Basin Electric Power Cooperative v. Henry et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WILMINGTON DIVISION
IN RE:
LACY M. HENRY and
JUDY B. HENRY,
Debtors. 	Case No. 05-04620-8-JRL
Chapter 11
______________________________________________________________________________
BASIN ELECTRIC POWER COOPERATIVE,
Plaintiff,
v. 	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.;
Defendants,
and
LACY M. HENRY and JUDY B. HENRY,
Third-Party Plaintiffs,
v.
ORMAT, INC., and CLIFFORD WADDELL,
Third-Party Defendants.
ORDER
SO ORDERED.
SIGNED this 19 day of September, 2007.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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The matter before the court is the motion for summary judgment filed by third-party
defendant, Clifford Waddell. On August 23, 2007, the court conducted a hearing on this matter.
UNDISPUTED FACTS
1. 	Basin Electric power Cooperative (“Basin”) is a North Dakota cooperative
principally located in Bismarck, North Dakota, that provides electricity to its member
cooperatives.
2. 	MPS Generation, Inc. (“MPSG”) is a North Carolina corporation principally
located in Wilmington, North Carolina, and licensed to do business in the State of North Dakota.
3. 	Mechanical Plant Services, Inc. (“MPS”), is an administratively dissolved North
Carolina corporation that was primarily engaged in constructing and repairing turbines.
4. 	Qualified Plant Services, Inc., (“QPS”) is an administratively dissolved North
Carolina corporation that was in the business of refurbishing rail cars.
5. 	Lacy M. Henry is a resident of the State of North Carolina and the sole
shareholder of MPSG and MPS.
6. 	Judy B. Henry, wife of Lacy M. Henry, is a resident of the State of North
Carolina and the sole shareholder of QPS.
7. 	Ormat, Inc. (“Ormat”) is a Delaware corporation with its principal office in the
State of Nevada.
8. 	Clifford Waddell is a resident of the State of Michigan.
9. 	Mr. Waddell was originally employed by MPS.
10. 	After MPS’ charter was suspended in 2002, Mr. Waddell became an employee of
MPSG.
11. 	MPSG shared payroll accounts and employees with MPS and QPS.
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12. 	On November 3, 2003, MPSG and Northern Border Pipeline Company
(“Northern Border”), a Texas general partnership, entered into a Waste Heat Purchase
Agreement.
13. 	Under the Waste Heat Purchase Agreement, MPSG acquired the rights to
purchase waste heat from four compressor stations on the Northern Border Pipeline (initial sites
7, 9, 10 and 11).
14. 	The Waste Heat Purchase Agreement also gave MPSG an option to acquire one
or more of nine remaining sites (secondary sites 1, 2, 3, 4, 5, 6, 8, 12 and 13).
15. 	On November 5, 2003, MPSG entered into an Engineering, Procurement and
Construction Contract (“EPC Contract”) with Basin, whereby MPSG agreed to furnish and
install four waste heat recovery systems (“WHRS”) at sites 7, 9, 10 and 11 for the purpose of
generating electric power and energy (“Basin Project”).
16. 	Mr. Henry formed MPSG for the purpose of performing the EPC Contract and
related contracts with Basin.
17. 	John Stephens, the initial director named in MPSG’s articles of incorporation,
believed that MPSG lacked the money and resources to take on the project with Basin.
18. 	When MPSG was formed, no stock certificates were issued in exchange for
capital.
19. 	Aside from the Northern Border heat rights and easement, MPSG had no other
known assets, such as patents or equipment, that Lacy Henry could identify in his deposition.
20. 	MPSG did not file a tax return.
21. 	MPSG never conducted director meetings..
22. 	Grady Windham, accountant for MPSG and related entities, was unaware of
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any certified audit, review or bound statement for MPSG during its existence or the
related entities since 1995.
23. 	Mr. Henry had no knowledge of the directors and officers of MPSG.
24. 	Mr. Henry admitted that he was the decision maker for MPSG, including the
decision maker regarding the allocation of capital.
25. 	Mr. Windham considered Powertec and Light Logix as “probably one and the
same.”
26. 	Most of the bookkeeping for Powertec and Light Logix was handled through
MPS.
27. 	MPSG had no separate payroll account.
28. 	QPS was the administrative entity for the other corporations, and payroll checks
for the separate entities were made on one account entitled “Plant Services.”
29. 	There is little or no evidence that Judy Henry controlled MPSG.
30. 	At the time that MPSG contracted with Basin, Mr. Henry was aware that MPS
owed $1.4 million for delinquent withholding taxes for 2002 and 2003.
31. 	MPS shared its employees with other related entities, such as MPSG.
32. 	QPS was also delinquent in the approximate amount of $1.6 million for unpaid
withholding taxes for the third quarter of 2000 and for all of 2002.
33. 	The Henrys were delinquent on federal income taxes due from previous
years.
34. 	MPSG assigned Basin the waste heat rights to sites 7, 9, 10 and 11 pursuant to the
Partial Assignment and Assumption Agreement between Basin and MPSG dated November 5,
2003.
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35. 	MPSG was required to complete its obligations under the EPC Contract within
fourteen months of the written notice to commence construction.
36. 	On November 5, 2003, MPSG and Basin also entered into an Operating and
Maintenance Agreement, whereby MPSG agreed to operate and maintain the waste heat
recovery systems on behalf of Basin for a period of ten years.
37. 	Mr. Waddell was involved in the negotiation of the EPC Contract and Operating
and Maintenance Contracts between Basin and MPSG.
38. 	The EPC Contract provided that each WHRS would include the ORMAT
Energy Converter (“OEC”) and balance of plant.
39. 	Pursuant to the EPC Contract, each OEC was to be integrated with a Waste Heat
Oil Heater (“WHOH”) to produce electrical power.
40. 	Under the EPC contract, MPSG guaranteed that each WHRS would produce
5.726 MW of net power.
41. 	Under the Operations and Maintenance Contract, if a WHRS failed to produce the
guaranteed power, MPSG was liable to Basin for liquidated damages for the term of ten years.
42. 	Pursuant to the EPC Contract, Basin agreed to pay MPSG a total of
$28,900,000.00 in accordance with a Milestone Payment Schedule.
43. 	The Milestone Payment Schedule describes the work to be completed for each
milestone, the estimated time for each award, the documentation required, and the percentage of
the contract price to be awarded.
44. 	The Milestone Payment Schedule states that the first milestone consists of a direct
payment to MPSG and an amount to be placed in an escrow account.
45. 	Basin, MPSG, and Wells Fargo Bank entered into an Escrow Agreement.
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46. 	Basin deposited $2,052,000.00 in the escrow account at Wells Fargo Bank as
required by the EPC Contract.
47. 	On December 29, 2003, MPSG entered into a Supply Contract with Ormat, Inc.,
(“Ormat”) whereby Ormat agreed to supply the process and conceptual design including the
WHOH performance specifications; supply, transport, handle and insure the OECs from the port
of origin to the four sites; and provide other ancillary services.
48. 	MPSG submitted invoices for work completed pursuant to the Milestone Payment
Schedule.
49. 	Basin made payments to MPSG in excess of four million dollars for milestones
one through four.
50. 	Mr. Henry authorized transfers of funds from MPSG to related entities, such as
MPS, QPS, and Powertec, as well as to himself and Judy Henry.
51. 	There were no loan agreements between MPSG and these related entities and
individuals.
52. 	Basin directed MPSG to acquire and assign to Basin sites 5 through 12 and paid
MPSG $125,000.00 by wire transfer on March 31, 2004.
53. 	On April 2, 2004, Basin made the fourth milestone payment under the EPC
Contract by transferring $1,300,500.00 to MPSG.
54. 	In April 2004, MPSG exercised its option with Northern Border and paid
$437,000.00 to acquire the rights to seven of the remaining nine sites (sites 1, 3, 5, 6, 8, 12 and
13).
55. 	During the spring of 2004, MPSG realized that there would be a power shortfall
under the EPC Contract. While MPSG had guaranteed 5.726 MW of net power under the EPC
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Contract, Ormat had guaranteed 5.726 MW of “OEC power” under the Supply Contract.
56. 	During the spring of 2004, Basin expressed dissatisfaction with the design of the
WHOH, asserting that the proposed design far exceeded standard heat exchanger design and
created an acid dew risk.
57. 	By letter dated July 29, 2004, Basin notified MPSG that it would not accept the
WHOH design.
58. 	Basin, MPSG and Ormat met to consider various assignments, releases, and
consents that would have resulted in Ormat constructing and owning the four waste heat
facilities and selling the electricity to Basin.
59. 	MPSG would not sign such assignments, releases, and consents.
60. 	MPSG did not invoice Basin for the milestone five payment.
61. 	MPSG invoiced Basin for the sixth milestone payment for mobilization.
62. 	Basin refused to make milestone payment six.
63. 	During the course of performing the EPC Contract, MPSG did not pay certain
subcontractors and employees.
64. 	A number of subcontractors filed liens for nonpayment against certain
sites subject to the Waste Heat Purchase Agreement between MPSG and Northern Border.
65. 	Perigon Architectural and Engineering Associates, P.A., obtained a money
judgment against MPSG.
66. 	Northern Border terminated the Waste Heat Purchase Agreement with MPSG.
67. 	In October 2004, the Internal Revenue Service filed a notice of levy against MPS
for unpaid taxes for calendar years 2002 and 2003 in the amount of $1,400,601.54.
68. 	MPSG did not construct any waste heat recovery systems.
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69. 	During the course of the project, Rany Raviv of Ormat nicknamed Mr. Waddell
Pinnocchio.
70. 	On August 26, 2004, Hezy Ram of Ormat sent a memorandum to L.Y. Bronicki
and Dita Bronicki of Ormat, explaining that Pinnocchio was “willing to jump ship.” The
memorandum further stated: “I talked to him before and impressed on the fact that we would
need his services throughout the project for obvious reasons. He is willing to listen and move to
us with the project, but needs an answer shortly as he does not wish to stay bold.”
71. 	Mr. Waddell resigned from MPSG on September 30, 2004.
72. 	Mr. Waddell was not paid his salary of $28,846.00 for 20 weeks (calculated for
May 15, 2004 through October 1, 2004) and expenses of $19,246.00.
73. 	When Waddell left MPSG, he did not tell MPSG that he was going to work for
Ormat; rather, he said that he was going to work for a small company in Michigan.
74. 	Mr. Waddell was officially employed by Ormat on Oct. 1, 2004.
75. 	On December 12, 2004, Basin entered into a Power Purchase Agreement with an
Ormat-related company, OREG 1, Inc. (“OREG 1").
76. 	Under the Power Purchase Agreement, Basin assigned OREG 1 the waste heat
rights to sites 7, 9, 10 and 11.
77. 	OREG-1 built the sites and is now selling power to Basin.
78. 	By letters dated February 8, 2005 and February 9, 2005, Basin formally gave
notice that it was terminating the EPC Contract for its convenience.
79. 	By the letter dated February 9, 2005, Basin demanded to audit MPSG’s records.
80. 	MPSG refused the audit.
81. 	Upon Basin’s cancellation for convenience, MPSG demanded Wells Fargo to
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distribute all of the escrow funds to MPSG.
STANDARD OF REVIEW
Rule 56 of the Federal Rules of Civil Procedure is applicable to adversary proceedings.
Fed. R. Bankr. P. 7056. Summary judgment is appropriate when “the pleadings, depositions,
answers to interrogatories, and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.” Fed. R. Civ. P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317,
324 (1986). “When a motion for summary judgment is made and supported . . . , an adverse
party may not rest upon the mere allegations or denials of the adverse party’s pleading, but the
adverse party’s response, by affidavits or as otherwise provided in this rule, must set forth
specific facts showing that there is a genuine issue for trial.” Fed. R. Civ. P. 56(e). “If the
adverse party does not so respond, summary judgment, if appropriate, shall be entered against
the adverse party.” Id. The facts must be viewed in the light most favorable to the non-moving
party. Evans v. Tech. Applications & Serv. Co., 80 F.3d 954, 958 (4th Cir. 1996). “Where the
record taken as a whole could not lead a rational trier of fact to find for the non-moving party,
there is no genuine issue for trial.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475
U.S. 574, 587 (1986).
ANALYSIS
MPSG filed a third party complaint against Mr. Waddell, asserting claims of breach of
fiduciary duty, tortious interference with contract, constructive fraud, and unfair or deceptive trade
practices. Lacy and Judy Henry filed an identical third party complaint against Mr. Waddell in
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1The court has granted summary judgment in favor of Judy Henry on Basin’s claim of
piercing the corporate veil, thus Judy Henry will not be held individually liable for MPSG’s
corporate debt.
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the event they are found to be the alter ego of MPSG.1 Mr. Waddell filed an answer and
counterclaim to the third-party complaint. In his counterclaim, Mr. Waddell seeks recovery of
his wages, expenses, and commissions. On summary judgment, Mr. Waddell seeks dismissal of
the third-party claims against him and seeks judgment in his favor on the counterclaim.
A. 	Breach of Fiduciary Duty
MPSG and the Henrys allege that Waddell used his position of trust and confidence to
bring about the termination of the EPC Contract between MPSG and Basin, whereby Waddell
benefitted financially by payment from Basin and/or Ormat or its affiliated parties. MPSG and the
Henrys assert that this breach caused MPSG to suffer losses and lost profits in excess of
$100,000.00.
The North Carolina Supreme Court has described the elements of a claim for breach of
fiduciary duty as follows:
For breach of fiduciary duty to exist, there must first be a fiduciary relationship
between the parties. Such a relationship has been broadly defined by this Court as
one in which ‘there has been a special confidence reposed in one who in equity and
good conscience is bound to act in good faith and with due regard to the interests of
the one reposing confidence . . . [and] ‘it extends to any possible case in which a
fiduciary relationship exists in fact, and in which there is confidence reposed on one
side, and resulting domination and influence on the other.’
Harris v. Matthews, 361 N.C. 265, 284, 643 S.E.2d 566, 577-78 (2007). Generally, “the relation of
employer and employee is not one of those regarded as confidential.” Dalton v. Camp. 353 N.C.
647, 651 (2001).
MPSG and the Henrys take the position that Mr. Waddell was more than just an employee,
as he served in the capacity of vice president of MPSG when signing the EPC Contract and Supply
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Contract and served as MPSG’s primary representative in communicating with Basin and Ormat
regarding the Project. The scope of Mr. Waddell’s position is disputed. Mr. Waddell contends that
he served as vice president for the limited and isolated purpose of signing the EPC Contract and
Supply Contract and was not a point person with decision-making authority. MPSG and the
Henrys point to Section 55-8-42 of the North Carolina General Statutes, which states that “[a]n
officer with discretionary authority shall discharge his duties under that authority: (1) In good
faith; (2) With the care an ordinarily prudent person in a like position would exercise under similar
circumstances; and (3) In a manner he reasonably believes to be in the best interests of the
corporation.” N.C. Gen. Stat. § 55-8-42. While that statutory provision addresses the manner in
which an officer must discharge his duties, it does not set forth the specific duties of the corporate
officer. Section 55-8-41 states “Each officer has the authority and duties set forth in the bylaws or,
to the extent consistent with the bylaws, the authority and duties prescribed by the board of
directors or by direction of an officer authorized by the board of directors to prescribe the authority
and duties of other officers.” N.C. Gen. Stat. § 55-8-41.
The court finds that there is a genuine issue of material fact regarding the specific scope of
duties, if any, that Mr. Waddell allegedly breached. The court also finds that there are genuine
issues of material fact regarding Mr. Waddell’s conduct when communicating with Basin and
Ormat while working for MPSG and whether Mr. Waddell sabotaged the EPC Contract.
The court also notes that Basin has filed a claim against Mr. Henry to pierce the corporate
veil of MPSG, and the court has granted summary judgment regarding the first element of the
instrumentality rule—that Mr. Henry had such control over the corporation that it had no separate
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mind, will or existence of its own. If Lacy Henry is deemed to be the alter ego of MPSG, then
there would be no legitimate North Carolina corporation to which an officer would owe a fiduciary
duty.
Because there are genuine issues of material fact regarding this claim, the court denies
summary judgment.
B. 	Tortious Interference with Contract
MPSG and the Henrys allege that Mr. Waddell wrongfully induced Basin and Ormat to
enter into an agreement that excluded MPSG. They assert that Mr. Waddell did so without
justification and for his sole benefit. MPSG and the Henrys assert that Mr. Waddell’s
inducement led MPSG to be excluded from the Basin Project and to lose its rights under the Waste
Heat Purchase Agreement, causing MPSG to suffer losses and lost profits in excess of
$100,000.00.
To establish a claim of tortious interference with contract, a plaintiff must show: “(1) a
valid contract between the plaintiff and a third person which confers upon the plaintiff a
contractual right against a third person; (2) the defendant knows of the contract; (3) the defendant
intentionally induces the third person not to perform the contract; (4) and in doing so acts without
justification; (5) resulting in actual damage to plaintiff.” Beck v. City of Durham, 154 N.C. App.
221, 232, 573 S.E.2d 183, 191 (N.C. Ct. App. 2002).
MPSG had a valid contract with Basin which conferred contractual rights against Basin.
Mr. Waddell knew of the contract. However, there are genuIne issues of material fact regarding
the remaining elements of the claim. Accordingly, the court denies summary judgment as to this
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claim.
C. 	Constructive Fraud
MPSG and the Henrys assert that Waddell took advantage of his relationship of trust and
confidence with MPSG for his own calculated benefit. They assert that, as a result of Mr.
Waddell’s conduct, MPSG was excluded from the Basin Project and lost its rights under the Waste
Heat 	Purchase 	Agreement, 	causing 	MPSG 	to 	suffer 	losses 	and 	lost 	profits 	in 	excess 	of
$100,000.00.
The North Carolina Supreme Court has set forth the standard for constructive fraud:
In order to maintain a claim for constructive fraud, plaintiffs must show that they
and defendants were in a ‘relation of trust and confidence ... which led up to and
surrounded the consummation of the transaction in which defendant is alleged to
have taken advantage of his position of trust to the hurt of plaintiff.’ Constructive
fraud differs from actual fraud in that ‘it is based on a confidential relationship
rather 	than 	a 	specific 	misrepresentation.’ 	Implicit 	in 	the 	requirement 	that 	a
defendant ‘take advantage of his position of trust to the hurt of plaintiff’ is the
notion that the defendant must seek his own advantage in the transaction; that is,
the defendant must seek to benefit himself.
Barger v. McCoy Hillard & Parks, 346 N.C. 650, 666, 488 S.E.2d 215, 224 (1997) (internal
citations omitted). “Put simply, a plaintiff must show (1) the existence of a fiduciary duty,
and (2) a breach of that duty.” Keener Lumber Co. v. Perry, 149 N.C. App. 19, 28, 560
S.E.2d 817, 823 (N.C. Ct. App. 2002).
As stated above when addressing the claim of breach of fiduciary duty, the court
finds that there is a genuine issue of material fact regarding the specific scope of duties, if
any, that Mr. Waddell allegedly breached. The court also finds that there are genuine issues
of material fact regarding Mr. Waddell’s conduct when communicating with Basin and
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Ormat while working for MPSG and whether Mr. Waddell sabotaged the EPC Contract. If
the court determines at trial that Lacy Henry is the alter ego of MPSG, then there would be
no legitimate North Carolina corporation to which an officer would owe a fiduciary duty.
Based on the foregoing, the court denies summary judgment as to this claim.
D. 	Unfair or Deceptive Trade Practices
MPSG and the Henrys assert that Mr. Waddell’s actions constitute unfair or deceptive trade
practices under Chapter 75 of the North Carolina General Statutes. They assert that Waddell is
liable to MPSG for treble damages and attorney fees.
To establish a claim for unfair or deceptive trade practices, a plaintiff must show: “(1)
defendant committed an unfair or deceptive act or practice, (2) the action in question was in or
affecting commerce, and (3) the act proximately caused injury to the plaintiff.” Dalton v. Camp,
353 N.C. 647, 656 (2001). “A practice is unfair if it is unethical or unscrupulous, and it is
deceptive if it has a tendency to deceive.” Id.
Waddell asserts that the claim fails because an employer-employee relationship does not
fall within the intended scope of the North Carolina Unfair and Deceptive Trade Practices Act.
Although “the Act does not normally extend to run-of-the-mill employment disputes,” the North
Carolina 	Supreme 	Court 	has 	clarified 	that 	“the 	mere 	existence 	of 	an 	employer-employee
relationship does not in and of itself serve to exclude a party from pursuing an unfair trade or
practice claim.” Id. 	“Employers have successfully sought damages under the Act when an
employee’s 	conduct: 	(1) 	involved 	egregious 	activities 	outside 	the 	scope 	of 	his 	assigned
employment duties, and (2) otherwise qualified as unfair or deceptive practices that were in or
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affecting commerce.” Id.
The court finds that there are genuine issues of material fact regarding whether Mr.
Waddell engaged in an unfair or deceptive trade practice and whether his actions led to injury of
MPSG. There are also genuine issues of material fact regarding whether Mr. Waddell conducted
“egregious activities” under the heightened employer-employee standard. Based on the foregoing,
the court denies summary judgment.
E. 	Counterclaim for Wages, Expenses, and Commissions
Mr. Waddell seeks earned salary, reimbursement of costs and expenses, and earned
commission, plus interest. Mr. Waddell filed a proof of claim in the amount of $155,510.17. This
includes salary of $28,846.00 for 20 weeks (calculated for May 15, 2004 through Oct. 1, 2004),
expenses of $19,246.00, commissions on the Williams Project of $6,300.00 based on 2% of
receipts, commissions on the Light Logix sales of $19,910.90 based on 2% of receipts, and
commissions on the Basin a/k/a Northern Border Project of $81,207.00 based on 2% of receipts.
In support of its claim, Mr. Waddell refers to the affidavit of John Stephens. In the
affidavit, Mr. Stephens states that he hired Mr. Waddell and served as his immediate supervisor.
Mr. Stephens agrees with Mr. Waddell’s assessment of earned salary, reimbursement of costs and
expenses, and earned commission, plus interest totaling $155,510.17. 	In its answer to Mr.
Waddell’s counterclaim, MPSG admits that Mr. Waddell’s salary was $75,000.00 per year to be
paid weekly in the amount of $1,442.31 gross plus reimbursement of expenses, but it denies that
Mr. Waddell was entitled to any commission on projects.
Mr. Henry is the sole shareholder of MPSG. The court has found that Mr. Henry
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completely controlled MPSG, as the court has granted summary judgment on the first element of
the instrumentality test in favor of Basin on its claim against Mr. Henry for piercing the corporate
veil of MPSG. At deposition, when asked to review Mr. Waddell’s proof of claim, Mr. Henry said
that he did not question Mr. Waddell’s salary or expenses. Lacy Henry Deposition p. 751-52. Mr.
Henry, however, disputed that Mr. Waddell was owed any commission on the Williams Project,
Light Logix Project, or Basin Project, asserting that Mr. Waddell had not added commission to
those projects.
The court finds that there is no genuine issue of material fact regarding whether Mr.
Waddell is due his salary of $28,846.00 for 20 weeks (May 15, 2004 through Oct. 1, 2004) and
expenses of $19,246.00. The court grants summary judgment as to these amounts. Payment of
earned salary and reimbursable expenses will not be due until all third party claims are
adjudicated. The court, however, finds that there is a genuine issue regarding whether Mr. Waddell
was entitled to commission. That issue is reserved for trial.
CONCLUSION
Based on the foregoing, the court denies Mr. Waddell’s motion for summary judgment as
to the third party claims of MPSG and the Henrys. The court grants in part Mr. Waddell’s motion
for summary judgment regarding his third party counterclaim.
END OF DOCUMENT
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