Court Opinion

ID: 7797347
Source: CourtListenerOpinion
Date Created: 2022-08-03 15:00:11.905814+00
Date Added: 2024-06-11T16:28:37.190035
License: Public Domain

21-2301
Miller v. Brightstar Asia, Ltd.

                            In the
                United States Court of Appeals
                         FOR THE SECOND CIRCUIT

                                  AUGUST TERM 2021
                                    No. 21-2301

                                   TYLER MILLER,
                                  Plaintiff-Appellant,

                                          v.

                             BRIGHTSTAR ASIA, LTD.,
                               Defendant-Appellee.

             On Appeal from the United States District Court
                 for the Southern District of New York

                             ARGUED: APRIL 11, 2022
                             DECIDED: AUGUST 3, 2022

Before:         KEARSE, SACK, and MENASHI, Circuit Judges.

        Plaintiff-Appellant Tyler Miller appeals the dismissal of his
direct suit against Defendant-Appellee Brightstar Asia, Ltd. In
connection with the sale of his company, Harvestar, to Brightstar
Asia, Miller entered into a contract with Brightstar Asia, Harvestar,
and his co-founder. The contract provided that conflicted transactions
between Brightstar Asia and Harvestar must be on “terms no less
favorable to” Harvestar than those of an arm’s-length transaction. It
also provided that Miller would have options rights to sell Harvestar
shares to—or to buy Harvestar shares from—Brightstar Asia. Miller
alleged in his complaint that Brightstar Asia engaged in conflicted
transactions that rendered his options rights worthless. Those actions,
according to Miller, breached both the express terms of the contract
and the implied covenant of good faith and fair dealing. The district
court (Daniels, J.) dismissed his complaint for raising claims that
could be brought only in a derivative suit. We agree that Miller can
bring a claim for breach of the express conflicted-transactions
provision only in a derivative suit. However, we hold that Miller may
bring a direct suit for breach of the covenant of good faith and fair
dealing because that covenant is based on his individual options
rights. Accordingly, we AFFIRM in part and VACATE in part the
district court’s judgment.

            PAUL J. KROG, Bulso PLC, Brentwood, TN, for Plaintiff-
            Appellant.

            PETER C. SALES (Frankie N. Spero, Kristina A. Reliford, on
            the brief), Bradley Arant Boult Cummings LLP, Nashville,
            TN, for Defendant-Appellee.

MENASHI, Circuit Judge:

      Tyler Miller, the plaintiff-appellant in this case, and Omar Elmi
formed Harvestar, a cellphone refurbishment company, in 2016.
About two years later, they sold a controlling stake in Harvestar to

                                  2
Brightstar Asia, Ltd., the defendant-appellee, and concurrently
entered into a shareholders agreement with Brightstar Asia and
Harvestar. That agreement included a contractual standard of
conduct for conflicted transactions. It also granted call and put
options to Miller and Elmi to buy and sell shares at prices that
depended on such variables as the number of cellphones Harvestar
refurbished, Harvestar’s indebtedness, and Harvestar’s earnings
before interest and taxes (“EBIT”).

      According to Miller, Brightstar Asia violated the shareholders
agreement when it mismanaged Harvestar such that Miller’s options
rights lost all value. He filed a diversity action in federal district court
alleging breach of the written terms of—and the implied covenant
in—the shareholders agreement. The district court dismissed the case
because, in the district court’s view, his claims could be brought only
in a derivative action. That prompted this appeal.

      The district court was only partially correct. We agree with the
district court that the contractual duty created by the conflicted-
transactions provision is owed to Harvestar, and therefore Miller’s
claim for breach of that provision must be brought in a derivative suit.
However, the district court erred when it held that the implied duty
based on Miller’s own options rights was owed to Harvestar as well.
We affirm in part and vacate in part the district court’s judgment.

                            BACKGROUND

      On August 1, 2016, Tyler Miller and Omar Elmi formed
Harvestar, and they were the only stockholders and officers of the
company. Harvestar’s main business involved buying used
cellphones, refurbishing the phones in laboratories in the Philippines,
and then reselling the phones at a profit. It also provided its repair

                                     3
services to other vendors, restoring used cellphones for those vendors
to resell.

       Brightstar Corporation was one such vendor. As a Harvestar
customer, Brightstar Corporation used Harvestar’s services to restore
damaged cellphones to “like new” condition before reintroducing the
phones to the market. App’x 119-20. According to Miller’s complaint,
Brightstar   Corporation     “became    familiar   with    the   quality,
professionalism and efficiency of Harvestar and its experienced team
of technicians” through these business dealings. Id. at 120.

       In April 2018, Brightstar Asia, a Brightstar Corporation affiliate
based in Hong Kong, bought from Miller and Elmi a 51 percent stake
in Harvestar for $4 million, leaving the two founders each with a 24.5
percent stake in Harvestar. In connection with that transaction,
Brightstar Asia, Harvestar, Miller, and Elmi entered into a
Shareholders Agreement (“Agreement”), which provides that it was
“made under, and shall be construed and enforced in accordance
with, the laws of the state of Delaware.” Id. at 152.

       The Agreement contains two provisions important to this
appeal. First, Paragraph 14 of the Agreement authorizes transactions
between Brightstar Asia’s other companies and Harvestar despite the
conflict of interest, with one caveat: “[A]ny transactions between the
Company or the Subsidiaries thereof, on the one hand, and an
Investor or an Other Business, on the other hand, will be on terms no
less favorable to the Company or the Subsidiaries thereof than would
be obtainable in a comparable arm’s-length transaction.” Id. at 149. 1

1 The Agreement specifies that “Company” refers to Harvestar and that
“Investors” includes Brightstar Asia. “Other Business[es]” are Brightstar

                                    4
      Second, the Agreement provides for put and call rights.
Paragraph 10 provides the put right: after the second anniversary of
the Agreement, “the Executives and their Permitted Transferees shall
have the right, but not the obligation, … to sell to Brightstar … a
portion of the Ordinary Shares … held by such Persons.” App’x 146. 2
Paragraph 11 provides the call right: “the Executives shall have the
right but not the obligation, … to purchase from Brightstar and its
Permitted Transferees … all of the Ordinary Shares held by such
Persons.” App’x 148. The prices at which these shares could be bought
or sold would be calculated according to a contractual formula
specific to each right. The sale price of the put shares depends on the
indebtedness of Harvestar, Harvestar’s EBIT, and other factors such
as sales volume. Id. at 146. The sale price of the call shares is the
greater of the fair market value of the shares multiplied by the
ownership percentage of Brightstar or the total amount of cash and
other property invested by Brightstar minus $2 million. Id. at 148. 3

Asia’s or its affiliates’ “investments or other business or strategic
relationships, ventures, agreements or other arrangements with entities”
other than Harvestar or Harvestar’s subsidiaries that are “engaged in the
business of [Harvestar]” or “may be competitive with [Harvestar].”
App’x 134, 149.
2The Agreement refers to Miller and Elmi collectively as the “Executives.”
App’x 134.
3 The Agreement defines the terms in the formulas in an attached exhibit.
“Indebtedness” includes, among other things, “all obligations for borrowed
money or in respect of loans, deposits, or advances of any kind.” App’x 161.
“Ownership Percentage” means, “for any Shareholder, such Person’s
Ownership Percentage as set forth from time to time on the Schedule of
Shareholders.” Id. at 161.

                                     5
      According to Miller, Brightstar Asia began to mismanage
Harvestar “[a]lmost immediately upon obtaining majority control.”
App’x 122. Among other things, Brightstar Asia “placed millions of
dollars in intercompany loans and other obligations on Harvestar’s
balance sheet,” “cancelled all repair services Harvestar was formed to
provide to its customers, except the repair work that Harvestar
provides    to    Brightstar    Asia’s    insurance     affiliate,”   and
“caused … Harvestar to repair handsets for its insurance affiliate at a
cost of $50 per device less than that company was paying to an
unrelated, third party vendor.” Id. at 122-23.

      Miller filed a complaint in federal district court on June 24,
2020, and amended it on September 30 of the same year. Id. at 7, 117.
His complaint—which he brought as a direct suit—included four
counts: three breach of contract claims, and one breach of fiduciary
duty claim. In Count I, Miller claimed that Brightstar Asia breached
Paragraph 14 of the Agreement by deflating the repair prices
Harvestar charged to Brightstar Asia’s affiliate. In Count II, Miller
sought specific performance to enforce Paragraph 14 as well as
disgorgement. In Count III, Miller alleged that Brightstar Asia
violated the “implied covenant of good faith and fair dealing” by
suppressing Harvestar’s prices and business, which “caused
[Miller’s] ‘put’ rights pursuant to Paragraph 10 of the Shareholders
Agreement and [Miller’s] ‘call’ rights pursuant to Paragraph 11 of the
Shareholders Agreement to be rendered worthless.” Id. at 128. In
Count IV, Miller claimed Brightstar Asia violated the fiduciary duty
it owed Miller as a minority shareholder.

      Brightstar Asia moved to dismiss Miller’s complaint under
Federal Rule of Civil Procedure 12(b)(1) or, in the alternative, 12(b)(6).

                                    6
Brightstar Asia argued that the district court lacked subject-matter
jurisdiction over Miller’s claims for three reasons. First, it asserted
that Miller had alleged only “derivative claims, not direct claims,
under Delaware law.” Id. at 226-27. Second, Brightstar Asia
contended that Miller could exercise his put rights “only” by “acting
jointly” with Elmi, meaning that Miller cannot plead an injury-in-fact
without alleging that the put rights were “jointly exercised.” Id. at
239-40. Third, Brightstar Asia argued that, because Miller could not at
the time of the complaint have exercised the put rights, his claim was
not ripe.

      A magistrate judge agreed with Brightstar Asia on the first
point and recommended to the district court that the case be
dismissed on the ground that Miller’s complaint alleged only
derivative claims. Miller v. Brightstar Asia, Ltd., No. 20-CV-4849, 2021
WL 2133385, at *1 (S.D.N.Y. May 26, 2021). The magistrate judge
determined that Counts I through IV all alleged breaches of duties
owed to Harvestar, not to Miller. According to the magistrate judge,
Paragraph 14—on which Counts I and II were based—described a
contractual duty owed to Harvestar. Id. at *6. He additionally
determined that Count III described a breach of a duty to Harvestar
because, “assuming the implied covenant exists to conflict[ed]
transactions, the enforcement of that duty belongs to Harvestar.” Id.
at *7. Last, the magistrate judge determined that the fiduciary duty
under Count IV was owed to Harvestar because, in his view, “Miller
d[id] not explain why the breach of fiduciary duty belongs to him.”
Id. Because he held that the duties underlying Miller’s claims were
owed to Harvestar, the magistrate judge applied Tooley v. Donaldson,
Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), and concluded that
Miller’s claims were derivative. Id. at *7-8.

                                    7
      Over Miller’s timely objections, the district court (Daniels, J.)
adopted the magistrate judge’s report and recommendation. Miller v.
Brightstar Asia, Ltd., No. 20-CV-4849, 2021 WL 4148896, at *1 (S.D.N.Y.
Sept. 13, 2021). It began by holding that clear error review applies to
the report and recommendation because “the issue raised in [Miller’s]
objections … is the exact same issue that was fully considered and
analyzed by” the magistrate judge. Id. at *3. The district court agreed
with the magistrate judge that the breaches alleged in the complaint
were of duties owed to Harvestar, and it concluded that under
Delaware law Miller’s claims were “derivative in nature.” Id. at *4.
The district court granted Brightstar Asia’s motion to dismiss the case.
Id. at *5. Miller timely appealed.

                            DISCUSSION

      Before this court, Miller challenges the dismissals only of
Counts I and III of his complaint. He raises two principal arguments
on appeal. First, Miller contends that, because of the put and call
rights conferred on him in the contract, both Paragraph 14 and the
alleged covenant of good faith and fair dealing describe a contractual
duty owed to him. Second, Miller argues in the alternative that, even
if the contractual duties described in Counts I and III belong to
Harvestar, his claims are direct under Tooley. After considering these
arguments, we affirm in part and vacate in part the district court’s
judgment.

                                     I

      First, however, we must decide what standard of review
applies to Miller’s claims. It is well settled that “[w]here a district
court grants a defendant’s Rule 12(b)(1) motion to dismiss, an
appellate court will review the district court’s factual findings for

                                     8
clear error and its legal conclusions de novo.” Aurecchione v. Schoolman
Transp. Sys., 426 F.3d 635, 638 (2d Cir. 2005). Nevertheless, Brightstar
Asia argues that we should review the district court’s legal
conclusions only for “clear or plain error.” Appellee’s Br. 13-14.
According to Brightstar Asia, we are constrained by the standard the
district court applied when it decided to adopt the report and
recommendation over Miller’s objections.

      Federal Rule of Civil Procedure 72(b) provides that when a
magistrate judge gives a recommendation on a dispositive motion
“[t]he district judge must determine de novo any part of the
magistrate judge’s disposition that has been properly objected to.”
Fed. R. Civ. P. 72(b)(3). The rule also describes what constitutes a
proper objection: “Within 14 days after being served with a copy of
the recommended disposition, a party may serve and file specific
written objections to the proposed findings and recommendations.”
Id. 72(b)(2) (emphasis added). We have interpreted that language to
mean that “[m]erely referring the court to previously filed papers or
arguments does not constitute an adequate objection under … Fed. R.
Civ. P. 72(b).” Mario v. P & C Food Mkts., 313 F.3d 758, 766 (2d Cir.
2002). And although Rule 72 applies only to the district court’s review
of a report and recommendation, this court has “adopted the rule that
‘when a party fails to object timely to a magistrate’s recommended
decision, it waives any right to further judicial review of that
decision.’” Wesolek v. Canadair Ltd., 838 F.2d 55, 58 (2d Cir. 1988)
(alteration omitted) (quoting McCarthy v. Manson, 714 F.2d 234, 237
(2d Cir. 1983)).

      We disagree with Brightstar Asia’s argument that because the
district court reviewed the magistrate judge’s recommendation for

                                   9
clear or plain error, so must this court. As an initial matter, it is unclear
that the district court was correct to hold that Miller’s objections were
improper. In deciding that the clear error standard applied, the
district court relied on the rule that when “the party makes only
conclusory or general objections, or simply reiterates his original
arguments,      the   [district   court]    reviews     the    Report     and
Recommendation only for clear error.” Thomas v. Astrue, 674
F. Supp. 2d 507, 511 (S.D.N.Y. 2009) (quoting Silva v. Peninsula Hotel,
509 F. Supp. 2d 364, 366 (S.D.N.Y. 2007)). Normally that principle is
applied when the objections are nonspecific or “merely perfunctory
responses … argued in an attempt to engage the district court in a
rehashing of the same arguments set forth in the original petition.”
Edwards v. Fischer, 414 F. Supp. 2d 342, 346-47 (S.D.N.Y. 2006)
(internal quotation marks omitted).4 That does not describe Miller’s
objections, which took issue with a specific legal conclusion in the
report and recommendation. Miller objected to the magistrate judge’s

4 See, e.g., Rodriguez v. Colvin, No. 12-CV-3931, 2014 WL 5038410, at *4
(S.D.N.Y. Sept. 29, 2014) (“Because these objections ignore the Report and
simply reiterate arguments made to [the magistrate judge], they are not
proper objections, and are reviewed only for clear error.”); McDonaugh v.
Astrue, 672 F. Supp. 2d 542, 548 (S.D.N.Y. 2009) (“Insofar as Plaintiff objects
to the weight that the ALJ assigned to the opinion of Dr. Gair, Plaintiff does
not raise a new argument and thus is not entitled to de novo review on the
basis of this objection.”); Edwards, 414 F. Supp. 2d at 347 (“Petitioner does
not expressly object to the Report’s recommendation that his Fourteenth
Amendment claims be denied. This Court finds no clear error in that
recommendation and therefore adopts it in its entirety.”) (footnote
omitted); Nelson v. Smith, 618 F. Supp. 1186, 1190 (S.D.N.Y. 1985) (“[T]hose
portions of the Report to which petitioner has not specifically objected will
be adopted by the Court absent a finding of ‘clear error’ on the face of the
record.”).

                                      10
determination that “Section 14 mirrors the contractual duties in El
Paso [Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248 (Del. 2016),]
and Backus [v. U3 Advisors, Inc., No. 16-CV-8990, 2017 WL 3600430
(S.D.N.Y. Aug. 18, 2017)],” which led the magistrate judge to
recommend applying Tooley. App’x 329. The district court held that
Miller’s “objection is improper as it seeks to relitigate an issue that
was fully argued in the original briefs to the magistrate judge.” Miller,
2021 WL 4148896, at *3 (internal quotation marks omitted). To the
extent that the objection sought to revisit an issue already argued, it
was only because, in Miller’s view, the magistrate judge’s specific
error was a fundamental one. As far as we can tell, however, Miller
timely filed “specific written objections to the proposed findings and
recommendations” and therefore properly objected. Fed. R. Civ.
P. 72(b)(2).

       Regardless, even if the rule applicable to the district court
required it to review Miller’s objections only for clear error, that same
standard does not apply to this court’s review. See Fed. R. Civ. P. 1
(noting that the rules govern “proceedings in the United States district
courts”). Rule 72 does not dictate the standard of review for a court of
appeals when a party objects to a magistrate report and
recommendation. To be sure, as noted above we have adopted a rule
that “fail[ure] to object timely” operates as a waiver of any further
judicial review. Wesolek, 838 F.2d at 58 (quoting McCarthy, 714 F.2d at
237). But that rule is a waiver rule, “enforced under our supervisory
powers,” and a “nonjurisdictional … provision whose violation we
may excuse in the interest of justice.” United States v. Male Juvenile, 121
F.3d 34, 39 (2d Cir. 1997).

                                    11
        The rule Brightstar Asia urges us to follow is more than a
waiver rule. The district court held that Miller’s objection to the
magistrate report and recommendation was improper and subject to
clear error review because the magistrate judge had already rejected
Miller’s argument. Brightstar Asia argues that we must also apply
clear or plain error review. That rule would effectively accord more
deference to magistrate judges than we do to Article III district court
judges. Had the proceedings in this case happened before the district
court without the assistance of a magistrate judge, there would be no
question that we would review the very same legal conclusions de
novo. Aurecchione, 426 F.3d at 638. We do not think the involvement of
a magistrate judge alters the standard of review on appeal.

        Miller has argued that his complaint raised direct rather than
derivative claims at every stage of this litigation—before the
magistrate judge, in objections to the district court, and before this
court. Whether he is correct is a question of law, and we review it de
novo.

                                      II

        Miller challenges the dismissals only of Counts I and III of his
complaint. Those counts allege breaches of Paragraph 14 of the
contract and of the covenant of good faith and fair dealing,
respectively. The district court dismissed his complaint for bringing
derivative claims in a direct suit.

        The district court’s holding turned on the distinction between
derivative suits and direct—or individual—suits. The shareholders’
derivative suit is a creature of equity, developed “so that the
shareholder could enforce a corporate right or claim (that is, one
derived from the corporation) and thereby indirectly protect his

                                      12
investment in the corporation.” Harry G. Henn, Handbook of the Law
of Corporations and Other Business Enterprises 559 (1961). “[T]he
derivative action is unique, for the plaintiff-shareholder does not sue
for his own direct benefit or in his own direct right but rather as a
guardian ad litem for the corporation.” Id. at 560. Because derivative
suits are brought on behalf of the corporation, only shareholders may
bring such suits, Schoon v. Smith, 953 A.2d 196, 201-02 (Del. 2008), and
“the recovery, if any, must go to the corporation,” Tooley, 845 A.2d at
1036.

        Although Miller is a shareholder, he has not brought a
derivative action in this case. Instead, he brought his suit as a direct
action, which must allege “injuries affecting his … legal rights” that
are “distinct from an injury caused to the corporation alone.” Id. at
1036. “In such individual suits, the recovery or other relief flows
directly to the stockholders, not to the corporation.” Id. Additionally,
a plaintiff bringing a direct action need not comply with Delaware’s
requirements for derivative actions, namely that the stockholder
(1) “retain ownership of the shares throughout the litigation,”
(2) “make presuit demand on the board,” and (3) “obtain court
approval of any settlement.” Id.

        We agree with the district court that Count I of Miller’s
complaint may be brought only in a derivative suit. However,
because we hold that Count III states a direct claim belonging to
Miller, we vacate in part the district court’s judgment.

                                     A

        In Count I, Miller alleges that “[a]s a direct and proximate result
of Brightstar Asia[’s] violation of Paragraph 14 of the Shareholders
Agreement, plaintiff has been damaged in at least two respects”—

                                    13
diminution of the value of his Harvestar shares, and harm to his
options rights. App’x 125. 5 The district court held that this claim
could be properly brought only in a derivative action. We agree.

         “The   leading   Delaware     Supreme      Court    case   on    the
direct/derivative dichotomy is widely acknowledged to be Tooley.”
AHW Inv. P’ship v. Citigroup, Inc., 806 F.3d 695, 699 (2d Cir. 2015).
“[T]o plead a direct claim under Tooley, a stockholder must
demonstrate that the duty breached was owed to the stockholder and
that he or she can prevail without showing an injury to the
corporation.” Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251, 1266
(Del. 2021) (internal quotation marks omitted). However, the
Delaware Supreme Court has clarified that “when a plaintiff asserts a
claim based on the plaintiff’s own right, such as a claim for breach of
a commercial contract, Tooley does not apply.” Citigroup Inc. v. AHW
Inv. P’ship, 140 A.3d 1125, 1139-40 (Del. 2016). Thus, in NAF Holdings,
LLC v. Li & Fung (Trading) Ltd., that court held that “a suit by a party
to a commercial contract to enforce its own contractual rights is not a
derivative action under Delaware law,” 118 A.3d 175, 182 (Del. 2015),
despite the fact that “NAF cannot demonstrate its injury without
showing an injury to the corporation in which it owns stock,” NAF
Holdings, LLC v. Li & Fung (Trading) Ltd., 772 F.3d 740, 744 (2d Cir.
2014).

         Tooley applies to Count I of Miller’s complaint because the right
Miller claims was breached was not his “own contractual right[].”
NAF Holdings, 118 A.3d at 182. In El Paso, the Delaware Supreme
Court applied Tooley to a claim that the general partner of a limited

5  Miller does not appeal the district court’s dismissal of Count I insofar as
it relates to the diminution in value of his Harvestar shares.

                                     14
partnership failed to comply with a provision of the limited
partnership agreement requiring that for every action the general
partner “must believe that the determination or other action is in the
best interests of the Partnership.” El Paso, 152 A.3d at 1258 (quoting
the limited partnership agreement). Because that provision required
that actions be believed to be in the “best interests of the Partnership,”
the court held that “the contractual duty of good faith was owed to
the Partnership.” Id. at 1258-59. Similarly, the contractual provision
which Miller claims Brightstar Asia breached in Count I provides that
any conflicted transactions “will be on terms no less favorable to the
Company … than would be obtainable in a comparable arm’s-length
transaction.” App’x 149 (emphasis added). As in El Paso, the
contractual duty at issue in Count I is owed to the corporation, not to
the plaintiff.

       Applying Tooley, we agree with the district court that Count I
is a derivative claim. A claim is direct only if the plaintiff “can prevail
without showing an injury to the corporation.” Brookfield, 261 A.3d at
1266. 6 In this case, Miller’s success on Count I is predicated on an
injury to Harvestar. Count I alleges that Brightstar Asia “entered into
numerous transactions with Harvestar on terms less favorable to
Harvestar than Brightstar Asia could obtain in a comparable arm’s-

6  See also Tooley, 845 A.2d at 1038 (“[T]o bring a direct action, the
stockholder must allege something other than an injury resulting from a
wrong to the corporation.”); Daniel S. Kleinberger, Direct Versus Derivative
and the Law of Limited Liability Companies, 58 Baylor L. Rev. 63, 88-104 (2006)
(characterizing Tooley as adopting the “direct harm approach,” under
which “mismanagement by the entity’s managers gives rise to only a
derivative claim because the owners’ loss in value—no matter how real and
substantial—is a consequence of a prior injury to the entity”).

                                      15
length transaction” in violation of a duty owed to Harvestar. App’x
124. Although the impact on Harvestar’s EBIT, productivity, and
indebtedness negatively affected the value of Miller’s options rights,
that effect depends on an injury to Harvestar. Thus, Miller cannot
pursue his claim that Brightstar Asia breached Paragraph 14 of the
Agreement in a direct suit.

                                    B

      Count III is different. Count III alleges a “breach of the implied
covenant of good faith and fair dealing.” Id. at 128. According to
Miller, the “implied covenant of good faith and fair dealing” “fill[s]
‘gaps’ left in the Shareholders Agreement pertaining to the[] variables
[in the put and call price formulas] and impose[s] an obligation
flowing to the Plaintiff.” Appellant’s Br. 28. Miller argues that
Brightstar Asia violated the implied covenant by engaging in
conflicted   transactions     and   by   unreasonably    manipulating
Harvestar’s indebtedness and the number of handset units processed.

      The district court saw no difference between the duty alleged
in Count III and the duty alleged in Count I, and it concluded that
“any alleged contractual duty”—including the duty of good faith and
fair dealing—“belongs to Harvestar and not Plaintiff individually.”
Miller, 2021 WL 4148896, at *4. We disagree.

      Under Delaware law, “[t]he implied covenant [of good faith
and fair dealing] is inherent in all contracts and is used to infer
contract terms to handle developments or contractual gaps that the
asserting party pleads neither party anticipated.” Dieckman v. Regency
GP LP, 155 A.3d 358, 367 (Del. 2017) (internal quotation marks
omitted). The implied covenant “requires a party in a contractual
relationship to refrain from arbitrary or unreasonable conduct which

                                    16
has the effect of preventing the other party to the contract from
receiving the fruits of the bargain.” Dunlap v. State Farm Fire & Cas.
Co., 878 A.2d 434, 442 (Del. 2005) (internal quotation marks omitted).
“[P]arties are liable for breaching the covenant when their conduct
frustrates the overarching purpose of the contract by taking
advantage of their position to control implementation of the
agreement’s terms.” Id. (internal quotation marks omitted).

      The implied covenant is at once pervasive and limited.
“[I]mplied good faith cannot be used to circumvent the parties’
bargain, or to create a free-floating duty unattached to the underlying
legal document.” Id. at 441 (internal quotation marks, alteration, and
footnote omitted). “Parties have a right to enter into good and bad
contracts, the law enforces both.” Nemec v. Shrader, 991 A.2d 1120,
1126 (Del. 2010). In other words, the implied covenant cannot
override what the contract expressly provides. Instead, the covenant
applies when “the express terms of the agreement can be reasonably
read to imply certain other conditions, or leave a gap, that would
prescribe certain conduct, because it is necessary to vindicate the
apparent intentions and reasonable expectations of the parties.”
Dieckman, 155 A.3d at 367.

      In this case, Miller alleges an implied covenant of good faith
and fair dealing that creates a contractual duty owed to him, not to
Harvestar. The options rights described in Paragraphs 10 and 11 are
individual rights; both paragraphs provide that “the Executives shall
have the right” to sell shares to or purchase shares from Brightstar
Asia. App’x 146 (Paragraph 10), 148 (Paragraph 11). Those express
contractual terms imply that Brightstar Asia will not engage in

                                  17
“arbitrary or unreasonable conduct” to destroy the value of Miller’s
options rights. See Dunlap, 878 A.2d at 442.

      Miller alleges that sort of misconduct in his complaint.
According to Miller, Brightstar Asia’s misconduct includes “plac[ing]
millions of dollars in intercompany loans and other obligations on
Harvestar’s balance sheet” and “cancel[ling] all repair services
Harvestar was formed to provide to its customers, except the repair
work that Harvestar provides to Brightstar Asia[].” App’x 122-23. By
operation of the formulas described in Paragraphs 10 and 11, “the
price at which [Miller] has the right to ‘put’ the purchase of his shares
to Brightstar Asia is currently $0” while “the price at which [Miller]
has the right to ‘call’ the purchase of Brightstar Asia’s majority
interest in Harvestar is … a prohibitively expensive and unreasonable
amount.” Id. at 128-29. In sum, Count III alleges that “Brightstar Asia
has caused plaintiff’s ‘put’ rights pursuant to Paragraph 10 of the
Shareholders Agreement and plaintiff’s ‘call’ rights pursuant to
Paragraph 11 of the Shareholders Agreement to be rendered
worthless.” Id. at 128. That conduct, according to the complaint,
violated the “implied covenant” that “required, inter alia, that
Brightstar Asia refrain from engaging in, or causing Harvestar to
engage in, conflict[ed] transactions to the detriment of Harvestar or
plaintiff.” Id. at 127 (emphasis added). Because Miller alleges a
violation of an implied contractual duty owed to himself, he may
bring Count III in a direct suit.

      Brightstar Asia contended before the district court that, even if
Miller’s claim for breach of the implied covenant could be brought in
a direct suit, Miller cannot state a claim based on conflicted
transactions. Id. at 243. Brightstar Asia pointed to the principle that

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when “the contract at issue expressly addresses a particular matter,
an implied covenant claim respecting that matter is duplicative and
not viable.” Id. (quoting Edinburgh Holdings, Inc. v. Educ. Affiliates, Inc.,
No. 2017-0500, 2018 WL 2727542, at *9 (Del. Ch. June 6, 2018)).
According to Brightstar Asia, Miller’s claim for breach of the implied
covenant based on conflicted transactions “is entirely duplicative of
[Miller’s] claim for breach of [Paragraph] 14” and for that reason fails
as a matter of law. Id.

       We again disagree. Brightstar Asia is correct that, under
Delaware law, the implied covenant of good faith and fair dealing
“does not apply when the contract addresses the conduct at issue.”
Nationwide Emerging Managers, LLC v. NorthPointe Holdings, LLC, 112
A.3d 878, 896 (Del. 2015). That principle, however, recognizes that
“implied good faith cannot be used to circumvent the parties’
bargain.” Id. at 896 n.72 (quoting Dunlap, 878 A.2d at 441); see also
Dunlap, 878 A.2d at 441 (“[O]ne generally cannot base a claim for
breach of the implied covenant on conduct authorized by the terms of
the agreement.”). It does not override the court’s function of
“implying contract terms to ensure the parties’ reasonable
expectations are fulfilled.” Id. at 442 (internal quotation marks
omitted). In cases such as NorthPointe Holdings and Edinburgh
Holdings, the courts held that express contractual provisions between
two parties ruled out an implied covenant between those parties
covering identical ground. See NorthPointe Holdings, 112 A.3d at 896;
Edinburgh Holdings, 2018 WL 2727542, at *9. In this case, by contrast,
the alleged implied covenant arises between Brightstar Asia and
Miller while Paragraph 14 arises between Brightstar Asia and
Harvestar. An implied covenant between Brightstar Asia and Miller
to avoid conduct that would unreasonably undermine the value of

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Miller’s options rights would not “circumvent” a bargain between
Brightstar Asia and Harvestar to avoid conflicted transactions.
Dunlap, 878 A.2d at 441. Thus, Paragraph 14 does not render Miller’s
implied covenant claim impermissibly duplicative.

       We hold that the district court erred when it determined that
the implied duty alleged in Count III “belong[ed] to Harvestar and
not Plaintiff individually.” Miller, 2021 WL 4148896, at *4. Miller
adequately pleaded that Brightstar Asia engaged in “arbitrary or
unreasonable conduct” that “prevent[ed] [Miller] from receiving the
fruits of the bargain” in Paragraphs 10 and 11. Dunlap, 878 A.2d at 442
(internal quotation marks omitted). Such a claim may be brought in a
direct suit. Accordingly, we vacate the district court’s judgment as to
Count III.

                             CONCLUSION

       When the district court determined that Miller brought only
derivative claims, it dismissed his case for lack of subject-matter
jurisdiction. Miller, 2021 WL 4148896, at *4. That decision stemmed
from the Delaware courts’ practice of referring to the ability to bring
a derivative claim as “[d]erivative standing.” El Paso, 152 A.3d at 1256.
But, as the Supreme Court has noted, the term “standing” is often
“misleading” because courts sometimes use the term to refer to
requirements that “do[] not implicate subject-matter jurisdiction.”
Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 128
n.4 (2014). Here, the inquiry into whether a claim is direct, and a
plaintiff therefore has “standing” to bring it, is not an Article III
standing inquiry. 7 Even if the district court were right that Miller’s

7 That is, it is not an inquiry into whether the plaintiff suffered an “injury
in fact,” whether there is a “causal connection between the injury and the

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claims had to be brought in a derivative suit, it should have dismissed
the complaint for failure to state a claim. See Culverhouse v. Paulson &
Co., 813 F.3d 991, 994 (11th Cir. 2016) (“When the district court later
concluded that Culverhouse was wrong and that his claims were
derivative, its ruling should have been on the merits.”). 8

       “A dismissal for lack of jurisdiction must be without prejudice
rather than with prejudice. Dismissals for failure to state a claim, on
the other hand, are generally with prejudice.” Donnelly v. CARRP, 37
F.4th 44, 57 (2d Cir. 2022) (internal quotation marks and citation
omitted). It is nevertheless permissible to dismiss for failure to state a
claim without prejudice, for example to enable a party to seek to
amend its complaint. See, e.g., Eisen v. Carlisle & Jacquelin, 479 F.2d
1005, 1015 (2d Cir. 1973) (observing that cases may be disposed of “on

conduct complained of,” and whether the injury is redressable. Carter v.
HealthPort Techs., LLC, 822 F.3d 47, 55 (2d Cir. 2016) (quoting Lujan v. Defs.
of Wildlife, 504 U.S. 555, 560 (1992)).
8  Because whether Miller properly stated a direct claim was not a
jurisdictional question, the district court should have considered Brightstar
Asia’s arguments that the district court lacked subject-matter jurisdiction
before proceeding to the merits. See Steel Co. v. Citizens for a Better Env’t, 523
U.S. 83, 94 (1998). For reasons similar to those that lead us to conclude that
Miller states a direct claim, we conclude that the district court had subject-
matter jurisdiction to hear this case. An option “is itself a valuable property
right,” and rendering the option valueless is a “legally cognizable injury-
in-fact.” Toll Bros., Inc. v. Township of Readington, 555 F.3d 131, 141-42 (3d
Cir. 2009); see also In re MTBE Prods. Liability Litig., 725 F.3d 65, 110 (2d Cir.
2013) (“In most cases, that a plaintiff has Article III standing is enough to
render its claim constitutionally ripe.”). To the extent Brightstar Asia
argued that prudential considerations required dismissal, the district court
may consider those arguments for the first time on remand. See Adelphia
Bus. Sols., Inc. v. Abnos, 482 F.3d 602, 607 (2d Cir. 2007) (“In general, a federal
appellate court refrains from passing on issues not raised below.”).

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the merits” in “dismissals with or without prejudice for failure to state
a claim”). Accordingly, although the district court erred in
characterizing its holding as jurisdictional, we AFFIRM its judgment
of dismissal as to Count I. As to Count III, we VACATE the judgment
of the district court and REMAND for further proceedings consistent
with this opinion.

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