',f•,/v R f P" Y

IN THE SUPREME COURT OF OHIO

AMERICAN MUNICIPAL POWER, INC., : CASE No. 2014-1847

V.

Plaintiff-Petitioner, . On a Certified Question of State Lawfrom the U.S. District Court, SouthernDistrict of Ohio, Eastern Division

BECHTEL POWER CORPORATION,

Defendant-Respondent.

Case No. 2:11-cv-131

PRELIMINARY MEMORANDUM OF AMERICAN MUNICIPALPOWER, INC. IN SUPPORT OF CERTIFIED QUESTION OF STATE LAW

Stephen C. Fitch (0022322) (Counsel ofRecord)sfitchgtaftlaw. comDavid J. Butler (0068455)dbutlerna,taftlaw. comCelia M. Kilgard (0085207)ckil ard e,taftlaw.comTaft Stettinius & Hollister LLP65 East State Street, Suite 1000Columbus, Ohio 43215Telephone: (614) 221-2838Facsimile: (614) 221-2007

Judah Lifschitz (PHV - 5803-2014)(PNo Hac Vice Motion Pending)lifschitz@slslaw.comShapiro, Lifschitz & Schram1742 N Street, N.W.Washington, DC 20036Telephone: (202) 689-1900Facsimile: (202) 689-1901

Attorneys for Plaintiff-PetitionerAmerican Municipal Power, Inc.

William G. Porter (0017296) (Counsel ofRecord)waporterLa,vorys. comDouglas R. Matthews (0039431)drnnatthews(a?,vor s.y comVorys, Sater, Seymour and Pease LLP52 East Gay StreetP.O. Box 1008Columbus, Ohio 43216-1008Telephone: (614) 464-5448Facsimile: (614) 719-4911

Attorneys for Defendant-RespondentBechtel Power Corporation

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TABLE OF CONTENTS

INTRODUCTION ........................................................................................................................... I

STATEMENT OF THE CASE AND FACTS ................................................................................2

ARGUMENT IN SUPPORT OF THE CERTIFIED QUESTION ..................................................5

A. ANSWERING THE QUESTION MAY BE DETERMINATIVEOF THE PROCEEDING IN THE DISTRICT COURT ..........................................5

B. THERE IS NO CONTROLLING OHIO SUPREME COURTPRECEDENT RESOLVING THE QUESTION .....................................................6

C. PRINCIPLES OF FEDERALISM SUPPORT ACCEPTANCE OFTHE CERTIFIED QUESTION ...............................................................................7

D. THE COURT SHOULD ANSWER THE CERTIFIEDQUESTION IN THE AFFIRMATIVE ....................................................................7

CONCLUSION ......................................................................:.......................................................12

CERTIFICATE OF SERVICE ......................................................................................................13

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INTRODUCTION

Defendant-Respondent Bechtel Power Corporation ("Bechtel") failed to perform critical

contractual obligations leading to a surprise $1 Billion increase in the estimated cost of a coal-

fired power plant being designed and to be constructed by Bechtel for Plaintiff-Petitioner

American Municipal Power, Inc. ("AMP") in Meigs County, Ohio. The surprise price increase

and resultant termination of the project caused millions of dollars in damage to AMP and its

member municipalities that participated in this project. This case concerns the standard to be

applied under Ohio law when a materially breaching party like Bechtel seeks to shield itself from

liability for damages resulting from its material breach pursuant to a contractual limitation of

liability clause. In petitioning this Court to accept the certified question, AMP does not seek to

undermine the fundamental proposition that parties should be bound to the terms of their

agreement. Rather, AMP seeks a ruling from this Court that, consistent with the public policy of

Ohio as expressed by its legislature, a party to a contract cannot consciously and unreasonably

materially breach a contract and disregard a known risk to the other party and yet avail itself of a

limitation of liability clause therein.

On October 21, 2014, Judge Michael H. Watson of the U.S. District Court (Southern

District Ohio) certified the following question of state law to this Court:

Does reckless conduct by the breaching party, as defined in Anderson v.Massillon, 134 Ohio St.3d 380 (2012), render a contractual limitation of liabilityclause unenforceable?

Plaintiff-Petitioner AMP respectfully requests that the Court accept the certified question

and order full merits briefing. Under S. Ct. Prac. R. 9.01(A), the Supreme Court may answer a

question of law certified to it by a court of the United States if the certifying court finds:

(1) there is a question of Ohio law that may be determinative of the proceeding in the certifying

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court; and (2) for which there is no controlling precedent in the decisions of the Ohio Supreme

Court. Both circumstances exist here. Furthermore, the issue presented is a quintessential

question of state law.

STATEMENT OF THE CASE AND FACTS

AMP is a nonprofit corporation organized under the laws of Ohio and headquartered in

Columbus, Ohio that purchases, generates and distributes electrical power and provides related

services for 129 publicly owned member utilities in seven states. In January, 2009, AMP entered

into an engineering, procurement, and construction contract ("EPC Contract") with Bechtel for

the design and construction of a coal-fired electric generating station in Meigs County, Ohio

knoNvn as the American Municipal Power Generating Station ("AMPGS" or "the Project").

AMP entered into the EPC Contract on behalf of its members who elected to participate in the

AMPGS Project (the "Participants"). Eighty-one AMP members became Participants, sixty-nine

from Ohio including such cities as Bowling Green, Cleveland, Cuyahoga Falls, Galion, Jackson,

Niles, Piqua, St. Marys and Wadsworth. The remaining member-Participants are municipalities

in West Virginia, Virginia and Michigan.

Under the EPC Contract, Bechtel provided AMP with an "indicative estimate," referred

to in the EPC Contract as the "current estimate basis." Ten months after entering the contract

and after completing its detailed estimating process, Bechtel was to provide AMP with a°`target

price estimate" which, while not a fixed price, was the price Bechtel was required to meet

without loss of a portion of its $100 Million fee. The EPC Contract required, however, that

Bechtel establish at contract commencement a "trend program" to keep AMP inforined "of

potential developments (i.e. "trends") that may introduce cost and!or schedule impacts (or

savings) to the current estimate basis . . ." The trend program was to provide AMP with a

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critically important "early warning system" of potential cost increases and was especially

important during the first ten months of the contract.

As part of the pre-contract negotiation process, Bechtel had provided AMP with an

indicative estimate of $2.273 Billion. During the early stages of the contract, in May, 2009,

AMP asked Bechtel to update its indicative estimate in connection with a Participants' meeting

called to decide whether to go forward with the Project. In response, Bechtel actually reduced its

indicative estimate to $2.263 Billion. Based on Bechtel's revised indicative estimate, the AMP

Participants decided to proceed with the Project, including closing on land options and

purchasing the boilers and generators.

In November, 2009, however, after AMP had closed on land options for the site of the

facility, begun construction and committed to $400 Million in contracts for the facility's boilers

and generators, Bechtel surprised AMP with a target price estimate of $3.333 Billion, over $1

Billion more than its indicative estimate in May. As a result, AMP terminated Bechtel for

default and ultimately cancelled the Project. In reliance upon Bechtel performing its obligations

in the EPC Contract, AMP had spent or accrued liabilities of over $87 Million in "sunk costs"

prior to termination of the Project. The AMPGS Participant municipalities, and ultimately their

rate payers, are obligated to pay their pro rata share of these sunk costs pursuant to a Power Sales

Contract between AMP and each Participant.

In February, 2011, AMP filed its complaint against Bechtel in the U.S. District Coui-t for

the Southern District of Ohio. The complaint alleged multiple counts against Bechtel, including

breach of the EPC Contract's trend requirement, and sought recovery of the sunk costs plus pre-

judgment interest. In discovery, AMP uncovered evidence that Bechtel had been experiencing

dramatic cost increases on its other similar coal-fired projects which had formed the basis of

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Bechtel's "$2.273 Billion" indicative estimate, information known to Bechtel but never shared

with AMP as required by the EPC Contract.

In February, 2013, Bechtel filed a Motion for Summary Judgment. In March, 2014, the

District Court granted in part and denied in part Bechtel's Motion. In its Opinion and Order, the

District Court found that, as AMP contended, the EPC Contract required Bechtel, as part of its

trend program, to trend cost information from its other coal-fired projects and advise AMP of

any information that might impact its indicative estimate for AMPGS. The Court also noted that

"Bechtel concedes that it did not trend similar project information" and that AMP's allegation

that Bechtel "knew that the substantial risks associated with undisclosed potential cost impacts

was significant" was similarly undisputed by Bechtel. March 31, 2014 Op. and Order at 20-21.

The Court also refused to grant summary judgment to Bechtel on AMP's damage claim, finding

that conflicting testimony exists as to whether Bechtel's surprise $1 Billion increase from its

May, 2009 indicative estimate to its November, 2009 target price estimate, alleged by AMP to

have been caused by Bechtel's failure to trend its similar project cost information, was the cause

of AMP's damages.

The magnitude of the impact of Bechtel's $1 Billion increase on AMP and its Participants

cannot be overstated. Nonetheless, and in spite of its other findings and conclusions, the District

Court concluded that AMP's damages for breach of contract were subject to the limitation of

liability ("LOL") clause in the contract. Using a formula based in part on the early stage of the

Project, the LOL clause, if enforced, would limit AMP's damages to $500,000, instead of the

approximately $87 Million in sunk cost damages AMP was seeking for its Participants, plus pre-

judgment interest, for a total damage claim of $97 Million.

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In its response to Bechtel's summary judgment motion, AMP argued that the LOL clause

was unenforceable if Bechtel had engaged in willful, wanton or reckless conduct and noted that

this Court had only recently clarified the distinction between the three types of conduct in

Anderson v. Massillon, 134 Ohio St.3d 380 (2012). The District Court found, however, based

primarily upon this Court's 1978 opinion in Richard A. Berjian, D. 0., Inc. v. Ohio Bell Tel: Co.,

54 Ohio St.2d 147, that the standard for overcoming a LOL clause under Ohio law was limited to

willful or wanton conduct. Thus, under the District Court's interpretation of Ohio law, a

breaching party could be guilty of reckless conduct as defined in Anderson and yet, nonetheless,

be entitled to the protections of a LOL clause. Further, the Court defined wanton conduct as a

failure to exercise "any care whatsoever" and concluded that, under that standard, AMP had

failed to demonstrate that genuine issues of fact existed that precluded enforcement of the LOL

clause.

Shortly thereafter, AMP filed a motion with the District Court asking that it certify the

state law issue of whether reckless conduct renders a contractual LOL clause unenforceable to

this Court. AMP's motion was granted by the Court on October 21, 2014 and the District

Court's certification order was filed with the Clerk of this Court on October 24, 2014.

ARGUMENT IN SUPPORT OF THE CERTIFIED QUESTION

A. Answering The Question May Be Determinative Of The Proceeding In TheDistrict Court.

As the District Court found in its Certification Order, the central issue in this case is the

enforcement of the LOL clause. In its motion to dismiss and in its motion for summary

judgment, Bechtel did not seek judgment on the merits of AMP's claims of breach of contract

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but rather sought only to limit AMP's damages tlarough application of the LOL clause.l In

opposition to Bechtel's summary judgment motion, AMP presented evidence of damages of over

$56 Million in connection with termination of its boiler and generator contracts, over $16

Million in payments to Bechtel, and over $15 Million in other costs incurred on the project

which, when combined with prejudgment interest, totaled over $97 Million. Resolution of the

certified question thus, in the District Court's words, "implicates the difference between $97

million and $500,000 in potential damages" and "is tantamount to determinative of this particular

proceeding." October 21, 2014 Cert. Order at 9. The U.S. District Court (the certifying court)

having found that the certified question of Ohio law may be determinative of the proceeding, the

first condition for acceptance of a certified question in S. Ct. Prac. R. 9.01(A) has been met.

B. There Is No Controlling Ohio Supreme Court Precedent Resolving TheQuestion.

In 1978, this Court held in Richard A. Berjian v. Ohio Bell Telephone Company, 54 Ohio

St.2d 147, 375 N.E.2d 410, that a limitation of liability clause in a telephone directory

advertising agreement was valid and enforceable absent a showing of willful or wanton

misconduct on the part of the telephone company. The Court did not address whether other

degrees of culpable conduct would also preclude enforcement of a limitation of liability clause.

Subsequent to Berjian, multiple courts have used willful, wanton, reckless and gross

negligence in describing conduct by the breaching party that would render a contractual

limitation of liability clause unenforceable.2 Also subsequent to Berjian, this Court indicated, in

1 As noted above, Bechtel also sought full summary judgment on the grounds that AMP couldnot establish the causation element of its damage claim. The Court denied summary judgment toBechtel on those grounds.

2 Transcontinental Insurance Company v. SimplexGrinnel, LP, No. 3:05-cv-7012, 2006 WL2035571, *5-7 (N.D. Ohio 2006) (Court denied summary judgment and enforcement of a

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a footnote, that willful, wanton and reckless were functional equivalents. Thompson v. McNeill,

53 Ohio St.3d 102, 104, 559 N.E.2d 705, fn. 1 (1990). In 2012, this Court disavowed the dicta in

Thompson and clarified that willful, wanton and reckless "describe different and distinct degrees

of care and are not interchangeable." Anderson v. Massillon, 134 Ohio St.3d 1511, 2012 Ohio

5711, 983 N.E.2d 266. Anderson involved a statutory irnmunity issue and thus, while it resolved

the differences in the types of conduct discussed, it did not address their application to breach of

contract cases involving limitation of liability clauses.

Thus, as succinctly stated by the District Court in its certification order:

In sum, while there exists controlling Ohio Supreme Court precedent onwhether willful and wanton conduct bars enforcement of a limitation of liabilityclause, there appears to be no controlling Ohio Supreme Court precedent onwhether Ohio law recognizes recklessness as a standard of conduct that would barenforcement of a contractual limitation of liability. There also does not appear tobe guidance from the Ohio appellate and trial courts on the issue. In light of thislack of Ohio law, as well as the Ohio Supreme Court's recent clarification in.Anderson of the difference between the willful, wanton, and reckless standards,the Ohio Supreme Court is in the best position to determine if recklessness asdefined therein should be deemed to bar enforcement of a contractual limitation ofliability clause.

October 21. 2014 Certification Order at 12.

limitation of liability clause, ruling that factual issues existed on whether the defendant was"grossly negligent" or "reckless," which would "warrant non-enforcement of the contract['slimitation of liability provision]."); Nahra v. Honeytivell, Inc., 892 F.Supp. 962, 969-70 (N.D.Ohio 1995) (party not entitled to invoke limitation of liability clause if it had committed a"willful or reckless breach"); Motorist Mutual Insurance Conapany v. ADT Security Systems,Mid-South, Inc., No. 14799, 14803, 1995 WL 461316, *4 (Ohio App. 2d Dist. 1995) (grossnegligence); Superior Integrated Solutions, Inc. v. The Reynolds and Reynolds Co., 3:09-cv-314,2009 WL 4135711, *3 (S.D. Ohio Nov. 23, 2009) (limitation of liability clause ineffective ifwillful or wanton misconduct. "A wilful or reckless breach is considered to be an intentionalbreach and is, thus, wilful misconduct."); Ohio Cas. Ins. Co. v. D and J. Distributing and Mfg.,Inc., 2009-Ohio-3806, 2009 WL 2356849 (Ohio Ct. App. July 31, 2009) (genuine issue of factexisted concerning whether defendant's behavior "constituted gross negligence, or willful andwanton misconduct."); Solid Gold Jewelers v. ADT Security Systems, Inc., 600 F. Supp.2d 956,964 (N.D. Ohio 2007) (willful or reckless); Purizer Corp. v. Battelle Mem. Inst., 01 C 6360,2002 WL 22014 (N.D. Ill. Jan. 7, 2002) (applying Ohio law) (willful or reckless).

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C. Principles Of Federalism Support Acceptance Of The Certified Question.

As noted in the District Court's Certification Order and in footnote 2 above, multiple

U.S. District Courts liave had occasion to apply Ohio law to limitation of liability clause cases

without the benefit of clear precedent. "Through certification of novel or unsettled questions of

state law for authoritative answers by a State's highest court, a federal court may save `time,

energy, and resources and hel[p] build a cooperative judicial federalism."' Arizonans foN Official

English v. Arizona, 520 U.S. 43, 77, 117 S.Ct. 1055, 1073-74 (1997), quoting Lehman Brothers

v. Schein, 416 U.S. 386, 391, 94 S.Ct. 1741, 1744. Furthermore, "(c)ertification frees federal

courts from `having to guess how state courts will decide important questions of state law. "'

Scott v. Bank One Trust Company, 62 Ohio St.3d 39, 577 N.E.2d 1077 (1991), quoting from

Norris, The Bicentennial of Judicial Federalism (1990), 53 Ohio St.3d lvii, lviii.3 (Emphasis in

Original)

D. The Court Should Answer The Certified Question In The Affirmative.

Given this Court's express definition of reckless conduct in Anderson, the issue presented

by the certified question for this Court is straightforward:

Where a party to a contract breaches the contract by conduct characterized by aconscious disregard of or indifference to a known or obvious risk of harin to thenon-breaching party that is unreasonable under the circumstances and issubstantially greater than negligent conduct, is a limitation of liability clause inthe contract rendered unenforceable?

Petitioner AMP asserts that the Court should answer the question in the affirmative.

While this Court decides propositions of law rather thari resolving individual disputes, the

facts in this case illuminate the injustice that results if a non-breaching party is required to prove

willful or wanton conduct, as interpreted by the District Court, in order to render a limitation of

3 In Scott, this Court held that its rule permitting certification of state law questions from thefederal courts was constitutional.

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liability clause unenforceable. As discussed above, the District Court found, in ruling on

Beclitel's motion for summary judgment, that (1) Bechtel was obligated to implement a "trend

program" beginning at the start of the AMPGS project which would timely provide AMP with

potential cost impacts to the AMPGS project, including cost information from other similar

Bechtel projects; (2) Bechtel concedes it did not trend similar project information and did not

inform AMP of the substantial increased costs Bechtel was experiencing on the similar projects;

and (3) Bechtel knew of the substantial risks to AMP associated with failing to disclose potential

costs impacts to the AMPGS project. March 31, 2014 Order at 19, 21 and 20. Nonetheless,

applying its interpretation of wanton conduct under Ohio law as "no care whatsoever," the Court

found that Bechtel had exercised "some care, thereby precluding a finding that it exercised no

care whatsoever." Id. at 25-26.4

The use of a wanton conduct standard, as interpreted by the District Court, creates a

virtually impossible hurdle to overcome. According to the District Court, critical contractual

obligations can be consciously ignored by the breaching party, with full knowledge of the

resultant substantial risk and adverse consequences to the non-breaching party, and yet, literally,

any act wliieh the breaching party can point to can be deemed to rise to the level of "some care"

and thus preclude enforcement of the LOL clause.

As discussed above, AMP does not contend that contractual terms, agreed to by the

parties, should be ignored. Applying a reckless conduct standard, however, as well as a willful

and wanton standard, to the enforcement of a limitation of liability clause would not abridge a

party's right to rely upon the tern7s of a contract but, rather, would make clear that a breaching

party cannot consciously and unreasonably disregard known risks to the non-breaching party

4 AMP does not concede that the District Court's ruling with respect to whether Bechtel'sconduct was wanton was correct.

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with impunity. As defined in Anderson, a reckless conduct standard requires the non-breaching

party to prove that the breaching party acted with a "conscious" disregard of or indifference to "a

known or obvious risk of harm" that is "unreasonable" and "substantially greater than negligent

conduct."

The Ohio legislature has expressly adopted a wanton or reckless standard throughout the

Ohio Revised Code in defining conduct sufficiently culpable to warrant the loss of statutory

benefits or protections. For example, R.C. 2744.33, dealing with immunity for political

subdivisions and their employees, provides that, in addition to other specified immunities, an

employee is immune from liability unless the employee's acts or omissions "were with malicious

purpose, in bad faith, or in a wanton or reckless manner." R.C. 2744.33(A)(6). On the state

level, R.C. 9.86 provides that no officer or employee of the state shall be liable in a civil action

"unless the officer or employee acted with malicious purpose, in bad faith, or in a wanton or

reckless manner." A sampling of the numerous other statutes where the legislature has adopted a

reckless standard include: R.C. 109.362 (Prior to the attorney general defending a state officer

under R.C. 109.361, the attorney general must make a determination that the officer or employee

was not "acting manifestly outside of his employment * * * or in a wanton or reckless manner

***."); R.C. 2743.02 (The state waives immunity from liability unless the court of claims

determines that the officer or employee acted in a wanton or reckless manner.); R.C. 3345.122

(Members of board of trustees of an institution of higher education are not liable in damages in a

civil action unless the trustee acted in a wanton or reckless manner.); R.C. 3797.12 (Certain

persons are immune from civil liability in connection with child abuse registration unless they

acted in wanton or reckless manner.); R.C. 5923.37 (A member of the organized militia on active

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duty is not liable for an act performed within his military duties unless the conduct was wanton

or reckless.).

In Sommer v. Federal Signal Corp., 79 N.Y.2d 540, 593 N.E.2d 1365, 583 N.Y.S.2d 957,

(1992), New York's highest court was faced with a nearly identical issue as is presented by the

certified question here. An alarm company contract contained clauses both exonerating the

companv from liability and limiting the amount of damages that could be recovered against it.

The Court held that such clauses could not insulate a party from damages caused by "gross

negligence" and defined gross negligence as "conduct that evinces a reckless indifference to the

rights of other." 593 N.E.2d at 1371. The court also noted that "public policy precludes

enforcement of contract clauses exonerating a party from its reckless indifference to the rights of

others, whether or not termed "gross negligence." Id. at fn. 3. In support of its conclusion, the

court noted that the New York legislature had expressly adopted a reckless indifference standard

in the context ofjoint tortfeasor liability. Id at 1371. See also, Wolf v. Ford, 335 Md. 525, 531,

644 A.2d 522 (1994) ("a party will not be permitted to excuse its liability for intentional harms

or for the more extreme forms of negligence, i.e., reckless, wanton or gross.")

Similarly here, the Ohio legislature has repeatedly adopted a reckless standard for when a

party loses a statutory benefit or protection. The same standard should be adopted by this Court

in determining whether a contractual limitation of liability clause is unenforceable against a

materially breaching party who consciously and unreasonably disregards its contractual

obligations with full knowledge of the risk to the non-breaching party.

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CONCLUSION

For the reasons set forth above, Petitioner American Municipal Power, Inc. asks that the

Court accept the certified question and order full briefing and oral argument as provided for in S.

Ct. Prac. R. 9.07.

Respectfully submitted,

Stephen C. Fitch (0022322) (Counsel of Record)sfitch cr taftlaw.comDavid J. Butler (0068455)dbutler@taftlaw.comCelia M. Kilgard (0085207)ckilgard@taftlaw.comTaft, Stettinius & Hollister LLP65 East State Street, Suite 1000Columbus, Ohio 43215Telephone: (614) 221-2838Facsimile: (614) 221-2007

Judah Lifschitz (PHV - 5803-2014)(Pro Hac Vice Motion Pending)lifschitzoa slslaw. comShapiro, Lifschitz & Schram1742 N Street, N.W.Washington, DC 20036Telephone: (202) 689-1900Facsimile: (202) 689-1901

Counsel for Plaintiff-PetitionerAmerican Municipal Power, Inc.

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CERTIFICATE OF SERVICE

The undersigned hereby certifies that a true and accurate copy of the foregoing was

served via regular U.S. mail, postage prepaid, this 13th day of November, 2014 upon:

William G. Porter, Esq.Douglas R. Matthews, Esq.Vorys, Sater, Seymour and Pease LLP52 East Gay StreetP.O. Box 1008Columbus, Ohio 43216-1008

Counsel for Defendant-Respondent

`--• ` ^

Stephen C. Fitch

31680771.1

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