In Re: El Paso Pipeline Partners, L.P. Derivative Litigation

EFiled: Jun 12 2014 01:00PM EDT
Transaction ID 55583898
Case No. 7141-VCL

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE: EL PASO PIPELINE PARTNERS, ) C.A. No. 7141-VCL
L.P. DERIVATIVE LITIGATION )

MEMORANDUM OPINION

Date Submitted: April 16, 2014
Date Decided: June 12, 2014

Jessica Zeldin, ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware;
Jeffrey H. Squire, Lawrence P. Eagel, Raymond A. Bragar, BRAGAR EAGEL &
SQUIRE, PC, New York, New York; Attorneys for Plaintiffs.

Peter J. Walsh, Jr., Brian C. Ralston, Matthew F. Davis, Samuel L. Closic, POTTER
ANDERSON & CORROON LLP, Wilmington, Delaware; Attorneys for Defendants El
Paso Pipeline GP Company, L.L.C., El Paso Corporation, Douglas L. Foshee, John R.
Sult, Ronald L. Kuehn, Jr., D. Mark Leland, Arthur C. Reichstetter, William A. Smith,
and James C. Yardley.

Lewis H. Lazarus, Thomas E. Hanson, Jr., Courtney R. Hamilton, MORRIS JAMES
LLP, Wilmington, Delaware; Attorneys for Nominal Defendant El Paso Pipeline
Partners, L.P.

LASTER, Vice Chancellor.
 In March 2010, El Paso Corporation sold to El Paso Pipeline Partners, L.P. (the

“Partnership” or “El Paso MLP”) a 51% interest in Southern LNG Company, L.L.C.

(“Southern LNG”) and a 51% interest in El Paso Elba Express Company, L.L.C. (“Elba

Express”). In this lawsuit, the plaintiffs challenge both the March 2010 transaction and a

subsequent November 2010 transaction in which El Paso MLP acquired the remaining

49% interests in Southern LNG and Elba Express. After discovery, the defendants

moved for summary judgment in their favor, and the plaintiffs cross moved for summary

judgment as to liability. This decision grants the defendants‟ motion for summary

judgment as to the March 2010 transaction. The plaintiffs‟ cross motion as to the March

2010 transaction is consequently denied. This opinion does not address the November

2010 transaction.

I. FACTUAL BACKGROUND

The facts are drawn from the materials presented in support of the cross motions

for summary judgment. When considering the defendants‟ motion, conflicts in the

evidence must be resolved in favor of the plaintiffs and all reasonable inferences drawn in

their favor. At this stage of the case, the court cannot weigh the evidence, decide among

competing inferences, or make factual findings.

A. The Partnership Structure

El Paso MLP is a Delaware limited partnership headquartered in Houston, Texas.

El Paso MLP operates as a master limited partnership (“MLP”), a term that refers to a

publicly traded limited partnership that is treated as a pass-through entity for federal

income tax purposes. El Paso MLP owns interests in companies that operate natural gas

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pipelines, liquid natural gas (“LNG”) terminals, and storage facilities throughout the

United States. Its common units trade on the New York Stock Exchange under the

symbol “EPB.”

MLPs that focus on transporting and storing oil and natural gas, like El Paso MLP,

are commonly referred to as midstream MLPs. Midstream MLPs are typically

“sponsored” by a corporation with MLP-qualifying assets that generate stable cash flows.

The sponsor seeks to maximize the market value of those assets by selling them to an

MLP that can issue publicly traded securities on the strength of the cash flows and

distribute the cash periodically to investors in a tax-efficient manner. In the typical

structure, the sponsor owns 100% of the general partner of the MLP, giving the sponsor

control over the MLP. The sponsor initially contributes a block of assets to the MLP and,

over time, sells additional assets to the MLP. Because the assets move from the sponsor

level down to the MLP level, the sales are referred to colloquially as “drop-downs.”

In August 2007, El Paso Corporation (“El Paso Parent”) formed El Paso MLP and

contributed to El Paso MLP an initial set of MLP-qualifying assets. On November 15, El

Paso MLP announced an initial public offering of 25,000,000 common units. The IPO

prospectus cautioned that El Paso Parent would have no obligation to drop down

additional assets into El Paso MLP. Despite this disclosure, El Paso Parent was plainly

creating a sponsored MLP, implying that El Paso MLP over time would acquire assets

from El Paso Parent.

Consistent with the typical MLP structure, El Paso Parent indirectly owns 100% of

defendant El Paso Pipeline GP Company, L.L.C., a Delaware limited liability company

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and the general partner of El Paso MLP (the “General Partner”). The General Partner in

turn owns a 2% general partner interest in El Paso MLP. By virtue of the general partner

interest, El Paso Parent has a 2% economic interest in El Paso MLP and, more

importantly, exercises control over El Paso MLP. At the time of the transaction in

question, El Paso Parent also owned, either through the General Partner or its affiliates,

approximately 61.4% of El Paso MLP‟s outstanding common units plus all of its

incentive distribution rights. As is customary with sponsored MLPs, El Paso MLP has no

employees of its own. Employees of El Paso Parent manage and operate El Paso MLP‟s

business.

At the time of the March 2010 transaction, defendants Douglas L. Foshee, James

C. Yardley, John R. Sult, D. Mark Leland, Ronald L. Kuehn, William A. Smith, and

Arthur C. Reichstetter (together, the “Individual Defendants”) constituted the board of

directors of the General Partner (the “GP Board”). Four of the Individual Defendants

held management positions with El Paso Parent or the General Partner. Foshee was the

President and CEO of El Paso Parent. Yardley served as an Executive Vice President of

El Paso Parent and as President and CEO of the General Partner. Sult served as CFO of

El Paso Parent and the General Partner. Leland served as an Executive Vice President of

El Paso Parent and President of El Paso Midstream Group, Inc., having previously served

as the CFO of El Paso Parent and the General Partner. Each of the management directors

beneficially owned equity stakes in El Paso Parent that dwarfed their equity stakes in El

Paso MLP.

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 The other three members of the GP Board were outside directors, although two

had past ties to El Paso Parent. Kuehn was Interim CEO of El Paso Parent in 2003 and

served as Chairman of the Board of El Paso Parent from 2003 until 2009, one year before

the challenged transaction occurred. Smith was an Executive Vice President of El Paso

Parent and Chairman of El Paso Merchant Energy‟s Global Gas Group until 2002.

Reichstetter was the only director without past ties to El Paso Parent.

At the time of the challenged transaction, El Paso Parent was itself a publicly

traded Delaware corporation headquartered in Houston, Texas. In May 2012, El Paso

Parent was acquired and became a wholly owned subsidiary of Kinder Morgan, Inc.

B. The Drop-Down Proposal

On February 9, 2010, El Paso Parent offered to sell to El Paso MLP 49% interests

in Southern LNG and Elba Express. El Paso Parent proposed that El Paso MLP would

pay $865 million and assume $147 million of debt, for total value of $1.012 billion. On

February 15, El Paso Parent altered its proposal to offer 51% of Southern LNG and Elba

Express for $900 million plus the assumption of $153 million in debt, for total value of

$1.053 billion. This decision refers to El Paso MLP‟s eventual purchase of 51% of

Southern LNG and Elba Express as the “Drop-Down.”

Southern LNG owned an LNG terminal on Elba Island, a private 840-acre island

off the coast of Georgia. Elba Express owned a 190-mile natural gas pipeline that

connected the Elba Island terminal to four major interstate natural gas pipelines. The

Elba Island terminal was built in the 1970s to receive LNG shipped from overseas, store

it, and vaporize it for distribution in the United States. Shortly after it was built, market

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developments made importing LNG unattractive, and the terminal was mothballed for

nearly 20 years. It resumed operations in 2001 after market developments made

importing LNG attractive again.

In 2006, when the market for imported LNG was strong, El Paso Parent sought

approval from the Federal Energy Regulatory Commission (“FERC”) for a two-phase

expansion of the Elba Island facility, referenced respectively as Phase III-A and Phase

III-B. Royal Dutch Shell, plc (“Shell”) reserved the output from Phase III-A, and BG

Group plc (“British Gas”) secured an option to reserve the output from Phase III-B.

By 2010, when El Paso Parent proposed the Drop-Down, domestic discoveries of

shale gas and improved techniques for its extraction had led to higher levels of domestic

production and lower gas prices. As a result, the market for imported LNG had

weakened. Demand at the Elba Island facility fell to less than 10% of capacity, and El

Paso Parent assumed that British Gas would not exercise its option for Phase III-B. At

the time, the principal sources of revenue for Southern LNG and Elba Express were

existing contracts with subsidiaries of Shell and British Gas (the “Service Agreements”).

Under the Service Agreements, the subsidiaries had reserved 100% of the firm capacity

of the Elba Island terminal and the Elba Express pipeline, guaranteeing that Shell and

British Gas would have the capacity to transport or store gas at any time for a set charge.

Because the Service Agreements were firm contracts, Southern LNG and Elba Express

would charge fees to Shell and British Gas regardless of whether they actually stored or

transported gas. The Service Agreements had terms of 25 to 30 years.

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 Despite their lengthy terms and firm pricing, the Service Agreements were not

sure things. The Shell and British Gas counterparties were special purpose entities with

no assets of their own. If the Service Agreements became sufficiently unprofitable, then

Shell and British Gas could walk away from their subsidiaries, leaving Southern LNG

and Elba Express to collect from judgment-proof shells. Although other subsidiaries of

Shell and British Gas had guaranteed the counterparties‟ performance, those guarantees

only covered approximately 20% of the revenue that the Service Agreements otherwise

might generate.

The plaintiffs believe that because of the weakened domestic market for imported

LNG, El Paso Parent faced a significant risk that Shell and British Gas would choose to

breach the Service Agreements, leaving Southern LNG and Elba Express with less than

20% of their anticipated revenue. The plaintiffs argue that through the Drop-Down, El

Paso Parent sought to off-load these now-risky assets onto El Paso MLP at an inflated

price.

C. The Conflicts Committee

Because El Paso Parent controlled El Paso MLP through the General Partner, and

because El Paso Parent owned the assets that El Paso MLP would be acquiring, the Drop-

Down created a conflict of interest for the General Partner. El Paso MLP‟s limited

partnership agreement (the “LP Agreement” or “LPA”) contemplated that El Paso MLP

could proceed with a transaction that presented a conflict of interest for the General

Partner if El Paso MLP followed one of four contractual paths set out in Section 7.9(a) of

the LP Agreement. One of the contractual paths authorized El Paso MLP to proceed if

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the conflict-of-interest transaction received “Special Approval.” The LP Agreement

defined this form of approval as “approval by a majority of the members of the Conflicts

Committee acting in good faith.” LPA § 1.1. The LP Agreement in turn defined the

Conflicts Committee as

a committee of the Board of Directors of the General Partner composed of
two or more directors, each of whom (a) is not a security holder, officer or
employee of the General Partner, (b) is not an officer, director or employee
of any Affiliate of the General Partner, (c) is not a holder of any ownership
interest in the Partnership Group other than Common Units and awards that
may be granted to such director under the Long Term Incentive Plan and
(d) meets the independence standards required of directors who serve on an
audit committee of a board of directors established by the Securities
Exchange Act and the rules and regulations of the Commission thereunder
and by the National Securities Exchange on which the Common Units are
listed or admitted to trading.

Id.

At El Paso MLP, the Conflicts Committee was not a standing committee of the GP

Board, but rather a committee constituted on an ad hoc basis to consider specific conflict-

of-interest transactions. On February 12, 2010, the GP Board resolved to seek Special

Approval for the Drop-Down. The resolution established a limited-duration iteration of

the Conflicts Committee for that purpose, specifying that this incarnation of the Conflicts

Committee would

automatically dissolve upon the earlier to occur of the time at which
(i) either such Conflicts Committee or the [GP] Board determines that there
are no terms which appear to be acceptable to both sides and which would
be within parameters that would allow the Conflicts Committee to grant
Special Approval regarding the [Drop-Down] or (ii) the [Drop-Down] is
consummated.

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Transmittal Affidavit of Samuel L. Closic dated Oct. 30, 2013 (the “Closic Aff.”) Ex. 5 at

EPP0002.

The resolution granted the Conflicts Committee, for the period of existence, the

power and authority

to evaluate and assess whether the [Drop-Down] is fair and reasonable to
the Partnership and, if the Conflicts Committee so determines, (a) to
approve the [Drop-Down] as provided by Section 7.9(a) of the Limited
Partnership Agreement and (b) to make a recommendation to the [GP]
Board whether or not to approve such terms and conditions of the [Drop-
Down].

Id. at EPP0003. The resolution provided that when acting for these purposes, the

Conflicts Committee would “assume and exercise all lawfully delegable powers and

authority of the [GP] Board in taking any of the aforesaid actions and in making any and

all decisions relating to the [Drop-Down].” Id. The resolution also provided that “the

officers, agents and employees of [El Paso MLP] are hereby authorized to assist the

Conflicts Committee and to provide it with all information and documents that it requests

with respect to the [Drop-Down].” Id. at EPP0003-04.

The resolution named Reichstetter, Kuehn, and Smith as the members of the

committee. At its first meeting on February 19, 2010, the Conflicts Committee appointed

Reichstetter to serve as Chair. At some point, the committee retained Akin Gump Strauss

Hauer & Feld LLP (“Akin Gump”) as its legal advisor and Tudor, Pickering, Holt & Co.

(“Tudor”) as its financial advisor. The engagements appear to have happened as a matter

of course before the Conflicts Committee ever formally met.

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 As suggested by the ready hiring of Akin Gump and Tudor, the record reflects that

El Paso Parent, the GP Board, and the individuals who served on the Conflicts

Committee have developed a level of comfort with the Special Approval process:

● Between 2008 and 2012, El Paso Parent and El Paso MLP engaged
in eight drop-down transactions. Although El Paso MLP‟s initial
public offering prospectus stated that El Paso MLP could obtain
assets from third parties, the eight drop-down deals were the
exclusive means by which El Paso MLP acquired assets.

● El Paso Parent initiated each transaction. El Paso MLP never
initiated a transaction.

● On each occasion, the General Partner opted to proceed by Special
Approval and formed a Conflicts Committee.

● On each occasion, the members of the Conflicts Committee were
Kuehn, Smith, and Reichstetter.

● On each occasion, Reichstetter served as Chair of the Conflicts
Committee and did the bargaining for the Conflicts Committee.

● On each occasion, the committee hired Tudor as its financial
advisor.

● On each occasion, the Conflicts Committee obtained some marginal
improvement in the terms of El Paso Parent‟s original proposal.

● On each occasion, Tudor opined that the resulting deal was fair and
collected a $500,000 fee plus expenses.

The Special Approval process for the Drop-Down fit this pattern.

D. Special Approval Is Granted.

Over the course of the next month and a half, the Conflicts Committee met five

times to review El Paso Parent‟s proposal. On February 19, 2010, Tudor held its first due

diligence session with El Paso Parent management, including representatives of Southern

LNG and Elba Express. El Paso Parent management gave Tudor a fifty-four page

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presentation that provided an overview of the proposed transaction and Southern LNG‟s

and Elba Express‟s assets, including a summary of the Service Agreements. The

summary described the Service Agreements as long-term, fixed-fee contracts, but noted

that the contractual counterparties were subsidiaries of Shell and British Gas rather than

Shell and British Gas themselves. The summary also noted that the counterparties‟

obligations were covered by multi-year guarantees from other subsidiaries of Shell and

British Gas that had Aa2/AA+ and A2/A credit ratings, respectively. The presentation

included a chart that set forth the total demand revenue that Southern LNG and Elba

Express would receive over the life of the Service Agreements and the total amount of

the demand revenue that was guaranteed by the Shell and British Gas subsidiaries.

Later in the day on February 19, 2010, the Conflicts Committee held its initial

meeting. The committee formally elected Reichstetter as Chair and discussed due

diligence issues with Tudor. According to the minutes of the meeting, Tudor explained

that El Paso Parent management had

spoken at length about the high quality of the assets, operations and cash
flows of [Southern LNG and Elba Express] that made them attractive
investments, including (i) the long term, demand-charge contracts backed
by substantial guarantees from Shell and British Gas, (ii) the stable, long-
term cash flows, (iii) minimal maintenance capital requirements, (iv) dual
docks, (v) the absence of commodity price exposure and (vi) significant
natural gas take-away capacity with access to numerous substantial
pipelines.

Closic Aff. Ex. 5 at EPP0012. The minutes recite that the Conflicts Committee discussed

“how the valuation of the [interests] could be affected by the projected growth [of less

than 1%] and the stability of the cash flows, which were impacted by the firm, long-term,

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demand charge contracts, as well as the related credit analysis, including the substantial

sponsor support from Shell and British Gas.” Id. The plaintiffs argue that by stressing

the “long-term” nature of the Service Agreements and the “substantial” guarantees and

support from Shell and British Gas, the El Paso Parent representatives and Tudor misled

the Conflicts Committee about the value of those agreements.

The Conflicts Committee next met on February 24, 2010, when Tudor presented

its preliminary financial analysis. Tudor‟s analysis addressed (i) the cash flow accretion

of the proposed transaction, (ii) factors affecting the value/yield of El Paso MLP units,

(iii) a summary of the current state of the public capital markets, (iv) recent midstream

drop-down transactions comparable to the proposed transaction, (v) Tudor‟s preliminary

valuation analysis, and (vi) the pro forma impact of the proposed transaction on El Paso

MLP. Tudor‟s preliminary valuation analysis included a discounted cash flow analysis, a

transaction comparables analysis, and a publicly traded company comparables analysis.

The Conflicts Committee focused primarily on the discounted cash flow analysis.

According to the minutes, the Conflicts Committee discussed that “due to the nature and

quality of the assets . . . , the [Drop-Down] likely could have a positive affect [sic] on the

Partnership‟s credit rating.” Id. at EPP0017. The plaintiffs assert that the continued

emphasis on the quality of the Southern LNG and Elba Express assets demonstrates that

the Conflicts Committee did not fully understand how easily Shell and British Gas could

walk away from the Services Agreement and the limited coverage provided by the

guarantees.

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 The Conflicts Committee met again on March 2, 2010. Tudor had updated its

financial analysis to address questions previously raised by the Conflicts Committee. In

discussing the Drop-Down‟s probable impact on El Paso MLP‟s credit rating, Tudor

explained that members of El Paso MLP had met with the Fitch, Moody‟s, and S&P

ratings agencies, and the ratings agencies were “cautiously optimistic about the

possibility of receiving in the near future a ratings upgrade to an „investment grade‟

rating.” Closic Aff. Ex. 5 at EPP0023. In addition, the Conflicts Committee asked,

hypothetically, whether Tudor would be a buyer at the 10.8x EBITDA multiple implied

by the Drop-Down. According to the minutes, Tudor advised that “a 10.8x EBITDA

multiple tended to be higher than the average multiples applicable to more recent M&A

transactions in [the] midstream sector” but that “such a multiple was consistent with the

lower risk profile of [Southern LNG and Elba Express].” Id. Given their assessment of

the Services Agreements, the plaintiffs disagree that the Southern LNG and Elba Express

assets had a “lower risk profile.”

After the meeting on March 2, 2010, Reichstetter met with representatives of El

Paso Parent to negotiate the transaction price. After some limited back and forth, they

agreed upon consideration of $963 million, consisting of $661 million in cash, common

units of El Paso MLP worth $149 million, and the assumption by El Paso MLP of a 51%

share of the $300 million of outstanding debt owed by Southern LNG and Elba Express.

The parties later agreed to value the common units at $27.87 per unit, representing the

highest of the average of the volume-weighted average prices of the common units for the

5-, 10-, and 20-day trading periods ending on March 23, 2010. Dividing the agreed-upon

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figure of $149 million by the price of $27.87 resulted in the issuance of 5,346,251

common units to El Paso Parent.

On March 17, 2010, the Conflicts Committee met and received an updated

valuation analysis from Tudor. The materials addressed the implied return on El Paso

MLP‟s potential investment and suggested that it would exceed the implied return that

might typically be associated with a long-term firm contract with either Shell or British

Gas. The materials also addressed counterparty credit risk associated with the Southern

LNG and Elba Express contracts. Akin Gump provided a presentation on the current and

historical credit ratings of Shell and British Gas and on issues relating to applicable

FERC regulations.

On March 24, 2010, the Conflicts Committee met for the fifth and final time.

Tudor again delivered an updated analysis. The valuation summary, or “football field,”

showed that El Paso Parent‟s offer price for Southern LNG and Elba Express fell within

or below the range of values established by Tudor‟s chosen valuation metrics. Tudor

opined that the proposed transaction was “fair, from a financial point of view, to the

holders of the Common Units of [El Paso MLP], other than [the General Partner] and its

affiliates.” Id. at EPP0057. The Conflicts Committee then unanimously approved

resolutions recommending that El Paso MLP enter into the Drop-Down. As part of the

resolutions, the Conflicts Committee

determined that the [Drop-Down] is fair and reasonable to the Partnership
and to the holders of common units of the Partnership other than the
General Partner and its affiliates, in each case, taking into account the
totality of the relationships between the parties involved (including other

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 transactions that may be particularly favorable or advantageous to the
Partnership).

Id. at EPP0042. The Conflicts Committee also “approve[d] the [Drop-Down] . . .

pursuant to Section 7.9(a) of the [LP] Agreement relating to „Special Approval.‟” Id.

Later that day, the GP Board adopted the Conflicts Committee‟s recommendation.

On March 25, 2010, El Paso MLP announced that it had agreed to the Drop-

Down. The transaction closed shortly thereafter.

E. El Paso Parent Declines To Exercise A Right Of First Refusal For Gulf LNG.

Unbeknownst to the Conflicts Committee, at the same time that El Paso Parent

was proposing to sell LNG assets to El Paso MLP and touting their value, El Paso Parent

was turning down an opportunity to buy LNG assets for itself. El Paso Parent held a 50%

interest in Gulf LNG, an entity that owned a LNG terminal in Pascagoula, Mississippi.

El Paso Parent also managed Gulf LNG and had a right of first refusal on a 30% interest

in Gulf LNG that a third party was proposing to sell to GE Capital.

When El Paso Parent emailed its opening proposal for the Drop-Down to the

members of the GP Board on February 9, 2010, defendants Sult, Yardley, and Leland

knew that GE Capital had agreed to purchase 30% of Gulf LNG. Later that same day,

Sult and Yardley received an internal presentation showing that the price GE Capital had

agreed to pay implied an EBITDA multiple of 9.1x. After reviewing the presentation,

Sult sent an email to Leland describing Gulf LNG‟s finances as “[n]ot a pretty picture.”

Affidavit of Jeffrey H. Squire dated Oct. 29, 2013 (the “Squire Aff.”) Ex. 87. El Paso

Parent declined to exercise its right of first refusal.

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 During the negotiation of the Drop-Down, the Conflicts Committee did not know

about the proposed Gulf LNG transaction, the implied EBITDA multiple for that deal, or

El Paso Parent‟s decision not to exercise its right of first refusal at that price. El Paso

Parent and the members of the GP Board who knew about the proposed transaction did

not disclose its existence or any of its details to the Conflicts Committee.

According to the plaintiffs, the fact that El Paso Parent decided not to acquire an

LNG asset at a lower implied EBITDA multiple while at the same time selling its own

LNG assets to El Paso MLP for a higher implied EBITDA multiple was highly material

information that should have been provided to the Conflicts Committee. The plaintiffs

contend that the Gulf LNG deal illustrated arm‟s-length pricing for a comparable LNG

asset, such that the Conflicts Committee‟s decision to buy a similar LNG asset at a

significantly higher implied EBITDA multiple gives rise to an inference of bad faith.

The plaintiffs also argue that El Paso Parent‟s concealment of the information from the

Conflicts Committee means that Special Approval was not properly obtained.

F. Post-Transaction Events

Both sides have relied on post-transaction events. The defendants have cited

various after-the-fact developments in an effort to confirm the wisdom of the Conflicts

Committee‟s decision to approve the Drop-Down. The plaintiffs have identified different

post-transaction events in an attempt to support an inference that the Conflicts Committee

acted in bad faith. Under Delaware law, business decisions are not judged by hindsight.

The defendants‟ actions must stand or fall based on what they knew and did at the time.

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G. This Litigation

On December 22, 2011, the plaintiffs filed a lawsuit challenging the Drop-Down.

The plaintiffs later filed a second suit challenging the November 2010 transaction in

which El Paso Parent sold El Paso MLP assets that included the remaining 49% interests

in Southern LNG and Elba Express. On March 4, 2013, the two actions were

consolidated. A consolidated complaint was never filed. Instead, both complaints were

designated as operative pleadings for the consolidated action (respectively, the “First

Complaint” and the “Second Complaint”).

Count I of each complaint asserted that by engaging in the pertinent drop-down

transaction, the defendants violated their express contractual obligations and the implied

covenant of good faith and fair dealing. Count II of each complaint asserted that any

defendant not directly liable for breach of contract was secondarily liable for aiding and

abetting the breaches of contract. Count III of each complaint asserted that any defendant

not directly liable for breach of contract tortiously interfered with the plaintiffs‟

contractual rights. Count IV of each complaint alleged that El Paso Parent was unjustly

enriched.

On February 21, 2012, before the Second Complaint had been filed, the

defendants moved to dismiss the First Complaint. On October 26, the court heard

argument on the motion. Ruling from the bench, the court granted the motion to dismiss

as to Count IV and decided one narrow aspect of Count I. The court denied the motion as

to the remainder of Count I and all of Counts II and III.

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 In dismissing Count IV of the First Complaint in its entirety, the court held that the

allegations of the complaint supported only two alternatives. Either the defendants

complied with their contractual obligations, in which case there was no unjust

enrichment, or the defendants breached their contractual obligations, in which case the

appropriate claim was for breach of contract. Count IV therefore failed to state a claim.

As to Count I of the First Complaint, the court ruled on only one narrow aspect of

the breach of contract claim. In paragraph 99 of the First Complaint, the plaintiffs

alleged that the members of the Conflicts Committee failed to meet the independence

requirements set forth in the LP Agreement, such that they could not have given Special

Approval. After reviewing the allegations of the complaint and considering the language

of the LP Agreement, the court held that the complaint did “not plead facts which suggest

that any member of the [Conflicts Committee] was disqualified.” Brinckerhoff v. El Paso

Pipeline GP Co., C.A. No. 7141-CS, at 52 (Del. Ch. Oct. 26, 2012) (TRANSCRIPT).

The plaintiffs have not challenged or sought to revisit these rulings, which are law

of the case for purposes of both the First Complaint and the Second Complaint. Most

pertinently for this decision, it is undisputed that the Conflicts Committee was duly

constituted and met the requirements of the LP Agreement.

After the hearing on the motion to dismiss the First Complaint, the parties

proceeded with discovery. After completing fact and expert discovery, the defendants

moved for summary judgment in their favor, and the plaintiffs cross moved for summary

judgment as to liability. The trial was deferred to permit the court to rule on the cross

motions. This decision rules on the motions only to the extent they address the March

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2010 drop-down challenged in the First Complaint. This decision does not address the

November 2010 drop-down challenged in the Second Complaint.

II. LEGAL ANALYSIS

Under Court of Chancery Rule 56, summary judgment “shall be rendered

forthwith” if “there is no genuine issue as to any material fact and . . . the moving party is

entitled to a judgment as a matter of law.” Ct. Ch. R. 56(c). The moving party bears the

initial burden of demonstrating that, even with the evidence construed in the light most

favorable to the non-moving party, there are no genuine issues of material fact. Brown v.

Ocean Drilling & Exploration Co., 403 A.2d 1114, 1115 (Del. 1979). If the moving

party meets this burden, then to avoid summary judgment the non-moving party must

“adduce some evidence of a dispute of material fact.” Metcap Sec. LLC v. Pearl Senior

Care, Inc., 2009 WL 513756, at *3 (Del. Ch. Feb. 27, 2009), aff’d, 977 A.2d 899 (Del.

2009) (TABLE); accord Brzoska v. Olson, 668 A.2d 1355, 1364 (Del. 1995).

On an application for summary judgment, “the court must view the evidence in the

light most favorable to the non-moving party.” Merrill v. Crothall-American, Inc., 606

A.2d 96, 99 (Del. 1992). “Any application for such a judgment must be denied if there is

any reasonable hypothesis by which the opposing party may recover, or if there is a

dispute as to a material fact or the inferences to be drawn therefrom.” Vanaman v.

Milford Mem’l Hosp., Inc., 272 A.2d 718, 720 (Del. 1970).

[T]he function of the judge in passing on a motion for summary judgment
is not to weigh evidence and to accept that which seems to him to have the
greater weight. His function is rather to determine whether or not there is
any evidence supporting a favorable conclusion to the nonmoving party.

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 When that is the state of the record, it is improper to grant summary
judgment.

Cont’l Oil Co. v. Pauley Petroleum, Inc., 251 A.2d 824, 826 (Del. 1969). “The test is not

whether the judge considering summary judgment is skeptical that [the non-movant] will

ultimately prevail.” Cerberus Int’l, Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141, 1150

(Del. 2002). “If the matter depends to any material extent upon a determination of

credibility, summary judgment is inappropriate.” Id. When a party‟s state of mind is at

issue, a credibility determination is “often central to the case.” Johnson v. Shapiro, 2002

WL 31438477, at *4 (Del. Ch. Oct. 18, 2002).

“There is no „right‟ to a summary judgment.” Telxon Corp. v. Meyerson, 802

A.2d 257, 262 (Del. 2002). When confronted with a Rule 56 motion, the court may, in its

discretion, deny summary judgment if it decides upon a preliminary examination of the

facts presented that it is desirable to inquire into and develop the facts more thoroughly at

trial in order to clarify the law or its application. See, e.g., Cerberus, 794 A.2d at 1150;

Alexander Indus., Inc. v. Hill, 211 A.2d 917, 918-19 (Del. 1965).

A. Breach Of The Express Terms Of The LP Agreement

Count I of the First Complaint contends that the defendants breached both their

express and implied contractual obligations. This section addresses the express

obligations. Part II.B, infra, addresses the implied obligations.

1. The Proper Defendant

As a threshold matter, summary judgment on Count I of the First Complaint is

granted in favor of all defendants other than the General Partner. Count I asserts a claim

19
for breach of contract. “It is a general principle of contract law that only a party to a

contract may be sued for breach of that contract.” Gotham P’rs, L.P. v. Hallwood Realty

P’rs, L.P., 817 A.2d 160, 172 (Del. 2002). The General Partner is the only defendant that

was a party to the contract. The defendants other than the General Partner were not

parties to the LP Agreement and are entitled to summary judgment on Count I.

2. The Operative Contractual Framework

To determine whether the evidence supports a potential breach of the LP

Agreement, it is necessary to understand the operative contractual framework. Section

7.9(e) of the LP Agreement eliminates all common law duties that the General Partner

and the Individual Defendants might otherwise owe to El Paso MLP and its limited

partners, including fiduciary duties. The LP Agreement replaces those duties with

contractual commitments. A high-level overview of the structure of the LP Agreement

reveals that it divides the decisions that the General Partner might make into three broad

categories: (i) decisions made by the General Partner in its individual capacity,

(ii) decisions made by the General Partner in its capacity as the General Partner that do

not involve a conflict of interest, and (iii) decisions made by the General Partner in its

capacity as the General Partner that involve a conflict of interest. Each type of decision

has its own contractual standard.

For decisions that the General Partner makes in its individual capacity, the LP

Agreement states that the General Partner does not owe any duty to El Paso MLP or any

of the limited partners, can act in its own interest, and does not have to believe in good

20
faith that its actions are in the best interests of El Paso MLP. Section 7.9(c) sets forth the

relevant contractual language:

Whenever the General Partner makes a determination or takes or declines to
take any other action . . . in its individual capacity as opposed to in its
capacity as the general partner of the Partnership, . . . then the General
Partner . . . [is] entitled, to the fullest extent permitted by law, to make such
determination or to take or decline to take such other action free of any duty
(including any fiduciary duty) or obligation whatsoever to the Partnership,
any Limited Partner or Assignee, . . . and the General Partner . . . shall not,
to the fullest extent permitted by law, be required to act in good faith or
pursuant to any other standard imposed by this Agreement . . . [or] any
other agreement contemplated hereby or under the Delaware Act or any
other law, rule or regulation or at equity.

LPA § 7.9(c).

For decisions the General Partner makes in its capacity as the General Partner that

do not involve a conflict of interest, the General Partner must only believe in good faith,

subjectively, that its actions are in the best interests of El Paso MLP. Section 7.9(b) sets

forth the relevant contractual language:

Whenever the General Partner makes a determination or takes or declines to
take any other action . . . in its capacity as the general partner of the
Partnership as opposed to in its individual capacity . . . then, unless another
express standard is provided for in this Agreement, the General Partner . . .
shall make such determination or take or decline to take such other action
in good faith and shall not be subject to any other or different standards
(including fiduciary standards) . . . . In order for a determination or other
action to be in “good faith” for purposes of this Agreement, the Person or
Persons making such determination or taking or declining to take such
other action must believe that the determination or other action is in the
best interests of the Partnership.

Id. § 7.9(b).

At first blush, this standard appears to apply to all decisions made by the General

Partner in its capacity as the General Partner. Analytically, however, Section 7.9(b)

21
applies only to decisions made by the General Partner in its capacity as the General

Partner that do not involve a conflict of interest, because Section 7.9(b) states that the

standard it sets forth will apply “unless another express standard is provided for in this

Agreement.” Id. When a decision involves a potential conflict of interest on the part of

the General Partner, Section 7.9(a) provides “another express standard.” See id. § 7.9(a).

Under Section 7.9(a), if the General Partner takes action in its capacity as the

General Partner, and the action involves a conflict of interest, then the action will be

“permitted and deemed approved by all Partners” and “not constitute a breach” of the LP

Agreement or “any duty stated or implied by law or equity” as long as the General

Partner proceeds in one of four contractually specified ways. Id. The relevant

contractual language states:

Unless otherwise expressly provided in this Agreement . . . , whenever a
potential conflict of interest exists or arises between the General Partner
. . . , on the one hand, and the Partnership . . . , any Partner or any Assignee,
on the other, any resolution or course of action by the General Partner . . .
in respect of such conflict of interest shall be permitted and deemed
approved by all Partners, and shall not constitute a breach of this
Agreement, . . . or of any duty stated or implied by law or equity, if the
resolution or course of action in respect of such conflict of interest is
(i) approved by Special Approval, (ii) approved by the vote of a majority of
the Outstanding Common Units (excluding Common Units owned by the
General Partner and its Affiliates), (iii) on terms no less favorable to the
Partnership than those generally being provided to or available from
unrelated third parties or (iv) fair and reasonable to the Partnership, taking
into account the totality of the relationships between the parties involved
(including other transactions that may be particularly favorable or
advantageous to the Partnership).

Id. Because the four contractually specified ways constitute an express standard

“provided for in this Agreement,” Section 7.9(a) takes a decision involving a conflict of

22
interest outside the scope of the general decision-making discretion granted to the

General Partner under Section 7.9(b).1

Notably, Section 7.9(a) has its own introductory phrase—“[u]nless otherwise

expressly provided in this Agreement”—which is itself important, because for certain

types of transactions that involve a conflict of interest on the part of the General Partner,

the LP Agreement sets forth a separate and even more specific contractual standard. For

example, Section 7.5 governs the outside activities of the General Partner, covering

matters that traditionally would fall under the heading of the corporate opportunity

doctrine. See LPA § 7.5. Section 7.6 of the LP Agreement addresses loans by the

General Partner to the Partnership or its subsidiaries, and Section 7.7 addresses

indemnification of the General Partner (and other indemnitees) by the Partnership. See

id. §§ 7.6, 7.7. The introductory clause to Section 7.9(a) does not create a recursive loop

with Section 7.9(b). Instead, it recognizes that the LP Agreement establishes a hierarchy

of contractual standards ranging from the general to the specific and that in each case the

most specific standard applies.

1
See, e.g., Gelfman v. Weeden Investors, L.P., 792 A.2d 977, 990 (Del. Ch. 2001)
(holding that specific provision governing conflict-of-interest transactions controlled in lieu of
general provision addressing non-conflicted transaction); Sonet v. Timber Co., 722 A.2d 319,
325 (Del. Ch. 1998) (holding that specific provision in limited partnership agreement controlled
over more general provision). See generally DCV Hldgs., Inc. v. ConAgra, Inc., 889 A.2d 954,
961 (Del. 2005) (“Specific language in a contract controls over general language [and thus] the
specific provision ordinarily qualifies the meaning of the general one.”); Wood v. Coastal States
Gas Corp., 401 A.2d 932, 941 (Del. 1979) (citing the “familiar and well-settled rule[] of
construction” that specific contractual provisions control over more general ones); accord 11
Richard A. Lord, Williston on Contracts § 32:10 (4th ed. 1999) (“Where general and specific
clauses conflict, the specific clause governs the meaning of the contract.”).

23
 Because El Paso Parent controlled El Paso MLP through the General Partner, and

because El Paso Parent owned the assets that El Paso MLP would purchase in the Drop-

Down, El Paso Parent‟s proposals involved a conflict of interest for the General Partner.

The Drop-Down therefore implicated the contractual requirements of Section 7.9(a). To

comply with the LP Agreement, the General Partner had to proceed in one of the four

contractually specified ways. The General Partner chose to proceed by Special Approval,

so this decision concentrates on that path.

The LP Agreement defines Special Approval as “approval by a majority of the

members of the Conflicts Committee acting in good faith.” LPA § 1.1. The LP

Agreement defines “good faith” for purposes of a decision by the Conflicts Committee in

terms of the members‟ belief that the decision is in the best interests of El Paso MLP.

The pertinent contractual language states:

Whenever the Conflicts Committee makes a determination or takes or
declines to take any other action, it shall make such determinations or take
or decline to take such other action in good faith and shall not be subject to
any other or different standards (including fiduciary standards) . . . . In
order for a determination or other action to be in “good faith” for purposes
of this Agreement, the Person or Persons making such determination or
taking or declining to take such other action must believe that the
determinations or other action is in the best interests of the Partnership.

Id. § 7.9(b).

Under Delaware law, the standard for good faith that applies to the Conflicts

Committee requires a subjective belief that the determination or other action is in the best

interests of El Paso MLP. In construing identical language in another limited partnership

agreement, the Delaware Supreme Court held that “an act is in good faith if the actor

24
subjectively believes that it is in the best interests of [the partnership].” Allen v. Encore

Energy P’rs, L.P., 72 A.3d 93, 104 (Del. 2013). The language therefore establishes a

subjective good faith standard and “eschews an objective standard when interpreting the

unqualified term „believes.‟” Id.

3. The Application Of The Subjective Good Faith Standard

Under the subjective good faith standard, “the ultimate inquiry must focus on the

subjective belief of the specific directors accused of wrongful conduct.” Encore Energy,

72 A.3d at 107. The Delaware Supreme Court has admonished that when applying the

subjective belief standard, “[t]rial judges should avoid replacing the actual directors with

hypothetical reasonable people.” Id. Nevertheless, because science has not yet

developed a reliable method of reading minds, objective facts are logically and legally

relevant to the extent they permit an inference that the defendants lacked the necessary

subjective belief. Id. The high court has provided illustrations of this concept:

Some actions may objectively be so egregiously unreasonable . . . that they
“seem[] essentially inexplicable on any ground other than [subjective] bad
faith.” It may also be reasonable to infer subjective bad faith in less
egregious transactions when a plaintiff alleges objective facts indicating
that a transaction was not in the best interests of the partnership and that the
directors knew of those facts. Therefore, objective factors may inform an
analysis of a defendant‟s subjective belief to the extent they bear on the
defendant‟s credibility when asserting that belief.

. . . [T]he ultimate inquiry must focus on the subjective belief of the
specific directors accused of wrongful conduct. The directors‟ personal
knowledge and experience will be relevant to a subjective good faith
determination, which must focus on measuring the directors‟ approval of a
transaction against their knowledge of the facts and circumstances
surrounding the transaction.

Id. (first two alterations in original and footnote omitted).

25
 The Encore Energy decision discussed the subjective good faith standard as

applied at the pleadings stage. The same legal principles apply at the summary judgment

stage, but the procedural standard changes. Summary judgment should be granted “if the

pleadings, depositions, answers to interrogatories and admissions on file, together with

the affidavits, if any, show that there is no genuine issue as to any material fact and that

the moving party is entitled to a judgment as a matter of law.” Ct. Ch. R. 56(c). In lieu

of pled facts, therefore, the plaintiff must provide some evidence to support its position.

Consequently, under the principles outlined in Encore Energy, to defeat a motion for

summary judgment, the plaintiff must point to some evidence from which the court

reasonably could infer subjective bad faith. If the plaintiff can meet this burden, a

credibility assessment becomes necessary to determine the defendant‟s state of mind.

Johnson, 2002 WL 31438477, at *4. “In such cases, the court should evaluate the

demeanor of the witnesses whose states of mind are at issue during examination at trial.”

Id.

In this case, the plaintiffs contend that the members of the Conflicts Committee

failed to appreciate how easy it would be for Shell and British Gas to walk away from the

Service Agreements, that Shell and British Gas would have a significant economic

incentive to do so given the weakness in the domestic gas market, and that the value of

the projected revenue under the Service Agreements had to be discounted significantly in

light of that risk. The plaintiffs also fault the Special Committee for failing to take into

account the fact that on February 9, 2010, the same day El Paso Parent made its initial

proposal to sell LNG assets to El Paso MLP at a multiple of 12.2x EBITDA, El Paso

26
Parent was analyzing and later decided not to exercise a right to purchase a 30% interest

in Gulf LNG at 9.1x EBITDA. As additional evidence of the Conflicts Committee‟s bad

faith, the plaintiffs cite an email Kuehn sent early in the process in which he suggested an

EBITDA multiple well below where the Conflicts Committee began negotiating and

ultimately ended up. The plaintiffs also rely on two expert reports.

a. The Service Agreements

The plaintiffs focus primarily on the risk that Shell and British Gas would walk

away from the Service Agreements. They have introduced evidence that, if credited,

would establish that by the first quarter of 2010, a thriving domestic supply of natural gas

was having a negative effect on LNG imports. Shortly after opining on the fairness of the

Drop-Down, Tudor published a report on the LNG market that observed that “shale [gas]

production has made a mockery of previous estimates of US LNG imports” and that “US

regasification facilities are likely to run at very low utilization rates as long as shale

growth continues.” Squire Aff. Ex. 212 at 5, 46. The plaintiffs also have introduced

evidence establishing that the contractual counterparties to the Service Agreements were

corporate shells and that only 17% of the projected revenue from the Service Agreements

was guaranteed by entities with meaningful assets. Despite these limitations, the

Conflicts Committee and Tudor valued the Service Agreements based on 100% of their

projected revenue, without any discounting for the risk of breach.

The record establishes that there is no genuine dispute about whether the Conflicts

Committee understood the state of the natural gas market. The members of the Conflicts

Committee had extensive experience in the energy industry, and they received

27
presentations about the condition of the natural gas market. No reasonable fact-finder

could conclude that the members of the Conflicts Committee lacked information about or

failed to understand the dynamics of the natural gas market, the implications of domestic

shale gas exploration for the LNG market, and other similar factors.

The record likewise establishes that the Conflicts Committee was informed about

the terms of the Service Agreements, the credit profile of the counterparties, and the

limited scope of the guarantees. Record evidence shows that the Conflicts Committee

and Tudor focused on these issues and conducted due diligence to understand them. The

plaintiffs have used excerpts from the directors‟ deposition testimony to suggest that the

members of the Conflicts Committee overestimated the extent to which the Service

Agreement revenue was guaranteed. Viewed in the light most favorable to the plaintiffs,

this testimony establishes for purposes of summary judgment that the members of the

Conflicts Committee did not fully understand the limitations on the guarantees and

believed that the guarantees covered a much higher portion of the projected revenue than

they actually did.

Wrapping everything together, the plaintiffs contend that the members of the

Conflicts Committee consciously disregarded the level of risk inherent in the Service

Agreements and acted in bad faith by valuing the revenue as if it were fully guaranteed.

Contrary to the plaintiffs‟ position, the record evidence establishes that the Conflicts

Committee considered the revenue risk. Unlike the plaintiffs, the members of the

Conflicts Committee believed that the guarantees were meaningful and that even if the

guarantees covered only a portion of the Service Agreements‟ revenue, neither Shell nor

28
British Gas would default. The Conflicts Committee saw little to no risk in the

agreements because of El Paso MLP‟s ongoing relationships with Shell and British Gas,

the interests that Shell and British Gas have in maintaining the availability of shipping

and storage capacity, and the importance to Shell and British Gas of having a reputation

for fulfilling their contracts.

What the plaintiffs really dispute is the weight the Conflicts Committee should

have given to risks that both the Conflicts Committee and the plaintiffs identified.

Reasonable minds could disagree about the judgment made by the Conflicts Committee,

but the Conflicts Committee‟s judgment was not so extreme that it could support a

potential finding of bad faith, nor was the committee‟s process sufficiently egregious to

support such an inference.2 No reasonable fact-finder could conclude that the Conflicts

Committee lacked a good faith belief in its assessment of the value of the Service

Agreements. See, e.g., Encore Energy, 72 A.3d at 108-09; see also Atlas Energy, 2010

WL 4273122, at *15 (“Whether [the Chairman and CEO‟s] belief was correct is not

relevant under the [subjective good faith] standard prescribed by the LLC Agreement.”).

2
See Encore Energy, 72 A.3d at 108 (holding that allegations that a conflicts committee
may have negotiated poorly did not suggest an inference of subjective bad faith); Brinckerhoff v.
Enbridge Energy Co., 2011 WL 4599654, at *10 (Del. Ch. Sept. 30, 2011) (dismissing claim that
conflicts committee acted in bad faith where committee met with financial and legal advisors to
consider transaction), aff’d, 67 A.3d 369 (Del. 2013); In re Atlas Energy Res., LLC, 2010 WL
4273122, at *14 (Del. Ch. Oct. 28, 2010) (dismissing cause of action against directors and
officers where the complaint alleged that members of the conflicts committee “failed even to
look at all of its options or to negotiate the best deal available” and holding that such allegations
“[did] not suggest the type of subjective bad faith required to state a claim under the duty
imposed by [a Special Approval provision]”).

29
 b. El Paso Parent’s Decision Not To Invest In Gulf LNG

The plaintiffs next attack the Drop-Down based on the contemporaneous

transaction involving Gulf LNG. El Paso Parent managed Gulf LNG, held a 50% interest

in the entity, and had a right of first refusal on the 30% interest that GE Capital was

interested in purchasing. On February 9, 2010, when El Paso Parent sent its opening

proposal for the Drop-Down to the members of the GP Board, defendants Sult, Yardley,

and Leland knew that GE Capital had proposed to purchase a 30% interest in Gulf LNG

for 9.1x EBITDA. El Paso Parent declined to exercise its right of first refusal.

During the negotiation of the Drop-Down, the Conflicts Committee was unaware

of the proposed Gulf LNG transaction, the implied EBITDA multiple, and El Paso

Parent‟s decision not to buy at that price. Neither El Paso Parent nor the members of the

GP Board who knew about the proposed transaction disclosed its existence or any of the

details about the Gulf LNG transaction to the Conflicts Committee.

The plaintiffs contend that El Paso Parent‟s decision not to acquire an LNG asset

at a 9.1x EBITDA multiple while at the same time proposing to sell its own LNG assets

to El Paso MLP at a 12.2x EBITDA multiple supports an inference that the Drop-Down

was approved in bad faith. The plaintiffs first argue that because El Paso Parent

concealed information from the Conflicts Committee, Special Approval for the Drop-

Down was not properly obtained. But the subjective good faith of the members of the

Conflicts Committee cannot be challenged based on information that the plaintiffs admit

the members did not have. The contractual language of the Special Approval provision

turns only on the subjective good faith of the Conflicts Committee. It does not address

30
whether Special Approval is valid if the General Partner withholds information from the

Conflicts Committee. That gap in the LP Agreement must be filled, if necessary, by the

implied covenant of good faith and fair dealing.

For purposes of the Drop-Down, the plaintiffs fare no better when arguing that the

Gulf LNG deal illustrates arm‟s-length pricing such that the Conflicts Committee‟s

decision to buy LNG assets at a significantly higher EBITDA multiple gives rise to an

inference of bad faith. A sufficiently egregious differential in pricing or terms can

support an inference of bad faith. Encore Energy, 72 A.3d at 107; see also Gelfman, 792

A.2d at 990 (holding that terms of conflict-of-interest transaction were sufficiently

extreme to support a pleading-stage inference of bad faith).

After negotiation, El Paso MLP paid 11.1x EBITDA in the Drop-Down, which

was the highest multiple it had ever paid. If the plaintiffs are correct that the Gulf LNG

transaction and the Drop-Down were comparable, then El Paso MLP purchased LNG

assets in a self-dealing transaction for 22% more than the price at which El Paso Parent

declined to buy from a third party for its own account.

If the Conflicts Committee or its advisors knew about the Gulf LNG data point

contemporaneously with the Drop-Down, then the pricing disparity might be sufficient to

support an inference of bad faith when evaluated under the current procedural standard.

Such a ruling would not mean that the defendants would lose and be held liable, only that

a trial would be necessary to resolve a disputed question of fact as to their intent. In this

case, however, the plaintiffs admit that the Conflicts Committee did not know about the

Gulf LNG data point for purposes of the Drop-Down. That concession is dispositive.

31
 c. Kuehn’s Initial Pricing Expectations

The plaintiffs also argue with respect to the Drop-Down that Kuehn came to the

conclusion on March 1, 2010, that a fair multiple to pay in the Drop-Down would be 8.5x

to 9x EBITDA, well below the 11.1x that El Paso MLP ultimately agreed to pay. Squire

Aff. Ex. 25. When Reichstetter opened negotiations with El Paso Parent, he responded to

El Paso Parent‟s offer of 12.2x EBITDA by starting at 10.5x, well above Kuehn‟s

suggested range. The plaintiffs point out that the Conflicts Committee could not have

expected to end up in Kuehn‟s range by starting so far above it.

As with the Conflicts Committee‟s assessment of the Service Agreements,

reasonable minds could disagree over the Conflicts Committee‟s negotiating strategy, but

the strategy was not so extreme that it could support a potential finding of bad faith.

Likewise, the fact that El Paso MLP ultimately paid a higher multiple than what Kuehn

initially believed appropriate is insufficient to support such a finding. Kuehn‟s belief

reflected his preliminary assessment of value, and he continued his email by noting that

“[t]he info in paragraph 1 of Scott‟s 2/24 email may produce a different result . . . .” Id.

In arriving at the final transaction price, the Conflicts Committee relied on numerous

other factors, including Tudor‟s analyses.

d. The Plaintiffs’ Expert Reports

The plaintiffs finally attack the good faith of the Conflicts Committee with two

expert reports. Neither provides meaningful support for the plaintiffs‟ claims.

The first report was submitted by Gilbert E. Matthews, who opined that the

Conflicts Committee breached the contractual good faith standard established in the LP

32
Agreement. The Matthews opinion is not entitled to any weight. First, it is an

impermissible legal opinion that purports to address the legal issue that the court has been

asked to decide. See In re Walt Disney Co. Deriv. Litig., 2004 WL 550750, at *1 n.3

(Del. Ch. Mar. 9, 2004) (excluding expert report that opined the defendants breached

their fiduciary duties and recognizing that “Delaware law requires „exclusion of expert

testimony that expresses a legal opinion‟”). Second, Matthews testified that he did not

know how the term “good faith” was defined in the LP Agreement. He applied an

objective good faith standard, not the subjective good faith standard established in the LP

Agreement.

The other expert report came from Zachary Nye. Rather than opining on the issue

of good faith, Nye valued the assets that El Paso MLP acquired on the premise that there

was “not negligible” risk of counterparty default under the Service Agreements. Nye

divided the cash flow streams from Southern LNG and Elba Express into a guaranteed

stream and a non-guaranteed stream. He then accounted for the default risk by using

option pricing theory to estimate the cost of capital to be applied to the non-guaranteed

cash flows. His method makes sense, but it is not an industry standard practice for

valuing similar assets. Nye‟s method might well be theoretically correct, but the failure

of the Conflicts Committee and Tudor to invent the same analysis and deploy it does not

support a reasonable inference of bad faith.

e. Summary Judgment On Count I For The Drop-Down

The plaintiffs have not cited record evidence which, when viewed in the light most

favorable to the plaintiffs, is sufficient to give rise to a dispute of fact about whether the

33
members of the Conflicts Committee subjectively believed in good faith that the Drop-

Down was in the best interests of the Partnership. Summary judgment is therefore

granted in favor of the General Partner, as well as the other defendants, on Count I as to

the claim that the Drop-Down violated the express requirements of the LP Agreement.

B. Breach Of The Implied Terms Of The LP Agreement

In addition to contending that the defendants breached their express contractual

obligations under the LP Agreement, Count I of the First Complaint asserts that the

defendants violated unwritten obligations supplied by the implied covenant of good faith

and fair dealing. Because a claim for breach of the implied covenant of good faith and

fair dealing is a claim for breach of contract, the General Partner is the only defendant

potentially liable on this claim. See Part II.A.1, supra. Summary judgment is granted to

the General Partner because the plaintiffs have not presented evidence sufficient to

support a claim for breach of an implied provision.

1. The Definition Of “Good Faith” Is Not Controlling.

The defendants initially try to defeat the implied covenant claim by arguing that

the LP Agreement expressly defines the term “good faith,” leaving no room for the

implied covenant. According to the defendants, the implied covenant does not apply

because the LP Agreement makes “good faith” the standard for evaluating whether the

Conflicts Committee validly gave Special Approval and further defines “good faith” as

subjective good faith. The defendants argue that when the parties have “agreed how to

proceed under a future state of the world” (i.e., in the face of a conflict transaction), their

bargain (i.e., the LP Agreement) “naturally controls.” Lonergan v. EPE Hldgs., LLC,

34
5 A.3d 1008, 1018 (Del. Ch. 2010). The Delaware Supreme Court has rejected similar

arguments. Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 418 (Del. 2013),

overruled in part on other grounds by Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del.

2013); accord DV Realty Advisors LLC v. Policemen’s Annuity and Benefit Fund of Chi.,

75 A.3d 101, 109 (Del. 2013) (recognizing that the agreement‟s “contractual duty [of

good faith] encompasses a concept of „good faith‟ that is different from the good faith

concept addressed by the implied covenant of good faith and fair dealing”).

The defendants‟ reliance on the definition of “good faith” misunderstands the

implied covenant. The implied covenant is not a free-floating duty that requires good

faith conduct in some subjectively appropriate sense. Gerber, 67 A.3d at 418. The

implied covenant is rather the doctrine by which Delaware law cautiously supplies

implied terms to fill gaps in the express provisions of an agreement. Contractual gaps

always exist because the human negotiators and drafters lack perfect foresight, operate

with limited resources, and practice their craft using the imprecise tool of language.3 “No

3
An extensive literature elaborates on these basic points. See, e.g., Paul M. Altman &
Srinivas M. Raju, Delaware Alternative Entities and the Implied Contractual Covenant of Good
Faith and Fair Dealing Under Delaware Law, 60 Bus. Law. 1469, 1476 (2005) (“Delaware
courts have long recognized the difficulty inherent in contract formation relating to the parties‟
ability to negotiate and describe within their contract all of the possible provisions that could be
included.”); Harold Dubroff, The Implied Covenant of Good Faith in Contract Interpretation and
Gap-Filling: Reviling a Revered Relic, 80 St. John‟s L. Rev. 559, 576 (2006) (“[C]ourts,
whether implicitly or explicitly, and regardless of their jurisprudential philosophy . . .
acknowledge the impracticality (due to transaction costs) and the impossibility (due to the limits
of human imagination . . . ) of producing an all-encompassing, express agreement.”); Ralph
James Mooney, The New Conceptualism in Contract Law, 74 Or. L. Rev. 1131, 1147 (1995)
(“The assumption that most parties in fact reduce their entire agreement to a single, perfectly
accurate writing [is] . . . unrealistic.”).

35
matter how skilled, sophisticated, or resourceful, parties will be unable to anticipate and

address every possible situation that may develop after their contract is formed.” 4 “And

even if it were possible, contracting is costly. It would be impractical to raise, negotiate,

and address every conceivable situation in the express terms of even the most prolix

agreement.”5 Gaps also exist because some aspects of the deal are so obvious to the

participants that they never think, or see no need, to address them. See Katz v. Oak Indus.

Inc., 508 A.2d 873, 880 (Del. Ch. 1986) (Allen, C.) (“[P]arties occasionally have

understandings or expectations that were so fundamental that they did not need to

negotiate about those expectations.” (quoting Corbin on Contracts § 570, at 601

(Kaufman Supp. 1984)). Precisely because gaps always exist, the implied covenant is a

mandatory, nonwaivable aspect of every contract governed by Delaware law. Dunlap v.

State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005).

In this case, the LP Agreement supplies a definition of “good faith” that governs

whether the defendants have complied with provisions of the LP Agreement that utilize

4
Mohsen Manesh, Express Contract Terms and the Implied Contractual Covenant of
Delaware Law, 38 Del. J. Corp. L. 1, 7 (2013) [hereinafter Implied Contractual Covenant]; see,
e.g., Sonet, 722 A.2d at 324 (noting “the rather practical problem of the impossibility of writing
contract provisions that incorporate every bell and whistle all at once”).
5
Implied Contractual Covenant, supra, at 20; accord Lonergan, 5 A.3d at 1018
(observing that when contracting, parties will necessarily “fail to address a future state of the
world . . . because contracting is costly and human knowledge imperfect”); Amirsaleh v. Bd. of
Trade of City of New York, Inc., 2008 WL 4182998, at *1 (Del. Ch. Sept. 11, 2008) (“No
contract, regardless of how tightly or precisely drafted it may be, can wholly account for every
possible contingency.”); Credit Lyonnais Bank Nederland, N.V. v. Pathe Commc’ns Corp., 1991
WL 277613, at *23 (Del. Ch. Dec. 30, 1991) (Allen, C.) (“In only a moderately complex or
extend[ed] contractual relationship, the cost of attempting to catalog and negotiate with respect
to all possible future states of the world would be prohibitive, if it were cognitively possible.”).

36
that term. The definition is not a means of implying terms to fill contractual gaps, and

the implied covenant does not turn on whether the counterparty acted in subjective good

faith. ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member, LLC,

50 A.3d 434, 442, 444 (Del. Ch. 2012) (observing that “[t]here are references in

Delaware case law to the implied covenant turning on the breaching party having a

culpable mental state,” but finding that “[t]he elements of an implied covenant claim

remain those of a breach of contract claim” and that “[p]roving a breach of contract claim

does not depend on the breaching party‟s mental state”), rev’d on other grounds, 68 A.3d

665 (Del. 2013). The definition of good faith in the agreement does not displace the

implied covenant. DV Realty, 75 A.3d at 109 (“The LPA‟s contractual duty encompasses

a concept of „good faith‟ that is different from the good faith concept addressed by the

implied covenant of good faith and fair dealing.”); Gerber, 67 A.3d at 418 (same).

2. The Application Of The Implied Covenant Standard

The plaintiffs rest their implied covenant claim on the assertion that El Paso Parent

“intentionally concealed material information—GE‟s proposed purchase of 30% of Gulf

LNG—that, were it disclosed, should have led [Tudor] to decline to provide a fairness

opinion.” Pls.‟ Answering Br. at 59-60. The plaintiffs also claim that the General

Partner and Tudor “repeatedly misrepresented” the credit quality of the Service

Agreement counterparties to the Conflicts Committee. Id. at 60. The plaintiffs conclude

that the General Partner “sought and obtained Special Approval in bad faith.” Id.

When presented with a claim under the implied covenant, the first step in the

analysis is to determine whether there is a gap that needs to be filled. Scholars refer to

37
this step as the process of contract construction, which is distinct from the process of

contract interpretation.6 “Interpretation is the process by which a court resolves

ambiguity in the express terms of a contract. . . . By contrast, construction is the process

by which a court determines the scope and legal effect of those terms.” Implied

Contractual Covenant, supra, at 19 (footnote omitted). Through the process of contract

construction, a court determines whether the language of the contract expressly covers a

particular issue, in which case the implied covenant will not apply, or whether the

contract is silent on the subject, revealing a gap that the implied covenant might fill. Id.

A court must first determine whether a gap exists because “[t]he implied covenant

will not infer language that contradicts a clear exercise of an express contractual right.”

Nemec v. Shrader, 991 A.2d 1120, 1127 (Del. 2010). “[B]ecause the implied covenant is,

by definition, implied, and because it protects the spirit of the agreement rather than the

form, it cannot be invoked where the contract itself expressly covers the subject at issue.”

Fisk Ventures, LLC v. Segal, 2008 WL 1961156, at *10 (Del. Ch. May 7, 2008).

“[I]mplied covenant analysis will only be applied when the contract is truly silent with

respect to the matter at hand . . . .” Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910

A.2d 1020, 1032 (Del. Ch. 2006).

If a contractual gap exists, then the court must determine whether the implied

covenant should be used to supply a term to fill the gap. Not all gaps should be filled.

6
See Implied Contractual Covenant, supra, at 18; see also 5 Margaret N. Kniffin, Corbin
on Contracts § 24.3 (Joseph M. Perillo ed., rev. ed. 1998); Williston on Contracts, supra, § 30:1.

38
 The most obvious reason a term would not appear in the parties‟ express
agreement is that the parties simply rejected that term ex ante when they
articulated their contractual rights and obligations. Perhaps, for example,
the parties . . . considered the term, and perhaps [after] some give-and-take
dickering, the parties agreed the term should not be made part of their
agreement. They thus rejected the term by purposefully omitting the term.

Implied Contractual Covenant, supra, at 28 (footnote omitted). Under those

circumstances, the implied covenant should not be used to fill the gap with the omitted

term. To do so would grant parties “contractual protections that they failed to secure for

themselves at the bargaining table.” Aspen Advisors LLC v. United Artists Theatre Co.,

843 A.2d 697, 707 (Del. Ch.), aff’d, 861 A.2d 1251 (Del. 2004). A court must not use

the implied covenant to “rewrite the contract” that a party “now believes to have been a

bad deal.” Nemec, 991 A.2d at 1126. “Parties have a right to enter into good and bad

contracts, the law enforces both.” Id.

But a gap may exist for other reasons:

It may be that, through haste or limited imagination, the parties simply
failed to foresee the need for the term and, therefore, never considered to
include it. Or it may be that the parties considered the term, but given
practical considerations, judged it too remote, unlikely, or otherwise
unimportant to warrant raising during negotiations. They instead sensibly
focused their attention on the terms they deemed more likely to be
significant. Or perhaps the parties, hoping to avoid an unmanageably
prolix agreement, thought the term too obvious to articulate—it “goes
without saying,” they figured—given the other express terms of their
agreement.

Implied Contractual Covenant, supra, at 30 (footnotes omitted). Under these or other

circumstances, it may be appropriate to fill a gap using the implied covenant. The

Delaware Supreme Court has provided guidance in this area by admonishing against a

free-wheeling approach to the implied covenant. Invoking the doctrine is a “cautious

39
enterprise.” Nemec, 991 A.2d at 1125. Implying contract terms is an “occasional

necessity . . . to ensure [that] parties‟ reasonable expectations are fulfilled.” Dunlap, 878

A.2d at 442 (internal quotation marks omitted). Its use should be “rare and fact-

intensive, turning on issues of compelling fairness.” Cincinnati SMSA Ltd. P’ship v.

Cincinnati Bell Cellular Sys. Co., 708 A.2d 989, 992 (Del. 1998). A restrictive approach

encourages parties to craft agreements carefully and be specific about their commitments,

because they cannot be confident that the implied covenant will rescue them later.

Assuming a gap exists and the court determines that it should be filled, then the

court must determine how to fill it. At this stage, a reviewing court does not simply

introduce its own notions of what would be fair or reasonable under the circumstances.

“The implied covenant seeks to enforce the parties‟ contractual bargain by implying only

those terms that the parties would have agreed to during their original negotiations if they

had thought to address them.” Gerber, 67 A.3d at 418. To supply an implicit term, the

court “looks to the past” and asks “what the parties would have agreed to themselves had

they considered the issue in their original bargaining positions at the time of contracting.”

Id. The court seeks to determine “whether it is clear from what was expressly agreed

upon that the parties who negotiated the express terms of the contract would have agreed

to proscribe the act later complained of as a breach of the implied covenant of good

faith—had they thought to negotiate with respect to that matter.” Id. “Terms are to be

implied in a contract not because they are reasonable but because they are necessarily

involved in the contractual relationship so that the parties must have intended them and

have only failed to express them because they are too obvious to need expression.”

40
Cincinnati SMSA Ltd. P’ship v. Cincinnati Bell Cellular Sys. Co., 1997 WL 525873, at *5

(Del. Ch. Aug. 13, 1997), aff’d, 708 A.2d 989 (Del. 1998).

a. No Implied Duty To Volunteer Information

The first contractual gap in this case is whether the General Partner had an

obligation to volunteer information that could be material to the Conflicts Committee‟s

decision to grant Special Approval. The plaintiffs argue that the General Partner should

have disclosed to the Conflicts Committee that (i) GE Capital was acquiring 30% of Gulf

LNG for 9.1x EBITDA, subject to El Paso Parent‟s right of first refusal and (ii) El Paso

Parent declined to exercise its right of first refusal at that price. The defendants have

advanced a number of reasons why the Gulf LNG transaction was not comparable to the

Drop-Down, why El Paso Parent declined to exercise its right of first refusal, and why no

one disclosed the information to the Conflicts Committee. If a duty to disclose existed,

then resolving those arguments would require a trial.

Section 7.9(a) does not require that the General Partner volunteer information to

the Conflicts Committee when seeking Special Approval. The LP Agreement does not

elsewhere impose any affirmative informational obligations on the General Partner or El

Paso Parent. The record suggests that the parties believed that the Conflicts Committee

and its advisors could ask for information from the General Partner and El Paso Parent,

and both the General Partner and El Paso Parent generally seem to have been responsive.

The LP Agreement is silent, however, on what happens without a request. A gap exists.

If the LP Agreement did not eliminate fiduciary duties, then Delaware law would

require both the General Partner and El Paso Parent, as controller of the General Partner,

41
to disclose voluntarily to the Conflicts Committee the material information they

possessed about the Drop-Down. In the Atlas Energy case, this court held that when an

LLC agreement had not eliminated the fiduciary duties owed by the entity who controlled

the LLC, the minority unitholders stated a claim for breach of fiduciary duty against the

controller by alleging, among other things, that the controller withheld material

information from a special committee established under a special approval process

similar to the one in this case. Atlas Energy, 2010 WL 4273122, at *10-11. This default

rule of law parallels the obligations owed by a controller in the corporate context.7

Because the LP Agreement eliminates all fiduciary duties, the fiduciary duty precedents

do not control. The question rather is whether the implied covenant gives rise to a similar

disclosure obligation.

7
Kahn v. Tremont Corp. (Tremont I), 1996 WL 145452, at *15 (Del. Ch. Mar. 21, 1996)
(Allen, C.) (“Generally in order to make a special committee structure work it is necessary that a
controlling shareholder disclose fully all the material facts and circumstances surrounding the
transaction.”) (alteration and internal quotation marks omitted), rev’d on other grounds, 694
A.2d 422 (Del. 1997); accord In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 26-27 (Del.
Ch. 2014); see also Weinberger v. UOP, Inc., 457 A.2d 701, 708-09 (Del. 1983) (holding that
squeeze-out merger did not satisfy test of entire fairness where officers of parent corporation
who served on subsidiary board prepared report on value of subsidiary using subsidiary‟s
information and “it [was] clear from the record that neither [director] shared this report with their
fellow directors of [the subsidiary]” and noting that “[s]ince the study was prepared by two UOP
directors, using UOP information for the exclusive benefit of Signal, and nothing whatever was
done to disclose it to the outside UOP directors or the minority shareholders, a question of
breach of fiduciary duty arises”). Even when fiduciary duties apply, there are certain categories
of sensitive negotiating information that the controlling stockholder need not share, such as
“information disclosing the top price that a proposed buyer would be willing or able to pay, or
the lowest price that a proposed seller would accept.” Tremont I, 1996 WL 145452, at *15;
accord In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 451 (Del. Ch. 2002).

42
 When an alternative entity agreement eliminates fiduciary duties as part of a

detailed contractual governance scheme, Delaware courts should hesitate to use the

implied covenant to reconstruct the outcome that fiduciary duty analysis would have

generated.

Under a fiduciary duty or tort analysis, a court examines the parties as
situated at the time of the wrong. The court determines whether the
defendant owed the plaintiff a duty, considers the defendant‟s obligations
(if any) in light of that duty, and then evaluates whether the duty was
breached. Temporally, each inquiry turns on the parties‟ relationship as it
existed at the time of the wrong.

Gerber, 67 A.3d at 418. “Fiduciary duty review empowers courts to determine how a

governance scheme should operate under particularized factual circumstances.”

Lonergan, 5 A.3d at 1018. Although the availability of ex post fiduciary review

inherently produces some degree of uncertainty, “there is good reason to suppose it can

be efficient.” Equity-Linked Investors, L.P. v. Adams, 705 A.2d 1040, 1055 n.48 (Del.

Ch. 1997) (Allen, C.).

“The implied covenant is not a substitute for fiduciary duty analysis.” Lonergan,

5 A.3d at 1017. “When parties exercise the authority provided by the LP Act to eliminate

fiduciary duties, they take away the most powerful of a court‟s remedial and gap-filling

powers.” Id. at 1018.

[W]hen parties fail to address a future state of the world—and they
necessarily will because contracting is costly and human knowledge
imperfect—then the elimination of fiduciary duties implies an agreement
that losses should remain where they fall. After all, if the parties wanted
courts to be in the business of shifting losses after the fact, then they would
not have eliminated the most powerful tool for doing so.

43
Id. (footnote omitted). To use the implied covenant to replicate fiduciary review “would

vitiate the limited reach of the concept of the implied duty of good faith and fair dealing.”

Nemec, 991 A.2d at 1128; see In re IAC/InterActive Corp., 948 A.2d 471, 507 (Del. Ch.

2008) (“If this court were to rely on the implied covenant of good faith and fair dealing

. . . to read in a broad fiduciary obligation, it would undermine the bargain reached by the

parties.”).

In Gerber, in the course of rejecting the defendants‟ contention that a contractual

definition of good faith displaced the implied covenant, the Delaware Supreme Court

identified potential Special Approval scenarios that could give rise to an implied

covenant breach:

Examples readily come to mind of cases where a general partner‟s actions
in obtaining a fairness opinion from a qualified financial advisor
themselves would be arbitrary or unreasonable, and “thereby frustrat[e] the
fruits of the bargain that the asserting party reasonably expected.” To
suggest one hypothetical example, a qualified financial advisor may be
willing to opine that a transaction is fair even though (unbeknownst to the
advisor) the controller has intentionally concealed material information
that, if disclosed, would require the advisor to opine that the transaction
price is in fact not fair.

67 A.3d at 420 (quoting Nemec, 991 A.2d at 1126). The “hypothetical example” was not

essential to the Delaware Supreme Court‟s decision. To illustrate the example, the

Gerber decision cited In re Emerging Communications, Inc. Shareholders Litigation,

2004 WL 1305745 (Del. Ch. June 4, 2004), a corporate law fiduciary duty case involving

a controlling stockholder squeeze-out that did not implicate the implied covenant of good

faith and fair dealing. Notably, the Gerber decision never stated that the example

necessarily would constitute a breach of the implied covenant, only that the defendants‟

44
position that a contractual definition of good faith dominated the implied covenant

“would preclude those claims.” 67 A.3d at 421.

“There is no question that, if the Supreme Court has clearly spoken on a question

of law necessary to deciding a case before it, this court must follow its answer.” In re

MFW S’holders Litig., 67 A.3d 496, 520 (Del. Ch. 2013), aff’d sub nom. Kahn v. M & F

Worldwide Corp., 88 A.3d 635 (Del. 2014). But when an opinion contains judicial

statements on issues that “would have no effect on the outcome of [the] case,”8 those

statements are dictum and “without precedential effect.”9 The better reading of Gerber

(at least to me) appears to be that the Delaware Supreme Court identified the implied

covenant issue and cited a corporate fiduciary duty case to illustrate the potential reason

for concern. Gerber does not appear to have held that a failure to volunteer information

would always constitute an implied covenant breach. Obviously this is the interpretation

of one trial judge, and it may not accurately reflect the Delaware Supreme Court‟s intent.

Having concluded that the question remains open, this court‟s task is to determine

whether it is clear from what was expressly agreed upon in the LP Agreement that the

parties would have agreed to require the General Partner to volunteer material

information about other transactions to the Conflicts Committee, had they thought to

address that matter. Gerber, 67 A.3d at 418. Several factors contribute to the conclusion

8
Brown v. United Water Del., Inc., 3 A.3d 272, 277 (Del. 2010).
9
Crown EMAK P’rs, LLC v. Kurz, 992 A.2d 377, 398 (Del. 2010); accord United Water,
3 A.3d at 275, 276 n.17.

45
that the drafters of the LP Agreement would not have imposed an affirmative obligation

on the General Partner to disclose material information about other transactions to the

Conflicts Committee.

First, the drafters of the LP Agreement adopted a general approach of using the

contractual freedom provided by the Delaware Limited Partnership Act (the “Act”) to

expand the General Partner‟s freedom of action and dial back the protections that

otherwise would exist if fiduciary duties applied. If the issue of voluntary disclosure had

arisen at the time of contracting, then it is reasonable to assume that the drafters would

have researched the fiduciary duty precedents, identified the disclosure obligation they

imposed, and expressly eliminated it.

Second, the drafters of the LP Agreement did not merely restrict or limit fiduciary

duties. They eliminated them, resulting in a fully contractual relationship. In such a

relationship, the general rule is that similarly situated counterparties have no duty to

speak that would require one party to disclose private information to the other. 10 The LP

Agreement provides that the members of the Conflicts Committee would be at least three

directors of the General Partner, suggesting that its members would be individuals

knowledgeable about El Paso MLP, El Paso Parent, and the oil and gas industry. The LP

Agreement contemplates that the Conflicts Committee would retain expert legal and

10
See generally Laidlaw v. Organ, 15 U.S. (2 Wheat.) 178 (1817); Restatement (Second)
of Contracts § 161 (1981); Michael J. Borden, Mistake and Disclosure in a Model of Two-Sided
Informational Inputs, 73 Mo. L. Rev. 667 (2008) (surveying and analyzing justifications under
contract theory for non-disclosure).

46
financial advisors with similar knowledge and expertise. The Conflicts Committee

therefore would be a sophisticated and similarly situated negotiating adversary for the

General Partner. Ordinarily, under those circumstances, one party to the contract would

not owe an affirmative duty of disclosure to its counterparty.

Third, as a consequence of eliminating all fiduciary obligations, the LP Agreement

eliminated the General Partner‟s fiduciary duty of disclosure to the limited partners. See

In re K-Sea Transp. P’rs L.P. (K-Sea I), 2011 WL 2410395, at *7-8 (Del. Ch. June 10,

2011); Lonergan, 5 A.3d at 1023. As explained by corporate precedents, the duty to

disclose all material information reasonably available when seeking stockholder action

represents “the application in a specific context of the board‟s fiduciary duties.”

Malpiede v. Townson, 780 A.2d 1075, 1086 (Del. 2001). The duty not to speak falsely

that applies whenever directors choose to communicate with stockholders similarly flows

from a board‟s fiduciary duties. Malone v. Brincat, 722 A.2d 5, 14 (Del. 1998). The

same is true in the limited partnership context: Absent contractual modification, a

general partner owes fiduciary duties that include a “duty of full disclosure.” Sussex Life

Care Assocs. v. Strickler, 1988 WL 156833, at *4 (Del. Ch. June 13, 1989) (“There can

be no question but that partners owe fiduciary duties to their fellow partners, and this

duty has been held to encompass a duty of full disclosure . . . .” (citing Boxer v. Husky

Oil Co., 429 A.2d 995 (Del. Ch. 1981))). A limited partner who wishes to assert a

disclosure claim therefore “must allege either a fiduciary duty or a contractual duty to

disclose.” Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *3 (Del. Ch.

Aug. 26, 2005). When an alternative entity agreement eliminates all fiduciary duties,

47
then all fiduciary duties have been eliminated. A claim for common law fraud remains,

and the alternative entity agreement might well include a contractual duty to disclose

specific information or to provide broad categories of information. However, “the

implied covenant cannot support a generalized duty to disclose all material information

reasonably available.” Lonergan, 5 A.3d at 1025. The drafters of the LP Agreement

eliminated the fiduciary duty of disclosure owed to limited partners. It seems unlikely

that the same drafters would expect the General Partner to owe an implicit contractual

obligation to volunteer information when negotiating with the Conflicts Committee.

Fourth, the LP Agreement‟s approach to the corporate opportunity doctrine shows

how the drafters handled a common law principle that, absent contractual modification,

could require the General Partner to inform El Paso MLP about business opportunities

within the Partnership‟s line of business that the Partnership had the capacity to

undertake. Section 7.5(c) states:

No Indemnitee (including the General Partner) who acquires knowledge of
a potential transaction, agreement, arrangement or other matter that may be
an opportunity to the Partnership, shall have any duty to communicate or
offer such opportunity to the Partnership, and such Indemnitee (including
the General Partner) shall not be liable to the Partnership, to any Limited
Partner or any other Person for breach of any fiduciary or other duty by
reason of the fact that such Indemnitee (including the General Partner)
pursues or acquires for itself, directs such opportunity to another Person or
does not communicate such opportunity or information to the Partnership;
provided such Indemnitee does not engage in such business or activity as a
result of or using confidential or proprietary information provided by or on
behalf of the Partnership to such Indemnitee.

LPA § 7.5(c). Confronted with a situation where common law fiduciary duties could

require the General Partner to disclose information to the Partnership, the LP Agreement

48
specified that the General Partner would not have a duty to communicate the information

to the Partnership or liability for failing to do so.

Finally, precedent suggests that if the drafters intended for a disclosure obligation

to exist, they would have included specific language. A recent decision by this court

interpreted a limited partnership agreement that utilized a similar structure for conflict-of-

interest transactions, with four contractual alternatives including Special Approval. See

K-Sea I, 2011 WL 2410395, at *5. The language authorizing the Special Approval route

stated that it would be effective “as long as the material facts known to the General

Partner or any of its Affiliates regarding any proposed transaction were disclosed to the

Conflicts Committee at the time it gave its approval.” Id. The inclusion of this condition

in the K-Sea agreement indicates that without this language, a general partner and its

affiliates would not have an obligation to disclose information.11

The plaintiffs have not identified countervailing indications that would support an

expectation at the time of contracting that the General Partner would have to volunteer

information to the Conflicts Committee. Given this confluence of factors, the plaintiffs

cannot rely on the implied covenant to fill the gap in the LP Agreement with a mandatory

11
See Kuroda v. SPJS Hldgs., L.L.C., 2010 WL 925853, at *10 (Del. Ch. Mar. 16, 2010)
(agreeing that “the implied covenant . . . should not be used as a tool to insert language into an
agreement . . . [that the] defendants obviously knew how to employ”); Airborne Health, 984
A.2d at 146-47 (observing that a litigant‟s argument for an implied term was “undercut by the
ease with which” the parties could have inserted the terms themselves, especially when the terms
were “familiar to any transactional lawyer”); Corporate Prop. Assocs. 14 Inc. v. CHR Hldg.
Corp., 2008 WL 963048, at *5 (Del. Ch. Apr. 10, 2008) (dismissing claim seeking to imply a
term in stock warrants where “sophisticated parties such as those involved in this transaction
know that cash dividends are a dilution technique, . . . and that there are methods for protecting
themselves contractually”).

49
disclosure requirement. The gap exists by design to replicate an arm‟s-length, non-

fiduciary negotiation.

b. No Breach Of The Duty Not To Provide False Information

The second alleged contractual gap in this case is whether the General Partner

could intentionally misrepresent facts to the Special Committee. The implied covenant

generally prohibits a party from providing false information to its contractual

counterparty.

[E]ven when agreeing to a contractual relationship that either party could
terminate at will, parties generally would not grant each other the right to
commit fraud. It would be a rare party who, in the original bargaining
position, would agree that their counterparty could defraud him. Absent
explicit anti-reliance language pursuant to which a sophisticated party
knowingly assumes risk, see RAA Mgmt., LLC v. Savage Sports Hldgs.,
Inc., 45 A.3d 107, 110, 115 (Del. 2012), a court can presume that the
question “Can I lie to you?” would have been met with a resounding “No.”
Proof of fraud therefore violates the implied covenant, not because breach
of the implied covenant requires fraud, but because “no fraud” is an implied
contractual term.

ASB Allegiance, 50 A.3d at 443; accord id. at 444 (“Proving fraud thus offers one way of

establishing a breach of the implied covenant, but not the only way. Proving fraud

represents a specific application of the general implied covenant test, viz., what would the

parties have agreed to when bargaining initially?”).

Unfortunately for the plaintiffs, the evidence does not support a reasonable

inference that El Paso Parent, the General Partner, or Tudor provided information to the

Conflicts Committee knowing it was incorrect. As discussed previously, the Conflicts

Committee obtained and considered information about the terms of the Service

Agreements, the size of the guarantees, and the creditworthiness of the counterparties and

50
guarantors. Just as the plaintiffs disagree with the Conflicts Committee‟s assessment of

the riskiness of the Service Agreements, the plaintiffs disagree with how El Paso Parent,

the General Partner, and Tudor described the information. The plaintiffs have not

submitted evidence from which a fact-finder could infer that El Paso Parent, the General

Partner, or Tudor provided false information to the Conflicts Committee. Summary

judgment on the implied covenant claim is therefore granted in favor of the defendants.

C. Secondary Liability

The plaintiffs assert claims for aiding and abetting a breach of contract (Count II)

and tortious interference with contract (Count III). Both counts seek to impose secondary

liability on other actors for their involvement in the primary wrong asserted in Count I.

Because summary judgment has been granted on Count I, there is no underlying wrong to

support a claim for secondary liability. Summary judgment is granted on Counts II and

III as well.

III. CONCLUSION

Summary judgment is granted in favor of all defendants with respect to the March

2010 drop-down transaction. The plaintiffs‟ cross motion seeking to establish liability as

a matter of law is denied.

51