Wilmington Trust Co. v. AEP Generating Co.
859 F.3d 365
| 6th Cir. | 2017Background
- AEP affiliates built Rockport 2 (coal-fired unit completed 1989) and financed it via a 33‑year sale-and-leaseback; lease expires Dec. 7, 2022. Owners (investor trusts) receive rents and residual value at lease end.
- Facility Lease contains a broad no‑lien clause (Section 7) but lists 17 Permitted Liens; clause (x) excepts rights “reserved to or vested in any Governmental Authority to condemn or appropriate … or to control or regulate” the unit.
- Participation Agreement Section 6.01(j) prohibits AEP from actions that materially adversely affect operation, safety, capacity, economic useful life or any other aspect of Unit 2.
- EPA enforcement litigation (not alleging violations at Rockport) led to a 2007 consent decree and a 2013 modification that deferred Rockport 2’s scrubber/retrofit obligation to 2028 — after the lease expires — shifting retrofit or retirement costs to the owners.
- Owners sued for: (1) breach of the Facility Lease (impermissible Lien), (2) breach of Section 6.01(j), and (3) breach of covenant of good faith and fair dealing. District court dismissed claims holding the consent decree was a Permitted Lien; owners appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the consent‑decree obligation (deferred scrubber/retrofit to 2028) is a Permitted Lien under Facility Lease clause (x) | The 2013 modification created an encumbrance on owners’ residual value and is not covered by clause (x) because clause (x) only covers rights existing (reserved or vested) when lease was executed | Clause (x) should be read broadly to include governmental powers or negotiated settlements that result in obligations to control/regulate the unit, so the consent decree is a Permitted Lien | Reversed district court: clause (x) does not cover rights created after lease execution; consent‑decree mandate is not a Permitted Lien under Section 7 (remand) |
| Whether Section 7’s Permitted Lien rationale excuses AEP’s alleged breach of Participation Agreement §6.01(j) | If the deferred obligation materially adversely affected owners’ economic useful life, AEP breached §6.01(j) | Section 7’s Permitted Lien exception authorizes the conduct, so §6.01(j) claim fails | Reversed dismissal of §6.01(j); remanded for factual determination whether AEP’s actions materially adversely affected owners’ interests |
| Whether district court properly granted partial summary judgment/Rule 12 dismissal on these contract claims | Owners argued dismissal was premature because factual issues (material adverse effect) remained and clause (x) is inapplicable | AEP argued the contract permitted the result and dismissal was proper | Court held dismissal was improper as to Sections 7 and 6.01(j); factual issues remain and claims should proceed on remand |
| Whether owners’ claim for breach of the covenant of good faith and fair dealing may proceed alongside express contract claims | Owners contended covenant claim is independent because AEP’s conduct undermined lease purpose | AEP argued the covenant claim duplicates the express contract claims and should be dismissed | Affirmed dismissal: covenant claim is duplicative of the breach of contract claims |
Key Cases Cited
- Beardslee v. Inflection Energy, LLC, 31 N.E.3d 80 (N.Y. 2015) (clear, unambiguous contracts enforced according to plain meaning)
- S. Rd. Assocs., LLC v. Int’l Bus. Machines Corp., 826 N.E.2d 806 (N.Y. 2005) (commercial certainty in negotiated real‑property contracts)
- Banos v. Rhea, 33 N.E.3d 471 (N.Y. 2015) (whether contract is ambiguous is a question of law)
- Ellington v. EMI Music, Inc., 21 N.E.3d 1000 (N.Y. 2014) (ambiguous language susceptible to two reasonable interpretations creates a factual issue)
- Beal Sav. Bank v. Sommer, 865 N.E.2d 1210 (N.Y. 2007) (court must not render contract provisions meaningless)
- Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P., 920 N.E.2d 359 (N.Y. 2009) (interpret contract terms in light of the whole agreement)
- Mallad Constr. Corp. v. Cty. Fed. Sav. & Loan Ass’n, 298 N.E.2d 96 (N.Y. 1973) (related instruments executed at the same time read together)
- Florida Power Corp. v. FirstEnergy Corp., 810 F.3d 996 (6th Cir. 2015) (standard of review for Rule 12 motions)
- Thomas M. Cooley Law Sch. v. Kurzon Strauss, LLP, 759 F.3d 522 (6th Cir. 2014) (summary judgment standard)
- Gallo v. Moen, Inc., 813 F.3d 265 (6th Cir. 2016) (avoid strained contract constructions to find unlikely implications)