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Brinckerhoff v. Enbridge Energy Co., Inc.

Supreme Court of Delaware

March 20, 2017

PETER BRINCKERHOFF, INDIVIDUALLY AND AS TRUSTEE OF THE PETER R. BRINCKERHOFF REV. TR U A DTD 10/17/97, and on behalf of all others similarly situated, Plaintiff Below, Appellant,
v.
ENBRIDGE ENERGY COMPANY, INC., et al., Defendants Below, Appellees, and ENBRIDGE ENERGY PARTNERS, L.P., Nominal Defendant Below, Appellee.

          Submitted: January 11, 2017

         Court Below-Court of Chancery of the State of Delaware C.A. No. 11314

         Upon appeal from the Court of Chancery: REVERSED

          Jessica Zeldin, Esquire, Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware; Lawrence P. Eagel, Esquire (argued), Jeffrey H. Squire, Esquire and David J. Stone, Esquire, Bragar Eagel & Squire, P.C., New York, New York, for Plaintiff, Appellant, Peter Brinckerhoff.

          Raymond J. DiCamillo, Esquire, Richards, Layton & Finger, P.A., Wilmington, Delaware; Michael H. Steinberg, Esquire (argued), Sullivan & Cromwell LLP, Los Angeles, California; Laura Kabler Oswell, Esquire, Sullivan & Cromwell LLP, Palo Alto, California, for Defendants, Appellees, Enbridge Inc., J. Richard Bird, J. Herbert England, C. Gregory Harper, D. Guy Jarvis, Mark A. Maki, John K. Whelen and Enbridge Pipelines (Alberta Clipper) L.L.C.

          Thomas W. Briggs, Jr., Esquire and Richard Li, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; Kevin C. Logue, Esquire (argued) and Kevin P. Broughel, Esquire, Paul Hastings LLP, New York, New York, for Defendants, Appellees, Enbridge Energy Company, Inc., Enbridge Energy Management, L.L.C., Jeffrey A. Connelly, Rebecca B. Roberts, Dan A. Westbrook, Enbridge Energy Limited Partnership and Nominal Defendant Enbridge Energy Partners, L.P.

          Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, and SEITZ, Justices, constituting the Court en Banc.

          SEITZ, Justice

         The plaintiffs, Peter Brinckerhoff and his trust, are long-term investors in Enbridge Energy Partners, L.P. ("EEP"), a Delaware master limited partnership ("MLP"). As followers of this investment space know, MLPs are set up in the petroleum transportation business to allow sponsors and public investors to take advantage of favorable tax laws. Another benefit under Delaware law is the ability to eliminate common law duties in favor of contractual ones, thereby restricting disputes to the four corners of the limited partnership agreement ("LPA").

         MLPs are typically families of entities that often engage in internal business transactions, referred to as dropdowns, rollups, insider financings, incentive distribution rights, and equity investments. Because the entities proposing transactions often have representatives seated at both sides of the negotiating table, the LPAs typically attempt to address conflicts using various contractual tools. Even so, disputes still arise over whether the conflicted parties have complied with the letter and spirit of the LPA. Our Court has frequently been called upon to interpret a number of LPAs to resolve these disputes.[1]

         This is not the first lawsuit between Brinckerhoff and the Enbridge MLP entities over a conflicted transaction. In 2009, Brinckerhoff filed suit against most of the same defendants in the current dispute, and challenged a transaction between the sponsor and the limited partnership. Enbridge, Inc. ("Enbridge"), the ultimate parent entity that controlled EEP's general partner, Enbridge Energy Company, Inc. ("EEP GP"), proposed a joint venture agreement ("JVA") between EEP and Enbridge, whereby Enbridge would contribute 66.7% and EEP would contribute 33.3% of the cost, and share the profits in the same proportion, of the Alberta Clipper project-a proposed pipeline used to transport petroleum from the Alberta tar sands to the United States.

         Brinckerhoff contested the fairness of the transaction on a number of grounds. After several rounds in the Court of Chancery leading to the dismissal of his claims, and a trip to our Court, Brinckerhoff eventually came up short when we affirmed the Court of Chancery's ruling that he had waived his claims for reformation and rescission of the transaction by failing to assert them first in the Court of Chancery.[2]

         The Alberta Clipper project would blow east again into the Court of Chancery. In 2014, Enbridge proposed that EEP repurchase Enbridge's interest in the Alberta Clipper project ("Alberta Clipper Interest"), excluding the expansion rights that were part of the earlier transaction. As part of the billion dollar transaction, EEP would issue to Enbridge $694 million of a new class of EEP partnership securities designated Class E Units, repay $306 million in outstanding loans made by EEP GP to EEP, and, central to the current dispute, amend the LPA to effect a "Special Tax Allocation" whereby the public investors would be allocated items of gross income that would otherwise be allocated to EEP GP.

         The allocation of gross income for tax purposes has important consequences to the public investors. According to Brinckerhoff, the Special Tax Allocation unfairly benefited Enbridge by reducing its tax obligations by hundreds of millions of dollars while increasing the taxes of the public investors, thereby undermining the investor's long-term tax advantages in their MLP investment.

         Brinckerhoff filed suit and alleged that the defendants breached the LPA by (a) agreeing to repurchase the same asset-the Alberta Clipper Interest-EEP sold to Enbridge six years earlier, on terms Brinckerhoff claims were not "fair and reasonable" as required by Section 6.6(e) of the LPA; and (b) implementing the Special Tax Allocation that, according to Brinckerhoff, materially adversely affected the investors, and enlarged their "obligations, " in violation of Sections 5.2(c) and 15.3(b) of the LPA.

         EEP GP and its Affiliates moved to dismiss, claiming that, regardless of any breach of the LPA's specific affirmative requirements, before Brinckerhoff could pursue his claims, he first had to plead facts leading to an inference that the defendants acted in bad faith. In other words, EEP GP and its affiliates were free to breach any of the LPA's specific requirements, so long as they did so in good faith. The defendants also argued that to allege bad faith, Brinckerhoff had to plead facts that ruled out all legitimate explanations for the defendants' actions except for bad faith-a pleading hurdle borrowed from one of the most demanding corporate law standards, that of "waste."

         The Court of Chancery did its best to reconcile earlier decisions interpreting the same or a similar LPA, and ended up dismissing the complaint. Though the court believed that in the corporate context Brinckerhoff's allegations would have stated a claim, it concluded that so long as EEP GP acted in good faith, it was free to breach any of the LPA's specific requirements. Once that standard applied, the court found that Brinckerhoff had failed to allege bad faith conduct by EEP GP, which required dismissal of the complaint.

         On appeal, Brinckerhoff has challenged the reasonableness of the Court of Chancery's interpretation of the LPA. He also argues that this Court in Brinckerhoff III improperly defined what was needed to plead bad faith. As Brinckerhoff sees it, his allegations that (a) the partnership agreed to pay $200 million more to Enbridge to repurchase the same asset it sold in 2009, despite declining EBITDA, slumping oil prices, and the absence of expansion rights sold in 2009; (b) EEP's financial advisor ignored the 2009 transaction as a comparable transaction; (c) EEP GP added hundreds of millions of dollars more in benefits for itself and Enbridge through the Special Tax Allocation, to the detriment of the public unitholders and in breach of specific provisions of the LPA; and (d) the Special Tax Allocation was not properly valued when determining whether the transaction's terms were fair and reasonable to the Partnership-support a fair pleading-stage inference of bad faith that precludes dismissal.

         We agree with Brinckerhoff in part and reverse the decision of the Court of Chancery. We say in part because we agree with the defendants that the Special Tax Allocation did not breach Sections 5.2(c) and 15.3(b) governing new unit issuance and tax allocations. But, we find that the Court of Chancery erred when it held that other "good faith" provisions of the LPA "modified" Section 6.6(e)'s specific requirement that the Alberta Clipper transaction be "fair and reasonable to the Partnership." The provisions of the LPA relied on by the Court of Chancery- Sections 6.8(a), 6.9(a), and 6.10(d)-exculpate EEP GP and others from monetary damages if they act in good faith, apply a good faith standard to EEP GP's resolution of conflicts of interest, and replace default fiduciary duties with a contractual good faith standard. They do not, however, alter the specific affirmative obligations of the LPA. The Court of Chancery's interpretation of the LPA leads to an unreasonable result no public investor would have considered possible when reviewing the LPA-that EEP GP is free to violate any specific LPA requirement so long as the breach is in good faith. In fact, precisely because the Delaware Revised Uniform Limited Partnership Act ("DRULPA") allows LPAs-like that of the Enbridge LPA-to eliminate fiduciary duties, it is essential that unitholders be able to hold the GP accountable for not complying with the terms of the LPA.

         We also find that the Court of Chancery erred when it determined that EEP GP and its Affiliates were exculpated under Section 6.8(a) from any liability for breaching the LPA. The Court of Chancery cannot be faulted for faithfully applying our earlier decision in Brinckerhoff III, and its rigorous pleading standard for bad faith. But we now change course from our earlier decision and adhere to the more traditional definition of bad faith utilized in Delaware entity law. We hold that bad faith is sufficiently alleged under the Enbridge LPA if the plaintiff pleads facts supporting an inference that EEP GP did not reasonably believe it was acting in the best interest of the partnership. Accepting the facts as pled, as we must on an appeal from a motion to dismiss, Brinckerhoff has met this standard.

         On remand, Brinckerhoff can proceed on his claim that the Alberta Clipper transaction violated Section 6.6(e). If the Court of Chancery eventually finds a breach of Section 6.6(e), and the defendants as Indemnitees are not immune from monetary damages under Section 6.8(a) because they acted in bad faith, the court can assess monetary damages to remedy the breach. Alternatively, if the defendants are immune from monetary damages under Section 6.8(a) because they acted in good faith, or the court finds that monetary damages would be speculative or difficult to determine reliably, then we leave it to the Court of Chancery's broad discretion, after its evaluation of all of the circumstances of the case, whether to impose an equitable remedy tailored to address the harm caused by the breach of Section 6.6(e) of the LPA.

         I.

         Peter Brinckerhoff is a unitholder of 73, 080 Class A EEP common units. The defendants and their business relationships are as follows:

EEP - A publicly-traded Delaware MLP headquartered in Houston, Texas. EEP's business focuses on energy transportation in the mid-Continent and Gulf Coast regions of the United States. EEP was formed in 1991 to own and operate the Lakehead pipeline system, the United States portion of a crude oil and liquid petroleum pipeline system running through portions of Canada and the United States.
EEP GP - The general partner of EEP. EEP GP is a Delaware corporation wholly owned by Enbridge, Inc. EEP GP owns a 2% general partnership interest and 38.1% limited partnership interest in EEP. EEP GP also owns 100% of the voting shares and 11.7% of the listed shares of Enbridge Energy Management, L.L.C.
Enbridge Energy Management, L.L.C. ("Enbridge Management") -EEP's designated manager. Enbridge Management owns a 14.7% limited partnership interest in EEP.
Enbridge - EEP GP's controlling parent. Enbridge is a Canadian energy corporation operating an integrated midstream asset network in Canada and the United States. Enbridge indirectly owns 100% of EEP GP. Through its control of EEP GP and Enbridge Management, Enbridge controls a 2% general partnership interest and a 52.8% limited partnership interest in EEP.

         The following chart from the Court of Chancery's opinion depicts the relationships between the entities.

         (Image Omitted)

         The remaining defendants, Jeffrey A. Connelly, Rebecca B. Roberts, Dan A. Westbrook, J. Richard Bird, J. Herbert England, C. Gregory Harper, D. Guy Jarvis, Mark A. Maki, and John K. Whelen (the "Director Defendants") each served as directors, and in some cases, officers of EEP GP and Enbridge Management. Defendants Roberts and England also served as Enbridge directors, and Bird, Harper, Jarvis, Maki, and Whelen served as Enbridge officers.

         A.

         In early 2009, EEP owned 100% of the Alberta Clipper project, a proposed $1.2 billion pipeline construction project extending almost a thousand miles from Hardisty, Alberta to Superior, Wisconsin.[3] EEP wanted to build the pipeline to meet the expected petroleum demands in the Midwestern United States. In April 2009, Enbridge proposed a joint venture to EEP whereby Enbridge would contribute 75% and EEP would contribute 25% of the Alberta Clipper project's costs. Profits would be divided according to their percentage contributions. The transaction also included expansion rights.[4]

         EEP GP formed a Special Committee to determine whether the Alberta Clipper project transaction was "fair and reasonable to [EEP] and its unitholders, "[5]and to make a recommendation whether to pursue the transaction. The Special Committee hired a financial advisor who was asked to evaluate whether the Alberta Clipper transaction "was representative of an arm's length transaction."[6]

         In response to Enbridge's proposal, the Special Committee recommended that EEP retain a 33.3% equity stake in the Alberta Clipper project. EEP agreed to the revised split. The financial advisor then opined that the JVA's terms "are representative, in all material respects, of those that would have been obtained by the Partnership in an arm's length transaction."[7] The Special Committee thereafter recommended the transaction to EEP GP's board. When the transaction closed in 2009, the 66.7% Alberta Clipper Interest was valued at $800 million, a multiple of 7x EBITDA. Brinckerhoff alleged that the Special Committee's financial advisor typically recommended a 9-12x forward year EBITDA multiple.

         Brinckerhoff filed a complaint in the Court of Chancery asserting derivative and direct claims against most of the same defendants named in the current action. Relying on multiple legal theories, Brinckerhoff essentially claimed that EEP GP and others sold the Alberta Clipper Interest to Enbridge for an unreasonably low price.

         In Brinckerhoff I, the Court of Chancery recognized that the Enbridge LPA contained a specific provision, Section 6.6(e), covering the JVA. Section 6.6(e) required that the JVA be "fair and reasonable to the Partnership." But the court jumped to another LPA provision, Section 6.8(a), which exculpates Indemnitees, including EEP GP, from monetary damages if the Indemnitee acted in good faith. Invoking the conclusive presumption of good faith in Section 6.10(b) when EEP GP relies on a qualified advisor, the Court of Chancery found that EEP GP was exculpated from monetary damages. The other defendants were also found to have acted in good faith. The court dismissed the complaint without considering the possibility of equitable relief to remedy a breach of Section 6.6(e).

         Brinckerhoff appealed the dismissal. Before considering the merits of the appeal, our Court remanded to the Court of Chancery to consider "the sufficiency of [Brinckerhoff's] claims for reformation and rescission under Chancery Court Rule 12(b)(6) in the first instance."[8] Following remand, the court issued its decision in Brinckerhoff II, finding that equitable relief could be a viable remedy for breach of the LPA, but also ruling that Brinckerhoff waived his right to seek any equitable relief.

         In Brinckerhoff III, we affirmed the Court of Chancery's decisions in Brinckerhoff I and II. Specifically, we affirmed both the finding of waiver, and absence of bad faith. Using corporate law principles similar to pleading waste, we found that Brinckerhoff had failed to allege that "the decision to enter into the JVA, under the circumstances, must be 'so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.'"[9]

         B.

         Turning to the current dispute, Brinckerhoff claims that, during the five years before the announcement of the next Alberta Clipper transaction, crude oil prices declined, reflected in the Alberta Clipper project's nearly 20% decrease in projected EBITDA. Further, tariffs on the Alberta Clipper project faced increased risk that they would be rebased with long-term negative effect on revenue. Despite this negative environment, on September 16, 2014, Enbridge proposed a sale of its Alberta Clipper Interest, excluding the earlier expansion rights, to EEP for $1 billion, a multiple of 10.7x EBITDA. The purchase price consisted of $694 million in newly issued Class E units and approximately $306 million in repaid debt. As part of the transaction, the LPA would be amended to "allocate to the Public Unitholders significant items of gross income that [would otherwise] have been allocated to [General Partner], " referred to as the Special Tax Allocation.[10]

         According to Brinckerhoff, the Special Tax Allocation benefited Enbridge in two ways. First, it would offset a $410 million capital gain EEP GP expected to incur on the sale of its Alberta Clipper Interest back to EEP.[11] Second, EEP GP would receive fewer cash distributions from EEP on the Class E Units than EEP GP would have received from the Alberta Clipper Interest. Brinckerhoff claims the Special Tax Allocation depressed EEP GP's allocation of Partnership income by an additional amount to lower EEP GP's tax burden.

         The bottom line, according to Brinckerhoff, is EEP GP's unfair shift of a large tax burden from EEP GP to the public unitholders. Brinckerhoff alleges that the Special Tax Allocation amounts to approximately "$24.8 million of additional gross income, per year, for 22 years (or approximately $545.6 million in total), and then approximately $12.4 million per year thereafter in perpetuity."[12] According to the complaint, "the Special Tax Allocation increases the proportion of Partnership income taxes for which Class A and B common unit holders and Class D unit holders are responsible, without the benefit of receiving distributions in that proportion."[13]

         In response to Enbridge's proposal, Enbridge Management, as designated manager for EEP GP, formed a Special Committee consisting of Roberts, Connelly, and Westbrook. The Special Committee's charge was to determine whether the offer was fair and reasonable to EEP and its unitholders (other than EEP GP and its affiliates), and whether they should proceed with the transaction or seek alternatives.[14] The Special Committee hired legal counsel and an investment banker, Simmons & Company International ("Simmons").

         During a presentation on December 23, 2014, Simmons explained to the Special Committee that, "[a]t the updated proposed transaction value of $1 billion, [EEP GP] is projected to have a large taxable gain of $410 million on the sale of its units in Alberta Clipper."[15] Thus, "to be cash neutral, the taxable gain will be allocated to the EEP A, B, and D [unitholders]."[16] Enbridge planned to partially offset the increased tax burden by allocating additional "depreciation to the A, B, and D units."[17] Simmons informed the Special Committee that the Special Tax Allocation would "negate most of the accretion the Public Unitholders would otherwise obtain from the Transaction."[18] On December 23, 2014, Simmons concluded that "the Transaction is fair to [EEP] and to the holders of EEP's common units (other than [EEP GP] and its affiliates) from a financial point of view."[19] The Special Committee then recommended the transaction, and EEP GP approved the transaction the same day.[20]

         On January 2, 2015, EEP repurchased from Enbridge the Alberta Clipper Interest, excluding the Alberta Clipper project expansion rights, for $1 billion. On the same day, EEP GP amended the 6th LPA to create the 7th LPA, adding Section 5.2(i) to implement the Special Tax Allocation.

         C.

         On July 20, 2015, Brinckerhoff filed an eight-count complaint in the Court of Chancery against the defendants. In essence, the complaint claims that the defendants violated three specific provisions of the LPA by approving the Alberta Clipper transaction-Section 6.6(e), requiring that contracts with Affiliates be "fair and reasonable to the Partnership"; Section 5.2(c), governing new unit issuance; and Section 15.3(b), prohibiting enlargement of the unitholders' "obligations" under the LPA. Brinckerhoff sought monetary damages against all defendants, and equitable relief rescinding the Alberta Clipper transaction or reforming the transaction "to render the Transaction fair and reasonable to EEP and the Public Unitholders" and to remove the newly-added Section 5.2(i) implementing the Special Tax Allocation.[21]

         Following briefing on the defendants' motion to dismiss, the Court of Chancery granted the motion. Relying on the trilogy of earlier Brinckerhoff decisions and other MLP cases, the court set aside the LPA's specific requirements and focused instead on the LPA's good faith standards. According to the court, "Brinckerhoff was obliged to state well-pled facts that would allow a reasonable inference that Defendants acted in bad faith" before considering his LPA breach claims.[22] Because he had failed to do so under the rigorous pleading standard adopted in Brinckerhoff III, the court ruled that the defendants were exculpated from any liability under the LPA, and dismissed the complaint.[23] This appeal followed.

         II.

         We turn to the gating issue on appeal-whether the Court of Chancery correctly found that the LPA can reasonably be interpreted to permit EEP GP to breach any of the LPA's specific requirements if EEP GP acts in good faith. Because the appeal is from a decision granting a motion to dismiss, we review the claims of error de novo.[24]

         The Court of Chancery did its best to attempt to reconcile complex contractual provisions and confusing precedent. In this appeal, we change course from the earlier pleading standard announced in Brinckerhoff III to which the Court of Chancery was bound, and apply the definition of bad faith that is commonly used in our entity law and incorporated into the Enbridge LPA. We also hold that the LPA's general good faith standards do not displace specific affirmative obligations contained in other provisions of the LPA.

         A.

         The DRULPA permits the LPA drafter to disclaim fiduciary duties, and replace them with contractual duties.[25] The drafter cannot, however, disclaim the implied covenant of good faith and fair dealing.[26] If fiduciary duties have been validly disclaimed, the limited partners cannot rely on traditional fiduciary principles to regulate the general partner's conduct. Instead, they must look exclusively to the LPA's complex provisions to understand their rights and remedies.[27] Further, when trying to square existing precedent with the language of different LPAs, we have observed that:

Although the limited partnership agreements in all of these cases contain troublesome language, each decision was based upon significant nuanced substantive differences among each of the specific limited partnership agreements at issue. That is not surprising, because the Delaware Revised Uniform Limited Partnership Act is intended to give "maximum effect to the principle of freedom of contract." Accordingly, our analysis here ...

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