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CHRYSLER CAPITAL v. CENTURY POWER CORP.

November 15, 1991

CHRYSLER CAPITAL CORPORATION, CILCORP LEASE MANAGEMENT INC., IOR CAPITAL, INC., NORTHERN LEASING COMPANY, INC., AND US WEST FINANCIAL SERVICES, INC., PLAINTIFFS,
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. Plaintiffs Chrysler Capital Corporation ("Chrysler"), Cilcorp Lease Management Inc. ("Cilcorp"), IOR Capital Inc. ("IOR"), Northern Leasing Company Inc. ("Northern Leasing"), and US WEST Financial Services ("U S WEST"), investors in the transaction, seek recovery from defendants Century Power Corporation ("Century") (previously known as Alamito Company, "Alamito"), Catalyst Energy Corporation ("Catalyst"), Tucson Electric Power Company ("Tepco") and San Diego Gas & Electric Company ("San Diego").

The complaint charges Century, Tepco, and Catalyst with violations of Section 10(b) of the Securities and 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 § 10(b) and Rule 10b-5, aiding and abetting the violation of § 10(b) and Rule 10b-5, and various state law claims grounded in fraud. Defendants move pursuant to Fed.R.Civ.P. 12(b) to dismiss all claims against them on the grounds that the federal claims are time-barred and the state law claims fail to state a claim upon which relief may be granted. Defendants also move pursuant to Fed. R.Civ.P. 9(b) to dismiss the fraud claims on the ground that Plaintiffs have not pleaded fraud with particularity. Defendant San Diego moves separately pursuant to Fed. R.Civ.P. 12(b)(2) for dismissal of all claims against it on the ground that this Court lacks personal jurisdiction over it.

This Court has excluded all matters outside the pleadings and does not convert the 12(b)(6) motions to motions for summary judgement. Kopec v. Coughlin, 922 F.2d 152, 154-155 (2d Cir. 1991).

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 which involved both San Diego and Tepco. 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 Diego 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 several investors a private placement memorandum describing the proposed sale and leaseback transaction. Complaint ¶ 12. The five Plaintiffs in this action and Philip Morris Capital Corporation ("Philip Morris")*fn1 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 financial gain realized from such a sale and leaseback transaction and apply that gain over the life of the lease toward reducing the cost of service 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 in 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.*fn2 The sale and leaseback transaction closed on December 31, 1986 with the execution of, among other agreements, a Participation Agreement by the investors, the Plaintiffs and Philip Morris.

Pursuant to these agreements, Plaintiffs and Philip Morris purchased from Alamito an electric power generating unit known as Springerville Unit 1 and an undivided, 50% interest in the common utility facilities of the Springerville Generating Station. The Springerville unit and facilities were then leased back to Alamito for a period of 28 years. On the same date, the New Power Sale Agreement became effective. Under the New Power Sale Agreement, Tepco would buy from Alamito most of the output of Springerville Unit I 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.*fn3 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.*fn4 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 reasonable;
  (2) Tepco would not unilaterally seek reductions
      from FERC before January 1, 1995; and
  (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 obligations.

Complaint ¶ 23. San Diego was not a party to any of these agreements.

Plaintiffs claim 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. Plaintiffs allege that Alamito persuaded San Diego not to make its intentions known until after the deal closed for fear the transaction would abort.*fn5 In this regard, Plaintiffs charge that San Diego suggested that Alamito should "maybe . . . finesse its documents to our advantage now." Complaint ¶ 30.

In connection with the closing of the sale and leaseback transaction, Alamito's general counsel updated its representations and warranties to the investors 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. Plaintiffs claim 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 ¶¶ 22-24, 32-33. The sale and leaseback transaction closed on December 31, 1986.

Over two years later, on February 15, 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. On the same day, the Arizona Corporation Commission ("ACC"), an Arizona state utility regulatory agency, filed a similar challenge to the rates charged to Tepco by Alamito under the New Power Sale Agreement.*fn6 San Diego and Alamito later entered into a settlement agreement which an administrative law judge has now certified to FERC for approval. San Diego Gas & Electric v. Century Power Corp., 54 F.E.R.C. ¶ 63,024 (March 8, 1991). The administrative law judge also issued an initial decision which basically accepted the ACC's position regarding Alamito's treatment of the gain realized on the sale of its facilities. Arizona Corp. Comm'n v. Century Power Corp., 55 F.E.R.C. ¶ 63,016 (April 30, 1991). FERC review of that decision is now pending.

Plaintiffs filed the instant suit on March 20, 1991, charging, among other allegations, that:

  (1) they were not informed by Defendants of the
      potential effect of the Niagara Mohawk decision
      on the sale and leaseback transaction;
  (2) Defendants Tepco, Catalyst and Century made
      false representations of material facts
      related to the transaction; and
  (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 sale and leaseback
      transaction closed on December 31, 1986.

DISCUSSION

I.  FEDERAL SECURITIES CLAIMS

The parties make essentially the same arguments made in the related Philip Morris case. In that case, this Court dismissed the Plaintiff's federal securities claims as time-barred following the United States Supreme Court's decisions in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, ___ U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991) (upholding the one year/three year statute of limitations for § 10(b) and Rule 10b-5 claims), and James B. Beam Distilling Co. v. Georgia, ___ U.S. ___, 111 S.Ct. 2439, 115 L.Ed.2d 481 (1991) (concerning retroactive application of new rules of decision in civil cases), and the Second Circuit's decision in Welch v. Cadre Capital, 946 F.2d 185 (2d Cir. 1991) (holding that one year/three year limitations period by the Supreme Court in Lampf applies retroactively to all cases pending on direct review).

Philip Morris and the present case arise from the same set of facts, are based on almost the same allegations, and involve the same attorneys. Accordingly, for the reasons stated in Philip Morris, supra, the federal securities claims in this action are dismissed.

In Philip Morris, the absence of complete diversity between all plaintiffs and all defendants prevented this Court from accepting jurisdiction based on diversity of citizenship. 28 U.S.C. § 1332. Here, however, there is complete diversity of citizenship. Accordingly, Defendants' arguments related to the state law claims will be addressed.

II. PERSONAL JURISDICTION OVER SAN DIEGO

San Diego argues that this Court lacks personal jurisdiction over it. In a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(2), the plaintiff has the ultimate burden of establishing jurisdiction over the defendant by a preponderance of the evidence. Marine Midland Bank, N.A. v. Miller, 664 F.2d 899, 904 (2d Cir. 1981). However, at this stage of the litigation, when discovery has been stayed, Plaintiffs need only make out a prima facie case for jurisdiction through their pleadings and affidavits. Cutco Industries, Inc. v. Naughton, 806 F.2d 361, 365 (2d Cir. 1986). Such pleadings and affidavits are to be construed in the light most favorable to the Plaintiffs, and all doubts must be resolved in the Plaintiffs' favor. Hoffritz for Cutlery, Inc. v. Amajac, Ltd., 763 F.2d 55, 57 (2d Cir. 1985).

Plaintiffs allege that this Court has personal jurisdiction over San Diego under New York Civil Practice Law & Rules ("CPLR") ...


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