Chancery Court Denies Assignor’s Inspection Demand under Real Party in Interest Rule, Prohibits Substitute Plaintiff
By: Scott E. Waxman and Michael C. Payant
In SolarReserve CSP Holdings, LLC v. Tonopah Solar Energy, LLC, C.A. No 2020-0064-JRS (Del. Ch. July 24, 2020), the Delaware Court of Chancery (the “Court”) examined an alleged breach of contract based on the denial of inspection rights to which SolarReserve CSP Holdings, LLC (“SR”) was allegedly entitled under the LLC Agreement (the “LLCA”) of Tonopah Solar Energy, LLC (the “Company”). The Court entered judgment for the Company, finding (i) SR was not a real party in interest under Chancery Court Rule 17 because it had made a complete assignment of its rights under the LLCA, and (ii) the real party in interest assignee was not entitled to inspection rights under the LLCA.
SR was originally the sole member in the Company, a Delaware LLC formed to operate a solar power plan project in Nevada (the “Project”). In the process of raising capital to finance the Project, SR ceded its sole-member status and became an indirect owner in the Company, several layers removed. SolarReserve, Inc. (“SR Parent”), SR’s parent company, experienced financial difficulties in 2019, furloughing all employees and shifting toward a wind-down of its business. Most of SR Parent’s assets were sold, and those that remained were assigned to a trustee for the benefit of SR Parent’s creditors pursuant to a General Assignment.
Amid the liquidation of SR Parent, SR filed an action seeking dissolution of the Company in October 2019 (the “Prior Action”). In December 2019, SR executed an Assignment of Claims (the “Assignment”) in favor of CMB Infrastructure Group IX, L.P. (“CMB”), an unaffiliated SR lender. Shortly thereafter, SR made a written demand under the LLCA to inspect the Company’s books and records, including an array of documents relating to the Project (the “Demand”). The Company rejected the Demand, and SR filed the present case in February 2020, alleging the denial constituted a breach of the LLCA. In March 2020, the Court dismissed the Prior Action for failure to state a claim noting SR had knowingly bargained away its rights under the LLCA (including the right to seek a dissolution) – that decision remains under appeal.
Relevant to the present action, the LLCA dictated that a defined list of “Sponsor Entities” of the Company were entitled to inspection rights. One such entity was “SolarReserve Sponsor” (“SR Sponsor”), which was defined as “[SR] excluding any unaffiliated successor”. While another of the Sponsor Entities was defined to expressly include such entity’s “assignees, transferees and successors”, SR Sponsor was not.
Beginning its analysis in the present case, the Court first determined SR was not a real party in interest under Rule 17. CMB was the assignee of all SR’s “right, title, and interest in and to all actions” against the Company, including “claims” and “lawsuits of any nature whatsoever”, along with all related rights and benefits. The Court noted in the case of a complete assignment, the plaintiff should be the assignee. Accordingly, in light of the absolute assignment of SR’s interest in the lawsuit, it was clear on the record that CMB, not SR, was the sole party in interest.
The Court briefly summarized and rejected SR’s arguments to the contrary. SR pointed to a provision in the Assignment that granted CMB rights as SR’s attorney-in-fact, in an apparent attempt to suggest that rights in the lawsuit remained with SR, and that CMB in fact possessed the ability to cause SR to exercise its own rights. The Court found this argument unpersuasive and noted that the power of attorney between the parties was irrelevant to the Rule 17 inquiry – the only pertinent fact was that CMB, a party not before the Court, was the only entity with the substantive right to bring the action. SR separately contended that the Company raised the Rule 17 issue too late. The Court noted that Rule 17 need not be raised in a responsive pleading but must merely be raised “in a timely or seasonable fashion.” Given that the Company raised Rule 17 in its Answer, the Pretrial Order and its Answering Brief, there was no waiver. Accordingly, the Court held that SR was an improper plaintiff under Rule 17 because it had no interest in the proceeding.
The Court next concluded that CMB, the real party in interest, was not entitled to inspection rights under the LLCA. SR argued CMB could be joined to the proceeding as a substitute plaintiff under Chancery Court Rule 25(c), but the Court disagreed for several reasons. First, Rule 25(c) applies only when there is a transfer of interest while an action is pending. Here, the transfer predated the action – SR executed the Assignment on December 31, 2019 and filed its complaint on February 5, 2020. Second, in any case, the plain text of the LLCA did not support the assertion that CMB was entitled to inspection rights. SR argued CMB was not an unaffiliated successor expressly carved out from the SR Sponsor definition, but instead an assignee of SR’s rights in the lawsuit. Therefore, the Company argued, CMB was entitled to inspection rights. This distinction was not meaningful, the Court explained, because an “assignee” was not included in the definition of SR Sponsor, despite the fact it had been expressly included in the definition for another of the Sponsor Entities. The Court therefore held that the record “supported a finding that [SR] alone was afforded a personal right to inspect Company records, and that any attempt to assign that right to CMB would be ineffective.” Even assuming CMB was not automatically excluded as an unaffiliated successor, SR was still the only entity that could qualify as an SR Sponsor entitled to inspection rights, and CMB was not an appropriate plaintiff to assert inspection rights under the LLCA.
Based on the foregoing, the Court determined judgment would be entered in favor of the Company.