The recent decision of SolarReserve CSP Holdings, LLC v. Tonopah Solar Energy, LLC, C.A. No. 2020-0064-JRS (Del. Ch. July 24, 2020), handed down by the Delaware Court of Chancery, is an important read for any litigant involved in a books and records demand, where the party seeking information has assigned its interests in the company to a non-party. Of significance to this action, the Court had previously denied equitable relief by the plaintiff on similar grounds, prompting Vice Chancellor Slights to note that this action, in the words of the great Yogi Berra, is “déjà vu all over again.”
In this case, the plaintiff, SolarReserve CSP Holdings, LLC (“SolarReserve”) sought inspection of certain books and records of Tonopah Solar Energy, LLC (“Tonopah” or “Company”) under Tonopah’s Third Amended and Restated Limited Liability Company Agreement (“LLC Agreement”). Tonopah defended on the grounds that SolarReserve was no longer associated with the Company, and therefore lacked rights to inspect its books and records under the LLC Agreement.
Notably, SolarReserve previously brought an action seeking the equitable dissolution of Tonopah, SolarReserve CSP Holdings LLC v. Tonopah Solar Energy LLC, C.A. No. 2019-0791-JRS (Del. Ch., Mar. 18, 2020). That action was denied earlier this year on the grounds that it is neither a member nor manager of Tonopah, and that the complaint failed to allege facts supporting the “extreme remedy” of equitable dissolution of a Delaware LLC. A link to the March 18, 2020 opinion can be found here.
SolarReserve had previously assigned its claims against the Company to an unaffiliated third party, and under the agreement, any recovery would go to the assignee. As such, the Court found that SolarReserve was not the real party in interest under Chancery Rule 17(a). Moreover, the Court found that because the assignee has no information rights under the LLC Agreement, it likewise has no right to the information that SolarReserve seeks.
According to the March 18, 2020 opinion, Tonopah is a federally funded, nonoperational $1 billion solar energy project in Nevada. Initially, SolarReserve was the sole owner of Tonopah, having invested $90 million into the Company. However, after expenses mounted, SolarReserve was able to locate investors to finance the project, but in exchange gave up its direct interest in the Company.
In finding that SolarReserve lacked standing under Rule 17(a), the Court found that Plaintiff had transferred all of its claims against the Company to nonparty, CMB Infrastructure Investment Group IX, L.P. (“CMB”), a lender to SolarReserve. CMB is not in the solar power business and is unaffiliated with SolarReserve. Vice Chancellor Slights also struck down Plaintiff’s argument that, under the terms of the assignment, CMB may act as the “attorney-in-fact” for SolarReserve. The Court disagreed, given that, under the assignment, the right to maintain the lawsuit belonged not to SolarReserve, but to non-party CMB. Moreover, the Court noted that “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.'” Slip op. at 14. (citations omitted).
Further, Vice Chancellor Slights rejected Plaintiff’s argument that Tonopah failed to timely raise its defense that Plaintiff was not the real party in interest. The Court noted that a Rule 17(a) defense is not an affirmative defense that must be raised in a responsive pleading, and nonetheless, Tonopah raised the defense in its Answer, in the Pretrial Order, and in its Answering Brief. Accordingly, the Court was satisfied that a “reasonable time has been allowed” after the Company raised its objection under Rule 17, and dismissal of SolarReserve’s claim is therefore not premature.
Finally, the Court rejected SolarReserve’s argument that CMB can be joined to the proceeding as a substitute plaintiff under Chancery Rule 25(c). Characterizing the argument as a “last-ditch effort to escape Rule 17”, the Court noted that Rule 25(c) only applies “where there has been a transfer of interest during the pendency of an action.” Slip Op. at 16 (citations omitted). Here, the assignment was made well before the litigation commenced. In addition, the Court also held that the LLC Agreement only provided SolarReserve rights to inspect books and records, and the agreement was not written to include information rights to SolarReserve’s assignees.
This decision is an important read for parties to a books and records demand, where the party seeking information has assigned its rights to a non-party. Had the LLC Agreement at issue provided for inspection rights to an assignee of a member, and the lawsuit was commenced not by SolarReserve but by the assignee (CMB), then the result could have been different. Parties to an LLC agreement should be careful not to assume that an assignee’s right to information is preserved through an assignment, unless that right has been specifically provided for in the LLC agreement.
Time will tell if SolarReserve files an appeal, because, as Mr. Berra has also famously said: “It ain’t over ’til it’s over.”
Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.