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William Mitchell Legal Studies Research Paper No. 2012-12


The Chancery Court’s opinion in Policemen’s Annuity and Benefit Fund of Chicago v. DV Realty Advisors LLC, C.A. No. 7204-VCN, 2012 WL 3548206 (Del. Ch. Aug. 16, 2012) is thought provoking for at least two reasons. The first is somewhat technical and concerns the relationship between a partnership agreement’s reference to “good faith” and the implied covenant of good faith. The second concerns what appears to be yet another Delaware permutation on the meaning of “good faith.”

Due to the opinion’s treatment of the covenant, it seems possible (though hardly desirable) for two different standards of good faith to apply to the exercise of discretion under an operating agreement or partnership agreement – good faith as intended by the parties when they expressly subject discretion (or other conduct) to “good faith” and good faith as irrevocably present in any limited partnership or operating agreement per the LLC and LP statutes.

Even more thought provoking is the opinion’s emphasis on the objective aspect of good faith. The court quotes the UCC definition of the concept and then uses that definition to make its determination on the merits. The opinion does not actually hold the UCC definition applicable but rather uses the definition for an a fortiori analysis. Nonetheless, the favorable reference to the UCC definition should give transactional lawyers pause. The objective notion of contractual good faith can occasion judicial second-guessing of the most important aspects of deals.