Basin Electric Power Cooperative v. Henry et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
LACY M. HENRY and
JUDY B. HENRY,
Debtors. 	Case No. 05-04620-8-JRL
BASIN ELECTRIC POWER
COOPERATIVE,
Plaintiff,
vs. 	Adversary Proceeding No.:
L-05-00262-8-AP
LACY M. HENRY; JUDY B. HENRY;
MPS GENERATION, INC.;
MECHANICAL PLANT SERVICES,
INC.; QUALIFIED PLANT SERVICES,
INC.; and KEITH HENRY,
Defendants.
and,
MPS GENERATION, INC.;
LACY M. HENRY; and
JUDY B. HENRY,
Third-Party Plaintiffs,
vs.
ORMAT, INC. and CLIFFORD
WADDELL,
Third-Party Defendants.
SO ORDERED.
SIGNED this 10 day of May, 2007.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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ORDER
This matter is before the court on the motion to amend the complaint and for leave to
assert a claim for punitive damages filed by Basin Electric Power Cooperative (“Basin”). On
April 25, 2007, the court conducted a hearing on this matter in Wilmington, North Carolina.
BACKGROUND
Lacy Henry is the sole shareholder of MPS Generation, Inc. (“MPSG”), a North Carolina
corporation. On November 5, 2003, MPSG entered into a contract with Basin, regarding the
construction of four waste heat recovery generation systems. The systems were intended to
convert waste heat from four compressor stations along the Northern Border Natural Gas
Pipeline into electricity, which Basis intended to sell to its members.
On February 24, 2005, Basin filed a complaint in the United States District Court of the
District of North Dakota against Lacy Henry, Judy Henry, and MPSG. The Henrys later filed a
chapter 11 bankruptcy petition on June 13, 2005. On September 15, 2005, Basin filed a
complaint against the debtors in this court claiming that they are the alter egos of MPSG. On
November 15, 2005, the debtors answered the complaint, asserted counterclaims, and filed a
third-party complaint against Ormat. On January 5, 2006, the court entered an order staying the
lawsuit filed against the debtors and other defendants in North Dakota. Basin was permitted to
amend its complaint filed in this adversary proceeding to include claims against the other
defendants. An amended complaint was filed on March 31, 2006, which added MPSG as a
defendant and set forth eleven counts for relief including breach of contract.
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1Basin’s claim that the liability of the Henrys is nondischargeable arises under
bankruptcy law while its attempt to pierce the corporate veil of MPSG is arguably determined
under North Carolina law.
2
Section 32-03.2.11(1) of the North Dakota Century Code provides:
In any action for the breach of an obligation not arising from contract,
when the defendant has been guilty by clear and convincing evidence of oppression,
fraud, or actual malice, the court or jury, in addition to the actual damages, may give
damages for the sake of example and by way of punishing the defendant. Upon
commencement of the action, the complaint may not seek exemplary damages. After
filing the suit, a party may seek exemplary damages. The motion must allege an
applicable legal basis for awarding exemplary damages and must be accompanied
by one or more affidavits or deposition testimony showing the factual basis for the
claim. The party opposing the motion may respond with affidavit or deposition
testimony. If the court finds, after considering all submitted evidence, that there is
sufficient evidence to support a finding by the trier of fact that a preponderance of
the evidence proves oppression, fraud, or actual malice, the court shall grant the
moving party permission to amend the pleadings to claim exemplary damages. For
purposes of tolling the statute of limitations, pleadings amended under this section
relate back to the time the action was commenced.
N.D.C.C. § 32-03.2-11(1).
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ANALYSIS
Basin’s claims against the defendants are primarily North Dakota state law claims 1
,
which are in federal court based upon this court’s bankruptcy jurisdiction. See 28 U.S.C.
1334(c)(2). “When substantive state law claims . . . are pursued via adversary proceedings in
bankruptcy, the substantive law of that state is controlling.” Byrd v. Atlanta Casualty Co. (In re
Byrd), 294 B.R. 808, 813 (Bankr. M.D. Ga. 2003)(citing Erie R. Co. V. Tompkins, 304 U.S. 64,
78, 58 S.Ct. 817 (1938)). Therefore, North Dakota law applies to Basin’s state law claims.
Basin now seeks to amend its complaint to include a claim for punitive damages pursuant
to N.D. Cent. Code § 32-03.2-11(1). 2 However, the defendants argue that N.D. Cent. Code § 32-
03.2-11(1) is inapplicable, because the statute only pertains to an “action for the breach of an
obligation not arising from contract[.]” This case is based on an alleged breach of a contract
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between the plaintiff and MPSG. Furthermore, under N.D. Cent. Code § 32-03-07, the
predecessor statute to N.D. Cent. Code § 32-03.2, a plaintiff must elect to waive its contract with
the defendant in order to recover in tort. Jamestown Farmers Elevator, Inc. v. General Mills, Inc.,
413 F. Supp. 764, 774-75 (D.N.D. 1976), rev’d on other grounds, 552 F.2d 1285 (8th Cir. 1977);
Campbell v. Wishek Publ. Sch. Dist., 150 N.W.2d 840, 842 (N.D. 1967). The defendants argue
that under North Dakota law a plaintiff must waive its contract claim before the plaintiff can
amend its complaint to include a claim for punitive damages. Therefore, because Basin has not
waived its breach of contract claim, it follows that Basin should be prohibited from amending its
complaint to include a punitive damage claim.
Basin disagrees with the defendants’ arguments. More recent cases from the Supreme
Court of North Dakota have allowed plaintiffs to allege punitive damages in their amended
complaints, along with their breach of contract claims. See Delzer v. United Bank of Bismark,
559 N.W.2d 531, 534 (N.D. 1997); Pioneer Fuels, Inc. v. Montana-Dakota Utils. Co., 474
N.W.2d 706 (N.D. 1991). The court is clear that “where there is a breach of contract, there must
be some additional, independent facts not connected to the manner of the breach of contract to
support tort and exemplary damage claims.” Delzer v. United Bank of Bismark, 527 N.W.2d
650, 654 (N.D. 1995); see also Pioneer Fuels, Inc., 474 N.W.2d at 709-10.
North Dakota law is unclear on when or if a plaintiff must waive his contract claim in
order to receive punitive damages. The cases cited by the Henrys have not been directly
overruled, but they can be distinguished from the present case. Neither case required the plaintiff
to waive the contract prior to amending its complaint to add an exemplary damages claim. The
issue in Jamestown Farmers Elevator, Inc. was whether the plaintiff was entitled to jury
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instructions on exemplary damages when he did not waive the contract. Jamestown Farmers
Elevator, Inc., 413 F. Supp. at 774-75. In Campbell the court allowed a motion to dismiss on the
grounds that the plaintiff had not established a prima facie case for breach of contract damages
and exemplary damages. Campbell, 150 N.W.2d at 841. In that case, the motion was made at the
close of the plaintiff’s case in chief. Id. In both cases, the court did not consider the issue of
waiving the contract until the trial. Although the more recent cases do not address the issue of
waiving the contract, they do allow a plaintiff’s amended complaint to contain both a claim for
breach of contract and a separate claim for exemplary damages. The court finds that there is
enough authority to allow a plaintiff to at least include a claim for punitive damages in his
amended complaint even through he has also alleged a breach of contract claim. Therefore, the
court rejects the defendants argument that under N.D. Cent. Code § 32-03.2-11(1) Basin must
waive its breach of contract claim prior to adding a claim for punitive damages.
Next, the court must determine the applicable standard for amending the complaint.
Even though state substantive law applies in this case, federal courts usually apply federal
procedural law. Hanna v. Plumer, 380 U.S. 460, 470 (1965). Federal Rule of Civil Procedure 15
made applicable in bankruptcy by Bankruptcy Rule 7015, generally governs motions to amend
pleadings. However, N.D. Cent. Code § 32-03.2-11(1) provides that a claim for punitive
damages must be raised via an amendment and not in the initial pleadings. The United States
District Court for the District of North Dakota has held that this provision is substantive rather
than procedural. McHugh v. Jacobs, 450 F.Supp.2d 1019, 1021 (D.N.D. 2006)(finding that N.D.
Cent. Code § 32-03.2-11(1) provides a substantive right, and therefore, applies in a diversity
action); Lowell v. Zurich Ins. Co., Civ. No. A3-91-72, 1992 WL 212233 at *2 (D.N.D. Aug. 20,
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1992)(applying North Dakota’s punitive damage statute in a case where jurisdiction was
predicated upon diversity of citizenship); see also Myers v. Richland County, 288 F.Supp.2d
1013, 1021 (D.N.D. 2003) (“Exemplary damages statutes provide a substantive right and
therefore state law applies.”). Since N.D. Cent. Code § 32-03.2-11(1) provides a substantive
right, the procedures set forth in that section require Basin to assert its exemplary damages claim
by motion. Additionally, the section sets forth the standard a party must meet in order to add a
claim for punitive damages.
In order for Basin to amend its complaint to add a claim for punitive damages pursuant to
N.D. Cent. Code § 32-03.2-11(1), the court must find that there is “sufficient evidence to support
a finding by the trier of fact that a preponderance of the evidence proves oppression, fraud, or
actual malice.” N.D. Cent. Code § 32-03.2-11(1). For the purpose of punitive damages, the term
“oppression” means “subjecting a person to cruel and unjust hardship in conscious disregard of
that person’s rights.” McHugh, 450 F.Supp.2d at 1022 (quoting North Dakota Pattern Jury
Instructions C-72.10); see also Ingalls v. Paul Revere Life Ins. Group, 561 N.W.2d 273, 284-85
(N.D. 1997). “Actual malice” is defined as “an intent with ill will or wrong motive to harass,
annoy, or injure another person.” McHugh, 450 F.Supp.2d at 1022 (quoting North Dakota
Pattern Jury Instructions C-72.16); see also Ingalls, 561 N.W.2d at 284-85. Lastly, as a basis for
awarding punitive damages, “fraud” is
(1) the suggestion as fact of that which is not true by one who does not believe it to
be true; (2) the assertion as a fact of that which is not true by one who has no
reasonable ground for believing it to be true; (3) the suppression of a fact by one who
is bound to disclose it, or who gives information that is likely to mislead because that
fact was not communicated; or (4) a promise made without any intention of
performing.
McHugh, 450 F.Supp.2d at 1022-23(quoting North Dakota Pattern Jury Instructions C-72.16).
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3 The Supreme Court of North Dakota held that exemplary damages are recoverable
under N.D. Cent. Code § 32-03-07, the predecessor statute to N.D. Cent. Code § 32-03.2-11(1),
in conversion actions when the wrongdoer has been oppressive or malicious. John Deere Co. v.
Nygard Equip., 225 N.W.2d 80, 94 (N.D. 1974).
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Basin’s exemplary damages claim derives from its allegations of fraud and conversion. 3
In support of its motion to amend its complaint to add punitive damages, Basin alleges that the
defendants accepted project funds without any intention of performing on the contract or even
making progress towards completion. Basin contends that almost immediately after Basin
released project funds to MPSG those funds were distributed to other companies controlled by
Mr. and Mrs. Henry. Those funds were then used for the Henrys’ own personal use, as well as by
Mechanical Plant Services, Inc. and Qualified Plant Services, Inc. Some of those funds were
allegedly used to pay the large tax liability of Qualified Plant Services, Inc. Since the money
provided by Basin was allegedly used for purposes other then the contract project, little progress
was made on the construction of the facilities. Basin presented evidence in the form of affidavits,
deposition transcripts, and other documents to support the factual basis for its claim.
Having reviewed the evidence submitted by the parties, the court finds that there is
sufficient evidence at this stage to support a finding by the trier of fact that a preponderance of
the evidence establishes oppression, fraud, or actual malice.
CONCLUSION
For the reasons set forth above, the plaintiff’s motion to amend the complaint and for
leave to assert a claim for punitive damages is ALLOWED. The clerk of court’s office is
directed to file the plaintiff’s second amended complaint.
“END OF DOCUMENT”
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