The Regents of the Univ. of Cal. v. Buttgenbach

• Docket Number: A164833
• Decision Date: 30 June 2023
• Parties: THE REGENTS OF THE UNIVER- SITY OF CALIFORNIA, Plaintiff and Respondent, v. THOMAS BUTTGENBACH et al., Defendants and Appellants.
• Court: California Court of Appeals Court of Appeals

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THE REGENTS OF THE UNIVER- SITY OF CALIFORNIA, Plaintiff and Respondent, v. THOMAS BUTTGENBACH et al., Defendants and Appellants.

A164833

California Court of Appeals, First District, First Division

June 30, 2023

NOT TO BE PUBLISHED

Order Filed Date 7/5/23

Alameda County Super. Ct. No. 21CV004034

ORDER MODIFYING OPINION

The court, on its own motion, modifies the opinion that was filed on June 30, 2023, to correct a clerical error as follows:

On page 44 of the unredacted version of the opinion, and on page 41 of the redacted version, the last sentence of the disposition is deleted and the following sentence is inserted in its place: "Appellants to recover costs on appeal.''

This modification does change the appellate judgment.

Banke J.

This appeal is the latest chapter in an acrimonious dispute arising out of a solar development investment deal that did not go as the parties planned. The whys and wherefores of the failure of this venture has already been litigated once in an arbitration between the investment firm that assisted The Regents in structuring the deal and managed the university's investment funds, and the parties that actually developed the solar projects. Both sides accused the other of bearing the responsibility for the implosion of the venture. Although the investment firm pursued the arbitration to recover The Regents' funds and The Regents assisted with the firm's case, The Regents was not a party to the arbitration. The arbitrator ultimately ruled against the investment firm and for the solar developers.

On the day the arbitration hearing commenced, The Regents, itself sought recompense on a parallel track and filed the instant lawsuit against the solar developers based on the same acts of alleged wrongdoing at issue in the arbitration. The defendants moved to compel arbitration. Recognizing The Regents was not a signatory to the joint venture agreement due to the way The Regents and the investment firm structured the deal defendants sought to compel arbitration on alternative theories, including agency and equitable estoppel. The trial court denied the motion without comment or reasons stated. We reverse.

BACKGROUND

Defendant Thomas Buttgenbach entered the arena of solar energy development nearly a decade prior to the events at issue in this case. By 2012, his development entity had gained approval for what was then the world's largest solar farm. Buttgenbach's company continued to develop solar projects over the ensuing years. His business model was to undertake the development of a project (for example obtaining the rights to land, preliminary approvals, and locating potential energy purchasers) and then selling the project at the construction-ready or operating-ready phase to others for completion and/or the production of power.

In 2018, Buttgenbach, who either had or was in the process of parting company with his then business partner, was seeking outside investors to support his solar development business. He entered into discussions with a new private equity firm, Upper Bay Infrastructure Partners (Upper Bay), about potential investors. [REDACTED.]

Later that year, the J.P. Morgan Private Equity Group ("JP Morgan entities") invested $135 million in what was effectively a newly created joint venture, 8minutenergy U.S. Solar, LLC.^[1] [REDACTED.] The joint venture agreement was between the two Buttgenbach entities (by Buttgenbach as president), the JP Morgan entities, and Upper Bay's own investment vehicle, MDS Capital, LCC (which Upper Bay calls its "affiliate").^[2] The JP Morgan entities and MDS Capital were "[c]lass B" members of the joint venture. Buttgenbach's entities were "[c]lass A" members, and one of the entities (8minutenergy U.S. Investor, LLC) was designated the "Managing Member."

The joint venture, in turn, entered into a management services contract with another Buttgenbach entity, 8minutenergy U.S. Manager, LLC. As do the parties, we refer to this entity as the "manager" of the joint venture.

Given the structure of the joint venture and the attendant management agreement, The Regents characterizes the joint venture as a "mere holding company." Although the joint venture "legally owned the projects, it had no real physical operations or real assets of its own. Instead, [the manager] provided all of the services in connection with the [joint venture] [p]rojects and billed [the joint venture] for the [manager's] time and expenses directly attributable to the [joint venture] [p]rojects."

In the spring of 2019, Upper Bay, through MDS Capital, invested $40 million in the joint venture.^[3]

[REDACTED] engaged in extensive discussions with the Upper Bay principals and with Buttgenbach directly about a potential investment in the joint venture and the structure any such investment would take. Upper Bay supplied a substantial amount of written material for The Regents' team to review, some of which was prepared by Buttgenbach and his own team and passed on to The Regents' team by Upper Bay.

In January 2020, The Regents authorized a $150 million investment in the joint venture, but not directly. The Regents' chief investment officer had considered, but refused to authorize, an investment whereby The Regents "would become [a] direct . . . co-owner of [the joint venture] or otherwise bound by the [joint venture agreement]." Instead, The Regents entered into two "Upper Bay-controlled and managed investment funds" that were in the form of limited partnerships (Upper Bay Infrastructure Partners, LP and Upper Bay Infrastructure Partners UC Renewables SMA, LP). Upper Bay was the general partner; The Regents, the only limited partner in one and among the limited partners in the other. These two limited partnerships, in turn, invested in MDS Capital.^[4] MDS Capital, in turn, funneled the investment funds into the joint venture.

At this time, the joint venture agreement was again revised and retitled "Third Amended and Restated Limited Liability Company Agreement."^[5] The agreement, which is the operative agreement for purposes of this appeal, states it is between 8minutenergy U.S. Solar, LLC and, among other entities, certain" 'JPM Investor[s],'" the "Private Equity Group of J.P. Morgan Investment Managements, Inc.," and "MDS Capital, LLC, a Delaware limited liability company ('Upper Bay')." (Underscoring omitted.) The agreement contains an arbitration provision. The management services agreement between the joint venture and the manager was also amended at about this same time. This agreement also contains an arbitration provision.

Apparently, the relationship of the class A and class B members was rocky from the start. Eventually, the four-member governing board of the joint venture (two members were class A members, and two, class B members) could not agree about a major business decision, and, in December 2020, the managing member served a formal deadlock notice on the class B members. The Regents was not a member of the governing board. But the class A and B members could invite up to three" '[o]bservers'" to meetings, and one of The Regents' key investment officers involved in the transaction was named as an observer and received materials concerning the joint venture.

In early February 2021, the class B members filed an arbitration demand, naming Buttgenbach, the managing member (8minutenergy U.S. Investor, LLC), and the manager (8minuteenergy U.S. Manager LLC) as the respondents. The introduction of the demand commences with the following statement: "This dispute arises from Respondent Thomas Buttgenbach's fraud and conduct taken in total disregard of the best interests of the [joint venture] he controls and its investors in favor of his own self-interest, all of which constitute contractual violations."

The introduction went on to state that "The [c]lass B Investors-which include (i) Upper Bay Infrastructure Partners, through its affiliate MDS Capital, LLC ('Upper Bay'), an independently-owned private investment firm focused primarily on diversified North American infrastructure, and (ii) entities related to J.P. Morgan ('JPM Investors')-have collectively invested $325 million in the [joint venture]. The University of California Board of Regents has invested in the [joint venture] through Upper Bay."

The introduction then summarized the class B members claims as follows: "Starting in the fall of 2019, Mr. Buttgenbach, individually and through the Managing Member [of the joint venture], engaged in a campaign of fraud directed at the [c]lass B Investors by providing false and inflated financial projections to induce the [c]lass B Investors to invest substantial amounts of capital in the [joint venture] and subsequently to support a significant financing arrangement. Further, Mr. Buttgenbach, individually and through the Managing Member and the Manager [of the joint venture], then used that money to develop Projects which Mr. Buttgenbach sought to sell to buyers that he controlled or would co-manage, instead of capitalizing on an attractive broader market for solar development projects to obtain the best possible terms for the [joint venture] on an arm's length basis. Mr. Buttgenbach, individually and through the Managing Member [of the joint venture], also delayed the [joint venture's] audit reporting and failed to provide meaningful responses to books and records requests, thus concealing the impact of his wrongful conduct from the [c]lass B Investors. As described further below, this improper conduct by Mr. Buttgenbach constitutes 'Management Breaches' under the [joint venture agreement].... The conduct alleged herein also constitutes breaches of the [management agreement]."

The 38-page demand goes on to detail the class B members'...