R. Power Biofuels LLC v. Agri Beef Co. et al

Filing 35

MEMORANDUM DECISION AND ORDER. IT IS ORDERED that Defendants Robert Rebholtz, Todd Lindsey, and Kim Stuart's Motion to Dismiss Pursuant to Fed. R. Civ. P. 12(b)(1) 11 is GRANTED in part and DENIED in part. All of RPower's derivative claims against the Members. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (st)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
R. POWER BIOFUELS LLC, a
Delaware limited liability company, on
its own behalf, and derivatively for
NORTH STAR BIOFUELS LLC, a
Delaware limited liability company,

Case No. 1:14-cv-00390-BLW
MEMORANDUM DECISION AND
ORDER

Plaintiff,
v.
AGRI BEEF CO., an Idaho corporation;
ROBERT REBHOLTZ, an individual
and Member Representative of NSB;
TODD LINDSEY, an individual and
Member Representative of NSB; and
KIM STUART, an individual and
Member Representative of NSB,
Defendants.

INTRODUCTION
Plaintiff R.Power Biofuels LLC brings this action individually and derivatively as
a member of North Star Biofuels, LLC, a limited liability company. North Star’s
members include RPower and AB Bioenergy, LLC. The defendants are Agri Beef Co., an
Idaho corporation, and three of North Star’s Member Representatives – Robert Rebholtz,

MEMORANDUM DECISION AND ORDER - 1

Todd Lindsey, and Kim Stuart (collectively, “Member Representatives”) – all of whom
are Idaho citizens. RPower alleges derivative claims on behalf of North Star for the
breach of the duty of good faith and fair dealing (Count One), breach of the duty of care
and loyalty (Count Two), duress and economic coercion (Count Four), unjust enrichment
(Count Five), constructive trust (Count Six), unconscionability (Count Seven), and
injunctive relief (Count Eight), as well as a direct claim against the Member
Representatives for breach of the duty of good faith and fair dealing and duty of care
(Count Three). Subject-matter jurisdiction is based on diversity.
The Member Representatives argue that complete diversity does not exist. They
have therefore moved to dismiss the Complaint. Defendant Agri Beef joined in the
motion to dismiss. For the reasons set forth below the Court will dismiss RPower’s
derivative claims, but will allow RPower’s direct claim against the Member
Representatives to survive.
BACKGROUND
RPower is the creation of Michael Doyle, a petroleum engineer and the “creative
genius” behind the technology, and James Levine, a professional engineer and selfproclaimed innovator. Levine Decl. ¶ 2, Dkt. 8. In 2006, Doyle approached Levine with
the idea for this new technology. Id. Doyle and Levine then formed Sauber Technologies
LLC, a California limited liability company, to develop, test, and prove the efficacy of
the technology. Id. ¶ 3. Doyle submitted a patent application for the technology,
identifying Sauber as the owner. Id.¶ 5. The application remains pending. Id.

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In 2009, after spending three years testing the technology and submitting a patent
application, Doyle and Levine formed RPower as a Delaware limited liability company.
Id. ¶ 6. Sauber gave RPower an exclusive license to the technology and together they
continued to develop it for the next two years. Id. ¶ 8. In July 2011, seeking to capitalize
on their “know how” and the emerging demand for biodiesel fuel, RPower successfully
started a 2,000 gallon-per-day commercial production facility in Redwood City,
California. The apparent success of this facility led RPower to begin soliciting and
accepting angel investor funding with the goal of developing the business for a broader,
ideally worldwide, platform. Id.¶ 10.
At this point, RPower and Defendant Agri Beef’s paths converge. Id. ¶ 11. Agri
Beef’s goal of finding “environmentally positive profit activities” for its affiliate, AB
Bioenergy, LLC, to pursue coincided with RPower’s goal of finding investors to develop
a global biodiesel business using the technology it had developed.
Agri Beef’s affiliate, AB Bio, and RPower formed North Star to pursue this
business opportunity. Id. ¶ 12/ At the outset, RPower and AB Bio were the sole members
of North Star. As the sole members, each held a 50 percent membership and management
interest in the company. Operating Agreement, §§ 16, 17. The Operating Agreement
further provided that both RPower and AB Bio were to appoint three Members’
Representatives to “do all things necessary or convenient to carry out the business of
North Star.” Id. § 18.b. RPower and Sauber also agreed to license to North Star their

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“Existing Technology,” which consisted of the patent application submitted by Sauber,
and trade secrets relating to the use of that technology. Id., § 2.8.1.
As part of deal, Agri Beef agreed to loan to North Star the $8 million estimated
cost for construction and startup of the plant. Levine ¶ 12; Loan Agreement. The loan
collateral included, among other things, the Existing Technology and RPower’s
ownership interest in North Star. Loan Agreement, pp. 8-9. RPower and Sauber
guaranteed the loan. Id., p. 16.
So far the project has not gone quite as planned. During the first year and a half of
the project, North Star drew down the entire $8 million under the Loan Agreement, had
the Loan Agreement maturity extended twice, and issued over $4 million in capital calls.
Rebholtz Decl. ¶¶ 22-30. In July 2013, according to Agri Beef, North Star defaulted
under the Loan Agreement.
Alleging that North Star had defaulted on the loan, Agri Beef sued RPower and
Sauber as the guarantors of the loan. AgriBeef Co. v. R. Power Biofuels, LLC, et al, Case
No. 1:14-cv-00298-BLW (“Agri Beef action”). On August 29, 2014, Agri Beef notified
North Star that it intended to auction collateral on October 7, 2014. RPower responded by
filing a counterclaim in the Agri Beef action, id. at Dkt. 11, and filing a motion for a
temporary restraining order, id. at Dkt. 17. RPower also filed this action against Agri
Beef and the Member Representatives. It filed a separate motion for a TRO in this action
as well.

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The Member Representatives now move to dismiss RPower’s claims in this action.
AgriBeef has joined this motion. Defendants argue that complete diversity does not exist
because RPower is a necessary party, and its joinder would destroy diversity whether it is
joined as a plaintiff or as a defendant.
ANALYSIS
The federal court's diversity jurisdiction extends to “all civil actions where the
matter in controversy exceeds ... $75,000 ... and is between ... [c]itizens of different
States.” 28 U.S.C. § 1332(a)(1). In cases where entities rather than individuals are
litigants, diversity jurisdiction depends on the form of the entity. To illustrate, an
unincorporated association such as a partnership has the citizenships of all of its
members. Carden v. Arkoma Assocs., 494 U.S. 185, 195–96 (1990). By contrast, a
corporation is a citizen only of (1) the state where its principal place of business is
located, and (2) the state in which it is incorporated. 28 U.S.C. § 1332(c)(1).
Although limited liability companies resemble both partnerships and corporations,
the Ninth Circuit treats limited liability companies like partnerships for diversity
purposes. Johnson v. Columbia Properties Anchorage, LP, 437 F.3d 894, 899 (9th Cir.
2006). In other words, “an LLC is a citizen of every state of which its owners/members
are citizens.” Id.

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In the context of this case, this rule would presumably mean that complete
diversity does not exist if North Star is deemed a necessary party. As noted above, North
Star’s members include RPower, most likely a California citizen,1 AB Bio, an Idaho
citizen, and a California limited liability company named Malpaso Energy LLC. North
Star is therefore both a citizen of California and a citizen of Idaho. So if North Star is
named as a plaintiff, complete diversity does not exist because North Star is an Idaho
citizen and all Defendants are Idaho citizens. Likewise, if North Star is named as a
defendant, complete diversity does not exist because North Star shares the same
citizenship as RPower.
RPower argues, however, that North Star’s joinder would not defeat jurisdiction.
Relying primarily on a district court case from Maryland, Beck v. CKD Praha Holding,
A.S., 999 F.Supp. 652, 655 (D.Md.1998), RPower contends that North Star’s citizenship
may be ignored if antagonism exists between the entity’s management and the
member/owner bringing suit. In Beck, the Maryland district court posited that “the
Supreme Court applies a different test in shareholder derivative suits to determine
whether a nominal, but indispensable, corporate defendant defeats diversity jurisdiction.”

1

The Court refers to RPower is a citizen of California for ease of reference. It is
unclear what RPower’s citizenship is. But it makes no difference in the analysis because
North Star shares the same citizenship as RPower no matter what RPower’s citizenship
may be.

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Id. This test, according to the Beck court “is whether antagonism exists between the
management of the corporation and the shareholder bringing suit.” Id.
The Court is not convinced.
First, “Beck dealt with the proper alignment of the parties, which requires an
inquiry into whether antagonism exists.” Gamrex, Inc. v. Schultz, 2010 WL 3943910, *6
n. 11 (D. Haw. 2010). But North Star’s alignment is not an issue before the Court. Id.
And even if it were, it would not matter because, as explained above, diversity is
destroyed whether North Star is aligned as a plaintiff or as a defendant. Id.
Second, contrary to Beck, most courts hold that a corporation is considered an
indispensable party in a derivative action, and its citizenship does matter for diversity
purposes. Id. Indeed, at least two federal district courts have directly considered Beck’s
interpretation of Supreme Court precedent regarding the antagonism doctrine and have
deemed it “flawed.” Racetime Investments, LLC v. Moser, 2013 WL 987834, *2
(E.D.Va. March 8, 2013); Gamrex, 2010 WL 3943910 at *6. And the Fourth Circuit has
implicitly rejected it. See, e.g., General Technology Applications, Inc. v. Exro Ltda, 388
F.3d 114, 120 (4th Cir. 2004) (finding that court lacked diversity jurisdiction over
derivative action brought on behalf of LLC by one member against another member,
regardless of whether company was aligned as plaintiff or defendant).
Diversity jurisdiction is judged by the real parties in interest. Allstate Ins. Co. v.
Hughes, 358 F.3d 1089, 1095 (9th Cir. 2004). The Beck court identified the stockholder
as the real party in interest and the corporation as the “nominal plaintiff.” But, according

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to Supreme Court precedent, in a derivative lawsuit, the corporation is the real party in
interest, and the stockholder bring suit on the corporation’s behalf is the nominal
plaintiff. Ross v. Bernard, 396 U.S. 531, 538 (1970); Koster v. Lumbermens Mutual
Casualty, 330 U.S. 518, 523 (1947). Applying this clear precedent, the Court can only
conclude that the Beck court incorrectly dubbed the corporation the nominal party, and
therefore incorrectly ignored the corporation’s citizenship for diversity purposes.
Because North Star’s citizenship cannot be ignored for diversity purposes, the
Court must decide whether North Star is a necessary party. As explained above, the
corporation is the real party in interest, Koster, 330 U.S. at 523 n. 2, and the stockholder
“at best” is the nominal plaintiff, Ross, 396 U.S. at 539. “The corporation [therefore] is a
necessary party to the action; without it the case cannot proceed.” Ross, 396 U.S. at 538.
Accordingly, RPower’s derivative claims must be dismissed, as North Star’s joinder
destroys diversity.
RPower, however, also brings one direct claim against the Member
Representatives for breach of good faith and fair dealing and duty of care (Count Three),
and North Star would not necessarily be an indispensable party to this claim. But the
Member Representatives argue that RPower’s individual claim should be recast as
derivative claims and also dismissed. The Court disagrees.
The analysis to distinguish between direct and derivative claims asks two
questions: “(1) who suffered the alleged harm (the corporation or the suing stockholders,
individually); and (2) who would receive the benefit of any recovery or other remedy.”

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Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). “The
stockholder's claimed direct injury must be independent of any alleged injury to the
corporation.” Id. at 1039. “The stockholder must demonstrate that the duty breached was
owed to the stockholder and that he or she can prevail without showing an injury to the
corporation.” Id.
RPower’s direct claim alleges that the Member Representatives “participated, in
bad faith, in Agri Beef’s plan to deprive [RPower] of its benefits conferred upon
[RPower] by the Operating Agreement,” including RPower’s right to control the
management and direction of North Star, RPower’s financial interests in North Star and
the technology, and RPower’s right to maintain possession and control of the technology.
Compl. ¶¶ 92-95. The alleged injuries are independent from any alleged injury to North
Star. North Star is not necessarily harmed if RPower loses its right to control the
direction and management of North Star. Nor would North Star be directly harmed if
RPower lost is financial interest in North Star and its right to possess and control the
technology. These alleged rights belong to RPower, not North Star, and any recovery for
the alleged deprivation of these rights would inure directly to RPower. The Court will
therefore allow RPower’s direct claim against the Member Representatives to survive.
ORDER
IT IS ORDERED that Defendants Robert Rebholtz, Todd Lindsey, and Kim
Stuart’s Motion to Dismiss Pursuant to Fed. R. Civ. P. 12(b)(1) (Dkt. 11) is GRANTED
in part and DENIED in part. All of RPower’s derivative claims against the Members

MEMORANDUM DECISION AND ORDER - 9

Represen
ntatives and Agri Beef are dismis
d
f
ssed, but Co
ount Three, RPower’s direct claim
m
against the Member Represent
t
r
tatives, surv
vives.

TED: Janua 8, 2015
DAT
ary

__________
__________
_____
___
B. L
Lynn Winm
mill
Chief Judge
ited
District Cou
urt
Uni States D

MEMORA
ANDUM DECI
ISION AND ORDER - 10
R