By: Jeff Dutson, King & Spalding, LLP
Claim of implied covenant of good faith and fair dealing to former shareholder based on ambiguity in LLC Agreement did not apply where the subject at issue was expressly addressed in the agreement. The Rainmaker Group Ventures, LLC v. Bellack, 841 S.E.2d 738 (Ct. App. Ga. 2020).
The Rainmaker Group Ventures, LLC (“Rainmaker”) was a Delaware limited liability company where Lawrence Bellack served as a vice president for five years. While working for Rainmaker, Bellack received shares of common stock governed by a Limited Liability Company Agreement (the “LLC Agreement”), which was governed by Delaware law. The LLC Agreement provided that Rainmaker retained a right to repurchase Lawrence’s vested shares of stock, stating that if Rainmaker chose to repurchase the shares of a former employee, its Board of Managers (“Board”) would determine the value of the shares. Additionally, the LLC Agreement contained a “clawback” provision that afforded protection to a former employee if Rainmaker were to enter into a transaction that resulted in a higher price per share within three months of the date when the employee’s shares were repurchased (the “Clawback Provision”). In such case, Rainmaker must pay the former employee the difference between the two amounts. After Bellack’s termination as vice president, Rainmaker notified Bellack that Rainmaker planned to repurchase his shares for a specified price. Almost three months later, Rainmaker and one if its competitors, RealPage, Inc. (“RealPage”), executed an Asset Purchase Agreement in which RealPage acquired Rainmaker, in which the price per share was higher than the valuation that had been afforded to Bellack for his shares. Upon Bellack’s request to adjust the price for his shares accordingly, Rainmaker asserted that the Clawback Provision did not apply to the RealPage deal.
Bellack filed an action against Rainmaker in the Superior Court of Fulton County alleging that Rainmaker’s Board had failed to determine the fair value of his repurchased shares accurately and in good faith in accordance with the LLC Agreement, asserting a claim for breach of the implied covenant of good faith and fair dealing. Rainmaker filed a motion for summary judgment, arguing that the implied covenant of good faith and fair dealing did not provide a viable theory of recovery because the express terms of the Clawback Provision covered the parties’ dispute. The trial court disagreed, concluding that the Clawback Provision was ambiguous, and therefore, the implied covenant claim was viable.
In this appeal, the Court of Appeals of Georgia reversed the trial court’s judgement, ruling that the trial court ruling was erroneous in its denial of Rainmaker’s motion for summary judgment because the implied covenant claim does not apply in this circumstance. The Court reasoned that an implied covenant of good faith claim only applies to gaps in contracts, and does not apply when the subject at issue is expressly covered by the contract. Further, the Court reasoned that even if there is an ambiguity in the meaning of an undefined term of a contract, this is a separate question than whether a contract has a gap that needs to be filled by an implied term. Here, the parties’ dispute over whether the price of Bellack’s repurchased shares should be adjusted was expressly governed by the terms of the Clawback Provision. Because the subject at issue is expressly covered by the parties’ contract, the implied covenant is inapplicable under Delaware law because there was no contractual gap for the implied covenant to fill. Accordingly, the appropriate action for this dispute, which Bellack failed to pursue, was a breach of contract claim, under which any ambiguous terms would be interpreted under the standard rules of contract interpretation.