United States District Court, Southern District of New York
October 25, 1991
PHILIP MORRIS CAPITAL CORPORATION, PLAINTIFF,
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.
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.
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 that Alamito's rates were not
2. Tepco would not unilaterally seek reductions from
FERC before January 1, 1995;
3. Even after January 1, 1995, any relief Tepco might
seek from FERC would not impair Alamito's ability
to pay its costs of operation, including its lease
Complaint, ¶ 23. San Diego was not a party to any of these
Philip Morris claims that in early December 1986, San Diego
notified Alamito of its view that under the Niagara Mohawk
ruling, if the proposed sale and leaseback transaction closed, it
would be entitled to a reduction in the rates it was paying
Alamito for blended power pursuant to the Alamito-San Diego Power
Sale Agreement. Furthermore, San Diego told Alamito that it felt
obligated to raise its claim with FERC before the transaction
closed or risk waiving it. Philip Morris also alleges that
Alamito persuaded San Diego not to make its intentions known
until after the deal closed for fear the transaction would
abort.*fn4 In addition, Philip Morris charges that San Diego
suggested that Alamito should "maybe . . . finesse its documents
to our advantage now." Complaint, ¶ 30.
Subsequently, Alamito's general counsel updated its
representations and warranties to the plaintiff with a litigation
letter which described Alamito's FERC proceedings involving San
Diego, but failed to mention the possibility of San Diego raising
a Niagara Mohawk challenge to the rates charged by Alamito to
San Diego. Philip
Morris claims that Catalyst and Tepco, each of which had made
representations and warranties to the investors that it knew of
no fact which would adversely affect the transaction, knew of San
Diego's intention to apply for a reduction in rates for power
supplied by Alamito under the Alamito-San Diego Power Sale
Agreement, yet failed to disclose this information. Complaint, ¶¶
In February 1989, San Diego filed with FERC a challenge to the
rates it was being charged by Alamito, alleging that it was
entitled to a set-off for the capital gain Alamito realized from
the sale of its facilities. About the same time, the Arizona
Corporation Commission ("ACC"), an Arizona state utility
regulatory agency, filed a similar challenge to the rates charged
to Tepco by Alamito. In accordance with its obligations under the
New Power Sale Agreement, Tepco did not join either challenge.
On December 20, 1990, San Diego and Alamito submitted to FERC a
proposed settlement of various disputes between them, including
the treatment of the gain from the sale of the Springerville
facilities. That settlement has been certified by an
administrative law judge for FERC approval.
Philip Morris filed the instant suit on December 28, 1990. It
charged, among other allegations, that:
1. It was not informed of the Niagara Mohawk decision and its
potential effect on the sale and leaseback transaction;
2. Defendants Tepco, Catalyst and Century Power made false
representations of material facts related to the transaction;
3. San Diego intended to bring a regulatory challenge based on
Niagara Mohawk but conspired with the other defendants not
to bring its challenge until after the transaction at issue
here closed on December 31, 1986.
Plaintiff alleges that it has been damaged by defendants'
actions, but specifies only that it has lost undesignated tax
benefits and suffered undesignated adverse tax consequences.
I. The Statute of Limitations for Philip Morris' § 10(b) and Rule
10b-5 Claims Has Run
Defendants move to dismiss Philip Morris' § 10(b) and Rule
10b-5 claims as time-barred. After the parties briefed and argued
this issue, the United States Supreme Court decided two
In Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,
___ U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991), the
Supreme Court ruled that the judicially implied private rights of
action under § 10(b) and Rule 10b-5 are subject to the same "one
year/three year" limitations period as applies to express causes
of action brought by the Securities and Exchange Commission
thereunder. Under this one year/three year period, for a claim
to be timely, it must be brought within one year of the discovery
of the alleged fraud and no later than three years after the
actual occurrence of the alleged fraud. Significantly, the Court
applied the new rule to the parties in Lampf, the case
announcing the rule. Id., 111 S.Ct. at 2782-83.
In James B. Beam Distilling Co. v. Georgia, ___ U.S. ___,
111 S.Ct. 2439, 115 L.Ed.2d 481 (1991), the Court ruled that a
prior decision applying a tax ruling retroactively to the case
announcing the rule, see Bacchus Imports, Ltd. v. Dias,
468 U.S. 263, 104 S.Ct. 3049, 82 L.Ed.2d 200 (1984), applied to all
cases then pending on direct review. James B. Beam, 111 S.Ct.
at 2448. The Court held that it is error not to apply
retroactively a rule of federal law "after the case announcing
the rule has already done so." Id. at 2446.
While James B. Beam involved a question of constitutionality
and the instant case does not, it is clear that the James B.
Beam holding on retroactivity in civil cases applies not only to
those cases involving constitutional questions, but also to those
cases applying retroactively reduced statutes of limitations. The
vacated Welch v. Cadre Capital, 923 F.2d 989 (2d Cir. 1991),
vacated sub nom. Northwest Savings Bank, PaSA v. Welch, ___
U.S. ___, 111 S.Ct. 2882, 115 L.Ed.2d 1048 (1991), for
reconsideration in light of Lampf and James B. Beam. In
Welch, the District Court had anticipated the decisions in
Ceres Partners v. GEL Associates, 918 F.2d 349 (2d Cir. 1990)
and Lampf and applied the one year/three year limitations
period retroactively. Welch v. Cadre Capital, 735 F. Supp. 467,
476-477 (D.Conn. 1989). The Second Circuit reversed, holding that
under the three-part test set forth in Chevron Oil v. Huson,
404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971),*fn5 the case
"[fell] within the exception to the general practice of applying
new judicial decisions retroactively." Welch, 923 F.2d at 991,
993. That Welch was remanded by the Supreme Court for
reconsideration in light of Lampf and James B. Beam is a
clear indication that the James B. Beam analysis was meant to
apply to cases involving retroactively reduced statutes of
limitations. Furthermore, in its reconsideration of Welch after
remand, the Second Circuit conclusively held, "[T]he retroactive
ruling in Lampf is to be applied retroactively to all cases not
finally adjudicated on the date when Lampf was decided. Welch
v. Cadre Capital, 946 F.2d 185, 187-88 (2d Cir. 1991).
In light of these recent decisions, the limitations period
adopted in Lampf must be applied to the present case. Philip
Morris filed this suit on December 28, 1990, more than three
years after the December 31, 1986 closing of the transaction at
issue. Accordingly, Philip Morris' § 10(b) and Rule 10b-5 claims
is not timely and are dismissed.
II. Catalyst is an Indispensible Party
Having dismissed all of plaintiff's claims arising under
federal statutes, this Court no longer has subject matter
jurisdiction pursuant to 28 U.S.C. § 1331. Furthermore, because
both plaintiff Philip Morris and defendant Catalyst have their
principal places of business in New York, Complaint, ¶¶ 2, 4,
there is not complete diversity of citizenship between plaintiff
and all defendants as required for diversity jurisdiction
pursuant to 28 U.S.C. § 1332.
Philip Morris requests that this Court dismiss Catalyst from
this lawsuit, thus restoring complete diversity and preserving
the plaintiff's filing date as to counts against the remaining
defendants. Letter from Plaintiff's Counsel, June 24, 1991. In
order to do this, this Court must determine whether such
dismissal would comport with the requirements of Fed.R.Civ.P.
Rule 19(b) provides that:
If a person . . . cannot be made a party, the court
shall determine whether in equity and good conscience
the action should proceed among the parties before
it, or should be dismissed, the absent person thus
being regarded as indispensable.
In Provident Tradesmens Bank and Trust Co. v. Patterson,
390 U.S. 102
, 88 S.Ct. 733, 19 L.Ed.2d 936 (1968), the Supreme Court
definitively outlined the four factors that a court should
consider in determining whether a party is indispensible:
(1) the plaintiff's interest in having a federal
forum, with the strength of this interest dependent
upon whether a satisfactory alternative forum
(2) the defendant's interest in avoiding multiple
litigation, inconsistent relief, and sole
responsibility for jointly shared liability;
(3) the absent co-defendant's inability to protect
its interests in any judgement rendered; and
(4) the public interest in complete, consistent, and
efficient settlement of controversies.
Provident Tradesmens, 390 U.S. at 109-111, 88
S.Ct. at 737-39.
Substantial discretion is afforded to the district court in
considering which factors to weigh and what weight to give them.
Envirotech Corp. v. Bethlehem Steel Corp., 729 F.2d 70
, 75 (2d
Cir. 1984). As an alternative to dismissal, a court should take a
flexible approach when deciding what parties need to be present
for a just resolution of a lawsuit. Jaser v. New York Property
Insurance Underwriting Ass'n., 815 F.2d 240
, 242 (2d Cir. 1987).
"As a consequence, very few cases should be terminated due to the
absence of non-diverse parties unless there has been a reasoned
determination that their non-joinder makes just resolution of
that action impossible." Id.
As for the first of the four Provident Tradesmens factors, a
satisfactory alternative forum exists. All remaining claims are
state law claims, and Philip Morris should be able to obtain
adequate relief in a state forum if any is warranted against
Catalyst and the other defendants. Furthermore, since an almost
identical lawsuit brought by the other five investors against
these same defendants is pending before this Court in Chrysler
Capital Corp. v. Century Power Corp., 91 Civ. 1937 (RPP), Philip
Morris will likely benefit from any early judgement rendered
against the defendants in the Chrysler case by virtue of
As for the second factor, continuation of this lawsuit in the
absence of Catalyst would harm the interests of the remaining
defendants. Catalyst was the party which expected "to receive the
largest immediate benefit by far" from the transaction. Complaint
¶ 32. Philip Morris alleges that Catalyst, as parent corporation
of Alamito, caused Alamito to use $120 million of the proceeds of
the sale of its facilities to repurchase its own stock from
Catalyst. The result was a transfer from Alamito to Catalyst of
$120 million of the proceeds from the transaction. Complaint ¶
47. It was Catalyst who allegedly "took the money and ran," so to
speak. To continue this lawsuit without Catalyst might result in
the remaining defendants being held responsible for what may
ultimately be Catalyst's liability. Because Catalyst is not the
sole shareholder of Alamito stock, there is the risk that
Alamito's minority shareholders will be held liable for actions
taken at the behest of their absent co-shareholder, Catalyst.
The third factor to weigh is the interest of the absent
co-defendant whom it would have been desirable to join. As the
Provident Tradesmens Court noted, "the court must consider the
extent to which the judgement may `as a practical matter impair
or impede his ability to protect' his interest in the subject
matter." Provident Tradesmens, 390 U.S. at 110, 88 S.Ct. at
738, citing F.R.Civ.P. 19(a). The parties have not shown that
any of Catalyst's property will be affected by the outcome of
Lastly, dismissal of Catalyst would be against the public
interest because it would increase the likelihood of this Court
granting "hollow and incomplete" relief. Envirotech, 729 F.2d
at 74. The relief requested specifically includes "a mandatory
injunction directing Catalyst to repay Century all amounts
transferred by Alamito to Catalyst following the sale and
leaseback." Complaint at 31. In the event of a FERC application
of the Niagara Mohawk ruling to Alamito, it may be that Alamito
will be unable to make its lease payments to the investors and
would face bankruptcy unless Catalyst were required to make such
payments. Thus, in Catalyst's absence, any determination in
plaintiff's favor would result in less than complete relief for
Having considered the four Provident Tradesmens factors, this
Court in its discretion finds that Catalyst is an indispensible
party to this action. Accordingly, this Court in equity and good
conscience cannot allow this action to proceed in Catalyst's
absence and, the case is dismissed for lack of diversity pursuant
to 28 U.S.C. § 1332.
For the reasons stated above, defendants' motion to dismiss
this case is granted.
IT IS SO ORDERED.