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SMC Holdings, LLC v. McCann

United States District Court, D. Minnesota

September 27, 2017

SMC HOLDINGS, LLC, VINCO, INC., RENEWTECH, LLC, and STEVE ANDERSON, Plaintiffs / Counter Defendants,
v.
AARON A.J. MCCANN and SWITCHINGGEARS, LLC, Defendants/ Counter Claimants.

          CURTIS D. SMITH, MOSS & BARNETT, PA, FOR PLAINTIFFS / COUNTER DEFENDANTS.

          BROOKS F. POLEY AND MATTHEW C. ROBINSON, WINTHROP & WEINSTINE, PA, FOR DEFENDANTS / COUNTER CLAIMANTS.

          MEMORANDUM OPINION AND ORDER

          JOHN R. TUNHEIM CHIEF JUDGE UNITED STATES DISTRICT COURT

         This action stems from a failed business venture related to wind energy developments with Native American tribes. Plaintiffs brought this action seeking to recover their $2.7 million investment and other expenses, bringing claims based on common-law fraud, securities fraud, unjust enrichment, conversion, civil theft, and breach of contract. Defendants counterclaimed for breach of a joint venture agreement, breach of fiduciary duties, breach of the duty of loyalty, and negligence.

         Defendants move for summary judgment on all of Plaintiffs' claims except for the breach of contract claim. The Court will grant in part and deny in part Defendants' motion for summary judgment, finding insufficient support for some of Plaintiffs' fraud claims and Plaintiffs' securities fraud claim. Additionally, because the Court does not find the testimony of Plaintiffs' expert so factually unsupported as to warrant exclusion at this time, the Court will deny Defendants' motion to exclude the expert's testimony.

         Plaintiffs move for summary judgment on Defendants' counterclaims and for affirmative summary judgment on Plaintiffs' claim for breach of contract. The Court will grant Plaintiffs' motion with regard to Defendants' negligence counterclaim, but, because questions of material fact remain over whether the parties entered into a joint venture or partnership and whether Defendants breached the Convertible Loan Agreement, the Court will deny Plaintiffs' motion in all other respects. The Court will also deny Plaintiffs' motion to strike Defendants' reply declaration because it was responsive to Plaintiffs' arguments in opposition that were not reasonably anticipated.

         BACKGROUND

         I. THE PARTIES

         Defendant Aaron McCann is the owner and sole member of Defendant SwitchingGears, LLC (“SwitchingGears”). (Decl. of Aaron McCann in Supp. (“McCann Decl.”) ¶ 1, Dec. 1, 2016, Docket No. 77.) McCann describes SwitchingGears as “a wind energy developer that specializes in the development of wind turbine installments for Native American tribes.” (Id. ¶ 2.) According to McCann, SwitchingGears began developing relationships with Native American tribes in the Midwest, including the Oglala Sioux Tribe in Pine Ridge, South Dakota, starting in 2009. (Id. ¶¶ 3-4.) SwitchingGears worked “to develop a project model that would allow [it] to expand the traditional target market for multiple wind turbine installments in rural and non-taxable communities, such as Native American Tribes.” (Id. ¶ 5.) Pursuant to SwitchingGears' financial model, it sought to “aggregate wind projects and finance them through a series of investors; federal, state and local investment tax credits; grants; programs; and other financing sources that were uniquely available, collectively, to these communities.” (Id.)

         Plaintiffs include related companies, SMC Holdings, LLC (“SMC Holdings”), Vinco, Inc. (“Vinco”), Renewtech, LLC (“Renewtech”), as well as Steve Anderson (the president of Vinco and a member of SMC Holdings and Renewtech). (See Second Am. Compl. ¶¶ 2-5, Jan. 27, 2016, Docket No. 44; Decl. of Steve Anderson (“Anderson Decl.”) ¶ 1, Dec. 1, 2016, Docket No. 64.) Vinco is a telecom and electrical contractor, and Renewtech is a wind turbine manufacturer and installer. (Decl. of Matthew C. Robinson in Supp. (“Robinson Decl.”), Ex. C at 6:25-7:1, 10:20-11:15, Dec. 1, 2016, Docket No. 76.) Non-party Steve Martineau worked for Vinco and was McCann's principal contact with Plaintiffs during the relevant period. (McCann Decl. ¶ 7; Robinson Decl., Ex. C at 6:21-22.)

         The contemplated roles of the parties in the failed wind energy business venture were as follows. SwitchingGears was the project developer or sponsor responsible for arranging financing. (Decl. of Curtis D. Smith in Supp. (“Smith Decl.”), Ex. 3 (“McCann Dep.”) at 78:18-79:21, Dec. 1, 2016, Docket No. 65; McCann Decl. ¶ 6.) Renewtech was to be the manufacturer.[1] (McCann Decl. ¶ 6.) Vinco would contribute in the “engineering, procurement, and construction role.” (Id.) There is some dispute over SMC Holdings' precise role, but the parties agree that SMC Holdings was going to be an investor in the project. (See id.; Anderson Decl. ¶¶ 6-7.)

         II. THE PINE RIDGE PROJECT

         In early August 2012, SwitchingGears (through a wholly-owned subsidiary, TREC-REDA, LLC) entered into a Joint Development Agreement and a Power Purchase Agreement with the Renewable Energy Development Authority (“REDA”) of the Oglala Sioux Tribe, in anticipation of what will be referred to as the “Pine Ridge Project.” (Robinson Decl., Exs. D, E; McCann Decl. ¶ 8.) McCann contends that he initially contemplated the Pine Ridge Project would include more than fifty wind turbines with a project value of approximately $45 million. (McCann Decl. ¶ 10; Robinson Decl., Ex. F at 1.)[2]

         Defendants chose U.S. Bancorp Community Development Corporation (“US Bank”) as an investor for the project; negotiations with U.S. Bank resulted in a nonbinding term sheet (the “US Bank Term Sheet”), executed on February 13, 2013. (Robinson Decl., Ex. F; McCann Decl. ¶¶ 11-12.) Under the plan contemplated in the U.S. Bank Term Sheet, U.S. Bank would contribute approximately $16, 875, 000 towards the project. (Robinson Decl., Ex. F at 3.) The U.S. Bank Term Sheet provided several conditions for its investments. (Id. at 6-7; Smith Decl., Ex. 6 (“Lowell Dep.”) at 79:8-80:24.) One requirement was that SwitchingGears provide U.S. Bank a guaranty against recapture of investment tax credits. (Robinson Decl., Ex. F at 13.) According to McCann, SwitchingGears had to demonstrate sufficient financial strength to support the guaranty. (McCann Decl. ¶ 12.) SwitchingGears deposited $100, 000 with U.S. Bank as required by the U.S. Bank Term Sheet on February 15, 2013. (Robinson Decl., Ex. F at 16; McCann Decl. ¶ 12.)

         SwitchingGears' primary contact at U.S. Bank, Tracey Gunn Lowell, testified that U.S. Bank never advanced any money to SwitchingGears or held money on deposit in relation to the Pine Ridge Project. (Lowell Dep. at 32:24-33:12; McCann Decl. ¶ 11.) But, on March 4, 2013, McCann told Martineau in a text message that U.S. Bank had “put $1.6[ million] in escrow.” (Decl. of Steve Anderson in Opp'n (“Second Anderson Decl.”), Ex. E, Dec. 22, 2016, Docket No. 82; see also id., Ex. E-1; Decl. of Curtis D. Smith in Opp'n (“Second Smith Decl.”), Ex. O (“Martineau Dep.”) at 99:14-100:18, Dec. 22, 2016, Docket No. 83.)

         On June 4, 2013, U.S. Bank notified SwitchingGears that it “ha[d] decided not to pursue the [Pine Ridge Project] opportunity at this time.” (Robinson Decl., Ex. H.) U.S. Bank stated that it “remain[ed] committed to the intent and purpose of the project and . . . would like to revisit the project with [SwitchingGears] once [its] plans and models [were] more concrete.” (Id.) The letter stated that SwitchingGears' $100, 000 deposit was applied to outstanding consulting fees. (Id.) The letter ended with the following:

While we are terminating this specific term sheet, we respect the relationship we have developed and would like to explore future opportunities with you. But we would appreciate your written confirmation and agreement that we are no longer negotiating the proposed investment in the Pine Ridge “small-wind” turbines described in our February 14th term sheet, that we have withdrawn our proposed terms, and that you have no further rights, and we have no remaining obligations, arising out of that term sheet, the proposed investment or our potential participation in the project.

(Id.)

         Lowell testified that U.S. Bank withdrew from the Pine Ridge Project because the valuation did not support SwitchingGears' proposed model and because U.S. Bank could not get a tax opinion based on available information in a timely manner. (Lowell Dep. at 54:1-13.) Specifically, U.S. Bank's preliminary internal valuation estimated a total value of around $12.5 million, rather than the $45 million SwitchingGears estimated. (Id. at 58:1-61:13.) Lowell stated that she and McCann spoke the day before she sent McCann the letter, to make clear to McCann that U.S. Bank was withdrawing, in part because the Pine Ridge Project was not ready to move forward, and to state that if it became “more concrete [the parties] could talk again.” (Id. at 55:1-22.)

         Lowell testified that she did not have further substantive communication with McCann aside from receiving an email from him in either late 2015 or early 2016 and a cordial note at some point; Lowell did not consider either of these communications to be attempts to reengage U.S. Bank. (Id. at 56:21-57:17.) Lowell testified that, on December 27, 2013, U.S. Bank was no longer involved in looking at the Pine Ridge Project. (Id. at 62:19-63:21.)

         According to McCann, he continued to communicate with Lowell and he “believed that U.S. Bank was still a viable possible investor for the [Pine Ridge] Project in the future if [they] worked towards positioning [them]selves to better satisfy U.S. Bank's proposed requirements, terms and conditions as set forth in the U.S. Bank Term Sheet.” (McCann Decl. ¶¶ 14.)

         III. SMC HOLDINGS' INVOLVEMENT

         McCann contends that, after U.S. Bank withdrew its proposal, he sought other investors and he and Anderson agreed that SMC would be an investor in the Pine Ridge Project. (McCann Decl. ¶ 15.) According to Anderson, McCann stated that in order for U.S. Bank to participate in the Pine Ridge Project, SwitchingGears or another party had to “agree to guaranty against any recapture of the federal tax credits associated with the [Pine Ridge] Project, and demonstrate the financial ability to satisfy the guaranty.” (Anderson Decl. ¶ 4.) Anderson contends that McCann suggested Vinco act as the guarantor, but Anderson rejected the idea because he did not want to expose Vinco to the guaranty; McCann then told Anderson “that if one of the Plaintiffs would make an equity investment in [SwitchingGears], it could pay off a mortgage loan it owed to Lincoln Savings Bank on [7Flags], thereby allowing [SwitchingGears] to demonstrate sufficient financial strength to satisfy [US Bank's] guaranty requirement without Vinco having to also sign as a guarantor.” (Id. ¶ 5.)

         As a result, SMC Holdings transferred $1.5 million to SwitchingGears on December 30, 2013, and made a second payment of $1.2 million around February 27, 2014. (Martineau Dep. at 61:22-63:21; Anderson Decl. ¶ 6.) The parties dispute the purpose of these transfers. Anderson contends that he thought this “investment was the last step needed to close the deal with [US Bank].” (Anderson Decl. ¶ 6.) Plaintiffs also contend that these transfers were earnest money that McCann would hold in escrow pending a final agreement and that the funds would be spent only for limited purposes with Anderson's express consent. (Id.; Martineau Dep. at 66:16-71:10.)

         McCann testified that SMC Holdings' payments were equity contributions to SwitchingGears. (McCann Dep. at 99:9-101:12, 110:1-113:19.) According to McCann, the parties contemplated that SMC Holdings would receive either 49% or 51% interest in SwitchingGears. (Id. at 99:9-101:12.)

         According to Anderson, Defendants used the $2.7 million provided by SMC Holdings to pay Defendants' creditors, “including the purchase of a personal condominium in Hawaii, and motorhome and other personal expenses, ” without getting Anderson's approval. (Anderson Decl. ¶ 8.)

         IV. THE TERM SHEET

         Defendants and SMC Holdings executed a Term Sheet, dated just after the first transfer, but not signed until the time of the second transfer in February 2014. (Robinson Decl., Ex. I; Martineau Dep. at 61:22-63:21; McCann Decl. ¶ 16; see also Robinson Decl., Exs. Q, R.) The Term Sheet contemplated a deal under which SMC Holdings would contribute $2.7 million in exchange for a membership interest in SwitchingGears; SMC Holdings would transfer $1.5 million for SwitchingGears to hold “as earnest money pending the negotiation and execution of the definitive agreements, ” and after the agreements were executed, the funds - along with another $1.2 million - would be released to SwitchingGears for several specific purposes detailed in the Term Sheet. (Robinson Decl., Ex. I at 1.) The Term Sheet stated that SwitchingGears could use SMC Holdings' contribution to pay off SwitchingGears' mortgage on a particular property (referred to elsewhere as the 7Flags property), ordinary and reasonable operational expenses, and other approved payments. (Id.) The Term Sheet stated that the parties would “negotiate in good faith with a view towards entering into one or more definitive agreements” and that the Term Sheet itself was generally nonbinding. (Robinson Decl., Ex. I at 4.)

         The parties continued to negotiate, but they never reached an agreement on the essential terms or executed definitive agreements. (See Second Anderson Decl. ¶ 23; Robinson Decl., Ex. J at 53:17-54:2.) Plaintiffs acknowledged in interrogatory responses that they never purchased ownership interest in SwitchingGears. (Robinson Decl., Ex. O at 2.)

         McCann and Anderson did execute a separate contract, called the “Convertible Loan Agreement, ” on October 23, 2013. (Smith Decl., Ex. 4; Second Am. Compl. ¶ 43.) Under the agreement, Anderson loaned McCann $370, 000 and interest, in return for a previous advance of that sum. (Smith Decl., Ex 4 ¶ 1.) McCann did not repay the loan by the stated date, April 1, 2014, and Anderson contends that he never exercised his option to accept an interest in another company, Scarab Investments, LLC, in lieu of repayment. (Anderson Decl. ¶ 10.)

         V. TERMINATION OF THE PINE RIDGE PROJECT

         The Oglala Sioux Tribe terminated the project with SwitchingGears on October 8, 2014, stating that they had “not seen any progress that [would] give[ them] confidence in moving forward with SwitchingGears.” (Robinson Decl., Ex. K.)

         Defendants assert that Plaintiffs intentionally caused the tribe to terminate the Pine Ridge Project in order to take the opportunity for themselves. Defendants rely on a text message Martineau sent the day after the cancellation, in which he stated, “Barth had the tribe fire [SwitchingGears] yesterday.” (Robinson Decl., Ex. S.) Plaintiffs subsequently hired the subject of the text message, Barth Robinson, and the recipient of the text message, Dave Loney. (Robinson Decl., Ex. N at 2-3; id., Ex. O at 6.)

         Martineau admitted that the Oglala Sioux Tribe approached Renewtech about replacing SwitchingGears on the Pine Ridge Project, and that they were told it was “not possible until SwitchingGears ha[d] been terminated.” (Martineau Dep. at 90:6-15.) Martineau stated that at the time “[n]othing was going anywhere” and “SwitchingGears hadn't put the . . . project together.” (Id. at 90:16-19.)

         ANALYSIS

         I. MOTION TO STRIKE

         As a preliminary issue, the Court will address Plaintiffs' motion to strike the declaration Defendants provided along with their reply brief. (Second Decl. of Matthew C. Robinson in Supp. (“Third Robinson Decl.”), Jan. 5, 2017, Docket No. 92.) Plaintiffs argue that the filing is not permitted by local rule and contains facts that Defendants should have included in their initial filing instead.

         “Reply affidavits are appropriate only when necessary to address factual claims of the responding party that were not reasonably anticipated.” Advisory Notes to Local Rule 7.1(b)(2). While some of these documents are not particularly important to the Court's analysis, the Court finds them responsive to Plaintiffs' arguments in opposition that were not reasonably anticipated. Exhibits 1 through 3 relate to REDA's agreements with McCann, which are responsive to Plaintiffs' new contention that McCann made fraudulent statements about a land lease and Bureau of Indian Affairs ("BIA") approval. Exhibits 4 and 5 involve Plaintiffs' contacts with U.S. Bank and are responsive to Plaintiffs' opposition because Plaintiffs submitted affidavits in which both Martineau and Anderson stated that they were unaware U.S. Bank had withdrawn from the U.S. Bank Term Sheet until they learned as much through this litigation. Exhibits 6 through 10 relate to Nathan Ante and are responsive to Plaintiffs' assertions that McCann knew about Ante's second mortgage on the 7Flags property. Because these documents satisfy Local Rule 7.1 requirements, the Court will deny Plaintiffs' motion to strike.

         II. MOTIONS FOR SUMMARY JUDGMENT

         Summary judgment is appropriate where “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A fact is material if it might affect the outcome of the lawsuit, and a dispute is genuine if the evidence is such that it could lead a reasonable jury to return a verdict for either party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). A court considering a motion for summary judgment must view the facts in the light most favorable to the non-moving party and give that party the benefit of all reasonable inferences that can be drawn from those facts. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)). “When the moving party has carried its burden . . . its opponent must do more than simply show that there is some metaphysical doubt as to the material facts.” Id. at 586.

         A. DEFENDANTS' MOTION FOR PARTIAL SUMMARY JUDGMENT

         Defendants move for summary judgment on the following claims: common law fraud (Count I), securities fraud (Count II), unjust enrichment (Count IV), conversion (Count V), and civil theft (Count VI). The Court will address each claim below.

         1. ...


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