Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP ( 2021 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
BANDERA MASTER FUND LP, BANDERA )
VALUE FUND LLC, BANDERA OFFSHORE )
VALUE FUND LTD., LEE-WAY FINANCIAL )
SERVICES, INC., and JAMES R. MCBRIDE, )
on behalf of themselves and similarly situated )
BOARDWALK PIPELINE PARTNERS, LP )
UNITHOLDERS, )
)
Plaintiffs, )
)
v. ) C.A. No. 2018-0372-JTL
)
BOARDWALK PIPELINE PARTNERS, LP, )
BOARDWALK PIPELINES HOLDING )
CORP., BOARDWALK GP, LP, )
BOARDWALK GP, LLC, and LOEWS CORP., )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: July 14, 2021
Date Decided: November 12, 2021
A. Thompson Bayliss, J. Peter Shindel, Jr., Daniel G. Paterno, Eric A. Veres, Samuel D.
Cordle, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Attorneys for Plaintiffs.
Srinivas M. Raju, Blake Rohrbacher, Matthew D. Perri, John M. O’Toole, RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware; Rolin P. Bissell, YOUNG
CONAWAY STARGATT & TAYLOR LLP, Wilmington, Delaware; Daniel A. Mason,
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware;
Stephen P. Lamb, Andrew G. Gordon, Harris Fischman, Robert N. Kravitz, Carter E.
Greenbaum, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York,
New York; Lawrence Portnoy, Charles S. Duggan, Gina Cora, DAVIS POLK &
WARDWELL LLP, New York, New York; Attorneys for Defendants.
LASTER, V.C.
In 2005, Loews Corporation formed Boardwalk Pipeline Partners, LP (“Boardwalk”
or the “Partnership”). Loews controlled Boardwalk by controlling Boardwalk’s general
partner. From 2005 until 2018, Boardwalk was a master limited partnership (“MLP”),
meaning that the common units representing its limited partner interests traded on an
exchange.
Throughout its existence, Boardwalk has served as a holding company for
subsidiaries that operate interstate pipeline systems for the transportation and storage of
natural gas. The Federal Energy Regulatory Commission (“FERC” or the “Commission”)
regulates interstate pipelines. Loews took Boardwalk public in 2005 after FERC
implemented a regulatory policy that made MLPs a highly attractive investment vehicle
for pipeline companies.
As a business matter, Loews wanted to be able to take Boardwalk private again if
FERC took regulatory action that would have a material adverse effect on Boardwalk. To
address that business issue, the lawyers who drafted Boardwalk’s partnership agreement
included a provision that gave Boardwalk’s general partner the right to acquire the limited
partners’ interests if certain conditions were met (the “Call Right”). Two conditions are
front and center in this case.
The first condition required that the general partner receive “an Opinion of Counsel
that the Partnership’s status as an association not taxable as a corporation and not otherwise
subject to an entity-level tax for federal, state or local income tax purposes has or will
reasonably likely in the future have a material adverse effect on the maximum applicable
rate that can be charged to customers” (respectively, the “Opinion,” and the “Opinion
Condition”). The Opinion Condition required counsel to address a mixed question of fact
and law: whether an event had or was reasonably likely in the future to have a material
adverse effect on the maximum applicable rate that Boardwalk could charge its customers.
By focusing on a rate that could be charged to customers, the Opinion Condition meshed
imperfectly with Loews’ business goal of protecting against future regulatory action that
would have a material adverse effect on Boardwalk. And as this decision details, the
Opinion Condition used language that presented a host of interpretive difficulties.
The second condition required that the general partner determine that the Opinion
was acceptable (the “Acceptability Condition”). Boardwalk’s general partner was itself a
limited partnership. The general partner of that limited partnership was a limited liability
company, and it had both a board of directors and a sole member, each of which had
authority to make certain decisions regarding the Partnership. Boardwalk’s partnership
agreement did not specify which decision-maker in this structure would determine whether
the Opinion was acceptable. Other agreements did not clearly answer the question either.
Reading the agreements in combination led to at least two possible answers. Under one
interpretation, the LLC’s board of directors would make the acceptability determination.
That made sense from a governance perspective, because the LLC’s board of directors
included outside directors who could inject a measure of independence into the
determination. Under another interpretation, the LLC’s sole member would make the
determination. The LLC’s sole member was a subsidiary of Loews, and all of the decision-
makers at that entity were Loews insiders. That interpretation enjoyed more textual
support, but it rendered the Acceptability Condition surplusage, because Loews always had
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the ability to make a de facto acceptability determination when deciding whether or not to
exercise the Call Right.
In March 2018, FERC proposed a package of regulatory policies that could have
made MLPs an unattractive investment vehicle for pipeline companies. Everyone
recognized that the proposals were not final, and industry players lobbied vigorously to
change them. One of the major questions surrounding the proposals was how FERC would
treat a pipeline’s outstanding balance for accumulated deferred income taxes (“ADIT”).
Boardwalk made clear in its public comments to FERC that it was impossible to determine
the effect of FERC’s proposals on Boardwalk’s rates until FERC made a decision on the
treatment of ADIT.
Boardwalk and other industry participants expected FERC to provide further insight
at its July 2018 meeting. At that meeting, FERC implemented its proposals in conjunction
with a determination that pipelines could eliminate their outstanding ADIT balances.
Rather than making MLPs a less attractive investment vehicle for pipeline companies, that
regulatory result made MLPs even more attractive.
In the interim, Loews seized on the period of maximum uncertainty that existed after
FERC announced the proposed changes but before FERC implemented the actual changes.
Loews caused Boardwalk’s general partner to exercise the Call Right, and the acquisition
closed just one day before FERC announced the final package of regulatory measures.
By acquiring the limited partner interest, Loews generated what its management
team described euphemistically as $1.5 billion in “Value Creation”—much of which would
be characterized more aptly as value expropriation. And Loews was able to acquire the
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limited partners’ interest at a highly attractive price even though the regulatory changes
ultimately did not have any negative effect on Boardwalk.
Loews achieved this remarkable result because its in-house legal team and outside
counsel worked hard to generate a contrived Opinion. The Opinion that outside counsel
provided did not satisfy the Opinion Condition because outside counsel did not render it in
good faith. Outside counsel knowingly made unrealistic and counterfactual assumptions,
knowingly relied on an artificial factual predicate, and consistently engaged in goal-
directed reasoning to get to the result that Loews wanted. Among other noteworthy
decisions detailed in this opinion, outside counsel determined that the regulatory proposals
were sufficiently final to trigger the Call Right, even though everyone knew the proposals
were not final. And outside counsel determined that the proposals were reasonably likely
to have a material adverse effect on Boardwalk’s rates, even as Boardwalk stated in its
comments to FERC that it was impossible to determine the effect on Boardwalk’s rates
until FERC made a decision on the treatment of ADIT. To address the issue that
management deemed impossible to assess, outside counsel examined hypothetical
indicative rates, failed to incorporate the admittedly low chance that Boardwalk’s rates
actually would change, and derived the magnitude of the assumed change from a simple
syllogism. Viewed as a whole, outside counsel’s conduct went too far to constitute a good
faith effort to render a legal opinion.
Loews locked in its ability to exercise the Call Right by having the sole member of
the LLC that served as the general partner of Boardwalk’s general partner pronounce the
Opinion acceptable. That determination did not satisfy the Acceptability Condition because
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the partnership agreement is ambiguous. Under the doctrine of contra proferentem, the
resulting ambiguity must be resolved against the general partner, not in favor of the general
partner. In this case, the doctrine requires interpreting the partnership agreement so that
only the board of directors of the LLC could pronounce the Opinion acceptable. Four of
the eight members of that board of directors were outsiders. Vesting the decision in that
decision-maker is more favorable to the limited partners than an interpretation that gives
sole authority over the decision to the sole member of the LLC, where all of the decision-
makers were Loews insiders.
A bevy of lawyers strived to paper the record so that the Opinion Condition and the
Acceptability Condition would appear satisfied. In reality, they were not. The general
partner therefore breached the partnership agreement by exercising the Call Right and
acquiring the limited partners’ interests.
At this point in the analysis, the general partner argues that it is nevertheless
insulated against liability by two protective provisions in the partnership agreement. The
first provision generally exculpates the general partner against liability, but contains an
exception for willful misconduct. Because the general partner acted intentionally and
opportunistically, the general partner’s contractual breach constituted willful misconduct,
and the general partner is not exculpated from liability. The second provision protects the
general partner if it relies on opinions, reports, or other statements provided by someone
that the general partner reasonably believes to be an expert. Here, the general partner
participated knowingly in the efforts to create the contrived Opinion and provided the
propulsive force that led the outside lawyers to reach the conclusions that Loews wanted.
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The general partner therefore cannot claim to have relied on the Opinion, and the defense
is unavailable.
The general partner is liable for damages in the amount of $689,827,343.38, plus
pre- and post-judgment interest on that amount from July 18, 2018, through the date of
payment. The plaintiffs are entitled to an award of costs as the prevailing party.
I. FACTUAL BACKGROUND
Trial took place over four days using the zoom videoconferencing platform. Eight
fact witnesses and six experts testified live. The parties introduced 1,978 exhibits, including
twenty deposition transcripts.
In the pre-trial order, the parties commendably agreed to nearly 400 stipulations of
fact. The court thanks litigation counsel for their efforts as officers of the court in preparing
those detailed stipulations. This decision relies on them when applicable.1 The stipulations
do not address all of the factual issues, and they do not determine the inferences to be drawn
from the stipulated facts when evaluated in conjunction with the evidence.
1
Citations in the form “PTO ¶ ––” refer to stipulated facts in the pre-trial order. See
Dkt. 173. Citations in the form “[Name] Tr.” refer to witness testimony from the trial
transcript. Citations in the form “[Name] Dep.” refer to witness testimony from a
deposition transcript. Citations in the form “JX –– at ––” refer to a trial exhibit, with the
page designated by the internal page number. If a trial exhibit used paragraph numbers or
sections, then references are by paragraph or section. Citations in the form “PDX –– at ––
” refer to the plaintiffs’ demonstrative exhibits that summarized information appearing of
record in other sources.
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The court has evaluated the credibility of the witnesses and carefully weighed the
evidence. The court has placed the burden of proof on the plaintiffs for all contested issues.
The plaintiffs proved the following factual account by a preponderance of the evidence.
A. The Partnership
Boardwalk is a limited partnership organized under the laws of the State of
Delaware. During the period relevant to this litigation, Boardwalk owned three principal
subsidiaries, each of which operated an interstate pipeline and storage system for natural
gas: Texas Gas Transmission, LLC (“Texas Gas”); Gulf South Pipeline Company, LP
(“Gulf South”); and Gulf Crossing Pipeline Company LLC (“Gulf Crossing”).
Loews formed Boardwalk in August 2005. At all times since Boardwalk’s
formation, Loews has controlled Boardwalk. Loews is a diversified conglomerate whose
shares trade on the New York Stock Exchange under the symbol “L.” Loews is controlled
and managed by members of the Tisch family.
FERC regulates interstate pipeline companies, including the rates that pipelines can
charge for cost-based services. PTO ¶ 61. Loews took Boardwalk public as an MLP after
FERC implemented a regulatory policy that made MLPs a highly attractive investment
vehicle for pipeline companies. Thirteen years later, Loews exercised the Call Right after
FERC proposed a package of regulatory policies that could have made MLPs an
unattractive investment vehicle for pipeline companies. As it turned out, the package of
policies that FERC actually implemented made MLPs an even more attractive investment
vehicle for pipeline companies. Because of the importance of the potential and actual
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regulatory changes to the case, a basic understanding of the regulatory landscape is
necessary to make sense of what transpired.
1. The Regulation Of Pipeline Rates
As part of its regulatory mandate, FERC determines the maximum rates—also
known as “recourse rates”—that a pipeline can charge the firms who pay the pipeline to
transport and store their product—known as “shippers.” PTO ¶¶ 61, 80, 111. Under the
Natural Gas Act (“NGA”), a pipeline’s recourse rates must be “just and reasonable.” PTO
¶ 88.
FERC establishes a pipeline’s recourse rates through a litigated administrative
proceeding known as a “rate case.” Id. ¶ 81; JX 89 at 7–8. If a pipeline believes its recourse
rates are too low, then it can file a rate case under Section 4 of the NGA to obtain new,
higher rates. JX 89 at 7. If FERC or a shipper believes the pipeline’s recourse rates are too
high, they can file a rate case under Section 5 of the NGA to challenge the rates. See id. at
7–8.
Recourse rates remain in effect until FERC approves new rates in a subsequent rate
case. PTO ¶ 88. Once approved, a pipeline’s recourse rates are listed publicly in a schedule
known as a “tariff.” As a result, they are sometimes called “tariff rates.” See JX 1744
(Webb Report) ¶ 89.
Recourse rates are not mandatory rates. FERC generally grants pipelines the
authority to contract with shippers to provide services at agreed-upon rates. PTO ¶ 97. The
resulting “negotiated rates” are “not bound by the maximum and minimum recourse rates
in the pipeline’s tariff.” Id. FERC also allows pipelines “to selectively discount their rates,”
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resulting in what are referred to as, unsurprisingly, “discounted rates.” Id. Negotiated and
discounted rates are alternatives to recourse rates. The term “recourse rate” reflects the fact
that a shipper always has recourse to the rates specified in the tariff and cannot be forced
to pay a different rate. PTO ¶ 97.
A rate case is a complex affair that involves a five-step process, known as “cost-of-
service ratemaking.” JX 89 at 7, 10. Cost-of-service ratemaking aims to “establish just and
reasonable rates” that will provide the pipeline with the opportunity to recover all
components of its cost of service and to generate a reasonable rate of return that will
adequately compensate its investors. PTO ¶ 93.
What follows is a high-level overview of each of the five steps. Those curious about
cost-of-service ratemaking may consult FERC’s 106-page Cost-of-Service Rates Manual,
which includes much more detail on each of the five steps and an example of the five steps
as applied to a fictional pipeline company. See generally JX 89.
The first step in the ratemaking process is to determine the pipeline’s cost-of-service
requirement, which represents the total revenue that the pipeline needs both to cover its
expenses and to provide a reasonable rate of return on its invested capital. Id. at 12. The
total investment in a pipeline is known as its rate base. Id. at 14. To arrive at a pipeline’s
cost-of-service requirement, FERC (1) multiplies a pipeline’s rate base by its overall rate
of return, then (2) adds a pipeline’s operating and maintenance expenses, administrative
and general expenses, depreciation expenses, and non-income and income taxes, and (3)
subtracts any revenue credits. Id. at 12–13. The pipeline’s overall rate of return is a function
of the pipeline’s capitalization ratio, its cost of debt, and an allowed rate of return on equity
9
(“ROE”). Id. at 20. In 2018, to calculate a pipeline’s allowed ROE, FERC used a discounted
cash flow model. Webb Report ¶ 67.
As noted, a pipeline’s rate base “represents the total investment of the pipeline,”
determined using a formula specified by FERC. JX 89 at 14. Among other things, the
formula accounts for ADIT, discussed in greater detail below. Id. at 14, 17–18.
After determining the pipeline’s cost-of-service requirement, the analysis moves to
step two. That phase involves computing a “functionalized cost-of-service” by allocating
the expenses associated with a pipeline system between its two main functions:
transmission and storage. JX 89 at 29–30. There are two main categories of expenses:
operation and maintenance expenses, and administrative and general expenses. Id. at 30.
Assigning operation and maintenance expenses to one function or another is relatively easy
because of existing pipeline accounting requirements. Id. Assigning administrative and
general expenses is less straightforward, and FERC prefers to allocate those expenses using
a four-step process known as the Kansas-Nebraska Method. Id. at 30–31. FERC then
functionalizes any remaining expenses, costs, or credits. Id. at 31–32. At the end of step
two, the analysis has generated a functionalized cost of service for both the transmission
and storage functions.
Step three is itself a two-step process. Id. at 34. Each of the functionalized costs is
“classified as either fixed or variable.” Id. A functionalized cost is fixed if it “remain[s]
constant regardless of the volume of throughput” and typically is “associated with capital
investment in the pipeline system.” Id. Variable costs, unsurprisingly, are those that “vary
with the volume of throughput.” Id. The fixed and variable costs are then further designated
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as either reservation (demand) costs or usage (commodity) costs. Id. at 35. Whether a cost
is classified as a demand or a commodity cost can have an effect on the rate. Id. Generally,
variable costs are designated as commodity costs. Id. There is no similar consensus on
fixed costs, which require a case-by-case assessment. Id.
Step four splits the functionalized and classified costs derived in steps two and three
“between jurisdictional and non-jurisdictional services, among zones and among
jurisdictional services.” Id. at 39. FERC uses volume metrics to allocate costs between
jurisdictional and non-jurisdictional services, but the importance of that distinction has
waned over time. Id. at 42–43. When a pipeline is divided into geographic regions, FERC
uses distance metrics to allocate costs among zones. Id. at 43.
The final step of rate design “directly translate[s] the costs allocated to the
jurisdictional customers into unit charges or rates.” Id. at 45. The goal of this phase is to
design rates that enable the pipeline to “recover the jurisdictional cost-of-service.” Id. Rate
design includes both a “firm service rate,” which is made up of a “reservation charge” and
a “usage charge,” and an “interruptible service rate,” which is “charged per unit of gas
transported.” Id. at 45–46. Calculating the “interruptible service rate” requires a separate
multi-step analysis. Id. at 47–48.
The accuracy of a rate design is determined by running a revenue check. Id. at 49.
A rate is accurate if the product of the rates for each service and its accompanying billing
determinant (for example the volume of gas transported over a given contractual period)
equals the cost of service calculated at step one. Id. The numbers need not be exactly equal,
but they must be within 1/100th of a percent of each other. Id.
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2. The Income Tax Allowance And ADIT
One component of a pipeline’s cost of service is the income taxes that the pipeline
pays. In the years before 1995, FERC allowed all pipelines to include an “income tax
allowance” in their cost-of-service calculations, regardless of how they were organized as
entities. As a general rule, including the income tax allowance increases the total cost of
service, which in turn supports a higher rate base and a greater revenue requirement. JX 89
at 12. A higher cost of service generally (but not always) leads to higher recourse rates.
That result favors pipelines, who could therefore charge shippers higher rates.
A related component of a pipeline’s cost of service is ADIT, which is an accounting
concept that arises because various tax provisions authorize pipelines to depreciate their
assets on an accelerated basis. PTO ¶ 98. When calculating recourse rates, however, FERC
uses straight-line depreciation. Because a pipeline can claim depreciation more quickly for
tax purposes than for rate setting, the pipeline pays lower income taxes in the years when
accelerated depreciation applies, resulting in greater cash flows than FERC’s rate-setting
calculations contemplate. Id. ¶ 99. Once the period of accelerated depreciation ends, the
process reverses, and the pipeline ends up paying higher taxes than FERC’s rate-setting
calculations contemplate. Id. ¶ 100.
By accelerating depreciation and deferring taxes, the pipeline benefits from the
time-value of money. To reflect the fact that the taxes ultimately must be paid, the pipeline
records the accumulated value of the tax deferral on its balance sheet as ADIT. During the
years when the pipeline benefits from accelerated depreciation and pays lower taxes, the
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ADIT balance builds up. After the period of accelerated depreciation, once the pipeline
begins paying higher taxes, the ADIT balance declines. Id. ¶¶ 99–100.
In substance, the accelerated depreciation acts as an interest-free loan from the
government that the pipeline eventually must repay. The balance on the pipeline’s balance
sheet is therefore referred to as an “ADIT liability.” Id. ¶ 99. More importantly for present
purposes, FERC historically treated a positive ADIT balance as a cost-free source of
capital. Id. ¶ 98. FERC therefore subtracted the ADIT balance from the pipeline’s rate base
for purposes of the cost-of-service calculation.
As a general rule, subtracting ADIT decreases the total cost of service, which in turn
supports a lower rate base and a lower revenue requirement. A lower cost of service thus
generally (but not always) leads to lower recourse rates. See id. ¶¶ 98, 101. That result
favors shippers, who have recourse to lower rates.
The foregoing discussion makes explicit an obvious economic reality: pipelines and
shippers have opposing interests in setting recourse rates. As a general rule, pipelines want
higher recourse rates, and they advocate for regulatory approaches that tend to generate
higher rates. Shippers want lower recourse rates, and they advocate for regulatory
approaches that tend to generate lower rates.
3. Changes In Cost Of Service Do Not Necessarily Lead To Changes In
Recourse Rates.
Although the cost-of-service calculation is a core part of the ultimate determination
of recourse rates, a change in a pipeline’s cost of service is not the same as a change in its
recourse rates. The two ideas reflect “different things.” Wagner Tr. 286. A pipeline’s cost
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of service changes over time, but those changes do not automatically trigger changes in
recourse rates. See id. at 265. As a result, it is improper to equate a change in cost of service
with a change in recourse rates. See McMahon Tr. 547–48; JX 575 at 2; JX 1139 at 30–31.
Instead, there must be a “vehicle” for a rate change, namely a rate case under Section
4 or 5 of the NGA. See, e.g., McMahon Tr. 481; Wagner Tr. 264–66; Webb Tr. 936–37. If
there is no rate case, then there cannot be a change in recourse rates. If a rate case is
unlikely, then a change in recourse rates is unlikely. Wagner Tr. 266.
If a rate case is filed, and if the evidence shows that one cost-of-service input has
changed, then rates still might end up increasing, decreasing, or staying the same. As
described above, the complex five-step analysis in a rate case looks to all of the cost-of-
service inputs and applies principles of rate design. It does not simply adjust a single cost-
of-service variable (such as the income tax allowance) to generate a change in recourse
rates. See Wagner Tr. 274–75; Webb Tr. 914. That type of approach is called “single-issue
ratemaking,” and FERC has a general policy against it.2
There is also a longstanding legal prohibition against FERC engaging in “retroactive
ratemaking.” That term refers to any effort to adjust a pipeline’s current rates to make up
2
See JX 1743 (Court Report) ¶ 39 (“[A]lthough one component of the cost-of-
service calculation may have increased, others may have declined[,] . . . . and any decreases
in an individual component may be offset against increases in other cost components.”);
McMahon Tr. 548 (same); Johnson Tr. 663 (agreeing that “if you change one variable in a
rate calculation, you have to revisit all the other variables as well”); id. at 614–16 (same);
Sullivan Dep. 102 (agreeing that changing one cost-of-service element does not provide
“meaningful information” regarding recourse rates).
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for over- or under-collection in prior periods. See Court Tr. 854–55. Put another way,
“FERC’s regulation of rates has to be prospective only.” Johnson Tr. 662. In a decision
from 1990, the United States Court of Appeals for the District of Columbia (the “DC
Circuit”)—the final court of appeal as of right from FERC determinations—applied the
prohibition against retroactive ratemaking to an ADIT balance. Pub. Utils. Comm’n of Cal.
v. FERC, 894 F.2d 1372 (D.C. Cir. 1990). The case involved a pipeline changing how it
priced its services such that it would no longer draw on an accumulated ADIT balance to
fund future tax liability. See id. at 1375–76. The pipeline’s customers sought a refund of
the ADIT balance, but the court rejected that request. Among other reasons, the court stated
that refunding ADIT would violate the prohibition on retroactive ratemaking by forcing
the pipeline to return a portion of the rates that FERC had approved and the pipeline had
collected during prior periods. Id. at 1383.
4. FERC’s 2005 Policy
Because cost-of-service calculations ultimately affect rates, and because pipelines
and shippers have opposing interests when it comes to rates, FERC’s regulations and
policies regarding cost-of-service calculations are subject to constant challenge. Pipelines
and shippers engage relentlessly in litigation and lobbying to advance their competing
interests.
One perennial debate concerns the extent to which a pipeline organized as a pass-
through entity for tax purposes, and which therefore does not pay taxes at the entity level,
can nevertheless claim an income tax allowance for purposes of its cost-of-service
calculation. The prevailing pass-through entity in the pipeline industry is the limited
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partnership, so the debate has been framed in terms of the extent to which a pipeline
organized as a limited partnership can claim an income tax allowance.
In 1995, FERC issued a ruling that permitted a pipeline organized as a limited
partnership to claim an income tax allowance when calculating its cost of service, but only
to the extent that its partnership interests were held by a corporation. FERC announced that
ruling in a decision involving the Lakehead Pipeline Company, so the ruling became
known as the Lakehead policy. See Lakehead Pipeline Co., Ltd. P’ship, 71 FERC ¶ 61,338(1995), abrogated by SFPP, L.P. v. FERC, 967 F.3d 788 (D.C. Cir. 2020).
When adopting the Lakehead policy, the Commission focused on the existence of
two potential levels of taxation before returns from the pipeline reached investors. The
Commission noted that for the partnership interests owned by the corporation, the
corporation would have to pay corporate-level tax before distributing any returns to its
investors. The Commission reasoned that the pipeline should be able to take into account
the corporate-level tax when determining the level of return that those investors would
require. By contrast, the Commission noted that for the partnership interests owned by
individual investors, there would not be an intervening level of tax; those investors would
receive the returns from the pipeline directly. Accordingly, the Commission reasoned that
because the individuals would not pay corporate-level tax, the pipeline should not receive
a tax allowance for those individuals. Otherwise, the Commission concluded, the pipeline
would be able to claim an unrealistically large cost-of-service requirement and provide its
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investors with a rate of return greater than warranted. See Lakehead, 71 FERC ¶ 62,313–
15, 62,329.3
Nine years later, in 2004, the DC Circuit abrogated the Lakehead policy. The case
involved challenges to the Commission’s determinations in a rate case involving SFPP,
L.P., an oil pipeline organized as a limited partnership. See BP West Coast Products, LLC
v. FERC, 374 F.3d 1263 (D.C. Cir. 2004). The Commission had applied the Lakehead
policy to SFPP, ruling that SFPP could claim a tax allowance for the taxes paid by its
corporate parent, which owned a 42.7% interest in the partnership. The Commission had
determined that SFPP could not claim a tax allowance for any of the interests held by its
public investors. The DC Circuit rejected that analysis and the Lakehead policy in general,
finding that the Commission had not provided any grounds for distinguishing between the
tax liability of the corporate partner and the tax liability of other partners. Id. at 1290. The
DC Circuit explained that the regulated entity was entitled to include its own costs of
service in its rate base, including taxes, but not costs incurred by its investors, again
including taxes. Id. The DC Circuit held squarely that “no such [tax] allowance should be
included.” Id. at 1291.
3
An example illustrates how the Lakehead policy operates. Assume that a pipeline
is organized as an MLP, that its corporate general partner owns 50% of the partnership
interests, and that public investors own the rest. If the corporation paid taxes at a rate of
35%, then the pipeline could claim a tax allowance of 17.5%, reflecting the taxes paid at
the corporate level. Rosenwasser Tr. 42. The pipeline could not, however, claim a tax
allowance for taxes paid by the individual investors.
17
In 2005, FERC responded to the BP West decision by heading in the opposite
direction. Rather than concluding that a pipeline organized as a partnership could not claim
an income tax allowance, as BP West held, FERC announced that it would “return to its
pre-Lakehead policy” and permit a pipeline organized as a partnership to claim an income
tax allowance for all of its partners. PTO ¶ 104; see JX 205 (the “2005 Policy”). In reaching
this conclusion, the Commission took the view that all partners pay income taxes and that
their taxes should be imputed to the pipeline for purposes of determining the pipeline’s
cost of service. PTO ¶ 104. Because a pipeline organized as a limited partnership does not
actually pay entity-level income taxes, the 2005 Policy made pipelines organized as limited
partnerships a highly attractive investment vehicle. See id. ¶ 106; Rosenwasser Tr. 39–40.
B. Loews Forms Boardwalk.
To take advantage of the 2005 Policy, Loews formed Boardwalk in August 2005.
PTO ¶ 106. Loews planned to take Boardwalk public through an initial public offering
(“IPO”) later that year. Id. Loews retained Michael Rosenwasser, then a partner at Vinson
& Elkins LLP, to lead the legal team that prepared Boardwalk’s organizational documents
and supported the IPO. Id. ¶ 51.
1. Boardwalk’s Structure
Loews organized Boardwalk as a Delaware limited partnership. As a result, its
internal affairs were (and are) governed by its partnership agreement. By the time of the
events giving rise to this litigation, the operative version was the Third Amended and
Restated Agreement of Limited Partnership dated June 17, 2008. JX 352 (the “Partnership
Agreement” or “PA”).
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The Partnership’s general partner was another Delaware limited partnership,
defendant Boardwalk GP, LP (the “General Partner”). The General Partner held a 2%
general partner interest in the Partnership and owned all of its incentive distribution rights.
JX 256 at 14. The General Partner did not have a board of directors. Id.
The sole general partner of the General Partner was defendant Boardwalk GP, LLC
(“the GPGP”). Id. The GPGP was a Delaware limited liability company, so its internal
affairs were governed by its limited liability company agreement. By the time of the events
giving rise to this litigation, the operative version was the First Amended and Restated
Limited Liability Company Agreement dated November 15, 2005. JX 235 (the “LLC
Agreement” or “LLCA”).
The sole member of the GPGP was defendant Boardwalk Pipelines Holding Corp.
(“Holdings,” or the “Sole Member”). Id. § 1.1 at 7. At all relevant times, Holdings was a
wholly owned subsidiary of Loews. Through Holdings, Loews controlled the GPGP.
Through the GPGP, Loews controlled the General Partner. Through the General Partner,
Loews controlled Boardwalk and its subsidiaries.
In addition to having Holdings as its Sole Member, the GPGP had a board of
directors (the “GPGP Board”). The LLC Agreement generally assigned authority over the
business and affairs of the GPGP and the Partnership to the GPGP Board. PTO ¶ 76. The
LLC Agreement granted the Sole Member “exclusive authority over the business and
affairs of [the GPGP] that do not relate to management and control of [the Partnership].”
LLCA § 5.6.
19
For the vast majority of the Partnership’s existence as an MLP, the GPGP Board
had eight members. Four were outside directors whose only affiliation with Boardwalk or
Loews was their status as directors on the GPGP Board. The other four members were:
• Kenneth I. Siegel, Senior Vice President of Loews and Chairman of the GPGP
Board;
• Andrew H. Tisch, the Co-Chairman of the board of directors of Loews, the
Chairman of the Executive Committee of Loews, and member of the Office of the
President of Loews.
• Peter W. Keegan, a Senior Advisor to Loews; and
• Stanley C. Horton, the President and Chief Executive Officer of Boardwalk.
During the period relevant to this litigation, the Holdings board of directors (the “Holdings
Board”) consisted of Siegel, Keegan, and Jane Wang, Vice President of Loews.
The different composition of the GPGP Board and the Holdings Board meant that
if Holdings made a decision for the GPGP as its Sole Member, then Loews controlled the
decision. By contrast, if the GPGP Board made the decision for the GPGP, then the outside
directors would participate in the decision. If the four outside directors unanimously
opposed the Loews and Boardwalk representatives, then they could prevent the GPGP from
taking the action that Loews wanted.
The following diagram depicts Boardwalk’s organizational structure and its
principal pipeline subsidiaries.
20
2. The Call Right
The provision at the heart of this case is the Call Right, which granted the General
Partner the right to acquire the common units that the General Partner and its affiliates did
not already own as long as certain conditions were met. The Call Right came to be included
in the Partnership Agreement because the 2005 Policy was contentious. It favored pipelines
over shippers, and shippers challenged it immediately. See, e.g., ExxonMobil Oil Corp. v.
FERC, 487 F.3d 945 (D.C. Cir. 2007) (addressing shipper challenge to 2005 Policy).
Loews was concerned that FERC might change course. McMahon Dep. 62, 160–61.
Loews wanted a mechanism for taking Boardwalk private again if the 2005 Policy
changed in a manner that was materially adverse to Boardwalk. See Rosenwasser Tr. 41–
44; McMahon Tr. 480, 544–45. Rosenwasser recalled these matters vividly. He testified
that Loews was not “going to go forward with [Boardwalk’s IPO] unless [Rosenwasser and
21
his team] were able to include a provision in [the Partnership Agreement] which would
allow them quickly, easily and without dispute, to go private if there was an adverse change
in that tax policy or the way it was implemented.” Rosenwasser Dep. 34–35; see id. at 39
(“Loews . . . wanted a mechanism that would allow them to go private in a simple, clear
manner without dispute if, in fact, there was a change in FERC policy that would be adverse
to maximum applicable rates.”). He testified at trial that Loews told the underwriter for the
IPO that it would not take Boardwalk public unless it could guard against the risk of
“los[ing] any substantial portion of the tax allowance if there was a reversion to Lakehead.”
Rosenwasser Tr. 42. Early drafts of the Partnership Agreement referred to the call right as
a “Lakehead call.” PTO ¶ 109. Referring to the 2005 Policy, the IPO prospectus and
Boardwalk’s subsequent annual reports informed investors that “[i]f the FERC policy is
reversed . . . our general partner’s call right may be triggered.” JX 256 at 31; accord JX
285 at 11.
Critically, however, no one intended the Call Right to be triggered by a change that
“wasn’t substantive, wasn’t meaningful.” Rosenwasser Tr. 46. Loews “wanted an off-ramp
if FERC reverse[d] its policy” in a way that materially threatened revenues. McMahon Tr.
480, 545. Rosenwasser and his team attempted to draft the Call Right to achieve that
business objective. Rosenwasser Dep. 39. It was a “business point,” not a “legal point.” Id.
at 40.
In an effort to implement this business point, Rosenwasser included language stating
that the General Partner could exercise the Call Right if three conditions were met. First,
the General Partner and its affiliates had to own “more than 50% of the total Limited
22
Partner Interests of all classes then Outstanding.” PA § 15.1(b)(i). Second, the General
Partner had to satisfy the Opinion Condition by receiving an “Opinion of Counsel” that
Boardwalk’s status as a pass-through entity for tax purposes “has or will reasonably likely
in the future have a material adverse effect on the maximum applicable rate that can be
charged to customers.” Id. § 15.1(b)(ii). Third, the General Partner had to satisfy the
Acceptability Condition by determining that the Opinion was “acceptable to the General
Partner.” Id. § 1.1 at 24.
As long as these conditions were met, then the General Partner could decide whether
to exercise the Call Right. When making that decision, the General Partner could act in its
sole discretion, free of any fiduciary duty or express contractual standard, with the express
right to consider its self-interest, and constrained only by its obligation to comply with the
non-waivable implied covenant of good faith and fair dealing. Id. § 7.1(b)(iii).
The Partnership Agreement did not impose any timeline for obtaining the Opinion,
but once the Opinion Condition was satisfied, the General Partner had ninety days to
exercise the Call Right. Id. §15.1(b). The Partnership Agreement did not require that
independent counsel render the Opinion. The term “Opinion of Counsel” was not specific
to the Opinion Condition and appeared in multiple provisions in the Partnership
Agreement; the agreement defined it as “a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner or any of its Affiliates).” Id. § 1.1 at 24.
If the General Partner exercised the Call Right, then the General Partner was
obligated to send notice by mail to that effect to the limited partners. Id. § 15.1(c). The
General Partner was then obligated to purchase all of the outstanding limited partner
23
interests that it did not already own “at a purchase price . . . equal to the average of the
daily Closing Prices . . . for the 180 consecutive Trading Days immediately prior to the
date three days prior to the date that the notice described in Section 15.1(c) is mailed.” Id.
§ 15.1(b) (the “Purchase Price”).
3. The IPO
On November 8, 2005, Boardwalk offered common units to the public at a price of
$19.50 per unit. JX 260 at 1. Until the General Partner acquired the public units at a price
of $12.06 per unit on July 18, 2018, Boardwalk’s common units traded on the New York
Stock Exchange under the symbol “BWP.”
During the intervening years, Loews caused Boardwalk to issue additional units at
prices well above $12.06 per unit. Loews also sold units to the public in secondary offerings
at values well above $12.06 per unit. The following table summarizes those offerings:
24
PDX 6 at 1 (footnotes omitted).
When Loews exercised the Call Right, public investors held approximately 49% of
Boardwalk’s common units. PTO ¶ 48. It is undisputed for purposes of this litigation that
the General Partner and its affiliates held a sufficient percentage of the total limited
partnership interests to satisfy the first condition for exercising the Call Right.
C. The United Airlines Decision
For purposes of the current litigation, the next significant development took place
in 2016. The initial efforts by shippers to challenge the 2005 Policy failed when the DC
Circuit held in 2007 that the 2005 Policy was “not unreasonable” and hence entitled to
deference. ExxonMobil, 487 F.3d at 953. Nine years later, however, the shippers prevailed
in United Airlines, Inc. v. FERC, 827 F.3d 122 (D.C. Cir. 2016).
Despite its name, the United Airlines case was an appeal from FERC’s
determinations in a rate case involving SFPP. Advancing a different argument than the
theory the DC Circuit had rejected in 2007, the shippers contended that by permitting MLP
pipelines to claim an allowance for partner-level taxes, the 2005 Policy “permit[ted] [the]
partners in a partnership pipeline to ‘double recover’ their taxes.” Id. at 127.
FERC rejected that contention, but the DC Circuit endorsed it. In vacating the
Commission’s order and ruling in favor of the shippers, the DC Circuit cited the following
undisputed facts:
First, unlike a corporate pipeline, a partnership pipeline incurs no taxes,
except those imputed from its partners, at the entity level. Second, the
discounted cash flow return on equity determines the pre-tax investor return
required to attract investment, irrespective of whether the regulated entity is
a partnership or a corporate pipeline. Third, with a tax allowance, a partner
25
in a partnership pipeline will receive a higher after-tax return than a
shareholder in a corporate pipeline, at least in the short term before
adjustments can occur in the investment market.
Id. at 136 (internal citations omitted). Based on these undisputed facts, the DC Circuit
concluded that “granting a tax allowance to partnership pipelines results in inequitable
returns for partners in those pipelines as compared to shareholders in corporate pipelines.”
Id. at 137. The DC Circuit remanded the case with instructions for the Commission to
determine whether it could eliminate the double-recovery problem, such as by changing
the calculation of the ROE. The DC Circuit also noted that “prior to ExxonMobil, FERC
considered the possibility of eliminating all income tax allowances and setting rates based
on pre-tax returns,” and that none of the court’s precedents “foreclos[ed] that option.” Id.In December 2016, FERC responded to the United Airlines decision by issuing a
notice of inquiry requesting “comment[s] regarding the double-recovery concern.” JX 579
¶ 1. Before FERC announced the results of that inquiry, Congress enacted the Tax Cuts
and Jobs Act (the “Tax Act”). Among other things, the Tax Act lowered the federal
corporate income tax rate from 35% to 21%, effective January 1, 2018. Pub. L. No. 115-
97, 131 Stat. 2054 (2017).
D. The March 15 FERC Actions
At its regularly scheduled meeting on March 15, 2018, FERC took four interrelated
actions to address the implications of the United Airlines decision and the Tax Act (the
“March 15 FERC Actions”). In presenting the March 15 FERC Actions, the Commission
explained that it was “addressing these issues concurrently” to “ensure[] administrative
efficiencies by reducing the number of filings required of regulated entities.” JX 554 at 49.
26
1. The Revised Policy
The first of the March 15 FERC Actions was the issuance of a revised policy
statement on the treatment of income taxes. JX 579 (the “Revised Policy Statement” or
“Revised Policy”). In the Revised Policy, FERC stated that it would no longer permit
pipelines organized as MLPs to recover both an income tax allowance and a ROE
determined by the discounted cash flow methodology in their cost-of-service calculations.
See id. ¶ 8. FERC stated in a concurrently issued notice of proposed rulemaking that it
would promulgate regulations to address the effects of the Revised Policy “on the rates of
interstate natural gas pipelines organized as MLPs.” Id.; see JX 580.
During the March 15 meeting, in response to a question about when “FERC
Jurisdictional Rates [would] actually change,” FERC staff stated that “the NOPR
anticipates that the deadlines for pipeline filings will be late summer or early fall [2018].
We obviously have to go to a final rule first.” PTO ¶ 117. The Revised Policy thus had no
impact on Boardwalk’s rates. Court Report ¶¶ 102–12.
At the same time, FERC signaled that pipelines would have answers on the
regulatory issues soon—in “late summer or early fall”—which would allow them to make
anticipated regulatory filings. PTO ¶ 117. Boardwalk anticipated that FERC would address
the March 15 FERC Actions further in connection with its regularly scheduled meeting on
July 19, 2018. See JX 1152 at 2.
2. The Notice Of Proposed Rulemaking
The second of the March 15 FERC Actions was the issuance of a notice of proposed
rulemaking titled Interstate and Intrastate Natural Gas Pipelines; Rate Changes Relating
27
to Federal Income Tax Rate (the “NOPR”). JX 580. The NOPR was not an actual rule and
did not have any immediate effect on Boardwalk or other industry participants. It was a
notice of a proposed rule that invited comment.
In the NOPR, FERC proposed to require interstate natural gas pipelines to make a
one-time informational filing on a proposed Form 501-G so that FERC could evaluate the
impact of the Tax Act and the change in income tax policy on pipelines’ revenue
requirements. JX 580 ¶ 32. FERC explained that the purpose of the Form 501-G was to
provide information “regarding the continued justness and reasonableness of the pipeline’s
rates after the income tax reduction and elimination of MLP income tax allowances.” Id. ¶
26. The Form 501-G therefore would call for “an abbreviated cost and revenue study in a
format similar to the cost and revenue studies the Commission has attached to its orders
initiating NGA section 5 rate investigations in recent years.” Id. ¶ 32.
FERC proposed that when completing the Form 501-G, a pipeline would use data
from its 2017 FERC Form No. 2, which provided information on the major components of
its cost of service for that year. Id. Using that information, the pipeline would estimate (1)
the percentage change in its cost of service resulting from the Tax Act’s reduction of the
corporate income tax from 35% to 21% and the Revised Policy’s reduction of the corporate
income tax allowance for MLPs from 35% to 0% and (2) the pipeline’s ROE both before
and after those developments. Id.; see also PTO ¶ 120. To derive the cost-of-service
component associated with the return to equity investors, FERC proposed that pipelines
use an ROE of 10.55%. JX 580 ¶ 34.
28
FERC intended for resulting calculations to indicate whether the pipeline’s rate base
could have decreased as a result of the elimination of the income tax allowance. The
resulting calculations also would indicate whether, based on the pipeline’s actual historical
revenues, the pipeline was over-recovering its rate base in a manner that might warrant a
rate case.
The NOPR proposed that a pipeline would have four options to consider in
connection with its Form 501-G:
• The pipeline could make a limited filing under Section 4 of the NGA to reduce the
pipeline’s recourse rates to reflect a decrease in its revenue requirements.
• The pipeline could commit to file a general rate case under Section 4 of the NGA in
the near future to establish new recourse rates.
• The pipeline could file a statement explaining why a rate adjustment was not
needed.
• The pipeline could take no action other than filing the Form 501-G.
PTO ¶ 121; JX 580 ¶¶ 41–51. If a pipeline chose the third or fourth option, the Commission
anticipated that it would consider, based on information in the Form 501-G, whether to
issue an order to show cause to the pipeline requiring a reduction in its rates. PTO ¶ 121.
FERC recognized that even with a lower tax rate and the elimination of the income
tax allowance, “a rate reduction may not be justified for a significant number of pipelines.”
JX 580 ¶ 48. As an example, FERC noted that “a number of pipelines may currently have
rates that do not fully recover their overall cost of service,” such that a reduction in tax
costs “may not cause their rates to be excessive.” Id. Typically, a pipeline would be under-
recovering its costs if it operated in a competitive market and hence had to offer discounted
29
rates to shippers. See JX 1139 at 11. FERC also cited other possibilities that would obviate
the need to adjust rates, such as “an existing rate settlement [that] provides for a rate
moratorium” or the existence of contracts providing for negotiated rates. See JX 580 ¶¶ 45,
48–49.
3. The Notice Of Inquiry
The third of the March 15 FERC Actions was a notice of inquiry that sought industry
comment on the effect of the Tax Act and the Revised Policy on recourse rates. In
particular, FERC sought comment on how it should address ADIT. See JX 576 (the “ADIT
NOI”).
In requesting comment on ADIT, FERC distinguished between the “[t]reatment of
ADIT for [p]artnerships” and the treatment of ADIT for other regulated entities. Id. ¶¶ 24–
25. For partnerships, FERC specifically asked that “commenters . . . address whether
previously accumulated sums in ADIT should be eliminated altogether from cost of service
or whether those previously accumulated sums should be placed in a regulatory liability
account and returned to ratepayers.” Id. ¶ 25.
4. The Order On Remand
The fourth and final of the March 15 FERC Actions was the issuance of an order
implementing the United Airlines decision for the ongoing proceeding involving SFPP. JX
553 (the “Order on Remand”). The Order on Remand required SFPP to revise its rate filing
consistent with the Revised Policy and prohibited SFPP from claiming an income tax
allowance. Id. ¶¶ 28, 58(B). That was the only binding and immediately applicable
component of the March 15 FERC Actions, and it did not affect Boardwalk.
30
Also on March 15, 2018, FERC initiated two proceedings under Section 5 of the
NGA against interstate natural gas pipelines. FERC initiated one proceeding against
Dominion Energy Overthrust Pipeline, a natural gas pipeline owned by an MLP, based on
an estimated calculation that the pipeline achieved ROEs for calendar years 2015 and 2016
of 23.4% and 19.9%, respectively. The order initiating the proceeding noted that “[i]f
Overthrust’s ROEs for 2015 and 2016 were recalculated consistent with the Revised Policy
Statement, its ROEs would have been 36.4 percent and 30.9 percent, respectively.” PTO ¶
133.
FERC also initiated a proceeding against Midwestern Gas Transmission Company,
a natural gas pipeline, based on an estimated calculation that Midwestern had achieved
ROEs for calendar years 2015 and 2016 of 15.8% and 16.6%, respectively The order
initiating the proceeding noted that “if the reduced 21 percent corporate income tax rate
had been in effect during 2015 and 2016, Midwestern’s ROE for those years would have
been 19.2 percent and 20.2 percent, respectively.” PTO ¶ 133.
E. The Reaction To The March 15 FERC Actions
The March 15 FERC Actions triggered a flurry of activity from industry
participants. Over the next four months, shippers, pipelines, trade associations, and others
filed thirteen requests for rehearing, 108 comments, sixteen reply comments, and numerous
other submissions. See PDX 9 at 12; Court Tr. 858. Each participant sought to persuade
FERC to adopt its preferred outcome. Matters were very much in flux.
The resulting uncertainty generated market reactions. The trading price of
Boardwalk’s units dropped by more than 7% from its closing price on March 14, 2018, the
31
day before the March 15 FERC Actions. PTO ¶ 135; see JX 1802 at 1. The Alerian Index,
which tracks an index of MLPs in the oil and gas industry, fell by 4.6%. Collectively, MLPs
lost $15.8 billion in market capitalization. Plaintiff James McBride tweeted, “Blood in the
street. Where’s the buying opportunity?” JX 1839 at 3. Barry Sullivan, a respected FERC
consultant who worked for Boardwalk, emailed its executives saying, “I hope you guys are
still breathing. That was unbelievable. Sorry.” JX 546 at 1.
Several MLPs issued press releases stating that they did not anticipate that the
March 15 FERC Actions would have a material impact on their rates, primarily because
their customers were locked into negotiated rate agreements. McMahon Tr. 498–99; Siegel
735–36; see, e.g., JX 592 (Spectra Energy Partners press release stating that it “anticipates
no immediate impact to its current gas pipeline cost of service rates as a result of the revised
policy”). One industry analyst report stated that although “FERC dropped a bombshell on
the industry,” stock prices were rebounding “as companies issued statements saying
minimal impact.” JX 624 at 4, 6. Horton, Boardwalk’s CEO, told Loews’ senior
management that the analyst report offered “a pretty good summary” of what had
happened. Id. at 1.
F. Boardwalk’s Initial Assessment: No Material Effect On Rates, But A Chance
For Loews To Exercise The Call Right.
After the announcement of the March 15 FERC Actions, Horton instructed Ben
Johnson, Boardwalk’s Vice President of Rates and Tariffs, to conduct an expedited analysis
of the possible impact on Boardwalk’s three interstate pipelines. JX 565 at 1. The day’s
events prompted questions that Boardwalk’s management team needed to answer. Siegel
32
and Thomas Hyland, an outside director on the GPGP Board, asked Jamie Buskill,
Boardwalk’s Chief Financial Officer, for his “thoughts on the economic impact on
[Boardwalk].” JX 567 at 1; see also JX 548. Molly Whitaker, Boardwalk’s Director of
Investor Relations and Corporate Communications, fielded similar inquiries from
approximately a dozen investors and analysts. JX 550 at 1.
To answer these questions, Johnson used an analysis that Boardwalk had performed
in early February 2018 to project the effect of the March 15 FERC Actions on the rates that
each of the three pipelines could charge. By that evening, he had preliminary answers.
Johnson viewed Gulf Crossing as “relatively protected” from any impact on its rates.
JX 572 at 1. Almost all of Gulf Crossing’s contracted volumes were subject to negotiated
rates, meaning that a change in cost-of-service-based rates would not affect the pipeline.
Id. at 2. Johnson also viewed Gulf South as “relatively protected.” Id. at 1. A majority of
its contracts provided for negotiated or discounted rates, and Gulf South was also subject
to a rate case moratorium until May 2023. See PTO ¶ 409; JX 604; JX 1139 at 6.
Texas Gas was the only pipeline that had potential exposure to a rate case, but it too
had factors that would help in defending against any challenge to its rates. Among other
things, Texas Gas served highly competitive markets, and a majority of its contracts with
shippers provided for negotiated or discounted rates. See JX 1139 at 6. Assuming a rate
case was filed, Johnson estimated that the downside impact of eliminating the income tax
allowance would be about $20.5 million. See JX 572 at 1–2.
Importantly, Johnson characterized his estimate of the downside as a floor, because
it “ignores any bounce from rate base increase associated with removal of ADIT.” Id.33
Elaborating in a later email, he explained that “it’s unclear on what they [FERC] would do
with [Boardwalk’s] current ADIT” balance, and he observed that FERC could decide that
the ADIT balance should be “zeroed out because there’s no income taxes (because there
would be no difference between book and tax depreciation).” JX 602 at 1. Johnson thus
recognized at the outset that the treatment of ADIT would be critical for understanding the
implications of the March 15 FERC Actions. For purposes of his analysis, Johnson
“assume[d] that [the ADIT balance] would just remain until it’s amortized off.” Id.Having reached the conclusion that the March 15 FERC Actions would not have a
materially adverse impact on the rates that Boardwalk’s subsidiaries could charge,
Boardwalk’s management team noted that other MLP pipelines had issued press releases
expressing similar views about their own rates. Boardwalk’s management team worried
that if Boardwalk did not issue a similar statement, then the market participants would infer
the March 15 FERC Actions would have an adverse effect on Boardwalk’s rates, which
Boardwalk had determined not to be the case. See McMahon Tr. 498–99; Alpert Tr. 322.
Horton therefore instructed Michael McMahon, Boardwalk’s General Counsel, to
draft a short press release that described the extent to which Boardwalk’s pipelines were
protected from any impact on their rates. JX 568 at 1. In his first draft, McMahon pointed
out that FERC had invited pipelines to “file statements explaining why an adjustment to
rates to reflect the impact of the Commission’s decisions is not required.” JX 571 at 7.
McMahon noted that this path seemed tailor-made for Boardwalk’s pipelines. As he put it,
“[t]his option recognizes the unique competitive circumstances of each pipeline, for
example, essentially all of the contracts on our Gulf Crossing and a number of the contracts
34
on Texas Gas are negotiated rate agreements and Gulf South is currently under a rate
moratorium until 2023 . . . .” JX 571 at 7.
Buskill proposed making the release stronger by stating that the overall impact to
Boardwalk and its rates would not be material. JX 571 at 1. McMahon agreed that “the
elimination of the income tax allowance will not result in a material impact.” Id. Neither
Buskill nor McMahon addressed the possible upside of eliminating ADIT. See id.By late evening on March 15, 2018, Boardwalk management was satisfied with the
language of the release. But as discussed below, the draft would go through a series of
revisions once Loews’ personnel got involved.
In the meantime, Buskill responded to the inquiries about the effect of the March 15
FERC Actions by explaining that they would not have a material impact on Boardwalk.
During the evening of March 15, 2018, Buskill told Hyland, the outside director on the
GPGP Board, that virtually all of the shippers at Gulf Crossing and Gulf South were under
negotiated or discounted rate agreements, that Gulf South was under a rate moratorium
until 2023, and that only about 20% of Texas Gas’ revenues were from tariff rates. JX 548
at 1. Buskill concluded: “Based on our interpretation of the rules, we don’t think it will
have a material impact to Boardwalk.” Id.Buskill conveyed similar information to Siegel, who immediately forwarded the
information to Jim Tisch, the CEO of Loews, and Ben Tisch, another senior officer of
Loews. JX 566 at 1. The Loews executives quickly focused on ADIT. JX 601 at 2. At Ben
Tisch’s request, a Loews employee analyzed the March 15 FERC Actions and reported that
“the loss of 100 percent of taxes in calculating allowed ROE’s would be a flesh wound for
35
the long haul pipes like . . . [Boardwalk].” Id. at 1. But if FERC required that pipelines
return their ADIT balances to ratepayers, then that “would be the a-bomb outcome” and
would be “extremely painful.” Id. The treatment of ADIT dominated the analysis.
1. A Chance To Exercise The Call Right
When the March 15 FERC Actions took place, Buskill and McMahon were each
angling to succeed Horton as CEO of Boardwalk. Both immediately realized that the March
15 FERC Actions might give Loews the ability to exercise the Call Right. That course of
action could be attractive to Loews because the Purchase Price was calculated using a
trailing market average.
In addition to the stock drop resulting from the March 15 FERC Actions, there was
reason to believe that Boardwalk’s market price continued to reflect a shock that
Boardwalk had delivered by slashing its distributions in 2014. As an asset class, common
units in MLPs are a yield-based investment, and MLPs generally make regular quarterly
distributions to their investors. In 2014, Boardwalk stunned investors by cutting its
quarterly distribution from $0.5325 to $0.10 per unit, making Boardwalk one of the lowest
yielding MLPs in the industry. Boardwalk’s trading price fell from the low $30s to the low
$10s almost overnight. The unit price never again approached its former levels. See Horton
Dep. 52; PDX 11 at 9.
Between 2014 and 2017, Boardwalk spent $2.077 billion on capital expenditures,
including $1.6 billion in growth capital expenditures. PTO ¶ 85–86. During the same
period, Boardwalk distributed $405.1 million to unitholders. Id. ¶ 85. There is evidence
36
that investors were unsure about how to value the growth capital expenditures. See PTO ¶
87.4
On March 15, 2018, Buskill and McMahon each made a point of flagging the Call
Right for Loews. Buskill emailed Siegel and described the opportunity presented by the
Call Right as “compelling” because Loews could “buy back all units when the units are
trading well below book value.” JX 567 at 1. Siegel told Buskill that he “need[ed] to better
understand the deferred taxes,” namely ADIT. Id.McMahon contacted Marc A. Alpert, Loews’ Senior Vice President and General
Counsel. He told Alpert that “FERC’s actions might have triggered the call.” McMahon
Tr. 552; PTO ¶ 136–37. McMahon recommended that Alpert contact Rosenwasser, who
had since joined Baker Botts LLP, to ask whether he could issue the Opinion that would
enable the General Partner to exercise the Call Right. McMahon Tr. 552–53. McMahon
told Alpert that while practicing at Vinson & Elkins, Rosenwasser was “one of the principal
draftspersons of the [C]all [R]ight.” Alpert Tr. 325, 330; see Rosenwasser Tr. 39–40;
McMahon Tr. 503; McMahon Dep. 31–32.
Alpert liked the idea of hiring Baker Botts and Rosenwasser. Baker Botts had ten
nationally ranked practice groups, including groups providing regulatory, litigation, and
4
As this court has observed in other settings, an advantageous time for a controller
to acquire a controlled company is when the controlled company has invested capital in
net-positive-value projects, but when minority investors have not yet received the benefit
of those investments. See, e.g., In re Dole Food Co., Inc. S’holder Litig., 2015 WL
5052214, at *36 (Del. Ch. Aug. 27, 2015); Del. Open MRI Radiology Assocs., P.A. v.
Kessler, 898 A.2d 290, 315–16 (Del. Ch. 2006).
37
transactional advice to the oil and gas sector. JX 1498 at 149. Rosenwasser was highly
regarded and considered the “[D]ean of the MLP Bar.” Alpert Tr. 325. And although
Rosenwasser was a principal drafter of the Call Right, Baker Botts as a firm had never done
any work for Boardwalk, which Loews and Boardwalk viewed as a helpful fact. See
Rosenwasser Tr. 54–55; Alpert Tr. 324–25; McMahon Tr. 503.
2. Alpert Calls Rosenwasser.
On March 16, 2018, Alpert called Rosenwasser. PTO ¶ 137. Rosenwasser’s
secretary transcribed Alpert’s message as saying there was “something urgent that he needs
to speak with you about.” Id. At trial, Rosenwasser recalled a brief and measured
conversation in which Alpert described the assignment as whether Baker Botts could
advise one way or the other about whether it could give the Opinion. Rosenwasser recalled
saying only that he would “look into it.” Rosenwasser Tr. 55.
Consistent with an urgent and significant assignment, Rosenwasser quickly
assembled a team within Baker Botts. He brought in a group of senior Baker Botts attorneys
to act as an ad hoc opinion committee. Rosenwasser had to assemble an ad hoc opinion
committee because Baker Botts does not typically utilize opinion committees and does not
have a standing committee. Its members were:
• Andy Baker, the Chair of the firm;
• Mike Bengtson, the Chair of the firm’s corporate practice group and a member of
the Executive Committee;
• Michael Bresson, the leader of the firm’s energy capital markets tax practice;
• Joshua Davidson, the leader of the firm’s capital markets practice;
38
• Richard Husseini, a partner focused on tax litigation; and
• Julia Guttman, the firm’s General Counsel.
To perform the substantive work, Rosenwasser recruited three other Baker Botts
partners:
• Greg Wagner, a FERC practitioner who was representing shippers in their rate
disputes with SFPP, including in the United Airlines case;
• Michael Swidler, a transactional partner and longtime colleague of Rosenwasser
who previously had worked at Vinson & Elkins as part of the team that drafted the
Call Right; and
• Seth Taube, a former federal prosecutor and SEC official whose practice includes
securities and commercial litigation.
Rosenwasser and his colleagues spent the weekend reviewing a package of documents
from Alpert.
3. The Loews-Approved Press Release
Meanwhile, Loews weighed in on the press release about the March 15 FERC
Actions. Loews delayed its publication and edited it heavily, admittedly with an eye to the
potential exercise of the Call Right. Alpert Dep. 36 (“I certainly had [the Call Right] in my
mind when I looked at the press release.”). Boardwalk issued the Loews-approved draft on
the morning of March 19.
Cognizant of the Call Right, Loews changed the wording of the release to address
revenues rather than rates. Recall that the General Partner’s ability to exercise the Call
Right turned on whether a law firm could opine that Boardwalk’s status as a pass-through
entity for tax purposes “has or will reasonably likely in the future have a material adverse
effect on the maximum applicable rate that can be charged to customers.” PA § 15.1(b)
39
(emphasis added). In changing the language of the press release, Loews focused on the fact
that the language of the Call Right did not mention revenues.
The draft press release prepared by Boardwalk’s management explained that the
March 15 FERC Actions were unlikely to have a negative impact on Boardwalk’s rates.
See JX 607. Other pipeline companies likewise issued press releases that focused on rates.
See, e.g., JX 592 (Spectra Energy Press Release: “Any future impacts would only take
effect upon the execution and settlement of a rate case. In the event of a rate case, all cost
of service framework components would be taken into consideration which we expect to
offset a significant portion of any impacts related to the new FERC policy.”).
As prepared by Boardwalk’s management, the draft press release contained three
sentences identifying the factors FERC had cited as mitigating the need for any rate
adjustment and explaining how they applied to Boardwalk’s pipelines. Loews struck those
statements. See JX 607 at 3. Loews also drafted the headline to focus on revenue rather
than rates.
After the Loews edits, the press release read, “Boardwalk Does Not Expect FERC’s
Proposed Policy Revisions To Have A Material Impact On Revenues.” JX 615. The body
of the press release elaborated on the effect on revenues:
Based on a preliminary assessment, Boardwalk does not expect FERC’s
proposed policy revisions to have a material impact on the company’s
revenues. All of the firm contracts on Boardwalk’s Gulf Crossing Pipeline
and the majority of contracts on Texas Gas Transmission are negotiated or
discounted rate agreements, which are not ordinarily affected by FERC’s
policy revisions. Gulf South Pipeline currently has a rate moratorium in place
with its customers until 2023. Boardwalk will continue to evaluate the
potential impact these proceedings could have on its interstate pipelines, and
the company plans to submit comments to FERC.
40
Id.
At his deposition, Rosenwasser tried to distance himself from the press release. He
speculated that “somebody was pressured at Boardwalk to get something out quickly” and
issued the press release “with just . . . thoughts and without analysis.” Rosenwasser Dep.
97. This was not accurate: Rosenwasser’s speculation notwithstanding, Boardwalk had
analyzed the effect on its subsidiaries’ rates, and Loews was thinking about the Call Right
when its personnel revised the language of the release. Implicitly recognizing that the
release was problematic for the exercise of the Call Right, Rosenwasser testified adamantly
that he “had nothing to do with this disclosure[]. And if [he] had, it wouldn’t have said
this.” Rosenwasser Dep. 95; see also id. at 95–98.
4. The Post-Press Release Call With Baker Botts
Several hours after Boardwalk issued the Loews-approved press release, Alpert
convened a call with Rosenwasser and other members of the Baker Botts team. Loews
wanted answers to two questions. First, had the contents of the press release affected Baker
Botts’ ability to issue the Opinion? Second, were the March 15 FERC Actions sufficiently
concrete to enable Baker Botts to issue the Opinion?
The next day, Baker Botts answered both questions. On the press release, Loews
got the answer it wanted. Baker Botts advised that, “[g]iven [the press release’s] focus on
[Boardwalk’s] revenues, and not on the maximum applicable rate that can be charged by
[Boardwalk’s] interstate gas pipelines, we are not concerned that the release precludes any
strategic analysis or action of the type that we were discussing.” JX 627 at 1. Loews’ edits
41
had paid off, and Alpert quickly forwarded the response to members of Loews’ senior
management. JX 632 at 1.
Baker Botts also addressed whether the March 15 FERC Actions constituted a
sufficient triggering event. On this issue, the answer did not meet Loews’ expectations.
Wagner explained that there were “two FERC actions that directly affect the
analysis: the Revised Policy and the Notice of Inquiry.” JX 626 at 1. Absent further
regulatory developments, neither would have an effect on Boardwalk’s rates:
The Revised Policy Statement, in which FERC announced its new policy
prohibiting MLP-owned gas pipelines from including an income tax
allowance in their cost of service, is effective now as a statement of FERC
policy. Standing alone, it does not require pipelines to take any action but it
announces how FERC intends to treat the issue on a going-forward basis.
The Revised Policy Statement will be implemented through the proposed
regulations, which when adopted, will require all interstate gas pipelines to
make informational filings revising their cost of service, which may lead to
rate challenges. These regulations would be administrative in that they will
not announce new policy. I expect that any litigated rate challenges would
not be resolved and therefore result in decreased rates until 2020 at the
soonest.
The second action is the Notice of Inquiry in which FERC is seeking
comment on how to address overfunded deferred tax balances held by MLP
pipelines. Comments will be due in late May, 60 days after the notice is
published in the Federal Register. Any policy emerging from this proceeding
would have the potential to further reduce gas pipelines’ cost of service.
Unlike the proposed rulemaking, FERC is simply gathering information and
there is no proposed timetable for action. FERC may issue a Policy Statement
on Deferred Taxes announcing a generally applicable policy or it may
determine that it will address the issue in individual litigation. My best
judgment is that FERC should act in this proceeding by the end of 2018. Any
FERC decision is not likely to be self-implementing and would require
additional proceedings to reflect the policy in pipeline rates.
Id. In simple terms, Wagner recognized that the March 15 FERC Actions did not have any
immediate effect. The Revised Policy did not require any action, and nothing would happen
42
until FERC issued regulations. The same was true for the ADIT NOI. Even then, there
would not be any effect on rates absent litigated rate cases.
Four minutes later, Alpert requested a second call with Baker Botts. JX 626 at 1.
During the call, Alpert criticized Wagner’s analysis as having “[t]oo much nuance.” JX
646 at 5. Alpert wanted a direct answer addressing when Loews could get the Opinion. Id.
(“When do we can [sic] get [the] opinion? When [would it be] prudent to act?”).
Rosenwasser told Alpert what Loews wanted to hear. He said that the “most
important thing has happened” so that “we’re already there.” JX 646 at 5. But because
Wagner had provided a well-reasoned explanation supporting a different conclusion,
Alpert asked Baker Botts to confirm Rosenwasser’s view that “we’re already there.” Id. at
7 (“2x check that we think issuance of [the Revised Policy Statement] is appropriate
triggering event for issuing opinion.”). After the call ended, Alpert updated Loews’ senior
leadership. Copying Rosenwasser, Wagner, and Swidler, Alpert reported that Baker Botts
would analyze whether the Revised Policy was a sufficient trigger “in the context of all the
facts and the likelihood of future actions changing materially the outcome of the
conclusions that would support any opinion of counsel.” JX 625 at 1. Alpert also cautioned
Loews’ executives to “address [all emails on this matter] to me and cc others so we can
best argue communications are privileged.” Id.
G. Baker Botts Reframes The Analysis.
Alpert scheduled a follow-up call with Baker Botts and Boardwalk for March 29,
2018. That gave Baker Botts just over a week to take a position on rendering the Opinion.
To get to the outcome Loews wanted, Rosenwasser crafted a syllogism.
43
1. Rosenwasser’s Syllogism
Rosenwasser knew that the Call Right was intended to address a business problem.
He was, after all, the one who drafted it. Rosenwasser Dep. 40 (characterizing Section
15.1(b) of the Partnership Agreement as “a business point . . . not a legal point”). The Call
Right sought to protect Loews against a regulatory change that would have a materially
adverse effect on Boardwalk. The provision referred to rates because rates generate
revenue. The Call Right was not intended to create a trapdoor that Loews could open based
on a regulatory change that had no real-world effect. Rosenwasser Dep. 45 (describing the
Call Right as not “easy to trigger” as indicated by the fact that the “[O]pinion takes lots of
thought and it takes lots of analysis to make certain that the [O]pinion could be given”).
But the Call Right’s reference to “rates,” combined with Loews’ careful parsing of
that distinction when editing the March 19 press release, gave Rosenwasser an opening.
Rosenwasser decided to take the view that the Call Right was not concerned with the actual
economic impact on Boardwalk; it was only concerned with the abstract concept of
“maximum applicable rates.” See JX 679 at 5, 8. If a regulatory change could have a
materially adverse effect on the abstract concept of “maximum applicable rates,” then the
Call Right could be exercised. And because a tax allowance had been part of the cost-of-
service calculation, a policy change eliminating the tax allowance could be said to lead
ineluctably to a change in that abstract concept.
On March 21, 2018, Rosenwasser explained his approach to Wagner, who took
contemporaneous notes. JX 637. Wagner’s transcription memorializes the Rosenwasser
syllogism:
44
1 – A pipeline charges COS [cost-of-service] rates
2 – COS includes ITA [income tax allowance]
[No] ITA → material effect
No examination of FERC actions/shipper actions
COS/over/under-recovery
Just saying [no] ITA = lower COS
= MAE on
max applicable rates
JX 639 at 1. As Wagner correctly and immediately perceived, Baker Botts was “[j]ust
saying” that no income tax allowance meant a lower cost of service, which would equate
to a material adverse effect on maximum applicable rates. Id.
For Baker Botts, the beauty of Rosenwasser’s syllogism was that it did not require
any type of predictive exercise about when an actual rate case might be brought or what
the outcome of a full-blown, litigated, cost-of-service proceeding might be. See JX 639 at
1 (“No examination of FERC actions/shipper actions” or Boardwalk’s “over/under-
recovery” of its pipelines’ costs of service). Indeed, the syllogism did not require any real
factual analysis about the effect of the March 15 FERC Actions. The principal step
involved elementary subtraction.
To implement Rosenwasser’s syllogism, Baker Botts asked Boardwalk “what would
FERC allow them to charge” in a hypothetical world that assumed “there was a full mkt
for services.” JX 646 at 3. Swidler found reassurance for this approach in the fact that the
Call Right did not contain any language addressing “the commercial conditions that might
prevail in setting rates (e.g., whether or not the pipeline’s capacity is in high demand).” JX
645 at 1.
45
Rosenwasser’s syllogism did not account for ADIT. No one knew what would
happen with ADIT. See JX 644 at 1 (“[G]iven the lack of clarity on FERC’s eventual policy
on this [ADIT] issue, [McMahon] had no estimates” concerning “the potential effect of a
return of ADIT to ratepayers”). But Baker Botts knew that FERC’s treatment of ADIT
could “affect the rate impact on the pipelines substantially.” JX 619 at 1. The known
unknown of ADIT defeated Rosenwasser’s syllogism, but Baker Botts went ahead anyway.
2. The March 29 Memorandum
In preparation for the scheduled meeting with Loews and Boardwalk on March 29,
2018, Baker Botts prepared a memorandum that worked through the issues that had to be
resolved before Baker Botts could render the Opinion. JX 679 (the “March 29
Memorandum”). There were many, and Baker Botts resolved them all in Loews’ favor.
One issue was the Call Right’s use of the term “maximum applicable rates,” which
had no established meaning in FERC regulatory parlance. The FERC lexicon equates the
terms “maximum rates,” “tariff rates,” “cost-of-service rates,” and “recourse rates.” Only
in the context of its capacity release regulations had FERC used a similar phrase—
“applicable maximum rate.” PTO ¶ 89. An investor or a court might interpret the
idiosyncratic insertion of the word “applicable” to refer to the actual rates applicable to a
particular pipeline’s customers, including discounted rates or negotiated rates. Without an
established meaning, the term could be regarded as ambiguous, and under the doctrine of
contra proferentem, a court applying Delaware law would interpret the term against the
general partner and its affiliates and in favor of the limited partners.
46
To solve this problem, the March 29 Memorandum interpreted “maximum
applicable rates” as synonymous with “the maximum rates Boardwalk can charge, as a
legal matter, not as an economic matter.” JX 679 at 5. Baker Botts asserted that the Call
Right’s drafters would not have used the words “maximum” and “can be charged to
customers” if they had meant for the Call Right to focus on the rates that Boardwalk
actually charged its customers. Id. at 5–6. Without explanation, the March 29
Memorandum concluded that the word “applicable” “certainly does not mean actual.” Id.
at 6.
To support its interpretation, Baker Botts looked to extrinsic evidence in the form
of references in Boardwalk’s Form S-1 from its IPO. That document indeed contained
passages that seem to equate “maximum applicable rates” with recourse rates. See PTO ¶¶
90–91. Other Boardwalk filings, such as its Form 10-Ks, use the term in similar ways. See
id. ¶ 92. Baker Botts also found orders that FERC issued in rate cases involving Boardwalk,
where Boardwalk seemed to have used the term as a substitute for recourse rates. See JX
637 at 1. Baker Botts could not identify any broader uses of the term. Id.
Another issue was the need for an analysis of Boardwalk’s rates. One of the
ostensible justifications for Rosenwasser’s syllogism was that the legal opinion addressed
a question of law that did not require predicting the outcome of a rate case. The March 29
Memorandum could not keep up that pretense. Recognizing that factual analysis was
required, the March 29 Memorandum stated, “Boardwalk will need to prepare an analysis
of each pipeline’s regulatory cost of service” and counsel would need “certificates from
Boardwalk’s officers” so that counsel could rely on it. JX 679 at 6. Recognizing that the
47
ratemaking principles would be implicated, the March 29 Memorandum stressed
“[c]ounsel will need to review that analysis in detail to confirm that the analysis is being
prepared consistent with counsel’s understanding of federal regulatory rate making
requirements.” Id.
Yet another problem was how to interpret the term “material adverse effect.” If
interpreted consistent with Delaware cases like In re IBP, Inc. Shareholders Litigation, 789
A.2d 14 (Del. Ch. 2001), and its progeny, then that standard would be difficult to meet.
The Baker Botts team acknowledged that the drafters “did not want to make it easy” for
there to be a sufficient effect. JX 679 at 7. But even though the term appeared in a
partnership agreement governed by Delaware law, the Baker Botts team found “no reason
to think the drafters of Section 15.1(b) intended to incorporate the meaning the Delaware
courts have applied to merger and acquisition MAC clauses to the words ‘material adverse
effect.’” Id. Instead, Baker Botts planned to interpret the phrase by looking to federal
securities law, where “something is material if an investor would consider it important in
making an investment decision.” Id.; see id. at 6 (“Those rates [that Boardwalk’s
subsidiaries charge] are regulated by federal law. The opinion requested therefore involves
an analysis of federal law.”). Baker Botts also asserted that the doctrine of contra
proferentem would permit the Call Right to be interpreted in favor of its drafter—contrary
to what the doctrine contemplates. See id. at 7. Once again, the March 29 Memorandum
could not keep up the pretense that the analysis was purely a legal question. The
memorandum concluded: “Materiality is not, however, a fundamentally [] legal concept.
48
Therefore, in giving any opinion required by Section 15.1(b), counsel will need to rely
heavily on Loews and Boardwalk.” JX 679 at 7.
The March 29 Memorandum also flagged an issue raised by the Acceptability
Condition: Who would determine on behalf of the General Partner whether the Opinion
was “acceptable”? Would that determination be made by Holdings, the Sole Member of
the GPGP, where all the decision-makers were Loews insiders, or would the decision be
made by the GPGP Board, which included outside directors? JX 679 at 7–8. Baker Botts
concluded that Holdings was the correct decision-maker. As Baker Botts saw it, because
the General Partner could exercise the Call Right “at its option” and in its individual
capacity, it did not make sense for there to be any constraint on the General Partner’s ability
to determine in its own interest that the Opinion was acceptable. JX 679 at 7–8.
3. The March 29 Meeting
On March 29, 2018, Rosenwasser and Wagner spoke with Alpert and McMahon as
planned. They agreed on the outcome that favored Loews: The March 15 FERC Actions
“met the procedural predicate” for the exercise of the Call Right. JX 688 at 1; see id.
(“Policy Statement sets up factual predicate for [t]he P[artnership] [contract] [.]”). Even
though the March 15 FERC Actions were not final, and despite the known unknown of
ADIT, they decided that enough had happened for Baker Botts to proceed with the Opinion
that could enable Loews to exercise the Call Right.
H. The Financial Data
To generate the Opinion, Baker Botts needed what the Opinion would refer to as
“Financial Data.” Johnson took charge of providing it. On April 4, 2018, Johnson reported
49
that he had numbers that “should get us where we need to go.” JX 713 at 1. He sent
McMahon an email attaching two analyses for use by Baker Botts, a “Form 501-G
Analysis” and a “Rate Model Analysis.” JX 727 at 4.
The Form 501-G Analysis contained the information that Boardwalk would include
in a Form 501-G filing if FERC adopted regulations consistent with the NOPR. The
proposed Form 501-G contemplated that each pipeline would disclose its cost-of-service
requirement for 2017 and how much revenue the pipeline actually collected. Each pipeline
then would recalculate those figures using a tax allowance based on the lower tax rate of
21% established by the Tax Act and a hypothetical tax rate of 0% to reflect the absence of
any tax allowance. JX 580 ¶ 32. The Form 501-G also included lines for amortization of
ADIT, but it did not specify a methodology for treating ADIT. JX 558.
The following table summarizes Johnson’s Form 501-G Analysis:
Form 501-G Analysis:
35% Tax 21% Tax 0% Tax 35% COS 35% COS 21% COS 21% COS
COS COS COS Delta % Change Delta % Change
Texas Gas Pipeline
2017 $431.09 $406.47 $362.23 $68.86 15.97% $44.24 10.88%
Gulf South Pipeline
2017 $640.21 $601.93 $534.50 $105.71 16.51% $67.43 11.20%
Gulf Crossing Pipeline
2017 $275.50 $259.88 $232.30 $43.20 15.68% $27.59 10.62%
JX 727 at 4. In reaching these results, Johnson assumed that each pipeline’s ADIT balance
would be returned to ratepayers through amortization over the life of each pipeline, an
approach known as the “Reverse South Georgia Method.” Id. at 1. At that time, FERC had
not decided how to treat ADIT balances. One option, which pipelines favored, would be to
eliminate the ADIT balance entirely. Another option, which shippers favored, would be to
50
require a cash refund of the ADIT balance. Intermediate options involved amortizing the
ADIT balance over various periods. The Baker Botts attorneys and Boardwalk executives
knew that FERC could handle ADIT in a number of ways, each of which would result in a
different outcome. Yet because they believed the Reverse South Georgia Method was the
most likely, that was the only one they analyzed.
The Form 501-G Analysis did not include the actual revenue calculations that the
Form 501-G contemplated. If Johnson had performed them, they would have shown that
both Gulf South and Gulf Crossing were under-recovering their cost of service, generating
ROEs that would not warrant a rate case, and were in no danger of having their rates
lowered. See JX 644 at 1. Boardwalk’s actual Form 501-G submissions, filed in late 2018,
confirmed that fact: Gulf South’s ROE in 2017 was 4.9%, and Gulf Crossing’s was 4.7%.
Webb Report Ex. 16 at 6765 (Gulf Crossing ROE); id. Ex. 17 at 6770 (Gulf South’s ROE).
Texas Gas, on the other hand, faced some risk of a rate case, because its indicative ROE
was 24.3%, and historically FERC would file a rate case if a pipeline’s ROE was above
20%. JX 1064; Sullivan Dep. 168. Nevertheless, Wagner and Sullivan “share[d] the
opinion that there is a low probability that Texas Gas would face a section 5 case in the
next 1–2 years.” JX 1064 at 1. “Beyond that time frame,” they concluded, “there are too
many variables to make a prediction with any confidence.” Id.
Johnson’s Rate Model Analysis followed the same basic steps as the Form 501-G
Analysis. JX 727 at 2. But unlike the Form 501-G Analysis, which used FERC’s indicative
ROE of 10.55%, Johnson performed the calculations in the Rate Model Analysis using an
ROE of 12.0%. That decision increased the cost-of-service requirement. In his cover email,
51
Johnson explained that his choice of an ROE of 12.0% was “[t]he biggest driver as to the
difference in Cost of Service from the Form 501-G analysis.” JX 727 at 2. At trial, Johnson
testified that he found that rate in an annual report issued by a shipper-side advocacy group
that lobbies FERC to pursue rate cases against pipelines. Johnson Tr. 617, 658–59. It was
not an unreasonable selection, but it also was not a pro-pipeline selection. It is, however,
another indication that Loews and Boardwalk did not think that the March 15 FERC
Actions necessarily would be implemented as proposed.
The following tables summarize the results of Johnson’s Rate Model Analysis:
Rate Model Analysis:
35% Tax 21% Tax 0% Tax 35% Tax 35% Tax 21% COS 21% COS
COS COS COS Delta % Change Delta % Change
Texas Gas Pipeline-Overall System
2017 $424.34 $393.66 $346.57 $77.77 18.33% $47.09 11.96%
Gulf South Pipeline
2017 $491.05 $457.04 $403.55 $87.50 17.82% $53.49 11.70%
Gulf Crossing Pipeline
2017 $220.29 $198.62 $167.60 $52.70 23.92% $31.03 15.62%
35% Tax 21% Tax 0% Tax
Indicative Indicative Indicative 35% Rate 35% Rate 21% Rate 21% Rate
Rate Rate Rate Delta % Change Delta % Change
Texas Gas Pipeline
2017 $0.2337 $0.2168 $0.1909 $0.0428 18.33% $0.0259 11.98%
Gulf South Pipeline
2017 $0.3698 $0.3442 $0.3040 $0.0658 17.80% $0.0402 11.68%
Gulf Crossing Pipeline
2017 $0.3549 $0.3200 $0.2700 $0.0849 23.92% $0.0500 15.62%
JX 727 at 4. The Rate Model Analysis thus resulted in a bigger percentage change than the
Form 501-G Analysis.
Baker Botts used the Rate Model Analysis to render the Opinion. No one on the
Boardwalk team prepared any sensitivity analysis using different treatments of ADIT or
52
different ROE calculations. See Webb Report ¶¶ 128, 134–35; JX 1757 (Webb Rebuttal)
¶¶ 29–30.
Although Johnson claimed at trial to have followed all of the steps of cost-of-service
ratemaking in his analysis, he plainly did not. The Rate Model Analysis presented a
hypothetical cost-of-service calculation, subtracted the income tax allowance, and
concluded that the new total was lower. FERC does not calculate rates by changing a single
element in a cost-of-service calculation. Instead, FERC evaluates all elements of a
pipeline’s cost of service when calculating a pipeline’s rates. Court Report ¶¶ 146–48;
Webb Report ¶¶ 129–33.
Sullivan, the rate expert that Baker Botts hired to assist with the Opinion, testified
that the Rate Model Analysis was “not a recourse rate calculation.” Sullivan Dep. 151.
While Johnson attempted to justify his approach by contending that the Rate Model
Analysis generated an “indicative rate” for each of Boardwalk’s pipelines, Sullivan made
clear that “an indicative rate doesn’t mean anything.” Id. 168–69. Sullivan explained that
[t]o really find out what the true rate reduction is, you have to do the billing
determinant adjustments . . . where you take into account how much of the
billing determinants are discounted, how much are negotiated discounted
rates, how much is [interruptible transportation], how much are firm recourse
rates. You have to do all those calculations to properly calculate a rate
reduction.
Id. at 120. The Rate Model Analysis did not do that. Id.
In his cover email circulating the Rate Model Analysis, Johnson explained the
limitations of the exercise he conducted. JX 727 at 2. As pertinent here, he stated:
In order to provide a comparable rate assessment for each of the assets to
assist in business decision-making, we have provided indicative rates that are
53
postage stamp (i.e., every shipper pays the same maximum rate for each
molecule) and unadjusted (i.e., does not adjust the maximum tariff rate for
any under-recoveries of cost associated with either discounted or negotiated
rate capacity that is below the maximum tariff rate). This provides the
cleanest approach to understanding the relative rate impact of changes in the
income tax rate and income tax policy within each of the three pipes and
removes any argument as to subjective adjustments to volumes tied to a
calculated rate reflected on the summary.
Id.
In reality, Boardwalk’s pipelines do not have just one rate. In April 2018, they had
167 total recourse rates on file with FERC.5 Those rates covered nine different pipeline
zones and incorporated forty-six different rate schedules. Webb Report ¶¶ 91–93. In the
real world, the “postage stamp” approach does not work for assessing the rates charged by
Boardwalk’s subsidiaries.
The abbreviated analysis that Johnson conducted contrasts with the voluminous
record generated for a rate case. In their most recent rate cases, Texas Gas and Gulf South
submitted hundreds of pages of complex calculations to determine cost-based recourse
rates. See Johnson Tr. 652–53. In stark contrast, the Rate Model Analysis contained
approximately five pages of calculations for each pipeline. Id. at 640. The Rate Model
Analysis gave no consideration to issues of competition, discounting, or other adjustments
that would affect the determination of recourse rates in a FERC rate case.6 By assuming
5
Webb Report Ex. 1 at 8–26 (Texas Gas, 114 recourse rates); Webb Report Ex. 2
at 10–37 (Gulf South, 42 recourse rates); Webb Report Ex. 3 at 3–5 (Gulf Crossing, 11
recourse rates).
6
When competition pressures a gas pipeline to provide services at a discount to
applicable recourse rates, the pipeline is no longer recovering its full cost of service. In its
54
that a change in cost of service would translate directly into a change in recourse rates, the
Rate Model Analysis ignored critical elements of rate design. Johnson effectively admitted
as much. Johnson Tr. 648–49, 651–52.
Perhaps most significantly, the Rate Model Analysis ignored the reality that rate
changes are not self-implementing. Even if a pipeline’s cost of service changes, recourse
rates do not change unless and until there is a litigated rate case.7 If a pipeline is unlikely
to face a rate case, then it is all the more unlikely that its recourse rates will change.
The Rate Model Analysis made no effort to incorporate the risk of a rate case. It
easily could have. The NOPR contemplated using the Form 501-G to assess the need for a
rate case. FERC also identified factors that could obviate the need to change a pipeline’s
rates, all of which applied to Boardwalk’s subsidiaries. Gulf South and Gulf Crossing faced
next rate case, the portion of the pipeline’s cost of service that would have been allocated
to the discounted services is reduced, and the difference is reallocated to the pipeline’s less
price sensitive customers. Webb Report ¶ 177. That way, FERC permits the pipeline to
raise its remaining undiscounted recourse rates so that it can recover its full cost of service.
All three of Boardwalk’s pipelines have emphasized in FERC filings that they face
significant competition. The actual recourse rates of Texas Gas and Gulf South reflect that
competition. Webb Report ¶ 95 (Texas Gas); id. ¶ 96 (Gulf South); id. Ex. 4 at 443; id. Ex.
6 at 626. Texas Gas and Gulf South earn less than a third of their revenue from recourse
rates; Gulf Crossing earns essentially none. Id. ¶ 194. McMahon’s statement that Gulf
Crossing will be undersubscribed by the time its contracts expire in 2023 evidences a
likelihood that discount adjustments will figure prominently in its next rate case. Finally,
in transmittal letters attached to the Form 501-G filings that Boardwalk submitted on behalf
of its pipelines in late 2018, Johnson identified significant and apparently increasing
competition as a reason FERC should not require them to lower their rates. See Webb
Report ¶ 198 & n.175.
7
Wagner Dep. 77–79; Sullivan Dep. 79–80; see McMahon Tr. 507–08, 512–13.
55
no risk of a rate case in the foreseeable future. For Texas Gulf, the rate case risk was low
through April 2020; beyond that, it was impossible to predict the likelihood of a rate case
“with any confidence.”8 Yet the Rate Model Analysis implicitly assumed a 100%
likelihood that all three pipelines would face a rate case immediately, lose the rate case,
and each have their rates reduced by an amount determined by singe-issue ratemaking.
I. Alpert Adds Skadden To The Team.
Shortly after hiring Baker Botts, Alpert hired Skadden, Arps, Slate, Meagher &
Flom LLP (“Skadden”) to supplement the legal team. Alpert had considerable experience
working with Skadden, and the firm had a deep bench in FERC matters, extensive
experience with MLPs, and expertise in Delaware law. Rosenwasser Tr. 61–62; Alpert Tr.
326–27. Richard Grossman, a corporate partner, led the Skadden team. Jennifer Voss, a
litigation partner in Skadden’s Delaware office, provided advice on Delaware issues.
Alpert hired Skadden after Rosenwasser suggested that bringing in another law firm
to advise on whether the Opinion was acceptable might further protect Loews from
liability. See JX 975 at 1. The Partnership Agreement contains language exculpating the
8
See JX 1064 (Wagner advising Loews that Texas Gas had a low rate-case risk for
“the next 1–2 years”); see Wagner Tr. 245, 248 (Wagner testifying that there was some
risk of a rate case at Texas Gas due to its ROE, but that because of FERC’s workload, a
rate case was unlikely in the next one to two years); Johnson Tr. 632–34 (testifying that
Texas Gas faced some risk of a rate case); see also JX 1807 at 6 (Wagner noting that
Sullivan believed FERC would use an ROE of 20–30% to screen for rate cases). The
defendants’ FERC expert testified at trial that Texas Gas would have an ROE of between
17.5% and 24.3%, which was high enough to create some risk of a rate case. See Kelly Tr.
1104. The plaintiffs’ rate expert agreed that FERC historically pursued rate cases when
pipelines had ROEs in this range. Webb Tr. 1007–08.
56
General Partner and its Affiliates from monetary liability unless it engages in fraud, bad
faith acts, or willful misconduct. PA § 7.8(a). The Partnership Agreement also states that
the General Partner will be “conclusively presumed” to have acted in good faith if it
“reli[ed] upon the advice or opinion [of legal counsel] (including an Opinion of Counsel).”
Id. § 7.10(b). Rosenwasser and Alpert thought that if Skadden advised the General Partner
that Baker Botts was qualified to render the Opinion and that the Opinion was acceptable,
then those additional protections would apply.9 At the time, Alpert also thought that
Skadden would handle any litigation challenging the exercise of the Call Right. See Alpert
Tr. 445–46; JX 1136. He later would decide not to use Skadden for any litigation after
Skadden balked at giving Alpert the advice he wanted.
The first issue that Skadden looked at was Baker Botts’ assertion that Holdings was
the proper entity to decide whether the Opinion was “acceptable to the General Partner.”
See JX 679 at 7–8. Rosenwasser had struggled with this question, which the Partnership
Agreement did not plainly address. See JX 596 (Rosenwasser’s handwritten notes on the
Partnership Agreement); Rosenwasser Dep. 65. By late March, Rosenwasser had taken the
position that Holdings, rather than the GPGP Board, would determine acceptability. See
JX 679 at 8. On March 27, Alpert suggested that Skadden “confirm” that “the redemption
was the sole decision of the [General Partner]—such that the [GPGP] [B]oard will not need
to act.” JX 669 at 1.
9
Rosenwasser Tr. 61; Alpert Tr. 325–26, 407; JX 1100 (Skadden engagement letter
dated April 23, 2018).
57
Instead of confirming Rosenwasser’s position, Voss reached the exact opposite
conclusion. In an insightful internal email that carefully worked through the issues, she
expressed the view that “the MLP Agreement likely requires that the [GPGP] Board make
the determination to accept the Opinion of Counsel. Or, at a minimum, it is ambiguous.”
JX 747 at 1.
Skadden subsequently prepared a memorandum for Alpert, where Skadden framed
its concerns in more lawyerly and less direct language. Skadden began by noting that the
Call Right
is atypical and, to the best of our knowledge, notwithstanding the many MLP
cases (and MLP contract terms) that have been litigated, no Delaware court
has interpreted such a provision. . . . [I]t’s also fair to say that courts generally
dislike the interpretive difficulties often inherent in MLP agreements. . . .
And, here, we think that any “question marks” or ambiguities likely would
be decided against the “sophisticated drafter” and not the minority
unitholders.
JX 773 at 1. Skadden also flagged arguments that a plaintiff could make about the
circumstances surrounding the exercise of the Call Right, such as “purported efforts to
depress the price of the units prior to the exercise of the right by, for example, increasing
capital expenditure” or “purported partnership ‘admissions’ about the ‘lack of materiality’
of the FERC’s March 15 policy statement.” Id.
Setting aside those issues, Skadden agreed with Baker Botts that Holdings had the
right to exercise the Call Right in its individual capacity. But Skadden perceived that to be
a different question than who had the ability to determine whether the conditions for
exercising the Call Right were met. Skadden noted the following:
58
• “[T]he ‘right to purchase’ . . . does not seem to arise unless and until certain
preconditions exist, including acceptance by the General Partner of a specified
‘Opinion of Counsel.’” Id. at 2.
• “A plaintiff could argue that this Opinion of Counsel must be acceptable to the
General Partner in its capacity as general partner and not in its individual capacity.”
Id.
• “[T]he words ‘exercisable at its option’ (indicating ‘individual capacity’) do not
appear in the ‘precondition’ portion of the provision.” Id.
• “At a minimum, the matter is arguably ambiguous.” Id.
Skadden also discussed the structure of the Partnership Agreement. Skadden
observed that if the Acceptability Condition existed to benefit the General Partner in its
individual capacity, then it followed that an affiliate of the self-interested General Partner
could determine acceptability. But if the Acceptability Condition was intended to introduce
some check on the quality of the Opinion for the benefit of the limited partners, then
enabling the self-interested General Partner to make the decision did not make sense. It
was “akin to permitting the fox to guard the henhouse.” Id. at 3. Instead, “the added ‘layer’
of [GPGP] Board involvement serves a purpose and must occur before the right to call
arises.” Id. Skadden reiterated that “at a minimum, there is arguable ambiguity here.” Id.
To address the resulting litigation risk, Skadden recommended that the GPGP Board
determine whether the Acceptability Condition had been met. Id. at 2. Skadden also
recommended that the outside directors on the GPGP Board participate in and not abstain
from the determination. Id. at 4.
Skadden plastered its analysis with caveats about its views being “preliminary” and
“for discussion purposes only.” Id. at 1. Skadden also downplayed its internal conclusion
59
regarding ambiguity by adding the adjective “arguable” in the memorandum it provided to
Alpert. Id. at 2. But the overall tenor of Skadden’s memo was clear, and Skadden presented
its advice with the understanding that Loews would rely on it.
Loews begrudgingly did just that. Alpert and McMahon found Skadden’s
recommendation “frustrating” and viewed the firm as a “pain in the ass.” See JX 874 at 1
(Layne handwritten notes); Layne Dep. 111–12. But consistent with Skadden’s reasoned
analysis, Loews initially decided to have the GPGP Board make the acceptability
determination. See JX 948 at 2; JX 979 at 1.
J. Baker Botts Struggles With The Material Adverse Effect Inquiry.
By the second week of April 2018, Baker Botts was struggling with the need to
conclude that the March 15 FERC Actions would have an effect that was both material and
adverse. They wanted Skadden’s help. See JX 770 at 1; JX 772. But as a matter of firm
policy, Skadden does not render opinions on whether an event constitutes a material
adverse effect, and Grossman was not willing to give Baker Botts any analysis that might
be construed as expressing an opinion on it. See JX 771 at 1.
For its part, Skadden was skeptical about the claim that a 10–15% change in a
maximum applicable rate could be deemed in the abstract to qualify as a material adverse
effect. JX 772 at 1. The Skadden attorneys believed that an 11% change in the maximum
applicable rate was “likely insufficient” under Delaware law, although they acknowledged
that the duration of the change would be a pertinent consideration. See id. The Skadden
attorneys did not think anyone could assess whether a change in the range of 10–15%
constituted a material adverse effect without delving into the facts. Id.
60
Alpert wanted Grossman to support Baker Botts. But during a call with Alpert,
Grossman held the line on not providing any analysis that might be construed as an opinion
on the existence of a material adverse effect. Alpert emailed his colleague, Tom Watson,
that Grossman was “pissing [him] off.” JX 798 at 1. Watson’s response was more telling:
Yes, these calls are getting really annoying. Too many lawyers doing nothing
but muddying the waters on what is a clear question (to me). If people think
the language says that the relevant test is what is the real world effect, then
we have an issue. I think it’s crystal clear that we’re talking hypothetical
future max FERC rates.
Id. In other words, Watson understood that the material adverse effect analysis only worked
under Rosenwasser’s syllogism based on “hypothetical future max FERC rates.” Under
Rosenwasser’s syllogism, the answer was baked into the assumptions. But in the real
world, the March 15 FERC Actions did not have any meaningful effect, much less a
material and adverse effect.
Grossman ultimately agreed to provide Baker Botts with a description of the key
cases “so that they did not miss a key case or an important factor looked at by the Delaware
courts.” JX 777 at 1. Grossman also had Mike Naeve, a Skadden partner and former FERC
Commissioner, speak with Wagner, Alpert, and McMahon about the various issues
presented by the Opinion. See JX 790 at 2. Going into a call on April 10, 2018, Naeve had
doubts about what “maximum applicable rates” meant. But after talking it over with the
group, he thought that “recourse rates” was a more reasonable reading of “maximum
applicable rates” than “the maximum rate that can be charged a specific customer under a
negotiated or discounted rate agreement.” Id. To get Naeve “more comfortable” with the
Baker Botts position, Wagner sent Naeve over 500 pages culled from Boardwalk’s Form
61
S-1 and the FERC orders involving Boardwalk’s pipelines that used the term “maximum
applicable rates” as a synonym for recourse rates. Id.
After speaking with the Baker Botts team, Naeve identified a number of issues
surrounding the material adverse effect analysis in discussions with Grossman and other
Skadden partners. Naeve immediately flagged the question of whether any of Boardwalk’s
pipelines actually faced a risk of a rate case. As Naeve explained,
[t]he risk that a customer will ask for a new rate case and that FERC will
agree to grant that request will depend on whether there is substantial
evidence that a new rate case will result in materially lower rates. A reduction
in the revenue requirement to take out taxes would suggest lower rates, but
it is possible that any reduction might be offset by other factors such as recent
facility investments expenditures or changes in allowed ROE.
JX 800 at 1. In other words, Naeve recognized that whether the March 15 FERC Actions
would have a material adverse effect on recourse rates depended on both the risk of a rate
case and on the full ratemaking exercise that would take place in a rate case. It was much
more than just a function of Rosenwasser’s syllogism and its subtraction of a tax allowance.
Naeve and his Skadden colleagues also discussed whether the inquiry into a material
adverse effect needed to account for Boardwalk’s existing contracts for negotiated rates
and discounted rates or any rate-case moratoriums at its pipelines. See JX 800 at 2. Those
were real-world factors with real-world impacts, and FERC had cited them as reasons why
a change in rates might not be warranted. But Baker Botts had no intention of taking those
issues into account. Baker Botts instead was taking the position that
because pipelines are long-lived assets, and because the relevant language
refers to the potential for material adverse rate effects in the future, their
analysis need not be affected by discounts or moratoria that will be lifted
within the next several years.
62
JX 800 at 2.
K. Baker Botts Works Towards A “Preliminary” Opinion.
Rosenwasser wanted to be in a position to provide Loews with a “preliminary”
version of the Opinion by the end of April 2018. See JX 1956. The preliminary version
would turn out to be an all-but-signed version that Baker Botts could render formally if and
when Loews requested it.
Rosenwasser and his drafting team prepared an initial draft of the Opinion dated
April 4, 2018. See JX 726 (the “April 4 Draft”). Like the preliminary Opinion and the final
Opinion, the April 4 Draft was a non-explained opinion that identified background
information, flagged assumptions, and stated a conclusion, but did not provide reasoning
or cite authority to support the conclusion.
Throughout April, Rosenwasser and his drafting team worked with the senior Baker
Botts lawyers comprising the ad hoc opinion committee. The senior lawyers raised a
number of concerns that highlight how difficult it was for Baker Botts to reach the outcome
necessary to render the Opinion.
A persistent problem was the meaning of “maximum applicable rates.” The April 4
Draft simply stated that it addressed “maximum applicable rates” without explaining how
Baker Botts interpreted that term. JX 726 at 2. The next significant draft, dated April 17,
2018, sought to address the ambiguity inherent in the term by stating,
Based on the wording of Section 15.l(b)(ii) and supported by disclosure in
the Registration Statement and discussions with representatives of the
Partnership who assisted in preparing the Registration Statement, it is our
judgment that . . . we should not consider the impact of negotiated rates,
discounted rates, contractual rates, settlement rates, market-based rates, rate
63
moratoria, or other market-related factors when interpreting the term
“maximum applicable rates that can be charged to customers.”
JX 935 at 2. That language telegraphed all the market-based, real-world considerations that
Baker Botts was leaving out, and subsequent drafts continued to dispense with any analysis
of the real-world impact of facts that would affect the actual “maximum applicable rates
that can be charged to customers.” Rosenwasser continued to claim that the Opinion would
not look at real-world effects, which he characterized as “speculation about real market
conditions and their impact on rates.” JX 879 at 1.
Another persistent problem was that the March 15 FERC Actions would not have
any effect on Boardwalk’s recourse rates unless those rates changed through a rate case.
The April 4 Draft addressed that issue head on by expressly assuming that Boardwalk’s
pipelines would file rate cases and take any other actions necessary to permit them to
charge the reduced recourse rates that would generate a material adverse effect. See JX 726
at 2 (“[W]e have requested that the Partnership assume that the Subsidiaries will file rate
cases and take any other appropriate and legal action to be permitted to charge the
maximum rates permitted under the applicable cost of service rules and regulations
regardless of competitive conditions or any other non-legal factor.”). But by including this
explicit assumption, the April 4 Draft both highlighted the role of rate-case risk and openly
assumed that Boardwalk and its subsidiaries would act contrary to their own interests. By
April 17, Baker Botts had deleted this language and substituted an assumption that
Boardwalk’s pipelines would charge customers their new recourse rates, without
addressing how those rates would come about. The new assumption reached the same
64
result, but without advertising the counterintuitive premise. See JX 935 (omitting reference
to Boardwalk’s subsidiaries filing rate cases).
Yet another problem was the fact that the March 15 FERC Actions were not final,
could be revised significantly, and required clarification. The April 4 Draft contained
language recognizing that reality, while assuming that the March 15 FERC Actions would
not be revised. See JX 726 at 2 (acknowledging that “[i]mportant details of implementing
the Revised Policy require clarification”). By April 17, Baker Botts had eliminated that
acknowledgment of uncertainty. See JX 935 at 2. That draft instead sought to strengthen
the assumption that the March 15 FERC Actions would not be revised, would be
implemented as written, and would be applied by FERC in individual regulatory
proceedings. See id. Subsequent drafts took the same approach. See id.
The senior Baker Botts lawyers also flagged other issues with the language of the
Call Right. One debate concerned the reference to Boardwalk’s “status as an association
not taxable as a corporation.” See JX 1958 at 1, 8; see also JX 878 at 2; JX 939 at 1. That
phrase seemed to refer to Boardwalk’s status as an entity taxed as a partnership, but that
created an issue for the Opinion because the Revised Policy did not affect all entities taxed
as partnerships. It was thus difficult to say that Boardwalk’s status as an entity taxed as a
partnership had a causal effect on the rates it could charge. See JX 1958 at 1; JX 1957 at 5.
The senior Baker Botts lawyers also questioned whether Baker Botts should be
giving an opinion under Delaware law about the existence of a material adverse effect. See
JX 878 at 4. The April 4 Draft only addressed federal law, and it did not contain any
discussion of the term “material adverse effect.” See JX 726 at 2.
65
Once Baker Botts came to grips with the fact that the existence of a material adverse
effect under the Partnership Agreement was a question of Delaware law, the firm was out
of its depth. Baker Botts generally rendered enforceability opinions under the Delaware
Revised Uniform Limited Partnership Act, but that was it. The firm did not render opinions
more broadly on Delaware issues. See JX 878 at 4. By April 17, the draft included language
which noted that the term “material adverse effect” was “not defined in the Partnership
Agreement” and stated that Baker Botts had considered “what we believe to be relevant
law.” JX 935 at 3. As Grossman had anticipated, the senior Baker Botts lawyers wanted to
rely on Skadden’s work product on this issue. See JX 878 at 4–5; JX 892 at 2.
The senior Baker Botts lawyers also wanted reassurance on the Financial Data. The
April 4 Draft referred only to information provided by the Partnership about its “cost of
service . . . , and the related maximum rates that can be charged.” JX 726 at 2. By April 17,
the draft contained language discussing the Financial Data and containing assumptions that
it was “prepared in a reasonable manner and in good faith.” JX 935 at 3. By April 19, the
extent of the assumptions regarding the Financial Data had grown further. See JX 1005 at
3.
Rosenwasser was concerned that the Financial Data alone might not be enough. He
sought to bolster the case for a material adverse effect by asking Johnson to expand his
analysis beyond the Financial Data to include projections for 2020 and add “DCF,
EBIDTA, and EBIT (Operating Income) comparisons.” See JX 775 at 1; see also JX 797.
He thus sought to include the real-world effects of changed rates when considering their
66
effect on Boardwalk, despite persisting in refusing to consider real-world effects when
evaluating whether the March 15 FERC Actions would have any effect on rates.
During this timeframe, Johnson simplified the presentation of the Financial Data by
dropping the scenarios that involved a tax rate of 35%. JX 775 at 3–4; JX 785 at 1–2. A
version of the Financial Data from April 10 presented the information as follows:
Form 501-G Analysis:
21% Tax COS 0% Tax COS 21% COS Delta 21% COS % Change
Texas Gas Pipeline
2017 $406.47 $362.23 $44.24 10.88%
Gulf South Pipeline
2017 $601.93 $534.50 $67.43 11.20%
Gulf Crossing Pipeline
2017 $259.88 $232.30 $27.59 10.62%
Rate Model Analysis:
21% Tax COS 0% Tax COS 21% COS Delta 21% COS % Change
Texas Gas Pipeline-Overall System
2017 $386.21 $339.12 $47.09 12.19%
Gulf South Pipeline
2017 $457.04 $403.55 $53.49 11.70%
Gulf Crossing Pipeline
2017 $198.62 $167.60 $31.03 15.62%
21% Tax 0% Tax
Indicative Rate Indicative Rate 21% Rate Delta 21% Rate % Change
Texas Gas Pipeline
2017 $0.2129 $0.1871 $0.0258 12.12%
Gulf South Pipeline
2017 $0.3442 $0.3040 $0.0402 11.68%
Gulf Crossing Pipeline
2017 $0.3200 $0.2700 $0.0500 15.62%
JX 775 at 3–4; JX 785 at 1–2. Compared to the April 4 figures, the percentages for Texas
Gas in the Rate Model Analysis had creeped up from 11.96% (cost of service) and 11.91%
67
(indicative rate) to 12.19% (cost of service) and 12.12% (indicative rate). Otherwise, the
figures remained the same as in the information Johnson had provided on April 4.
By this point, however, Boardwalk’s management team was preparing comments in
response to the ADIT NOI and was focused on the implications of ADIT. Horton expressed
concern that the Financial Data gave up Boardwalk’s argument that “the [Revised Policy]
essenti8ally [sic] eliminates ADIT,” meaning that Boardwalk’s pipelines “do not have a
reduction of rate base.” JX 797 at 1. He wanted to caveat Johnson’s analysis to make clear
“that it does not include any impact from adjusting the ADIT balances to account for the
reduction or the elimination of income taxes.” Id.
Like Boardwalk’s management, the Baker Botts lawyers knew that the treatment of
ADIT would have a significant effect on the Financial Data. Wagner was representing the
shippers on remand in the United Airlines case, so he understood that different industry
participants were arguing for different outcomes.
The Baker Botts team had retained Sullivan as a rate expert,10 and Wagner asked
Sullivan to examine how the Financial Data treated ADIT:
It seems to us that different assumptions on how to handle that issue could
affect the calculations. Have they assumed that they will flow back the ADIT
over the remaining life of the assets (with the corresponding reversals of the
reduction to rate base)? Or is there another method used here?
10
Sullivan had thirty-eight years of experience working in the oil and gas industry,
including twenty-five years working at FERC, and he had testified in FERC proceedings
more than fifty times. PTO ¶ 154; JX 1498 at 151. His expertise is unchallenged.
68
JX 868 at 2. Sullivan reported that Johnson was using the Reverse South Georgia Method,
which Sullivan thought was appropriate. See JX 868 at 1. Boardwalk’s executives and the
Baker Botts lawyers thought that was the most likely regulatory outcome. But they also
understood that the approach FERC took on ADIT would have a big effect. Wagner’s
handwritten notes show him regularly wrestling with the uncertainty generated by how
FERC would treat ADIT. See JX 646 at 8; JX 1400 at 1; JX 1807 at 3–4 (“[T]he effect on
ADIT is unknown & unknowable.”). In one set of notes, he commented, “Will want to run
scenarios on ADIT flowback.” JX 1807 at 12. Another set of notes stated: “ADIT NOI –
Policy Statement w/ no immediate effect. 501-G filings do not acct for ADIT. No idea what
they’ll do w/ ADIT. If there’s litigation coming from 501-Gs, ADIT policy will prob factor
in there.” JX 1216 at 3.
After conducting further review of the Financial Data, Sullivan advised Wagner that
“the spreadsheet work done by Boardwalk appropriately represents the cost of service for
each Boardwalk interstate pipeline, the federal income tax impact at 21%, and the potential
reduction in the cost of service for each pipeline if FERC reduces the income tax allowance
to 0.” JX 960 at 2 (emphasis added). Wagner did not think that a statement about a cost of
service analysis was sufficient. He asked Sullivan to let him know “[o]nce you’re able to
state definitively that you agree with their rate analyses.” Id. (emphasis added).
On April 18, 2018, Sullivan told Wagner that he had finished his review. He did not
provide the representation that Wagner wanted. Instead, Sullivan stated:
I have confirmed that Boardwalk has properly used the correct financial and
accounting entries in the calculated cost of service for each of its pipelines.
In my expert judgment Boardwalk’s spreadsheets provide an accurate
69
presentation of the cost of service impact of the January 2018 federal income
tax change from 35% to 21%. Boardwalk’s spreadsheets also provide an
accurate presentation of the cost of service impact of the potential reduction
in the cost of service for each pipeline if FERC eliminates the federal income
tax allowance for MLP owned interstate pipelines as proposed in Docket No.
PL17-1.
JX 960 at 1 (emphases added). In his deposition, Sullivan explained persuasively that the
Financial Data did not attempt to engage with principles of rate design and did not address
the risk of a rate case. See Sullivan Dep. 101, 126, 149, 150–51.
In a separate call with Loews, Sullivan addressed the risk of a rate case at Texas
Gulf, where the Financial Data indicated an ROE of approximately 24.3% after the
elimination of the tax allowance and using the Reverse South Georgia Method for ADIT.
Although returns at that level had caused FERC to initiate rate cases in the past, Sullivan
thought that resource constraints on the agency meant that the probability was low that
Texas Gas would face a rate case in the next one to two years. JX 1064 at 1. The likelihood
of a shipper filing a rate case was also low. See id. No one thought that the risk of a rate
case at Gulf Crossing or Gulf South was worth discussing.
Sullivan’s work confirmed what everyone knew. In the real world, any potential
effect on Boardwalk’s rates could not be understood without a FERC determination
regarding ADIT. And even if FERC implemented the March 15 FERC Actions, the
regulations would not have a material adverse effect on Boardwalk’s rates because there
was no risk of a rate case at Gulf Crossing or Gulf South and only a low risk of a rate case
at Texas Gas. The March 15 FERC Actions only had an effect in the hypothetical world of
70
Rosenwasser’s syllogism, and only if supported by a coterie of assumptions necessary to
generate the result that Loews wanted.
L. Baker Botts Calls On Richards Layton.
As noted previously, the senior Baker Botts lawyers wanted to be able to rely on
Skadden’s work product for purposes of the material adverse effect issue. See JX 878 at 4–
5; JX 892 at 2. When they received Skadden’s description of the Delaware cases, it fell
short of their expectations. See JX 913 at 1 (Baker Botts attorney David Kirkland telling
Rosenwasser, “I was expecting more analysis than this”); see also JX 936 at 1. Rather than
analyzing the Call Right, Skadden’s memorandum explicitly disclaimed any intent to do
so. JX 900 at 2.
Seeking to reassure his partners that Baker Botts still should render the Opinion,
Rosenwasser reported that Loews only would exercise the Call Right if Skadden advised
that Baker Botts’ Opinion met the Acceptability Condition. JX 913 at 1. Rosenwasser’s
partners wanted that condition built into the Opinion, so the Baker Botts attorneys added
language to the preliminary draft which stated that Baker Botts’ Opinion was “based on,”
and its delivery “conditioned on,” the fact that “other counsel has advised [the General
Partner] that [its] reliance on this opinion when delivered should provide the benefits set
forth in Section 7.10(b) of the Partnership Agreement.” JX 1955 at 6 (draft from April 17,
2018); JX 1959 at 7 (draft from April 18, 2018). Perhaps anticipating pushback from
Skadden, Baker Botts subsequently eliminated the “based on” and “conditioned on”
language. See JX 1960 (draft from April 19, 2018).
71
The senior Baker Botts lawyers also wanted reassurance on the analysis of a
“material adverse effect.” And Baker Botts was on a deadline, because Loews had made
clear that it wanted an indication from Baker Botts that it could deliver the Opinion by
Friday, April 20, 2018. Rosenwasser knew that Boardwalk and Loews had quarterly
security filings to make and that Loews’ CEO, Jim Tisch, was planning to hold board
meetings before the end of month to approve those filings. Rosenwasser understood that
Tisch wanted to know where Baker Botts stood going into those meetings. See JX 914 at
1.
To satisfy his partners, Rosenwasser contacted Srinivas Raju, a partner at Richards,
Layton & Finger, P.C. See JX 957 at 1; JX 975 at 1. In a call on Wednesday, April 18,
2018, Rosenwasser told Raju that a FERC rate expert had modeled a “decrease of 12.19%
on top line revenue” for Texas Gas, an “11.70% decrease” for Gulf South, and a “15.62%
decrease” for Gulf Crossing. JX 975 at 1; see also id. (“top line revenue impact – excess
of 10% impact”). In reality, those figures referred to the percentage changes in cost of
service and indicative rates under the Rate Model Analysis that Johnson prepared. JX 775
at 3; JX 785 at 2. Those figures would only translate into a comparable effect on topline
revenue if Boardwalk’s subsidiaries charged recourse rates for a high percentage of their
volumes. They did not.
Rosenwasser also told Raju that the FERC rate expert had projected that EBIT
would decrease by 21–22% and distributable cash flow would decrease by “closer to 25%.”
JX 975 at 1; see also id. (“21% decline in net income” and “even higher in distribution”).
Sullivan had not addressed the effect on EBIT or distributable cash flow. Sullivan Dep.
72
140–42 (discussing final Financial Data in JX 1398); see also id. at 141 (Q: “Did you offer
an opinion regarding the calculation of DCF, EBITDA or EBIT?”; A: “I do not believe I
did specifically cite to EBITDA, EBIT or the DCF.”). Rosenwasser told Raju about those
factors because he wanted to be able to consider real-world effects on Boardwalk’s
business, as well as real-world stock market reactions, when determining whether a
material adverse effect had occurred.11 Yet he continued to want to ignore the real-world
reasons why the March 15 FERC Actions would not have any material effect on the rates
that Boardwalk’s pipelines could charge.
Having provided these representations, Rosenwasser asked Raju to consider
whether “material adverse effect” is “only measured based on the effects on the ‘maximum
rate’ or is . . . measured by the effect on the business as a result of the decline in the
maximum rate.” JX 975 at 1; see also JX 957 at 2. He also asked whether Richards Layton
11
Rosenwasser’s back-up memorandum offers further insight into what he wanted
to consider to reach a conclusion that the effect on Boardwalk was “not immaterial.” PTO
¶ 161. There, he wrote:
The fact that so many regulated pipelines have requested that the FERC
reconsider the Revised Policy is an indication they considered the changes
caused by the Revised Policy are not immaterial. The magnitude of the
adverse effect that the Revised Policy had on the trading market for many
MLPs that own regulated pipelines is an indication that the matter is not
immaterial. The fact that several MLPs that owned regulated pipelines have
indicated that they are converting to corporate tax status is an indication that
the matter is not immaterial.
Id.
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could support the assertion that an adverse effect in “excess of 10%” would be sufficient
under Delaware law. JX 1502 at 21.
Less than twenty-four hours later, Raju and his team gave advice orally to Baker
Botts via teleconference. JX 956 at 1. Raju advised that the “[b]etter [r]eading” was to
“look [at] rates more, not effects.” JX 1007 at 1. He also cautioned that a Delaware court
would “construe ambig[uity] ag[ai]nst [the] drafter.” Id.
In response, the Baker Botts team clarified that their rate expert had not analyzed
the Revised Policy’s effect on Boardwalk’s rates. Instead, the analysis considered
“Hypothetical Rates.” JX 1007 at 1. Notes taken by a Baker Botts partner reveal that
everyone focused on the core issue: There would be “no actual change—no effect yet screw
min[ority].” Id. That was obviously a “challenging fact.” Id.
Turning to the magnitude of the change in rates that would be necessary for a
material adverse effect, Raju advised that he would have a “hard time saying [12% in
perpetuity is] not material.” Id. at 2. Raju noted that there was “not a lot of precedent” and,
74
in any event, “no cases against us” because “MAC cases [are] different” and the rate change
was assumed to have an effect in “perpetuity.” Id.
Raju agreed to put his advice into an email. But he cautioned that it would be
caveated by “assumptions and carve-outs” and say “[n]othing stronger” than that existence
of a material adverse effect based on a change of 12–13% to rates in perpetuity represented
the “better argument.” JX 975 at 1. Raju also stressed that Baker Botts could not reference
his advice in the Opinion. Id.; see Raju Dep. 113–14.
Raju’s advice reassured Rosenwasser’s partners. After the call, Rosenwasser
emailed Raju, telling him “[y]ou are so good.” JX 1003 at 1. Baker Botts sent Richards
Layton a copy of their preliminary opinion. The next day, Raju told Baker Botts, “We stand
by what was discussed on the call yesterday, and nothing in the draft opinion changes our
thinking.” JX 1031 at 1.
M. Baker Botts Makes Clear That It Can Deliver The Opinion.
As noted, Loews had been pushing Baker Botts to provide an indication that it could
deliver the Opinion, and Loews wanted an answer by Friday, April 20, 2018. See JX 914
at 1. After his call with Raju, Rosenwasser told Alpert and Siegel that there was “no show
stopper yet,” but that Baker Botts still needed to secure internal approvals. See JX 1006 at
1. Alpert and Siegel were not pleased. Id.
The internal approval that Rosenwasser needed was signoff from the firm’s
chairman, Andy Baker. Baker could not provide the signoff by Friday because he was in
the United Kingdom attending his daughter’s wedding. Rosenwasser told Loews that
because of Baker’s absence, Baker Botts would not be able to get his signoff until Monday.
75
JX 1019 at 2. That did not sit well with Loews. Siegel wanted to know why Baker Botts
had not raised this issue earlier, since “[t]hey must have known for weeks that Baker would
be in London.” Id. Jim Tisch wanted Alpert to ask Rosenwasser “why they didn’t anticipate
this problem, and whether this is an indication that there may be a problem with the opinion
committee.” JX 1020 at 1.
Alpert told Tisch and Siegel that Rosenwasser was just “trying to be emotionally
intelligent with his partners in an effort to obtain the desired result.” Id. at 1. But he
nevertheless pressed Rosenwasser “to make absolutely sure” that there was no way to reach
Baker on April 20. JX 1033 at 3. On April 20, 2018, at 6:47 a.m., Alpert asked Rosenwasser
for a call that morning. JX 1059. One hour later, at 7:51 a.m., Alpert sent a follow-up email.
He told Rosenwasser that “[y]our timing affects many things, especially our disclosure,
[Siegel’s] conversations with board members and Loews special board meeting being held
next week.” JX 1033 at 3. He also conveyed that the senior Loews executives did not
understand why no one anticipated the issues created by Baker’s absence. Id.
Eleven minutes after the second email, Rosenwasser emailed his partners, telling
them that Tisch “need[ed] board support for his plans” and “need[ed] to tell [the] board
this afternoon” about whether Baker Botts could issue the Opinion. JX 1032 at 1. In
response to Rosenwasser’s email, Baker Botts attorneys David Kirkland and Mike
Bengtson separately considered whether to try to reach Baker. Id. Kirkland told Bengtson
that he had “already been lobbied by Mike R[osenwasser] this morning to let him give Jim
T[isch] the thumbs up this morning.” Id.
76
Rosenwasser’s lobbying was successful. Around 11:00 a.m., Rosenwasser emailed
Alpert that “we are still working but believe at this point that we will be able to give the
General Partner the Opinion of Counsel if and when requested.” JX 1065.
At 12:09 p.m., Rosenwasser sent Alpert a draft of the Opinion. JX 1045 at 1 (the
“Preliminary Opinion”).12 The Preliminary Opinion was in substantially the same form as
the final Opinion delivered more than two months later on June 29. Compare JX 1045
(Preliminary Opinion) with JX 1522 (Opinion).
N. Skadden Makes Clear That It Will Say That The Opinion Is Acceptable.
After securing a “thumbs up” from Baker Botts, Alpert sought confirmation from
Skadden that, if and when asked, it would advise the GPGP Board that the Opinion was
“acceptable.” Alpert anticipated that Skadden’s advice would protect the GPGP Board
when determining that the Opinion was acceptable for purposes of the Acceptability
Condition. Everything would be buttoned down.
After receiving the draft from Baker Botts, Alpert forwarded it to Grossman and
asked for an answer by the afternoon of Tuesday, April 24 “at the latest.” JX 1121 at 1.
12
At his deposition, Rosenwasser denied that Baker Botts provided Loews any
commitment on April 20. Instead, he claimed that Baker Botts gave Loews an indication
that it was “more likely than not” that Baker Botts could deliver the Opinion. Rosenwasser
Dep. 122, 129, 257–82. That testimony was not credible. Baker Botts made clear that it
was prepared to deliver the Opinion if asked. See JX 1234 at 2; Grossman Dep. 76–77.
Loews did not want to receive the formal Opinion at the end of April because it would
create a disclosure issue and start a ninety-day clock for Loews to exercise the Call Right.
Loews wanted to control the timing of the issuance of the Opinion, which would start the
clock for exercising the Call Right.
77
Skadden objected to the language in the draft stating that other counsel “has advised you
that your reliance on this opinion when delivered should provide the benefits set forth in
Section 7.10(b) of the Partnership Agreement.” JX 1056 at 5. Skadden had feared that
Baker Botts would try to rely on its work, and the Skadden attorneys viewed this language
as a backdoor attempt to do that. See JX 1094 at 1. Skadden asked to strike language. JX
1126 at 1.
Alpert was furious, and he “threatened to fire Skadden.” JX 1116 (“I told Skadden
tell me today if [they] can’t get there or I’ll hire other counsel.”). Alpert told Rosenwasser
he was “in no mood to negotiate with [Skadden]” and that he had “senior management
back-up to move to another firm if [Skadden] is not reasonable.” JX 1113 at 1. In an email
to Skadden, Alpert made his expectations “absolutely clear.” Id.
I thought we were absolutely clear on the following, but if not, we need to
be. I need to know that if we ask for the opinion from Baker Botts, that
Skadden can and will advise the [GPGP] [B]oard that based on Baker Bott’s
[sic] experience, the diligence and process they conducted, the wording of
the opinion and other factors, it is reasonable for the board to accept the
Baker Botts opinion.
Id. at 1–2.
Skadden relented. Alpert told his colleagues that Skadden “fell into line,” but that
he “[r]eally had to beat on them.” JX 1136 at 1. Alpert had planned to use Skadden for any
litigation challenging the exercise of the Call Right. Now he decided that he would “look
to other firms re potential litigation.” Id.
78
O. Boardwalk’s Public Comments On The NOPR
While Baker Botts was working on a legal opinion that treated the NOPR and other
March 15 FERC Actions as final, Boardwalk’s management team filed public comments
on the NOPR, consistent with the fact that it was not final. It was the eventual regulations,
not the NOPR, that would matter. Indeed, Naeve, the former FERC commissioner, noted
that “If I were Baker Botts I would prefer to wait until FERC acts on the comments.” JX
1076 at 1.
On April 25, 2018, Boardwalk filed its public comments on the NOPR. JX 1139.
Rosenwasser printed out a physical copy of the comments and made handwritten
annotations. See JX 1130. A section that addressed the treatment of ADIT caught his
attention, and he underlined and double-starred key text:
Id. at 14. That, of course, was exactly what Baker Botts was doing in the Opinion—
purporting to correctly assess the impact of FERC’s actions on its pipelines’ costs of
service. And Baker Botts was relying on a Rate Model Analysis that largely paralleled the
Form 501-G analysis, which Boardwalk said “will be misleading and inaccurate” unless
and until FERC had addressed ADIT. And Baker Botts was going further. Baker Botts was
not just addressing cost of service. Under Rosenwasser’s syllogism, Baker Botts was
79
claiming that eliminating one component of the cost of service—the income tax
allowance—would have a material adverse effect on maximum applicable rates.
When Skadden saw the comments the next day, Voss focused on the same passage.
She noted dryly, “this seems to be relatively unhelpful.” JX 1207 at 2. Another Skadden
attorney asked if the comment “could be problematic.” Id. at 1.
The passage that Rosenwasser double starred appeared within the following larger
section that Rosenwasser annotated:
2. The Commission Must Align the Timing of Its Actions Under This
NOPR and the ADIT NOI.
Contemporaneous with the NOPR, the Commission has issued the ADIT
NOI, which seeks comment on how the Commission should address
changes related to ADIT as a result of the Revised Policy Statement. ADIT
is a critical issue in analyzing a pipeline’s maximum recourse rates.
Although ADIT is a non-cash item—merely the function of the timing
☆
difference between book depreciation and tax depreciation—certain
shippers have and will continue to argue that ADIT should be treated in a
manner that results in a large and immediate cash refund from the pipelines.
Significant dollars and the validity of certain portions of the Form No. 501-
G are at stake. The Commission should not sideline the ADIT issue while
it attempts to rush the Form No. 501-G NOPR to be ready for decision by
its July meeting.
ADIT is a key element of the proposed Form No. 501-G, and the ADIT
NOI raises a number of questions fundamental to the treatment of this rate
component under the Revised Policy Statement. For example, will the
Commission adhere to normalization methodologies? The uncertainty
surrounding how to handle ADIT is particularly problematic for an MLP
like Boardwalk, which, as a result of the Revised Policy Statement, owns
pipelines that are no longer allowed to collect income taxes in their rates
but still have large ADIT balances on their FERC books. Boardwalk
intends to address these and other questions in more detail in response to
the ADIT NOI.
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Until the Commission provides a final decision on the treatment of ADIT,
☆☆
Boardwalk cannot correctly assess the impact of the Revised Policy
Statement and ADIT on its pipelines’ costs of service, and any response in
the Form No. 501-G will be misleading and inaccurate.
The comment date for the ADIT NOI is not until May 21, 2018
(approximately thirty days after comments are due in this NOPR
proceeding), and the date of final Commission action on the ADIT NOI
is unknown. It is improper for the Commission to require the industry
to complete a new form, a key element of which is directly tied to the
cost of service intended to be addressed by the Form No. 501-G, and
which is still under review. Without resolution of the ADIT issues, the
Form No. 501-G will be misleading and inaccurate, and will
substantially hamper a pipeline’s ability to have meaningful settlement
discussions with its customers, since the calculation of a key element of
rate base will be subject to change. Pipelines may also be discouraged
from selecting the option to file a limited section 4 rate case with the
potential to face additional risk regarding ADIT in a subsequent
proceeding which would render that proposed option in the NOPR moot.
The Commission must resolve the issues raised in the ADIT NOI at the
same time or before it issues a final rule in this proceeding to ensure that
pipelines have the necessary information to complete the Form No. 501-G
accurately, select the appropriate filing option, and/or to engage in
meaningful settlement discussions with their customers.
JX 1130 at 13–15 (underlining and annotations in original) (footnotes omitted).13
In this passage, Boardwalk explained that without a determination on ADIT, matters
were so unsettled that pipelines could not even have meaningful discussions with shippers
about rates. Yet Baker Botts was claiming for purposes of its Opinion that matters were so
13
At trial, Rosenwasser claimed that he was not “reading it that closely” and that he
starred or double-starred passages so that he could “go back and read it again.”
Rosenwasser Tr. 82. That testimony was not credible. Rosenwasser underlined, starred,
and double-starred aspects of Boardwalk’s comments because they fatally undermined the
syllogism that drove the Opinion. Revealing that he was reading the comments for
problematic language, Rosenwasser wrote “nothing bad here” next to a passage reciting
the procedural history of the ADIT NOI. JX 1130 at 9.
81
settled that the firm could opine as a matter of law that the March 15 FERC Actions would
have a material adverse effect on Boardwalk’s recourse rates.
Other aspects of the comments were equally problematic for purposes of the
Opinion. For example:
• Boardwalk pointed out that the Policy Statement was “not a binding rule” and that
FERC had not justified its application. JX 1139 at 2. The Opinion treated the Policy
Statement as a binding rule. Rosenwasser drew a line next to this paragraph, and
also made an unintelligible note. JX 1130 at 2.
• Boardwalk objected to FERC instructing pipelines to complete the Form 501-G that
evaluated changes in cost-of-service requirements based solely on changes in
income taxes, then using the revised cost-of-service requirements to identify an
“Indicative Rate Reduction.” Boardwalk explained that using that procedure to
establish rates constituted improper “single-issue rulemaking.” JX 1139 at 12, 30–
31; see JX 1296 at 9. The Rate Model Analysis on which the Opinion depended took
the same approach that Boardwalk criticized.
• Boardwalk made clear that the Commission’s treatment of ADIT was not known
and that different outcomes were possible. See JX 1139 at 13–14. Yet the Rate
Model Analysis operated as if the treatment of ADIT under the Reverse South
Georgia Method was a known fact.
• Boardwalk asserted that its “fixed negotiated rate agreements—almost all of which
expressly state that they will apply ‘without regard’ to the pipeline’s maximum or
minimum applicable rates—should not be affected by any potential impact to
recourse rates.” JX 1139 at 16. The Opinion ignored the existence of Boardwalk’s
fixed negotiated rate agreements.
• Boardwalk asserted that there is no impact on Gulf South’s revenue requirements
due to the rate case moratorium that extended through May 1, 2023. JX 1139 at 20.
The Opinion ignored the existence of the rate moratorium and assumed a rate impact
at Gulf South.
What Boardwalk conspicuously did not argue in its comments was that FERC
should eliminate the ADIT balance entirely as a natural consequence of removing the
income tax allowance. Boardwalk instead argued that FERC should instruct pipelines to
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amortize the ADIT balances over the remaining depreciation life of the asset, using the
Reverse South Georgia Method. That was the method that Boardwalk was using in the Rate
Model Analysis, and it was where Boardwalk management and Sullivan thought FERC
ultimately would come out.
Many other pipelines, however, argued explicitly that FERC should eliminate the
ADIT balance entirely. PTO ¶ 337. Shippers generally took the opposite side of the issue,
arguing that FERC should require pipelines to pay a cash refund of the ADIT balance or
require amortization on an accelerated schedule. Id. ¶ 339.
P. Loews Prepares To Make The Potential Exercise Disclosures.
Well before Baker Botts gave Loews the “thumbs up” that it could issue the Opinion
if and when asked, Loews took a number of steps in anticipation of exercising the Call
Right.
One task involved preparing the disclosures that Boardwalk and Loews would issue
in their quarterly reports on their respective Form 10-Qs, assuming Baker Botts gave the
anticipated “thumbs up.” Those discussions involved Loews, Boardwalk, Baker Botts, and
Skadden, as well as Loews’ outside securities counsel Davis Polk & Wardell LLP, and
lawyers from Vinson & Elkins. Id. ¶ 229.
The evolution of Boardwalk’s Form 10-Q reveals at least two things. First, there
was a widespread understanding that the March 15 FERC Actions were not final, that their
effects could not be predicted, and that they would not be likely to have a material adverse
impact on Boardwalk. Second, despite that widespread understanding, Loews pushed the
disclosures in a contrary direction that would facilitate the exercise of the Call Right.
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On April 4, 2018, Baker Botts sent Loews a first draft of the Boardwalk Form 10-
Q. Id. ¶ 230. The draft contained relatively nuanced disclosures about the March 15 FERC
Actions, including that “[i]mportant details of implementing the new policy statement
require clarification and the Company will continue to assess the financial impacts as more
information becomes available.” Id. Similar statements about the lack of finality
surrounding the March 15 FERC Actions did not appear in the final Form 10-Q.
On April 4, 2018, Vinson & Elkins sent Boardwalk a first draft of the Form 10-Q.
Id. ¶ 232. Like the Baker Botts draft, it flagged that the March 15 FERC Actions were not
final and noted that “[r]equests for rehearing or clarification of the Revised Policy
Statement may change the outcome of the FERC’s decision on these requests.” Id. It stated
that as a result, the “impacts that such changes may have on the rates we can charge for
natural gas transportation and storage services are unknown at this time.” Id. The draft
likewise observed that the NOPR proposed a new rule, that rule was not final, and that, as
a consequence, “[a]t this time, we cannot predict the outcome of the NOPR, but adoption
of the regulation in its proposed form could impact the rates we are permitted to charge our
customers.” Id. ¶ 233. The Vinson & Elkins draft also recognized that the treatment of
ADIT was an open issue and that there was no necessary connection between the
elimination of the income tax allowance and a change in the treatment of ADIT and a
reduction in rates, explaining that “[a]lthough changes in these two tax related components
may decrease, other components in the cost-of-service rate calculation may increase and
result in a newly calculated cost-of-service rate that is the same as or greater than the prior
84
cost-of-service rate . . . .” Id. ¶ 236. Similar statements did not appear in the final Form 10-
Q.
On April 10, 2018, McMahon circulated his draft, using the Vinson & Elkins draft
as a starting point. Id. ¶ 237.
• McMahon retained the statement that “requests for rehearing or clarification of the
Revised Policy Statement may change the outcome of the FERC’s decision on this
issue” and stated that the “ultimate outcome regarding the Revised Policy Statement
could impact the maximum rates we are permitted to charge.” Id. ¶ 238.
• McMahon retained the statement that “any potential impacts from final rules or
policy statements issued following the NOI on the rates we can charge for
transportation services are unknown at this time.” Id. ¶ 239.
• McMahon added language stating that Boardwalk “cannot predict the outcome of
the NOPR, but adoption of the regulation in its proposed form could ultimately
impact the rates we are permitted to charge our customers.” Id. ¶ 240.
The Boardwalk draft was thus relatively neutral and balanced.
Later on April 10, 2018, Alpert circulated Loews’ comments, which took a different
approach.
• The Loews draft stated, “we do not expect the FERC to reverse [the Revised Policy
Statement] or otherwise revise the policy in a manner favorable to master limited
partnerships.” Id. ¶ 245.
• Loews deleted the language stating that “[a]t this time, we cannot predict the
outcome of the NOPR, but adoption of the regulation in its proposed form could
ultimately impact the rates we are permitted to charge our customers.” Id. ¶ 246.
• Loews added language stating, “[a]s we do not expect FERC’s Revised Policy
Statement to be reversed or modified in a manner favorable to master limited
partnerships, we believe that our status as a pass-through entity for tax purposes will
reasonably likely in the future have a material adverse effect on the maximum
applicable rates” that Boardwalk’s subsidiaries could charge. Id. ¶ 247.
• Loews added language stating, “[i]n addition, the ultimate outcomes of the NOI and
NOPR may have further material adverse effects.” Id.
85
Viewed charitably, Loews sought to characterize events in a way that would facilitate
Loews’ exercise of the Call Right.
McMahon and Horton objected to aspects of the Loews draft. Horton believed that
Loews’ language resulted in Boardwalk “rendering an opinion on the materiality issue.”
Id. ¶ 249. McMahon regarded the draft as tilted in favor of Loews. Id.
A push and pull ensued over the disclosures. See id. ¶¶ 250–64. Loews took a
particular interest in eliminating the language which stated that “[a]lthough changes in
these two tax-related components may decrease, other components in the cost of service
rate calculation may increase and could result in a newly calculated cost of service rate that
is the same as or greater than the prior cost of service rate.” See id. ¶ 254. Loews also
pushed for language focusing on the effects on Boardwalk’s rates, rather than on revenue
or other aspects of Boardwalk’s business. See id. ¶¶ 263–64.
In addition to editing Boardwalk’s disclosures, Loews analyzed the effect of the
disclosures on the trading price of Boardwalk’s common units with the assistance of
investment bankers from Barclays. See id. ¶¶ 271–74. The analyses projected a short-term
bump in the trading price, followed by a steady decline over time. See JX 822; JX 882; JX
915; see also JX 1051 at 3. Barclays attributed the decline in part to “[u]ncertainty
regarding timeline” and the “[p]robability Loews doesn’t” exercise the Call Right. JX 915
at 15–16. Because the lower trading price would feed back into the formula for the Call
Right, Loews would pay a lower exercise price the longer it waited.
Loews also began lining up the members of the GPGP Board to make the
determination that the Opinion was acceptable. In the leadup to a meeting of the GPGP
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Board on April 26, 2018, Siegel contacted each director. See Siegel Dep. 232–34; Alpert
Dep. 172. Siegel reported that Loews had “retained Baker Botts to determine whether it
can give the opinion.” JX 1069 at 2; see also Alpert Dep. 90. He also explained that
although Holdings would determine whether to exercise the Call Right, “the [GPGP] Board
would be required to make a narrow determination as to whether the opinion is an
acceptable opinion.” JX 1069 at 2. The outside directors had a “hostile reaction” and asked
“shouldn’t we have independent counsel[?]” JX 874 at 5; see Layne Dep. 160.
Alpert and Siegel had approached the GPGP Board based on Skadden’s advice in
the hope of eliminating any litigation risk posed by the uncertainty over which decision-
maker would make the acceptability determination. With the solution creating additional
problems, Loews reversed course. See JX 874 at 5 (“→ Alpert’s view – getting board
involved was to take an issue off the table = probably not going to the directors, & L[oews]
will exercise”).
Around April 27, 2018, Alpert asked Richards Layton to “take a fresh look” at
whether the GPGP Board’s involvement was necessary. Alpert Dep. 224; JX 1340 at 5.
Alpert did not tell Richards Layton about Skadden’s prior advice or the GPGP Board’s
reaction. Raju Tr. 809, 843. The question of who would determine the acceptability of the
Opinion would play out over the ensuing days.
Q. Boardwalk And Loews Issue The Potential Exercise Disclosures.
On April 30, 2018, Boardwalk and Loews each filed their Form 10-Qs. PTO ¶ 222.
As discussed in the prior section, Boardwalk and Loews coordinated their filings in
advance to ensure that the disclosures were consistent. See id.
87
After the push-and-pull of the prior month, Boardwalk’s Form 10-Q contained
disclosures regarding the March 15 FERC Actions that were largely consistent with the
initial press release Boardwalk had issued on March 18, 2018. The Form 10-Q stated:
While we are continuing to review FERC’s Revised Policy Statement,
[Notice of Inquiry,] and NOPR, based on a preliminary assessment, we do
not expect them to have a material impact on our revenues in the near term.
All of the firm contracts on Gulf Crossing and the majority of contracts on
Texas Gas Transmission, LLC are negotiated or discounted rate agreements,
which are not ordinarily affected by FERC’s policy revisions. Gulf South
currently has a rate moratorium in place with its customers until 2023, which
we believe will be unaffected by these actions.
JX 1201 at 40. The only addition was the reference to the absence of any material effect on
revenue “in the near term.” Boardwalk’s initial press release had not limited the absence
of a material impact to the near term, and the record does not suggest any additional
analysis that would have shortened the time horizon of any effect. In reality, Boardwalk
did not anticipate any material impact on revenue for the foreseeable future.
Despite this reassuring language, the Form 10-Q went on to disclose that in light of
FERC’s actions, Boardwalk’s General Partner was evaluating the potential exercise of the
Call Right (the “Potential Exercise Disclosures”). See JX 1201 at 40–42, 48. The Form 10-
Q stated flatly: “[O]ur general partner has a call right that may become exercisable
because of recent FERC action. Any such transaction or exercise may require you to
dispose of your common units at an undesirable time or price, and may be taxable to
you.” Id. at 48. Continuing, the Form 10-Q explained:
[A]s has been described in our SEC filings since our initial public offering,
our general partner has the right under our partnership agreement to call and
purchase all of our common units if (i) it and its affiliates own more than
50% in the aggregate of our outstanding common units and (ii) it receives an
88
opinion of legal counsel to the effect that our being a pass-through entity for
tax purposes has or will reasonably likely in the future have a material
adverse effect on the maximum applicable rate that can be charged to
customers by our subsidiaries that are regulated interstate natural gas
pipelines. Because our general partner and its affiliates hold more than 50%
of our outstanding common units, this call right would become exercisable
if our general partner receives the specified opinion of legal counsel.
The magnitude of the effect of the FERC’s Revised Policy Statement may
result in our general partner being able to exercise this call right. Any
exercise by our general partner of its call right is permitted to be made in our
general partner’s individual, rather than representative, capacity; meaning
that under the terms of our partnership agreement our general partner is
entitled to exercise such right free of any fiduciary duty or obligation to any
limited partner and it is not required to act in good faith or pursuant to any
other standard imposed by our partnership agreement. Any decision by our
general partner to exercise such call right will be made by [Holdings], the
sole member of [GPGP], rather than by our Board. . . . We have been
informed by [Holdings] that it is analyzing the FERC’s recent actions and
seriously considering its purchase right under our partnership agreement in
connection therewith.
Id. at 48 (emphasis added).
In its Form 10-Q, Loews made similar disclosures. PTO ¶ 223. In addition to issuing
its Form 10-Q, Loews amended its previously filed Schedule 13-D to state as follows:
In light of the FERC announcement, the General Partner is analyzing the
FERC’s recent actions and seriously considering its purchase right under the
Limited Partnership Agreement in connection therewith. The exercise of the
purchase right would be subject to the approval of the Board of Directors of
Loews. There is no assurance that the Loews Board will authorize the
purchase or that the pre-conditions to the exercise of the purchase right under
the Limited Partnership Agreement will be satisfied, and even if such pre-
conditions are met, there is no assurance that there will be a determination
by the General Partner to exercise the purchase right discussed herein or the
timing thereof.
Id. ¶ 224.
89
Later on April 30, 2018, Boardwalk held an earnings call. Id. ¶ 225. During the call,
Horton explained the formula for calculating the exercise price for the Call Right. Id. ¶
226. He noted that the decision on the Call Right was for Loews to make and stated that
“given where we are in this process, we need to rely on the disclosures and the relevant
SEC filings and are unable to answer questions concerning the decision-making process or
the possible timing of any such decision.” Id. ¶ 227.
Loews made similar statements during its earnings call later that day. Jim Tisch
informed investors that the FERC actions “may result in Loews being able to exercise a
call right under the terms of the Boardwalk partnership agreement.” Id. ¶ 228. He added:
We at Loews are exploring all our options regarding these developments.
Although we expect to be able to make a decision sometime this year, no
decisions have yet been made. As you can imagine, we’ll have to let our
documents speak for themselves since we are constrained from answering
any questions on this topic.
Id.
The initial market reaction to the announcements tracked the bump that Barclays
anticipated. Boardwalk’s units had closed at price of $11.04 per unit on April 27, 2018, the
last trading day before the Potential Exercise Disclosures. Id. ¶ 277. On the day of the
disclosures, Boardwalk’s units traded up to a high of $12.70, before trading down to close
at $11.37. Id.; JX 1774 at 2. Internally, Barclays bankers observed that the units were “up
~8.3% right now - firmly within the 7–10% estimate to which we guided.” JX 1174 at 1.
After the initial market reaction, however, the implications of the Call Right began
to sink in. On May 1, 2018, U.S. Capital Advisors downgraded Boardwalk “to Hold from
Buy” and reduced its price target from $20 to $11. JX 1222 at 1. The report explained that
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any purchase by Loews “would be at a formula-derived price, which, if a deal were
consummated, would likely result in limited upside on the price of BWP units.” Id. at 2.
McMahon was impressed by the analysis: “[a]mazing how good they are.” Id. at 1. Alpert
circulated the note to Loews management. JX 1232.
Subjected to the overhang of the pricing formula, Boardwalk’s trading price
declined steadily. The units closed at $10.94 on May 1, then at $10.88 on May 2. On May
3, the price fell to $10.01. On May 4, it fell to $9.56. On May 7, the units closed at $9.26.
PTO ¶ 277.
Fund managers and traders working for Bandera Partners LLC, one of the plaintiffs,
initially viewed the price trend as a buying opportunity. On May 8, 2018, a fund manager
emailed a colleague that “we should buy heavily at this price.” Id. ¶ 278. On May 9, the
colleague reported that “we bought with both hands today . . . [and] we will likely get more
stock tomorrow.” Id.
But as investors began to understand the effect of the Call Right, they became
outraged. TAM Capital Management published an open letter criticizing Loews. See JX
1915. After seeing that letter, the Bandera representatives began drilling down into the
mechanics of the Call Right. See PTO ¶ 279.
On May 6, 2018, Deutsche Bank explained the “Prisoner’s Dilemma” that Loews
had created. JX 1270 at 2.
Stakeholders could expect no higher price for shares of BWP than $11.50
unless Loews chose voluntarily to tender at a higher share price (or chose not
exercise at all). Given that the probable “best” the stakeholders could do
seemed to be around $11.50 in August 2017, there seemed to be little
incentive to hold onto BWP shares above that price. And so the stock has
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begun to fall. However, as the stock falls, so too does the 180-average price
for which Loews can demand tender. This has engendered a real-time game
theory practice known as “the prisoner’s dilemma.” By this logic, the
stakeholders assume the worst of their fellow stakeholders and aim to sell
first in order to arguably . . . get a better price than those who wait. This has
created a pile-on where stakeholders are willing to part with their shares
below what some might argue is fair value. And no shareholder has the
incentive to pay more than this price if Loews has the option to tender below
that price level.
Id.
On May 10, 2018, Barclays issued a research report that expressed concern about
the potential exercise of the Call Right. The report noted that
[w]hile the FERC actions could change the max rates the pipelines could
charge, we note that Gulf Crossing is 100% negotiated rates while cost of
service only makes up ~25% on Gulf South and Texas Gas, making it a bit
difficult to see how [Boardwalk’s] cash flows would be materially impacted
later on as the FERC changes primarily impact cost of service contracts.
PTO ¶ 284. Barclays suggested that Loews appeared was using a “loophole” in the
Partnership Agreement “to buy in the assets for what we believe is an extremely attractive
price.” Id. The report explained that
the more appropriate thing for Loews to have done, if they were going to
indeed buy in [Boardwalk], was to get the legal opinion and then just
announce it would be buying in the MLP rather than just tease the market
that they were “seriously considering” it, putting pressure on the stock and
in essence, trying to time the potential purchase at a time that would be most
favorable to them.
Id.
Loews’ management did not like the report, particularly since Loews had used
Barclays for advice on the Call Right. Siegel contacted Gary Posternack, Head of Global
M&A at Barclays, to express his “dissatisfaction” with the report. Id. ¶ 285. Posternack
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emailed Jes Staley, Barclay’s then-CEO, with a heads up that he might be “getting a call
in the next day from Jim Tisch at Loews, who is very upset about some equity research
commentary that our analyst put out. I should brief you before you speak.” Id. The call
ultimately did not take place.
On May 15, 2018, with Boardwalk’s trading price continuing to fall, JP Morgan
issued an analyst report that described it as “fundamentally undervalued at this juncture.”
Id. ¶ 288. JP Morgan expressed the view that Loews should exercise the Call Right “at least
at the ~$13/unit 180 trading VWAP leading up to the April 30 announcement should the
company seek to avoid the perception of securities manipulation.” Id. ¶ 289. JP Morgan
subsequently issued a clarification stating that its report included “certain wording [which]
could have inadvertently been construed as implying a legal conclusion.” Id. ¶ 290.
By May 21, 2018, Bandera’s views about Loews’ actions had changed. Bandera
issued a public letter addressed to Loews asserting that its actions had caused a
“catastrophic collapse in the market price of Boardwalk’s units” and that the “[t]he units’
180 consecutive trading day average, which sets the purchase price, is considerably lower
than it would have been without this announcement.” Id. ¶ 291. Bandera also cited
Boardwalk’s decision in 2014 to cut its distributions and the implications for the unit price:
We believe that you, as stewards of Boardwalk’s capital, made a tough but
wise decision to slash the partnership’s cash distribution, and invest
substantial funds into the existing base of assets. While these strategic actions
depressed unit prices, they were implemented to drive meaningful long-term
returns for investors. We estimate that Boardwalk has raised over $3 billion
from its limited partners to execute this long-term strategy. The benefits of
these investments should accrue to all of the partnership’s investors, not just
Loews. This is why we believe the best outcome for unitholders would be for
Loews to pass on its purchase right altogether. If Loews does exercise its
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option, we think that, at a minimum, it must do so only at a fair price and in
accordance with straightforward procedures that accord with unitholders’
reasonable expectations of fairness.
Id. ¶ 293.
R. Loews Ties Off The Acceptability Issue.
While the Potential Exercise Disclosures were having their effect on the market,
Loews was tying off the loose ends created when the outside members of the GPGP Board
had a hostile reaction to determining whether the Opinion satisfied the Acceptability
Condition. In response to Alpert’s appeal for expedited advice, Richards Layton had
advised orally that it felt the “far better view” was that Holdings had the authority to make
both the acceptability determination and the exercise decision. Raju Tr. 809, 842. Richards
Layton “did not know Skadden had been asked to analyze this issue until after [Richards
Layton] had given [its] oral advice to Loews.” Id. at 809. It was only after Richards Layton
provided this advice that Alpert sent over Skadden’s analysis. See JX 1197. He then asked
Richards Layton to speak with Skadden to see “if they can get on the same page.” Alpert
Dep. 224. When the firms connected on May 1, Skadden’s “main point” was that “there is
ambiguity and ambiguity is construed against the General Partner.” JX 1228 at 1.
On May 1, 2018, Richards Layton sent Alpert an email memorializing their advice.
JX 1225. The email stated that “[w]hile there is some ambiguity and arguments can
certainly be made to the contrary, we think that the better view is that the [acceptability
determination] is within the sole authority of the Sole Member [Holdings] pursuant to
Section 5.6 of the LLC Agreement.” Id. at 2–3 (emphasis added). The email included the
following caveat:
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[I]f the Board of Directors is approached and declines to determine that the
Opinion of Counsel is acceptable and the Section 15.1(b) call right is
exercised by the Sole Member anyway, that would be a difficult fact to
overcome in any future litigation regarding the exercise of the Section
15.1(b) call right.
Id. at 3 (emphasis added). It was not until discovery in this litigation that Richards Layton
learned that Loews had approached the GPGP Board and that the outside directors had
reacted negatively to making the determination. See Raju Tr. 843.
Less than two hours after receiving the email, Alpert drafted and circulated new
talking points for Siegel to deliver to the GPGP directors. JX 1213 at 1. Alpert’s talking
points represented that “[w]e and outside counsel agree that the documents provide that
[Holdings’] authority to exercise the call right includes the ability to determine that the
opinion of counsel is acceptable.” Id. at 2 (emphasis added). That description did not match
Skadden’s view, so when the Skadden lawyers saw the talking points, they struck the “[w]e
and outside counsel agree” and substituted “[w]e believe the better reading . . . is.” See JX
1863; 1864 at 1. At first, Alpert accepted the change. See JX 1852; 1853. But five minutes
later, he reintroduced the reference to “outside counsel” and added: “—as we are confident
that the sole member has the ability and authority to make the determination of an
acceptable opinion.” See JX 1850; 1851 at 1. Alpert sent the revisions to Baker Botts and
Richards Layton but not to Skadden. See JX 1850.
That evening, Alpert, McMahon, Rosenwasser, Layne, and Richards Layton had a
call “to get on the same page” about the acceptability determination. See McMahon Tr.
576–77; JX 1237 at 1. Alpert told Richards Layton that its email was too “measured” and
did not reflect the strength of their oral advice. Alpert Dep. 214. After the call, Richards
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Layton sent Alpert a revised email saying that it was the “far better view” that Holdings
could make the acceptability determination, but otherwise maintained its comments about
ambiguity. See JX 1265 at 4.
Siegel then held follow-up calls with the members of the GPGP Board and told them
that their involvement was not required after all. PTO ¶ 323; Siegel Dep. 235–36. The
reversal of position worried the outside directors, who requested “a board call to discuss
the partnership agreement and [their] obligations under that agreement.” PTO ¶ 325; JX
1319 at 1.
On May 14, 2018, the GPGP Board met telephonically. JX 1318; see also JX 1435
at 1. Instead of having Skadden or Richards Layton lead the discussion, Alpert tapped
Layne of Vinson & Elkins. Alpert knew Layne “was of the firm view . . . even stronger
than Rosenwasser, that the proper entity was the sole member, [Holdings].” Alpert Tr. 394.
Unlike Skadden and Richards Layton, Layne never prepared a written analysis of the
acceptability issue, and contemporaneous documents suggest that when presenting to the
Board, he lumped together the question of authority to exercise with the determination of
acceptability.14
14
Documents created on or around May 14 suggest that Layne only discussed who
had the authority to exercise the Call Right and did not separately address the question of
acceptability. See JX 1325 at 1; JX 1331 at 2; JX 1343 at 1; JX 1812 at 1. Two weeks later,
Layne, McMahon, and trial lawyers at Vinson & Elkins and Foley & Lardner LLP signed
off on minutes which only documented Layne addressing the Call Right’s exercise. JX
1435 at 1, 3. It was not until May 31, 2018, that McMahon revised the minutes to add a
reference to the question of acceptability. JX 1444 at 1, 3. In pertinent part, McMahon
revised the minutes to read, “Layne stated that if the 15.1(b) right is exercised, the outside
directors would not approve that decision or the appropriateness of the Opinion of
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In any event, the GPGP’s outside directors were “pleased that they did not have to
be part of this very awkward process.” Siegel Tr. 739. With the GPGP Board out of the
picture and Baker Botts and Skadden prepared to deliver their opinions when asked, Loews
was ready to exercise the Call Right.
S. The ADIT Issue Gets Worse.
With Loews preparing to exercise the Call Right, the uncertainty regarding the
known unknown of ADIT grew worse. On May 14, 2018, SFPP submitted a compliance
filing in response to the Order on Remand that FERC had issued in response to the United
Airlines decision. The Order on Remand had directed SFPP to revise its filings in
accordance with the Revised Policy. SFPP not only removed the income tax allowance, but
also eliminated ADIT. See JX 1330 at 185–86. If SFPP had treated ADIT correctly, then
the result would be a boon for Boardwalk, but fatal to the Opinion.
Loews, Boardwalk, and their advisors immediately focused on this development.
See Johnson Tr. 684. Baker Botts was particularly attuned to the news, because Wagner
was representing BP West Coast Products LLC and ExxonMobil Oil Corporation in the
proceedings involving SFPP and filed a submission on their behalf that opposed SFPP’s
filing. See Wagner Tr. 304–05; Wagner Dep. 387–89; JX 1465 at 37.
Counsel.” Id. at 3 (emphasis added). In his cover email, McMahon explained that “some
changes” were “suggested by certain of the outside directors,” and requested that Layne
and the litigators call him if they “ha[d] any questions about them.” JX 1444 at 1. Layne
testified that he told the GPGP Board that, “under the LLC [A]greement, the board of
directors did not have authority with respect to exercise of the call or acceptability of the
opinion.” Layne Dep. 216 (emphasis added).
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The ADIT NOI process was also unfolding. Between May 21 and June 20, sixty
industry participants filed comments, reply comments, or both in FERC’s ongoing NOI
proceeding. Court Report ¶ 74. The vast majority of comments from shippers and
organizations aligned with their interests took the position that ADIT balances should be
refunded or amortized on an accelerated basis. The vast majority of comments from
pipelines and organizations aligned with their interests took the position that ADIT
balances should be eliminated. See Webb Rebuttal ¶ 40 n.46 & Ex. 25; JX 1549 ¶ 9.
Van Ness Feldman and Vinson & Elkins, two of Boardwalk’s go-to law firms,
argued in favor of eliminating the ADIT balances on behalf of multiple pipeline clients.
See, e.g., JX 1382 at 2, 18–23; JX 1460 at 4, 6–7, 18. They did not make that argument on
behalf of Boardwalk, even though its subsidiaries had accumulated ADIT balances totaling
at least $750 million. See JX 644 at 1. The reality was that Boardwalk could not advocate
publicly to eliminate its ADIT balance without undercutting the Rate Model Analysis and
the assumptions driving the Opinion. Instead, Boardwalk publicly advocated for a middle
ground—either the Reverse South Georgia Method or the Average Rate Assumption
Method. JX 1388 at 11 (NOI Comments).
Privately, however, Boardwalk wanted FERC to eliminate ADIT. See JX 797 at 1
(Boardwalk not wanting to “give up [the] argument” that “the Policy Statement essenti8ally
[sic] eliminates ADIT”). To advance that position, Boardwalk management lobbied FERC
through the Interstate Natural Gas Association of America (“INGAA”). See JX 1457
(INGAA NOI Comments) at 7; Horton Dep. 183. Boardwalk has been a member of
INGAA for almost three decades. McMahon Tr. 565–66. McMahon, Boardwalk’s general
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counsel, is the Chairman of INGAA’s Legal and Rates Committee, serves on INGAA’s
Board of Directors, and served as the Chair of INGAA’s Board of Directors in 2016. See
McMahon Dep. 23–24. Johnson also serves on INGAA’s Legal and Rates Committee,
along with two other Boardwalk executives. See Johnson Dep. 78; McMahon Tr. 566–67.
Attorneys at Van Ness Feldman reviewed the comments, and the defendants’ privilege log
reveals Boardwalk executives and Van Ness Feldman were heavily involved. McMahon
Tr. 572–73; McMahon Dep. 29–30; JX 1881 (Privilege Log) at Rows 3527–44, 3565–76,
3580–83.15
McMahon and Johnson also met with FERC staff on June 12, 2018, “as part of a
group from [INGAA]” to discuss “Taxes and ADIT.” JX 1680 at 45; JX 1464 at 1.
McMahon and Johnson had helped INGAA prepare a supporting presentation, but FERC
ended up prohibiting the discussion of ADIT at the last minute. See JX 1463 at 1; JX 1471
at 2. The presentation nevertheless made a compelling case that ADIT represented “a cost-
free form of financial capital,” was “not a loan from customers but from the federal
government,” and should be handled in accordance with IRS normalization rules, all of
which were premises for the argument that ADIT balances should be eliminated. See JX
1476 at 6–8.
15
Despite this evidence, at their depositions and at trial, McMahon and Johnson
attempted to distance themselves from INGAA’s comments. See McMahon Dep. 30–31;
Johnson Dep. 183–84.
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Even though it was obvious that ADIT was an unsettled issue, and even though
everyone knew that different outcomes for ADIT were possible, Baker Botts did not update
its analysis. No one prepared sensitivity analyses for different outcomes regarding ADIT.
The Preliminary Opinion provided the answer Loews wanted, and developments in the real
world were not going to change that.
T. This Litigation And The Original Settlement
On May 24, 2018, two holders of common units (the “Original Plaintiffs”) filed this
action and moved for expedited proceedings. The Original Plaintiffs wanted to prevent the
General Partner from exercising the Call Right using a 180-day measurement window that
included trading days that had been affected by the Potential Exercise Disclosures. The
defendants opposed the motion, arguing that the dispute was not ripe because the General
Partner had not yet elected to exercise the Call Right.
Five days after the action was filed, the court held a hearing on the motion to
expedite. The court agreed with the defendants and denied the motion.
Having defeated the motion to expedite on the theory that the claims were not yet
ripe, defense counsel contacted the lawyers for the Original Plaintiffs the very next day to
explore settling the non-justiciable claims. A settlement in this litigation would give the
defendants the ultimate protection: a global release of claims relating to the exercise of the
Call Right.
The lawyers for the Original Plaintiffs understood that Loews wanted to exercise
the Call Right. They offered up a settlement, including a global release, if Loews did what
it wanted to do. As part of the negotiations with the defendants, lead counsel made precisely
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that argument, telling defense counsel, “Your clients want to make this purchase. Getting
a release on a deal they want to make anyway is actually an amazing outcome for them.”
Dkt. 56 Ex. 1.
The Original Plaintiffs initially proposed settling if the General Partner agreed to
exercise the Call Right using June 1, 2018, as the end date for the 180-day measurement
period, which would have included twenty-four trading days after the issuance of the
Potential Exercise Disclosures in the calculation of the Purchase Price. The defendants
countered with an end date of September 1, 2018, which would have included sixty-four
trading days after the issuance of the Potential Exercise Disclosures in the calculation.
On June 11, 2018, eighteen days after the lawsuit was filed, the parties agreed that
Loews would exercise the Call Right on or before June 29, 2018. The resulting period
included forty-four affected days in the pricing formula. Using that end date, the formula
yielded a Purchase Price of $12.06 per unit.
On June 22, 2018, the parties informed the court by email that they had reached an
agreement in principle and asked the court to review the settlement papers in camera. JX
1487. The court rejected that request as seeking a non-public advisory opinion. Dkt. 26.
That night, the parties filed a stipulation of settlement. JX 1496 (the “Original
Settlement”). Under its terms, the defendants would receive a global release as long as the
General Partner exercised the Call Right on or before June 29, 2018—the day that Barclays
had projected Loews might exercise. Id. at 15–16; JX 915 at 15. That date was optimal for
the defendants because it ensured that purchases under the Call Right would close before
FERC’s regularly scheduled meeting on July 19, when FERC was expected to make
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additional announcements regarding the subject matter of the March 15 FERC Actions. See
PA §15.1(c) (governing timing of exercise, notice and purchase date); JX 793 at 1 (“[T]he
Commission indicated its desire to issue an order on the [NOPR] in its July meeting which
will take place on July 19.”). The Original Settlement contemplated a fee award for
plaintiffs’ counsel “in an amount not to exceed $1.8 million.” JX 1496 at 20.
U. Baker Botts Renders The Opinion.
Believing that they had secured a settlement that would extinguish and release any
challenges to the exercise of the Call Right, Loews asked its advisors to finalize their work
product. See JX 1489 at 1 (Richards Layton email thread reporting that “Loews is likely to
settle its litigation this evening and is likely to exercise the purchase right on Friday”).
On June 29, 2018, Baker Botts delivered the Opinion. JX 1522. It was substantially
unchanged from the Preliminary Opinion that Baker Botts had provided on April 29.
The Opinion resembled a closing opinion in that it expressed a conclusion, without
supporting reasoning or citations to legal authority. The Opinion did not reference a single
case or statute, much less provide any discussion or application. The Opinion thus
proceeded as if Baker Botts were opining on a routine issue, such as the due formation of
an entity, its good standing, or its authority to enter into an agreement.
As is customary in a closing opinion, the Opinion began by listing the materials that
Baker Botts had consulted. The Opinion next provided its conclusion, consisting of the
following statement:
On the basis of the foregoing, and subject to the assumptions, limitations,
and qualifications set forth herein, we are of the opinion that the status of the
Partnership as an association not taxable as a corporation and not otherwise
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subject to an entity-level tax for federal, state or local income tax purposes
has or will reasonably likely in the future have a material adverse effect on
the maximum applicable rate that can be charged to customers by
subsidiaries of the Partnership that are regulated interstate natural gas
pipelines (the “Subsidiaries”).
Id. at 2.
The Opinion then provided two paragraphs summarizing the Financial Data. Those
paragraphs stated:
In rendering this opinion, we have requested and received from the
Partnership cost, rate and other financial information, including projections,
estimates and pro forma information (“Financial Data”) relating to the
Partnership and the Subsidiaries, which we have relied upon. We have been
assisted in our review of the Financial Data by a consultant engaged by us
with expertise in the calculation of the cost of service of regulated interstate
natural gas pipelines. The Financial Data includes a calculation of the
estimated cost of service of each of the Subsidiaries under two scenarios. In
preparing Financial Data pertaining to both scenarios, the Partnership made
several assumptions, including that each Subsidiary would charge all its
customers the maximum applicable rate, and as a result, each Subsidiary
would recover its entire cost of service. The first scenario included in the cost
of service of each Subsidiary an income tax allowance derived from the
current federal, state and local income tax rates. The second scenario
excluded an income tax allowance from the cost of service of each
Subsidiary. We have participated in conferences with officers and other
representatives of the Partnership, [the General Partner] and [the GPGP] in
which the Financial Data, as well as other matters, were discussed. The
purpose of our engagement, however, was not to establish or confirm the
accuracy of factual matters or the reasonableness of projections, estimates or
pro forma information provided to us or reviewed by us. Therefore, we have
assumed that the Financial Data is correct in all material respects, that all
calculations were performed accurately in all material respects and that the
Financial Data was prepared in a reasonable manner and in good faith.
With regard to the Financial Data, in rendering our opinion referred to above,
we relied substantially on the fact that the Financial Data indicated that the
removal of the income tax allowance derived from the current federal, state
and local income tax rates from the cost of service of the Subsidiaries would
result, in the case of each Subsidiary, in an estimated reduction in excess of
ten percent in the maximum applicable rates that can be charged to the
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customers of each of the Subsidiaries on a long-term basis. The Financial
Data included a “Rate Model Analysis for 2017,” which compared an
estimate of (a) the maximum applicable rate that each Subsidiary could
charge its customers, based on the development of a system wide rate for
each Subsidiary and assuming each Subsidiary could include an income tax
allowance derived from the current federal, state and local income tax rates
in its cost of service with (b) the maximum applicable rate that each
Subsidiary could charge its customers, based on the development of a system
wide rate for each Subsidiary and assuming that each Subsidiary could not
include any income tax allowance in its cost of service. The Rate Model
Analysis indicates that elimination of an income tax allowance from the cost
of service would result in an estimated 12.12% decline in the maximum
applicable rate for Texas Gas Transmission, LLC, an estimated 11.68%
decline in the maximum applicable rate for Gulf South Pipeline Company,
LP, and an estimated 15.62% decline in the maximum applicable rate for
Gulf Crossing Pipeline Company LLC. We also took notice that, because
these reductions in the maximum applicable rates would not be offset by any
reduction in costs incurred by the Subsidiaries, the reductions in the
maximum applicable rates would have a substantially larger percentage
impact on the earnings before interest and taxes and on the cash available for
distribution of each of the Subsidiaries assuming each Subsidiary could
actually charge and collect its maximum applicable rate.
Id. at 3.
The remainder of the Opinion consisted of a series of assumptions. Id. at 3–5. They
included the following:
• “[T]he Revised Policy will not be revised, reversed, overturned, vacated, modified
or abrogated in any relevant manner by any court or administrative or executive
body, including the FERC, or by an act of Congress;” and
• “[T]he Revised Policy will be applied to individual FERC regulatory proceedings
involving the Subsidiaries in accordance with its terms . . . .”
Id. at 4.
This section of the Opinion also included descriptions of how Baker Botts
interpreted the terms “maximum applicable rate” and “material adverse effect.” On the
issue of “maximum applicable rate,” the Opinion stated:
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Based on the wording of Section 15.l(b)(ii) of the Partnership Agreement,
other provisions of the Partnership Agreement and support in the
Registration Statement (particularly the final prospectus included therein), in
rendering the opinion set forth above, we have, in using our judgment,
interpreted the words (a) “maximum applicable rate that can be charged to
customers by subsidiaries that are regulated interstate natural gas pipelines
of the Partnership,” to mean the recourse rates of the Subsidiaries now and
in the future as that term is used by the FERC in its regulations, rulings and
decisions, and (b) “status as an association not taxable as a corporation,” to
mean status as an entity not taxable as a corporation.
Id. at 4.
On the issue of “material adverse effect,” the Opinion stated:
The term “material adverse effect” as used in Section 15.1(b)(ii) of the
Partnership Agreement is not defined in the Partnership Agreement or in the
Delaware Revised Uniform Limited Partnership Act. In rendering the
opinion set forth above, we have considered Delaware case law construing
such term. Our analysis leads us to the conclusion that there is no case
directly applicable to this situation and no bright-line test regarding what is
a “material adverse effect,” although the case law has provided us some
guidance.
Id. at 4.
Baker Botts limited its Opinion to “applicable federal law of the United States, the
Delaware Revised Uniform Limited Partnership Act, the Delaware Limited Liability
Company Act, and, only to the extent relevant, in our judgment, to the opinion set forth
above, Delaware law as it applies to the interpretation of contracts.” Id. at 5. A non-
Delaware law firm thus rendered a non-explained opinion on the existence of a material
adverse effect, a subject on which both a Delaware law firm (Richards Layton) and a
national law firm with a Delaware office (Skadden) would not opine.
On the same day that Baker Botts rendered the Opinion, the firm’s rate expert—
Sullivan—testified in a proceeding before FERC that it was impossible to assess the effects
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of changing the income tax allowance without a determination on the treatment of ADIT.
Webb. Tr. 949.
V. The General Partner Exercises The Call Right.
After receiving the Opinion, Loews management recommended that Loews cause
the General Partner to exercise the Call Right. See JX 1515 at 2; JX 1523 at 2–3. In their
“Updated Base Case,” management estimated that the transaction would generate more
than $1.5 billion in “Value Creation” for Loews. JX 1515 at 9. After discussion, the Loews
board of directors adopted resolutions authorizing Holdings to exercise the Call Right on
behalf of the General Partner. JX 1523 at 4.
The Holdings Board met afterwards. See JX 1509. Skadden made a presentation
concluding that “it would be within the reasonable judgment of [Holdings] to find that” the
Opinion was acceptable. JX 1518 at 23. Comprised of three Loews insiders, the Holdings
Board approved resolutions deeming the Opinion acceptable and exercising the Call Right.
See JX 1509 at 5–9.
Later that day, Boardwalk announced that the General Partner had elected to
purchase all outstanding units at a price of $12.06 per common unit, for approximately $1.5
billion in total consideration. JX 1526 at 1. Ten days later, on July 18, 2018, the transaction
closed on schedule. See JX 1547 at 2.
W. FERC Makes Its Determinations.
Hours after the closing, FERC issued an order on rehearing of the Revised Policy
and a final rule in response to the NOPR. JX 1549 (the “Order on Rehearing”); JX 1546
(the “Final Rule”). In the Order on Rehearing, FERC reiterated that its policy would not
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automatically permit MLP pipelines to recover an income tax allowance in their cost of
service, but MLPs would not be precluded from arguing in a rate case that they were
entitled to an income tax allowance based on an evidentiary record. JX 1549 ¶ 8.
Critically, FERC stated that MLPs that were no longer entitled to an income tax
allowance could eliminate their overfunded ADIT balances without returning the balances
to rate payers (whether by refund or amortization). See id. ¶ 10. The Commission based its
ADIT decision on the arguments raised by pipeline-side commenters in the NOI docket
and INGAA’s presentation to FERC staff. Id. ¶ 13.
In its Final Rule, FERC adopted the procedures proposed in the NOPR with certain
modifications, required all interstate natural gas pipelines to file a Form 501-G, provided
options for each pipeline to address the recovery of tax costs (including filing a statement
explaining why an adjustment to rates was not needed), and reiterated that a rate reduction
might not be justified for a significant number of pipelines for several reasons. See JX
1546. Consistent with the Order on Rehearing, FERC “modifie[d] the proposed Form 501-
G so that, if a pass-through entity state[d] that it d[id] not pay taxes, the form w[ould] not
only eliminate its income tax allowance but also eliminate ADIT.” Id. ¶ 132 (emphasis
added). The Commission reasoned that doing otherwise would violate the prohibition
against retroactive ratemaking. Id. ¶¶ 133–34. The DC Circuit ultimately agreed that
returning ADIT to shippers would violate the prohibition against retroactive ratemaking.
SFPP, 967 F.3d at 801 (dismissing shippers’ contrary arguments as “non-starters”).
The Final Rule meant there would be no effect on Boardwalk’s recourse rates. When
one of his colleagues who had worked on the Opinion commented that the news “sounds
107
pretty good for MLPs,” Rosenwasser responded: “Seems all mitigates adverse effect
without changing policy. Loews buy in of [B]oardwalk closed day before order came out.”
JX 1569 at 1.
Johnson circulated the news within Boardwalk. One of the executives responded,
“Maybe I wish we were still publically [sic] traded….. [sic].” JX 1532 at 1.
On August 3, 2018, Wagner sent McMahon a summary of FERC’s actions, copying
Rosenwasser and Alpert. Confirming that the March 15 FERC Actions had opened the door
to changes in ADIT, he explained that “FERC’s March 2018 Revised Policy Statement
created an issue of first impression by prohibiting MLP-owned pipelines from collecting a
tax allowance, which raised the issue of how to treat the ADIT.” JX 1578 at 1. He also
confirmed the effect of the Order on Rehearing: “FERC announced that MLP-owned
pipelines may reduce the balance to zero without providing any refunds or rate reductions.
This has the net effect of reducing the pipeline’s exposure to rate reductions.” Id. (emphasis
added).
X. The Current Plaintiffs Pursue The Litigation.
The current plaintiffs objected to the Original Settlement. On September 28, 2018,
the court declined to approve the Original Settlement. Because the current plaintiffs had
prevailed on their objections, the court permitted them to take over the litigation.
The court subsequently certified a plaintiffs’ class consisting of:
Any natural person or entity who held Boardwalk limited partnership units
on July 18, 2018 and whose units were purchased on that date by Boardwalk
GP, LP, together with their heirs, assigns, transferees, and successors in
interest, but excluding Defendants, their successors in interest and assigns,
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and any natural person or entity that is a director, officer or affiliate of any
of the foregoing
Dkt. 194 ¶ 1. The case proceeded through discovery and to trial.
II. LEGAL ANALYSIS
The plaintiffs proved that the General Partner breached the Partnership Agreement
by exercising the Call Right without first satisfying the Opinion Condition or the
Acceptability Condition. By acting manipulatively and opportunistically, the General
Partner engaged in willful misconduct when it exercised the Call Right, and the exculpatory
provisions in the Partnership Agreement therefore do not protect the General Partner from
liability. This decision does not reach the plaintiffs’ other claims.
A. Governing Principles Of Contract Law
The plaintiffs’ principal claim asserts that the General Partner breached the
Partnership Agreement, which is a contract governed by Delaware law. Delaware law
therefore governs the claim for breach of the Partnership Agreement.
Under Delaware law, the elements of a breach of contract claim are (i) a contractual
obligation, (ii) a breach of that obligation by the defendant; and (iii) causally related harm
to the plaintiffs. WaveDivision Hldgs. v. Millennium Digit. Media Sys., L.L.C., 2010 WL
3706624, at *13 (Del. Ch. Sept. 17, 2010). No one disputes the status of the Partnership
Agreement as a binding contract. No one disputes that the General Partner exercised the
Call Right and acquired the publicly held units, thereby causing the resulting effects on the
plaintiffs. The central issue is the question of breach. If the General Partner breached the
109
Partnership Agreement, then the court must determine the quantum of harm, which also
logically will serve as the measure of damages.
To determine the scope of a contractual obligation, “the role of a court is to
effectuate the parties’ intent.” Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728,
739 (Del. 2006). “If a writing is plain and clear on its face, i.e., its language conveys an
unmistakable meaning, the writing itself is the sole source for gaining an understanding of
intent.” City Investing Co. Liquidating Tr. v. Cont’l Cas. Co., 624 A.2d 1191, 1198 (Del.
1993). A writing is plain and clear on its face “[w]hen the plain, common, and ordinary
meaning of the words lends itself to only one reasonable interpretation . . . .” Sassano v.
CIBC World Mkts. Corp., 948 A.2d 453, 462 (Del. Ch. 2008). When a writing is plain and
clear, the court “will give priority to the parties’ intentions as reflected in the four corners
of the agreement, construing the agreement as a whole and giving effect to all its
provisions.” In re Viking Pump, Inc., 148 A.3d 633, 648 (Del. 2016) (internal quotations
omitted).
A writing that is ambiguous is not plain and clear on its face, and the text of the
agreement therefore cannot be the exclusive source of contractual meaning. “[A] contract
is ambiguous only when the provisions in controversy are reasonably or fairly susceptible
of different interpretations or may have two or more different meanings.” Rhone-Poulenc
Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992). “A contract
is not rendered ambiguous simply because the parties do not agree upon its proper
construction.” Id.110
If the language of a contract is ambiguous, then a court may look beyond the contract
itself to determine the parties’ shared intent. Under appropriate circumstances, extrinsic
evidence sheds light on “the expectations of contracting parties” and can “reveal[] . . . the
way contract terms were articulated by those parties.” SI Mgmt. L.P. v. Wininger, 707 A.2d
37, 43 (Del. 1998). Because its purpose is to elucidate “the expectations of contracting
parties,” extrinsic evidence is only relevant when it “can speak to the intent of all parties
to a contract.” Id. “Thus, it is proper to consider extrinsic evidence of bilateral negotiations
when there is an ambiguous contract that was the product of those negotiations . . . .” Id. It
follows that if there have not been “bilateral negotiations,” then “extrinsic evidence is
irrelevant to the intent of all parties at the time they entered into the agreement.” Id. at 43–
44.
A partnership agreement for an MLP is not the product of bilateral negotiations; the
limited partners do not negotiate the agreement’s terms. Extrinsic evidence therefore
cannot speak to the intent of all parties to the agreement. In that setting, Delaware courts
apply the doctrine of contra proferentem and “construe ambiguous provisions of the
partnership agreement against the general partner.” Martin I. Lubaroff et al., Lubaroff &
Altman on Delaware Limited Partnerships § 14.02[B], at 14-39 (2d ed. 2021 Supp.); see
Dieckman v. Regency GP LP, 155 A.3d 358, 366 n.18 (Del. 2017); Norton v. K-Sea Transp.
P’rs L.P., 67 A.3d 354, 360 (Del. 2013). In addition to recognizing that extrinsic evidence
is unhelpful in that setting, the doctrine of contra proferentem “protects the reasonable
expectations of people who join a partnership or other entity after it was formed and must
rely on the face of the [entity] agreement to understand their rights and obligations when
111
making the decision to join.” Stockman v. Heartland Indus. P’rs, L.P., 2009 WL 2096213,
at *5 (Del. Ch. July 14, 2009).
B. The Failure To Satisfy The Opinion Condition
Before the General Partner could exercise the Call Right, the General Partner had
to satisfy the Opinion Condition. For that condition to be satisfied, the General Partner had
to receive “an Opinion of Counsel that the Partnership’s status as an association not taxable
as a corporation and not otherwise subject to an entity-level tax for federal, state or local
income tax purposes has or will reasonably likely in the future have a material adverse
effect on the maximum applicable rate that can be charged to customers.” PA § 15.1(b)(ii).
If the General Partner exercised the Call Right without satisfying the Opinion Condition,
then the exercise of the Call Right breached the Partnership Agreement. The General
Partner obtained the Opinion, but the plaintiffs proved at trial that the Opinion was not a
bona fide “Opinion of Counsel” that could satisfy the Opinion Condition. The General
Partner therefore breached the Partnership Agreement.
When parties to a contract agree that the delivery of an opinion of counsel is
necessary to satisfy a condition precedent, “it is [counsel]’s subjective good-faith
determination that is the condition precedent.” Williams Cos., Inc. v. Energy Transfer
Equity, L.P., 2016 WL 3576682, at *11 (Del. Ch. June 24, 2016), aff’d, 159 A.3d 264 (Del.
2017). Counsel renders on opinion in subjective good faith by applying expertise to the
facts in an exercise of professional judgment. Id.Beyond that foundational principle, Delaware decisions have not expounded on
what it means for an opinion giver to act in subjective good faith. In a related setting, the
112
Delaware Supreme Court has held that a general partner violated the implied covenant of
good faith and fair dealing by relying on an opinion “that did not fulfill its basic function.”
Gerber v. Enter. Prod. Hldgs., LLC, 67 A.3d 400, 422 (Del. 2013), overruled on other
grounds by Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del. 2013). That holding implies
that an opinion giver cannot render an opinion in good faith if the opinion giver knows that
the opinion does not fulfill its basic function.
Authorities on the rendering of closing opinions confirm related and self-evident
propositions about what it means for an opinion giver to render an opinion in good faith.16
For example, an opinion giver plainly must have competence in the particular area of law.
See Glazer et al., supra, § 2.7.1 at 61–62. An opinion giver who knowingly lacks
competence in the area of law and nevertheless proceeds is not acting in good faith. In that
setting, the opinion giver must look elsewhere for the relevant experience, and an opinion
giver who lacks the competence to opine on an area of law may rely on an opinion from
counsel with competence in that area. See id.; TriBar Report, supra, § 5.1 at 637–39.
16
See, e.g., Restatement (Third) of the Law Governing Lawyers §§ 50, 51, 95,
Westlaw (Am. L. Inst. database updated Oct. 2021) [hereinafter Restatement]; Donald W.
Glazer et al., Glazer & FitzGibbon on Legal Opinions (2d ed. 2001); Legal Ops. Comm.
of the ABA Section of Bus. L., Legal Opinion Principles, 53 Bus. Law. 831 (1998)
[hereinafter Opinion Principles]; TriBar Op. Comm., Third-Party “Closing” Opinions: A
Report of the Tribar Opinion Committee, 53 Bus. Law. 591 (1998) [hereinafter TriBar
Report] see also Legal Ops. Comm. of the ABA Section of Bus. L., Third-Party Legal
Opinion Report, Including the Legal Opinion Accord, of the Section of Business Law,
American Bar Association, 47 Bus. Law. 167 (1991) [hereinafter ABA Accord]. As stated
in the text, this decision regards the principles it articulates as self-evident manifestations
of what it means for an opinion giver to act in subjective good faith. This decision cites the
authorities as providing illustrative support for those principles.
113
These principles apply equally to the rendering of opinions on matters of Delaware
entity law, where it is nevertheless customary for sophisticated law firms to provide third-
party closing opinions on routine matters, such as due formation. Glazer et al., supra, §
2.7.1 at 94.
Non-Delaware lawyers, however, normally do not render opinions on more
difficult questions of Delaware corporation law or on questions arising under
Delaware commercial law. In those circumstances, they usually rely on an
opinion of Delaware counsel or deal with the issue in some other way, for
example by relying on an express assumption.
Id. § 2.7.3 at 64–65. Although the quoted passage discusses Delaware corporate law, those
same principles apply to opinions involving other types of Delaware entities. See id. § 2.7.3
at 65.
It is also self-evident that an opinion giver must act in good faith when establishing
the factual basis for an opinion, including when making assumptions. Legal opinions “do
not address the law in the abstract. Rather, they apply the law to real companies in real
transactions.” Id. § 4.1 at 82. Legal opinions accordingly “require grounding in the facts as
well as the law.” Id. The opinion giver usually will have firsthand knowledge of some of
the facts necessary to render the opinion, but rarely will the opinion giver have firsthand
knowledge of all of the necessary facts.17
17
See Glazer et al., supra, § 4.1, at 83, 85–86; Opinion Principles, supra, § III.A at
833; Tribar Report, supra, §§ 2.1.1 to .1.2 at 608–09.
114
To establish the factual basis for an opinion, the opinion giver can rely in good faith
on factual information provided by others.18 An opinion giver cannot act in good faith by
relying on information known to be untrue or which has been provided under circumstances
that would make reliance unreasonable.19 For example, an opinion giver could not rely in
good faith on information if the opinion giver knew that the person providing the
information had not done the work required to support it. See Glazer et al., supra, § 4.2.3.6
at 105. An opinion giver also could not rely in good faith on factual representations that
effectively establish the legal conclusion being expressed. See Opinion Principles, supra,
§ III.C at 833. If the factual representations are “tantamount to the legal conclusions being
expressed,” then the opinion giver is regurgitating facts, not giving an opinion in good
faith. See id.
In lieu of factual representations, an opinion giver may establish the factual
predicate for an opinion by making assumptions that certain facts are true. See Glazer et
al., supra, §§ 4.1, 4.3.1 at 83, 109; Restatement, supra, § 95 cmt. c. Whether the opinion
giver can make an assumption in good faith depends on the nature of the opinion. If an
assumption or set of assumptions effectively establishes the legal conclusion being
expressed, then the opinion giver cannot properly rely on those assumptions, as doing so
vitiates the opinion. See Opinion Principles, supra, §§ III.C–D at 833; ABA Accord, supra,
18
See Glazer et al., supra, § 4.1 at 83; Restatement, supra, § 95 cmt. c.
19
See Glazer et al., supra, §§ 4.1, 4.2.3 at 83, 95–96; Restatement, supra, § 95 cmt.
c.; Opinion Principles, supra, §§ I.F, III.A at 832–33; TriBar Report, supra, § 2.1.4 at 610.
115
¶ 4.6 at 189–90. As with factual representations, if the assumptions establish the legal
conclusions being expressed, then the opinion giver is simply making assumptions, not
giving an opinion in good faith.
Although an opinion giver cannot rely on factual information known to be untrue,
an opinion giver can base an opinion in good faith on an assumption that is contrary to
existing fact. The flexibility to rely on a counterfactual assumption enables an opinion giver
to render an opinion based on facts that do not exist on the date of the opinion but that the
giver and recipient are confident will exist in the future. See Glazer et al., supra, § 4.3.6 at
119. For example, an opinion giver might assume that stock will be duly authorized after
the closing of a transaction once necessary filings are made. Id. Or the opinion giver may
use counterfactual assumptions to address situations that are not expected to arise, but
which the recipient wants the opinion giver to address, such as the possibility that the law
of a particular jurisdiction may govern the transaction. Id.
To rely in good faith on a counterfactual assumption, the opinion giver must identify
the assumption explicitly. The opinion giver cannot rely in good faith on an unstated factual
assumption that is known to be untrue. See Glazer et al., supra, § 4.3.4 at 115; Restatement,
supra, § 95 cmt. c; TriBar Report, supra, § 2.3(c) at 616.
In this case, the Opinion Condition limited the ability of the opinion giver to rely on
assumptions. To satisfy the Opinion Condition, the opinion giver had to conclude that
Boardwalk’s status as a pass-through entity for tax purposes “has or will reasonably likely
in the future have a material adverse effect on the maximum applicable rate that can be
charged to customers.” PA § 15.1(b)(ii). The Opinion Condition required an opinion about
116
an actual event (“has . . . a material adverse effect”) or a future event (“will reasonably
likely in the future have a material adverse effect”). The opinion giver thus was not being
asked to opine on a counterfactual event. To render that Opinion, the opinion giver could
make good faith predictions about what would happen in the future, but the opinion giver
could not assume what would happen in the future. In particular, the opinion giver could
not construct a set of assumptions about the existence of future facts that would generate
the conclusion that the Opinion Condition required.
The plaintiffs proved that the Opinion did not reflect a good faith effort to discern
the actual facts and apply professional judgment. Instead, Baker Botts made a series of
counterfactual assumptions that were designed to generate the conclusion that Baker Botts
wanted to reach. Baker Botts then deployed those assumptions as part of a syllogism that
turned on elementary subtraction. In the process, Baker Botts stretched its analysis in
myriad other ways. The Opinion was a contrived effort to reach the result that the General
Partner wanted.
1. The Assumptions
In the Opinion, Baker Botts made a series of counterfactual assumptions. One was
explicit. The rest were not. Baker Botts did not make those assumptions legitimately
because its client asked for a hypothetical opinion about a set of alternative facts. Instead,
Baker Botts made those assumptions because Baker Botts knew they were the only way
that the firm could purport to reach the outcome that its client wanted. By making those
assumptions, Baker Botts did not address whether an event had occurred that “has or will
117
reasonably likely in the future have a material adverse effect.” Baker Botts addressed an
imaginary scenario that was never reasonably likely to come to pass.
a. Counterfactual Assumption: The Revised Policy Was Final.
To facilitate the exercise of the Call Right, Baker Botts assumed that the Revised
Policy was final such that FERC had “revers[ed] its prior policy of allowing interstate
natural gas pipelines owned by publicly traded partnerships . . . to include an income tax
allowance in their cost of service.” JX 1522 at 1. Baker Botts also assumed that “the
Revised Policy will be applied to individual FERC regulatory proceedings involving the
Subsidiaries in accordance with its terms and will not be directly or indirectly revised to
allow any of the Subsidiaries to recover an income tax allowance in its cost-of-service
rates.” Id. at 4. Those assumptions were contrary to known facts.
An agency’s statement of policy “is not finally determinative of the issues or rights
to which it is addressed,” but rather, only “announces the agency’s tentative intentions for
the future.” Pac. Gas & Electric Co. v. FPC, 506 F.2d 33, 38 (D.C. Circ. 1974); see Consol.
Edison Co. of NY, Inc. v. FERC, 315 F.3d 316, 323 (D.C. Cir. 2003) (“‘Policy statements’
differ from substantive rules that carry the ‘force of law,’ because they lack ‘present
binding effect’ on the agency.” (quoting Interstate Nat. Gas Ass’n v. FERC, 285 F.3d 18,
59 (D.C. Cir. 2002))). Because of these attributes, “when [an] agency applies [a general
statement of] policy in a particular situation, it must be prepared to support the policy just
as if the policy statement had never been issued.” Pac. Gas, 506 F.2d at 38.
Those principles of law applied with greater force to the Revised Policy, which was
subject to further regulatory proceedings. Court Tr. 861. FERC stated in the concurrently
118
issued NOPR that it intended to promulgate regulations to address the effects of the
Revised Policy “on the rates of interstate natural gas pipelines organized as MLPs.” JX 579
¶ 8. When announcing the March 15 FERC Actions, Commission personnel responded to
a question asking when “FERC Jurisdictional Rates [would] actually change,” by saying
that “the NOPR anticipates that the deadlines for pipeline filings will be late summer or
early fall [2018]. We obviously have to go to a final rule first.” PTO ¶ 117 (emphasis
added). Absent a final rule and the filing of a rate case, jurisdictional rates, i.e. recourse
rates, would not change.
Over the next four months, Boardwalk joined other pipelines, shippers, trade
associations, and other industry participants in seeking to change the Revised Policy.
Collectively, they filed thirteen requests for rehearing, 108 comments, sixteen reply
comments, and numerous other submissions in response to the March 15 FERC Actions.
See PDX 9 at 12; Court Tr. 858. And while the regulatory process was unfolding, members
of Congress were “grill[ing]” the FERC commissioners about whether they were pursuing
an appropriate policy. See JX 1076 at 1. The regulatory situation was in flux, and no one
could predict where matters would end up. See JX 1525 at 67 (Sullivan testifying that
“FERC’s income tax allowance policy for ‘pass through entities’ is still being
determined”).
Baker Botts understood that reality, and Wagner explained those facts to Alpert in
an email on March 20, 2018. JX 626. Wagner observed that “[s]tanding alone, [the Revised
Policy] does not require pipelines to take any action.” Id. at 1. He noted that by issuing the
NOPR, FERC had made clear that it would implement the policy through regulations. Id.
119
He added that if the final regulations called for the contemplated Form 501(g) filing, then
those filings “may lead to rate challenges,” but that those challenges would not be resolved
until 2020 at the earliest. Id. (emphasis added). Alpert, however, pushed Baker Botts to
take the position that the March 15 FERC Actions were sufficiently final to render the
Opinion. In a call that Alpert convened shortly after receiving Wagner’s email,
Rosenwasser told Alpert what Loews wanted to hear. Rosenwasser agreed that the “most
important thing has happened” and that “we’re already there.” JX 646 at 5.
Rosenwasser knew that was not true. He knew about and understood Wagner’s
analysis. Later, he acknowledged in his backup memorandum that “FERC could choose in
its discretion to change the Revised Policy.” JX 1502 at 10. In the April 4 Draft, Baker
Botts recognized that “[i]mportant details of implementing the Revised Policy require
clarification, and as a result our understanding regarding the implementation of the Revised
Policy could prove to be incorrect.” See JX 1949 at 2. That candid language did not appear
in the final Opinion.
Boardwalk’s executives did not believe that the Revised Policy was final. In
Boardwalk’s comments on the NOPR, they pointed out that the Revised Policy “is not a
binding rule.” JX 1139 at 2. They asked FERC to modify the Revised Policy by
“eliminat[ing] issues related to the MLP income tax allowance from the proposed rule,”
and they asserted that the Revised Policy was “arbitrary and capricious and not the product
of reasoned decisionmaking.” Id. They also cautioned that any determination by the
Commission to implement the Revised Policy needed to take into account the related issue
of ADIT. Id. at 5.
120
Rosenwasser reviewed and marked up Boardwalk’s comments on the NOPR, and
he double-starred Boardwalk’s statement that “[u]ntil the Commission provides a final
decision on the treatment of ADIT, Boardwalk cannot correctly assess the impact of the
Revised Policy Statement and ADIT on its pipelines’ costs of service.” JX 1138 at 14. That
was exactly what Baker Botts was purporting to do in the Opinion. And Baker Botts was
going further by assuming that the Revised Policy was final not only for the purpose of
determining Boardwalk’s cost of service but also for purposes of assessing an effect on
rates.
If Baker Botts had been asked to render an opinion for a client about what might
happen in the hypothetical event that the Revised Policy became final, then these
assumptions would not have been problematic. But the Opinion Condition required that
Baker Botts express a legal opinion based on a set of facts: whether there had been a
regulatory development that “has or will reasonably likely in the future have a material
adverse effect on the maximum applicable rate that can be charged to customers.” The
assumption that a sufficient trigger had happened drove the result.
In finding that Baker Botts improperly assumed that the Revised Policy was final,
this decision clarifies an aspect of its ruling on the defendants’ motion to dismiss, which
the defendants invoke to support their arguments. In the complaint, the plaintiffs asserted
that Baker Botts “relied on assumptions that Defendants knew to be false,” including the
assumption that the Revised Policy would not be changed, and argued that “the defendants
purportedly ‘knew on June 29, 2018[,] that FERC’s March 15 Proposed [sic] Policy
Statement would soon be ‘revised, reversed, [or] modified.’” Bandera Master Fund LP v.
121
Boardwalk Pipeline Pr’s, LP, 2019 WL 4927053, at *20 (Del. Ch. Oct. 7, 2019). The court
rejected that allegation, explaining:
This assumption was not false. FERC did not revise, reverse, or modify the
Revised Policy Statement. FERC issued an order on July 18, 2018, in which
it declined to reconsider the Revised Policy Statement and reaffirmed that
FERC “will generally not permit MLP pipelines . . . to recover an income tax
allowance in their cost of service.” The Final Rule addressed other aspects
of FERC’s new rate-setting policies, including the treatment of ADIT
balances, but it did not revise, reverse, or modify the Revised Policy
Statement.
The plaintiffs’ allegations do not support a reasonable inference that Baker
Botts failed to exercise its independent judgment when it assumed that the
Revised Policy Statement would not be revised, reversed, or modified. The
motion to dismiss this aspect of Count II is granted.
Id. at *20 (citations omitted). The court understood the plaintiffs’ argument at the motion
to dismiss stage to be that the defendants knew that the Revised Policy in fact would be
changed, rendering the assumption false. Because the Revised Policy was not changed, that
allegation could not support a claim on which relief can be granted.
The trial record establishes that when Baker Botts rendered the Opinion, Baker Botts
and the defendants knew that the policy could be changed. The policy on the tax allowance
was not changed, but the related decision on the treatment of ADIT was so substantial as
to operate as a change. By assuming that the policy was final when issued on March 15,
Baker Botts accelerated the date when it could render the Opinion. That decision meant
that Loews did not have to wait until the terms of the Revised Policy and the related
treatment of ADIT were known. Instead, Loews could exercise the Call Right during a
period of maximum market uncertainty, thereby benefitting itself.
122
The record presented at trial demonstrates that the Revised Policy was not final. The
fact that the lawyers who wanted the General Partner to be able to exercise the Call Right
convinced themselves over time that the Revised Policy was sufficiently final to render the
Opinion—and testified to that belief at trial20—does not mean that it was final. The Opinion
started from a counterfactual premise that Baker Botts knew was untrue.
b. Counterfactual Assumption: Recourse Rates Would Change
Without A Rate Case.
To facilitate the exercise of the Call Right, Baker Botts assumed that the rates that
Boardwalk’s subsidiaries could charge would change to the subsidiaries’ detriment without
a rate case. Unlike its first assumption, Baker Botts did not make this second assumption
explicitly. Without that unstated counterfactual assumption, Baker Botts could not have
rendered the Opinion.
To satisfy the Opinion Condition, Baker Botts had to conclude in good faith that
Boardwalk’s status as a pass-through entity for tax purposes “has or will reasonably likely
in the future have a material adverse effect on the maximum applicable rate that can be
charged to customers.” PA § 15.1(b)(ii). A threshold question was the meaning of
“maximum applicable rates.”
If “maximum applicable rates” meant the real-world rates applicable to the shippers
who purchased capacity on the subsidiaries’ pipelines, then the March 15 FERC Actions—
even if they became final—would not have a meaningful effect, because the majority of
20
See Rosenwasser Tr. 65; Wagner Tr. 207; Alpert Tr. 335; McMahon Tr. 525.
123
the shippers on Boardwalk’s pipelines paid negotiated or discounted rates. As discussed in
greater detail below, Baker Botts sidestepped that issue by interpreting “maximum
applicable rates” to mean “recourse rates.” But that solution created another problem:
Recourse rates do not change without a rate case. Assessing whether there would be a
material adverse effect on recourse rates therefore required evaluating the risk that
someone would bring a rate case against one of Boardwalk’s Subsidiaries. See JX 1138 at
2; JX 1307 at 7; Court Tr. 860. It also required assessing whether Boardwalk’s rates would
change if a rate case was brought. See Court Tr. 861–65.
Baker Botts assumed away these issues. The Opinion did not address either the risk
that someone would bring a rate case or the risk that Boardwalk’s rates would change as a
result of a rate case. Instead, the Opinion implicitly made the counterfactual assumption
that each of Boardwalk’s subsidiaries would be involved in a rate case and lose. See Court
Report ¶¶ 113–14.
The April 4 Draft made that assumption openly, stating: “[W]e have requested that
the Partnership assume that the Subsidiaries will file rate cases and take any other
appropriate and legal action to be permitted to charge the maximum rates permitted under
the applicable cost of service rules and regulations regardless of competitive conditions or
any other non-legal factor.” See JX 1949 at 2. The April 4 Draft thus made clear that Baker
Botts was assuming that the subsidiaries would act contrary to their own interests, file rate
cases seeking to lower their rates, and eschew any arguments that might enable them to
maintain or raise their rates.
124
The Opinion dropped the clear language from the April 4 Draft and omitted any
reference to rate cases. In its place, the Opinion substituted the more laconic assumption
“that each Subsidiary would charge all of its customers the maximum applicable rate.” JX
1522 at 3. That outcome only could happen if someone filed rate cases in which
Boardwalk’s subsidiaries lost. The assumption from the April 4 Draft thus remained, but
was now unstated. See Wagner Tr. 273–74; see also Rosenwasser Tr. 91.
Two of Boardwalk’s subsidiaries did not face any rate case risk, and a third faced
only low risk. See JX 571 at 7; JX 1064; JX 1521 at 16. When issuing the NOPR, FERC
made clear that many pipelines had characteristics that would obviate the need for a rate
adjustment, including (i) rate moratoria, (ii) negotiated rates, or (iii) under-recovery of
costs. See JX 580 ¶¶ 45, 48–49. Typically, a pipeline under-recovers its costs because it
operates in a competitive market and must offer discounted rates to capture business. See
JX 1139 at 11.
Those criteria mapped onto Boardwalk’s pipelines. See JX 571 at 1.
• Virtually all of Gulf Crossing’s contracted volumes were subject to negotiated rates.
PTO ¶ 139; JX 572 at 2–3. Gulf Crossing also operated in highly competitive
markets, was under-recovering its cost of service and would be “highly under-
subscribed” as its negotiated-rate contracts rolled off. See JX 644 at 1; JX 676 at 8.
• A majority of Gulf South’s contracts provided for negotiated or discounted rates.
Gulf South was also subject to a rate case moratorium until May 2023. And Gulf
South operated in highly competitive markets and thus was under-recovering its cost
of service. See PTO ¶ 139; JX 604 at 1; JX 644 at 1; JX 676 at 8; JX 1139 at 6; JX
1521 at 16.
• A majority of Texas Gas’ contracts with shippers provided for negotiated or
discounted rates. See JX 1139 at 6. Only 20% of its volumes were shipped at
recourse rates and potentially subject to any effect. See JX 548 at 1. It too served
highly competitive markets. Id.
125
Loews, Boardwalk and their advisors concluded there was “[n]o expected near-term rate
case risk for Gulf South or Gulf Crossing” and that over the long-term, rate case risk was
minimal because “current RoE [was] likely to be below allowable RoE.” JX 1521 at 16;
see Wagner Tr. 269. After some initial concern about the rate case risk at Texas Gas, Baker
Botts and its rate expert assured Loews that the rate case risk at Texas Gas was “low”
through April 2020. JX 1064 at 1. Beyond that, Baker Botts and its rate expert believed it
was impossible to “make a prediction with any confidence.” Id.; see JX 1078.
The Opinion rested on an unstated counterfactual assumption about the inevitability
of an adverse decision in a rate case. If Baker Botts had been asked to render an opinion
for a client about what might happen in a hypothetical world where all three subsidiaries
faced rate cases and lost, then an opinion based on explicit assumptions to that effect would
have been acceptable. But the Opinion Condition required that Baker Botts express a legal
opinion about whether Boardwalk’s status as a pass-through entity for federal tax purposes
has or “will reasonably likely in the future have a material adverse effect on maximum
applicable rates.” Rendering that opinion required assessing the risk of a material adverse
effect on rates, not making the unstated counterfactual assumption that each subsidiary
would face and lose a rate case.
c. Counterfactual Assumption: Hypothetical Indicative Rates Are
The Same As Recourse Rates.
To facilitate the exercise of the Call Right, Baker Botts made yet another
counterfactual assumption: Recourse rates are the same as hypothetical indicative rates.
Like the second counterfactual assumption, the third assumption was unstated.
126
As discussed previously, the Opinion Condition required that the Opinion address
whether there has been or will reasonably likely be a material adverse effect on the
“maximum applicable rate that can be charged to customers” The Partnership Agreement
did not define “maximum applicable rate,” and FERC has not defined it either. See Court
Report ¶¶ 152–55; Rosenwasser Dep. 365. None of defendants’ advisors, nor their FERC
expert in this litigation, identified a FERC order or ruling that defined or explained that
phrase. See Court Report ¶¶ 157–69; JX 1756 (Court Rebuttal) ¶¶ 11–17. At trial,
Rosenwasser conceded that the meaning of “maximum applicable rate” was a “key”
question his team “had to grapple with.” Rosenwasser Tr. 64.
Multiple law firms generated analyses of the phrase, in part because Baker Botts
was unable to identify any settled meaning of the term in its first attempt. See JX 637 (email
from Baker Botts interpreting the term); JX 781 at 1 (same); JX 800 at 2 (notes from
Skadden interpreting the term); JX 1375 (memorandum from Baker Botts interpreting the
term); JX 1437 (email from Van Ness Feldman interpreting the term). Naeve, the Skadden
partner and former FERC Commissioner, believed that the phrase reasonably could mean
either (1) “the maximum rate applicable to customers taking into consideration discounted
contracts that have been filed at FERC,” or (2) “the maximum rate contained in the tariff
which the pipeline could have charged and is free to charge other customers[.]”21 Layne,
21
JX 800 at 2. Naeve discussed this concern with Alpert. See id.; Alpert Tr. 421.
When Grossman raised the same point, Alpert was furious. See JX 798 at 1 (“Rich is pissing
me off.”). Baker Botts had to send Skadden a copy of Boardwalk’s Form S-1 to “get [them]
more comfortable” with the interpretation that Baker Botts needed to use. See JX 790 at 2.
127
the Vinson & Elkins transactional partner, similarly observed that there were multiple
reasonable interpretations.22
The Opinion implicitly conceded that the term “maximum applicable rates” was
ambiguous. Rather than asserting that the claim had a plain meaning, Baker Botts stated
that
we have, in using our judgment, interpreted the words . . . “maximum
applicable rate that can be charged to customers by subsidiaries that are
regulated interstate natural gas pipelines of the Partnership,” to mean the
recourse rates of the Subsidiaries now and in the future as that term is used
by the FERC in its regulations, rulings and decisions . . . .
JX 1522 at 4 (emphasis added).
Everyone knew that a Delaware court would apply the doctrine of contra
proferentem and construe ambiguous language against the General Partner and in favor of
the minority unitholders. Yet to reach the conclusion that the phrase meant “recourse rates,”
Baker Botts declined to apply the doctrine of contra proferentem and looked to two sources
of extrinsic evidence: (i) Boardwalk’s own use of the phrase in its public filings, and (ii)
Baker Botts thus turned to extrinsic evidence to support its reading of “maximum
applicable rates.”
22
See JX 733 at 1 (“One interpretation is that that means the maximum rates that
could be charged, assuming the customers were paying maximum cost of service rates. On
the other hand, because of the discounts, market based rates and negotiated rates (and
presumably the possibility of all this getting changed by FERC again), REVENUE won’t
take a hit…even though theoretical maximum rates (if we could charge them) would be
materially adversely effected [sic].”).
128
FERC’s use of the phrase in orders in proceedings involving Boardwalk, where FERC was
commenting on Boardwalk’s filings.
If Baker Botts had reached that interpretive judgment, assessed each pipeline’s risk
of a rate case, relied on a full ratemaking analysis, and rendered opinions about the
reasonably likely effect on recourse rates, then Baker Botts’ decision to interpret
“maximum applicable rates” as “recourse rates” would not have fatally undermined the
Opinion. Although relying on extrinsic evidence to interpret ambiguous language runs
contrary to how Delaware courts interpret MLP agreements, the Delaware Supreme Court
has looked on occasion to the surrounding transactional context, including by considering
language in an issuer’s public filings, to give meaning to a disputed phrase. See, e.g.,
Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182, 1189 (Del. 2010). Baker Botts thus
could have reached a reasoned conclusion that it was appropriate under the circumstances
to consider extrinsic evidence in the form of Boardwalk’s Form S-1, and Baker Botts could
have concluded in good faith, based on that broader transactional context, that when
drafting the Call Right, Rosenwasser meant to refer to recourse rates. In other words, to the
extent that extrinsic evidence and judgment enter the picture, reading “maximum
applicable rates” to mean recourse rates is a more persuasive reading than other
possibilities.
But Baker Botts did not do those things. Baker Botts made an unstated assumption
that resulted in the Opinion not actually interpreting the phrase “maximum applicable rate”
as “recourse rates.” Baker Botts instead considered the highest rates that FERC would
allow Boardwalk to charge in a hypothetical world that assumed there was a full market
129
for the pipelines’ services. JX 646 at 3. As Wagner wrote in his contemporaneous notes:
“‘Max hypothetical rate.’ This is not the recourse rate.” JX 646 at 4. Other
contemporaneous writings refer to the rates that Baker Botts examined as “indicative
rates,” “theoretical maximum rates,” and “maximum hypothetical rates.” See JX 727 at 2
(“indicative rates”); JX 733 at 1 (“theoretical maximum rates”); JX 798 (“[I]t’s crystal clear
that we’re talking hypothetical future max FERC rates.”); JX 1007 at 1 (“hypothetical
rates”).
In reality, the Opinion examined indicative rates, and Baker Botts’ conclusion rested
on the unstated counterfactual assumption that indicative rates were the same as recourse
rates. If Baker Botts had been asked to render an opinion for a client about what might
happen to “hypothetical future max FERC rates,” then equating indicative rates with
recourse rates would not have been problematic. The Opinion Condition, however, did not
turn on “hypothetical future max FERC rates.” The Opinion Condition required that Baker
Botts express a legal opinion about whether Boardwalk’s status as a pass-through entity
for tax purposes “has or will reasonably likely in the future have a material adverse effect
on maximum applicable rates.” Once Baker Botts expressly assumed that “maximum
applicable rates” were the same as “recourse rates,” Baker Botts had to stick with that
assumption. Instead, Baker Botts made an additional, unstated, and counterfactual
assumption that recourse rates were the same as “hypothetical future max FERC rates.”
130
d. Counterfactual Assumption: The Treatment Of ADIT Was
Known.
To facilitate the exercise of the Call Right, Baker Botts made a fourth counterfactual
assumption. Like the second and third assumptions, it too was implicit. This time, Baker
Botts assumed that the open question of how FERC would treat ADIT was a known fact
and that FERC would use the Reverse South Georgia Method. In reality, no one knew how
FERC would treat ADIT, and it was impossible to determine what effect the March 15
FERC Actions would have on rates without knowing how FERC would treat ADIT.
In the March 15 FERC Actions, FERC made clear that the treatment of ADIT was
an open issue. The ADIT NOI sought industry input on that very question. See JX 576 ¶
25. FERC staff specifically flagged whether an MLP’s accumulated ADIT balance should
be eliminated from cost of service or whether those previously accumulated sums should
be placed in a regulatory liability account and returned to ratepayers. See id.Boardwalk understood that the treatment of ADIT was an open issue. In Johnson’s
initial analysis of the impact of the March 15 FERC Actions, he characterized his estimate
of the downside as a floor, because it “ignores any bounce from rate base increase
associated with removal of ADIT.” JX 572 at 1–2. Elaborating in a later email, he explained
that “it’s unclear on what they [FERC] would do with [Boardwalk’s] current ADIT”
balance. JX 602 at 1. He further observed that FERC could decide that the ADIT balance
should be “zeroed out because there’s no income taxes (because there would be no
difference between book and tax depreciation).” Id.131
When the Loews executives examined Johnson’s analysis, they likewise recognized
that ADIT was the critical issue. JX 601 at 2. A Loews employee determined that losing
the income tax allowance was “a flesh wound for the long haul pipes like . . . [Boardwalk].”
Id. at 1. But if FERC required that pipelines return their ADIT balances to ratepayers, then
that “would be the a-bomb outcome” and would be “extremely painful.” Id.
Baker Botts knew that the future treatment of ADIT was an open issue. Just four
days into Baker Botts’ engagement, Wagner acknowledged that “FERC has not stated how
to treat ADIT balances” and “[t]his can affect the rate impact on the pipelines
substantially.” JX 619 at 1. Wagner explained to Alpert in an email on March 20, 2018,
that the ADIT NOI did not have a time frame for resolution but could be resolved by the
end of 2018. JX 626 at 1. He noted that any regulation was “not likely to be self-
implementing and would require additional proceedings to affect pipeline rates.” Id.
During a call on March 22, 2018, Boardwalk executives and Baker Botts lawyers
discussed whether they could estimate the effect of ADIT, concluding that they had “[n]o
idea [because we] don’t know rules.” JX 646 at 1; see JX 644 at 1 (noting the “lack of
clarity on FERC’s eventual policy on” the treatment of ADIT and characterizing any
possible effects as “highly speculative at this point”); JX 740 at 1 (“[W]e may want to see
the results under a few different scenarios.”); JX 868 at 2 (“[D]ifferent assumptions on how
to handle [the ADIT] issue could affect the calculations.”); see also JX 1525 at 67 (Sullivan
testifying that FERC was still determining “how [ADIT] balances will be treated”). The
Loews executives likewise understood that they did not have the answer on ADIT. See JX
567; JX 601 at 1–2.
132
A chorus of defense witnesses testified at trial that they believed that FERC would
instruct pipelines to amortize ADIT using the Reverse South Georgia Method. 23 That was
indeed one reasonable method, and the witnesses’ testimony about their belief seemed
convincing. The problem is that the Reverse South Georgia Method was only one
possibility, and no one knew what FERC actually would do.
Without knowing how FERC would treat ADIT, it was impossible to determine
what effects the March 15 FERC Actions would have. In its public comments on the
NOPR, Boardwalk emphasized that, “[u]ntil the Commission provides a final decision on
the treatment of ADIT, Boardwalk cannot correctly assess the impact of the Revised Policy
Statement and ADIT on its pipelines’ costs of service . . . .” JX 1130 at 14. Skadden
understood what that meant for the Opinion. In a model of understatement, Voss described
the language as “relatively unhelpful.” JX 1164 at 1. Rosenwasser also knew the language
posed a problem. In his personal notes on Boardwalk’s NOPR comments, Rosenwasser
underlined the text and double-starred it. See JX 1138 at 14.
Boardwalk’s comment was more than just unhelpful. It established that Baker Botts
had no basis for the Opinion.
The Opinion thus rested on the unstated counterfactual assumption that the
treatment of ADIT was known and would follow the Reverse South Georgia Method. If
Baker Botts had been asked to render an opinion for a client about what the effect on rates
23
See Rosenwasser Tr. 78; Wagner Tr. 217–18, 223; Alpert Tr. 347; McMahon Tr.
497, 517; Johnson Tr. 619.
133
would be if FERC required amortization of ADIT using the Reverse South Georgia
Method, then making that counterfactual assumption would have been fine. But the
Opinion Condition required an opinion based on fact. Instead, Baker Botts assumed its way
to a conclusion that a sufficient regulatory development had occurred.
2. The Factual Inputs
The foregoing assumptions formed the basis for Rosenwasser’s syllogism. That
exercise dictated the result of the Opinion by deploying elementary subtraction. Baker
Botts then obtained information from Boardwalk to make the syllogism work.
a. Rosenwasser’s Syllogism
As described in the Factual Background, Rosenwasser developed his syllogism so
that Baker Botts could render the Opinion. Rosenwasser knew that the Call Right was
intended to address a business issue by protecting Loews against a regulatory change that
would have a materially adverse effect on Boardwalk. Rosenwasser Dep. 39–40. Rates
were relevant because they led to revenue. McMahon Tr. 545. The Call Right was not
intended to create a regulatory trapdoor that could be triggered by a change that “wasn’t
substantive, wasn’t meaningful.” Rosenwasser Tr. 46. In fact, Rosenwasser did not believe
that “rates” were what the Call Right was designed to protect. JX 1502 at 34 (“Rates
themselves are not what is being protected. It must be the entities charging the rates.”). The
Call Right was intended to provide Loews with an “off-ramp” if FERC changed its policy
in a way that materially threatened Boardwalk as an entity. McMahon Tr. 480, 545.
That understanding comported with how Delaware cases approach the concept of a
material adverse effect. Determining whether a material adverse effect is reasonably likely
134
to occur involves forecasting, not fantasizing. “There must be some showing that there is
a basis in law and in fact for the serious adverse consequences prophesied by the party
claiming the MAE.” Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *65 (Del.
Ch. Oct. 1, 2018) (quoting Frontier Oil v. Holly Corp., 2005 WL 1039027, at *36 n.224
(Del. Ch. Apr. 29, 2005)), aff’d, 198 A.3d 724 (Del. 2018). Simply “proclaiming that bad
things can happen” is insufficient to establishing that a material adverse effect is reasonably
likely to occur. See Frontier Oil, 2005 WL 1039027, at *36 n.224.
The March 15 FERC Actions were not reasonably likely to have a material adverse
effect on Boardwalk. The Boardwalk management team determined immediately that the
March 15 FERC Actions were not reasonably likely to have a material adverse effect on
Boardwalk’s revenue. See JX 615 at 1; JX 733 at 1. The March 15 FERC Actions also were
not reasonably likely to have a material adverse effect on recourse rates. Two of
Boardwalk’s pipelines had characteristics which meant that if the March 15 FERC Actions
became final, they would not face a rate proceeding. For the third pipeline—Texas Gas—
the risk of a rate proceeding was low, and any effect on revenue would be small.
To deliver the Opinion, Rosenwasser needed to shift from the real world into an
imaginary one. He therefore took the position that the Call Right was not concerned with
the actual economic impact; it was only concerned with the abstract concept of “maximum
applicable rates.” See JX 645 at 1; JX 679 at 5, 8. If a regulatory policy affected that abstract
concept, then the Call Right could be exercised. And because a tax allowance had been
built into the cost-of-service calculation, a policy change eliminating the allowance would
lead ineluctably to a change in the maximum applicable rate, as Baker Botts was defining
135
that term. When Wagner heard Rosenwasser’s reasoning, he immediately understood what
they were doing: “Just saying” that eliminating the tax allowance led to a lower cost of
service and therefore a material adverse effect. JX 639.
The resulting syllogism turned on elementary subtraction, and it was fundamentally
flawed. Boardwalk knew that. During a discussion of the March 15 FERC Actions,
Jonathon Taylor from the FERC Office of General Counsel foreshadowed what would
become Rosenwasser’s syllogism when he explained that “when a tax expense decreases,
so does the cost of service.” JX 588 at 22. At the time, McMahon and his outside counsel
ridiculed that line of reasoning. McMahon wrote to Gregory Junge, a regulatory lawyer:
“That was a priceless statement[.] [T]axes go down[.] COS goes down[.] This is going to
be a train wreck.” JX 575 at 2. Junge responded: “That is . . . just [the] type of 1:1 thinking
that we were trying to explain is not the case.” Id. And in its comments to FERC on the
NOPR, Boardwalk rejected that simplistic approach. Boardwalk asserted that it was
“misleading” to equate a change in the cost of service stemming from the removal of the
income tax allowance with a “rate reduction,” because a cost-of-service change has “little
bearing” on whether or not a rate reduction will occur. JX 1138 at 30 (NOPR Comments).
If FERC tried it, then it would violate its policy against single-issue ratemaking. JX 1307
at 7; see Johnson Tr. 663.
Grasping for grounds to confirm that this approach was nevertheless justified,
Rosenwasser relied on the fact that the Opinion called for a legal opinion from counsel, not
a factual opinion from some other type of professional like a rate expert or an investment
banker. See JX 646 at 3 (“This is a legal opinion, independent of what’s happening in mkt.
136
Not a primarily factual analysis.”); see also JX 686 at 1; Rosenwasser Tr. 49–51. That is
nonsensical; the notion that the Partnership Agreement called for a legal opinion did not
mean that the opinion could ignore facts. Lawyers (and law-trained judges) apply the law
to facts. Legal opinions turn on facts. See Glazer et al., supra, § 4.1 at 82.
Not surprisingly, Rosenwasser and Baker Botts could not maintain the pretense that
the Opinion did not require considering real-world facts. Uncertain about whether it could
opine that the effect on indicative rates was sufficiently material and adverse, Baker Botts
wanted to consider other indications of materiality, such as the effect that a comparable
reduction in revenue would have on Boardwalk’s EBIT, EBIDTA, and distributable cash
flow. See PTO ¶ 182; JX 775 at 1. Rosenwasser sought reassurance from Richards Layton
that Baker Botts could consider these other effects, but Richards Layton advised the
“[b]etter [r]eading” was to “look [at] rates more, not effects.” JX 1007 at 1. Even then,
Baker Botts referred to the pass-through effect in the Opinion, stating that
[w]e also took notice that, because these reductions in the maximum
applicable rates would not be offset by any reduction in costs incurred by the
Subsidiaries, the reductions in the maximum applicable rates would have a
substantially larger percentage impact on the earnings before interest and
taxes and on the cash available for distribution of each of the Subsidiaries
assuming each Subsidiary could actually charge and collect its maximum
applicable rate.
JX 1522 at 3. Baker Botts thus considered real-world effects when doing so helped reach
the result that its client wanted, but not when doing so might cut in the opposite direction.
Rosenwasser’s syllogism ignored that the Call Right was drafted to address a
business issue, not an abstract legal question. The syllogism ignored the absence of any
real-world effect on revenue in favor of focusing on recourse rates. It ignored the question
137
of rate case risk and the real-world events that would have to take place before there was
any effect on recourse rates. The syllogism was a contrived exercise designed to achieve a
particular result.
b. The Rate Model Analysis
To provide the factual basis for the Opinion, Baker Botts had Boardwalk prepare
the Rate Model Analysis. That analysis implemented Rosenwasser’s syllogism and was
designed to “get us where we need to go.” JX 713 at 1. The exercise generated declines in
hypothetical indicative rates of 11.68%, 12.12%, and 15.62% under circumstances where
the rates that shippers actually paid had not changed at all and where recourse rates were
unlikely to change for the foreseeable future.
The Rate Model Analysis departed from ratemaking principles. The Rate Model
Analysis calculated a single, hypothetical, indicative rate for each of Boardwalk’s three
pipeline subsidiaries. See JX 1415 at 3. It then projected that the indicative rate would drop
as a result of the removal of income tax allowance. See id. In other words, the Rate Model
Analysis changed only the income tax allowance variable while holding all else constant.
See, e.g., JX 639 at 1; Wagner Tr. 258; Webb Tr. 938. That is single-issue ratemaking.
Through single-issue ratemaking, the Rate Model Analysis avoided any meaningful
assessment of how, if at all, a change in the cost of service might impact any of the 167
recourse rates that Boardwalk had on file with FERC. Sullivan, the rate expert hired by
Baker Botts, testified in his deposition that FERC would not focus on an indicative rate
because it does not “mean anything.” Sullivan Dep. 169. He confirmed that the Rate Model
Analysis calculated a cost-of-service reduction, not a rate reduction. Id. at 118. He
138
explained that deriving an indicative rate reduction by changing one cost-of-service
variable was “kind of meaningless” because a rate change does not depend on one cost-of-
service variable. Id. at 101. He observed that the Rate Model Analysis could not be used to
calculate the change to Boardwalk’s actual recourse rates. Id. at 150. At trial, the plaintiffs’
rate expert testified persuasively on these same points. See Webb Tr. 913–14 (describing
indicative rates as “meaningless” and “hypothetical”).
Because the Rate Model Analysis employed a simple syllogism, it only contained a
few pages of analysis. The calculations for the purported rate impact at Texas Gas took
only five pages. Johnson Tr. 640, 652. By contrast, the rate models used in actual rate cases
involve hundreds of pages of complex calculations to determine cost of service and,
ultimately, recourse rates. See Webb Report ¶ 174; see also Johnson Tr. 653 (conceding
that Gulf South’s initial submission in a recent rate case spanned 3,844 pages). The Rate
Model Analysis was much shorter because it skipped essential steps in the ratemaking
process. See, e.g., Johnson Tr. 651–52 (conceding that the Rate Model Analysis did not
calculate discount adjustments); id. at 648–49 (conceding that FERC requires use of zone-
based rate design where pipelines employ zones but the Rate Model Analysis failed to do
so). At the same time, the Rate Model Analysis applied a de-functionalizing step that is not
part of ratemaking process. Webb Tr. 967.
The resulting simplified calculation was highly sensitive to assumptions about
ADIT and ROE. The Rate Model Analysis thus confirms that Baker Botts could not opine
on the effect of the March 15 FERC Actions on rates without knowing more about the
regulations that FERC intended to adopt.
139
The Rate Model Analysis assumed that FERC would require amortization of ADIT
using the Reverse South Georgia Method, which was one possibility. Virtually all of the
pipelines (other than Boardwalk) publicly advocated for FERC to eliminate ADIT.
Changing from the Reverse South Georgia Method to the elimination of ADIT would have
eliminated Baker Botts’ ability to claim a material adverse effect on indicative rates.
Baker Botts
Percentage BB % Change with
Subsidiary Change ADIT Adjustment
Texas Gas 12.12% 2.58%
Gulf South 11.68% 1.80%
Gulf Crossing 15.62% -0.85%
Webb Report ¶ 128 fig. 6. The changes at Texas Gas and Gulf South become minimal, and
Gulf Crossing’s rates move in the opposite direction.
The Rate Model Analysis was also sensitive to assumptions about ROE. While
Baker Botts was working on the Opinion, some industry participants thought that FERC
might permit pipelines to calculate their cost-of-service requirements using higher ROEs
to offset the effect of the lost income tax allowance. See, e.g., JX 910 at 9 (“Guggenheim
[Partners, LLC] thinks . . . . the change to the tax allowance might not be material, as the
increased ROE could recover the cost lost by losing the tax allowance.”). While he was
acting as Baker Botts’ rate expert, Sullivan gave testimony in which he advocated for
increased ROEs. See Webb Report ¶¶ 132–33 (collecting Sullivan’s advocacy); Sullivan
Dep. 55 (conceding that he would have used a 13.5–14% ROE in a rate case).
Increasing the ROE in the Rate Model Analysis from 12% to 14% lowers the
percentage change in rates by approximately five percent:
140
Baker Botts
Percentage BB % Change with
Subsidiary Change ROE Adjustment
Texas Gas 12.12% 7.14%
Gulf South 11.68% 6.91%
Gulf Crossing 15.62% 9.32%
See Webb Report ¶ 134 fig. 7. The changes at all three pipelines fall below the level that
Baker Botts opined could give rise to a material adverse effect.
Changing both variables in the Rate Model Analysis—eliminating ADIT and
increasing the permissible ROE—reverses the direction of the change in indicative rates.
Baker Botts BB % Change with
Percentage Both ROE Correction
Subsidiary Change and ADIT Adjustment
Texas Gas 12.12% -3.33%
Gulf South 11.68% -3.95%
Gulf Crossing 15.62% -8.66%
See Webb Report ¶ 136 fig. 8. Instead of a projected decrease (which Baker Botts reports
as a positive percentage), there is a projected increase (reflected as a negative percentage).
That means that indicative rates would increase, resulting in a beneficial effect rather than
an adverse effect. The plaintiffs concede that these outputs do not mean that Boardwalk’s
recourse rates were reasonably likely to rise. See Webb Tr. 959. What they demonstrate is
that the Rate Model Analysis depended heavily on assumptions, including an answer on
the treatment of ADIT that no one knew when Baker Botts rendered its Opinion.
The Rate Model Analysis could not provide an adequate factual basis for the
Opinion. The Rate Model Analysis simply implemented Rosenwasser’s syllogism, which
ignored real world effects but allowed Baker Botts to reach the conclusion its client wanted.
141
3. Other Efforts To Reach The Desired Conclusion
After making all of the foregoing efforts to create a structure that would permit the
issuance of the Opinion, Baker Botts still had to stretch to render the Opinion. Those
strained conclusions are signs of motivated reasoning.
Most notably, Baker Botts stretched on what constituted a material adverse effect.
Richards Layton advised that “the better argument” was that a reduction in rates of 12–
13%, in perpetuity, would suffice for a material adverse effect.24 The Skadden attorneys
believed that an 11% change was “likely insufficient” under Delaware law, although the
duration of the change would be a pertinent consideration. See JX 772 at 1. In the Opinion,
Baker Botts went further and took the position that a material adverse effect would result
from “an estimated reduction in excess of ten percent in the maximum applicable rates that
can be charged to the customers of each of the Subsidiaries on a long-term basis.” JX 1522
at 3 (emphasis added); see Rosenwasser Tr. 96–98. Baker Botts had to dip below 12%
because the Rate Model Analysis generated a decline of 11.68% in the hypothetical
indicative rates that Texas Gas could charge. See JX 1522 at 3.
And Baker Botts stretched on other issues as well:
• Baker Botts was not sure what standard to use for “reasonably likely to have a
material adverse effect.” Rosenwasser decided to “call it more likely than not.” JX
1807 at 12; accord Rosenwasser Tr. 98–99.
24
JX 975 at 1; JX 1507 at 1–2. At trial, Raju testified that Richards Layton thought
the “better argument” was that “a 10 percent or greater adverse effect into perpetuity on
the rates metric would constitute an MAE.” Raju Tr. 800–01. The contemporaneous
documents do not provide that additional color.
142
• Baker Botts viewed the reference to the Partnership’s “status as an association not
taxable as a corporation” as incorrect terminology. JX 939. Baker Botts decided to
“tear off the band-aid and substitute ‘entity’ for ‘association’ in our statement of our
opinion.” Id. Thus, the real issue, as Baker Botts saw it, was the Partnership’s status
as an MLP. JX 733 at 1.
In substance, Baker Botts rewrote the Call Right so that it could render the Opinion.
As written, the Call Right required an opinion that
the Partnership’s status as an association not taxable as a corporation and not
otherwise subject to an entity-level tax for federal, state or local income tax
purposes has or will reasonably likely in the future have a material adverse
effect on the maximum applicable rate that can be charged to customers by
subsidiaries of the Partnership that are regulated interstate natural gas
pipelines.
PA § 15.1(b).
As rewritten by Baker Botts, the Call Right called for an opinion that
a notice of a proposed regulation about whether a regulated interstate natural
gas pipeline organized as an MLP can claim an income tax allowance in its
cost of service the Partnership’s status as an association not taxable as a
corporation and not otherwise subject to an entity-level tax for federal, state
or local income tax purposes has or will reasonably likely more likely than
not in the future will have a material 10% or more adverse effect on the
maximum applicable hypothetical indicative rates that can be charged to
customers by subsidiaries of the Partnership that are regulated interstate
natural gas pipelines if each subsidiary faces and loses a rate case in which
FERC (i) removes only the income tax allowance from the pipeline’s cost of
service, (ii) requires amortization of ADIT using the Reverse South Georgia
method, (iii) does not conduct the other steps in the ratemaking process, (iv)
does not consider rate moratoria, the effects of competition, or other factors
that FERC considers when determining rates, and (v) thereby violates the
policy against single-issue ratemaking.
Baker Botts chose to give the latter opinion. It could not have given the former opinion.
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4. Knowingly Going Where Others Would Not Tread
In addition to counterfactual assumptions, in addition to Rosenwasser’s syllogism,
and in addition to stretching on a series of issues that amounted to rewriting the Call Right,
at least two other dimensions of Baker Botts’ conduct support a finding of bad faith. Baker
Botts rendered a non-explained opinion on a complex issue of Delaware law that the two
Delaware law firms who were consulted would not formally address. And Baker Botts did
so in the face of fatal uncertainty that could have been mitigated simply by waiting.
Baker Botts is a sophisticated law firm, but it is not a Delaware law firm. Baker
Botts is also a leader in transactions involving MLPs, but it is not in the habit of opining
on complex issues of Delaware limited partnership law. Many sophisticated firms render
closing opinions on routine issues of Delaware entity law, such as the due formation of an
entity or the due authorization of a contract. Baker Botts generally rendered enforceability
opinions under the Delaware Revised Uniform Limited Partnership Act, but the firm did
not render opinions more broadly on other Delaware issues. See JX 878 at 4.
In this case, Baker Botts took on one of the most difficult issues under Delaware
law: determining the existence of a material adverse effect. Neither of the Delaware firms
in this case would render such an opinion. Skadden has a policy against rendering an
opinion on whether an event constitutes a material adverse effect, and Grossman was not
willing to give Baker Botts any work product that might be construed as expressing an
opinion. See JX 771 at 1. Richards Layton gave oral advice about what was the “better
argument” and was willing to memorialize its advice in an email, but it would not go further
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than that and would not let Baker Botts reference its views. See JX 975 at 1; see Raju Dep.
113–14.
Internally, Baker Botts appropriately questioned its ability to render this opinion
under Delaware law. Initially, Baker Botts sought to recast the matter as an issue of federal
law. See JX 679 at 7. After accepting that it was a Delaware law question, Baker Botts
looked to Skadden for help. See JX 770 at 1; JX 772. Skadden, however, only provided a
summary of the main Delaware authorities and disclaimed any intent to analyze the Call
Right. JX 900 at 2. That fell short of what Baker Botts wanted. See JX 913 at 1; see also
JX 936 at 1. Facing a deadline from Loews, Rosenwasser turned to Richards Layton, but
in an effort to obtain advice that would reassure his partners, Rosenwasser provided the
Richards Layton attorneys with a misleading description of the factual record. See Part I.L,
supra. Rosenwasser’s query resulted in Richards Layton’s oral advice that the firm would
have a “hard time saying [a decline of 12% in perpetuity is] not material.” JX 1007 at 2.
Richards Layton later stated that subject to assumptions and carveouts, it would regard as
the “better argument” the contention that a 12–13% change in rates in perpetuity was
sufficiently material and adverse, but Richards Layton would not let Baker Botts reference
its advice in the Opinion. JX 975 at 1; see Raju Dep. 113–14.
Baker Botts nevertheless rendered a non-explained opinion to the effect that a 10%
decline in indicative rates was reasonably likely to constitute a material adverse effect.
Baker Botts, a non-Delaware firm that did not regularly render opinions on complex
Delaware issues, did not explain how it reached that conclusion. It did not identify any
indicators of materiality that would justify that threshold. It did not discuss and distinguish
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the well-known and (at that point) unbroken line of transactional cases which had failed to
find a material adverse effects, such as In re IBP, Inc. Shareholders Litigation, 789 A.2d
14 (Del. Ch. 2001), Frontier Oil Corp. v. Holly Corp., 2005 WL 1039027 (Del. Ch. Apr.
29, 2005), Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch.
2008), or Mrs. Fields Brand, Inc. v. Interbake Foods LLC, 2017 WL 2729860 (Del. Ch.
June 26, 2017). Baker Botts acted as if it was rendering a third-party closing opinion on a
routine issue, which it plainly was not. The fact that Baker Botts rendered a non-explained
opinion on the existence of a material adverse effect itself suggests that Baker Botts was
serving Loews’ interests.
The timing of the Opinion points in the same direction. Given the non-final nature
of the Revised Policy, the avalanche of comments that FERC received, the direct linkage
between the Revised Policy and the ADIT NOI that Boardwalk itself identified, and the
uncertainty regarding the treatment of ADIT, Baker Botts could not have believed in good
faith that it could render the Opinion before FERC provided further guidance. There were
too many known unknowns. And an opportunity for clarity on these unknowns was on the
horizon: FERC was likely to provide more guidance at its meeting on July 19, 2018. Baker
Botts needed to wait.
Naeve, the Skadden partner and former FERC Commissioner, candidly observed in
real time that Baker Botts should have waited. He wrote to a colleague, “If I were Baker
Botts I would prefer to wait until FERC acts on the comments.” JX 1076 at 1. Among other
things, Naeve noted that the Revised Policy was a “blunt instrument that ignore[d]” the
fact that some MLPs (including Boardwalk) were “predominately owned by C-corps that
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pay federal income taxes.” Id. Naeve described how “the 5 FERC Commissioners testified
before a House Subcommittee and were grilled on this issue and others.” Id. According to
Naeve, “at least one Commissioner appeared to be having second thoughts about whether
the Commission had fully considered industry input before acting.” Id.Yet Baker Botts pushed ahead. In doing so, Baker Botts gave Loews the ability to
exercise the Call Right to maximum effect, during a fleeting period of maximum
uncertainty before FERC provided additional information on its future decisions. Rather
than exercising reasoned judgment, Baker Botts knowingly served Loews’ interests.
5. The Human Dynamics
In the course of evaluating whether the Opinion was rendered in good faith, the
court has taken account of the professional and personal incentives that Baker Botts faced.
Throughout its work on the Opinion, Baker Botts approached the assignment with an
advocate’s mindset. “Lawyers by nature tend to be loyal to their clients. This is sort of
baked into our professional rules.” Williams Cos., 159 A.3d at 280 (Strine, CJ., dissenting).
Baker Botts strived to conclude that the General Partner could exercise the Call Right
because that is what its client wanted.
Rosenwasser had an additional, personal incentive to push the limits. He drafted the
Call Right, and he understandably wanted that provision to accomplish what his client
thought it should do.25 And Loews was a forceful client. Throughout the events giving rise
25
Loews and Baker Botts recognized that Rosenwasser’s prior representation of
Boardwalk in connection with its IPO and the drafting of the Partnership Agreement
created a conflict of interest, and they called it out in Baker Botts’ engagement letter. In an
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to this litigation, Alpert demonstrated that he knew how to manipulate his outside counsel
so that counsel would deliver the answers that he wanted to receive. Sometimes he did so
subtly, as when he called for an immediate teleconference after receiving Wagner’s email
about the March 15 FERC Actions not being final.26 Sometimes, he was less subtle, as
effort to neutralize it, they included the following statement: “We [Baker Botts] believe,
and you have agreed, that the prior work by [Rosenwasser and other lawyers] while at
Vinson & Elkins LLP for Boardwalk, is not substantially related to the Matter.” JX 906 at
2.
That was not true. Under any reasonable understanding of the term, the two matters
were “substantially related.”
Beyond switching sides in the same matter, the concept of substantial
relationship applies to later developments out of the original matter. A matter
is substantially related if it involves the work the lawyer performed for the
former client. For example, a lawyer may not on behalf of a later client attack
the validity of a document that the lawyer drafted if doing so would
materially and adversely affect the former client.
Restatement, supra, § 132 cmt. d(ii); see J.E. Rhoads & Sons, Inc. v. Wooters, 1996 WL
41162, at *4 (Del. Ch. Jan. 26, 1996) (applying rule to disqualify a firm from litigating a
case that involved an employment agreement that was part of a transaction that the firm
helped negotiate and document).
This court expresses no view regarding Baker Botts’ compliance with the ethical
rules, both because in most circumstances any resulting conflict can be waived, and
because any ethical issue did not affect the fairness of these proceedings. Cf. In re Appeal
of Infotechnology, Inc., 582 A.2d 215, 220 (Del. 1990) (holding that a trial court has no
authority to rule on ethical issues involving Delaware lawyers, because that subject falls
within the exclusive jurisdiction of the Delaware Supreme Court). The point is rather that
the issue created by Rosenwasser’s former representation was front and center for
everyone. A related point is that the General Partner and Baker Botts attempted to deal
with the issue by agreeing to something that was untrue.
26
See JX 616 at 1; e.g., Rosenwasser Tr. 183–84 (testifying about obvious pressure
from Alpert and Loews to give a “thumbs up”); JX 1225 (obtaining advice from Richards
Layton to push back on Skadden without informing Richards Layton that Loews had
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when he “really beat on Skadden” until they “fell in line,” but nevertheless decided to
impose a consequence on Skadden by “look[ing] to other firms re potential litigation.” JX
1136 at 1.
It is also contextually relevant that the Opinion was rendered for an interested
transaction involving an MLP. In the MLP ecosystem, interested transactions abound and
become routinized. Governance practices are frequently suboptimal, and the Delaware
courts have had cause to question opinions rendered to facilitate transactions (albeit by
financial advisors rather than lawyers).27
The court recognizes that a parade of lawyers testified that they subjectively acted
in good faith. Where, as here, witnesses testify about their intent, the trial judge must “make
credibility determinations about [each] defendant’s subjective beliefs by weighing witness
testimony against objective facts.” Allen v. Encore Energy P’rs, L.P., 72 A.3d 93, 106 (Del.
2013). The credibility determination turns in part on “the demeanor of the witnesses whose
states of mind are at issue.” Johnson v. Shapiro, 2002 WL 31438477, at *4 (Del. Ch. Oct.
already consulted the independent directors); JX 1262 at 1 (bringing in Davis Polk to
address what Alpert described as “unusual language” in the Opinion).
27
See, e.g., Gerber, 67 A.3d at 422 (holding that plaintiffs stated a claim because a
fairness opinion “did not fulfill its basic function”); In re El Paso Pipeline P’rs, L.P. Deriv.
Litig., 2015 WL 1815846, at *21–22 (Del. Ch. Apr. 20, 2015) (“[The financial advisor’s]
work product further undermined any possible confidence in the Committee. . . . [the
financial advisor’s] actions demonstrated that the firm sought to justify Parent’s asking
price and collect its fee.”); cf. Allen v. El Paso Pipeline GP Co., 113 A.3d 167, 188 (Del.
Ch. 2014) (denying a motion for summary judgment on an implied covenant of good faith
and fair dealing claim where a fairness opinion did not take into account the possibility of
excessive dilution), aff’d, 2015 WL 803053 (Del. Feb. 26, 2015) (TABLE).
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18, 2002). A finding that a witness’ account is not credible does not mean that the witness
lied. Human recall is not like playing a video tape. The act of remembering shapes
recollection, as does the context in which the remembering takes place. A wide range of
situational and subjective factors prime and shape first-hand accounts. When a witness’
conduct is at issue, and as the witness strives to recall what happened in a setting where a
particular set of recollections both supports the witness’ self-image and generates a
favorable outcome in the case, it is understandable that the witness could come to believe
in a personally favorable account, while failing to recall or discounting contrary beliefs or
disconfirming evidence.
A finding that a party did not act in good faith does not require a confession. It
requires that the plaintiff prove by a preponderance of the evidence that the party in
question knew it was not acting legitimately when it performed the actions in question.
That finding can be made even if the human actors for that party convince themselves after
the fact that they acted properly.
6. The Court’s Finding
Based on the foregoing confluence of factors, and the more detailed recitation set
forth in the Factual Background, the plaintiffs proved the Opinion did not reflect a good
faith effort to discern the facts and apply professional judgment. The Opinion therefore
failed to satisfy the Opinion Condition.
The analysis of the Opinion is necessarily holistic. Although this decision has
discussed various aspects of the Opinion individually, it is the totality of the evidence that
results in the finding that the Opinion did not reflect a good faith effort.
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If Baker Botts had only stretched once or twice, or made an isolated counterfactual
assumption, then it would not be possible to reject the Opinion. Under those circumstances,
the court might have disagreed with Baker Botts’ assessments, but those disagreements
would not have been sufficient to support a lack of good faith. But here, the record as a
whole depicts a contrived effort to generate the client’s desired result when the real-world
facts would not support it. Baker Botts produced a simulacrum of an opinion, and that
flawed imitation did not satisfy the Opinion Condition.
C. The Failure To Satisfy The Acceptability Condition
Before the General Partner could exercise the Call Right, the General Partner also
had to satisfy the Acceptability Condition. PA §§ 1.1 at 24, 15.1(b)(ii). The Opinion
Condition derives directly from Section 15.1. The definition of “Opinion of Counsel” adds
the Acceptability Condition. If the Opinion was not acceptable, then the Acceptability
Condition could not be met and the General Partner could not exercise the Call Right.
The General Partner purported to satisfy the Acceptability Condition by having
Holdings determine in its capacity as Sole Member of the GPGP that the Opinion was
acceptable. But the language of the operative agreements is ambiguous as to whether
Holdings or the GPGP Board has the authority to make that determination. One reading of
the relevant agreements would recognize Holdings as having that authority. That reading
rests on textual hooks in the Partnership Agreement and the LLC Agreement, but it renders
the Acceptability Condition surplusage. Another reading of the relevant agreements would
recognize the GPGP Board as having the authority to make the acceptability determination.
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That reading has fewer textual supports but meshes better with the overall structure of the
agreements. Both readings are reasonable.
As this decision has discussed, the doctrine of contra proferentem applies when a
partnership agreement governing an MLP is ambiguous. That doctrine calls for the court
to apply the reading that is more favorable to the limited partners. The reading that the
GPGP Board had authority to make the acceptability determination is more favorable to
the limited partners than a reading in which Holdings, an entity where all of the decision-
makers were Loews insiders, had authority to make the acceptability determination in its
own interests. Under the contra proferentem doctrine, the GPGP Board had the authority
to make the acceptability determination. Because it did not, the Acceptability Condition
was not satisfied.
1. The Contractual Language
The Acceptability Condition exists because the Call Right uses the defined term,
“Opinion of Counsel.” PA § 15.1(b). The Partnership Agreement defines “Opinion of
Counsel” simply as “a written opinion of counsel . . . acceptable to the General Partner.”
Id. § 1.1 at 24. The Partnership Agreement defines “General Partner” to mean “Boardwalk
GP, LP . . . except as the context otherwise requires.” Id. § 1.1 at 18 (punctuation omitted).
The Partnership Agreement does not go further in defining who determines whether
an Opinion of Counsel is acceptable. It does not discuss the internal governance structure
of the General Partner or identify what organ within the General Partner would make the
acceptability determination. Traditionally, a general partner would be a natural person or
an entity with a single governing body, such as a corporation with a board of directors. In
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that scenario, it would be clear who would make the determination. But Loews chose a
more complicated structure. When Loews created Boardwalk, it structured the General
Partner as another limited partnership, then installed the GPGP as its general partner. The
GPGP is a limited liability company with both a board of directors (the GPGP Board) and
a sole member (Holdings). The GPGP Board has general authority to act on behalf of the
GPGP. The Sole Member has specific authority to make certain decisions on behalf of the
GPGP.
The Partnership Agreement did not attempt to allocate authority for the acceptability
determination among the multiple entities and decision-makers that Loews created. The
Partnership Agreement only spoke in terms of action by the General Partner. To the extent
that the Partnership Agreement considered the internal structure of the General Partner, it
contemplated that the General Partner would have a board of directors. See, e.g., PA §
7.9(a). From a structural standpoint, the Partnership Agreement implied that the General
Partner would make decisions through a board of directors.
Rather than assigning authority over different decisions to different actors, the
Partnership Agreement distinguished between actions that the General Partner took in an
individual capacity and actions that the General Partner took in an official capacity. The
Partnership Agreement explains “[b]y way of illustration and not of limitation,” that if a
provision uses “the phrase ‘at the option of the General Partner,’ or some variation of that
phrase,” then that language “indicates that the General Partner is acting in its individual
capacity.” PA § 7.9(c). The Call Right contains that type of signaling language, so the
decision whether to exercise the Call Right is a decision that the General Partner makes in
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its individual capacity. See id. § 15.1(b) (stating that General Partner has the “right . . .
exercisable at its option . . . to purchase” all the outstanding limited partner interests so
long as it satisfies the preconditions). The Opinion of Counsel definition does not have that
signaling language. See id.§ 1.1 at 24.
Notably, whether the General Partner is acting in an individual capacity or an
official capacity does not imply that a different decision-maker makes the decision. If the
general partner was a natural person or an entity with a single governing body, such as a
corporation with a board of directors, then the same decision-maker would make the
decision regardless of whether the general partner was acting in an individual capacity or
an official capacity. What would change is the contractual standard of review that would
apply to the resulting decision.28 For present purposes, the issue is not what standard of
review to apply to the General Partner’s decision to exercise the Call Right. The issue is
whether the proper decision-maker made the decision.
28
Compare PA § 7.9(b) (providing the standard of review for a decision made by
the General Partner “in its capacity as the general partner of the Partnership as opposed to
in its individual capacity”), with id. § 7.9(c) (providing the standard of review for a decision
made by the General Partner “in its individual capacity as opposed to in its capacity as the
general partner of the Partnership”); see also JX 1201 at 48 (“Any exercise by our general
partner of its call right is permitted to be made in our general partner’s individual, rather
than representative, capacity; meaning that under the terms of our partnership agreement
our general partner is entitled to exercise such right free of any fiduciary duty or obligation
to any limited partner and it is not required to act in good faith or pursuant to any other
standard imposed by our partnership agreement.”).
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A limited partner thus could not readily determine from the Partnership Agreement
who would make the acceptability determination on behalf of the General Partner. The
Partnership Agreement is silent and ambiguous.
Lacking guidance, a limited partner might turn to other sources. A logical next step
would be to look to the partnership agreement governing the internal affairs of the General
Partner, but no one has suggested that any provision in that agreement would be pertinent.
Still lacking guidance, a limited partner might search further. A sophisticated
limited partner might realize that the General Partner was itself a limited partnership with
the GPGP as its general partner. A diligent limited partner who pressed on might thus end
up at a third agreement: the LLC Agreement governing the internal affairs of the GPGP.
The LLC Agreement also does not clearly address what decisionmaker would make
the acceptability determination. The LLC Agreement provides generally that, “[e]xcept as
otherwise specifically provided in this Agreement, the business and affairs of the Company
shall be managed under the direction of the Board.” LLCA § 5.2(a). Section 5.6 creates an
exception that gives Holdings “exclusive authority over the business and affairs of the
Company that do not relate to management and control of the [Partnership].” Id. § 5.6. The
LLC Agreement adds that Holdings “shall have exclusive authority to cause the Company
to exercise the rights of the Company and those of the MLP General Partner . . . provided
in . . . Section 15.1.” Id. § 5.6(xi) (the “Authority Provision”).
The LLC Agreement thus divides the world of possible decisions into two
categories. Unlike in the Partnership Agreement, those two categories do not depend on
whether the General Partner is acting in an individual capacity or an official capacity.
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Rather, the categories in the LLC Agreement divide the world into decisions relating to
“the business and affairs of the Company,” where the GPGP Board has authority, and
decisions “that do not relate to management and control of the [Partnership],” where
Holdings has authority. The LLC Agreement then adds the Authority Provision to confirm
that Holdings has authority over the rights provided in Section 15.1 of the Partnership
Agreement. That addition suggests that without the Authority Provision it would be unclear
whether the decision to exercise the Call Right fell within the purview of the GPGP Board
or Holdings. The lack of clarity that would exist without the Authority Provision is also
consistent with the fact that whether an action is done in the General Partner’s “individual”
or “official” capacity only dictates the applicable standard of review, not which decision-
maker makes the decision.
The LLC Agreement also contains a definition of “Opinion of Counsel” that
expressly refers to the Sole Member. Unlike the definition of “Opinion of Counsel” that
appears in the Partnership Agreement, the definition in the LLC Agreement defines the
term as “a written opinion of counsel (which may be regular counsel to the Company or
the MLP or any of their respective Affiliates) acceptable to the Sole Member.” LLCA §
1.1 at 7. But the LLC Agreement never uses the term “Opinion of Counsel” in any
substantive provision. It is a stray definition.
As this discussion shows, none of the constitutive agreements gives a clear answer
as to which entity makes the acceptability determination. Instead, the agreements divvy up
decisions into categories, including (i) the difference between determining the acceptability
of the Opinion and exercising the Call Right, (ii) the difference between action in an official
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capacity and action in an individual capacity, and (iii) the difference between decisions that
relate to “the business and affairs of the Company” and those “that do not relate to
management and control of the [Partnership].” When mixed and matched, the three pairs
could generate eight combinatorial outcomes.
2. The Competing Arguments
One reasonable reading of the provisions is that Holdings makes the acceptability
determination. From a textual perspective, that reading treats the phrase “Opinion of
Counsel” as the linguistic version of an equivalency formula, like “X = [the definitional
text].” Under this reading, the definitional text is substituted algebraically wherever the
“X” appears, such that the full language of the “Opinion of Counsel” definition would be
substituted wherever the term “Opinion of Counsel” appears in the Partnership Agreement,
including in the Call Right in Section 15.1. The Call Right thus would state that if the
General Partner held “more than 50% of the total Limited Partner Interests of all classes
then Outstanding” and had received “a written opinion of counsel . . . acceptable to the
General Partner” then the General Partner could exercise the Call Right, assuming the
Opinion of Counsel satisfied the Opinion Condition. See PA §§ 1.1, 15.1(b). At that point,
the argument goes, the Authority Provision in the LLC Agreement specifies that Holdings
makes decisions regarding the General Partner’s rights under Section 15.1, so Holdings has
the authority to make the decision as the Sole Member. This reading has an added benefit
of giving some purpose to the stray definition of “Opinion of Counsel” in the LLC
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Agreement. Although the definition is never used, it does refer to Holdings making the
determination as Sole Member.29
The problem with this analysis is that Holdings always and inherently had the right
to determine whether the Opinion is acceptable. Holdings possessed that authority as part
of its ability to decide whether or not to exercise the Call Right. If Holdings did not think
that the Opinion was acceptable, then Holdings could simply decide not to exercise.
Because Holdings always had the ability to make a de facto acceptability determination,
assigning the acceptability determination to Holdings renders the Acceptability Condition
surplusage. Under standard principles of contract interpretation, a Delaware court generally
eschews an interpretation that would result in surplusage. See Sunline Com. Carriers, Inc.
v. CITGO Petroleum Corp., 206 A.3d 836, 846 (Del. 2019).
When viewed as a whole, the language of the Partnership Agreement suggests that
rather than serving as a redundant condition for the benefit of Holdings, the Acceptability
Condition exists to protect the Partnership. Both the Opinion Condition and the
29
Note that the argument in favor of Holdings making the acceptability
determination is not advanced by equating (i) the Partnership Agreement’s reference to the
General Partner taking action in an official capacity with the LLC Agreement’s reference
to the GPGP Board having authority over decisions that relate to “the business and affairs
of the Company,” and (ii) the Partnership Agreement’s reference to the General Partner
taking action in an individual capacity with the LLC Agreement’s reference to Holdings
having authority over decisions “that do not relate to management and control of the
[Partnership].” Aligning the categories in that way leads to the conclusion that Holdings
exercises the Call Right, which is consistent with the Authority Provision. But that
conclusion does not address whether the acceptability determination is part of the exercise
of the Call Right.
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Acceptability Condition ensure that the General Partner cannot exercise the Call Right
arbitrarily without satisfying an up-front test. The Opinion Condition establishes the basic
hurdle that the General Partner must clear, and the Acceptability Condition ensures that the
General Partner cannot obtain a contrived opinion. The Acceptability Condition is thus not
a protection for Holdings, which can always protect itself by deciding not to exercise the
Call Right. It is instead a protection for the minority partners. In this regard, the Call Right
at issue in this case contrasts with a second call right that the General Partner can exercise
without satisfying either the Opinion Condition or the Acceptability Condition, as long as
the General Partner owns 80% or more of the common units. See PA § 15.1(a). The
difference between the two call rights indicates that the Opinion Condition and the
Acceptability Condition were intended as meaningful limitations on the General Partner’s
ability to exercise the Call Right at the lower ownership level.
Viewed within this structure, the acceptability determination logically belongs to
the GPGP Board. Only the GPGP Board has outside directors, and only the GPGP Board
can inject a measure of independence into the determination of acceptability. The need for
some measure of independence becomes critical for the Call Right, because otherwise the
General Partner can exercise that right in its individual capacity, free of any duty or
constraint whatsoever. The defendants’ interpretation would make the General Partner the
“judge in [its] own cause.” See Dr. Bonham’s Case, 8 Co. Rep. 107a, 114a, 118a, 77 Eng.
Rep. 638, 646, 652 (C.P. 1610) (“[O]ne should not be judge in his own cause, indeed it is
unjust for one to be a judge of his own matter; and one cannot be Judge and attorney for
any of the parties . . . .”).
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Against this backdrop, the textual arguments for treating the acceptability
determination as a decision for Holdings to make as Sole Member are weaker than they
initially seem. To reiterate, the distinction between the General Partner acting in an
individual capacity as opposed to an official capacity does not shed light on who makes
the acceptability determination. That distinction only determines the standard of review
that applies to a decision made by the General Partner, not which entity within the General
Partner makes the decision. See PA § 7.9(b), (c).
The distinction between the two definitions of “Opinion of Counsel,” one in the
Partnership Agreement and the other in the LLC Agreement, also appears in a different
light. The fact that the LLC Agreement contains a reference to the Sole Member confirms
the obvious: the drafters could have included a similar reference in the Partnership
Agreement. The fact that they did not implies that the Partnership Agreement did not intend
to confer the authority to make the acceptability determination on the Sole Member. See
Int’l Rail P’rs LLC v. Am. Rail P’rs, LLC, 2020 WL 6882105, at *9 (Del. Ch. Nov. 24,
2020) (explaining that evidence of specific language in one agreement but not in a distinct
yet related agreement “reflects that the drafters knew how to craft” and include the specific
language at issue if they so desired).
Finally, the notion that the acceptability determination becomes part of the exercise
of the Call Right also becomes suspect. The Call Right is structured as a conditional option.
It first identifies conditions that the General Partner must meet, including receiving an
Opinion of Counsel that both addresses the substantive issue identified in the Call Right
and does so in an acceptable way. PA § 15.1(b)(ii). The second part of the Call Right
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provides that if the General Partner satisfies those conditions, “then the General Partner
shall then have the right . . . exercisable at its option within 90 days of receipt of such
opinion to purchase all, but not less than all, of all Limited Partner Interests then
Outstanding held by Persons other than the General Partner and its Affiliates.” Id.
(emphasis added). The conditions for exercise must be satisfied before the General Partner
can determine whether to exercise it.
As noted previously, the reading that gives Holdings authority over the acceptability
determination requires replacing “Opinion of Counsel” with the definitional language for
that term. That move does not change the structure of the Call Right. It merely introduces
the definitional language into the conditions that must be met before the General Partner
can decide whether to exercise the Call Right. It does not change the fact that the condition
must be met before the General Partner can act, and it does not address who has authority
over evaluating the condition.
The term “Opinion of Counsel” was not drafted specifically for the Call Right. The
Partnership Agreement uses it in many substantive provisions. See, e.g., PA §§ 4.6(c),
4.8(b), 7.10(b), 11.1(b), 12.1(a), 12.2(iii), 13.1 (f), 13.3(d), 13.11, 14.3(d),(e). It requires
consideration of context to determine who would make the resulting determination. For
purposes of the Call Right, the Acceptability Condition remains part of the conditions that
must be satisfied before the General Partner can exercise the Call Right. It is not part of the
decision to exercise the Call Right. It follows that the General Partner’s authority to
exercise the Call Right in its individual capacity does not mean that it can determine
acceptability in its individual capacity. For similar reasons, the Authority Provision does
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not clearly give the Sole Member the ability to make the acceptability determination as part
of the “rights . . . of the General Partner . . . provided in . . . Section 15.1.” LLCA § 5.6(xi).
The Acceptability Condition is not a right of the General Partner; it is a condition that must
be satisfied before the General Partner can exercise its rights.
Ultimately, the path to understand who makes the acceptability determination ends
in the marshy distinction that the LLC Agreement makes between an issue that relates to
the “business and affairs” of the Partnership, which is conferred to the GPGP Board, and
an issue that does “not relate to [the] management and control of the [Partnership],” which
is left to the Sole Member. LLCA § 5.6. At first blush, that distinction might seem to track
the distinction in the Partnership Agreement between official capacity decisions and
individual capacity decisions, but the language is different. To the extent the two concepts
do align, there are no textual signals relating to the Acceptability Condition that would
suggest that the General Partner makes the acceptability determination in an individual
capacity, such that the decision would “not relate to [the] management and control of the
[Partnership].”
Instead, the concepts of “business and affairs” and “management and control”
hearken to Section 141(a) of the Delaware General Corporation Law, which establishes the
capacious scope of authority possessed by a board of directors. See 8 Del. C. § 141(a).
Landmark Delaware Supreme Court cases establish that decisions about whether a public
entity’s shares are acquired relate to the business and affairs of the enterprise; a purchase
of shares is not exclusively an investor-level transaction between a buyer and seller that
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falls outside the board’s purview.30 Elsewhere in Section 5.6, the LLC Agreement
expressly invokes corporate law principles by stating that “[e]xcept as otherwise
specifically provided in this Agreement, the authority and functions of the Board, on the
one hand, and the Officers, on the other hand, shall be identical to the authority and
functions of the board of directors and officers, respectively, of a corporation organized
under the General Corporation Law of the State of Delaware.” LLCA § 5.6. Under
corporate law principles, a decision that would affect the success of a take-private
transaction would relate to the business and affairs of the corporation and fall within the
authority of the board of directors. Even without the backdrop of Delaware corporate law,
the exercise of the Call Right would “relate to” the management of the Partnership. If the
Call Right cannot be exercised, then the General Partner will continue to manage the
Partnership as an MLP with minority investors, making regular public filings with the SEC,
complying with listing requirements, and experiencing all of the other costs and benefits
of public status. If the Call Right is exercised, then the Partnership will no longer be an
MLP, and the General Partner can manage the Partnership’s affairs solely in the interest of
Loews and without the accoutrements of public status. Making the acceptability
determination therefore “relate[s] to [the] management and control of the [Partnership].”
30
See, e.g., Moran v. Household Int’l, Inc., 500 A.2d 1346, 1353 (Del. 1985) (“[W]e
note the inherent powers of the [b]oard conferred by 8 Del. C. § 141(a), concerning the
management of the corporation’s ‘business and affairs’ . . . also provides the [b]oard
additional authority upon which to enact the [r]ights [p]lan.” (emphasis removed) (citing
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 953 (Del. 1985))).
163
There is thus a reasonable reading of the pertinent agreements under which the
GPGP Board has the authority to make the acceptability determination. Recognizing the
potential merit in that argument, Loews initially intended to have the GPGP Board make
the acceptability determination. But the outside directors had a “hostile reaction,” and they
asked “shouldn’t we have independent counsel[?]” JX 874 at 5; see Layne Dep. 160. The
outside directors recognized the importance of the acceptability determination, and they
did not want to be treated as a speedbump on Loews’ path to the take-private. The outside
directors’ reaction shows why the Acceptability Condition exists, viz., it could provide an
external check.31
3. Counsel’s Contemporaneous Recognitions Of Ambiguity
Contrary to the defendants’ assertions, all of the lawyers acknowledged the
ambiguity that Loews created for the acceptability determination by establishing
Boardwalk’s complex entity structure. Within Skadden, Voss conducted the most thorough
and detailed analysis. After reasoning through the various issues, she expressed the view
that “the MLP Agreement likely requires that the [GPGP] Board make the determination
to accept the Opinion of Counsel. Or, at a minimum, it is ambiguous.” JX 747 at 1.
Skadden later prepared a memorandum for Alpert that framed the analysis more
conservatively and with additional caveats and qualifications. The memorandum
31
At trial, two defense witnesses disputed whether the outside directors had a
“hostile” reaction. McMahon Tr. 535; Siegel Tr. 738. It is not clear why the witnesses
quibbled over this point. They agreed that the outside directors were uncomfortable with
the determination and did not want to be involved. McMahon Tr. 535; Siegel Tr. 738.
164
nevertheless made clear that there were ambiguities surrounding the acceptability
determination. See JX 773 at 1, 3. And when advising Holdings about whether it could
accept the Opinion, Skadden would say only that it was reasonable for Holdings to
conclude that it had the authority to make the acceptability determination. See JX 1508 at
3. Even during his deposition, the farthest that Grossman would go in favor of the
defendants’ current view is that “the better reading” was for the GPGP Board to make the
decision. Grossman Dep. 70–71.
Richards Layton also saw both sides of the interpretive coin. In contrast to
Skadden’s more detailed analysis, Richards Layton gave advice orally on a twenty-four
hour turnaround, and without knowing that Loews had already received advice from
Skadden and contacted the members of the GPGP Board about making the acceptability
determination. In the initial call with Alpert, Richards Layton went beyond Grossman by
an adverb, saying it was the “far better view” that Holdings could make the acceptability
determination. Raju Tr. 808, 842. Only after receiving Richards Layton’s oral advice did
Alpert tell Richards Layton about Skadden’s view. No one told Richards Layton about
Loews’ outreach to the GPGP Board until this litigation.
After receiving Richards Layton’s oral advice, Alpert asked the firm to memorialize
its advice in an email. JX 1225 at 1. The email backed away from the oral advice by
removing the adverb, stating: “While there is some ambiguity and arguments can certainly
be made to the contrary, we think that the better view is that the [acceptability
determination] is within the sole authority of the Sole Member [Holdings] pursuant to
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Section 5.6 of the LLC Agreement.” Id. at 2–3 (emphasis added). The email included the
following caveat:
[I]f the Board of Directors is approached and declines to determine that the
Opinion of Counsel is acceptable and the Section 15.1(b) call right is
exercised by the Sole Member anyway, that would be a difficult fact to
overcome in any future litigation regarding the exercise of the Section
15.1(b) call right.
Id. at 3 (emphasis added). Richards Layton did not know that the GPGP Board had been
approached already about making the decision. See Raju Tr. 843. At Alpert’s request,
Richards Layton later revised its email to restore the adverb, but it kept the caveats. See JX
1265 at 4.
Even Baker Botts never opined explicitly that the plain language of the Partnership
Agreement and the LLC Agreement made clear that Holdings made the acceptability
determination. In its initial advice to Alpert, Baker Botts wrote that “[i]t seems that
determination of the acceptability of an opinion of counsel in the context of Section 15.1(b)
should be made by the Sole Member as opposed to the board of directors of the General
Partner.” JX 686 at 4 (emphasis added). After obtaining advice from Skadden and Richards
Layton, Baker Botts still only would go so far as to describe that as the “better view,” while
noting that “arguments can be made to the contrary.” JX 1508 at 40.
The lawyer who asserted most strongly that the Partnership Agreement gave the
General Partner the authority to make the acceptability determination was Layne. He never
prepared any written analysis, and he seems originally to have credited the argument that
166
the GPGP Board would determine acceptability.32 After the outside directors on the GPGP
Board expressed their displeasure about being involved in the acceptability determination,
Alpert tapped Layne to explain why they no longer had to address the issue. At that point,
Layne seems to have lumped together the issue of the authority to exercise the Call Right
with the issue of the authority to determine acceptability.33 The vacillation in Layne’s views
is also consistent with the ambiguity inherent in the Acceptability Condition.
4. Ambiguity Means The GPGP Board Had To Make The Acceptability
Determination.
Because the question of who could make the acceptability determination was
ambiguous, well-settled interpretive principles require that the court construe the
agreement in favor of the limited partners. See Norton, 67 A.3d at 360. Under the
interpretation that favors the limited partners, the GPGP Board had the authority to make
the acceptability determination. Because the GPGP Board did not make the acceptability
determination, the General Partner breached the Partnership Agreement by exercising the
Call Right.
32
When reviewing a draft of a memorandum from Richards Layton which explained
that Section 5.6 “specifies that the Sole Member has exclusive authority to cause GP LLC
to exercise the rights of GP LLC,” Layne commented, “but not to determine applicability.”
JX 1810 at 3. Next to another sentence that stated that Holdings decided whether the
Opinion of Counsel was acceptable “pursuant to Section 5.6 of the LLC Agreement
because the determination to accept the Opinion of Counsel is a part of Section 15.1 of the
Partnership Agreement,” Layne wrote “not exercise.” Id.33
See JX 1325; JX 1331 at 2; JX 1343; JX 1435 at 1, 3; JX 1812.
167
D. Contractual Immunity To Damages
The defendants maintain that even if the General Partner breached the Partnership
Agreement and otherwise would be responsible for damages, the plaintiffs cannot recover
because the defendants immunized themselves contractually against any damages award.
There are two relevant provisions in the Partnership Agreement. The first is a true
exculpation provision. The second is a provision that establishes a conclusive presumption
of good faith if the General Partner or another decision-maker relies on an advisor. The
General Partner cannot rely on either of them to escape liability in this case.
1. The Exculpation Provision
Section 17-1101(f) of the Delaware Revised Uniform Limited Partnership Act
authorizes a partnership agreement to eliminate “any and all liabilities for breach of
contract and breach of duties (including fiduciary duties) of a partner or other person to a
limited partnership or to another partner or to another person that is a party to or is
otherwise bound by a partnership agreement,” other than “any act or omission that
constitutes a bad faith violation of the implied contractual covenant of good faith and fair
dealing.” 6 Del. C. § 17-1101(f).
The Partnership Agreement takes full advantage of this statutory authority. Section
7.8(a) states:
Notwithstanding anything to the contrary set forth in this Agreement, no
Indemnitee shall be liable for monetary damages to the Partnership [or] the
Limited Partners . . . for losses sustained or liabilities incurred as a result of
any act or omission of an Indemnitee unless there has been a final and non-
appealable judgment entered by a court of competent jurisdiction
determining that, in respect of the matter in question, the Indemnitee acted in
bad faith or engaged in fraud, [or] willful misconduct . . . .
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PA § 7.8(a). The Partnership Agreement defines “Indemnitee” to include the “General
Partner,” “any Person who is or was an Affiliate of the General Partner,” and “any Person
who is or was a member, partner, director, officer, fiduciary or trustee of . . . the General
Partner or any Affiliate of . . . the General Partner.” Id. § 1.1 at 19.
Under this provision, to recover damages from the General Partner, the plaintiff
must prove that the General Partner “acted in bad faith or engaged in fraud [or] willful
misconduct.” Id. § 7.8(a). The Partnership Agreement does not define these terms. Under
Delaware law, however, all three require a showing of scienter.
The exception for willful misconduct best fits the facts of this case. That term
requires a showing of “intentional wrongdoing, not mere negligence, gross negligence or
recklessness.” Dieckman v. Regency GP LP, 2021 WL 537325, at *31 (Del. Ch. Feb. 15,
2021) (quoting 12 Del. C. § 3301(g)), aff’d per curiam, No. 92, 2021, slip op. (Del. Nov.
3, 2021); see Willful Misconduct, BLACK’S LAW DICTIONARY (11th ed. 2019)
(“Misconduct committed voluntarily and intentionally.”). The concept of misconduct
involves “unlawful, dishonest, or improper behavior, esp. by someone in a position of
authority or trust.” Misconduct, BLACK’S LAW DICTIONARY (11th ed. 2019).
While serving as a member of this court, Chief Justice Strine described two
situations that could support a finding of willful misconduct. See Gotham P’rs, L.P. v.
Hallwood Realty P’rs, L.P., 2000 WL 1476663 (Del. Ch. Sept. 27, 2000). A limited partner
of an MLP asserted that the general partner “designed” a series of transactions “to entrench
its owner [Hallwood Group Incorporated (“HGI”)], by placing a large number of
[partnership] units in HGI’s hands at an unfairly low price.” Id. at *3. The limited partner
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also asserted that the general partner “timed the [t]ransactions so as to enable HGI to grab
up a control block at a depressed price.” Id. Chief Justice Strine held on a motion for
summary judgment that the plaintiffs could not prove a claim for fraud, but that the ruling
did not eliminate the possibility that the plaintiffs could prove willful misconduct. Possible
scenarios included if the general partner or its affiliates
(i) purposely misled the [independent directors] about (a) the underlying
value of the [p]artnership units or (b) the ability of the [p]artnership to get a
higher price for the units than HGI was willing to pay, (ii) in order to induce
the [independent directors] to approve a sale to HGI at an unfair price.
Id. at *14. Another possible scenario that would provide evidence of willful misconduct
involved the general partner having “a secret plan to snatch up a large number of units that
could entrench it at a bargain price before an expected up-turn in the market and did not
disclose that plan to the [independent directors].” Id.Striving to limit the conceptual space available for a finding of willful misconduct,
the defendants argue that the court must (i) focus on the three individuals who comprised
the Holdings board (Siegel, Keegan, and Wang), (ii) examine their individual states of
mind when deciding to exercise the Call Right, and (iii) deny any recovery to the class
unless all three acted with scienter. The defendants would have the court ignore all of the
other actors in the drama and all of the events leading up to the decision to exercise the
Call Right.
If the court were deciding whether to hold Siegel, Keegan, or Wang personally liable
for their decision to exercise the Call Right, such as under a tortious interference theory,
170
then that mode of analysis might be warranted. But the plaintiffs are seeking to recover
damages from the General Partner, not those three individuals.
“A basic tenet of corporate law, derived from principles of agency law, is that the
knowledge and actions of the corporation’s officers and directors, acting within the scope
of their authority, are imputed to the corporation itself.” Stewart v. Wilm. Tr. SP Servs.,
Inc., 112 A.3d 271, 302–03 (Del. Ch. 2015), aff’d, 126 A.3d 1115 (Del. 2015); see
Teachers’ Ret. Sys. of La. v. Aidinoff, 900 A.2d 654, 671 n.23 (Del. Ch. 2006); Restatement
(Third) of Agency § 5.03 Westlaw (Am. L. Inst. database updated Oct. 2021). That
principle extends to alternative entities like the General Partner. See CompoSecure, L.L.C.
v. CardUX, LLC, 206 A.3d 807, 823–24 (Del. 2018). “An entity … can only make
decisions or take actions through the individuals who govern or manage it.” Dieckman,
2021 WL 537325, at *36 (quoting Gerber v. EPE Hldgs., LLC, 2013 WL 209658, at *13
(Del. Ch. Jan. 18, 2013) (omission in original)).
During the relevant period, numerous individuals acted on behalf of the General
Partner in a manner sufficient to impute scienter to the General Partner. During the relevant
period, Alpert, Siegel, McMahon and Johnson were management-level officers and agents
of Loews, Holdings, the GPGP, the General Partner, and Boardwalk. Their actions and
intent were imputed to the General Partner. Together, those individuals orchestrated the
sham Opinion, supported the sham Opinion with the inadequate Rate Model Analysis, and
diverted the acceptability determination for the sham Opinion from the GPGP Board to
Holdings.
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In addition, Baker Botts acted as counsel to the General Partner in rendering the
Opinion. A lawyer acts as an agent for its client, and the lawyer’s knowledge is imputed to
the client for matters within the scope of the lawyer’s agency. Vance v. Irwin, 619 A.2d
1163, 1165 (Del. 1993). Ordinarily, an issue would exist about whether to impute an
attorney’s knowledge to the client when the attorney did not act in good faith. Here,
however, the General Partner wanted Baker Botts to render the Opinion and pushed for the
outcome that Baker Botts reached. Under the circumstances, Baker Botts’ scienter in
issuing the Opinion can be attributed to the General Partner.
The General Partner engaged in “intentional wrongdoing . . . designed to . . . seek
an unconscionable advantage.” Dieckman, 2021 WL 537325, at *36 (quoting 12 Del. C. §
3301(g)). The General Partner and Baker Botts pasted together an Opinion intended to
achieve the goal of enabling the General Partner to exercise the Call Right. That conduct
is sufficient to render the exculpatory provision inapplicable.34
34
The parties have not addressed who has the burden to prove that the exculpatory
provision applies. Authorities demonstrate persuasively that the General Partner should
bear this burden. In the analogous context of corporate law exculpation, the director
defendants must prove that they fall within the exculpatory provision’s protections. See
Emerald P’rs v. Berlin, 726 A.2d 1215, 1223–24 (Del. 1999). For purposes of a breach of
contract claim, the exculpatory provision operates as an exception to normal principles of
contract liability. As a matter of hornbook law, “[a] party seeking to take advantage of an
exception to a contract is charged with the burden of proving facts necessary to come within
the exception.” 29 Am. Jur. 2d Evidence § 173, Westlaw (database updated Aug. 2021).
This decision has nevertheless analyzed the question of scienter as if the plaintiffs bore the
burden of proof.
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2. The Conclusive Presumption
Section 17-407(c) of the Delaware Revised Uniform Limited Partnership Act states
that a general partner
shall be fully protected from liability to the limited partnership, its partners
or other persons party to or otherwise bound by the partnership agreement in
relying in good faith upon . . . opinions, reports or statements presented . . .
by any . . . person as to matters the general partner reasonably believes are
within such . . . person’s professional or expert competence . . . .
6 Del. C. § 17-407(c).
The Partnership Agreement supercharges this statutory concept by providing as
follows:
The General Partner may consult with legal counsel . . . and any act taken or
omitted to be taken in reliance upon the advice or opinion (including an
Opinion of Counsel) of such [counsel] . . . shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such advice
or opinion.
PA § 7.10(b) (the “Reliance Provision”).
The General Partner cannot invoke the Reliance Provision when it knows that the
opinion in question was contrived to generate a result. Under those circumstances, the
General Partner is not relying on the contrived opinion. The opinion is window dressing to
enable the General Partner to take action.
That reality prevents the General Partner from relying on the Opinion for purposes
of the Reliance Provision. The General Partner not only knew the Opinion was contrived,
but the General Partner’s representatives participated actively in the manufacturing of the
Opinion.
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The General Partner also cannot rely on Skadden’s advice about the acceptability of
the Opinion. As a threshold matter, it is not clear that the Reliance Provision envisions
opinions like Matryoshka dolls, in which counsel renders an opinion, then another counsel
opines on the opinion, and so on, with the breadth of protection expanding at each level. If
anything, the procuring of a second opinion can be a tell, implying inadequacies or taints
in the original opinion. Boards often retain a second investment banker when they learn
that their chosen banker has a conflict of interest that could render its advice suspect. At
least in that setting, the second banker addresses the core issue. Here, Skadden refused as
a matter of firm policy to opine on the core issue and instead provided an opinion about an
opinion.
Regardless, the Reliance Provision only protects the General Partner when it
actually relies on the underlying opinion, not when it manufactures the opinion and then
gets another opinion to whitewash the first one. No matter what Skadden said about the
Opinion, the General Partner knew how the Opinion came about, including that it addressed
hypothetical maximum rates in a setting where the regulatory changes were not yet final
and were unlikely to have any meaningful real-world effect. Under those circumstances,
the General Partner cannot invoke the Reliance Provision.
Finally, the General Partner cannot invoke the Reliance Provision for purposes of
the Acceptability Condition because the wrong decisionmaker considered the issue. The
General Partner knew about the ambiguity surrounding the acceptability condition. The
General Partner opted for the decisionmaker more favorable to its interests rather than the
decisionmaker more favorable to the interests of the limited partners. With the wrong
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decisionmaker having acted, the General Partner cannot claim to have relied validly on
Skadden’s advice.
E. Damages
Having found that the General Partner breached the Partnership Agreement, and
having concluded that the General Partner can be held liable for damages, the next step is
to determine whether the plaintiffs suffered damages, and if so, the amount of a damages
award. The plaintiffs proved that by exercising the Call Right in breach of the Partnership
Agreement, the General Partner inflicted damages on the class of $689,827,343.38.
Plaintiffs are entitled to pre- and post-judgment interest on that amount. As the prevailing
party, the plaintiffs are also entitled to an award of fees.
[T]he standard remedy for breach of contract is based upon the reasonable
expectation of the parties ex ante. This principle of expectation damages is
measured by the amount of money that would put the promisee in the same
position as if the promisor had performed the contract.
Expectation damages thus require the breaching promisor to compensate the
promisee for the promisee’s reasonable expectation of the value of the
breached contract, and, hence, what the promisee lost.
Duncan v. Theratx, Inc., 775 A.2d 1019, 1022 (Del. 2001).
An injured party “need not establish the amount of damages with precise certainty
where the ‘wrong has been proven and injury established.’” Siga Techs., Inc. v.
PharmAthene, Inc., 132 A.3d 1108, 1131 (Del. 2015) (quoting Del. Express Shuttle, Inc.
v. Older, 2002 WL 31458243, at *15 (Del. Ch. Oct. 23, 2002)). “[D]oubts about the extent
of damages are generally resolved against the breaching party.” Id. at 1131. “Public policy
has led Delaware courts to show a general willingness to make a wrongdoer ‘bear the risk
of uncertainty of a damages calculation where the calculation cannot be mathematically
175
proven.’” Beard Rsch., Inc. v. Kates, 8 A.3d 573, 613 (Del. Ch. 2010) (quoting Great Am.
Opportunities, Inc. v. Cherrydale Fundraising, LLC, 2010 WL 338219, at *23 (Del. Ch.
Jan. 29, 2010) (collecting cases)). That said, expectation damages “should not act as a
windfall.” Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 146 (Del. 2009).
The plaintiffs proved that the General Partner breached the Partnership Agreement
by exercising the Call Right without meeting the necessary conditions. By exercising the
Call Right improperly, the General Partner deprived the plaintiffs of the stream of
distributions that they otherwise would have received as unitholders. The appropriate
measure of damages is therefore the difference between the present value of those future
distributions and the transaction price. The transaction price is undisputed. The General
Partner paid $12.06 per unit when it exercised the Call Right. Unsurprisingly, the parties
dispute the present value of the future distributions, and they presented drastically different
estimates to the court.
To make their respective cases, both sides presented damages experts. J.T. Atkins
submitted a report and testified on behalf of the plaintiffs. Atkins has been involved in
numerous M&A financing and restructuring transactions in the energy and MLP sectors,
and has acted as an expert witness in thirteen separate litigations involving energy
companies or MLPs. Atkins Tr. 1018. R. Glenn Hubbard submitted a report and testified
on behalf of the defendants. Hubbard is a professor at Columbia University’s business
school and has testified as an expert before this court on matters of valuation on numerous
occasions. JX 1745 (Hubbard Report) ¶¶ 2, 5.
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Atkins measured damages using a discounted distribution model (a “Distribution
Model”). He calculated the fair value of the units to be $17.84 at the low end and $19.30
at the high end, resulting in a range of damages from $720 million to $901.6 million. JX
1761 (Atkins Rebuttal Report) ¶ 2(d).
Hubbard also prepared a Distribution Model, but he discarded it in favor of a
valuation based on the market price of Boardwalk’s units. Using his market price metric,
Hubbard opined that the fair value of the units was $10.74 per unit. Hubbard Report ¶ 9.
Because that value was less than the Call Right exercise price, he concluded that the
plaintiffs suffered no damages.
Hubbard’s approach was not persuasive. This decision uses Atkins’ model with one
modification.
1. Hubbard’s Approach
After considering several valuation indicators, Hubbard opined that the best
evidence of the value of the units was their unaffected market price. In reaching this
conclusion, Hubbard examined various jurisprudential indicators of market efficiency and
concluded that when applied to Boardwalk’s units, those indicators were “generally
consistent with . . . trading in an efficient market.” Hubbard Report ¶ 71.
To derive a measure of damages based on the unaffected market price, Hubbard
could not simply use the market price on the date of the Call Right, because the Potential
Exercise Disclosures and the self-referential mechanic in the Purchase Price calculation
drove the market price downward. To derive an unaffected market price, Hubbard started
with the market price on the last trading day before the issuance of the Potential Exercise
177
Disclosures, then used a regression analysis to bring the market price forward to the date
on which Loews exercised the Call Right. See id. ¶ 89. Based on this analysis, Hubbard
concluded that the unaffected market price of the units would have been lower than the
Purchase Price. He therefore opined that the limited partners did not suffer any damages.
Id. ¶ 9.
Hubbard’s analysis is not persuasive because he failed to account for the General
Partner’s control over the Partnership and the resulting valuation overhang. A market for a
company’s shares “is more likely efficient, or semi-strong efficient, if it has . . . no
controlling stockholder.”35 Conversely, a market for a company’s shares is less likely to be
efficient if it has a controlling stockholder. The presence of a controlling stockholder
matters because “participants will perceive the possibility that the controller will act in its
own interests and discount the minority shares accordingly.” In re Appraisal of Regal Ent.
Gp., 2021 WL 1916364, at *26 (Del. Ch. May 13, 2021) (emphasis removed) (declining to
rely on unaffected trading price given the presence of a controlling stockholder); accord
Glob. GT v. Golden Telecom, Inc., 993 A.2d 497, 503, 508–09 (Del. Ch. 2010), aff’d, 11
A.3d 214 (Del. 2010). It is undisputed that Loews controlled the Partnership through the
General Partner. Hubbard’s starting point—the supposedly unaffected market price on the
35
Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd., 177 A.3d 1, 25 (Del.
2017); In re Appraisal of Stillwater Mining Co., 2019 WL 3943851, at *51 n.22 (Del. Ch.
Aug. 21, 2019) (collecting research supporting the reliability of unaffected trading price in
absence of controlling stockholder), aff’d sub nom. Brigade Leveraged Cap. Structures
Fund Ltd. v. Stillwater Mining Co., 240 A.3d 3 (Del. 2020).
178
last trading date before the issuance of the Potential Exercise Disclosures—was thus not a
reliable estimate of fair value.
Hubbard’s analysis also failed to account for the fact that the market did not possess
material information about the level of distributions that Boardwalk could make in the
future. “Under the semi-strong form of the efficient capital markets hypothesis, the
unaffected market price is not assumed to factor in nonpublic information.” Verition P’rs
Master Fund Ltd. v. Aruba Networks, Inc., 210 A.3d 128, 140 (Del. 2019). Consequently,
it is inappropriate to rely on the unaffected trading price as a measure of value when there
is “material, nonpublic information” which “could not have been baked into the public
trading price.” Id. at 139.
In this case, Loews projected internally that the Partnership’s distributions would
quadruple in 2023. See JX 1529, “Side Model” tab. Because Loews controlled the
Partnership, Loews had the ability to make that happen. The market was not aware of
Loews’ internal projections, and the unaffected trading price of the units could not and did
not reflect this information. See Dell, 177 A.3d at 25–26 (explaining that “valuation gaps”
can occur when “information fail[s] to flow freely or . . . management purposefully
temper[s] investors’ expectations for the [c]ompany so that it [can] eventually take over
the [c]ompany at a fire-sale price”). By relying on the unaffected trading price, Hubbard’s
approach failed to take into account this source of value.
Hubbard’s analysis of the trading price does not provide a reliable damages
estimate. This decision therefore declines to use it.
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2. Atkins’ Approach
Atkins provided a damages estimate using a Distribution Model. That methodology
is a variant of a discounted cash flow analysis, but instead of discounting future cash flows
at the entity level, the Distribution Model discounts the value of expected future
distributions at the investor level. Because the Distribution Model only looks at returns to
the equity, the discount rate is the company’s cost of equity capital. Atkins Tr. 1022. As
Hubbard acknowledged, a Distribution Model is a “customary” method for valuing units
in an MLP.36
The principal inputs to a Distribution Model are cash flow projections, the
company’s cost of equity capital, and a terminal growth rate. Atkins Tr. 1025–26. The
defendants do not dispute Atkins’ cost of equity capital or his terminal growth rate. In both
cases, Atkins used more conservative figures than Hubbard used in his competing
Distribution Model. See Hubbard Tr. 1195.
36
Hubbard Tr. 1194; see JX 397 at 15 (industry analyst white paper stating that
“[t]he methodology we prefer [for valuing MLPs] is the distribution discount model”); JX
423 at 85 (industry analyst white paper stating that “[o]ur primary tool for valuing MLPs
is a three-stage distribution (dividend) discount model”); JX 429 at 3 (analyst report
valuing the Partnership using a Distribution Model); JX 431 at 10 (same); JX 523 at 4
(same); JX 1223 at 8 (same); see also JX 451 at 29 (analyst white paper using the same
methodology but calling it a “Dividend Discount Model”). Hubbard prepared his own
Distribution Model to “corroborat[e]” his damages estimate. Hubbard Report ¶¶ 150–51,
155, Ex. 32A.
180
The defendants focused their attack on the cash flow projections that Atkins used.
Thus, the central question is whether the cash flow projections were sufficiently reliable to
use for valuation purposes.
“When evaluating the suitability of projections, Delaware cases express a strong
preference for management projections prepared in the ordinary course of business and
available as of the date of the [transaction].” Regal Ent. Gp., 2021 WL 1916364, at *21 &
n.17 (collecting cases). “[L]itigation-driven projections” are less likely to be reliable and
therefore are disfavored. Gray v. Cytokine Pharmasciences, Inc., 2002 WL 853549, at *8
(Del. Ch. Apr. 25, 2002). Relying on ex post, litigation-driven projections creates an
“untenably high” risk of “hindsight bias and other cognitive distortions.” Agranoff v.
Miller, 791 A.2d 880, 891–92 (Del. Ch. 2000); accord Owen v. Cannon, 2015 WL
3819204, at *22 (Del. Ch. June 17, 2015) (finding that “the after-the-fact projections . . .
created for purposes of this litigation are tainted by hindsight bias and are not a reliable
source to determine the fair value of [the] shares” (footnotes omitted)).
Both experts relied on a model that the Loews management team prepared (the
“Loews Model”). The Loews Model started from a five-year plan that Boardwalk’s
management team created in the ordinary course of business. Siegel Dep. 115; see Siegel
Tr. 754–55. The Loews management team then extended the five-year plan to the year
2029. In the course of assisting Loews senior executives in determining whether to exercise
the Call Right, the Loews management team modified and refined their model many times.
See, e.g., JX 767; JX 881; JX 1485; JX 1529.
181
Atkins used version ninety-one of the Loews Model. That version was the last one
that the Loews management team prepared before the Loews board of directors met on
June 29, 2018, and decided to cause the General Partner to exercise the Call Right. See JX
1529. Hubbard used version ninety of the Loews Model, which was the immediately
preceding version. See JX 1485. The two versions are virtually identical, and both project
the same amount of distributions. Compare JX 1485, “Side model” tab, Row 20, with JX
1529, “Side model” tab, Row 20.
Both experts agreed that the Loews Model was an appropriate starting point for a
Distribution Model. The court concurs. The Loews Model started from a five-year plan
prepared in the ordinary course of business, and the Loews management team refined it so
it could be used in real time to make a $1.5 billion dollar investment. The projections were
not created for litigation, nor is there any other reason to doubt their accuracy.
Both experts nonetheless made adjustments to the Loews Model. Hubbard made
multiple modifications to the cash flow projections. Atkins kept the cash flow projections
in the Loews Model, but he eliminated a reduction in EBITDA from the forecast. This
decision declines to adopt any of the adjustments and uses the Loews Model in its original
form.
a. Hubbard’s Adjustments To The Loews Model
For purposes of his Distribution Model, Hubbard arbitrarily removed the projections
for 2028 and 2029 from the Loews Model. See Hubbard Report Ex. 25. By doing so,
Hubbard shortened the projection period and changed the cash flows for the terminal
period. See id. Ex. 32A. Hubbard did not provide a persuasive explanation for this change.
182
Hubbard was serving as a litigation expert, and he lacked prior experience with MLPs in
general and Boardwalk’s business in particular. There is no reason to believe that Hubbard
had a better understanding of Boardwalk’s prospects than the Loews management team.
Hubbard also eliminated the distributions in the out-years of the Loews Model.
Hubbard claimed that he reduced the projections “so that the forecasts for the terminal
period would reflect a more realistic and sustainable steady state.” JX 1759 (Hubbard
Rebuttal Report) ¶ 10. That explanation was conclusory and unpersuasive.
In addition, Hubbard progressively increased the projected capital expenditures for
the years 2023–2027. Compare JX 1529, “Side model” tab, with Hubbard Report Ex. 25.
Hubbard allocated all capital expenditures to maintenance capital, which reduced the
projected distributions during those years. See Hubbard Report ¶ 114; Atkins Rebuttal
Report ¶ 26. By the year 2027, Hubbard’s approach resulted in more than double the
expenditures of maintenance capital than the Loews management team had projected. See
Atkins Rebuttal Report ¶ 26 tbl. 1. That was neither reasonable nor persuasive.
Hubbard’s modifications to the Loews Model caused distributions to decline over
time. Hubbard Report Ex. 32A. The high point for distributable cash flow in Hubbard’s
model was 2022, the last year before Hubbard’s modifications kicked in. See id. After that,
the value of the distributions declined steadily. Atkins explained persuasively that such a
result was counterintuitive, both in terms of the underlying business and given Loews’
decision to exercise the Call Right:
[I]nstead of having the normal projections where you have a slow and steady
growth in your distributions, [Hubbard’s] assumptions . . . push distributions
downward. Why would Loews. . . not just sell the business, get out of this
183
business, if it really believed that [the] distributions would decline as
opposed to go up over time?
Atkins Tr. 1057.
Hubbard made these adjustments based on an interview with two Loews executives.
Hubbard Report ¶ 106 n.161. Hubbard claimed that the executives told him that, “Loews
focused mostly on the period 2018 through 2022 and [that] their assumptions for 2023
through 2029 were vetted less rigorously.” Hubbard Report ¶ 106 n.161. The executives’
account was self-serving, and the defendants could not produce any documents to support
it. See JX 1752. The defendants also did not call either executive at trial to support
Hubbard’s assertion. Instead, they called Siegel, who knew next to nothing about the
Loews Model.37
37
See Siegel Tr. 755 (“Q: By April 4th your team was up to Version 25 of the model;
right? A: I don’t know.”); id. at 756–57 (“Q: By April 9th, your team had built a switch
into the model; correct?” A: I don’t know. Q: You could toggle the switch from base FERC
impact to downside FERC impact or to off; correct? A: Don’t know. . . . I never studied
the actual model itself and how it was put together, so I can’t comment. Q: If the switch
was toggled to downside FERC impact, the model would show a hit to EBITDA from the
refund to ADIT from the customers; correct? A: I don’t know. Q: If the switch was off, the
model would show no hit to EBITDA; correct? A: I don’t know. Q: On April 9th, your
team was at Version 39 of the Loews’ [sic] model; correct? A: Don’t know.”); id. at 758(“Q: By that point, the model was up to Version 43; correct? A: Again, I don’t know.”); id.at 761–62 (“Q: Barclays gave input to Ms. Wang about the model; correct? A: I don’t
know.”); id. at 763 (“Q: First of all, [the Loews Model] initially went out ten years; correct?
A: I don’t know. . . . Q: Version 43 of the model goes out 12 years; isn’t that right? A: I
have no recollection of seeing that model or many of the models you’ve referred to.”); id.
at 764 (Q: “Isn’t it true that the incentive distribution rights kick in in years 11 and 12 of
the Loews’ [sic] model? A. I don’t know. I’m not sure I’ve seen the model. Q. That’s why
the model goes out 12 years; right, Mr. Siegel? A. I don’t know.”); id. at 765 (“Q: Isn’t it
true that there are 91 versions of this model, Mr. Siegel? A. I have no idea.”); id. at 766(“Q: Isn’t it true that Version 91 of the model was used to prepare the June 29th Loews’
[sic] board deck? A. I don’t know. Q. Isn’t it true that the inputs or the pages of the Loews’
184
This court has rejected expert opinions when the experts downsized management
projections for purposes of litigation. While serving as a member of this court, Chief Justice
Strine rejected an expert’s opinion that was based “on a substantial negative revision of . .
. projections that he came up with after discussions with [the company’s] managers after
the valuation date.” Agranoff, 791 A.2d at 891. A party seeking to vary from reliable
projections must “proffer legitimate reasons to vary from the projections.” Prescott Gp.
Small Cap, L.P. v. Coleman Co., Inc., 2004 WL 2059515, at *21 (Del. Ch. Sept. 8, 2004)
(internal quotation marks omitted). To proffer legitimate reasons, a party must offer more
than just “reliance on management’s off-the-record denigrations of its own projections.”
Id. “Any other result would condone allowing a company’s management or board of
directors to disavow their own data in order to justify a lower valuation . . . .” Gray, 2002
WL 853549, at *8. The same reasoning supports rejecting Hubbard’s modifications to the
Loews Model.
This court likewise has rejected a valuation opinion when the expert increased
capital expenditures without good reason, thereby reducing cash flows. See In re Emerging
Commc’ns, Inc. S’holders Litig., 2004 WL 1305745, at *15 (Del. Ch. May 3, 2004).
Hubbard did the same thing. As Atkins explained, Hubbard’s changes were inconsistent
with “Boardwalk’s actual operational history.” Atkins Rebuttal Report ¶ 27. Maintenance
[sic] June 29th board deck come directly from Version 91 of the model? A. I don’t know.
I’m not sure I’ve seen Version 91 of the model. Q. Isn’t it true that your expert in this case
uses Version 90 of the model? A: Again, I don’t know.”).
185
capital expenditures for pipelines are “normally significantly less than depreciation,” and
Boardwalk’s “maintenance capital expenditures were on average 39.3% of depreciation
expense.” Atkins Rebuttal Report ¶¶ 28–29 (quoting Credit Suisse, CS MLP Primer – Part
Deux 14 (Nov. 23, 2011)). Hubbard projected that maintenance capital expenditures would
increase to 61.7% of depreciation by the terminal year of his Distribution Model. Atkins
Rebuttal Report ¶ 29; see id. Ex. B. at 46. That percentage exceeded Boardwalk’s historical
levels and the levels at eleven of twelve comparable MLPs. Id. ¶ 29 tbl. 2.
b. Atkins’ Adjustment To The Loews Model
Atkins made one modification to the Loews Model. The Loews management team
included a “switch” in the Loews Model labeled “FERC Impact,” which enabled a user to
toggle between three possible scenarios: “Base FERC Impact,” “Downside FERC Impact,”
and “Off,” meaning no FERC impact (the “FERC Switch”) The first two options—Base
FERC Impact and Downside FERC Impact—reflected Loews management’s assessment
of the potential implications of the March 15 FERC Actions. Johnson Tr. 636. The model
built on FERC’s proposed Form 501(g), which instructed MLPs to submit cost-of-service
information using an indicative ROE of 10.55%. Because FERC had singled out that figure,
the Loews management team was concerned that FERC could use it as a trigger for
pursuing a rate case.
Even using these assumptions, Gulf South and Gulf Crossing did not face any risk
of a rate case. Texas Gas faced some risk. The Loews management team projected that if
Texas Gas filed its Form 501(g) and presented its cost-of-service calculations using the
indicative ROE, no income tax allowance, and ADIT amortized using the Reverse South
186
Georgia method, then Texas Gas would show an ROE of 24.3%, which was within the
range of ROEs that historically had triggered rate cases. See JX 1071 at 1, 3; accord
Wagner Tr. 247. If FERC initiated a rate case and mandated an adjustment in the rates that
Texas Gas could charge based on an ROE of 10.55%, then the Loews Model calculated
that Texas Gas would face a revenue reduction of $73.9 million per year. See Johnson Tr.
636. The “Base FERC Impact” scenario therefore deducted $73.9 million from
Boardwalk’s EBITDA for every year of the discrete projection period, beginning in 2019.
See JX 1485, “Side Model” tab, Row 11. Turning the FERC Switch to “Off” removed the
negative impact.
Projecting a rate case for Texas Gas based on these assumptions reflected the
conservativism that went into the Loews Model. Wagner, the internal FERC expert on the
Baker Botts team, believed that there was “a low probability that Texas Gas would face a
section 5 case in the next 1–2 years.” JX 1071 at 1. Although an ROE of 24.3% was “the
type of return that has caused FERC to initiate a section 5 case” in the past, Wagner
believed that FERC’s existing workload, in addition to the influx of Form 501-G filings,
made it likely that FERC would “probably be somewhat swamped and not able to begin
those investigations.” Wagner Tr. 245; see JX 1071 at 1. Beyond two years, there were
“too many variables to make a prediction with any confidence.” JX 1071 at 1. Sullivan, the
outside rate expert that Baker Botts hired, thought that it would require an ROE of 20–30%
to trigger a rate case for the foreseeable future. See JX 1807 at 6; Sullivan Dep. 168. The
plaintiffs’ rate expert also believed that there was a “low risk of a rate case for Texas Gas.”
Webb Tr. 1008.
187
Based on Webb’s opinion, Atkins set the FERC Switch to the “Off” position. That
was reasonable, and it finds support in the broader record. But it results in an alteration to
the Loews Model. The Loews Model adopted a conservative approach on the assumption
that the Base FERC Impact scenario would occur. This decision therefore uses the Base
FERC Impact scenario.
By using the Base FERC Impact scenario, this decision also adopts a conservative
measure of damages compared to the more than $900 million that the court could have
awarded under the wrongdoer rule. That rule provides that when the “defendant’s wrongful
act” causes uncertainty in estimating damages, “justice and sound public policy alike
require that he should bear the risk of the uncertainty thus produced.” Story Parchment Co.
v. Paterson Parchment Paper Co., 282 U.S. 555, 565 (1931). The wrongdoer rule is a
“corollary to [the] presumption” that “doubts about the extent of damages are generally
resolved against the breaching party.” PharmAthene, 132 A.3d at 1131. Under the
wrongdoer rule, the court “take[s] into account the willfulness of the breach in deciding
whether to require a lesser degree of certainty” about the extent of damages.38
38
See Restatement (Second) of Contracts § 352 cmt. a, Westlaw (Am. L. Inst.
database updated Oct. 2021) (“A party who has, by his breach, forced the injured party to
seek compensation in damages should not be allowed to profit from his breach where it is
established that a significant loss has occurred. A court may take into account all the
circumstances of the breach, including willfulness, in deciding whether to require a lesser
degree of certainty, giving greater discretion to the trier of facts.”); see also Agilent Techs.,
Inc. v. Kirkland, 2010 WL 610725, at *27 (Del. Ch. Feb. 18, 2010) (“[I]n cases where a
specific injury to the plaintiff cannot be established, the defendant’s actual gain may be
considered.”).
188
In this case, the General Partner breached the Partnership Agreement by exercising
the Call Right without first meeting the necessary conditions. The General Partner’s breach
was willful. The uncertainty about the FERC Impact switch only existed because of the
timing of the willful breach, which resulted in the take-private transaction being completed
just before FERC published its final rule. The publication of the final rule “mitigate[d]”
the supposed “adverse effect” of the March 15 FERC Actions that formed the basis for the
Opinion. JX 1569. The uncertainty embodied in the Base FERC Impact scenario would not
have existed but for the opportunistic timing of the exercise of the Call Right. Under the
wrongdoer rule, that uncertainty should be resolved against the defendants, meaning the
proper measure of damages should use the Loews Model with the FERC Switch in the
“Off” position.
This decision nonetheless declines to apply the wrongdoer rule. Because Atkins’
model with the FERC Switch in the Base FERC Impact position results in a persuasive and
reliable measure of damages, the court adopts it.
3. The Finding Regarding Damages
With the FERC Switch set for the Base FERC Impact Scenario, Atkins’ Distribution
Model results in a valuation of $17.60 per unit. The transaction price was $12.06 per unit.
The plaintiffs are entitled to damages of $5.54 per unit.
189
When the General Partner exercised the Call Right, there were 124,467,395 units
outstanding that were not beneficially owned by Loews or its affiliates. 39 Multiplying
124,467,395 by $5.54 yields total damages of $689,827,343.38.
The resulting damages figure is conservative compared to the more than $900
million that the court could have awarded if it had adopted Atkins’ opinion in full. It is also
conservative relative to Loews’ contemporaneous estimate of the $1.557 billion in “Value
Creation” that Loews expected to enjoy from exercising the Call Right. JX 1505 at 10.
The plaintiffs are entitled to pre- and post-judgment interest on the damages award
from July 18, 2018, until the date of payment. When neither party submits evidence
showing the appropriate rate of interest, “the court looks to the legal rate of interest.” Taylor
v. Am. Specialty Retailing Gp., Inc., 2003 WL 21753752, at *12 (Del. Ch. July 25, 2003).
“The legal rate of interest, as defined by 6 Del. C. § 2301, is 5% over the Federal Reserve
39
See JX 1514 at 3 (June 29, 2018, Schedule 13D filing showing “250,296,782
Common Units Outstanding as of March 31, 2018,” of which “124,710,649 Common Units
that may be deemed to be beneficially owned by [Loews] based on the right of the General
Partner to acquire voting and investment power over such Common Units on July 18, 2018
as a result of the Transaction”); PTO ¶ 388 (“[T]hrough the exercise of the Call Right,
Loews . . . acquired all 124,710,469 of the outstanding common units”). Directors and
officers of the Partnership disposed of 243,254 units in the Call-Right Exercise. JX 1561
at 1 (Hyland and Hyland’s spouse disposed of 29,307 units); JX 1562 at 1 (Rebell, Rebell’s
spouse, and an affiliated LLC disposed of 60,583 units); JX 1563 at 1 (Shapiro disposed of
33,907 units); JX 1564 at 1 (Tisch disposed of 81,050 units); JX 1565 at 1 (Cordes disposed
of 23,407 units); JX 1566 at 1 (Horton’s spouse disposed of 15,000 units). Subtracting
243,254 from 124,710,649 yields 124,467,395, the total number of shares held by the class.
See Atkins Report Ex. C at 7.
190
discount rate.” Doft & Co. v. Travelocity.com Inc., 2004 WL 1152338, at *12 (Del. Ch.
May 20, 2004). When the court “award[s] the legal rate of interest, the appropriate
compounding rate is quarterly.” Id.; accord Taylor, 2003 WL 21753752, at *13. The
plaintiffs therefore are entitled to pre- and post-judgment interest at the legal rate,
compounded quarterly, from July 18, 2018, until the date of payment, with the legal rate
fluctuating with changes in the underlying reference rate. The plaintiffs are additionally
entitled to an award of fees as the prevailing party.
F. The Implied Covenant Of Good Faith And Fair Dealing
As an alternative theory of breach, the plaintiffs contend that the General Partner
breached the implied covenant of good faith and fair dealing that inheres in every contract
governed by Delaware law. Because the court has held that the General Partner breached
the express terms of the Partnership Agreement, there is no need to reach the implied
covenant.
The plaintiffs have articulated non-duplicative implied covenant theories about the
effect of the Potential Exercise Disclosures and the operation of the Purchase Price
formula, but a judgment in the plaintiffs’ favor on those questions would result in a lower
damages award than the claim for breach of the Call Right. The plaintiffs are only entitled
to one recovery. This decision therefore does not wade into the additional implied covenant
issues.
G. The Claims Against The Defendants Other Than The General Partner
The plaintiffs have asserted theories that would enable them to recover from the
GPGP, Holdings, and Loews. Those affiliates of the General Partner directed its actions
191
and caused it to exercise the Call Right, but the affiliates are not parties to the Partnership
Agreement and hence are not liable in contract. The plaintiffs maintain that the GPGP,
Holdings, and Loews are liable to the class on a claim for tortious interference with contract
and under the doctrine of unjust enrichment.
Determining whether the General Partner’s affiliates should be liable for tortious
interference will require a complex balancing of different factors. See, e.g., NAMA Hldgs.,
LLC v. Related WMC LLC, 2014 WL 6436647, at *25–36 (Del. Ch. Nov. 17, 2014). This
decision has covered much ground, and it would extend its length significantly to take on
the tortious interference claim at this time. Furthermore, as a practical matter, it should be
unnecessary to determine whether the General Partner’s affiliates tortiously interfered with
the Partnership Agreement. As noted, the plaintiffs are only entitled to a single recovery,
and if the General Partner pays the damages award, then the class will have no basis to
pursue the other defendants.
The facts of this case make it unlikely that pursuing the other defendants will be
necessary to ensure the plaintiffs recover their damages. The General Partner acquired 49%
of the limited partner interest by exercising the Call Right. It already possessed a 2%
general partner interest and all of Boardwalk’s incentive distribution rights. The General
Partner thus has access to substantial cash flows.
The same is true for the plaintiffs’ claim for unjust enrichment, although that claim
is comparatively easier to analyze. The General Partner remains the principal wrongdoer.
It should satisfy the claim.
192
Given these dynamics, the court will not adjudicate the claims for tortious
interference or unjust enrichment at this time. Those claims are severed and stayed. If the
General Partner satisfies the judgment, then those claims will be moot. If the General
Partner fails to satisfy the judgment, then the claims can be revived.
III. CONCLUSION
The General Partner is liable to the plaintiff class for damages in the amount of
$689,827,343.38, plus pre- and post-judgment interest on that amount through the date of
payment. The plaintiffs are also entitled to an award of costs as the prevailing party.
The parties will incorporate the court’s rulings into a partial final judgment that has
been agreed as to form. The partial final judgment will not extinguish the separate claims
for breach of the implied covenant of good faith and fair dealing against the General Partner
or for tortious interference and unjust enrichment against the General Partner’s affiliates.
If there are other issues that the court needs to address before such an order can be
entered, then the parties will prepare a joint letter that identifies the issues and proposes a
procedure for resolving them.
193