LFF IV Timber Holding LLC v. Heartwood Forestland Fund IV, LLC

A North Carolina Superior Court denied a motion to dismiss indemnification claims brought by companies that purchased West Virginia timberlands from the defendant. The property was enrolled as a carbon project in the California cap-and-trade program, and the plaintiffs alleged that the California Air Resources Board (CARB) had issued carbon offset credits worth more than $50 million for the timberlands. The plaintiff companies alleged that the defendant overstated the carbon stocks on the property in the initial inventory submitted to CARB, which the plaintiffs allegedly discovered when they conducted an updated carbon inventory of the property in preparation for a seven-year reverification report. The plaintiffs alleged they had or would incur costs that included costs to purchase carbon offsets as well as costs to manage the property based on lower carbon stocking. The court found that the plaintiffs offered a plausible interpretation of indemnification provisions as applying to any overstatement by the seller of carbon deposits in its initial inventory, which occurred prior to the closing date. Because “explicit contractual provisions” governed the circumstances under which indemnification was available, the court dismissed the plaintiffs’ unjust enrichment claim.

Two companies filed a lawsuit in state court in North Carolina asserting that they had incurred substantial liability to the California Air Resources Board (CARB), as well as other costs, due to misrepresentations by a defendant company (Heartwood Forestland Fund IV Limited Partnership (Heartwood)) regarding the amount of carbon sequestered by timberlands in West Virginia that one of the plaintiffs acquired from one of the defendants in 2017. The plaintiffs alleged that Heartwood “significantly overstated the carbon stocking” on the property when it sought carbon offsets, which CARB granted in 2017. The plaintiffs alleged that a carbon inventory conducted in conjunction with a 2023 “reverification”—which CARB requires to confirm carbon stocking—indicated that carbon stocks were “significantly below” modeled levels, resulting in a “reversal,” where the carbon stocking was below the project’s baseline. The plaintiffs alleged that the reversal would require them to purchase carbon offsets to comply with CARB requirements and to incur other costs, including legal and investigative costs and costs associated with the need to limit harvests at the property. The complaint sought a declaration that the defendants were obligated to indemnify the plaintiffs under a “Carbon Cooperation Agreement” that the plaintiffs and Heartwood entered into in conjunction with acquisition of the timberlands. The plaintiffs also requested damages commensurate with the indemnification rights. In the event the Carbon Cooperation Agreement is determined to be invalid and unenforceable, the complaint asserted an unjust enrichment claim.