Opinion ID: 2800503
Heading Depth: 1
Heading Rank: 1

Heading: ambit’s contractual obligations

Text: The Power Plant, a coal-fired facility that generates electricity, was financed substantially by $150 million in tax-exempt Solid Waste Disposal Revenue Bonds issued by the Marion County Commission, the repayment of which is governed by a Trust Indenture. The Trust Indenture sets forth the prioritization of various payments, including the essential operating costs of the plant, rent, and the principal and interest to the bondholders. AMBIT and Horizon’s landlord/tenant relationship is governed by a series of leases and by an agreement to settle a previous dispute. Pursuant to these contracts, the monthly lease payment is a percentage of gross revenue received by AMBIT, with that percentage varying with the type of fuel on site. The present dispute involves the failure of AMBIT to pay Horizon the full rent due under the terms of the governing Lease Agreement. To understand the underlying litigation, we find it is necessary to briefly outline the winding interplay of three contracts, which establish AMBIT’s payment obligations.
The Trust Indenture was entered into between AMBIT and its lenders on January 1, 1990; it governs the terms and conditions of the payments to the bondholders and sets forth explicit instructions and requirements for the allocation of the Power Plant’s revenues.2 Under the Trust Indenture, AMBIT is required to pay to the Trustee all of its revenues upon receipt. The Trustee then deposits the revenues into the Revenue Fund. Each month, the Trustee pays certain parties out of the Revenue Fund based upon a payment hierarchy that is set out in the Trust Indenture. Of particular note is the second payment group,3 which requires payment of the Power Plant’s essential operating costs. As discussed in more detail below, AMBIT and the Amicus Curiae argue that, without this payment, the Power Plant could not operate and, therefore, could not generate enough revenue to pay AMBIT’s other obligations, including the payments to the lender groups and rent to Horizon. Under the Trust Indenture, payment groups three through six require AMBIT to make monthly deposits into various funds, including a “Bank Payment Fund” and a “Debt Service Fund.” The Trustee uses these funds to make scheduled payments of principal and interest under 2 In its brief, the Amicus explains the intricate details of the financing of the bonds, including the various security interests, and also explains the various agreements that set forth the rights and obligations of all of the players involved, not just AMBIT and Horizon. The Amicus argues the circuit court’s summary judgment order failed to address or otherwise consider these intertwining relationships. The Amicus asserts that if not overruled, the order will trigger events of default in those financial agreements and jeopardize the future of the Power Plant. On remand, the Bank Group Lenders should consider filing a motion to intervene in this matter pursuant to Rule 24 of the West Virginia Rules of Civil Procedure. 3 The first payment group, which is not relevant in this case, requires payment of tax on the interest on the bonds to the federal government if the interest earnings from AMBIT’s various funds are not sufficient. 2 the bonds, and to pay AMBIT’s obligations to reimburse the Bank Group Lenders under the Reimbursement Agreement. The seventh payment group under the Trust Indenture provides payment for: “the Actual Operating and Maintenance Expenses referred to in paragraph Second . . . which are in excess of the limit specified in paragraph Second and to pay all Other Lease Rent (including accruals of interest thereon) which is then due and permitted to be paid[.]” (Emphasis added). AMBIT and the Amicus Curiae contend that, under the priority of payment hierarchy set forth in the Trust Indenture, it is under this seventh payment group that AMBIT must make rent payments. Horizon is not a party to the Trust Indenture but in its 1996 settlement agreement with AMBIT discussed below, the parties agreed that rent is payable as “Other Lease Rent” under the terms of the Trust Indenture. As stated in the Trust Indenture’s seventh payment group paragraph above, rent payments must be “due and permitted” under the Lease Agreement at Sections 7 and 7A, which govern when and how rent is to be paid, and when rent is subordinated to the payment of AMBIT’s other obligations. The Trust Indenture has no bearing on the second issue on appeal, the alleged overpayment of rent.
On November 29, 1989, Horizon and AMBIT entered into an Amended and Restated Lease Agreement under which Horizon leased to AMBIT certain parcels of real property for the purpose of constructing, operating, and maintaining the Power Plant. The Lease Agreement was amended on December 28, 1989, and again on January 11, 1990.4
All rent that Horizon is claiming in this case is believed to be subordinated rent under the Lease Agreement and is governed by Section 7A of that contract. The Lease Agreement provides that AMBIT’s payment of rent to Horizon is subordinated to the payment of “Senior Debt” defined as all indebtedness, obligations and liabilities of AMBIT pursuant to all notes, letters of credit, loan agreements, reimbursement agreements and/or guarantees between AMBIT and any banks or other financial institutions providing a letter of credit or other form of security or credit enhancement for the tax-exempt bonds. On this first issue, we note the circuit court failed to address the preliminary question of whether Horizon could file this action when the Lease Agreement provides it shall not institute proceedings to enforce subordinated rent when AMBIT is in default on Senior Debt. Section 7A(g) of the Lease Agreement provides that until all Senior Debt is paid when due, Horizon “shall not, without the prior written consent of the holders of Senior Debt, have any right to demand payment of, or institute any proceedings to enforce, any Subordinated Rent if at such time a default in payment of any Senior Debt when due shall have occurred and be continuing.” 4 Although the Lease Agreement was amended a third time on April 1, 1993, that amended lease was nullified in 1996 by agreement of the parties. 3
Section 6 of the Lease Agreement defines how rent is calculated. Rent owed to Horizon is based upon AMBIT’s gross revenue considering the source of its fuel; rent is based on the availability and usability of “local fuel” (e.g., waste coal) on the property. The Lease Agreement provides that if AMBIT burns usable local fuel, the rent is three percent (3%) of the gross revenues. However, when local fuel is not available and AMBIT has to buy “foreign fuel” (e.g., coal from outside sources), the rent is reduced to one percent (1%) of the gross revenues. Further, to the extent AMBIT does not use the local fuel for anything other than an “operating reason,” the amount of rent remains at three percent (3%) of the gross revenues.
In 1994 and 1996, AMBIT and Horizon had disputes regarding rent payment under the Lease Agreement. The 1994 dispute arose when AMBIT became delinquent on the rent. AMBIT claimed that its rental payments to Horizon were subordinate to payments other than Senior Debt. Horizon sued AMBIT and the matter was resolved by agreement on May 23, 1994. AMBIT paid Horizon for all of the past due rent, plus interest and attorney fees but the issue regarding the priority of the rent payments was not resolved. Subsequently, AMBIT became delinquent on rent due under the Lease Agreement and again took the position that its rent payments were subordinate to payments other than Senior Debt, specifically, operations and maintenance costs. On May 28, 1996, the parties entered into an Agreement to Resolve Pending Litigation that purported to resolve the dispute.
The Agreement to Resolve Pending Litigation addressed the issue of the priority of the rent owed by AMBIT to Horizon as follows: Tenant acknowledges and agrees that the payment of Tenant’s obligations to Horizon under the Lease . . . has been subordinated under the Lease to the payment of “Senior Debt,” as that term is defined in the Lease, on the terms and conditions, and subject to the limitations, contained in the Lease. Horizon has not agreed with Tenant (or, Horizon asserts, with any person or entity), to subordinate any payment of Lease Obligations to any other claims against Tenant, including, without limitation, claims for payment of other operating and maintenance expenses of Tenant or the Plant, which are not included in the definition of “Senior Debt” under the Lease (such other claims against Tenant, including, without limitation, the payment of other operating and maintenance expenses of Tenant or the Plant, which are not included in the definition of “Senior Debt” under the Lease, being hereinafter referred to as “Non-Senior Project Obligations”). Tenant acknowledges that any failure to pay or perform any of the Non-Senior Project Obligations (hereinafter a “Non-Senior Project Obligation Default”) neither is intended to nor does constitute an excuse for nonpayment or 4 nonperformance of, or a defense to payment, performance or enforcement of the Lease Obligations. Tenant agrees that it shall not, and it shall instruct its attorneys, accountants, financial advisors, investment bankers and other professionals representing it, that none of them shall assert at any time in any court or other legal proceeding that any prospective, threatened or actual NonSenior project Obligation Default constitutes or effects an excuse for or a defense to payment or performance of any Lease Obligations. We note the Agreement to Resolve Pending Litigation was executed after the Trust Indenture and this contract explicitly references the Trust Indenture. Section 2b of the Agreement to Resolve Pending Litigation states: Tenant [i.e., AMBIT] is permitted to and shall pay rent which is due and payable under the Lease as “Other Lease Rent” under the Trust Indenture or, if Revenues under the Trust Indenture are insufficient to pay Other Lease Rent, then as “Operating and Maintenance Expenses” from the “Maintenance Reserve Fund” under the Trust Indenture (so long as funds are available in the Maintenance Reserve Fund). Tenant further acknowledges that all payments of rent due or to become due under the Lease constitute “Operating and Maintenance Expenses” under the Trust Indenture. (Emphasis added). The above provision expressly brings the Trust Indenture’s priority of payment into AMBIT’s rent obligations to Horizon. However, this provision was not addressed by the circuit court in its summary judgment order.
In order to resolve the dispute over the use of local fuel versus foreign fuel, the parties agreed that Horizon would receive rent in the amount of two and one-half percent (2.5%) of AMBIT’s gross revenues so long as any local fuel, whether usable or not, remained on the leased premises.5 5 Specifically, the contract provides: Tenant acknowledges, as a fact, that since the commencement of operations by the Plant, all Foreign Fuel used in the operation of the Plant has been used for Non-Operating Reasons, and further acknowledges, as a fact, that so long as any Local Fuel is located at the Demised Premises, any Foreign Fuel being used in the operation of the Plant is being used for Non-Operating Reasons. As contemplated by the Lease, Local Fuel includes “waste coal material” (as defined in the Lease) on the Demised Premises, whether or not permitted by permits whose issuance or continuance is subject to actions which are within Tenant’s control and whether or not reclaimed, and is not dependent on the quality of the waste coal material. Tenant expects and intends that Horizon will detrimentally rely on this factual admission, that such reliance is foreseeable by 5