Brinckerhoff v. Enbridge Energy Co., Inc., C.A. No. 11314 (Del. Mar. 20, 2017) (Seitz, J.)
In this case involving a master limited partnership, the Delaware Supreme Court limited the reach of generalized contractual modifications of fiduciary duties. The Court also adopted a less stringent test for bad faith conduct, departing from the standard it had announced just four years ago in Brinckerhoff v. Enbridge Energy Co., Inc. (Brinckerhoff III), 67 A.3d 369 (Del. 2013) when considering the same limited partnership agreement (“LPA”).
This is the Delaware courts’ fifth opinion about the joint venture between Enbridge, Inc. (“Enbridge”) and Enbridge Energy Partners, L.P. (“EEP”). Enbridge is the ultimate parent of Enbridge Energy Company, Inc. (“EEP GP”), which is the general partner of EEP. In 2011, Brinckerhoff, who is a public investor in EEP, challenged the terms of EEP’s sale of an interest in the Alberta Clipper petroleum pipeline project to Enbridge. See Brinckerhoff v. Enbridge Energy Co., Inc. (Brinckerhoff I), 2011 WL 4599654 (Del. Ch.); Brinckerhoff v. Enbridge Energy Co., Inc. (Brinckerhoff II), 2012 WL 1931242 (Del. Ch.); and Brinckerhoff III. In the present dispute, Brinckerhoff challenged the terms of Enbridge’s sale of its Alberta Clipper stake back to EEP. See Brinckerhoff v. Enbridge Energy Co., Inc. (Brinckerhoff IV), 2016 WL 1757283 (Del. Ch.).
Brinckerhoff alleged that the terms EEP agreed to in purchasing Enbridge’s interest in the Alberta Clipper project violated several provisions of the LPA, including Section 6.6(e), which requires “transactions with affiliates” to be “fair and reasonable to the Partnership.” The Court of Chancery dismissed the complaint. Adhering to the principles outlined in Brinckerhoff III, the Court of Chancery focused on Section 6.10(d) of the LPA, which eliminated EEP GP’s default fiduciary duties, and substituted a duty to act in good faith (i.e., in a manner “reasonably believed by the General Partner to be in the best interests of the Partnership”). The Delaware Supreme Court acknowledged that the court below “did its best to attempt to reconcile complex contractual provisions and confusing precedent.” Nevertheless, the Court of Chancery erred in holding that the generalized good faith standard of Section 6.10(d) modified or enveloped LPA provisions that impose separate, specific, affirmative obligations, such as the “fair and reasonable” standard of Section 6.6(e).
The Court explained that Section 6.10(d) “is a general standard of care that operates in the spaces of the LPA without express standards.” Accordingly, under “settled rules of contract interpretation” favoring specific over general provisions, the Section 6.10(d) good faith standard should not have displaced the more specific standard of conduct contained in Section 6.6(e), which expressly addressed the situation in this case: a transaction with an affiliate. For similar reasons, the standards contained Section 6.9(a) (addressing more generic “conflict transactions”) and Section 6.8(a) (exculpating good faith breaches of the LPA) did not apply to the LPA breach that Brinckerhoff alleged. The Court also observed that the statutes governing alternative entities support the strict interpretation of operating agreement provisions: “[P]recisely because the Delaware Revised Uniform Limited Partnership Act (“DRULPA”) allows LPAs – like that of the Enbridge LPA – to eliminate fiduciary duties, it is essential that unitholders be able to hold the GP accountable for not complying with the terms of the LPA.”
Applying the Section 6.6(e) fair and reasonable standard, the Court found that Brinckerhoff’s complaint stated a claim. The Court then turned to the effect of the LPA’s exculpatory provision, which shields EEP GP from liability for monetary damages arising from actions taken in good faith. In Brinckerhoff III, the Delaware Supreme Court relied on “one of the most demanding corporate law standards” to define “bad faith” for purposes of an exculpatory clause. The Brinckerhoff III Court considered a bad faith claim similar to a corporate law waste claim, that is, an action “so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.” It was that “rigorous pleading standard” that the Court of Chancery used when evaluating, and dismissing, the Brinckerhoff IV complaint.
On appeal, the Delaware Supreme Court held that its approach in Norton v. K-Sea Transp. Partners, L.P., 67 A.3d 354 (Del. 2013) was superior to that of Brinckerhoff III. In Norton, the Court interpreted an exculpatory clause by defining “good faith” to mean “a reasonable belief that the action taken is in, or not inconsistent with, the best interests of the Partnership.” The Court explained, “We believe the approach taken in Norton interpreting essentially the same exculpatory language is more faithful to the specific language of the Enbridge LPA, and does not rely on extra-contractual notions of waste and a heightened pleading burden to plead bad faith.” The Court further noted that regardless of the effect of the exculpatory clause, the Court of Chancery has broad powers to craft an equitable remedy if EEP GP is found liable.
The Court also rejected EEP GP’s attempt to establish a conclusive presumption that it acted in good faith because it proceeded with the transaction after receiving a fairness opinion from a financial advisor. Under Section 6.10(b), EEP GP is entitled to a conclusive presumption of good faith for actions taken in reasonable reliance upon professional or expert advice. The Court held that whether EEP GP reasonably relied upon the fairness opinion was a fact question requiring further discovery. The Court seemed especially skeptical, noting that, according to the complaint, EEP GP’s financial advisor became involved in the transaction in the late stages, after “the financial terms were fully baked.”