case number one six stamps three four nine six wilmington trust company at all the a p generating company at all or arguments not to exceed fifteen minutes per side mr richard brus for the  good morning want to please the court i would like to reserve three minutes for a bottle the owners agreed to allow a e p to rent their one point seven billion dollars power plant for thirty three years with really two major conditions number one a p s to pay the rent number two he can't do material harm to the plant or to the owners long term interests in it a p violated the latter condition by trading away the long term value of the plant in order to obtain a more favorable settlement of claims brought by the government and others against its interests elsewhere claims that could not have had any effect on the plant itself the only question in this case really is whether there's something else in the agreements here that would excuse that violation the district court held that there is the district court held that because a p accomplished this result through a consent decree the one point four billion dollar encumbrance that it put on the plant is a permitted lien which means an exception to a separate prohibition against liens and it read that exception to give an affirmative right that was there it was there for two reasons number one a consent decree is not a permitted lien and number two even if it were this consent decree which materially adversely affected the plant and the owner's long term interests violated section six point zero one j of the participation agreement how how would this case of worked if everything about it is the same but rockport two is part of the underlying lawsuit and then same consent decree and let's just say to make it easier that the originals consent decree says the two thousand and twenty eight requirement in other words not the original so i'm just in terms of trying to figure out what the agreement does  terms of protecting lessee less or owners a piece interests how does it work this shore your honor i think actually it's a thank you for asking the question i think it will frame the case wonderfully so if the lawsuit were about potential violations of law essentially the violation was constructing major modifications to the plant without getting a permit and putting in a scrubber if that if it were about this plant if the lawsuit went to judgment and if you were to lose that case it would have violated the law which would violate section eight of the facility agreement the facility lease which is it page i and for any other harm that came to the owners from doing that on the other hand if if a p had litigated that case and won well then it would have paid its litigation costs but a consent decree once it would not have i so just to make sure i'm getting it they lose the judgement in that case the owners have no obligation everything else goes the same it's a piece responsibility so now you have this with the consent decree or settlement whatever how does it how does the agreement work there i don't think it changes the fact that he is responsible for whatever the costs of the consent to create are because that's a voluntary action on a piece part in other words a v p wants to agree that there will be a  for instance of a p itself wanted to put in a scrubber it wanted to make a major von that then required a scrubber that would be something you could do under section eight eight c but it would have to pay for it language at its expense that's what you're exactly because it would be because in a big business reason it believes it desirable to put that modification in and that modification led then to the requirement to put in a scrubber and under a dean your o here it wasn't required to begin with they made it required by their conduct putting in a model modifying the plant we would at that point actually have title to it that's under a d small three but getting back to your owner's question about the consent you know whether the consent decree or settlement in that in that example would be a permitted lien the answer is it would not for the same reasons frankly that in this case it isn't if we look that matter of the language of the permitted lien definition and clause ten but also of the context in which common clause tenant comes both in the overall agreement but specifically in the list of permitted liens i'll start with the language if that would be helpful as a matter of language what what section seven which is the entirely in provision says is that a p shall shall not create in incur or suffer to exist and elian right in a government authority to regulate to appropriate to condemn to regulate or control the plant we don't believe first of all that the syntax of you don't normally create as a private  party a reserved or vested right in the government we think that's an unnatural view of it we think that what the clause is most naturally read to be talking about is actions by the government unilateral actions by the government to regulate or control and  logically is in there because a p shouldn't be found to have violated the entitling provision merely from suffering to exist something that it can't do anything about which is the government has imposed a new obligation but that wouldn't be the case here with your honor's with your honor's example here the burden or the lien that's been put on the plant is a burden really and that's been put on the plant by a voluntary contract with the government so no we i guess one way of thinking about it that would be true particularly if sierra club it was the only plaintiff that's right your honor or is the fact that sierra club's relying on federal law changes i don't think it does your honor now and i don't even think a p is arguing otherwise the other interesting thing i think to look at is even if you thought the language were something that could reasonably go either way if you look at it in context it really can't because if you look at the list of permitted liens there really carefully defined the parties i thought this agreement was really quite carefully crafted and particularly this part if you look at it the permitted leans fall into three categories one preexisting leans two lanes that a p can do nothing to avoid so this would be for  example liens that are created by the transaction documents themselves or millions that are created by unilateral government action three there are liens such as mechanic's lien such as liens for putting in new repair parts those would be  five clause six clause fifteen and clause sixteen liens those liens are all carefully circumscribe their actions that a p can take to create a lien but there are lots of limits in each of those definitions the protect the owners from those liens being too material so for mechanic's lien for example it's got to be something that arises in the ordinary course of business and is paid within thirty days or is bonded another example the repair of the liens those are ones that that have to be paid off within a certain amount of time the oddity of their argument here is that there's a glaring exception to this careful scheme in clause ten haws ten allows them to create a lien of enormous materiality with no limits on it whatsoever so long as it doesn't in the form of a settlement that's blessed by consent decree one other feature of this case i can understand why your clients didn't pay attention to the initial consent to create because it was in their interests but i take it they were notified about the modification of the consent decree and i guess in terms of the unfairness of this is the fact that they had notice of this an opportunity intervene balance that out is the guess the question i don't believe so your honor because the consent decree provides quite specifically that and this is it page i do three five one five and it's paragraph to await this consent decree does not limit in larger affect the rights of any party to this consent to korea's against any third parties so when they did it we had no reason to disrupt the relationship between a p and the government in the private plans and whatever environmental concerns or public concerns were involved really not our business o business is between us and a p as to who has to pay for that and so wouldn't really have been a reason for us to have to go up and object to the court not don't do this modification it's a reason for us to go deep inside when you've done this modification you don't seem to have any desire or intent to build the scrubber yourself and to take on the expense yourself and now we have a problem with you because you've breached the contract your honor even if by the way we got passed and i don't think you can there are natural reading of the language and the fact that it doesn't really work just out of curiosity maybe you have no idea what happens if you're right you win you win it's a matter of law now is the consent decree and now no it will not affect the consent decree one one i as they have interpreted it as an affirmative authorization and unnecessary conflict with section six zero one j i interpret ing it as an authorization and by targeting it even to authorize materially adverse actions on the part a piece part it runs straight into six zero one j which says a p can't take any action that would have a materially adverse effect on the other hand if you read the permitted lean provision instead to  other permitted liens that you would agree are ok that are likely to run up against you know by their very nature your honor they're all as i said of the ones that can cause itself to be clear i mean the government of course could come in with a law tomorrow the chuch down power plants and a p is permitted to suffer that to exist can't do anything about it but of the ones that a p can create itself now we think it's very unlikely that any of them based on the circums nature of those of the definitions would materially adversely a place affect the plant i was you get close to the end of the lease as you get close to the end of the lease isn't it likely that some of those will carry over and become owner problems  may become owner problems your honor but again we're talking about material adverse effects on the owners long term interests and no we don't think given the value of the plant even under a p s view of what the value of the plant will be at this point and that they it but even under that you're talking about several hundred million dollars worth of plant that we're supposed to be inheriting at the end of the of the lease and no if you look at the definitions none of them are likely to have that effect by the way if they did we think zero one j would is an overarching provision that would prevent them from doing it but we actually think it's unlikely and that as i've said factors into how you ought to read ten because ten shouldn't be read as the one that somehow gives no protection at all to the owners i'm against a piece voluntary actions finally i guess it's it's a rare case i've done a lot of contract work and it's a rare case where the preceptor canon of avoiding commercially unreasonable results comes into play in such a clear cut fashion as it does here under a p s view and under the district court's view a p could have agreed that this plant would shut down the day after without any ability to even put a scrub or would have to simply be shut down the day after lisa ns and that would be perfectly ok there's no way that the owners agreed to allow e p to destroy the residual value in that way and this case isn't far  off that this case puts the date out a bit and allows us the option of putting in a one point four billion dollars scrubber now mind you this whole plant was purchased from one point seven billion so the idea that the plant would still be economic if you did that is fanciful the real effect of what they've done is to record the plant shut down in two thousand and twenty eight secondly as your honor and i discussed earlier if it had been accused of violating the law and indeed had violated the law at this plant a undoubtedly would be responsible for paying the costs of that it's a truly perverse world when a p is somehow better off because the law it's accused of violating the law and plants that we have nothing at all to do with and we can be stuck with the costs of of having to remediate that so if there were any doubts and i don't think there should be about the appropriate construction of any of the language here so long as our construction is a reasonable one the law would require that we have saved a couple of cases in the brief that dress it but let me find cited by either side really delve into in a serious way the question of whether that substantive rule is is that so called substantive really is a rule of substance or really is rule of procedure and if it's a rule of procedure whether it has to give way to the rules of procedure either in the state or federal secondly even if the fed if they were right about the state it wouldn't matter under erie the federal rules of civil procedure trump any country state rule and we know from the supreme court explaining it of course it's common sense that there is a very strong presumption that the rules in the federal rules of civil procedure are procedural is approved supreme court explained in the hannah case and i'm happy to give you that decide if you'd like but as they explained in that case three sixty u s four for three u s forces sixty in the jump for seventy four seventy one with the supreme court said is you'd have to assume that the advisory committee the supreme court and congress all wrongly felt that something was procedural all wrongly concluded that it's a very strong presumption against it and of course in this case we know it's not procedure because the new york will doesn't say you can't plead implied covenant of fair of good faith and fair dealing if you would have lost on an express claim what it says is you can't plead it if you if you're right on the first your major point that's correct your honor thank you thank you may please the court david ellsberg for the appellee is who all referred to collectively as a runner's under the contracts here the owners are getting paid about four point eight billion dollars plus substantial tax benefits and under those same contracts they agreed to clear terms of foreclose the claims that they're making here the very narrow question on this appeal is whether the consent decree violates six zero one j even though it's expressly permitted by section seven and the definition of permitted liens i intend to first address section seven then six zero one j and then finally i'll address the argument that we just heard today the mets are there to your argument could they have said not  were really going to overhaul this plant we're talking now solar panels and wind turbines i mean are those all on the table under your interpretation oh no absolutely not your honor and that's a very important part of this appeal because what they did with their argument especially in their reply brief is they activists act as if judge starr has held that there are not limits on what a e p can do here including with respect to entering into consent to c and that is not at all judge sutton what chief judge charges held and the owners frankly know better just to give a couple of examples of what really happened here in what would the limits be it was exposed i'll give you a list and i'll give you a list of limits so for example the prudent utility practice clause which is in section eight of the agreement specifically says that a t p is required to do two things number one p has to treat rockport two in the same way as other utilities treat their plant so there's an industry practice consistency requirement and number two the prudent utility practice clause specifically says a p and this is critical your honour's a p must exercise its discretion its judgment reasonably including in dealing with governmental authorities and in the same decision in which chief judge sharga said i'm dismissing the claim under six o one j he said i am letting the prudent utility practice claim go forward i'm not dismissing it and then the owners choose to dismiss that claim with prejudice and your honor this brings up two things that your honour's asked about during the other argument number one the implied covenant claim by voluntarily dismissing the prudent utility practice claim with prejudice they also dismissed the substance of their implied covenant claim with prejudice because the provision again specifically says exercise judgment reasonably and you can see the definition well yes and maybe yes it makes a lot of sense your honour's that's exactly what happened in the second circuit decision the cruise case which we cite where the court explicitly noted that the contract clause the express contract clause in compassed obligations were similar to the implied covenant claim and of course we also cite the case law that says you cannot have an implied claim that is inconsistent with what other terms for example what category ten of the permitted lien provision says here and your honour's it's not this case different if only the sierra club that brought it your honour's is a cot the same way or differently everything else is the same if the c s there is an argument that it would come out the same way that's not the argument that would i just just tell me the answer even your question sierra club is the only litigant same consent decree same outcome or not i would say yes there could be the same outcome it would be a tougher case but there is a reason the could be the same outcome and that's because if a private if a private litigant brings a claim under the clean air act as judge sutton i think you might have been alluding to earlier the clean air act is regulatory scheme that specifically makes private litigants private attorney generals and the court under the language here which talks about a governmental authority vested with rights reserved to it the court is a governmental authority exercising a right reserved to it however this case is much easier because here what you have is undisputedly clearly a governmental authority which was the e p a the e p a is right to bring clean air act lawsuits is vested in it by forty two u s c seventy four thirteen be under seventy four thirteen g settling suits and entering into consent to create is explicitly identified as an enforcement power of the e p a the title of the section is federal in forstmann so so today p is the record show whether a p consulted with the owners before it modified the consent decree not not the original one because you could make the argument that really didn't prejudice them but the modification was does the record reflect that it be your honor i believe that it's undisputed that the notice of i know about the notice but i'm asking you know is a phone call your what we're doing this is worth eight point one point eight billion dollars we can imagine your maybe not being that happy about it but here's why we're doing it and we kind of feel we're in a tough spot if we don't we'll get sued anyway whatever the explanation was that didn't happen that there's nothing in the record that shows that happened i do believe it's undisputed that they did receive notice and they don't deny that they were agree with counsel or from the other side that if they end up being right consent to create and i'm quoting prohibits the sale or transfer of operational or ownership interests and units covered by the consent decree to third parties unless the third parties agree to be bound by its terms so there was an aspect of this what they're really doing part of what they're i don't how could you have that language and not talk to the one point eight billion dollar entity that's astonishing to me you're going to say that's there to cover the possibility the whole consent decree gets blown up because they're going to object you know what i'm what i'm saying your honor is that under the contract and even if on track being the consent decree no ok what i'm saying is that under the contracts here consent decrees are permitted even if they had objected it wouldn't have altered the rights under the contracts here and under the contracts here because it was a governmental authority i guess i'm not understand your answer if they're right on construing the contract between a p and the owners does that upset the consent decree and i thought you started by saying yes it might for this reason that i misunderstand you no no no i'm sorry wouldn't it wouldn't upset the consent decree you agree with your friends on the other side what i'm saying is that they are because they don't have these rights under the contracts that they're claiming because they don't have these rights there was no need to call them up and say hey listen just want to let you know we're exercising our rights under the contract i'm asking is just a different question the question is counterfactual from your perspective they do have the rights they have alleged this was not lawful therefore to a minimum they can come after a p if they have as they have in this lawsuit i'm asking whether if they're right when it comes to the contract between you a p and the owners what happens to the consent decree they said nothing do you say what the remedy is that the the court granted it if if their complaint is that there could be a p has to pay the one point eight billion dollars no that that would not that the owners argue that a p a engaged in voluntary conduct and they same gaging involuntary conduct supposedly takes the consent decree outside of the coverage of section seven but the wrong about that section seven does not limit itself to conduct that is involuntary into the contrary section seven uses the words create and in car it says a shall not create or in car or suffer to exist liens except permitted liens and as chief judge or guess recognized the word create specifically refers to conduct that a engages in that is voluntary now chief judge sarvis also got a right when he held that section seven in the definition of permitted lien is more specific than six zero one j and therefore trumps six zero on j is a single sentence it only addresses material adverse effects on the highest level of generality it just says no and the ease by contrast section seven in the definition of permitted lean is about a page long nearly a page long seventeen subsections and it specifically addresses a lien like the one here which is created when you have a governmental authority that best's rights in it to control a regular regulate rockport two and any manner and i would point out that the owners don't dispute the principle that the specific trumps the general which is fatal to their claims here now i asked you before what else maybe you understood it this way one possibility is sierra club a private entity sues rockport t and how does this work it would have changed things if sierra club sues a different a p plant but then part of the consent to korea's rockport to i think none of that really changes your answer your kind of back in the same territory it's a harder case for you but you still think would it be able to win i think while i think it's a harder case right i do think it's a harder case and i would just like to address a couple of things that came up when your honor asked questions or just well i want to get to that but just one thing i want to make sure you address is just the kind of very natural intuition without parsing contracts which is pretty complicated just that shouldn't consent decrees mainly relate to subject the plants that are subject of this lawsuit and when you hear modifying things to unload burdens on the non involved parties it just is something that doesn't sound right about that and i maybe you don't think so but i'm going to guess most people would say that doesn't seem right and how do you how do you take that on this is how i take that on first of all with the plain language and so they had it coming to them they they agreed to this yet well yes they did they did agree to this in the plain language but another way so first of all again governmental authority exercising power vested in it to control the regulate in any matter that's the language that they agree to and again part of our you're talking this is permitted  governmental authority and there was a preexisting right vested in a governmental authority under forty two u s c seventy four thirteen b two percent of the right of the government contract specifically recognizes a scrubber may be required by political law and a political law includes a decree and there's no dispute that a consent decree is a decree and judge sought and just to answer a question asked earlier if you had a case where this went to judgment and a p was required by a judgment to install scrubber the owners would then be on the hook to pay for it because it would be a scrub remedy is put the scrubber in the rockport plant then they they have to pay for that yes under me where to under section eight d under section eighty one what it says is that if a wrist scrubber is required by a political law then the owners must pay for it and a political law is defined very broadly and it includes decrees includes orders and so while it's true that for other types of things the party did did not agree that the owners would be on the hook for judge griffin going back to your question about whether or not  counts as a consent to corey and and whether there was this is something that was contemplated at the time there's no question that paying for scrubber required by a political lawyer is something that was anticipated at the time and the last thing that i would like to mention before sitting down is that the owners have pointed to lots of a number of different provisions in  their brief and during the argument that we heard today and they say that these other provisions supposedly supreme provide clues that there is an overarching do no harm principle and that there's just something wrong here the something unfair here but what they didn't do below in front of chief judge sorry guess and what they don't do on this appeal is say i have a claim for express breach of contract and what happened here breach is those provisions and presumably the reason they don't do that is they know that they could not prevail on those claims and what you can't do is take a defective claim for breach of express contract provisions and say i'm going to smuggle it in as an implied covenant claim or of the six zero one j claim and as an example there's not just the prudent utility practice provision there's also the provision where they got protection and i said just this may not be a good hypothetical and if it is it just destroy it right away but to help me dealing with some intuitions here or so you a p s several plants they haven't paid property taxes on several of them but they've paid on the rockport plan there's a dispute the government comes in saying hey we need we need you to pay this and we're going to start slapping liens and the government and a p says ok fine here's a couple million dollars you can put some liens on the plants or that we have paid the real estate taxes but by the way if you let us to lay some more of our payments you can also put a lien the rockport plan and for some reason or another that infringes the owner's interest just for hypothetically could they do that with the property tax dispute well two things could you do that could you do that with the property taxes the answer is in that hypothetical i think that there is a likelihood that  they the owners would have arguments that could bar it to begin with why why not why just why not just ok number one they would have an argument of the prudent utility practice claim that this was not an exercise of reasonable judgment how you run utilities is how you pay your taxes well two things it's operating your utility and if in operating your utility you are treating it in a way that's different from the way other plants treat operator their plants or number two what you're doing is you're not exercising your judgment reasonably there's a claim number to tax prudent to put make other people pay your taxes for what it's worth i mean i don't know i don't know what's i about it seems very beneficial well in that case that's a contract right that they gave up that's in the contract and so if it's interpreted that way that's something that they agreed to and and also remember taxes called out for different treatment in the in permitted lien taxes it specifically has an additional and different burden to contest which shows that the parties when they wanted to hold out taxes for different treatment requiring burdens on a pay another protection that they would have is they could point to the provision that says rockport want to rockport to in all other similar plants have to be treated the same there's a provision in there section eight that says you must treat rockport too like other similar plants including the ones that you own that also gives protection against and and the the issue is they did not press those as express breach of contract claims they're not arguing those expressed claims now but they're coming in and they're saying my gosh we have no other protections in this contract they they did they didn't press them they dismissed one with prejudice and they can't smuggle these other be more plain about that and while they talk about smuggling things into six zero one j six one j is an overarching command that says they can't take action to bitterly at this adverse affects the plant so there's no smuggle it's a plant up claim secondly when it talks about new tele practice what it says is that the operating efficiency of unit two will be maintained and preserved ordinary we're excepted in all material respects in accordance with utility practice it's not talking about anything like you know the answers to the hypotheticals that this court posed it's talking about you're not going to run the plant in a way that's going to run it down more than normal wear and tear you've got to take care of it but it has nothing to do with this secondly i guess on the they're entirely wrong is if clause ten on which they've based their entire case really is an affirmative authorization to enter into any and all consent decrees which is their position that override six zero one j then of course that would override a day as well they haven't given any reason other than the fact that we're not making a day argument as to why it would overcome that one and the truth is overcomes neither it's just an exception to a prohibition against leans it's not an affirmative authorization third underlying government right and i think they're playing some games with this when the underlying government right of course the government does have a vested reserved right to an act regulations etc no doubt about it to pass laws and as part of that of course they can enforce laws that have been violated there is no underlying government right absent a new regulation or a new law to require us to put a no one has argued that there is we're not this plant other than the consent decree would be required to do so so what created the obligation to put a can consent to put scrubber in here it's not any reserved or vested government right it's their agreement to settle a lawsuit that they happen to settle through a consent decree so it's a voluntary action on their part seem six zero one j if it comes up against it if  court were to think that clause a ten created an affirmative right six zero one j is the one that ought to prevail because six zero one j very clearly says you can't take action that will have a materially adverse effect at best all clause ten says is consent decrees are permitted liens it doesn't say anything about no matter how material so the right way to resolve it is they each get their their due you can create consent decrees but if they are materially adverse is what does each get their due mean when they have a judgment so it works on the side of force and vested right that you agree with it's a massive judgement and there's no way it doesn't affect the owners section six rights what so ok that's easy i'm sorry your honor i can do that one so what sixty one j is says i'm asking the easy questions not the hard question i'm very happy to hear that so what's six in one j says is they can't take an action or mid to take an action that causes a material adverse effect if the government merely passes a new law regulation that materially adversely affects the plant they haven't violated six a one check even though they follow it they have no they have no choice but to follow it and in fact that's where you know action they're the ones that scrubbers well first of all if they actually had a screw up or if they themselves had a scrubber because applicable law a law is passed and requires that we're not going to say that having the scrubber violates anything in fact that's permitted that's required for them to do under section eight see if applicable law requires that they put in a scrubber then they've got to do it and there's further provisions in eight d for how we can split the cost in other words we took the risk we took regulatory risk here so today that during the period of the lease the law might change and if the law changes such that are scrubbers required they're going to have to put in the scrubber and then at the end of the lease we've got to pay them the fair market value of the scrubber the problem is in this case applicable law didn't change there is no requirement under applicable law for us to put in a scrubber the only reason a scrubbers required is they went out and made a settlement agreement to that effect all right thank you very much of this point the