Nathanson v. Tortoise Capital Advisors, LLC

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HOWARD NATHANSON, et al., Plaintiffs, v. TORTOISE CAPITAL ADVISORS, L.L.C., et al., Defendants.

No. 2:22-cv-02328-HLT-RES

United States District Court, D. Kansas

February 1, 2023

MEMORANDUM AND ORDER

HOLLY L. TEETER UNITED STATES DISTRICT JUDGE

This is a derivative action brought by Plaintiffs Howard Nathanson and Gus Gordon on behalf of Tortoise Energy Infrastructure Corp. and Tortoise Midstream Energy Fund, Inc. (collectively the “Funds”). Defendants are the Funds' directors and an investment advisory firm. Plaintiffs allege that Defendants' over-reliance on leverage led to significant financial losses in 2020. Defendants move to dismiss on grounds of forum non conveniens, lack of pre-suit demand under Federal Rule of Civil Procedure 23.1, and failure to state a claim. Doc. 28. Because a forumselection clause mandates that this action be brought in Maryland, the Court grants the motion to dismiss under the doctrine of forum non conveniens.

I. BACKGROUND

The Funds are closed-end investment companies that invest in the energy industry. Doc. 1 at ¶¶ 1-2, 17. They each use significant leverage to increase their investable assets which refers to the difference in the value of the total investment portfolio and the value of capital contributed by investors. Id. ¶ 22. Leverage is obtained by issuing senior notes, preferred stock, and by borrowing under a credit facility. Id. ¶ 23. This allows the Funds to purchase more securities than they would ordinarily be able to. Id.

The Funds are managed by a Board of Directors and Tortoise Capital Advisors, L.L.C. (“Tortoise”), the defendants in this case. Id. ¶ 2. The Board's responsibility is identifying material risks in operating the Funds, managing the Funds' risk, and evaluating whether various policies, procedures, and controls are working to mitigate known risks. Id. ¶ 33.

Tortoise is an investment advisory firm. Id. ¶ 34. Tortoise manages the Funds' day-to-day operations and their securities portfolios pursuant to Investment Advisory Agreements (“Agreements”). Id. ¶ 36. Under the Agreements, Tortoise agreed that it “shall be liable to the [Funds] for any loss, damage claim, cost, charge, expense or liability resulting from the willful misconduct, bad faith or gross negligence or disregard by [Tortoise] of [Tortoise's] duties or standard of care, diligence and skill set forth in this Agreement.” Id. ¶ 37. Tortoise is compensated 0.95% of the Funds' total assets. Id. ¶ 38. This includes leveraged assets. Id. ¶ 52.

In public filings, Tortoise and the Board stated it was policy to use leverage representing approximately 25% of total assets. Id. ¶ 55. But since 2017, the Funds' use of leverage has exceeded 30%. Id. ¶ 57. In 2019, it approached nearly 40%. Id. ¶ 58. The increased reliance on leverage increased the Funds' risk of a liquidity crisis. Id. ¶ 63. Different forms of leverage require certain asset-coverage requirements. Id. ¶ 46. If these requirements are violated, the Funds may be forced to sell securities to generate cash. Id. ¶ 47. This may occur in a declining market and can cause permanent losses. Id. ¶¶ 47-48.

Plaintiffs generally allege that, throughout 2019, Tortoise's leverage decisions fared poorly, causing a decline in returns. Id. ¶ 69. The Board was aware but took no action to rectify the situation. Id. ¶¶ 70-78. This left the Funds vulnerable to a market downturn. Id. ¶ 79.

In 2020, the pandemic and other global factors caused a steep drop in energy prices. Id. ¶ 81. This caused the Funds to fall out of compliance with asset-coverage requirements. Id. As a result, Tortoise sold a significant amount of the Funds' securities at a loss. Id. ¶ 82. By the end of the first quarter of 2020, the Funds collectively reported losses of over a billion dollars. Id. ¶ 84. The Funds' performance by the end of 2020 was comparatively worse than most similar entities. Id. ¶ 87.

Despite this poor performance, the Board did not impose any mitigation efforts and in fact renewed Tortoise's agreement for another year. Id. ¶¶ 100-01. Plaintiffs contend that the Board subsequently enacted certain defensive measures to prevent stockholders from electing new directors, which protected the current Board and Tortoise. Id. ¶¶ 106-07. The Board also failed to engage with a party seeking to purchase the Funds' claims against Tortoise. Id. ¶¶ 111-12.

Plaintiffs bring derivative clams alleging a breach of fiduciary duty by the Board and Tortoise. Id. ¶ 116. In Count 1, Plaintiffs seek recission of the Agreements under Section 215 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-15. Id. ¶¶ 127-31. In Count 2, Plaintiffs allege a breach of fiduciary duty under Maryland law. Id. ¶¶ 132-45.

II. ANALYSIS

Defendants move to dismiss the case for various reasons, including for forum non conveniens, lack of pre-suit demand under Federal Rule of Civil Procedure 23.1, and failure to state a claim. Because the Court finds that the case should be dismissed for forum non conveniens, it focuses on that analysis and does not reach Defendants' other arguments.^[1]

Defendants' forum non conveniens argument is based on the Funds' bylaws, which designate the exclusive forum for certain litigation. See Doc. 29-9 at 11; Doc. 29-10 at 10. The relevant provisions in the bylaws, which are identical, state:

Unless the Corporation consents in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Northern Division, shall be the sole and exclusive forum for . . . (b) any derivative action or proceeding brought on behalf of the Corporation, other than actions arising under federal securities laws, [or] (c) any action asserting a claim of breach of any duty owed by any director or officer or other employee of the Corporation to the Corporation or to the stockholders of the Corporation ....None of the foregoing actions, claims or proceedings may be brought in any court sitting outside the State of Maryland unless the Corporation consents in writing to such court.

Doc. 29-9 at 11. Defendants argue that Plaintiffs' derivative claims can only be brought in Maryland. Plaintiffs argue the forum-selection clauses don't apply because this action arises under federal securities law, which is an express carve-out under subsection (b). Doc. 34 at 26.

Based on these arguments, the Court must first “determine whether the forum-selection clause controls.” Kelvion, Inc. v. PetroChina Canada Ltd., 918 F.3d 1088, 1091 (10th Cir. 2019); DML Bakeries, Inc. v. Choice Prod. USA, LLC, 2020 WL 8181704, at *2 (D. Kan. 2020) (“Therefore, before weighing the various factors associated with the forum non conveniens analysis, the Court first addresses the applicability of the Management Agreement's forumselection clause.”). If a clause applies, the party resisting enforcement has a heavy burden of showing that the provision is invalid due to fraud or overreaching, or that it would be unreasonable or unjust to enforce the provision. K.R.W. Constr., Inc. v. Stronghold Eng'g Inc., 598 F.Supp.3d 1129, 1136 (D. Kan. 2022). Forum-selection clauses are presumptively valid. Id.

If a valid forum-selection clause applies and points to a state or foreign court, the court applies the doctrine of forum non conveniens. Kelvion, Inc., 918 F.3d at 1091; see also Atl. Marine Const. Co. v. U.S. Dist. Court for the W. Dist. of Tex., 571 U.S. 49, 60 (2013) (“[T]he appropriate way to enforce a forum-selection clause pointing to a state or foreign forum is through the doctrine of forum non conveniens.”).^[2] A motion to dismiss based on forum non conveniens is typically analyzed under a two-step process. “First, there must be an available and adequate alternative forum. Second, public and private interest factors must weigh strongly in favor of litigation in that alternative forum.” DML Bakeries, Inc., 2020 WL 8181704, at *3. However, if a forum-selection clause applies, the second step of the analysis focuses only on the public-interest factors, and the plaintiff's choice of forum carries no weight. Atl. Marine Const. Co., 571 U.S. at 63-64. A valid forum-selection clause will control in all but the most exceptional cases. Id.

A. The forum-selection clauses apply and are enforceable.

“The scope of a forum-selection clause is evaluated according to ordinary principles of contractual interpretation.” Kelvion, Inc., 918 F.3d at 1092; see also Kansas Heart Hosp., L.L.C. v. Idbeis, 184 P.3d 866, 883 (Kan. 2008) (“[C]orporate instruments such as charters and bylaws are interpreted in the same manner as other contracts.”); Tackney v. U.S. Naval Acad. Alumni Ass'n, Inc., 971 A.2d 309, 318 (Md. 2009) (“A corporation's bylaws are construed under the principles governing contract interpretation.”). The Court therefore starts with the plain language of the provisions. See Kelvion, Inc., 918 F.3d at 1092-93.^[3] Here, the Funds' bylaws have two relevant provisions: subsection (b), which refers to “any derivative action or proceeding brought on behalf of the Corporation, other than actions arising under federal securities laws,” and subsection (c), which refers to “any action asserting a claim of breach of any duty owed by any director or officer or other employee of the Corporation to the Corporation or to the stockholders of the Corporation.” Under these provisions, such actions, with the exception of actions arising under federal securities law, must be brought in Maryland state court or Maryland federal court if the state court lacks jurisdiction. Doc 29-9 at 11.

Plaintiffs bring a derivative action. Doc. 1 at ¶ 116. One claim arises under federal securities law, and the other claim arises...