Neil Wallace v. Mt. Poso Cogeneration Company, LLC

• Court: Court of Chancery of Delaware
• Decided: December 30, 2019
• Docket: C.A. No. 2018-0900-KSJM
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

NEIL WALLACE, ) ) Plaintiff, ) ) v. ) C.A. No. 2018-0900-KSJM ) MT. POSO COGENERATION ) COMPANY, LLC, ) ) Defendant. )

ORDER DENYING MOTION TO DISMISS 1. Defendant Mt. Poso Cogeneration Company, LLC (“Defendant”)

operates a biofuel power plant in California that produces substantial amounts of

ash. Due to storage constraints, the ash must be removed at least once every 72

hours. Defendant and non-party Calash, LLC (“Calash”) executed the Ash

Management Agreement (the “Agreement”) in October 2011, under which Calash

would remove ash from Defendant’s power plant and invoice Defendant using a

contractually determined formula. Defendant terminated the Agreement in

September 2016. Calash was suspended by the Secretary of State of California in

May 2017.

2. Plaintiff Neil Wallace alleges that Calash assigned him certain rights

under the Agreement. On October 29, 2018, Wallace sent a demand letter to

Defendant claiming that a recent audit revealed that Defendant underpaid Calash for

1 services. Wallace demanded arbitration of that claim under Section 11 of the

Agreement. After Defendant refused to arbitrate, on December 12, 2018, Wallace

filed his Verified Complaint (the “Complaint”) in this Court seeking to compel

arbitration.1

3. Defendant moved to dismiss the Complaint under Court of Chancery

Rule 12(b)(6) on February 6, 2019. 2 The parties completed briefing on August 16,

2019, 3 and the Court heard oral arguments on October 18, 2019.

4. Defendant made the following four arguments in support of dismissal.

First, Wallace could not assert rights under the Agreement because the assignment

was from Calash, Inc., not Calash, LLC. Second, Wallace lacked the authority to

assert rights under the Agreement because Calash, LLC was suspended by the

California authorities and thus could not maintain a suit, a disability that travels with

any assignment. Third, the Agreement prohibited assignments absent Mt. Poso’s

consent, which Mt. Poso did not provide. Fourth, the arbitration provision

terminated when the Agreement terminated.

1 C.A. No. 2018-0900-KSJM Docket (“Dkt.”) 1, Verified Compl. (“Compl.”). 2 Dkt. 10, Def.’s Mot. to Dismiss. 3 Dkt. 19, Mt. Poso Cogeneration Company, LLC’s Br. in Supp. of Mot. to Dismiss (“Def.’s Opening Br.”); Dkt. 26, Pro Se Pl.’s Answering Br. to Mot. to Dismiss; Dkt. 27, Mt. Poso Cogeneration Company, LLC’s Reply Br. in Supp. of Mot. to Dismiss (“Def.’s Reply Br.”).

2 5. Between the close of briefing and oral arguments on the motion to

dismiss, Wallace sought leave to amend the Complaint to demonstrate that the

assignment was in fact from Calash, LLC and that Calash, LLC was not suspended

by the California authorities. At oral argument, the Court granted Wallace’s request

to amend the Complaint, thereby mooting the first two of Defendant’s dismissal

arguments. This Order resolves Defendant’s two remaining arguments.

6. Under Rule 12(b)(6), the Court may grant a motion to dismiss for

failure to state a claim if a complaint does not allege facts that, if proven, would

entitle the plaintiff to relief.4 “[T]he governing pleading standard in Delaware to

survive a motion to dismiss is reasonable ‘conceivability.’” 5 When considering such

a motion, the Court must “accept all well-pleaded factual allegations in the

[c]omplaint as true . . . , draw all reasonable inferences in favor of the plaintiff, and

deny the motion unless the plaintiff could not recover under any reasonably

conceivable set of circumstances susceptible of proof.”6 The reasonable

conceivability standard asks whether there is a possibility of recovery. 7 The Court,

however, need not “accept conclusory allegations unsupported by specific facts

4 Ct. Ch. R. 12(b)(6). 5 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 537 (Del. 2011). 6 Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002)). 7 Id. at 537 n.13.

3 or . . . draw unreasonable inferences in favor of the non-moving party.” 8 “A copy of

any written instrument which is an exhibit to a pleading is a part thereof for all

purposes.”9 The Agreement is attached to the Complaint and thus properly before

the Court at this stage. 10

7. The Agreement contains a choice-of-law provision dictating that it

should be construed in accordance with California law. 11 Delaware honors these

types of provisions “so long as the jurisdiction selected bears some material

relationship to the transaction.”12 Under California law, contracts are interpreted to

effect the mutual intent of the parties as judged at the time the contract was formed.13

“When a contract is reduced to writing, the intention of the parties is to be

ascertained from the writing alone, if possible.”14 The “whole of the contract is to

be taken together, so as to give effect to every part, if reasonably practicable, each

clause helping to interpret the other.” 15

8 Price v. E.I. du Pont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011) (citing Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)). 9 Ct. Ch. R. 10(c). 10 Compl. Ex. B. 11 Agreement § 11.5. 12 J.S. Alberici Const. Co. v. Mid-West Conveyor, Co., 750 A.2d 518, 520 (Del. 2000) (citing Annan v. Wilm. Tr. Co., 559 A.2d 1289, 1293 (Del. 1991)). 13 Cal. Civ. Code § 1636. 14 Id. § 1639. 15 Id. § 1641.

4 A. The Anti-Assignment Provision Does Not Unambiguously Prohibit the Assignment. 8. Defendant argues that Section 11.6 of the Agreement prohibited Calash

from assigning rights under the Agreement to Wallace without the prior consent of

Mt. Poso, which Wallace failed to obtain. Section 11.6 provides:

Calash shall not assign or otherwise convey any of its rights, title, and interest under this Agreement without the prior written consent of [Mt. Poso], which Mt. Poso may not arbitrarily withhold; provided, however, that without any such consent, Calash or its successor or permitted assigns may assign any or all rights, titles, and interest hereunder:

a) As security to any person, corporation, bank, trust company, association, or other business or governmental entity as security in connection with obtaining or arranging financing for Calash or any affiliate of Calash, or b) To any person, corporation, bank, trust company, association or other business or governmental entity in order to enforce any security assignment described in Section 11.6(a); and provided that with [Mt. Poso’s] prior consent, which shall not be unreasonably withheld, Calash may assign any or all of its rights, titles and interests hereunder to: c) Any entity controlled by, controlling or under common control with Calash, or

d) Any successor, entity by merger, consolidation, or by sale of substantially all assets. 16

16 Agreement § 11.6.

5 9. The parties’ dispute centers on subsection (d) of the above language.

Defendant argues that the plain language of the exception allowed Calash to assign

rights only to a “successor entity,” by the three enumerated mechanisms that

followed that phrase, that is, “[i] by merger, [ii] consolidation, or [iii] by sale of

substantially all of its assets.”17 Wallace is not an entity, and thus the three

enumerated mechanisms do not apply to him, according to Defendant. Wallace

responds that “by sale of substantially all assets” presents an independent basis for

satisfying subsection (d) unconnected to the language preceding it in that subsection.

Wallace further contends that his assignment qualifies under that clause because the

assignment constituted a “sale of substantially all assets” of Calash.18

10. Defendant’s interpretation is problematic because it ignores the comma

preceding “entity,” which suggests that “successor” is a noun on a list and not an

adjective. Perhaps more problematic, Defendant’s interpretation ignores the word

“by” preceding “sale of substantially all assets.” Typically, repeating a determiner,

such as “by,” signals no carryover effect in a postpositive modifier. Both of these

factors suggest that the clause “by sale of substantially all assets” is, as Wallace

suggests, the last co-equal clause in a series of three, as in: “[i] [a]ny successor, [ii]

entity by merger, consolidation, [iii] or by sale of substantially all assets.”

17 Id. § 11.6(d) (emphasis added). 18 Id.

6 11. Wallace’s interpretation is also problematic. For starters, one could

argue that it renders the exception found in subsection (d) broad enough to swallow

the general prohibition against assignments. Moreover, Wallace’s interpretation

renders other aspects of Section 11.6 nonsensical. Despite the (a) through (d)

lettering scheme, subsection (d) appears to follow as a subpart of the proviso in

subsection (b) rather than the proviso in the general prefatory language of

Section 11.6. This conclusion flows from basic grammatical construction—

subsection (d) is a prepositional phrase in need of a preposition, and the preposition

“to” appears at the end of subsection (b), but not in the general prefatory language

of Section 11.6. This conclusion also flows from the punctuation—the colon at the

end of subsection (b) signals an intent to introduce a list of items. Thus, in effect,

subsection (d) is part of a proviso within a proviso. Read as part of subsection (b),

an assignment “by sale of substantially all assets” requires Mt. Poso’s consent.

12. This interpretative exercise reveals that Section 11.6 is far from clear.

As the movant, Defendant bears the burden. To prevail at this stage, Defendant’s

reading must be the only reasonable construction.19 Because it is not, this Court

rejects it.

19 VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 615 (Del. 2003) (citing Vanderbilt Income & Growth Assocs. v. Arvida/JMB Managers, Inc., 691 A.2d 609, 613 (Del. 1996)); Monaco v. Bear Stearns Residential Mortg. Corp., 554 F. Supp. 2d 1034, 1040 (C.D. Cal. 2008) (quoting Bedrosian v. Tenet Healthcare Corp., 208 F.3d 220 (9th Cir. 2000)).

7 13. Defendant argues in the alternative that even if Wallace is deemed a

successor to Calash under subsection (d), Wallace did not acquire substantially all of

Calash’s assets.20 At this stage, the Court finds that since Calash is now defunct, it

is reasonably conceivable that the claim at issue constitutes substantially all of

Calash’s assets. 21

B. The Arbitration Clause Is Not Terminated Upon Termination of the Agreement. 14. The arbitration clause of the Agreement provides that “[a]ny disputes

between the Parties as to the interpretation or enforcement of this Agreement shall

be resolved by negotiated agreement; or, failing that, by arbitration.” 22 Defendant

does not dispute that the plain language of this provision covers Wallace’s claims.

Instead, Defendant argues that by terminating the Agreement, Defendant terminated

the arbitration provision.

15. For this argument, Defendant points to the termination provision of the

agreement, which provides that “[u]pon termination, the Parties shall have no further

20 See Def.’s Opening Br. at 14 (“Thus, if the assignment actually does give Plaintiff Calash, LLC’s rights under the AMA . . . , then it also conclusively demonstrates that Plaintiff does not qualify for the Section 11.6(d) exception because Plaintiff only acquired Calash, LLC’s claims against Mt. Poso, not substantially all of its assets.”). 21 Defendant does not dispute this notion. Oral Arg. Tr. at 12:11–13:14 (counsel conceding “I certainly can’t dispute that” when asked if “it’s reasonable to infer . . . that [Calash is] nonoperational”). 22 Agreement § 11.2.

8 obligations to perform under this Agreement” except as specified. 23 The termination

provision then goes on to specify three continued obligations, none of which

expressly reference the obligation to arbitrate. Relying on the expressio unius

doctrine, Defendant argues that because the termination provision failed to expressly

specify that the arbitration provision survives termination, the parties have “no

further obligations” to perform under the arbitration provision. 24

16. Defendant’s interpretation of the termination provision is inconsistent

with California law, which governs this dispute. 25 California statutory law compels

arbitration if there is a valid agreement to arbitrate and no grounds exist to void the

agreement.26 In addition, “California has a strong public policy in favor of

arbitration and any doubts regarding the arbitrability of a dispute are resolved in

favor of arbitration.”27 In view of this policy, California courts have adopted the

23 Id. § 10.1. 24 Def.’s Opening Br. at 10–12; Def.’s Reply Br. at 7–9. 25 See supra ¶ 7. 26 Cal. Civ. Proc. Code § 1281.2. Section 1281.2 lists a number of grounds a party can assert to invalidate an arbitration clause. Arbitration will be compelled unless (a) the party seeking arbitration has waived its right to arbitration; (b) grounds exist that would allow a party to rescind the agreement; (c) a party to the agreement is also party to a pending court action with a third party that might lead to inconsistent outcomes with any arbitration; or (d) the petitioner is a state or federally chartered depository institution seeking to apply an arbitration agreement created fraudulently without the consumer’s consent. Defendant does not argue that any of these apply to this case. 27 Coast Plaza Doctors Hosp. v. Blue Cross of Cal., 83 Cal. App. 4th 677, 685 (Cal. Ct. App. 2000) (collecting cases).

9 United States Supreme Court’s reasoning that “where the dispute is over a provision

of the expired agreement, the presumptions favoring arbitrability must be negated

expressly or by clear implication.” 28

17. Consistent with these precepts, courts have enforced arbitration

provisions of terminated agreements even though the terminated agreement’s

survival clause omits reference to the arbitration provision. 29

18. In Brachfeld, the United States District Court for the Central District of

California compelled arbitration under a terminated agreement even though the

arbitration clause was omitted from the survival clause that included other

provisions. 30 In reaching this conclusion, Brachfeld favorably cited the Sixth

Circuit’s decision in Huffman, which is particularly instructive here.

19. In Huffman, the party seeking to avoid arbitration argued that omitting

reference to an arbitration provision in the survival clause “is tantamount to a clear

implication that the parties did not intend the arbitration clause to have post-

28 Nolde Bros., Inc. v. Local No. 358, Bakery & Confectionery Workers Union, 430 U.S. 243, 253 (1977); see also Ajida Techs., Inc. v. Roos Instruments, Inc., 104 Cal. Rptr. 2d 686, 695 (Cal. Ct. App. 2001) (“As the high court said, ‘in the absence of some contrary indication, there are strong reasons to conclude that the parties did not intend their arbitration duties to terminate automatically with the contract.’” (quoting Nolde Bros., 430 U.S. at 253; Litton Fin. Printing Div., Litton Bus. Sys., Inc. v. NLRB, 501 U.S. 190, 204 (1991))). 29 Brachfeld v. Hopkins, 2017 WL 10436075, at *4 (C.D. Cal. Dec. 11, 2017); Huffman v. Hilltop Cos., LLC, 747 F.3d 391, 396 (6th Cir. 2014)). 30 Brachfeld, 2017 WL 10436075, at *4.

10 expiration effect in light of the doctrine of expressio unius.”31 In response, the

proponent of arbitration pointed to other provisions in the agreement, which on their

face survived any termination of the agreement, as evidence that the survival clause

was not intended to be exhaustive. Based on this reasoning, the court found that it

was at least ambiguous whether the survival clause was intended to be exhaustive.32

The court further held that the “[t]he strong presumption in favor of arbitration”

compelled resolving any ambiguity in favor of arbitration.33

20. In reaching this conclusion, the Huffman court reasoned:

[T]he need for an arbitration provision to have post- expiration effect is intuitive, because if “the duty to arbitrate automatically terminated upon expiration of the contract, a party could avoid his contractual duty to arbitrate by simply waiting until the day after the contract expired to bring an action regarding a dispute that arose while the contract was in effect.”34

21. The Agreement in this case suffers from the same ambiguities as the

agreement in Huffman. In this case, the survival clause in the termination provision

is not the only clause that provides for the survival of terms of the Agreement.

Section 11.1, for example, separately requires that the confidentiality provisions

31 Huffman, 747 F.3d at 396. 32 Id. at 397–98 (noting that a “clear implication” of the parties’ intent to omit the arbitration clause from survival would be “if the survival clause listed twenty-three of the agreement’s twenty-four clauses—all but the arbitration clause”). 33 Id. at 396. 34 Id. at 395 (quoting Zucker v. After Six, Inc., 174 F. App’x 944, 947–48 (6th Cir. 2006)).

11 survive termination for two years. Accordingly, it is at least ambiguous whether the

survival clause was intended to be exhaustive. As in Huffman, therefore,

Defendant’s expressio unius argument falters to the strong presumption in favor of

arbitration. Defendant’s argument does not support dismissal of the Complaint.

22. For the foregoing reasons, Defendant’s motion to dismiss is DENIED.

IT IS SO ORDERED.

/s/ Kathaleen St. Jude McCormick Vice Chancellor Kathaleen St. Jude McCormick Dated: December 30, 2019