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Strategic Energy Concepts, LLC v. Otoka Energy, LLC

United States District Court, D. Minnesota

March 28, 2019

STRATEGIC ENERGY CONCEPTS, LLC, Plaintiff,
v.
OTOKA ENERGY, LLC, et al., Defendants.

          Arthur G. Boylan and Norman H. Pentelovitch, Anthony Ostlund Baer & Louwagie PA, Counsel for Plaintiff Strategic Energy Concepts, LLC.

          Andrew J. Pieper, Eric A. Bartsch, and Margaret E. Dalton, Stoel Rives LLP, Counsel for Defendants Otoka Energy, LLC; Buena Vista Biomass Development, LLC; Amador Biomass, LLC; and Buena Vista Biomass Power, LLC.

          Brooks F. Poley, Winthrop & Weinstine, PA, and Sean T. Carnathan and Joseph P. Calandrelli, O'Connor, Carnathan and Mack, LLC, Counsel for Defendants State Street Bank and Trust Company and Antrim Corporation.

          MEMORANDUM OF LAW & ORDER

          Michael J. Davis United States District Judge

         I. INTRODUCTION

         This matter is before the Court on Otoka Defendants' Motion for Summary Judgment [Docket No. 127] and State Street Bank and Trust Company's and Antrim Corporation's Motion for Summary Judgment [Docket No. 130]. The Court heard oral argument on January 30, 2019. For the reasons that follow, the Court grants both motions.

         II. BACKGROUND

         A. Factual Background

         1. The Original Purchase of the Plant

          In 2004, Mark Thompson formed a single-member LLC, Plaintiff Strategic Energy Concepts, LLC (“Strategic Energy”), for the purpose of investing in and advising the development of renewable energy projects. (Dalton Decl., Ex. 1, Thompson Dep. 22-24.)

         In 2006, Strategic Energy learned of an opportunity to acquire an idle lignite (brown coal) power plant in Ione, California (the “Plant”) and convert it to a biomass power plant. (Thompson Dep. 23-25, 40, 43-46.) Strategic Energy entered into an agreement to buy the Plant and to lease the land under it. (Id. 45-46.) Thompson set up Defendant Buena Vista Biomass Power, LLC (“BVBP”) to hold the Plant assets. (Id. 46.)

         Defendant Otoka Energy, LLC (“Otoka”) is a small renewable energy development company. (Dalton Decl., Ex. 3, Muston Dep. 21-22; Dalton Decl., Ex. 4, Broin Dep. 30-31.) Michael Muston is Otoka's President and CEO. (Muston Dep. 16, 21.) Robert Broin is one of Otoka's largest shareholders. (Muston Dep. 21; Broin Dep. 30-32.)

         Strategic Energy needed additional capital to close the deal to buy the Plant. (Thompson Dep. 60-61.) Otoka entered into the transaction, and the sale closed. (Id. 48.) In order to complete the purchase, in 2009, Otoka and Strategic Energy created Defendant Buena Vista Biomass Development, LLC (“BVBD”) to own 100% of the shares of BVBP. (Thompson Dep. 47; Dalton Decl., Ex. 11, 2009 Membership Interest Purchase and Sale Agreement.) Otoka invested in BVBD and received a 2/3 interest in BVBD, and Strategic Energy owned the remaining 1/3 of BVBD. (Thompson Dep. 48-49, 60-61; Dalton Decl., Ex. 2, Berk Dep. 149; Dalton Decl., Ex. 11, 2009 Membership Interest Purchase and Sale Agreement at ¶¶ 2.01, 2.06, and Ex. B.) Thus, when the transaction closed, Otoka and Strategic Energy owned BVBD, BVBD owned BVBP, and BVBP owned the Plant.

         2. The PPA

         The State of California requires that a certain percentage of all electrical power generated in the state come from sources other than fossil fuels, and utility companies must contract for the purchase of electricity from a “renewable electrical generation facility, ” such as the Plant. Cal Pub. Util. Code §§ 399.11- 399.12. Before Otoka became involved in BVBD, Strategic Energy had already negotiated and finalized a long-term power purchase agreement with the Sacramento Municipal Utility District (“SMUD”). (Thompson Dep. 52-53, 74-75.) Thus, in November 2009, BVBP entered into a Renewable Power Purchase Agreement with SMUD (“PPA”). (Carnathan Aff., Sealed Ex. X, PPA.) Under the PPA, SMUD was required to buy power from the Plant for 20 years, so long as the Plant met certain operational conditions by certain deadlines. (PPA ¶¶ 2.2-2.3.) Under the PPA, the Plant was required to achieve commercial operation on or before July 1, 2012 (“Commercial Operation”). (PPA; Dalton Decl., Sealed Ex. 29.)

         3. Development of the Plant through 2012

         Dean Street Capital Advisors, LLC (“Dean Street”) is a single-member LLC formed by Noam Berk in 2008 for the purpose of consulting on financial transactions in the energy field. (Berk Dep. 13.) Berk and Thompson had become friends in 2005 when they were both working on the same energy transaction. (Id. 15-16, 19, 108.) Dean Street worked with Strategic Energy to obtain a $19 million bridge loan from Macquarie Bank to BVBD to begin retrofitting construction of the Plant. (Thompson Dep. 59-60; Berk Dep. 25-26.) By 2012, the Plant was near operational status, but was still not operating, had no revenue, and had outstanding financial obligations, including the $19 million construction loan from Macquarie. (Thompson Dep. 68; Berk Dep. 27-30.)

         In early 2012, Dean Street introduced Muston and Thompson to Santosh Raikar, a president of Defendant Antrim Corporation (“Antrim”) and a managing director of Defendant State Street Bank and Trust Company (“State Street”), as a potential tax equity investor. (Berk Dep. 28; Dalton Decl., Ex. 5, Raikar Dep. 23.) Antrim was an affiliate of State Street created to be a vehicle for tax equity investments; Antrim was not a substantive entity in its own right and had very little capital. (Raikar Dep. 12, 14-15.)

         Otoka, Strategic Energy, and Antrim negotiated the terms of a tax equity investment for several months. In the negotiations, Strategic Energy was represented by attorneys from Leonard Street and Deinard (see Carnathan Aff., Ex. N; Thompson Dep. 234); Otoka was represented by attorneys from Stoel Rives (Carnathan Aff., Ex. N; Muston Dep. 151, 213); and Antrim was represented by Milbank, Tweed, Hadley and McCloy LLP (Raikar Dep. 214).

         4. The Tax Equity Transaction

         a) Negotiations for the Tax Equity Transaction

         The parties agreed to a multi-step and multi-contract tax equity transaction (“Tax Equity Transaction”) in which the $19 million construction debt would be recapitalized with equity; Strategic Energy would sell its shares and exit the business; and Otoka would continue as an owner of a new entity holding ownership of the Plant but would share that role with the tax equity investor, Antrim. (Thompson Dep. 84-85.) Antrim would invest $35 million in three payments: $25 million at closing and two $5 million installment payments (“Installment Payments”) payable at later dates.

         Otoka and Strategic Energy engaged in extensive negotiations regarding the terms and purchase price for Strategic Energy's ownership interest in BVBD. (See, e.g., Dalton Decl., Exs. 17-28.)

         The BVBP reserves were raised from approximately $700, 000 to $1.9 million in the final days before the Tax Equity Transaction closed because of the Plant's last-minute commercial operation problems and an unexpected surge in payables. (Raikar Dep. 80-84, 221-25.) Thus, the $1.1 million payment to Strategic Energy was removed from the list of payments to be made out of the first $25 million in order to have money to add to the reserves. (Id.)

         b) The MIPA

          On June 26, 2012, Strategic Energy, BVBD, and Otoka entered into the Membership Interest Purchase Agreement (“MIPA”). (Dalton Decl., Ex. 6, MIPA.) Under the MIPA, Otoka purchased Strategic Energy's 1/3 membership interest in BVBD, and Otoka became the 100% owner of BVBD. (MIPA ¶ 1.1.)

         The MIPA provided the following regarding the timing of the $1.1 million payment from Otoka to Strategic Energy:

When and to the extent proceeds from the State Street PSA (defined below) are available to the Company [BVBD] or Otoka and not otherwise required to be reserved or paid to parties other than [BVBD] or Otoka by the transaction documents entered into in connection with the transaction with Antrim Corporation, an affiliate of State Street Bank and Trust Company (“State Street”), whereby Amador Biomass, LLC (“Amador Biomass”) will purchase the membership interest of [BVBP] from [BVBD] and State Street will become the owner of the Class B interests in Amador Biomass (the “State Street Transaction”), which the parties anticipate will be no later than the Second Installment Payment Date (as defined in that certain Purchase and Sale Agreement executed in connection with the State Street Transaction (the “State Street PSA”)), [BVBD] or Otoka shall pay to [Strategic Energy] an amount equal to $1, 100, 000 (for clarity [BVBD] or Otoka will make this payment to [Strategic Energy] from proceeds from the State Street PSA and will not borrow or be required to make capital calls to fund the $1, 100, 000).

(MIPA ¶ 1.2(a) (emphasis added).)

         c) Extension of the SMUD Deadline

         On June 27, 2012, the parties learned for the first time that SMUD would not certify the Plant as commercially operational by July 1, 2012. (Raikar Dep. 225-26; Dalton Decl., Ex. 30.) The PPA gave SMUD the power to unilaterally terminate the PPA based on BVBP's failure to achieve Commercial Operation by July 1, 2012. (Dalton Decl., Sealed Ex. 29.) On June 28, Otoka secured an extension of the Commercial Operation deadline from SMUD to August 1, 2012. (Id.) In exchange for extending the Commercial Operation deadline, SMUD required BVBP to pay $95, 000 in “delay damages” until Commercial Operation was achieved. (Id.)

         d) The ECCA

          On June 28, 2012, pursuant to the terms of the Membership Interest Purchase and Equity Capital Contribution Agreement among Otoka, Antrim, and Defendant Amador Biomass, LLC (“Amador”) (“ECCA”) (Dalton Decl., Ex. 7), Antrim invested $25 million into Amador, an entity created to own the operating company that held the Plant assets. (Thompson Dep. 161-62.) Otoka held 100% of Amador's Class A membership, and Antrim owned 100% of Amador's Class B membership. (Id.; ECCA at p.1)

         Overall, Antrim agreed to pay $35 million for all of the Class B membership interests in Amador in three payments: $25 million at closing and two $5 million Installment Payments payable after the Plant achieved Commercial Operation. (ECCA at pp. 3, 6, 13 and §§ 2.1, 6.2, 6.3.)

         The ECCA provided that Antrim was required to make the Installment Payments conditioned on the Plant meeting certain milestones (“Funding Conditions”). (ECCA §§ 6.2, 6.3.) The Funding Conditions included that the Plant achieve Commercial Operation on or before July 31, 2012 and that SMUD confirm Commercial Operation. (ECCA § 6.2; ECCA Definitions at 11.) Specifically, the ECCA stated:

In addition to the conditions set forth in Section 6.1, the obligations of the Class B Investor [Antrim] to make the First Installment Capital Contribution are subject to the satisfaction or waiver (by [Antrim]) of each of the following conditions by no later than July 31, 2012:
(a) Not later than five (5) Business Days before the First Installment Funding Date, the Company shall cause [BVBP] to deliver to the Equity Investors a summary of the statistical data relating to the Capacity Test;
(b) [BVBP] (A) shall have delivered a notice of “Commercial Operation” with respect to the Project as set forth in Sections 2.2 and 2.3.1 of the Power Purchase Agreement, and (B) shall have notified the Power Purchaser under the Power Purchase Agreement that the “Commercial Operation Date” (as defined in the Power Purchase Agreement) has been achieved and shall have included in such notice evidence of the satisfaction or occurrence of all of the conditions set forth in Section 3.3.1 of the Power Purchase Agreement, and (ii) the Power Purchaser shall have confirmed that the “Commercial Operation Date” (as such term is defined in the Power Purchase Agreement) shall have been deemed to have occurred in accordance with Section 2.2 and 2.3.1 of the Power Purchase Agreement;
* * *

(ECCA ¶ 6.2(a)-(b).)

         The ECCA contained a Project Budget, which provided how Amador was going to use the $35 million payments. (ECCA at Annex 12-A.) The first $25 million payment was to be used to retire the $19 million Macquarie loan and pay off any other lienable project development and Tax Equity Transaction costs outstanding at the time of the Tax Equity Transaction closing. (Id.) The first $5 million Installment Payment was required to be used to pay Strategic Energy's $1.1 million payment and other outstanding project development and Tax Equity Transaction costs. (Id.) The second $5 million payment was reserved. (Id.)

         Strategic Energy was not a party to the ECCA. However, in the days before the signing of the ECCA, Thompson did receive a settlement statement and flow of funds memorandum documenting the uses of State Street's first $25 million payment and plan to pay Strategic Energy out of the first $5 million Installment Payment. (Dalton Decl., Exs. 55-57.)

         e) The PSA

         On June 28, 2012, Amador used the money that it received from Antrim to buy 100% of BVBP from BVBD. Amador's purchase was made under the terms of the June 28, 2012, Purchase and Sale Agreement by and between Amador Biomass, LLC as Purchaser and Buena Vista Biomass Development, LLC as Seller (“PSA”). (Dalton Decl., Ex. 8.)

         At the close of the Tax Equity Transaction, State Street owned Antrim, which owned 100% of the Class B Membership of Amador. Otoka owned 100% of the Class A Membership of Amador. Amador owned 100% of BVBP, and BVBP owned the Plant. (Dalton Decl., Ex. 13.)

         5. Plant Operations after the Tax Equity Transaction

          After the Tax Equity Transaction closed, the Plant suffered serious operational problems. (Broin Dep. 110-13.) Otoka attempted to solve the problems and achieve Commercial Operation by the July 31, 2012, deadline, but it failed. (Broin Dep. 114-18; Dalton Decl., Sealed Ex. 38.) Otoka testified that it tried its best to ...


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