ML020780514
| ML020780514 | |
| Person / Time | |
|---|---|
| Site: | Diablo Canyon  |
| Issue date: | 03/25/2002 |
| From: | Lopes J Howard, Rice, Nemerovski, Canady, Falk & Rabkin, Pacific Gas & Electric Co |
| To: | Office of Nuclear Reactor Regulation, US Federal Judiciary, Bankruptcy Court, Northern District of California |
| References | |
| 01-30923 DM, 94-0742640 | |
| Download: ML020780514 (29) | |
Text
1 JAMES L. LOPES (No. 63678)
JANET A. NEXON (No. 104747) 2 GARY M. KAPLAN (No. 155530)
HOWARD, RICE, NEMEROVSKI, CANADY, 3 FALK & RABKIN A Professional Corporation 4 Three Embarcadero Center, 7th Floor San Francisco, California 94111-4065 5 Telephone: 415/434-1600 Facsimile: 415/217-5910 6
Attorneys for Debtor and Debtor in Possession 7 PACIFIC GAS AND ELECTRIC COMPANY 8 UNITED STATES BANKRUPTCY COURT 9 NORTHERN DISTRICT OF CALIFORNIA 1n3
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SAN FRANCISCO DIVISION 11 Case No. 01-30923 DM 12 In re Chapter 11 Case 13 PACIFIC GAS AND ELECTRIC RICE COMPANY, a California corporation, Date: March 25, 2002 9:30 a.m.
FCAA 14 Time:
BULK Debtor. Place: 235 Pine Street San Francisco, California 16 Federal I.D. No. 94-0742640 17 BY PACIFIC GAS AND ELECTRIC 18 NOTICE OF MOTION AND MOTION AND SUPPORT COMPANY FOR ORDER (A) APPROVING SETTLEMENT AND SENIOR PROPONENTS 19 AGREEMENT BY AND AMONG PLAN PAYMENT OF PRE- AND POST DEBTHOLDERS, (B) AUTHORIZING OF UNDISPUTED CLAIMS IN 20 PETITION INTEREST TO HOLDERS PAYMENT OF FEES AND CERTAIN CLASSES, (C) AUTHORIZINGAND PAYING AGENTS AND 21 EXPENSES OF INDENTURE TRUSTEES INTO SIMILAR SETTLEMENTS; (D) AUTHORIZING DEBTOR TO ENTERPOINTS AND AUTHORITIES.
22 SUPPORTING MEMORANDUM OF M. HARVEY FILED 23 [SUPPORTING DECLARATION OF KENT SEPARATELY]
224 Z5 Z6 27 28 t,
AGMT MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT W
I TABLE OF CONTENTS 2 Page 3 NOTICE OF MOTION AND MOTION 1 4 MEMORANDUM OF POINTS AND AUTHORITIES 2 5 I. INTRODUCTION 2 6 II. FACTUAL BACKGROUND 5 7 A. General Background. 5 8 B. The Settlement Agreement. 6 9 III. ARGUMENT 10 10 A. The Settlement Agreement Should Be Approved. 10 11 1. The Probability Of Success On The Merits. 12 12 2. Litigation Of The Disputed Issues Would Be Costly And Result In Delays In Administration Of The Estate. 14 13 RD 3. The Settlement Is In The Best Interests Of Creditors. 15
@N4DL 14 SB. This Court Should Authorize The Debtor To Make Payments 15 Of Pre-Petition Interest And Post-Petition Interest To Holders Of Certain Undisputed Claims. 16 16
- 1. This Court Has Statutory Authority And Equitable 17 Power Under Sections 105(a) And 363(b) Of The Bankruptcy Code To Permit The Debtor To Make 18 Interest Payments To Holders Of Undisputed Claims During The Chapter 11 Case. 16 19
- 2. Early Payment Of Interest To Holders Of Undisputed 20 Claims Is In The Best Interest Of The Debtor's Estate And Creditors. 19 21
- 3. Proposed Procedure For Making Interest Payments. 21 22 C. Payment Of The Fees And Expenses Of Indenture Trustees 23 And Administrative Bank And Other Paying Agents Should Be Approved. 22 24 D. The Debtor Should Be Authorized To Enter Into Substantially 25 Similar Settlements Without Further Court Approval. 24 26 CONCLUSION 25 27 28 MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT
I TABLE OF AUTHORITIES 2 Page(s) 3 4 Cases 5 Committee of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d. 1063 (2d Cir. 1983) 17 6 DiStefano v. Stern (In re JFD Enters.), No. 99-2034, 2000 WL 560189 (1st Cir. May 1, 2000) 17 8 In re Chateaugay Corp., 80 B.R. 279 (Bankr. S.D.N.Y. 1987) 19 In re Equalnet Communications Corp., 258 B.R. 368 (Bankr. S.D. Tex. 2000) 19 10 In re Ernst Home Ctr., Inc., 209 B.R. 974 (Bankr. W.D. Wash. 1997) 17 In re Ionosphere Clubs, Inc., 98 B.R. 174 (Bankr. S.D.N.Y. 1989) 18 12 In re Purofied Down Prods. Corp., 150 B.R. 519 (S.D.N.Y. 1993) 11 13 In re Structurelite Plastic Corp., 86 B.R. 922 (Bankr. S.D. Ohio 1988) 18 HOWA&RD RN0< In re UNR Indus., Inc., 143 B.R. 506 (Bankr. N.D. Ill. 1992), rev'd on other CANu.uI MCI 14 grounds, 173 B.R. 149 (C.D. Ill. 1994) 18 15 In re W.T. Grant Co., 699 F.2d 599 (2d Cir. 1983) 11 16 Martin .v. Kane (In re A & C Props.), 784 F.2d 1377 (9th Cir. 1986) 11, 12, 15 17 Michigan Bureau of Workers' Disability Comp. v. Chateaugay Corp. (In re 18 Chateaugay Corp.), 80 B.R. 279 (S.D.N.Y. 1987) 16 19 Myers v. Martin (In re Martin), 91 F.3d 389 (3d Cir. 1996) 10, 12 20 Nellis v. Shugrue, 165 B.R. 115 (S.D.N.Y. 1994) 11, 12 21 Official Unsecured Creditors' Comm. v. Pennsylvania Truck Lines, Inc. (In re Pennsylvania Truck Lines, Inc.), 150 B.R. 595 (E.D. Pa. 1992), aff d, 8 22 F.3d 812 (3d Cir. 1993) 11,12 23 Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v.
Anderson, 390 U.S. 414 (1968) 11 24 Vaughn v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham 25 Lambert Group, Inc.), 134 B.R. 499 (Bankr. S.D.N.Y. 1991) 10, 11, 15 26 27 28 MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT
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1 TABLE OF AUTHORITIES 2 Page(s) 3 Statutes 4
11 U.S.C.
§§101, et se_. 1
§105(a) 1, 16, 17, 18, 21 5 §105(b) 16 6
§363 21
§363(b) 1, 16, 17 7
§1107 5
§1108 5 8
§1 129(a)(7) 17 Fed. R. Bankr. P.
9 9019 24 10 9019(a) 2,10 11 N.D. Cal. Local Bankr. R. 9014-1(c)(2) 2 12 Other Authorities HOWARD 13 RKIE
_kw 14 R. Eisenberg & F. Gecker, The Doctrine of Necessity and Its Parameters, 73 Marq. L. Rev. 1 (1989) 18
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, = 15 2 Lawrence P. King, Collier on Bankruptcy ¶105.01 (15th ed. rev. 2001) 17 16 10 Lawrence P. King, Collier on Bankruptcy ¶9019.03 (15th ed. rev. 2001) 24 17 18 19 20 21 22 23 24 25 26 27 28 MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT
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1 NOTICE OF MOTION AND MOTION 2 PLEASE TAKE NOTICE that on March 25, 2002, at 9:30 a.m., or as soon 3 thereafter as the matter may be heard, in the Courtroom of the Honorable Dennis Montali, 4 located at 235 Pine Street, 22nd Floor, San Francisco, California, Pacific Gas and Electric 5 Company, the debtor and debtor-in-possession in the above-captioned case ("PG&E" or the 6 "Debtor"), will and hereby does move the Court (the "Motion") for entry of an order 7 (a) approving that certain Settlement and Support Agreement dated February 12, 2002 (the 8 "Settlement Agreement"), by and among the Debtor, PG&E Corporation (the "Parent" and, 9 together with the Debtor, the "Plan Proponents") and the Senior Debtholders,'
10 (b) authorizing the Debtor to make payments of Pre-Petition Interest 2 and Post-Petition II Interest to the holders of undisputed Claims in certain Classes under the Plan during the 12 Chapter 11 Case, (c) authorizing the Debtor to pay, on an on-going basis, the fees and 13 expenses of certain indenture trustees and administrative bank or other paying agents who RKE
,A,,,, 14 have a right to hold back or otherwise seek reimbursement of their fees and expenses from APN-i. 15 the beneficial holders of financial debt to whom they make distributions and (d) authorizing 16 the Debtor to enter into additional settlement agreements with other holders of Class 5 17 Claims on substantially similar terms as the Settlement Agreement, without the need for 18 further Court approval.
19 A copy of the Settlement Agreement is annexed as Exhibit "A" to the 20 accompanying Declaration of Kent M. Harvey. This Motion is made pursuant to Sections 21 105(a) and 363(b) of the United States Bankruptcy Code, 11 U.S.C. §§ 101, et L%. (the 22 1The term "Senior Debtholders" means: State Teachers Retirement System of Ohio, 23 DC Water and Sewer Authority, Chandler Asset Management, Franklin Mutual Advisers, LLC, King Street Capital, M.H. Davidson & Co., L.L.C., OZF Management L.P., OZ 24 Management, L.L.C., Pacific Investment Management Company, L.L.C., Satellite Asset Management L.P., Security Benefit Life Insurance Co., Stark Investments, Angelo 25 Gordon & Co., the State of Tennessee, Appaloosa Management LP, Deutsche Banc Alex.
Brown, Inc., Bankers Trust Company, Halcyon Offshore Management Company LLC, and 26 Halcyon/Alan B. Slifka Management Company LLC.
2Capitalized terms not defined herein have the meanings ascribed to them in the 27 Settlement Agreement or in the First Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code for Pacific Gas and Electric Company, dated December 19, 2001 (as 28 amended from time to time, the "Plan").
MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT
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1 "Bankruptcy Code") and Rule 9019(a) of the Federal Rules of Bankruptcy Procedure (the 2 "Bankruptcy Rules"), and is based on the facts and law set forth herein, the Declaration of 3 Kent M. Harvey, the record of this case and any admissible evidence presented at or prior to 4 the hearing on the Motion.
5 PLEASE TAKE FURTHER NOTICE that pursuant to Rule 9014-1 (c)(2) of the 6 Bankruptcy Local Rules for the United States District Court for the Northern District of 7 California, any written opposition to the Motion and the relief requested herein must be filed 8 with the Bankruptcy Court and served upon appropriate parties (including counsel for each 9 of the Debtor, the Senior Debtholders, the Office of the United States Trustee, and the 10 Official Committee of Unsecured Creditors), at least five (5) days prior to the scheduled 11 hearing date. If there is no timely objection to the requested relief, the Court may enter an 12 order granting such relief without further hearing.
HOWtARD 13 MEMORANDUM OF POINTS AND AUTHORITIES RKE cANA MA~(
14 I. INTRODUCTION
&RAHON Aho .dt 15 The Senior Debtholders are a group of creditors holding approximately $2 billion 16 in General Unsecured Claims against the Debtor, including Commercial Paper Claims, 17 Floating Rate Note Claims, Medium Term Note Claims, Senior Note Claims and Revolving 28 Line of Credit Claims, each of which is classified as a Class 5 Claim under the Plan.3 Soon 19 after the filing of the Plan, the Senior Debtholders communicated to the Debtor their strong 20 disagreement with various aspects of the treatment to be afforded such Claims under the 21 Plan. In particular, the Senior Debtholders disagreed with the Debtor regarding the 22 appropriate rate of interest earned on their Claims, raised concerns regarding whether the 23 Long-Term Notes to be issued to creditors under the Plan would have a market value of par 24 and took the position-disputed by the Debtor-that they were entitled to exercise certain 25 subordination rights against the holders of QUIDS Claims because they were not assured of 26 payment in full.
27 3The evidentiary basis and support for the facts set forth in this Motion are contained in 28 the Declaration of Kent M. Harvey filed concurrently herewith, MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT
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1 In an effort to avoid costly and time-consuming litigation over these disputed 2 issues, the Senior Debtholders and the Plan Proponents commenced good faith and arms 3 length negotiations. After months of extensive and arduous negotiations, the parties reached 4 a compromise regarding the treatment of Senior Indebtedness. This compromise and 5 settlement was memorialized initially in a stipulation and term sheet filed with the 6 Bankruptcy Court on January 14, 2002, and subsequently in the Settlement Agreement for 7 which the Debtor now seeks approval.
8 In the Settlement Agreement (which is described more fully below), the Plan 9 Proponents have agreed to fix the principal amount of the Senior Debtholders' Claims and to 10 make certain amendments to the Plan after the Settlement Agreement becomes effective, 11 including, among other things, amendments relating to the rates of interest earned on Senior 12 Indebtedness and altering certain terms of the Long-Term Notes to enhance their value and HCm%.D 13 transferability. In addition, the Plan Proponents have agreed, subject to this Court's RKE M-0 14 approval, to pay the reasonable fees and expenses of the Senior Debtholders and to make
&RAEQN 15 payments of accrued and unpaid Pre-Petition Interest and Post-Petition Interest to the Senior 16 Debtholders during the Chapter 11 Case. In consideration of the Plan Proponents' 17 agreements, the Senior Debtholders have agreed to support confirmation of the Plan, 18 including voting their Allowed Claims in favor of the Plan, subject to certain conditions.
19 As noted above, the compromise memorialized in the Settlement Agreement is 20 the product of months of extensive negotiations among the parties. The settlement 21 negotiations were difficult, not only because of the number of parties involved- 18 creditors 22 are party to the Settlement Agreement-but also because these creditors had diverse 23 interests, depending upon the particular debt instrument(s) they hold. Notwithstanding these 24 diverse interests, the parties were able to reach accord on the terms of a settlement, the 25 benefits of which were intended for all holders of Senior Indebtedness and, in some cases, 26 all holders of Class 5 Claims. Moreover, the Settlement Agreement now provides the 27 framework for additional settlements with other creditors.
28 The Debtor has weighed carefully the b'enefits afforded to the estate by the MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 1 settlement against the expense, risks and delays attendant to litigation over the interest rate 2 and QUIDS Claim subordination issues and, in the exercise of its business judgment, has 3 concluded that the settlement terms are fair and reasonable and are in the best interests of the 4 estate in that they reflect:
5 a. the inherent risks of litigation; 6 b. the expense that would be incurred in protracted litigation between the Senior Debtholders and the Plan Proponents and the 7 holders of QUID Claims over certain of these issues and the likely delays such litigation would cause in the administration of 8 the estate and prosecution of the Plan; and 9 c. the benefits that will be afforded to other creditors who are not parties to the Settlement Agreement but who will nevertheless 10 receive favorable treatment based on the terms thereof, including the contemplated Plan amendments and the Debtor's proposal to 11 make current interest payments to holders of certain undisputed Claims.
12 HCM 13 The Debtor also seeks authorization from this Court to make current interest RXE ciux 14 payments to the holders of undisputed Claims (other than Administrative Expense Claims,
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- 15 Environmental, Fire Suppression and Tort Claims and Chromium Litigation Claims4) after 16 the Settlement Agreement becomes effective.5 The Debtor submits that payment of Pre 17 Petition Interest and Post-Petition Interest is warranted under the exceptional circumstances 18 of this Chapter 11 Case. The Debtor, a solvent entity, will have to make these payments 19 eventually pursuant to a plan of reorganization. Currently, the estate is incurring 20 unnecessary interest expense because the rates at which the Debtor must accrue and 21 compound accrued interest are significantly higher than the rates the Debtor can earn on its 22 invested cash in today's financial markets. Payment of current interest to the holders of 23 undisputed Claims thus will have a twofold benefit: it will reduce this negative arbitrage, 24 25 4 These Claims do not earn interest under the Plan. See Plan §4.1. Accordingly, these Claims are not included in the Classes of Claims for which the Debtor seeks authorization to 26 pay interest pursuant to this Motion.
5There are three conditions to effectiveness of the Settlement Agreement: (a) Court 27 approval of the Settlement Agreement, (b) Court approval of the Disclosure Statement and (c) entry into the Settlement Agreement or substantially similar agreements by the holders of 28 at least $3 billion in Class 5 Claims.
MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT time relieve creditors of some-of the 1 thus enhancing the value of the estate, and at the same of this bankruptcy.
2 financial burdens they have suffered as a result the fees and expenses of certain 3 Finally, the Debtor seeks authorization to pay paying agents to ensure full payment, 4 indenture trustees and administrative bank and other holders of financial debt, and to enter into 5 without holdback, is made to the beneficial the need for further Court authorization.
6 similar agreements with other creditors, without the settlements embodied in 7 The Debtor respectfully urges this Court to approve relief described herein as fair and equitable 8 the. Settlement Agreement and grant the related creditors.
9 and in the best interests of this estate and its 10 II. FACTUAL BACKGROUND 11 A. General Background.
petition for relief under Chapter 11 of 12 On April 6, 2001, PG&E filed a voluntary manage and operate its businesses and properties HOYWAR 13 the Bankruptcy Code. PG&E continues to 1107 and 1108 of the Bankruptcy Code.
0 fNN 14 as a debtor-in-possession, pursuant to Sections filed the Plan. The General On December 19, 2001, the Plan Proponents
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,.*O. 15 Class 5 Claims include, among others, 16 Unsecured Claims which are classified in the Plan as Paper Claims, Senior Note Claims, Medium Term Note Claims, Floating Rate 17 Commercial Claims, also referred to herein as "Senior 18 Note Claims and Revolving Line of Credit amended, currently proposes to pay 19 Indebtedness." The Plan, as it has been subsequently Interest (a) Pre-Petition Interest and Post-Petition 20 each holder of an Allowed Class 5 Claim:
(b) Cash equal to 60% of the remaining 21 accrued and unpaid up to the Effective Date, Claim after the payment of Pre-Petition Interest, (c) Long-Term Notes equal to 22 Allowed (d) a pLo rata share of a $40 million placement 23 40% of the remaining Allowed Claim, and be to approximately 1.5% of the Long Term Notes to be issued under the Plan) to 24 fee (equal 25 among the holders of Allowed Claims in certain Classes. Plan, §4.14. The Plan divided in the Plan, Post-Petition Interest on Allowed 26 further states that, unless otherwise provided non Plan will be calculated and paid at the lowest 27 Claims entitled to such interest under the specified in the applicable indenture or 28 default rate and in accordance with the terms
& SUPPORT AGMT MOT. FOR ORDER APPROVING SETTLEMENT
1 instrument governing the Allowed Claims, or if no instrument exists or if the applicable 2 instrument does not specify a non-default rate of interest, at the Federal Judgment Rate in 3 existence as of the Petition Date. Plan, §4.1.
4 As noted above, the Senior Debtholders, who hold approximately $2 billion in 5 Class 5 Claims (primarily Senior Indebtedness), disagreed with the interest rates proposed to 6 be paid on Senior Indebtedness and other elements of the treatment of these Claims under 7 the Plan. Although the parties began good faith settlement discussions shortly after.the 8 original version of the Plan was filed on September 20, 2001, they were not able to -reach an 9 immediate agreement. On November 27, 2001, the Senior Debtholders filed an objection to 10 approval of the Disclosure Statement in which they challenged, among other things, the 11 interest rates to be paid under the Plan, expressed concern about the value of the Long-Term 12 Notes and asserted that they were entitled to exercise certain subordination rights against the HCVMRD 13 holders of QUIDS Claims. On January 10, 2002, the Senior Debtholders filed a second PKE 14 objection to the Disclosure Statement.
&RAN(IN 15 The Plan Proponents and the Senior Debtholders continued negotiations and 16 ultimately reached an agreement in principle. On January 14, 2002, the parties executed and 17 filed with the Court a Stipulation (including a term sheet attached thereto), pursuant to which 18 the Senior Debtholders withdrew their objections to the Disclosure Statement, subject to the 19 parties entering into a definitive settlement agreement incorporating the terms of the 20 settlement.
21 B. The Settlement Agreement.
22 On February 12, 2002, the Plan Proponents entered into the Settlement 23 Agreement. The Settlement Agreement, which is the result of months of extensive, good 24 faith negotiations among the parties, resolves a number of disputes regarding the Senior 25 Debtholders' Claims, including, among others, disputes over (a) the principal amount of the 26 Class 5 Claims held by the. Senior Debtholders, (b) the rate of interest earned on such 27 Claims, (c) the amount of the placement fee to be distributed to holders of Allowed Claims 28 in certain Classes under the Plan (including the Senior Debtholders), (d) the Cash payments MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT
-i .. 3 A-A .... ...+n,,, *c,-mc nft1 I .nna-Term Nofe tc he 1 to be made to holders o0 AlloWed ilalms anU k,) C, Lalil+,1 's*%t To ...............
2 distributed under the Plan.
Under the Settlement Agreement, the principal amount of the Class 5 Claims 6
3 underlying 4 held by the Senior Debtholders will be fixed at the full face amount of the the effectiveness of 5 financial instruments that they hold. Settlement Agreement, §1.7 Upon Plan to provide 6 the Settlement Agreement, the Plan Proponents have agreed to amend the to such Claims on 7 that the interest rate for Class 5 Claims will be the interest rate applicable agreed to make the 8 the Petition Date. 8 Id., §2(a). In addition, the Plan Proponents have 9 following amendments to the Plan:
10 a. Step-up Interest Rates. The base interest rates earned on Senior Indebtedness will increase on a going-forward basis if the Plan 1 does not become effective by certain dates, as follows: (i) 37.5 basis points on February 15, 2003; (ii) an additional 37.5 basis points on 12 September 15, 2003; and (iii) an additional 37.5 basis points on March 15, 2004. The Debtor is not required to accrue or pay any HOYAM 13 increased interest rates for any §2(b). interest accruing prior to February 15, R. 1 2003. Settlement Agreement,
ýkq 14
&A b Placement Fee. The placement fee to be distributed on a
,AA-. -15 pro rata basis on the Effective Date to holders of Allowed Claims in Class 5-and the holders of Allowed Claims in certain other Classes (as 16 17 6A general description of the Settlement Agreement follows. For a more detailed understanding of all of-the terms of the settlement, reference should be made to the 18 Settlement Agreement, a copy of which is attached as Exhibit "A" to the Harvey Declaration.
7The Settlement Agreement provides that the amount of each Senior Debtholder's on Schedule A-I to the Settlement Agreement, and will be 20 Allowed Claim will be statedcertain exceptions. Settlement Agreement § 1. The Schedule treated as confidential, with Motion, and will set 21 will be prepared no later than three days prior to the hearing on this separately bring a Debtor will forth the Senior Debtholders' Claims as of the date thereof. set forth in the under seal, pursuant to the procedures 22 motion seeking to file Schedule A-I Court's Case Management Order (revised June 14, 2001).
23 8For example, the base interest rates earned on the following types of Class 5 Claims will be fixed at the contract rate in existence4 66% for such Claims on the Petition Date, as 24 follows: (i) Commercial Paper Claims-7. per annum; (ii) Floating Rate Note Claims-7.58 3 % per annum (calculated on an actual dayselapsed over 360 days, with an 25 implied yield of 7.690%); (iii) Medium Term Note Claims-5.81% to 8.45% per annum or higher, as provided in the applicable documents governing the issuance of the particular 26 Medium Term Notes; (iv) Senior Note Claims-9.625% per annum; and (v) Revolving Line of Credit Claims-8.0% per annum. Interest on such Class 5 Claims will be compounded 27 quarterly, with the exception that the Medium Term Note Claims and the Senior Note semi-annually (all in accordance with the indenture or other be compounded Claims willgoverning Agreement, §2(a).
28 documents the indebtedness). See Settlement AGMT MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT
1 and to the extent provided in the Plan) will be increased to 2.5% of the aggregate amount of Long-Term Notes issued pursuant to the Plan and 2 increased further by an additional 50 basis points with respect to any Long-Term Notes issued by ETrans and GTrans with a maturity of 3 greater than ten years. Id., §5.
4 c. Effective Date Payments. Each holder of an Allowed Class 5 Claim will receive on the Effective Date of the Plan the 5 following distributions: (i) a Cash payment equal to 60% of its remaining Allowed Class 5 Claim (after deducting any payments made Effective share pro_ rata of Date); (ii)toa holders of 6 to such Excess certain Cash,toifthe holder prior any, to be distributed Allowed 7 Claims in Class 5 and holders of Allowed Claims in such other Classes, as and to the extent the payment of Excess Cash to such 8 Classes is provided for in the Plan; and (iii) Long-Term Notes equal to the balance of such Allowed Class 5 Claim after deducting the Cash 9 payments made pursuant to clauses (i) and (ii). Id., §4.
10 d. Long-Term Notes. At least 50% of the Long-Term Notes issued by ETrans and GTrans will have a maturity often years. The 11 interest rates on the Long-Term Notes and the New Money Notes issued by Gen, ETrans and GTrans will increase in an amount equal to 12 the increase in the Option Adjusted Spread, quoted in the Lehman Brothers Electrical Utility Corporate Bond Index, over a defined 13 period of time and subject to a maximum increase of 25 basis points.
_RK Id., §§6-7.
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&9RAUGN 0 15 Additional material terms of the Settlement Agreement are:
16 a. Payment of Interest and Fees and Expenses. The Debtor has agreed, subject to the approval of the Bankruptcy Court, to make 17 an initial payment to the Senior Debtholders of accrued and unpaid Pre-Petition Interest and Post-Petition Interest through the last day of 18 the calendar month immediately preceding the date on which the Settlement Ageement is approved, in arrears, no later than ten days 19 after all conditions to effectiveness of the Settlement Agreement have been satisfied; and payments of Post-Petition Interest thereafter in 20 quarterly installments, with the last such payment to occur on the Effective Date. Such interest payments are subject to re 21 characterization as a partial payment of principal in the unlikely event that the Debtor is determined by a final non-appealable order of the 22 Bankruptcy Court to be insolvent on a balance sheet basis or the Chapter 11 Case is converted to a case under chapter 7. The Debtor 23 also has agreed, in consideration of the efforts of the Senior Debtholders in negotiating and compromising the disputes as 24 memorialized in the Settlement Agreement and subject to the approval of the: Bankruptcy Court, to pay certain reasonable fees and expenses 25 26 9The "Excess Cash" to be distributed on the Effective Date, if any, will equal the amount (if any) by which the Debtor's cash balance on its last month-end closing balance 27 sheet preceding the date of the preliminary prospectus for the New Money Notes, less the sum of certain of the Debtor's cash requirements (all as more particularly set forth, in the 28 Settlement Agreement), exceeds $500 million. See Settlement Agreement, §4.
MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 1 of the Senior Debtholders. Settlement Agreement, §§2(c)-(e), 19.
2 b. Senior Debtholders' Plan Support. The Senior Debtholders to the have agreed to support confirmation of the Plan. Subject receipt by the 3 Settlement Agreement becoming effective and the Senior Debtholders of a Plan and Disclosure Statement incorporating 4 the terms of the Settlement Agreement and otherDebtholder solicitation materials Senior has agreed approved by the Bankruptcy Court, each held and any 5 to (a) vote its Allowed10Class 5 Claim(s), currently acquired in the future, in acceptance of the vote Plan, (b) fully support 6 confirmation of the Plan, (c) not consent to, for, or otherwise other support or encourage any plan of reorganization an alternative than the Plan, or formulate plan of 7 (d) not take any actions to develop to develop or reorganization, (e) not solicit or meet with other parties not object to, 8 formulate an alternative plan of reorganization, toand (f) delay or impede or otherwise oppose or object the Plan or 9 Disclosure Statement. Id., § 13.
10 c. Termination Events. The obligations of the Senior of: (a) a Debtholders may only be terminated upon the occurrence Proponents, 11 material breach of the Settlement Agreement by the Plan of Post-Petition Interest payments as partial (b) a re-characterization to make timely 12 payments of principal, (c) the failure ofbythetheDebtor Bankruptcy Court that interest payments, (d) a determination the conversion of basis or the Debtor is insolvent on a balance sheet 7, (e) the failure of the 13 HOW'A RCEE the Chapter 11 Case to a case under Chapter 2003, (f) the voluntary NIaMrX 14 Plan to become effective on or before June 1, or (g) the entry of an withdrawal of the Plan by the Plan Proponents, Plan is not confirmable order by the Bankruptcy Court finding that theobligations
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,*.db. 15 Event"). The of the Plan (each, a "Creditor Termination occurrence of (a) a 16 Proponents may only be terminated upon thethe Debtor is insolvent on determination by the Bankruptcy Court that Chapter I1 Case to a 17 a balance sheet basis or the conversion of the Plan by holders of case under Chapter 7, (b) the rejection of the Senior Debtholder, a 18 Allowed Class 5 Claims, (c) as to an individual breach by such Senior Debtholder of its obligation to support the Plan, or breaches by Senior 19 and (d) as to all Senior Debtholders, if a breachthe Settlement Debtholders of their support obligations under Agreement results in the remaining non-breachingAgreement holders of Allowed 20 or Class 5 Claims who are parties to the Settlement less than the Required 21 substantially similar agreements constituting Termination Holders (as defined below) (each, a "Plan Proponent 22 Event"). Id., §14.
Survival of Certain Obligations. The Debtor is required to 23 d. Agreement unless accrue interest at the rates set forth in the Settlement of Post 24 (i) an event occurs giving rise to the re-characterization (ii) a Petition Interest payments as partial payments of principal; prior to a Creditor 25 Senior Debtholder breaches its support obligations cease accruing Termination Event (in which case the Debtortomay Senior 26 interest at the agreed rates only with respect the breaching 27 Debtholders will be subject to 10Any additional Class 5 Claims acquired by-the Senior § 14.
28 the Settlement Agreement. See Settlement Agreement,
& SUPPORT AGMT MOT. FOR ORDER APPROVING-9-SETTLEMENT
1 Debtholder), or (iii) as a result of breaches of the support obligations by one or more Senior Debtholders prior to a Creditor Termination 2 Event, the Required Holders constitute less than $3 billion in Allowed Claims that currently are Class 5 Claims (in which case the Debtor 3 may cease accruing interest at the agreed rates for all Senior Debtholders). The Debtor, however, may terminate payment of 4 interest: (i) if an event occurs giving rise to the re-characterization of Post-Petition Interest payments as partial payments of principal, (ii) if 5 a Senior Debtholder breaches its support obligations prior to a Creditor Termination Event (in which case the Debtor may terminate 6 payment of interest only with respect to the breaching Senior Debtholder), (iii) if, as a result of breaches of the support obligations 7 by one or more Senior Debtholders prior to a Creditor Termination Event, the Required Holders constitute less than $3 billion in Allowed 8 Claims that currently are Class 5 Claims (in which case the Debtor may terminate payment of interest as to all Senior Debtholders), (iv) 9 any other Plan Proponent Termination Event occurs, or (v) as to any Senior Debtholder, if such Senior Debtholder does not support a 10 subsequent plan of reorganization filed by the Plan Proponents. Id.,
§§2, 14 and 25.
11
- e. Nomination of Underwriters. Subject to the right of the 12 Debtor to exclude any underwriter that refuses to enter into an appropriate underwriting agreement, the Senior Debtholders, in HCVZ 13 consultation with the Committee, have the right to nominate 5 R.E underwriters to participate in the marketing of the New Money Notes cAw 14 that correspond by issuer and maturity date or principal payment dates'
&RA.NQN with the Long-Term Notes. Id., § 11.
S15 16 The Settlement Agreement will become effective only if (a) the Disclosure 17 Statement is approved by this Court, (b) the Settlement Agreement is approved by this Court 18 and (c) holders of Class 5 Claims, including each Senior Debtholder, holding at least $3 19 billion in the aggregate in Allowed Class 5 Claims have entered into the Settlement 20 Agreement or substantially similar agreements (the "Required Holders"). Id., §21.
-21 III. ARGUMENT 22 A. The Settlement Agreement Should Be Approved.
23 Bankruptcy Rule 9019(a) empowers a bankruptcy court to approve any settlement 24 or compromise related to a reorganization or liquidation."1 Myers v. Martin (In re Martin),
25 91 F.3d 389, 393 (3d Cir. 1996); Vaughn v. Drexel Burnham Lambert Group, Inc. (In re 26 27 "Bankruptcy Rule 9019(a) simply states, in part, that "[o]n motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement." Fed. R.
28 Bankr. P. 9019(a).
MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT (Bankr. S.D.N.Y. 1991). Indeed, I Drexel Burnham Lambert Group, Inc.), 134 B.R. 499, 505 favored occurrence in bankruptcy cases 2 compromises and settlements are a common and to avoid the financial and other burdens 3 because they allow a debtor and its creditors and expedite the administration of the 4 associated with litigation over contentious issues Stockholders of TMT Trailer Ferry, Inc. v.
5 bankruptcy estate. Protective Comm. for Indep.
(In re A & C Props.), 784 F.2d 1377, 6 AndersQn-, 390 U.S. 414, 424 (1968); Martin v. Kane 7 1380-81 (9th Cir. 1986).
court's inquiry focuses only 8 In reviewing proposed settlements, the bankruptcy the compromise is fair and equitable and in the best interest of the estate.
9 upon whether Trailer, 390 U.S. at 424; A & C Props., 784 F.2d at 1380-81; Nellis v. Shugrue, 165 10 TMT this determination, however, the bankruptcy 11 B.R. 115, 121 (S.D.N.Y. 1994). In making the merits of the underlying dispute or an 12 court is not required to conduct a mini-trial on Blair, 538 F.2d at 851; investigation into the reasonableness of the settlement.
13 Hamm independent B.R. 519, 522 (S.D.N.Y. 1993); Drexel 14 see also In re Purofied Down Prods. Corp., 150 15 Burnham, 134 B.R. at 505.
been described as lenient and 16 Rather, the standards for such approval have to encourage approval of settlements in bankruptcy cases. See Purofied Down, 150 17 intended factual issues B.R. at 522-23. The bankruptcy court need only canvass the legal and 18 that the proposed settlement does not fall "'below 19 underpinning the compromise to ensure Nellis v. Shuarue, 165 B.R. at 121-22 20 the lowest point in the range of reasonableness."'
609 (2d Cir. 1983)); Purofied Down, 150 B.R.
21 (quoting In re W.T. Grant Co., 699 F.2d 599,
- v. Pennsylvania Truck Lines, Inc. (In re 22 at 522; Official Unsecured Creditors' Comm.
(3d Truck Lines, Inc.), 150 B.R. 595, 598 (E.D. Pa. 1992), affd, 8 F.3d 812 23 Pennsylvania at 505. In making this determination, significant 24 Cir. 1993); Drexel Burnham, 134 B.R.
may be given to the informed judgment of the debtor-in-possession and its counsel 25 deference
_Martin 91 F.3d at 395; Nellis v. Shugrue, 26 that a proposed compromise is fair and equitable.
at 505.
165 B.R. at 122; Purofied Down, 150 B.R. at 522-23; Drexel Burnham, 134 B.R.
27 for Over the years, four significant criteria have been developed by the courts 28 MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 1 consideration in determining whether a proposed settlement falls below the lowest point in 2 the range of reasonableness:
3 1. the probability of success on the merits; 4 2. the difficulties, if any, to be encountered in the matter of collection; 5 3. the complexity of the litigation involved, and the expense, inconvenience 6 and delay necessarily attending it; and 7 4. the paramount interest of the creditors and a proper deference to their 8 reasonable views.
9 A & C Props., 784 F.2d at 1381; see also Martin, 91 F.3d at 393; Nellis v. Shugrue, 165 B.R.
10 at 122; Pennsylvania Truck Lines, 150 B.R. at 598. As demonstrated below, each of the 11 applicable criteria is satisfied here.12
- 12. 1. The Probability Of Success On The Merits.
HOWAD 13 The Settlement Agreement fully and finally resolves numerous disputes between RIKE c 14 the Debtor and the Senior Debtholders without the need for expensive, distracting and time (9RANON
, 15 consuming litigation. The disputes resolved by the Settlement Agreement-each of which is 16 discussed below in detail-include the amount of the Senior Debtholders' Class 5 Claims
- 17. and the appropriate interest rate to be paid on such Claims, the Senior Debtholders' 18 contention that the Plan may afford them less than full payment of their Claims, and the 19 Senior Debtholders' assertion that they are entitled to exercise certain subordination rights 20 against the holders of QUIDS Claims.
21 Although the Debtor believes that its positions have considerable merit and that,
.22 if litigated, the Debtor would have prevailed on the issues in dispute, no litigation is without 23 risk. Further, certain of the issues raised by the Senior Debtholders have not been 24 conclusively decided and, in some cases, have not been considered within the Ninth Circuit.
25 Accordingly, how the Court ultimately would have ruled on these disputes is uncertain, and 26 by resolving the disputes, the Debtor and the Senior Debtholders recognize the inherent risks 27 12The second factor typically considered by courts-difficulty associated with 28 collection-is not applicable here..
MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT including the avoidance of 1 of litigation and the benefits of reaching a compromise, 2 significant expense and time associated with litigation.
The first accommodation embodied in the settlement relates to the amount of the 3
rate to be paid on such Claims. Each of the 4 Senior Debtholders' Claims and the interest of the Senior Debtholders' Allowed Class 5 Claims will be fixed at the full face amount 5
Agreement also resolves the dispute among the 6 underlying debt instrument. The Settlement on the Senior Indebtedness. The Senior 7 parties regarding the rate of interest accrual per entitled to be paid interest at the rate of 10%
8 Debtholders have asserted that they are the legal rate specified under California state law for breach of contract. The Debtor 9 annum, however, that the trend in bankruptcy cases in the Ninth Circuit is to award Post 10 believes, as of the Petition Date (here, approximately i1 Petition Interest at the Federal Judgment Rate provided in the Plan that Post-Petition Interest would accrue at the lowest non 12 4%), but Claim (rates of interest in the agreement or instrument governing the particular HOWAR 13 default rate in the Judgment Rate as of the Petition Date) and,
.. i 14 that are generally higher than the Federal of the therein), at the Federal Judgment Rate as
,.o. C 15 absence of such a document (or provision will reflects the parties' compromise-interest 16 Petition Date. The Settlement Agreement at the contract rate, fixed as of the Petition Date, with a potential for certain increases 17 accrue effective by certain dates.
18 in the interest rate if the Plan does not become the Plan affords payment in full to 19 The dispute over whether the treatment under resolved. Although the Debtor firmly believes 20 the Senior Debtholders also has been fully interest full of all Allowed Claims, the increase in 21 that the Plan provides for the payment in 3 modification of certain terms of the Long-Term Notes1 puts this 22 rates and the agreed-upon 23 and transferability of the 24 13Among the other amendments intended to enhance the value to holders of Allowed the Plan Proponents haveofagreed that distributions Long-Term Notes, share Excess Cash, if any, thus potentially reducing 25 Class 5 Claims will include a pro r Long-Term creditors; that issued towill at least 50%-of theand that the amount of Long-Term Notes have a maturity often years; 26 the Notes to be issued to ETrans and GTrans Money Notes issued by Notes and the Corresponding-New in the Option 27 Gen,interest 27 rates on ETrans andtheGTrans will increase in an amount equal to the increase Index over a Long-Term Brothers Utility Corporate Bond Spread, quoted in the Lehman increase of 25 basis points.
28 delined period of time and subject to a maximum Adjusted
& SUPPORT AGMT MOT. FOR ORDER APPROVING SETTLEMENT I issue to rest without the need for extensive litigation between the Plan Proponents and the 2 Senior Debtholders. The foregoing compromise-under which the Senior Debtholders no 3 longer contend that they will receive less than full payment on their Claims-also forecloses 4 the need to litigate with the Senior Debtholders regarding the subordination issues related to 5 the QUIDS Claims. The Senior Debtholders had asserted that unless and until their claims 6 are paid in full, the holders of QUIDS Claims, which are contractually subordinated to the 7 Claims of the Senior Debtholders, cannot receive any recovery on their claims. Although 8 the Debtor believes that the treatment of the QUIDS Claims in the Plan is appropriate, this 9 compromise settles the controversy with the Senior Debtholders without the need for costly 10 and distracting litigation involving multiple parties.
11 2. Litigation Of The Disputed Issues Would Be Costly And Result In Delays In Administration Of The Estate.
12 13 As set forth above, the Settlement Agreement resolves numerous complex issues C ' 14 between the Debtor and eighteen creditors holding approximately $2 billion in Class 5
&RAMIN 14 15 Claims. In agreeing to the settlement embodied therein, the Debtor has made what it 16 believes is an economically prudent business judgment that the estate's assets are better 17 utilized in facilitating a settlement rather than prosecuting litigation.
18 The disputes at issue go to the heart of the Chapter .11 Case and, if left 19 unresolved, would have resulted in extensive and costly litigation' 5 in various contexts 20 throughout the Chapter 11 Case, including objections to the Disclosure Statement, objections 21 to the Senior Debtholders' Claims and ultimately, objections to confirmation of the Plan.
22 Already, the negotiations between the Debtor and the Senior Debtholders have resulted in 23 the filing of the Stipulation and the withdrawal of their objections to the Disclosure 24 25 14The Settlement Agreement will become effective only if $3 billion in Class 5 Claims have entered into the Settlement Agreement or similar agreements.
26 . 5Certain of the disputes with the Senior Debtholders might have required extensive discovery. Not only would such discovery have been expensive, it would have distracted the 27 Debtor from, and delayed, its reorganization efforts. The Settlement Agreement resolves all of these issues and obviates the need for litigation that would likely delay administration of 28 this estate.
MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT expenses. The Settlement 1 Statement, thus saving the estate considerable litigation and the Senior Debtholders, 2 Agreement resolves all outstanding issues between the Debtor Plan.
3 and commits the Senior Debtholders to support the Of Creditors.
4 3. The Settlement Is In The Best Interests reviewing a proposed settlement 5 The last criteria considered by bankruptcy courts to their reasonable views. A & C 6 is the paramount interest of creditors, with a deference B.R. at 505-06. While a creditor's objection 7 Pros.., 784 F.2d at 1381; Drexel Burnham, 134 it is not controlling and will not bar 8 to a proposed settlement must be given deference, 9 approval of settlements that "do not fall below the lowest point in the range of at 505.
Drexel Bumham, 134 B.R.
reasonableness." A &C Props., 784 F.2d at 1382; 10 Agreement will result-once the 11 The compromises reached in the Settlement to the Plan that will benefit all holders 12 .Settlement Agreement is effective-in amendments substantially all unsecured creditors. For HOWARD 13 of Senior Indebtedness and, in certain respects, R13 N 14 example:
B~UK from the higher 15 a. all holders of Senior Indebtedness will benefit interest rates to be earned on such Claims; 16 placement fee;
- b. certain creditors will benefit from the increased 17 terms of the
- c. certain creditors will benefit from the enhanced 18 Long-Term Notes; and 19 d. Interest-and Post-Petition all creditors entitled to Pre-Petition from Interest under the Plan- will benefit the current payment of 20 interest.
and its creditors because it lays 21 The Settlement Agreement also benefits the estate creditors and advances the administration of 22 the framework for future settlements with other 11 Case and the ultimate confirmation of the Plan. The principal objective of a 23 the Chapter is the confirmation and consummation of a plan, and the settlement with the 24 Chapter 11 case 25 Senior Debtholders furthers that goal.
complexity and expense associated 26 The Debtor has carefully considered the risks, their Claims and the treatment afforded 27 with litigation with the Senior Debtholders regarding the would be occasioned by such litigation. In 28 to them under the Plan and the delays that
& SUPPORT AGMT MOT. FOR ORDER APPROVING SETTLEMENT ii
1 Debtor's sound business judgment, these factors-when considered with the benefits 2 afforded the estate and its creditors by the settlement-tip the scale heavily in favor of 3 approval of the proposed settlement as fair, reasonable and equitable and in the best interests 4 of the estate and its constituencies. For these reasons, the Debtor believes that the 5 Settlement Agreement should be approved.
6 B. This Court Should Authorize The Debtor To Make Payments Of Pre-Petition Interest And Post-Petition Interest To Holders Of Certain Undisputed Claims.
7 8 In consideration of the compromises reached and because it is in the best interest 9 of the estate, the Debtor agreed in the Settlement Agreement to pay all accrued and unpaid 10 Pre-Petition Interest and Post-Petition Interest to the Senior Debtholders and to continue to 11 pay Post-Petition Interest in arrears on a quarterly basis during the Chapter 11 Case. By this 12 Motion, the Debtor seeks authorization to provide this same benefit to all holders of Claims 13 (other than holders of Administrative Expense Claims, Environmental, Fire Suppression and NEIMNU 14 Tort Claims and Chromium Litigation Claims) to which no objection is pending.' 6
&tRkN(IN
, 15 1. This Court Has Statutory Authority And Equitable Power Under Sections 105(a) And 363(b) Of The Bankruptcy Code To Permit The Debtor To 16 Make Interest Payments To Holders Of Undisputed Claims During The Chapter 11 Case.
17 18 Sections 105(a) and 363(b) of the Bankruptcy Code provide the statutory 19 authority for the payment of Pre-Petition Interest and Post-Petition Interest to holders of 20 undisputed Claims, as contemplated herein.
21 Section 363(b) provides that "[t]he trustee, after notice and a hearing, may use, 22 sell, or lease, other than in the ordinary course of business, property of the estate." Under 23 Section 363(b), the Court may authorize a proposed use of property if it finds that the 24 transaction represents a reasonable business judgment by the debtor. See Michigan Bureau 25 of Workers' Disability Comp. v. Chateaugay Corp. (In re Chateaugay Corp.), 80 B.R. 279, 26 282 (S.D.N.Y. 19.87) (authorizing pre-confirmation distribution under Sections 105(b) and 27 16The Debtor reserves its right to object to any Claim on any available ground, 28 notwithstanding the prior payment of interest to the holder of such Claim.
MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT
- v. Lionel Cor. (In re Lionel Corp.), 722 1 363(b)); see also Committee of Equity Sec. Holders Home Ctr., Inc., 209 B.R. 974, 979 (Bankr.
2 F.2d. 1063, 1070-71 (2d Cir. 1983); In re Ernst of business transaction appropriate 3 W.D. Wash. 1997) (approval of non-ordinary course for the transaction). In considering a 4 where debtor has "articulated business justification" course of business, the debtor's business 5 proposed use of estate property outside the ordinary See DiStefano v. Stern (In re JFD Enters.),
6 judgment is subject to "great judicial deference."
May 1, 2000).
7 No. 99-2034, 2000 WL 560189, at *5 (1st Cir.
for the Debtor's current payment 8 There are sound and practical business reasons Chapter 11 Case presents fairly exceptional 9 of interest during the Chapter 11 Case. The
.10 The Debtor is solvent. Thus, to satisfy the "best interests" test of Section circumstances.
a plan of reorganization, the Debtor must 11 1129(a)(7) of the Bankruptcy Code and confirm Because, absent Court 12 pay post-petition interest to holders of Allowed-Claims.
such payments during the Chapter 11 HOW'RD 13 authorization, the Debtor is prohibited from making RKE interest at rates that are significantly higher N 14 Case, the Debtor must compound accrued unpaid investments in today's economic climate than the interest the estate can earn on its cash
&RAWIN
,..***15 On the other hand, current payments of 16 thus creating a negative arbitrage to the Debtor.
17 would inure to the benefit of the estate and its creditors and prejudice no one. The interest the interest payments; creditors will be brought 18 Debtor has sufficient funds on hand to make cost on a going-forward basis; the unnecessary 19 current on interest payments and paid interest will be eliminated; and in the unlikely event 20 to the estate caused by this negative arbitrage the Post-Petition Interest payments would 21 that the Debtor were determined to be insolvent, 22 be re-characterized as partial payments of principal.
Code grants this Court'broad 23 In addition, Section 105(a) of the Bankruptcy to 24 power to "issue any order, process, or judgment that is necessary or appropriate equitable provisions of this title." The purpose of Section 105(a) is "to assure the 25 carry out the the 26 courts power to take whatever action is appropriate or necessary in aid of bankruptcy King, Collier on Bankruptcy ¶105.01, at 105-6 27 exercise of their jurisdiction." 2 Lawrence P.
28 (15th ed. rev. 2001).
& SUPPORT AGMT MOT. FOR ORDER APPROVING SETTLEMENT 1 Pursuant to Section 105(a), bankruptcy courts are granted broad authority and 2 discretion to enforce the provisions of the Bankruptcy Code, either pursuant to specific 3 statutory fiat or equitable common law principles. Under the doctrine of necessity, a 4 bankruptcy court may exercise its equitable powers to authorize a debtor to pay certain pre 5 petition claims, even though such payment is not explicitly authorized under the Bankruptcy 6 Code. As the court stated in In re Ionosphere Clubs, Inc., 98 B.R. 174, 175 (Bankr.
7 S.D.N.Y. 1989):
8 "The ability of a Bankruptcy Court to authorize the payment of pre petition debt when such payment is needed-to facilitate the 9 rehabilitation of the debtor is not a novel concept. It was first articulated by the United States Supreme Court in Miltenberger v.
10 Logansport, C.&S.W.R. Co., 106 U.S. 286, 1 S.Ct. 140,27 L.Ed. 117 (1882), and is commonly referred to as either the 'doctrine of 11 necessity' or the 'necessity of payment' rule." (Li at 175-76) 12 The court in that case recognized a bankruptcy court's authority under Section 105(a) to RICE 13 authorize payment of certain pre-petition debt to avoid economic sanctions against the 11ENEROVaG q 14 debtor that would result from nonpayment. Id.
Fix
&RANIN 15 Courts have established that "the Necessity Doctrine may also be used, however, 16 to justify post-petition payment of a wide variety of other types of pre-petition claims, as 17 long as payment of those claims will help to 'stabilize [the] debtor's business relationships 18 without significantly hurting any party."' In re UNR Indus., Inc., 143 B.R. 506, 519 (Bankr.
19 N.D. Ill. 1992) (quoting R. Eisenberg & F. Gecker, The Doctrine of Necessity and Its 20 Parameters, 73 Marq. L. Rev. 1, 2 (1989)), rev'd on other grounds, 173 B.R. 149 (C.D. Ill.
21 1994). In that case, the court authorized the debtor to pay pre-petition workers' 22 compensation claims which it found were necessary to enable the debtor to maintain its self 23 insurance privileges, where such self insurance would be less expensive than purchasing 24 insurance from a third party, The court accordingly determined that such payments were in 25 the best interests 'of the estate and were authorized under the necessity doctrine. See also In 26 re Structurelite Plastic Corp., 86 B.R. 922, 931 (Bankr. S.D. Ohio 1988) ("a bankruptcy 27 court may exercise its equity powers under section 105(a) to authorize payment of pre 28 petition claims where such payment is necessary to 'permit the greatest likelihood of MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT in full or at least proportionately"') (citing In 1 survival of the debtor and payment of creditors S.D.N.Y. 1987)); In re Equalnet 2 re Chateaugay Corp., 80 B.R. 279, 287 (Bankr.
S.D. Tex. 2000) ("[i]n certain cases, 3 Communications Corp., 258 B.R. 368, 369 (Bankr.
to [the] general rule of nonpayment [of pre 4 courts in this district have found exception common sense and the presence of
.5 petition claims]. These exceptions arise primarily out of Indeed, this Court recognized its ability to 6 legal or factual inevitability of payment").
when it used its equitable powers to authorize 7 authorize the payment of pre-petition claims of pre-petition employee-related expenses.
8 the Debtor to make, inter alia, certain payments Order Granting Motion for Authority to Pay Pre-Petition Compensation and 9 See, eg*.,
10 Benefits, dated April 6, 2001.
Claims Is In The 11 2. Earl Pament Of interest To Holders Of Undisputed Creditors.
Best Interest Of The Debtor's Estate And 12 that early interest payments RKE 13 The Debtor has made a sound business judgment assets. As noted above, this is based on NJ( 14 constitute a prudent and justified use of estate to solvent. Payment of post-petition interest exceptional circumstances. The Debtor is
&iRAEUN 15 to confirm a plan of reorganization. As reflected 16 creditors is inevitable, as it will be required Operating Reports filed herein, the Debtor has sufficient funds on hand to 17 in its Monthly Post-Petition Interest to holders of undisputed 18 make payments of Pre-Petition Interest and 17 19 Claims.
current interest payments has 20 Significantly, the Debtor's inability to make cost to the estate. The Debtor's cash 21 resulted (and will continue to result) in a significant funds, which experienced an average annual 22 currently is primarily invested in money market 23 Debt") are 24 17The initial interest payments on PG&E's financial debt ("Financial quarterly to aggregate approximately $477 million, and projected subsequent estimated to estimated ecember 31, 2002 are 25 interest payments on such Financial Debt through D' non aggregate approximately $313 million. The initial interest payments on PG&E's $157 26 financial debt ("Non-Financial Debt") are estimated to aggregate approximately interest payments on such Non-Financial Debt, million and projected subsequent quarterly to aggregate approximiately $57 million. As of 27 through December 31, 2002, are estimated cash balance was $4.22 billion, more than sufficient funds December 31, 2001, the Debtor's 28 to make the proposed interest payments.
& SUPPORT AGMT MOT. FOR ORDER APPROVING SETTLEMENT 1 return of 2.15% during the month of December, 2001 and an average annual return of 2.00%
2 during the month of January, 2002. At the same time, the average interest rate on Financial 3 Debt is approximately 7.9%, and the average interest rate on Non-Financial Debt is 5.5%.
4 Because the Debtor cannot pay this interest on a current basis absent Court approval, it must 5 accrue and compound the accrued interest at these significantly higher rates.
6 As of March 31, 2002, the Debtor estimates that it will have accrued 7 approximately $477 million in interest on Financial Debt alone. Because of the 8 compounding of interest, a nine-month delay, through December 31, 2002, in the payment of 9 interest on Financial Debt will increase the Debtor's interest payments by approximately $35 10 million. At the same time, the interest PG&E will likely earn on its investment of the cash 11 that would be used to pay accrued interest, during the period from March 31, 2002 through 12 December 31, 2002, would offset these increased interest expenses by only an estimated $6 HCVA 13 million. Thus, unless PG&E is allowed to make interest payments on its Financial Debt during the period from March 31,S14 2002 through December 31, 2002, it will suffer an
,
- 15 unnecessary interest expense of $29 million on Financial Debt alone. In addition, by making 16 interest payments to the holders of Non-Financial Debt during the six month period from 17 July 1, 2002 through December 31, 2002, PG&E will avoid incurring another $2 million in 18 unnecessary interest expense.' 8 Accordingly, the early payment of interest will result in 19 savings of approximately $31 million during the nine-month period ending December 31, 20 2002.
21 Significantly, since all holders of undisputed Claims in the Classes entitled to 22 receive interest will benefit from the early interest payments, the policy concern underlying 23 the general prohibition of pre-confirmation distributions-i.e., disparate treatment of 24 creditors-is not implicated here. In addition, these payments do not pose any risk of harm 25 26 18As set forth below, PG&E proposes to commence interest payments on Non Financial Debt no later than July 30, 2002. PG&E requires this additional time to reconcile 27 and determine which Claims based on Non-Financial Debt are disputed before commencing interestpayments on these Claims. Interest would continue to accrue on these Claims until 28 paid.
MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT ever adjudged insolvent, the Post I to the estate. In the unlikely event that the Debtor were as partial payments of principal. Thus, 2 Petition Interest payments would be re-characterized receive more than its pro rata payment on 3 there is no danger that any one creditor would 4 account of its Allowed Claim.
that early interest payments 5 For these reasons, the Debtor respectfully submits under Section 363 of the Bankruptcy Code and 6 constitute a sound use of the Debtor's assets to Section 105(a) of the Bankruptcy Code.
7 should be authorized on that basis, and pursuant 8 3. Proposed Procedure For Making Interest Payments.
payments to holders of Financial 9 The Debtor proposes to make the initial interest who hold undisputed Claims (including the Senior Debtholders) within ten days after 10 Debt Agreement have been satisfied.
11 all conditions to the effectiveness of the Settlement Claims will be made in arrears on a 12 Subsequent interest payments in respect of such Day of the next calendar quarter.
13 quarterly basis on the first Business proposes to make initial interest NY 14 With respect to Non-Financial Debt, the Debtor the later of (a) July 30, 2002 and (b) ten 15 payments in respect of undisputed Claims by the Disclosure Statement. The Debtor 16 Business Days after the entry of an order approving Case this time to determine which of the thousands of claims filed in the Chapter 11 17 requires objections accordingly, a process that must be 18 should be subject to objection and to prepare can commence.' 9 In addition, this time 19 substantially completed before interest payments procedures necessary to compute the 20 will allow the Debtor to establish the administrative Interest that is owed and to facilitate 21 amount of Pre-Petition Interest and Post-Petition 20 Interest will continue to accrue on 22 payments to thousands of creditors. Post-Petition Subsequent interest payments will be made 23 Allowed Claims until payments are made.
24 9gAs stated in the Disclosure Statement, the Debtor anticipates filing all of its.
30, 2002.
25 objections to Disputed Claims by June through an indenture trustee 2°Because payments to holders of Financial Debt are made time is not required to make 26 or administrative bank or other paying agent, this additional has agreed, under the Financial Debt. Thus, the Debtor payments to the holders toofmake 27 Settlement Agreement, the initial payment of Pre-Petition Interest and Post-Petition Days after all conditions to Debtholders within ten Business satisfied.
Interest to the SeniorSettlement Agreement have been 28 effectiveness of the
& SUPPORT AGMT MOT. FOR ORDER APPROVING SETTLEMENT II
1 quarterly in arrears within thirty days following the end of each calendar quarter.
2 The Debtor requests that the Court establish a record date of June 30, 2002 for the 3 initial interest payments to the holders of undisputed Claims arising out of Non-Financial 4 Debt and the last Business Day of each calendar quarter as the record date for subsequent 5 interest payments to such holders. The Debtor further requests that the Court order that 6 interest payments be made only to the record holders of such Claims on the applicable 7 record date.
8 C. Payment Of The Fees And Expenses Of Indenture Trustees And Administrative Bank And Other Paying Agents Should.Be Approved.
9 10 Under the Settlement Agreement, the Debtor agreed to use its reasonable best 11 efforts to ensure that the Senior Debtholders receive a full distribution on account of their 12 Claims, with no deduction or holdback by any indenture trustee or paying agent. See HCAM 13 Settlement Agreement, § 16(a). To satisfy this obligation, the Debtor agreed, subject to-the 5KE Fix_
approval of the B ankruptcy C ourt, to pay all costs and expenses necessary toS14 ensure that a
&RtANON 15 full distribution is made to Senior Debtholders. Id. Rather than limit this benefit to the 16 Senior Debtholders, the Debtor seeks, subject to the procedures described below, to pay the 17 fees and expenses of all indenture trustees and paying agents21 which have a right, under 18 19 21The indenture trustees or other paying agents whose fees and expenses would be paid are: (a) Wilmington Trust Company (successor-in-interest to The Bank of New York), as 20 indenture trustee for the Floating Rate Notes, the Medium Term Notes and the Senior Notes, all issued under the indenture dated as of September 1, 1987 between the Debtor and The 21 Bank of New York, as amended and supplemented (the "1987 Indenture"); (b) The Bank of New York, the former indenture trustee under the 1987 Indenture; (c) Bankers Trust 22 Company (Deutsche Bank), in its capacity as trustee for the 1992 Series A Pollution Control Bonds, 1996 Series C Pollution Control Bonds, 1996 Series E Pollution Control Bonds, 23 1996 Series F Pollution Control Bonds and 1997 Series B Pollution Control Bonds; (d) U.S.
Bank Trust, N.A. in its capacity as trustee for the 1992 Series B Pollution Control Bonds, 24 1993 Series A Pollution Control Bonds, and 1993 Series B Pollution Control Bonds; (e) Bank One Trust Company, N.A. (successor-in-interest to The First National Bank of 25 Chicago), as property trustee under the amended and restated trust agreement dated as of November 28, 1995 among the Debtor, The First National Bank of Chicago, a Delaware 26 Trustee and certain Administrative Trustees; (f) National City Bank of Indiana (successor in-interest to Bank One Trust Company, N.A.), indenture trustee for the QUIDS, issued 27 under the indenture dated November 28, 1995, as supplemented as of November 28, 1995 and March 25, 1996; and (g) Bank of America National Trust and Savings Association, as 28 administrative agent and documentation agent for the Debtor's Revolving Line of Credit.
MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT
-LL-
1 governing agreements or instruments, to deduct their fees and expenses from distributions to 2 beneficial holders or otherwise to seek reimbursement from the beneficial holder of 3 Financial Debt, so that all such creditors will receive full payment.
4 Unless the Debtor agrees to pay such costs, each of the paying agents and trustees 5 would likely deduct their costs and expenses from the amounts which will be paid to holders 6 of undisputed Financial Debt. Given the relatively modest cost of covering these fees and 7 expenses-current outstanding amounts are estimated to be approximately $3 million-the 8 Debtor seeks the Court's authorization to pay these fees and expenses. The Debtor also 9 requests that it be authorized to continue to pay such fees and expenses on an on-going basis.
10 The Debtor proposes that the same procedures established for the payment of fees 11 and expenses of BNY Western Trust Company, as indenture trustee for certain mortgage 12 bonds, in the Cash Collateral Stipulation, approved by this Court on May 9, 2001, be utilized HOWD 13 in connection with payments to indenture trustees and other paying agents as well as for u 14 payment of the fees and expenses of the Senior Debtholders, as provided in the Settlement
&RAWN(
AA*. . 15 Agreement:
16 (1) Any indenture trustee, administrative bank, other paying agent or Senior Debtholder seeking reimbursement of its fees and 17 expenses will be required to serve copies of its invoices and the invoices of any professionals it has retained upon the Debtor, its 18 counsel, counsel to the Committee and the United States Trustee's Office.
19 20 (2) If any such party believes that all or a portion of the amounts reflected in any invoice are unreasonable (an "Objecting Party"),
such Objecting Party will be required to provide written notice 21 thereof to such Senior Debtholder, indenture trustee, administrative bank or other paying agent, or the applicable 22 professional, within 20 days of the receipt of the invoice in 23 question (with a copy to the Debtor and its counsel).
(3) Promptly after the expiration of such 20-day period, the Debtor 24 will pay any undisputed portion of such invoices, and retain the balance thereof pending resolution of any dispute with an 25 Objecting Party, or, if any such dispute cannot be consensually 26 resolved, upon approval of any disputed portion by this Court.
(4) The payment of any fees and expenses of any indenture trustee, 27 administrative bank, other paying agent or Senior Debtholder will be expressly subject to disallowaince by the Court.
28 MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 1 The Debtor respectfully submits that the payment of fees and expenses of Senior 2 Debtholders, indenture trustees, administrative bank or other paying agents as provided 3 herein should be authorized as a necessary corollary to the payment of interest.
4 D. The Debtor Should Be Authorized To Enter Into Substantially Similar Settlements Without Further Court Approval.
5 6 Finally, the Debtor seeks authorization to enter into additional settlement 7 agreements with other holders of Allowed Class 5 Claims on substantially the same terms as 8 the Settlement Agreement, 22 without the burden and expense of seeking further Court 9 approval of such settlements.
10 It is well-established that where numerous settlements are anticipated, the court in 11 its discretion may grant the debtor-in-possession authority to settle under Rule 9019(b) 12 within appropriate parameters without requiring that each and every potential settlement be HCW.RD 13 set for hearing. See 10 Collier on Bankruptcy, supra, ¶9019.03, at 9019-5 to 9019-6.
RKE rvig 14 Indeed, this Court recognized its authority to authorize settlements without having each
&RIMN 15 individual settlement brought before the Court when it authorized the Debtor to enter into 16 settlements of disputed Claims within certain parameters. See Order on Debtor's Motion for 17 Authorization to Settle Certain Pre-Petition Claims, dated January 3, 2002.
18 Absent advance approval by the Court to enter into additional agreements with 19 creditors that are substantially similar to the Settlement Agreement, the Debtor would be 20 required under Bankruptcy Rule 9019 to seek this Court's approval of each such subsequent 21 settlement. The Debtor submits that it would be wasteful for the Debtor and burdensome for 22 the Court to review repeated motions seeking approval of settlements that are on 23 substantially the same terms already approved by this Court. To avoid this waste of estate 24 and judicial resources, the Debtor respectfully requests that the Court authorize the Debtor to 25 enter into future settlements on substantially the same terms as the Settlement Agreement 26 27 22A condition to effectiveness of the Settlement Agreement is that holders of Allowed Class 5 Claims aggregating at least $3 billion must be party to the Settlement Agreement or 28 substantially similar agreements. Settlement Agreement, §21.
MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 1 without further Court approval.
2 CONCLUSION 3 For all the foregoing reasons, the Debtor respectfully requests that this Court 4 make and enter an order that (a) approves the Settlement Agreement, (b) authorizes the 5 payment of Pre-Petition Interest and Post-Petition Interest to the holders of undisputed 6 Claims specified herein, (c) authorizes the Debtor to bring current and to pay, on an on 7 going basis, the fees and expenses of indenture trustees and paying agents specified herein 8 and (d) authorizes the Debtor, without further approval from this Court, to enter into future 9 settlement agreements with other creditors on substantially similar terms as the Settlement 10 Agreement.
11 12 DATED: March _, 2002.
HOMBD 13 Respectfully, RICE c_~NAmt 14 HOWARD, RICE, NEMEROVSKI, CANADY,
&RAMCN FALK & RABKIN
,_,Wd,* 15 A Professional Corporation 16 By:
17 JAMES L. L ES 18 Attorneys for Debtor and Debtor in Possession PACIFIC GAS AND ELECTRIC COMPANY 19 20 21 22 23 24 25 26 27 28 WD 030502/F-I 419913/Y1/977963/v6 "MOT.FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT