Baldwin v. New Wood Resources LLCBaldwin v. New Wood Resources LLC
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and MONTGOMERY-REEVES Justices, constituting the Court en Banc.
Upon appeal from the Superior Court. REVERSED and REMANDED.
Sean J. Bellew, Esquire (argued), Bellew, LLC, Wilmington, Delaware. Of Counsel: Chris L. Gilbert, Esquire, Gilbert PC, Dallas, Texas, for Appellant.
Richard P. Rollo, Esquire (argued), Travis S. Hunter, Esquire, Renee Mosley Delcollo, Esquire, Richards Layton & Finger, P.A., Wilmington, Delaware for Appellee.
This appeal involves a breach of contract claim arising out of an indemnitee‘s refusal to repay money advanced pursuant to an LLC Agreement. Under the LLC Agreement, a Person is entitled to indemnification if the Person acted in good faith and in a manner believed to be in or not opposed to the best interests of the Company.1 The indemnification payments are further
According to the LLC Agreement, the determination of whether a Person acted in good faith may be made in one of three ways: (1) by the managers; (2) by independent legal counsel; or (3) by a majority of the then-outstanding unitholders. We address the narrow issue of whether the LLC Agreement contains an implied covenant of good faith that would require this determination of a Person‘s entitlement to indemnification to be made in good faith. For the reasons set forth below, we hold that it does. Therefore, we REVERSE and REMAND for further proceedings cоnsistent with this opinion.
I. FACTUAL AND PROCEDURAL BACKGROUND
A. The Parties
Plaintiff/Counterclaim-Defendant Below-Appellee New Wood Resources LLC (“New Wood“) is a Delaware limited liability company that was formed on September 6, 2013.2 New Wood operates a plywood and veneer manufacturing facility in Mississippi known as Winston Plywood & Veneer LLC (“WPV“). New Wood controls WPV through New Wood‘s wholly-owned subsidiary, WPV Holdco LLC (“Holdco“).3 ACR Winston Preferred Holdings LLC (“ACR“) held approximately 85.52 percent of New Wood‘s then-outstanding units, making it the majority holder of New Wood. Andrew M. Bursky (“Bursky“) was President of ACR. Kurt Liebich (“Liebich“) was the former Chief Executive Officer of Winston.
Defendant/Counterclaim-Plaintiff Below-Appellant Dr. Richard F. Baldwin (“Baldwin“) served as a manager of New Wood starting in September of 2013,4 and served as a member of New Wood‘s Board of Managers.5 Baldwin served as the manager of Oak Creek Investments LLC (“OCI“).6 OCI is also a member of New Wood. Baldwin was asked to invest in New Wood, and to oversee the revitalization of a newly acquired plywood mill in Louisville, Mississippi.7
B. The LLC Agreement
In March 2014, New Wood‘s members entered the Second Amended and Restated Limited Liability Company Agreement (the “LLC Agreement” or the
Right to Indemnification. Subject to the limitations аnd conditions as provided in this Article 8, each Person who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative (hereinafter, a “Proceeding“), or any appeal in such a Proceeding or any inquiry or investigation that could lead to such a Proceeding, by reason of the fact that it, or a Person of whom it is the legal representative, is or was a Member, Manager, Member of a Committee of the Board or an Officer, or while a Member, Manager or an Officer is or was serving at the request of the Company as a member, manager, director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic limited liability company, corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other Person (each, an “Indemnitee“) shall be indemnified by the Company to the fullest extent permitted by the Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said Act permitted the Company to provide prior to such amendment) against judgments, penalties (including excise and similar taxes and punitive damages), fines, settlements and reasonable expenses (including attorneys’ fees) actually incurred by such Person in connection with such Proceeding, and indemnification under this Article 8 shall continue as to a Person who has ceased to serve in the capacity which initially entitled such Person to indemnity hereunder. Notwithstanding anything to the contrary in this Section 8.2, no Person shall be entitled to indemnification hereunder unless it is found (in the manner described below in this Section 8.2) that, with respect to the matter for which such Person seeks indemnification, such Person acted in good faith and in a manner that he or she reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had reasonable cause to believe that his or her conduct was unlawful.9
The second part of Section 8.2 addresses how the determination is made as to whether an indemnitee has met the standard of conduct:
The finding of the standard of conduct required above shall be made (a) by a
majority vote of all of the Managers who are not parties to such Proceeding even though less than a quorum or (b) if there are no such Managers, or if such Managers so direct, by independent legal counsel in a written opinion or (c) by holders of a Majority of the then-outstanding Units (determined without regard to any Members that are parties to such Proceeding). Notwithstanding anything to the contrary herein, “internal disputes” shall be excluded from the types of claims indemnified hereunder. For purposes of the preceding sentence, an “internal dispute” is defined exclusively as any proceeding commenced by any Atlas Member or one or more officers, directors, managers, partners, members or employees of any Atlas Member against any other Atlas Member or one or more other officers, directors, managers, partners, members or employees of such Atlas Member.10
Section 8.3 governs advancement rights, and provides as follows:
Advance Payment. The right to indemnification conferred in this Article 8 shall include the right to be рaid or reimbursed by the Company the reasonable expenses incurred by a Person of the type entitled to be indemnified under Section 8.2 who was, is or is threatened to be made a named defendant or respondent in a Proceeding in advance of the final disposition of the Proceeding and without any determination as to the Person‘s ultimate entitlement to indemnification; provided, however, that the payment of such expenses incurred by any such Person in advance of the final disposition of a Proceeding shall be made only upon delivery to the Company of a written affirmation by such Person of its good faith belief that it has met the standard of conduct necessary for indemnification under this Article 8 and a written undertaking, by or on behalf of such Person, to repay all amounts so advanced if it shall ultimately be determined that such indemnified Person is not entitled to be indemnified under this Article 8 or otherwise.11
Thus, Section 8.3 conditions a Person‘s receipt of advancement on: (1) delivery of the written affirmation by the Person that the Person has satisfied the standard of conduct (an “Affirmation“), and (2) execution of a written undertaking to repay all advanced amounts if it is ultimately determined that the Person is not entitled to indemnification (an “Undertaking“).
C. Baldwin‘s Employment by New Wood
New Wood leased the WPV manufacturing facility in Louisville, Mississippi.12 The facility had been dormant for years and wаs in need of repair. New Wood began to make repairs so that it could operate a plywood mill. New Wood chose Baldwin to oversee the restoration and revitalization of the WPV manufacturing facility because of Baldwin‘s expertise and prior successful business ventures in the forest-products industry.13 However, prior to the WPV facility‘s completion, the facility was destroyed by an EF-4 tornado.14 Thereafter, WPV received funding from the Federal Emergency Management Agency, and Baldwin took the lead role on behalf of New Wood to restore the WPV facility and
On August 24, 2016, just before the WPV mill was set to begin operations, Baldwin was terminated from his position as the President and General Manager of WPV by Bursky and Liebich.
D. The Underlying Actions
Three underlying lawsuits preceded the current litigation (the three lawsuits are referred to collectively as the “Lawsuits“). The Lawsuits were by and between Baldwin, New Wood, Bursky, and other entities in the following courts: the Mississippi federal court, the Mississippi state court, and the Delaware Court of Chancery.16
OCI, which was managed by Baldwin at the time,17 initiated the first action on February 9, 2018 by filing a complaint in the United States District Court for the Northern District of Mississippi (the “Mississippi Federal Action“). The Mississippi Federal Action alleged breach of contract, fraud, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty, among other things, against Atlas FRM LLC d/b/a Atlas Holdings LLC, Bursky,18 Liebich, New Wood, Holdco, and WPV (collectively, the “Defendants“). OCI sought declaratory judgment relief relating to the alleged improper dilution of OCI‘s equity interests and veil piercing arising out of a Management Services Agreement by and between Baldwin and WPV and investments by Baldwin in New Wood and Holdco.19 According to Baldwin, the basis for the claims in the Mississippi Federal Action arose out of
On May 17, 2018, the Defendants moved for dismissal of the Mississippi Federal Action for lack of subject matter jurisdiction.20 That same day, the Defendants filed suit against OCI and Baldwin in the Delaware Court of Chancery (the “Delaware Plenary Action“), asserting various claims for breach of fiduciary duty, breach of contract, and negligence. The Delaware Plenary Action also sought a declaratory judgment that OCI‘s allegations against the Defendants in the Mississippi Federal Action were false.
On May 25, 2018, OCI filed a Notice of Dismissal Without Prejudice in the Mississippi Federal Action.21 That same day, OCI refiled the claims asserted in the Mississippi Federal Action against the same Defendants in the Circuit Court of Winston County, Mississippi (the “Mississippi State Action“).22 The Defendants moved to dismiss based on Mississippi‘s “first-filed-rule” and on forum non conveniens.
E. Baldwin‘s Advancement Action
While litigation in the Mississippi State Action was pending, Baldwin and OCI sought advancement of their litigation expenses pursuant to Section 8.3 of the LLC Agreement. Under Section 8.3, Baldwin and OCI were required to provide an Affirmation and an Undertaking. On August 10, 2018, Baldwin sent a letter on his own behalf23 and one on behalf of OCI24 whereby they agreed “to repay all amounts so advanced if it shall ultimately be determined that [Baldwin/OCI is] not entitled to be indemnified in this lawsuit.” New Wood declined Baldwin‘s and OCI‘s requests.25
On January 10, 2019, Baldwin filed an advancement action in the Delaware Court of Chancery against New Wood, Holdco, and WPV (the “Advancement Action“).26 In this action, Baldwin sought advancement for fees incurred in the Delaware Plenary Action as well as fees and interest incurred in litigating the Advancement Action (the “fees on fees“).
On February 22, 2019, the Mississippi State Action was dismissed on grounds of forum non conveniens.27 Following that
On May 9, 2019, Baldwin moved for partial summary judgment in the Advancement Action. In his accompanying brief, Baldwin stated that New Wood had not advanced any funds in response to his August 10, 2018 demand. Baldwin alleged that on September 10, 2018, New Wood‘s counsel stated that it was “assessing” his demand.29 In addition, New Wood sought from Baldwin and OCI “‘all potential sources of alternative funding’ along with ‘any documents relating to or reflecting such rights[.]‘”30 New Wood also sought
“details of all steps Dr. Baldwin and/or OCI have taken to secure funding from any other source.”31 Baldwin argued that New Wood “sought to create insurmountable hurdles” for OCI and him.32 Baldwin stated that he responded to these requests, which were met with further requests for additional information and further delay.
During the September 16, 2019 oral argument on Baldwin‘s motion for partial summary judgment in the Advancement Action, the Vice Chancellor noted that he “struggle[ed] to see [the defendants‘] construction as being a reasonable one[,]”33 and ruled that Baldwin was entitled to advancement of his litigation expenses, including attorneys’ fees, incurred in defending against the claims asserted in the Delaware Plenary Action, as well as his fees and expenses incurred in the Advancement Action following his execution of the Undertakings. The Court of Chancery directed the parties to “put[] in place a
Fitracks process to govern future advancement requests.”34 On October 14, 2019, the Court
New Wood made its first timely partial advancement payment, but then objected to the subsequent advancement request.36 This prompted Baldwin to file, on March 16, 2020, a motion for fees and expenses pursuant to Court of Chancery Rule 8837 (the “Rule 88
Motion“) requesting outstanding fees and expenses, plus pre- and post-judgment interest.38 In his Rule 88 Motion, Baldwin stated that New Wood was asserting that it had insufficient funds to advance the amounts owed. His Rule 88 Motion also stated that New Wood had paid $502,068.07 of the $638,702.13, plus interest, requested. Baldwin requested that New Wood be ordered to pay $223,373.70, plus pre- and post-judgment interest as well as fees on fees.
On January 23, 2020, New Wood, Holdco, and WPV voluntarily dismissed their claims in the Delaware Plenary Action, which left only Baldwin‘s and OCI‘s counterclaims remaining.39
On March 20, 2020, the Court of Chancery granted New Wood‘s Rule 12(c) motion for partial judgment on the pleadings in the Delaware Plenary Action as to the following claims: fraud and fraud in the inducement against Bursky, Liebich, New Wood, ACR, and Holdco (Counts III and IV); conspiracy to commit fraud against all Defendants (Count VIII); and corporate veil piercing against Atlas, Bursky, and Liebich (Count XI).40 Based on the denial of Baldwin‘s and OCI‘s fraud claims, the court dismissed the alter-ego claim as well.41 Baldwin‘s and OCI‘s other claims for breach of contract, breach of fiduciary
duty, and declaratory judgment were not at issue for purposes of the Court of Chancery 12(c) motion for partial judgment on the pleadings.
Pursuant to Section 8.2 of the LLC Agreement, New Wood sought a determination as to whether Baldwin and OCI were entitled to indemnification. Under Section 8.2, Baldwin and OCI were entitled to indemnification if they “acted in good fаith and in a manner that [they] reasonably believed to be in or not opposed to the best interests of the Company[.]”42 This determination could be made in one of three ways:
(a) by a majority vote of all of the Mangers who are not parties to such Proceeding even though less than a quorum or (b) if there are no such Managers, or if such Managers so direct, by independent legal counsel in a written opinion or (c) by holders of a Majority of the then-outstanding Units (determined without regard to any Members that are parties to such Proceeding).43
In this case, the determination was made by the holders of a majority of the then-outstanding units. At the time of the indemnification determination, ACR held approximately 85.52 percent of New Wood‘s then-outstanding units, making it the majority unitholder of New Wood.44 On April 23, 2020, Bursky, as the President of ACR, executed a Written Consent of Certain Members of New Wood Resources LLC (the “Written Consent“).45 The Written Consent, dated April 23, 2020, stated that
the undersigned Members, constituting a Majority of the currently outstanding Units (determined without regard to Members that are party to the Lawsuits), (i) are familiar with and have had sufficient time to consider the performance, conduct and behavior of Baldwin prior to his resignation, (ii) are familiar with and have had sufficient time to consider the allegations and claims made by the parties to the Lawsuits, and (iii) have determined that Baldwin failed to act in good faith and in a manner that he reasonably believed to be in or not oрposed to the best interests of the Company with respect to the matters at issue in the Lawsuits.46
Without explanation, ACR stated that it had determined that “Baldwin failed to act in good faith[.]”47 The entirety of the Written Consent‘s “good faith” determination is contained in the following paragraph:
RESOLVED, that undersigned, constituting a Majority of the currently outstanding Units (determined without regard to Members that are party to the Lawsuits), have determined that Baldwin failed to act in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of the Company, in connection with the matters at issue in the Lawsuits.48
New Wood thereafter requested that Baldwin repay the advanced amounts. Baldwin refused.
On August 10, 2020, the Court of Chancery held oral argument in the Advancement Action and provided a ruling on Baldwin‘s Rule 88 Motion. The parties agreed that New Wood would pay Baldwin “$223,373.70 for advanceable fees and expenses.”49
On August 26, 2020, the Court of Chancery granted the proposed order in the Advancement Action and entered final judgment (the “Judgment“).51 According to the order, New Wood withdrew “all objections to [Baldwin‘s and OCI‘s] counsels’ attorney certifications for fees to be advanced to date[.]”52 Therefоre, Baldwin and OCI were entitled to advancement amounts of “$223,373.70 in fees and expenses, plus interest owed as of October 7, 2019 in the amount of $22,994.40, plus prejudgment interest at the Delaware legal rate of 5.25% in the amount of $7,688.31[.]”53 Further, Baldwin and OCI were entitled to be indemnified in the amount of $111,086.55 for their attorneys’ fees and expenses incurred in connection with the Rule 88 Motion, as well as the fees and expenses incurred for time spent preparing invoices, demands, and addressing responses.54 Combined with the amounts ordered on October 14, 2019, the total amount to be paid to Baldwin by New Wood was $867,211.03, consisting of $541,664.99 in advancement and $325,546.04 in indemnification.55
Following the Court of Chancery‘s order, New Wood failed to honor its obligation to advance Baldwin funds to cover his litigation expenses.56 According to Baldwin‘s Counterclaim, New Wood contended that it was “nearing insolvency and did not have the
funds to satisfy the Judgment.”57 Only after Baldwin domesticated the Judgment in Mississippi and sought discovery concerning New Wood‘s finances did New Wood comply with the Court of Chancery‘s order.58
G. The Current Breach of Contract Lawsuit
On October 26, 2020, New Wood initiated this lawsuit in the Delaware Superior Court against Baldwin seeking to claw back the $867,211.03 New Wood had paid to Baldwin.59 New Wood alleged that Baldwin‘s failure to repay the advanced monies constituted a breach of the LLC Agreement and Baldwin‘s Undertaking.60 In support of its breach of contract claim, New Wood alleged that Baldwin had “failed to act in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of New Wood, in connection with the matters at issue in
In response, Baldwin filed an Answer with affirmative defenses and a counterclaim (the “Counterclaim“) against New Wood. Baldwin asserted the following three affirmative defenses: (1) under the implied covenant of good faith and fair dealing, the LLC Agreement required the indemnification finding to be made in good faith; (2) Baldwin had acted in good faith; and (3) New Wood‘s delay in satisfying the judgment issued in Baldwin‘s favor in the Advancement Action caused Baldwin to incur expenses offsetting any money he owed to New Wood.62
Baldwin‘s Counterclaim against New Wood asserted that the Written Consent had been entered into “in bad faith and in an attempt to improperly avoid New Wood‘s indemnification obligations.”63 Baldwin‘s Counterclaim sought a declaratory judgment that: (i) Section 8.2 of the LLC Agreement contains an implied term that any such indemnification determination must be made in good faith, (ii) the Written Consent was entered into in a bad faith attempt to avoid New Wood‘s indemnification obligations under the LLC Agreement; (iii) New Wood was required to pay the attorneys’ fees and costs Baldwin incurred in domesticating the Judgment in Mississippi, and (iv) Baldwin was entitled to his attorneys’ fees and costs for pursing the Counterclaims.64
On March 16, 2021, New Wood filed a motion for judgment on the pleadings as to its breach of contract claim and Baldwin‘s Counterclaim. In response, Baldwin argued that New Wood‘s motion should be denied because the implied covenant of good faith and fair dealing filled a gap in Section 8.2—namely, that the indemnification decision must be made in good faith.
Baldwin elaborated on these assertions in his pleadings and in the briefing below. As Baldwin alleges in his Counterclaim, New Wood voluntarily refused to comply with the Judgment entered by the Court of Chancery. Specifically, he alleges that:
37. Indeed, New Wood refused, through its designee WPV, to voluntarily advance any of the fees owed to Dr. Baldwin.
38. New Wood only complied with its obligation after: (i) the Court of Chancery entered an order compelling New Wood to advance those fees; (ii) the Judgment was entered against New Wood; (iii) the Judgment was domesticated in Mississippi; and (iv) Dr. Baldwin pursued discovery to investigate New Wood‘s claim of insolvency.
39. Upon information and belief, New Wood was not nearing insolvency and chose to purposefully delay and force Dr. Baldwin to incur needless costs and fees (including attorneys’ fees) to domesticate and satisfy the Judgment.65
Baldwin alleges that rather than responding to various discovery requests he served, New Wood paid the Judgment thereby mooting thе requests.66
Citing to his Counterclaims, Baldwin argued in his answering brief below that
Focusing on New Wood‘s conduct, and citing to his pleadings, he argued further that New Wood had not acted in good faith:
The allegations in the Answer, as well as Dr. Baldwin‘s Affirmative Defenses, indicate that New Wood acted in bad faith and for the sole purpose of improperly avoiding its indemnification obligations. Indeed, Dr. Baldwin‘s Counterclaims and Affirmative Defenses show that New Wood (i) took what the Court of Chancery found to be an unreasonable position in its argument that Dr. Baldwin was not entitled to advancement, Countercl. ¶ 30, (ii) voluntarily withdrew its meritless claims against Dr. Baldwin, id. ¶ 25, (iii) purposefully delayed satisfying the Judgment until Dr. Baldwin domesticat[ed] the Judgment in Mississippi and served discovery on New Wood to investigate its claims of poverty, id. ¶¶ 32-37, and (iv) after losing on merits-based determinations related to the parties[‘] dispute, attempted to claw back the amounts paid to Dr. Baldwin by having ACR enter into the written consent containing no analysis, description, or example of Dr. Baldwin‘s alleged action. Id. ¶¶ 44-45. It is clear from Dr. Baldwin‘s allegations that New Wood is attempting to use a procedural tool to deny Dr. Baldwin his right to indemnification, just as New Wood has sought to do since the parties’ dispute arose.68
Thus, Baldwin argued that “[t]he fact that a majority of [his] advancement was incurred as a result of New Wood‘s refusal to voluntarily comply with advancement obligations further demonstrates the bad faith with which New Wood (and the other related defendants in the Advancement and Delaware Chancery Action) have conducted themselves in all of these related cases.”69 In sum, he argued that “New Wood, through ACR, made a bad faith determination that Dr. Baldwin was not entitled to indemnification.”70
The Superior Court heard oral argument during which Baldwin asserted that his Counterclaim was both an implied covenant claim and an independent claim seeking to imply a term in the LLC Agreement.71 At the conclusion, the Superior Court asked the parties to supplement the record by providing relevant authority relating to Baldwin‘s latest “implied term claim.”72
On August 23, 2021, the Superior Court entered judgment in New Wood‘s favor.73 The court interpreted the LLC Agreement‘s language and the Undertaking as expressly requiring Baldwin to repay the
The court also held that Baldwin had not pled a cognizable counterclaim because he had asserted the claim against the wrong party. The Superior Court focused on the Written Consent executed by the majority of New Woods’ unitholders (through ACR, as authorized by its President, Bursky) and ACR‘s determination that Baldwin had not satisfied Section 8.2‘s standard of conduct. Accordingly, the court found that “New Wood [could not] be said to have breached the implied covenant of good faith and fair dealing when the challenged decision was made by a non-party.”77
The Superior Court also rejected Baldwin‘s assertion that a covenant of good faith and fair dealing is implied in Section 8.2. Baldwin relied on Dieckman v. Regency GP LP78 to support his argument that Sectiоn 8.2 required any indemnification determination to be made in good faith, and that explicitly including “good faith” language would have been “obvious and provocative.”79
However, the Superior Court described Baldwin‘s reliance on Dieckman as “misplaced and unsupported by the pleaded facts.”80 According to the court, Dieckman is factually and legally distinct for two
Similarly, the Superior Court rejected Baldwin‘s argument that the court should invoke the doctrine of necessary implication. The court stated that “[t]he doctrine of necessary implication permits a court to read an implied promise into a contract in order to carry out the purpose for which the promise was mаde or prevent one party from frustrating the other‘s right to receive the fruits of the contract.”83 The court reasoned that the doctrine did not apply in this case “because the implied term would contradict the LLC Agreement‘s express language.”84 Therefore, the Superior Court granted New Wood‘s motion for judgment on the pleadings.
This appeal followed.
II. The Parties’ Contentions on Appeal
Baldwin raises three arguments on appeal. First, he contends that the Counterclaim against New Wood is proper, and that he did not sue the wrong entity. According to Baldwin, even though Bursky executed the Written Consent on behalf of ACR, joining Bursky as a third-party defendant in this lawsuit would serve no purpose because New Wood is the real party in interest. Second, he contends that the covenant of good faith and fair dealing is implicit in Section 8.2 of the LLC Agreement. Alternatively, Baldwin asserts that this Court should invoke the doctrine of necessary implication to imply a term that requires New Wood to make an indemnification determination in good faith.85
New Wood argues that Baldwin‘s affirmative defenses and Counterclaim fail at the outset because New Wood did not execute the Written Consent and, therefore, it cannot be found liable. New Wood argues that even if Baldwin sued the correct party, the implied covenant of good faith cannot be used to rewrite the LLC Agreement. Finally, New Wood asserts that this Court could affirm on alternative grounds—namely, that Baldwin‘s affidavit of defense was deficient under Delaware law.86
We review questions of law and contractual interpretation, including the interpretation of LLC agreements, de novo.87 We review de novo a trial court‘s judgment granting a motion for judgment on the pleadings.88
III. ANALYSIS
A. New Wood is the Correct Party
New Wood argues that because the Written Consent was executed by holders of a majority of the then-outstanding units -- and not New Wood -- Baldwin‘s Counterclaim must fail. We disagree.
Superior Court Civil Rule 17 states that “[e]very action shall be prosecuted in the name of the real party in interest.”89 Black‘s Law Dictionary defines a real party in interest as “[a] person entitled under the substantive law to enforce the right sued on and who generally, but not necessarily, benefits from the action‘s final outcome.”90
The right Baldwin seeks to enforce is his entitlement to indemnification under the LLC Agreement. The only entity that is required to indemnify Persons under the LLC Agreement is New Wood. Section 8.2 provides that, subject to its limitations and conditions, Persons meeting the standard of conduct “shall be indemnified by the Company.”91 “Company” is defined as New Wood.92 New Wood is managed by a board of managers who conduct the day-to-day
B. Section 8.2 Contains an Implied Covenant of Good Faith and Fair Dealing
“The implied covenant is inherent in all contracts” and ensures that parties do not “frustrat[e] the fruits of the bargain” by acting “arbitrarily or unreasonably.”95 The covenant of good faith and fair dealing “embodies the law‘s expectation that ‘each party to a contract will act with good faith toward the other with respect to the subject matter of the contract.‘”96 The covenant also encompasses “the principle of contract construction that ‘if one party is given discretion in determining whether [a] condition in fact has occurred[,] that party must use good faith in making that determination.‘”97
Courts utilize the implied covenant “to infer contract terms ‘to handle developments or contractual gaps that the asserting party pleads neither party anticipated[,]”98 and courts will invoke the implied covenant to imply terms when necessary to protect the reasonable expectations of the parties.99 Thus, the implied covenant is a “cautious enterprise”100 and is “best understood”
However, Delaware courts do not use the implied covenant as “an equitable remedy for rebalancing economic interests after events that could have been anticipated, but were not, that later adversely affected one party to a contract.”102 Nor is the implied covenant to be used as a backstop to imply terms that parties failed to include but which could easily have been drafted.103 But when the contract is “truly silent” about the issue, and the express terms of the partnership agreement naturally imply certain corresponding conditions, unitholders are entitled to have those terms enforced according to the reasonable expectations of the parties at the time of contracting.104
The Delaware Limited Liability Company Act (the “Act“) gives “maximum effect to the principle of freedom of contract.”105 This provides contracting parties with a wide latitude of contractual freedom.106 This freedom includes the ability to explicitly expand, restrict, or eliminate traditional fiduciary duties.107 Notwithstanding this freedom, the Act specifically prohibits eliminating the implied covenant of good faith and fаir dealing.108
“To sufficiently plead [a] breach of the implied covenant of good faith and fair dealing, a complaint ‘must allege a specific implied contractual obligation, a breach of that obligation by the
We agree with Baldwin‘s assertion that the LLC Agreement contains an implied obligation requiring that the indemnification determination be made in good faith. Section 8.2 states that an indemnitee “shall be indemnified by [New Wood] to the fullest extent permitted by the Act[.]”112 Section 8.2 qualifies the right to indemnification by requiring a determination that the indemnitee “acted in good faith and in a manner that he or she reasonably believed to be in or not opposed to the best interests of [New Wood].”113 Baldwin‘s Counterclaim suggests a possible gap -- that a determination of entitlement to indemnification will not be mаde in “bad faith.” We hold that although a good faith requirement is not expressly stated in Section 8.2, it is implicit in Section 8.2‘s language.
Dieckman is instructive. In Dieckman, two limited partnerships in the same master limited partnership group sought to merge in a conflicted transaction. The limited partnership agreement provided the general partner with conflict resolution safe harbors if the transaction were approved either by a fully independent special committee or by a majority of unaffiliated unitholders. The partnership agreement did not expressly address how the general partner was to conduct itself when seeking the safe harbors.
To obtain the approval of a majority of unaffiliated unitholders, the limited partnership agreement expressly required a summary disclosure of the merger agreement. Instead of a summary disclosure, the general partner distributed a 165-page proxy statement that described at length the planned merger. But the proxy statement failed to disclose that one member of the two-member special committee had alleged “overlapping and shifting allegiances”
We held that the implied covenant of good faith and fair dealing barred the general partner from seeking safe harbor protection where he had used deceptive and misleading tactics to comply with the safe harbor‘s exрress terms. We explained that it was reasonably conceivable that “implied in the language of the [limited partnership agreement‘s] conflict resolution provision [was] a requirement that the General Partner not act to undermine the protections afforded unitholders in the safe harbor process.”114 Practically speaking, partnership agreement drafters “do not include obvious and provocative conditions in an agreement like ‘the General Partner will not mislead unitholders when seeking Unaffiliated Unitholder Approval[.]‘”115 Thus, some aspects of the agreement are “so obvious” that the participants never think, or see no need, to address them.
Just as it would be “too obvious” to demand the inclusion of an express condition that a general partner not subvert a safe harbor protection through materially misleading disclosures, here too, it would be “too obvious” to demand the inclusion of an express condition that the person or persons making a determination as to whether a Person has met the standard of conduct do so in good faith.
The Court of Chancery‘s opinion in Wilmington Leasing v. Parrish Leasing116 also supports this conclusion. In that case, a limited partnership agreement gave the limited partners a right to remove the general partner if they determined that the general partner had “failed or [was] unable to perform satisfactorily.”117 The limited partners subsequently executed an agreement removing the general partner based on a finding that the general partner‘s performance was unsatisfactory. The limited partners then sued to enforce the removal against the general partner. In response, the general partner alleged that the purported removal was invalid because it was not made reasonably and in good faith as required by the implied covenant.
The Court of Chancery agreed with the general partner and concluded that the implied covenant of good faith was implicit in the grant of the limited partners’ removal power. The court relied on a principle of contract construction that provides that “if one party is given discretion in determining whether [a] condition in fact has occurred[,] that party must use good faith in making that determination.”118 The court explained that without this implied covenant, “the limited partners could remove, maliciously or unreasonably, a general partner who was performing satisfactorily,” thus rendering the standard of satisfactory performance meaningless.119 Accordingly, the Court of Chancery denied the limited partners’ motion for judgment on the pleadings.
The Court of Chancery‘s decision in Sheehan v. AssuredPartners, Inc. is similarly
Here the LLC Agreement calls for either the managers, legal counsel, or the majority of the then-outstanding unitholders to make a subjective discretionary determination as to whether an indemnitee has met a specific standard of conduct. But the LLC Agreement does not expressly state whether such determination must be made in good faith. If indemnification under Section 8.2 of the LLC Agreement could be denied for any reason, even in bad faith, the standard in Section 8.2 — requiring the indemnitee to act in good faith — would be rendered meaningless.124 Further, the parties bargained for indemnification “to the fullest extent permitted” so long as the indemnitee acted in good faith and in the best interests of New Wood. This “fullest extent” statement is consistent with Delaware‘s policy of favoring indemnification and advancement rights.125 Imрlying a good faith obligation in Section 8.2 is consistent with the policy embedded in the “fullest extent” language of the LLC Agreement and gives effect to this statement.126
This Court held two oral arguments on this matter. Following the first panel argument, New Wood appears to have retreated from seriously challenging the existence of an implied covenant of good faith in Section 8.2. During the second en Banc argument, counsel for New Wood essentially agreed that an indemnification determination pursuant to Section 8.2 is required to be made in good faith.127 New
As to the sufficiency of his bad faith allegations, the Superior Court did not address this issue, given its other rulings. In the context of a motion for judgment on the pleadings, the court accords the party opposing a motion for judgment on the pleadings the same benefits as a party defending a motion to dismiss.130 Accordingly, the court accepts the truth of all well-pleaded facts and draws all reasonable factual inferences in favor of the non-moving party — in this case, Baldwin.
Although Baldwin has alleged bad faith on the part of ACR, ACR is not а party. As to New Wood, Baldwin‘s counsel argued below that New Wood “has taken every opportunity it could to try to avoid paying advancement and now it‘s trying to avoid indemnification[,]” and that “[i]t‘s doing that through a procedural route in the LLC Agreement.”131 And although his counsel argued further that New Wood “collaborated with its majority holder,” he then conceded that such collaboration on the Written Consent was not actually alleged in Baldwin‘s Counterclaims or Affirmative Defenses.132 Thus, New Wood argues that as to the basis for the Written Consent reflecting the conclusion that Baldwin had not met the standard of conduct, Baldwin‘s pleadings are insufficient as to New Wood.
Despite this concession by Baldwin‘s prior counsel, at this stage of the proceedings, we think that Baldwin‘s allegations are sufficient — albeit, barely so — to
Although Baldwin does not specifically allege facts indicating that New Wood “collaborated with ACR on the indemnification determination” he does state in his Affirmative Defenses (which were directed to New Wood‘s claims) that “the Written Consent was entered into in a bad faith attempt to avoid New Wood‘s indemnification obligations.”135 Baldwin also alleges in his pleadings that New Wood engaged in bad faith conduct in the advancement litigation before and after the April 23, 2020 Written Consent was signed, evidencing a motive to frustrate his advancement and indemnification rights.
Further to this point, Baldwin asserts in his Answer to New Wood‘s Superior Court complaint that “a majority of the advancement amount that was paid to Dr. Baldwin is the result of Dr. Baldwin‘s efforts to pursue his advancement rights and collect on a judgment issued by the Delaware Court of Chancery entitling him to those amounts.”136 Similarly, in his Third Affirmative Defense he asserts that “New Wood improperly delayed in satisfying the [J]udgment issued in favor [of] Dr. Baldwin in the Advancement Action, causing Dr. Baldwin to incur needless additional attorneys’ fees and costs, and those fees and costs offset any amount New Wood claims it is owed.”137 He alleges that, “New Wood was not nearing insolvency and chose to purposefully delay and force Dr. Baldwin to incur needless costs and fees (including attorneys’ fees) to domesticate and satisfy the Judgment,”138 and that “New Wood‘s purposeful delay was done in bad faith and caused Dr. Baldwin to incur unnecessary additional fees and expenses.”139 He alleges further that “New Wood Resources sought to improperly claw back its payment for the Judgment.”140
Thus, although Baldwin‘s pleadings lack specific facts as to New Wood‘s conduct vis-à-vis the actual Written Consent entered into on April 23, 2020, he does allege bad faith on the part of New Wood throughout the overall advancement proceedings.143 Albeit in a disorganized fashion, Baldwin has sufficiently pleaded enough to create an issue of fact as to New Wood‘s good faith in discharging its obligations under Section 8.2 and to overcome New Wood‘s contention that it was merely presented with, and acted on, a facially valid consent obtained by ACR.144 As we have recognized, “a fairly pleaded claim of good faith/bad faith raises essentially a question of fact which generally cannot be resolved on the pleadings or without first granting an adequate opportunity for discovery.”145
This Court recognizes, as evidenced by the allegations contained in the pleadings in this case, as well as in the Delaware Plenary Action (of which this Court can take judicial notice),146 that there are two
IV. CONCLUSION
For the reasons stated herein, we REVERSE and REMAND for further proceedings consistent with this opinion.
Notes
Opening Br. at 6 (citing Pl.‘s Compl. ¶ 21, Oak Creek Invs., LLC v. Atlas Holdings LLC, No. 1:18-cv-0023 (N.D. Miss. Feb. 9, 2018)). In his answering brief in the proceedings before the Superior Court, Baldwin avers that the claims for breach of the implied covenant of good faith and fair dealing and breach of fiduciary duty asserted in the Mississippi Federal Action “arose from the wrongful attempted ouster of Dr. Baldwin and purposeful dilution of OCI‘s equity in New Wood.” B36 (Def./Countercl.-Pl. Richard F. Baldwin‘s Answering Br. in Opp‘n to Pl./Countercl.-Def. New Wood Resources LLC‘s Mot. for J. on the Pleadings [hereinafter Super. Ct. Ans. Br.]). The Court of Chancery noted in its March 20, 2020 Transcript Ruling that Baldwin alleged that his termination “was the culmination of a pattern of micromanagement by Bursky and Liebich that undermined Baldwin‘s authority and decision-making.” Mar. 20, 2020 Ct. Ch. Ruling, C.A. No. 2018-0350-JRS, at 6.Acting in their individual and representative capacities, Defendants Bursky‘s and Liebich‘s willful and bad-faith conduct, as well as the conduct of others, reached a climax on August 24, 2016 when, just weeks before the [WPV] mill was set to begin operations, with no prior notice, with no plausible rationale or reason, with no regard for OCI‘s significant investment in NWR and WPV, and with no consideration for Dr. Baldwin‘s efforts leading the mill to startup, or his superior knowledge of constructing and operating a plywood mill, Dr. Baldwin was summarily terminated from his role as President and General Manager of WPV.
Ct. Ch. R. 88.In every case in which an application to the Court [of Chancery] is made for a fee or for reimbursement for expenses or services the Court [of Chancery] shall require the applicant to make an affidavit or submit a letter, as the Court [of Chancery] may direct, itemizing (1) the amount which has been received, or will be received, for that purpose from any source, and (2) the expenses incurred and services rendered, before making such an allowance. This rule shall not apply to any petition for the allowance of additional commissions or fees pursuant to Rule 192.
Id. at *4.Baldwin does not dispute that he signed the written undertaking to repay or that a majority of New Woods’ unitholders ultimately made a determination that he was not entitled to indemnification in the Delaware Plenary Action. Neither party disputes that Section 8.2‘s language is clear and unambiguous, and the parties agree on the precise amounts advanced to Baldwin. Even drawing all reasonable inferences in Baldwin‘s favor, there is no material dispute that Baldwin contractually was required to repay the advanced amounts if it was later determined he was not entitled to indemnification.
Id.Sections 8.2 and 8.3 do not authorize claw-back of amounts paid out for indemnification, even if New Wood paid these amounts before any “good faith or best interests” determination. Rather, Sections 8.2 and 8.3 establish the standard that governs when indemnification must be paid. In short, Baldwin is not contractually obligated to reimburse New Wood the $325,546.04 paid as indemnification for the Advancement Action.
Oral argument video, at 25:19–25:1, https://livestream.com/accounts/5969852/events/10395723/videos/231575613. New Wood‘s Counsel stated further that Baldwin would have a claim for breach of the implied covenant of good faith if ACR had been named a party:The Court: Let me ask you a question. Hypothetically sрeaking, if Mr. Burksy signed the so-called Written Consent on behalf of ACR Winston Preferred Holdings, if he was motivated by personal hostility toward Baldwin, rather than any sincere question about what the Agreement says, would that be okay?
New Wood‘s Counsel: Would that be okay? I do not believe that Mr. Bursky acting on behalf of ACR could engage in bad faith conduct when making that determination. That would not be okay.
Oral argument video, at 29:07–29:22, https://livestream.com/accounts/5969852/events/10395723/videos/231575613. We appreciate counsel‘s candor before this Court.The Court: So, if ACR and Mr. Bursky were parties here, would they have a claim?
New Wood‘s Counsel: I believe it would have changed the outcome, provided that this Court or the below court made the determination that the allegations of bad faith were sufficiently pled.
Oral argument video, at 28:26–29:00, https://livestream.com/accounts/5969852/events/10395723/videos/231575613.The Court: What about Judge LeGrow‘s decision a year earlier in Sheehan v. Assured Partners, May 29, 2020, doesn‘t that suggest the majority consent has to be exercised in good faith?
New Wood‘s Counsel: Your Honor, I believe thе case law as a general matter is where a contract provides a contractual party discretion to make a subjective decision, that the implied covenant will impose an outer limit on that. All of the cases I‘m aware of, when those issues arose, the party who made the decision, was actually a party.