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Dean Street Capital Advisors, LLC v. Otoka Energy, LLC

United States District Court, D. Minnesota

March 28, 2019

OTOKA ENERGY, LLC, et al., Defendants.

          Arthur G. Boylan and Norman H. Pentelovitch, Anthony Ostlund Baer & Louwagie P.A., Counsel for Plaintiff Dean Street Capital Advisors, 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; Buena Vista Biomass Power, LLC; and Amador Biomass, 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.


          Michael J. Davis United States District Judge


         This matter is before the Court on the State Street Defendants' Motion for Summary Judgment [Docket No. 90] and the Otoka Defendants' Motion for Summary Judgment [Docket No. 100]. The Court heard oral argument on January 30, 2019. For the reasons that follow, the Court grants the State Street Defendants' motion and grants in part and denies in part the Otoka Defendants' motion.


         A. Factual Background

         1. The Original Purchase of the Plant

         In 2004, Mark Thompson formed a single-member LLC, 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.) In November 2009, BVBP entered into a Renewable Power Purchase Agreement with SMUD (“PPA”), under which SMUD would purchase electricity from BVBP. (Id. 52-53, 74-75.) The PPA required that the Plant reach “Commercial Operation” by July 1, 2012; SMUD had the power to unilaterally terminate the PPA if Commercial Operation was not met by July 1, 2012. (Thompson Dep. 115-16, 118, 120-21; 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 became involved in the Plant project in late 2008. (Id. 24-25.)

         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.) Berk viewed his work on the Macquarie loan as helping Thompson personally, Berk did not expect payment for his work, and Thompson did not pay Berk for his introductions and advice. (Berk Dep. 26-27, 32-33.) 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, 25.) 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.)

         In May or June 2012, after Berk had introduced Thompson and Muston to State Street, Muston and Berk had a telephone conversation in which, for the first time, they talked about a fee to Dean Street for introducing State Street to Strategic Energy and Otoka. (Muston Dep. 208-09; Berk Dep. 33-36, 145.)

         Berk recalls the conversation as follows:

I don't recall the conversation specifically. I know we discussed the amount, and I know it ended up being $200, 000. I don't remember the exact details of the conversation and how that number was agreed on. It's not a - it's a very standard number for a transaction of this size.

(Berk Dep. 37.)

         Muston recalls the conversation as follows:

I agreed to pay Dean Street Capital, Noam Berk, 200, 000 out of the State Street proceeds.
* * *
[Berk] said, I believe I should be entitled to a fee. He presented the 200, 000 as his - what he thought was fair. And I said, well, if we get, you know, 200, 000 out of the proceeds from this - from this tax equity financing, I would support that.

(Muston Dep. 13, 209.)

         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.

         Initially, up through the evening of June 28, 2012, Dean Street's $200, 000 fee was scheduled to be paid out of the initial $25 million payment. (See Berk Dep. 91-94; Dalton Decl., Ex. 17, June 28, 2012 Email Attaching Draft Settlement Statement, at ¶ 070683.) Later in the evening on June 28, Strategic Energy or its attorney called Berk and told him that there were other project costs that needed to be paid out of the first $25 million and, so, Dean Street's $200, 000 fee would be moved until the first $5 million Installment Payment on or about July 30, 2012. (Berk Dep. 75-78.) Berk “was told that the expectation was that the monies would be available when more money was coming into the project. The next money to - expected to come into the project was . . . the first installment, ” but “there was no conditioning or any sort that said it had to be the money that came in.” (Id. 77.) Dean Street “had no problem deferring the payment” and agreed to wait, and, so, on June 29, the $200, 000 fee was removed from the list of creditor payments to be paid out of the $25 million closing payment. (Berk Dep. 74-78, 94-97; Dalton Decl., Exs. 18-19.) 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, 221-22.)

         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.)

         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; Muston Dep. 84-85; 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.)

         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 certain Tax Equity Transaction costs outstanding at the time of the Tax Equity Transaction closing. (Id.) The first $5 million Installment Payment was to be used to pay Dean Street's $200, 000 and other outstanding project development and Tax Equity Transaction costs. (Id.) The second $5 million payment was reserved. (Id.)

         Section 3.19 of the ECCA provides:

Brokers. Except as set forth on Schedule 3.19, No broker, finder, investment banker, or other person is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated under this Agreement or any Transaction Document based upon arrangements made by the Company [Amador] or the Project Company [BVBP] for which the [Amador], [BVBP], or the Class B Investor [Antrim] will be responsible.

(ECCA § 3.19.)

         Schedule 3.19 provides:

Under the terms of a verbal commitment by Buena Vista Biomass Development, LLC, Dean Street is entitled to receive $200, 000 upon the closing of (1) the Purchase and Sale Agreement by and between Amador Biomass, LLC and Buena Vista Biomass Development, LLC and (2) the Membership Interest Purchase and Equity Capital Contribution ...

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