Baldwin v. New Wood Resources LLC, 283 A.3d 1099

Background

New Wood Resources LLC (the Company) and Richard F. Baldwin (manager/member) were parties to an LLC Agreement that granted indemnification and advancement rights to covered persons conditioned on acting "in good faith" and included an advancement Undertaking to repay advances if ultimately determined not entitled.
Section 8.2 allowed entitlement determinations to be made by (1) non‑party managers, (2) independent counsel, or (3) a majority of then‑outstanding unitholders. ACR (the majority unitholder) executed a Written Consent finding Baldwin had not acted in good faith.
Baldwin obtained a Court of Chancery judgment ordering advancement and indemnification payments; New Wood later paid but sought to claw back $867,211.03 based on ACR’s Written Consent and Baldwin’s alleged non‑entitlement.
New Wood sued in Superior Court to recover the advances; Baldwin counterclaimed, arguing an implied covenant requires any indemnification determination be made in good faith and alleging New Wood acted in bad faith to avoid its obligations.
The Superior Court granted New Wood judgment on the pleadings. The Delaware Supreme Court reversed and remanded, holding (1) New Wood is the real party in interest and (2) Section 8.2 contains an implied covenant requiring indemnification determinations be made in good faith; the sufficiency of Baldwin’s bad‑faith allegations survives a pleadings challenge.

Issues

Issue	New Wood's Argument	Baldwin's Argument	Held
Real party in interest — who may be sued to claw back advances	ACR (majority unitholder) made the Written Consent, so New Wood is not the proper target	New Wood, as the Company obligated by the LLC Agreement to indemnify and claw back under the Undertaking, is the real party in interest	New Wood is the real party in interest and may be sued
Whether Section 8.2 implies a covenant that the entitlement determination must be made in good faith	The agreement’s express terms control; implying a covenant would rewrite negotiated allocation of risks	The implied covenant (or necessary implication) fills the gap: those exercising discretion must act in good faith to preserve the Section 8.2 standard	Court holds Section 8.2 contains an implied good‑faith obligation on those making the determination
Whether Baldwin’s pleadings sufficiently allege bad faith by New Wood to survive judgment on the pleadings	Baldwin’s allegations are insufficient and relate to ACR, not New Wood	Baldwin alleges delays, refusals to advance, and conduct designed to frustrate advancement/indemnification	At the pleadings stage, Baldwin’s allegations are sufficient to create a factual issue; reversal and remand for further proceedings
Enforceability of Undertaking to repay advances when determination was made by majority unitholders	The Undertaking unambiguously requires repayment if ultimately determined not entitled	The Undertaking cannot be enforced where the underlying denial was made in bad faith (implied covenant limits enforcement)	Implied covenant applies; factfinder must assess whether denial was made in good faith before enforcing clawback (remanded)

Key Cases Cited

Dieckman v. Regency GP LP, 155 A.3d 358 (Del. 2017) (implied covenant prevents contracting party from subverting contract protections; some omissions are "too obvious" to state expressly)
Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (implied covenant protects reasonable expectations assessed at contracting)
Oxbow Carbon & Minerals Holdings, Inc. v. Crestview‑Oxbow Acquisition, LLC, 202 A.3d 482 (Del. 2019) (discretion conferred by contract remains subject to implied covenant limits)
Glaxo Grp. Ltd. v. DRIT LP, 248 A.3d 911 (Del. 2021) (implied covenant may impose good‑faith obligations when contracts confer discretion)
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199 (Del. 1993) (bad‑faith standard requires more than negligence; often a factual issue precluding resolution on pleadings)
E.I. du Pont de Nemours & Co. v. Pressman, 679 A.2d 436 (Del. 1996) (courts may imply terms to effectuate the parties’ reasonable contractual expectations)
Stifel Financial Corp. v. Cochran, 809 A.2d 555 (Del. 2002) (Delaware policy favors broad indemnification and advancement rights)