Delaware Business Litigation Report

Court Of Chancery Explains Covenant Application In LLC Agreement

Allen v. El Paso Pipeline GP Company LLC, C.A. No. 7520-VCL (June 20, 2014) One of the more difficult tasks a court faces is the determination of what complicated LLC agreements mean in terms of dealing with conflict of interest issues.  Considering that LLCs and LLPs are used in large part to permit such conflict deals that might not pass muster in a corporate form, this is a common issue.  First, the Court needs to deal with the form of conflict resolution provided for by the governing agreement. Here, that as not too difficult given the broad discretion given to the conflict committee involved. More difficult, however, is considering if the covenant of good faith and fair dealing is involved to invoke some right the plaintiff can use to assert a claim.  That decision boils down to seeing if there is some gap the covenant might fill in terms of what the operating agreement provides. Here, the Court found that the agreement clearly covered the transaction involved and left no room for some covenant duties to be asserted.  The analysis is a model for others to follow and illustrates how narrow the covenant really is. Share