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Wilmington Trust Co. v. AEP Generating Co.

United States Court of Appeals, Sixth Circuit

June 8, 2017

Wilmington Trust Company, a Delaware corporation, acting in its capacity as owner trustee of AEGCO Trust 1, AEGCO Trust 2, AEGCO Trust 5, I&M Trust 1, I&M Trust 2, and I&M Trust 5, and not in their individual capacities, Plaintiff-Appellant,
v.
AEP Generating Company, an Ohio corporation; Indiana Michigan Power Company, an Indiana corporation, Defendants-Appellees.

          Argued: March 9, 2017

         Appeal from the United States District Court for the Southern District of Ohio at Columbus. No. 2:13-cv-01213-Edmund A. Sargus, Jr., Chief District Judge.

         ARGUED:

          Richard P. Bress, LATHAM & WATKINS LLP, Washington, D.C., for Appellant.

          David L. Elsberg, QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, New York, for Appellees.

         ON BRIEF:

          Richard P. Bress, Edward J. Shapiro, Drew C. Ensign, Benjamin W. Snyder, LATHAM & WATKINS LLP, Washington, D.C., Stephen E. Chappelear, Russell J. Kutell, FROST BROWN TODD LLC, Columbus, Ohio, for Appellant.

          David L. Elsberg, Sanford I. Weisburst, Peter E. Calamari, Rollo Baker, QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, New York, for Appellees.

          Before: CLAY, SUTTON, and GRIFFIN, Circuit Judges.

          AMENDED OPINION

          GRIFFIN, Circuit Judge.

         Nearly twenty years after defendants built, sold, and leased back a coal-burning power plant, they committed to either make over a billion dollars of emission control improvements to the plant, or shut it down. Defendants did so by way of a consent decree, resolving various lawsuits involving alleged Clean Air Act violations at their other power plants. The genesis of this dispute is what happened next: they successfully obtained a modification to the consent decree providing that these improvements need not be made until after their lease expired, thus pushing their commitments to improve the air quality of the plant's emissions to the plant's owners (represented here by plaintiff, their trustee). The district court held this encumbrance did not violate the terms of the parties' contracts governing the sale and leaseback arrangement, and that plaintiff's breach of contract claims precluded it from maintaining an alternative cause of action for breach of the covenant of good faith and fair dealing. We affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.

         I.

         Affiliates American Electric Power and Indiana Michigan Power Company (collectively, AEP or defendants) sell, transmit, and distribute electric power. In the 1980s, they built two large coal-burning power plants in Rockport, Indiana, dubbed "Rockport 1" and "Rockport 2." Among the largest of their kind in the country, these units are efficient, low-cost, and "relatively young." Defendants completed Rockport 2, the focus of this litigation, in 1989, and it has an expected economic useful life of forty-five to sixty years-through 2034 to 2049.

         A.

         Defendants financed Rockport 2's construction through a sophisticated sale and leaseback arrangement with investor-owned trusts (collectively, owners). Finalized in 1989, the arrangement largely functions as follows: each investor formed a pair of trusts (one for each defendant); each trust purchased a portion of defendants' interest in Rockport 2; and each trust leased the interest back to defendants for a period of thirty-three years-through December 7, 2022. As a result, the owners receive annual rent payments, tax and accounting benefits, and, as important here, the value of Rockport 2 after the lease expires (what the parties call its "residual value").

         With this complex deal came several interlocking instruments. Two sections from two of these instruments are at the core of the owners' claims, each providing some protection to the plant's residual value. First, Section 6.01(j) of the Participation Agreement broadly prohibits AEP from "tak[ing] any action . . . which will materially adversely affect the operation, safety, capacity, economic useful life or any other aspect of Unit 2 . . . ." Second, Section 7 of the Facility Lease provides that AEP "shall not directly or indirectly create, incur or suffer to exist any Lien"[1] on Rockport 2, "except Permitted Liens." There are seventeen types of Permitted Liens, with "clause (x)" being the focal point of this appeal:

rights reserved to or vested in any Governmental Authority to condemn or appropriate the Undivided Interest, Unit 2, any Modification, the Unit 2 Site, the Unit 2 Site Interest, the Common Facilities, the Easements, the Rockport Plant Site or the Rockport Plant, or to control ...

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