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Trafalgar Power, Inc. v. Aetna Life Insurance Co.

April 12, 2006

TRAFALGAR POWER INC. AND CHRISTINE FALLS CORPORATION, PLAINTIFFS,
v.
AETNA LIFE INSURANCE COMPANY; ALGONQUIN POWER CORPORATION, INC.; ALGONQUIN POWER INCOME FUND; AND ALGONQUIN POWER FUND (CANADA) INC.; DEFENDANTS.
ALGONQUIN POWER CORPORATION, INC.; ALGONQUIN POWER INCOME FUND; AND FRANKLIN INDUSTRIAL COMPLEX, INC.; PLAINTIFFS,
v.
TRAFALGAR POWER, INC.; CHRISTINE FALLS CORPORATION; AND PINE RUN OF VIRGINIA, INC.; DEFENDANTS.
IN RE: MARINA DEVELOPMENT, INC.; FRANKLIN INDUSTRIAL COMPLEX, INC.; CHRISTINE FALLS OF NEW YORK, INC.; TRAFALGAR POWER, INC.; PINE RUN OF VIRGINIA, INC.; DEBTORS
MARINA DEVELOPMENT, INC.; TRAFALGAR POWER, INC.; CHRISTINE FALLS OF NEW YORK, INC.; FRANKLIN INDUSTRIAL COMPLEX, INC.; AND PINE RUN OF VIRGINIA, INC.; PLAINTIFFS,
v.
ALGONQUIN POWER CORPORATION, INC.; ALGONQUIN POWER SYSTEMS, INC.; ALGONQUIN POWER FUND (CANADA), INC.; ALGONQUIN POWER INCOME FUND; ALGONQUIN POWER SYSTEMS NEW HAMPSHIRE, INC.; ALGONQUIN POWER (U.S.) HOLDINGS, INC.; AETNA LIFE INSURANCE COMPANY; CIT CREDIT GROUP, INC., FKA NEWCOURT CREDIT GROUP, INC.; CANADIAN INCOME PARTNERS I LIMITED PARTNERSHIP; DEFENDANTS.



The opinion of the court was delivered by: David N. Hurd United States District Judge

ADV. PRO. NO. 02-80005

MEMORANDUM-DECISION and ORDER

I. INTRODUCTION

A. Lead Case

Trafalgar Power, Inc. and Christine Falls Corporation*fn1 (collectively "TPI") filed a complaint on August 9, 1999. On January 11, 2000, TPI filed an amended complaint alleging breach of contract, breach of the duty of good faith and fair dealing, breach of fiduciary duty, and conversion causes of action against Aetna Life Insurance Company ("Aetna") and breach of contract, breach of the duty of good faith and fair dealing, breach of fiduciary duty, tortious interference with contract, and conversion causes of action against Algonquin Power Corporation, Inc., Algonquin Power Income Fund, and Algonquin Power Fund (Canada) Inc. (collectively "Algonquin"). Algonquin counterclaimed for money allegedly due. The details regarding these claims will be addressed below. Jurisdiction was based on diversity of citizenship and TPI sought, inter alia, compensatory damages of $20 million, well over the jurisdictional amount. See 28 U.S.C. § 1332.

B. Member Case

On August 15, 2000, Algonquin Power Corporation, Inc. and Algonquin Power Income Fund filed suit against Trafalgar Power, Inc., Christine Falls Corporation, Pine Run Virginia, Inc. ("Pine Run"), and American Casualty Company of Reading, Pennsylvania.*fn2

Claims sounding in conversion and fraud were alleged. Again, details of the claims will be discussed below. Diversity of citizenship and a claim for damages over the jurisdictional amount provide the basis for jurisdiction. See 28 U.S.C. § 1332.

C. Adversary Proceeding

TPI, Pine Run, and other affiliated entities filed for bankruptcy protection in 2001. Shortly after filing their bankruptcy petitions, debtors initiated an adversary proceeding against Algonquin, Aetna, and others. Debtors asserted a total of nineteen claims, several of which were duplicative of the claims asserted in the Lead and Member Cases just described. Specifically, Counts 7, 8, 9, 10, 11, 12, and 13, as well as Counts 14 and 15 to the extent that they involve power projects in New York, of the adversary proceeding complaint duplicated claims set forth in the lead and member cases. Thus, in accordance with the Report and Recommendation of the Bankruptcy Court, the reference was withdrawn with regard to Counts 7, 8, 9, 10, 11, 12, and 13, as well as Counts 14 and 15 to the extent that they involve power projects in New York. The remaining bankruptcy matters are being held in abeyance pending a determination on these motions.

D. Current Status of Cases/Pending Motions

The lead case and the member case were consolidated on November 8, 2000. At the time the reference was withdrawn on Counts 7-13 and 14-15 (to the extent that New York power projects are implicated) of the adversary proceeding on November 7, 2003, those Counts were consolidated with the Lead Case.

Presently pending are Algonquin's and Aetna's motions for partial summary judgment*fn3 and TPI's motion for partial summary judgment all of which were filed in the adversary proceeding, the reference of which was withdrawn. An in-chambers conference was held on June 21, 2004, in Utica, New York. Decision on the pending motions was reserved.

On April 13, 2005, TPI moved for leave to supplement the record on summary judgment. Algonquin and Aetna opposed. The motion was taken on submission without oral argument.

Also pending is TPI's appeal of the Magistrate Judge's Order striking its demand for a jury trial. Algonquin filed a response, and TPI replied. The appeal was taken on submission without oral argument.

II. FACTS

The following facts are undisputed unless otherwise noted. In 1988, TPI financed the construction and operation of seven hydroelectric power plants in New York State ("power projects") by taking out a loan in the principal amount of $22,500,000 from Aetna ("Aetna loan"). TPI pledged substantially all of its assets, including the power projects, as collateral.

In 1989, TPI commenced a lawsuit against the engineering firm that designed the power projects, alleging engineering malpractice regarding the design of the power projects as it related to the projected power generation potential (and income generation). This lawsuit was successful and TPI eventually obtained a judgment in the amount of $7.6 million ("malpractice judgment"). See generally Hydro Investors v. Trafalgar Power, Inc., 63 F. Supp. 2d 225 (N.D.N.Y. 1999) (denying post-trial motions), aff'd in part, vacated & remanded in part, 227 F.3d 8 (2d Cir. 2000) (vacating denial of prejudgment interest and remanding for calculation of such interest).

Meanwhile, TPI defaulted on the Aetna loan, and on January 19, 1995, Aetna notified TPI of the default and its intent to accelerate the entire balance immediately due and to foreclose on the collateral. At that time the entire principal amount of $22,500,000 was owed, as was $10,199,659.50 in accrued interest.

Negotiations took place to restructure the loan. Aetna required that TPI hire an operator/manager for the power projects as a pre-condition to any restructured loan. Accordingly, TPI hired Algonquin to operate and manage the power projects. Algonquin began managing the power project operations in June 1995.

TPI and Aetna reached an agreement to restructure TPI's debt. The original $22,500,00 Aetna loan was cancelled and the interest owed was forgiven. Two new notes were issued as a result of the January 15, 1996, agreement to restructure ("1996 Agreement"). The "A Note" was in the principal amount of $6,700,000, bearing interest at 9.75% per annum, and maturing on February 10, 2003. The "B Note" was in the principal amount of $15,800,000, bearing interest at 6.10% per annum, and maturing on December 31, 2010. Apparently contemplating a future offer by Algonquin to purchase the notes, a right of first refusal on behalf of TPI was included in the 1996 Agreement. The 1996 Agreement provided that if Algonquin made an offer to purchase the A Note or the B Note, TPI would have ...


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