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Chancery Finds General Partner Breached Partnership Agreement in Exercising Call Right, and Awards Limited Partners Nearly $700 Million in Damages

Posted In Chancery, LLCs/LLPs, MLPs

Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Nov. 12, 2021)
If a partnership agreement requires an opinion of counsel as a condition precedent, such opinion must be rendered in subjective good faith under Delaware law, As Boardwalk Pipeline Partners illustrates, a court applying Delaware law may reject such an opinion as rendered in bad faith if the counsel and the requesting party involved coordinate to develop counterfactual assumptions designed to generate a desired result for the requesting party.

Since 2005, a holding company, whose subsidiaries operated interstate pipeline systems for the transportation and storage of natural gas, was a publicly-traded master limited partnership (MLP). The general partner, which was controlled by a sole member, had a contractual call right to acquire the limited partners’ interests if the Federal Energy Regulatory Commission (FERC) took certain regulatory action. To exercise the call right, the general partner had to satisfy two conditions: (1) receive an opinion of counsel (“Opinion”) that the partnership’s corporate 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 (“Opinion Condition”); and (2) determine that Opinion was acceptable (“Acceptability Condition”). In 2018, FERC proposed a package of policies that were not final, but that could have made MLPs unattractive investment vehicles for pipeline companies. Months later, however, the FERC implemented measures to make MLPs even more attractive, not less. In between these dates, the general partner worked with legal counsel to develop an Opinion, exercised the call right, and acquired the limited partners’ interests at a depressed price given market uncertainty regarding potential changes in FERC policy.

The limited partners challenged the exercise of the call right in the Delaware Court of Chancery as a breach of the partnership agreement on the grounds that the general partner had failed to satisfy the Opinion Condition and the Acceptability Condition. The Court ruled that the Opinion was not bona fide and that counsel had relied on counterfactual assumptions to reach a conclusion that supported the general partner exercising its call right. The potential changes to the FERC’s regulatory policy were still entirely in flux. But, in the Opinion, counsel nevertheless made assumptions that the revised policy was final, that inevitably the policy would lead to a change in pipeline rates, that the ambiguous term “maximum applicable rates” had a meaning favorable to the general partner, and that changes to certain FERC tax policies were final and unfavorable.

The Court found that when crafting the Opinion, counsel had knowingly served the general partner’s interests, rather than exercising reasoned judgment and awaiting FERC clarification. The Court explained that counsel had in effect rewritten the terms of the call right in bad faith because it had rendered an opinion involving the application of Delaware law on material adverse effects when it was not a Delaware law firm and two Delaware firms had previously refused to opine on that issue. Finally, imputing to the general partner the knowledge of individual officers and of its counsel, the Court determined that the general partner was not entitled to exculpation for reliance on counsel due to willful misconduct in orchestrating the sham Opinion and diverting the acceptability determination to the sole member of the general partner. For its breach relating to the Opinion Condition (and separately the Acceptability Condition), the general partner was found liable for nearly $700 million in damages.

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