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PHILIP MORRIS CAPITAL CORP. v. CENTURY POWER CORP.

October 25, 1991

PHILIP MORRIS CAPITAL CORPORATION, PLAINTIFF,
v.
CENTURY POWER CORPORATION, TUCSON ELECTRIC POWER COMPANY, CATALYST ENERGY CORPORATION, AND SAN DIEGO GAS & ELECTRIC COMPANY, DEFENDANTS.



The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.

OPINION AND ORDER

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 move jointly pursuant to Fed.R.Civ.P. 12(b)(1) for dismissal (1) of the federal securities claims on the grounds that the statute of limitations has run and (2) of the remaining state law claims on the ground that there is no diversity jurisdiction. Defendants also move pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6) for dismissal on the grounds that the allegations of the complaint do not state any causal connection between defendants' alleged acts and plaintiff's alleged injury with sufficient particularity. Catalyst moves separately to dismiss the common law claims on the ground of lack of diversity. Defendant San Diego moves separately to dismiss Counts VI, VIII, and IX of the complaint on the grounds of: failure to state a claim, failure to plead fraud with particularity, and lack of personal jurisdiction over San Diego.

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.

BACKGROUND

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 ...

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