Kinetic Sys., Inc. v. Fed. Fin. Bank

• Decision Date: 14 September 2012
• Docket Number: Case No. 12–1619–SC.
• Citation: 895 F.Supp.2d 983
• Court: U.S. District Court — Eastern District of California
• Parties: KINETIC SYSTEMS, INC., Plaintiff, v. FEDERAL FINANCING BANK and Does 1 through 25, Defendants.

895 F.Supp.2d 983

KINETIC SYSTEMS, INC., Plaintiff,

v.FEDERAL FINANCING BANK and Does 1 through 25, Defendants.

Case No. 12–1619–SC.

United States District Court,

N.D. California.

Sept. 14, 2012.

Mathew R. Troughton, Scott E. Hennigh, San Francisco, CA, for Plaintiff.

Steven J. Saltiel, San Francisco, CA, for Defendants.

ORDER DENYING PLAINTIFF'S MOTION TO REMAND AND DENYING DEFENDANT'S MOTION TO DISMISS

SAMUEL CONTI, District Judge.

I. INTRODUCTION

This lawsuit stems from the closure of Solyndra, a Fremont, California-based maker of solar panel technology. In September 2009, the U.S. Department of Energy (“DOE”), Solyndra, and Defendant Federal Financing Bank (“FFB”) entered into a series of agreements by which FFB, at the behest of DOE, purchased from Solyndra a promissory note in the amount of $535 million. DOE guaranteed the note. Solyndra used these funds to begin construction on a manufacturing facility (the “Project”), but, in August 2011, before the facility opened, Solyndra abruptly closed.

Plaintiff Kinetic Systems, Inc. (“Plaintiff”) is a California contractor. Plaintiff alleges that it performed $2.870 million worth of work on the Project and is still owed roughly $1.187 million. After Solyndra closed, Plaintiff served a bonded stop notice on FFB—that is, it claimed a right to be paid out of excess construction funds allegedly held by FFB. When FFB did not pay, Plaintiff sued FFB in California state court for enforcement of the bonded stop notice, whereupon FFB removed to this Court.

Two motions are now pending, both fully briefed and suitable for decision without oral argument. The first motion, filed by Plaintiff, asks the Court to remand this action to state court. ECF Nos. 10 (“MTR”), 30 (“MTR Opp'n”), 31 (“MTR Reply”). The second motion, filed by FFB, asks the Court to dismiss the case under Federal Rule of Civil Procedure 12(b)(1) for lack of subject-matter jurisdiction, or, in the alternative, to enter summary judgment in favor of FFB. ECF Nos. 6 (“MTD”), 19 (“MTD Opp'n”), 28 (“MTD Reply”). FFB has moved for dismissal under Rule 12(b)(1) because it asserts the defenses of sovereign immunity and conflict preemption, which are jurisdictional in nature. As for the summary judgment portion of its motion, FFB argues that it is not a “construction lender,” as California law defines that term. The question of whether California's stop-notice laws reach FFB appears to be one of first impression, as neither party has cited any case directly addressing the point, nor is the Court aware of any.

For the reasons set forth below, the Court DENIES Plaintiff's motion to remand because FFB has a “colorable federal defense,” Durham v. Lockheed Martin Corp., 445 F.3d 1247, 1251 (9th Cir.2006), namely, the federal defenses raised in its Rule 12(b)(1) motion. The Court, however, DENIES FFB's Rule 12(b)(1) motion: Though FFB's jurisdictional defenses are “colorable” for purposes of removal, they are not meritorious. The Court also denies FFB's request for summary judgment because FFB has not shown that it falls outside California's definition of a “construction lender.”

II. BACKGROUND

Understanding this dispute requires an understanding of: the nature of FFB; the framework of the program by which FFB provided financing guaranteed by DOE; and the details of the particular arrangement between Solyndra, DOE, and FFB. The Court reviews those topics before recounting the events that led Plaintiff to issue a bonded stop notice to FFB and hence to this lawsuit.

A. FFB

Nearly forty years ago, Congress created FFB by passing the Federal Financing Bank Act of 1973, Pub.L. No. 93–224, 87 Stat. 937 (1973) (“FFB Act”), codified at 12 U.S.C. § 2281 et seq. Congress found that “demands for funds through Federal and federally assisted borrowing programs [were] increasing faster than the total supply of credit and that such borrowings [were] not adequately coordinated with overall Federal fiscal and debt management policies.” 12 U.S.C. § 2281. Federal agencies administering increasingly popular loan-guarantee programs were using private lenders to furnish the loans, which had the unintended effect of increasing costs to the federal government and disrupting private finance markets. See generally Willis–Proctor Decl. Ex. 6 (“McNamar Report”) at 8–10, 12–17.¹ The purpose of the FFB Act was “to assure coordination of these programs with the overall economic and fiscal policies of the Government, to reduce the cost of Federal and federally assisted borrowings from the public, and to assure that such borrowings are financed in a manner least disruptive of private financial markets and institutions.” 12 U.S.C. § 2281.² Congress establishedFFB as a “body corporate ... subject to the general supervision and direction of the Secretary of the Treasury” and made it “an instrumentality of the United States Government.” 12 U.S.C. § 2283.

Congress conferred on FFB a number of general powers. Id. § 2289. One of these is the power “to sue and be sued, complain, and defend, in its corporate name.” Id. § 2289(1). Another is the power “to enter into contracts, to execute instruments to incur liabilities, and to do all things as are necessary or incidental to the proper management of its affairs and the proper conduct of its business.” Id. § 2289(9). One of the functions of FFB is to purchase or sell any obligation issued, sold, or guaranteed by a federal agency. Id. § 2285(a). “Obligation” is a defined term that includes “any note, bond, debenture, or other evidence of indebtedness,” with certain exceptions not relevant here. Id. § 2282(2). FFB often exercises its power to purchase obligations in order to serve as a lender for programs wherein a federal agency (for example, DOE) guarantees a loan to a private entity (for example, a builder of electrical infrastructure). Generally, FFB provides the financing by purchasing a note which the federal agency then guarantees.³

B. The Solyndra Financing Arrangement

The Energy Policy Act of 2005, Pub.L. No. 109–58, 119 Stat. 594 (2005) ( “Energy Policy Act”), codified at 42 U.S.C. § 16511 et seq., authorizes the Secretary of Energy (“Secretary”) to guarantee loans for certain eligible projects, and appropriates funds to cover the costs of such guarantees. See42 U.S.C. §§ 16511–14. When the Secretary guarantees 100 percent of a loan, the loan must be funded by FFB (as opposed to a private bank). See10 C.F.R. § 609.10(d)(4)(i).

In September 2009, FFB and the Secretary entered into a Program Financing Agreement that supplies the general framework for this financing program. See Willis–Proctor Decl. Ex. 1 (“PFA”). The financing process begins when the Secretary designates a borrower. See id. § 2.1. The Secretary's formal designation of a borrower places the Secretary and FFB under three separate commitments: (a) FFB and the Secretary must sign “a Note Purchase Agreement with the particular Borrower ... setting forth the terms and conditions under which FFB will purchase a Note issued by such Borrower”; (b) the Secretary must guarantee the note pursuant to the Energy Policy Act; and (c) FFB must purchase the note pursuant to the FFB Act. Id. § 2.3. Note Purchase Agreements signed by FFB and designated borrowers require the borrower to offer a promissory note to FFB, which FFB then buys, assuming certain preconditions are satisfied. Id. §§ 1.1, 4.1. One of those preconditions is the receipt by FFB of the Secretary's guarantee of the note in the event that a borrower defaults.

The PFA provides that the note shall be a future advance promissory note. Id. § 1.1 (definition of “Note”). The amount of the note represents the maximum amount of financing that a borrower may receive under their particular PFA. Form NPA § 7.3.4.⁴ The borrower receives the financing by requesting an advance on the note. Id. § 7.2. The borrower usually must specify a third party to receive the advance; in other words, FFB gives money to the borrower's creditors, not to the borrower itself. Id. § 7.2(b). ⁵ The Secretary must approve each request before FFB will disburse the advanced funds. Id. § 7.2(a). Advances may be made “only at such time and in such amount as shall be necessary to meet the immediate payment or disbursing need of the Borrower.” Id.

On September 2, 2009, Solyndra, DOE, and FFB entered into a Note Purchase Agreement. Willis–Proctor Decl. Ex. 2 (“Solyndra NPA”). Under the terms of the Solyndra NPA, Solyndra agreed to offer FFB a note in the amount of $535 million. The Secretary guaranteed the note and FFB purchased it. The terms of the Solyndra NPA tracked the general terms set forth above. That is, the Secretary guaranteed a $535 million note offered by Solyndra and purchased by FFB, against which note Solyndra could request advances of funds which, if approved by the Secretary, FFB would pay directly to Solyndra's creditors according to its “immediate payment or disbursing needs[s],” up to an aggregate maximum of $535 million and repayable with interest.

C. Plaintiff's Stop Notice

The Court takes this portion of its account from the allegations in Plaintiff's state court complaint and FFB's notice of removal. ECF No. 1 (notice of removal (“NOR”)) Ex. A (“Compl.”). Plaintiff is a California corporation and duly licensed contractor. Compl. ¶ 1. Plaintiff alleges that FFB acted as a “construction lender” to Solyndra with regard to construction of Solyndra's manufacturing facility at 47488 Kato Road, Fremont, California. Id. ¶ 8. Plaintiff “furnished labor, services, equipment and material for the installation of mechanical piping and components (HVAC, plumbing, process) for tool hookup ... pursuant to written contract with Solyndra.” Id. ¶ 9. Before its closure, Solyndra issued purchase orders to Plaintiff for work valued at $2,967,762. Id. Plaintiff allegedly completed $2,870,372 worth of work on those orders. Id. Plaintiff received partial payment on those purchase orders in the amount of $1,682,422,...