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Fischman v. Reed

United States District Court, S.D. California

March 29, 2017




         The matters before the Court are the motion to dismiss filed by Sempra Energy and Southern California Gas Company (collectively, the “Nominal Defendants”) (ECF No. 34); the motion to dismiss and joinder filed by Alan. L. Boeckmann, James G. Brocksmith, Jr., Kathleen L. Brown, Pablo A. Ferrero, William D. Jones, William G. Ouchi, Debra L. Reed, William C. Rusnack, William P. Rutledge, Lynn Schenk, Jack T. Taylor, and James C. Yardley (collectively, the “Directors”) (ECF No. 35); and, the motion to dismiss filed by Dennis V. Arriola, Justin C. Bird, Jimmie I. Cho, Steven D. Davis, Scott Furgerson, Joseph A. Householder, Jesse J. Knight, Jr., J. Bret Lane, George Minter, Doug Schneider, Michael M. Schneider, and Martha B. Wyrsch (collectively, the “Officers”) (ECF No. 37).

         I. Procedural Background

         On April 25, 2016, Plaintiff Arthur Fischman, derivatively on behalf of Sempra Energy (“Sempra”) and Southern California Gas Company (“SoCalGas”), initiated this action by filing a shareholder derivative complaint against members of the Board of Directors of both companies for their actions relating to a natural gas leak at the Aliso Canyon natural gas storage facility. (ECF No. 1). The complaint alleges the following three causes of action: (1) Breach of Fiduciary Duty by Sempra Individual Defendants and the SoCalGas Individual Defendants[1]; (2) Breach of the Duty of Honest Services against Reed, Householder, Davis, Bird, Director and Arriola, Cho, D. Schneider, M. Schneider, Furgerson, Minter, Lane and Wyrsch; (3) Aiding and Abetting Breaches of Fiduciary Duties against all Individual Defendants. Id.

         On August 1, 2016, the Nominal Defendants Sempra and SoCalGas filed a motion to dismiss with prejudice on the grounds that Plaintiff failed to adequately plead facts to demonstrate demand futility pursuant to Federal Rule of Civil Procedure 23.1. (ECF No. 34). Nominal Defendants also filed a request for judicial notice.[2] (ECF No. 34-2). On September 9, 2016, Plaintiff filed a response in opposition to t. (ECF No. 40). On September 23, 3016, Nominal Defendants filed a reply. (ECF No. 43).

         On August 1, 2016, Defendant Directors filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim against Defendant Directors. (ECF No. 35). On September 9, 2016, Plaintiff filed a response in opposition. (ECF No. 41). On September 23, 2016, Defendant Directors filed a reply. (ECF No. 45).

         On August 1, 2016, Defendant Officers filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim against Defendant Officers.[3] (ECF No. 37). Defendant Officers also filed a request for judicial notice. (ECF No. 37-2). On September 9, 2016, Plaintiff filed a response in opposition. (ECF No. 42). On September 23, 2016, Defendant Officers filed a reply. (ECF No. 46).

         On February 10, 2017, the Court heard oral arguments on the three pending motions to dismiss. (ECF No. 51).

         II. Allegations of the Complaint

         Plaintiff brings this verified shareholder's derivative suit “on behalf of nominal defendants [Sempra] and [SoCalGas] against certain officers and directors of Sempra and SoCalGas (collectively, the ‘Company') for breaches of fiduciary duties and violations of law from April 20, 2010 to the present.” (ECF No. 1 at ¶ 1). “SoCalGas is a wholly owned subsidiary of Sempra and provides natural gas distribution and storage services. Sempra is an energy-services holding company whose operating units invest in, develop, and operate energy infrastructure, and provide gas and electricity to their customers in North and South America.” Id. at ¶ 7. “Plaintiff Arthur Fischman . . . has continuously been a stockholder of Sempra Energy since the Company's inception in 1998, and is a current Sempra stockholder.” Id. at ¶ 24.

         “This shareholder derivative action involves breaches of fiduciary duties by Defendants in connection with knowingly causing the Company to underspend on safety measures and remediation efforts at the Company's Aliso Canyon underground storage well (the “Well”), leading to a massive natural gas leak which existed for years at the well but was first discovered in October 2015.” Id. at ¶ 1. By the time the leak was capped on February 18, 2016, it had become “the largest methane leak in U.S. history.” Id. “[T]he Company admitted in its most recent Annual Report filed with the SEC on Form 10-K on February 26, 2016” that numerous governmental agencies are investigating this incident, eighty-three lawsuits have been filed against SoCalGas, and the Los Angeles District Attorney's Office filed a misdemeanor criminal complaint against SoCalGas. Id. at ¶ 3. “The wrongdoing associated with the leak has already cost the Company more than $50 million in remediation costs. Sempra and SoCalGas have also experienced significant damages to their reputation, goodwill, and standing in the business community.” Id. at ¶ 4. “[T]hese actions have exposed the Company to billions of dollars in potential liability for violations of state and federal law.” Id.

         “Many of the lawsuits [filed against SoCalGas] name as defendants Does . . . who have been identified in part as those responsible for the oversight of Aliso Canyon.” Id. at ¶ 5. “[T]he naming of these Doe defendants is meant to preserve claims against some of the Individual Defendants named herein, who were responsible to ensure that Sempra's SoCalGas was operating safely.” Id. “[T]he Company is also being sued by . . . the California Attorney General . . . for creating and failing to abate a nuisance and violation of . . . California laws.” Id. at ¶ 12. “SoCalGas's current estimate of costs to be paid to address the leak and mitigate environmental and community impacts is between $250 and $300 million” and does not include the costs that will be incurred to defend against lawsuits. Id. at ¶¶ 127-128.

         Among the named defendants are twelve current members of the Sempra Board of Directors, Debra L. Reed[4], William C. Rusnack, William D. Jones, William G. Ouchi, James G. Brocksmith, Jr., William P. Rutledge, Lynn Schenk, Alan L. Boeckmann, Jack T. Taylor, James. C. Yardley, Kathleen L. Brown, and Pablo A. Ferrero. Id. at ¶¶ 27-41. All of the Sempra Directors joined the Sempra Board in 1998 or later. Id. With respect to each of these Sempra Directors, Plaintiff alleges,

Defendant . . . either knew, was reckless, or was grossly negligent in not knowing that the Well was unsafe and Sempra lacked an appropriate contingency plan in the event of a leak at the Well. Defendant . . . further caused or allowed Sempra to fail to timely provide adequate temporary housing to the thousands of affected residents, despite specific orders from the Health Department instructing Sempra to do so

Id. at ¶¶ 27-42. “By reason of their positions as officers and directors of Sempra and SoCalGas, each of the Individual Defendants owed and owe[s] the Company and its stockholders fiduciary obligations of trust, loyalty, good faith, and due care and were and are required to use their utmost ability to control and manage Sempra and SoCalGas in a fair, just, honest, and equitable manner.” Id. at ¶ 54.

         The Sempra Board is directly responsible for the misconduct alleged in the complaint and has “ultimate authority for all its operations.Id. at ¶¶ 65-66. “[T]he Board had direct responsibility for risk oversight.” Id. at ¶ 68. In its last two annual Proxy Statements,

the Company stated that “[t]he board has developed an integrated risk management framework to assess prioritize, manage and monitor risks across the company's operations” and that “the board has diversified its risk oversight responsibilities across its membership, housing categories of risk oversight within board committees by topic.” Id. at ¶ 68. The Proxy Statement stated, The board reviews and monitors strategic, financial and operating plans that are intended to provide sustainable long-term growth with what it deems to be an acceptable level of risk. . . . The board fulfills its risk oversight function through receipt of reports provided both directly to the board and to appropriate board committees. Based on these reports, the board or appropriate committees establish or amend existing risk oversight and control mechanisms. In addition, the company has a robust internal audit function that reports directly to the Audit Committee.


         Sempra Directors Brocksmith, Rutledge, Schenk, Taylor, Yardley, Brown and Ferrero “owed specific duties to Sempra to assist the Board in overseeing the Company's programs and performance related to environmental, health, safety, and technology matters” as members of the Environmental, Health, Safety, and Technology Committee of the Sempra Board. Id. at ¶ 57. Sempra Directors Jones, Brocksmith, Schenk, Taylor, Yardley, and Ferrero “owed additional specific duties to Sempra to ensure its compliance with legal and regulatory requirements” as members of the Audit Committee of the Sempra Board. Id. at ¶ 61. The Sempra Directors, including the Compensation Committee of the Sempra Board consisting of Defendants Boeckmann, Ouchi, Rusnack, Rutledge, and Schenk, “awarded huge bonuses to the Company's executives, notwithstanding the disastrous Aliso Canyon well leak and the huge financial costs to the Company resulting from the leak.” Id. at ¶ 130.

         Aliso Canyon, one of the Company's four underground natural gas storage facilities, “is actually a collection of approximately 116 underground wells. . .” Id. at ¶¶ 76, 78. “The leaking well is referred to as Standard Sesnon-25 or ‘SS-25'. . .” Id. “[T]he Well has been slowly leaking for over thirty-six years.” Id. at ¶ 13. “[F]ive years ago SoCalGas requested and obtained regulatory permission to increase rates to replace the many leaking valves at the Aliso Canyon storage field.” Id. “[I]nitial reports about the Well failure suggested that the safety valve failed” but “subsequent discovery . . . revealed that there was no safety valve at all.” Id. “SoCalGas purportedly told the California Division of Oil, Gas, and Geothermal Resources (‘DOGGR') that it ‘replaced' the safety valve in 1979. In December 2015, however, SoCalGas admitted that Sempra actually removed the valve in 1979 because it was old at the time, leaking, and it was difficult to find parts for and then failed to repair or replace it.” Id.

         “On December 15, 2015, Roger Schewecke . . ., a SoCalGas executive who was helping to coordinate a response to the leak, was asked by reporters about the safety valve.” Id. at ¶ 85. “Schwecke admitted that the safety valve was not damaged; it was removed in 1979.” Id. “This admission came nearly five years after SoCalGas requested and obtained regulatory permission to increase rates to replace the many leaking valves at the Aliso Canyon storage field. Despite the ratepayer increase and annual profits of nearly $100 million, SoCalGas never installed a new safety valve. The Director Defendants were aware of this decision and approved the decision not to replace the safety valve.” Id.

         “Individual Defendants were aware of increasing well integrity problems at Aliso Canyon and had proposed a [still pending] Storage Integrity Management Program (SIMP) for implementation as of October 2015.” Id. at ¶ 86. “[T]he leaking well SS-25 was not one of those designated for the program.” Id. “The decision not to replace the safety valve at Aliso Canyon and not to include SS-25 in the proposed SIMP, was a conscious decision made by the Director Defendants to put profits over safety.” Id. at ¶ 87.

         “Individual Defendants' knowledge of the needed repairs to the Aliso Canyon Well is demonstrated by the presentation that SoCalGas made to [the California Public Utilities Commission (CPUC)] in November 2014 regarding the proposed SIMP and recommended Operations and Maintenance expenses and capital improvements to SoCalGas' underground natural gas storage wells, including those at Aliso Canyon.” Id. at ¶ 88. “In remarks prepared by Phillip E. Baker, Director of Gas and Distribution at SoCalGas, the Company admitted the substantial capital improvements needed at the Aliso Canyon underground wells.” Id. “[A]s part of its presentation in November 2014 regarding necessary improvements at Aliso Canyon, Sempra candidly admitted that it had not spend the same resources on well safety as it had on gas transmission pipelines.” Id. at ¶ 89. “In his remarks to the CPUC, Phillip Baker . . . stat[ed] ‘we believe it is critical that we adopt a more proactive and in-depth approach. Historically, safety and risk considerations for wells and their associated valves and piping components have not been addressed in past rate cases to the same extent that distribution and transmission facilities have been under the Distribution and Transmission integrity management programs.'” Id. at ¶ 91. Baker noted the age, length, and location of the wells and stated, “Without a robust program to inspect underground storage wells to identify potential safety and/or integrity issues, problems may remain undetected within the high pressure above-ground wellheads, pipe laterals . . . and below-ground facilities . . . among the 229 storage field wells.” Id. at ¶ 93. “Baker told that CPUC in his written report and in his comments that major problems at SoCalGas' wells had developed, and were in fact a trend, stating: “In fact, a negative well integrity trend seems to have developed since 2008.” Id. at ¶ 94. “Baker concluded by noting . . . ‘Without the SIMP, SoCalGas will continue to operate in a reactive mode (with the potential for even higher costs to ratepayers) to address sudden failures of old equipment. In addition, SoCalGas and customers could experience major failures and service interruptions from potential hazards that currently remain undetected.'” Id. at ¶ 96. “Baker's November 2014 presentation was also based in part on material from [Defendant Schneider] . . . and the proposals and ultimate decisions were reviewed and approved by the Board of Directors of SoCalGas and Sempra.” Id. at ¶ 97. “SoCalGas and Sempra were fully aware of and had approved at all relevant times a bifurcated approach to natural gas safety, pursuant to which well safety had been relegated to an inferior stepchild status.” Id. at ¶ 92.

         “When the Company discovered the massive gas leak at Sempra's Aliso Canyon natural gas storage reservoir on October 23, 2015, it did not report the leak immediately as required by law. Instead Sempra and SoCalGas waited days to notify state and federal agencies.” Id. at ¶ 8. “Moreover, the Individual Defendants names as defendants herein consciously failed to cause the Company to take prompt and sufficient corrective actions to limit the damages caused to individuals, homeowners, and the Company itself from the leak. In fact, the Individual Defendants delayed more than a month in implementing a contingency plan for plugging the well. ...

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