Leone v. Owsley
810 F.3d 1149
10th Cir.2015Background
- Charles D. Leone II resigned as a principal of Madison Street Partners, LLC (MSP) in August 2012; MSP’s Operating Agreement allowed the managers (Owsley and Hayworth) to set a repurchase price for a departing principal’s interest as the company’s fair market value “as determined in good faith by the Managers.”
- Managers hired two independent valuation firms (St. Charles and INTRINSIC). Both produced low valuations for Leone’s 19.75% interest; Managers set the buyout at $135,850 (average of midpoints) which Leone rejected.
- Leone sued managers for breach of the Operating Agreement’s express good-faith valuation requirement and breach of the implied covenant of good faith and fair dealing, alleging managers influenced and misled the valuation firms and relied on clearly erroneous numbers.
- Managers asserted an affirmative defense under Delaware’s safe-harbor for good-faith reliance on experts (Del. Code tit. 6 § 18-406) and moved for summary judgment; district court granted summary judgment for the managers.
- On appeal, the Tenth Circuit reviewed de novo and found genuine disputes of material fact about the managers’ conduct and whether they in fact relied in good faith on the valuations, concluding the district court erred in granting summary judgment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether district court conflated express and implied good-faith obligations | Leone: express contractual and implied covenants have distinct temporal focuses and both can support relief | Managers: reliance on expert reports invokes statutory safe-harbor and bars liability | Court: district court’s failure to distinguish was error in analysis but both covenants overlap here; view of good faith inquiry is consistent with Delaware precedent |
| Whether "bad faith" requires a tortious mental state (moral obliquity, ill will) | Leone: bad faith can be shown by conduct that evinces evasion of the bargain or abuse of power, not only moral obliquity | Managers: bad faith requires a culpable, dishonest state of mind; reliance on experts presumptively shields them | Court: district court’s articulation (including non-tortious formulations from Delaware cases) was proper; bad faith may include conduct short of classic tortious moral obliquity when it subverts contractual integrity |
| Whether substantive unreasonableness of valuation alone can defeat safe-harbor | Leone: an appraiser’s result so egregiously unreasonable should permit substantive review and rebut reliance presumption | Managers: absent procedural taint or collusion with appraiser, parties are stuck with their bargain; safe-harbor protects reliance | Court: the district court erred to the extent it refused to consider cumulative evidence of procedural and substantive issues; substantive unreasonableness may be probative when paired with procedural taint |
| Whether summary judgment was appropriate on managers’ safe-harbor defense | Leone: presented evidence (misleading statements to appraisers, withheld materials, lower internal numbers used, managers’ contradictory emails/acts) creating triable issues | Managers: valuation firms were qualified; managers did not coerce or supply materially false data; they reasonably relied on experts | Held: Reversed — genuine disputes of material fact exist about procedural integrity of the valuations and managers’ good faith reliance; summary judgment improper; case remanded for further proceedings |
Key Cases Cited
- Gerber v. Enterprise Prods. Holdings, LLC, 67 A.3d 400 (Del. 2013) (distinguishes express contractual good faith from the implied covenant of good faith)
- DV Realty Advisors LLC v. Policemen’s Annuity & Benefit Fund of Chicago, 75 A.3d 101 (Del. 2013) (defines contractual good faith by reference to conduct that is "so far beyond the bounds of reasonable judgment" that it implies bad faith)
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (discusses rebuttable presumption of good faith when directors rely on outside experts)
- SIGA Techs., Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013) (addresses bad-faith standard and state-of-mind formulations)
- Allen v. Encore Energy Partners, L.P., 72 A.3d 93 (Del. 2013) (recognizes some actions may be objectively so egregious they imply bad faith)
- Brinckerhoff v. Enbridge Energy Co., Inc., 67 A.3d 369 (Del. 2013) (applies business-judgment-rule formulation to define bad faith)
- Calderone v. United States, 799 F.2d 254 (6th Cir. 1986) (discusses summary judgment burden when the movant bears the burden of proof)