Supreme Court Broadly Upholds Fair Dealing Claims
Gerber v. Enterprise Products Holdings LLC, No. 46, 2012 (June 10, 2013)
This decision has big implications. In a line of past decisions, the Court of Chancery has upheld arguments that an LLC agreement may define what constitutes "good faith" in such a way as to severely limit claims based on the implied duty of good faith and fair dealing. Of course, that duty under the Delaware LLC Act cannot be eliminated in an LLC agreement. But, by permitting drafters to define what constituted good faith, the trial courts came close to eliminating that duty. No more.
Exactly what will constitute a violation of the duty of good faith and fair dealing is also implicated by this decision. Conduct that may seem permitted by the LLC agreement may now be prohibited if done to take an action that the investors never would have agreed to had they thought of it when the LLC agreement was drafted. Time will have to tell what all this means.