In re El Paso Pipeline Partners, L.P. Derivative Litig. - No. 7141-VCL, 2015 Del. Ch. LEXIS 116 (Ch. Apr. 20, 2015)

Rule:

A claim for breach of contract has three elements: first, the existence of the contract, whether express or implied; second, the breach of an obligation imposed by that contract; and third, the resultant damage to the plaintiff. To satisfy the final element, a plaintiff must show both the existence of damages provable to a reasonable certainty, and that the damages flowed from the defendant's violation of the contract. While courts will not award damages which require speculation as to the value of unknown future transactions, so long as the court has a basis for a responsible estimate of damages, and plaintiff has suffered some harm, mathematical certainty is not required.

Facts:

In March 2010, El Paso Corporation ("Parent") sold El Paso Pipeline Partners, L.P. (the "Partnership" or "El Paso MLP") a 51% interest in Elba Island, Georgia and Elba Express, L.L.C (collectively, “Elba”). In November, Parent sold El Paso MLP the remaining 49% interest, plus a 15% interest in another Parent subsidiary. In both transactions, ownership interests "dropped down" from Parent to El Paso MLP. The limited partnership agreement governing El Paso MLP (the "LP Agreement" or "LPA") permitted El Paso Pipeline GP Company, L.L.C., the sole general partner of El Paso MLP (the "General Partner"), to cause El Paso MLP to engage in a transaction involving a conflict of interest, like the dropdowns, if the transaction received Special Approval, defined in the LP Agreement as approval from a Conflicts Committee (the "Committee") comprising qualified members of the board of directors of the General Partner (the "GP Board"). The only contractual requirement for Special Approval was that the Committee members believe in good faith that the transaction was in the best interests of El Paso MLP. The plaintiff challenged both dropdowns.

Issue:

By causing El Paso MLP to engage in the dropdown, did the general partner breach the LP agreement?

Answer:

Yes.

Conclusion:

The court held that the members of a committee comprising members of the board of directors of the general partner failed to form a subjective belief that a "dropdown" of ownership interests from a transaction was in the best interests of the LP, and the GP therefore breached the LP agreement by causing the LP to engage in the dropdown. While the court noted that the committee members thought the dropdown would allow the LP to increase distributions on its common units while raising inexpensive capital, it held that neither factor meant the transaction was in the best interests of the LP. The court further noted that the plaintiff’s expert demonstrated at trial that the LP paid $171 million more for a 49% interest in two LLC's than it would have if the GP had not breached the LP agreement; thus, the GP was liable for that amount, plus pre- and post-judgment interest at the legal rate, compounded quarterly, from the date the dropdown closed.