GE Mobile v Red Desert Reclamation 13-cv-357-PB 3/11/1A

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

GE Mobile Water, Inc.

v. Case No. 13-cv-357-PB Opinion No.

Red Desert Reclamation, LLC, et a l .

MEMORANDUM AND ORDER

In February 2012, GE Mobile Water, Inc. entered into a

contract with Red Desert Reclamation, LLC to lease water

treatment equipment for use at its Wyoming facility. After Red

Desert failed to make payments required under the contract, GE

Mobile sued it and two affiliated entities. Clean Runner, LLC

and Cate Street Capital, Inc. In an earlier order, I denied Red

Desert's motion to dismiss for lack of personal jurisdiction.

GE Mobile Water, Inc. v. Red Desert Reclamation, LLC, 2 014 DNH

049, 14. I now consider Clean Runner and Cate Street's motion

to dismiss for failure to state a claim. I. BACKGROUND1

In 2012, Red Desert operated a facility in Rawlins, Wyoming

for recycling water used in the hydraulic fracturing of natural

gas reserves. Red Desert used water treatment technology at its

Wyoming facility that was developed by Clean Runner. Red Desert

and Clean Runner are managed by Cate Street Capital, Inc., a

Delaware corporation with an office in Portsmouth, New

Hampshire. Cate Street planned to use the Wyoming facility as a

platform to showcase Clean Runner's technology, with the goal of

operating similar hydraulic fracturing water treatment

facilities throughout the country. Doc. Nos. 18-2, 18-4, 18-5,

18-6.

Beginning in September 2011, Steven Fischer, a GE Mobile

employee, began working with Hudson J. Cleveland on a proposed

contract under which GE Mobile would lease water processing and

treatment equipment for use at the Red Desert facility. At the

time, Cleveland was a Managing Director of Cate Street, Chief

Operating Officer of Red Desert, and President of Clean Runner.

Barry Glichenhaus and Samuel Olson of Cate Street were also

1 Unless otherwise specified, the facts are taken from the complaint. Doc. No. 1.

2 involved in negotiating the contract. During negotiations, Cate

Street's representative told Fischer that Cate Street was paying

for the project and was the ultimate decision maker. Cleveland

also represented "that Cate Street, being funded with $40

million for the Project, would be able 'to make good' on the

invoices issued by [GE Mobile] for the Project."

Negotiations culminated in a Proposal from GE Mobile and a

$3,264 million Purchase Order from Red Desert (collectively the

"Contract"). Cleveland signed the Purchase Order on behalf of

Red Desert on February 28, 2012. Under his signature, Cleveland

wrote, "President, Clean Runner." Cleveland similarly signed

the Proposal, writing "For: Red Desert Reclamation" by "Judson

Cleveland, President, Clean Runner." Doc. No. 1-1. A

representative of GE Mobile accepted the Purchase Order by

signing it and the Proposal the next day.

The Contract includes an integration clause, a no oral

modification clause, and a choice of law clause. The

integration clause states: "The parties intend this Agreement,

with any attached Exhibits and Addenda, as a final expression of

their agreement and a complete and exclusive statement of its

terms." It provides that "no representations . . . have been

3 made" other than those "expressly set forth," and notes that the

parties' course of previous dealings, usage, or trade shall be

inadmissible in any judicial proceeding. The no oral

modification clause provides that any modifications to the

Contract must be reduced to writing and signed by the parties.

The choice of law clause specifies that the Contract is governed

by Virginia law. Doc. No. 1-1.

Pursuant to the Contract, GE Mobile delivered equipment to

Red Desert's Wyoming facility in April 2012. GE Mobile

subsequently sent several invoices to Red Desert at Cate

Street's Portsmouth, New Hampshire address, the address

specified in the Purchase Order. In August 2012, Cleveland

emailed Fischer a proposal to address Red Desert's failure to

make payments required under the Contract. Cleveland asked

Fischer in the email: "[i]f I can get CSC to cut you a check

for $100K on Monday to be applied to RO Invoices will that help

you?" Doc. No. 1-4. Cleveland's email identifies him as

"Judson J Cleveland/President/CEO/Clean Runner, Inc., One Cate

Street, Portsmouth, NH 03801-7108." Approximately one week

later, GE Mobile received a check from Red Desert for $20,000.

The check was drawn on an account that listed the account holder

4 as "Red Desert Reclamation, LLC/ 1 Cate Street, Suite 100,

Portsmouth, NH 03801." Doc. No. 18-10.

On September 4, 2012, representatives of GE Mobile and Cate

Street met at Cate Street's offices to discuss the status of

outstanding payments on the Contract. In attendance were Cate

Street's president/CEO, its compliance director, and GE Mobile's

North American sales director. GE Mobile warned Red Desert that

its failure to make additional required payments risked a

shutdown of operations. Cate Street's president acknowledged

that Red Desert could not currently pay its invoices, but he

assured GE Mobile that Cate Street was finishing work on a $1

million contract and would be able to pay once the contract was

satisfied. He further explained that Cate Street would have to

recapitalize Red Desert and that it planned on doing so by going

"to its investors to obtain more money to pay off Red Desert's

debts, including the amount owed to G E ." Doc. Nos. 18, 18-9.

Discussions between GE Mobile and Cate Street continued in

the ensuing weeks over telephone and email. GE Mobile agreed to

adjust the balance due under the Contract, giving Red Desert a

credit of $172,050 to account for technologies that were not

utilized at the facility. On September 20, 2012, Cate Street

5 confirmed by phone its "continued interest in keeping the

Project operational." Doc. No. 18. The next day, Cate Street's

president emailed GE Mobile, stating "I w a n t [] to reiterate our

position and confirm Red Desert Reclamation, LLC's commitment to

its vendors." Doc. No. 1-5. He acknowledged that Cate Street

would have to make a serious decision regarding whether to close

the facility, but "[w]hether we close the facility or keep it

open Red Desert will pay its bills to G E ." On October 1, 2012,

GE Mobile emailed Cate Street's president, saying "[a]s I

understand, it is your intent to shut down the facility and move

forward with resolving all outstanding commitments." Doc. No.

1-5.

GE Mobile received no further payments, and the parties

agreed to shut down the project. After giving notice, GE Mobile

removed its equipment and technicians in early October 2012.

The removal coincided with the closing of operations for the

winter, so GE Mobile's actions did not compromise production at

the site. Up to that point, GE Mobile had provided everything

contractually required of it and was owed $996,000.

On October 16, 2012, GE Mobile emailed Cate Street's

president to again request his assistance in expediting

6 payments. The email outlined the September conversations

between the two companies and noted that Red Desert planned to

close its books by October 15 and pay GE Mobile by November 15.

It proposed a payment schedule and expressed "concern[] about

the continued delay in payment, and diminution of clear

communication between us." On October 26, 2012, Cleveland

stated in a telephone call with a GE Mobile official that he was

"confident" that Cate Street would come through for GE Mobile

and explained that Cate Street was raising equity to pay its

outstanding invoices. Doc. No. 18-8.

On February 27, 2013, GE Mobile received a letter from

Clean Runner on Red Desert letterhead. The letter stated that

Red Desert's recycling site was closed and that both Clean

Runner and Red Desert were beginning the process of winding down

their operations. Doc. No. 18-11. The letter offered Clean

Runner and Red Desert's creditors a global settlement of

$300,000 on an acknowledged debt of $1,147 million. A proposed

settlement agreement attached to the letter identified both

companies as the "debtor" to the project.

7 II. STANDARD OF REVIEW

To survive a Rule 12(b)(6) motion to dismiss, a plaintiff

must make factual allegations sufficient to "state a claim to

relief that is plausible on its face." Ashcroft v. Iqbal,

(2009) (quoting Bell Atl. Corp. v. Twombly,

(2007)). A claim is facially plausible when it

pleads "factual content that allows the court to draw the

reasonable inference that the defendant is liable for the

misconduct alleged. The plausibility standard is not akin to a

'probability requirement,' but it asks for more than a sheer

possibility that a defendant has acted unlawfully."

(citations omitted).

In deciding a motion to dismiss, I employ a two-step

approach. See Ocasio-Hernandez v. Fortuho-Burset,

(1st Cir. 2011). First, I screen the complaint for

statements that "merely offer legal conclusions couched as fact

or threadbare recitals of the elements of a cause of action."

I d . (citations, internal quotation marks, and alterations

omitted). A claim consisting of little more than "allegations

that merely parrot the elements of the cause of action" may be

dismissed.

Second, I credit as true all non-conclusory factual allegations and the reasonable inferences drawn from

those allegations, and then determine if the claim is plausible.

The plausibility requirement "simply calls for enough fact

to raise a reasonable expectation that discovery will reveal

evidence" of illegal conduct. Twombly,

. The

"make-or-break standard" is that those allegations and

inferences, taken as true, "must state a plausible, not a merely

conceivable, case for relief." Sepulveda-Villarini v. Dep't of

Ed u c .,

(1st Cir. 2010); see Twombly,

("Factual allegations must be enough to raise a right to

relief above the speculative level . . . .") .

Generally, under Rule 12(b)(6) I may properly consider

"only facts and documents that are part of or incorporated into

the complaint; if matters outside the pleadings are considered,"

then I must convert it to a motion for summary judgment. Rivera

v. Centro Medico de Turabo, Inc.,

(1st Cir.

2009) (citing Fed. R. Civ. P. 12(d)). The First Circuit

recognizes an exception to this rule allowing consideration of

"documents the authenticity of which are not disputed by the

parties; [] official public records; [] documents central to

plaintiff's claim; [and] documents sufficiently referred to in

9 the complaint" in a motion to dismiss for failure to state a

claim. I d . (citing Alt. Energy, Inc. v. St. Paul Fire & Marine

Ins. C o .,

(1st Cir. 2001)).

III. ANALYSIS

GE Mobile claims that Red Desert and Clean Runner are

liable for breach of contract and breach of the implied

contractual duty of good faith and fair dealing (Counts I-IV).

It argues that all three defendants are liable on an unjust

enrichment theory (Count V ) . It also contends that Cate Street

is liable for negligent misrepresentation and promissory

estoppel (Counts VI and V I I ) . Finally, it argues that it is

entitled to pierce the corporate veil and hold Cate Street

liable for Red Desert's alleged failure to fulfill its

obligations under the Contract (Count V I I I ) . Red Desert does

not challenge the viability of GE Mobile's claims against it.

Thus, I begin by considering GE Mobile's contract claims against

Clean Runner.

A. Contract Claims

GE Mobile claims that Clean Runner can be held liable for

breach of contract and breach of the implied contractual duty of

10 good faith and fair dealing because Cleveland signed the

Contract in his capacity as President of Clean Runner.

New Hampshire and Virginia both follow section 328 of the

Restatement (Second) of Agency, which provides that "[a]n agent,

by making a contract only on behalf of a competent disclosed or

partially disclosed principal whom he has power so to bind, does

not thereby become liable for its nonperformance." See Mbahaba

v. Morgan,

(N.H. 2012); accord Terry Phillips

Sales, Inc. v. SunTrust Bank, No. 3:13-CV-468,

,

at *7 (E.D. Va. Feb. 20, 2014); Berman v. Grossman, No. l:09-cv-

211,

, at *6 (E.D. V a . Nov. 24, 2009) (citing

Restatement (Second) of Agency § 320 (1958) ) Relying on this

basic legal principal. Clean Runner argues that it cannot be

held liable on a breach of contract claim because the contract

documents clearly provide that Cleveland, Clean Runner's

president, signed the Contract as an agent for Red Desert.

GE Mobile presents two responsive arguments, neither of

~ The cite both New Hampshire and Virginia law and they have not made a serious attempt to analyze the choice of law issues that the case presents. Nor has either party claimed that its argument on any issue depends upon how choice of law questions are resolved. Accordingly, I analyze the motion under New Hampshire law without conducting a choice of law analysis.

11 which is persuasive. First, it acknowledges that Cleveland

signed the Contract on behalf of Red Desert, a disclosed

principal, but it argues that this case qualifies under an

exception to the general rule of non-liability because Clean

Runner stood to benefit from the Contract even though it signed

only as an agent. Although I recognize that an agent can be

held liable on a contract with its principal if the agent

manifests an intention to also be bound by the contract, see

McCarthy v. Azure,

(1st Cir. 1994) (citing

Restatement (Second) of Agency § 328 (1958)), the mere fact that

the agent might somehow benefit from the contract is not

sufficient, standing alone, to establish such an intention. In

this case, the Contract plainly was intended to bind only GE

Mobile and Red Desert. No other relevant facts are pleaded to

support the contract claims against Clean Runner. GE Mobile's

assertion that Clean Runner stood to benefit from the Contract

thus is not sufficient to support a contract claim against it.

GE Mobile also argues that Clean Runner must have bound

itself to the Contract because it later joined with Red Desert

in a proposed settlement agreement that listed both Red Desert

and Clean Runner as the "debtor." The short answer to this

12 argument is that GE Mobile cannot rely on the proposed

settlement agreement because a party may not rely on settlement

proposals to prove a disputed claim. Fed. R. Evid. 408(a)(1);

Powell v. F. Acquisition, LLC, No. 2:12-cv-305,

,

at *3 (E.D. Va. Feb. 15, 2012). Accordingly, I dismiss GE

Mobile's breach of contract claims against Clean Runner.

B. Unjust Enrichment

GE Mobile next argues that Red Desert, Clean Runner, and

Cate Street "have all been unjustly enriched at GE's expense."

The defendants note that unjust enrichment is "narrower, more

predictable, and more objectively determined" than the words

"unjust enrichment" connote, and that the remedy is only

available "where an individual receives 'a benefit which would

be unconscionable for him to retain.'" Clapp v. Goffstown Sch.

Dist.,

(2009) (quoting Kowalski v. Cedars of

Portsmouth Condo. Ass'n,

(2001)).

Accordingly, they move to dismiss the unjust enrichment claim by

arguing that GE Mobile has failed to sufficiently allege that it

ever received such a benefit. They are correct.

GE Mobile's complaint contains little more than conclusory

assertions that either Clean Runner or Cate Street was unjustly

13 enriched. The complaint does not claim that GE Mobile's work on

Red Desert's behalf resulted in any benefit to Cate Street.

Rather, the complaint indicates that the project failed - that

Cate Street likely lost money on the project, and that Clean

Runner went out of business.

GE Mobile's opposition memorandum provides more ample

support for its claim, alleging that Cate Street and Clean

Runner aimed to use the site as a platform to showcase

technology with an eye toward expanding their recycling efforts

nationwide. Although increased visibility and an advertising

platform could benefit Cate Street and Clean Runner, GE Mobile

has nevertheless failed to sufficiently allege that either

defendant ever realized any benefit from the project. Rather,

the complaint suggests that Cate Street and Clean Runner's pilot

platform failed, and the latter corporation was forced to wind

up its business operations. Even in a best case scenario, these

facts could not support a claim that either defendant received a

benefit that would be unconscionable for it to retain.

I thus deny GE Mobile's unjust enrichment claims, not

because it has not alleged wrongdoing by Cate Street or Clean

Runner, but simply because the alleged wrongdoing did not result

14 in an unconscionable benefit to the defendants.

C. Negligent Misrepresentation

GE Mobile bases its negligent misrepresentation claim on

three representations: (1) prior to entering the Contract,

Cleveland "represented to GE that Cate Street, being funded with

$40 million for the Project, would be able 'to make good' on the

invoices issued by GE for the Project;" (2) on August 3, 2012,

Cleveland emailed Fischer, stating, in pertinent part, "[i]f I

can get CSC to cut you a check for $100k on Monday to be applied

to RO Invoices will that help you?"; and (3) at the September 4,

2012 meeting, Cate Street informed GE Mobile that it lacked

sufficient funding, but "was finishing a $1 million job for a

large customer and that receipt of funds from this job would

allow Cate Street to pay the amount owed under the Contract."

Doc. Nos. 1, 1-4.

All three of the statements GE Mobile cites are statements

of intention.3 While such statements can support a fraud claim

if they are false when made, they cannot serve as the basis for

3 Although the statements also contain representations of present or historic fact, GE Mobile does not assert that any of Cate Street's statements of fact were false. Rather, it bases its claim on Cate Street's failure to act in accordance with its stated intentions.

15 a negligent misrepresentation claim because honestly held

statements of intention are not false or misleading when made

even if the speaker later fails to act in accordance with the

stated intention. Alpine Bank v. Hubbell,

(10th Cir. 2009); see also Daley v. Blood,

(N.H. 1981) (rejecting negligent misrepresentation claim on

Statute of Frauds grounds); J.G.M.C.J. Corp. v. C.L.A.S.S.,

Inc.,

(2007) (same). Because GE Mobile does

not allege that Cate Street's statements of intention were false

when made, its misrepresentation claim must be dismissed.

D. Promissory Estoppel

GE Mobile asserts a claim against Cate Street based on

promissory estoppel, arguing that (1) Cate Street represented

that it would pay Red Desert's invoices; (2) GE Mobile

reasonably relied upon Cate Street's representations; (3) its

reliance was foreseeable; and (4) GE Mobile was thereby injured.

A successful promissory estoppel claim in New Hampshire must

allege "a promise reasonably understood as intended to induce

action[, ] enforceable by one who relies on it to his detriment

or to the benefit of the promisor." Rockwood v. SKF USA Inc.,

(2010) (citing Panto v. Moore Bus. Forms,

16 Inc.,

(1988)). Here, GE Mobile has

unquestionably alleged that Cate Street made several promises

both during contract negotiations and later, after the contract

was signed, to address GE Mobile's concerns with Red Desert's

failure to make payments. It has submitted evidence that Cate

Street's promises were intended to induce GE Mobile to continue

working on the project, and it has alleged that it relied on

these promises in entering the Contract and continuing to

perform in the face of nonpayment. Finally, it asserts that its

reliance was reasonable, and that it was harmed.

Cate Street nevertheless contends that the Statute of

Frauds bars GE Mobile's promissory estoppel claims. Promissory

estoppel, however, is not premised upon the existence of a

contract, but rather upon the alternative theory that, even if

there was no contract, the plaintiff was induced to rely on the

defendant's non-contractual promises. See Embree v. Bank of

N.Y. Mellon, 2 013 DNH 169, 15-16; Deutsche Bank Nat. Trust Co.

v. Fadili, No. 09-CV-385-LM,

, at *16 (D.N.H.

Oct. 4, 201 1 ) (noting that promissory estoppel is appropriate

only in the absence of an express agreement on the subject

between parties). In Embree, the court cited the Restatement

17 (Second) of Contracts, "upon which the New Hampshire Supreme

Court relies with regularity," as addressing a defendant's

argument that a promissory estoppel claim was barred by the

statute of limitations:

A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires.

Embree, 2013 DNH at 15 (citing Restatement (Second) of Contracts

§ 139(1) (1981)). Accepting GE Mobile's allegations as true, it

has successfully pleaded that "injustice can be avoided only by

enforcement of" the defendant's alleged promises. See i d . I

thus deny Cate Street's motion to dismiss the promissory

estoppel claim.

E. Piercing the Corporate Veil

GE Mobile also seeks to pierce the corporate veil and hold

Cate Street liable for Red Desert's alleged failure to fulfill

its obligations under the Contract.4 Cate Street argues in

I follow the practice employed by the New Hampshire Supreme Court in Mbahaba,

, and assume without deciding that the members and managers of a limited liability corporation may be held liable on a veil-piercing theory in an appropriate case. In making this assumption, I express no view as to

18 response that it cannot be held liable on a veil-piercing theory

because GE Mobile has failed to allege sufficient facts to

support its argument that the corporate veil should be pierced.

Courts have considered a variety of factors in determining

whether the corporate veil should be pierced including: whether

the corporation has been insufficiently capitalized, see Terren

v. Butler,

(1991); whether the corporation has

misled others as to its corporate assets, Vill. Press, Inc. v.

Stephen Edward Co., Inc.,

(1980); whether the

corporate assets have been intermingled, Zimmerman v. Puccio,

(1st Cir. 2010) (applying Massachusetts law);

and whether corporate formalities have been observed, see

Mbahaba,

. In this case, GE Mobile has pleaded

sufficient facts to state a viable veil-piercing claim.

GE Mobile alleges that Cate Street is the "parent

corporation" of Red Desert, that all three companies operate out

of the same business address, and that Cate Street's officers

hold titles with both Clean Runner and Red Desert. Moreover, it

maintains that Cate Street offered to pay at least a portion of

whether the veil-piercing test that applies to limited liability corporations differs from the test that is used to pierce the corporate veil for a traditional corporation.

19 Red Desert's debt, permitting an inference of the intermingling

of corporate funds. Cate Street officers' primary role in

negotiating the Contract and managing GE Mobile's concerns over

Red Desert's performance permits an inference that Cate Street

in fact controlled the project and was using Red Desert's

corporate form to not only insulate itself from liability but to

commit an injustice. This inference is supported by GE Mobile's

allegations that Red Desert was severely undercapitalized.

Cate Street contends that GE Mobile has not pleaded

sufficient facts in the complaint to support its allegation of

under-capitalization. I disagree, finding the facts alleged

support an inference that Red Desert was provided with

insufficient assets from the outset to meet its expected debts.

See Terren,

. GE Mobile's pleadings describe Red

Desert winding up operations after six months, not even one-

third of the way through a $3.2 million contract. They allege

that Red Desert paid only $20,000 on nearly $1 million owed and

relied on its manager's repeated promises that it would indeed

make good on past due invoices.5 They also allege that Cate

5 In opposing the motion to dismiss, Cate Street submits an affidavit stating that during the September 4, 2012 meeting, Cate Street's president confessed that Cate Street would have to

20 Street represented that the project was funded with $40 million

in investments, permitting an inference that it misled GE Mobile

into believing that the project would be adequately capitalized.

See Vill. Press,

.

GE Mobile has alleged sufficient facts to show that Cate

Street and Red Desert bent the rules regarding corporate

formalities and failed to adequately capitalize Red Desert so as

to cover its prospective debts. It has also sufficiently

alleged that these actions were undertaken to promote an

injustice on Red Desert's creditors. I thus deny Cate Street's

motion to dismiss GE Mobile's veil-piercing claim.

IV. CONCLUSION

For the reasons set forth above, I grant defendants' motion

to dismiss (Doc. No. 15) as it pertains to the contractual

claims against Clean Runner (Counts II and IV), the claim for

unjust enrichment against Clean Runner and Cate Street (Count

recapitalize Red Desert in order to have funds to keep the Project going, and that Cate Street would "go to its investors to obtain more money to pay off Red Desert's debts." Doc. Nos. 18, 18-9. This affidavit may be beyond consideration at this stage of the proceedings, but I need not consider it because GE Mobile alleges sufficient additional evidence that Red Desert was undercapitalized.

21 V ) , and the claim for negligent misrepresentation against Cate

Street (Count V I ) . I deny the motion in all other respects.

SO ORDERED.

/s/Paul Barbadoro Paul Barbadoro United States District Judge

March 17, 2014

cc: Danielle Andrews Long, Esq. Scott H. Harris, Esq.

22