CASE 0:12-cv-02703-JRT-SER Document 401 Filed 12/15/15 Page 1 of 47
UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA Fagen, Inc., a Minnesota corporation, and Midwest Ethanol Transport, LLC, a Minnesota limited liability company,
Civil No. 12-CV-02703 (MJD/SER)
Plaintiffs/Counter-Defendants /Third-Party Plaintiffs vs.
MEMORANDUM OF LAW IN SUPPORT OF EXERGY DEVELOPMENT GROUP OF IDAHO, Exergy Development Group of Idaho, L.L.C.’S OMNIBUS MOTION FOR L.L.C., an Idaho limited liability company, SUMMARY JUDGMENT AND, IN THE and James T. Carkulis, individually, ALTERNATIVE, MOTION FOR PARTIAL SUMMARY JUDGMENT Defendants/Counter-Plaintiffs, and [L.R. 7.1(c)(1)(A)(iii)] Fagen, Inc., a Minnesota corporation, Third-Party Plaintiff, vs. Hawley Troxell Ennis & Hawley LLP, Third-Party Defendant. and Exergy Development Group of Idaho, L.L.C., an Idaho limited liability company, and James T. Carkulis, individually, Defendants/Counter-Plaintiffs /Crossclaimants vs. Hawley Troxell Ennis & Hawley LLP, Crossdefendants.
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INTRODUCTION Imagine you were in a business relationship with a party who was your sole lender, had agreed to finance your operations in exchange for exclusivity of contract in performing certain tasks, and had taken as collateral for your debt all of your viable assets. Imagine then that your partner stops performing its obligations to you, demands full repayment of your obligations as a condition of allowing you to sell the projects you were developing and then continues to squeeze you for repayment until you had to sell your only liquid asset in order to break free from your partner’s grasp. From there, you tried to, but your reputation in the business community is ruined because you lack funds to repay other obligations and cannot form new lending relationships because your former partner had encumbered all your assets. Imagine also that, all the while, you were represented by legal counsel who promised you that you would have recourse in the event your partner decided to seize your assets, but instead the opposite is true. Briefly stated, this is the story of this lawsuit. The present Motion is intended to bring to a conclusion certain claims because the facts are so undisputable that there are no issues of material fact upon which a trier of fact could differ. STATEMENT OF UNDISPUTED FACTS1 HT’s Attorney-Client Relationship with Exergy SUF Fact
1
Supporting Evidence
Numbers of undisputed facts are cited through the body of this Memorandum.
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Hawley Troxell ("HT") represented Exergy Development Group of Idaho, L.L.C. ("Exergy") in the negotiation of several loans made by Fagen, Inc. ("Fagen") to Exergy during calendar years 2011 and 2012.
Declaration of James T. Carkulis (“Carkulis Decl.”) ¶ 2; Crossclaim dated 7/18/2014 (Dkt. No. 160) ("Crossclaim") at ¶ 6; Answer to Crossclaim ("Answer to Crossclaim") (Dkt. No. 165) at ¶ 34.
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3
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These loans consisted of (1) promises to pay confirmed by formal agreement (the "Term Loans"), and (2) undocumented advances memorialized without formal agreement but incorporated into Exergy's overall obligation to Fagen through "catch all" language in the formal lending agreements (the "Undocumented Advances") (collectively, the "Fagen Obligations"). HT also advised Exergy extensively on various legal matters relating to the Big Blue Project.
During negotiations with Fagen, Exergy relied upon HT to provide both legal counsel and advocacy and to protect Exergy's interests.
Carkulis Decl. ¶ 3;
First Amended Complaint dated 11/26/2012 (Dkt. No. 22) ("FAC") at ¶¶ 46-56, 78-81.
Carkulis Decl. ¶ 4; Declaration of Elizabeth Woolstenhulme (“Woolstenhulme Decl.”) ¶ 5. Carkulis Decl. ¶ 5; Deposition of James T. Carkulis ("Carkulis Depo") at 40:22-41:4; Woolstenhulme Decl. ¶ 6; Answer to Crossclaim at ¶ 35.
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Exergy repeatedly and clearly communicated to HT attorneys negotiating with Fagen that it expected HT to protect Exergy's interests.
Carkulis Decl. ¶ 6 (Exhibit A: 23 January 2012 E-mail from JTC to HT).; Exs. A-C to Woolstenhulme Decl;
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HT has admitted in this case that it owed Exergy a duty of care in its representation.
Answer to Crossclaim at ¶ 35;
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Contrary to Exergy's constant reminders that HT needed to protect Exergy's interests, HT attorney, Richard Riley, incongruously testified that HT's role was limited to documenting terms already reached between Exergy and Fagen by reviewing drafts of agreements prepared by Fagen's counsel. Mr. Riley further contradicted HT's responsibilities by claiming (under oath) that (a) James Carkulis was responsible for negotiating terms of the Fagen Obligations and that HT was never informed otherwise, and (b) that Fagen's initial loan agreement documents were the basis for all subsequent Term Loans.
Ex. D. to Declaration of Angelo L. Rosa (“Rosa Decl.”) at 27:10-17.
Id. at 32:17-33:11.
Fagen’s Purchase of the Big Blue Project 9
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In early 2012, Exergy needed to post a letter of credit in connection with an agreement to purchase wind turbines for a project Exergy had been developing since 2006 in Blue Earth, Minnesota (the "Big Blue Project"). Fagen agreed to post the letter of credit for Exergy’s subject to certain conditions, which were documented in three agreements effective as of 29 February 2012: (a) a Sixth Amended and Restated Master Loan Agreement (“Sixth Amended Loan Agreement”); (b) a Limited Liability Company Interest Purchase Agreement (“Purchase Agreement”); and (c) a First Amended and Restated Member Control Agreement of Exergy Minnesota (“Member Control Agreement”).
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Crossclaim ¶ 7;
Carkulis Decl. ¶ 7.
Crossclaim ¶ 7;
Carkulis Decl. ¶ 8 and Exs. B-D;
Ex. D to Rosa Decl. at 62:2-64:25.
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The Sixth Amended Loan Agreement obligated Fagen to post the aforementioned letter of credit on Exergy’s behalf, obligated Exergy to repay Fagen in the event of any draw on the letter of credit, and extended the maturity of all the Fagen Obligations to 29 June 2012.
Crossclaim at ¶ 8;
The Purchase Agreement effected a sale of ninety-nine (99) membership units of Exergy Minnesota Holdings, LLC (the "99 Units") in exchange for Fagen forgiving $11,447,503.02 of the Fagen Obligations. According to the testimony of Fagen/MET, this purchase price was formulated by Fagen's counsel at the firm (then known as) Leonard Street and Deinard. The purchase option language in the Purchase Agreement states as follows:
Carkulis Decl. ¶ 9 and Ex. C.
“2. Sale of Limited Liability Company Interests. On or before March 9, 2012 (the "Closing Date"), in consideration for the Big Blue Purchase Price described in Section 3 of this Agreement and in consideration for Fagen's agreement to extend additional credit to Exergy pursuant to the Loan Agreement, Exergy shall convey to Fagen ninetynine (99) units of the 100 outstanding units of membership interest in Exergy Minnesota Holdings, LLC, which units constitute 99% of the membership interest in Exergy Minnesota Holdings, LLC (the "Member Interests"). The Purchase Agreement further states: “6. Absolute Conveyance. Exergy acknowledges and agrees that the conveyance of the Member Interests is
5
Carkulis Decl. ¶ 9 and Ex. B.
Deposition of Fagen, Inc./Midwest Ethanol Transport, LLC ("Fagen/MET Depo."), Ex. H to Rosa Decl. at pp. 63-64. Ex. C to Carkulis Decl.
Id.
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being made and accepted in exchange for and in consideration of the Big Blue Purchase Price and Fagen's agreement to extend additional credit to Exergy pursuant to the Loan Agreement. The conveyance of Member Interests shall be interpreted and construed as an absolute conveyance of all of Exergy's right, title and interest in and to the Member Interests and is not intended (now or in the future) to constitute a mortgage, security interest, pledge, trust conveyance or other security agreement of any nature whatsoever. Exergy hereby waives any claim that the conveyance of the Member Interests pursuant to this Agreement constitutes a mortgage, security interest, pledge, trust conveyance or any other security agreement of any nature whatsoever.” The purchase option language in the Member Control Agreement states as follows: “2.8 Purchase Option. As soon as Exergy has Repayment Capital (defined below), but no later than June 29, 2012, Exergy shall have the obligation and option to purchase the Units owned by Fagen for a purchase price equal to $11,447,503.02, together with interest accrued thereon from and after February 29, 2012 at an interest rate equal to 10% per year (the "Option Purchase Price")…If Exergy fails to exercise the purchase in the manner described herein, on or before June 29, 2012, the purchase option shall automatically expire and be of no further force or effect. If the Units owned by Fagen are not repurchased by June 29, 2012, the Units owned by Exergy shall automatically transfer to Fagen, such that Fagen is the owner of 6
Id. at Ex. D.
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one hundred percent (100%) of the Units, and Exergy shall no longer be a Member and shall have no rights as a Member as of such date, and Borrower shall thereupon be relieved of any obligation to pay (i) any amounts drawn on the Letter of Credit (as such term is defined in the Loan Agreement), and (ii) accrued interest thereon.” 17
The parties agreed that the purchase option created a contingency that Exergy would retain the remaining one (1) membership unit.
Deposition of Ronald Fagen ("Fagen Depo."), Ex. F. to Rosa Decl. at 117:23-118:13.
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Fagen already held a collateral interest in 100 units of Exergy Minnesota by way of that certain Pledge Agreement by Exergy in favor of Fagen dated 14 September 2011. Fagen's lead transaction attorney on the Big Blue transaction, Tom Jensen, admitted that he is not an expert in the UCC.
Carkulis Decl. ¶ 11 and Ex. E.
19
Ex. G to Rosa Decl. at 177:2-11.
HT’s Advice to Exergy Regarding the UCC 20
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Where the substance of the agreements was concerned, Mr. Riley testified that the agreements were drafted by counsel for Fagen and, where HT was concerned: "I don't think we had much to propose to modify it." However, Mr. Riley represented to Exergy that the sale of the 99 Units was not really an absolute conveyance but rather a security interest governed by the Minnesota Uniform Commercial Code.
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Ex. D to Rosa Decl. at 57:1-15.
Carkulis Decl. at ¶ 12 and Ex. F.
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Despite advising Exergy of this, Mr. Riley testified under oath that the UCC was not an area of law in which he had expertise. Mr. Riley also represented in writing that he was "no UCC guru".
Ex. D to Rosa Decl. at 282:22283:8, and Ex. M.
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Mr. Riley even deferred to the expertise in UCC matters to Fagen's counsel. Further, Mr. Riley based his advice that the UCC applied to the transaction on research conducted not by him, but by an associate attorney at HT recently graduated from law school. During negotiations, Fagen unequivocally rejected Mr. Riley's assertion that the transaction was governed by the UCC, the analysis which Mr. Riley laid out without conviction. Nevertheless, HT advised Exergy that the transaction was not an outright sale
Ex. L to Rosa Decl.
HT admitted in its expert disclosure that the only purported "warning" of the risks of the transaction given by HT to Exergy was the e-mail from Richard Riley that Fagen’s position was “probably wrong as a matter of law.”
Ex. Q to Rosa Decl.
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25
26 27
Ex. D. to Rosa Decl. at 293:15-19, 295:20-296:3.
Ex. M to Rosa Decl.
Carkulis Decl. at ¶ 12 and Ex. F.
The 23 March 2012 Opinion Letter 28
As a requirement of the transaction, HT issued a legal opinion dated 23 March 2012 (the “March 23 Opinion”) for Fagen’s benefit.
Crossclaim at ¶ 11; Ex. D. to Rosa Decl. at 102:13104:5; Carkulis Decl. ¶ 14 and Ex. G.
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The March 23 Opinion was signed by Richard Riley on behalf of the HT firm and provided specific legal opinions that Fagen required before further advances could be made to Exergy.
Crossclaim at ¶ 11; Ex. D to Rosa Decl. at 106:9-12, 123:1-123:4; Carkulis Decl. ¶ 14 and Ex. G.
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Specifically, the March 23 Opinion contained the material opinion that Fagen was the 99% owner of the Big Blue Project.
Crossclaim at ¶ 11; Ex. D to Rosa Decl. at 122:2-8; Carkulis Decl. ¶ 14 and Ex. G.
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Prior to the issuance of the March 23 Opinion, Richard Riley had prepared a preliminary draft of the opinion. The draft opinion was reviewed by HT attorney Paula Kluksdal.
Ex. D to Rosa Decl. at 122:22-25.
The draft contained the specific language: "assignment", which was later changed to the term "sale" in the final version of the 23 March Opinion that was issued. Further, the draft opinion described the ownership of the Big Blue Project as follows: "All of the Membership Interest in Big Blue is owned one hundred percent by MN Wind, which is owned one hundred percent (100%) by Exergy MN Holding, which is owned ninetynine percent (99%) by Lender and one percent (1%) by Borrower". Ms. Kluksdal reviewed this language.
Id. at 84:21-86:12.
When deposed, Ms. Kluksdal testified that she instructed Mr. Riley to modify the language of the opinion to address only the ninety-nine (99) membership units.
Ex. E to Rosa Decl. at 82:17-85:15.
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Ex. E. to Rosa Decl. at 23:10-17.
Id. at 82:16-84:17, and Ex. N.
Ex. E. to Rosa Decl. at 87:13-90:9 and Ex. N.
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Mr. Riley also drafted a Certificate of Managing Member to accompany the opinion letter, which Mr. Carkulis was required to execute on behalf of Exergy in conjunction with the issuance of the 23 March 2012 Opinion. In reliance upon HT's instructions, Mr. Carkulis executed the certificate containing affirmations of Fagen's ownership of the 99 Units. Mr. Riley also prepared membership certificates indicating that Fagen was the owner of the 99 Units.
Ex. D to Rosa Decl. at 27:18-25; Carkulis Decl. ¶ 15 and Ex. H.
Carkulis Decl. ¶ 15 and Ex. H.
Ex. D to Rosa Decl. at 291:6-10.
HT’s Failure to Competently Advise Exergy 40
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At no time during negotiation of the Purchase Agreement or Member Control Agreement did any HT attorney warn Exergy of the risks and consequences of the transaction with Fagen. HT's only relevant comment to Exergy was that Mr. Riley believed that Fagen's position-that the UCC did not apply to the transaction-was incorrect. HT failed to advise on the business risks posed by these legal decisions to Exergy, and did not communicate (verbally or in writing) any kind of analysis identifying the consequences of these transactions with Fagen on Exergy’s ability to do business at that time or in the future. HT has confirmed (under oath) that at no time did HT ever (i) counsel Exergy on the potential consequences of the transactions giving rise to the Fagen Obligations, or (ii) advise Exergy on the impact these transactions might have.
10
Carkulis Decl. ¶ 16; Woolstenhulme Decl. ¶ 11.
Carkulis Decl. ¶ 17 and Ex. I.
Carkulis Decl. ¶ 16
Ex. D to Rosa Decl. at 36:12-16, 37:1-5, 40:24-41:7.
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HT further confirmed its failure to advocate on behalf of Exergy by testifying under oath that "Fagen had the money and Exergy needed it and whatever Fagen wanted is where it ended up." In reality, Exergy had other financing options open to it, but those options required Exergy to make unencumbered collateral available and Fagen had insisted on securitizing every viable asset Exergy owned in order to extend further capital; this incorrect advice has been identified by Exergy’s expert, Phil Kunkel as errors that eliminated Exergy’s recourse. When confronted about the abundance of language contained in the 23 March 2012 Opinion and backup certificate executed by Exergy - affirming the nature of the transaction with Fagen as a sale, Mr. Riley resorted to vague explanation, declaring: "ownership is a bundle of sticks".
Id. at 49:6-9.
Carkulis Decl. ¶ 18 and Ex. J; Exs. R and S to Rosa Decl.
Ex. D to Rosa Decl. at 80:14-17.
Exergy’s Continued Development of Big Blue Using Funds Borrowed from the Project’s Owner 47
Between February and June 2012, Exergy continued to borrow money from Fagen to complete the Big Blue Project. Exergy continued to borrow money from Fagen during this timeframe under the belief that it would be entitled to recover ownership of the 99 Units, but if the repurchase deadline passed, Exergy could still preserve its investment by presenting a buyer during foreclosure proceedings HT had represented Fagen would be required to follow.
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Carkulis Decl. ¶ 19 Am. Compl. at ¶¶ 46-81.
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Exergy continued to borrow money from Fagen during this timeframe under the belief that it could recover ownership of the 99 Units and if the repurchase deadline passed, Exergy could still preserve its investment by presenting a buyer during the foreclosure proceedings that HT had represented Fagen was obligated to follow.
Id.
Exergy’s Efforts to Finance/Sell the Big Blue Project 49
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Between 2011 and mid-2012, Exergy had tirelessly worked to procure financing for the Big Blue Project and other projects in Exergy's development portfolio. Exergy was involved in advanced discussions for the purchase of the Big Blue Project from numerous financiers, among which was D.E.Shaw, with whom a financing package backed by Bank of Tokyo-Mitsubishi, UFJ (the "BTMU Transaction") had been arranged after several months of effort and negotiation by Exergy, and BTMU’s satisfaction with the diligence and feasibility of the financial prospects of the Big Blue Project, which was the direct result of Exergy’s expertise and efforts. Exergy's project development acumen resulted in BTMU issuing a proposal for financing that also included several other projects in Exergy's portfolio. After extensive due diligence, BTMU issued a "mandate letter" defining the terms of the transaction and a target of late June 2012 was set for the closing.
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Carkulis Decl. ¶ 20; Ex. B to Rosa Decl. at pp. 166-167.
Carkulis Decl. ¶ 21 and Ex. K; Ex. B to Rosa Decl. at 63:1-65:19, 164:3-13.
Carkulis Decl. ¶ 21 and Ex. K.
Carkulis Decl. ¶ 22 and Ex. L.
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In late June 2012, Exergy and BTMU conducted a conference call, which is conducted so the parties understand the exact methodology to initiate the interest swap hedge involved in the transaction. The significance of this fact is that, apart from the formality of procuring a number of signatures, the transaction with BTMU was ready to close. Apart from the formality of procuring a number of signatures, the transaction with BTMU was ready to close. Despite the BTMU transaction ready to close, Fagen suddenly refused to cooperate with Exergy in closing the BTMU Transaction by insisting that it obtain all of its loan funds from the closing, which was not feasible given the metrics of the transaction. In response to Fagen's obstructions, Exergy advised Fagen that Fagen’s cooperation was necessary, as Exergy did not intend to lose its investment and that the consequences of Fagen obstructing the successful closing of the BTMU transaction would pose significant detriment to Exergy. Further, Fagen's refusal to cooperate with the BTMU transaction by ceding back ownership of the 99 Units prevented Exergy from making requisite representations and warranties to the State of Minnesota for C-BED certification purposes.
Carkulis Decl. ¶ 23.
Carkulis Decl. ¶ 24.
Carkulis Decl. ¶ 24 and Ex. M; Ex. F to Rosa Decl. at 133:3-134:20, 135:15-136:13.
Carkulis Decl. ¶ 24 and Ex. M.
Carkulis Decl. ¶ 25.
HT’s Contradiction of Previous Advice to Exergy Regarding the UCC
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In an e-mail to Exergy dated 4 June 2012, Mr. Riley maintained that the Minnesota UCC applied to the transaction, stating:
Crossclaim at ¶ 15; Carkulis Decl. ¶¶ 26-27 and Ex. O.
“Fagen’s counsel took the position that this arrangement constitutes an absolute assignment of 99% ownership of the Big Blue project to Fagen, Inc. and that Fagen therefore would be able to avoid Uniform Commercial Code procedural prerequisites to foreclosure on the previously pledged membership interests in Exergy MN Holdings. However, we at HTEH argued then and continue now to believe that the assignment, coupled with the option to reacquire the interest without any payment other than repayment of the loans, is a UCC security interest under MN’s Uniform Commercial Code and that, if Fagen were to declare a loan default, Exergy could insist on compliance with the UCC procedures applicable to foreclosure on security interests. In our view, the modified structure did not accomplish a change of ownership but only conveyed a different form of security interest in Exergy MN Holdings’ membership interests.” However, one week later (on 11 June 2014), HT represented to Exergy in writing that Fagen would not "recharacterize" the transaction as a security interest, stating: “As I reported last week, Tom Jensen says (i) Fagen is unwilling to rescind the Exergy Minnesota Holdings ownership transfer or to recharacterize it as a security interest; and (ii) Fagen will require (as provided in the EMH member control agreement) that the 14
Crossclaim at ¶ 15; Carkulis Decl. ¶ 28 and Ex. P.
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entire $11M+ repurchase option price (essentially ALL loans (other than the $6.4M loan) plus accrued interest) be repaid as a condition precedent to Fagen’s re-transfer of EMH to Exergy.” 60
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Then, on 25 June 2012, HT further contradicted its prior advice by representing to Exergy in writing that challenging the substance of the documents that it negotiated on Exergy’s behalf would be dangerous, explaining: “The danger with the rescission approach is that the earlier documents state that the Big Blue Transaction is an absolute assignment and not a security interest; those documents are out there, leaving tracks that may raise questions.” Because Fagen intentionally refused to release its collateral interests in the Big Blue membership units unless it was paid in full from closing, the BTMU transaction disintegrated; it would have closed successfully but for Fagen’s imposition of this condition. Fagen declared on 29 August 2012 that Exergy’s one (1) unit of membership interest in Exergy Minnesota automatically transferred to Fagen pursuant to the Member Control Agreement, that Exergy had no rights as a member after that date, and that Fagen claimed to be Exergy Minnesota’s sole owner (and thus the sole indirect owner of Minnesota Wind, Big Blue, and the Big Blue Project). No consideration was paid for the transfer of the remaining one (1) unit of membership in Exergy Minnesota as the definition of the "Member Interests" purchased under the Purchase 15
Crossclaim at ¶ 16; Carkulis Decl. ¶ 29 and Ex. Q.
Carkulis Decl. ¶ 30.
Crossclaim at ¶ 18; Carkulis Decl. ¶ 31 and Ex. R.
Carkulis Decl. ¶ 32 and Ex. C.
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Agreement is defined (at Paragraph 2) as the 99 Units. Further, Fagen neither undertook any steps to foreclose on the remaining membership unit pursuant to the requirements set forth in Article 9 of the Minnesota UCC, nor is there any testimony in this action to the contrary. This chain of events was contrary to HT’s advice to Exergy that the Minnesota UCC would govern the transaction. Exergy had materially relied upon this advice when entering into the Purchase Agreement and Member Control Agreement, yet now six years of hard work and millions of dollars of investment were at risk of being lost. As a consequence of Fagen not following the UCC foreclosure procedures Exergy was led by HT to understand applied, Exergy lost an opportunity to sell the Big Blue Project that would have yielded a purchase price between $66,000,000 and $84,000,000 based upon the projections relevant to the BTMU transaction and other projections. In the wake of Fagen successfully obstructing the BTMU transaction, Exergy sought direction from its counsel at HT on how to recover this monumental loss. In response, HT contradicted its prior advice by claiming the transfer of membership was a “technical argument” and that, the “the language of the agreements generally supports Fagan’s (sic) position on this issue.” However, Exergy’s counsel has reported that the ultimate result was irrelevant given
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Carkulis Decl. ¶ 33.
Crossclaim at ¶ 19; Ex. B to Rosa Decl. at 38:5-16, 42:20-43:8. Crossclaim at ¶ 19; Carkulis Decl. ¶ 34; Woolstenhulme Decl. ¶ 20. Carkulis Decl. ¶ 34 and Ex. S; Ex. B. to Rosa Decl. at 75:4-17.
Crossclaim at ¶ 20;
Carkulis Decl. ¶ 35 and Ex. T. Id. Exs. R and S to Rosa Decl.
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HT’s incompetent advising on whether the UCC applied. 70
Ultimately, Fagen ceased cooperating with Exergy in its efforts to sell the Big Blue Project, and opted to finish construction of the project itself.
Ex. F to Rosa Decl. at 162:7-17.
Exergy’s Damages 71
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Exergy’s damages fall into four categories: (1) the lost value of the Big Blue Project; (2) expenses that Exergy paid/advanced out-of-pocket for the development of the Big Blue Project over the course of six years of hard effort in developing the project; (3) a development fee representing some recompense for the development of the project; and (4) damages resulting from Fagen’s interference with prospective economic advantage and its breach of fiduciary duty. Fagen's testimony is that the cost of completion of the Big Blue Project was $74,000,000, less a refund of $3,900,000 from ITC and $19,200,000 in USTC 1603 Cash Grant proceeds, leaving a project cost of approximately $50,900,000. Fagen and MET have admitted under oath that (a) Exergy's projected lost revenue calculations are accurate because the Big Blue Project is performing consistently with Exergy's financially projections, (b) other vendors of the Big Blue Project have been paid, and (c) Fagen has not paid Exergy because, in the words of Fagen’s own Chief Financial Officer, such obligations were debt that was “converted” into equity.
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Carkulis Decl. ¶ 36.
Carkulis Decl. ¶ 37; Ex. H. to Rosa Decl. at 34:11-35:23, 43:15-44:19.
Ex. C to Rosa Decl. at 38:3-6, 42:143:7 and Ex. H at 120:17-121:6.
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Based upon Exergy's own expert witness calculations regarding key assumptions of the financial profile of the Big Blue Project, Exergy’s lost value in the project is approximately $14,900,000. Second, Exergy incurred approximately $18,910,932.96 in expenses directly attributable to the development of the Big Blue project between 2006 and 2012.
Carkulis Decl. ¶ 38 and Ex. U.
Included within this amount is approximately (a) $7,610,807.00 in funds advanced directly by Exergy to Big Blue Windfarm, LLC between 2006 and 2011 documented by intercompany promissory notes in favor of Exergy and (b) $5,266,831.82 in funds advanced to/on behalf of Big Blue Windfarm, LLC in 2012. This amount also includes a development fee calculated on the basis of overhead allocated to the Big Blue Project and an industry standard component of compensation to a developer. None of the loan documents with Fagen contain a waiver of, or any treatment of, the costs incurred by Exergy or the development fee that is included in the amounts invoiced by Exergy for its outof-pocket expenditures and development fee submitted to Fagen in the invoice submitted to Fagen. As a direct consequence of HT's incorrect and negligent advice, Exergy was left with no ability to sell the project and nothing but the prospect of having to fight (through this litigation) to recover funds owed to it and the lost value of the project resulting from HT's negligent advice.
Carkulis Decl. ¶ 39;
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Crossclaim at ¶ 22; Carkulis Decl. ¶ 39 and Ex. V; Ex. A to Rosa Decl. at 101:5-24.
Ex. J to Rosa Decl. at 76:23-78:2.
Carkulis Decl. ¶ 40; Ex. J to Rosa Decl. at 79:11-80:7.
Carkulis Decl. ¶ 39.
Crossclaim at ¶ 21; Ex. B to Rosa Decl. at 177:9-178:20.
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Fagen’s Breach of Fiduciary Duty & Interference with Economic Advantage 80
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85
On or about 20 December 2011, Fagen and Exergy entered into a binding Amended and Restated Memorandum of Understanding ("MOU") whereby Fagen agreed to finance the development of Exergy's projects, including the Big Blue Project. Ron Fagen testified under oath that this MOU obligated Fagen to finance Exergy's development activities. Fagen stopped performing under the MOU when it ripped the Big Blue Project out from under Exergy’s feet while it was in the process of obtaining financing to sell it. Fagen's breach of its obligations under the Memorandum of Understanding put Exergy into a financially ruinous situation, and Fagen owned or had encumbered all of Exergy's viable assets. Fagen's encumbrance of Exergy's assets included Exergy’s entitlement to payments arising from residual income relating to a wind project called Idaho Wind Partners I (“IWP1”). The document encumbering the IWP1 revenue stream in favor of Fagen and a letter directing payment of the proceeds from that revenue stream for Fagen's benefit have been disclosed during discovery and/or pleading in this case. Fagen's encumbrance of Exergy's assets necessitated the desperate and last-resort move of selling its only liquid asset: the revenue stream associated with the IWP1 project.
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Carkulis Decl. ¶ 41 and Ex. W.
Carkulis Decl. ¶ 42; Ex. F to Rosa Decl. at 41:11-48:11. Carkulis Decl. ¶ 43; Ex. J to Rosa Decl. at 53:10-60:24.
Id. at ¶ 44; Ex. J to Rosa Decl. at 104:8-18.
Carkulis Decl. ¶ 45; Rosa Decl. ¶ 8 and Ex. J at 71:1172:13, 73:11-75:4.
Carkulis Decl. ¶ 46; Ex. J to Rosa Decl. at 49:11-16, 83:8-18.
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87
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89
90
Fagen knew the amount of revenue it stood to gain from its ongoing ownership of IWP1. As a result, its oppressive conduct (a) constituted a breach of fiduciary duty under the MOU given the partnership relationship the MOU created, (b) was an intentionally calculated move to interfere with Exergy's long term benefit from IWP1, and (c) forced Exergy into a position of helplessness because Exergy had no basis upon which to fulfill its development obligations and other financial obligations. On or about 1 August 2014, Exergy concluded the sale of its IWP1 revenue interest. As a necessary prerequisite to the sale of that interest, the Fagen obligations needed to be paid in full. On 1 August 2014, Fagen received repayment of all outstanding obligations owing to it as identified in Plaintiffs’ Amended Complaint. Had Fagen's conduct not necessitated Exergy selling the IWP1 revenue stream, the value that would have inured to Exergy as a contractual entitlement would have been approximately $95,000,000 over time. Instead, Exergy was forced to sell its interest in the IWP1 project for a fraction of its long-term cash value as evidenced by the transaction that resulted in the Term Loans made by Fagen to Exergy to be paid off.
Carkulis Decl. ¶ 47; Ex. I to Rosa Decl. at 87:23, 74:1975:4, and 83:8-18.
Carkulis Decl. ¶ 48.
Carkulis Decl. ¶ 48. Ex. K to Rosa Decl. Carkulis Decl. ¶ 48 and Ex. X; Rosa Decl. ¶ 8 and Ex. J at 74:1975:4.
Id.
The Present Litigation
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91
92
93
94
On or about 12 October 2012, Fagen filed suit against Exergy, alleging various breaches of agreement and that Mr. Carkulis had defamed Fagen in connection with Fagen's assumption of control over Exergy Minnesota. Shortly thereafter, HT advised Exergy to stipulate with Fagen/MET that Fagen owned the project. As litigation in this matter progressed, with HT representing Exergy initially, HT attempted to shift blame for the documents back onto Fagen by claiming "the issue is not that you proclaimed ownership; it's whether there have been actions that have caused doubt as to who does own the project. Part of that doubt relates to how the documents were drafted by Fagen..." Internal discussions between HT attorneys acknowledge the theory that a security interest existed lacked merit; an internal email between HT attorneys Rick Smith and Richard Riley explicitly stated: "To allow the potential damages to continue to accrue to Fagan, as deadlines get closer, is a tremendous gamble where it is made based on such a slender thread as the security interest theory. Perhaps we could wait until Faegre performs the Minnesota research, but I think at most that will give us an arguable theory but not a winning one, on these facts." HT further confirmed Exergy's observation that HT failed to advocate its interest by stating to Exergy: "While Fagen acted in its own self-interest, there's not necessarily anything wrong with doing so."
21
Notice of Removal and Complaint, dated 23 October 2012 (Dkt. No. 1). Stipulation and Order (Dkt Nos. 1516).
Carkulis Decl. ¶ 49 and Ex. Y.
Ex. O to Rosa Decl.
Woolstenhulme Decl. ¶ 20 and Ex. D.
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95
96
97
98
99
On or about 19 December 2012, HT filed a Counterclaim against Fagen on behalf of Exergy, alleging (among other claims) violation of the UCC, which was later amended. As litigation progressed, Exergy lost faith in HT's ability to represent its interests and communicated this fact to HT. On or about 19 January 2013, after HT filed its Counterclaim on behalf of Exergy, Fagen filed a Third-Party Complaint against HT, alleging (in part) professional negligence on the basis that Exergy's Counterclaim contradicted the issuance of the 23 March 2012 Opinion Letter. As a result of Fagen's filing of the Third-Party Complaint, HT promptly distanced itself from Exergy and the positions it had taken on Exergy's behalf. The consequences of Fagen being able to hold the Big Blue Project hostage and not be obligated to follow the procedures of the UCC resulted in the loss of the BTMU Transaction and other opportunities to sell the project: facts that Ronald Fagen himself confirmed under oath.
Answer and Counterclaim (Dkt. No. 23) and First Amended Counterclaim (Dkt. No. 260).
Carkulis Decl. ¶ 50 and Ex. Z; Ex. A to Rosa Decl. at 130:1-3. See Answer and Third-Party Complaint, (Dkt No. 24) ("ThirdParty Complaint").
Carkulis Decl. ¶ 51 and Ex. Z.
Carkulis Decl. ¶ 52 and Ex. M; Ex. F to Rosa Decl. at 140:15-25.
STANDARD OF REVIEW Rule 56(a) of the Federal Rules of Civil Procedure provides that “the court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Id. The moving party bears the initial responsibility to demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322-323 (1986); Mems v. City of
22
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St. Paul, Dep't of Fire & Safety Servs., 224 F.3d 735, 738 (8th Cir. 2000). Once the moving party meets its initial burden, the nonmoving party “may not rest upon the mere allegations or denials of [that party’s] pleadings, but . . . must set forth specific facts showing that there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). ARGUMENT The argument of this Motion is organized into three sections: (1)
Exergy’s claim for declaratory relief (Count VII of its Counterclaim) as to
the applicability of the UCC. Relief is appropriate as it bears directly upon Count I of Exergy’s First Amended Counterclaim against Fagen/MET and Count I of Exergy’s Crossclaim against HT; (2)
Exergy’s motion for summary judgment/partial summary judgment against
HT as to Count I of its Crossclaim in light of Exergy’s request for declaratory relief vis-àvis applicability of the UCC; and (3)
Exergy’s motion for summary judgment/partial summary judgment against
Fagen/MET as to Count IV (breach of fiduciary duties), Count V (intentional interference with prospective economic advantage), and Count VI (unjust enrichment). 1.
SUMMARY JUDGMENT SHOULD BE GRANTED AS TO COUNT VII OF EXERGY’S CROSSCLAIM AGAINST FAGEN/MET FOR DECLARATORY RELIEF AS A MATTER OF LAW.
The gravamen of Exergy’s Crossclaim against HT for professional negligence is the advice given to Exergy that the UCC applied to the conveyance effected by the Purchase Agreement and Member Control Agreement. This is the premise from which 23
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the correctness of that advice and the act of issuing a legal opinion in favor of Fagen/MET that is contrary in substance to the advice given Exergy is properly analyzed. Similarly, the gravamen of Exergy’s Counterclaim against Fagen/MET for violation of the Minnesota UCC is whether the proper procedures were followed to the extent the UCC did apply to any part of the transaction at issue. Whether a transaction is governed by the UCC is a question of law. Duxbury v. Spex Feeds, Inc., 681 N.W.2d 380, 386 (Minn. Ct. App. 2004). Accordingly, this issue is properly presented for disposition via summary judgment. As set forth in Section B, infra, it is Exergy’s position that HT negligently advised Exergy as to the applicability of the UCC to its transaction with Fagen regarding the Big Blue Project. 2.
SUMMARY JUDGMENT SHOULD BE GRANTED AS TO COUNT I OF EXERGY’S CROSSCLAIM AGAINST HT FOR PROFESSIONAL NEGLIGENCE AS A MATTER OF LAW.
“He is no lawyer who cannot take two sides”- Charles Lamb (1775-1834). While amusing at first blush, this aphorism becomes a disturbing truism when the conduct of HT is applied against the interests of its own client. Minnesota law explicitly defines the scope of the duty of reasonable care an attorney must provide his or her client. In transactional matters, an action for legal malpractice requires a plaintiff to prove four key elements: “(1) an attorney-client relationship; (2) acts constituting negligence or breach of contract; (3) that such acts proximately caused the plaintiff’s damages; and (4) that but for the defendant’s conduct, the plaintiff would have obtained a more favorable result in the underlying transaction than the result obtained.” Schmitz v. Rinke, Noonan, Smoley, Deter, Colombo, Wiant, 24
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Von Korff & Hobbs, Ltd., 783 N.W.2d 733, 738 (Minn. Ct. App. 2010); Jerry's Enters., Inc. v. Larkin, Hoffman, Daly & Lindgren, Ltd., 711 N.W.2d 811, 816 and 819 (Minn. 2006). As set forth below, the undisputed evidence shows that all four key elements of Exergy’s malpractice claim are met: A.
It is Undisputed that an Attorney-Client Relationship Existed between HT and Exergy.
A claim for legal malpractice requires the existence of an attorney-client contractual relationship creating a duty of care upon the attorney. Ronnigen v. Hertogs, 294 Minn. 7, 199 N.W.2d 420 (1972). Here, it is undisputed that an attorney-client relationship existed between HT and Exergy for the purposes of the transactions at issue.1-3 Accordingly, there is no triable issue of material fact as to the existence of an attorney-client relationship between HT and Exergy. B.
The Undisputed Facts Confirm that HT Acted Negligently in Advising on the Transactions at Issue.
This Motion is founded on undisputed facts, namely: (1) HT advised Exergy that the UCC applied to the conveyance transaction at issue1-4; (2) HT issued a legal opinion in favor of Fagen/MET that Fagen was the owner of the 99 Units28-30; (3) HT prepared a “backup certificate” to be signed by Exergy confirming Fagen’s ownership of the 99 Units37-38; (4) Fagen/MET rejected the belief espoused by HT that the UCC applied to the transaction21-27; (5) HT subsequently changed its view of the applicability of the UCC in subsequent advice to Exergy to reflect Fagen’s view58-60, 91-94; and (6) HT advised Exergy to stipulate to Fagen’s ownership of the Big Blue Project in the course of this litigation.91 As demonstrated below, these facts fall below the standard of care owed to Exergy. 25
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i.
HT’s Duty of Care as Exergy’s Counsel and Advocate Required Competent Advice Concerning Consequences of Conveying the 99 Units to Fagen.
Under Minnesota law governing legal malpractice, a plaintiff must first establish that the defendant owed him a duty of care. Togstad v. Vesely Otto Miller & Keefe, 291 N.W.2d 686, 692 (Minn. 1980). In the context of malpractice relating to business transactions, attorneys owe a duty of ‘reasonable care’ when representing clients, which is usually proven through expert testimony, though this is not required “when the matters to be proven are within the area of common knowledge and lay comprehension.” Hill v. Okay Constr. Co., 312 Minn. 324, 337, 252 N.W.2d 107, 116 (1977). Hill addresses the core issues relevant to Exergy’s counterclaims against HT given that “even an untrained jury could understand that an attorney must communicate with his client regarding transactions and conflicts of interest, and that the failure to do so is negligence.” Pearson v. Oxford Prop. Advisors, LLC, No. A10-1766, 2011 WL 1833133, at *3 (Minn. Ct. App. May 16, 2011). Thus, if attorneys fail to provide their client with adequate communication regarding commercial transactions, then as a matter of law they have committed negligence under Minnesota law. It is against this backdrop that the conduct of HT vis-à-vis the conveyance of the 99 Units from Exergy to Fagen/MET and HT’s issuance of the 23 March Opinion must be analyzed. ii.
HT Negligently and Incorrectly Advised Exergy that the UCC Applied to the Conveyance of the 99 Units.
26
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HT’s theory of the applicability of the UCC, as condensed in a single statement taken from an e-mail from HT attorney Richard Riley to Fagen’s counsel dated 28 February 2012, is as follows: “The proposed assignment to Fagen/MET of title to Big Blue is expressly coupled with the Fagen/MET loan agreement and a requirement that title be reconveyed upon repayment of the loan. Legally, this transaction is an assignment for security purposes, not an absolute assignment.”21 HT relies upon Section 9-202 of the UCC as support for this proposition.25-26 HT’s analysis and advice to Exergy was wrong for several reasons: First, Section 9-202 merely establishes the broad principle that who holds title to collateral is immaterial [Minn. Stat. § 335.9-202], and does not reach to the ultimate mechanics of the transaction that actually took place between Fagen/MET and Exergy. The law in Minnesota is clear that the intent of the parties to the transaction is the primary consideration in determining whether a transaction is intended to create a security interest: “The relevant intention is that of the parties at the time of conveyance.” Ministers Life and Cas. Union v. Franklin Park Towers Corp., 307 Minn. 134, 138 (1976) (citing St. Paul Mercury Ind. Co. v. Lyell, 216 Minn. 7, 11 N.W.2d 491 (1943)). Testimony that one party intended the transaction to be a secured transaction is insufficient. See id. (discussing the intention of both parties as necessary to create an equitable mortgage). Because a conveyancing document is presumed to be a conveyance, it must be clear that both parties intended that the transaction result in a mortgage. Id. Here, HT was the only party who believed the transaction in question was a secured transaction governed by Article 9 of the UCC.25 Fagen/MET steadfastly
27
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refused to agree with HT’s interpretation of the transaction as creating a security interest with respect to the 99 Units.25 The purchase option language in the Purchase Agreement that HT mischaracterizes as an assignment, cited in the Statement of Undisputed Fact, supra, not only defines the transaction as a sale but confirms that the consideration exchanged by Fagen/MET for the 99 Units constitutes an absolute conveyance.15 The purchase option language in the Member Control Agreement reflects the intent of the parties to convey the 99 Units to Fagen/MET unconditionally and with an option to repurchase which, if Exergy did not exercise, would have no effect on Fagen’s ownership of the 99 Units.15-17 HT may insist that the UCC applies to the transaction in its entirety, and it certainly advised Exergy of that up to a point in the chronology of events giving rise to this action, but HT was alone in its belief. Exergy was in no position to opine on matters of which it was relying upon HT’s advice, and Fagen/MET explicitly disagreed with HT’s position.26 Given that the transaction documents themselves expressly negate any intention to create a secured transaction instead of what the transaction was (an outright sale), the essential requirement of the parties’ intent to create a security interest with respect to the 99 Units cannot exist. Second, the existence of an option to repurchase does not create a security interest subject to the UCC. See, e.g., Textron Financial Corp. v. Weeres Industries Corp. 2011 WL 2682901 (D. Minn 2011). In the Textron matter, a commercial lender financed the acquisition of inventory produced by a watercraft equipment manufacturer to be sold by various dealers of the equipment. As a material inducement for the lender to finance the transaction, the manufacturer was obligated to enter into a repurchase agreement whereby 28
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it would repurchase the financed equipment in the event of non-performance by any of the equipment dealers. Id. at *1-2. The equipment manufacturer subsequently defaulted on its obligations under the repurchase agreement due to allegedly oppressive repurchase terms. In Textron, this Court was presented with a motion for summary judgment by the lender. The manufacturer responded that the equipment covered by the repurchase agreement was not liquidated in a commercially reasonable manner under Article 9 of the UCC, requiring the Court to answer the question of whether the UCC applied to a repurchase agreement. This Court agreed with the manufacturer that the UCC did not apply to the repurchase agreement because there was no security interest created by the repayment obligation between the lender and the manufacturer. Id. at *6. The Textron facts parallel those of the present case and the legal analysis is the same: the repurchase obligation in Textron were absolute by their clear and unambiguous terms; in this case, the Purchase Agreement and Member Control Agreement, title to the 99 Units immediately vested in Fagen, they were not subject to forfeiture by Exergy at a later date, and they were sold in exchange for consideration in the form of $11,447,503.02 in debt forgiveness.12 In Textron the Court relied upon limited foreign authority to conclude that whereas a repurchase agreement may possess attributes of a secured loan, the absence of any record to indicate a security interest was created places the transaction outside the scope of Article 9. Id. at *6 n. 1 (citing Matter of Financial Corp., 1 B.R. 522, 526 n. 7 (W.D.Mo. 1979)). In this case, the record consists exclusively of unambiguous agreements whose language effects an absolute conveyance both in form but also in 29
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substance, creating an absolute conveyance with a right of repurchase which, if not exercised by Exergy, would leave the conveyance of the 99 Units intact as being purchased for consideration.16-17 Third, HT’s notion that the conveyance of the 99 Units was a sale conditioned upon the right of repurchase is misplaced. “A conditional sale is one in which the vesting of the title is subject to a condition precedent, or in which its revesting in the seller is subject to a failure of the buyer to comply with a condition subsequent.” Dunlop v. Mercer, 156 F. 545, 548 (8th Cir. 1907). Under the present facts, the vesting of title in the 99 Units was not subject to a condition precedent. The vesting of the 99 Units in Fagen/MET was absolute at the time it was made by the explicit terms of the Purchase Agreement and the Member Control Agreement.15-17 No condition subsequent existed to confirm title of the 99 Units in Fagen.15-17 If the sale was indeed conditional, the conveyance of the 99 Units would have been subject to some kind of reversion to Exergy, and the debt forgiveness that served as consideration for the conveyance would have to be reversible. The fact that the conveyance was absolute from the outset places the conveyance outside the scope of the UCC according to the case law authority interpreting transactions that are identical or closely parallel the transactions at issue here. This distinction makes all the difference to the present analysis. Fourth and finally, HT’s advice and counsel to Exergy on the applicability of the UCC ultimately changed over time from assurances that the UCC applied to the transaction to conceeding that the transaction documents in question “generally support Fagen’s position”58-60,69 then the deplorable disavowal of responsibility for these errors.830
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9,44-45
Without the requirements of foreclosure proceedings imposed by Article 9 of the
Minnesota UCC, Exergy was left without any recourse when it had previously been advised that it had.45 iii.
HT Contradicted its Advice to Exergy by Issuing the 23 March Opinion and Subsequently Retreating from its Advice Regarding the Applicability of the UCC.
As established above, HT issued a legal opinion that Fagen was the owner of the 99 Units28-30 and prepared a backup certificate for the opinion letter that confirmed Fagen’s ownership of the 99 Units.37-38 Ownership of the Big Blue Project was transferred to Fagen/MET by the Purchase Agreement and Member Control Agreement.12 Ancillary to that transaction was the issuance of the 23 March Opinion. HT has emphatically denied that Fagen’s ownership of the 99 Units can be inferred from its opinion41,46 as a matter of principles governing legal opintions, yet the very same opinion letter is predicated upon and garnished with references to the sale of those units to Fagen leaving the incredulous question of who else could have owned it? Furthering the contradiction of its advice to Exergy is the Certificate of Managing Member prepared by HT.37-38 HT has since testified that the language of these instruments is irrelevant and secondary to the true character of the transaction.46 However, the true character of the transaction is, as a matter of law, different from what HT represented to Exergy. See Section B(2)(b), supra. HT’s negligence drastically limited Exergy’s options to the point where Exergy was left with no options other than to address the negligent character of the advice given to Exergy through this litigation.45
31
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B.
But For HT’s Negligent Advice, Exergy Would Have Obtained a More Favorable Outcome Vis-à-Vis the Disposition of the Big Blue Project.
Proximate cause in legal malpractice cases exists when, but for the attorney's negligence, the loss would not have occurred. Raske v. Gavin, 438 N.W.2d 704, 706 (Minn. Ct. App. 1989). Although customarily a question of fact, proximate cause can be decided as a matter of law where reasonable minds can arrive at only one conclusion. Lennon v. Pieper, 411 N.W.2d 225, 228 (Minn. Ct. App. 1987); Raske, supra. Here, Exergy had aggressively sought financing for the Big Blue Project during 2011-2012.49 In 2012, a transaction for the financing of the Big Blue Project was negotiated with D.E. Shaw & Company, with financing being provided by Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”).50 BTMU had issued a “mandate letter” defining the terms of the transaction and a target of late June 2012 was set for closing.51-52 A rehearsal closing conference call took place in anticipation of that closing.53 In addition, Exergy had other purchasers/financiers waiting in the wings.49 At the last minute, with the deadline for repurchase approaching, Fagen/MET refused to release ownership of the Big Blue Project.55-57 As discussions with BTMU dragged on past the 29 June 2012 repurchase option deadline, Fagen/MET continued to refuse to cooperate. Id. When Exergy sought to fall back on the advice that HT had given regarding the applicability of the UCC to the transactions by which Fagen/MET took ownership of the 99 Units, HT contradicted its previous advice.58,69 Without the ability to claw back the transaction by forcing Fagen/MET to undergo the procedures under Article 9 of the Minnesota UCC, liquidate the Big Blue Project in a commercially reasonable manner, and present the 32
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financiers like BTMU as purchasers, Exergy lost the full benefit of disposing of a project it had invested six years and millions of dollars developing. Instead, Fagen/MET now owns and is operating the project, which is performing according to the prosperous projections Exergy had made.73 HT has built its defense of Exergy’s Crossclaim on the notion that Exergy could not have closed a deal, and thus, any error in advice concerning the Minnesota UCC is inconsequential. Not only is this factually incorrect, it is irrelevant. HT’s negligence is the predicate to Exergy having any ability to take action regarding the project. Exergy’s expert witness, Phil Kunkel, has attested to the actions of HT as eliminating any recourse Exergy may have had so whether the deal closed or not is immaterial.45 Further, Exergy’s expert witness, Robert Reilly, has calculated the value of the Big Blue Project lost by Fagen’s usurpation of the project at a minimum of $14,900,000.73 Therefore, it is irrelevant what defense HT posits with respect to any possible since its own conduct made the prospects of closing irrelevant by rendering negligent advice to Exergy on the one hand and providing a contradictory legal opinion to Fagen/MET on the other. In Hill v. Okay Constr. Co., supra, the defendant was found guilty for malpractice due to negligence regarding the sale of business assets (for which the attorney was responsible for negotiating), which was intended to be a security interest, but instead was a true and complete conveyance of business assets. The court ruled that claims brought against an attorney for such conduct is not for ‘bad business judgment,’ but rather for ‘legal malfeasance,’ specifically counsel’s failure to properly advise the client of the potential
33
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legal consequences of a given transaction. Hill, supra, 312 Minn. at 337, 252 N.W.2d at 116. C.
Exergy’s Damages Are Quantifiable and Based upon the Lost Value of the Big Blue Project Plus the Costs of Litigating this Action.
The calculation of Exergy’s damages suffered as a result of HT’s negligent advice can be reduced to a formula prescribed by the Minnesota UCC: Section 9-610 of the Minnesota UCC [Minn. Stat. § 335.9-610] that requires the liquidation of collateral in a commercially reasonable manner. Section 9-608(a) of the Minnesota UCC [Minn. Stat. § 335.9-608(a)] prescribes the method by which proceeds from such a sale must be applied; the measure of damages is the difference between (a) the value of the project if sold in a commercially reasonable manner, less costs to complete the project to get to the point of sale, and (b) any outstanding loan balances. Minn. Stat. Ann. §§ 335.9608(a)(1)-(4). Exergy’s damages expert confirms the lost value of the Big Blue Project at $14,900,000.73 Additional damages are the legal fees, disbursements and costs incurred in this litigation. See,.e.g, Hill, supra, 312 Minn. at 347, 252 N.W.2d at 121. This Court therefore has both the indisputable facts and the legal standard necessary to determine there is no triable issue of material fact as to HT’s negligence in advising on the purported applicability of the UCC to the subject transactions as a matter of law. To the extent that the Court determines that damages remain at issue, Exergy requests (at the minimum) that this Honorable Court grant partial summary for liability against HT as to the issue of liability.
34
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3.
SUMMARY JUDGMENT SHOULD BE GRANTED AS TO EXERGY’S COUNTS I, IV, V, AND VI OF ITS COUNTERCLAIMS AGAINST FAGEN/MET. A.
No Triable Issue of Material Fact Exists Regarding Fagen’s Taking Possession of the Remaining One Membership Unit of Exergy Minnesota Holdings in Violation of the Minnesota UCC.
While HT’s negligence was the direct and proximate cause of the majority of Exergy’s injury for the loss of the Big Blue Project, Fagen/MET was nonetheless obligated to follow the Minnesota UCC concerning the remaining 1 Unit of Exergy Minnesota (the “Remaining Unit”). There are three fundamental reasons for this. First, the Purchase Agreement excluded the remaining unit in the sale of the 99 Units as consideration for debt forgiveness.12-16 There was no express or implied consideration for the transfer of the remaining one unit63 and there was no waiver of any UCC provisions requiring foreclosure upon the Remaining Unit and Fagen already held the full units as collateral.17-18 Second, the transfer of the Remaining Unit was, unlike the 99 Units, subject to a contingency: Exergy’s failure to exercise the repurchase option by the 29 June 2012 deadline stated in the Purchase Agreement.17 The contingent nature of this portion of the transaction created a security interest triggering the applicability of the UCC. No foreclosure occurred.64 Instead, the only action Fagen/MET took to assert control over the Remaining Unit was a letter informing Exergy that Fagen/MET had assumed control over Exergy Minnesota.62 Contrary to HT’s incorrect advice about the character of the 99 Units, the existence of a contingency brings the Remaining Unit under the purview of the Minnesota UCC that explicitly states a security interest “means an interest in personal 35
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property or fixtures which secures payment or performance of an obligation.” U.C.C. § 1201(35). Additionally, “Under Minnesota law no particular form of words is required for an assignment, but the assignor must manifest an intent to transfer and must not retain any control or any power of revocation.” Minn. Mut. Life Ins. Co. v. Anderson, 504 N.W.2d 284, 286 (Minn. App. 1993). It is agreed that both parties intended to transfer the 99 Units as consideration for debt restructuring. However, control and power was still retained by Exergy via the Remaining Unit; Exergy had an option to repurchase the Remaining Unit, but not the other 99 Units. Thus, an obligation was unequivocally created on the Remaining Unit under the Purchase Agreement. “It is the clear policy of Article 9 of the code to look to the substance, rather than to the form, of an agreement to determine whether or not it is a security agreement.” James Talcott, Inc. v. Franklin Nat’l Bank of Minneapolis, 194 N.W.2d 775, 779 (Minn. 1972). Third, the language of the Purchase Agreement where the Remaining Unit is concerned is a thinly-veiled attempt to claim one-hundred percent (100%) ownership of Exergy Minnesota without giving fair compensation for the Remaining Unit. The fact that Exergy would retain title to the Remaining Unit17 during the repurchase option period is not dispositive to the character of the whole transaction; “[T]he draftsmen of the [UCC] intended that its provisions should not be circumvented by the manipulation of the locus of title.” Talcott, supra, 194 N.W.2d at 781. Whether a transaction is governed by the UCC is a question of law. Duxbury, supra, 681 N.W.2d at 386. Accordingly, this Court is empowered to determine, as a matter of law, whether the UCC applies to some 36
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or all of the transaction components at issue here. Should this Court determine the UCC does apply, Exergy is entitled to summary judgment as to Count I of its First Amended Counterclaim as a matter of law. B.
No Triable Issue of Material Fact Exists with Respect to Exergy’s Claim against Fagen/MET for Breach of Fiduciary Duty or Intentional Interference with Prospective Economic Advantage.
Under Minnesota law, a claim for breach of fiduciary duty includes four elements: (1) the existence of a duty, (2) breach of that duty, (3) causation, and (4) damages. Conwed Corp. v. Employers Reinsurance Corp., 816 F. Supp. 1360, 1362 n.3 (D. Minn. 1993). “[a] fiduciary relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other.” H. Enterprises Intern. Inc. v. General Electric Capital Corp., 833 F. Supp. 1405, 1421 (D. Minn. 1993) (quoting Stark v. Equitable Life Assurance Co., 285 N.W. 466, 470 (1939) (quotation omitted)). Here, the undisputed facts establish: (1) a fiduciary duty existed by creation of the partnership memorialized in the Amended and Restated Memorandum of Understanding between Exergy and Fagen dated 20 December 2011 (the “MOU”)80 requiring Fagen to fund Exergy’s development activities81; (2) Fagen/MET breached that duty by ceasing performance under the MOU82 and by creating dependence whereby Fagen/MET’s breach not only deprived Exergy of the benefits under the MOU but set off a chain reaction that made Exergy beholden to Fagen for its survival and created a subterfuge whereby the only escape was for Exergy to sell, for a pittance, the only liquid asset it had: its interest in IWP1’s revenue stream83-84; and (3) Fagen/MET was the sole malefactor
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causing the losses suffered by Exergy as Fagen was in the position of both a fiduciary taking gross advantage of its position. C.
Concomitant with the Fagen/MET’s Breach of Fiduciary Duty was their Interference with Exergy’s Prospective Economic Advantage.
Fagen interfered with two primary benefits due to Exergy: (1) the renewable energy projects contemplated in that 20 December 2011 MOU, and (2) the revenue stream arising from Exergy’s residual ownership of a wind energy project called Idaho Wind Partners 1 (“IWP1”). Fagen entered into the MOU, performed for a time, and then withdrew performance, leaving Exergy without the promised support for those projects.8283
Then, Fagen (having maneuvered itself over time to become Exergy’s only source of
operational financing) collateralized a goldmine source of income for Exergy; the revenue stream from IWP1.84-85 The undisputed facts demonstrate that this revenue stream was worth in excess of $95 million to Exergy.89 Accordingly, Fagen capitalized on funding that was lifeblood to Exergy but to Fagen served only to serve as a source of slow repayment of the debt service Exergy owed.86 For Exergy, the only way out of this impossible situation created by Fagen was the sale of that revenue stream.89-90 The result was Exergy selling that revenue stream for a fraction of its full value in 2014, paying off the Term Loans and finally getting out from under Fagen’s thumb.90 What makes these acts of tortious interference is Fagen’s intentional securing of assets that would make it impossible for Exergy to get ahead of its debt service to Fagen, to cut off its partnership for the development of future projects, and its subsequent capitalization
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of Exergy’s weakened position now that Fagen held ultimate control of Exergy’s assets. Wrongful interference with a prospective advantage is an actionable tort claim in Minnesota. See Wild v. Rarig, 234 N.W.2d 775 (Minn. 1975); Witte Transportation Co. v. Murphy Motor Freight Lines, Inc., 193 N.W.2d 148 (Minn. 1971); Wicker v. Roering, 364 N.W.2d 479 (Minn. Ct. App. 1985). The cause of action protects an interest in the reasonable expectation of an economic advantage. Wild, 234 N.W.2d at 791. In order to prevail on such a claim, a plaintiff must prove the following elements: (1) the existence of a reasonable expectation of economic advantage or benefit belonging to Plaintiff; (2) that Defendants had knowledge of that expectation of economic advantage; (3) that Defendants wrongfully and without justification interfered with Plaintiffs’ reasonable expectation of economic advantage or benefit; (4) that in the absence of the wrongful act of Defendants, it is reasonably probable that Plaintiff would have realized his economic advantage or benefit; and (5) that Plaintiff sustained damages as a result of this activity. Harbor Broad., Inc. v. Boundary Waters Broad., Inc., 636 N.W.2d 560, 569 (Minn. Ct. App. 2001). When determining whether a party’s conduct is intentionally interfering with a contract or a prospective contractual relation of another is improper, consideration is given to the following factors: (a)
the nature of the actor’s conduct,
(b)
the actor’s motive,
(c)
the interests of the other with which the actor’s conduct interferes,
(d)
the interests sought to be advanced by the actor, 39
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(e)
the social interests in protecting the freedom of action of the actor and the
contractual interests of the other, (f)
the proximity or remoteness of the actor’s conduct to the interference, and
(g)
the relations between the parties.
Restatement (Second) of Torts § 767 (1979). Tortious interference with a business relationship is based on “the intentional doing of a wrongful act without legal justification or excuse, or otherwise stated the willful violation of a known right . . ., malice in the sense of ill will or spite not being essential.” Witte Transportation Co. v. Murphy Motor Freight Lines, Inc., 193 N.W.2d 148, 151 (Minn. 1971) (citations omitted). As set forth in detail below, the undisputed facts establish that no triable issue of material fact exist as to any of element of Count V of Exergy’s Counterclaim and the subfactors set forth in the Restatement of Law adopted in Minnesota. i.
The Undisputed Facts Show that Exergy had a Reasonable Expectation of an Economic Advantage Vis-àvis the Projects under Development as Stated in the MOU and in the IWP1 Revenue Stream.
It is not disputed that Fagen was obligated to perform under the MOU terms80-81 and that Exergy reasonably expected to receive the benefits of the IWP1 revenue stream.84 ii.
The Undisputed Facts Show that Fagen Knew of Exergy’s Expectation of the Economic Benefits that Would Inure to it under the MOU and under the IWP1 Revenue Stream.
Fagen knew fully of the benefits that Exergy expected to reap from the aforementioned economic benefits. With respect to the MOU, Fagen’s own Chairman,
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Ron Fagen, confirmed under oath that it was Fagen’s obligation to supply funding for the renewable energy projects contemplated under the MOU.81 With respect to the IWP1 revenue stream, Fagen collateralized that source of funding and was slowly drawing all revenue away from Exergy as interest service for the Term Loans. The proximity of Exergy’s interest to Fagen’s own conduct is inextricable given the privity of contract in the context of the MOU and the collateralization of the IWP1 revenue stream. See Restatement (Second) of Torts § 767, supra at subsections (f)-(g). iii.
The Undisputed Facts Demonstrate that Fagen Wrongfully Interfered with the Benefits that Exergy Reasonably Expected to Reap with Respect to the Projects Contemplated by the MOU and the IWP1 Revenue Stream.
The terms of the MOU itself confirm that Exergy was developing several projects that would not only benefit Exergy, but also Fagen.80 However, the premise of the MOU, by its explicit language, was that Fagen would provide the financing and Exergy would do the development work necessary to bring those projects to fruition. Id. See also Restatement (Second) of Torts § 767, supra at subsections (a)-(b), (d). With respect to the IWP1 revenue stream, had Fagen not tied up all of Exergy’s other assets and breached its agreement under the MOU, Exergy would not have been forced to sell the revenue stream in order to get out from under the crushing Fagen debt and encumbrance of all assets. Fagen may argue that it was Exergy’s choice to assume debt and that Fagen was acting in good faith by providing Exergy with the funding it needed, the devil (as ever) lies in the details: Fagen insisted on securing every asset viable to Exergy to the point where there was no means of operating Exergy’s business, 41
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securing other financing, or conducting any other business, because Fagen held everything. Tortious interference with a business relationship is based on “the intentional doing of a wrongful act without legal justification or excuse, or otherwise stated the willful violation of a known right . . ., malice in the sense of ill-will or spite not being essential.” Witte Transportation Co. v. Murphy Motor Freight Lines, Inc., 193 N.W.2d 148, 151 (Minn. 1971) (citations omitted). Moreover, Minnesota courts have also followed the Restatement in recognizing the special privilege granted to competitors, and stated that, to prevail on a claim of interference, plaintiff must show that, absent the conduct of his adversary, plaintiff would have been able to secure the business. North Central Co. v. Phelps Aero, Inc., 139 N.W.2d 258, 263 (Minn. 1965). It is in this detail that the wrongfulness of Fagen’s conduct lies. iv.
It is Undisputed That Had Fagen Not Interfered with the Benefits that Exergy was Attempting in Good Faith to Generate, Exergy would have Realized those Benefits.
Fagen withdrew its performance under the MOU, leaving Exergy without the needed support to continue its development activities under the provisions that would have enabled it to do so.82-83 At the same time, Fagen was encumbering all of Exergy’s viable assets and effectively “hog-tying” it in such a way that Exergy was financially crippled.84 Then, with respect to the IWP1 revenue stream, Fagen not only encumbered that asset but was actively drawing down all the benefits that Exergy was entitled to as a form of debt service going directly into Fagen’s pocket.84,86 The only means by which Exergy could escape from this untenable situation was to sell the revenue stream, pay off
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Fagen87-88 and hope to survive by other means.89-90 See Restatement (Second) of Torts § 767, supra at subsections (e)-(g). v.
It is Undisputed that Exergy Sustained Damages as a Result of Fagen’s Conduct Vis-à-vis its Breach of the MOU and Interference with the IWP1 Revenue Stream.
But for Fagen’s conduct, Exergy would still be enjoying the benefits flowing from the MOU in the form of renewable energy projects developed pursuant to its terms and Exergy would still be entitled to the benefits of the revenue stream flowing from the IWP1 project. Instead, the projects contemplated by the MOU are dead in the water and, with respect to IWP1, Exergy has been forced to sell an asset worth $95 million for far less than that amount.89-90 D.
No Triable Issue of Material Fact Exists with Respect to Exergy’s Claim against Fagen/MET for Quantum Meruit Unjust Enrichment.
Exergy invested six years and in excess of $18 million Dollars in costs developing the Big Blue Project.75-76 Fagen took ownership of the Big Blue Project, but failed to pay Exergy back any of those costs.73 As such, Fagen is liable to Exergy for these costs in unjust enrichment. “An action for unjust enrichment may be based on failure of consideration, fraud, mistake, and situations where it would be morally wrong for one party to enrich himself at the expense of another.” Anderson v. DeLisle, 352 N.W.2d 794, 796 (Minn. Ct. App. 1984); see also Timmer v. Gray, 395 N.W.2d 477, 478 (Minn. Ct. App. 1986). A plaintiff must show that the defendant knowingly received something of value, while not being entitled to the benefit, and under circumstances that would make it unjust to permit 43
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its retention. ServiceMaster of St. Cloud v. GAB Business Services, Inc., 544 N.W.2d 302 (Minn. 1996). In Anderson v. DeLisle, supra, the Minnesota Court of Appeals recognized a claim for unjust enrichment where the defendant permitted the plaintiff to make significant improvements to defendant’s property knowing that plaintiff would likely default under the contract: “An action for unjust enrichment may be based on failure of consideration, fraud, mistake, and situations where it would be morally wrong for one party to enrich himself at the expense of another. Klass v. Twin City Federal Savings and Loan Ass’n, 190 N.W.2d 493, 495 (Minn. 1971); Cady v. Bush, 166 N.W.2d 358, 361 62 (Minn. 1969). In this case there was no mistake or fraud by the vendors. But, DeLisles stood silent and watched Anderson make extensive improvements to their property. They contracted to retain those improvements upon default knowing that because of Anderson’s financial problems there was little or no chance that he could perform under the contract. In such a situation, the jury reasonably could find that equity and good conscience require DeLisles to compensate Anderson for the improvements.” Id. at 796. Summary judgment is appropriate for the following reasons: First, the undisputed facts show that Exergy was a creditor of the Big Blue Project like any other75-77, Fagen has openly admitted to paying other creditors of the project73, and Fagen failed to articulate any defense to payment. The only explanation Fagen has offered for not paying these costs is the euphemistic testimony of Jennifer Johnson, claiming that other vendors of the project were paid but that Exergy was not paid because its costs were debt that “was converted into equity”73, and because Fagen had lent some of the funds used by Exergy to develop the project (funds which have since been repaid in full), so Fagen is somehow (albiet wrongly) exempt from repaying those funds. Second, as Fagen has insisted on strict interpretation of the documents relating to the Fagen Obligations, there 44
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is no contractual language addressing the inclusion of those costs in the purchase price paid by Fagen for the project and there has been no waiver or release of claims by Exergy.78 Moreover, even if those funds had originated with Fagen, there is no authority for denying Exergy repayment of the costs that Fagen has fully enjoyed as the owner of a viable and operational wind power project. Fagen took ownership of the Big Blue Project62, demanded (and obtained) repayment of all debts owed to it87-88 and now denies Exergy should be paid. Fagen/MET cannot pick and choose which vendors it is legally obligated to repay. Finally, notwithstanding that a special purpose entity was utilized to gather the project assets and was the target for funds, a parent (Fagen) may be held liable under unjust enrichment when a subsidiary fails to honor a commitment. See, e.g., Bank of Montreal v. Avalon Capital Group, Inc. 743 F.Supp.2d 1021, 1032-1033 (D.Minn 2010). The cumulative result of this analysis is that Fagen has received the benefit of over $18 million and deliberately not paid Exergy for those benefits. Summary judgment as to Count VII of Exergy’s First Amended Counterclaim is therefore appropriate. CONCLUSION For the foregoing reasons, Exergy respectfully submits that this Honorable Court grant summary judgment in its favor against HT and Fagen as requested herein. In the alternative, Exergy respectfully submits that this Honorable Court grant partial summary judgment as to each element of the causes of action addressed herein with the exception of damages, to be reserved for trial.
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DATED: 15 December 2015
Respectfully Submitted,
/s/ Angelo L. Rosa Angelo L. Rosa, Esq. (Admitted Pro Hac Vice) MARSH ROSA LLP P.O. Box 1605 Boise, Idaho 83701 Telephone: (801) 440-4400 Facsimile: (801) 415-1773 E-mail:
[email protected]
/s/ Bryan R. Battina Bryan R. Battina (#338102) TREPANIER MACGILLIS BATTINA P.A. 8000 Flour Exchange Building 310 Fourth Avenue South Minneapolis, Minnesota 55415 Telephone: (612) 455-0505 Facsimile: (612) 455-0501 E-mail:
[email protected] ATTORNEYS FOR DEFENDANTS/COUNTERCLAIMANTS/CROSSCLAIMANTS EXERGY DEVELOPMENT GROUP OF IDAHO, LLC, AND DEFENDANT JAMES T. CARKULIS, INDIVIDUALLY
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CERTIFICATE OF SERVICE I HEREBY CERTIFY that on 15 December 2015 I submitted the foregoing to the Clerk of the Court for service on CM/ECF Registered Participants as reflected on the Notice of Electronic Filing, including, but not limited to, the following: Keith Moheban
[email protected]
Timothy Kelley
[email protected]
James C. MacGillis
[email protected]
Bryan R. Battina
[email protected]
Richard J. Thomas
[email protected]
Bryon Ascheman
[email protected]
/s/ Angelo L. Rosa Angelo L. Rosa
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