Brinckerhoff v. Enbridge Energy Company, Inc.
273, 2016
Del.
Mar 28, 2017

Background

  • Peter Brinckerhoff, a long-term public unitholder of Enbridge Energy Partners, L.P. (EEP), challenged a 2015 transaction in which EEP repurchased the Alberta Clipper interest from sponsor Enbridge for $1 billion and issued $694 million of new Class E units to Enbridge, plus $306 million debt repayment.
  • The 2015 repurchase omitted expansion rights that had been included in the 2009 joint-venture (JVA) sale of the same asset; projected EBITDA and oil prices declined between 2009 and 2014.
  • The LPA was amended to add a “Special Tax Allocation” allocating certain taxable gross income to public unitholders (reducing EEP GP’s taxable share), which Brinckerhoff alleges shifted hundreds of millions of dollars of tax burden to public unitholders.
  • Brinckerhoff sued alleging breaches of specific LPA provisions: Section 6.6(e) (affiliate transactions must be “fair and reasonable”), Section 5.2(c) (tax allocations cannot have a material adverse effect), and Section 15.3(b) (amendments cannot enlarge limited partners’ obligations). He sought monetary and equitable relief.
  • The Court of Chancery dismissed for failure to plead bad faith under the pleading standard derived from earlier Brinckerhoff decisions; the Delaware Supreme Court reversed in part, holding Section 6.6(e) is a standalone affirmative obligation and bad faith should be judged by an objective “reasonable belief” standard.

Issues

Issue Plaintiff's Argument Defendant's Argument Held
Whether Section 6.6(e) (affiliate transactions) is displaced by general good-faith provisions (6.8(a), 6.9(a), 6.10(d)) Brinckerhoff: Section 6.6(e) is a specific affirmative requirement that controls; general provisions do not nullify it Defendants: General LPA good-faith/exculpatory clauses require plaintiff to plead bad faith before claiming breach Held: Specific Section 6.6(e) controls; general good-faith clauses do not modify or displace its affirmative duty
Proper standard to allege bad faith under the LPA exculpatory clause (6.8(a)) Brinckerhoff: allegations (price, ignored comparables, undervaluation of tax allocation) support inference GP lacked reasonable belief transaction was in partnership’s best interests Defendants: Plaintiff must plead a heightened waste-like standard, i.e., decision inexplicable except for bad faith; or GP conclusively presumed to have acted in good faith by relying on advisor Held: Court adopts Norton standard: bad faith alleged if plaintiff pleads facts showing GP did not reasonably believe action was in partnership’s best interests (objective standard); Brinckerhoff’s allegations suffice at pleading stage
Whether Special Tax Allocation violated Sections 5.2(c) and 15.3(b) of the LPA Brinckerhoff: Tax allocation increased unitholders’ tax burdens and thus materially adverse / enlarged obligations without consent Defendants: Allocation and LPA amendment were lawful; Section 5.2(c) inapplicable; “obligations” in 15.3(b) means contractual obligations to the partnership, not tax liabilities to government Held: Claims under 5.2(c) and 15.3(b) fail—plaintiff waived 5.2(c) argument; “obligations” in 15.3(b) does not cover tax liabilities to third parties, so no breach
Availability of remedies (monetary damages vs equitable relief) if breach proven Brinckerhoff: Monetary damages and equitable relief (reformation/rescission) are available because exculpation applies only if GP acted in good faith Defendants: Section 6.8(a) exculpates GP from monetary damages if acted in good faith; conclusive presumption of good faith from fairness opinion (6.10(b)) may bar relief Held: If GP acted in good faith monetary damages are barred, but equitable remedies remain available; at pleading stage GP not entitled to conclusive presumption of good faith based on Simmons opinion; case remanded for further proceedings on breach and remedies

Key Cases Cited

  • Norton v. K-Sea Transp. Partners L.P., 67 A.3d 354 (Del. 2013) (interprets LPA language to replace fiduciary duties with an objective contractual good-faith standard and supplies definition of "good faith" for exculpatory clauses)
  • Brinckerhoff v. Enbridge Energy Co., Inc., 67 A.3d 369 (Del. 2013) (prior appeal involving related 2009 transaction and articulation of pleading standard later revisited)
  • Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160 (Del. 2002) (contractual fiduciary duties in an agreement can support equitable remedies)
  • DCV Holdings, Inc. v. ConAgra, Inc., 889 A.3d 954 (Del. 2005) (specific contract provisions control over general ones in interpretation)
  • Parnes v. Bally Entertainment Corp., 722 A.2d 1243 (Del. 1998) (articulated the "waste"-style standard relied upon in earlier pleading decisions)
Read the full case