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Kahuku Holdings, LLC v. MNA Kahuku LLC

Court of Chancery of Delaware

September 15, 2014

Kahuku Holdings, LLC and First Wind Kahuku Holdings, LLC
v.
MNA Kahuku, LLC,

Submitted: August 29, 2014

Dear Counsel:

This matter involves the arbitrability of a dispute between the two members of a Delaware LLC created to hold a single asset: a subsidiary operating a wind farm on the island of Maui in Hawaii. The defendant here filed an arbitration proceeding in Hawaii, consistent with its understanding of the operative LLC agreement. The plaintiff filed this action, seeking to enjoin the arbitration. The defendant then filed a mirror-image action in Hawaii, seeking to compel arbitration. The arbitration itself is effectively stayed, awaiting a decision from this Court or the Hawaii court on arbitrability. Because I find that the parties agreed in the LLC agreement to have questions of arbitrability decided before a court in Hawaii, this action must be stayed or dismissed in favor of the pending Hawaii action.

I. Background

The parties' dispute before this Court arises from a joint venture to operate a wind generation project in Kahuku, Hawaii (the "Wind Farm").[1] In 2010, non-party entities First Wind Holdings, LLC ("FW Holdings") and Makani Nui Associates, LLC ("Makani") entered into a limited liability agreement (the "Original LLC Agreement") to govern Plaintiff Kahuku Holdings, LLC ("Kahuku Holdings"), a Delaware entity that had been formed by FW Holdings the previous month.[2] Under the Original LLC Agreement, FW Holdings owned 92% of the ownership interest of Kahuku Holdings and was its sole manager, while Makani owned the remaining 8% ownership interest and held no voting rights. In turn, Kahuku Holdings' sole asset was and still is its 100% ownership interest in non- party Kahuku Wind Power, a Delaware limited liability company and the owner and operator of the Wind Farm.

In 2011, FW Holdings and Makani executed amendments to the Original LLC Agreement (the "Amended LLC Agreement"), the provisions of which are at issue in this dispute. The Amended LLC Agreement transferred FW Holdings' 92% ownership interest and role as managing member to Plaintiff First Wind Kahuku Holdings, LLC ("First Wind") and Makani's 8% ownership interest to Defendant MNA Kahuku, LLC ("MNA").[3] Further, key to the renegotiation, the Amended LLC Agreement included provisions that granted MNA the right to provide input in the annual budgeting process and curbed First Wind's discretion in issuing distributions of cash; Section 4.4(a) states: "Following the end of each calendar year of the Company, . . . the Company shall distribute the Net Cash of the Company, if any, to the Members."[4] The Amended LLC Agreement defines "Net Cash" as:

net cash from operating activities . . . prepared in accordance with [GAAP] . . . but which shall in any event deduct, to the extent not already deducted, (A) debt service . . ., (B) actual expenses, (C) taxes and (D) any amount determined by the Managing Member as necessary to meet the requirement of any third party financing agreements and for reasonable reserves for contingencies and expected expenses.[5]

The parties also negotiated and adopted an extensive arbitration provision in the Amended LLC Agreement, which reads in relevant part:

All disputes, claims, or controversies arising out of or relating to the corporate contract . . . between and among the Company, its Members, officers, managers, employees or agents (a "Dispute") shall be resolved by mutual agreement of the Members. If a dispute is not resolved by mutual agreement between the Members within thirty (30) days after the start of the Dispute, a Member may deliver written demand to the Company and the other Members and the Dispute shall be resolved solely and exclusively by binding arbitration to be conducted before Dispute Prevention Resolution, Inc. ("DPR") or its successor; provided, that, for purposes of clarification, this arbitration clause does not apply to (a) Member votes or decisions (such as with respect to the Annual budget or Super Majority Vote under SubArticle 7.3 of this Agreement) of the Managing member . . . . The parties will initiate and select a single arbitrator in accordance with DPR's prevailing rules and procedures. Any such arbitration shall be held on the island of Maui, State of Hawaii and shall be conducted in accordance with DPR rules and regulations unless specifically modified herein. . . . The provisions of this SubArticle shall be enforceable In [sic] any court of competent jurisdiction. Each of the parties hereto irrevocably and unconditionally consents to the exclusive jurisdiction of the arbitrator to resolve all disputes, claims or controversies arising out of or relating to (i) this Agreement . . . and further consents to the jurisdiction of the courts of the State of Hawaii for the purposes of enforcing the arbitration provisions of this

SubArticle.[6]

Around the same time that the Amended LLC Agreement was adopted, in April 2011, the Wind Farm became operational. Development and construction of the Wind Farm had required "significant" up-front costs.[7] To cover these expenses, Kahuku Wind Power entered into a loan agreement for $117, 330, 968 (the "DOE Loan Agreement") with the United States Department of Energy (the "DOE") in July 2010, as well as received capital contributions from First Wind.[8]MNA only contributed "an initial nominal contribution of $80."[9] Soon after the project launched, however, the energy storage facilities "suffered two small fires and then a catastrophic fire on or about August 1, 2012, " causing the Wind Farm to become completely inoperative from August 1, 2012 to August 29, 2013.[10] The Wind Farm was able to return to production in September 2013, but could only operate on a "significantly reduced capacity"-"approximately sixteen percent of its prior capacity"-through January 2014.[11] Currently, the Wind Farm is back to "operating at full capacity, but its contract to supply power is still pending approval by the Hawaii Public Utilities Commission."[12]

Despite the Wind Farm's fires and resulting diminished production capacity, "in late 2013, MNA began demanding that [Kahuku Holdings] make distributions to its members" pursuant to the Net Cash provision of the Amended LLC Agreement.[13] On December 30, 2013, MNA made a written demand on Kahuku Holdings for $1, 059, 550, "which MNA claimed represented its share of Net Cash of the Company for 2012."[14] In a written response, First Wind denied the demand, notifying MNA that the loss of operations due to fire had triggered a provision of the DOE Loan Agreement that prevented Kahuku Wind Power from issuing a distribution. Specifically, Kahuku Holdings cited § 7.10(a) of the DOE Loan Agreement, which prevents Kahuku Wind Power from "reduc[ing] its capital or declar[ing] or mak[ing] or authoriz[ing] any dividend or any other payment or distribution of cash or property to its Equity Owners on account of any equity interest" so long as certain enumerated conditions are not met, including that "no Potential Default or Event of Default exists."[15] According to the Plaintiffs, the DOE, which "controls access to [Kahuku Wind Power's] accounts" pursuant to the DOE Loan Agreement, had taken the position that, in addition to other missing conditions under Section 7.10(a), the halted and eventual diminished operations of the Wind Farm due to fire constituted a Potential Default or Event of Default, and thus the DOE would "permit[] funds to be withdrawn only for limited rebuilding purposes."[16] As a result, First Wind informed MNA that "after deducting all of the amounts determined by First Wind, in its discretion as Managing Member, to be 'necessary to meet the requirements of third party financing and for reasonable reserves for contingencies and expected expenses, ' from the amount shown as 'net cash from operating activities, ' Net Cash equaled zero in 2012."[17]

Following the initial distribution demand in late 2013, MNA and First Wind traded correspondence in early 2014 in which MNA demanded to see the DOE Loan Agreement, which First Wind provided, and reiterated its demand for a distribution of Net Cash, which First Wind repeatedly denied. In letters in March and May of 2014, MNA "notified First Wind that there was a 'Dispute' between MNA and the Company and threatened arbitration."[18] On June 4, 2014, MNA "demanded to inspect voluminous books and records of the Company, " including "the General ledger, trial balance, Cash receipts journal, Cash disbursement journals, Payroll registers, General journal entries, Invoices from vendors, Bank statements, Loan agreements and related documents [and] Agreements between [Kahuku Holdings] and related parties or affiliates" "from the inception of the Company to present.-[19] In response, First Wind notified MNA that certain books and records would be made available at its principal place of business in August 2014, but that others would first need to be identified and collected from off-site locations. Subsequently, on July 14, 2014, MNA filed an arbitration demand with DPR in Hawaii asserting four counts: that First Wind's failure to distribute Net Cash after calendar years 2012 and 2013 constituted (1) a breach of the Amended LLC Agreement, (2) a breach of the implied covenant of good faith and fair dealing, and (3) a breach of First Wind's fiduciary duties as a majority member of Kahuku Holdings; and (4) that First Wind had wrongfully denied MNA's right to inspect books and records of Kahuku Holdings.

In response to MNA's arbitration demand, Plaintiffs have filed suit in this Court seeking declaratory and injunctive relief, and have brought a Motion for a Preliminary Injunction to prevent MNA from proceeding with the Hawaii arbitration. MNA has responded by filing to dismiss the action for lack of personal jurisdiction and insufficiency of process and service of process. In addition, MNA argues that this Court should dismiss this litigation in favor a pending action in the Second Circuit Court of the State of Hawaii, in Maui, where MNA filed a motion to compel arbitration after the initiation of this litigation. MNA did not address insufficiency of process and service of process at oral ...


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