Isquith for and on Behalf of Isquith v. Middle South Utilities, Inc.

• Citation: 847 F.2d 186
• Decision Date: 07 June 1988
• Docket Number: No. 87-3081,87-3081
• Parties: Fed. Sec. L. Rep. P 93,801, 11 Fed.R.Serv.3d 694 Rita ISQUITH for and on Behalf of Fred Taylor ISQUITH, Jr. Under the Uniform Gift to Minors Act on Behalf of Herself and all Other Shareholders of Middle South Utilities, Inc., Similarly Situated, Plaintiff-Appellant, v. MIDDLE SOUTH UTILITIES, INC., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 186

847 F.2d 186

Fed. Sec. L. Rep. P 93,801, 11 Fed.R.Serv.3d 694

Rita ISQUITH for and on Behalf of Fred Taylor ISQUITH, Jr.

Under the Uniform Gift to Minors Act on Behalf of Herself and all Other Shareholders of Middle South Utilities, Inc., Similarly Situated, Plaintiff-Appellant, v. MIDDLE SOUTH UTILITIES, INC., et al., Defendants-Appellees.

No. 87-3081.

United States Court of Appeals, Fifth Circuit.

June 7, 1988.

Sessions, Fishman, Rosenson, Boisfontaine, Nathan & Winn, Curtis R. Boisfontaine, New Orleans, La., Douglas G. Cole, Richard S. Wayne, Strauss, Troy & Ruehlmann Co., Cincinnati, Ohio, Stephen T. Rodd, Abbey & Ellis, Arthur N. Abbey, New York City, Michael Grant Kohn, Cincinnati, Ohio, for plaintiff-appellant.

Herschel L. Abbott, Jr., Richard J. Tyler, Thomas A. Casey, Jr., David G. Radlauer, Robert B. Bieck, Jr., W.D. Meriwether, Jr., New Orleans, La., Louis H. Willenken, Reid & Priest, New York City, for Middle South Utilities, Inc.

Phelps, Dunbar, Marks, Claverie & Sims, Harry A. Rosenberg, New Orleans, La., Henry Bisgaier, Cahill, Gordon & Reindel, New York City, for Deloitte, et al.

Daniel Lund, Francis P. Accardo, for New Orleans, La., for Morgan Stanley/First Boston/Merrill Lynch.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before KING ^* and DAVIS, Circuit Judges, and PARKER ^**, District Judge.

KING, Circuit Judge:

Plaintiffs, who purchased common stock of Middle South Utilities, Inc. during the period from March 30, 1983 to August 16, 1985, appeal a summary judgment entered against them in their proposed class action against Middle South, its officers and directors, certain of its subsidiaries, the underwriters of a common stock offering that occurred during that period, and its independent auditors. For the reasons set forth below, we vacate the summary judgment and remand the case to the district court for further development.

I.

A. Background Information ¹

Middle South is an investor-owned public utility holding company which owns all the outstanding common stock of four operating utility subsidiaries: Arkansas Power & Light Co., Louisiana Power & Light Co. ("LP & L"), Mississippi Power & Light Co. ("MP & L"), and New Orleans Public Service, Inc. In the late 1960's and early 1970's, Middle South embarked upon a program to expand the power generating facilities of its operating subsidiaries. LP & L was given the responsibility for constructing Waterford, a 1,104,000 kilowatt nuclear power unit. Initially, MP & L was given the responsibility for constructing Grand Gulf Station, a generating facility composed of two nuclear units: Grand Gulf 1 and Grand Gulf 2. However, when it became apparent in 1974 that none of the operating subsidiaries alone possessed sufficient resources to finance, construct, and operate Grand Gulf Station, Middle South formed another subsidiary, Middle South Energy, Inc. ("MSE"), for that purpose.

Originally, MSE estimated that Grand Gulf 1 would begin commercial operation in 1979, and that the total cost of the unit would be $600 million. Actually, construction of Grand Gulf 1 was completed six years behind schedule and greatly over budget; commercial operation of the facility--which had an actual installed cost of $3.29 billion--finally began in July of 1985. Waterford experienced similar problems. When plans for the unit began in 1970, Waterford was slated for commercial operation by January, 1977 at a total cost of $230 million. Reality, however, was that commercial operation did not occur until September, 1985, at which time Waterford's installed cost had increased to approximately $3 billion.

Middle South managed its operating subsidiaries as an integrated system. As part of this system, the electricity generated by each power plant--regardless of the facility's actual owner--was pooled for use by the operating subsidiaries according to their individual needs. In addition to, and in fact because of, this sharing of energy, the operating subsidiaries also shared in the cost of the system's energy-producing facilities. The ability of the operating subsidiaries to repay obligations incurred to finance the nuclear power plants and to earn a return on their investments in those plants depended upon their ability to obtain increases in the retail rates charged to their customers. However, as public utilities, the operating subsidiaries' retail rates are controlled by state and local regulatory bodies. Accordingly, the extent to which the operating subsidiaries could successfully shift the cost of the nuclear power plants to their respective customers rested, at least in part, in the hands of the relevant regulatory bodies, which could grant, deny, or delay adequate rate relief.

In the early 1980's, however, the state regulatory authorities became hostile to the Grand Gulf 1 and Waterford projects. This hostility stemmed from concern that the demand for electricity which was projected for the Middle South area at the inception of the nuclear power plant construction projects was significantly overestimated. The regulatory authorities were also concerned over the dramatically escalating costs of those projects.

In the summer of 1985, the regulatory authorities began denying rate increases which the operating subsidiaries needed in order to meet their financial obligations. The authorities' actions precipitated serious financial crises for the individual operating subsidiaries and, predictably, for Middle South. During the week of August 16, 1985, Middle South's common stock declined in price from $12 per share to $9.125 per share. On August 16, 1985, the Securities and Exchange Commission disclosed that Chapter 11 was a "very real possibility" for both Middle South and its operating subsidiaries unless emergency rate relief was granted soon. During the week of August 26, 1985, all of the operating subsidiaries withheld payment of their common stock dividends to Middle South. As a result, on August 29, 1985, Middle South omitted its third quarter dividend on common stock to its shareholders.

B. The Complaint and Defendants' Responses Thereto

The five suits covered by this appeal, which have been consolidated for pretrial purposes, ensued. Briefly stated, plaintiffs' seventy-one page consolidated amended complaint challenged--under the federal securities laws and Louisiana state law--the adequacy of more than forty excerpts from twelve documents Middle South filed with the SEC and disseminated to its stockholders from 1982 to 1985. Basically plaintiffs alleged that to pay for the construction and related costs of Waterford and Grand Gulf Station, the Middle South system needed debt and equity capital from the investing public. The Middle South system's ability to raise this needed capital, however, was dependent on the maintenance of stockholder and investor confidence in Middle South and its operating subsidiaries. To insure that necessary confidence, plaintiffs posited, Middle South and the other defendants embarked upon a "scheme, plan and course of conduct to issue and disseminate reports and statements which artificially inflated the market price" of Middle South's common stock. Plaintiffs charged that, in the twelve documents principally at issue here, defendants misrepresented to, and concealed from, the investing public a substantial number of material facts in violation, depending upon the document involved, of section 11 or 15 of the Securities Act of 1933 (the "1933 Act"), or section 10(b) or 20 of the Securities Exchange Act of 1934 (the "1934 Act"). The misrepresentations and omissions concerned five areas of disclosure: (1) the Middle South system's need for the electricity to be generated from the Waterford and Grand Gulf Station units; (2) the ability of the operating subsidiaries to obtain adequate and timely rate relief from state regulatory agencies to meet the financial obligations they incurred to construct the nuclear power plants; (3) the factual bases for the various estimates of costs and dates of completion which Middle South disclosed to the public during the construction of Waterford and Grand Gulf 1; (4) the effect of the operating subsidiaries' cost-recovery problems on Middle South's ability to continue to pay dividends to its common stockholders; and (5) the propriety of reporting Equity-AFUDC ² as income in Middle South's financial statements during the construction of the Waterford and Grand Gulf Station facilities.

None of the defendants filed an answer to the complaint. Instead, on April 18, 1986, the Middle South defendants filed a 2 page "Motion To Dismiss" and a 127 page "Memorandum of Law In Support of Defendants' Motion to Dismiss." In their motion, the Middle South defendants

move[d] for dismissal of plaintiffs consolidated class action complaint pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state claims upon which relief can be granted, alternatively, pursuant to Fed.R.Civ.P. 12(c) for judgment on the pleadings, or in the further alternative and in the event that this Court determines that the foregoing motions are more properly characterized as a summary judgment, pursuant to Fed.R.Civ.P. 56(b) for summary judgment or Fed.R.Civ.P. 56(d) for partial summary judgment.

For our purposes, the Middle South defendants asserted that the plaintiffs had failed to state a claim under both the federal securities laws and state law because the documents upon which the complaint focused, when taken in their entirety, as a matter of law fully disclosed without misrepresentation all of the facts which the plaintiffs claimed the documents either misrepresented or omitted. To prove this point, the Middle South defendants filled approximately twenty-one pages with "disclosure examples" taken principally from the documents at issue in plaintiffs' complaint. For purposes of comparison, the excerpts were grouped into five categories which, according to the defendants,...