BANDERA MASTER FUND LP, BANDERA VALUE FUND LLC, BANDERA OFFSHORE VALUE FUND LTD., LEE-WAY FINANCIAL SERVICES, INC., and JAMES R. MCBRIDE, on behalf of themselves and similarly situated BOARDWALK PIPELINE PARTNERS, LP UNITHOLDERS, Plaintiffs,
BOARDWALK PIPELINE PARTNERS, LP, BOARDWALK PIPELINES HOLDING CORP., BOARDWALK GP, LP, BOARDWALK GP, LLC, and LOEWS CORP., Defendants.
Submitted Date: July 2, 2019
Thompson Bayliss, J. Peter Shindel, Jr., ABRAMS & BAYLISS
LLP, Wilmington, Delaware; Attorneys for Plaintiffs.
Srinivas M. Raju, Blake Rohrbacher, Matthew D. Perri,
RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware;
Rolin P. Bissell, YOUNG CONAWAY STARGATT & TAYLOR LLP,
Wilmington, Delaware; Daniel A. Mason, PAUL, WEISS, RIFKIND,
WHARTON & GARRISON LLP, Wilmington, Delaware; Lawrence
Portnoy, Charles S. Duggan, Gina Cora, DAVIS POLK &
WARDWELL LLP, New York, New York; Stephen P. Lamb, Andrew G.
Gordon, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New
York, New York; Attorneys for Defendants.
April 2018, Boardwalk Pipeline Partners, LP (the
"Partnership" or "Boardwalk") announced
that its general partner was seriously considering whether to
exercise an option to purchase all the Partnership's
publicly traded common units (the "Call Right").
The announcement caused the trading price of the common units
to plummet. In July, the general partner exercised the Call
Right and purchased the common units at what the plaintiffs
contend was an artificially depressed price.
plaintiffs are former holders of common units who seek to
hold the defendants accountable for the allegedly wrongful
exercise of the Call Right. The plaintiffs contend that the
defendants should be held primarily liable for breaching
their fiduciary duties, their express contractual
obligations, and their implied contractual obligations. The
plaintiffs contend that the defendants who are not primarily
liable should be secondarily liable for aiding and abetting
the other defendants' breaches of fiduciary duty and for
tortious interference with contract.
defendants moved to dismiss the complaint under Rule 12(b)(6)
for failing to state a claim on which relief can be granted.
This decision grants the motion as to the claims premised on
breaches of fiduciary duty. It also grants the motion as to
certain claims that sound in contract. It denies the motion
as to other contract-based claims.
facts are drawn from the currently operative complaint, the
documents integral to it, and the documents that it
incorporates by reference. At this procedural stage, the
complaint's allegations are assumed to be true, and the
plaintiffs receive the benefit of all reasonable inferences.
Citations in the form "Ex. - at -" refer to
exhibits to the complaint.
Partnership is a Delaware limited partnership engaged in the
business of storing and transporting natural gas products.
The Partnership's general partner is defendant Boardwalk
GP, LP (the "General Partner"), which owns a 2%
general partner interest in the Partnership. The General
Partner is itself a Delaware limited partnership, and the
general partner of the General Partner is defendant Boardwalk
GP, LLC ("GPGP"). Defendant Loews Corporation
("Loews") owns and controls GPGP through defendant
Boardwalk Pipelines Holding Corp. ("Holdings"),
which is the sole member of GPGP. Loews thus controls both
the General Partner and the Partnership.
the events giving rise to this litigation, the
Partnership's common units traded on the New York Stock
Exchange under the symbol BWP. Through Holdings, Loews owned
common units representing a 51.2% limited partner interest in
Partnership's internal affairs were governed by its Third
Amended and Restated Agreement of Limited Partnership (the
"Partnership Agreement" or "Agr.").
Section 15.1 of the Partnership Agreement set out the Call
Right, which gave the General Partner the option under
specified circumstances to acquire all of the common units
that the General Partner or its affiliates did not already
conditions had to be met before the General Partner could
exercise the Call Right. First, the General Partner and its
affiliates had to own more than 50% of the Partnership's
limited partner interests. Second, the General Partner had to
receive an "Opinion of Counsel" that its
pass-through tax status "has or will reasonably likely
in the future have a material adverse effect on the maximum
applicable rate that can be charged to customers." Agr.
§ 15.1(b). The Partnership Agreement defined the term
"Opinion of Counsel" as "a written opinion of
counsel . . . acceptable to the General Partner."
Id. § 1.1 at 17.
15.1(c) of the Partnership Agreement required the Partnership
to mail a notice to the record holders of common units
informing them about the exercise of the Call Right. The
pricing formula for the Call Right used a date three days
before the mailing of the notice as the end date for a
measurement period. Under the formula, the purchase price per
common unit would be the average of the daily closing prices
for the common units during the 180 consecutive trading days
immediately before the end date. Through this mechanism, the
purchase price would be set before the holders of common
units received notice that the General Partner had exercised
the Call Right, resulting in a purchase price that was not
affected by the exercise of the Call Right.
FERC Changes Its Rate-Setting Policies.
Partnership earns money by charging customers for natural gas
transportation and storage services. In pipeline parlance,
the customers are sometimes called shippers, and the rates
that the pipeline charges its shippers are sometimes called
Federal Energy Regulatory Commission ("FERC")
establishes a schedule of approved rates for each interstate
pipeline. The approved rates are not mandatory rates. The
pipeline and its shippers can contract for services at
negotiated rates, which can be higher or lower than the
FERC-approved rates. When negotiating the terms of the
contract, however, the shipper can always reject the
pipeline's terms and choose to ship at the FERC-approved
rates. Because the shipper has recourse to the FERC-approved
rates, the latter are called "recourse rates." The
pipeline can also choose to charge shippers discounted rates,
which must be less than the recourse rates.
setting recourse rates, FERC calculates an amount sufficient
to enable the pipeline to recover all of its costs of service
plus earn a profit that will compensate its investors. One
component of a pipeline's cost of service is the income
taxes that it pays. The level of profit reflects the
pipeline's cost of capital based on the components of its
FERC allowed pipeline owners to recover an income tax
allowance based on the assumption that the pipeline would pay
federal corporate income taxes at the longstanding headline
rate of 35%. FERC even allowed pipelines organized as master
limited partnerships ("MLP pipelines") to recover
this income tax allowance, despite the fact that MLP
pipelines are pass-through entities for tax purposes and thus
do not pay tax at the entity level.
March 15, 2018, FERC announced a major change in its
treatment of MLP pipelines for purposes of setting tariff
rates. Ex. 4 (the "Revised Policy Statement").
Under the new policy, MLP pipelines would no longer be
permitted to recover an income tax allowance when calculating
their costs of service. The Revised Policy Statement became
effective when it was published in the Federal
Register on March 21, 2018.
same time it announced the Revised Policy Statement, FERC
issued a notice of inquiry that solicited comment on the
implications of the Revised Policy Statement for a separate
aspect of pipeline tax treatment. See Inquiry
Regarding the Effect of the Tax Cuts and Jobs Act on
Commission-Jurisdictional Rates, 83 Fed. Reg. 12, 371 (Mar.
21, 2018) (the "Notice of Inquiry"). Various tax
regulations permit pipelines to depreciate their assets on an
accelerated basis. When calculating tariff rates, however,
FERC uses straight-line depreciation. Because a pipeline can
claim depreciation more quickly than FERC's method
anticipates, the pipeline pays lower taxes in the early
years, resulting in greater cash flows than FERC's
projections contemplate. The value of the increased cash
flows builds up as an asset on the pipeline's balance
sheet called "Accumulated Deferred Income Tax" or
"ADIT." Once the accelerated depreciation ends, the
pipeline pays higher taxes than FERC's projections
contemplate, and the increased tax payments reduce the ADIT
accelerating depreciation and deferring taxes, the pipeline
benefits from the time-value of money. FERC therefore
historically treated the value of the pipeline's ADIT
balance as cost-free capital when determining the rate of
return that a pipeline needed to earn from its tariff rates.
All else equal, a pipeline with an ADIT balance would have
lower recourse rates than a pipeline without an ADIT balance,
because the pipeline with an ADIT balance would not need to
earn a return on that portion of its capital structure. The
same principle would hold for a relatively higher ADIT
balance versus a lower ADIT balance.
Notice of Inquiry, FERC asked for comments regarding the
implications of the Revised Policy Statement for the rules
governing ADIT balances. One possible implication would be
the elimination of ADIT balances for MLP pipelines.
Eliminating their ADIT balances would benefit those entities
by removing a block of cost-free capital from their asset
bases, thereby increasing the value of the assets on which
MLP pipelines needed to earn a return. Viewed in isolation,
the elimination of ADIT balances would enable MLP pipelines
to ask FERC to approve higher recourse rates. The
implications of removing the ADIT balances were not entirely
clear, however, because it could be argued that any benefits
from removing the ADIT balances should be shared with
shippers, creating near-term liabilities for the MLP
pipelines that could offset the benefits.
Notice of Inquiry also addressed the implications of the Tax
Cuts and Jobs Act of 2017 (the "Tax Act"), which
reduced the headline corporate income tax rate from 35% to
21%. Viewed in isolation, a reduction in the tax rate would
reduce the value of accelerated depreciation and hence the
value of the ADIT balances. The implementation of the Tax Act
thus had the same potential implications as the elimination
of ADIT balances, albeit to a lesser degree because the ADIT
balances would be reduced rather than eliminated. The Tax Act
also affected all pipelines, not just MLP pipelines.
addition to the Revised Policy Statement and Notice of
Inquiry, FERC issued a notice of proposed rulemaking that set
out a process for addressing the implications of the Revised
Policy Statement and the Tax Act for pipeline recourse rates
(the "Notice of Rulemaking"). The proposed
rulemaking contemplated that each pipeline would submit a new
form to FERC in which the pipeline owner would report
information and select one of four options for its rates.
The Partnership Responds To The Revised Policy
after FERC issued the Revised Policy Statement, the Notice of
Inquiry, and the Notice of Rulemaking, the Partnership
addressed the implications of the regulatory changes. In a
press release dated March 16, 2018, the Partnership stated:
"Based on a preliminary assessment, Boardwalk does not
expect FERC's proposed policy revisions to have a
material impact on the company's revenues." Ex. 9.
The press release explained that for two of the
Partnership's four operating subsidiaries, "[a]ll of
the firm contracts are negotiated or discounted rate
agreements, which are not ordinarily affected by FERC's
policy revisions." Id. For its other two
operating subsidiaries, a rate moratorium remained in place
until 2023, so the Revised Policy Statement would not affect
the rates those subsidiaries could charge.
one month later, on April 25, 2018, the Partnership responded
to the Notice of Inquiry by submitting comments to FERC. The
Partnership essentially asked FERC to reverse the Revised
Policy Statement and provide instead "that all
pipelines, including, [sic] MLP pipelines, are permitted to
propose a tax allowance in future rate proceedings . . .
." Ex. 10 at 5. The Partnership also asked FERC to
clarify how it planned to treat ADIT balances and confirm
that the revised policy would not affect negotiated rate
The Partnership Announces The Potential Exercise Of The Call
April 30, 2018, the Partnership filed its Form 10-Q. In a
section discussing FERC's recent regulatory actions, the
While we are continuing to review FERC's Revised Policy
Statement, [Notice of Inquiry, ] and [Notice of Rulemaking],
based on a preliminary assessment, we do not expect them to
have a material impact on our revenues in the near term. All
of the firm contracts on Gulf Crossing and the majority of
contracts on Texas Gas Transmission, LLC are negotiated or
discounted rate agreements, which are not ordinarily affected
by FERC's policy revisions. Gulf South currently has a
rate moratorium in place with its customers until 2023, which
we believe will be unaffected by these actions.
Ex. 11 at 28. The Partnership thus generally maintained the
position taken in its initial press release, while clarifying
that FERC's regulatory actions were unlikely to have a
material impact on revenues in the near term. The
Partnership's initial press release had not limited the
absence of a material impact to the near term.
this relatively anodyne disclosure, the Partnership's
Form 10-Q went on to disclose that in light of FERC's
actions, the Partnership was evaluating whether to remain a
publicly traded entity, citing the potential exercise of the
Call Right by the General Partner (the
"Potential-Exercise Disclosure"). See id.
at 28-29, 34. The Form 10-Q stated flatly: "[O]ur
general partner has a call right that may become exercisable
because of recent FERC action. Any such transaction
or exercise may require you to dispose of your
common units at an undesirable time or price, and may be
taxable to you." Id. at 34 (emphasis in
original). Continuing, the Form 10-Q explained:
[A]s has been described in our SEC filings since our initial
public offering, our general partner has the right under our
partnership agreement to call and purchase all of our common
units if (i) it and its affiliates own more than 50% in the
aggregate of our outstanding common units and (ii) it
receives an opinion of legal counsel to the effect that our
being a pass-through entity for tax purposes has or will
reasonably likely in the future have a material adverse
effect on the maximum applicable rate that can be charged to
customers by our subsidiaries that are regulated interstate
natural gas pipelines. Because our general partner and its
affiliates hold more than 50% of our outstanding common
units, this call right would become exercisable if our
general partner receives the specified opinion of legal
The magnitude of the effect of the FERC's Revised Policy
Statement may result in our general partner being able to
exercise this call right. Any exercise by our general partner
of its call right is permitted to be made in our general
partner's individual, rather than representative,
capacity; meaning that under the terms of our partnership
agreement our general partner is entitled to exercise such
right free of any fiduciary duty or obligation to any limited
partner and it is not required to act in good faith or
pursuant to any other standard imposed by our partnership
agreement. Any decision by our general partner to exercise
such call right will be made by [Holdings], the sole member
of [GPGP], rather than by our Board. . . . We have been
informed by [Holdings] that it is analyzing the FERC's
recent actions and seriously considering its purchase right
under our partnership agreement in connection therewith.
Id. at 34 (emphasis added).
same day, the Partnership held an earnings call. During the
call, the Partnership reiterated its clarification that the
policy was unlikely to have a material impact on revenues
in the near term. See Ex. 12 at 5. The
Partnership also reiterated that Loews was "seriously
considering" whether to cause the General Partner to
exercise the Call Right. Id. The Partnership
declined to take questions concerning "the decision
making process or the possible timing of any such
decision," instead referring investors to its public
filings. Id.; see id. at 8.
that day, Loews made a similar announcement during its
earnings call. Loews stated that it was "exploring all
[its] options" and that "no decisions ha[d] yet
been made." Ex. 13 at 3. Loews likewise declined to
answer questions about the Call Right, instead referring
investors to its public filings. See id. at 3, 6, 7.
the week after the Potential-Exercise Disclosure, the market
price of the Partnership's common units fell from $11.04
to $9.26, reflecting a decline of 16%. Numerous investors and
research analysts objected to Lowes and the General Partner
relying on FERC's regulatory actions as a basis for
exercising the Call Right. They also objected that the
Potential-Exercise Disclosure enabled the Partnership and
Loews to undermine the contractually specified mechanism for
determining the call price.
The Original Plaintiffs File Suit And Reach A
24, 2018, two holders of common units (the "Original
Plaintiffs") filed this action and moved for expedited
proceedings. The Original Plaintiffs wanted to prevent the
General Partner from exercising the Call Right using a
180-day measurement window that included trading days that
had been affected by the Potential-Exercise Disclosure. The
defendants opposed the motion, arguing that the dispute was
not ripe because the General Partner had not yet elected to
exercise the Call Right. The court agreed with the defendants
and denied the motion to expedite.
defeating the motion to expedite on the theory that the
claims were not yet ripe, defense counsel contacted the
lawyers for the Original Plaintiffs to explore settling the
not-yet-ripe claims. Ex. 35 at 14-17. On May 30, 2018, the
Original Plaintiffs offered to settle if the defendants
agreed to exercise the Call Right using June 1, 2018, as the
end date for the 180-day measurement period, which would have
included twenty-four affected trading days in the
calculation. The defendants countered with an end date of
September 1, 2018, which would have included sixty-four
affected days in the calculation. After further back and
forth, the parties agreed to an end date of June 29, 2018,
which included forty- four affected days in the calculation.
Using that end date, the pricing formula yielded a purchase
price for the Call Right of $12.06 per unit.
parties spent two weeks drafting settlement documents. On
June 22, 2018, they informed the court by email that they had
reached an agreement in principle and asked the court to
review the settlement papers in camera. The court
rejected that request as seeking a non-public advisory
that night, the parties signed and filed their proposed
settlement, which contemplated the certification of a class
and provided the defendants with a broad release of all
claims. After the settlement was announced, several
unitholders objected to its terms. See Exs. 41 &
The Call-Right Exercise
29, 2018, the Partnership announced that the General Partner
would exercise the Call Right on July 18 at a price of $12.06
per unit (the "Call-Right Exercise"). The
Partnership reported that Baker Botts LLP had provided the
General Partner with the opinion of counsel required by the
Partnership Agreement (the "Tax Opinion").
hours later, FERC announced a final rule that addressed
several open issues about its rate-setting policies for MLP
pipelines, including two of the issues that the Partnership
had raised in its comments. Ex. 2 (the "Final
Rule"). First, FERC announced that because the Revised
Policy had eliminated the income tax allowance for MLP
pipelines, those entities could eliminate their accumulated
ADIT balances. Going forward, a pipeline owner like the
Partnership would not need to need subtract an ADIT balance
from the pipeline's asset base when seeking approval for
a tariff rate and thus could seek a competitive rate of
return on its entire rate base. The practical effect of the
Final Rule was to enable MLP pipelines to ask FERC to approve
higher rates. Equally important, FERC determined that when an
MLP pipeline eliminated its ADIT balance, it would not be
required to return any amounts to shippers. Ex. 2 at 85-90.
As a result of these clarifications, instead of the Revised
Policy Statement having an adverse impact on the rates that
MLP pipelines could charge, the Revised Policy Statement had
a potentially favorable impact.
second issue, FERC confirmed that the Revised Policy
Statement would not affect negotiated rate contracts.
Id. at 157-60. The Revised Policy Statement would
thus not affect the Partnership's negotiated rates,
consistent with the announcement the Partnership initially
made in response to the Revised Policy Statement.
18, 2018, the General Partner exercised the Call Right. As a
result, the Partnership became a wholly owned subsidiary of
the General Partner and its affiliates.
The Settlement Is Rejected, And The Current
Plaintiffs Pursue The Litigation.
current plaintiffs objected to the proposed settlement. On
September 28, 2018, the court declined to approve it. Because
the current plaintiffs had prevailed on their objections, the
court permitted them to take over the litigation.
current plaintiffs subsequently filed the operative
complaint. They allege that the defendants carried out a
"deliberate scheme" to "manipulate
Boardwalk's common unit price for their own benefit"
that included making the Potential-Exercise Disclosure so
that the price of the common units would plummet. Compl.
¶¶ 1, 171. Based on the allegations in the
complaint, the current plaintiffs assert six causes of
• Count I seeks a declaratory judgment that the
defendants breached the express terms of the Partnership
Agreement, the implied covenant of good faith and fair
dealing, and their fiduciary duties.
• Count II contends that the Partnership, the General
Partner, and GPGP breached the Partnership Agreement by
exercising the Call Right in bad faith and in breach of the
express terms of the Partnership Agreement.
• Count III contends that the Partnership, the General
Partner, and GPGP breached the implied covenant of good faith
and fair dealing that inheres in the Partnership Agreement by
"teasing" the market that they were "seriously
considering" exercising the Call Right, thereby
depressing the unit price and allowing the General Partner to
exercise the Call Right at a price significantly lower than
intended by the Partnership Agreement. Compl. ¶
• Count IV contends that Holdings, the General Partner,
GPGP, and Loews breached their equitable and contractual
fiduciary duties to the Partnership and its limited partners
by engaging in a "scheme [that] culminated] in the
improper and unauthorized exercise of the Call Right to
purchase the common units of all minority unitholders after
Defendants had deliberately depressed the Purchase Price by
threatening to exercise the Call Right . . . ." Compl.
¶¶ 240, 242.
• Count V contends that GPGP, Holdings, and Loews aided
and abetted the General Partner's breach of its equitable
and contractual fiduciary duties to the Partnership and its
limited partners by causing the General Partner to breach its
• Count VI alleges that GPGP, Holdings, and Loews
tortiously interfered with contractual relations by using
their control over the General Partner to cause it to breach
the Partnership Agreement.
defendants have moved to dismiss the complaint under Rule
12(b)(6) for failure to state a claim on which relief can be
granted. When considering a Rule 12(b)(6) motion, this court
(i) accepts as true all well-pleaded factual allegations in
the complaint, (ii) credits vague allegations if they give
the opposing party notice of the claim, and (iii) draws all
reasonable inferences in favor of the plaintiffs. Central
Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC,
27 A.3d 531, 535 (Del. 2011). Dismissal is inappropriate
"unless the plaintiff would not be entitled to recover
under any reasonably conceivable set of circumstances."
decision does not address the counts of the complaint in the
order presented. It does not discuss Count I at all, because
that count seeks redundant declaratory judgments on the same
issues raised substantively by the other counts. This
decision's rulings on the other counts suffice to address
the parallel declaratory judgments sought in Count I. This
decision starts with Count IV, which asserts a claim for
breach of fiduciary duty, then addresses a related claim in
Count V for aiding and abetting a breach of fiduciary duty.
These claims are readily swept away because the Partnership
Agreement eliminated all fiduciary duties. This decision then
returns the core contract-based claims that logically
demarcate the disputed terrain in a purely contractual
entity. At the pleading stage, the complaint states claims
for breach of the express provisions of the Partnership
Agreement (Count II), breach of the implied covenant that
inheres in the Partnership Agreement (Count III), and
tortious interference with the Partnership Agreement (Count
Count IV: Breach Of Fiduciary Duty
IV of the complaint contends that the General Partner and its
controllers breached their fiduciary duties when engaging in
the conduct challenged in the complaint. The language of the
Partnership Agreement clearly eliminated fiduciary duties. As
a result, Count IV fails to state a viable claim.
Delaware Limited Partnership Act gives "maximum effect
to the principle of freedom of contract and to the
enforceability of partnership agreements." 6 Del. C.
§ 17-1101(c). This freedom is "often exercised in
the MLP context" by "eliminating any fiduciary
duties a partner owes to others in the partnership
structure." Dieckman v. Regency GP LP, 155 A.3d
358, 366 (Del. 2017) (citing 6 Del. C. § 17-1101(d)). By
doing so, the drafters of a limited partnership agreement
replace fiduciary duties with contractual obligations.
Id. If fiduciary duties have been validly
eliminated, "the limited partners cannot rely on
traditional fiduciary principles to regulate the general
partner's conduct." Brinckerhoff v. Enbridge
Energy Co., 159 A.3d 242, 252 (Del. 2017).
drafters of the Partnership Agreement chose to eliminate all
common law duties, including fiduciary duties, that the
General Partner and its affiliates might otherwise have owed
to the Partnership and its limited partners. Section 7.9(e)
of the Partnership Agreement states:
Except as expressly set forth in this Agreement, neither the
General Partner nor any other Indemnitee shall have any
duties or liabilities, including fiduciary duties, to the
Partnership or any Limited Partner or Assignee and the
provisions of this Agreement, to the extent that they
restrict, eliminate or otherwise modify the duties and
liabilities, including fiduciary duties, of the General
Partner or any other Indemnitee otherwise existing at law or
in equity, are agreed by the Partners to replace such other
duties and liabilities of the General Partner or such other
Agr. § 7.9(e). The Partnership Agreement defines the
term "Indemnitee" to include the General Partner
and "any Person who is or was an Affiliate of the
General Partner . . . ." Id. § 1.1 at 12.
The Partnership Agreement defines the term
"Affiliate" as "with respect to any Person,
any other Person that directly or indirectly through one or
more intermediaries controls, is controlled by or is under
common control with, the Person in question."
Id. § 1.1 at 3. Consequently, GPGP, Holdings,
and Loews are Indemnitees for purposes of the Partnership
language of Section 7.9(e) eliminated all "duties or
liabilities, including fiduciary duties" owed by the
General Partner and its affiliates to the Partnership and its
limited partners. Section 7.9(e) left in place only those
duties and liabilities "expressly set forth in [the
Partnership] Agreement." Thus, the only duties and
liabilities that the General Partner, GPGP, Holdings, and
Loews owed to the ...