Leasing v. Midwest Propane & Refined Fuels, LLC

• Decision Date: 18 December 2013
• Docket Number: Civil Action No. 5:12–CV–00129–TBR.
• Citation: 988 F.Supp.2d 772
• Parties: PRO TANKS LEASING, et al., Plaintiffs v. MIDWEST PROPANE AND REFINED FUELS, LLC, et al., Defendants.
• Court: U.S. District Court — Western District of Kentucky

988 F.Supp.2d 772

PRO TANKS LEASING, et al., Plaintiffs

v.MIDWEST PROPANE AND REFINED FUELS, LLC, et al., Defendants.

Civil Action No. 5:12–CV–00129–TBR.

United States District Court, W.D. Kentucky.

Dec. 18, 2013.

Samuel J. Wright, Farmer and Wright PLLC, Paducah, KY, for Plaintiffs.

Amanda N. Klein, Terry M. Evans, Andereck Evans Widger Johnson & Lewis, LLC, Smithville, MO, Mark C. Whitlow, Whitlow, Roberts, Houston & Straub, PLLC, Paducah, KY, for Defendants.

MEMORANDUM OPINION AND ORDER

THOMAS B. RUSSELL, Senior District Judge.

This matter is before the Court upon Defendants Midwest Propane and Refined Fuels LLC (“Midwest”), Innovative Energy Solutions, LLC (“Innovative”), and Grundy Electric Cooperative, Inc.'s (“Grundy”) Motion to Dismiss Plaintiffs' Complaint for Lack of Personal Jurisdiction as to Grundy and Innovative. (Docket No. 33.) Plaintiffs have responded. (Docket No. 41.) Defendants have replied. (Docket No. 44.) This matter is now fully briefed and ripe for adjudication. For the following reasons, the Court will DENY Defendants' Motion to Dismiss Plaintiffs' Complaint for Lack of Personal Jurisdiction. The Court also DENIES Defendants' request for oral argument on their Motion to Dismiss Plaintiffs' Complaint for Lack of Personal Jurisdiction.

BACKGROUND

The Court notes the facts in this case are lengthy and there is a voluminous record including deposition testimony. The Court has highlighted most of the pertinent background facts.

Claims Asserted

This action arises from an Asset Purchase Agreement (“APA”) entered into by Defendant Midwest and Plaintiffs, under which the Plaintiffs essentially purchased Midwest's propane business—including assets, accounts receivables, and the Midwest name. (Docket No. 1, Page 4–5.) Plaintiffs allege that after the APA was executed they learned that a significant number of the propane tanks that were purchased “did not contain the requisite data plates and as a result contain no value,” which was concealed and/or misrepresented by Defendants. Id. at 5. Plaintiffs also allege that Defendant knowingly provided inaccurate information regarding the receivables purchased and/or failed to provide accurate information after learning the information provided was incorrect. Id.

Plaintiffs bring claims for breach of contract, fraud, and an equitable action to pierce the veils of Innovative and Grundy. (Docket No. 1, Page 3.) They assert that jurisdictional discovery has revealed that Midwest was the “alter ego” of Innovative and Grundy. (Docket No. 41, Page 3.) Accordingly, Plaintiffs seek to hold Grundy and Innovative liable for the breach of contract and fraud claims. On the other hand, Defendants assert that this Court lacks personal jurisdiction over Grundy and Innovative.

Asset Purchase Agreement

The proceeds paid by Plaintiffs pursuant to the APA were distributed in the followingmanner: ¹ (1) $35,000 to Grundy's construction account for two parcels which Grundy owned that Plaintiffs wanted to be part of the transaction for their office and plant; ² and (2) the remaining proceeds went to Grundy's accounts, which according to the manager of the three entities was because Midwest was going to be dissolved shortly after the purchase because it did not own any more assets.³ (Docket No. 33–6, Page 56–58.) The remaining proceeds were kept separate on Grundy's books and used to make loan payments on a note which Grundy had guaranteed for the benefit of Midwest. Id. at 58.

In the APA, Midwest, Grundy, and Innovative all agreed to a non-competition and non-solicitation clause for a period of ten years. (Docket No. 12–2, Page 26, Article 10.) The APA also contained a provision titled “Submission to Jurisdiction” in which “[t]he parties hereto irrevocably submit to the exclusive jurisdiction of the state courts of Kentucky ... or if jurisdiction exists to the United States District Court for the Western District of Kentucky over any dispute arising out of or relating to this Agreement.” (Docket No. 12–2, Page 28, Article 12.10.) The parties do not appear to dispute that the “Submission to Jurisdiction” provision only applied to Midwest.

Overview of Entities

Grundy is a Missouri corporation and electric cooperative with its main office in Trenton, Missouri. (Docket No. 41, Page 2.) Innovative and Midwest are both Missouri LLCs also located in Trenton, Missouri. Innovative appears to have been primarily a holding company with no assets or employees. Midwest primarily sold propane and refined fuel. Grundy Electric is the sole owner of Innovative and Innovative is the sole owner of Midwest Propane and Refined Fuels LLC (“Midwest”).⁴ (Docket No. 33, Page 15.)

These Defendants entered into a Management and Service Agreement among themselves, whereby Grundy would provide operations and management service to Innovative and Midwest. This Management Service Agreement provided for payments from Midwest to Grundy in exchange for Grundy providing management services for Midwest. Notably, Grundy would “at times” give these payments back to Midwest due to its poor financial condition. (Docket No. 33–6, Page 63.)

Grundy Electric, Innovative, and Midwest all resided at the same business address of 4100 Oklahoma Avenue, although it appears they had separate entrances. (Docket No. 33–6, Page 10–12, 37–38.) Grundy' and Innovative have a common board of directors/ownership group, but the employees of Grundy and Midwest are not identical. (Docket No. 33–3, Number 35.) Innovative's ownership group governsMidwest. Midwest dissolved as a LLC in March 2012. (Docket No. 41–9.)

I. Midwest Propane and Refined Fuels, LLC

Midwest Propane was organized as an LLC in July 1999. It was created for the purpose of retail sale and delivery of propane. (Docket No. 33–3, Page 1.) After acquiring two existing propane companies in August 1999, Midwest was in continuous operation until January 28, 2011, when substantially all of its assets were sold to Plaintiffs, including its name and any variations thereof.

All of the Midwest employees were paid by Midwest. Id. at 41. Midwest had an operating account that was separate from Grundy Electric and it had its own website separate from Grundy and Innovative. Midwest paid its own bills during its period of operation, including insurance coverage. All customer payments for the sale of propane were directly deposited into a Midwest bank account and records were kept as to these payments.⁵ Grundy employees handled Midwest billing, accounting services, customer service, consulting, and assisted in Midwest's collection efforts pursuant to the Management and Services Agreement. (Docket No. 33–6, Page 34, 40.)

Midwest typically operated at a loss—it did not regularly make money. Id. at 42–43. Those losses were covered through loans, which Grundy guaranteed, from the National Cooperative Service Corporation (“NCSC”), a subsidiary of Cooperative Finance Corporation (“CFC”). Grundy also donated capital to cover these losses.⁶ (Docket No. 33, Page 28.) Midwest did not transfer assets or revenue in return for the guarantees or the donated capital. Id. Grundy has also guaranteed Midwest's purchase of product/their trade debt. Id. at 50–52. However, it appears Grundy never directly wrote checks for Midwest's operating expenses.

NCSC also loaned Midwest money for its startup costs. (Docket No. 33–5, Page 31–32.) Grundy guaranteed that loan.⁷ Software that Midwest used to manage its propane business was located at 4100 Oklahoma Avenue and was on some of the same computers used by Grundy employees. In some instances, Midwest did not own the real estate where it operated—Grundy Electric did.

Since its formation, Midwest has either held regular monthly meetings or reported in regular monthly meetings of Innovative. These regular monthly meetings were held separate from Grundy's meetings. At no time did Grundy refer to Midwest as its department or division. (Docket No. 33–3, Page 11, ¶ 80.)

II. Innovative Energy Solutions, LLC

Innovative is a not for profit LLC organized in June 1999 as a subsidiary of GrundyElectric.⁸ “Its purpose is to further the economic, community and member services development efforts of rural electric cooperatives.” (Docket No. 33–3, Page 1.) Innovative owns no tangible assets. (Docket No. 33–6, Page 32.) At monthly meetings the ownership group of Innovative would discuss the Midwest operations report and financial report. These meetings were held separate from Grundy Electric's monthly meetings. Innovative covered the payroll taxes and salaries of employees for Midwest, but Midwest wrote them a check to perform this apparently administrative task.⁹ Innovative has never guaranteed any debts owed by Midwest. Innovative does not generate any income and does not own any assets. It does not have any employees, other than Scott Wilson who is the manager.

III. Grundy Electric Cooperative, Inc.

Grundy Electric is a Missouri rural electric distribution cooperative incorporated in 1938 and was created by reason of the Rural Electrification Act of 1936 in order to bring electricity to rural communities. As a cooperative, it is owned by and is responsible to its members. The members elect an eight member board of directors. Grundy's board meets once a month and holds an annual membership meeting. By law, Grundy Electric can only serve its members with electric power and is not allowed to make a profit. Any profit is returned to its members. Because Grundy Electric is not required to file an income tax return, it does not receive any tax benefit from the operation of Midwest Propane. (Docket No. 33–3, Page 1.)

Scott Wilson served as a Manager for Grundy Electric, Innovative, and Midwest.¹⁰ (Docket No. 41, Page 2; 33–6, Page 8–9, 20.) His managerial services as to Innovative and Midwest were provided under a formal Management and Services Agreement between Defendants. (Docket No. 33–6, Page 22.) However, he was only paid by Grundy. (Docket No. 33–6, Page 21–22.) He...