Zero Carbon Holdings, LLC v. Aspiration Partners, Inc.

Background

Zero Carbon Holdings, LLC (ZCH) supports carbon-credit projects, and Four Thirteen, LLC (413) is ZCH’s sole member. ZCH and Aspiration Partners, Inc. entered into a prepaid forward transaction involving carbon credits generated by two Brazilian reforestation projects known as ZCH-1 and ZCH-2. The transaction was documented through an International Swaps and Derivatives Association Master Agreement, a February 9, 2022 Confirmation, and an Equity Pledge Agreement.

Under the Confirmation, ZCH agreed to deliver a total of 6,555,556 carbon credits in two periods. The first period covered up to 3,600,000 credits, and the second covered the remaining 2,955,556 credits. The Confirmation defined a carbon credit as one issued by Verra, the designated registry, and defined the first-period quantity as the amount of credits issued by Verra during the relevant calculation period. The agreements also provided that failure to make a required delivery or a material misrepresentation could constitute an event of default.

The projects were delayed. The parties extended the first physical settlement date from December 31, 2022, to March 31, 2023, because political unrest in Brazil delayed the audit process for ZCH-1. ZCH-2 was abandoned after ZCH learned that the project’s parcels overlapped with areas designated by state governments as public park lands. Aspiration sent three notices of default, alleging misrepresentations and later failure to deliver the carbon credits. Aspiration also notified ZCH and 413 of its intent to sell ZCH’s membership interests and rights to the approved projects under the pledged collateral.

Claims and Motion

ZCH and 413 filed a third amended complaint asserting seven claims for declaratory relief. The claims sought declarations that Verra’s issuance of carbon credits was a condition that had to occur before ZCH had to deliver credits; that the condition had failed; that impossibility, impracticability, or frustration of purpose excused ZCH’s performance; that no default had occurred; that Aspiration therefore lacked a membership interest in ZCH; and that Aspiration’s right to control the approved projects ended upon receipt of the credits.

Aspiration moved under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal for failure to state a legally sufficient claim, to dismiss the third amended complaint. The central question was whether, even without Verra’s issuance of the credits, ZCH had been required to deliver credits by the end of the extension period, such that its failure constituted an event of default.

Court’s Analysis

The court explained that, at the motion-to-dismiss stage, it generally must accept well-pleaded allegations as true and may dismiss a contract claim only when the contract is unambiguous. A contract is ambiguous when its terms can reasonably support more than one meaning when viewed in context.

Aspiration argued that the Confirmation required ZCH to deliver up to 3,600,000 credits by December 31, 2022, or the agreed extension date. It emphasized that the transaction was described as a prepaid forward agreement, argued that ZCH assumed the risk of delays in issuance, and contended that the reference to credits being “issued by the Registry” identified the credits rather than creating a condition precedent to delivery.

The plaintiffs argued that Verra’s issuance of credits was a condition precedent to ZCH’s delivery obligation. In their view, if Verra issued no credits during the first calculation period, ZCH had no credits to deliver and could not be in default. They also argued that the first-period quantity provision set a maximum of 3,600,000 credits but no minimum, so the court should not add a minimum requirement that the parties had not written into the agreement.

The court found force in both interpretations. It stated that the plaintiffs’ reading appeared to make the Confirmation’s requirement that ZCH deliver the total quantity—and the parties’ use of two settlement dates—unnecessary. But Aspiration’s reading appeared to add a minimum delivery requirement that was not stated in the first-period quantity provision and to change the definition of carbon credits from credits “issued by” the registry to credits “to be issued by” the registry.

Disposition

The court concluded that the Confirmation was ambiguous as written. It stated that deciding which party’s interpretation was stronger was not appropriate at this stage. The court therefore denied Aspiration’s motion to dismiss and directed that the case proceed to a bench trial. The opinion states that a bench trial was scheduled for early April 2024.