Marubeni Spar One, LLC v. Williams Field Services - Gulf Coast Company, L.P. ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MARUBENI SPAR ONE, LLC, )
)
Plaintiff, )
)
v. ) C.A. No. 2018-0908-SG
)
WILLIAMS FIELD SERVICES – GULF )
COAST COMPANY, L.P., )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: October 18, 2019
Date Decided: January 7, 2020
Brian E. Farnan and Michael J. Farnan, of Farnan LLP, Wilmington, Delaware; OF
COUNSEL: Thomas J. Heiden, Mary Rose Alexander, and Thomas A. Benhamou,
of Latham & Watkins LLP, Chicago, Illinois, Attorneys for Plaintiff Marubeni Spar
One, LLC.
Adam V. Orlacchio, of Blank Rome LLP, Wilmington, Delaware; OF COUNSEL:
Barry Abrams, Joshua A. Huber, and Stephanie Holden, of Blank Rome LLP,
Houston, Texas, Attorneys for Defendant Williams Field Services – Gulf Coast
Company, L.P.
GLASSCOCK, Vice Chancellor
Sports-fishermen on the U.S. East and Gulf coasts are well acquainted with
the “canyons,” the drowned mouths of prehistoric great rivers whose inshore depths
attract gamefish. In the Gulf of Mexico, the canyons also provide access to offshore
oil and gas reserves. While onshore oilfield names are primarily descriptively
prosaic (the East Texas field, the Permian Basin, etc.), offshore field names—at
least, so the facts here would suggest—tend more towards whimsy. This matter
involves production from the Tubular Bells field, located in the Mississippi Canyon
off New Orleans, and the neighboring Gunflint field.
Production from oil fields below thousands of feet of water is, to my mind, an
engineering marvel. Once the oil is located, the wells are installed and the oil and
gas pumped from deep underground, the job is only begun—the product must be
transported to an onshore facility for processing and refining. The installation at
issue here—the Tubular Bells platform1—is designed for that task; it is a floating
manifold moored in the Mississippi Canyon that receives oil and gas, and pumps it
ashore. It was built to serve the Tubular Bells field by the Defendant, Williams Field
Services – Gulf Coast Company, L.P. (“Williams”). Williams currently owns 51%
of the company that owns the facility, Gulfstar One, LLC (“Gulfstar,” or, the
1
The “platform” is variously referred to in the record as “Tubular Bells” and “Gulfstar One”;
although the Plaintiff’s complaint uses the latter, I employ “Tubular Bells platform” here as, I
hope, less conducive to confusion.
1
“Company”). The remainder is owned by the Plaintiff, Marubeni Spar One, LLC
(“Marubeni”).
As will be explained in detail below, the interests of the two litigants in the
profits from Gulfstar are provided by contract. In simplified form, the contracts
provide that the net revenue from Gulfstar’s Tubular Bells field operation is split
51% to Williams, 49% to Marubeni.
As described above, however, the Tubular Bells platform is a manifold or
“hub,” it can receive oil and gas from more than one source. The parties provided
for Marubeni to have the option to participate should Gulfstar have the opportunity
to handle product from new fields. If Marubeni chooses to participate, revenue from
these new projects (each, an “Expansion Project”) is split 87.75% to Williams and
the remainder to Marubeni, net of expenses incurred. Marubeni has participated in
one Expansion Project, which serves the Gunflint field.
The parties’ disagreement, and this Action, involves which expenses are
“incurred” in connection with the Gunflint Project. Williams contends it is the out-
of-pocket costs of hooking Gunflint into the Tubular Bells platform, and the
project’s direct operating costs. This reading allocates the fixed costs associated
with the Gulfstar installation to the Tubular Bells distribution. Because Williams’
percentage of profit is higher from Gunflint, this reading is in its economic interest.
Marubeni, unsurprisingly, takes the view that all expenses should be allocated
2
between the two projects; this reading is in its economic interest. Marubeni asks for
a judgment vindicating its position, and seeks specific performance and damages,
via this suit.
Williams has moved to dismiss, citing what it contends is the plain language
of the contracts at issue. Marubeni has moved for partial summary judgement also
alleging that I may decide the meaning of the contracts solely from the language
therein.
The technology employed by all parties exploiting the oil reserves of the deep-
water Gulf of Mexico is mind-boggling. These are engineering projects of the most
sophisticated type. The legal issue, by contrast, is mundane. Upon review of the
documents at issue in light of the complaint, I find that the intention of the parties is
unclear, and interpretation would benefit from a record. Therefore, the cross-
motions are denied with respect to the contract claims.
My reasoning follows.
3
I. BACKGROUND2
A. The Company and the Parties
Gulfstar is a Delaware limited liability company3 and a midstream oil and gas
company.4 Gulfstar owns a floating production system moored 135 miles southeast
of New Orleans, Louisiana in the Gulf of Mexico.5 Gulfstar’s production system
“acts as a hub that aggregates and combines production handling services with oil
and gas export pipeline services, which feed downstream oil and gas gathering and
processing services on the Gulf Coast.”6
Williams7 is a Delaware limited partnership, and both a Member and the
Operating Member of Gulfstar.8 Williams has a 51% Percentage Interest in
Gulfstar.9
2
The facts, except where otherwise noted, are drawn from the well-pled allegations of the
Plaintiff’s Verified Complaint (the “Complaint” or “Compl.”) and exhibits or documents
incorporated by reference therein, which are presumed true for purposes of evaluating the
Defendant’s Motion to Dismiss.
3
Compl., Ex. A, Limited Liability Company Amended and Restated Operating Agreement of
Gulfstar One LLC (the “LLC Agreement”), at 1.
4
Id. ¶ 7.
5
Id.
6
Id.
7
The Defendant indicated in its briefing that it has changed its name to Williams Field Services –
Gulf Coast Company LLC. “Williams” refers to the entity under either name and the change does
not affect this Memorandum Opinion.
8
Compl., ¶¶ 8, 12. The LLC Agreement notes: “The day-to-day business and affairs of the
Company shall be managed by or under the direction of a Member designated as the Operating
Member . . . .” LLC Agreement, § 5.6.
9
Compl., ¶ 11. Percentage Interest is defined in the LLC Agreement, in part as: “with respect to
each Member, a fraction (expressed as a percentage), the numerator of which is the Member
Contributions of that Member, and the denominator of which is the Total Member Contributions.”
LLC Agreement, § 1.2.
4
Marubeni is a Delaware limited liability company and a Member of Gulfstar.10
Marubeni invests in infrastructure projects for oil and gas production, processing,
transportation, and distribution.11 Marubeni has a 49% Percentage Interest in
Gulfstar.12
B. Tubular Bells and Marubeni’s Investment
Williams’ parent company, Williams Partners, founded Gulfstar in 2011 to
“provide oil and gas handling services for Tubular Bells, a deepwater oil and gas
field in the Gulf of Mexico.”13 Gulfstar’s first platform (the Tubular Bells
platform)— intended to service the Tubular Bells field—was engineered to process
60,000 barrels of oil per day and 132 million standard cubic feet of gas per day.14
Marubeni became a Member in Gulfstar on January 18, 2013 when Williams
and Marubeni entered into a Contribution Agreement.15 Pursuant to the Contribution
Agreement, Marubeni was issued a 49% Percentage Interest in Gulfstar in exchange
for a cash contribution of $187 million.16 Gulfstar is governed in part by an
Amended and Restated Operating Agreement (the “LLC Agreement”) and an
10
Compl., ¶¶ 3, 11.
11
Id. ¶ 9.
12
Id. ¶ 11.
13
Id. ¶ 8.
14
Id.
15
Id. ¶ 10.
16
Id.
5
Operating Member Services Agreement (the “Operator Agreement”),17 each
between Marubeni and Williams and effective as of April 1, 2013.18
C. The LLC Agreement and Operator Agreement
The LLC Agreement and the Operator Agreement delineate standards of
conduct for Williams as the Operating Member. Williams “shall manage and control
the Company’s business, properties and affairs to the best of its ability and shall use
commercially reasonable efforts to carry out the business of the Company.”19
Additionally, Williams “shall perform the Operating Services20 in a timely manner
in accordance with the Prudent Operating Standards.”21 Section 5.15 of the LLC
Agreement notes:
Notwithstanding any provision of this Agreement . . . (a) Williams and
any successor Operating Member shall have no liability under this
Agreement or otherwise to the Company or any Member for any actions
taken in its capacity as Operating Member or for any actions it fails to
17
Compl., Ex. B, Operating Member Services Agreement (the “Operator Agreement”).
18
Compl., ¶ 13.
19
LLC Agreement, § 5.6.
20
This includes, in part: “[o]perat[ing], manag[ing] and direct[ing] the maintenance, upkeep and
repair of the Gulfstar One Facilities . . .”, “[s]upervis[ing], direct[ing], oversee[ing], coodinat[ing]
and provid[ing] services to the extent requirement of Company . . .”, and “[s]upervis[ing],
dirtect[ing], oversee[ing], coordinat[ing], approv[ing] and obtain[ing] the procurement and
purchase of all materials, components and equipment required to operate and maintain the Gulfstar
One Facilities . . . .” Operator Agreement, § 2.2.2.
21
Id. § 2.3. Prudent Operating Standards is defined in the LLC Agreement as: “acting in
accordance with (i) all Laws and Permits, at the minimum federal safety standards set forth in all
Laws and Permits, (ii) nationally recognized codes and standards applicable to the Operating
Services, and (iii) those standards, practices, methods, and procedures that, at a given time in light
of the circumstances then known, are generally accepted for use in the operation of facilities like
the Gulfstar One Facilities in accordance with the Project Operating Agreements, and are
consistent with general offshore oilfield practices applicable to facilities such as the Gulfstar One
Facilities.” LLC Agreement, § 1.2.
6
take unless it breaches its obligations under this Agreement as a result
of its gross negligence, fraud or willful misconduct . . . .22
The Operator Agreement has a similar provision:
Operating Member shall have no liability to any Non-Operator
Indemnitee,23 and each Non-Operator Indemnitee hereby releases
Operating Member from any liability, under this Operating Member
Services Agreement or otherwise in connection with the Project or the
performance of Operating Member Services by Operating Member or
its failure to perform any such services unless Operating Member
commits a breach of its obligations under this Operating Member
Services Agreement involving Operating Member's gross negligence,
fraud or willful misconduct.24
Important to this Action, the LLC Agreement contains a formula to distribute
Gulfstar’s Available Cash.25 Section 4.3.2 reads:
Within thirty (30) days following the end of each Quarter ending
after the date of First Production an amount equal to 100% of Available
Cash with respect to such Quarter shall, subject to Section 18-607 of
the Delaware Act, be distributed by the Company in accordance with
this Article 4 (ALLOCATIONS AND DISTRIBUTIONS) as follows:
(a) first, to Williams an amount equal to the lesser of (i)
the Handling Amount with respect to such Quarter and (ii) the
amount of GAAP Net Income of the Company with respect to
such Quarter,
(b) second, to Williams until Williams has received
cumulative distributions pursuant to this Section 4.3.2(b) in an
amount equal to the Third Party Production Amount with respect
to such Quarter and all prior Quarters,
22
LLC Agreement, § 5.15.
23
Defined as “the Company and its other Members, and any Affiliates, officers, employees, agents,
borrowed servants and contract employees of each of the foregoing . . .” Operator Agreement, §
11.1.
24
Id. § 11.2(a).
25
Compl., ¶ 27.
7
(c) third, to Williams an amount equal to the Positive
Value Amount, if any, with respect to such Quarter, and
(d) thereafter, to the Members in accordance with their
Percentage Interests.26
This dispute centers on the definition of Third Party Production Amount (“TPPA”)
as used in Section 4.3.2(b). From Marubeni’s Verified Complaint (the
“Complaint”), it appears that the TPPA is $0 for distributions from Tubular Bells
whereas the TPPA is positive for other projects as discussed below, leading to
divergent distribution outcomes.
D. Expansion Projects and Sole Risk Projects
The Tubular Bells platform was designed with the ability to expand
production by the construction of new projects able to utilize the platform’s
“facilities and resources.”27 The LLC Agreement allows either Williams alone, or
both Williams and Marubeni, to participate in the construction, and share in the
proceeds, of a new project.28 Put simply, if Marubeni decides not to participate in a
new project, the project is a “Sole Risk Project,” and “Williams receives all of the
benefits and incurs all of the costs associated with that project.”29 Conversely, if
Marubeni decides to participate in a new project, the project is an “Expansion
26
LLC Agreement, § 4.3.2.
27
Compl., ¶¶ 1, 8.
28
See LLC Agreement, § 5.22.4.
29
Compl., ¶ 23.
8
Project” and “Marubeni and Williams share distributions and costs according to the
terms of the LLC Agreement.”30
The TPPA “specifies how net proceeds associated with any Expansion Project
. . . are to be distributed.”31 TPPA:
means the product of (a) any cash inflows received by the Company
derived from Third Party Producer Agreements or production otherwise
handled pursuant to an Expansion Project less associated cash outflows
(including capital expenditures, operating expenditures and any other
costs associated with such Expansion Project) incurred by the Company
in connection therewith, and (b) 75%; provided, however, that this term
shall not include revenues or associated costs related to Sole Risk
Projects.32
Since Williams is to receive the TPPA pursuant to the distribution waterfall in
Section 4.3.2 of the LLC Agreement, Williams receives 75% of the amount in clause
(a) of the TPPA definition.33 The remaining 25% falls to the bottom of the waterfall
to be distributed “to the Members in accordance with their Percentage Interests.”34
Since Williams owns a 51% Percentage Interest in the Company, it receives 51% of
this remaining 25%.35 Williams is thus due 87.75% of the net proceeds of an
Expansion Project. This contrasts to 51% of net proceeds for production from the
Tubular Bells field.36
30
Id. ¶ 24.
31
Id. ¶ 28.
32
LLC Agreement, § 1.2.
33
Compl., ¶ 31.
34
Id. (quoting LLC Agreement, § 4.3.2).
35
Id. ¶ 1. This equals 12.75%.
36
Id.
9
E. The Gunflint Project
The Company has developed one project other than Tubular Bells, the
Gunflint Project (“Gunflint”).37 Gunflint is an Expansion Project.38 “[A]ll projects,
present . . . and future, of the Company” derive benefits from certain expenditures
already undertaken by Gulfstar in connection with the Tubular Bells platform.39
Williams, as the Operating Member, has not allocated certain costs to Gunflint, and
instead has allocated them solely to Tubular Bells.40 According to the Complaint,
these costs include:41 “(a) Operating and maintenance costs associate[sic] with
Export Pipelines,42 (b) Operating and maintenance costs associated with Hull and
Mooring,43 (c) Selling, General and Administrative expenses,44 (d) Third Party
37
Id.
38
Id. ¶ 25.
39
Id. ¶ 33.
40
Id. ¶ 39.
41
At Oral Argument, Williams maintained that the Complaint misstates its actual allocation of
costs; that dispute is not pertinent at the pleadings stage.
42
The Company “uses certain infrastructure that is shared among projects, such as pipeline, that
takes commodity volumes from both Tubular Bells and Gunflint closer to shore.” Compl., ¶ 33.
43
“[T]he infrastructure that causes the floating platforms to remain onsite.” Id.
44
“[E]xpenses incurred to promote, sell and deliver the Company’s services and to manage the
overall Company, which necessarily includes the costs to promote, sell, deliver and manage each
project of the Company.” Id. ¶ 34.
10
Producer revenue sharing,45 (e) Operating Member Fee,46 (f) Handling Amounts,47
and (g) ARO Expenditures.48”49 Marubeni alleges that the allocation of costs
between Tubular Bells and Gunflint by Williams is inconsistent with the TPPA
language in the LLC Agreement. That disagreement spawned this Action.
F. Procedural Background of this Action
Marubeni filed the Complaint on December 14, 2018. On March 7, 2019,
Williams made two Motions: (i) to dismiss all counts of the Complaint other than
that for a declaratory judgment or to stay such counts pending resolution of the
declaratory judgment count and (ii) to stay discovery and for a protective order.50
Marubeni subsequently moved for Partial Summary Judgment on April 29, 2019.51
I heard Oral Argument on all outstanding Motions on October 10, 2019. During
45
The Company “is required to share a portion of its revenues generated from Gunflint with
Tubular Bells Producers.” Id. ¶ 35.
46
“Under Section 8.1 of the Operator Agreement, [the Company] must pay Williams, as Operating
Member, a monthly fee for providing Operating Services to the Company. These Operator
Services include, among other things, the operation, management, maintenance and performance
of the Gulfstar One Facilities and the Project Operating Agreements.” Id. Gulfstar One Facilities
is a defined term in the LLC Agreement which includes the floating production systems and the
pipelines used to export the production from the floating production systems. LLC Agreement, §
1.2.
47
“The Handling Amount is the amount [the Company] pays Williams based on the Billable Oil
Volumes and Billable Gas Volumes from both [Tubular Bells] and Gunflint[] as defined in the
Production Handling Agreements between the Company and the Gunflint and Tubular Bell
Producers, respectively. (Each project has a separate Production Handling Agreement with [the
Company]).” Compl., ¶ 37.
48
“ARO stands for Asset Retirement Obligations and are the costs to abandon, remove and
decommission the facilities of the Company.” Id. ¶ 38 (internal quotation marks omitted).
49
Id. ¶ 32.
50
Mot. to Dismiss, D.I. 22; Mot. to Stay Disc. and for Protective Order, D.I. 23.
51
Mot. for Summ. J., D.I. 33.
11
Oral Argument, at the request of Marubeni, I allowed Marubeni until October 18,
2019 to reconsider certain of its Counts. On October 18, 2019, Marubeni wrote me
that all Counts remained. I considered the Motions submitted for decision on that
date.
The Complaint pleads five Counts.
Count A asserts breach of contract against Williams. It alleges that Williams
has not properly allocated costs “associated with” Gunflint and consequently
breached (i) the LLC Agreement by failing to “use[] commercially reasonable
efforts” in managing the Company52 and (ii) the Operator Agreement by failing to
“perform Operating Services in accordance with Prudent Operating Standards.”53
Count B asserts breach of fiduciary duty against Williams. It alleges that
Williams “owes Marubeni and the Company fiduciary duties” as the Majority
Member and Operating Member of Gulfstar and breached those duties by “failing to
allocate costs associated with Gunflint to Gunflint.”54
Count C asserts breach of the “duty” of good faith and fair dealing against
Williams. It alleges that Williams is breaching such duty by “engaging in
unreasonable conduct which has the effect of preventing Marubeni from receiving
52
Compl., ¶¶ 50, 52.
53
Id. ¶¶ 50–51.
54
Id. ¶¶ 55–56.
12
the fruits of its bargain and frustrates the overarching purpose of the LLC
Agreement.”55
Count D requests a declaratory judgment with a “final determination of the
duties and obligations of the Operating Member” regarding the costs that must be
allocated to Expansion Projects.56
Count E requests “an injunction requiring Williams to allocate costs
associated with Expansion Projects to Expansion Projects and refrain from and avoid
any further breaches of its contract obligations.”57
II. ANALYSIS
Williams has moved to dismiss this Action pursuant to Chancery Court Rule
12(b)(6).58 The standard of review for a Rule 12(b)(6) motion is well settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are well-pleaded if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the nonmoving party; and (iv) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.59
55
Id. ¶ 62.
56
Id. ¶ 68.
57
Id.
58
Ch. Ct. R. 12(b)(6).
59
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotations
omitted).
13
When reviewing a motion to dismiss, the court may take into consideration
documents “incorporated into the pleadings by reference and may take judicial
notice of relevant public filings.”60
A. The TPPA Definition
Notwithstanding the myriad of Counts pled by Marubeni, all relief sought in
the Complaint hinges on whether Williams’ cost allocation for Gunflint comports
with the definition of TPPA. Resolving that issue requires an interpretation of that
definition. In Delaware, “the proper interpretation of language in a contract is a
question of law,” and, “[a]ccordingly, a motion to dismiss is a proper framework for
determining the meaning of contract language.”61
When interpreting a contract, “the court strives to determine the parties’
shared intent, ‘looking first at the relevant document, read as a whole, in order to
divine that intent.’”62 Words should be interpreted “using their common or ordinary
meaning, unless the contract clearly shows that the parties’ intent was otherwise.”63
Where the language of a contract is “‘clear and unambiguous,’ the ordinary meaning
60
See Fairthorne Maint. Corp. v. Ramunno, 2007 WL 2214318, at *4 (Del. Ch. Jul. 20, 2007)
(internal citations omitted).
61
Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006).
62
Pharmathene, Inc. v. Siga Techs., Inc., 2008 WL 151855, at *11 (Del. Ch. Jan. 16, 2008)
(quoting Matulich v. Aegis Comm’ns Grp., Inc., 2007 WL 1662667, at *4 (Del. Ch. May 31,
2007)).
63
Pharmathene, 2008 WL 151855, at *11 (quoting Cove on Herring Creek Homeowners’ Assoc.
v. Riggs, 2005 WL 1252399, at * 1 (Del. Ch. May 19, 2005)).
14
of the language will generally establish the parties’ intent.”64 However, “[a] contract
is ambiguous . . . when the language ‘in controversy [is] reasonably or fairly
susceptible of different interpretations or may have two or more different
meanings.’”65 In ruling on a motion to dismiss, “a trial court cannot choose between
two different reasonable interpretations of an ambiguous document.”66 Thus, a party
moving to dismiss must show that its interpretation is “the only reasonable
construction as a matter of law.”67
Reduced to its simplest form, allocation of cash available from Expansion
Projects relies on computation of the TPPA. That amount is derived by subtracting
cash outflows from cash inflows and multiplying the difference by 75%. The parties
dispute the meaning of the cash outflows (or expense) part of the definition. The
disputed language reads: “less associated cash outflows (including capital
expenditures, operating expenditures and any other costs associated with such
Expansion Project) incurred by the Company in connection therewith.”68
Williams’ interpretation is that the definition limits TPPA expenses to those
cash payments that Gulfstar has “become liable or subject to in connection with the
64
Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *7 (Del. Ch. Dec. 22, 2010)
(quoting Brandywine River Prop., Inc. v. Maffet, 2007 WL 4327780, at *3 (Del. Ch. Dec. 5, 2007)).
65
Id. (quoting Pharmathene, 2008 WL 151855, at *11).
66
Id. (citing Appriva S’holder Litig. Co. v. EV3, Inc., 937 A.2d 1275, 1289 (Del. 2007)).
67
Id. (quoting Appriva, 937 A.2d at 1289).
68
LLC Agreement, § 1.2.
15
2016 Gunflint Expansion Project.”69 To Williams, the phrase “cash outflows”
excludes from the TPPA “the types of non-cash accrual items (such as ARO), or
contingent future Gulfstar expenses that have not yet been paid (such as the Third
Party Producer revenue sharing payments).”70 Further, in Williams’ view, the
“incur” language “impose[s] a temporal and causal limitation” such that “[p]re-
existing Gulfstar operating and capital expenditures that Gulfstar ‘incurred’ long ago
in connection with the Tubular Bells Project, are not . . . ‘cash outflows . . . incurred
by Gulfstar in connection []with’ the later Gunflint Expansion Project.”71 Thus “[i]f
a Gulfstar capital expenditure, operating cost or other cost would not exist but for
the existence of the Gunflint Expansion Project – then it was ‘incurred’ by Gulfstar
‘in connection with’ Gunflint and is to be included for purposes of calculating the
TPPA.”72 On the other hand, if a cost or expenditure would exist regardless of
whether Gunflint was constructed, then it is not “incurred . . . in connection with”
Gunflint and should not be included in the TPPA calculation.
Marubeni disagrees. In Marubeni’s reading, cash outflows “includes any and
all past, present and future costs of expenditures, either directly or indirectly,
69
Opening Br. in Support of Def.’s Mot. to Dismiss, D.I. 30, at 22 (citing Towerhill Wealth Mgmt.
LLC v. Bander Family P’ship, LP, 2010 Del. Ch. LEXIS 129, at *34 (Del. Ch. Jun. 4, 2010))
(internal quotation marks omitted).
70
Id. at 21.
71
Id. at 22 (citing Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010)). Williams
argues that “expenses related to hull and mooring, Export Pipelines, Operating Member Fees, the
Handling Amount and SG&A” all existed “several years” before Gunflint. Id. at 22–23.
72
Reply Br. in Supp. of Def.’s Mot. to Dismiss, D.I. 49, at 7.
16
associated with Gunflint.”73 Furthermore, Marubeni argues that the words of the
LLC Agreement are “words of full inclusion” that “do not limit in type, amount or
time the costs and expenditures to be deducted from the cash available of an
Expansion Project.”74 In support, Marubeni points to the word “any” towards the
beginning of the TPPA definition and the phrase “any other costs” in the
parenthetical. Rejecting the “but for” interpretation proffered by Williams,
Marubeni argues that “to the extent that . . . costs and expenditures are associated
with Gunflint . . . the LLC Agreement requires that they be deducted from the cash
available for distribution from Gunflint.”75 To do otherwise, in the words of
Marubeni, would “treat[] Gunflint like cost-free operation . . . in violation of the
express terms of the LLC Agreement.”76
Marubeni argued in its brief in opposition to Williams’ Motion that the costs
associated with Gunflint “must be allocated at least proportionately to Gunflint.”77
Somewhat confusingly, at Oral Argument, when asked how to allocate “capital
expenditures, operating expenses” and other expenses between Tubular Bells and
Gunflint, Marubeni’s counsel stated that the “plain wording” of the LLC Agreement
meant that “all of those costs and expenses are to be deducted from the cash available
73
Answ. Br. in Opp’n to Def.’s Mot. to Dismiss, D.I. 42, at 23.
74
Id. at 23–24.
75
Id. at 26.
76
Id.
77
Id. at 28 (emphasis added).
17
for” Gunflint.78 When asked if he was suggesting that expenses “should all be
shifted from Tubular Bells to the expansion project,” Marubeni’s counsel replied
that he was “not suggesting that, but I think that’s what the plain wording of the
parties’ agreement says.”79 Marubeni’s counsel, however, stated that it was not
asking the Court to enforce the LLC Agreement based on that literal interpretation;
instead “there should be a good-faith allocation of those costs and expenses between
the expansion project and the original project.”80 In other words, Marubeni takes the
rather odd position that it entered a contract that plainly ascribes all costs for the
operation of the Tubular Bells platform to Gunflint, while also maintaining that
enforcing this express language would be unfair; it essentially, at least as expressed
at Oral Argument, asks me to reform the contract.
If one accepts Marubeni’s assertion that the contractual obligations must be
construed to require a good-faith allocation of costs, then a methodology is needed
to allocate expenses shared between Gunflint and Tubular Bells. Marubeni’s
counsel stated at Oral Argument that I need not search far for such a formula because
the expenses should be “split according to the exact same formula that the parties
put into their contract to allocation[sic] and prorate costs and expenses for the sole-
78
Oral Arg. Tr. 15:8–15:15 (emphasis added).
79
Id. 15:17–15:22.
80
Id. 16:6–16:9.
18
risk project” (that is, a new project with respect to which Marubeni opted out). 81 As
with Gunflint, any Sole Risk Project would share certain costs with Tubular Bells.
Section 5.22.3 of the LLC Agreement expressly allocates such costs by prorating all
Company “Operating Costs”82 for Sole Risk Projects on a Barrel of Oil Equivalent
(“BOE”) basis.83
Williams seizes on this same language, but insists that it cuts the other way:
Williams argues that the inclusion of this expense allocation methodology for Sole
Risks Projects—and its omission with respect to Expansion Projects—is prima facie
evidence that the parties did not intend for this allocation methodology to determine
TPPA expenses for Expansion Projects. Williams points out that Operating Costs is
a defined term in the LLC Agreement, and used as such in Section 5.22.3, yet the
expense portion of TPPA uses “operating costs” in the lowercase form, choosing not
to incorporate the defined term. Thus, in Williams’ view, “when Williams and
Marubeni intended to allocate a prorated portion of existing [Company] expenses to
81
Id. 18:4–18:7.
82
Defined as: “all expenditures and all Internal Reimbursable Costs other than Project Completion
Expenditures and Capital Expenditures of (a) Company and/or (b) Operating Member or any
Affiliate of Operating Member, on behalf of Company, after the Gulfstar One Facilities become
Operational, that, subject to the terms of this Agreement, (i) are reasonable and necessary for
Company to fulfill its obligations under the Project Agreements or otherwise operate the Gulfstar
One Facilities and the business of Company including all out-of-pocket costs and expenses payable
to Third Parties and (ii) are reasonable and necessary for Operating Member to perform the
Operating Member Services; provided, however, that, except for Internal Reimbursable Costs, this
term shall not include any expenditures of Operating Member or one of its Affiliates that is not an
External Cost.” LLC Agreement, § 1.2.
83
Id. § 5.22.3.
19
a new project – as is the case with a Sole Risk Project . . . the parties knew how to
say so in a clear and specific way.”84
I am faced with competing interpretations of the TPPA definition. Williams
advocates that only those amounts which would not have been expended “but for”
Gunflint should be allocated to Gunflint, while Marubeni proposes that a
proportional amount of expenses as between Gunflint and Tubular Bells calculated
on a BOE basis should, in fairness, be allocated to Gunflint, and argues that the
contract language itself allocates all Tubular Bells platform expenses to Gunflint.
At this litigation phase, I may not find for Williams unless its construction is the
only reasonable construction as a matter of law. I thus must deny the Motion “unless
[Marubeni] could not recover under any reasonably conceivable set of circumstances
susceptible of proof.”85 I note that I must “accept as true all of the well-pleaded
allegations of fact and draw reasonable inferences in [Marubeni’s] favor.”86 In
considering the Motion I am confined to the well-pled Complaint and the LLC and
Operator Agreements, both incorporated therein.
Considering the Motion in light of the limited documents on which I may rely
is all the more difficult in light of the immense complexity of the enterprise. The
84
Opening Br. in Support of Def.’s Mot. to Dismiss., D.I. 30, at 25 (citing Comerica Bank v. Glob.
Payments Direct, Inc., 2014 Del. Ch. LEXIS 136, at *29 (Del. Ch. Aug. 1, 2014)).
85
Savor, Inc. v. FMR Corp., 812 A.2d 894, 897 (Del. 2002) (citing Kofron v. Amoco Chems. Corp.,
441 A.2d 226, 227 (Del. 1982)).
86
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (citing Malpiede v.
Townson, 780 A.2d 1075, 1082 (Del. 2001)).
20
costs and expenses for Tubular Bells and Gunflint arise from complicated feats of
engineering with costs reaching well into the hundreds of millions of dollars.87
Without a better understanding of how Tubular Bells and Gunflint operate, informed
by evidence of what the parties intended when the LLC Agreement was signed, I
cannot say as a matter of law that only Williams’ interpretation of TPPA is
reasonable.88 This is notwithstanding the fact that the interpretation urged by
Marubeni is not in fact one that it asks me to enforce, suggesting that it understands
that its own interpretation is not reasonable. On this record, I find the language
employed as to Expansion Project cost allocation ambiguous, and I cannot construe
the contractual language as a matter of law.
For the forgoing reasons, Williams’ Motion to Dismiss Marubeni’s claims for
breach of contract and declaratory judgment (Counts “A” and “D”) are denied.
Additionally, “Count E” seeks equitable relief for the breach of contract; it is not a
freestanding cause of action, and survives the Motion to Dismiss.
B. Good Faith and Fair Dealing
The allegations of the Complaint alleging breach of the “duty of good faith
and fair dealing” are murky. To the extent that Marubeni refers to fiduciary good
87
Compl., ¶ 16 (“Marubeni has committed to, and has invested, more than $500 million in Gulfstar
One . . . .”).
88
I note that Williams introduced exhibits and other information, such as email correspondence
and letters, in connection with its Motion, which Marubeni argues should convert the Motion to
Dismiss into one for Summary Judgment. I have not considered any of this extrinsic information
considering Williams’ Motion, which thus remains a Motion to Dismiss.
21
faith, I address that below. To the extent that “Count C” refers to the implied
covenant, it must be dismissed.
The covenant of good faith and fair dealing, so called, is implicit in every
Delaware contract. The covenant, pace Marubeni, is not a license for a court to
replace “unfair” terms with “fair.”89 It is essentially a tool of construction, by which
a court may impose a term consistent with the intent of the parties to a contract.
Where a party can show that it and its counterparty failed to address an issue, but it
is clear what the parties would have done had they considered the issue, the covenant
may be available as a gap filler.90 A court in such a situation will not allow one party
to oppress the other in a way inimical to their bargain via an overlooked term or
unanticipated circumstance.91
In the Complaint, Marubeni identifies no such gap, nor could counsel, when
pressed on the issue at Oral Argument. Instead, the parties clearly foresaw and
89
Nemec v. Shrader, 991 A.2d 1120, 1128 (Del. 2010) (“Delaware’s implied duty of good faith
and fair dealing is not an equitable remedy for rebalancing economic interests after events that
could have been anticipated, but were not, that later adversely affected one party to a contract.”).
90
Lonergan v. EPE Holdings, LLC, 5 A.3d 1008, 1018 (Del. Ch. 2010) (“The doctrine thus
operates only in that narrow band of cases where the contract as a whole speaks sufficiently to
suggest an obligation and point to a result, but does not speak directly enough to provide an explicit
answer.”) (quoting Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 146 (Del. Ch. 2009));
Allen v. El Paso Pipeline GP Co., L.L.C., 2014 WL 2819005, at *10 (Del. Ch. June 20, 2014)
(“The implied covenant of good faith and fair dealing is the doctrine by which Delaware law
cautiously supplies terms to fill gaps in the express provisions of a specific agreement.”).
91
Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872, 888 (Del. Ch. 2009) (“The implied covenant
of good faith and fair dealing inheres in every contract and ‘requires a party in a contractual
relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing
the other party to the contract from receiving the fruits of the bargain.’”) (quoting Dunlap v. State
Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005)) (internal quotation marks omitted).
22
contracted concerning the precise situation at issue: investment by Marubeni in
additional projects, and allocation of resulting profits. They laid out their agreement
regarding such Expansion Projects in detail, although the parties dispute the meaning
of that agreement. In this situation there is no room for application of the covenant.
More to the point, Marubeni’s pleading is deficient as a matter of law; assuming in
its favor all pled facts and reasonable inferences, Marubeni cannot prevail on a claim
based on the covenant of good faith and fair dealing. To that extent, Claim C must
be dismissed.
C. Fiduciary Duty
In “Count B” Marubeni asserts a claim for breach of fiduciary duty, and may
assert a breach of the fiduciary duty to act in good faith in “Count C” as well. These
claims must be dismissed
LLC agreements import corporate fiduciary duties by default, unless the
pertinent agreement provides to the contrary.92 The parties to LLC agreements are
free, however, to impose or eschew what duties they like; indeed, that is one of the
advantages of the LLC form of entity.93 Here, Williams, as Operating Member, is
92
Beach to Bay Real Estate Ctr. LLC v. Beach to Bay Realtors Inc., 2017 WL 2928033, at *5 (Del.
Ch. July 11, 2017) (“Delaware LLCs are known for their contractual flexibility; however, our
Courts have interpreted the Delaware LLC Act to imply default fiduciary duties to managers of a
LLC unless such duties are clearly disclaimed.”) (citing Kelly v. Blum, 2010 WL 629850, at *10
(Del. Ch. Feb. 24, 2010); Feeley v. NHAOCG, LLC, 62 A.3d 649, 661 (Del. Ch. 2012); H.B. 126,
147th Gen. Assemb. (Del. 2013)).
93
6 Del. C. § 18-1101 (“To the extent that, at law or in equity, a member or manager or other
person has duties (including fiduciary duties) to a limited liability company or to another member
23
liable under the LLC Agreement only for “gross negligence, fraud or willful
misconduct.”94
In this Action, Marubeni alleges that as Operating Member of the Company,
Williams has breached its duty to allocate costs incurred on behalf of the Gunflint
Project for purposes of determining and distributing revenue. That is a purely
contractual duty. If Williams has breached the contract, Marubeni is entitled to a
remedy. Conversely, if Williams is complying with its contractual duty, Marubeni
cannot plead a common-law fiduciary breach based on Williams’ contractually-
compliant action. The fiduciary duty causes of action must be dismissed.95
D. Motion for Partial Summary Judgment
For the same reasons described in Part II.A of this Memorandum Opinion,
Marubeni’s Motion for Partial Summary Judgment is denied.
or manager or to another person that is a party to or is otherwise bound by a limited liability
company agreement, the member's or manager's or other person's duties may be expanded or
restricted or eliminated by provisions in the limited liability company agreement . . . .”).
94
LLC Agreement, § 5.15.
95
Renco Grp., Inc. v. MacAndrews AMG Holdings LLC, 2015 WL 394011, at *7 (Del. Ch. Jan.
29, 2015) (“Delaware respects ‘the primacy of contract law over fiduciary law in matters involving
. . . contractual rights and obligations and does not allow fiduciary duty claims to proceed in
parallel with breach of contract claims unless there is an independent basis for the fiduciary duty
claims apart from the contractual claims.’”) (quoting Grayson v. Imagination Station, Inc., 2010
WL 3221951, at *7 (Del. Ch. Aug. 16, 2010)) (internal quotation marks omitted).
24
E. Williams’ Motion to Stay, and Motion to Stay Discovery and for
Protective Order
In light of my decision dismissing the non-contractual Counts of the
Complaint, and denying the Motion to dismiss the contractual Counts, these Motions
are moot.
III. CONCLUSION
For the foregoing reasons Williams’ Motion to Dismiss is granted in part and
denied in part. Its remaining Motions are moot. Marubeni’s Motion for Partial
Summary Judgment is denied. The parties should submit an Order consistent with
this decision.
25