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,
AEP Generating Company, an Ohio corporation; Indiana Michigan Power Company, an Indiana corporation, Defendants-Appellees.
Argued: March 9, 2017
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.
Richard P. Bress, LATHAM & WATKINS LLP, Washington, D.C.,
L. Elsberg, QUINN EMANUEL URQUHART & SULLIVAN, LLP, New
York, New York, for Appellees.
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.
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.
GRIFFIN, Circuit Judge.
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.
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.
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").
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" on Rockport 2, "except
Permitted Liens." There are seventeen types of Permitted
Liens, with "clause (x)" being the focal point of
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 ...