United States District Court, S.D. California
ARTHUR FISCHMAN, derivatively on behalf of SEMPRA ENERGY and SOUTHERN CALIFORNIA GAS COMPANY, Plaintiff,
DEBRA L. REED; JOSEPH A. HOUSEHOLDER; STEVEN D. DAVIS; JUSTIN C. BIRD; 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; PABLO A. FERRERO; LUIS M. TELLEZ; DENNIS V. ARRIOLA; JIMMIE I. CHO; MICHAEL M. SCHNEIDER; DOUG SCHNEIDER; SCOTT FURGERSON; GEORGE MINTER; J. BRET LANE; MARTHA B. WYRSCH; JESSE J. KNIGHT, JR; and DOES 1-25, Inclusive Defendants, and SEMPRA ENERGY; and SOUTHERN CALIFORNIA GAS COMPANY Nominal Defendants
WILLIAM Q. HAYES UNITED STATES DISTRICT JUDGE
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).
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; (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
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. (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
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).
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. (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).
February 10, 2017, the Court heard oral arguments on the
three pending motions to dismiss. (ECF No. 51).
Allegations of the Complaint
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.
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
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.
the named defendants are twelve current members of the Sempra
Board of Directors, Debra L. Reed, 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,
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.
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.
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.
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.
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.
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.
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.
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. ...