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COUNTY OF COOK v. MIDCON CORP.

November 7, 1983

THE COUNTY OF COOK, ET AL., PLAINTIFFS,
v.
MIDCON CORP., ET AL., DEFENDANTS. CITY OF CHICAGO, ET AL., PLAINTIFFS, V. MIDCON CORP., ET AL., DEFENDANT.



The opinion of the court was delivered by: Leighton, District Judge.

  Memorandum

These consolidated actions arise out of events surrounding the recent corporate reorganization involving Peoples Energy Corporation, MidCon Corporation, and their various corporate subsidiaries. Plaintiffs, the City of Chicago and the County of Cook, allege that the defendant corporations, various of their officers and directors, and their accountant, effected the reorganization in a manner which violated the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961-1968, the statute popularly known by the acronym "RICO." The causes are before the court on two motions to dismiss by defendants: one on the ground of res judicata or collateral estoppel, the other for failure of the complaint to state a claim on which relief may be granted. For the following reasons, the court grants the former motion, relying primarily on collateral estoppel; and in the alternative, it grants the latter motion, the court concluding that on the facts alleged, plaintiffs cannot plead adequately a violation of RICO.

I

Before filing complaints in this court, the County of Cook and the City of Chicago were parties to two consolidated cases before Judge George J. Schaller of the Circuit Court of Cook County, Chancery Division. The proceedings in the state court commenced August 20, 1981 when several of the defendants in this action, Peoples Energy Corporation, MidCon Corporation, and Natural Gas Pipeline Company of America, filed a complaint against the Illinois Commerce Commission which sought, inter alia, an injunction against interference with a planned corporate reorganization. Peoples Energy proposed to transfer the common stock of its nonutility subsidiaries to a newly incorporated holding company, MidCon Corporation, in exchange for MidCon stock which was to be distributed to shareholders of Peoples Energy on a pro rata basis. Under the plan, Peoples Energy would continue to hold the common stock of its two public utility subsidiaries, The Peoples Gas Light and Coke Company and North Shore Gas Company. On September 3, 1981 the Illinois Commerce Commission filed a separate action against Peoples Energy, MidCon and Natural, as well as Peoples Gas Light and North Shore, seeking to enjoin the proposed reorganization; this suit eventually was consolidated with the already pending action in which the Commerce Commission was a defendant.

Cook County intervened in the state litigation on September 16, 1981 as a defendant to the affiliated corporations' suit for injunctive relief against interference with the reorganization by the Illinois Commerce Commission, and as a counterplaintiff seeking to enjoin the proposed Peoples reorganization. By this time, various other parties also had intervened in the proceedings as defendants and counterplaintiffs; among them were the State of Illinois, the Governor's Office of Consumer Services, an agency of the Illinois executive branch, Business and Professional People for the Public Interest, Inc., a not-for-profit corporation, and the South Austin Coalition Community Council, a not-for-profit community organization. In September and October 1981, Judge Schaller conducted a five-week hearing on the parties' cross motions for preliminary injunctive relief. On October 23, 1981, he issued a 54-page decision, granting a preliminary injunction to Peoples and its affiliates, and denying such relief to the Illinois Commerce Commission, Cook County, and the other intervenors. After obtaining the approval of shareholders, Peoples and its affiliates implemented the reorganization on November 30, 1981. According to plan, control of the nonutility subsidiaries was transferred to MidCon from Peoples Energy, the remaining corporate parent of the two public utility subsidiaries.

Cook County filed an amended counterclaim before Judge Schaller on February 4, 1982, seeking a declaratory judgment that the Peoples reorganization was void, and praying for a permanent injunction requiring the corporations involved in the reorganization to undo what they were attempting to accomplish. Thereafter, on April 27, 1982, Judge Schaller granted the City of Chicago leave to intervene as an additional defendant-counterplaintiff. The City's intervention was subject to various terms and conditions: Chicago was to be bound by all orders previously entered by the state court; it was not to raise new issues or add new parties; finally, it was not to interfere with the control of the litigation in a manner which promoted injustice or caused undue delay. In its counterclaim, the City, too, sought an order granting declaratory and injunctive relief reversing the Peoples reorganization transaction.

In their counterclaims, the City and the County alleged that the Peoples reorganization was an ill-conceived attempt to circumvent the jurisdiction of the Illinois Commerce Commission while the corporations involved deprived consumers of the benefits of assets properly belonging to the rate base of the public utilities, Peoples Gas and North Shore, by transferring those assets to MidCon. Cook County specifically alleged that excessive dividend payments extracted from the utility subsidiaries, combined with Peoples Energy's investment policy of investing these funds in its nonutility holdings, constituted an arrangement which facilitated the exchange of utility assets to MidCon when the reorganization took place. As a consequence of the reorganization, consumers were injured, both parties contended, by having to pay increased gas prices while receiving less reliable service. These core allegations were repeated in virtually every pleading filed by the other intervening parties.

After obtaining the preliminary injunction, the Peoples affiliates filed a motion on October 28, 1981 for permanent injunctive relief. Judge Schaller then set July 6, 1982 as the trial date for hearing on the merits all the various claims and counterclaims of the parties.

On May 6, 1982, before the trial before Judge Schaller, Cook County filed a complaint in this court, alleging as a basis of federal jurisdiction that defendants, the corporations involved in the reorganization, various of their officers, directors, and their accountant, violated RICO by effecting the reorganization through a concerted pattern of racketeering. The City of Chicago filed a virtually identical complaint on May 26, 1982. These two actions were consolidated by this court's order of June 11, 1982. The gravamen of the RICO allegations before this court is that the reorganization was the culmination of a scheme to defraud consumers of their right to receive adequate and efficient utility service at just and reasonable rates by transferring to MidCon assets that properly belonged to the utilities. The major steps in this scheme to defraud, which took place between 1977 to 1981, are alleged by plaintiffs to be that:

  (1) Defendants caused the utility subsidiaries to
  pay excessive dividends to Peoples Energy.
  (2) They then caused Peoples Energy to invest
  these dividends in subsidiaries which were
  nonutilities.
  (3) Meanwhile, defendants made misrepresentations
  to the Illinois Commerce Commission and to the
  public, stating that these dividends were not
  excessive and that their investment program would
  benefit the utility subsidiaries and their
  consumers.
  (4) Defendants made plans to reorganize by
  transferring the nonutilities to a newly
  incorporated MidCon Corporation without
  disclosing those plans to the public until
  January 1981.
  (5) Misrepresentations were made that the
  reorganization would not result in higher gas
  rates for the customers of Peoples Gas Light and
  North Shore and would have no adverse effect on
  the financial condition of either company.
  (6) Finally, in late 1981, the scheme to defraud
  was consummated when the reorganization took
  place, leaving the nonutilities with a new
  corporate parent, MidCon, while North Shore and
  Peoples Gas Light remained subsidiaries of
  Peoples Energy. As a result of all the foregoing,
  plaintiffs allege, the utilities had become
  undercapitalized and the public, having been
  deprived of the benefits of assets generated by
  the utilities, has had to pay higher prices for
  less efficient utility services.

Plaintiffs further aver that defendants committed multiple acts of mail fraud, as prohibited by 18 U.S.C. § 1341, by using the United States mails in furtherance of their scheme to defraud. Included among these mailings were proxy statements, Form 10-K filings to the Securities and Exchange Commission, annual reports, press releases, transfers of assets, and various correspondence, including communications between officers and directors. Except for proxy statements issued by defendants when shareholder approval of the reorganization was sought, no mention of these mailings is made elsewhere in the complaint. The City and County allege that the proxy statements seeking shareholder approval of the reorganization were unconditionally certified by defendant Arthur Andersen & Co., the accountant of the corporate defendants, even though the statements determined dividends declared on common stock for MidCon on a different basis than dividends declared on common stock for Peoples. These inconsistent accounting methods, plaintiffs maintain, "concealed the intentionally indirect transfer of assets from Peoples Gas Light and North Shore to MidCon."

In addition to claiming that defendants' alleged misconduct violated RICO, the City of Chicago appended to its complaint Counts II through IV, seeking to impose an accounting and constructive trust on the corporations and their officers for breach of their fiduciary duties under state law.

On July 2, 1982, only four days before all claims were to be heard on their merits, Cook County and Chicago filed motions to dismiss their counterclaims in the state proceedings voluntarily. These motions were granted by Judge Schaller. This development, however, did not terminate the participation of Chicago and Cook County in the state litigation. Despite the withdrawal of their counterclaims, they elected to remain in the state suit as intervening defendants by virtue of their answers, still on file, to the complaint for injunctive relief of Peoples Energy and its affiliates.

Cook County and Chicago also made pretrial motions in limine on July 2, 1983. These motions sought to limit evidence accepted and findings made in the state proceedings to the issue of the jurisdiction of the Illinois Commerce Commission over the Peoples Energy reorganization. If the motions in limine were granted, evidence concerning the effect of the reorganization on the public interest, the utilities and their consumers would have been excluded from the hearing; this issue, Chicago and Cook County contended, was raised solely in the counterclaims of the other intervenors, and was irrelevant to a determination whether a permanent injunction should issue in favor of Peoples Energy and its affiliates against the Illinois Commerce Commission's attempted exercise of jurisdiction. Judge Schaller, however, denied the motions in limine, remarking from the bench that he realized that plaintiffs were concerned about the possible collateral estoppel effects of his judgment, but that they had remained in the suit at their own election.

In July and August 1982, Judge Schaller conducted a trial in the Circuit Court of Cook County, hearing the merits of the claims for declaratory and injunctive relief of Peoples Energy and its affiliates, as well as the counterclaims of the Illinois Commerce Commission and the intervening defendant-counterplaintiffs for declaratory judgments, a permanent injunction, the imposition of fines and other relief setting aside the Peoples reorganization. At this trial, Cook County and Chicago were afforded a full opportunity to examine and cross-examine witnesses and to introduce documentary evidence. Cook County, in fact, called its own expert witness, Pat A. Laconto, to testify on the effect of the reorganization on the cost of capital to the utilities. During the trial, which lasted 19 days, nearly 300 exhibits and the testimony of 17 witnesses were introduced into evidence. Judge Schaller heard considerable evidence concerning Peoples' dividend, investment and acquisition practices, and the alleged transfer of utility assets to MidCon through the reorganization; moreover, evidence was introduced about the effect, if any, of the foregoing on the public interest, the utilities and their consumers.

On November 19, 1982, Judge Schaller issued an exhaustive 97-page opinion, setting forth the court's findings of facts and conclusions of law, in support of an order granting the corporate defendants in this action all the relief that they requested from the state court and denying the relief sought by the ICC and the various intervenors. The court found that the Peoples Energy reorganization was beyond the jurisdiction of the Illinois Commerce Commission because it did not involve the regulated utility subsidiaries, Peoples Gas Light and North Shore. The reorganization was effected by transferring from Peoples Energy to MidCon, both of whom are not utilities, the stock of nonutility subsidiaries. Moreover, Judge Schaller concluded, no assets of the regulated subsidiaries had been transferred in connection with the reorganization; nor was their capitalization, capital stock, or retained earnings altered as a consequence of the reorganization. Accordingly, he entered a declaratory judgment that the Illinois Commerce Commission lacked jurisdiction over the Peoples reorganization.

The state court further granted Peoples Energy and its affiliates permanent injunctive relief against interference with the reorganization by the Illinois Commerce Commission, determining that declaratory relief was an inadequate legal remedy and that issuance of the injunction would prevent irreparable harm to the companies and would not disserve the public interest. In conjunction with his determination that the public interest would not be disserved by issuance of the injunction, Judge Schaller made the following specific findings of fact:

  (1) The reorganization has not impaired the gas
      supply of the two regulated utility
      subsidiaries, Peoples Gas Light and North
      Shore, or their ability to service their
      respective customers.
  (2) Further, the reorganization has not impaired
      the financial viability of the utility
      subsidiaries or their ability to raise
      capital.
  (3) The payment by the utility subsidiaries to
      Peoples Energy of approximately 85% of their
      net income as dividends was neither
      excessive, illegal, or improper.
  (4) Neither the decision of Peoples Energy not to
      reinvest these dividend payments in its
      utility subsidiaries nor the investment of
      these monies in nonutility subsidiaries which
      were eventually transferred to MidCon was
      illegal or improper.
  (5) Moreover, the Illinois Commerce Commission
      may not lawfully consider the earnings and
      assets of nonutility businesses in setting
      rates for utility businesses. Therefore,
      before the reorganization, the Commission
      could not look to the financial viability of
      Peoples Energy or any of its ...

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