lessor defendants in the united states bankruptcy …

J. Todd Shields (TX 18260500) Michael W. Anglin (TX 01260800) Louis R. Strubeck, Jr. (TX 12425600) Richard S. Krumholz (TX 00784425) FULBRIGHT & JAWORSKI L.L.P. 2200 Ross Avenue, Suite 2800 Dallas, Texas 75201-2784 Telephone: (214) 855-8000 Facsimile: (214) 855-8200 ATTORNEYS FOR THE LESSOR DEFENDANTS

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION IN RE: § Chapter 11 Case MIRANT CORPORATION, ET AL., § § Case No. 03-46590 (DML) Debtors. § Jointly Administered § § MIRANT MID-ATLANTIC, LLC, ET AL., § § Plaintiffs, § v. § Adversary Case No. 04-4283 § MORGANTOWN OL1 LLC, ET AL., § § Defendants. §

LESSOR DEFENDANTS’ MEMORANDUM IN SUPPORT OF THEIR MOTION FOR PARTIAL SUMMARY

JUDGMENT ON PLAINTIFFS’ RECHARACTERIZATION CLAIM

Case 04-04283-dml Doc 117 Filed 02/25/05 Entered 02/25/05 21:33:04 of 50

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30882790.1/10310580 i

TABLE OF CONTENTS I. SUMMARY OF ARGUMENT .............................................................................................. 1

II. SUMMARY JUDGMENT STANDARD .............................................................................. 4

III. FACTUAL GROUNDS.......................................................................................................... 5

A. Procedural History ...................................................................................................... 5

B. The Owner Lessors Purchase The Facilities Directly From PEPCO.......................... 6

IV. LEGAL GROUNDS ............................................................................................................. 10

A. The Lessor Defendants Are Entitled To Summary Judgment On Plaintiffs’ Recharacterization Claim.......................................................................................... 10

(1) State Law Governs The Inquiry Into Whether An Agreement Is A “True Lease” Or A Secured Financing Arrangement ........................................ 10

(2) The Facility Lease Agreements Are Not Per Se Secured Financings........................ 13

(3) Under The Economic Realities Test, The Facility Lease Agreements Are True Leases......................................................................................................................... 15

(4) Plaintiffs Have Admitted All Facts Necessary To Support This Motion .................. 33

(5) Plaintiffs’ Are Estopped From Contending That The Facility Lease Agreements Are Not True Leases ...................................................... 39

B. The Lessor Defendants Are Entitled To Summary Judgment On Plaintiffs’ Recharacterization Claim Because Plaintiffs Can Produce No Evidence In Support Of That Claim.............................................................................................. 44

V. CONCLUSION..................................................................................................................... 45


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30882790.1/10310580 ii

TABLE OF AUTHORITIES

FEDERAL CASES 317 B.R. 335 (N.D. Ill. 2004).......................................................................................................33

In re APB Online, Inc., 259 B.R. 812 (Bankr. S.D.N.Y. 2001) ...................................................33

Bill Swad Leasing Company v. Stikes (In re Tillery), 571 F.2d 1361 (5th Cir. 1978) ...........13, 14

Celotex, 477 U.S. at 324...............................................................................................................47

Chase Leasing Co. v. P.W.L. Invs. (In re P.W.L. Invs.), 92 B.R. 680 (Bankr. W.D. Tex.

1987).......................................................................................................................................19

Citi-Lease Co. v. Entertainment Family Style, Inc., 825 F.2d 1497 (11th Cir. 1987)..................19

Compliance Marine, Inc. v. Campbell (In re Merritt Dredging Co., Inc.), 839 F.2d 203 (4th Cir. 1988) ..................................................................................................................13, 15

Cox v. Cox (In re Cox), 292 B.R. 141 (Bankr.E.D.Tex. 2003) ....................................................44

In re Cress, 106 B.R. 246 (D. Kan. 1989)....................................................................................19

Davidson v. Davidson (In re Davidson), 947 F.2d 1294 (5th Cir. 1991).........................44, 45, 47 In re Edison Bros. Stores, Inc., 207 B.R. 801 (Bankr.D.Del. 1997)13, 15, 18, 19,

21, 23, 26, 27, 31, 33, 35, 36 ..................................................................................................34

In re Farrell, 79 B.R. 300 (Bankr. S.D. Ohio 1987)....................................................................18

Goldstein v. Aleet Leasing Associates II (In re Spangler), 56 B.R. 990 (D.Md. 1986) .........13, 15

In re Hardy, 146 B.R. 206 (Bankr. N.D. Ill. 1992) ................................................................18, 19

In re Herold Radio & Elecs. Corp., 218 F. Supp. 284 (S.D.N.Y. 1963) .....................................18

Hispanic Am. Television, 113 B.R. at 459..............................................................................18, 19

In re Integrated Health Services, Inc., 260 B.R. 71 (D.Del 2001)...................................18, 23, 34

Jahn v. M.W. Kellogg Co. (In re Celeryvale Transp., Inc.), 822 F.2d 16 (6th Cir. 1987), aff'g 44 B.R. 1007 (Bankr. E.D. Tenn. 1984)...................................................................18, 19

Long v. Turner, 134 F.3d 312 (5th Cir. 1998)........................................................................45, 46


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30882790.1/10310580 iii

In re Marhoefer Packing Co., 674 F.2d 1139 (7th Cir. 1982) ...............................................18, 19

Milligan v. Evert (In re Evert), 342 F.3d 358 (5th Cir. 2003)......................................................46

NYNEX BISC v. Beker Indus. Corp.(In re Beker Indus. Corp.), 69 B.R. 937 (Bankr. S.D.N.Y. 1987).................................................................................................................18, 19

National Equip. Rental, Ltd. v. Priority Elects. Corp., 435 F. Supp. 236 (E.D.N.Y. 1977) ........18

Newsome v. Ron Edwards Leasing, Pre-Fab Decks, Inc. (In re Newsome), 2003 Bankr. LEXIS 514 (Bankr.N.D.Tex. May 8, 2003) ...........................................................................13

Orix Credit Alliance, Inc. v. Pappas, 946 F.2d 1258 (7th Cir. 1991) ....................................18, 19

In re Owen, 221 B.R. 56 (Bankr.N.D.N.Y. 1998)........................13, 16, 18, 19, 20, 21, 23, 31, 33

Pacific Express, Inc. v. Teknekron Infoswitch Corp. (In re Pacific Express, Inc.), 780 F.2d 1482 (9th Cir. 1986).......................................................................................................19

In re Pillowtex, 349 F.3d 711 (3d Cir. 2003) ...................13, 15, 18, 19, 20, 23, 25, 27, 31, 33, 35 In re QDS Components, Inc., 292 B.R. 313 (Bankr. S.D. Ohio 2002)...................................33, 35

In re Robertson, 203 F.3d 855 (5th Cir. 2000).............................................................................14

In re Shangri-La Nursing Center, Inc., 31 B.R. 367 (Bankr.E.D.N.Y. 1983) ............................13

Templet v. Hydrochem Inc., 367 F.3d 473 (5th Cir. 2004) ..................................................7, 8, 47

In re The Answer-The Elegant Large Size Discounter, Inc., 115 B.R. 465 (Bankr.

S.D.N.Y. 1989).......................................................................................................................19

Triple B Oil Producers, Inc. v. Puder (In re Triple B Oil Producers, Inc.), 75 B.R. 461 (Bankr.S.D.Ill. 1987)........................................................................................................18, 19

In re UAL Corp., 307 B.R. 618 (Bankr. N.D. Illinois 2004), rev'd on other grounds .................33

Villa Residential Care Homes, 2003 Bankr. LEXIS 1689 ("Obviously the controlling documents and the intent of the parties have some relevance to the nature of the relationship.") .............................................................................................................20, 23, 34

White v. White, 265 B.R. 547 (Bankr.N.D.Tex. 2001).................................................................44

In re Winston Mills, Inc., 6 B.R. 587 (Bankr. S.D.N.Y. 1980) ....................................................18


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STATE CASES CCG Assoc. I v. Riverside Assoc., 157 A.D.2d 435 (N.Y. 1990) ..................................................22

Gilchrist v. Chester, 514 A.2d 483 (Md. App. 1986) ....................................................................22

Guardsman Lease Plan, Inc. v. Gibraltar Transmission Corp., 129 Misc.2d 887, 494

N.Y.S.2d 59 (N.Y. Supr. Ct. 1985)..........................................................................................18

J.L. Teel, 491 So.2d at 858.......................................................................................................18, 19

O.P.M. Leasing Servs., Inc. v. Homestead Fabrics, Inc., 1976 WL 23728 (N.Y. Sup. Ct. 1976) ........................................................................................................................................19

Pactel Fin. v. D.C. Marine Serv. Corp., 136 Misc.2d 194, 518 N.Y.S.2d 317 (N.Y. Dist. Ct. 1987) ..................................................................................................................................18

Rourke v. Amchem Prods., Inc., 863 A.2d 926 (Md. App. 2004)..................................................22

In re Soule, 2004 WL 2314524 (E.D.La. Oct. 13, 2004)...............................................................44

Stebbins v. Seibert (In re Stebbins), 2002 WL 1482728 (N.D.Tex. July 8, 2002) ........................44

In re Telemax Corp., 1973 WL 21427 (S.D.N.Y. 1973) ...............................................................19

FEDERAL STATUTES 11 U.S.C. § 101..............................................................................................................................14 Federal Rule of Bankruptcy Procedure 7056...................................................................................4 Federal Rule of Bankruptcy Procedure 7030.................................................................................36

Federal Rule of Civil Procedure 30(a) .................................9, 10, 12, 16, 20, 22, 25, 27, 29, 35, 36

STATE STATUTES Md. Code Ann., Com. Law § 1-201(37)........................................16, 18, 19, 21, 24, 26, 33, 34, 35

N.Y. UCC § 1-201(37) (McKinney Supp. 1996).............................6, 15, 16, 19, 21, 24, 31, 33, 35


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LESSOR DEFENDANTS’ MEMORANDUM IN SUPPORT OF THEIR MOTION FOR PARTIAL SUMMARY JUDGMENT ON PLAINTIFFS’ RECHARACTERIZATION CLAIM PAGE 1 OF 50 30882790.1/10310580

TO THE HONORABLE D. MICHAEL LYNN, UNITED STATES BANKRUPTCY JUDGE

Pursuant to Federal Rule of Civil Procedure 56, made applicable by Federal Rule of

Bankruptcy Procedure 7056, Local Bankruptcy Rule 7056.1 of the United States Bankruptcy

Court for the Northern District of Texas, and Local Civil Rules 56.1, 56.3 and 56.5 of the United

States District Court for the Northern District of Texas, the Lessor Defendants file this

Memorandum in support of their Motion seeking summary judgment on Plaintiffs’

Recharacterization Claim (Claim 1) as set forth in Plaintiffs’ Amended Complaint, and for same

respectfully show as follows:

I. SUMMARY OF ARGUMENT

1. Plaintiffs have represented to this Court that an agreement can “not be

characterized as a financing agreement” if none of the following “necessary requirements” are

satisfied:

(a) the original term of the lease is equal to or greater than the remaining economic life of the goods,

(b) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods,

(c) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement, or

(d) the lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.1

The Lessor Defendants could not agree more with Plaintiffs’ position on this issue. Because

none of the critical recharacterization factors identified by Plaintiffs are satisfied in this

adversary proceeding, the Lessor Defendants are entitled to summary judgment on the

1 See Brief in Opposition of Plaintiff Mirant Peaker, LLC, Mirant Chalk Point, LLC and Mirant

Corporation to Defendant SMECO and PEPCO’s Motions to Dismiss (the “SMECO Brief”) at 15, a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 9 (LDApp001474).


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Recharacterization Claim.

2. The Facility Lease Agreements2 are true leases, and nothing else. No other

conclusion can be reached given the: (a) Facility Lease Agreements form and substance; (b)

undisputed evidence concerning the background and circumstances surrounding their negotiation

and execution; (c) undisputed evidence of the parties’ economic expectations as of the inception

of the leases; (d) absence of any historical evidence or even litigation expert evidence to

challenge these expectations; (e) parties’ subsequent treatment of, and representations regarding,

them for all purposes, including financial accounting and tax treatment; (f) effect of the Lessor

Defendants’ requests for admissions, which are deemed admitted by Rule 30(a) of the Federal

Rules of Civil Procedure; and (g) positions taken by the Plaintiffs in other proceedings in this

case involving the characterization of a transaction which are diametrically opposite from the

position Plaintiffs have taken in the Amended Complaint.3 The summary judgment evidence

conclusively establishes that the parties intended to create, and did in fact create, true leases, in

both form and economic substance. The summary judgment evidence further establishes that

under applicable law the Lessor Defendants retain, at the end of the Basic Lease Term of each of

the Facility Lease Agreements, the type of meaningful ownership or residual value in the

Facilities that is the critical factor in differentiating between true leases and disguised financing

arrangements. Notably, Plaintiffs have not, and cannot, direct this Court to any historical

evidence regarding the transaction, nor any litigation expert evidence, that could contradict or

challenge this dispositive evidence.

2 All defined terms in the “Summary of the Argument” have the definitions ascribed to them in Section

III of this Memorandum. 3 The Lessor Defendants further contend that the Amended Complaint was not filed, nor is it being

prosecuted, for any proper purpose. The Lessor Defendants intend to present such contentions at an appropriate time in an appropriate proceeding.


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3. The Facility Lease Agreements contain no mandatory renewal provisions and no

purchase options. They also are devoid of any of the characteristics necessary to meet the per se

test for the existence of a financing arrangement established by Section 1-201(37) of the Uniform

Commercial Code. Moreover, provisions in the Facility Lease Agreements and related Operative

Documents reflect the substantial efforts made to ensure that the Owner Lessors would enjoy, for

their exclusive benefit as owners of the Facilities, the substantial residual value in the Facilities

that was expected to exist at the end of the Basic Lease Term of the Facility Lease Agreements.

Nowhere is this more clear than in the differences between the duration of the agreements under

which MirMA operates the Facilities (i.e., the Facility Lease Agreements and the Facility Site

Sublease Agreements) as compared to the duration of the agreements under which the Owner

Lessors have the right to continue to use and operate the Facilities after the expiration of

MirMA’s rights (i.e., the Facility Site Lease Agreements and the Shared Facilities Agreements).

4. Based on Deloitte & Touche LLP’s independent appraisal concluding that the

Leased Morgantown Units and the Leased Dickerson Units would have remaining expected

useful lives from the inception of the Facility Lease Agreements of at least 45 years and 38

years, respectively, the Lessor Defendants ensured that MirMA’s rights to possession and use of

the Facilities were limited by the Basic Lease Term of the Facility Lease Agreements and

Facility Site Sublease Agreements to 33.75 years for the Leased Morgantown Units and 28.5

years for the Leased Dickerson Units. At the same time, the Lessor Defendants ensured that the

Owner Lessors’ rights to possess and use the Leased Morgantown Units and the Leased

Dickerson Units for their own exclusive benefit under the Facility Site Lease Agreements and

Shared Facilities Agreements would extend for at lease 45 years and 38 years, respectively, with

the Owner Lessors having the option to renew the Facility Site Lease Agreements and Shared


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Facilities Agreements through as late as December 18, 2099, if a late term reappraisal were to

indicate that either of the Facilities had a longer remaining useful life than had been anticipated

at the inception of the transaction. In this manner, it was assured that the Owner Lessors would

have the contractual rights in place necessary for them to enjoy, for their exclusive benefit as

owners of the Facilities, the substantial remaining useful lives that were expected to exist for

those facilities at the end of the Facility Lease Agreements’ term.

5. The undisputed evidence establishes that while the Facility Lease Agreements

contain the types of risk allocation provisions that are common in sophisticated commercial

leasing transactions involving valuable, long-lived assets, none of these provisions protected the

Lessor Defendants from the biggest risk that every owner entering a long term – lease faces –

that at the end of the Basic Lease Term the leased property might not have the anticipated

residual value that the owner/lessor envisioned at the inception of the lease.

6. Based on the foregoing, the Lessor Defendants are entitled to summary judgment

declaring that the Facility Lease Agreements are true leases within the meaning of Section 365 of

the Bankruptcy Code.

II. SUMMARY JUDGMENT STANDARD

7. Pursuant to Federal Rule of Civil Procedure 56, summary judgment is appropriate

when there is no genuine issue as to any material fact and the moving party is entitled to a

judgment as a matter of law. Templet v. Hydrochem Inc., 367 F.3d 473, 477 (5th Cir. 2004).

The evidence is viewed “in a light most favorable to the non-movant.” Id. (citing Coleman v.

Houston Indep. Sch. Dist., 113 F.3d 528, 533 (5th Cir. 1997)). The non-moving party “must go

beyond the pleadings and come forward with specific facts indicating a genuine issue for trial to

avoid summary judgment.” Id. (citing Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986)).


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There is a genuine issue of material fact “when the evidence is such that a reasonable jury could

return a verdict for the non-movant.” Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

248 (1986)). However, “[s]ummary judgment is appropriate . . . if the non-movant ‘fails to make

a showing sufficient to establish the existence of an element essential to that party's case.’” Id.

(quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)).

III. FACTUAL GROUNDS

A. Procedural History

8. Beginning July 14, 2003, and continuing thereafter, Plaintiffs, along with 77 other

entities (collectively, the “Debtors”), filed voluntary petitions for relief under chapter 11 of title

11 of the United States Code (the “Bankruptcy Code”).

9. On August 31, 2004, Plaintiffs filed their Complaint for Declaratory Judgments

Relating to MirMA Agreements and for Related Relief (the “Complaint”), wherein Plaintiffs

brought claims against the Defendants, including a claim similar to Claim 1 in the Amended

Complaint, in addition to numerous non-justiciable causes of action requesting advisory

opinions.

10. On October 25, 2004, the Lessor Defendants filed a motion to dismiss the

Complaint (the “Motion to Dismiss”). Pursuant to the Motion to Dismiss, the Lessor Defendants

sought to have the Complaint dismissed on grounds that (a) the Complaint sought advisory

opinions from the Court on a myriad of non-justiciable causes of action, (b) the Complaint

sought to impermissibly vitiate provisions and/or entire agreements governing the leasing

relationship between Plaintiffs and the Lessor Defendants, and (c) MirMA, the lessee of the


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Facilities (defined hereafter), was not named as a plaintiff.4 A hearing on the Motion to Dismiss

was held on January 5, 2005, at which the Court both granted and denied, in part, the Motion to

Dismiss.

11. On February 9, 2005, Plaintiffs finally filed their Amended Complaint, which

includes the recharacterization claim that is the subject of the Motion and this Memorandum.

B. The Owner Lessors Purchase The Facilities Directly From PEPCO

12. On December 19, 2000 (the “Closing Date”), the Owner Lessors purchased

interests in certain energy generating facilities and improvements directly from Potomac Electric

Power Company (“PEPCO”), including those generating units commonly known as the

Morgantown Base-Load Units 1 and 2 (the “Leased Morgantown Units”) and Dickerson Base-

Load Units 1, 2 and 3 (the “Leased Dickerson Units,” and together with the Leased Morgantown

Units, the “Facilities”), for approximately $1,500,000,000.00 (the “Purchase Price”).5

Significantly, the Facilities were never owned by MirMA.6 Of the Purchase Price, approximately

4 Although it was not included as a plaintiff when the Complaint was filed, MirMA was later added as a

party to the Complaint. 5 The facts set forth in Paragraphs 12 through 18 are supported by the “Affidavit of Maurice Moore in

Support of Lessor Defendants’ Response to Plaintiffs’ Motion for Partial Summary Judgment” (the “Moore Affidavit”), which is attached to the LD Evidence Appendix as Exhibit 25 (see LDApp001959), the “Affidavit of Lance Markowitz in Support of Lessor Defendants’ Response to Plaintiffs’ Motion for Partial Summary Judgment” (the “Markowitz Affidavit”), which is attached to the LD Evidence Appendix as Exhibit 23 (see LDApp001915), and the “Affidavit of Jim Jordan in Support of Lessor Defendants’ Response to Plaintiffs’ Motion for Partial Summary Judgment” (the “Jordan Affidavit”), which is attached to the LD Evidence Appendix as Exhibit 24 (see LDApp001937).

6 See also Letter from Mirant Corporation to Jim Allegretto of the Securities and Exchange Commission, dated March 14, 2003 (the “SEC Letter”), at 7 (Each of the Owner Lessors are “the owners of an undivided interest in the baseload units at the” Facilities.) (LDApp001269), and attachment A, at 2 (“MIRMA and/or its subsidiaries purchased all of the above assets except for the Morgantown and Dickerson baseload units.”) (LDApp001276), a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 3N. Moreover, Plaintiffs have admitted that the Facilities were “purchased” by the Owner Lessors and are “owned” by the Owner Lessors. See, infra, paragraphs 55 and 56 and accompanying text (Requests for Admission 39-42).


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$1,200,000,000.00 was allocated to the Leased Morgantown Units and approximately

$300,000,000.00 was allocated to the Leased Dickerson Units.7

13. At the same time the Owner Lessor purchased the Facilities directly from PEPCO,

MirMA, then known as Southern Energy Mid-Atlantic, LLC (“SEMA”), purchased the land and

underlying improvements below the Facilities from PEPCO (collectively, the “Facility Sites,”

individually, a “Facility Site”). By virtue of these separate conveyances directly from PEPCO to

the Owner Lessors and MirMA, the Facilities were constructively severed from the Facility

Sites, with title to the Facilities held by the Owner Lessors and title to the Facility Sites held by

MirMA.

14. The Owner Lessors purchased the Facilities directly from PEPCO by using

approximately $300,000,000.00 in cash provided by the Equity Investors, through the Owner

Participants, and borrowing the remainder of the $1,500,000,000.00 from a group of certificate

holders (the “Certificate Holders”) represented by U.S. Bank, N.A. (“US Bank”), successor to

State Street Bank and Trust Company of Connecticut, N.A., in its capacity as both Pass Through

Trustee and Lease Indenture Trustee (the “Trustee”).8 MirMA did not provide any of the

consideration for the Owner Lessors to purchase the Facilities. The Owner Lessors’ obligations

7 See Amended Complaint, at ¶ 46 (LDApp001496); see also SEC Letter, attachment A, at 2 (same)

(LDApp001276). Moreover, Deloitte & Touche LLP (“Deloitte”) determined that the fair market value, as of the Closing Date, for the Leased Dickerson Units was $300,000,000 and the fair market value, as of the Closing Date, for the Leased Morgantown Units was $1,200,000,000. See e.g. letters from Deloitte to Gary Kubik, V.P. CFO and Treasurer, SEMA, dated December 19, 2000 (the “Deloitte Letters”), at 1 (LDApp001576), true and correct copies of which are attached to the LD Evidence Appendix as Exhibit 11; appraisal reports dated December 19, 2000, of Deloitte entitled “Appraisal Report – Morgantown Coal-Fired Power Facility – Prepared for First Chicago Leasing Corporation – Prepared as of December 19, 2000” (the “Morgantown Appraisal”), at 40-63 and 71, and “Appraisal Report – Dickerson Coal-Fired Power Facility – Prepared for First Chicago Leasing Corporation – Prepared as of December 19, 2000” (the “Dickerson Appraisal”), at 40-63 and 71, true and correct copies of which are attached to the LD Evidence Appendix as Exhibits 2C & 2D (see LDApp000152 et seq.). Plaintiffs have also admitted that the cost of the Leased Morgantown Units was $1,200,000,000 and the cost of the Leased Dickerson Units was $300,000,000. See, infra, paragraph 55 and accompanying text (Requests for Admission 11 & 12).

8 See also Amended Complaint, at ¶¶ 31, 48-50, 52 & 56 (LDApp001490, 001496, 001498 & 001499).


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to the Certificate Holders are evidenced by notes payable to the Pass Through Trustee

(collectively, the “Lessor Notes,” individually, a “Lessor Note”) which are secured by liens

against the Owner Lessors’ interests in the Facilities.9

15. The purchase of the Facilities was structured such that the Facilities are owned in

eleven notional undivided interests (collectively, the “Undivided Interests,” individually, an

“Undivided Interest”) by the Owner Lessors as tenants in common, who are in turn owned by

certain Owner Participants,10 all of which are special purpose entities affiliated with the Equity

Investors.11 The Owner Lessors and the Owner Participants are independently managed by

Wilmington Trust Company, not in its individual capacity but solely in its capacity as owner

manager (the “Owner Manager”).12

16. The Owner Lessors then leased the Undivided Interests in the Facilities (which

had been constructively severed from the Facility Sites) to MirMA pursuant to eleven essentially

identical leases (collectively, the “Facility Lease Agreements,” individually, a “Facility Lease

Agreement”), with the lease term (the “Basic Lease Term”) of the Facility Lease Agreements

continuing for 33.75 years for the Leased Morgantown Units and 28.5 years for the Leased

9 See also Amended Complaint, at ¶¶ 49-52 & 57 (LDApp001496 & 001499). 10 Specifically, SEMA OP1, LLC owns 100% of Morgantown OL1, LLC; SEMA OP2, LLC owns 100%

of Morgantown OL2, LLC; SEMA OP3, LLC owns 100% of Dickerson OL1, LLC; SEMA OP4, LLC owns 100% of Morgantown OL3, LLC; SEMA OP5, LLC owns 100% of Morgantown OL4, LLC; SEMA OP6, LLC owns 100% of Dickerson OL2, LLC; SEMA OP7, LLC owns 100% of Dickerson OL3, LLC; SEMA OP8, LLC owns 100% of Dickerson OL4, LLC and Morgantown OL5, LLC; and SEMA OP9, LLC owns 100% of Morgantown OL6, LLC and Morgantown OL7, LLC. See also Amended Complaint, at ¶ 23 (LDApp001488).

11 Specifically, Steamed Crab Partners, L.P. owns 100% of SEMA OP1, LLC; Steam Heat LLC owns 100% of SEMA OP2, LLC and SEMA OP3, LLC; First Chicago Leasing Corp. owns 100% of SEMA OP4, LLC, SEMA OP5, LLC, SEMA OP6, LLC and SEMA OP7, LLC; and Bankers Commercial Corp. owns 100% of SEMA OP8, LLC and SEMA OP9, LLC. See also Amended Complaint, at ¶¶ 24, 25, 27, 29 (LDApp001489).

12 See also Amended Complaint, at ¶¶ 20-22, 32 (LDApp001487 & 001490).


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Dickerson Units.13

17. MirMA separately leased the Facility Sites in eleven notional undivided interests

(collectively, the “Ground Interests,” individually, a “Ground Interest”) to the Owner Lessors as

tenants-in-common pursuant to eleven essentially identical ground leases for terms substantially

longer than the Basic Lease Term of the Facility Lease Agreements, renewable at the option of

the Owner Lessors based on a late-term appraisal until the earlier of December 18, 2099, or the

last day of the reappraised useful life of the Facilities (collectively, the “Facility Site Lease

Agreements,” individually, a “Facility Site Lease Agreement”).14 The Basic Lease Term of the

Facility Site Lease Agreements continues for 45 years for the Leased Morgantown Units and 38

years for the Leased Dickerson Units.15 The Owner Lessors then separately subleased the

Facility Sites back to MirMA pursuant to eleven essentially identical ground subleases for terms

equaling the Basic Lease Term of the Facility Lease Agreements (collectively, the “Facility Site

Sublease Agreements,” individually, a “Facility Site Sublease Agreement”).16

18. Through this series of leases, MirMA obtained the right to operate and manage

the Facilities on the Facility Sites (as lessee of the Facilities and sublessee of the Facility Sites)

13 See also Facility Lease Agreement, a true and correct copy of which is attached to the LD Evidence

Appendix as Exhibit 26A (LDApp001985); Amended Complaint, ¶¶ 59-61 (LDApp001500) and Exhibits G & H attached thereto. Plaintiffs have admitted that the Basic Lease Term of the Facility Lease Agreements for the Leased Morgantown Units is 33.75 years and that the Basic Lease Term of the Facility Lease Agreements for the Leased Dickerson Units is 28.5 years. See, infra, paragraphs 55 and 56 and accompanying text (Requests for Admission 3 & 7).

14 See also Facility Site Lease Agreement, a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 4 (LDApp001321); Amended Complaint, at ¶¶ 70-76 (LDApp001503) and Exhibits I & J attached thereto.

15 See also Facility Site Lease Agreement (LDApp001321); Amended Complaint, at ¶ 76 (LDApp001505) and Exhibits I & J attached thereto.

16 See also Facility Site Sublease Agreement, a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 5 (LDApp001410); Amended Complaint, at ¶ 77 (LDApp001505) and Exhibits K & L attached thereto.


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and in exchange the Owner Lessors receive Periodic Lease Rent from MirMA, in addition to

certain other rental payment obligations and other benefits.

IV. LEGAL GROUNDS

A. The Lessor Defendants Are Entitled To Summary Judgment On Plaintiffs’ Recharacterization Claim

(1) State Law Governs The Inquiry Into Whether An Agreement Is A “True Lease” Or A Secured Financing Arrangement

19. State law controls the determination of the character of a debtor’s property,

including whether an arrangement is a true lease or a security agreement. See Butner v. United

States, 440 U.S. 48, 54-55 (1979) (the existence, nature, and extent of a security interest in

property is governed by state law); In re Pillowtex, 349 F.3d 711, 716 (3d Cir. 2003) (“Whether

an agreement is a true lease or a secured financing arrangement under the Bankruptcy Code is a

question of state law”); Compliance Marine, Inc. v. Campbell (In re Merritt Dredging Co., Inc.),

839 F.2d 203, 209 (4th Cir. 1988) (applying state law to determine whether a putative lease

actually represented a security agreement); Bill Swad Leasing Company v. Stikes (In re Tillery),

571 F.2d 1361, 1364 (5th Cir. 1978) (same); Goldstein v. Aleet Leasing Associates II (In re

Spangler), 56 B.R. 990, 992 (D.Md. 1986) (same); Newsome v. Ron Edwards Leasing, Pre-Fab

Decks, Inc. (In re Newsome), 2003 Bankr. LEXIS 514, at 8 (Bankr.N.D.Tex. May 8, 2003)

(“State law controls the determination of whether an arrangement is a true lease or a security

agreement.”); In re Owen, 221 B.R. 56, 60 (Bankr.N.D.N.Y. 1998) (“Whether a lease is intended

as security (thus, a conditional sale) or as a ‘true’ lease is a matter of state law”); In re Edison

Bros. Stores, Inc., 207 B.R. 801, 807 (Bankr.D.Del. 1997) (“The legislative history of § 365 [of

the Bankruptcy Code] states that the determination of whether a transaction constitutes a true

lease or a disguised secured transaction should be governed by state law”); In re Shangri-La


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Nursing Center, Inc., 31 B.R. 367, 371 (Bankr.E.D.N.Y. 1983) (applying state law to determine

whether a putative lease actually represented a security agreement). See also 11 U.S.C. § 101,

Historical and Statutory Notes (“whether a consignment or lease constitutes a security interest

under the bankruptcy code will depend on whether it constitutes a security interest under

applicable State or local law.”).17

20. The Facility Lease Agreements contain the following choice of law provision:

Section 23.6. Governing Law. This Facility Lease [Agreement] was negotiated in the State of New York which [MirMA] and the Owner Lessor agree has a substantial relationship to the parties and to the underlying transaction embodied hereby, and, in accordance with § 5-1401 of the New York General Obligations Law, in all respects, including matters of construction, validity and performance, this Facility Lease shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts made and performance in such State and any Requirement of Law of the United States of America, except provisions for the creation and enforcement of the leasehold interest created hereby shall be governed by and construed according to the law of the state in which the Facility is located, it being understood that, to the fullest extent permitted by the law of the state in which the Facility is located, the law of the State of New York shall govern the validity and the enforceability of the representations, warranties, covenants and obligations of [MirMA] and the Owner Lessor under this Facility Lease [Agreement] and all other Operative Documents and all of the indebtedness arising hereunder or thereunder. To the fullest extent permitted by law, [MirMA] and the Owner Lessor hereby unconditionally and irrevocably waive any claim to assert that the law of any other jurisdiction governs this Facility Lease [Agreement], except as expressly otherwise provided above.18

17 Plaintiffs have admitted that “state law governs the determination of whether the contracts at issue are

true leases or secured financing arrangements.” See Debtors’ Expedited Motion for a Protective Order (the “Protective Motion”), a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 16 (see LDApp001665). See also Plaintiffs’ Brief in Support of Motion for Partial Summary Judgment on Complaint for Declaratory Judgments Relating to MirMA Agreements and for Related Relief (the “MSJ Brief”), at 22 (“[r]esolving situations regarding who owns property between landlord and tenants, the priority of liens, and other interests in property are questions of state law.”), a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 17 (LDApp001707). Plaintiffs, citing both In re Robertson, 203 F.3d 855, 859 (5th Cir. 2000) (“Generally, Congress has left the creation and definition of property interests of a debtor’s bankruptcy estate to state law,” (quoting Butner v. United States, supra)), and section 23.6 of the Facility Lease Agreements, then go on to admit that “[t]he nature of the property that is the subject of the Facility Lease Agreement would appear to be a question of the nature of the interest created by the Facility Lease Agreement.” MSJ Brief, at 22-23 & n.7 (see LDApp001707).

18 See Facility Lease Agreement, § 23.6 (emphasis added) (LDApp002048). See also Exhibits G & H attached to the Amended Complaint.


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21. Plaintiffs contend that New York law, specifically, Section 1-201(37) of the New

York Uniform Commercial Code, should be applied in any analysis of the Recharacterization

Claim.19 Maryland, the state in which the Facilities are located, has also adopted Section 1-

201(37) of the Uniform Commercial Code. Thus, the only state law applicable to any analysis of

whether the Facility Lease Agreements are true leases or security agreements is the law of the

states of New York and Maryland. See Spangler, 56 B.R. at 992 (where issue was whether

Maryland or New York law applied, court stated that “the question of which law governs . . . is

seemingly of relatively little importance since New York and Maryland law . . . are relatively

similar.”).

22. The determination of whether an agreement is a true lease or a disguised security

interest is governed by section 1-201(37) of the Uniform Commercial Code and applicable case

law. See Pillowtex, 349 F.3d at 717; Merritt Dredging, 839 F.2d at 208-09. The 1995 version of

section 1-201(37) applies to this case because the Facility Lease Agreements were executed

before the effective date of the 2001 version. See Edison, 207 B.R. at 808.20 The 1995 version

of section 1-201(37) states, in pertinent part:

(37) …Whether a transaction creates a lease or security interest is determined by the facts of each case; however, a transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee, and

(a) the original term of the lease is equal to or greater than the remaining economic life of the goods,

(b) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods,

19 See Protective Motion, at ¶ 15 (LDApp001674). 20 The 2001 version of section 1-201(37) adds paragraph identifiers but does not differ substantively from

the 1995 version.


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(c) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement, or

(d) the lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.

N.Y. U.C.C. LAW § 1-201(37) and MD. CODE ANN., COM. LAW § 1-201(37) (emphasis added).

Courts applying Section 1-201(37) have described this two-part test as a “bright-line” test or a

“per se” rule. See e.g., Pillowtex, 349 F.3d at 717; Owen, 221 B.R. at 60-61. Only if a lessee

does not have a right to terminate the lease before the end of the lease term and one of the four

enumerated conditions are met will the transaction be deemed a per se secured financing

agreement. Id. The four factors set forth in the second part of the two-part test are referred to as

“residual value factors” because they relate to whether residual value remains for the lessor at the

end of the lease term. See Pillowtex, 349 F.3d at 718.

(2) The Facility Lease Agreements Are Not Per Se Secured Financings

23. As previously stated, the “bright line” test or “per se” rule established by Section

1-201(37) of the Uniform Commercial Code has two prongs. The first prong of the test inquires

whether “the consideration the lessee is to pay the lessor for the right to possession and use of the

goods is an obligation for the term of the lease not subject to termination by the lessee . . . . ,”

and the second prong of the test inquires whether the putative lease has one or more

characteristics inconsistent with the lessor retaining residual value in the leased property at the

end of the lease term.21

24. Here, leaving aside the question of whether the Facility Lease Agreements could

be viewed as meeting the first prong of the two-part per se test under Section 1-201(37), the

21 See supra paragraph 22 and discussion therein.


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Facility Lease Agreements clearly do not meet any of the four residual value factors that

comprise the second prong of the test. First, the Basic Lease Term of the Facility Lease

Agreements is not equal to or greater than the useful lives of the Facilities; the useful lives of the

Facilities are much longer than the terms of the Facility Lease Agreements.22 Second, MirMA is

not bound to renew the Facility Lease Agreements and is not bound to become the owner of the

Facilities because there are no mandatory renewal provisions and no purchase options within the

Facility Lease Agreements.23 Third, upon compliance with the Facility Lease Agreements,

MirMA does not have the option to renew the Facility Lease Agreements for the remaining

economic life of the Facilities for no consideration or nominal consideration.24 Fourth, upon

compliance with the Facility Lease Agreements, MirMA has no option to become the owner of

the Facilities for no consideration or nominal consideration.25 Importantly, Plaintiffs have not,

and cannot, introduce any competent summary judgment evidence that could contradict or

challenge the conclusive evidence on any of these factors. As a result, the Facility Lease

Agreements are not security interests as a matter of law and thus this Court must consider the

various “economic realities” factors in determining whether the Facility Lease Agreements are

22 The Facilities have useful lives that are much longer than the Basic Lease Term of the Facility Lease

Agreements. See, e.g., Deloitte Letters, at 1 (LDApp001576); Morgantown Appraisal, at 38, 39 and 71 (LDApp000197, 000198 & 000230), and Dickerson Appraisal, at 38-39 and 71 (LDApp000436, 000437 & 000469); Ellsworth Depo, at 27, 36 (LDApp0000032 & 000041); and Beck Report, at A-16 and A-23 (LDApp000643 & 000650).

23 Pursuant to the Facility Lease Agreements, MirMA has the right, but not the obligation, to renew the Facility Lease Agreements for durations that would always be less than 75% of the revised useful lives of the Facilities. See Facility Lease Agreement, § 15 (LDApp002030). See also Exhibits G & H attached to the Amended Complaint.

24 See Facility Lease Agreement, § 15 (LDApp002030). See also Exhibits G & H attached to the Amended Complaint.

25 Pursuant to the Facility Lease Agreements, MirMA is obligated to pay substantial consideration in the limited circumstances in which it might have the possibility of purchasing the Facilities. See Facility Lease Agreement, §§ 5.2(i); 10.1(b)(2); 13.2 and 13.3 (LDApp002001, 002009, 002024 & 002025). See also Exhibits G & H attached to the Amended Complaint.


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leases or secured financing arrangements. See e.g. Pillowtex, 349 F.3d at 719 and Edison, 207

B.R. at 809.

(3) Under The Economic Realities Test, The Facility Lease Agreements Are True Leases

25. If, as here, an agreement is not a per se secured financing arrangement under the

bright-line rule set forth above, courts then go to the next step of examining the economic

realities of the transaction, by looking to state law, to determine if the agreement is a lease or a

secured financing arrangement. See N.Y. U.C.C. LAW § 1-201(37) and MD. CODE ANN., COM.

LAW § 1-201(37); see also Pillowtex, 349 F.3d at 719 and Edison, 207 B.R. at 809.

26. In determining the economic realities of a transaction, “[t]he main focus of the

courts has been on ‘(1) whether the purchase option price at the end of the lease term is nominal,

(2) whether the lessee is required to make aggregate rental payments having a present value

equaling or exceeding the original cost of the leased property, and (3) whether the lease term

covers the total useful life of the equipment.’” Owen, 221 B.R. at 61 (quoting Edison, 207 B.R.

at 809-10); see also Pillowtex, 349 F.3d at 719; Integrated Health Services, 260 B.R. at 76. The

Court in Edison cited abundant case law in support of the purchase option price,26 aggregate

26 Edison, 207 B.R. at 809 n.8 (citing Orix Credit Alliance, Inc. v. Pappas, 946 F.2d 1258, 1261 (7th Cir.

1991); Jahn v. M.W. Kellogg Co. (In re Celeryvale Transp., Inc.), 822 F.2d 16, 18 (6th Cir. 1987), aff’g 44 B.R. 1007 (Bankr. E.D. Tenn. 1984); In re Marhoefer Packing Co., 674 F.2d 1139, 1144 (7th Cir. 1982); National Equip. Rental, Ltd. v. Priority Elects. Corp., 435 F. Supp. 236, 238-39 (E.D.N.Y. 1977); In re Herold Radio & Elecs. Corp., 218 F. Supp. 284, 285-86 (S.D.N.Y. 1963); In re Hardy, 146 B.R. 206, 209 (Bankr. N.D. Ill. 1992); Hispanic Am. Television, 113 B.R. at 459; In re Farrell, 79 B.R. 300, 303 (Bankr. S.D. Ohio 1987); Triple B Oil Producers, Inc. v. Puder (In re Triple B Oil Producers, Inc.), 75 B.R. 461, 463 (Bankr.S.D.Ill. 1987); NYNEX BISC v. Beker Indus. Corp.(In re Beker Indus. Corp.), 69 B.R. 937, 940 (Bankr. S.D.N.Y. 1987); In re Winston Mills, Inc., 6 B.R. 587, 598 (Bankr. S.D.N.Y. 1980); J.L. Teel Co. v. Houston United Sales, Inc., 491 So.2d 851, 858-59 (Miss. 1986); Pactel Fin. v. D.C. Marine Serv. Corp., 136 Misc.2d 194, 518 N.Y.S.2d 317, 318-19 (N.Y. Dist. Ct. 1987); Guardsman Lease Plan, Inc. v. Gibraltar Transmission Corp., 129 Misc.2d 887, 494 N.Y.S.2d 59, 63 (N.Y. Supr. Ct. 1985)).


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rental payment,27 and useful life28 factors identified in Owen as being the “main focus” of the

economic realities analysis. 207 B.R. at 809-10. Consequently, in applying state law, this Court

should place additional emphasis on these factors.

27. Plaintiffs carry the heavy burden of demonstrating that the transactions are

something other than what they purport to be. See e.g. Pillowtex, 349 F.3d at 716 (party seeking

to recharacterize the agreement bears the burden of proof); In re Owen, 221 B.R. at 60 (“The

Debtors have the burden of demonstrating that the transaction was other than what it purports to

be in the Agreement . . .”); Edison, 207 B.R. at 812 (debtor has burden as the party seeking to

recharacterize the lease). Debtors cannot meet this burden because the Facility Lease

Agreements are “true leases” as a matter of law.29

27 Edison, 207 B.R. at 810 n.9 (citing Orix Credit Alliance, 946 F.2d at 1262; Citi-Lease Co. v.

Entertainment Family Style, Inc., 825 F.2d 1497, 1500 (11th Cir. 1987); Marhoefer Packing, 674 F.2d at 1145; Hardy, 146 B.R. at 209; Hispanic Am. Television, 113 B.R. at 462; Chase Leasing Co. v. P.W.L. Invs. (In re P.W.L. Invs.), 92 B.R. 680, 682 (Bankr. W.D. Tex. 1987); Triple B Oil Producers, 75 B.R. at 463; J.L. Teel, 491 So.2d at 858; O.P.M. Leasing Servs., Inc. v. Homestead Fabrics, Inc., 1976 WL 23728, *6 (N.Y. Sup. Ct. 1976)).

28 Edison, 207 B.R. at 810 n.10 (citing Celeryvale Transp., 822 F.2d at 19; Pacific Express, Inc. v. Teknekron Infoswitch Corp. (In re Pacific Express, Inc.), 780 F.2d 1482, 1485 (9th Cir. 1986); Marhoefer Packing, 674 F.2d at 1145; In re Cress, 106 B.R. 246, 251 (D. Kan. 1989); In re Telemax Corp., 1973 WL 21427, *5-6 (S.D.N.Y. 1973); Hardy, 146 B.R. at 210; In re The Answer–The Elegant Large Size Discounter, Inc., 115 B.R. 465, 469 (Bankr. S.D.N.Y. 1989); Hispanic Am. Television, 113 B.R. at 461-62; Beker Indus., 69 B.R. at 943; J.L. Teel, 491 So.2d at 858; N.Y. UCC § 1-201(37) (McKinney Supp. 1996)).

29 It is insufficient as a matter of law for Plaintiffs to contend that, for example, the Facility Lease Agreements are secured financing arrangements because MirMA pays property taxes or, is responsible for insurance on the Facilities. See NY UCC § 1-201(37) and MD. CODE ANN., COM. LAW § 1-201(37), which state that when assessing “the facts of each case,” a transaction does not create a security interest merely because it provides that:

(a) the present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into,

(b) the lessee assumes risk of loss of the goods, or agrees to pay taxes, insurance, filing, recording, or registration fees, or service or maintenance costs with respect to the goods,

(c) the lessee has an option to renew the lease or to become the owner of the goods,

(d) the lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed, or


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28. Further, Although the Lessor Defendants acknowledge that the characterization of

the agreement (i.e., the labels affixed to it) and the intent of the parties are not controlling, intent

and characterization are to be considered in determining whether an agreement constitutes a true

lease or a security agreement. See Villa Residential Care Homes, 2003 Bankr. LEXIS 1689, at

18, n.9 (“Obviously the controlling documents and the intent of the parties have some relevance

to the nature of the relationship.”) (emphasis added). There is no doubt that the parties in this

case clearly intended the Facility Lease Agreements be true leases. By way of example, the title

to each of the Facility Lease Agreements is “Facility Lease Agreement,” and each of the Facility

Lease Agreements states, in pertinent part, “True Lease . . .[t]his Facility Lease shall constitute

an agreement of lease and nothing herein shall be construed as conveying to [MirMa] any right,

title or interest in or to [the leased property] except as lessee only.”30 Moreover, Plaintiffs have

admitted that as of the Closing Date they both “believed” and “intended” the Facility Lease

Agreements to be leases of property as opposed to secured financings.31 Thus, the intent of the

parties and the labeling of the agreements constitute additional evidence that the Facility Lease

Agreements are true leases.

29. As discussed more fully below, and given the heightened emphasis on the three

factors considered the “main focus” of the economic realities test, Owen, 221 B.R. at 61 (quoting

Edison, 207 B.R. at 809-10); see also Pillotex, 349 F.3d at 719, there can be no question that the

subject Facility Lease Agreements are true leases. Accordingly, because the undisputed

(e) the lessee has an option to become the owner of the goods for a fixed price that is equal to or

greater than the reasonably predictable fair market value of the goods at the time the option is to be performed.

30 See Facility Lease Agreement, § 23.5 (LDApp002047); see also Exhibits G and H attached to the Amended Complaint.

31 See, infra, paragraph 55 and accompanying text (Requests for Admission 1 & 2).


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summary judgment evidence mandates but one conclusion, the Lessor Defendants are entitled to

judgment as a matter of law that the Facility Lease Agreements are true leases.

(a) The Facility Lease Agreements Do Not Give MirMA A Bargain Purchase Option To Buy The Facilities

30. When the lessee has an option to become the owner of the goods for no additional

consideration or nominal additional consideration upon compliance with the lease agreement, “it

is presumed that an agreement is a disguised security agreement.” Owen, 221 B.R. at 61; see

also Edison, 207 B.R. at 810 (“If the lease agreement explicitly provides that the lessee has an

option to purchase the leased goods for nominal consideration (e.g., for $1), the agreement is

presumed to be a disguised security agreement . . .”). In determining whether the option price is

nominal, a court must evaluate the option price as of the inception of the transaction. Id. at 811.

31. The Facility Lease Agreements and related documents were negotiated at arms-

length by the parties. A review of the unambiguous provisions in the Facility Lease Agreements

demonstrates that MirMA has no right at the end of the Facility Lease Agreements to purchase

the Facilities at their option, and thus have no purchase option much less a “bargain purchase

option” for the Facilities, making this factor inapplicable.32 There is no “bargain purchase

option” contained in the Facility Leases, nor is MirMA obligated at the end of the Basic Lease

32 Under New York and Maryland law, whether an optional purchase price is nominal would also be

governed by New York and Maryland law. Section 1-201(37) of the New York Uniform Commercial Code defines when consideration is not considered nominal. Therein, both the New York and Maryland Uniform Commercial Code state that:

Additional consideration is not nominal if (i) when the option to renew the lease is granted to the lessee the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed, or (ii) when the option to become the owner of the goods is granted to the lessee the price is stated to be the fair market value of the goods determined at the time the option is to be performed. Additional consideration is nominal if it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised . . . .

N.Y. U.C.C. LAW § 1-201(37) and MD. CODE ANN., COM. LAW § 1-201(37).


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Term of the Facility Lease Agreements to purchase the Facilities.33 Additionally, MirMA has no

option to become the owner of the Facilities for no additional consideration or nominal

consideration.34 The absence of any “bargain purchase option” further supports the conclusion

that the Facility Lease Agreements are true leases.35 In fact, there are relatively few

circumstances at all under which MirMA would even have the opportunity to attempt to buy the

Facilities, and, in each circumstance, the purchase price would be substantial.36 As a result, this

33 See Facility Lease Agreement, §§ 5.2(i); 10.1(b)(2); 13.2 and 13.3 (LDApp002001, 002009, 002024 &

002025). See also Exhibits G & H attached to the Amended Complaint; SEC Letter, attachment A, at 9 (“There is no purchase option – bargain or otherwise.” … “MIRMA has a right of first refusal, but it is not considered an obligation or an option to repurchase.” … “The Owner Participant can not compel MIRMA to buy the property.”). Plaintiffs admit that the Facility Lease Agreements do not contain a bargain purchase option and that MirMA is not obligated at the end of the Basic Lease Term of the Facility Lease Agreements to purchase the Facilities. See, infra, paragraph 55 and accompanying text (Request for Admission 57) and paragraphs 55 and 56 and accompanying text (Request for Admission 53).

34 See Facility Lease Agreement, §§ 5.2(i); 10.1(b)(2); 13.2 and 13.3 (LDApp002001, 002009, 002024 & 002025) (describing the substantial consideration and or fair market value payable by the Facility Lessees in the limited circumstances in which they might have an option to purchase). See also Exhibits G & H attached to the Amended Complaint. Additionally, Plaintiffs admit that at the end of the Basic Lease Term of the Facility Lease Agreements, MirMA does not have the option of buying the Facilities for no additional consideration or nominal consideration. See, infra, paragraph 55 and accompanying text (Request for Admission 56). It is significant that MirMA does not have an option to purchase the Facilities for no additional or nominal consideration. Under SFAS 13, to qualify for operating lease treatment, there cannot be a transfer of title at the end of the lease or a bargain purchase option. See Deposition of Michael Jon Grillaert of KPMG, dated December 23, 2004 (the “Grillaert Depo”), at 37 and 73, a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 3 (LDApp000775 & 000811). The Facility Lease Agreements qualification for operating lease treatment, see, infra, note 37 and accompanying text, verifies that the Facility Lease Agreements do not provide for the transfer of title to the Facilities at the end of the Basic Lease Term or provide for a bargain purchase option.

35 Importantly, Plaintiffs do not contend that any of the contract provisions at issue are ambiguous. Bedrock principals of contract law mandate that, when construing unambiguous contract provisions, courts are required to derive the intent of the parties from the plain meaning of the language used in the provision itself. See CCG Assoc. I v. Riverside Assoc., 157 A.D.2d 435, 441 (N.Y. 1990) (“When an agreement's terms are clear and unambiguous, there is no need to resort to other means of interpretation to determine their meaning.”); Rourke v. Amchem Prods., Inc., 863 A.2d 926, 941 (Md. App. 2004) (“If the language of the contract is unambiguous, we give effect to its plain meaning and do not delve into what the parties may have subjectively intended.”). Further, courts may not consider parol evidence in interpreting unambiguous contract provisions. CCG Assoc., 157 A.D.2d at 441 (“[P]arol evidence of the parties' intentions as to the terms of a contract is inadmissible when the contract is unambiguous.”); Gilchrist v. Chester, 514 A.2d 483, 484 (Md. App. 1986) (where agreement was “clear and unambiguous, in the absence of fraud and mistake, there was no need to construe it through the use of extrinsic evidence.”).

36 See Facility Lease Agreements, §§ 5.2(i); 10.1(b)(2); 13.2 and 13.3 (LDApp002001, 002009, 002024 & 002025); see also Exhibits G & H attached to the Amended Complaint.


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factor clearly supports a finding that the Facility Lease Agreements are true leases and not

secured financing arrangements.

(b) The Present Value Of Aggregate Periodic Lease Rent Is Less Than The Original Cost Of The Facilities

32. The second principal factor considered by the majority of courts is whether the

lessee is required to make aggregate rental payments having a present value equaling or

exceeding the purchase price of the property. See Owen, 221 B.R. at 61. “The rationale behind

this second factor is that if the alleged lessee is obligated to pay the lessor a sum equal to or

greater than the full purchase price of the leased goods plus an interest charge over the term of

the alleged lease agreement, a sale is likely to have been intended since what the lessor will

receive is more than a payment for the use of the leased goods and the loss of their value; the

lessor will receive a consideration that would amount to a return on its investment . . .” Edison,

207 B.R. at 814; see also Pillowtex, 349 F.3d at 719-720.

33. Like the first factor, application of the second factor evidences that the Facility

Leases are true leases. Pursuant to the Facility Lease Agreements, MirMA is obligated to pay,

inter alia, Periodic Lease Rent to the Owner Lessors as follows:

Section 3.2. Rent. (a) [MirMA] hereby agrees to pay to the Owner Lessor lease rent payable with respect to the Basic Lease Term (“Periodic Lease Rent”). The Periodic Lease Rent shall be paid by [MirMA] to the Owner Lessor in installments in the amounts and on the dates (each a Rent Payment Date) shown on Schedule 1-1 hereto. All Periodic Lease Rent to be paid pursuant to this Section 3.2 shall be payable in the manner set forth in Section 3.5 and shall be adjusted from time to time in accordance with Section 3.4 hereof…. The term “Periodic Lease Rent” is intended to constitute “fixed rent” (as such term is defined in Treasury Regulation §1.467-1 (h)(3).37

37 See Facility Lease Agreement, § 3.2 (LDApp001991). See also Exhibits G & H attached to the

Amended Complaint. Periodic Lease Rent payable under the facility Lease Agreements represents “fair market rents” for the facilities. See Morgantown Appraisal, at 69 and 72 (LDApp000228 & 000231), and Dickerson Appraisal, at 69 and 72 (LDApp000467 & 000470); see also In re Integrated Health Services, Inc., 260 B.R. 71, 77 (D.Del 2001) (reasonable market rentals support “a conclusion the agreements were true leases.”); Villa Residential Care Homes – Arlington I, L.P. v. Health Care Property Investors, Inc. (In re Villa Residential Care Homes), 2003


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Over the Basic Lease Term of the Facility Lease Agreements, MirMA is obligated to pay

$588,131,595.34 in Periodic Lease Rent for the Leased Dickerson Units and $2,552,399,039.24

in Periodic Lease Rent for the Leased Morgantown Units.38

34. Indeed, as indicated in the Participation Agreement,39 the parties contracted to use

10.06% per annum, assuming semi-annual compounding as the appropriate discount rate (the

“Discount Rate”).40 In fact, the parties specifically intended for the Discount Rate to be used in

making present value calculations of Periodic Lease Rent under the Facility Lease Agreements.41

Absent evidence that the Discount Rate was manifestly unreasonable at the time the transaction

was entered into, the agreed-to discount rate controls.42 Here, Plaintiffs can point to know

evidence that the Discount Rate was manifestly unreasonable as of the Closing Date.

35. Using the Discount Rate of 10.06% agreed to by MirMA and the Owner Lessors,

Bankr. LEXIS 1689, at 19, n.10 (Bankr.N.D.Tex. December 11, 2003) (“questions regarding rental calculation . . . seem to the court of limited significance.”).

38 See Amended Complaint, at ¶ 63 (LDApp001485). The Lessor Defendants do not admit that the amounts listed here reflect the actual amounts of Periodic Lease Rent due for the facilities over the Basic Lease Term of the facility Lease Agreements, and in fact, have denied as much in their Answer to the Amended Complaint. However, for purposes of the Motion and this Memorandum, these figures will be presumed correct.

39 Pursuant to the eleven essentially identical Participation Agreements, MirMA, the Owner Lessors, the Owner Participants, the Owner Manager and the Trustee agreed to participate in the transactions contemplated by, inter alia, the Facility Lease Agreements, the Facility Site Lease Agreements and the Facility Site Sublease Agreements. The Participation Agreements contain various representations, covenants, rights and obligations of the parties, including MirMA’s obligations to indemnify the Lessor Defendants, the Trustee and the Owner Manager for certain defined liabilities and obligations, including certain tax liabilities and obligations. See Participation Agreements (LDApp002073). See also Exhibits M & N attached to the Amended Complaint.

40 See Appendix A to Participation Agreement (LDApp002166). 41 See Participation Agreement, § 4.16 (LDApp002109). 42 State law will also govern the definition of present value and the interest rate to be used. Section 1-

201(37) defines present value as, “the amount as of a date certain of one or more sums payable in the future, discounted to the date certain. The discount is determined by the interest rate specified by the parties if the rate is not manifestly unreasonable at the time the transaction is entered into; otherwise, the discount is determined by a commercially reasonable rate that takes into account the facts and circumstances of each case at the time the transaction was entered into . . .” N.Y. U.C.C. LAW § 1-201(37) and MD. CODE ANN., COM. LAW § 1-201(37) (emphasis added). The Discount Rate is clearly not manifestly unreasonable because it is also the interest rate under the Series C Lessor Notes for the Leased Morgantown Units. See Series C Lessor Note, a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 18 (LDApp001739); see also Amended Complaint, ¶ 49 (LDApp001496).


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the present value of the aggregate Periodic Lease Rent (the rent actually paid under the Facility

Leases) is less than 90% of the Purchase Price of the Facilities.43 Specifically, using the

Discount Rate, the present value of the aggregate Periodic Lease Rent (the rent actually paid

under the Facility Lease Agreements) is $1,242,638,660 – 83% of the Purchase Price for the

Facilities.44

36. Further, MirMA admits that the net present value is less than 90%, by accounting

for the Facility Lease Agreements as “operating leases” under SFAS 13, which requires that the

aggregate rentals be less than 90% of the cost of the leased asset.45 Courts acknowledge that

SFAS 13 is relevant in a true lease dispute. See Pillowtex, 349 F.3d at 714. In fact, qualification

for treatment under SFAS 13 was a condition for closing the transaction under the Participation

Agreements:

43 Even assuming the discount rate is the weighted average of the interest rates contained in all the Lessor

Notes, an assumption that applies a discount rate of 9.19544% (4.59772% for a half year) – almost ten percent less than the Discount Rate – Plaintiffs have admitted the present value of the aggregate Periodic Lease Rent still is comfortably less than 90% of the original cost of the Facilities. See, infra, paragraph 55 and accompanying text (Request for Admission 50).

44 See Declaration of John Tittle, Jr. in Support of Lessor Defendants’ Motion for Partial Summary Judgment on Plaintiffs’ Recharacterization Claim (the “Tittle Affidavit”), at ¶ 7, a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 26 (LDApp001981). Further, Plaintiffs admit that the net present value of the aggregate Periodic Lease Rent under the Facility Lease Agreements does not equal or exceed the Purchase Price for the Facilities. See, infra, paragraph 55 and accompanying text (Request for Admission 58).

45 See Form 10-K for Mirant Mid-Atlantic, LLC, filed March 28, 2002, for the period ending December 31, 2001 (the “MirMA 2001 10-K”), at 18, F-19, and F-20; and Form 10-K for Mirant Mid-Atlantic, LLC, filed April 30, 2003, for the period ending December 31, 2002 (the “MirMA 2002 10-K”), at 20, F-3, F-11, F-17, F-27, F-28, and F-29, true and correct copies of which are attached to the LD Evidence Appendix as Exhibits 15, 3B and 3C (LDApp001601, 000839 & 000965 ); SEC Letter, at 7 (“The Company leases the Morgantown and Dickerson baseload units under 11 operating lease agreements” with the Owner Lessors) (LDApp001269), and attachment, at 5 (“MIRMA accounts for each Facility Lease [Agreement] as an operating lease.”) (LDApp001267). See also Grillaert Depo, at 37-47, 72-80 (discussing SFAS 13 and factors for qualification for operating lease treatment and confirming that Facility Lease Agreements were operating leases) (LDApp000775 & 000810). See, infra, paragraph 55 and accompanying text (Request for Admission 51).

Plaintiffs have admitted that the MirMA 2001 10-K and the MirMA 2002 10-K were “materially correct

and the financial statements were fairly presented in all material respects.” See, infra, paragraph 55 and 56 and accompanying text (Requests for Admission 13 & 14). Moreover, Plaintiffs have admitted that they have consistently, both pre-petition and post-petition, accounted for the Facility Lease Agreements as operating leases. See, infra, paragraph 55 and accompanying text (Requests for Admission 22-28) and paragraph 55 and 56 and accompanying text (Requests for Admission 16, 18-21).


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The present value of scheduled Periodic Lease Rent payable under each [Facility] Lease [Agreement] payable during the Fixed Lease Term (taking into account any rent adjustment through or contemplated on the Closing Date) together with all rent payable under the related Facility Site Sublease [Agreement], discounted at the Discount Rate, shall satisfy the 90% test for operating lease treatment under SFAS 13 and SEMA shall have been advised by its auditor that the Facility Lease [Agreement] qualifies for such operating lease treatment.46 37. Based on the foregoing evidence, and Plaintiffs’ inability to put forth any

countering evidence, there is clearly a significant part of the Facilities that is not being paid for

by MirMA through the Periodic Lease Rent over the duration of the Facility Lease Agreements.

Consequently, the Owner Lessors have significant ownership interests in the Facilities at the end

of the Basic Lease Terms and this factor therefore suggests that the Facility Lease Agreements

are, indeed, true leases.

(c) The Useful Life Of The Facilities Is Significantly Longer Than The Terms Of The Facility Lease Agreements

38. “The third principal factor focused on by the majority of courts is the useful life

of the subject property.” Edison, 207 B.R. at 816. The useful life of the property is to be

determined as it existed at the time of the transaction. See N.Y. U.C.C. LAW § 1-201(37) and

MD. CODE ANN., COM. LAW § 1-201(37) (“‘Reasonably predictable’ and ‘remaining economic

life of the goods’ are to be determined with reference to the facts and circumstances at the time

the transaction is entered into”); Edison, 207 B.R. at 817 (“[T]he useful life of the [leased

property] should be determined as it existed at the time of the transaction since [the Court is]

required to look to the economic reality of the transaction and to examine the facts and

circumstances as they existed at that time”). The rationale behind this factor is that “[a]n

essential characteristic of a true lease is that there be something of value to return to the lessor

46 See Participation Agreement, § 4.16 (LDApp002109). See also Exhibits M & N attached to the

Amended Complaint.


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after the term.” In re Edison, 207 B.R. at 816. However, “[s]uch an inference [the lessor’s

expectation of residual value] would only be proper . . . where the evidence showed a plausible

intent by the transferor to repossess the goods . . .” In re Pillowtex, 349 F.3d at 720.

39. Unlike the agreement at issue in Pillowtex, the Facility Lease Agreements and the

Facility Site Lease Agreements unequivocally establish that the Owner Lessors retained a

meaningful interest in the Facilities after the end of the Basic Lease Terms. As of the date the

Owner Lessors purchased the Facilities directly from PEPCO, Deloitte opined that the remaining

useful life of the Facilities far exceeded the Basic Lease Term of the Facility Lease Agreements.

Specifically, Deloitte found that, as of the Closing Date, the expected useful life of the Leased

Morgantown Units was 45 years and the expected useful life of the Leased Dickerson Units was

38 years.47 Additionally, R.W. Beck, Inc., acting as independent engineers retained by the

Equity Investors, opined, in an opinion examined by Deloitte in rendering its useful life

opinions,48 that the Facilities “should have a useful life extending well beyond the term of the

Certificates” held by the Certificate Holders, which terms end at the latest on December 30,

2028.49

47 See e.g. Deloitte Letters, at 1 (LDApp001576); Morgantown Appraisal, at 34-39 and 71

(LDApp000193 & 000230), and Dickerson Appraisal, at 34-39 and 71 (LDApp000432 & 000469); deposition transcript of Richard K. Ellsworth (the “Ellsworth Depo”), at 27, 36, a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 2 (see LDApp000032 & 000041). Moreover, Plaintiffs have admitted that the expected useful life of the Leased Morgantown Units was at least, if not greater than, 45 years and the expected useful life of the Leased Dickerson Units was at least, if not greater than, 38 years. See, infra, paragraph 55 and accompanying text (Requests for Admission 5, 9, 59 & 60).

48 See Ellsworth Depo, at 23-24, 28, 29 (LDApp000028, 000033 & 00034). 49 See report dated December 7, 2000, of R.W. Beck, Inc. entitled “Independent Engineer’s Report –

Southern Energy Mid-Atlantic, LLC Generating Facilities” (the “Beck Report”), at A-16 and A-23, a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 2E (LDApp000643 & 000650). The Certificates have the following Final Distribution Dates: Series A, June 30, 2012; Series B, June 30, 2017; and Series C, December 30, 2028. True and correct copies of a Series A Certificate, Series B Certificate and Series C Certificate are attached to the LD Evidence Appendix as Exhibits 12, 13 & 14 (see LDApp001580, 001587 & 001595). Plaintiffs have admitted that the useful life of the Leased Morgantown Units and the Leased Dickerson


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40. Again, Plaintiffs can provide this Court with no evidence, most importantly expert

evidence, that contradict these useful life figures as of the time of the Closing Date. Thus, the

useful lives of the Facilities and the Facility Site Lease Agreements extend well beyond the

terms of the Facility Lease Agreements.50

41. Thus, at the Closing Date, the parties recognized and acknowledged that the

expected useful life of the Leased Morgantown Units exceeded the term of their respective

Facility Lease Agreements by more than eleven (11) years and the expected useful life of the

Leased Dickerson Units exceeded the term of their respective Facility Lease Agreements by

almost ten (10) years.51 As such, upon the expiration of the Basic Lease Terms of the Facility

Lease Agreements, the Owner Lessors retain property rights in the Facility Sites for the

remaining term of the Facility Site Lease Agreements beyond the Basic Lease Term of the

Units extend well beyond December 30, 2028. See, infra, paragraph 55 and accompanying text (Requests for Admission 6 & 10).

Moreover, almost two years after the Closing Date, R.W. Beck continued to stand by its opinion that the useful life of the Leased Morgantown Units and the Leased Dickerson Units extend well beyond December 30, 2028. See letter from Kenneth Marino to Raymond Haley, dated October 11, 2002 (the “Marino Letter”), at 1, a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 8 (“[W]e are comfortable that there are sufficient funds budgeted which, if spent appropriately, will allow the Generating Facilities to physically operate at the capacity factors projected by Hagler Bailly for the duration of the useful lives projected by Deloitte & Touche of 38 years for the Dickerson facility and 45 years for the Morgantown Facility.”) (LDApp001459). In fact, R.W. Beck admitted that “our analysis could have been used to support slightly higher useful lives than those stated above.” See Marino Letter, at 1 (LDApp001459).

50 In addition to the extensive useful life remaining at the end of the Basic Lease Term of the Facility Lease Agreements, there is significant residual value in the Facilities as well. Deloitte opined that at the end of the Basic Lease Term, residual value “is expected to be at least 20 percent of the current fair market value of the” Facilities, with or without taking inflation into consideration. Morgantown Appraisal, at 64-67 and 71 (LDApp000223 & 000230), and Dickerson Appraisal, at 64-67 and 71 (LDApp000462 & 000469).

51 Deloitte opined that at the end of the Basic Lease Term of the Facility Lease Agreements, the Facilities are expected to have a remaining useful life “of at least 25 percent of the remaining useful life.” Morgantown Appraisal, at 34-39 and 71 (LDApp000193 & 000230), and Dickerson Appraisal, at 34-39 and 71 (LDApp000432 & 000469); see also, email from Raymond Haley to various persons, dated October 31, 2000, a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 7 (suggesting that 38 years of useful life for the Leased Dickerson Units is conservative and stating that “with aggressive maintenance programs there is no reason coal-fired plants like these cannot keep operating far beyond any theoretical date.”) (LDApp001458). Further, Plaintiffs have admitted that the expected economic life for the Leased Dickerson Units and the Leased Morgantown Units is greater than the Basic Lease Term of the Facility Lease Agreements. See, supra, paragraph 55 and accompanying text (Requests for Admission 4 & 8).


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Facility Lease Agreements; which is over eleven years with respect to the Leased Morgantown

Units and almost ten years with respect to the Leased Dickerson Units. Moreover, the Owner

Lessors have the option to renew the Facility Site Leases Agreements until the earlier of

December 18, 2099, or the last day of the reappraised useful life of the Facilities.52 This

remaining term of the Facility Site Lease Agreements above the Basic Lease Term of the Facility

Lease Agreements, in addition to the option to renew the Facility Site Lease Agreements, allows

the Owner Lessors to take exclusive advantage of the significant remaining expected useful lives

of the Facilities.

42. Moreover, the Facility Lease Agreements contain no mandatory renewal

provisions.53 Thus, MirMA is not bound to renew the Facility Lease Agreements. In fact,

MirMA is not even obligated to remain the lessee under the Facility Leases through the end of

the Basic Lease Term as the Facility Lease Agreements are terminable by MirMA under various

circumstances.54 Most important is the fact that if MirMA does elect to continue leasing the

Facilities under the Facility Lease Agreements, it does not have the option to renew the Facility

Lease Agreements for the remaining economic life of the Facilities for nominal consideration.55

52 See Facility Site Lease Agreement, § 2.3(b) (LDApp001329). See also Exhibits G & H attached to the

Amended Complaint. 53 Plaintiffs admit that the Facility Lease Agreements contain no mandatory provision binding MirMA to

renew the Facility Lease Agreements. See, infra, paragraphs 55 and 56 and accompanying text (Request for Admission 54).

54 See Facility Lease Agreement, §§ 10, 13 and 14 (LDApp002009, 002022 & 002027). See also Exhibits G & H attached to the Amended Complaint. See also SEC Letter, attachment A, at 9-10 (describing termination options for economic obsolescence and burdensome buyout) (LDApp001271). Further, Plaintiffs have admitted that the Facility Lease Agreements are “terminable by MirMA before the end of the Basic Lease Term.” See, infra, paragraphs 55 and 56 and accompanying text (Request for Admission 52).

55 See Facility Lease Agreement, §§ 10, 13 and 14 (LDApp002009, 002022 & 002027). See also Exhibits G & H attached to the Amended Complaint. Deloitte opined that, as of the Closing Date, it was “more likely than not” that neither the First Wintergreen Renewal Lease Term nor the Second Wintergreen Renewal Lease Term under the Facility Lease Agreements will be exercised. Morgantown Appraisal, at 69 and 71 (LDApp000228 & 000230), and Dickerson Appraisal, at 69 and 71 (LDApp000467 & 000469). In addition, Deloitte opined that MirMA “will not exercise its option to renew for any FMV Renewal Lease Term at the end of the Basic Lease


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Therefore, under any scenario, MirMA can not occupy the Facilities for their remaining useful

life, ensuring that the Lessor Defendants are able to capitalize on that remaining useful life.

43. In order to capture the remaining useful life of the Facilities after MirMA ceases

to be the tenant under the Facility Lease Agreements, MirMA and the Owner Lessors expressly

provided in the eleven substantially similar Shared Facilities Agreements that the Owner Lessors

are entitled to access certain infrastructure owned by MirMA, located on property adjacent to the

Facilities, beginning on the Lease Termination Date of any Facility Lease Agreement and

continuing until the Facilities (or any Owner Lessor Owned Facilities) shall permanently cease to

operate.56 Thus, after the expiration of the Facility Lease Agreements, although MirMA owns

the Facility Sites underneath the Facilities, the Lessor Defendants already have in place the

Facility Site Lease Agreements and other contractual rights necessary to operate the Facilities

themselves, or to find an alternative lessee to do so, for the many years of remaining useful life

of the Facilities.57 This fact again supports the conclusion that the Facility Lease Agreements are

true leases. See Edison, 207 B.R. at 818 (“[I]f the lessor expected a remaining useful life after

the expiration of the lease term, it can be reasonably inferred that it expected to retain substantial

residual value in the leased property at the end of the lease term and that it therefore intended to

create a true lease”).

Term.” Morgantown Appraisal, at 69 and 72 (LDApp000228 & 000231), and Dickerson Appraisal, at 69 and 72 (LDApp000467 & 000470). Moreover, Plaintiffs admit that at the end of the Basic Lease Term of the Facility Lease Agreements, MirMA does not have the option of leasing the Facilities for the remaining useful life of the Facilities for no additional consideration or nominal consideration. See, infra, paragraph 55 and accompanying text (Request for Admission 55).

56 See Shared Facilities Agreement, § 3.1, a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 6 (LDApp001440).

57 Deloitte concluded the same in finding that at the end of the Basic Lease Term, the use of the Facilities by the Lessor Defendants or some other person unrelated to Mirant, MirMA or any affiliate thereof “is expected to be commercially feasible based on the standards that would be applied by prudent business persons on the basis of present knowledge and generally accepted operating standards.” Morgantown Appraisal, at 68 and 71 (LDApp000227 & 000230), and Dickerson Appraisal, at 68 and 71 (LDApp000466 & 000469).


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44. Because the Facility Lease Agreements are true leases under the three principal

factors discussed above, the Lessor Defendants are entitled to summary judgment on plaintiffs’

recharacterization claim as a matter of law. Compare Edison, 207 B.R. at 810-818 and 822

(holding that lease agreement was a true lease where three “principal factors” weighed in favor

of true lease); and Owen, 221 B.R. at 64 (holding that agreement was a true lease where three

“principal factors” weighed in favor of presumption of true lease); with Pillowtex, 349 F.3d at

719 (holding that agreement was a secured financing when three “principal factors” on balance

weighed in favor of secured financing).58

(d) Other Factors Do Not Control

45. Because the three principal factors under the economic realities test dictate that

the Facility Lease Agreements are true leases, the Lessor Defendants are entitled to summary

judgment. Before New York’s and Maryland’s 1995 amendment to Section 1-201(37), some

courts analyzed a variety of miscellaneous factors relating to a transaction to determine the true

nature of the transaction. See Owen, 221 B.R. at 61. The 1995 amendment to section 1-201(37)

attempted to bring some uniformity to the determination of recharacterization issues. Moreover,

as discussed above, the 1995 amendment to Section 1-201(37) set forth five factors that – even

though one or more might apply to a transaction – do not create a security interest. See N.Y.

U.C.C. LAW § 1-201(37) and MD. CODE ANN., COM. LAW § 1-201(37).

58 Not only does the foregoing analysis demonstrate that this Court should apply Edison and Owen and

find that the facility Lease Agreements are true leases, the Court should reject Pillowtex since it is easily distinguishable from the facts in the current dispute. In Pillowtex, the lessee did not account for the agreement at issue as a lease and the agreement itself failed to meet the requirements for operating lease treatment under SFAS 13. See Pillowtex, 349 F.3d at 714, 722-723. Unlike the agreement in Pillowtex, the Facility Lease Agreements meet the requirements of SFAS 13 for operating lease treatment, MirMA accounts for the Facility Lease Agreements as operating leases (i.e., disclosing the future lease obligations in the notes to its financial statements as opposed to recognizing assets and corresponding debt on MirMA’s balance sheet), and the Owner Lessors accounted for the Facility Leases as owners. See supra, note 37 and relevant portions of MirMA 2001 10-K and MirMA 2002 10-K cited therein. Further, the agreement in Pillowtex was not even labeled a lease and did not refer to the parties as lessor and lessee. See Pillowtex, 349 F.3d at 714.


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46. The three “principal factors” cited above recognize that the most important

inquiry under the economic realities test is whether the putative lessor retains an interest in the

property upon the expiration of the original lease term, or whether the lessor has been made more

than whole by the rental income. See In re APB Online, Inc., 259 B.R. 812, 823 (Bankr.

S.D.N.Y. 2001) (in discussing revised Section 1-201(37), the court noted that the revision sought

to refocus attention on the significance of residual value as the touchstone of the common law

definition of a true lease); In re UAL Corp., 307 B.R. 618, 635 (Bankr. N.D. Illinois 2004), rev’d

on other grounds, 317 B.R. 335 (N.D. Ill. 2004) (bankruptcy court found a true lease to be one in

which the property had a substantial part of its economic life remaining at the end of the lease

term); In re QDS Components, Inc., 292 B.R. 313, 340, 341 (Bankr. S.D. Ohio 2002) (in

applying the California version of Section 1-201(37), the court held that the outcome

determinative question is whether the lessor retained a meaningful reversionary interest in the

leased property).

47. Indeed, the three critical factors – the presence of a bargain purchase option, the

present value of aggregate lease rentals and the remaining useful life – all emphasize the

importance, in determining whether a purported lease is a true lease, of the lessor’s reversionary

interest in the leased property. In each case in which the lease was determined to be a true lease,

there was evidence of a reversionary interest in the property for the lessor. Edison, 207 B.R. at

818; Owen, 221 B.R. at 64. By contrast, decisions such as Pillowtex and UAL stand for the

proposition that agreements will be recharacterized when the lessor does not retain a significant,

valuable interest in the property at the end of the lease term.

48. In the present case, the undisputed summary judgment evidence establishes that

the Lessor Defendants maintain a significant and valuable interest in the Facilities after the


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expiration of the terms of the Facility Lease Agreements. MirMA does not have the option to

purchase the Facilities at the end of the Basic Lease Term for a nominal amount; moreover, the

Facilities will have a significant useful life beyond the Basic Lease Term. Such useful life will

allow the Lessor Defendants to themselves operate the Facilities or to re-lease the Facilities in

order to continue to exploit the residual value of their ownership interests in the Facilities. The

present value of the aggregate Periodic Lease Rent under the Facility Lease Agreements amounts

to less than 90% of the original cost of the Facilities. Moreover, MirMA has admitted that “[t]he

expected substantive residual risks and substantially all the residual rewards of the leased assets

and the obligations imposed by the underlying debt of the [Owner Lessors] reside directly or

indirectly with the [Owner Lessors]. Neither the substantive residual risks nor substantially all

the residual rewards are borne by MirMA.”59 Thus, it is clear from the structure of the Facility

Lease Agreements, as well as the economic realities of the transaction, that this transaction

involves true leases because there is “something of value” to return to the Lessor Defendants at

the end of the terms of the Facility Lease Agreements. See Edison, 207 B.R. 816; Pillowtex, 349

F.3d at 720.

49. Numerous additional provisions in the Facility Lease Agreements clearly were

designed to protect the Lessor Defendants’ reversionary interest in the remaining useful lives of

the Facilities for the benefit of the Lessor Defendants. For example, the Facility Lease

Agreements provide that improvements to the Facilities must be made to protect the useful life,60

and that at the end of the Basic Lease Term, the Facilities must be returned to the Lessor

Defendants in a condition in which they are capable of continuing to perform their intended

59 See SEC Letter, at 9 (LDApp001271), and attachment A, at 1, 7 (same) (LDApp001275 & 001281). 60 See Facility Lease Agreement, §§ 7.1, 7.2 (LDApp002002 & 002003). See also Exhibits G and H

attached to the Amended Complaint.


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functions, i.e., produce power.61 This again confirms that the transaction involved true leases

and thus further entitles the Lessor Defendants to summary judgment. See Edison, 207 B.R. at

821-22.

50. Many of the “other factors” previously mentioned by various courts when

analyzing recharacterization issues are no longer considered controlling. For example, even

though a lessee may assume the risk of loss, and the obligations to repair and maintain the

property, to maintain insurance on the property, and to pay taxes on the property, these facts are

entitled to little weight because the assumption of such risks and obligations is typical of various

industry practices and is merely reflective of bargaining positions. See N.Y. U.C.C. LAW § 1-

201(37)(b) and MD. CODE ANN., COM. LAW § 1-201(37)(b); see also Edison, 207 B.R. at 818-19

(“I place little weight on the fact that Debtor assumed many of the obligations associated with

outright ownership …. These factors ‘are necessarily borne by one party or the other and

therefore they reflect less the true character of the transaction than the strength of the parties’

respective bargaining positions’”); Integrated Health Services, 260 B.R. at 77 (“[A] triple net

lease is not an unusual term in a true lease.”); Villa Residential Care Homes, 2003 Bankr. LEXIS

1689, at 19 n.12 (“[A]llocation of costs associated not only with ownership but also with

possession and use . . . seem to the court of limited significance.” Moreover, “[i]t is a typical

feature of a triple net lease to shift to the tenant costs such as taxes, insurance and repairs.”).62

61 See Facility Lease Agreement, § 5.2(i) (LDApp001998). See also Exhibits G and H attached to the

Amended Complaint. 62 Plaintiffs apparently agree with this position based on the position taken by them in the SMECO Brief.

See, infra, paragraphs 58-59 and accompanying text. In fact, MirMA admits in the SEC Letter that it “is required to maintain, improve and insure the leased facilities under the Facility Lease [Agreements], which is standard under a triple net lease agreement and does not result in substantive risks or rewards to MIRMA.” SEC Letter, attachment A, at 8 (LDApp001282). Moreover, MirMA also admits that “[a]ll of these rights and responsibilities of MIRMA are consistent with the normal obligations of a lessee in an operating lease. None relieves the lessor of the normal risks and rewards of owning assets that are leased to others through operating leases.” SEC Letter, attachment A, at 8 (LDApp001282).


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Likewise, merely because the lessor also plays the role of financier does not weigh in favor of

finding a security interest. See Edison, 207 B.R. at 821 (“… [t]he fact that the role of lessor is

that of a financier is inconclusive”); QDS Components, 292 B.R. at 344 (“These factors –

selectively plucked from the laundry lists developed by courts employing the Multiple-Factor

Approach – do not support a finding that the Lessors did not retain a meaningful reversionary

interest in the [property]”). Likewise, it is of no legal consequence to the true lease analysis that

the lessor purchased the property specifically for the lessee’s use. QDS Components, 292 B.R. at

344.

51. Plaintiffs’ Amended Complaint attempts to create doubt about the true lease

nature of the Facility Lease Agreements because the Lessor Defendants received certain tax

benefits from the transaction.63 This fact, however, is irrelevant. Before the amendment to

Section 1-201(37), some courts referenced this factor in their decision matrix. However, the

drafters of amended Section 1-201(37) chose not to reference this factor in the new version of the

statute. See N.Y. U.C.C. LAW § 1-201(37) and MD. CODE ANN., COM. LAW § 1-201(37). This

deliberate omission is understandable in light of the business and economic reality that both

leases and purchases often are structured so as to take advantage of certain tax benefits

depending upon the situations of the parties to the transaction. See APB Online, at 817 (“[N]ew

§ 1-201(37) . . . eschews the laundry list of factors relied on in cases [that used a multiple factor

approach] . . .”). Although tax benefits are a major consideration in the world of leveraged

leasing (which involves billions of dollars of assets such as power plants, airplanes, and rail

cars), the fact that tax benefits are available is immaterial. Whether tax benefits are available

63 See Amended Complaint, at ¶ 3 (LDApp001483). MirMA, too, received tax benefits from the

transaction, namely those associated with MirMA’s treatment of the Facility Lease Agreements as “operating leases.” See, supra, paragraph 45 and accompanying text.


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does not change the fact that, in this instance, the Facilities have significant remaining useful

lives after the expiration of the Facility Lease Agreements and the Lessor Defendants have

valuable reversionary interests. At its core, the economic realities test seeks to determine

whether the lessor maintains an interest in the property at the end of the lease term and, in this

case, the Facility Leases meet that test as a matter of law.

(4) Plaintiffs Have Admitted All Facts Necessary To Support This Motion

52. On November 24, 2004, the Lessor Defendants served their Requests for

Admissions on the Plaintiffs pursuant to Federal Rule of Civil Procedure 30(a), made applicable

through Federal Rule of Bankruptcy Procedure 7030.64

(a) Lessee Defendants’ Requests For Admission Are Deemed Admitted Pursuant To Rule 36(a) Of The Federal Rules Of Civil Procedure.

53. Plaintiffs’ responses to the Requests for Admission were due on December 27,

2004. Prior to said due date, Plaintiffs neither requested nor received an extension of the

deadline from the Lessor Defendants. Plaintiffs further neither requested nor received an order

from the Court extending such deadline on, or before, December 27, 2004.

54. On December 28, 2004, the day after the responses to Request for Admission

were due, Plaintiffs made an oral motion to the Court to extend the time to respond to the Lessor

Defendants’ discovery requests. A hearing was held later in the day at the conclusion of which

the Court granted Plaintiffs’ request for additional time to respond to other discovery served on

the Plaintiffs but rendered no opinion on the effect of Rule 36(a) on the Requests for Admissions

to which Plaintiffs had failed to timely respond.

64 See Lessor Defendants’ First Set Of Written Discovery Requests To Plaintiffs served November 24,

2004 (the “Lessor Defendants’ Discovery”), a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 19 (LDApp001791).


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55. By operation of Rule 30(a), all of the Lessor Defendants’ Requests for Admission

in the Lessor Defendants’ Discovery are deemed admitted, including the following:65

REQUEST FOR ADMISSION NO. 1: Admit that on December 19, 2000, Plaintiffs believed the Facility Leases to be leases of property as opposed to a secured financing.

REQUEST FOR ADMISSION NO. 2: Admit that on December 19, 2000, Plaintiffs intended the Facility Leases to be leases of property as opposed to a secured financing.

REQUEST FOR ADMISSION NO. 4: Admit that on December 19, 2000, Plaintiffs believed that the expected economic life of Morgantown would be greater than the Basic Lease Term of the Morgantown Leases.

REQUEST FOR ADMISSION NO. 5: Admit that on December 19, 2000, the Useful Life of Morgantown was expected to be at least 45 years.

REQUEST FOR ADMISSION NO. 6: Admit that on December 19, 2000, the Useful Life of Morgantown was expected to extend well beyond December 30, 2028.

REQUEST FOR ADMISSION NO. 8: Admit that on December 19, 2000, Plaintiffs believed that the expected economic life of Dickerson would be greater than the Basic Lease Term of the Dickerson Leases.

REQUEST FOR ADMISSION NO. 9: Admit that on December 19, 2000, the Useful Life of Dickerson was expected to be at least 38 years.

REQUEST FOR ADMISSION NO. 10: Admit that on December 19, 2000, the Useful Life of Dickerson was expected to extend well beyond December 30, 2028.

REQUEST FOR ADMISSION NO. 11: Admit that the Original Cost of Morgantown was approximately $1,200,000,000.

REQUEST FOR ADMISSION NO. 12: Admit that the Original Cost of Dickerson was approximately $300,000,000.

REQUEST FOR ADMISSION NO. 22: Admit that Randall E. Harrison represented in MirMA’s 10-k for the period ending December 31, 2001, in his capacity as Chief Executive Officer (Principal Executive Officer) of MirMA, that the Facility Leases were operating leases.

65 The Lessor Defendants note that all of their Requests for Admission in the Lessor Defendants’

Discovery are deemed admitted, notwithstanding Plaintiffs’ subsequently served belated admissions or the Lessor Defendants’ addressing of same in paragraph 56 of this Memorandum. Nothing contained herein shall be construed as a waiver of Plaintiffs’ deemed admissions.


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REQUEST FOR ADMISSION NO. 23: Admit that J. William Holden, III represented in MirMA’s 10-k for the period ending December 31, 2001, in his capacity as Vice President of Finance (Principal Financial Officer) of MirMA, that the Facility Leases were operating leases.

REQUEST FOR ADMISSION NO. 24: Admit that Paul M. Lansdell represented in MirMA’s 10-k for the period ending December 31, 2001, in his capacity as Vice President and Controller (Principal Accounting Officer) of MirMA, that the Facility Leases were operating leases.

REQUEST FOR ADMISSION NO. 25: Admit that Lisa D. Johnson represented in MirMA’s 10-k for the period ending December 31, 2001, in her capacity as President of MirMA, that the Facility Leases were operating leases.

REQUEST FOR ADMISSION NO. 26: Admit that Richard J. Pershing represented in MirMA’s 10-k for the period ending December 31, 2002, in his capacity as Chief Executive Officer (Principal Executive Officer) of MirMA, that the Facility Leases were operating leases.

REQUEST FOR ADMISSION NO. 27: Admit that J. William Holden, III, represented in MirMA’s 10-k for the period ending December 31, 2002, in his capacity as Chief Financial Officer and Treasurer (Principal Financial Officer) of MirMA, that the Facility Leases were operating leases.

REQUEST FOR ADMISSION NO. 28: Admit that Dan Streek represented in MirMA’s 10-k for the period ending December 31, 2002, in his capacity as Vice President (Principal Accounting Officer) of MirMA, that the Facility Leases were operating leases.

REQUEST FOR ADMISSION NO. 50: Admit that, at the discount rate of 9.19544% (4.59772% for a half year), the present value of the aggregate cash rental payments under the Facility Leases is less than 90% of the Original Cost of Morgantown and Dickerson.

REQUEST FOR ADMISSION NO. 51: Admit that, on December 19, 2000, you intended that the present value of the aggregate cash rental payments under the Facility Leases be less than 90% of the Original Cost of Morgantown and Dickerson.

REQUEST FOR ADMISSION NO. 55: Admit that, based on the expected useful lives of the Facilities on December 19, 2000, at the end of the Basic Lease Term under the Facility Leases, MirMA did not have the option of leasing the Facilities for the remaining Useful Life of the Facilities for no additional consideration or nominal consideration.

REQUEST FOR ADMISSION NO. 57: Admit that the Facility Leases do not contain a Bargain Purchase Option.


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REQUEST FOR ADMISSION NO. 58: Admit that the present value of the aggregate rental payments under the Facility Leases does not equal or exceed the Original Cost of Morgantown and Dickerson.

REQUEST FOR ADMISSION NO. 59: Admit that on December 19, 2000, the Useful Life of Morgantown was 45 years or greater.

REQUEST FOR ADMISSION NO. 60: Admit that on December 19, 2000, the Useful Life of Dickerson was 38 years or greater.

(a) Plaintiffs Belatedly Served Responses To The Lessor Defendants’ Requests For Admission

56. On January 10, 2005, Plaintiffs belatedly served their responses to the Lessor

Defendants’ Discovery, admitting the following:66

REQUEST FOR ADMISSION NO. 3: Admit that the Basic Lease Term of the Morgantown Leases is 33.75 years. . . .Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 7: Admit that the Basic Lease Term of the Dickerson Leases is 28.5 years. . . .Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 13: Admit that MirMA’s Form 10-k for the period ending December 31, 2001, was true and correct on the date it was filed. . . . Plaintiffs admit that the document was materially correct and the financial statements were fairly presented in all material respects.

REQUEST FOR ADMISSION NO. 14: Admit that MirMA’s Form 10-k for the period ending December 31, 2002, was true and correct on the date it was filed. . . . Plaintiffs admit that the document was materially correct and the financial statements were fairly presented in all material respects.

REQUEST FOR ADMISSION NO. 15: Admit that MirMA’s year-end 2003 consolidated financial statements (and accompanying notes), as audited by KPMG LLP, are true and correct. . . . Plaintiffs admit that the document was materially correct and the financial statements were fairly presented in all material respects.

REQUEST FOR ADMISSION NO. 16: Admit that MirMA has consistently accounted for the Facility Leases as operating leases. . . . Plaintiffs so admit.

66 See Plaintiffs’ Objections And Responses To The Lessor Defendants’ First Set Of Written Discovery Requests served on January 10, 2005 (“Plaintiffs’ Discovery Responses”), a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 20 (LDApp001819). The Lessor Defendants continue to insist that all Requests for Admission in the Lessor Defendants’ Discovery are deemed admitted under Rule 30(a), including those listed in paragraphs 58 and which were belatedly served on the Lessor Defendants.


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REQUEST FOR ADMISSION NO. 17: Admit that MirMA has never accounted, and does not currently account, for the Facility Leases as a secured financing. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 18: Admit that, in MirMA’s Form 10-k for the period ending December 31, 2001, MirMA accounted for the Facility Leases as operating leases. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 19: Admit that, in MirMA’s Form 10-k for the period ending December 31, 2002, MirMA accounted for the Facility Leases as operating leases. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 20: Admit that in MirMA’s year-end 2003 financial statements, MirMA accounted for the Facility Leases as operating leases. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 21: Admit that in each and every monthly operating report submitted by MirMA since MirMA’s filing of its Chapter 11 Voluntary Petition in July 2003, MirMA accounted for the Facility Leases as operating leases. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 29: Admit that, in MirMA’s year-end 2001 financial statements, the Facility Leases were not listed as debt in MirMA’s balance sheet. . . . Plaintiffs so admit.



REQUEST FOR ADMISSION NO. 32: Admit that, in each and every MirMA monthly operating report filed in connection with the MirMA Bankruptcy, the Facility Leases were not listed as debt in MirMA’s balance sheet. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 33: Admit that, in MirMA’s financial statements for the period ending December 31, 2001, MirMA’s minimum lease payments under the Facility Leases were disclosed in the notes to MirMA’s financial statements. . . . Plaintiffs so admit.



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REQUEST FOR ADMISSION NO. 36: Admit that, in 2001, MirMA represented in its publicly filed financial statements that Morgantown and Dickerson were leased facilities. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 37: Admit that, in 2002, MirMA represented in its publicly filed financial statements that Morgantown and Dickerson were leased facilities. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 38: Admit that, in MirMA’s 2003 year-end financial statements, MirMA characterized Morgantown and Dickerson as leased facilities. Plaintiffs admit that they described Morgantown and Dickerson as leased facilities.

REQUEST FOR ADMISSION NO. 39: Admit that, in 2001, MirMA represented in its publicly filed financial statements that Morgantown and Dickerson were purchased by the Owner Lessors. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 40: Admit that, in 2002, MirMA represented in its publicly filed financial statements that Morgantown and Dickerson were purchased by the Owner Lessors. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 41: Admit that, in 2001, MirMA represented in its publicly filed financial statements that the Owner Lessors owned Morgantown and Dickerson. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 42: Admit that, in 2002, MirMA represented in its publicly filed financial statements that the Owner Lessors owned Morgantown and Dickerson. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 49: Admit that, at the discount rate of 9.19544% (4.59772% for a half year), the present value of the aggregate cash rental payments under the Facility Leases is less than the Original Cost of Morgantown and Dickerson. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO. 52: Admit that, under certain circumstances, the Facility Leases are terminable by MirMA before the end of the Basic Lease Term. . . . Plaintiffs so admit.

REQUEST FOR ADMISSION NO.53: Admit that, at the end of the Basic Lease Term under the Facility Leases, MirMA is not bound to purchase the Facilities. . . . Plaintiffs admit MIRMA was not so obligated.


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REQUEST FOR ADMISSION NO. 54: Admit that, at the end of the Basic Lease Term under the Facility Leases, MirMA is not bound to renew the Facility Leases. . . . Plaintiffs admit MIRMA was not so obligated.

REQUEST FOR ADMISSION NO. 56: Admit that, at the end of the Basic Lease Term under the Facility Leases, MirMA did not have the option of buying the Facilities for no additional consideration or nominal consideration. . . . Plaintiffs so admit.

57. The result of the above admissions (both deemed and actually admitted)

establishes, as a matter of law, that the Facility Lease Agreements are true leases.

(5) Plaintiffs’ Are Estopped From Contending That The Facility Lease Agreements Are Not True Leases.

58. On March 15, 2004, Mirant, Mirant Chalk Point and Mirant Peaker, all Plaintiffs

in this case, filed an adversary proceeding against PEPCO and Southern Maryland Electric

Cooperative, Inc. (“SMECO”) seeking a declaration that an agreement between Mirant Peaker

and SMECO relating to the long term use of a power plant facility constituted a true lease rather

than an operations, maintenance and capacity agreement (the “SMECO Litigation”).67 Both

PEPCO and SMECO filed motions to dismiss the SMECO Litigation. In their brief in opposition

to PEPCO’s and SMECO’s motions to dismiss,68 Mirant, Mirant Chalk Point and Mirant Peaker

argued that the agreement was a true lease because:

(a) The agreement gave Mirant Peaker – the putative lessee – the right to control the power plant (SMECO Brief at pages 2 and 13);

(b) The agreement provided that Mirant Peaker made regular payments for use and control of the power plant (SMECO Brief at pages 13, 14 and 15);

(c) The agreement did not provide Mirant Peaker the ability to purchase the power plant at the end of the agreement (SMECO Brief at page 14);

(d) The agreement provided that Mirant Peaker had control over the power plant and SMECO (the putative lessor) only had the right to enter the premises for the purposes of inspection (SMECO Brief at page 14);

67 See Complaint for Declaratory Judgment Determing [sic] that an Agreement is an Unexpired Lease of

Real Property (the “SMECO Complaint”), a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 21 (LDApp001858).

68 See SMECO Brief, at 2, 13-17 (LDApp001461 & 001472).


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(e) The agreement provided that Mirant Peaker was responsible for all damages to the power plant (SMECO Brief at page 15);

(f) The agreement provided that Mirant Peaker was responsible for maintaining insurance on the power plant (SMECO Brief at pages 15, 17);

(g) The agreement contained no mandatory renewal or purchase options (SMECO Brief at pages 15 and 16); and

(h) The economic life of the power plant was greater than the original term of the agreement (SMECO Brief at page 16).69

59. While the Lessor Defendants do not agree that the factors cited by Mirant, Mirant

Chalk Point and Mirant Peaker in the SMECO Brief for the proposition that the agreement at

issue was a true lease constitute the appropriate standard for such an inquiry, based on previous

representations to this Court, Mirant’s, Mirant Chalk Point’s and Mirant Peaker’s arguments that

the Facility Lease Agreements are not true leases lack credibility. Each factor cited by Mirant,

Mirant Chalk Point and Mirant Peaker above in favor of characterization of a true lease is

equally applicable to the Facility Lease Agreements:

(a) MirMA – the lessee – has the right to control the Facilities;

(b) The Facility Lease Agreements require MirMA to make regular payments (in this case semi-annually) for the use and control of the Facilities;

(c) The Facility Lease Agreements, as outlined above, do not provide MirMA the ability to purchase the Facilities at the end of the Basic Lease Term;

(d) MirMA has the right to control the Facilities and the Owner Lessors retain only a right of inspection;

(e) MirMA is responsible for all damages to the Facilities;

(f) MirMA is responsible for maintaining insurance, paying taxes and other associated costs on the Facilities;

69 In addition, Mirant, Mirant Chalk Point and Mirant Peaker stated that the “agreement could not be

characterized as a financing agreement” because it did not satisfy any of the critical recharacterization factors under section 1-201(37)(ii) of the Maryland Uniform Commercial Code. See SMECO Brief, at 15 (LDApp001474); see also paragraph 1 of this Memorandum and accompanying text. Again, New York has enacted the same version of section 1-201(37)(ii) as has Maryland. As outlined above in Section IV(A)(2) of this Memorandum, none of the factors listed here can be satisfied by Plaintiffs. Therefore, according to Mirant’s, Mirant Chalk Point’s and Mirant Peaker’s own analysis, the Facility Lease Agreements can not be, as a matter of law, characterized as financing agreements.


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(g) The Facility Lease Agreements do not contain a mandatory renewal or a mandatory purchase option; and

(h) The economic lives of the Facilities are longer than the Basic Lease Term of the Facility Lease Agreements.

The position taken by Mirant, Mirant Chalk Point and Mirant Peaker before this Court on the

issue of recharacterization is additional evidence that the Facility Lease Agreements are true

leases and the Lessor Defendants are entitled to summary judgment as a matter of law.

60. The Lessor Defendants are also entitled to summary judgment on the grounds that

they are quasi estopped from contending that the Facility Lease Agreements are not true leases

within Section 365 of the Bankruptcy Code. The Fifth Circuit has applied the doctrine of quasi

estoppel to prohibit a debtor from attempting to take an inconsistent position post-petition

through recharacterizing an obligation, when the debtor had taken certain tax benefits based on

the characterization from which the debtor was seeking relief in the bankruptcy court. See

Davidson v. Davidson (In re Davidson), 947 F.2d 1294 (5th Cir. 1991) (alimony versus property

settlement); In re Soule, 2004 WL 2314524, at 2 (E.D.La. Oct. 13, 2004) (community property

versus separate property); Stebbins v. Seibert (In re Stebbins), 2002 WL 1482728, at 2 (N.D.Tex.

July 8, 2002) (alimony versus property settlement); Cox v. Cox (In re Cox), 292 B.R. 141, 147-

148 (Bankr.E.D.Tex. 2003) (same); White v. White, 265 B.R. 547, 554-55 (Bankr.N.D.Tex.

2001) (support versus division of marital property).

61. In Davidson, a debtor sought to discharge his alimony obligation set forth in his

divorce settlement by having the bankruptcy court recharacterize the alimony as a property

settlement. Davidson, 947 F.2d at 1295-96. In opposition, the ex-wife argued that equitable

estoppel barred recharacterization of the alimony to a property settlement. Id. at 1296. The

bankruptcy court rejected her estoppel theory and held that the true nature of the alimony was


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that it was a property settlement and not alimony. Id. The district court upheld the decision on

appeal. Id. The Fifth Circuit reversed and held that the doctrine of quasi estoppel prohibited the

debtor from claiming the payment obligation was not alimony when he had treated the payments

as alimony for tax purposes. Id. at 1297.

62. In finding that quasi estoppel applied, the Fifth Circuit found that quasi estoppel

“forbids a party from accepting the benefits of a transaction or statute and then subsequently

taking an inconsistent position to avoid the corresponding obligations or effects.” Id; see also

Long v. Turner, 134 F.3d 312, 318 (5th Cir. 1998) (“one who retains benefits under a transaction

cannot avoid its obligations and is estopped to take an inconsistent position.”). There the debtor

had accepted the benefits of his divorce settlement by taking tax deductions for the alimony he

had paid to his ex-wife. Davidson, 947 F.2d at 1297. Although the Fifth Circuit stated that

detrimental reliance was not a necessary element for quasi estoppel, the Fifth Circuit found that

the ex-wife had detrimentally relied by claiming the alimony payments as income and paying the

appropriate taxes. Id.70 In rejecting the debtor’s attempts to recharacterize the alimony as a

property settlement, the Fifth Circuit stated that it is not an uncommon scenario for a debtor to go

broke after entering into an agreement, but that is “no excuse” for allowing the debtor to escape

an obligation that he chose to characterize. Id. To allow a debtor to enter into an agreement,

“consistently taking advantage of this characterization for tax purposes,” and then allow the

debtor to recharacterize that agreement when it is advantageous to do so, “would be a legal

affront to both the bankruptcy and tax codes” and “would reward an admitted manipulation

tantamount, at best, to deception.” Id.

70 See also Long, 134 F.3d at 318 (quasi estoppel “does not, at least normally, require either

misrepresentation by the party to be estopped or detrimental reliance by the party invoking the estoppel”).


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63. Attempted recharacterization of alimony to a property settlement is no different

than, as we have in the case before this Court, attempted recharacterization of a lease to a

security agreement. See Milligan v. Evert (In re Evert), 342 F.3d 358, 364 (5th Cir. 2003) (In

recharacterizing alimony, “courts will generally look beyond the labels which . . . parties . . . give

obligations . . . .); see also In re Snelson, 305 B.R. 255, 258-59 (Bankr.N.D.Tex. 2003) (finding

that estoppel is applicable to attempts to recharacterize leases as financing arrangements). It was

not until this lawsuit was filed that MirMA or any of the Plaintiffs publicly denounced their

previous statements and actions that the Facility Lease Agreements were anything but true

leases. Prior to this time, MirMA, upon information and belief, has received and taken, as lessee

under the Facility Lease Agreements, tax benefits afforded to lessees of property under the

Internal Revenue Code.71 In turn, the Lessor Defendants have claimed the Periodic Lease Rent

as income and paid the appropriate taxes on those amounts.72 To allow Plaintiffs to now

disregard their prior statements and actions and treat the Facility Lease Agreements as anything

other than true leases would, as the Davidson court so eloquently stated, “be a legal affront to

both the bankruptcy and tax codes” and “would reward an admitted manipulation tantamount, at

71 The Lessor Defendants requested that Plaintiffs produce “all Documents evidencing, containing and/or

referring to your contention that the overall transaction, as well as the assignment referenced in the above sentence, was orchestrated to take advantage of certain tax benefits.” See Lessor Defendants’ Discovery, at 25 (LDApp001815). Plaintiffs objected to the request and have not produced any tax returns for any of the Plaintiffs, which are presumably the best evidence the transaction was structured to take advantage of certain tax benefits. See Plaintiffs’ Discovery Responses, at 31 (LDApp001849). Plaintiffs have however admitted that not only have they accounted for the Facility Lease Agreements as operating leases, but the Facility Leases have not been listed as debt or a secured financing and Plaintiffs have described the Facilities as being leased and that they have received rental payments pursuant to the Facility Lease Agreements. See, supra, paragraph 55 and 56 and accompanying text (Requests for Admission 17, 29-38). Moreover, MirMA, the Owner Participants and the Equity Investors agreed that the Facility Lease Agreements will be true leases “for federal income tax purposes, under which the Owner Participant shall be treated as owner and lessor, and [MirMA] shall be treated as lessee, of the [Facilities] for such purposes.” Tax Indemnity Agreement, § 2(g), a true and correct copy of which is attached to the LD Evidence Appendix as Exhibit 22 (LDApp001876).

72 Pursuant to the Tax Indemnity Agreements, “[t]he Owner Participant shall be required to include in its gross income for state and local income tax purposes for any taxable year during the Facility Lease Term, amounts equal to such amounts as are required to be included in its gross income for federal tax purposes.” Tax Indemnity Agreement, § 2(o) (LDApp001887).


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best, to deception.” 947 F.2d at 1297. The Court should therefore find that Plaintiffs are quasi

estopped from attempting to recharacterize the Facility Lease Agreements as anything but true

leases under Section 365 of the Bankruptcy Code.

B. The Lessor Defendants Are Entitled To Summary Judgment On Plaintiffs’ Recharacterization Claim Because Plaintiffs Can Produce No Evidence In Support Of That Claim

64. In addition to the foregoing, the Lessor Defendants move for summary judgment

on Claim 1 on the grounds that Plaintiffs can produce no evidence on the following:

(a) That the Facility Lease Agreements give MirMA a bargain purchase option to buy the Facilities;

(b) That the present value of the aggregate Periodic Lease Rent is equal to or greater than the Purchase Price of the Facilities; and

(c) That the useful life of the Facilities is equal to or less than the Basic Lease Term of the Facility Lease Agreements.

Because Plaintiffs can provide no competent evidence of the foregoing, the Lessor Defendants

are entitled as a matter of law to summary judgment on Claim 1 declaring that the Facility Lease

Agreements are true leases within the meaning of Section 365 of the Bankruptcy Code. See

Celotex, 477 U.S. at 324; Templet, 367 F.3d at 477.

V. CONCLUSION

The undisputed summary judgment evidence establishes that the economic reality of the

Facility Lease Agreements is that of true leases within the meaning of Section 365 of the

Bankruptcy Code. The Lessor Defendants therefore are entitled, as set forth in the Motion, this

Memorandum and the LD Evidence Appendix, to summary judgment on Claim 1 in Plaintiffs’

Amended Complaint. The Lessor Defendants request all other relief to which they may be justly

entitled.


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Dated: February 25, 2005

Respectfully submitted,

FULBRIGHT & JAWORSKI L.L.P. By: /s/ Louis R. Strubeck, Jr. J. Todd Shields (TX 18260500) Michael W. Anglin (TX 01260800) Louis R. Strubeck, Jr. (TX 12425600) Richard S. Krumholz (TX 00784425) 2200 Ross Avenue, Suite 2800 Dallas, TX 75201-2784 Telephone: (214) 855-8000 Facsimile: (214) 855-8200 ATTORNEYS FOR THE LESSOR DEFENDANTS


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