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Oxbow Calcining Usa Inc., et al., Plaintiffs-Respondents-Appellants v. American Industrial Partners

June 26, 2012

OXBOW CALCINING USA INC., ET AL., PLAINTIFFS-RESPONDENTS-APPELLANTS,
v.
AMERICAN INDUSTRIAL PARTNERS, ET AL., DEFENDANTS-APPELLANTS-RESPONDENTS.



Oxbow Calcining USA Inc. v American Indus. Partners

Decided on June 26, 2012

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

Andrias, J.P., Friedman, DeGrasse, Freedman, Manzanet-Daniels, JJ.

Order, Supreme Court, New York County (Eileen Bransten, J.), entered February 3, 2011, which denied defendants' motion to the extent that it sought to compel arbitration and dismiss the fraud and fraudulent concealment causes of action or, in the alternative, to stay the action pending a simultaneously commenced Texas arbitration, and which granted the motion to dismiss with respect to the breach of fiduciary duty causes of action, unanimously modified, on the law, to the extent of reinstating plaintiffs' causes of action for breach of fiduciary duty, dismissing the fraud and fraudulent concealment causes of action, and granting the motion to stay the action, and otherwise affirmed, without costs.

The facts gleaned from the first amended complaint (the complaint) are as follows. Plaintiff Oxbow Carbon LLC (Oxbow Carbon) is the immediate parent and sole owner of plaintiff Oxbow Calcining USA Inc. (Oxbow USA), formerly known as Great Lakes Carbon USA Inc. (GLC USA). Oxbow USA, through its subsidiary, nonparty Oxbow Calcining LLC (Oxbow LLC), the arbitration claimant, formerly known as Great Lakes Carbon LLC (GLC LLC), owns and operates a calcining plant in Port Arthur, Texas.

Defendants Rogers and Bingham are former directors of GLC USA and principals of defendant American Industrial Partners (AIP). Defendants American Industrial Partners Capital Fund II, L.P. (AIP Fund II) and American Industrial Partners Capital Fund III, L.P. (AIP Fund III) are affiliates of AIP. In or about 1998, AIP, through AIP Fund II, acquired all of the stock of GLC USA and its subsidiaries, which the complaint refers to collectively as GLC.

The calcining process emits large amounts of waste heat, which can be converted to steam. Adjacent to the calcining plant is a steam plant that Dynergy Power Corp. (Dynergy) owned and operated until sometime in 2000. Pursuant to an agreement between GLC and Dynergy, waste heat was transferred from the calcining plant's kilns to the steam plant and used to heat generators that produced steam and electricity for sale to end users. The release of flue gas from both the calcining plant's kiln stacks and the steam plant's boiler stack was conducted pursuant to regulatory permits issued to GLC.

In 2000, GLC purchased the steam plant from Dynergy. Before operations could resume, the plant required refurbishment, including the installation of a new pollution control system, which GLC could not fund.

In 2003, AIP sold a portion of its interest in GLC to the Great Lakes Carbon Income Fund (GLC Income Fund), but continued to hold a controlling interest. In 2004, two competing offers for the purchase of the steam plant and the transfer of waste heat from the calcining plant were submitted to GLC. One was from Cinergy and the other from AIP, which, along with another entity, formed nonparty Port Arthur Steam Energy LP (PASE), the arbitration respondent, for that purpose. Because GLC's AIP directors were conflicted, GLC appointed an independent committee of non-AIP directors to review the competing proposals.

In November 2004, to obtain the committee's approval, AIP, with the knowledge of the individual defendants, represented, as had Cinergy, that it would install electrostatic precipitators in its new pollution control system. Based on defendants' knowledge of GLC, and defendants' representations that AIP would fully protect the interests of GLC and its shareholders, the committee agreed to accept AIP's proposal. However, AIP soon advised GLC that it would probably be worth installing a magnesium hydroxide injection and multicone pollution control system, which was less expensive and would enable operations to commence sooner. To induce GLC to agree, AIP represented that it would install an effective system at AIP's expense if the injection system failed, and that GLC would never have any monetary liability for the requirement to supply waste heat to PASE. Relying on these representations, GLC sold the steam plant to PASE for $1 and, effective February 25, 2005, entered into a Heat Exchange Agreement (HEA) with PASE whereby PASE agreed to process all waste heat and flue gas from the calcining plant.

In 2005, AIP sold another portion of its interest in GLC to the GLC Income Fund. In 2006, it sold its remaining interest to Rain Commodities (USA) Inc., an unaffiliated third party. In or about May 2007, Oxbow Carbon, LLC purchased the stock of GLC.

Plaintiffs allege that AIP's inadequate injection system, and installation of unlined carbon steel boiler stacks, resulted in excessive and rapid corrosion, causing the stacks to fail. After AIP/PASE refused to fix the problems, Oxbow USA had to fix them, at a cost estimated to be between $6 million and $9 million. Towards this end, Oxbow USA installed a "cooler baghouse" (an added pollution control system), replaced corroded boiler stacks, and retained experts to conduct testing.

On July 16, 2010, Oxbow LLC demanded arbitration in Texas of claims against PASE for breach of the HEA and related duties. Simultaneously, plaintiffs commenced this action alleging that defendants, as former directors and controlling shareholders of GLC, engaged in fraud before and during the sale of the steam plant to PASE and breached their fiduciary duty to GLC and its shareholders. Plaintiffs also alleged that defendants concealed the material risks created by the inferior pollution control system, ...


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