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In re El Paso Pipeline Partners, L.P. - No. 7141-VCL, 2014 Del. Ch. LEXIS 101 (Ch. June 12, 2014)

Rule:

Assuming a contractual 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 of good faith and fair dealing 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. 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. 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. 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.

Facts:

In March 2010, El Paso Corporation sold to El Paso Pipeline Partners, L.P. (the "Partnership" or "El Paso MLP") a 51 percent interest in Southern LNG Company, L.L.C. ("Southern LNG") and a 51 percent interest in El Paso Elba Express Company, L.L.C. ("Elba Express"). El Paso MLP's proposal and eventual purchase of 51 percent of Southern LNG and Elba Express are referred to as the March 2010 "drop-down" proposal and transaction. Now, in this derivative action, the plaintiffs challenge the March 2010 drop-down transaction. (They are not currently challenging the decision related to a November 2010 drop-down transaction in which El Paso MLP acquired the remaining 49 percent interests in Southern LNG and Elba Express.) Plaintiffs contend that the individual defendants violated their express contractual obligations and the implied covenant of good faith and fair dealing.  The plaintiffs argue that through the drop-down, the El Paso parent sought to off-load now-risky assets onto El Paso MLP at an inflated price. After discovery, the defendants moved for summary judgment in their favor, and the plaintiffs cross moved for summary judgment as to liability. 

Issue:

In plaintiffs' derivative action challenging a "drop-down" transaction, asserting that the individual defendant directors  violated their express contractual obligations and the implied covenant of good faith and fair dealing, were defendants entitled to a grant of summary judgment?

Answer:

Yes

Conclusion:

The Court of Chancery of Delaware granted the defendants' motion for summary judgment as to the March 2010 transaction and denied the plaintiffs' cross-motion as to the same transaction. The plaintiffs had not cited record evidence which, when viewed in the light most favorable to them. The Court held that this was sufficient to give rise to a dispute of fact about whether members of the LP' agreement's "conflicts committee" subjectively believed in good faith that a "drop-down" sale was in the best interests of El Paso MLP. The Court further held that the plaintiffs could not rely on the implied covenant of good faith and fair dealing to fill a gap in the LP agreement with a mandatory disclosure requirement; the gap existed by design to replicate an arm's-length, non-fiduciary negotiation. Lastly, the plaintiffs had not submitted evidence from which a fact-finder could infer that the general partner or a financial advisor had provided false information to the conflicts committee.

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