The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.
This action arises from a transaction involving the sale and
leaseback of an electric generating plant and certain other
utility facilities. Plaintiff Philip Morris Capital Corporation
("Philip Morris"), an investor in the transaction, seeks recovery
from defendants Century Power Corporation ("Century Power,"
previously known as Alamito Company, "Alamito"), Tucson Electric
Power Company ("Tepco"), Catalyst Energy Corporation
("Catalyst"), and San Diego Gas & Electric Company ("San Diego").
The complaint charges Century Power, Tepco, and Catalyst with
violations of Section 10(b) of the Securities Exchange Act of
1934 ("§ 10(b)"), 15 U.S.C. § 78j, as amended, and Rule 10b-5
thereunder. The several defendants are also charged variously
with conspiracy to violate and aiding and abetting the violation
of § 10(b) and Rule 10b-5, and with various state law claims
grounded in fraud.
Defendants also applied for a temporary stay of discovery under
Fed.R.Civ.P. 26(c) pending this Court's decision on their motions
to dismiss. That application was granted on June 17, 1991.
Because it is not deemed necessary, despite the voluminous
nature of the parties' submissions, this opinion does not address
every issue raised in the papers and at argument.
In 1984, Alamito and its then parent corporation, Tepco,
entered into an agreement (the "Power Sale Agreement") whereby
Tepco agreed pursuant to a "take or pay" provision to buy certain
minimum amounts of electric power from Alamito's generating
plant. Alamito also had a second, separate power sale arrangement
involving both Tepco and San Diego. Under a "Blending Agreement,"
Alamito would sell power to Tepco, Tepco would "blend" this
Alamito power with other Tepco power, and Tepco would sell
blended power back to Alamito for re-sale to San Deigo pursuant
to a service contract (the "Alamito-San Diego Power Sale
Agreement"). Complaint, ¶ 8.
In 1985, Tepco spun off its shares in Alamito to Tepco
shareholders. In 1986, Catalyst acquired Alamito in a hostile
takeover and thereafter owned almost all of Alamito's common
stock. After this takeover, a disagreement arose between Alamito
and Tepco, Alamito's former parent corporation, regarding Tepco's
obligations under the Power Sale Agreement.
In 1986, Alamito and Tepco reached an understanding which
resolved their dispute. The terms of this understanding provided
that Alamito would enter into a sale and leaseback transaction
involving certain of its facilities, and Alamito and Tepco would
enter into a new, long-term "take or pay" agreement for the
purchase of power, the "New Power Sale Agreement". The rates
provided for in the New Power Sale Agreement were calculated to
assure Alamito's ability to make its payments under the lease
portion of the sale and leaseback transaction. The New Power Sale
Agreement also resulted in a reduced "cost of service" for
Alamito and Tepco. In October 1986, Alamito and Tepco agreed to
the terms of the New Power Sale Agreement, and on October 24,
1986, Alamito submitted it to the Federal Energy Regulatory
Commission ("FERC") for approval. Timely motions to intervene in
the FERC proceeding were filed by Tepco and by San Diego.
At an unspecified time in November 1986, Goldman, Sachs & Co.
and Drexel Burnham Lambert Inc. offered Philip Morris and several
other investors a private placement memorandum describing the
proposed sale and leaseback transaction. Complaint, ¶ 12. Philip
Morris and five other entities would ultimately become investors
in the transaction.
On November 3, 1986, FERC issued a ruling in Niagara Mohawk
Power Corp., 37 F.E.R.C. ¶ 61,081 (1986). The essence of the
ruling was that a lessee in Alamito's position was obligated to
defer any gain realized from such a sale and leaseback
transaction and apply that gain over the life of the lease toward
reducing the rates charged to purchasing utilities. In November
1986, shortly after the Niagara Mohawk ruling, Alamito was
informed by its FERC counsel that the new ruling could affect the
proposed sale and leaseback transaction, especially with regard
to the rates Alamito would be permitted to charge Tepco.
Complaint, ¶ 28.
On December 17, 1986, FERC issued an order accepting the rates
in the New Power Sale Agreement without suspension and instituted
an investigation into the prospective reasonableness of the rates
to be charged by Alamito thereunder. Several days later, at the
request of the potential investors, Alamito petitioned FERC for
clarification of the extent of the investigation. By order of
December 29, 1986, FERC restricted the scope of its investigation
to Alamito's capital structure and the rate of return to be
allowed on that structure.*fn1 The sale and leaseback
transaction closed on December 31, 1986 with the execution of,
among other agreements, a Participation Agreement by Philip
Morris and five other investors.
Pursuant to these agreements, Philip Morris and the other
investors purchased from Alamito an electric power generating
unit known as Springerville Unit 1 and an undivided, 50% interest
in the common facilities of the Springerville Generating Station.
These facilities were then leased back to Alamito for a period of
28 years. At the same time, the New Power Sale Agreement became
effective. Under the New Power Sale Agreement, Tepco would buy
from Alamito most of the output of the Springerville Unit 1 for a
period of 28 years at rates which were calculated as covering
Alamito's costs of operation, including its lease payments.
As security for its lease payments, Alamito granted each of the
six purchasers a security interest in the New Power Sale
Agreement.*fn2 The New Power Sale Agreement expressly prohibited
Tepco from unilaterally seeking from FERC a reduction in the
rates provided for therein until January 1, 1995.*fn3 Complaint,
¶¶ 10-11. While Tepco was not a party to the transaction, it did
deliver to the investors a "Letter of Representation, Consent and
Further Agreement" dated December 15, 1986. In this letter, Tepco
repeated its understanding of the New Power Sale Agreement and
represented the following:
1. At the FERC public hearings regarding the
reasonableness of Alamito's prospective rates,
Tepco would not intentionally provide any testimony
supporting a position ...