MEMORANDUM OPINION

BOUCHARD, C.

In March 2011, two sophisticated investors (the "Walnut Investors") acquired preferred units in PECO Logistics, LLC ("PECO" or the "Company") and became parties to an LLC agreement that afforded them the voluntary right to sell their preferred units back to PECO three years later (the "Put Right"). The LLC agreement provides that, upon exercise of the Put Right, the Company must retain a nationally recognized valuation firm to determine the fair market value of the preferred units in accordance with a specified formula, and that the Company must repurchase the preferred units for the determined value. The LLC agreement further provides that both the Company and the investors "shall be bound by the determination" of the valuation firm.

In May 2014, after the Walnut Investors exercised the Put Right, PECO's board engaged Duff & Phelps to perform the valuation required under the LLC agreement. A representative of the Walnut Investors who was on PECO's board at the time participated in the selection of Duff & Phelps, whose independence is unchallenged in this case. After Duff & Phelps made its determination, however, the Walnut Investors refused to transfer their preferred units back to the Company at the determined value. This refusal prompted PECO to file this action seeking declaratory relief that PECO had complied with the terms of the LLC agreement in valuing the preferred units, and that the Walnut Investors are bound by the Duff & Phelps valuation. The Walnut Investors filed a counterclaim in response alleging that PECO had breached the implied covenant of good faith and fair dealing.

The Walnut Investors challenge the substance of several decisions Duff & Phelps made in applying the valuation formula in the LLC agreement, which they claim is ambiguous in three respects and was construed against them. The Walnut Investors also assert that the parties agreed to modify the LLC agreement to afford them rights they originally did not have because the Walnut Investors unilaterally "reserved their rights" to participate in the valuation process and to object to the determination of value when they exercised the Put Right. The matter is presently before the Court on PECO's motion for judgment on the pleadings to grant its requested declarations and to dismiss the counterclaim for failure to state a claim for relief.

The most significant question before me is what standard of review to apply in evaluating the Walnut Investors' challenges to certain decisions Duff & Phelps made in applying the valuation formula in the LLC agreement. Based on the reasoning in Senior Housing Capital, LLC v. SHP Senior Housing Fund, LLC,1 I conclude that the Court should defer to the judgment calls Duff & Phelps had to make to apply the valuation formula in a sensible manner because the parties here expressly agreed that the valuation firm's determination would be binding without providing any mechanism for review of that determination. I also conclude that the LLC agreement was not modified and that no facts have been alleged to call into question the independence of Duff & Phelps or to suggest that the Company tainted the contractually prescribed valuation process so as to sustain a claim for breach of the implied covenant of good faith and fair dealing. For these reasons and others explained below, the Walnut Investors' counterclaim fails to state a claim for relief and PECO is entitled to the declaratory relief it seeks.

I. BACKGROUND2

A. The Parties

Plaintiff PECO Logistics, LLC is a Delaware limited liability company with its principal executive offices in Irvington, New York. PECO is managed by a seven-person board of managers, which includes Frederic Mayerson, the general partner of the Walnut Investors. PECO's sole asset is its equity interest in PECO Pallet Holdings, Inc. (together with its subsidiaries, "PECO Pallet"), a provider of pallet rental services. PECO Pallet rents pallets to manufacturers who use the pallets to ship grocery products and consumer goods to retailers.

Defendants Walnut Investment Partners, L.P. and Walnut Private Equity Fund, L.P. (together, the "Walnut Investors") are Delaware limited partnerships with their principal places of business in Cincinnati, Ohio. As of May 2014, when they both exercised the Put Right, they owned 5,382.84 and 1,287.32 preferred units of PECO, respectively.

B. History of PECO Pallet

Formed in the 1990s, PECO Pallet supplies pallets, through pallet pooling arrangements, under which its customers rent pallets based upon their shipping needs. Pallet pooling on a large scale requires significant capital investment, as the pallets must be purchased, paid for in full, and stored to be available for use by PECO Pallet's customers. To meet its increasing capital needs, PECO Pallet sought out buyers for the business.3

In March 2011, Jabodon PT Company acquired PECO Pallet. In the acquisition, PECO Pallet merged with and into PECO Merger Sub, Inc., and survived the merger as a wholly owned subsidiary of PECO. As part of this transaction, certain pre-acquisition stockholders of PECO Pallet, including the Walnut Investors (collectively, the "Rollover Investors"), "rolled over" their existing shares into preferred units of PECO and became parties to the PECO Logistics, LLC Limited Liability Company Agreement dated as of March 14, 2011 (the "LLC Agreement").

C. The LLC Agreement and the Put Right

The LLC Agreement, which is governed by Delaware law,4 affords each Rollover Investor a voluntary right to require PECO to purchase all (but not less than all) of their preferred units (the "Put Units") during a window of time commencing on the three-year anniversary of the LLC Agreement:

As promptly as practicable following receipt of a written notice exercising the Put Right, PECO must engage at its cost "a nationally recognized valuation firm . . . to determine the Fair Market Value of the Put Units as determined by the Valuation Firm in accordance with this Agreement (the `Put Price'). . . ."6 "Within 45 days following the Valuation Firm's determination of the Put Price," the Company is required to purchase the preferred units from the Rollover Investors who exercised their Put Right.7

The LLC Agreement sets forth a formula the valuation firm must apply. To begin, Section 13.1 defines the "Fair Market Value" of the Put Units as follows:

The term "Pro Rata Share" is defined as "the proportionate amount such Unit would receive if an amount equal to the Total Equity Value were distributed to all Units in accordance with the distribution provisions of Section 4.1(b)," which sets forth a waterfall for making distributions to holders of preferred and common units.8

The definition of "Total Equity Value" specifies a three-step process for determining the amount of proceeds hypothetically available to distribute to the unitholders:

For the purpose of calculating the Total Equity Value when the Put Right has been exercised, Section 9.2 provides that the value of the assets (i.e., part (i) of the definition of "Total Equity Value" quoted above) shall be subject to upper and lower limits based on certain earnings multiples calculated as of year-end 2013 (the "EBITDA Collar"):

To summarize, the valuation methodology in the LLC Agreement when the Put Right has been exercised involves the following steps:

Critical to the dispute in this case, the last sentence of Section 9.2(b) of the LLC Agreement states that the Company and the Rollover Investors "shall be bound by the determination of the Valuation Firm . . . with respect to the Put Price as established by the Valuation Firm . . . pursuant to this Section 9.2(b) and the terms of this Agreement." The LLC Agreement does not contain any mechanism providing for judicial, arbitral or any other form of review of the valuation firm's determination.

D. The Rollover Investors Exercise the Put Right

On February 13, 2014, PECO provided the Rollover Investors with a ledger showing their respective ownership of preferred units, the Company's 2013 unaudited financials, and a waterfall calculation showing the estimated value of the preferred units the Rollover Investors owned based upon PECO's understanding of the valuation methodology in the LLC Agreement.10 After receiving this information, Mayerson of the Walnut Investors exchanged e-mails with Thomas Kuczmarski, the Company's Chief Financial Officer, expressing disagreement with the Company's calculation.11 The Company and the Rollover Investors met numerous times but failed to reach agreement on the value of the preferred units.

Despite failing to reach agreement with the Company on the value of their preferred units, the Rollover Investors proceeded to exercise the Put Right in a letter dated May 5, 2014 (the "Put Notice"). The Put Notice stated, in part, that "[t]he Rollover Investors reserve all rights with respect to the determination of the Fair Market Value of the Put Units, including without limitation the right to participate in the determination, the right to provide information to and confer with the Valuation Firm concerning the determination and the right to object to the Valuation Firm's Determination."12 I refer to this provision as the "Reservation of Rights."

E. PECO Engages Duff & Phelps

On May 8, 2014, the Company's board of managers met to discuss the Rollover Investors' exercise of the Put Right. The board, including Mayerson, discussed three potential valuation firms. After discussing possible conflicts, the board eliminated one of the candidates. On May 12, 2014, the board further discussed potential conflicts concerning the two remaining firms (one of which was Duff & Phelps) and unanimously authorized the Company's CFO to seek proposals from them and, based on the timing, economics, and other aspects of each proposal, to select one of the firms to conduct a valuation of the Put Units. Mayerson attended this meeting and voted in favor of this proposal.13 On June 20, 2014, after negotiating the terms of Duff & Phelps' engagement, the board formally approved the Duff & Phelps engagement letter. Mayerson abstained from this vote.

F. The Duff & Phelps Report

On July 29, 2014, Duff & Phelps presented its valuation report to the PECO board. In its report, Duff & Phelps stated that "[t]he LLC Agreement provides considerable detail regarding valuation procedures and assumptions related to the determination of the Put Price."14 The Duff & Phelps report went on to explain certain key assumptions it made in performing its valuation, including the following:

Based on the foregoing assumptions and others detailed in its report, Duff & Phelps calculated a total enterprise value for PECO Pallet of approximately $275 million. Because that value exceeded the cap under the EBITDA Collar, Duff & Phelps reduced the total enterprise value to approximately $209 million—or 7.5 times the "2013 EBITDA less Maintenance Capex" of $27,949,000. After subtracting approximately $114.4 million of debt, adding back approximately $1 million of cash and cash equivalents, and subtracting hypothetical transaction, legal and accounting fees, Duff & Phelps determined the total equity value available for distribution to the unitholders to be approximately $93.12 million.16

At the July 29 board meeting, Mayerson, on behalf of the Rollover Investors, declined to accept the Duff & Phelps report. When asked whether the Rollover Investors would promptly execute documents to transfer their preferred units to the Company at the value set forth in the Duff & Phelps report, Mayerson, on behalf of the Rollover Investors, refused to do so.

G. Procedural History

PECO filed a verified complaint on July 30, 2014, and a verified amended complaint on August 1, 2014, asserting two claims for declaratory relief. On October 1, 2014, the Walnut Investors filed an answer to the amended complaint and a counterclaim asserting a single claim for breach of the implied covenant of good faith and fair dealing. On November 7, 2014, PECO moved for an order granting judgment on the pleadings on its two claims for declaratory relief, and dismissing the counterclaim.

II. LEGAL ANALYSIS

A. Legal Standard

Under Court of Chancery Rule 12(c), "[a]fter the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings." "In determining a motion under Court of Chancery Rule 12(c) for judgment on the pleadings, a trial court is required to view the facts pleaded and the inferences to be drawn from such facts in a light most favorable to the non-moving party."17 "The court must take the well-pleaded facts alleged in the complaint as admitted," and "[a] motion for judgment on the pleadings may be granted only when no material issue of fact exists and the movant is entitled to judgment as a matter of law."18

Under 10 Del. C. § 6501, Delaware courts are authorized to entertain declaratory judgment actions provided that an "actual controversy" exists between the parties.19 For an "actual controversy" to exist, four prerequisites must be satisfied:

B. The Parties' Contentions

In Count I of its amended complaint, PECO seeks a declaration that it fully complied with the terms of the LLC Agreement in valuing the preferred units. In Count II, PECO seeks a declaration that the Walnut Investors are bound by the Duff & Phelps valuation of the preferred units. Taken together, Counts I and II essentially seek a declaration of the validity of the process by which PECO responded to the exercise of the Put Right and Duff & Phelps valued the Walnut Investors' preferred units.

The Walnut Investors do not dispute that an actual controversy exists concerning the process by which their preferred units were valued, nor could they. They have refused to accept the valuation determined in the Duff & Phelps report and to execute customary documents necessary to transfer their preferred units to PECO.21 They also have filed their own claim challenging the valuation process. The form of that challenge is revealing. The Walnut Investors do not assert that PECO breached any express term of the LLC Agreement. They instead advance essentially two arguments. First, in response to PECO's motion for judgment on the pleadings of its affirmative claims for declaratory relief, the Walnut Investors argue that the pleadings raise issues of material fact that preclude entry of judgment in PECO's favor as a matter of law. Second, the Walnut Investors argue that PECO breached the implied covenant of good faith and fair dealing inherent in the LLC Agreement. I analyze these issues in that order.

C. The Pleadings Do Not Raise Material Issues of Fact that Would Preclude Entry of Judgment.

According to the Walnut Investors, the pleadings raise material issues of fact falling into two categories. The first is whether the parties agreed to modify the LLC Agreement to afford the Rollover Investors the right to participate in the valuation process and to object to the valuation firm's determination. The second is whether certain provisions of the LLC Agreement governing the valuation methodology are ambiguous. For the reasons explained below, I conclude that neither category raises a genuine issue of material fact that would preclude entry of judgment on the pleadings.

1. The LLC Agreement Was Not Modified

Upon the exercise of the Put Right, the LLC Agreement requires PECO to select a nationally recognized valuation firm to determine the fair market value of the preferred units in accordance with the valuation methodology set forth in the LLC Agreement. The LLC Agreement does not afford the Rollover Investors any right to participate in the selection of the valuation firm or in the valuation process itself after the valuation firm has been selected. Nor does the LLC Agreement afford the Rollover Investors any right to reject or challenge the valuation firm's determination. To the contrary, Section 9.2(b) of the LLC Agreement states explicitly that both the Company and the Rollover Investors "shall be bound by the determination" of the valuation firm. The LLC Agreement, moreover, provides no mechanism for judicial or any other form of review of that determination.

In an effort to obtain rights not afforded to them under the plain terms of the LLC Agreement in its original form, the Walnut Investors argue that the Company agreed to modify the LLC Agreement when the Rollover Investors exercised their Put Right to afford them the right to participate in the valuation process (e.g., to provide information to and confer with the valuation firm about its determination) and to object to the valuation firm's determination.22 The first hurdle to making this argument is Section 14.2 of the LLC Agreement, which states, in relevant part, that the LLC Agreement "may be amended, modified, or waived with the written consent of the Board. . . ." The Walnut Investors have not alleged, however, that the PECO board of managers ever consented in writing to modify the LLC Agreement, nor have they alleged any facts from which such a conclusion is reasonably inferable.

The Walnut Investors instead rely on well-settled Delaware law that contract provisions deeming oral modifications unenforceable can be waived by a course of conduct.23 Specifically, they argue that the LLC Agreement was modified by virtue of the inclusion of the Reservation of Rights in the Rollover Investors' Put Notice, which PECO accepted by its conduct when it proceeded with the valuation without expressing any objection to the Reservation of Rights. This argument is unavailing as a matter of law because there was no consideration to support the asserted modification.

"A modification of a contract requires consideration, i.e., some benefit to the promisor or detriment to the promisee in exchange for the amendment."24 But "[a] commitment to honor a pre-existing obligation works neither benefit nor detriment; therefore, a promise to fulfill a pre-existing duty, such as a promise to pay a debt owed, cannot support a binding contract because consideration for the promise is lacking."25

Here, the only action PECO took in response to the Put Notice was to engage a valuation firm to effectuate a purchase of the Rollover Investors' preferred units— something PECO already was obligated to do under Section 9.2(b) of the LLC Agreement.26 That provision states explicitly that PECO "shall engage" at its own cost a nationally recognized valuation firm "as promptly as practicable" following receipt of a written notice exercising a Put Right. Indeed, PECO would have been in breach of Section 9.2(b) if it had not engaged a valuation firm after receiving the Rollover Investors' Put Notice. Thus, the fact that PECO engaged Duff & Phelps in response to the Put Notice fails to demonstrate that PECO received new consideration or that it agreed to modify the LLC Agreement.

On the other side of the ledger, although the Walnut Investors claim they obtained new contractual rights, they do not identify any consideration they gave for those putative rights. That is because there was none. All the Walnut Investors did was "reserve" pre-existing rights they purported to (but did not) have with respect to the determination of value without giving up anything in return. In sum, there was no benefit to PECO, or detriment to the Walnut Investors, that can serve as the consideration necessary to support the alleged modification. Accordingly, I conclude as a matter of law from the face of the pleadings that the LLC Agreement was not modified to afford the Walnut Investors any right to participate in the valuation process or to object to the determination of value.

2. The Alleged Ambiguities in the LLC Agreement Are Irrelevant

The Walnut Investors' second theory for why the pleadings raise material issues of fact is based on alleged ambiguities in the valuation methodology in the LLC Agreement. According to the Walnut Investors, "[w]henever there was ambiguity or lack of clarity in the LLC Agreement with respect to the valuation methodology, Duff & Phelps took an approach that benefited PECO at the expense of the Rollover Investors."27 The Walnut Investors criticize three specific decisions or assumptions Duff & Phelps made in applying the valuation formula: (1) deducting from its valuation long-term debt as of the valuation date, in particular $64 million of debt that was incurred in the second half of 2013 and the first five months of 2014; (2) using June 1, 2014 as the valuation date instead of December 31, 2013, which was the date for determining the EBITDA Collar; and (3) applying the EBIDTA Collar to the EBITDA of PECO Pallet, the operating subsidiary.

Regarding the first issue, the deduction of long-term debt, the LLC Agreement is not ambiguous in my view. The "Fair Market Value" of the preferred units is derived from "Total Equity Value," which is expressly defined to mean that the Company has satisfied and paid in full all of its obligations and liabilities:

Given the breadth of the phrase "all of its obligations and liabilities" in the definition quoted above, the plain language of the LLC Agreement required that long-term debt obligations be subtracted from the value of Company's assets in order to determine the amount hypothetically available to distribute to the unitholders for purposes of determining the value of the Put Units.29

Regarding the second issue, the Walnut Investors argue that the valuation date should have been December 31, 2013 (the date used for applying the EBITDA Collar), and that the decision to use a June 1, 2014 valuation date increased the deduction for debt (thus decreasing the valuation) by an additional $14 million for debt that was incurred between January 1, 2014 and May 30, 2014.30 The Walnut Investors point to no provision in the LLC Agreement mandating a December 31, 2013 valuation date. Although application of the EBITDA Collar required making certain EBITDA multiple calculations as of December 31, 2013,31 the parties were free to pick whatever metric they wished to set upper and lower limits on the valuation of PECO's assets and to use a different date to determine the valuation of the preferred units.32

Article XIII of the LLC Agreement, which is entitled "Valuation," provides simply that the "Fair Market Value" of units shall be calculated "as of the date of valuation." The Put Notice was exercised on May 5, 2014. The Duff & Phelps report states as an "Assumption" that it selected a valuation date of June 1, 2014 "based on the latest financial information available to [it] at the commencement of [its] valuation work, which is information prepared as of May 2014." The choice of a June 1, 2014 valuation date thus was not irrational on its face. Indeed, the Walnut Investors concede the selection of this date was reasonable, although "the lesser of the two reasonable explanations" in their view.33

Regarding the third issue, the parties agree it would have made no sense to construe the LLC Agreement literally to apply the EBITDA Collar to PECO, the parent company, when determining the value of the assets of PECO. As the Walnut Investors acknowledged in briefing, "[t]he literal application of the agreement's valuation collar to PECO would have reduced the Company's valuation to zero, which would have produced a meaningless valuation."34 This is because PECO is a holding company that has no EBITDA of its own. PECO's only asset is its equity interest in PECO Pallet. Thus, it was rational for Duff & Phelps to apply the EBITDA Collar to the EBITDA of the operating subsidiary (PECO Pallet) to generate a positive value for the assets held by PECO (i.e., its equity in PECO Pallet) and to avoid producing the absurd result of a zero valuation for PECO's assets.

To sum up, the Walnut Investors take issue with three aspects of Duff & Phelps' valuation determination. One aspect (deducting long-term debt) was consistent with the plain language of the LLC Agreement. The other two aspects (selecting June 1, 2014 as the valuation date and applying the EBITDA Collar to PECO Pallet) involved judgment calls to apply the valuation methodology in ways that were not specifically prescribed by the text of the LLC Agreement but were admittedly reasonable. Significantly, PECO, the Rollover Investors' counterparty to the LLC Agreement, did not make either of these judgment calls. They were made by Duff & Phelps, a third-party valuation firm selected in accordance with the procedures set forth in the LLC Agreement. Critically in that regard, both the Company and the Rollover Investors expressly agreed that they "shall be bound by the determination of the Valuation Firm . . . with respect to the Put Price as established by the Valuation Firm. . . ."35 In other words, the LLC Agreement reflects a reciprocal arrangement whereby the buyer and seller of the preferred units were both bound to whatever determination a nationally recognized valuation firm made.

When parties to a contract agree to be bound by a contractually established valuation methodology, this Court will respect their right to order their affairs as they wish and refrain from second-guessing the substantive determination of value.36 As then-Chancellor Strine explained in Senior Housing Capital, LLC v. SHP Senior Housing Fund, LLC, "[w]hen parties bargain to have a contractual payment turn on the valuation of property, the parties are free to set whatever level of judicial review they like."37

The Court in Senior Housing conceptualized three levels of review for valuation appraisals extending along a spectrum. First, the parties could agree to de novo judicial review, with the calculated valuation merely acting as a starting point for the reviewing court in case of a dispute. Second, as an intermediate level of review, the parties could choose to appoint an appraiser to determine a valuation, and designate that appraiser as an arbitrator should the parties disagree on the valuation, with review of the appraiser's decision limited to whatever statutory or private regime is chosen to govern the arbitration.38 Third, the parties could agree to a regime in which the appraiser's valuation is final, thereby precluding judicial or any other form of review of the appraiser's substantive determination of value. The rationale for this final option is captured in a rhetorical question the Chancellor posed in Senior Housing: "When parties contractually decide to have a qualified expert with relevant credentials make a determination of value without any indication that the expert's judgment is subject to judicial review, on what basis would it make sense to infer that the parties intended to have a law-trained judge do a de novo review of the expert's determination?"39

Although the role of the appraiser in Senior Housing was somewhat different than the role of the valuation firm in this case,40 the third scenario identified in Senior Housing accurately describes the choice the parties to the contract made here. The LLC Agreement explicitly states that both parties agree to be bound by the valuation of the preferred units as determined by the valuation firm, and provides for no judicial, arbitral or other form of review of that valuation. Accordingly, in order to respect the contractual choice that the indisputably sophisticated parties made here, the Court must in my opinion refrain from second-guessing the substance of Duff & Phelps' valuation of the preferred units.

Given this framework, it becomes apparent that the Walnut Investors misconceive the level at which the Court may review the LLC Agreement for ambiguity. Although judgment on the pleadings for a contract claim ordinarily would be inappropriate when the contract is susceptible to more than one reasonable interpretation,41 the relevant contractual provisions are not the ones setting forth the valuation methodology the valuation firm is supposed to apply to make its determination of value. Rather, the relevant provisions—as to which no argument of ambiguity has been advanced—are those delegating determinative authority to the valuation firm in the first place. Put differently, that Duff & Phelps was required to make certain judgment calls in its application of the prescribed valuation methodology is irrelevant to deciding the present motion because the LLC Agreement unambiguously grants the valuation firm the sole authority to make the value determination, and unambiguously states that such determination is binding on all parties. Had the LLC Agreement provided for judicial review of disputes over that determination, questions about the reasonableness of Duff & Phelps' assumptions might be fair game. Because the parties contractually agreed that they both "shall be bound" by the valuation firm's determination and thus agreed to forego judicial review of that determination, however, the Court will not take mere allegations of ambiguity about the valuation methodology as an invitation to circumvent the structure of the deal to substitute its own judgment for that of the valuation firm.

This is not to say that the Rollover Investors are left without any legal protection. Even when parties to a contract agree to preclude judicial review of the substance of an appraiser's determination, they have a legitimate contractual expectation that the appraiser's determination was the product of a good faith, independent judgment. Thus, the Court may protect against conduct undertaken by a contractual party to taint or corrupt the contractually prescribed appraisal process. This form of review involves determining whether a party breached the implied covenant of good faith and fair dealing inherent in every contract governed by Delaware law. As the Court in Senior Housing explained:

For the reasons explained above, I conclude that the parties to the LLC Agreement unambiguously agreed to be bound by the determination of value that Duff & Phelps made in response to the Walnut Investors' exercise of the Put Right, and thus that the Court is not free to second-guess the (admittedly reasonable) judgment calls Duff & Phelps made in applying the valuation methodology in the LLC Agreement to reach its determination. I also conclude that the parties did not modify the original provisions of the LLC Agreement to afford the Walnut Investors the right to participate in the valuation process or to object to the valuation firm's determination. Accordingly, I hold that the Walnut Investors' pleadings do not present any genuine issues of material fact that would preclude entry of judgment on the pleadings regarding the express terms of the LLC Agreement. In order to decide whether to enter judgment in PECO's favor, however, it remains necessary to determine whether the Walnut Investors have stated a claim for breach of the implied covenant of good faith and fair dealing. I turn to that issue next.

D. The Walnut Investors Have Failed to State a Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing

Under Delaware law, "[i]n order to plead successfully a breach of an implied covenant of good faith and fair dealing, the plaintiff must allege a specific implied contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff."43 "The implied covenant inheres to every contract, and is `best understood as a way of implying terms in the agreement.'"44 Terms will only be implied, however, "when the party asserting the implied covenant proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected."45 Moreover, "[t]he implied covenant only applies to developments that could not be anticipated, not developments that the parties simply failed to consider. . . ."46

In their counterclaim, the Walnut Investors assert a single claim for breach of the implied covenant of good faith and fair dealing. As significant as what this claim focuses on, is what it does not allege. The Walnut Investors do not allege any facts suggesting that Duff & Phelps is not a nationally recognized valuation firm (as required under the LLC Agreement) or that it was not independent. To the contrary, the Walnut Investors admit that the PECO board—with the participation and approval of their own general partner (Mayerson)—vetted each of the three valuation firms it considered for potential conflicts and unanimously authorized the Company's CFO to select between two of the firms, one of which was Duff & Phelps.47 Nor do the Walnut Investors allege any facts demonstrating that PECO or its representatives took or refrained from taking any actions that tainted the process by which Duff & Phelps conducted the valuation of the preferred units once it was retained.48 In other words, the Walnut Investors do not allege any of the kind of facts the Court in Senior Housing identified that would cast doubt on whether the valuation of the preferred units was the product of a "genuine impartial judgment on value."49

The Walnut Investors instead premise their implied covenant claim on essentially two theories. The first theory challenges the decision Duff & Phelps made to value the preferred units as of June 1, 2014, which, according to the Walnut Investors, was "unauthorized by the contract."50 But it was not. As discussed above, Article XIII of the LLC Agreement simply required that the Fair Market Value (defined term) of the preferred units be determined "as of the date of valuation." Although the LLC Agreement did not prescribe a more precise date for the valuation, the decision to use June 1, 2014 as the valuation date was not "unauthorized" but instead was plainly reasonable given that the Put Notice was submitted on May 5, 2014, and the latest financial information available to Duff & Phelps was for May 2014. Indeed, as noted above, the Walnut Investors concede that the use of a June 1, 2014 valuation date was reasonable.51 A decision to select one (even the lesser) of two admittedly reasonable options available under the LLC Agreement does not, by definition, constitute arbitrary or unreasonable conduct that has the effect of preventing a party to a contract from receiving the fruits of the bargain that was struck—especially when that decision was made by an independent third party, rather than the Walnut Investors' contractual counterparty.

The Walnut Investors' second theory focuses on business decisions the PECO board made before the Put Notice was delivered to the Company. According to the Walnut Investors, it was "unreasonable and arbitrary" for PECO to "pile on debt,"52 apparently referring to $50 million in long-term debt that was incurred in the second half of 2013, and an additional $14 million in debt that was incurred during the first five months of 2014.53 This conclusory allegation fails to state a claim for breach of the implied covenant of good faith and fair dealing.

As an initial matter, the essence of the claim is unsupported by any well-pled facts. In particular, the counterclaim is devoid of any facts from which it would be reasonable to infer that the debt in question did not serve a legitimate business purpose and was incurred for the bad-faith purpose of diminishing the valuation of the Put Units. Indeed, such an inference is contradicted by important admitted facts. It is admitted, for example, that the business of PECO, pallet pooling, requires significant capital investment when done on a large scale because pallets must be purchased, paid for, and stored to be available to customers.54 As the Walnut Investors' counsel explained at argument:

The Walnut Investors further admit they received the Company's 2013 unaudited financials in February 2014, and were aware of the Company's debt situation as of the end of 2013 when they exercised the Put Right.56 As to the $14 million in debt that was incurred in the first five months of 2014, it was Duff & Phelps—not PECO—that made the admittedly reasonable decision to value the preferred units as of June 1, 2014, thereby causing this debt to be taken into account in the valuation process. Given the lack of any well-pled facts demonstrating that PECO incurred the debt in question for an improper, bad-faith purpose, and given the admitted facts to the contrary, the Walnut Investors' second implied covenant theory fails to state a claim for relief.

* * * * *

In summary, on the basis of the pleadings, I find that PECO responded to the Walnut Investors' exercise of their Put Right appropriately according to the terms of the LLC Agreement. Upon receipt of the Put Notice, PECO promptly selected Duff & Phelps—a concededly nationally recognized valuation firm—to value the Put Units. It did so through a vote of its board, which included a representative from the Walnut Investors who approved the process by which PECO sought and selected a valuation firm. Once PECO received Duff & Phelps' valuation, which both it and the Walnut Investors were contractually bound to accept, PECO promptly sought to repurchase the Put Units.

The Walnut Investors have not pled any facts, nor have they disputed any facts pled by PECO, such as would render entry of judgment on the pleadings inappropriate. They have not challenged the independence of Duff & Phelps, nor have they alleged any facts demonstrating that PECO took any action to taint or undermine the valuation process so as to sustain a claim for breach of the implied covenant of good faith and fair dealing. Finally, the Walnut Investors' arguments that the LLC Agreement was modified, or that it was ambiguous in any relevant respect, both fail as a matter of law. Accordingly, PECO is entitled to the declaratory relief that it seeks.

IV. CONCLUSION

For the foregoing reasons, PECO's motion for judgment on the pleadings of its affirmative claims and to dismiss the counterclaim for failure to state a claim for relief is granted. An implementing order accompanies this opinion.

FINAL JUDGMENT

IT IS HEREBY ORDERED this 30th day of December, 2015, for the reasons stated in the Court's Memorandum Opinion of today's date, that: