Federal lawsuits reveal corporate intrigue behind controversial Lumberton wood pellet plant

Federal lawsuits reveal corporate intrigue behind controversial Lumberton wood pellet plant

- in Environment, News, Top Story
The Active Energy “family”: In addition to its Lumberton companies, Active Energy licenses CoalSwitch technology to RMDE, a Canadian company. Timberlands International had planned to cut trees and build a pellet plant in Newfoundland, but that project has stalled and several top officials have resigned. (Sources: Canadian media, Secretary of State incorporation documents in N.C. and Utah, company reports, court documents. Graphic: Lisa Sorg)

Active Energy left Utah to build a wood pellet plant in Lumberton. Court documents describe a Jenga tower of “alter egos” allegedly designed to shield the firm from responsibility.

P hilip Scalzo and Daniel McCarthy were living large, pulling down $12,000 to $15,000 a month, plus expenses and benefits as top-tier workers for Active Energy Group. 

Scalzo, the company’s chief technology officer, routinely jetted to locales around the world — Malaysia, Ukraine, Canada — to persuade utilities and businesses to adopt CoalSwitch technology, a type of wood pellet that could be swapped for coal. 

Meanwhile, back at Active Energy Group’s home base in Utah, McCarthy, vice president of engineering, led a team that ensured CoalSwitch would deliver its results as promised.

Both men had been on a team of inventors that had patented CoalSwitch, which AEG now owned.

Then in late February 2019, Scalzo and McCarthy were suddenly fired. AEG owes them in total, more than $150,000 in unpaid wages, according to allegations in court documents.

They are the plaintiffs in a federal lawsuit filed in North Carolina last month against Active Energy and three related companies known in legal parlance as “alter egos”: Lumberton Energy Holdings and Active Energy Renewable Power, located in Lumberton, in Robeson County, and Advanced Biosystem Solutions, based in the U.K.

An alter ego is legal term of art that refers to “a corporation, organization or other entity set up to provide a legal shield for the person actually controlling the operation.”

According to court filings, it was AEG’s and its alter egos’ “conscious design, plan, and scheme … to suddenly abandon all Utah operations, while taking its valuable assets to North Carolina, and leaving its employees, creditors and liabilities behind.”

This lawsuit — and a separate one by a different plaintiff — lodge common allegations in the field of business and labor disputes: breach of contract, failure to pay back wages, intellectual property misuse, and irresponsible company management. 

Within the documents, though, the plaintiffs in both lawsuits unravel a skein of Active Energy Group’s myriad side deals, financial failures, and alleged corporate subterfuge, before and after it relocated to Lumberton. 

Antonio Esposito is a top official at three Active Energy subsidiaries, all located in Lumberton; two of them are named in the most recent lawsuit. He also sits on the Active Energy board of directors. Esposito told Policy Watch that he is not “the person to address for information on this matter.”

Michael Rowan is CEO of Active Energy and a co-manager of the two North Carolina facilities named in the lawsuit. He did not respond to an email seeking comment.

Brycen Williams, the attorney for the plaintiffs, told Policy Watch he “has no idea why Active Energy Group is not paying these wages.”

“They’ve admitted their obligations to pay each plaintiff to varying degrees on various occasions,” Williams said. “And yet, they have not paid a dime. It is an interesting coincidence, however, in combination with it being an international company operating through hollow ‘alter egos’ — it makes this process much more complex. Most people would just give up and disappear. I believe this is their strategy.”

Active Energy Renewable Power’s facility on Alamac Road in Lumberton. (File photo: Lisa Sorg)

Leaving Utah for North Carolina “to evade liability”

As Policy Watch reported last year, CoalSwitch was tested in 2016 at the University of Utah’s Institute for Clean and Secure Energy. The results showed that CoalSwitch wood pellets could be burned alongside coal or as a standalone fuel in traditional power plants with no loss of heat. Utilities that chose to use CoalSwitch pellets wouldn’t have to spend millions of dollars to retrofit their facilities. And because the patented technology uses steam to explode the pellets, which resemble black kibble, to remove some contaminants, they burn cleaner than coal.

“The results of the CoalSwitch testing prove that the group’s faith in the technology and our investment in it over the past 12 months were fully justified,” Richard Spinks, then the CEO of Active Energy Group, was quoted in Biomass magazine at the time. “For the first time to our knowledge, the glass wall between coal and biomass usage within existing power generation plants has been shattered.”

The Institute for Clean and Secure Energy, funded in part by the U.S. Department of Defense and the Department of Energy, as well as the fossil fuel industry, did not, however, test the stack emissions for CoalSwitch. The tests catered only to utilities, which would buy the pellets, generating energy for themselves and substantial profits for Active Energy. 

However, the technology has never been tested on such a vast commercial scale — ultimately 400,000 tons of wood pellets each year. Air pollution from the plant, and its potential harm to the environment and nearby residents of Lumberton, is not part of the balance sheet.

In February 2017, about a year after the University of Utah tests, Scalzo and McCarthy began working for Active Energy Group in Utah. But by 2018, the company had encountered cash flow problems. (The company has never been profitable and has incurred millions in debt, inciting considerable angst within investor chat rooms.) 

Many employees, including Scalzo and McCarthy, worked without pay for several months. Then-CEO Richard Spinks assured them that they would be repaid the full amounts they were owed and “instructed them to continue working.”

And so they did, until February 2019, when Scalzo and McCarthy were “indefinitely furloughed, effectively terminated.” The men allege that Active Energy owes them back wages from the time they worked without a paycheck: $101,599.54 to McCarthy and $60,116.75 to Scalzo.

The litigation is careful to claim Scalzo and McCarthy were employees of Active Energy Group, not independent contractors. This is important because employees have legal rights that contractors don’t. For example, they can sue not only for the money owed them, but for punitive damages and attorneys’ fees.

The timing of Scalzo’s and McCarthy’s termination is notable. Within two weeks, in early March 2019, Active Energy “suddenly” shut down its Utah operations, which were then reincarnated as North Carolina companies, “leaving its employees, creditors and liabilities behind,” court documents read.

The CoalSwitch technology in Utah was disassembled for transporting to Lumberton. There, in a community that is nearly two-thirds non-white and home to the Lumbee Tribe, Active Energy Renewable Power announced it would build a wood pellet plant using an technology untested with respect to air pollution with an unknown pollutant load — CoalSwitch. 

The new North Carolina companies were Active Energy Renewable Power and Lumberton Energy Holdings, with Michael Rowan and Antonio Esposito as co-managers, according to NC Secretary of State documents.

“I cannot speculate as to what, if any, legitimate motives Active Energy Group had for the relocation,” Williams, the plaintiffs’ attorney said. “I do know that they did not need to fold up their alter egos in Utah and retitle all of their assets to accomplish it. They could have just domesticated those entities in North Carolina — a much easier process.”

While Scalzo and McCarthy were waiting for their back pay, in April 2019 Active Energy Group spent $3.2 million to buy the vacant Alamac Knits building in Lumberton. The CoalSwitch plant would be churning out wood pellets by the end of the year, the company promised investors — a promise soon broken.

The plot thickens in a second federal lawsuit 

As Active Energy claimed it was experiencing financial turbulence, the company nonetheless raised enough money that could have paid for employees’ wages and then some. Instead, the plaintiffs allege that at least some of the funds went to settle another pending lawsuit that involved a debt Active Energy Group owned on a shipping contract.

Meanwhile, Active Energy was also being sued in federal court by James Pappas, a Hawai’i millionaire. He was one of the largest investors in a company called Biomass Energy Enhancements, known as BEE. Like Active Energy, BEE did business in Utah. 

In late 2016 and early 2017, Pappas sued Active Energy, BEE, and several BEE officials, including ironically, Scalzo, a top official there before he joined Active Energy. 

Pappas could not be reached by phone at his home in Honolulu. The settlement terms, finalized through mediation in 2018, are confidential.

In court documents, Pappas alleged that he had lost his investment and “the expenditure of time and money … discovering and attempting to undo” the defendants’ “self-dealing and mismanagement.”

Again, the focus of the litigation was CoalSwitch. Active Energy and BEE had entered a joint venture agreement to roll out commercial plants using the technology worldwide. Because of the supposed economic promise of CoalSwitch, Active Energy agreed to fund international patent protections for BEE, at a cost of $3.1 million.

Active Energy Group also lent BEE $1.3 million, under special terms: If BEE defaulted, Active Energy could go after the money, but couldn’t foreclose on the company’s assets, the most valuable being the CoalSwitch technology.

Within a year, Active Energy had failed to meet its financial obligations, according to court documents. And instead of holding the company accountable, BEE and several of its directors, including Scalzo, cut a new deal.

That deal, brokered in October 2016, forgave Active Energy’s failure to pay most of the $3.1 million promised. The deal also changed BEE’s loan terms so that Active Energy could seize CoalSwitch if BEE defaulted on its $1.3 million note.

The new agreements “essentially doomed BEE to collapse” because BEE could not repay the loans, court documents read. And that’s what happened. Despite reneging on its original funding agreement, Active Energy maneuvered its way into obtaining the CoalSwitch technology.

Active Energy also lured away Scalzo, McCarthy and several other BEE employees, all of whom coincidentally had also signed consulting agreements with AEG in return for shares in the company.

Five months later, Scalzo and McCarthy went to work for Active Energy.

The timing of Scalzo and McCarthy’s recent litigation against Active Energy is notable. On Feb. 10, they sued Active Energy, seeking not only their unpaid wages, but punitive damages and attorney’s fees. Just a day before, CEO Michael Rowan announced the company raised another round of funding to bolster its operations in Lumberton — $10 million.

It’s as if money grows on the trees Active Energy plans to cut for fuel.

Let’s make a deal: Lawsuits detail an Active Energy timeline

1996
Active Energy Group forms in London, England.

2014

Biomass Energy Enhancements (BEE) launches in Wyoming. Its purpose is to “design, manufacture and sell technologies that turn plant matter into biofuel.”

2015

September: BEE enters into a joint venture agreement with Active Energy Group to “pursue business opportunities” through a newly formed company AEG CoalSwitch Limited. AEG owns 51% of CoalSwitch; BEE owns 49%.

October: Because of the supposed economic promise of CoalSwitch, Active Energy Group agrees to fund international patent protections for BEE, at a cost of $3.1 million.

Active Energy Group also lends BEE $1.3 million, under the terms that if BEE defaults, Active Energy can go after the funds, but can’t seize the company’s assets, such as the CoalSwitch technology.

2016

February: Active Energy holds a “reveal” event in Utah, to announce the CoalSwitch technology.

September: Active Energy Group fails to comply with some of the financial terms of the joint venture agreement. Some of BEE’s board of directors negotiate a new agreement that “essentially waives AEG’s defaults” and gives that company “unwarranted business and concessions.” 

This includes changing the terms of the loan so Active Energy Group could seize a key asset from BEE: intellectual property related to CoalSwitch. With this new agreement, it’s learned that several BEE directors had previously signed consulting agreements with Active Energy Group.

October: Active Energy Group announces that it has fully absorbed CoalSwitch from BEE.

December: A minor stockholder and millionaire James Pappas sues BEE, some of its directors and Active Energy Group, over allegations of “self-dealing and mismanagement.”

2017

January: A firm known as Gladiola registers as a business in Utah. According to the plaintiffs, it’s merely a shell company to pass British funds from Active Energy to pay U.S. employees.

February: Philip Scalzo and Daniel McCarthy, formerly of BEE, begin working for Active Energy Group.

June: AEG CoalSwitch registers as a business in Utah.

2018

First six months: The Active Energy/BEE lawsuit with James Pappas is settled. The terms are confidential.

AEG runs into financial trouble. Payroll is delayed.

July: Because of ongoing financial issues with the company, Richard Spinks steps down as CEO; Michael Rowan replaces him. 

October: Active Energy Renewable Power incorporates in North Carolina. Antonio Esposito and Michael Rowan are top officials.

2019

Feb. 21-22: Philip Scalzo and Daniel McCarthy are fired from Active Energy; they later sue.

Feb. 28: Lumberton Energy Holdings incorporates in North Carolina. Esposito and Rowan are top officials.

April: Active Energy Group buys the Alamac American Knits building in Lumberton for $3.25 million. The company is awarded a $500,000 grant from the NC Department of Commerce to upfit the building. (As of 2021, the money has yet to be awarded because Robeson County has not submitted all of the required paperwork.) The company plans to transport the CoalSwitch facility to Lumberton and reassemble it there.

June: Renewable Energy Systems, whose directors are also part of Active Energy Group, incorporates in North Carolina. It operates a sawmill at the Lumberton plant. 

September: AE Renewable Power begins discussing the wood pellet plant with DEQ officials.

November: AE Renewable Power applies for air permit.

2020

April: AE Renewable Power projects it will begin producing wood pellets later this year; estimates it will ramp up production from 40,000 tons of pellets to 400,000 tons by 2021. 

August: After public hearings and a public comment period where there was overwhelming opposition to the proposal, the Division of Air Quality approves AE Renewable Power’s air permit.

Southern Environmental Law Center notifies the company of its intent to sue over violations of the Clean Water Act, claiming AE Renewable Power has been illegally discharging stormwater and wastewater offsite, without a permit. DEQ requires the company to obtain a permit.

By the end of 2020, the company had not reassembled the CoalSwitch plant and was not producing wood pellets.

2021

Feb. 9: Active Energy Renewable Power announces it has secured $10 million in new funding.

Feb. 10: Philip Scalzo and Daniel McCarthy sue Active Energy for unpaid wages and breach of contract.

Although Active Energy promised two years ago the CoalSwitch plant would be reassembled in North Carolina, that work has not been completed. There is still no wood pellet production.

March 10: The Southern Environmental Law Center, representing the Winyah Rivers Alliance, filed litigation alleging the companies have violated the Clean Water Act. According to the lawsuit, Active Energy Renewable Power has been illegally discharging industrial pollutants into the Lumber River and a tributary Jacob’s Branch for two years.