Brinckerhoff v. Enbridge Energy Co., Inc., C.A. No. 5526-VCN (Del. Ch. Sept. 30, 2011) (Noble, V.C.)
In this memorandum opinion, the Court of Chancery dismissed breach of fiduciary duty claims because the plaintiff failed to allege facts suggesting that the defendants acted in bad faith, which the Court found was required to impose liability on the defendants under the limited partnership agreement. In addition, the Court applied the two-pronged Tooley standard for determining whether a limited partner’s claims were derivative or direct.
Plaintiff Peter Brinckerhoff (“Brinckerhoff”) was the holder of limited partner units in Enbridge Energy Partners, L.P., a publicly traded Delaware master limited partnership (“EEP”). EEP was managed by Enbridge Energy Company, Inc., a Delaware corporation (“EEP GP”), which delegated the power and authority to manage EEP to Enbridge Management, a Delaware limited liability company (“Enbridge Management”). EEP GP, in turn, was wholly owned by Enbridge, Inc., a Canadian corporation (“Enbridge”), which also owned Enbridge Employee Services, Inc., a Delaware corporation (“EES”), which employed all of the employees at EEP, EEP GP, and Enbridge Management.
In 1991, EEP was formed to own and operate a pipeline system extending from Northern Alberta Canada through the Great Lakes to Eastern Canada. More recently, EEP conceived of the Alberta Clipper project (the “ACP”) that consisted of the construction and operation of a $1.2 billion pipeline from Canada to Wisconsin. Soon thereafter, Enbridge approached EEP with a joint venture agreement (the “JVA”) whereby Enbridge and EEP would split profits from the ACP.
After receiving the JVA proposal, EEP GP’s board of directors (the “EEP GP Board”) formed a special committee to determine whether the JVA was fair and reasonable to EEP and its unitholders. The special committee hired legal advisors and Tudor Pickering Holt & Co. (“Tudor”) as its financial advisor. Tudor opined that the terms of the JVA were representative of those that EEP would have obtained in an arm’s length transaction. After Tudor rendered its opinion, the special committee recommended that EEP proceed with the JVA. The EEP GP Board accepted the recommendation and approved the deal on July 17, 2009.
Following the approval, Brinckerhoff filed a complaint both derivatively, on behalf of EEP, and directly, on behalf of the EEP unitholders. The complaint alleged that EEP GP, the EEP GP Board, Enbridge Management, Enbridge, and EES (collectively the “Defendants”) breached their duties under EEP’s limited partnership agreement (the “LPA”) and the implied covenant of good faith and fair dealing by causing EEP to enter into a financially unfair and unreasonable deal. In response, the Defendants filed a motion to dismiss pursuant to Court of Chancery Rule 12(b)(6) arguing that the complaint failed to allege facts entitling Brinckerhoff to relief.
Relying on the standard outlined in Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), the Court first found that Brinckerhoff’s claims were derivative, not direct. Under Tooley, whether a plaintiff’s claim is derivative or direct depends on (1) who suffered the alleged harm and (2) who would receive the benefit of a remedy. Here, because the alleged harm was against EEP and any remedy would go to EEP as reimbursement for an unfair and unreasonable deal, the Court determined that the claims were derivative.
Brinckerhoff argued, however, that under Brinckerhoff v. Texas Eastern Products Pipeline Co., L.L.C., 986 A.2d 370, 383 (Del. Ch. 2010) (“Teppco”), a partner of a limited partnership has standing to enforce a limited partnership agreement directly where the defendants acted in direct violation of the agreement. The Court, however, interpreted Teppco differently. According to the Court, Teppco stands for the proposition that when a plaintiff pursues a derivative action on behalf of a limited partnership and that partnership is about to merge into another entity, the limited partners may have standing to bring their claims directly. Here, however, the transaction did not extinguish Brinckerhoff’s claims, leading the Court to reject his argument.
The Court then found that Brinckerhoff properly alleged demand futility as required under Section 17-1003 of the Delaware Revised Uniform Limited Partnership Act (“DRULPA”). Under Section 17-1003, a complaint “shall set forth with particularity the effort, if any, of the plaintiff to secure initiation of the action by a general partner or the reasons for not making the effort.” Here, the Court noted that it would have been futile for Brinckerhoff to demand EEP, an entity completely owned by Enbridge, to sue Enbridge. Moreover, the Court found that Brinckerhoff alleged particularized facts creating a reasonable doubt that a majority of the EEP GP Board was independent of Enbridge. The Court stated that a board member is not independent if the member is “beholden” to another such that the member’s decision would not be based on the merits of the subject before her. The Court found that the complaint alleged facts suggesting that four of the seven board members of EEP GP were beholden to Enbridge. Specifically, Brinckerhoff alleged that one EEP GP Board member was also a director of Enbridge, two other members were executive officers of Enbridge, and one other member was an executive officer of EEP GP who was paid by EES, a company wholly owned by Enbridge. Therefore, the Court held that the complaint created a reasonable doubt that a majority of the EEP GP Board was independent. As such, demand was futile and Brinckerhoff satisfied the Section 17-1003 requirement.
The Court then discussed what duties EEP GP, the EEP GP Board, Enbridge Management, Enbridge, and EES owed to EEP and its unitholders. First, the Court held that EES owed no fiduciary duties to EEP because Brinckerhoff failed to allege that EES exercised any control over EEP. Quoting In re USACafes, L.P. Litigation, 60 A.2d 43 (Del. Ch. 1991), the Court stated that the principle of fiduciary duty is “that one who controls property of another may not, without implied or express agreement, intentionally use that property in a way that benefits the holder of the control to the detriment of the property or its beneficial owner.” Therefore, the Court reasoned, “if an entity does not exercise control over partnership property, then there is no reason for the Court to believe that the entity will use partnership property to the partnership’s detriment.”
To the extent EEP GP, the EEP GP Board, Enbridge Management, and Enbridge owed fiduciary duties to EEP and its unitholders, the Court found that the LPA modified their duties so as to only require them to act in good faith. Further, with respect to EEP GP, the Court found that the LPA provided that EEP GP would be presumed to have acted in good faith if it made decisions in reliance on expert advice. Here, the Court found that this presumption existed because EEP GP relied on Tudor’s expert opinion before approving the JVA. As a result, Brinckerhoff failed to allege facts suggesting that EEP GP breached its duties to EEP and its unitholders.
With respect to the EEP GP Board, Enbridge Management, and Enbridge, the Court found that Brinckerhoff failed to allege that they acted in bad faith and dismissed the breach of duty claims against them as well. The Court noted that it was an open question concerning the extent to which the EEP GP Board could even be found to have acted in bad faith by causing EEP GP to act when EEP GP itself was entitled to a presumption of good faith under the LPA. However, as the Court found that Brinckerhoff failed to allege an act of bad faith, the Court determined that it did not need to resolve the issue in order to dismiss the claims against the EEP GP Board.
Finally, the Court held that EEP GP was the only defendant bound by the implied contractual covenant of good faith and fair dealing because it was the only defendant who was an actual party to the LPA. The implied covenant, the Court noted, only protects parties from events that could not reasonably have been anticipated at the time the parties contracted. Here, the Court found that at the time the parties entered into the LPA, the parties thought about related party transactions and EEP GP’s reliance on expert opinions. As such, the Court dismissed the breach of implied covenant claim against EEP GP.