SolarReserve CSP Holdings v. Tonopah Solar Energy, LLC, C.A. No. 2020-0064-JRS(Del. Ch. July 24, 2020)
Plaintiff, SolarReserve CSP Holdings, LLC (“SolarReserve”), seeks to compel Defendant, Tonopah Solar Energy, LLC (the “Company”), to produce certain books and records in compliance with its alleged obligations to allow inspection as set forth in the Company’s Third Amended and Restated Limited Liability Company Agreement (the “LLC Agreement”).
At first, SolarReserve was the sole owner of the Company, but as a solar power plant project (the “Project”) moved forward and expenses mounted, SolarReserve determined that it needed to seek out other funding sources to help cover expenses. Although SolarReserve was able to find investors to finance the Project, in exchange for their investments, SolarReserve was forced to give up its direct ownership interest in the Company.
In connection with SolarReserve’s withdrawal as the sole member of the Company, the Company and its stakeholders agreed to insert certain provisions into the LLC Agreement that would provide a mechanism for SolarReserve to request access to the Company’s books and records as a “Sponsor Entity.” To that end, Section 7.2 of the LLC Agreement states, in relevant part:
The Company shall keep books and records . . . [and] shall provide to each of the Sponsor Entities access to the books and records or any other information held by the Company reasonably requested by such Sponsor Entity, including the records of all transactions of the Company.
Relatedly, the LLC Agreement defines “Sponsor Entity” as “any of Santander Sponsor, Cobra Sponsor, or SolarReserve Sponsor.” In turn, “SolarReserve Sponsor” is defined as “SolarReserve CSP Holdings, LLC excluding any unaffiliated successor.” The LLC Agreement defines one of the other Sponsor Entities, “Santander Sponsor,” differently, to include the identified entity as well as that entity’s “assignees, transferees and successors.”
Following SolarReserve Parent’s liquidation, one critical change occurred that is relevant here: on December 31, 2019, SolarReserve assigned all of its “right title and interest in and to all actions, claims, choses in action, and lawsuits of any nature whatsoever against” the Company to CMB (the “Assignment of Claims”). Under the Assignment of Claims, CMB (rather than SolarReserve) has the right to prosecute SolarReserve’s claims against the Company, and CMB alone is entitled to the proceeds of such claims (whether proceeds take the form of cash, other property, or other forms of relief).
On December 31, 2019, SolarReserve executed the Assignment of Claims in favor of CMB. Soon after, on January 28, 2020, SolarReserve made a written demand on the Company to inspect books and records under the LLC Agreement (the “Demand”). In the Demand, SolarReserve sought an array of documents, including “all communications” between the Company and multiple entities engaged in the Project. The Company rejected the Demand.
In response, SolarReserve filed its Complaint on February 5, 2020. The Complaint contains a single count for breach of contract.
- Does Plaintiff have a contractual right to compel Defendant to produce certain books and records in compliance with its alleged obligations to allow inspection as set forth in the LLC Agreement, when Plaintiff is not the real party in interest, and the real party in interest has no rights under the LLC Agreement?
As discussed below, SolarReserve has assigned all claims it has against the Company to CMB and is, therefore, no longer the real party in interest. Moreover, given that the real party in interest, CMB, possesses no information rights under the LLC Agreement, it cannot continue to prosecute this action in SolarReserve’s stead. Accordingly, judgment must be entered for the Company.
First, because SolarReserve is not the real party in interest, it cannot maintain this action under Court of Chancery Rule 17(a). Under Court of Chancery Rule 17(a), where, as here, there has been a complete assignment, the plaintiff should be the assignee. In other words, “the assignee is the owner of any claim arising from the chose and should be treated as the real party in interest.” According to the court, it is clear on this record that CMB is the sole party in interest in the wake of the absolute assignment of SolarReserve’s interest in this lawsuit to CMB.
However, SolarReserve relies on Assignment of Claims provisions, and argues that CMB possesses the right to enforce SolarReserve’s rights in a lawsuit and that, by virtue of its power of attorney, CMB is causing SolarReserve to exercise SolarReserve’s rights under the LLC Agreement.
Nevertheless, the court notes that this argument is wrong. The premise of the real party in interest rule is that, as an assignee under a complete assignment, the right to maintain the lawsuit belongs to CMB, not SolarReserve. Multiple courts have recognized that a grant of a mere power of attorney, short of an assignment of a claim, does not change the real party in interest. In other words, a power of attorney from SolarReserve in favor of CMB is irrelevant to the real party in interest inquiry. For this reason, the court explains, SolarReserve is an improper plaintiff under Rule 17, because it has no interest (economic or otherwise) in the proceeding.
Second, the real party in interest has no rights under the LLC Agreement. In a last-ditch effort to escape Rule 17, SolarReserve seeks shelter under Court of Chancery Rule 25(c) by arguing the real party in interest, CMB, can be joined to this proceeding as substitute plaintiff. Rule 25(c) states:
In case of any transfer of interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original party.
However, the court notes a procedural defect in that “Rule 25(c) only applies where there has been a transfer of interest during the pendency of an action, and SolarReserve executed the Assignment of Claims well before it filed the Complaint in this action.”
Moreover, SolarReserve argues CMB is not its “unaffiliated successor” as that term is used in the LLC Agreement, where “SolarReserve Sponsor” is defined as “SolarReserve CSP Holdings, LLC excluding any unaffiliated successor.” Because CMB is not a SolarReserve “unaffiliated successor” and is instead an “assignee,” CMB should be entitled to the Company’s records because CMB has been assigned SolarReserve’s rights and is not expressly excluded by the limiting language within the LLC Agreement’s information rights provision.
However, in Section 7.2 of the LLC Agreement, “Sponsor Entities” have a circumscribed right to inspect the Company’s books and records. SolarReserve has not attempted to proffer a reasonable construction of the LLC Agreement wherein CMB fits within the definition of a “Sponsor Entity.” It could not offer such a construction because the LLC Agreement defines the Sponsor Entity, in relevant part, as SolarReserve “excluding” its unaffiliated successors.
Even if CMB is not SolarReserve’s unaffiliated successor, its status as assignee does not, ipso facto or ipso jure, make CMB the same as SolarReserve, the only entity with inspection rights under the LLC Agreement. To the contrary, this record supports a finding that SolarReserve alone was afforded a personal right to inspect the Company’s records, and that any attempt to assign that right to CMB would be ineffective.
The LLC Agreement’s drafters knew how to include a Sponsor Entity’s assignees within the definition of Sponsor Entity (and thereby extend the inspection right). As noted above, “Santander Sponsor” (one of the “Sponsor Entities”) includes “assignees, transferees and successors.”
Accordingly, the court gave effect to the plain meaning of the LLC Agreement, and held that CMB has no information rights under the agreement, because it is not SolarReserve, and the definition of SolarReserve Sponsor does not include SolarReserve’s assignees.
*This article was written with assistance from our 2020 summer associate Steve Greco.