Dieckman v. Regency GP LP (2017): what Delaware LLC founders should know

Case at a glance

• Case name: Dieckman v. Regency GP LP
• Year: 2017
• Court: Delaware Supreme Court
• Citation: 155 A.3d 358 (Del. 2017)
• Category: Fiduciary Duty

The facts

Limited partners of Regency sued the general partner over conflict-resolution mechanism in the partnership agreement.

The holding

The implied covenant of good faith and fair dealing applies even when explicit fiduciary duties are eliminated. The conflict-resolution mechanism was applied in a manner inconsistent with the implied covenant.

Why this case matters

Reinforced that the implied covenant cannot be eliminated by contract under § 18-1101 or its LP equivalent.

What this means for Delaware LLC founders

LLC Operating Agreements can eliminate explicit fiduciary duties but cannot eliminate the implied covenant of good faith and fair dealing.

How Dieckman v. Regency applies to your LLC

For solo single-member Delaware LLC founders, most fiduciary-duty cases have limited direct application: there is no co-member to owe duties to, and creditor-fiduciary-duty exposure arises only after actual insolvency. The cases become more relevant as the LLC grows:

• Adding co-founders or investors: multi-member LLCs face the full range of fiduciary-duty analysis, though Operating Agreements can modify duties under § 18-1101.
• Manager-managed structures: when non-member managers run the LLC, they owe fiduciary duties to members by default (§ 18-1104).
• Sale or merger transactions: Revlon and Unocal duties translate to LLC change-of-control transactions.
• Member disputes: Court of Chancery jurisdiction over Operating Agreement disputes applies the body of Delaware case law as guidance.

Primary source

The full text of Dieckman v. Regency GP LP is available through Westlaw, LexisNexis, and Google Scholar. The Delaware Court of Chancery publishes opinions at courts.delaware.gov/chancery. The Delaware Supreme Court publishes opinions at courts.delaware.gov/supreme.

Related cases and concepts

For broader Delaware corporate and LLC case law context, see our coverage of the business judgment rule, fiduciary duties, Delaware Court of Chancery, and the Delaware LLC Act. The Delaware Limited Liability Company Act sections (6 Del. C. § 18-101 et seq.) interact with the body of Delaware case law to define LLC governance.

See all cases in the Delaware Case Law Library →

What dispute brought Dieckman v. Regency GP LP before the Delaware Supreme Court?

The case grew out of a transaction involving Regency, a Delaware limited partnership. Limited partners, who are the passive investors in that kind of entity, sued the general partner over the way a conflict-resolution mechanism written into the partnership agreement was used. A general partner runs the partnership and makes the decisions, while limited partners contribute capital and largely rely on the written agreement to protect them. When a deal arose in which the general partner stood on both sides or otherwise had a personal stake, the partnership agreement supplied specific procedures the general partner could follow to cleanse that conflict. The limited partners argued that those procedures had not been honored in the spirit the agreement contemplated, even if the literal boxes appeared to be checked.

At the trial level the claims were dismissed, which set up the appeal to the Delaware Supreme Court in 2017. The reported decision sits at 155 A.3d 358 (Del. 2017). The factual core, as the record frames it, is narrow and concrete: limited partners of Regency challenged the general partner's handling of the conflict-resolution mechanism in the partnership agreement. That framing matters because Delaware courts read these agreements closely. The question was not whether the general partner had broken some abstract code of conduct. It was whether the contractual machinery the parties themselves had drafted was operated in a way that respected the bargain. Because Delaware alternative entities like limited partnerships and limited liability companies are creatures of contract, the words of the agreement, and the duties that survive around those words, did the heavy lifting in deciding who should prevail.

What exact legal question did the court have to answer?

The central question was whether following the literal terms of a conflict-resolution provision is enough, on its own, to defeat a claim by limited partners. Delaware law lets the drafters of a limited partnership or LLC agreement eliminate the traditional fiduciary duties that would otherwise apply, such as the duty of loyalty. When those default duties are stripped out, the agreement's own procedures become the main yardstick. So the puzzle was this: if the agreement says a conflicted transaction is permitted when, for example, a special committee approves it or the limited partners approve it, can the general partner satisfy that standard while withholding or shading the information the approving body needed to give a meaningful decision?

Underneath that practical question sat a doctrinal one about the implied covenant of good faith and fair dealing. The implied covenant is a default rule that Delaware reads into every contract. It fills gaps the parties did not anticipate and asks what they would have agreed to had they thought about the situation. The general partner's position implied that a fully detailed conflict-resolution mechanism left no gaps for the implied covenant to address, and that compliance with the express steps ended the inquiry. The limited partners countered that the agreement assumed honest and fair operation of those steps, and that the implied covenant protects the integrity of the very process the agreement created. Resolving that tension is what gives Dieckman its lasting significance for Delaware alternative entities.

What did the Delaware Supreme Court actually hold?

The court held, as the case record states, that the implied covenant of good faith and fair dealing applies even when explicit fiduciary duties have been eliminated. In other words, drafters can remove the duty of loyalty and the duty of care from a Delaware limited partnership or LLC agreement, but they cannot remove the implied covenant. It remains as a backstop. Applying that principle, the court concluded that the conflict-resolution mechanism had been used in a manner inconsistent with the implied covenant. The express safe harbors in the agreement did not give the general partner a free pass to operate those safe harbors unfairly. If the agreement conditioned a conflicted transaction on an approval by an informed body, the implied covenant required that the body actually be given a fair opportunity to act on accurate information.

Several points follow from that holding and are worth stating plainly:

• Eliminating fiduciary duties by contract is permitted, but it does not eliminate the implied covenant.
• Satisfying the literal words of a conflict-resolution provision is not automatically enough if the process behind those words was operated in bad faith.
• Where an agreement relies on an informed approval to cleanse a conflict, the integrity of that approval is protected by the implied covenant.
• The covenant looks to what the parties would have agreed had they addressed the gap, not to a roving notion of fairness untethered from the contract.

The result reversed the dismissal and allowed the limited partners' claims to proceed, signaling that the implied covenant had real teeth in policing how cleansing mechanisms are used.

What is the implied covenant of good faith and fair dealing, in plain terms?

The implied covenant is a rule of contract law that Delaware courts treat as part of every agreement, whether or not it is written down. It does not add new substantive promises that contradict the deal. Instead, it protects the reasonable expectations that flow from the bargain the parties did strike. A useful way to think about it is gap filling. Real contracts cannot anticipate every future event. When a gap appears and one side tries to exploit it in a way that defeats the obvious purpose of the deal, the implied covenant asks what the parties would have agreed to had they foreseen the issue. It then holds the parties to that implied term.

In the alternative entity setting, the implied covenant becomes especially important because so many default protections can be contracted away. A limited partnership or LLC agreement can be drafted to favor the managing party heavily. Delaware respects that freedom. But the implied covenant ensures that the discretion a manager is granted is not used arbitrarily or to undermine the spirit of the arrangement. In Dieckman the agreement created a path for approving conflicted deals. The implied covenant did not rewrite that path. It required that the path be walked honestly, so that an approval truly reflected an informed and fair process rather than a hollow formality. That distinction, between honoring the form and honoring the substance, is at the heart of how the doctrine operates.

Why did this decision shape Delaware alternative entity law?

Dieckman matters because it drew a firm line around something parties cannot bargain away. Delaware statutes governing limited partnerships and limited liability companies are famous for the contractual freedom they grant. Drafters can expand, restrict, or eliminate the fiduciary duties that would otherwise apply. Many investors and founders assume that freedom is close to unlimited. The case record captures the corrective: the implied covenant cannot be eliminated by contract under Section 18-1101 of the LLC Act or its limited partnership equivalent. By reinforcing that the covenant survives even total elimination of express fiduciary duties, the court fixed a floor beneath every Delaware alternative entity agreement.

The decision also clarified how cleansing mechanisms should be read. Sophisticated agreements often say that a conflicted transaction is permissible if approved by a special committee or by a vote of disinterested holders. Before Dieckman, a managing party might have read such a clause as a mechanical checklist. After Dieckman, the lesson is that those approvals presuppose a fair and informed process. If the approving body is misled or kept in the dark, the approval does not carry the protective weight the agreement promises. This has practical consequences for how disclosures are prepared, how special committees are constituted and informed, and how managers document the steps they take. It rewards genuine procedural fairness and discourages formalism that masks self-dealing.

How does the principle carry over from a limited partnership to a Delaware LLC?

Although Regency involved a limited partnership, the reasoning travels directly into the LLC world. Delaware limited partnerships and limited liability companies are built on parallel statutory schemes. Both let the parties shape duties through their governing agreement, and both contain provisions confirming that the implied covenant of good faith and fair dealing may not be eliminated. The case record makes that bridge explicit by pointing to Section 18-1101 of the LLC Act alongside the limited partnership equivalent. So an LLC operating agreement that copies the structure at issue in Dieckman, with broad elimination of fiduciary duties and a contractual mechanism to cleanse conflicts, would face the same analysis.

For an LLC, the takeaways line up cleanly:

• An operating agreement can eliminate the explicit duty of loyalty and duty of care that managers and members would otherwise owe.
• An operating agreement cannot eliminate the implied covenant of good faith and fair dealing.
• If the agreement permits conflicted transactions through member or committee approval, that approval must rest on an honest and informed process.
• A manager who follows the literal steps but corrupts the underlying process may still face liability under the implied covenant.

The structural similarity means founders should not treat the partnership label as a reason to dismiss the ruling. The doctrine speaks to alternative entities generally, and an LLC organized in Delaware sits squarely within its reach.

What does this case suggest about drafting an LLC operating agreement?

Drafting choices determine how much of Dieckman ever becomes relevant to a particular company. If an operating agreement keeps default fiduciary duties in place, the implied covenant is one layer among several. If an agreement eliminates those duties, the implied covenant becomes the principal remaining constraint, which raises the stakes for the conflict-resolution provisions the agreement contains. Because of that, the case invites careful attention to any clause that allows interested parties to approve their own transactions. The cleaner and more honest the approval process described in the agreement, the more reliably the safe harbor will function as intended.

Some considerations that flow from the decision, framed as general information rather than tailored advice:

• Spell out clearly what information must be shared with an approving committee or with members before a conflicted transaction is approved.
• Describe how a special approval body is selected and what independence, if any, it should have.
• Recognize that a provision purporting to waive the implied covenant will not be enforceable, so it is better to build fair procedures than to rely on disclaimers.
• Consider whether to retain some fiduciary duties rather than eliminate them entirely, since elimination shifts more weight onto the implied covenant and the express process.

These are drafting questions a Delaware corporate or alternative entity lawyer typically helps resolve, and the right balance depends on the parties and the deal.

How does Dieckman relate to fiduciary duties and contractual freedom under the LLC Act?

The Delaware LLC Act embraces what its drafters call the policy of giving maximum effect to freedom of contract and to the enforceability of LLC agreements. That policy lets parties tailor the internal rules of their company with very few mandatory constraints. Among those few constraints is the rule that the implied covenant of good faith and fair dealing cannot be eliminated. Dieckman is a vivid illustration of how those two ideas coexist. Contractual freedom allows the parties to discard the duty of loyalty and the duty of care. The implied covenant remains as the non-waivable minimum, ensuring that the discretion the agreement grants is exercised consistently with the parties' reasonable expectations.

It helps to see the implied covenant and express fiduciary duties as different tools. Express fiduciary duties impose broad standards of conduct, such as acting loyally and with due care, that apply across many situations. The implied covenant is narrower and contract specific. It does not float free of the agreement, and it does not give a court license to impose its own sense of fairness. It asks a focused question about a particular gap in a particular contract. When fiduciary duties are eliminated, the broad standards disappear, but the focused, gap-filling protection of the implied covenant stays in force. That is why the doctrine in Dieckman is sometimes described as the floor that contractual freedom cannot drop below.

What should a non-resident founder take from this case in practical terms?

Founders outside the United States often choose Delaware precisely because its alternative entity statutes are flexible and well understood by investors. Dieckman should not discourage that choice. It should inform how a founder reads and negotiates the operating agreement. The most useful mental model is that Delaware will hold the company to whatever process the agreement describes, and will also insist that the process be operated in good faith. A founder who relies on a manager-friendly agreement should understand that disclaimers of fiduciary duty do not buy a license to mislead co-investors or to hollow out approval mechanisms.

For a non-resident founder, a few practical themes stand out:

• Read the conflict and related party provisions of any operating agreement closely, since these are where the implied covenant most often becomes relevant.
• Keep records that show approvals were based on accurate and reasonably complete information.
• Do not assume that eliminating fiduciary duties removes all accountability, because the implied covenant survives.
• Engage Delaware counsel when the agreement gives one party broad discretion over transactions in which that party has a personal stake.

None of this is legal advice for a specific company. It is general information about how the doctrine in Dieckman tends to operate, and a founder facing a real transaction should consult a qualified Delaware attorney about the particular facts.

How might Dieckman come up in everyday LLC operations rather than litigation?

Most companies never litigate, so the more common value of a case like Dieckman is preventive. The decision gives managers and members a shared vocabulary for handling conflicts before they harden into disputes. When a manager proposes a transaction in which that manager has an interest, the agreement's cleansing mechanism becomes the road map. The practical discipline the case encourages is to treat that road map as more than a formality: gather the relevant facts, share them with whoever must approve the deal, and document that the approval was informed. Doing so respects both the express terms and the implied covenant, which reduces the chance that a later challenge succeeds.

The case also informs how members evaluate the people who run their company. Because the implied covenant protects the integrity of contractual processes, members can reasonably expect that approval rights written into the agreement are not empty. If a member is asked to bless a related party transaction, the spirit of Dieckman supports asking for the information needed to decide thoughtfully. Likewise, a manager who wants the protection of a cleansing provision has an incentive to provide that information voluntarily. In this way the decision nudges everyday governance toward transparency, even outside the courtroom, by tying the legal protection of a transaction to the honesty of the process that produced it.

What are the limits of what Dieckman decided?

It is important not to overstate the ruling. Dieckman did not abolish contractual freedom for Delaware alternative entities, and it did not revive fiduciary duties that an agreement has validly eliminated. The decision confirms a boundary rather than a broad new duty. The implied covenant remains a focused doctrine that operates within the four corners of the agreement. It does not let a court impose terms the parties never agreed to, and it does not function as a general fairness review of every business decision. A claim under the covenant still requires showing that an agreement has a gap and that the challenged conduct defeats the reasonable expectations the bargain created.

Reading the case sensibly therefore means holding two ideas together. First, drafters retain wide latitude to shape duties and procedures, and Delaware will enforce those choices. Second, no amount of drafting can erase the implied covenant, so the procedures the parties design must be capable of honest operation. The holding, as the record summarizes it, is that the covenant applies even where explicit fiduciary duties are eliminated and that the conflict-resolution mechanism in Regency was used inconsistently with that covenant. Those are the load bearing points. Anything beyond them, including how the doctrine applies to a specific set of facts, depends on the particular agreement and circumstances and is properly a matter for qualified Delaware counsel.