Opinion
3:22-cv-01410-YY
08-03-2023
JOHN J. SURINA, JR., trustee of the Elizabeth Sophia Surina Trust and Nicholas William Surina Trust; BRUCE LANDREY, an individual; PAUL LORENZINI, an individual; RICHARD SANDVIK, an individual; EDWARD G. WALLACE, an individual; JACK A. BAILEY, an individual; GARY CARL BARBOUR, an individual; PAUL D. BENNETT, an individual; JAMES E. CARTER, an individual; CHARLES MARCINKIEWICZ, trustee of the Charles & Kathleen Marcinkiewicz Trust; MICHAEL S. MCGOUGH, an individual; CHRISTOPHER RUNCKEL, an individual; and JOE CLAYTON TURNAGE, an individual; on behalf of themselves and all others similarly situated, Plaintiffs, v. NUSCALE POWER, LLC, an Oregon limited liability company; FLUOR ENTERPRISES, INC., a California corporation; JAPAN NUSCALE INNOVATION, LLC, a Delaware limited liability company; SARGENT & LUNDY NUHOLDINGS, LLC, an Illinois limited liability company, Defendants.
FINDINGS AND RECOMMENDATIONS
Youlee Yim You United States Magistrate Judge
FINDINGS
Plaintiffs have brought this putative class action suit alleging that defendants “abuse[d] their control” of defendant NuScale Power, LLC by amending the company's operating agreement and restructuring the company's equity to facilitate a public offering of the company's shares and wrongly enrich themselves at plaintiffs' expense. Compl. ¶ 1, ECF 1. Plaintiffs allege the following claims:
• Claim 1: declaratory judgment against all defendants.
• Claim 2: unjust enrichment against defendants Flour Enterprises, Inc. (“Flour”), Japan NuScale Innovation, LLC (“JNI”), and Sargent & Lundy NuHoldings, LLC (“S&L”).
• Claim 3: breach of the duty of good faith and fair dealing against all defendants.
• Claim 4: breach of contract based on NuScale's 5th Operating Agreement against all defendants.
• Claim 5: breach of contract based on the NuScale's Unit Option Agreements and Option Plan (“Option Plan”) against defendant NuScale.Id. ¶¶ 65-90. Currently pending are motions to dismiss brought by each defendant. See ECF 18, 21, 22. For the reasons discussed below:
• Plaintiffs' breach of contract claims against defendants Flour, JNI, and S&L should be dismissed because the 5th Operating Agreement does not impose any duties running from these defendants to plaintiffs that could be breached.
• Plaintiffs' breach of contract claims against defendant NuScale based on the 5th Operating Agreement and the Option Plan should not be dismissed because the disputed
terms are at least ambiguous, and the question whether the “step transaction doctrine” applies here is a factual one not amenable to a motion to dismiss.
• Plaintiffs' breach of the duty of good faith and fair dealing claims against defendant NuScale should be not be dismissed because plaintiff has adequately alleged an independent breach of an implied duty. Plaintiffs' similar claims against defendants Flour, JNI, and S&L should be dismissed, though, because the express terms of the controlling contract expressly allowed those defendants to exercise their right to vote on proposed amendments to the company's operating agreement.
• Plaintiffs' unjust enrichment claims should be dismissed because there is a valid, enforceable contract that controls the dispute between plaintiffs and defendants Flour, JNI, and S&L.
• Plaintiffs' declaratory judgment claim should be dismissed because plaintiffs have conceded it, without waiving the right to re-assert it after discovery.
Plaintiff Jack Bailey is not part of this claim. See Compl. ¶¶ 80-81, ECF 1.
I. Motion to Dismiss Standard
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) requires the court to examine whether the complaint contains sufficient factual allegations to show that the pleader is entitled to relief. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing FED. R. CIV. P. 8(a)(2)). While a complaint need not contain detailed factual allegations, “formulaic recitation[s] of the elements of a cause of action” or “naked assertion[s]” devoid of “further factual enhancement” are not sufficient. Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 557 (2007)). In the absence of a cognizable legal theory or sufficient facts to support a cognizable legal theory, the claim should be dismissed. Taylor v. Yee, 780 F.3d 928, 935 (9th Cir. 2015). To survive a motion to dismiss, the plaintiff must plead facts sufficient for the “court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 663.
In evaluating a motion to dismiss, the court must accept the allegations of material fact as true and construe those allegations in the light most favorable to the non-moving party. Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). In addition to the factual allegations in the complaint, the court may consider documents that are attached to or incorporated by reference in the complaint, where the parties do not contest the authenticity of those documents, as well as matters capable of judicial notice. Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005).
II. Background
This is a dispute among holders of two different classes of equity securities and one class of options to purchase equity securities of defendant NuScale Power LLC (“NuScale” or the “Company”), an Oregon company that “designs scalable advanced nuclear technology-called small modular reactors-for the production of electricity, heat, and clean water.” Under NuScale's 5th Operating Agreement, the Company was manager-managed, and the membership interests consisted of common units and six classes of preferred units. The Company had also issued options to purchase common units. Plaintiffs are “former executives and minority members of NuScale” that held common units or common unit options. Defendants Flour, JNI, and S&L held preferred units. Defendant Flour held a majority interest in the Company, including a majority of the preferred units, and it had appointed all the members of the Company's Board of Managers.
NuScale Mot. Dismiss 1, ECF 18. For the purposes of resolving defendants' motions to dismiss, the adjudicative facts are taken solely from plaintiffs' complaint and are assumed to be true. This additional fact regarding defendant NuScale's business operations is taken from NuScale's motion to dismiss, is uncontested, and is only offered to provide the reader with background context.
Compl. ¶¶ 3, 30, ECF 1.
Id. ¶ 3.
Id. ¶ 4.
Id. ¶¶ 4, 31-33. These defendants are collectively referred to as “Preferred Unit Defendants” where appropriate. These defendants should be distinguished, though, from the preferred unit holders of the Company as a whole, as many of those holders are not defendants in this lawsuit. See Goldberg Decl. Ex. 1, Sch. A, ECF 19-1.
Id. ¶ 4.
Under the 5th Operating Agreement, preferred unit holders were entitled to certain privileges, such as preferential distributions and the right to vote on, among other things, proposed amendments to the operating agreement or changing the size of the Company's board.The 5th Operating Agreement also provided that preferred units could be exchanged for common units at the “common equivalent ratio,” which at the relevant time was 1:1. Common unit holders had, as a general matter, more limited power than preferred unit holders, but importantly, Section 14.3 of the 5th Operating Agreement provided that changes to certain provisions of the operating agreement pertaining to common unit holders' distribution and voting rights could not be changed without the common unit holders' consent.
Goldberg Decl. Ex. 1 at 41, ECF 19-1.
Compl. ¶¶ 37-38, ECF 1.
Id. ¶¶ 39-41; see also Goldberg Dec. Ex. 1 at 69-70, ECF 19-1.
On December 14, 2021, defendant NuScale announced a planned merger to facilitate a public offering. Sometime in December of 2021, NuScale and the Preferred Unit Defendants “voted to amend and replace the 5th Operating Agreement with the 6th Operating Agreement.”At a meeting on December 21, 2021, the Board of Managers adopted the 6th Operating Agreement. The 6th Operating Agreement was disclosed in a public filing on January 4, 2022, and became effective on May 2, 2022, the date the merger transaction closed. All of these changes were done by the Company without obtaining common members' consent.
Id. ¶ 42.
Id. ¶ 44.
Id. ¶¶ 44, 50.
Id. ¶ 46.
The 6th Operating Agreement created two new classes of membership units: Class A units, which could be publicly traded, and Class B units, which were not publicly tradeable.Class B units were deemed “exchangeable units,” meaning that holders of the Class B units could exchange those units for the Class A units of the new company at a specified “Exchange Ratio,” and then those Class A units could be publicly sold. The 6th Operating Agreement also described how the Company's old preferred units and common unit were to be converted into the new Class B units. First, the preferred units were converted or re-classified into common units using a new “Preferred Conversion Ratio,” between approximately 1.56:1 and 1.63:1, depending on the class of the preferred unit. Second, all of the common units (including the re-classified preferred units) were then converted into Class B units based on the Exchange Ratio provided for in the merger agreement.
Goldberg Decl. Ex. 2 at 258, ECF 19-2.
Compl. ¶ 47, ECF 1.
Id.
Id. ¶ 10.
Id. ¶ 47.
As a result of the new Preferred Conversion Ratio in the 6th Operating Agreement, the preferred unit holders received more shares and the common unit holders received less shares than each would have been entitled to under the terms of the 5th Operating Agreement. Had the restructuring taken place using the 5th Operating Agreement, plaintiffs allege that a holder of 1,000 common units would have received 251.2 shares of the new company; under the 6th Operating Agreement, those 1,000 common units translated to 173.2 shares of the new company.
Id. ¶ 13.
Id. ¶ 54.
Plaintiffs have brought this suit on the overarching theory that the common members had the right under Section 14.3 of the 5th Operating Agreement to vote on the changes wrought by the adoption of the 6th Operating Agreement. They seek to represent a class of more than 600 common unit holders and option holders, and claim that defendants' actions caused approximately $100 million in damages to the class. Plaintiffs assert claims for breach of contract, unjust enrichment, and declaratory judgement, as set out in detail above. Each of the defendants have separately moved to dismiss the claims plaintiffs assert against them. ECF 18, 21, 22.
E.g., id. ¶¶ 46, 68, 79, 84.
Id. ¶¶ 14-15, 58.
III. Discussion
A. Breach of Contract - 5th Operating Agreement
Plaintiffs allege that defendants “breached the 5th Operating Agreement by amending Sections 3.1(g), 4.1(a)(iii), 4.1(a)(iv), 4.1(a)(v), 12.2(c) and 14.3(aa) of the 5th Operating Agreement, including by implementing the Restructuring, without the written consent of the Members holding a majority of the Common Units, consenting as a separate class, when Defendants amended the 5th Operating Agreement and replaced it with the 6th Operating Agreement.” Compl. ¶ 84, ECF 1. Section 3.1(g) provides:
On any matter presented to the Members for their action or consideration at any meeting of Members (or by written consent of Members in lieu of a meeting), each Common Member shall be entitled to cast the number of votes equal to the number of whole Common Units held by such holder as of the record date for determining Members entitled to vote on such matter (with any
fractional Units rounded down to the nearest whole number). Except as provided by Law or by the other provisions of this Agreement, holders of Common Units shall vote together with the holders of Preferred Units as a single class.
Goldberg Decl. Ex. 1 at 33, ECF 19-1.
Section 14.3(aa) is the fulcrum of plaintiffs' theory and provides, in relevant part:
(aa) [A]ny amendment to Sections 3.1(g), 4.1(a)(iii), 4.1(a)(iv), 4.1(a)(v) or 12.2(c), or this clause (aa) to the proviso of Section 14.3 (other than any amendment to such Sections and clause (aa) pursuant to Section 3.1(d) in connection with the creation and/or issuance of Equity Securities), shall also require the written consent of the Members holding a majority of the Common Units, consenting as a separate class.
Id. at 69-70.
According to plaintiffs, the 6th Operating Agreement eliminated Section 3.1(g) and Section 14.3(aa), entirely, and amended Section 4.1(a)(iii)-(v), and thus defendants breached Section 14.3(aa) by adopting the 6th Operating Agreement without the consent of the common unit members voting as a separate class. Compl. ¶¶ 45, 84, ECF 1.
Section 4.1(a)(iii)-(v) provides:
(a) Except as otherwise set forth in Section 4.1(b) or Section 4.1(d), the Board may (but shall not be obligated to) direct the Company to make Distributions at any time or from time to time, but only in the following order of priority: ...
(iii) third, to the holders of Common Units (ratably among such holders based on their respective Common Pro Rata Interests) until the amount distributed with respect to each Common Unit is equal to the Lowest Hurdle;
(iv) fourth, to the holders of Common Units (including Common Units then issuable upon the hypothetical conversion of all Lowest Hurdle Preferred Units into Common Units at the Common Equivalent Ratio then in effect) until the amount distributed with respect to each Common Unit is equal to the Next Lowest Hurdle;
(v) fifth, and repeating this clause (v) until the amount distributed with respect to each Common Unit (including each Common Unit then issuable upon the hypothetical conversion of all Lowest Hurdle Preferred Units and Next Lowest Hurdle Preferred Units into Common Units at the Common Equivalent Ratio then in effect) equals the Highest Preferred Hurdle, to the holders of Common Units (including Common Units then issuable upon the hypothetical conversion of all Lowest Hurdle Preferred Units and Next Lowest Hurdle Preferred Units at the Common Equivalent Ratio then in effect) until the amount distributed with respect to each Common Unit is equal to the Subsequent Next Lowest Hurdle[.]Goldberg Decl. Ex. 1 at 36, ECF 19-1.
Defendant NuScale argues that (1) Section 14.3(aa) does not apply because the amendments embodied in the 6th Operating Agreement were done “in connection with the creation and/or issuance of Equity Securities” and were therefore expressly exempted from Section 14.3(aa) via Section 3.1(d); (2) the 6th Operating Agreement was adopted as part of a merger transaction for which the common unit holders did not have any voting or consent rights; and (3) plaintiffs do not sufficiently allege damages as a result of the alleged breaches. Def. NuScale Mot. Dismiss 3-4, ECF 18.
The Preferred Unit Defendants join defendant NuScale's motion and argue separately that the 5th Operating Agreement does not create any duties running from the Preferred Unit Defendants to plaintiffs that could support a breach of contract claim. Def. JNI and S&L Mot. Dismiss 9-12, ECF 21; Def. Flour Mot. Dismiss 9-15, ECF 22.
Each argument is addressed in turn.
1. Section 14.3(aa) - Common Member Voting Rights
Defendant NuScale asserts that Section 14.3(aa) specifically carved out any amendment made “in connection with the creation and/or issuance of Equity Securities.” Def. NuScale Mot. Dismiss 13-16, ECF 18. According to NuScale, the conversion of preferred units to the new Class B units was either itself a creation or issuance of equity securities, or it was at least done in connection with the creation or issuance of equity securities, those being the new Class A and Class B units, and therefore did not breach the 5th Operating Agreement. Def. NuScale Reply 916, ECF 45.
The question is one of contractual interpretation. Oregon courts follow a three-step inquiry for interpreting a contract. Yogman v. Parrott, 325 Or. 358, 361 (1997); see also Ness & Campbell Crane, Inc. v. Kleppe, No. 3:17-cv-01865-HZ, 2018 WL 1702049, at *3 (D. Or. Apr. 5, 2018). First, the court must determine whether the disputed provision is ambiguous, which is a question of law. Ross Dress for Less, Inc. v. Makarios-Oregon, LLC, 210 F.Supp.3d 1259, 1263 (D. Or. 2016). A provision is ambiguous if it can “reasonably be given more than one plausible interpretation.” Id. (quoting Williams v. RJ Reynolds Tobacco Co., 351 Or. 368, 379 (2011)). The court must, if possible, construe the contract in a way that gives effect to all of its provisions, and must not “insert what has been omitted, or to omit what has been inserted.” Id. (quoting O.R.S. § 42.230; Yogman, 325 Or. at 361). If the provision is clear and unambiguous, the court applies the contractual term to the facts. Id. If, however, the term is ambiguous, the second step of the analysis requires the trier of fact to examine extrinsic evidence of the parties' intent and to construct the disputed term consistent with that intent. Id. This means that, on a motion to dismiss, the analysis ends if the provision is ambiguous, and the motion must be denied. Ness & Campbell Crane, 2018 WL 1702049 at *4.
It may be true that adoption of the 6th Operating Agreement resulted in the creation of new securities, including the Class A and Class B units of the new company. But the gravamen of plaintiffs' allegations here is that the defendants wrongly changed existing equity interests through the adoption of the Preferred Conversion Ratio. See Compl. ¶ 10, ECF 1. And those existing preferred and common units had already been “issued” to the members of the Company via the 5th Operating Agreement. See Section 3.1(b) (authorizing the Company to issue common units and preferred units). The 5th Operating Agreement states in a separate section that preferred units were “convertible . . . at any time . . . into a number of Common Units equal to the Common Equivalent Ratio in effect at the time of conversion.” Section 3.1(f)(xi). Reading these provisions together in the context of the contract as a whole, it appears the parties envisioned that the “creation” or “issuance” of equity securities was a separate action from the “conversion” of preferred units to common units. See Yogman, 325 Or. at 361 (directing courts to examine the “text of the disputed provision . . . in the context of the document as a whole”).
Goldberg Decl. Ex. 1 at 23, ECF 19-1.
Id. at 33.
Section 2.1 of the 6th Operating Agreement also reflects this distinction between “issue” or “creation” and “conversion.” Section 2.1(a)(b) provides that the Class A and Class B units were “issuable” to, roughly, the managers and members respectively. And Section 2.1(c) provides that the old preferred units were to be “re-classified” into common units:
Goldberg Decl. Ex. 2 at 337-8, ECF 19-2 (providing that “Class A Units . . . are issuable solely to the Manager and such other persons as the Manager shall determine[.]”).
(c) Recapitalization. Immediately upon the effectiveness of this Agreement and without any action required on the part of the Company or any Member, (i) each Series A Preferred Unit, Series A-1 Preferred Unit, Series A-2 Preferred Unit, Series A-3 Preferred Unit, Series A-4 Preferred Unit, Series A-5 Preferred Unit and Common Unit (each, as defined in the Fifth Operating Agreement) of the Company issued and outstanding immediately prior to the effective time of this Agreement shall be re-classified into 1.5818, 1.5818, 1.5636, 1.5576, 1.5818, 1.6303, and 1.00, Common Units of the Company, respectively, and immediately after such reclassification (ii) each Common Unit issued and outstanding immediately prior to the Effective Time (including each Common Unit issued pursuant to the immediately preceding clause (i)) shall be re-classified into a number of Class B Units
equal to the Exchange Ratio (as defined in the Merger Agreement) (collectively, the “Recapitalization”).
Goldberg Decl. Ex. 2 at 338, ECF 19-2.
The recapitalization is described to take place in at least two distinct steps. First, existing preferred and common units are converted using the preferred ratio. Then, those common units are “re-classified” into Class B units. This “re-classification” of existing shares does not seem to fit the definitions the parties offer for “create” or “issue.” See Def. NuScale Reply 13, ECF 45 (citing plaintiffs' definitions of “create” as “to bring into existence” and “issue” as “to cause to appear . . . or distributing or granting”). At the very least, the term “creation or issuance of equity securities” is ambiguous, as it could reasonably be interpreted to either exclude or include the “re-classification” of existing shares. Batzer Const., Inc. v. Boyer, 204 Or.App. 309, 313, rev. den., 341 Or. 366 (2006) (“A contract provision is ambiguous if it has no definite significance or if it is capable of more than one sensible and reasonable interpretation.”).
So too, the term “in connection with” is ambiguous. Defendant NuScale asserts that the exception in Section 14.3(aa) for actions taken “in connection with” the creation of equity securities should be broadly interpreted to “refe[r] to actions that coincide or are more than tangentially related” to the issuance of the Class A and Class B units of the new company. Def. NuScale Mot. Dismiss 15, EF 18 (quoting Falkowski v. Imation Corp., 309 F.3d 1123, 1131 (9th Cir. 2002) (internal quotation marks and additional citations omitted); Reply 14, ECF 45. And, so broadly construed, the “conversion” of the company's existing units could be seen as happening “in connection with” the Class A and Class B issuance. Id.
But there is an alternative reasonable interpretation of the term “in connection with” when reading Section 14.3(aa) and Section 3.1(d) of the 5th Operating Agreement together in context. Section 3.1(d) provides that, in the event the Board decides to create or issue equity securities, the Board
shall have the power to amend this Agreement to reflect such creation, and to make any such other amendments as the Board reasonably and in good faith deems necessary to reflect such creation (including amending this Agreement to create and authorize a new type, class or series of Units and to add the terms of such new type, class or series of Units, including distribution and voting rights which may be different from, senior to or more favorable than those of the other existing types, classes and series of Units) . . . without the approval or consent of any Member[.]
Goldberg Decl. Ex. 1 at 20, ECF 19-1.
Section 3.1(d) could be read to authorize the Board to issue new equity securities and then to amend the operating agreement as essentially a housekeeping measure to ensure that the operating agreement accurately reflected the various classes or types of equity interests in the company. And in turn the “in connection with” language in Section 14.3(aa) could be interpreted as referring to this more limited power to amend the operating agreement and not, as defendant NuScale asserts, as a grant of broader power that would allow the Board to use the issuance of any new equity securities to bootstrap another action to thwart the common unit holders' consent rights. See Resp. 14-15. ECF 37) (“The ‘in connection with' language in Section 14.3 is not substantive and does not expand Section 3.1(d).”)
Given these competing reasonable interpretations, the contract is ambiguous and plaintiffs' breach of contract claim against defendant NuScale is not subject to dismissal for failure to state a claim on this ground. Madson v. W. Oregon Conf. Ass'n of Seventh-Day Adventists, 209 Or.App. 380, 384 (2006) (“A contract is ambiguous if it is susceptible to more than one reasonable interpretation.”); Arnett v. Bank of Am., N.A., 874 F.Supp.2d 1021, 1033 (D. Or. 2012) (“Because there are two reasonable interpretations of this provision, the contract is ambiguous. Since no extrinsic evidence can be considered at this stage, the motion to dismiss the breach of contract claim must be denied.”) (quoting Roling v. E*Trade Sec., LLC, 756 F.Supp.2d 1179, 1188-89 (N.D. Cal. 2010)).
2. Plan of Merger
Alternatively, defendant NuScale argues that plaintiffs' breach of contract claims regarding the 5th Operating Agreement should be dismissed because the challenged amendments were made pursuant to a “plan of merger,” and the common unit holders did not have, under Section 14.3(aa), any voting or consent rights for a merger. Def. NuScale Mot. Dismiss 17-22, ECF 18. NuScale points to, among other things, the default rules under Oregon's LLC Act regarding the voting rights of members for mergers, and case law from Delaware that purports to stand for the proposition that an LLC member's right to vote or consent on a merger “must be stated specifically.” Def. NuScale Reply 19, ECF 37 (citing Elliot Associates, L.P. v. Avatex Corp., 715 A.2d 843 (Del. 1998); In re P3 Health Grp. Holdings, LLC, No. 2021-0518-JTL, 2022 WL 16548567, at *13 (Del. Ch. Oct. 31, 2022) (“Delaware decisions have made clear that if a party wants a consent right that applies to mergers generally, or which applies to mergers that have the effect of altering, amending, or eliminating a special right that the party possesses, then the consent right must refer specifically to a merger. If the special right does not refer specifically to a merger, then the right does not encompass a merger.”) (internal citations omitted).
But even assuming, without deciding, that the 5th Operating Agreement's voting provisions for common unit holders did not extend the right to vote on the plan of merger, plaintiffs allege that the Board held a separate vote on the 6th Operating Agreement, and it is this separate vote, not the vote to enter the plan of merger, that breached the 5th Operating Agreement. Resp. 16, ECF 37 (“Plaintiffs do not contend that Common Members had a right to a separate vote to approve a merger. Plaintiffs contend that they had a right, pursuant to Section 14.3(aa), to approve the Preferred Conversion and related amendments to the operating agreement.”). That distinguishes this case from the Delaware cases defendant NuScale cites in which the dissatisfied shareholders or LLC members sought to enforce voting rights provisions as to the merger transaction itself. In those cases, unlike here, there did not appear to be a distinct action taken by the existing company prior to the merger's closing that implicated the aggrieved party's contractual rights. See P3 Health, 2022 WL 16548567 at *3-8 (explaining merger negotiations, terms, execution, and effects); Avatex, 715 A.2d at 844-45 (same).
Defendant NuScale assails this attempt to “split up” the adoption of the 6th Operating Agreement as a separate transaction from the adoption of the plan of merger. Def. NuScale Reply 18, ECF 45. NuScale correctly points out that the 6th Operating Agreement was included as an exhibit to the plan of merger and was incorporated by explicit reference in the merger documents. Id. NuScale argues that, because the adoption of the 6th Operating Agreement and its preferred conversion ratio “was indisputably part of the Plan of Merger itself” and “did not happen prior to or separate from the merger,” the adoption of the 6th Operating Agreement must be analyzed as part of the merger under the so-called “step transaction” doctrine, and not as its own separate transaction. Def. NuScale Reply 18-19, ECF 45.
The step transaction doctrine is “a concept familiar in tax law” whereby the “steps in a series of formally separate but related transactions involving the transfer of property” are viewed as a single transaction or as “components of an overall plan.” Noddings Inv. Grp., Inc. v. Capstar Commc'ns, Inc., No. CIV. A. 16538, 1999 WL 182568, at *6 (Del. Ch. Mar. 24, 1999), aff'd, 741 A.2d 16 (Del. 1999) (quoting Greene v. United States, 14 F.3d 577, 583 (2d Cir. 1994) (internal quotation marks omitted); see also Comm'r v. Clark, 489 U.S. 726, 738 (1989) (“Under [the step transaction] doctrine, interrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction. By thus linking together all interdependent steps with legal or business significance, rather than taking them in isolation, federal tax liability may be based on a realistic view of the entire transaction.”) (simplified). The doctrine also applies in the fraudulent conveyance context, and Delaware courts have previously applied the step transaction doctrine to other areas including “partnership agreements, warrant agreements, and recapitalization transactions.” Coughlan v. NXP B.V., No. CIV. A. 5110-VCG, 2011 WL 5299491, at *9 (Del. Ch. Nov. 4, 2011); Kentrox, Inc. v. Bernstein, No. 3:13-cv-01492 -ST, 2014 WL 4221592, at *10 (D. Or. May 9, 2014), report and recommendation rejected in part on other grounds, Kentrox, Inc. v. Berstein, No. 3:13-cv-01492-ST, 2014 WL 4220929 (D. Or. Aug. 25, 2014) (explaining application of step transaction outside of tax context).
But even assuming it is appropriate to apply the step transaction doctrine to defendants' actions here, it does not provide a basis for dismissing plaintiffs' claims at this preliminary stage because the “application of the step transaction doctrine . . . is a question of fact which cannot be decided on a motion to dismiss or for judgment on the pleadings.” Kentrox, 2014 WL 4221592 at *10; Custom Chrome, Inc. v. Comm'r, 217 F.3d 1117, 1121 (9th Cir. 2000) (“The Tax Court's determination that the several steps of a complex transaction are, under the step transaction doctrine, a single taxable transaction is a finding of fact subject to the clearly erroneous standard of review.”).
The parties dispute whether plaintiffs have stated a breach of contract claim based on adoption of the preferred conversion ratio itself, as distinct from plaintiffs' allegations regarding their voting rights under Section 14.3(aa). See Resp. 11, ECF 37; Def. NuScale Reply 5-7, ECF 45. That argument was not raised in defendant NuScale's initial motion, nor is that theory pleaded with sufficiently clarity in the complaint to allow a comprehensive analysis on that issue at this time.
3. Damages
Defendant NuScale also asserts that plaintiffs have failed to allege nonspeculative damages for the breach of contract claim. Def. NuScale Mot. Dismiss 22-24, ECF 18. Again, plaintiffs allege that defendant NuScale failed to obtain the consent of the common unit holders before amending certain provisions of the 5th Operating Agreement, as required by Section 14.3(aa). Compl. ¶ 84, ECF 1. Plaintiffs allege that, as part of those changes, defendants adopted the Preferred Conversion Ratio, which necessarily diluted the common unit holders' interest and allowed the Preferred Unit Defendants to obtain substantially more equity value than they would have been afforded under the 5th Operating Agreement. See id. ¶¶ 13-15. That is sufficient to draw a reasonable inference that “defendant's conduct is the factual cause of all harm that would have not occurred but for the defendant's actions” and thus maintain a breach of contract claim against defendant NuScale at this preliminary stage. PacificCorp v. Nw. Pipline GP, 879 F.Supp.2d 1171, 1198 (D. Or. 2012); see also Tibbets v. Athene Annuity & Life Assurance Co. of New York, No. 3:19-cv-00796-BR, 2020 WL 129093, at *4 (D. Or. Jan. 10, 2020) (“[A]lthough the amount and exact nature of Plaintiff's damages is to be determined, the Court concludes Plaintiff has sufficiently pled damages at this stage of the proceedings.”); Logan v. D.W. Sivers Co., 207 Or.App. 231, 243 (2006), rev'd in part on other grounds, 343 Or. 339 (2007) (“A plaintiff may recover damages for breach of contract if the damages are (1) caused by the breach, (2) foreseeable, and (3) not too speculative.”).
4. Breach of 5th Operating Agreement - Preferred Unit Defendants
The Preferred Unit Defendants join Defendant NuScale's motion, and each move separately to dismiss plaintiffs' breach of contract claims against them based on the 5th Operating Agreement. See Defs. JNI and S&L Mot. Dismiss 9-12, ECF 21; Def. Flour Mot. Dismiss 8-15, ECF 22. The Preferred Unit Defendants argue that (1) plaintiffs fail to allege that they breached any duty they owed to plaintiffs under the 5th Operating Agreement; and (2) various exculpation clauses in the 5th Operating Agreement protect them from liability for exercising their right to vote or other powers of membership. Defs. JNI and S&L Mot. Dismiss 9-11, ECF 21; Def. Flour Mot. Dismiss 9-15, ECF 22.
Plaintiffs counter that the Preferred Unit Defendants are parties to the 5th Operating Agreement, and they breached it by voting to amend the 5th Operating Agreement, signing the 6th Operating Agreement, and converting their preferred units “at a ratio greater than the contract allowed.” Resp. 22, ECF 37 (citing Compl. ¶¶ 44-48, ECF 1). Indeed, all of those alleged breaches flow from the amendments to the 5th Operating Agreement via the adoption of the 6th Operating Agreement. But while plaintiffs have stated a claim against the Company for breaching the voting rights provision of Section 14.3(aa) of the 5th Operating Agreement in connection with those amendments, plaintiffs have not alleged a viable breach of contract claim against the Preferred Unit Defendants in their capacity as parties to the 5th Operating Agreement or as the members who voted for the amendments.
Section 14.3(aa) governs how the company's 5th Operating Agreement could be amended, and as explained above, it limits the power of the Company to amend certain portions of the agreement without the separate consent of the common unit members. But plaintiffs do not identify any duty that the Preferred Unit Defendants owed to plaintiffs under that section. See Duffy v. Oregon Glass Co., No. 06-cv-1579-BR, 2008 WL 1925038, at *5 (D. Or. Apr. 29, 2008) (“A claim for breach of contract accrues when a party to the agreement does not perform a duty owed to another party.”) (citing Kantor v. Boise Cascade Corp., 75 Or.App. 698, 703 (1985); see also P3 Health, 2022 WL 16548567 at *1 (dismissing breach of contract claims against a “party to the LCC agreement in its capacity as a member” but who did “not owe any of the obligations” the plaintiff sought to enforce).
Goldberg Decl. Ex. 1 at 69, ECF 19-1.
Defendant NuScale is an Oregon company, and the 5th Operating Agreement is controlled by Oregon law. See Resp. 18-21, ECF 37; Compl. ¶ 30, ECF 1. In applying Oregon law, Oregon courts and judges in this district often look, however, to Delaware law for guidance in areas of corporate and business law when there is limited Oregon law on point. See Crandon Cap. Partners v. Shelk, 219 Or.App. 16, 29 (2008) (applying Delaware law to determine when a prelitigation demand may be excused in shareholder-derivative suits); Kentrox, 2014 WL 4221592 at *9 (“[A]s do courts in many other states, Oregon courts often look to Delaware law for guidance in construing Oregon corporate law when the relevant issue in Oregon corporate law is undeveloped.”) (internal quotation marks omitted);
Amending the operating agreement is an action that is taken by the Company with, if required, the consent of the members. Section 5.1 of the 5th Operating Agreement empowers the Board of Managers to direct and manage the “business and affairs” of the Company. Section 6.2 provides that “[n]o member in its capacity” as a member “has the authority to act for on behalf of the Company in any manner or way” unless the agreement specifically provides otherwise. And Section 5.1(d)(xiv) of the 5th Operating Agreement provides that “the Company shall not . . . amend any provision of this Agreement” without the preferred unit holders' consent. Section 14.8 specifically protects the right of each member to exercise, or not, any rights or privileges it has under the agreement, and specifically states that members “shall not . . . be subject to any liability or obligations to any other Member . . . by reason of exercising or refraining from exercising any such rights, powers, or privileges.” The fact that the Preferred Unit Defendants exercised their contractual right to vote on the amendments proposed by the Company cannot support a breach of contract claim against them. See Hogan v. N.W. Tr. Servs., Inc., No. 6:10-cv-06028-HO, 2010 WL 1872945, at *6 (D. Or. May 7, 2010), aff'd, 441 Fed.Appx. 490 (9th Cir. 2011) (“[A] party invoking an express contractual right does not merely by doing so, violate the [contractual] duty of good faith and fair dealing.”).
Goldberg Decl. Ex. 1 at 38, ECF 19-1.
Id. at 50.
Id. at 39, 41 (emphasis added).
Id. at 71 (“Each Member recognizes, acknowledges and agrees that the other Members have substantial financial interests in the Company to preserve and that (a) each Member, in its sole and absolute discretion, may exercise or refrain from exercising any rights, powers or privileges that such Member, in its capacity as a Member, may have pursuant to this Agreement or at law or in equity[.]”)
This conclusion is further supported by the Oregon LLC Act, which provides that the members of an LLC are not personally responsible for the company's liabilities, “whether arising in contract, tort or otherwise,” solely because they are members. O.R.S. § 63.165 (a). Section 6.1 of the 5th Operating Agreement reflects the same. And plaintiffs have not offered any authority for the proposition that members of a manager-managed LLC can bring an action against another member of the LLC based on an alleged breach of the company's operating agreement. See Quantum Tech. Partners II, L.P. v. Altman Browning & Co., No. 3:08-cv-00376-BR, 2009 WL 4826474, at *6 (D. Or. Dec. 8, 2009), aff'd, 436 Fed.Appx. 792 (9th Cir. 2011) (dismissing plaintiff-shareholder's “breach of contract [claim] against another shareholder for violation of the corporation's bylaws” as unsupported by Delaware law).
Id. at 49.
And to the extent plaintiff's allegations could be generously read to suggest that defendant Flour should be liable on a “piercing the corporate veil” or similar theory for the Company's actions, the facts as alleged are not sufficient to state such a claim. See Compl. ¶ 31, ECF 1 (alleging that defendant Flour “held a majority interest in NuScale . . . and had the ability to control the Company through its Board of Managers, having appointed all those managers” and all the managers have some connection to Flour); Int'l Longshore & Warehouse Union, Loc. 40 v. Grain, No. 3:13-CV-00513-AC, 2013 WL 6665725, at *6 (D. Or. Dec. 17, 2013) (applying Rule 9's heightened pleading standard to alter ego theory and dismissing claim).
Therefore, plaintiffs have failed to state a breach of contract claim against defendants Flour, JNI, and S&L based on the 5th Operating Agreement.
B. Breach of Option Plan
The sub-class of plaintiffs who held options to purchase common units (the “Option Holder Plaintiffs”) allege that defendant NuScale breached the Option Plan through the restructuring and adoption of the 6th Operating Agreement. Compl. ¶¶ 86-90, ECF 1. They assert that the Option Plan “required that, in any recapitalization, the Option Holders receive the same proportional interest after a recapitalization that they had prior to the recapitalization (that is, 1:1).” Id. ¶ 8.
Defendant NuScale argues that (1) Section 8.2 of the Option Plan controls because the changes to the option units were done pursuant to a plan of merger; and (2) Section 8.1 of the Option Plan does not apply. The argument regarding the merger and its effect on the Option Plan is equally unavailing here as it was for the 5th Operating Agreement, as explained above. Supra, Section III.A.2. As for Section 8.1 of the Option Plan, the Option Holder Plaintiffs have adequately stated a claim for breach of contract based on that provision. The analysis begins with the “recapitalization” provision of the 6th Operating Agreement, Section 2.1(c), which describes how the outstanding preferred units would be “re-classified” into common units:
(c) Recapitalization. Immediately upon the effectiveness of this Agreement and without any action required on the part of the Company or any Member, (i) each Series A Preferred Unit, Series A-1 Preferred Unit, Series A-2 Preferred Unit, Series A-3 Preferred Unit, Series A-4 Preferred Unit, Series A-5 Preferred Unit and Common Unit (each, as defined in the Fifth Operating Agreement) of the Company issued and outstanding immediately prior to the effective time of this Agreement shall be re-classified into 1.5818, 1.5818, 1.5636, 1.5576, 1.5818, 1.6303, and 1.00, Common Units of the Company, respectively, and immediately after such reclassification (ii) each Common Unit issued and outstanding immediately prior to the Effective Time (including each Common Unit issued pursuant to the immediately preceding clause (i)) shall be re-classified into a number of Class B Units equal to the Exchange Ratio (as defined in the Merger Agreement) (collectively, the “Recapitalization”).
Goldberg Decl. Ex. 2 at 338, ECF 19-2.
The number of outstanding common units was therefore increased by the re-classification of preferred units into common units, and then those outstanding common units were re-classified into Class B units of the new company.
Section 8.1 of the Option Agreement provides that if the number of outstanding common units were “increased or decreased or changed into or exchanged for a different number or kind of units” by, among other things “reclassification,” then the option holders' “proportionate interest before and after” must be “maintained.” Defendant NuScale insists that only preferred units were changed via the 6th Operating Agreement and that Section 8.1 only applies to changes to common units. The Option Holder Plaintiffs allege that through the reclassification, the preferred units were “converted into an increased number . . . of common units,” which “necessarily diluted the interests of the” Option Holder Plaintiffs. Compl. ¶¶ 47-48, ECF 1.
Id., Ex. 3 at 7, ECF 19-3.
Assuming those allegations are true, the number of common units was “increased” by reason of a re-classification at some point, which fits squarely under the terms of Section 8.1. That is sufficient at this stage to state a claim for breach of contract against defendant NuScale based on Section 8.1 of the Option Plan and the dilution of the Option Holder Plaintiffs' interests via the preferred conversion.
C. Breach of Implied Duty of Good Faith & Fair Dealing
Oregon “law imposes a duty of good faith and fair dealing in the performance and enforcement of every contract.” Hampton Tree Farms, Inc. v. Jewett, 320 Or. 599, 615 (1995). The purpose of the duty “is to prohibit improper behavior in the performance and enforcement of contracts, and to ensure that the parties will refrain from any act that would have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” Klamath Off-Project Water Users, Inc. v. Pacificorp, 237 Or.App. 434, 445 (2010) (internal quotation marks omitted). The duty of good faith “focuses on the agreed common purpose and the justified expectations of the parties, both of which are intimately related to the parties' manifestation of their purposes and expectations in the express provisions of the contract.” Id. (internal quotation marks omitted). It serves to “effectuate the objectively reasonable expectations of the parties,” and thus the duty cannot “contradict an express contractual term, nor otherwise provide a remedy for an unpleasantly motivated act that is permitted expressly by the contract.” Id. Put differently, “a party invoking an express contractual right does not, merely by doing so, violate the duty of good faith.” Stevens v. Foren, 154 Or.App. 52, 59 (1998).
Plaintiffs allege that defendant NuScale breached the duty of good faith and fair dealing “by enacting and implementing the Preferred Conversion without the written consent of the Members holding a majority of the Common Units, consenting as a separate class.” Defendant NuScale asserts that this claim should be dismissed because it is “based on the same facts and same issues that comprise” plaintiffs' breach of contract claims. Def. NuScale Mot. Dismiss 30, ECF 18.
This claim is asserted against defendant NuScale and the Preferred Unit Defendants, but only in connection with the amendments to the 5th Operating Agreement and not the alleged breach of the Option Plan. See Resp. 32, ECF 37. Further, plaintiffs clarify that “plaintiff Jack A. Bailey does not allege claims based on the 5th Operating Agreement.” Resp. 32 n.13, ECF 37.43 Compl. ¶¶ 39-41, ECF 1.
Under Oregon law, a plaintiff may succeed on either or both a breach of contract claim and a claim for the breach of the implied duty of good faith and fair dealing premised on the same facts. Opal Labs Inc. v. Sprinklr, Inc., No. 3:18-cv-01192-HZ, 2021 WL 3713042, at *6 (D. Or. Aug. 19, 2021). And, in any event, plaintiffs' claims are not entirely duplicative. Plaintiffs allege that the voting rights provisions were adopted to “protec[t] the Common Members against amendments to their rights,” including their “voting [and] distribution . . . rights.”43 And even if, as defendant NuScale asserts, the adoption of the Preferred Conversion Ratio did not violate the express terms of Section 14.3(aa)'s voting rights provision, it could have violated these implied protections of the common members' rights. See Andrews v. Treasure Valley Cmty. Coll., No. 2:19-cv-01314-SU, 2020 WL 1678050, at *6 (D. Or. Mar. 18, 2020), report and recommendation adopted, No. 2:19-cv-1314-SU, 2020 WL 1674119 (D. Or. Apr. 6, 2020) (“A party may violate the duty of good faith and fair dealing without also breaching the express provisions of the contract and a claim for breach of the duty may be maintained independent of the express terms of the contract.”).
There are also other allegations in the complaint that plausibly support a claim based on the duty of good faith and fair dealing. In particular, plaintiffs allege that after the merger closed, holders of Class B units had the right to exchange those units for the publicly tradeable Class A units. When plaintiffs notified defendant NuScale of “their intention to file this class action,” NuScale “advised Plaintiffs that ‘[t]he filing of a class action lawsuit could be viewed as material information by investors,' and threatened to report Plaintiffs to the SEC for insider trading if they traded their shares.” Assuming, as is required at this juncture, that those allegations are true, defendant NuScale's attempt to dissuade plaintiffs from exercising their contractual right to exchange their Class B units could support a claim for the breach of duty of good faith and fair dealing. See McCartney v. Malinka CPA, LLC, No. 3:22-CV-01322-IM, 2023 WL 4134909, at *7 (D. Or. June 22, 2023) (explaining that the duty of good faith and fair dealing “bars improper behavior in the performance and enforcement of contracts to ensure that the parties will refrain from any act that would have the effect of destroying or injuring the right of the other party to receive the fruits of the contract”) (simplified). Defendant NuScale's assertion in a footnote that a claim based on this theory may be vulnerable to future motions practice is not grounds for dismissing the claim at this time. See Reply 32 n.14, ECF 45.
Id. ¶ 55.
Id.
Regarding the Preferred Unit Defendants, as explained above, the 5th Operating Agreement expressly empowered the preferred unit holders to vote on amendments to the Company's operating agreement. Section 14.8 specifically provides that members exercising their “rights, powers or privileges,” which for the Preferred Member Defendants included the right to vote on amendments to the operating agreement, “shall not be deemed to constitute a lack of good faith or unfair dealing.” Contrary to plaintiffs' insistence, this does not “fully eliminate” the duty of good faith and fair dealing; it simply codifies the principle stated in numerous cases that a “party invoking an express contractual right does not merely by doing so, violate the duty of good faith and fair dealing.” Hogan, 2010 WL 1872945 at *6 (citing Uptown Heights Associates v. Seafirst Corp, 320 Or. 638, 645 (1995)).
Goldberg Decl. Ex. 1 at 71, ECF 19-1.
Accordingly, plaintiffs do not state a claim for breach of the duty of good faith and fair dealing against the Preferred Member Defendants, but plaintiffs' claim for breach of this implied duty against defendant NuScale survives.
D. Unjust Enrichment
Plaintiffs also assert an unjust enrichment claim against the Preferred Unit Defendants, alleging that they “wrongfully authorized and implemented the Preferred Conversion and the 6th Operating Agreement,” and as a result, the Preferred Unit Defendants “received surplus Common Units and publicly traded shares, with substantial value.” Compl. ¶ 70, ECF 1. The Preferred Unit Defendants move to dismiss these claims on the basis that the 5th Operating Agreement is a binding, enforceable contract that “sets out the respective rights” of plaintiffs and the other members of the company, including the Preferred Unit Defendants. Defs. JNI and S&L Mot. Dismiss 14, ECF 21; see also Def. Flour Mot. Dismiss 18, ECF 22.
“A plaintiff typically may plead a quasi-contract claim in the alternative to a contract claim.” Granados v. OnPoint Cmty. Credit Union, No. 3:21-CV-847-SI, 2023 WL 3570039, at *7 (D. Or. May 18, 2023) (citing Kashmir Corp. v. Patterson, 43 Or.App. 45, 48 (1979), aff'd, 289 Or. 589 (1980)). “Such alternative pleading may be beneficial to the pleader in the situation where it is faced with a contract which may be void under the statute of frauds, where its performance has been hindered by the defendant, where the facts at trial may show that it did not substantially perform the contract but that it is entitled to the reasonable value of the services furnished, or where the pleader is unsure of whether it can actually prove the existence of the contract at trial.” Kashmir, 43 Or.App. at 48.
If a valid, enforceable contract exists, however, a plaintiff cannot succeed on an unjust enrichment claim. Granados, 2023 WL 3570039 at *7 (citing Gillett v. Tucker, 317 Or.App. 570, 582 (2022); Ken Hood Constr. Co. v. Pac. Coast Constr., Inc., 203 Or.App. 768, 772, rev. den., 341 Or. 366 (2006); Larisa's Home Care, LLC v. Nichols-Shields, 362 Or. 115, 124-132 (2017). Here, no party disputes the validity and enforceability of the 5th Operating Agreement, or that its provisions ultimately govern this dispute. See Compl. ¶¶ 36-37, ECF 1 (describing the parties to the 5th Operating Agreement); Id. ¶ 82 (alleging that the 5th Operating Agreement is a “valid contract binding the parties”); Def. Flour Mot. Dismiss 18, ECF 22; Defs. JNI and S&L Mot. Dismiss 14-15, ECF 21. Accordingly, plaintiffs have not stated a claim for unjust enrichment against the Preferred Unit Defendants. See Kashmir, 43 Or.App. at 48-49 (“In the present situation the contract was pleaded and was incorporated in plaintiff's complaint. Defendants admitted the contract in their answer. The enforceability of the contract was not in dispute. At that time the action became one in contract. The basis of the plaintiff's cause of action was established. The count in Quantum meruit was no longer relevant to the law suit and was properly stricken.”).
E. Declaratory Judgment
Plaintiffs concede that their declaratory judgment claim should be dismissed, but have “reserve[d] the right to re-assert it after discovery.” Resp. 1 n.1, ECF 37.
RECOMMENDATIONS
Defendant NuScale's Motion to Dismiss (ECF 18), defendant Flour's Motion to Dismiss (ECF 22), and defendants JNI and S&L's joint Motion to Dismiss (ECF 21) should be granted in part and denied in part as follows:
• Plaintiffs' breach of contract claims against defendants Flour, JNI, and S&L should be dismissed because the 5th Operating Agreement does not impose any duties running from these defendants to plaintiffs that could be breached.
• Plaintiffs' breach of contract claims against defendant NuScale based on the 5th Operating Agreement and the Option Plan should not be dismissed because the disputed terms are at least ambiguous, and the question whether the “step transaction doctrine” applies here is a factual one not amenable to a motion to dismiss.
• Plaintiffs' breach of the duty of good faith and fair dealing claims against defendant NuScale should be not be dismissed because plaintiff has adequately alleged an independent breach of an implied duty. Plaintiffs' similar claims against defendants Flour, JNI, and S&L should be dismissed, though, because the express terms of the controlling contract expressly allowed those defendants to exercise their right to vote on proposed amendments to the company's operating agreement.
• Plaintiffs' unjust enrichment claims should be dismissed because no party disputes that a valid, enforceable contract controls the dispute between plaintiffs and defendants Flour, JNI, and S&L.
• Plaintiffs' declaratory judgment claim should be dismissed because plaintiffs have conceded so, without waiving the right to re-assert the claim after discovery.
SCHEDULING ORDER
These Findings and Recommendations will be referred to a district judge. Objections, if any, are due Thursday, August 17, 2023. If no objections are filed, then the Findings and Recommendations will go under advisement on that date.
If objections are filed, then a response is due within 14 days after being served with a copy of the objections. When the response is due or filed, whichever date is earlier, the Findings and Recommendations will go under advisement.
NOTICE
These Findings and Recommendations are not an order that is immediately appealable to the Ninth Circuit Court of Appeals. Any Notice of Appeal pursuant to Rule 4(a)(1), Federal Rules of Appellate Procedure, should not be filed until entry of a judgment.