Lansing Trade Grp., LLC v. OceanConnect, LLC
| Decision Date | 26 June 2012 |
| Docket Number | Case No. 12-2090-JTM |
| Parties | LANSING TRADE GROUP, LLC, Plaintiff, v. OCEANCONNECT, LLC, Defendant. |
| Court | United States District Courts. 10th Circuit. United States District Courts. 10th Circuit. District of Kansas |
Plaintiff Lansing Trade Group filed this action claiming breach of contract and breach of warranties against defendant OceanConnect. The matter is now before the court on OceanConnect's Motion to Dismiss or to Stay the Proceedings.
The dispute involves a contract for the sale of "RINs," or Renewable Identification Numbers. RINs are numbers associated with renewable fuels under Environmental Protection Agency (EPA) regulations.1 They are used to measure and track renewable fuel production.2 EPA rules require "obligated parties" - fuel refiners, importers and blenders - to annually show they are responsiblefor introducing a certain volume of renewable fuels into gasoline sold in the United States. They do this by showing EPA they have acquired and are "retiring" a sufficient number of RINs.3
Under EPA regulations, fuel producers generate RINs as they make renewable fuel, with at least one RIN created for each gallon of renewable fuel produced. When a producer transfers ownership of the renewable fuel, it transfers the associated RINs with it to the purchaser. Once an obligated party acquires the fuel or once the fuel is blended with gasoline, the RINs are "separated" from the fuel and can be kept by the obligated party when it resells the fuel. When an obligated party gets enough RINs to meet its annual quota, it can start selling its "excess" RINs to other obligated parties. The buyers then may use these RINS as credits to meet their EPA quotas.4 RINs can be bought and sold by anyone registered with EPA, and can be transferred any number of times.5 Both plaintiff and defendant buy and sell RINs as part of their business. Plaintiff claims it bought RINs from defendant and resold them, only to learn the RINs were fraudulent and invalid. Defendant contends it likewise bought and sold the RINs without knowing of their fraudulent origin.
The EPA regulations declare a RIN to be invalid for a number of reasons, including if the RIN has expired (RINs have a limited life span), if it does not represent renewable fuel, or if it was otherwise improperly generated.6 Upon a determination by any party that the RINs it owns are invalid, EPA rules require the party to adjust its records and to retire the invalid RINs.7 Invalid RINscannot be used to satisfy a party's annual fuel obligation, even if the party acquired the RIN with a good faith belief that it was valid.8 EPA regulations make it a violation for any person to create or transfer an invalid RIN.9 Any person who commits a violation can be liable for a civil penalty.10
The defendant's motion to dismiss argues plaintiff has no claim for breach of contract because defendant delivered what the contract called for - a specified number of RINs. It says plaintiff does not - and cannot - allege that defendant made any express representation concerning the validity of the RINs. It further says plaintiff has no claim for breach of warranties because RINs are not "goods" under the UCC and the Code's warranty provisions do not apply. Defendant also contends the claims should be dismissed because plaintiff failed to join a required party. It says a producer named Clean Green Fuels (CGF) generated the disputed RINs, and it argues CGF must either be joined as a party or the claims must be dismissed. Alternatively, defendant asks the court to stay the case pending the outcome of a criminal case against the former president of CGF, who is now charged with a scheme to create and sell fraudulent RINs to various companies including OceanConnect. And in a supplemental motion to stay, defendant notes it recently filed suit against the EPA challenging its administrative enforcement of the Renewable Fuels Program. Among other things, the suit challenges EPA's refusal to allow companies that purchased RINs generated by CGF to use the RINs to meet their EPA quotas. It also seeks a declaration that OceanConnect acted in good faith and has no legal liability to persons to whom it sold its RINs. Defendant says the issues in the EPA suit "are similar to (if not determinative of) those in the instant action," and argues thiscase should be stayed pending the outcome of the EPA action.
The following allegations are taken from plaintiff's Second Amended Complaint (Doc. 8). Plaintiff is a limited liability company with its principal place of business in Kansas. Defendant is an LLC with its principal place of business in New York. Plaintiff's business includes buying and selling RINs as a broker and trader; defendant's business likewise includes the marketing and selling of RINs.
Plaintiff purchased RINs from defendant by telephone and email. The RINs were delivered by defendant to plaintiff at its Kansas office. Three contracts were allegedly entered into: on July 29, 2010 (500,000 RINs for $255,000); on September 26, 2011 (500,000 RINs for $260,000); and on October 5, 2010 (250,000 RINs for $149,750).
Plaintiff thereafter sold the RINs to other buyers, only to learn the RINs were "fraudulent, invalid and of no value whatsoever." Plaintiff's purchasers have now demanded refunds and other relief from plaintiff, including reimbursement for penalties assessed by EPA for use of the invalid RINs in EPA filings.
Count I alleges that defendant had a contractual obligation to supply the goods specified in the contract, "namely RINs that were valid and marketable." Doc. 8, ¶ 14. Defendant allegedly breached the contract and caused damage to plaintiff by supplying goods that were non-conforming. Count II alleges that defendant breached the implied warranty of merchantability in K.S.A. § 84-2-314 because the RINs were unfit for the ordinary purposes for which they are sold. Count III alleges that defendant breached the warranty of fitness for a particular purpose in K.S.A. § 84-2-315because defendant knew the particular purpose for which plaintiff acquired the RINs and knew plaintiff was relying on defendant to deliver suitable goods, namely valid RINs.
Fed. R. Civ. P. 8(a)(2) provides that a complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." The complaint must give the defendant adequate notice of what the plaintiff's claim is and the grounds of that claim. Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (2002). This simplified notice pleading rule is justified because of the liberal discovery rules and availability of summary judgment to dispose of unmeritorious claims. Id.
Corder v. Lewis Palmer Sch. Dist No. 38, 566 F.3d 1219, 1223-24 (10th Cir. 2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (). Allegations that raise the specter of mere speculation are not enough. Corder, 566 F.3d at 1223-24. The court must assume that all allegations in the complaint are true. Iqbal, 129 S. Ct. at 1936-37. "The issue in resolving a motion such as this is 'not whether [the] plaintiff will ultimately prevail, but whether the claimant is entitled to offer evidence to support the claims.'" Bean v. Norman, No. 008-2422, 2010 WL 420057, at *2 (D. Kan. Jan. 29, 2010) (quoting Swierkiewicz , 534 U.S. at 511). The Tenth Circuitutilizes a two-step process when analyzing a motion to dismiss. Hall v. Witteman, 584 F.3d 859, 863 (10th Cir. 2009). First, the court must identify conclusory allegations not entitled to the assumption of truth. Id. Second, the court must determine whether the remaining factual allegations plausibly suggest the plaintiff is entitled to relief. Id.
The court may consider documents referred to in the complaint if the documents are central to the plaintiff's claim and are undisputed. Alvarado v. KOB-TV, L.L.C., 493 F.3d 1210, 1215 (10th Cir. 2007). A court may also consider facts subject to judicial notice without converting the motion into one for summary judgment. Tal v. Hogan, 453 F.3d 1244, 1264 n.24 (10th Cir. 2006).
Plaintiff asserts three claims: breach of contract, breach of the implied warranty of merchantability, and breach of the implied warrant of fitness for a particular purpose. The parties agree the substantive law of Kansas governs the dispute.
Breach of Contract. The essential elements of a claim for breach of contract under Kansas law are: (1) The existence of a contract between the parties; (2) sufficient consideration to support the contract; (3) the plaintiff's performance or willingness to perform in compliance with the contract; (4) the defendant's breach of the contract; and (5) damages to plaintiff caused by the breach. Commercial Credit Corporation v. Harris, 212 Kan. 310, Syl. ¶ 2, 510 P.2d 1322 (1973); City of Andover v. Southwestern Bell Telephone, 37 Kan.App.2d 358, 362, 153 P.3d 561 (2007). Plaintiff's complaint alleges: defendant had a contractual obligation to provide valid and marketable RINs; plaintiff performed its part of the bargain by paying for the RINs; defendant breached its obligation by delivering non-conforming RINs; and plaintiff was damaged as a result. Under the standards governing a motion to dismiss, these allegations are sufficient to state a plausible claimfor breach of contract. Defendant argues it did not expressly warrant that the RINs were valid. But plaintiff's complaint alleges the goods specified in...
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