Chancery Court Rules on Fraud Claims and Breach of Fiduciary Duty Claim against a Solar Project Fund and its Manager
By: Scott E. Waxman and Marissa Leon
In HOMF II Investment Corp., et al v. Joaquin Altenberg, et al. (C.A. No. 2017-0293-JTL), the Delaware Chancery Court (the “Court”) ruled in favor of the plaintiffs on a breach of fiduciary duty claim, in favor of the defendant on a fraud in the inducement claim due to the plaintiffs’ failure to give defendant procedural notice and in favor of the defendant on plaintiff’s second claim of fraud due to the plaintiffs’ failure to prove fraud while operating a fund.
HOMF II Investment Corp., OBD Partners LLC and Brett Jefferson (the “Plaintiffs”) invested a total of $6,829,500 in VERT Solar Fund I, LLC (the “Fund”) with the understanding that the Fund would invest in an initial project named Project Cali. The Fund was managed by VERT Solar Finance, LLC (“Finance”), an entity controlled by Joaquin Altenberg (“Altenberg”). Altenberg’s plan was for the Fund to acquire solar projects, own the projects through special purpose vehicles and provide the necessary equity capital for commercial operation. Once a project achieved commercial operation, the project could be refinanced with long-term debt all within three to six months.
The Plaintiffs filed a lawsuit against Altenberg, Finance and the Fund in response to the Fund’s poor performance, the failure to launch Project Cali and disagreements between Plaintiffs and Altenberg with respect to the Fund’s other projects. After trial, the Plaintiffs focused on four claims: (1) fraud in the inducement, (2) fraud during the operation of the Fund, (3) breach of fiduciary duty and (4) breach of contract.
The Court found that Altenberg provided communications to the Plaintiffs that were materially misleading or contained material omissions that induced them to invest in the Fund. For example, Altenberg misrepresented the Fund’s plans for its first project, that the Fund would acquire projects which would be completed within three to six months, the Fund’s relationship with experts and committed sources of financing and other details of the Fund and its operations. However, the claim of fraud in the inducement arose in a post-trial answering brief and the Plaintiff did not move under Rule 15(b) to amend the pleadings to conform to the evidence presented at trial. Therefore, the Court concluded that the claim of fraud in the inducement was not validly introduced on procedural grounds and the Court ruled in favor of Altenberg.
As to the second fraud claim, the Court found that the Plaintiffs failed to prove fraud during the operation of the Fund. Altenberg deviated from the Fund’s plan, but his false representations did not rise to fraud. The Court therefore ruled in favor of Altenberg on the second fraud claim.
The Court found that Altenberg breached his fiduciary duty of loyalty owed to the Fund by engaging in self-interested transactions that were not entirely fair. For example, Altenberg caused the Fund to pay excessive management fees to Finance, placed Fund assets under Finance’s name, failed to hold title to the Fund’s assets in the Fund’s name, caused the Fund to pay project-related fees for projects that were held in Finance’s name, caused the Fund to take excessive fees, caused the Fund to pay for various legal expenses and deprived Plaintiff of their interest in certain projects. The Court ruled on the issue of liability on the various instances of breaches of fiduciary duty and provided preliminary rulings on the potential remedy for each of the breaches.
Finally, with respect to the Plaintiffs’ breach of contract claim, the Court did not examine whether Altenberg breached the explicit terms of the Fund’s Operating Agreement and the implicit terms supplied by the implied covenant of good faith and fair dealing. The Court determined that Altenberg was not a party to the Operating Agreement and was therefore not liable. The Court also determined that it could not make a decision with respect to Finance because the entity filed for bankruptcy and stayed the breach of contract claim. The Court therefore could not decide whether to hold Altenberg personally liable for resulting damages after piercing Finance’s entity veil.
HOMF II Investment Corp., et al v. Joaquin Altenberg, et al.