Chancery Confirms that the Implied Covenant Imposes a “Good Faith” Component to an Agreement to Negotiate

Morris James LLP

DG BF, LLC v. Ray, C.A. No. 2020-0459-MTZ (Del. Ch. Mar. 1, 2021)

The Operating Agreement for an LLC involved in the cannabis industry provided for a five-member board of managers, with one Independent Manager appointed by a process of negotiation between two other managers (the plaintiff in the action and one of the defendants). Under the process set forth in the Operating Agreement, either side could present various candidates until there was agreement, which was supposed to happen within a 180-day period. The parties could also mutually agree to extend the deadline.

Plaintiff alleged the defendant manager strung him along, rejected his candidate without explanation, and refused to present any of his own candidates at any point. The Court found that such allegations stated a claim for breach of the implied covenant, as the Operating Agreement did have a gap: it did not address a bad-faith failure to participate in the process. The Court explained that the implied covenant could not be used as a bludgeon to force agreement where the parties have made an agreement to negotiate, but it certainly imposed a duty to participate in the process in good faith.

In light of plaintiff’s twenty-four count complaint, the decision also contains an extensive analysis of many of the types of claims that can or cannot be asserted in litigation involving the management of an LLC.

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