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ESI, INC. v. COASTAL CORP.

August 31, 1999

ESI, INC., PLAINTIFF,
v.
THE COASTAL CORPORATION, COASTAL POWER COMPANY F/K/A COASTAL POWER PRODUCTION COMPANY, COASTAL SALVADORAN POWER, LTD., COASTAL NEJAPA, LTD., COASTAL TECHNOLOGY SALVADOR, S.A., LA CASA CASTRO, S.A. DE C.V., CRYSTAL POWER COMPANY, NEJAPA POWER COMPANY, L.L.C., TRIGEN ENERGY CORPORATION, EPEC GAS INTERNATIONAL, INC. F/K/A TENNECO GAS INTERNATIONAL, INC. AND LATIN AMERICAN ENERGY DEVELOPMENT, INC. D/B/A DESARROLLOS ENERGETICOS LATINO AMERICANOS, S.A., DEFENDANTS, AND VARIOUS CROSS-CLAIM ACTIONS.



The opinion of the court was delivered by: William C. Conner, Senior District Judge.

        OPINION AND ORDER

This diversity action arises from a dispute as to the parties' relative ownership interests in an electric power plant located in El Salvador (the "Plant"). The action is presently before the Court on a welter of motions related to the Second Amended Complaint filed by plaintiff ESI, Inc. ("ESI"), and the Amended Answer to Second Amended Complaint, Counterclaim and Cross-Claim (the "Cross-Claim") filed by defendant Latin American Energy Development, Inc. d/b/a Desarrollos Energeticos Latino Americanos, S.A. ("Delasa"). The motions are more specifically described hereinafter; principally they seek dismissal of the various claims on grounds of lack of personal jurisdiction, forum non conveniens and failure to state a claim upon which relief may be granted.

BACKGROUND

This Court has already set out a significant portion of the complex factual background of this case in ESI, Inc. v. Coastal Power Prod. Co., 995 F. Supp. 419 (S.D.N.Y. 1998) ("ESI I"), which involved a motion to dismiss brought by defendant Coastal Power Company f/k/a Coastal Power Production Company ("Coastal Power"). For purposes of the instant motion, the Court assumes familiarity with that opinion and hereby incorporates its factual discussion with a few exceptions which will be discussed more fully below.*fn1

In ESI I, we discussed the factual background of, and various agreements involving, the initial bidding process, development, ownership, construction and operation of the Plant (the "Project"). We concluded our discussion with the sale by EPEC Gas International, Inc. f/k/a Tenneco Gas International, Inc. ("Tenneco") of its interest in the Project to defendant Coastal Power. ESI has since had an opportunity to conduct further discovery with respect to the current ownership structure of the Plant and has uncovered a complex organization of affiliated companies through which profits from the Plant are ultimately distributed to Coastal "Power and La Casa Castro, S.A. de C.V. ("LCC").*fn2 Indeed, Tenneco assigned its interest in the Project, not to Coastal Power, but to Coastal Salvadoran Power Ltd. ("Coastal Salvador"), a wholly owned subsidiary of Coastal Power.

I. The Coastal Affiliates' Acquisition of Tenneco Interest in the Project

Robert C. Hart, as President of Coastal Power set forth the terms by which Coastal Power would acquire Tenneco's interest in the Project in a Letter Agreement dated July 27, 1994. See Pl's Ex. A.*fn3 This Letter Agreement indicated that either Coastal Power or an "affiliate designated by Coastal Power" would purchase Tenneco's interest in the Project subject to the approval of the transaction by the Board of Directors of The Coastal Corporation ("Coastal Corp."),*fn4 Coastal Power's parent corporation. See id.*fn5 It was clear from the outset that Coastal Corp. would have to guarantee the loans acquired by Coastal Power or its affiliates in connection with the financing of the Project. See Pl's Ex. E ("Construction financing of approximately $80 million will require a Coastal [Corp.] guarantee").

Coastal Corp. authorized the transaction on July 27, 1994 *fn6 and Tenneco transferred its interest in the Project to Coastal Salvador,*fn7 a wholly owned subsidiary of Coastal Power, pursuant to a Purchase Agreement dated July 29, 1994. See Pl's Ex. L. The Purchase Agreement was signed by Robert C. Hart, as President of Coastal Salvador. See id. Coastal Salvador maintains that the Purchase Agreement was primarily negotiated and executed in Texas, although it admits to occasional telephone communications with Tenneco's counsel in New York.*fn8

Under the terms of the Purchase Agreement, Tenneco agreed to transfer and assign to Coastal Salvador (or its designee) Tenneco's interest in the Power Purchase Agreement ("PPA"), the Engineering, Procurement and Construction Contract with Wartsila Diesel ("Wartsila"), as amended on June 17, 1994 (also known as the "Amended EPC Contract" or "Turnkey Contract"), and Tenneco's other tangible and intangible rights relating to the Project. See Pl's Exs. A, B, K and L.

As contemplated by the Purchase Agreement, Tenneco assigned the PPA and the Turnkey Contract*fn9 to Coastal Salvador*fn10 on July 29, 1994.*fn11 But not until Coastal Power had guaranteed all of the obligations of Coastal Salvador ("and/or an El Salvador limited partnership of which Coastal Salvador is the General Partner") under the PPA,*fn12 and Coastal Salvador's Board had authorized the assignment of the PPA to Coastal Salvador "and/or an El Salvador limited partnership of which Coastal Salvador will be the general partner and a limited partner."*fn13

II. Ownership Structure and Financing of the Project

The "El Salvador limited partnership" contemplated by the parties was to be the Project entity that ultimately owned and operated the Plant and was to be jointly owned by Coastal Power and LCC affiliates through which the profits from the Plant would flow back to Coastal Power and LCC.*fn14 The proposed structure and financing arrangements for the Project entity went through numerous permutations. See Pl's Exs. V, W and X. The parties ultimately decided on a lease financing model which required the creation of a limited liability company to be owned by affiliates of Coastal Power and LCC, and a U.S. special purpose trust.*fn15

The Project entity formed to own and operate the Plant is Nejapa Power Company, L.L.C. ("Nejapa Power"), a Delaware limited liability company.*fn16 Nejapa Power is owned 99% by the special purpose trust, .5% by Coastal Salvador, and .5% by Coastal Nejapa, Ltd. ("Coastal Nejapa"),*fn17 which in turn is owned 90% by Coastal Salvador and 10% by Crystal Power Company, Ltd. ("Crystal Power"), a wholly owned subsidiary of LCC.*fn18 The 99% ownership of Nejapa Power held by the special purpose trust is then "leased" to Coastal Nejapa, resulting in the flow all benefits of ownership through to the wholly owned affiliates of Coastal Power and LCC.*fn19 Coastal Power and LCC signed a Letter Agreement confirming this arrangement on December 29, 1994. See Pl's Ex. Y.*fn20

The affiliates of Coastal Power and LCC entered into five key agreements, dated as of December 28, 1994, in order to effectuate this arrangement: (1) the Shareholders Agreement of Coastal Nejapa; (2) the Subscription Agreement; (3) the Declaration of Trust for 1994 El Salvador Power Trust; (4) the Certificate Purchase Agreement; and (5) the Lease Agreement. In addition, Nejapa Power and Coastal Technology Salvador, S.A. ("CTS") entered into an Administrative Services Agreement. Each of these agreements will be discussed in turn.

A. The Shareholders Agreement

In the Shareholders Agreement of Coastal Nejapa (Pl's Ex. FF), Crystal Power and Coastal Salvador acknowledge that Coastal Nejapa was formed for the purpose of holding an ownership interest in Nejapa Power and confirm the ownership structure of Nejapa Power as outlined above. Under the Shareholders Agreement, the authorized share capital of Coastal Nejapa is divided into Class A, B and C shares. Class A shares were issued to Crystal Power, Class B shares were issued to Coastal Salvador, and Class C shares were to be purchased by Crystal Power at a later date. This left Crystal Power with 10% ownership of Coastal Nejapa which would increase to 15% by the issuance of Class C shares to Crystal in the event that it complied with the Certificate Purchase Agreement discussed below.

Section 5.1 of the Shareholders Agreement, entitled "Governing Law; Jurisdictional Matters" states in pertinent part:

  This Agreement shall be governed by and interpreted in
  accordance with the laws of the State of New York. . . .
  Any legal action or proceeding with respect to
  this Agreement may be brought in the courts of the
  State of New York . . . [or in the United States
  District Court] for the Southern District of New
  York. . . . The parties hereby accept for themselves
  and in respect of their property, generally and
  unconditionally, the jurisdiction of the aforesaid
  courts. The parties hereby irrevocably waive any
  objection, including any objection to the laying of
  venue or based on the grounds

  of forum non-conveniens, which they may now or
  hereafter have to the bringing of any such action or
  proceeding in such respective jurisdictions.

See Pl's Ex. FF, § 5.1 (emphasis in original). Coastal Salvador and Crystal Power, therefore, consented to personal jurisdiction and venue in any action brought in a New York forum with respect to the Shareholders Agreement. The above-quoted provision is incorporated verbatim or virtually so in many of the other contracts discussed below; this provision will hereinafter be referred to as the "Forum Selection Clause.

Section 4.1 provides that "all notices, consents, directions, approvals, instructions, requests and other communications" for Coastal Nejapa or Coastal Salvador shall be given to Coastal Corp. and, any such notices for Crystal Power shall be given to Crystal Power do LCC.

The Shareholders Agreement was signed by Robert C. Hart, as President of Coastal Salvador and by Roberto Vilanova, as President of Crystal Power and was allegedly negotiated and executed by the parties in Texas and El Salvador, respectively.*fn21

B. The Subscription Agreement

The Subscription Agreement entered by and between Crystal Power, LCC, Coastal Salvador and Coastal Nejapa (Pl's Ex. KK) sets forth the terms under which Crystal Power agreed to subscribe for and purchase (and Nejapa Power agreed to issue to Crystal Power) Class C shares of Coastal Nejapa. LCC covenanted that, at all relevant times, it would retain the power to vote all Class A and Class C shares issued to Crystal Power and would cause Crystal Power to perform all of its obligations under the Certificate Purchase Agreement discussed below.

Section 5.03 contains the Forum Selection Clause. It also provides for notices to Coastal Nejapa and Coastal Salvador to be sent to Coastal Corp., and notices to Crystal Power to be sent do LCC. The Subscription Agreement was signed by Roberto Vilanova, as President of LCC and Crystal Power, and by Robert C. Hart, as President of Coastal Salvador and Coastal Nejapa, and was allegedly negotiated and executed by the parties in El Salvador and/or Texas.*fn22

C. The Declaration of Trust for 1994 El Salvador Power Trust

The parties financed the construction of the Plant by having a number of New York banks, including Citibank, N.A., The Bank of New York, The Canadian Imperial Bank of Commerce — New York Agency, and Kredietbank N.V. — New York Branch buy into a trust. The land, construction in progress, and other fixed assets of the Plant were then transferred to the trust. The trust assets (which would then be leased to Coastal Nejapa) consisted of a 99% Trust Membership Interest in Nejapa Power and a project loan to Nejapa Power.*fn23 Via the Declaration of Trust, State Street Bank and Trust Company, a Massachusetts trust company, in the capacity as Trustee imposed a trust on these trust assets thereby creating the 1994 El Salvador Power Trust (the "Trust") (Pl's Ex. WW).*fn24

D. Certificate Purchase Agreement

The Certificate Purchase Agreement entered into between Crystal Power, Coastal Salvador and State Street Bank and Trust Company, as Trustee of the 1994 El Salvador Power Trust (Pl's Ex. RR), obligates Crystal Power to purchase a Term Certificate from the trust (i.e., invest additional capital in the Project) upon completion of the Plant. Upon purchasing the Term Certificate, Crystal Power would be issued Class C shares in Coastal Nejapa.

It contains the Forum Selection Clause at § 16, and requires any notices to Crystal Power to be sent do LCC and any notices to Coastal Salvador to be sent to Coastal Corp. (Id. at § 9). The Certificate Purchase Agreement was signed by Roberto Vilanova, on behalf of Crystal Power, and by Robert C. Hart, as President of Coastal Salvador. It was allegedly negotiated face-to-face and executed in Texas, however, some telephone calls were placed and facsimiles sent to New York.*fn25

E. Lease Agreement

Nejapa Power and Coastal Nejapa entered into a Lease Agreement with State Street Bank and Trust Company, as Trustee under the Declaration of Trust, in which Coastal Nejapa agreed to lease (and, in the future purchase some or all of) the Trust's 99% ownership interest in Nejapa Power (Pl's Ex. OO). Coastal Nejapa, therefore leased the Trust's rights to receive cash distributions or income flowing from Nejapa Power.

Section 6.07 of the Lease Agreement contains the Forum Selection Clause. Robert C. Hart signed the Lease Agreement on behalf of both Coastal Nejapa and Nejapa Power.*fn26

F. Administrative Services Agreement

Lastly, Nejapa Power and CTS entered into the Administrative Services Agreement, dated December 1, 1994, which gave CTS complete managerial control over the affairs and business of Nejapa Power (Pl's Ex. DD). CTS, a Cayman Islands corporation with a principal place of business in Texas, is a wholly owned indirect subsidiary of Coastal Corp.*fn27

Although the Administrative Services Agreement is governed by Texas law (Id. at § 7.7), it contains both a New York forum-selection and waiver of objections to jurisdiction and venue clause similar to that in the Shareholders Agreement (Id. at § 7.10.1). Copies of all notices to CTS are to be sent to Coastal Technology, Inc., and all notices to Nejapa Power are to be sent in care of Coastal Corp., with a copy to Coastal Power (Id. at § 7.1).

The Administrative Services Agreement was negotiated and executed in Texas, and was signed by Robert C. Hart on behalf of both Nejapa Power and CTS.*fn28 Indeed, in what can only be described as the antithesis of an arm's length transaction, CTS signed the agreement on behalf of Nejapa Power as its "Manager."*fn29

None of the agreements executed by and between Tenneco, Coastal Corp., Coastal Power, Coastal Salvador, Coastal Nejapa, Nejapa Power, CTS, Crystal Power and LCC addresses ESI's or Delasa's claimed ownership interests in the Project. However, LCC and Delasa had entered into an agreement on October 31, 1994 entitled the "Acuerdo" which stated that LCC would give Delasa 20% of the income it received from the Plant during the life of the Project.*fn30

III. Operation and Expansion of the Plant

The Project, as initially envisioned, involved the development, construction and operation of a 91MW heavy fuel oil fired power plant. *fn31 However, in June 1995, Coastal Corp. authorized a 53MW expansion of the Plant (Pl's Ex. R). LCC, of course, cooperated with Coastal Power to obtain the required modification of the PPA.*fn32 On July 14, 1995, Crystal Power and Coastal Salvador executed a Memo of Understanding regarding the expansion of the Project which documented the parties' consent to amend the original implementing agreements to cover ownership and financing changes due to the expansion of the Plant (Pl's Ex. BB). The Memo of Understanding was signed by Robert C. Hart on behalf of Coastal Salvador (and Coastal Power which had to consent to the agreement), and by Roberto Vilanova on behalf of Crystal Power (and LCC which had to consent to the agreement).

All five implementing documents were amended accordingly on November 28, 1995.*fn33 Each amended and restated agreement or document contains a choice-of-law and/or forum selection clause identical to that in the original document.*fn34 With but one exception, the amended and restated agreements were executed by the same individuals as the original documents,*fn35 and each amended and restated agreement was allegedly negotiated and executed in Texas and/or El Salvador.*fn36

As a result of the expansion, Crystal Power was given the opportunity to purchase additional Class C shares of Coastal Nejapa. On January 31, 1996, the parties executed the first amendments to the Amended and Restated Shareholders Agreement and Subscription Agreement in order to allow Crystal Power to purchase the additional Class C shares.*fn37 None of these amendments affected the choice-of-law or forum selection clauses contained in the preceding contracts and documents. With a few exceptions, the amendments were executed by the same individuals as the original documents,*fn38 and were allegedly negotiated and executed in Texas and/or El Salvador.*fn39

When Crystal Power exercised its option to purchase the additional Class C shares on November 29, 1996, the implementing documents were amended once again.*fn40 None of these amendments affected the choice-of-law or forum selection clauses contained in the preceding contracts and documents. Indeed, almost all the amendments themselves contain New York choice-of-law provisions, if not New York forum selection and acceptance of jurisdiction and venue provisions.*fn41

The amendments were allegedly negotiated and executed in Texas and/or El Salvador,*fn42 and most of them were executed by the same individuals as the original documents. However, Coastal Corp. entered into the First Amendment to the Amended and Restated Lease "to recognize and confirm the terms of [the amendment] with respect to [its] obligations under those Operative Documents to which it is a party" (Pl's Ex. QQ, § 5). Donald H. Gullquist then executed the First Amendment to the Amended and Restated Lease as Senior Vice President of Coastal Corp., Coastal Nejapa and CTS in its capacity as Manager of Nejapa Power.

Coastal Salvador, Coastal Nejapa, Crystal Power, LCC and Credit Suisse also signed a Consent and Agreement dated November 29, 1996.*fn43 The Consent and Agreement also contains the Forum Selection Clause. Although the parties admit that they engaged in negotiations by telephone and facsimile between Texas and New York, they claim that no face-to-face meetings took place in New York. See Adams Aff. at ¶ 8. The agreement was executed by Coastal Salvador and Coastal Nejapa in Texas, by LCC and Crystal Power in El Salvador, and by Credit Suisse-First Boston apparently in New York, See id.

Crystal Power purchased the Class C shares under a Term Trust Certificate with State Street Bank and Trust Company, dated November 29, 1996. Pl's Ex. SS. The Term Trust Certificate also contains a New York choice-of-law clause. Credit Suisse-First Boston of New York financed Crystal Power's purchase of the Term Trust Certificate (Class C shares). As collateral for this loan, Crystal Power had to pledge all of its Class A and C shares of Coastal Nejapa and its entire interest in the income and profits of the Plant.*fn44

Finally, to comply with the requirements of the Amended and Restated Security and Pledge Agreement, Crystal Power and Coastal Salvador entered into the Third Amendment to Amended and Restated Shareholders Agreement on February 27, 1998 (Pl's Ex. JJ). This amendment did not affect the previous and itself contains the Forum Selection Clause at § 5. Again, this amendment was negotiated and executed by Roberto Vilanova, as President of Crystal Power, in El Salvador, and by Robert C. Hart, as President of Coastal Salvador, in Texas.*fn45

Since the Plant commenced production in September 1995, the government of El Salvador, through its nationally-owned utility, Comision Ejecutiva Hidroelectica del Rio Lempa ("CEL"), has been making payments to Nejapa Power for the electricity produced by the Plant. These payments are made to a Nejapa Power bank account at Citibank, N.A. in New York, New York. *fn46 This account is utilized to receive the revenues and pay the operating expenses of Nejapa Power. It is also the account from which Nejapa Power remits its distributions of the Plant's income to Coastal Nejapa, Coastal Salvador and the 1994 El Salvador Power Trust.*fn47 The income paid to the Trust is then "leased" to Coastal Nejapa and, pursuant to the terms of the Lease, Nejapa Power pays "rent" to Citibank, N.A. "as Agent."*fn48

Therefore, all income from the operation of the Plant is ultimately distributed to LCC and Coastal Power through their affiliates, to the exclusion of ESI and Delasa. In its 1998 Form 10K, Coastal Corp. stated that "Coastal Power, through its affiliates, currently receives approximately 86.6% of the distributable cash flow [from the Plant] and [LCC] receives the remainder." To date, LCC, Coastal Power and their affiliates have refused to recognize ESI's or Delasa's interest in the Project and the income from the Plant.

IV. ESI's and Delasa's Amended Pleadings

With leave of court, ESI filed its Second Amended Complaint on September 16, 1998, naming Coastal Corp., Coastal Salvador, Coastal Nejapa, CTS, Nejapa Power, Crystal Power, Trigen Energy Corporation ("Trigen") and Tenneco as additional defendants.*fn49 Coastal Corp., Coastal Salvador, Coastal Nejapa and CTS are affiliates of Coastal Power. Crystal Power is an affiliate of LCC.

In its Second Amended Complaint, ESI puts forth the following claims: (1) the First Claim, against all defendants except Tenneco, seeks a declaratory judgment that, pursuant to the Three-Party Agreement and the Delasa-ESI Assignment, ESI has a valid and enforceable ownership interest in 2.5% of the Project and the Plant's income; (2) the "Second Claim, against all defendants except Tenneco, alleges damages related to ESI's status as an intended third-party beneficiary of the Power Purchase Agreement; (3) the Third Claim, against all defendants, seeks damages for breach of the Three-Party Agreement; (4) the Fourth Claim, against all defendants except LCC, Crystal Power and Nejapa Power, alleges tortious interference with the Three-Party Agreement; (5) the Fifth Claim, against all defendants except Coastal Corp. and Nejapa Power, alleges damages related to ESI's status as an intended third-party beneficiary of the Three-Party Agreement; (6) the Sixth Claim, against all defendants except Nejapa Power, alleges breach of fiduciary duty; (7) the Eighth*fn50 Claim, against all defendants except Nejapa Power, alleges tortious interference with the DELASA-ESI Assignment; (8) the Ninth Claim, against all defendants except Tenneco, seeks an accounting and the imposition of a constructive trust; (9) the Tenth Claim, against all defendants, alleges unjust enrichment; (10) the Eleventh Claim, based on promissory estoppel, alleges that all defendants should be estopped from denying ESI's 2.5% interest in the Project and the Plant's income; and finally (11) the Twelfth Claim seeks damages for fraud against LCC only.

On October 26, 1998, Delasa filed its Amended Answer to the Second Amended Complaint, Counterclaim*fn51 and Cross-Claim naming Coastal Corp., Coastal Salvador, Coastal Nejapa, CTS, Nejapa Power, Crystal Power, Trigen and Tenneco as additional cross-claim defendants and asserting the following by way of Cross-Claim*fn52: (1) the First Claim, against all cross-claim defendants except Tenneco, seeks a declaratory judgment that, pursuant to the Three-Party Agreement, Delasa has a valid and enforceable ownership interest in 10% of the Project and the power plant's income; (2) the Second Claim, against all cross-claim defendants, seeks a declaratory judgment that Delasa was a joint venturer with Trigen, LCC (on its own and through its affiliate Crystal Power), Tenneco and Coastal Power (on its own and through its affiliates); (3) the Third Claim, against all cross-claim defendants except Nejapa Power, alleges breach of fiduciary duty; (4) the Fourth Claim, against all cross-claim defendants except Tenneco, seeks an accounting and the imposition of a constructive trust; (5) the Fifth Claim, against all cross-claim defendants, seeks damages for breach of the Three-Party Agreement; (6) the Sixth Claim, against all cross-claim defendants except LCC and Crystal Power, alleges tortious interference with the Three-Party Agreement; (7) the Seventh Claim, against all cross-claim defendants except Tenneco, alleges damages related to Delasa's status as an intended third-party beneficiary of the Power Purchase Agreement; (8) the Eighth Claim, against all cross-claim defendants except Crystal Power, alleges intentional inducement to breach fiduciary duties; (9) the Ninth Claim, based on promissory estoppel, alleges that Tenneco and LCC should be estopped from denying Delasa's 10% interest in the Project and the Plant's income; (10) the Tenth Claim seeks damages for fraud against Tenneco and Coastal Power; and (11) the Twelfth*fn53 Claim, against all cross-claim defendants, alleges unjust enrichment.

Defendants Coastal Salvador, Coastal Nejapa, CTS, Nejapa Power and Crystal Power now move: (1) to dismiss ESI's Second Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(2) for lack of personal jurisdiction and pursuant to the doctrine of forum non conveniens or, in the alternative, pursuant to Fed.R.Civ.P. 12(e) for a more definite statement of the allegations against them; and (2) to dismiss Delasa's Cross-Claim pursuant to Fed.R.Civ.P. 12(b)(2) for lack of personal jurisdiction and pursuant to the doctrine of forum non conveniens. ESI cross-moves for sanctions against Coastal Salvador, Coastal Nejapa, CTS, Nejapa Power, Crystal Power and their attorneys pursuant to Fed. R.Civ.P. 11(b) and (c).

Defendant Coastal Power moves pursuant to Fed.R.Civ.P. 12(f), to strike the Second and Fourth Claims, allegations of conspiracy and additional parties named as defendants in ESI's Second Amended Complaint.

In addition, Tenneco moves to dismiss: (1) the Third, Fourth, Fifth, Sixth, Eighth and Eleventh Claims of ESI's Second Amended Complaint pursuant to Fed. R.Civ.P. 12(b)(6); and (2) Delasa's Cross-Claim it its entirety on abstention grounds or, in the alternative, the Second, Third and Fifth Claims of Delasa's Cross-Claim pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief may be granted.

Next, LCC moves to dismiss the Twelfth Claim in ESI's Second Amended Complaint pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6) for failure to state a claim upon which relief may be granted. ESI has filed a cross-motion for leave to amend pursuant to Fed.R.Civ.P. 15(a) in the event that its Twelfth Claim is dismissed.

Finally, Coastal Power and LCC move to dismiss the Seventh and Tenth Claims in Delasa's Cross-Claim pursuant to Fed. R.Civ.P. 9(b) and 12(b)(6).

DISCUSSION

I. Personal Jurisdiction

Plaintiff bears the burden of establishing this Court's jurisdiction over the defendants. See Metro. Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560, 566 (2d Cir. 1996). The nature of the plaintiffs obligation, however, "varies depending on the procedural posture of the litigation." Ball v. Metallurgie Hoboken-Overpelt, S.A., 902 F.2d 194, 197 (2d Cir. 1990). If the court elects not to hold an evidentiary hearing, a motion to dismiss pursuant to Rule 12(b)(2) may be defeated if the plaintiffs complaint and affidavits contain sufficient allegations to establish a prima facie showing of jurisdiction.*fn54 See Kronisch v. United States, 150 F.3d 112, 130 (2d Cir. 1998); Ball 902 F.2d at 197. Moreover, the court must liberally construe, and assume the truth of, the plaintiffs uncontroverted factual allegations. See PDK Labs, Inc. v. Friedlander, 103 F.3d 1105, 1108 (2d Cir. 1997); Robinson v. Overseas Military Sales Corp., 21 F.3d 502, 507 (2d Cir. 1994); Ball, 902 F.2d at 197.

In diversity actions, the extent of the court's personal jurisdiction is governed by New York law, as circumscribed by the Due Process Clause of the United States Constitution. See Metro. Life Ins., 84 F.3d at 567; Arrowsmith v. United Press Int'l, 320 F.2d 219, 223 (2d Cir. 1963). Although it is unclear from the internally inconsistent jurisdictional statement contained in the Second Amended Complaint, (and lack of a summary statement in Delasa's Cross-Claim), ESI's and Delasa's opposition papers reveal that they are asserting general jurisdiction over Coastal Salvador, Coastal Nejapa, CTS, Nejapa Power and Crystal Power (collectively the "Affiliates")*fn55 under C.P.L.R. § 301 or, in the alternative, specific jurisdiction under C.P.L.R. § 302(a)(1).

A. C.P.L.R. § 301: Doing Business by Virtue of Being a "Mere
   Department" of a Parent Corporation

Under New York law, a foreign corporation is subject to general personal jurisdiction in New York if it engages in a continuous and systematic course of "doing business" here sufficient to warrant a finding of its presence. See Jazini v. Nissan Motor Co., 148 F.3d 181, 184 (2d Cir. 1998) (standard for general jurisdiction over non-domiciliary pursuant to C.P.L.R. § 301). Courts will extend such jurisdiction over a foreign parent corporation if the jurisdictional acts of its subsidiary in New York can be imputed to the foreign parent corporation. See Taca Int'l Airlines, S.A. v. Rolls-Royce of England, Ltd., 15 N.Y.2d 97, 204 N.E.2d 329, 256 N.Y.S.2d 129 (1965). The corporate veil will be pierced for jurisdictional purposes, however, only when the subsidiary is acting as an agent for the parent, or the parent's control is so complete that the subsidiary is a "mere department" of the parent. See Koehler v. Bank of Bermuda Ltd., 101 F.3d 863, 865 (2d Cir. 1996). "These tests require a fact-specific inquiry into the realities of the actual relationship between the parent and subsidiary." Id. Jurisdiction over the foreign subsidiary will be found only when "the activities of the parent show a disregard for the separate corporate existence of the subsidiary." Volkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp., 751 F.2d 117, 120 (2d Cir. 1984).

The same rule applies to the converse situation, when a plaintiff seeks to assert personal jurisdiction over a foreign subsidiary based upon the presence of its parent. See Public Adm'r of N.Y County v. Royal Bank of Canada. 19 N.Y.2d 127, 224 N.E.2d 877, 278 N.Y.S.2d 378 (1967); Aboud v. Rapid Rentals Inc., No. 97 Civ. 1742 (MGC), 1998 WL 132790 (S.D.N Y Mar.24, 1998); Palmieri v. Estefan, 793 F. Supp. 1182, 1188 (S.D.N Y 1992); DCA Food Indus. v. Hawthorn Mellody, Inc., 470 F. Supp. 574, 585 (S.D.N.Y. 1979); Titu-Serban Ionescu v. E.F. Hutton & Co., 434 F. Supp. 80 (S.D.N.Y. 1977), aff'd, 636 F.2d 1202 (2d Cir. 1980). Here, ESI and Delasa allege that the Affiliates are "mere departments" of Coastal Corp., Coastal Power and/or LCC, defendant parent corporations which have conceded that they are subject to general personal jurisdiction in New York. (See ESI's 2nd Amd. Compl., ¶ 14-22, Delasa's Cross-Claim ¶ 233-41).

The Second Circuit has outlined four factors to aid in determining whether one entity is the "mere department" of another: (1) common ownership; (2) financial dependency of the subsidiary on the parent; (3) the degree to which the parent interferes in the selection of the subsidiary's "executive personnel and fails to observe corporate formality; and (4) the degree of the parent's control over the subsidiary's marketing and operational policies. Beech Aircraft, 751 F.2d at 120-122.

The first factor, common ownership, is "essential to the assertion of jurisdiction over a foreign related corporation," while the other three factors are "important." Id. at 120. "The overall weighing of the various factors thus necessitates a balancing process, and not every factor need weigh entirely in the plaintiffs' favor." Mayatextil, S.A. v. Liztex U.S.A., Inc., No. 92 Civ. 4528 (SS), 1995 WL 131774, at *5 (S.D.N Y Mar.23, 1995) (internal quotations and citation omitted).

1. Common Ownership

This factor is easily satisfied with respect to Coastal Salvador, CTS and Crystal Power — Coastal Salvador is a wholly owned direct subsidiary of Coastal Power*fn56 and a wholly owned indirect subsidiary of Coastal Corp;*fn57 CTS is a wholly owned indirect subsidiary of Coastal Corp.;*fn58 and Crystal Power is a wholly owned direct subsidiary of LCC.*fn59 Therefore, only Coastal Nejapa and Nejapa Power need be examined more closely.

Coastal Nejapa is owned 90% by Coastal Salvador and 10% by Crystal Power.*fn60 Therefore, Coastal Corp. and Coastal Power indirectly own 90% of Coastal Nejapa.*fn61 The Second Circuit acknowledged in Beech Aircraft, however, that 100% direct ownership is not required, noting that "jurisdiction has been found in cases other than a classic parent-subsidiary relationship" and only "nearly identical ownership interests must exist." 751 F.2d at 120. See also Levant Line, S.A. v. Marine Enters. Corp. (In re Levant Line, S.A.), 166 B.R. 221, 232 (Bankr.S.D.N.Y. 1994) ("there is not a per se rule barring suits against a foreign entity which is not a wholly owned subsidiary"). Indeed, courts have found jurisdiction when the two entities at issue ultimately share a common parent, see Palmieri, 793 F. Supp. at 1188.

In Levant Line, the court found that the New York parent company's indirect ownership interest of only 52% of the foreign affiliate was "not sufficient to establish the nearly identical ownership interests required for personal jurisdiction under a mere department theory." 166 B.R. at 232. The court buttressed its conclusion by pointing out that the companies did not share common directors. See id. Coastal Corp.'s and Coastal Power's indirect ownership of 90% of Coastal Nejapa, however, is a much closer call. We believe that this level of ownership is sufficient to satisfy the nearly identical ownership requirement, especially in light of the fact that the Shareholders Agreement of Coastal Nejapa expressly acknowledged that it was "formed to own . . . Nejapa Power" (Pl's Ex. FF, p. 1, ¶ A), 86.6% of the distributable cash flow of which is received by Coastal Power (1998 Form 10K).

The Affiliates claim that common ownership cannot be established with respect to Nejapa Power because it is owned .5% by Coastal Nejapa, .5% by Coastal Salvador and 99% by the 1994 El Salvador Power Trust. However, Coastal Nejapa currently leases from the Trust its 99% ownership interest in Nejapa Power (see Pl's Exs. OO, PP and QQ). Therefore, if we focus on the "realities of the actual relationship between the parent and subsidiary" as the Second Circuit directed in Koehler, 101 F.3d at 865, Coastal Nejapa has a 99.5% ownership interest in Nejapa Power which when coupled with Coastal Salvador's direct .5% ownership interest gives Coastal Salvador, and therefore Coastal Power, a 90.5% indirect ownership interest in Nejapa Power. As already stated above, this level of ownership is sufficient to establish the nearly identical ownership interest required.

2. Financial Dependence

The second factor of financial dependency of the subsidiary on the parent corporation exists where the parent provides no- or low-interest loans to the subsidiary or extends credit on terms not otherwise available, guarantees the subsidiary's obligations, or provides and pays for insurance coverage or other necessities on behalf of the subsidiary. See Beech Aircraft, 751 F.2d at 121 (no-interest loans, insurance coverage); Satcorp Int'l Group v. China Nat'l Import & Export Corp., 917 F. Supp. 271, 278 (S.D.N.Y. 1996) (no-interest loans, profit shifting among subsidiaries); Titu-Serban Ionescu, 434 F. Supp. at 82 (parent guaranteed all obligations and liabilities, subsidiary given special discount by parent and derived half its income from business transactions with parent); Rabinowitz v. Kaiser-Frazer Corp., 198 Misc. 707, 710-11, 96 N.Y.S.2d 642, 644 (1950), aff'd, 278 A.D. 584, 102 N.Y.S.2d 815 (2d Dep't), aff'd, 302 N.Y. 892, 100 N.E.2d 177 (1951) (parent made no-interest loans and guaranteed third-party credit). Cf. Saraceno v. S.C. Johnson and Son, Inc., 83 F.R.D. 65, 69 (S.D.N.Y. 1979) (not mere department where no loans guaranteed or collateralized by parent, no accounts receivable guaranteed by parent and subsidiary did not receive supplies or achieve economies through use of parent-provided materials).

Courts also inquire whether the subsidiary retains its own profits or whether they are received by and reported on the financial statements of the parent. See DCA Food Indus., 470 F. Supp. at 585 (all revenue collected by subsidiary transferred to master depository account controlled by parent); Public Adm'r, 19 N.Y.2d at 131, 224 N.E.2d at 879, 278 N YS.2d at 381 (assets and liabilities of subsidiary carried on books and records of parent); Taca Int'l Airlines, 15 N.Y.2d at 101, 204 N.E.2d at 330, 256 N.Y.S.2d at 131 tall of subsidiary's net income appears on balance sheet of parent); Kossoff v. Samisung Co., 123 Misc.2d 177, 178, 474 N.Y.S.2d 180 (1984). Cf. Larball Publ'g Co., Inc. v. CBS Inc., 664 F. Supp. 704, 707 (S.D.N.Y. 1987) (no jurisdiction over subsidiaries whose "profits are their own and are not counted by CBS on its books" and parent does not issue consolidated financial statements). The issuance of consolidated financial statements, however, is not dispositive if the parent company is merely complying with SEC requirements. See Beech Aircraft, 751 F.2d at 121, n. 3 (SEC requires parent corporations to consolidate if parent owns more than 50% of subsidiary's stock).

Despite the fact that Coastal Corp. issues consolidated financial statements on behalf of itself and the Coastal Affiliates (see 1998 Form 10K), and Coastal Power receives 86.6% of the distributable cash flow from the operation of the Plant (with the remainder going to LCC), the Coastal Affiliates claim that they are not financially dependent on their respective parent companies and that they maintain their own books and records separate and distinct from their parent corporations.*fn62 Crystal Power does not even claim to maintain a set of books and records separate and distinct from LCC.*fn63 The record clearly shows, however, that the Affiliates are wholly dependent upon Coastal Corp.'s, Coastal Power's and LCC's financial support to stay in business.

In order to induce Tenneco to assign its interest in the Project to Coastal Salvador or another designated affiliate, Coastal Power had to guarantee all of the obligations of Coastal Salvador ("and/or an El Salvador limited partnership of which Coastal Salvador is the General Partner" i.e., Coastal Nejapa) under the PPA.*fn64 Coastal Salvador was fully capitalized by Coastal Power, and Coastal Nejapa was subsequently fully capitalized by Coastal Power (via Coastal Salvador) and LCC. (See Pl's Ex. U).

Later, the issuance of Coastal Nejapa Class C shares to Crystal Power was subject to the retention of control over such shares by LCC, and LCC had to guarantee all of Crystal Power's obligations under the Certificate Purchase Agreement. (See Pl's Ex. KK, §§ 2.04, 2.05). Indeed, Roberto Vilanova had to pledge his entire interest in the Plant as collateral for its loan from Credit Suisse-First Boston. (See Pl's Exs. AA and CC).

Meanwhile, Coastal Corp. and Coastal Power authorized the expenditures to develop and construct the Plant and its expansion. (See Pl's Exs. D and R). The PPA was assigned to Nejapa Power on the condition that Coastal Corp. and Coastal Power guarantee all obligations and liabilities of Nejapa Power. (See Pl's Ex. Q). During the term of the Lease, Coastal Corp. and/or Coastal Power remain fully responsible (although the Trust holds legal title to the fixed assets of the Plant) and have guaranteed Coastal Nejapa's obligations under the Lease. (See Pl's Exs. V and QQ).

Finally, Coastal Corp., through its wholly owned indirect subsidiaries, CTS and Coastal Petroleum, N.V., provides for the administrative/managerial and fuel supply requirements of Nejapa Power through special long-term contracts. (See Pl's Exs. DD and EE; Sereno Aff. at ΒΆ 5; 1998 Form 10K). Undoubtedly, the operation and existence of the ...


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