Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC

• Court: Court of Chancery of Delaware
• Decided: June 30, 2014
• Docket: CA 8652-VCN
• Status: Published

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE

417 SOUTH STATE STREET JOHN W. NOBLE DOVER, DELAWARE 19901 VICE CHANCELLOR TELEPHONE: (302) 739-4397 FACSIMILE: (302) 739-6179

June 30, 2014

Sean J. Bellew, Esquire Henry E. Gallagher, Jr., Esquire Ballard Spahr LLP Connolly Gallagher LLP 919 North Market Street, 11th Floor 1000 West Street, Suite 1400 Wilmington, DE 19801 Wilmington, DE 19801

Re: Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN Date Submitted: February 18, 2014

Dear Counsel:

Plaintiff Xcell Energy and Coal Company, LLC (“Xcell”), which owns a

permit for a coal mine in eastern Kentucky, defaulted on its loan obligations to a

creditor, non-party Alpha Credit Resources, LLC (“Alpha”). After Alpha obtained

a court-appointed receiver for the company, Xcell, by and through its receiver, now

alleges that its past manager and member are liable for their mismanagement and

misconduct that supposedly caused those defaults. Specifically, Xcell asserts

claims for breach of fiduciary duty and waste against Defendants Energy Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 2

Investment Group, LLC (“EIG”) and Polo Investments, LLC (“Polo”) and for

aiding and abetting, tortious interference with a contract, and waste against

Defendant Edmond L. DiClemente (“DiClemente,” and together with EIG and

Polo, the “Moving Defendants”).1 The Moving Defendants moved to dismiss the

Complaint under Court of Chancery Rule 12(b)(6). They contend that Xcell failed

to allege the requisite elements—such as a fiduciary relationship or an intent to

cause a contract breach—to state a claim.2

The Court grants the Moving Defendants’ motion to dismiss for the reasons

set forth below.

I. BACKGROUND

A. The Parties

Xcell, a Kentucky limited liability company (“LLC”),3 is in the coal mining

business. It owns one permit for one coal mine: Permit No. 877-0175 (the

“Permit”) for the Grape Creek No. 1 mine (the “Grape Creek Mine”), located in

1 Xcell also asserts claims for breach of fiduciary duty, waste, and conversion against Defendants Gregg Steinhauser Family, LLC (“GSF”) and claims for aiding and abetting, tortious interference with a contract, waste, and conversion against Defendant Gregg Steinhauser (“Steinhauser”). 2 The Moving Defendants withdrew their arguments for dismissal under Rules 12(b)(2), 12(b)(3), and 12(b)(5). Stipulation and Order Amending Briefing Schedule (Dec. 2, 2013). 3 Verified Compl. (the “Complaint” or “Compl.”) ¶ 1. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 3

Magoffin and Johnson Counties, Kentucky.4 The Kentucky Department of Natural

Resources (the “Department”), the state agency charged with regulating surface

mining, granted the Permit to Xcell in April 2008.5

Prior to the appointment of a receiver in June 2013, Xcell was managed by a

manager appointed by its member.6 From 2009 until December 2012, Steinhauser

managed Xcell.7 The Complaint implies, and the Moving Defendants do not

dispute, that Polo was Xcell’s manager from December 2012 until June 2013.8

Before January 2013, Xcell’s principal place of business was Paintsville,

Kentucky; since then, its principal place of business is allegedly Burlington,

Connecticut.9

4 Id. ¶ 7. 5 Id. ¶¶ 35-36. 6 Id. ¶ 1. 7 Id. ¶¶ 5, 7. 8 Compare id. ¶¶ 6, 45, 63, 70, with Opening Br. of Defs. Energy Investment Group, LLC, Polo Investments, LLC, and Edmond L. DiClemente in Support of their Mot. to Dismiss (“Defs.’ Opening Br.”) 22 n.2 (“On or about December 28, 2012, Polo became Xcell’s manager.”). 9 Compl. ¶ 1. This newer address is allegedly the same as that of DiClemente’s accounting firm. Id. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 4

When the Complaint was filed, Xcell had one member: EIG, a Delaware

LLC.10 EIG, likewise, had only one member: Polo, a Connecticut LLC.11 Polo, in

turn, had two members: DiClemente and non-party Nathan Capital Holdings, LP.12

DiClemente has allegedly represented that he is a manager of Polo.13

B. Xcell Borrows Money from Alpha

In October 2009, Xcell borrowed $4 million (the “Loan”) from Alpha

pursuant to the Loan and Security Agreement and a corresponding Promissory

Note.14 The Loan was set to mature on February 21, 2010.15 In the Loan and

Security Agreement, Xcell agreed to maintain material compliance with the

Kentucky laws and regulations applicable to its business—namely, the Grape

Creek Mine.16

10 Id. ¶ 2. 11 Id. ¶ 3. Until December 2012, GSF owned approximately 30% of EIG. Id. ¶ 4. 12 Id. ¶ 3. The Moving Defendants contest that DiClemente is a member of Polo. See Defs.’ Opening Br. 5 n.1 (“DiClemente is not a member of Polo.”); see also DiClemente Aff. ¶ 4 (“I am not now, and never have been, the manager of Polo in my individual capacity.”). DiClemente’s relationship with Polo is immaterial to the Court’s analysis. 13 Compl. ¶ 6. (“DiClemente has represented that he is a manager of Polo and, as a result, purportedly authorized to manage both EIG and Xcell since at least December 2012.”). 14 Id. ¶ 8. 15 Id. ¶ 17. 16 Id. ¶ 16. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 5

Pursuant to the contemporaneous Pledge Agreement, EIG pledged its

membership interest in Xcell to Alpha as collateral to secure Xcell’s obligations

for the Loan.17 Xcell and EIG also provided confessions of judgment, and EIG

further provided its written consent for the Loan.18

During its due diligence on Xcell, Alpha commissioned an expert opinion on

the value of the Grape Creek Mine’s coal reserves. Alpha’s expert noted that the

Grape Creek Mine “had between 4.295 million tons and 66.1 million tons of

permitted and non-permitted coal reserves (respectively) with an estimated value

between $12.9 million and $33.1 million (respectively).” 19

Xcell was to use the proceeds of the Loan for specified business purposes,

including purchasing an excavator and preparing the Grape Creek Mine for mining

operations.20 At a deposition in another proceeding, DiClemente allegedly testified

that he was unable to identify how Xcell used the Loan proceeds.21

17 Id. ¶¶ 9-10. 18 Id. ¶¶ 11-12. 19 Id. ¶ 13. 20 Id. ¶ 14. 21 Id. ¶ 15. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 6

C. Xcell Defaults on the Loan

Xcell failed to repay the Loan when it matured in February 2010.22 The

parties to the Loan and Security Agreement then agreed to modify Xcell’s

obligations through the Omnibus Loan Document Modification and Reaffirmation

Agreement (the “Modification Agreement”) in April 2010.23

Under the Modification Agreement, the new Loan balance was

approximately $4,743,000, with a maturity date of May 27, 2010.24 Xcell also

agreed to pay a modification fee of $225,000 by May 3, 2010.25 As part of the

Modification Agreement, EIG reaffirmed its obligations under the Pledge

Agreement.26

D. Xcell Defaults on the Modification Agreement

Xcell failed to pay the $225,000 due under the Modification Agreement on

May 3. Instead, it made a $100,000 payment on May 6. Consequently, Alpha

declared an event of default.27

22 Id. ¶ 17. 23 Id. ¶ 18. 24 Id. ¶ 20. 25 Id. ¶ 21. 26 Id. ¶ 22. 27 Id. ¶ 23. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 7

The parties to the Modification Agreement next agreed to the First

Amendment to Omnibus Loan Modification and Reaffirmation Agreement (the

“First Amendment”) in early May. Xcell was now required to make a $125,000

payment to Alpha by May 13.28 As part of the First Amendment, EIG again

reaffirmed its obligations under the Pledge Agreement.29

E. Xcell Defaults on the First Amendment

Once again, Xcell defaulted on its obligations to Alpha, this time under the

First Amendment. At the time, the outstanding Loan principal was $4,743,900.30

After this default, the parties agreed to the Forbearance Agreement in late

May 2010.31 In the Forbearance Agreement, Alpha agreed not to exercise its

default rights and remedies until June 15, 2010, in exchange for an agreement by

Xcell, EIG, GSF, and Steinhauser to make two additional payments to Alpha:

(i) 730,000 shares of Clean Coal Technologies, Inc. common stock and $10,000 by

May 26; and (ii) $59,300 in cash or securities by June 4. After these two

28 Id. ¶ 25. 29 Id. ¶ 26. 30 Id. ¶¶ 27-28. 31 Id. ¶ 28. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 8

payments, the outstanding Loan principal (after accrued interest) would be

modified to $4,943,900.32

As part of the Forbearance Agreement, EIG once again reaffirmed its

obligations under the Pledge Agreement. Along with GSF and Steinhauser, EIG

also agreed to use its best efforts to liquidate Xcell’s assets to repay Alpha.33

As of the filing of the Complaint, Xcell’s assets had not been sold, and the

Loan had not been repaid.34

F. Xcell Receives Notices of Noncompliance Regarding the Grape Creek Mine

Since Xcell received the Loan proceeds in October 2009, the Department

has issued to Xcell nine notices of noncompliance regarding the Permit.35 Because

of continued noncompliance, the Department subsequently issued a failure to abate

cessation order and a failure to abate compliance order.36 In one case, the

Department also assessed a $112,500 penalty against Xcell.37

32 Id. ¶ 30. 33 Id. ¶¶ 31-32. 34 Id. ¶ 33. 35 Id. ¶ 37. 36 Id. ¶¶ 40-41. 37 Id. ¶ 42. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 9

Xcell alleges that the failure of its managers and member to operate the

Grape Creek Mine properly has put the Permit at risk of being forfeited or not

renewed.38 Specifically, Xcell claims that, under Kentucky law, the Department

may deny permit renewals, revoke a permit, or terminate a mining operation for

failure to comply with a notice of noncompliance. Moreover, the Department’s

determination purportedly may affect anyone who owns or controls the entity that

received the permit.39

G. Alpha Seeks Relief against Xcell

Alpha has attempted to work with Xcell to address the issues identified by

the Department, but, allegedly, “Xcell stonewalled all such efforts and refused to

work cooperatively with Alpha to rectify the issues.”40 DiClemente also made

less-than-pleasant comments to Alpha’s representatives and allegedly threatened

legal action.41 In January 2013, Alpha sought the appointment of a receiver for

38 Id. ¶ 47. 39 Id. ¶¶ 43-44. 40 Id. ¶ 39. This allegation, among several others, strongly suggests that the entity directing this litigation is not Xcell but rather Alpha. 41 Id. ¶¶ 45-46. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 10

Xcell in Kentucky state court.42 At the same time, Alpha exercised its foreclosure

rights on EIG’s membership interest in Xcell.43

H. Xcell and EIG File for, and then Withdraw from, Chapter 11 Bankruptcy

Soon after receiving notice of the foreclosure proceedings, DiClemente

allegedly caused Xcell and EIG to file for Chapter 11 bankruptcy protection on

February 14, 2013. The petitions were jointly administered by the United States

Bankruptcy Court for the Eastern District of Kentucky (the “Bankruptcy Court”).44

In the bankruptcy filings, DiClemente certified that Xcell had unliquidated claims

against GSF, Steinhauser, and a non-party bank “regarding potential fraudulent

transfer and related claims” in an amount exceeding $3 million.45

Alpha filed a motion in the Bankruptcy Court seeking relief from the

automatic stay to continue the foreclosure proceeding for EIG’s membership

interest in Xcell. Alpha alternatively sought dismissal of the bankruptcy petitions

or conversion to a Chapter 7 proceeding.46

42 Id. ¶¶ 51-52. 43 Id. ¶ 53. 44 Id. ¶ 54. As of January 2013, Xcell was allegedly insolvent because it did not own sufficient assets to cover its debts, including the Loan. Id. ¶¶ 49-50. 45 Id. ¶ 56. 46 Id. ¶ 57. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 11

Xcell and EIG consented to dismiss their bankruptcy petitions voluntarily on

May 30, 2013. After finding that “[g]ood cause exists,” the Bankruptcy Court

dismissed the petitions and enjoined Xcell and EIG, “[u]nder the current ownership

and/or management, . . . from filing for bankruptcy relief for a period of 180

days.”47

I. The Kentucky State Court Appoints a Receiver for Xcell

After certain developments not alleged in the Complaint,48 the Kentucky

state court appointed Jonathan Lasko (“Lasko”) as Xcell’s statutory receiver on

June 7, 2013.49 Ten days later, Xcell, by and through Lasko, filed the Complaint.

Since the filing of the Complaint, Alpha apparently completed the

foreclosure proceeding and owns 100% of the membership interests in Xcell.50

II. CONTENTIONS

Xcell asserts four causes of action against the Moving Defendants. First,

Xcell claims that Polo, as its manager, breached its fiduciary duties through

47 Id. ¶ 58. 48 Tr. of Oral Arg. Defs.’ Mot. to Dismiss (“Tr. of Oral Arg.”) 45-46, 48. 49 Compl. ¶¶ 59-60. 50 Pl.’s Answering Br. in Opp’n to Defs. Energy Investment Group, LLC, Polo Investments, LLC and Edmond L. DiClemente’s Amended Motion to Dismiss (“Pl.’s Answering Br.”) 3. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 12

improper conduct, including grossly mismanaging Xcell’s business and causing

Xcell to file an improper bankruptcy petition. It also claims that EIG, as its

member, breached its fiduciary duties by failing to run Xcell for the benefit of its

creditors when the company was insolvent.51

Second, Xcell asserts that DiClemente, who “represented that he was Polo’s

manager,” is liable for aiding and abetting Polo’s breaches of fiduciary duty. 52

Third, Xcell alleges that DiClemente tortiously inferred with various agreements

between Xcell and Alpha, including the Loan and Security Agreement, the

Promissory Note, the Pledge Agreement, the Modification Agreement, the First

Amendment, and the Forbearance Agreement.53 Fourth, Xcell asserts that the

Moving Defendants “caused or contributed to a waste of Xcell’s assets and

revenue streams.”54

The primary relief that Xcell seeks is damages.

51 Compl. ¶¶ 62-68. 52 Id. ¶¶ 70-72. 53 Id. ¶¶ 73-75. 54 Id. ¶¶ 76-77. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 13

III. ANALYSIS

A. The Procedural Standard of Review

When considering the Moving Defendants’ Rule 12(b)(6) motion, the Court

is tasked with determining whether the well-pled allegations of the Complaint meet

a minimal pleading threshold—conventionally, whether they state a claim—to

justify Xcell’s continued pursuit of this action against the Moving Defendants.

The procedural standard of review for a Rule 12(b)(6) motion is familiar:

[The Court] should accept all well-pleaded factual allegations in the Complaint as true, accept even vague allegations in the Complaint as “well-pleaded” if they provide the defendant notice of the claim, 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.55

The Court’s analysis is typically limited to the “universe of facts” alleged in the

Complaint56 and any documents attached to it.57 For limited purposes, however,

the Court may consider a document extrinsic to the Complaint if it is (i) integral to

Xcell’s claims and thereby incorporated into the Complaint, (ii) not being relied

55 Central Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536 (Del. 2011). 56 See Malpiede v. Townson, 780 A.2d 1075, 1082 (Del. 2001). 57 See Alliance Data Sys. Corp. v. Blackstone Capital P’rs V L.P., 963 A.2d 746, 752 (Del. Ch. 2009), aff’d, 976 A.2d 170 (Del. 2009) (TABLE); see also Ct. Ch. R. 10(c). Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 14

upon for the truth of its contents, or (iii) subject to judicial notice.58 That said, that

the Court may consider certain extrinsic documents does not mean that it must

consider them.59

B. The Governing Law

1. The Breach of Fiduciary Duty, Aiding and Abetting, and Waste Claims

In deciding disputes between and among corporate actors, Delaware

subscribes to the internal affairs doctrine, a conflict of laws principle under which

the internal affairs of a corporate entity are governed by the laws of the state of

incorporation or, for an LLC such as Xcell, the state of formation.60 Claims

implicating an entity’s internal affairs include breach of fiduciary duty, aiding and

58 See In re Gardner Denver, Inc. S’holders Litig., 2014 WL 715705, at *2 (Del. Ch. Feb. 21, 2014) (identifying the three exceptions recognized by the Delaware Supreme Court). 59 Xcell submitted several documents extrinsic to the Complaint less than two hours before the previously-scheduled oral argument on the motion to dismiss. In doing so, Xcell halfheartedly requested that the Court take judicial notice of those documents. See Letter from Sean J. Bellew, Esq. (Feb. 18, 2014). Because Xcell’s belated submission is procedurally improper under at least Court of Chancery Rule 171(a), the Court declines to consider these materials. Even were it to consider them, the Court is not convinced that they would change any of its conclusions. 60 See generally Edgar v. MITE Corp., 457 U.S. 624, 645 (1982); see also McDermott Inc. v. Lewis, 531 A.2d 206, 215 (Del. 1987). Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 15

abetting,61 and waste.62 Because Xcell is a Kentucky LLC, Kentucky law governs

Xcell’s claims for breach of fiduciary duty against Polo and EIG, aiding and

abetting against DiClemente, and waste against all three Moving Defendants.

2. The Tortious Interference with a Contract Claim

To determine the governing law for a claim for tortious interference with a

contract, Delaware follows the choice of law principles of the Restatement and

applies the laws of the jurisdiction with the “most significant relationship.”63 In

doing so, the Court should weigh four factors:

1) the place where the injury occurred; 2) the place where the conduct causing the injury occurred; 3) the domicile, residence, nationality, place of incorporation and place of business of the parties; and 4) the place where the relationship, if any, between the parties is centered.64

DiClemente’s allegedly tortious conduct involves various financing contracts for

Xcell, which was, until January 2013, based in Kentucky, the same jurisdiction

where Xcell and Alpha’s relationship was centered. Based on these and other

61 See, e.g., Hamilton P’rs, L.P. v. Highland Capital Mgmt., L.P., 2014 WL 1813340, at *9 (Del. Ch. May 7, 2014) (discussing the general contours of the internal affairs doctrine). 62 See, e.g., Sample v. Morgan, 914 A.2d 647, 669-70 (Del. Ch. 2007) (applying Delaware law, implicitly pursuant to the internal affairs doctrine, to a stockholder’s derivative claim of waste against corporation’s board of directors). 63 Restatement (Second) of Conflict of Laws § 145(1) (1971). 64 See UbiquiTel Inc. v. Sprint Corp., 2005 WL 3533697, at *3 (Del. Ch. Dec. 14, 2005) (citing Restatement (Second) of Conflict of Laws § 145(2) (1971)). Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 16

allegations of the Complaint, the Court concludes, as the parties argued, 65 that

Kentucky law governs Xcell’s claim for tortious interference with a contract

against DiClemente.

C. The Breach of Fiduciary Duty Claim

1. The Claim against Polo as Xcell’s Manager

Xcell claims that Polo breached the fiduciary duties that it owed the

company by virtue of its position as Xcell’s manager. The Moving Defendants

contend that, because Xcell’s Operating Agreement provides that “[t]he Manager

shall have no fiduciary duties to the Company,” 66 Polo did not owe any fiduciary

duties to Xcell.67 In response, Xcell effectively conceded this point and agreed to

65 Reply Br. of Defs. Energy Investment Group, LLC, Polo Investments, LLC, and Edmond L. DiClemente in Supp. of their Mot. to Dismiss (“Defs.’ Reply Br.”) 14-17; Pl.’s Answering Br. 23-24; Defs.’ Opening Br. 28-30. 66 Compl. Ex. 5, Operating Agreement § 4.9. 67 Defs.’ Opening Br. 21-22. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 17

dismiss this breach of fiduciary duty claim against Polo.68 These statements by

counsel are binding on Xcell.69

Accordingly, this claim against Polo will be dismissed as abandoned.70

2. The Claim against EIG as Xcell’s Member

Next, Xcell asserts that EIG, through its alleged misconduct, breached its

fiduciary duties as Xcell’s member. The Moving Defendants submit that, because

Xcell’s Articles of Organization provide that “[t]he Company is to be managed by

a manager,”71 EIG did not owe any fiduciary duties as its member.72 Xcell, in

opposition, asserts that EIG owed it fiduciary duties under Kentucky law, even as a

member in a manager-managed LLC.73

68 Pl.’s Answering Br. 14 n.1 (“Based on this provision, Xcell will agree to dismiss Count I against . . . Polo.”); id. 28 (“Defendants’ Amended Motion to Dismiss should be denied, with the exception of Count I (breach of fiduciary duties) against . . . Polo, which Xcell will agree to dismiss.”). 69 See, e.g., Ravenswood Inv. Co., L.P. v. Winmill & Co. Inc., 2014 WL 2445776, at *2 (Del. Ch. May 30, 2014). 70 Based on this conclusion, the Court need not address whether Xcell’s Operating Agreement is consistent with Kentucky law or the Moving Defendants’ alternative arguments about the insufficiency of specific allegations regarding Polo’s improper conduct or about the Operating Agreement’s indemnification provisions. See Defs.’ Reply Br. 8; Defs.’ Opening Br. 23-25. 71 Compl. Ex. 5, Articles of Organization, Art. VI. 72 Defs.’ Reply Br. 2-3; Defs.’ Opening Br. 21-22. 73 Pl.’s Answering Br. 13-14. Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 18

A Kentucky LLC can be managed by its members or by its managers.74

Under Kentucky law, fiduciary duties are generally concomitant with the

responsibility for management of the LLC. Unless provided otherwise in the

LLC’s operating agreement, if a Kentucky LLC is managed by its managers, then,

by Kentucky statute, its members do not manage the LLC and thus do not owe

fiduciary duties to the LLC.75 Here, Xcell’s Operating Agreement does not

expressly provide that its members owe fiduciary duties. EIG, as the member of

Xcell, a manager-managed LLC, thus did not owe fiduciary duties to Xcell under

Kentucky law.76 The sole case on which Xcell relies—which discusses whether a

managing, majority member in an LLC owed certain fiduciary duties to the non-

74 See Ky. Rev. Stat. Ann. § 275.025(1)(d) (West 2011). 75 See Ky. Rev. Stat. Ann. § 275.165(2) (West 2011); Ky. Rev. Stat. Ann. § 275.170(4) (West 2011) (“Unless otherwise provided in a written operating agreement: . . . (4) A member of a limited liability company in which management is vested in managers under [Ky. Rev. Stat. Ann. §] 275.165(2) and who is not a manager shall have no duties to the limited liability company or the other members solely by reason of acting in his or her capacity as a member.”); see also Thomas E. Rutledge, Shareholders Are Not Fiduciaries: A Positive and Normative Analysis of Kentucky Law, 51 U. Louisville L. Rev. 535, 547 (2013) (“This absence of fiduciary obligations upon the members in a manager-managed LLC [under Kentucky law] applies even as the members retain the authority to approve organic transactions such as amendment of the operating agreement or a merger.”). 76 The Court also notes that Xcell did not raise whether this claim may implicate any implied covenant of good faith and fair dealing under Xcell’s Operating Agreement. See, e.g., Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 418-19 (Del. 2013). Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 19

managing, minority members77—does not change the Court’s interpretation or

application of Kentucky law.

Thus, this claim against EIG is dismissed under Rule 12(b)(6).78

D. The Aiding and Abetting Claim

In the Complaint, Xcell alleged that DiClemente is liable for aiding and

abetting Polo’s breaches of fiduciary duty.79 Xcell sought to recast its allegations

in its briefing and at oral argument, suggesting instead that DiClemente is liable for

aiding and abetting EIG’s breaches of fiduciary duty.80

The Moving Defendants argue that because Xcell abandoned the underlying

breach of fiduciary duty claim against Polo and because Xcell did not allege that

DiClemente aided and abetted EIG’s improper conduct, DiClemente cannot be

77 See Patmon v. Hobbs, 280 S.W.3d 589, 593-97 (Ky. Ct. App. 2009). 78 Again, based on this conclusion, the Court need not address the Moving Defendants’ alternative arguments about the insufficiency of specific allegations regarding EIG’s improper conduct or about the Operating Agreement’s indemnification provisions. See Defs.’ Reply Br. 8; Defs.’ Opening Br. 23-24. 79 Compl. ¶ 71 (“Through the actions set forth herein, . . . DiClemente aided and abetted . . . Polo’s breaches of [its] fiduciary duties to Xcell.”). 80 See, e.g., Pl.’s Answering Br. 18-20 (“The Complaint adequately pleads that DiClemente aided and abetted EIG’s breach of fiduciary duties.”); Tr. of Oral Arg. 54 (“He aided and abetted EIG’s [breach of fiduciary duty] . . . That’s not in our complaint.”). Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 20

liable for aiding and abetting.81 Xcell contends that it has sufficiently stated a

claim against DiClemente for his aiding and abetting EIG’s misconduct by failing

to operate the Grape Creek Mine properly, making unpleasant comments to Alpha,

threatening legal action, and filing an improper Chapter 11 bankruptcy petition.82

Under Kentucky law, to state a claim for aiding and abetting against

DiClemente, Xcell must sufficiently allege: (1) an underlying breach of fiduciary

duty; (2) “substantial assistance or encouragement” by DiClemente in effecting the

breach of fiduciary duty; and (3) that DiClemente “knew” that the underlying

conduct constituted a breach of fiduciary duty.83 Xcell has failed to allege an

underlying breach. First, it abandoned its fiduciary duty claim against Polo.

Second, its attempt to rewrite the Complaint to assert that DiClemente aided and

abetted EIG’s breaches of fiduciary duty is procedurally improper.84

81 Defs.’ Reply. Br. 11-13; Defs.’ Opening Br. 26-28. 82 Answering Br. 19 (citing Compl. ¶¶ 15, 44-47, 54, 56). 83 See Miles Farm Supply, LLC v. Helena Chem. Co., 595 F.3d 663, 666 (6th Cir. 2010) (citing Restatement (Second) of Torts § 876 (1979)) (noting that Kentucky subscribes to the Restatement’s definition of an aiding and abetting claim); see also Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 485 (Ky. 1991) (“[A] person who knowingly joins with or aids and abets a fiduciary in an enterprise constituting a breach of the fiduciary relationship becomes jointly and severally liable with the fiduciary for any profits that may accrue.”). 84 See Morgan v. Cash, 2010 WL 2803746, at *8 n.64 (Del. Ch. July 16, 2010) (“[A] plaintiff cannot use her briefing to rewrite her complaint.”); see also McGowan v. Ferro, 2002 WL Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 21

Thus, because there is no underlying breach of fiduciary duty by Polo, Xcell

has failed to state a claim for aiding and abetting against DiClemente.85

E. The Tortious Interference with a Contract Claim

Xcell alleges that DiClemente tortiously interfered with no less than six of

its contracts with Alpha. To state a claim for tortious interference with a contract

against DiClemente under Kentucky law, Xcell must allege six elements:

(1) the existence of a contract; (2) [DiClemente’s] knowledge of the contract; (3) that [DiClemente] intended to cause a breach of that contract; (4) that [DiClemente’s] actions did indeed cause a breach; (5) that damages resulted to [Xcell]; and (6) that [DiClemente] had no privilege or justification to excuse [his] conduct.86

The Moving Defendants argue that Xcell has failed to allege the requisite elements

of this claim, particularly that DiClemente knew of the contracts and that he

77712, at *4 n.27 (Del. Ch. Jan. 11, 2002) (“Arguments contained in a brief, however, cannot cure a defect caused [by] the failure to allege critical facts in the complaint.”). In any event, even were the Court permitted to consider the merits of Xcell’s argument that DiClemente aided and abetted EIG’s misconduct, the Court would nonetheless conclude that Xcell has failed to state an aiding and abetting claim against DiClemente because EIG did not owe fiduciary duties to Xcell. 85 Based on these conclusions, the Court need not consider whether Xcell’s well-pled allegations, to the extent there are any, satisfy the other elements required to state a claim. 86 Snow Pallet, Inc. v. Monticello Banking Co., 367 S.W.3d 1, 6 (Ky. Ct. App. 2012); see also Hunt Enters., Inc. v. John Deere Indus. Equip. Co., 18 F. Supp. 2d 697, 702-03 (W.D. Ky. 1997) (“In order to prove a claim for tortious interference, [the plaintiff] must demonstrate that ‘a wrongdoer intentionally meddle[d] with an agreement without justification or invade[d] contractual relations by engaging in significantly wrongful conduct.’”) (citation omitted), aff’d, 162 F.3d 1161 (6th Cir. 1998). Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 22

intended, and did, cause a breach.87 Xcell contends that it has satisfied the

pleading requirements here, insisting that “DiClemente intentionally caused these

[contract] breaches by his gross mismanagement of Xcell’s affairs.”88

The Court concludes that Xcell has failed to allege the six elements

necessary to state a claim for tortious interference with a contract. Even assuming

that Xcell has alleged damages caused by DiClemente’s supposedly improper

conduct, there is no well-pled allegation that, through his mismanagement or

otherwise, DiClemente intended to, and did, cause Xcell to breach any of its

agreements with Alpha. Xcell’s vague and generalized arguments in its brief and

at oral argument failed to identify any well-pled allegations in the Complaint

regarding DiClemente’s intent—likely because there are no such well-pled

allegations. In sum, there is no basis for the Court reasonably to infer that

DiClemente intended for or caused Xcell to breach any of the identified contracts.

87 Defs.’ Reply Br. 14-15; Defs.’ Opening Br. 28-29. 88 Pl.’s Answering Br. 23-24 (citing Compl. ¶¶ 34-50). Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 23

Thus, the claim for tortious interference with a contract against DiClemente

is dismissed under Rule 12(b)(6).89

F. The Waste Claim

The Moving Defendants contend that since Xcell has not established that

Polo, EIG, or DiClemente owed it fiduciary duties, neither can they be held liable

for waste.90 Xcell disputes that contention. It maintains that because DiClemente

was allegedly unable to identify how Xcell used the Loan proceeds, the Loan

proceeds could not have been used for any valid corporate purpose such that the

Moving Defendants must have improperly wasted Xcell’s assets.91

Courts applying Kentucky law have often looked to Delaware for guidance

on novel issues of corporate law.92 This Court treats a claim for waste arising

89 Based on this conclusion, the Court need not address whether DiClemente, as an agent, can be liable for tortious interference with the contracts of Xcell, EIG, or Polo, as the principals, under Kentucky law. See Defs.’ Reply Br. 15-17; Defs.’ Opening Br. 29-30. 90 Defs.’ Reply Br. 17-21; Defs.’ Opening Br. 31-33. 91 Pl.’s Answering Br. 26-28. 92 See, e.g., Bacigalupo v. Kohlhepp, 240 S.W.3d 155, 157 (Ky. Ct. App. 2007) (“[T]his court has previously adopted Delaware case law when examining corporate statutes . . . .”); see also Allied Ready Mix Co., Inc. ex rel. Mattingly v. Allen, 994 S.W.2d 4, 8 (Ky. Ct. App. 1998) (finding Delaware case law persuasive where there was no Kentucky case law “addressing the standard of review to apply to a corporate committee’s decision regarding a derivative suit after a demand has been made”). Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 24

under Delaware law as a species of a breach of fiduciary duty claim.93 In other

words, if there is no fiduciary relationship, then there cannot be liability under a

fiduciary-duty-based theory of waste. Xcell did not argue, nor is the Court

convinced from its independent review, that Kentucky would depart from this

general corporate law principle.

The Court thus concludes that a fiduciary relationship is a necessary element

for a waste claim under Kentucky law. Based on the well-pled allegations of the

Complaint and Xcell’s concession, none of Polo, EIG, or DiClemente owed

fiduciary duties under Kentucky law to Xcell. Accordingly, Xcell’s claim for

waste against Polo will be dismissed as abandoned, and its claims for waste against

EIG and DiClemente must be dismissed under Rule 12(b)(6).

93 See, e.g., Hampshire Gp., Ltd. v. Kuttner, 2010 WL 2739995, at *35 (Del. Ch. July 12, 2010) (“The waste test is just another way to examine whether a fiduciary breach has been committed.”); Sample, 914 A.2d at 669 (citing In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 74 (Del. 2006)) (“Claims of waste are sometimes misunderstood as being founded on something other than a breach of fiduciary duty. Conceived more realistically, the doctrine of waste is a residual protection for stockholders that polices the outer boundaries of the broad field of discretion afforded directors by the business judgment rule.”). Xcell Energy and Coal Company, LLC v. Energy Investment Group, LLC C.A. No. 8652-VCN June 30, 2014 Page 25

IV. CONCLUSION

For the foregoing reasons, Xcell has failed to state a claim against the

Moving Defendants. Therefore, the Moving Defendants’ motion to dismiss the

Complaint against them under Rule 12(b)(6) is GRANTED.

IT IS SO ORDERED.

Very truly yours,

/s/ John W. Noble

JWN/cap cc: Mr. Gregg Steinhauser Register in Chancery-K