of
which the Court may take judicial notice.5
A. The Parties
Plaintiff Peter Brinckerhoff (“Brinckerhoff” or “Plaintiff”), individually and
as trustee of the Peter R. Brinckerhoff Rev. Tr. U.A. DTD 10/17/97 (the “Trust”),
brings this action directly on behalf of himself and a class of similarly situated
holders of EEP’s Class A common units (excluding the defendants and affiliates,
the “Public Unitholders”), and derivatively on behalf of EEP against EEP’s
General Partner, Enbridge Energy Company, Inc. (“EEP GP”), EEP’s designated
manager, Enbridge Energy Management, L.L.C. (“Enbridge Management”), EEP
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PETER BRINCKERHOFF, INDIVIDUALLY : AND AS TRUSTEE OF THE PETER R. : BRINCKERHOFF REV. TR U A DTD : 10/17/97, and on behalf of all others similarly : situated, : : Plaintiff, : : v. : C.A. No. 11314-VCS : ENBRIDGE ENERGY COMPANY, INC.; : ENBRIDGE, INC.; ENBRIDGE ENERGY : MANAGEMENT, L.L.C.; JERREY A. : CONNELLY; REBECCA B. ROBERTS; : DAN A. WESTBROOK; J. RICHARD BIRD; : J. HERBERT ENGLAND; C. GREGORY : HARPER; D. GUY JARVIS; MARK A. MAKI; : JOHN K. WHELEN; ENBRIDGE PIPELINES : (ALBERTA CLIPPER) L.L.C. and ENBRIDGE : ENERGY, LIMITED PARTNERSHIP, : : Defendants. :
MEMORANDUM OPINION
Date Submitted: November 18, 2015 Date Decided: April 29, 2016 Jessica Zeldin, Esquire of Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware, and Jeffrey H. Squire, Esquire, Lawrence P. Eagel, Esquire, and David J. Stone, Esquire of Bragar Eagel & Squire, P.C., New York, New York, Attorneys for Plaintiff.
Thomas W. Briggs, Jr., Esquire and Richard Li, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, and Kevin C. Logue, Esquire, Kevin P. Broughel, Esquire, and Inna Coleman, Esquire of Paul Hastings LLP, New York, New York, Attorneys for Defendants Enbridge Energy Company, Inc., Enbridge Energy Management, L.L.C., Jeffrey A. Connelly, Rebecca B. Roberts, Dan A. Westbrook, Enbridge Energy Limited Partnership, and Nominal Defendant Enbridge Energy Partners, L.P.
Raymond J. DiCamillo, Esquire, J. Scott Pritchard, Esquire, and Shawna C. Bray, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, and Michael H. Steinberg, Esquire of Sullivan & Cromwell LLP, Los Angeles, California, and Laura K. Oswell, Esquire of Sullivan & Cromwell LLP, Palo Alto, California, Attorneys for Defendants Enbridge Inc., J. Richard Bird, J. Herbert England, C. Gregory Harper, D. Guy Jarvis, Mark A. Maki, John K. Whelen, and Enbridge Pipelines (Alberta Clipper) L.L.C.
SLIGHTS, Vice Chancellor Plaintiff is an investor in a master limited partnership, Enbridge Energy
Partners, L.P. (“EEP” or the “Partnership”). He has brought class and derivative
claims against the general partner and its controller, affiliates and directors
alleging, inter alia, that they breached, variously, the operative limited partnership
agreement, the implied covenant of good faith and fair dealing and default
fiduciary duties by causing the Partnership to reacquire a substantial asset from the
general partner in a conflicted transaction, at an unfair price and on terms unfair to
the unaffiliated unitholders. In bringing these claims Plaintiff invites the Court to
return to familiar quarters—familiar not only because this is the latest in a “series”
of cases where an investor in a master limited partnership alleges that the
managing general partner engaged in conduct not sanctioned by the operative
limited partnership agreement or common law duties,1 but also because the very
agreement to be construed here was recently interpreted by this Court and our
Supreme Court in connection with a related dispute involving most of these same
parties.
The asset in question is an interest in a crude oil pipeline the general partner
acquired from the Partnership only six years prior to the transaction at issue here.
Plaintiff challenged that sale and, thus, caused the Court to review the various
1 See In re Encore Energy P’rs LP Unitholder Litig., 2012 WL 3792997, at *1 (Del. Ch. Aug. 31, 2012) (collecting cases in the “series”).
1 defendants’ roles in approving the transaction against the standards of conduct
established by a limited partnership agreement identical in all material respects to
the agreement sub judice. This Court dismissed Plaintiff’s complaint after
concluding that the limited partnership agreement effectively replaced all fiduciary
duties with a contractual governance scheme and that Plaintiff had failed to plead a
violation of the only contractual standard by which the defendants’ conduct could
be measured: bad faith.2
In this action, Plaintiff seeks an order (1) directing Defendants to account to
EEP and the public unitholders for damages incurred and profits and benefits
Defendants obtained as a result of the alleged wrongs; and (2) directing Defendants
to pay money damages, disgorgement, and restitution to EEP and the public
unitholders or their successors, assigns, and transferees (the “Class”) for all value
gained as a result of the alleged wrongs; or alternatively, (3) rescinding the
transaction, reforming the terms of the transaction, reforming the Seventh
Amended and Restated Agreement of Limited Partnership of Enbridge Energy
2 Brinckerhoff v. Enbridge Energy Co., 2011 WL 4599654, at *8–9 (Del. Ch. Sept. 30, 2011) (“Brinckerhoff I”), aff’d, 67 A.3d 369 (Del. 2013) (“Brinckerhoff III”). See also Brinckerhoff v. Enbridge Energy Co., 2012 WL 1931242 (Del. Ch. May 25, 2012) (“Brinckerhoff II”) (addressing Plaintiff’s rescission and reformation claims).
2 Partners, L.P. (the “7th LPA”),3 or awarding rescissory damages to the Partnership
and the Class.4
Defendants have moved to dismiss the Complaint under Court of Chancery
Rule 12(b)(6) for failure to state claims upon which relief can be granted. They
also seek dismissal of Plaintiff’s derivative claims under Court of Chancery
Rule 23.1 for failure to plead facts that would excuse demand. In their
Rule 12(b)(6) motions, Defendants repeat most of the contractual arguments they
advanced successfully in Brinckerhoff I. These arguments, which are grounded in
the now-settled tenet that a limited partnership agreement may eliminate the
fiduciary duties owed by the general partner to the partnership and its limited
partners in favor of contractual duties, resonate with equal effect in this case.
For the reasons that follow, I conclude that the general partner complied in
all respects with the provisions of the limited partnership agreement, just as it did
in Brinckerhoff I, and that it and the other defendants cannot be held liable for
money damages unless Plaintiff has well-pled that they acted in bad faith. He has
not. Nor has Plaintiff pled sustainable claims for breach of the implied covenant of
good faith and fair dealing, breach of residual fiduciary duties or entitlement to
3 Pl.’s Answering Br. in Opposition to Defs.’ Mots. to Dismiss Compl. (“Pl.’s Answering Br.”) Ex. A (“7th LPA”) § 5.2(i). 4 Verified Class Action and Derivative Compl. (“Compl.” or the “Complaint”), prayers for relief.
3 reformation or rescission. Accordingly, Defendants’ motions to dismiss must be
granted.
I. BACKGROUND
The facts are drawn from the Complaint, the operative limited partnership
agreements, other documents that are integral to the Complaint and matters of
which the Court may take judicial notice.5
A. The Parties
Plaintiff Peter Brinckerhoff (“Brinckerhoff” or “Plaintiff”), individually and
as trustee of the Peter R. Brinckerhoff Rev. Tr. U.A. DTD 10/17/97 (the “Trust”),
brings this action directly on behalf of himself and a class of similarly situated
holders of EEP’s Class A common units (excluding the defendants and affiliates,
the “Public Unitholders”), and derivatively on behalf of EEP against EEP’s
General Partner, Enbridge Energy Company, Inc. (“EEP GP”), EEP’s designated
manager, Enbridge Energy Management, L.L.C. (“Enbridge Management”), EEP
GP’s controlling parent, Enbridge, Inc. (“Enbridge”), and the shared directors of
EEP GP and Enbridge Management, as well as the parties to certain agreements
5 See Pfeiffer v. Toll, 989 A.2d 683, 684 (Del. Ch. 2010) (noting that “[t]he facts are drawn from the allegations of the Complaint, from publicly available documents it incorporates by reference, and from information subject to judicial notice, such as the historical prices at which securities traded on the public markets”); Orman v. Cullman, 794 A.2d 5, 16 (Del. Ch. 2002) (holding that the Court may consider information that is “integral” to Plaintiff’s claims which includes any document that is a “source for the . . . facts as pled in the complaint”).
4 that Plaintiff seeks to reform—Enbridge Pipelines (Alberta Clipper) L.L.C. and
Enbridge Energy, Limited Partnership (together, the “Defendants”). The Trust has
owned EEP Class A common limited partnership units continuously since
December 26, 2008, and owned 73,080 such units at the time Plaintiff filed the
Complaint.
EEP is a Delaware master limited partnership (“MLP”) headquartered in
Houston, Texas. Formed in 1991, EEP owns and operates the Lakehead pipeline
system—the United States portion of a crude oil and liquid petroleum pipeline
system traversing portions of Canada and the United States. EEP’s Class A
common limited partnership units trade on the New York Stock Exchange, and it
reported $17.7 billion in assets and $371.8 million of net income in 2014. At the
time of the transaction that gives rise to the Complaint, the rights and obligations
of the general and limited partners of EEP were set forth in the Sixth Amended and
Restated Agreement of Limited Partnership of Enbridge Energy Partners, L.P. (the
“LPA”).
EEP GP, EEP’s general partner, is a Delaware corporation wholly owned by
Enbridge. As of the date of the Complaint, EEP GP owned a 2% general
partnership interest and a 38.1% limited partnership interest in EEP. EEP GP also
owns 100% of the voting shares and 11.7% of the listed shares of Enbridge
Management which, in turn, owns a 14.7% limited partnership interest in EEP. In
5 October 2002, EEP GP delegated to Enbridge Management its authority to manage
EEP.6 Each EEP GP director and officer is employed in the same capacity at
Enbridge Management.
Enbridge is a Canadian energy corporation engaged in “pipeline oil
transportation; natural gas gathering, processing, transportation, and storage;
[natural gas liquid] fractionation (or separation), transportation, storage and import
and export terminaling; and offshore production platform services.”7 Enbridge
owns the Canadian portion of the Lakehead pipeline system, and controls EEP GP,
Enbridge Management, and EEP.8 Through its control of EEP GP and Enbridge
Management, Enbridge controls a 2% general partnership interest and a 52.8%
limited partnership interest in EEP. The following chart depicts the relationships
between EEP, EEP GP, Enbridge Management, and Enbridge:
6 Enbridge Management’s business consists solely of managing the business and affairs of EEP. 7 Compl. ¶ 24. 8 The Lakehead pipeline system extends “from the tar sands oil production fields in Northern Alberta in Western Canada through the upper and lower Great Lakes region of the United States to eastern Canada.” Id. ¶ 21.
6 At the time of the transaction at issue, Jeffrey A. Connelly, Rebecca B.
Roberts, Dan A. Westbrook, J. Richard Bird, J. Herbert England, C. Gregory
Harper, D. Guy Jarvis, Mark A. Maki, and John K. Whelen (the “Director
Defendants”) each served as directors and, in some cases, officers of both EEP GP
and Enbridge Management.9 Roberts, Connelly and Westbrook comprised the
special committee that recommended the transaction at issue to the EEP GP
Board.10
9 “Enbridge establishes the types and amounts of compensation granted to the officers of EEP and Enbridge Management, all of whom are employed by Enbridge Employee Services, Inc. . . ., a company 100% owned by Enbridge.” Id. ¶ 27. 10 Id. ¶ 52.
7 B. The 2009 Transaction and Subsequent Litigation (Brinckerhoff I-III)
In early 2009, while in the midst of the so-called “great recession,” EEP
developed the Alberta Clipper project (“ACP”) as a means to address anticipated
demands for petroleum in the Midwestern United States by delivering petroleum to
that region from growing supplies in the Western Canada oil sands.11 Given the
volatility in the world markets, EEP was open to sharing the $1.2 billion
implementation costs with a strategic partner.12 In April 2009, Enbridge proposed
a joint venture agreement to EEP pursuant to which Enbridge would contribute
75% of the costs of the ACP, EEP would contribute 25%, and both parties would
share profits in relation to their respective capital contributions (the “JVA”). 13
Upon receiving Enbridge’s proposal, EEP GP’s Board formed a special
committee and directed it to determine whether the JVA was “fair and reasonable
to [EEP] and its unit holders.”14 The special committee, in turn, hired legal and
financial advisors and thereafter met with its advisors on several occasions to study
the JVA and evaluate whether its terms were “representative of an arm’s length
transaction.”15 Ultimately, the special committee recommended that EEP proceed
11 See Brinckerhoff I, 2011 WL 4599654, at *2. 12 Id. 13 Id. 14 Id. (internal quotation marks omitted). 15 Id. (internal quotation marks omitted).
8 with the JVA if Enbridge would agree that EEP could retain a 33-1/3% (as
opposed to 25%) equity stake in the ACP.16 Enbridge agreed and EEP GP’s Board
passed a resolution approving the JVA shortly thereafter (hereinafter “the 2009
Sale”).17 The closing price Enbridge paid for its interest in the ACP (the “AC
Interest”), $800 million, represented a 7x EBITDA multiple, even though the
special committee’s financial advisor typically recommended a forward year
EBITDA multiple for pipeline projects of 9x–12x.18
In response to the 2009 Sale, Brinckerhoff filed a complaint in this Court in
which he asserted derivative and direct claims against most of the same defendants
named here. The gravamen of his complaint was that the JVA was unfair to
unaffiliated unitholders because EEP GP, through a flawed special committee
process, allowed Enbridge to pay too little for the AC Interest. The essential
counts in Brinckerhoff I—breach of express and implied duties under the operative
limited partnership agreement, breach of default fiduciary duties and breach of the
implied covenant of good faith and fair dealing—mirror the principal claims set
forth in the Complaint.19
16 Id. at *3. 17 Id. 18 Id. 19 Id. at *4.
9 To address the defendants’ motions to dismiss, the Court in Brinckerhoff I
engaged in a thorough analysis of nearly all of the contractual provisions within the
LPA relating to partnership governance that are at issue here. As discussed in
more detail below, the Court determined that several provisions of the LPA
operated in concert to replace all common law duties, particularly default fiduciary
duties, with a more indulgent contractual scheme by which the defendants’ conduct
must be measured.20 Because Brinckerhoff failed to plead facts allowing a
reasonable inference that the defendants failed to fulfill their contractual duties to
the unitholders, the Court dismissed the complaint.21 The Supreme Court
affirmed.22
C. The Repurchase of the AC Interest
The Complaint alleges that between 2009 and 2015 the AC Interest’s value
declined, as evidenced by a near 20% decrease in projected EBITDA due to an
“almost 50%” drop in the price of Canadian crude oil, a six year reduction in time
during which the AC Interest would operate under the current tariffs (set to expire
20 Id. at *8–10. 21 Id. at *11–12. Brinckerhoff II addressed a remand order from the Supreme Court that instructed this Court to consider whether Brinckerhoff was entitled to pursue his claims for reformation or rescission. This Court determined that he was not and the Supreme Court affirmed that ruling as well. Brinckerhoff II, 2012 WL 1931242, at *4; Brinckerhoff III, 67 A.3d at 373. 22 Brinckerhoff III, 67 A.3d at 372–73.
10 in 2025), and the expected “rebasing” of the tariff agreement.23 In this context,
five years after Enbridge had acquired the AC Interest, with the recovery of the
financial markets well underway and the Alberta Clipper pipeline constructed and
operational, Enbridge and EEP determined it was time to explore whether EEP
should reacquire the AC Interest.
On September 16, 2014, Enbridge proposed a sale of the AC Interest,
excluding the expansion rights,24 back to EEP for a total price of $915 million
(later increased to $1 billion). The proposed purchase price consisted of “a new
class of EEP partnership securities to be designated as ‘Class E Units,’ valued at
$694 million, and the repayment of an outstanding loan made by [EEP GP] to EEP
in the amount of $306 million.”25 Also, as part of the transaction, EEP GP would
amend the LPA “so as to allocate to the Public Unitholders significant items of
gross income that [would otherwise] have been allocated to [EEP GP]” (the
“Special Tax Allocation”).26
23 Compl. ¶¶ 6, 64. 24 According to the Complaint, the expansion rights are significant because they had the potential to “increase Alberta Clipper (US)’s throughput capacity from 450,000 bpd [barrels per day] to 800,000 bpd.” Id. ¶ 7. See also id. ¶¶ 5, 70. 25 Id. ¶ 5. 26 Id. ¶ 2. The Special Tax Allocation allocated to Class A and B common units and Class D units of the Partnership (including those held by EEP GP) “gross income that would otherwise be allocated to the newly created Class E units, in an annual amount equal to $40 million for 22 years (or $880 million total), and then approximately $20 million per year thereafter in perpetuity.” Id. The portion of the Special Tax Allocation affecting Public Unitholders (i.e., excluding EEP GP’s units) amounts to “approximately 11 1. The Special Committee
In response to Enbridge’s proposal, Enbridge Management (as designated
manager for EEP GP), on behalf of EEP, formed a special committee consisting of
defendants Connelly, Roberts and Westbrook (the “Special Committee”).27 The
Special Committee’s charge was to consider whether the terms of the offer were
fair and reasonable to EEP and its unitholders and whether EEP should proceed
with the proposed transaction or seek alternatives. The Special Committee hired
legal counsel and Simmons & Company International (“Simmons”), an investment
banking firm with particular expertise in the energy industry, as its financial
advisor. Simmons was to be paid a cash fee of $600,000, all but $100,000 of
which was contingent on Simmons delivering a fairness opinion.
Simmons’ process included the identification and evaluation of more than
two dozen comparable transactions,28 with a particular emphasis on comparable
EBITDA multiples,29 consideration of alternative transaction structures,30
$24.8 million of additional gross income, per year, for 22 years (or $545.6 million total), and then approximately $12.4 million per year thereafter in perpetuity.” Id. As Plaintiff correctly observes, the Special Tax Allocation increases the proportion of Partnership income taxes for which Class A and B common unit holders and Class D unit holders are responsible, without the benefit of receiving distributions in that proportion. 27 “Connelly and Westbrook also served on the special committee for the 2009 [Sale].” Id. Brinckerhoff alleges that each Special Committee member had close ties to Enbridge, and that, in March 2015, Roberts was appointed as a director of Enbridge. 28 Compl. Ex. B (“Simmons Report”) at EEPLP000323. 29 Id. at EEPLP000321.
12 “[m]ultiple due diligence calls with Enbridge management to discuss financial
projections and Transaction tax treatment,”31 and several meetings with the Special
Committee during which it made detailed presentations, including at least three
that addressed the Special Tax Allocation.32 The Simmons presentations did not,
however, reference the 2009 Sale, sale price, or EBITDA multiple.
During a presentation on December 23, 2014, Simmons explained to the
Special Committee that, “[a]t the updated proposed transaction value of $1 billion,
[EEP GP] is projected to have a large taxable gain of $410 million on the sale of its
units in Alberta Clipper.”33 To be cash neutral, the presentation continued, “the
taxable gain will be allocated to the EEP A, B, and D unit[] holders,” though
Enbridge planned to partially offset the increased tax burden by allocating
additional “depreciation to the A, B, and D units.”34 Simmons informed the
Special Committee “that the Special Tax Allocation would negate most of the
accretion the Public Unitholders would otherwise obtain from the Transaction.”35
30 Id. at EEPLP000288. 31 Id. 32 Compl. ¶¶ 56, 59, 68; Simmons Report at EEPLP000288. 33 Compl. ¶ 57 (incorporating Simmons’ presentation). 34 Id. ¶¶ 57–58. 35 Id. ¶ 59.
13 2. The EEP GP Board Approves the Transaction
Simmons issued its findings on December 23, 2014, and concluded that “the
Transaction is fair to [EEP] and to the holders of [EEP’s] common units (other
than [EEP GP] and its affiliates) from a financial point of view” (the “Fairness
Opinion”).36 The Special Committee recommended and the EEP GP Board
approved the transaction the same day. On January 2, 2015, EEP repurchased
from EEP GP the AC Interest, excluding the Alberta Clipper (US) expansion
rights, for $1 billion (the “Transaction”).37 As part of the Transaction, EEP GP
amended the LPA to add Section 5.2(i), which effectuated the Special Tax
Allocation.38
36 Opening Br. in Supp. of Enbridge Energy Co., Inc., Enbridge Energy Mgmt., L.L.C., Jeffrey A. Connelly, Rebecca B. Roberts, Dan A. Westbrook, Enbridge Energy Ltd. P’ship and Nominal Def. Enbridge Energy P’rs, L.P.’s Mot. to Dismiss the Verified Class and Derivative Compl. (“Enbridge Opening Br.”) Ex. 2. 37 The market responded to the announcement of the Transaction “with an increase in [common unit] price of approximately 6.2% (38.09 to 40.45),” which “remained unchanged even one month following the announcement of the Transaction, where the price closed at 40.09.” Enbridge Opening Br. 34–35. See In re Lear Corp. S’holder Litig., 967 A.2d 640, 656 n.65 (Del. Ch. 2008) (“The court may take judicial notice of the trading price of a listed stock.”). 38 7th LPA § 5.2(i). But for the addition of Section 5.2(i) to the LPA, “items of Partnership income, gain, loss, deduction and credit would have been allocated to the Class A Common Units, Class B Common Units, Class D Units and Class E Units, on a pro rata basis.” Compl. ¶ 47.
14 D. The Limited Partnership Agreement
The LPA governed EEP GP’s authority to approve the Transaction on behalf
of EEP. Relevant to this dispute are the provisions establishing EEP’s governance
structure and the provisions Brinckerhoff has invoked to challenge certain
elements of the Transaction.
1. The Contractual Governance Scheme
Article VI of the LPA addressed the “Management and Operation of [the]
Business.” At Section 6.10(d), the parties expressly agreed that common law
duties otherwise owed by EEP GP to EEP and the Public Unitholders, including
fiduciary duties, would be displaced by a contractual “standard of care”:
Any standard of care and duty imposed by this Agreement or under the Delaware Act or any applicable law, rule or regulation shall be modified, waived or limited as required to permit the General Partner to act under this Agreement or any other agreement contemplated by this Agreement and to make any decision pursuant to the authority prescribed in this Agreement, so long as such action is reasonably believed by the General Partner to be in the best interests of the Partnership. Section 6.8, in turn, defines the “standard of care” to which EEP GP and its
officers, directors, employees and Affiliates (“Indemnitees”) would be held
accountable by providing: “no Indemnitee shall be liable for monetary damages to
the Partnership, the Limited Partners, the Assignees or any other Persons who have
acquired interests in the Units, for losses sustained or liabilities incurred as a result
15 of any act or omission if such Indemnitee acted in good faith.”39 Section 6.10(b)
provides that any act taken by EEP GP in reliance on an advisor is “conclusively
presumed to have been done . . . in good faith.”
Section 6.9(a) evinces that the parties anticipated potential conflict of interest
transactions between EEP GP and EEP. It expressly provides that any conflict of
interest would “not constitute a breach of this Agreement . . . if the resolution or
course of action is or, by operation of this Agreement, is deemed to be, fair and
reasonable to the Partnership.” Section 6.9(c) provides that when a transaction “is
required under this Agreement to be ‘fair and reasonable’ to any Person, the fair
and reasonable nature of such transaction . . . shall be considered in the context of
all similar or related transactions.” With regard to conflict of interest transactions
specifically, Section 6.6(e) provides that the “fair and reasonable” standard is met
“as to any transaction the terms of which are no less favorable to the Partnership
than those generally being provided to or available from unrelated third parties.”
When determining whether to enter into a conflicted transaction,
Section 6.9(a) makes clear that EEP GP is not required “to consider the interests of
39 LPA § 6.8(a). The LPA defines “Indemnitee” as [EEP GP], an “Affiliate of . . . [EEP GP] . . ., [or] any Person who is or was an officer, director, employee, [or] partner . . . of . . . [EEP GP or any Affiliate].” Id. at Article II. It further defines “Affiliate” as any “Person that directly or indirectly controls, is controlled by or is under common control with, the Person in question.” Id. Enbridge and Enbridge Management are Affiliates of EEP GP.
16 any Person other than the Partnership.” Further, when resolving conflicts, Section
6.9(a) allows EEP GP to consider, inter alia, the “relative interests of any party to
such conflict,” “customary or accepted industry practices,” “generally accepted
accounting . . . practices” and “such additional factors as [EEP GP] determines in
its sole discretion to be relevant, reasonable or appropriate under the
circumstances.” In those instances where the General Partner is authorized to
make a decision in its “sole discretion,” Section 6.9(b) states that EEP GP and its
Affiliates are obliged to “consider only such interests and factors as [they]
desire[]” and are under “no duty or obligation to give any consideration to any
interest of, or factors affecting, the Partnership, any Subsidiary, any Limited
Partner or any Assignee.”
Section 6.9(a) further limits EEP GP’s liability in the context of conflict
transactions by providing:
In the absence of bad faith by the General Partner, the resolution, action or terms so made, taken or provided by the General Partner with respect to such matter shall not constitute a breach of this Agreement or any other agreement contemplated herein or a breach of any standard of care or duty imposed herein or therein or under the Delaware Act or any other law, rule or regulation.
Consistent with Section 6.9(a), Section 6.9(b) reiterates that when the LPA
directs EEP GP to act in “good faith,” EEP GP “shall act under such express
standard and shall not be subject to any other or different standards imposed
17 by this Agreement, any Subsidiary Agreement … or under the Delaware
[limited partnership] Act or any other law, rule or regulation.”
2. Amendments to the LPA, the Issuance of New Securities and Allocation of Income to Unitholders
Article 15 governs amendments to the LPA. Section 15.1 states
Each Limited Partner agrees that [EEP GP] . . . without the approval of any Limited Partner or Assignee, may amend any provision of the [LPA] to reflect, . . . (f) subject to the terms of Section 4.4, an amendment that [EEP GP] determines in its sole discretion to be necessary or appropriate in connection with the authorization for issuance of any class or series of Units pursuant to Section 4.4.
At Section 4.4(a), the parties agree that EEP GP may issue additional units, “or
classes or series thereof . . . for any Partnership purpose . . . in its sole discretion, all
without the approval of any Limited Partners.”40 Similarly, at Section 4.4(b), the parties
agree that
[n]otwithstanding any provisions of this Agreement to the contrary (other than [provisions not implicated here]) . . . additional Partnership Securities . . . shall be issuable from time to time in one or more classes . . . with such designations, preferences and relative, participating, optional or other special rights . . . as shall be fixed by the General Partner in the exercise of its sole and complete discretion, subject to Delaware law, including, without limitation, (i) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership securities.
Section 4.4(d) confirms the broad authority granted to EEP GP in Section 15.1(f)
with respect to amendments of the LPA by providing that “[EEP GP] is hereby
40 Id. at Recitals.
18 authorized and directed to take all actions that it deems necessary or appropriate in
connection with each issuance of Units . . . and to amend this Agreement in any manner
that it deems necessary or appropriate to provide for each such issuance.”
Section 5.2(c) governs “Allocations for Tax Purposes,” and provides that “[f]or
the proper administration of the Partnership or for the preservation of uniformity of the
Units (or any class or classes thereof), the General Partner shall have sole discretion to
. . . (ii) make special allocations for federal income tax purposes of income (including,
without limitation, gross income) or deductions,” but only if the allocation “would not
have a material adverse effect on the Partners, [or] the holders of any class or classes of
Units.” Similarly, Section 15.3(b) provides that “[n]otwithstanding the provisions of
Sections 15.1 and 15.2, no amendment to this Agreement may (i) enlarge the obligations
of any Limited Partner without such Limited Partner’s consent.”41
E. Procedural Posture
Brinckerhoff filed the Complaint on July 20, 2015, asserting eight claims as
a class action on behalf of himself and a class of similarly situated Class A
Common unitholders excluding Defendants (as to Counts I–VI), and as a
representative action on behalf of EEP (as to all Counts).
In Count I, Brinckerhoff asserts that the Special Committee’s approval of the
Special Tax Allocation and the attendant amendment to the LPA to include
41 Id. § 15.3(b). Each Public Unitholder is a “Limited Partner.” Compl. ¶ 41.
19 Section 5.2(i) (implementing the Special Tax Allocation) amounted to “conscious
disregard for the best interests of EEP and its Public Unitholders and [a] breach of
the LPA’s implied duty of good faith and fair dealing.”42 This count is directed
specifically against EEP GP and Enbridge Management.
In Count II, Brinckerhoff asserts that “EEP GP and Enbridge Management,
through the actions of the Director Defendants, . . . acted in bad faith when
approving the Transaction,” and in so doing, violated Section 6.6(e) (requiring
conflicted transactions to be on terms “fair and reasonable to the Partnership”).43
Count II further alleges that any purported reliance on Simmons’ Fairness Opinion
is ineffective because
[n]o fiduciary acting in good faith would have relied upon the Simmons opinion, which did not consider (i) the terms of the 2009 transaction; (ii) the methodology employed in connection with the 2009 transaction (i.e., relative cost); (iii) the additional value transferred to EEP GP on account of the Special Tax Allocation; and (iv) the withholding of expansion rights previously transferred from EEP to EEP GP as part of the 2009 transaction.44
Even if the conclusive presumption of good faith for actions taken in reliance on a
consultant’s opinion applies, the Complaint alleges that “such presumption would
42 Compl. ¶ 91. 43 Id. ¶¶ 105, 108. 44 Id. ¶ 110.
20 violate Delaware law which prohibits partnership agreements from eliminating the
implied covenant of good faith and fair dealing.”45
Count III alleges that Enbridge and the Director Defendants breached
Section 15.3(b) and the implied covenant of good faith and fair dealing by
approving in bad faith the Special Tax Allocation and the implementing
amendment to the LPA. According to Brinckerhoff, Enbridge and the Director
Defendants “exercised dominion and control over EEP GP and Enbridge
Management, . . . [and] were obligated not to cause EEP GP to approve the
amendment to the LPA adopting the Special Tax Allocation.”46
Count IV alleges that Enbridge and the Director Defendants breached
Section 6.6(e) by approving in bad faith a transaction “not consistent with terms
that would have been generally provided by or available from unrelated third
parties.”47 The Complaint further alleges (1) that any reliance on the Simmons
Fairness Opinion violated the implied covenant of good faith and fair dealing
because the Simmons opinion was “fatally flawed,”48 and (2) that Enbridge and the
Director Defendants exercised “dominion and control” over EEP GP and Enbridge
45 Id. ¶ 111. 46 Id. ¶ 118. 47 Id. ¶ 127. 48 Id.
21 Management to cause them to enter into the Transaction in “conscious disregard
for the best interests of EEP and its Public Unitholders.”49
Counts V and VI allege aiding and abetting breach of contract and tortious
interference, respectively, against Enbridge and the Director Defendants. Count
VII alleges breach of residual fiduciary duties against all Defendants, and Count
VIII seeks equitable relief in the form of reformation or rescission.
In their motions to dismiss, Defendants argue: (1) Counts II and IV fail
because the LPA displaced Defendants’ fiduciary duties with a contractual good
faith standard, Brinckerhoff has failed to plead bad faith and Defendants’ reliance
on Simmons’ Fairness Opinion establishes a conclusive presumption of good faith
under Section 6.10(b); (2) Counts I and III fail because the Special Tax Allocation
is just one component of a transaction wholly protected from challenge by multiple
exculpatory provisions within Article 6; (3) the breach of contract claims (counts I-
IV and VIII) against any defendant not a party to the LPA must be dismissed as
Delaware law does not permit breach claims against those not parties to the
contract; (4) Brinckerhoff cannot rely on the covenant of good faith and fair
dealing because it binds only parties to the contract, and because the LPA leaves
no “gaps” for the implied covenant to fill; and (5) Counts V through VIII fail
49 Id. ¶¶ 130–31.
22 because the Complaint does not state a claim for an underlying breach of contract
or otherwise plead facts that would justify the equitable relief requested.
II. ANALYSIS
Before turning to Defendants’ Rule 12(b)(6) motion, the Court must
consider whether Brinckerhoff has complied with Court of Chancery Rule 23.1’s
demand requirements with respect to his derivative claims. If demand is not
excused, then the derivative claims must be dismissed regardless of whether they
state otherwise actionable claims.
A. The Complaint Adequately Pleads Demand Futility50
To state derivative claims, the Complaint must “set forth with particularity
the effort, if any, [Brinckerhoff made] to secure initiation of the action by [EEP
GP] or the reasons for not making the effort.”51 In Brinckerhoff I, the Court held
that “it would have been futile for [Brinckerhoff] to demand that EEP, an entity
completely owned by Enbridge, sue Enbridge.”52 The Court went on to hold that
50 “When considering a motion to dismiss under Rule 23.1, this Court affords plaintiffs all reasonable inferences that logically flow from the particularized facts alleged in the complaint.” Postorivo v. AG Paintball Hldgs., Inc., 2008 WL 553205, at *4 (Del. Ch. Feb. 29, 2008). 51 6 Del. C. § 17-1003. See also Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000) (holding that a plaintiff must plead “particularized factual statements” demonstrating that demand is excused). 52 Brinckerhoff I, 2011 WL 4599654, at *7; accord Dean v. Dick, 1999 WL 413400, at *3 (Del. Ch. June 10, 1999) (“[W]here the only party against whom relief is sought is the 100% owner of the party that would be requested to prosecute the lawsuit-what could be closer to beholdenness?”).
23 Brinckerhoff had “alleged particularized facts creating a reasonable doubt that a
majority of EEP GP’s Board was independent of Enbridge and, thus, that it would
have been futile for Brinckerhoff to have demanded that EEP GP’s Board initiate
claims against Enbridge or its affiliates.”53
EEP’s ownership structure is now as it was in Brinckerhoff I. The
Complaint’s allegations regarding demand futility are practically the same as those
considered by the Court in Brinckerhoff I. With regard to demand futility,
therefore, nothing material has changed since Brinckerhoff I that would justify a
different outcome. Brinckerhoff has again pled sufficient facts to excuse demand
upon EEP GP.
Defendants argue that the Court should not stop its demand futility analysis
with the entity (EEP GP) but should continue the analysis by considering whether
demand upon the EEP GP Board would have been futile. The Court disagrees. As
this Court recently held, “an independent board directing the affairs of [a general
partner] would not, for these purposes, overcome the consequences to the general
partner entity of domination and control by [it’s controller’s] interests.”54
53 Brinckerhoff I, 2011 WL 4599654, at *7. 54 Gerber v. EPE Hldgs., LLC, 2013 WL 209658, at *13 (Del. Ch. Jan. 18, 2013). See also Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 1998 WL 832631, at *5 (Del. Ch. Nov. 10, 1998) (holding that, in the limited partnership context, demand futility is addressed against the general partner entity, not its board or its “internal decisionmaking apparatus”).
24 Therefore, the Complaint’s identification of “particularized factual statements”55
that allow a reasonable inference that EEP GP was not independent and free from
improper influence are sufficient to excuse the demand requirement.56
Even if the Court accepted Defendants’ argument that the Complaint must
allege futility with respect to EEP GP’s Board, the pled facts mandate the same
conclusion. Brinckerhoff alleges that six (a majority) of EEP GP’s directors were
conflicted at the time he filed the Complaint “by virtue of holding simultaneous
employment at both EEP GP and Enbridge and/or by being an overlapping director
or officer of EEP GP and Enbridge, and/or by being dependent on Enbridge or EEP
GP for their compensation.”57 Specifically, the Complaint alleges that England,
Bird, Harper, Whelen, and Jarvis, while serving as directors or officers of EEP GP,
also served as directors or officers of Enbridge.58 The Complaint alleges that Maki
55 Brehm, 746 A.2d at 254 (Del. 2000). 56 For instance, the Complaint alleges that “EEP GP and Enbridge Management’s Boards are composed of the same individuals, each of whom were appointed by and serve at the pleasure of Enbridge,” and that “EEP GP’s and Enbridge Management’s purportedly independent directors each had close ties to Enbridge.” Compl. ¶ 12. The Complaint then alleges that Connelly “has had a long-standing relationship with Enbridge’s Chairman, David Arledge,” Roberts resigned from the Boards of EEP GP and Enbridge Management [in March 2015] and was appointed to the board of Enbridge,” and Westbrook “served [from May 2007 to August 2008] on the Board of Directors of Synenco Energy Inc. . . . together with Patrick Donald Daniel, who, since 1994, was a senior executive officer of Enbridge.” Id. ¶¶ 28–30. 57 Pl.’s Answering Br. 61 (citing Compl. ¶ 76). 58 Compl. ¶ 77. See Brinckerhoff I, 2011 WL 4599654, at *7 (finding that a director’s service both on EEP GP’s board and as an officer or director of Enbridge constituted sufficient interestedness to render demand excused as to that director).
25 “joined Enbridge in 1986 and progressed through a series of accounting and
financial roles,” including Interim President of Gas Pipelines and other executive-
level roles in various Enbridge subsidiaries, and that he is employed and paid by
Enbridge Employee Services, Inc., Enbridge’s wholly owned subsidiary.59
Based on the foregoing, the Court is satisfied that the Complaint pleads
particularied facts to excuse demand under 6 Del. C. § 17-1003. Defendants’
motion to dismiss the derivative claims under Court of Chancery Rule 23.1 must
be denied.
B. The Complaint Fails to State Legally Viable Claims and Must Be Dismissed
1. The Rule 12(b)(6) Standard
On a motion to dismiss under Rule 12(b)(6), the Court accepts as true all
well-pled facts in the Complaint and reasonable inferences drawn therefrom, but is
not required to adopt “every strained interpretation of the allegations proposed by
the plaintiff.”60 The Court will dismiss a complaint pursuant to Chancery Court
59 Compl. ¶ 34. See also Brinckerhoff I, 2011 WL 4599654, at *7 (finding an EEP GP officer interested because he was “paid by EES, a company that Enbridge wholly owns”). All EEP, EEP GP, and Enbridge Management officers are employed by Enbridge Employee Services, Inc., a company solely owned by Enbridge. In fact, “[t]he Partnership, EEP GP, and Enbridge Management have no employees of their own.” Compl. ¶ 27. 60 Malpiede v. Townson, 780 A.2d 1075, 1082–83 (Del. 2001). See also Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs., LLC, 27 A.3d 531, 537 (Del. 2011) (confirming that complaints in Delaware may not be dismissed unless the plaintiff would 26 Rule 12(b)(6) “only where the court determines with ‘reasonable certainty’ that the
plaintiff could prevail on no set of facts that may be inferred from the well-pled
allegations in the complaint.”61
2. Giving Maximum Effect to the Principle of Freedom of Contract
Delaware limited partnerships, including MLPs, are governed by the
Delaware Revised Uniform Limited Partnership Act (the “DRULPA”),62 which
aims to “give maximum effect to the principle of freedom of contract and to the
enforceability of partnership agreements.”63 In keeping with this principle, the
DRULPA “recognizes [that] partners may modify fiduciary duties through
contract.”64 Indeed, 6 Del. C. § 17-1101(d) “allows MLPs to eliminate completely
a general partner’s fiduciary duties to common unitholders, subject only to the
limited protections of the covenant of good faith and fair dealing.” 65 While our
not be entitled to recover “under any reasonably conceivable set of circumstances susceptible of proof”). 61 Id. 62 In re Inergy L.P., 2010 WL 4273197, at *12 (Del. Ch. Oct. 29, 2010). 63 6 Del. C. § 17-1101(c); accord Allen v. Encore Energy P’rs, L.P., 72 A.3d 93, 100 (Del. 2013); Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 817 A.2d 160, 170 (Del. 2002) (“DRULPA’s ‘basic approach is to permit partners to have the broadest possible discretion in drafting their partnership agreements and to furnish answers only in situations where the partners have not expressly made provisions in their partnership agreement’ or ‘where the agreement is inconsistent with mandatory statutory provisions.’” (footnote omitted)). 64 In re Cencom Cable Income P’rs, L.P. Litig., 1996 WL 74726, at *4 (Del. Ch. Feb. 15, 1996); accord Inergy, 2010 WL 4273197, at *12. 65 Inergy, 2010 WL 4273197, at *12.
27 law’s contractarian deference “affords commercial parties the advantage of great
flexibility to privately order their affairs, . . . that flexibility can come at a cost.”66
Recognizing the “harsh”67 consequences that may result from such flexibility, the
Supreme Court recently reminded “investors in these agreements [to] be careful to
read th[e] agreements and . . . understand the limitations on their rights.”68 To that
end, investors in MLPs must weigh the risk associated with “[t]he near absence . . .
of any duties whatsoever to [the limited partnership’s] public equity holders” with
the “kind of returns a master limited partnership investment might yield.”69
Brinckerhoff’s claims are rich in allegations of wrongdoing that likely would
gain traction if the Defendant’s conduct were to be measured under traditional
corporate governance standards. His parsing of the LPA likewise would merit
detailed, sequential analysis of each of the interrelated provisions to evaluate his
claims of breach were his claims under the LPA straightforward breach of contract
66 Dieckman v. Regency GP LP, 2016 WL 1223348, at *11 (Del. Ch. Mar. 29, 2016). 67 Id. 68 The Haynes Family Trust v. Kinder Morgan G.P., Inc., 2016 WL 912184, at *1 (Del. Mar. 10, 2016) (citing Miller v. Am. Real Estate P’rs, L.P., 2001 WL 1045643, at *8 (Del. Ch. Sept. 6, 2001) (“This court has made clear that it will not [be] tempted by the piteous pleas of limited partners who are seeking to escape the consequences of their own decisions to become investors in a partnership whose general partner has clearly exempted itself from traditional fiduciary duties. The DRULPA puts investors on notice that fiduciary duties may be altered by partnership agreements, and therefore that investors should be careful to read partnership agreements before buying units.” (footnote omitted))). 69 Encore Energy P’rs, 2012 WL 3792997, at *13.
28 claims. The Complaint, however, presents neither a traditional breach of fiduciary
claim nor a straightforward breach of contract claim; the LPA’s clear and
unequivocal adoption of a good faith standard envelopes each of Brinckerhoff’s
claims. As discussed below, the Complaint’s failure to present well-pled
allegations of bad faith is fatal to all claims asserted therein.
3. Counts II and IV—The Complaint Fails to State a Claim that Defendants Breached Express or Implied Duties by Failing to Secure a Fair Price for the AC Interest
Brinckerhoff alleges that the Transaction was not “fair and reasonable”
under Section 6.6(e) because it was on terms “less favorable to the Partnership than
those generally being provided to or available from unrelated third parties.”70
Specifically, Brinckerhoff notes that the price paid by EEP for the AC Interest was
“hundreds of millions of dollars above fair value” and at no time did EEP GP,
Enbridge Management or Simmons determine that any comparable third-party
transaction (1) required Public Unitholders of the purchaser to absorb the seller’s
tax burden, (2) reserved to the seller valuable expansion rights associated with the
underlying transaction, or (3) financed the equity component of the transaction
with units consisting of rights similar to the Class E Units, as opposed to common
units.71 He also points to the fact that Simmons failed to consider the 2009 Sale
70 LPA § 6.6(e). 71 Compl. ¶¶ 102, 104.
29 when running its comparables analysis and failed to suggest that the Special
Committee “consider the cost to the Public Unitholders of the Special Tax
Allocation [or the exclusion from the Transaction of the expansion rights] when
evaluating the fairness of the [Transaction price].”72
In arguing that the Transaction is neither “fair” nor “reasonable” to the
Partnership, Brinckerhoff reminds the Court that, in a prior decision, the Court
interpreted Section 6.6(e) “as requiring something similar, if not equivalent, to
entire fairness review.”73 Brinckerhoff correctly observes that where a transaction
is required under the LPA to be “fair and reasonable,” the “fair and reasonable
nature of such transaction . . . shall be considered in the context of all similar or
related transactions.”74 He argues that consideration of the 2009 Sale is
indispensable to a proper review of the fairness of the Transaction under
Section 6.9(c) (requiring consideration of “all similar or related transactions”).75 In
light of these contractual standards, Brinckerhoff concludes, the Complaint’s
detailed description of Defendants’ role in causing EEP to sell the AC Interest
(minus the expansion rights) back to EEP GP for $200 million more than the 2009
72 Id. ¶¶ 66–69. In fact, Simmons’ opinion letter “did not mention the Special Tax Allocation[] or the exclusion of the expansion rights.” Id. ¶ 71. 73 Brinckerhoff II, 2012 WL 1931242, at *2; Compl. ¶ 102. 74 LPA § 6.9(c). 75 Brinckerhoff alleges that the Simmons “presentations to the Special Committee did not make any reference to the 2009 sale.” Compl. ¶ 66.
30 Sale, at a price that does not include the value of the Special Tax Allocation to EEP
GP and following a highly flawed Special Committee review, is more than
adequate to state a “claim that the [Transaction] price was not fair and reasonable
to the Partnership.”76
Defendants riposte that Brinckerhoff’s challenge to the fairness of the price
is not well-pled for two basic reasons: (1) Section 6.6(e) must be read together with
Section 6.8(a) which limits the Defendants’ liability to decisions made in bad faith,
and (2) the Defendants were entitled to a presumption of good faith. The Court
agrees.77
a. The LPA Requires Brinckerhoff to Plead Bad Faith
With Section 17-1101(c)’s express deference to the “principle of freedom of
contract” in mind, the Court’s “first task” in determining the nature and scope of
duties owed between investors and general partners in a limited partnership is to
construe the limited partnership agreement, if there is one.78 “The proper
interpretation of a contract, although analytically a question of fact, is considered a
76 Pl.’s Answering Br. 40–42. 77 To the extent Brinckerhoff’s claims against the defendants other than EEP GP sound in breach of contract, the claims fail as a matter of law as Delaware does not recognize breach of contract claims against non-parties to the contract. In re Kinder Morgan, Inc. Corporate Reorganization Litig., 2015 WL 4975270, at *5 (Del. Ch. Aug. 20, 2015) (holding that “only a party to a contract may be sued for breach of that contract” and dismissing claims of breach of a limited partnership agreement as to defendants other than the general partner (citation omitted)). 78 Encore Energy P’rs, 2012 WL 3792997, at *7.
31 question of law.”79 Before addressing the validity of Brinckerhoff’s claims,
therefore, it is appropriate first to construe the LPA. In so doing, the Court applies
general rules of contract interpretation,80 and seeks to interpret language
“consistently with past precedents interpreting identical language.”81 As noted,
several of the relevant provisions of the LPA already have been interpreted by this
Court and again de novo by our Supreme Court. The Court does not approach its
contract construction duties with a tabula rasa.
According to Section 6.6(e), EEP GP was authorized to approve the
Transaction, notwithstanding the acknowledged conflict of interest, if it determined
that the Transaction was “fair and reasonable to the Partnership.” When assessing
the fairness and reasonableness of the Transaction, EEP GP was to consider
comparable transactions to ensure that the terms being offered EEP were “no less
favorable . . . than those generally being provided to or available from unrelated
third parties.”82 While EEP GP was obliged to consider the interests of the
Partnership when determining whether to approve a transaction between EEP GP
79 W. Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, 2007 WL 3317551, at *9 (Del. Ch. Nov. 2, 2007), aff’d, 985 A.2d 391 (Del. 2009), as corrected (Nov. 30, 2009). 80 Cantera v. Marriott Senior Living Servs., Inc., 1999 WL 118823, at *3 (Del. Ch. Feb. 18, 1999) (“[I]t is . . . well settled that Delaware courts apply rules of contract interpretation to limited partnership agreements.”). 81 Encore Energy P’rs, 2012 WL 3792997, at *8 (“Where the relevant contractual language is identical, the Delaware Supreme Court and sound public policy instruct trial courts to interpret such language consistently from case to case.”). 82 LPA § 6.6(e)(iii).
32 and EEP, it was under no obligation and, in fact, was expressly relieved of any
obligation to consider the interest of Limited Partners.83
The LPA, however, “does not stop there”; through a series of interrelated
provisions, the LPA “broadly limits” the duties Defendants owe EEP and its
unitholders.84 These provisions, by their terms, are directed at the conduct of EEP
GP, but they also cloak Enbridge and Enbridge Management as “Affiliates” of EEP
GP85 and the directors and officers of EEP GP as “Indemnitees”86 with identical
protections.87
To be sure, Brinckerhoff is correct when he observes that EEP GP’s
authorization of the Transaction was subject to the requirement that the
Transaction be “fair and reasonable to the Partnership.”88 But Brinckerhoff misses
the mark when he urges the Court to consider the propriety of the Defendants’ role
in approving the Transaction only within the isolated framework of Section 6.6(e).
83 Id. § 6.9(a). See Brinckerhoff I, 2011 WL 4599654, at *8–9; In re Kinder Morgan, Inc., 2015 WL 4975270, at *7 (construing very similar language); Gelfman v. Weeden Invs., L.P., 792 A.2d 977, 986 (Del. Ch. 2001) (same). 84 Brinckerhoff I, 2011 WL 4599654, at *8. 85 LPA Article II; Brinckerhoff I, 2011 WL 4599654, at *8. 86 LPA Article II; Brinckerhoff I, 2011 WL 4599654, at *9. 87 Brinckerhoff I, 2011 WL 4599654, at *9 (holding that, when read together, Section 6.8(a) and the LPA’s definitions of “Indemnitee” and “Affiliate” extend the protections inherent in the “good faith” standard to all Defendants); accord Brinckerhoff III, 67 A.3d at 372. 88 LPA §6.6(e).
33 That argument was advanced in Brinckerhoff I and rejected. Instead, in
Brinckerhoff I, this Court considered Plaintiff’s claim that the defendants there
were liable for violating Section 6.6(e) in the broader context of the governance
provisions of the LPA and ultimately held that those provisions modified Section
6.6(e)’s “fair and reasonable” standard.89 To meet the standard set by Section 6.8
and Section 6.10(d), Plaintiff must “plead facts suggesting that EEP GP’s Board
acted in bad faith” in its determination that the Transaction was “fair and
reasonable to the Partnership.”90
Brinckerhoff’s final attempt to avoid having to plead bad faith rests on a
strained reading of Brinckerhoff II. Relying on dicta from that decision,
Brinckerhoff argues that, even assuming the Defendants did not act in bad faith,
they still violated the LPA because the “bad faith” standard in Section 6.9(a) of the
LPA does not modify Section 6.6(e)’s requirement that the terms of the
Transaction be “fair and reasonable.”91 This argument fails for two distinct
reasons.
89 2011 WL 4599654, at *9 (“[T]he only duty that EEP or its unit holders may successfully hold the Defendants monetarily liable for is a breach of the duty to act in good faith”). 90 Id. at *4; accord Brinckerhoff III, 67 A.3d at 372. 91 Brinckerhoff II, 2012 WL 1931242, at *2 (noting that the Court would not invoke Section 6.9(a)’s “bad faith” clause when construing Section 6.6(e) because Section 6.9(a) was modified by an “[u]nless otherwise expressly provided” clause).
34 First, in Brinckerhoff II, the Court concluded that Section 6.9(a)’s “bad
faith” standard did not displace Section 6.6(e)’s “fair and reasonable” standard
because “Defendants seem to have conceded for purposes of their motions to
dismiss that the ‘unless otherwise’ language applies to all of Article 6.9(a), and
thus, that Article 6.6(e) is not subject to Article 6.9(a).”92 After acknowledging the
Defendant’s apparent concession, however, the Court went on to construe
Section 6.9(a) as follows: “a plain reading of Article 6.9(a) arguably suggests that
the ‘unless otherwise’ language in Article 6.9(a) does not modify the ‘in the
absence of bad faith’ language, which appears several sentences later in that
article.”93 This construction of Section 6.9(a) comports with an objective reading
of the two provisions.
Second, and perhaps more importantly, Defendants need not rely upon
Section 6.9(a) to avail themselves of the LPA’s “good faith” standard. As the
Court held in Brinckerhoff I, and as the Supreme Court affirmed in Brinckerhoff
III, Section 6.8(a) works in tandem with other provisions in the LPA to ensure that
92 Id. Defendants have made no such concession here and, in fact, have argued persuasively that Brinckerhoff’s construction of Sections 6.6(e) and 6.9(a) is flawed. Reply Br. in Supp. of Defs.’ Mot. to Dismiss the Verified Class and Derivative Compl. 9- 10, n.4. 93 Brinckerhoff II, 2012 WL 1931242, at *2.
35 the Defendants “will not be liable to EEP or its unit holders for any actions taken
in good faith.”94
When the “Gordian knot of interrelated standards in different sections” of
the LPA is untied,95 Brinckerhoff is left with the difficult task of pleading facts that
allow an inference that Defendants acted in bad faith when they approved or
caused EEP to approve the Transaction. That is, he must plead facts that allow an
inference that “the decision to enter into the Transaction, under the circumstances,
[was] ‘so far beyond the bounds of reasonable judgment that it seems essentially
inexplicable on any ground other than bad faith.”96
b. Brinckerhoff Has Failed to Plead Bad Faith
As was true in Brinckerhoff I, Brinckerhoff’s allegations of bad faith fall
short. He has failed to plead facts that allow a reasonably conceivable inference
that the Transaction violated Section 6.6(e), much less an inference that the
Defendants acted in bad faith.
Upon receipt of Enbridge’s offer to sell the AC Interest, Enbridge
Management immediately formed a Special Committee comprised of independent
94 Brinckerhoff I, 2011 WL 4599654, at *9 (emphasis added); accord Brinckerhoff III, 67 A.3d at 372–73. 95 Norton v. K-Sea Transp. Partners L.P., 67 A.3d 354, 361 (Del. 2013). 96 Brinckerhoff III, 67 A.3d at 373.
36 directors to evaluate the Transaction and consider alternatives.97 The Special
Committee, in turn, engaged legal and financial advisors to assist in its evaluative
process. The materials attached to the Complaint, while offering only a narrow
window, reveal clearly that Simmons’ review was thorough.98 The Court accepts
the Complaint’s allegation that Simmons did not consider the 2009 Sale when
rendering its Fairness Opinion. But Simmons did consider twenty seven
comparable transactions announced between 2011 and 2014, and concluded that
the “[i]mplied transaction value to EBITDA multiple of 10.7x for the Alberta
Clipper is within the range of comparable pipeline transaction multiples reviewed
97 The Complaint alleges that Roberts, one of the three Special Committee members, was not independent because she was appointed in March 2015 as a director of Enbridge. The appointment of a subsidiary’s director to the parent’s board three months after she recommended approval of a transaction, however, is not sufficient evidence from which the Court may reasonably infer interestedness at the time the Special Committee was evaluating the Transaction. See Orman, 794 A.2d at 28–29 (“No case has been cited to me, and I have found none, in which a director was found to have a financial interest solely because he will be a director in the surviving corporation. To the contrary, our case law has held that such an interest is not a disqualifying interest.”). Further, the alleged personal connection to Enbridge of the remaining two special committee members, Compl. ¶¶ 28, 30, 79, similarly fails to rise to the level of interestedness. Zimmerman v. Crothall, 2012 WL 707238, at *13 (Del. Ch. Mar. 5, 2012), as revised (Mar. 27, 2012) (finding that “allegations of mere friendship and shared work experiences likely fall short of what is necessary to call into question [a director’s] independence” absent “financial ties, familial affinity, a particularly close or intimate personal or business affinity or . . . evidence that in the past the relationship caused the director to act non-independently vis-à-vis an interested director” (alteration in original) (quoting Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1051 (Del. 2004))). 98 Simmons Report at EEPLP000288.
37 by Simmons (approximately 10.0x to 12.0x).”99 Simmons also met multiple times
with the Special Committee and engaged in “[m]ultiple due diligence calls with
Enbridge . . . to discuss financial projections and Transaction tax treatment.”100
At the conclusion of its review, Simmons issued a Fairness Opinion in
which it recommended the Transaction to the Special Committee as fair to EEP
and its unitholders. Brinckerhoff’s conclusory allegations to the contrary are
insufficient to plead bad faith.101
c. The Defendants Are Entitled to a Presumption of Good Faith
Section 6.10(b) of the LPA provides that any act taken by EEP GP in
reliance on an advisor is “conclusively presumed to have been done . . . in good
99 Id. at EEPLP000321, EEPLP000323. See Brinckerhoff I, 2011 WL 4599654, at *10 (“The valuation methodology and comparable transaction analysis that an investment banker undertakes … are properly within the discretion of the investment banker.”). 100 Simmons Report at EEPLP000288. 101 As this Court observed in Brinckerhoff I, given the establishment of an independent special committee and its reliance on a financial advisor’s fairness opinion and independent legal counsel, any contrary result would invite the question: what would Enbridge have to do to be able to dispose of bad faith claims on a motion to dismiss? Would Enbridge be required, in analogy to In re John Q. Hammons Hotels Inc. S’holder Litig., 2009 WL 3165613 (Del. Ch. Oct. 2, 2009), to negotiate a transaction with an independent committee and have the transaction approved by a majority of the public unit holders? Requiring Enbridge to put in place those “robust procedural protections,” in order to be able to dispose of a bad faith claim on a motion to dismiss, would seem to rewrite the LPA when the Delaware General Assembly has explicitly stated that “[i]t is the policy of [Delaware’s Limited Partnership Act] . . . to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.” Brinckerhoff I, 2011 WL 4599654, at *10 n.39 (alterations in original).
38 faith.” EEP GP approved the Transaction in reliance upon Simmons’ Fairness
Opinion.102 It is entitled, therefore, to Section 6.10(b)’s presumption of good
faith.103
The express terms of Section 6.10(b) suggest that EEP GP alone is entitled
to the presumption of good faith. The only reasonable construction of the LPA,
however, suggests that Section 6.10(b)’s presumption of good faith radiates
beyond EEP GP to the other Defendants as well. As our Supreme Court has
explained, a plaintiff “cannot state a cognizable claim for relief against the other
defendants for causing [the general partner] to take an action that did not breach
[the general partner’s] duties under the LPA.”104 After acknowledging that Section
6.10(b)’s good faith presumption applies by its terms only to EEP GP, the Court in
Brinckerhoff I similarly noted that “[i]t may nevertheless be the case that if a
limited partnership agreement expressly permits a corporate general partner to take
certain action, . . . the board of that general partner cannot be found to have acted
102 Simmons arrived at its conclusions after evaluating twenty seven comparable transactions announced between 2011 and 2014, Simmons Report at EEPLP000323, analyzing alternative transaction structures and values “as projections and terms changed over the diligence period,” id. at EEPLP000288, holding multiple due diligence calls and meetings with Enbridge Management and the Special Committee, id.; Compl. ¶¶ 56–57, and making various presentations to the Special Committee. Simmons Report at EEPLP000288; Compl. ¶ 59. 103 Compl. ¶¶ 56–59; Simmons Report at EEPLP000288. See Brinckerhoff I, 2011 WL 4599654, at *9. 104 Norton, 67 A.3d at 368.
39 in bad faith for causing the general partner to take the expressly permitted
action.”105
The Court need not reach the breadth of Section 6.10(b), however, because
with or without the presumption, the Complaint has not alleged facts from which
the Court may draw a reasonably conceivable inference that EEP GP, EEP GP’s
Board, Enbridge Management or Enbridge acted in bad faith in connection with the
approval of the Transaction. Consequently, Defendants’ Motion to Dismiss
Counts II and IV must be granted.106
4. Counts I and III—The Complaint Fails to State a Claim that the Issuance of New Units and the Special Tax Allocation Violated Express or Implied Duties
Brinckerhoff has invoked multiple provisions of the LPA to support his
claim that the Defendants’ approval of the Special Tax Allocation violated express
and implied duties. First, he argues that Section 4.4(b), while authorizing EEP GP
to issue “additional Partnership Securities” and fix “allocations of items of
Partnership income” with respect to any newly issued Units, did not “allow EEP
GP to adversely impact the rights of the existing unitholder[s] by increasing the
obligations of those unitholders.”107 With regard to the Transaction specifically,
105 Brinckerhoff I, 2011 WL 4599654, at *9. 106 See Brinckerhoff III, 67 A.3d at 373 (emphasizing that “the Court of Chancery did not rest its decision solely on the LPA’s conclusive presumption that [EEP GP] acted in good faith”). 107 Pl.’s Answering Br. 25 (emphasis added). 40 Brinckerhoff construes Section 4.4(b) to permit an allocation of income to the
newly-created Class E units but to prohibit an allocation of income from the Class
E Unitholder(s) to the existing Public Unitholders.
Second, he argues that the Special Tax Allocation is a “special allocation[]
for federal income tax purposes,”108 and therefore “subject to the provisions of
Section 5.2(c).”109 Section 5.2(c), in turn, authorizes EEP GP to “make special
allocations for federal income tax purposes of income . . . or deductions,” but only
to the extent such allocations “would not have a material adverse effect on the
Partners [or] the holders of any class or classes of Units.”110 The Special Tax
Allocation violates Section 5.2(c), Brinckerhoff contends, because it “shifts over
$500 million of taxable income from EEP GP to the Public Unitholders over a 22
year period, and then continues, at $12.4 million per year, in perpetuity.”111
Third, Brinckerhoff argues that the Special Tax Allocation violates
Section 15.3(b) by impermissibly “enlarg[ing] the Limited Partners’
obligations.”112 Specifically, he argues that it is “plainly ‘reasonably conceivable’
that plaintiff will prove that the Special Tax Allocation” breached Section 15.3(b)
108 LPA § 5.2(c). 109 Pl.’s Answering Br. 26. 110 LPA § 5.2(c). 111 Pl.’s Answering Br. 27. 112 Id. at 30.
41 by “negat[ing] most of the accretion to the Public Unitholders [they] would
otherwise obtain from the Transaction.”113
When viewing the Special Tax Allocation in isolation, apart from the LPA’s
governance provisions, Brinckerhoff’s construction of Sections 4.4(b), 5.2(c) and
15.3(b) provide a platform on which “reasonably conceivable” claims of breach
might be constructed. Thus, Brinckerhoff has expended much energy to separate
the Special Tax Allocation from the broader Transaction, presumably anticipating
that the Court might view the Defendants’ approval of the Transaction with favor,
much as the Court viewed the defendants’ approval of the 2009 Sale in
Brinckerhoff I. To support his contention that the Special Tax Allocation was
separate from the Transaction, Brinckerhoff stresses that the Special Tax
Allocation was not disclosed with the press release accompanying the issuance of
the Class E Units,114 was not valued by Simmons and constitutes “additional
consideration paid to the general partner . . . by the limited partners.”115
113 Id. at 22. 114 Oral Arg. Tr. 43. 115 Id. at 35. Of course, Simmons was under no duty to consider the Special Tax Allocation separate and apart from the other consideration being offered to EEP in the Transaction. See Norton, 67 A.3d at 367–68 (holding that the investment banker engaged by the conflicts committee was not required to evaluate one element of consideration plaintiff alleged was not fair to the partnership “separately from the remaining consideration”); In re Kinder Morgan, Inc., 2015 WL 4975270, at *8 (finding no breach where the transaction at issue included, in part, “the transfer of significant value in the form of tax benefits from the limited partners to the controller”); In re K-Sea Transp. 42 Brinckerhoff’s attempt to distance the Special Tax Allocation from the
Transaction falters under the weight of his own Complaint and the Simmons report
upon which he has relied to support his claims. At the very outset of his Complaint
Brinckerhoff acknowledges that the Special Tax Allocation was adopted “as part of
the Transaction.”116 This characterization comports with Simmons’ view of the
Special Tax Allocation; Simmons saw the Special Tax Allocation as a central
element of the Transaction the purpose of which was to “make the transaction for
[EEP GP] cash neutral.”117 And Simmons leaves no doubt in its Fairness Opinion
that it considered the Special Tax Allocation when reaching its conclusion that the
Transaction as a whole was “favorable” to EEP and the Public Unitholders.118
Having determined that the Special Tax Allocation is an integral component
of the overall Transaction, the Court must apply Section 6.8(a)’s good faith
standard when reviewing the propriety of Defendants’ conduct in adopting or
causing EEP to adopt the implementing amendment to the LPA.119 Against the
backdrop of the good faith standard, to state actionable claims against the
Defendants, Brinckerhoff must plead not only a breach of the LPA’s provisions
Partners L.P., 2011 WL 2410395, at *5–6 (Del. Ch. June 10, 2011) (financial advisor not required to consider fairness of each separate component of the deal). 116 Compl. ¶ 2. 117 Id.; Simmons Report at EEPLP000317. 118 Simmons Report at EEPLP000315-18, EEPLP000321. 119 See supra text accompanying note 90.
43 relating to the issuance of new securities and allocation of Partnership income but
also that such breaches were committed in bad faith. Stated differently, Section
6.8(a)’s good faith standard modifies Section 5.2(c)’s “material adverse effect”
provision and Section 15.3(b)’s “enlarge the obligations” provision.
Analyzing EEP GP’s approval of the Special Tax Allocation in this context,
Brinckerhoff’s attempts to plead actionable violations of Sections 5.2(c) and
15.3(b) unravel.120 Brinckerhoff has not even attempted to plead facts from which
the Court may reasonably infer that EEP GP, in bad faith, created a “material
adverse effect on the Partners [or] the holders of any class or classes of Units,”121
or in bad faith “enlarge[d] the obligations of any Limited Partner.”122 In the
absence of allegations of a bad faith breach of the LPA—for example, well pled
allegations that Simmons or the Special Committee regarded the Special Tax
Allocation as harmful to the Partnership or the Public Unitholders in a manner that
120 The Court undertakes this analysis assuming the validity of Brinckerhoff’s construction of Section 4.4(b), i.e., that EEP GP was not expressly authorized to allocate income from newly issued units to existing units. The absence of express authorization in Section 4.4(b) to allocate income to existing units, however, does not ipso jure require a finding that doing so would result in a breach of the LPA. This is particularly so when other provisions of the LPA—e.g. Sections 4.4(d), 5.2(c) and 15.1(f)—suggest that EEP GP was authorized to implement the Special Tax Allocation. The Court need not go down this road, however, given its determination that the Special Tax Allocation is a component of the properly authorized Transaction. 121 LPA § 5.2(c). 122 Id. § 15.3(b).
44 rendered the Transaction unfair to either—Defendants are shielded from liability
for any adverse effect or obligation created by the Special Tax Allocation.123
To the contrary, however, EEP GP relied on its Special Committee which
studied the Transaction and properly considered Simmons’ Fairness Opinion. That
Fairness Opinion treated the Special Tax Allocation as a component of the
Transaction and described the Transaction as “favorable.”124 Analyzed in this
context, Brinckerhoff has failed to plead that EEP GP’s adoption of the Special
Tax Allocation violated the LPA. Accordingly, Defendants’ Motion to Dismiss
Counts I and III must be granted.125
123 This Court recently held that a provision nearly identical to Section 6.10(d) of the LPA “eliminate[d] all common law fiduciary duties and substitute[d] in their place a contractual duty under which the General Partner ‘must reasonably believe that its action is in the best interest of, or not inconsistent with, the best interests of the Partnership.’” In re Kinder Morgan, Inc., 2015 WL 4975270, at *5. The Court concluded that the provision “establishes ‘a free-standing, enigmatic standard of good faith’ which requires ‘a reasonable belief’ on the part of the General Partner.” Id. (citation omitted). Further, where an LPA exculpates “all the Defendants” so long as they “acted in ‘good faith,’ . . . in order to state a claim that withstands Rule 12(b)(6), [the plaintiff] must allege facts supporting an inference that [the general partner] had reason to believe that it acted inconsistently with the Partnership’s best interests.” Norton, 67 A.3d at 362. 124 See supra text accompanying note 118. 125 In response to this conclusion, one might reasonably ask whether EEP GP, as a practical matter, is relieved of all obligations to act in compliance with the detailed provisions of a limited partnership agreement that comprehensively address nearly all aspects of the relationship between the general and limited partners. The short answer to that question is no. EEP GP has committed to the Public Unitholders that it will act in good faith. In the context of the broader Transaction, Brinckerhoff has failed to allege well-pled facts that EEP GP and its Affiliates acted in bad faith by determining that the Special Tax Allocation, as a component of consideration, violated Sections 5.2(c) or 15.3(b). In isolation, however, separated from the overall benefits of the Transaction, the 45 5. Plaintiff Cannot Invoke the Implied Covenant of Good Faith and Fair Dealing
Brinckerhoff accurately points out that the LPA’s contractual limitations of
liability cannot, as a matter of law, extend to claims that Defendants breached the
implied covenant of good faith and fair dealing.126 Nevertheless, Plaintiff’s
implied covenant claims fail as a matter of law.127
“[T]he implied covenant of good faith and fair dealing . . . is ‘a limited and
extraordinary legal remedy’ that addresses only events that could not reasonably
have been anticipated at the time the parties contracted.”128 “When presented with
an implied covenant claim, a court first must engage in the process of contractual
construction to determine whether there is a gap that needs to be filled.”129 The
implied covenant will not “override the express terms of the contract,” nor will it
replicate fiduciary review, particularly when the contract supplants traditional
governance structures.130
Special Tax Allocation may well have provided a factual predicate for a well-pled claim of breach that would survive a Rule 12(b)(6) challenge. That is not the case sub judice. 126 6 Del. C. § 1101(d). 127 The implied covenant does not extend beyond the parties to the contract. Thus, to the extent it is applicable at all, only EEP GP may be held liable for a breach of the implied covenant. See Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010); Encore Energy P’rs, 2012 WL 3792997, at *12 n.84. 128 In re Atlas Energy Res., LLC, 2010 WL 4273122, at *13 (Del. Ch. Oct. 28, 2010). 129 Allen v. El Paso Pipeline GP Co., 2014 WL 2819005, at *10 (Del. Ch. March 28, 2014). 130 Encore Energy P’rs, 2012 WL 3792997, at *13.
46 Here, the LPA contemplates each breach alleged in the Complaint, including
the scope of duties owed in connection with conflicted transactions and the extent
to which EEP GP can cause EEP to allocate income among the Unitholders for tax
purposes. Although the Supreme Court has held that a plaintiff’s identification of
a contractual gap is not an absolute prerequisite to sustain an implied covenant
claim where one party “acted arbitrarily or unreasonably, thereby frustrating the
fruits of the bargain,”131 on these facts, where the LPA specifically addresses the
challenged conduct and expressly eliminates fiduciary duties, the Court can discern
no reasonable basis to allow the implied covenant claims to stand.132
6. Count VII—The Complaint Fails to State a Claim for Breach of Residual Fiduciary Duties
Brinckerhoff contends that because Section 6.10(d) extends its presumption
of good faith only to EEP GP, the remaining Defendants are still subject to residual
131 Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 421 (Del. 2013), overruled on other grounds by Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del. 2013). 132 See Encore Energy P’rs, 2012 WL 3792997, at *13 (observing that “the ‘right to enter into good and bad contracts’ makes the implied covenant an ersatz substitute for the warning ‘caveat emptor.’ Investors apprehensive about the risks inherent in waiving the fiduciary duties of those with whom they entrust their investments may be well advised to avoid master limited partnerships,” and then holding that ‘the elimination of fiduciary duties implies an agreement that losses should remain where they fall” (footnote omitted)); Brinckerhoff I, 2011 WL 4599654, at *11 (finding that the LPA addressed each of Brinckerhoff’s claims regarding the special committee process, the conflicted nature of the 2009 Sale and, more generally, the standard by which the General Partner’s conduct would be measured such that there was no basis to rewrite the agreement with implied covenants); Lonergan v. EPE Hldgs., LLC, 5 A.3d 1008, 1020 (Del. Ch. 2010) (holding that the express terms of the operative agreement “dispose[] of the plaintiff’s contention that [the] implied covenant requires an ‘adequate and fair sales process’”).
47 fiduciary duties. Even if he is correct in his construction of Section 6.10, and there
is good reason to conclude that he is not, Brinckerhoff’s argument still fails to
account for the various additional provisions of the LPA that allow all Defendants
to avail themselves of the contractually established good faith standard.133
Brinckerhoff’s attempt to mine a residual fiduciary duty claim from a
comprehensive LPA that expressly displaces them is unavailing. Count VII must
be dismissed.134
7. Counts V and VI—The Complaint Fails to State Claims for Aiding and Abetting a Breach of the LPA or Tortious Interference with the LPA
Counts V and VI fail for two basic reasons. First, as a matter of law,
Delaware does not recognize a claim for aiding and abetting a breach of
contract.135 Second, Brinckerhoff cannot state a claim for aiding and abetting a
breach or tortious interference with contract when he has failed to state a claim for
an underlying breach of the LPA.136 Counts V and VI must be dismissed.
133 See supra notes 103–06, 123, 126 and accompanying text. 134 Norton, 67 A.3d at 368–69 (dismissing residual fiduciary duty claim). 135 Allen, 2014 WL 2819005, at *20 (holding that where a limited partnership agreement “establishes a purely contractual relationship, a theory of aiding and abetting a breach of contract is unavailable”); accord Gerber, 2013 WL 209658, at *11 (“Delaware law does not recognize a claim for aiding and abetting a breach of contract,” and therefore “claims—if they are asserted—for aiding and abetting a breach of the LPA, or a covenant implied through the LPA, must also fail”). 136 Gerber v. Enter. Prods. Hldgs., LLC, 2012 WL 34442, at *13 (Del. Ch. Jan. 6, 2012) (“A claim for tortious interference with a contract, as well as a claim for aiding and abetting a breach of duties, requires an underlying breach.”), aff’d in part, rev’d in part, 48 8. Count VIII—The Complaint Fails to State Claims for Rescission or Reformation
With respect to his request for equitable remedies, Brinckerhoff argues
(correctly) that while Section 6.8(a) shields Defendants from monetary damages
for acts taken in good faith, it “does not preclude an award of equitable relief
against any person, including EEP GP, Enbridge Management, or Enbridge.”137
The fact that the LPA’s exculpatory provisions do not bar the claims, however,
does not excuse Brinckerhoff from supporting his claims for reformation or
rescission with well-pled facts that meet the requisite elements of these remedies.
Here again, the Complaint falls short.
Brinckerhoff requests that the Court equitably reform the Transaction “to
reflect a fair price for the AC Interest . . . or eliminate the amendment to
Section 5.2(i) in the LPA.”138 As noted in Brinckerhoff II, however, reformation is
a remedy meant to address very limited and exceptional circumstances:
The reformation remedy that Brinckerhoff seeks . . . is rarely sought and obtained. Generally, “[r]eformation is appropriate only when the contract does not represent the parties’ intent because of fraud, mutual
67 A.3d 400 (Del. 2013). See also Brinckerhoff I, 2011 WL 4599654, at *11 (noting that “a claim for tortious interference with a contract[] requires an underlying breach,” and concluding that because the LPA was not breached, Brinckerhoff’s aiding and abetting and tortious interference claims fail as a matter of law). 137 Pl.’s Answering Br. 32. 138 Compl. ¶ 175; accord Pl.’s Answering Br. 32.
49 mistake or, in exceptional cases, a unilateral mistake coupled with the other parties’ knowing silence.”139
Thus, to state a claim for reformation, Brinckerhoff was required to plead
either fraud, mutual mistake or unilateral mistake with knowing silence.140 No
such facts have been pled here. While Brinckerhoff places much weight on the
Court’s recognition in Brinckerhoff II of its “broad remedial powers” to reform an
agreement,141 the Court cannot and will not do so absent well-pled allegations that
the contract the parties agreed to does not reflect the parties’ actual agreement.142
Brinckerhoff’s request for reformation fails as a matter of law.
Plaintiff’s rescission claim suffers a similar fate. This Court has jurisdiction
to hear a rescission action when
damages are not available; when the amount of damages [is] not ascertainable; or when damages are inadequate to do justice. When a
139 Brinckerhoff II, 2012 WL 1931242, at *3 (alteration in original) (footnote omitted) (quoting James River-Pennington Inc. v. CRSS Capital, Inc., 1995 WL 106554, at *7 (Del. Ch. Mar. 6, 1995)). 140 Universal Compression, Inc. v. Tidewater, Inc., 2000 WL 1597895, at *7 (Del. Ch. Oct. 19, 2000) (“[T]o state a claim for reformation of a contract, a party must allege that the contract as written does not represent the parties’ actual intent, because of either fraud, mutual mistake or a unilateral mistake coupled with the other party’s knowing silence or concealment.”). 141 Pl.’s Ansewring Br. 35 (quoting Brinckerhoff II, 2012 WL 1931242, at *3). 142 Carey v. Brittingham, 1992 WL 71509, at *2 (Del. Ch. Apr. 6, 1992) (“Reformation is appropriate only where there is clear and convincing evidence that, because of mutual mistake, a written instrument does not properly reflect the agreement of the parties.”), aff’d, 615 A.2d 530 (Del. 1992).
50 plaintiff, however, has a full, adequate and complete remedy at law, equity will not ordinarily interfere to rescind a contract.143
Even if Brinckerhoff had met his burden to plead facts that “explain how the Court
could restore the parties to the positions they were in before they entered into the
[Transaction],”144 which he has not, the Complaint fails to explain or otherwise
reveal why money damages would be “inadequate to do justice.”145 The Complaint
merely states, in conclusory fashion, that “EEP’s and the Public Unitholders’
damages may be insufficient to make EEP and the Public Unitholders whole.”146
This unsupported allegation is hardly adequate to justify a wholesale undoing of
the Transaction. Count VIII must be dismissed.
III. CONCLUSION
The LPA contains broad protections for EEP GP, its Affiliates and other
Indemnitees. These protections, and the enforcement of them as has occured here,
harmonize well with the DRULPA’s policy “to give maximum effect to the
principle of freedom of contract and to the enforceability of partnership
agreements.”147 Pursuant to the LPA, Brinckerhoff was obliged to state well-pled
facts that would allow a reasonable inference that Defendants acted in bad faith.
143 Russell v. Universal Homes, Inc., 1991 WL 94357, at *2 (Del. Ch. May 23, 1991). 144 Brinckerhoff II, 2012 WL 1931242, at *4. 145 Russell, 1991 WL 94357, at *2. 146 Compl. ¶ 173 (emphasis added). 147 6 Del. C. § 17-1101(c).
51 Because he has failed to do so, and has failed to support his other claims with
allegations that demonstrate a reasonably conceivable basis for recovery,
Defendants’ Motion to Dismiss is GRANTED. An appropriate order accompanies
this Memorandum Opinion.
Related
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