Ralls Corp. v. Huerfano River Wind, LLC

• Decision Date: 27 June 2014
• Docket Number: Civil Action No. 3:13–cv–213–TCB.
• Parties: RALLS CORPORATION, Plaintiff, v. HUERFANO RIVER WIND, LLC, et al., Defendants.
• Court: U.S. District Court — Northern District of Georgia

27 F.Supp.3d 1303

RALLS CORPORATION, Plaintiff
v.
HUERFANO RIVER WIND, LLC, et al., Defendants.

Civil Action No. 3:13–cv–213–TCB.

United States District Court, N.D. Georgia, Newnan Division.

Signed June 27, 2014.

27 F.Supp.3d 1309

Brian Joel Levy, John Phillip MacNaughton, Ross A. Albert, Morris Manning & Martin, LLP, Atlanta, GA, for Plaintiff.

Jeffrey A. Leon, Complex Litigation Group, LLC, Highland Park, IL, Andrew Joseph Coomes, McConnell & Sneed, LLC, Atlanta, GA, for Defendants.

ORDER

TIMOTHY C. BATTEN, SR., District Judge.

Before the Court are two motions to dismiss: a motion to dismiss for lack of personal jurisdiction brought by Defendants U.S. Innovative Renewable Energy, LLC (USIRE), Xiaolin “Jerry” Zhang and Lu “Lucy” Zhang [29]; and a motion to dismiss for failure to state a claim on each of the nine counts in Plaintiff Ralls Corporation's amended complaint brought by USIRE and the Zhang's [29] and Defendant Huerfano River Wind, LLC (HRW) [30].

I. Background¹

In October 2012, Ralls began negotiations with Jerry Zhang and USIRE, a Delaware limited liability company of which Zhang is the sole member, about constructing a wind farm in Huerfano County, Colorado. Ralls and its senior executives knew and had done business with Zhang in the past. Over the next five months, Zhang and his wife Lucy negotiated the terms of the deal. In doing so, they made several trips to Georgia. They also communicated with Ralls's representatives or attorneys in Georgia; specifically, Jerry Zhang placed or participated in at least eight telephone calls, and both Jerry and Lucy Zhang sent a number of emails. The deal closed on March 22, 2013.

As part of this deal, USIRE purchased HRW,² a Colorado limited liability company. Ralls and HRW then entered into a series of related transactions memorialized in integrated agreements. This action centers around the alleged breach of two of those agreements.

The first is a loan and security interest agreement in which Ralls loaned HRW just over $13.4 million. This loan was to cover the cost of (1) acquiring the wind farm (~$1.1 million), (2) purchasing four wind-turbine generators ($8.8 million), and (3) constructing the wind farm (~$3.5 million, with the possibility of upward adjustment). In return, HRW granted Ralls a security interest in the turbines to secure its obligations under the loan documents.

The second is a secured promissory note that HRW executed in favor of Ralls. HRW can derive revenue from two different sources: a power purchase agreement that it entered into with a local electric cooperative, San Isabel Electric Association, Inc., and investment and production tax credits. The repayment terms in the note vary by source.

According to the loan agreement, an event of default occurs if HRW fails to perform any of its obligations under any of the loan documents. If an event of default

27 F.Supp.3d 1310

remains uncured, Ralls has the right to accelerate the loan, rendering the entire debt immediately due and payable. And once accelerated, Ralls is entitled to exercise any right or remedy under the loan documents.

For present purposes, the following obligations under the loan documents are relevant.

First, paragraph 5 of the note provides that “the Acquisition Cost shall become immediately due and fully payable” to Ralls on “the date on which the actual amount of the Construction Cost has exceeded [$2,419,169]”—the trigger amount.

Second, section 1.7 of the loan agreement provides that “the date that the actual amount of the Construction Cost has exceeded [$2,419,169]”—the trigger amount—“such excess amount, as incurred, shall be immediately due and payable to [Ralls] by [HRW].”

Third, section 1.4 of the loan agreement provides for the opening of a “mutually designated” account into which any proceeds from the sale of electricity to San Isabel are to be deposited. The sole purpose of this account, according to that section, is to facilitate the calculation of the net cash flow (defined in paragraph 4 of the note) and the repayment of the loan under the terms of the note.

Section 1.4 also provides that

(x) any single payment in the amount in excess of $5,000 or (y) any payment that shall make the total payments in a calendar month to exceed $10,000, in either case to be made out of such mutually designated account to any third party, shall be made only upon the written approval of [Ralls].

Finally, paragraph 2 of the note provides that the loan is to be repaid quarterly from the revenue generated from the sale of electricity to San Isabel. Specifically, the quarterly payments must be ninety-five percent of the “Net Cash Flow,” which is defined in paragraph 4 of the note as

the payments received by [HRW] from any of its customers, including any utility company, in consideration for the electricity purchased from [HRW] minus (x) any amount paid by [HRW] for the maintenance services on the turbines and other equipment of [HRW] minus (y) any other statutory or mandatory payment made by [HRW], including tax payments....

Ralls alleges that HRW has breached several of its obligations under the loan documents and thus is in default and liable for the entire balance of the loan.

First, in a letter dated August 26, 2013, Ralls notified HRW that the actual construction costs had exceeded the trigger amount and demanded payment of the full amount of the acquisition cost under paragraph 5 of the note. HRW has not made this payment.

Second, in a letter dated February 14, 2014, Ralls notified HRW that the actual construction costs had exceeded the trigger amount—enclosing a letter from the wind farm's contractor confirming that Ralls had incurred and paid $2,875,833 in construction costs. Under section 1.7 of the loan agreement, Ralls demanded that HRW make an immediate payment of $456,664, the amount by which the actual construction costs exceed the trigger amount. HRW has yet to make this payment.

Third, Ralls alleges that “HRW has refused to open and administer an account mutually designated by Ralls and HRW.” Ralls notified HRW that this violated section 1.4 of the loan agreement in a letter dated November 26, 2013.

27 F.Supp.3d 1311

Last, Ralls avers that HRW has used the San Isabel revenue for purposes other than repaying the loan. To support this allegation, Ralls relies on HRW's 2013 profit-and-loss statement (received in late January 2014). In Ralls's view, the profit-and-loss statement “reflects several hundred thousands of dollars of purported expenses that were neither permissible under the definition of ‘Net Cash Flow’ set forth in the Note, nor were they incurred and paid in compliance with Section 1.4 of the Loan Agreement.”

Ralls alleges that the following expenses listed in the profit-and-loss statement, among others, cannot be deducted when determining the net cash flow:

(1) $125,000 for payroll. HRW entered into an undated executive employment agreement with Lucy Zhang under which she receives a monthly base salary of $12,500 effective March 2013;

(2) $155,000 for professional fees (other). Based on an invoice from USIRE seeking an asset management fee equal to three percent of the appraised value of HRW ($15.5 million) prorated for the September to December 2013 period; and

(3) $139,430 for legal fees.

Ralls also alleges that the profit-and-loss statement shows that HRW has entered into agreements that impair its ability to meet its obligations as they come due and thus has failed to keep its representation to avoid incurring such obligations and to possess sufficient capital to operate. Finally, Ralls alleges that the profit-and-loss statement demonstrates Jerry Zhang's self-dealing and shows that he has not respected the corporate form of HRW and USIRE.

Accordingly, Ralls brings the following causes of action against Defendants:

Count one: breach of contract against HRW;

Count two: breach of the implied duty of good faith and fair dealing against HRW;

Count three: conversion against all Defendants;

Count four: alter-ego liability against USIRE and Jerry Zhang;

Count five: unjust enrichment against Lucy Zhang;

Count six: request for prejudgment attachment against all Defendants;

Count seven: equitable accounting against all Defendants;

Count eight: fraudulent transfers against USIRE and Lucy Zhang; and

Count nine: civil conspiracy against Jerry and Lucy Zhang.

In addition to these causes of action, Ralls seeks attorney's fees in connection with its breach-of-contract claim and punitive damages in connection with its claims for conversion and civil conspiracy.

Defendants have moved to...