ML022260995
| ML022260995 | |
| Person / Time | |
|---|---|
| Site: | Diablo Canyon  |
| Issue date: | 08/06/2002 |
| From: | Bliss K 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: ML022260995 (18) | |
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_ 15 16 17 18 19 20 21 22 23 24 25 26 27 28 In re PACIFIC GAS and ELECTRIC COMPANY, a California corporation, Debtor.
Federal I.D. No. 94-0742640 Case No. 01-30923 DM Chapter 11 Case NOTICE OF MOTION AND MOTION OF PACIFIC GAS AND ELECTRIC COMPANY FOR AN ORDER AUTHORIZING ASSUMPTION OF POWER PURCHASE AGREEMENTS AND COMPROMISE OF CLAIMS WITH SIERRA PACIFIC INDUSTRIES Date:
Time:
Place:
Judge:
September 12, 2002 1:30 p.m.
235 Pine Street, 22nd Floor San Francisco, California Hon. Dennis Montali
/
MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI JEFFREY L. SCHAFFER (No. 91404)
WILLIAM J. LAFFERTY (No. 120814)
KIMBERLY A. BLISS (No. 207857)
HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN A Professional Corporation Three Embarcadero Center, 7th Floor San Francisco, California 94111-4065 Telephone:
415/434-1600 Facsimile:
415/217-5910 Attorneys for Debtor and Debtor in Possession PACIFIC GAS and ELECTRIC COMPANY UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION
TABLE OF CONTENTS 1
2 3
4 5
6 7
8 9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ARGUMEN CONCLUSI
- T A.
The Court Should Approve The Settlement And Assumption Agreements.
- 1.
The Probability Of Success On The Merits.
- 2.
The Complexity Of The Litigation, And The Expense, Inconvenience And Delay Attending It.
- 3.
The Settlement Is In The Best Interest Of The Creditors.
B.
The Court Should Approve The Assumption Agreement.
ION MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI Page 1
1 2
2 4
7 8
RIM Fix EIRA.NG NOTICE OF MOTION AND MOTION MEMORANDUM OF POINTS AND AUTHORITIES INTRODUCTION FACTUAL AND PROCEDURAL BACKGROUND A.
The Procedural History Of The Dispute Between The Parties.
B.
The Parties' Mediation And The Resulting Settlement And Assumption Agreements.
C.
The Agreements Are In The Best Interest Of The Estate.
8 10 10 10 11 13
TABLE OF AUTHORITIES Page(s) 3 4
5 6
7 8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Cases Group of Institutional Investors v. Chicago, Milwaukee, St. Paul & Pac. R.R.
Co., 318 U.S. 523 (1943)
In re III Enters., Inc., 163 B.R. 453 (Bankr. E.D. Pa.) affd, 169 B.R. 551 (E.D. Pa. 1994)
In re Purofied Down Prods. Corp., 150 B.R. 519 (S.D.N.Y. 1993)
In re W.T. Grant Co., 699 F.2d 599 (2d Cir. 1983)
Lewis v. Anderson, 615 F.2d 778 (9th Cir. 1979)
Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043 (4th Cir. 1985)
Martin v. Kane (In re A & C Props.), 784 F.2d 1377 (9th Cir. 1986)
Myers v. Martin (In re Martin), 91 F.3d 389 (3d Cir. 1996)
NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984)
Nellis v. Shugrue, 165 B.R. 115 (S.D.N.Y. 1994)
Official Unsecured Creditors' Comm. of Pennsylvania Truck Lines, Inc. v.
Pennsylvania Truck Lines, Inc. (In re Pennsylvania Truck Lines, Inc.),
150 B.R. 595 (E.D. Pa. 1992), aff d mem., 8 F.3d 812 (3d Cir. 1993)
Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095 (2d Cir. 1993)
Port O'Call Inv. Co. v. Blair (In re Blair), 538 F.2d 849 (9th Cir. 1976)
Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v.
Anderson, 390 U.S. 414 (1968)
Robertson v. Pierce (In re Chi-Feng Huang), 23 B.R. 798 (B.A.P. 9th Cir.
1982)
Summit Land Co. v. Allen (In re Summit Land Co.), 13 B.R. 310 (Bankr. D.
Utah 1981)
Turbowind, Inc. v. Post Street Mgmt., Inc. (In re Turbowind, Inc.), 42 B.R.
579 (Bankr. S.D. Cal. 1984)
Vaughn v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 134 B.R. 499 (Bankr. S.D.N.Y. 1991)
MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI
-ii-1 2
CANUX BIMNU 11 12 9
9 12 11, 12 8,9, 10,11 8, 9 11 8,9 9
11 9
8 12 12 12 8,9, 10,11
TABLE OF AUTHORITIES Page(s)
Statutes 1
2 3
4 5
6 7
8 9
10 11 12 HOMM~
13 N
14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 Lawrence P. King, Collier on Bankruptcy ¶365.03[2], at 365-22 (15th ed.
rev. 2000) 11 MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI
-iii-11 U.S.C.
§362
§365
§365(a)
§503
§1107
§1108 Fed. R. Bankr. P. Rule 9019(a)
Northern Dist. Cal. Local Bankr. R. 9014-1(c)(2)
Other Authorities 4
2, 6 12 7
2 2
1,8 I
1 NOTICE OF MOTION AND MOTION 2
PLEASE TAKE NOTICE that on September 12, 2002, at 1:30 p.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 Chapter 11 case 6
("PG&E" or the "Debtor"), will and hereby does move the Court for entry of an order 7
authorizing PG&E to enter into: (1) a Settlement Agreement resolving ongoing litigation 8
and claims between PG&E, Sierra Pacific Industries ("SPI") and the California Independent 9
Systems Operator (the "ISO"); and (2) an Assumption Agreement to assume the Power 10 Purchase Agreements ("PPAs") of four Qualifying Facilities ("QFs") owned by SPI-i.e.,
11 the Burney Facility (Log No. 13C049), the Quincy Facility (Log No. 10C018), the 12 Susanville Facility (Log No. 10C009), and the Lincoln Facility (Log No. 12C008).
HOWA 13 This Motion is based on the facts and law set forth herein (including the following M
14 Memorandum of Points and Authorities), the accompanying Declaration of Charles R.
PANx 15 Middlekauff, the record of this case, and any evidence presented at or prior to the hearing on 16 this Motion.
17 PLEASE TAKE FURTHER NOTICE that pursuant to Rule 9014-1(c)(2) of the 18 Bankruptcy Local Rules for the Northern District of California, any written opposition to the 19 Motion and the relief requested therein must be filed with the Bankruptcy Court and served 20 upon appropriate parties (including counsel for PG&E, the Office of the United States 21 Trustee and the Official Committee of Unsecured Creditors) at least five (5) days prior to the 22 scheduled hearing date. If there is no timely objection to the requested relief, the Court may 23 enter an order granting such relief without further hearing.
24 25 MEMORANDUM OF POINTS AND AUTHORITIES 26 INTRODUCTION 27 PG&E commenced this Chapter 11 case by the filing of a voluntary petition on April 6, 28 2001.
PG&E continues to manage and operate its property as a debtor in possession MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI 1
pursuant to Sections 1107 and 1108 of the Bankruptcy Code.
PG&E submits this 2
Memorandum of Points and Authorities in Support of its Motion For An Order Authorizing 3
Assumption Of Power Purchase Agreements And Compromise Of Claims With Sierra 4
Pacific Industries (the "Motion"). By this Motion, PG&E seeks authorization to enter into 5
and be bound by two related agreements (the "Agreements"), setting forth the terms of 6
PG&E's compromise of controversy and settlement with SPI. The first-the "Settlement 7
Agreement"--resolves ongoing litigation and claims between SPI and PG&E, and is 8
attached as Exhibit 1 to the Declaration of Charles Middlekauff In Support Of Motion Of 9
Pacific Gas And Electric Company For An Order Authorizing Assumption Of Power 10 Purchase Agreements And Compromise Of Claims With Sierra Pacific Industries 11
("Middlekauff Decl."),' filed concurrently herewith.
The second-the "Assumption 12 Agreement"--is required by the Settlement Agreement and provides for the assumption of HOWAD 13 four reinstated Power Purchase Agreements ("PPAs") between PG&E and SPI-owned RIM U
14 qualifying facilities pursuant to Section 365 of the Bankruptcy Code. It is attached to the
-,P,.,a._
15 Settlement Agreement as Exhibit A.
16 17 FACTUAL AND PROCEDURAL BACKGROUND 18 A.
The Procedural History Of The Dispute Between The Parties.
19 In the mid-1980s, PG&E entered into long-term contracts--otherwise known as 20 PPAs-for the purchase of energy and capacity from four SPI facilities, referred to herein as 21 the Burney Facility (Log No. 13C049), the Quincy Facility (Log No. 10C018), the 22 Susanville Facility (Log No. 10C009), and the Lincoln Facility (Log No. 12C008).
See 23 MiddlekauffDecl., Ex. 1 at 1-2.
24 25
'PG&E is not attaching exhibits to the service copies of the Middlekauff Declaration because they are too voluminous. However, any person served with this document may 26 obtain copies of any of the exhibits to the Middlekauff Declaration by written request by mail to Howard, Rice, Nemerovski, Canady, Falk & Rabkin, Attn: Nathaniel H. Hunt, Three 27 Embarcadero Center, 7th Floor, San Francisco, California 94111-4065, or by e-mail request to nhunt@hrice.com.
28 MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI 1
As the Court is aware from previous filings in this case, beginning in the late summer 2
of 2000, PG&E was forced to pay dramatically increased wholesale prices for electricity.
3 Moreover, PG&E was prevented from passing these costs on to retail customers, resulting in 4
a staggering financial shortfall.2 Accordingly, as with other QFs, PG&E was unable to fully 5
pay SPI for its December 2000 and January 2001 deliveries, and made no payment for 6
February and March 2001 energy deliveries. In total, PG&E's underpayment to SPI was 7
approximately $18 million. See Middlekauff Decl., Ex. 1 at 2. As a result of PG&E's 8
deteriorating financial position, PG&E filed a voluntary petition under Chapter 11 of title 11 9
on April 6, 2001.
10 Shortly before the filing of PG&E's voluntary petition, SPI filed a complaint against 11 PG&E and the ISO in Sacramento Superior Court, Case No. 01AS02027 (the "State Court 12 Action"). Id. at 2-3. SPI asserted eight separate contract based claims against PG&E in the 13 State Court Action, all based on PG&E's defaults under the PPAs. Id. at 3. In addition, SPI RE Y14 asserted non-contractual claims against PG&E and the ISO for alleged antitrust violations
- 15 under California's Cartwright Act, unfair competition, intentional interference with 16 prospective business advantage, and declaratory relief. Those claims arose out of an alleged 17 conspiracy between PG&E and the ISO to exclude SPI from the California energy market.
18 On April 5, 2001, SPI sought and obtained on a temporary restraining order ("TRO") in the 19 State Court Action, barring PG&E or the ISO from taking any extra-judicial steps to prevent 20 SPI from selling its power to third parties. Id. The court found preliminarily that PG&E had 21 breached the PPAs through its partial payment and that its asserted defense of force majeure 22 failed.
23 A few weeks after filing its voluntary petition, PG&E removed the State Court Action 24 to the U.S. Bankruptcy Court for the Eastern District of California, which court subsequently 25 2See, e._., Declaration of Marc Renson In Support Of Pacific Gas And Electric 26 Company's Opposition To Martinez Cogen LP's Motion For Entry Of An Order To Pay Fair Market Value In Advance For All Electricity Delivered By Martinez Cogen LP Pending 27 Assumption Or Rejection Of Its Power Purchase Agreement With The Debtor [Docket No.
28 736] at 2.
MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI 1
transferred the State Court Action to this Court. Id. On May 29, 2001, this Court granted 2
SPI a preliminary injunction against PG&E, finding that there was a "likelihood of [SPI]
3 prevailing on the merits of its claim against PG&E that SPI cancelled its power purchase 4
agreement with PG&E before PG&E petitioned for bankruptcy [and] that the balance of 5
hardships tip in favor of SPI."
Order Granting Sierra Pacific Industries' Motion For 6
Preliminary Injunction Against PG&E filed May 29, 2001 in Adversary Proceeding No. 01 7
3087 DM at 1. On October 9, 2001, this Court granted partial summary judgment in favor of 8
SPI on its eighth cause of action for declaratory relief, finding that PG&E had materially 9
breached its obligations under the PPAs, and that SPI had no further obligations under the 10 PPAs. Middlekauff Decl., Ex. 1 at 3. Finally, on November 21, 2001, this Court granted 11 SPI relief from the automatic stay provisions of Section 362 of the Bankruptcy Code, and 12 remanded the State Court Action to the Sacramento Superior Court. PG&E appealed this H(OAA 13 Court's Order remanding the State Court Action, which appeal is currently pending before x 14 the U.S. Bankruptcy Appellate Panel of the Ninth Circuit (the "Appeal"). Id. at 3-4.
15 Additionally, SPI filed Proof of Claim No. 8845 on September 5, 2001 in the amount 16 of $1,108,361,147.00 (the "Claim"), based primarily on damages it contended were owed in 17 the State Court Action, including nearly $900 million in punitive damages.
18 19 B.
The Parties' Mediation And The Resulting Settlement And Assumption 20 Agreements.
21 In April 2002, the parties retained Layn R. Phillips, an experienced mediator, former 22 United States District Judge and current partner at the law firm of Irell & Manella, to 23 mediate the issues presented in the State Court Action. See Middlekauff Decl., Ex. 2 at 1.3 24 Between them, SPI, PG&E and the ISO filed nearly 80 pages of mediation briefs and over 25 100 supporting exhibits. Id.
26 3As part of PG&E's application to the CPUC for approval of the Agreements, PG&E is 27 submitting the prepared testimony of the mediator, Judge Phillips, a copy of which is 28 attached as Exhibit 2 to the Middlekauff Declaration.
MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI 1
On June 4, 2002, Judge Phillips presided over the mediation, which was attended by 2
the chief executive officers of SPI, PG&E and the ISO.
After nearly 12 hours1.388889e-4 days <br />0.00333 hours <br />1.984127e-5 weeks <br />4.566e-6 months <br /> of 3
negotiations, the parties agreed on settlement terms which they memorialized in a term 4
sheet. Over the next month, the parties negotiated the specific terms of the Settlement 5
Agreement, including the amendment and assumption of the PPAs.
On two different 6
occasions, the parties returned to Judge Phillips to have him mediate disputes arising out of 7
the finalization of the settlement. Id.
8 The result of.the lengthy but productive settlement negotiations is the Settlement and 9
Assumption Agreements attached to the Middlekauff Declaration. The Agreements provide 10 for an integrated resolution of the State Court Action, the Appeal, and SPI's Claim, as well 11 as the amendment and assumption of SPI's PPAs. Accordingly, the Agreements require the 12 approval of both this Court and the California Public Utilities Commission ("CPUC"), which 13 pursuant to the terms of the Settlement Agreement, must be achieved on or before October 4, N
14 2002 or the Agreements will be deemed null and void. See MiddlekauffDecl., Ex. 1 §1.0 &
, 15 Ex. A to Ex. 1 § 1. Concurrent with the filing of this Motion, PG&E is filing an application 16 with the CPUC to obtain its approval.
17 The principal terms of the Settlement Agreement include:
18 (a)
The reinstatement and amendment of the PPAs (see Middlekauff Decl.,
19 Ex. 1 §3.0);4 20 (b)
PG&E's cure of all prepetition defaults owing to SPI under the PPAs in the 21 amount of $17,950,371.15, and interest thereon at a rate of five percent per 22 annum, compounded monthly, and paid in equal monthly installments 23 starting within five days after final approval of the Settlement Agreement is 24 4The Settlement Agreement provides for several different PPA amendments, including:
25 (1) the provision of a fixed energy price of 5.37 cents per kWh for a term of four years, pursuant to CPUC Decision 01-06-015, with reversion thereafter to PG&E's short-run 26 avoided costs ("SRAC") as determined by the CPUC pursuant to the provisions of the PPAs (Middlekauff Decl., Ex. 1 §3.1); (2) the addition of provisions allowing for the pooling of 27 capacity from the four QFs (id. §§3.1 & §3.2); and (3) the deletion of the minimum damages clause currently contained in the PPAs (id. §3.4).
28 MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI 1
obtained and continuing through June 4, 2003 (id. §2.0);
2 (c)
SPI's payment of amounts due PG&E by SPI or its affiliate Sierra Pine for 3
energy and energy related services provided by PG&E during the period 4
from March 1, 2001 through June 1, 2001, in the amount of $912,050, and 5
interest thereon at a rate of five percent per annum, compounded monthly, 6
and paid in equal monthly installments starting within five days after final 7
approval of the Settlement Agreement is obtained and continuing through 8
June 4, 2003. (id. §2.1);
9 (d)
PG&E's agreement not to derate or place SPI on probation for its failure to 10 deliver either energy or capacity between March 21, 2001 and the date it 11 begins to provide energy and capacity to PG&E pursuant to the amended 12 PPAs (j. §3.4);
13 (e)
The dismissal of both the State Court Action and the Appeal within 14 days 14 of the final approval of the Settlement Agreement (d. §4.1(A)); and Ah,,..
15 (f)
Full releases of all known and unknown claims between SPI and PG&E (id.
16
§5.0(A)).'
17 In the event that the Court and the CPUC approve the Settlement Agreement, the 18 Assumption Agreement provides for the assumption of the amended PPAs and the cure of 19 any prepetition defaults thereunder pursuant to Section 365 of the Bankruptcy Code. With 20 this Court's approval, the Assumption Agreement also provides for:
21 (a)
PG&E's cure of the prepetition defaults and payment of interest thereon at a 22 rate of five percent per annum, compounded monthly, and paid in 23 accordance with Section 2.0 of the Settlement Agreement as outlined above 24 (Middlekauff Decl., Ex. A to Ex. 1 at 3);
25 (b)
SPI's withdrawal, within seven days of a bankruptcy court order approving 26 27 5In addition, the Settlement Agreement contains limited releases between SPI and the 28 ISO, and between PG&E and the ISO. See MiddlekauffDecl., Ex. A to Ex. 1 §5.0(B)-(C).
MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI 1
the Agreement, of any claims SPI filed in the bankruptcy case, other than 2
the Section 503 administrative expense claims provided for in the 3
Assumption Agreement with respect to PG&E's prepetition defaults and 4
interest thereon (id. at 4); and 5
(c)
SPI's waiver of its right to recover "pecuniary loss" damages in connection 6
with the assumption of the amended PPAs (d.'). 6 7
8 C.
The Agreements Are In The Best Interest Of The Estate.
9 As noted above, the Agreements provide not just for the amendment and assumption of 10 SPI's PPAs, but also the resolution of all disputes between SPI and PG&E, including the 11 State Court Action, the Appeal and SPI's Clainim In the Debtor's opinion, the Agreements 12 achieve this result with terms that are in the best interest of the estate and its creditors.
H00AW 13 In his prepared testimony attached to PG&E's application for CPUC approval of the RXZX N
14 Agreements, Judge Phillips notes that while neither PG&E nor the ISO has ever believed 1.11.6 15 that SPI's non-contractual claims had validity, there was a risk that the State Court Action 16 could have resulted in a finding that PG&E was liable for SPI's lost profits. Middlekauff 17 Decl., Ex. 2 at 3-4. SPI claimed over $86 million in lost profits plus interest at seven percent 18 in both the State Court Action and as part of its Claim. Id. Under both the Settlement and 19 Assumption Agreements, PG&E avoids having to pay any lost profit damages to SPI.
20 Moreover, PG&E avoids any risk that SPI could have recovered on its claim for punitive 21 damages.
22 Not only do the Settlement and Assumption Agreements allow PG&E to avoid a 23 potential award of lost profit damages to SPI, they also allow PG&E to avoid the substantial 24 25 6PG&E notes that other than the monthly compounding of interest, these terms are consistent with those reached between PG&E and over two hundred other qualifying 26 facilities and already approved by the Court in a series of Stipulations and Orders between PG&E and the Committee, filed pursuant to this Court's December 21, 2001 oral Order 27 granting PG&E's Motion For Authority To Compromise Claims Between Estate And 28 Various Qualifying Facilities.
MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI 1
litigation costs associated with defending the State Court Action, prosecuting its Appeal, and 2
defending the Claim. For example, PG&E's counsel in the State Court Action alone 3
estimated that it would cost PG&E between $2-3 million to litigate the State Court Action 4
through trial, not including an appeal. See Middlekauff Decl., Ex. 2 at 4.
5 For these and other reasons, not only the Debtor, but also Judge Phillips concluded that 6
the Settlement Agreement was a reasonable and prudent alternative to the risks and expenses 7
of continued litigation. Id.
8 9
ARGUMENT 10 A.
The Court Should Approve The Settlement And Assumption Agreements.
11 Bankruptcy Rule 9019(a) empowers.a bankruptcy court to approve any settlement or 12 compromise related to a reorganization or liquidation.7 Myers v. Martin (In re Martin), 91 HMMD 13 F.3d 389, 393 (3d Cir. 1996); Vaughn v. Drexel Burnham Lambert Group, Inc. (In re Drexel RJM
"".MU 14 Burnham Lambert Group. Inc.), 134 B.R. 499, 505 (Bankr. S.D.N.Y. 1991).
- Indeed, 15 compromises and settlements are a common and favored occurrence in bankruptcy cases 16 because they allow a debtor and its creditors to avoid the financial and other burdens 17 associated with litigation over contentious issues and expedite the administration of the 18 bankruptcy estate. Protective Comm. for Indep. Stockholders of TMT Trailer Ferry. Inc. v.
19 Anderson, 390 U.S. 414, 424 (1968); Martin v. Kane (In re A & C Props.), 784 F.2d 1377, 20 1380-81 (9th Cir. 1986).
21 In reviewing proposed settlements, the bankruptcy court's inquiry focuses only upon 22 whether the compromise is fair and equitable and in the best interest of the estate. TMT 23 Trailer, 390 U.S. at 424; A & C Props., 784 F.2d at 1380-81; Nellis v. Shugrue, 165 B.R.
24 115, 121 (S.D.N.Y. 1994). In making this determination, however, the bankruptcy court is 25 not required to conduct a mini-trial on the merits of the underlying dispute or an independent 26 7Bankruptcy Rule 9019(a) simply states, in part, that "[o]n motion by the trustee and 27 after notice and a hearing, the court may approve a compromise or settlement." Fed. R.
28 Bankr. P. 9019(a).
MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI 1
investigation into the reasonableness of the settlement. Port O'Call Inv. Co. v. Blair (In re 2
Blair), 538 F.2d 849, 851 (9th Cir. 1976); see also In re Purofied Down Prods. CoQ., 150 3
B.R. 519, 522 (S.D.N.Y. 1993); Drexel Burnham, 134 B.R. at 505.
4 Rather, the standards for such approval have been described as lenient and intended to 5
encourage approval of settlements in bankruptcy cases. See Purofied Down, 150 B.R. at 6
522-23. The bankruptcy court need only canvass the legal and factual issues underpinning 7
the compromise to ensure that the proposed settlement does not fall "'below the lowest point 8
in the range of reasonableness."' Nellis, 165 B.R. at 121-22 (quoting In re W.T. Grant Co.,
9 699 F.2d 599, 608 (2d Cir. 1983)); Purofied Down, 150 B.R. at 522; Official Unsecured 10 Creditors' Comm. of Pennsylvania Truck Lines, Inc. v. Pennsylvania Truck Lines, Inc. (In re 11 Pennsylvania Truck Lines, Inc.), 150 B.R. 595, 598 (E.D. Pa. 1992), affd m___, 8 F.3d 812 12 (3d Cir. 1993); Drexel Burnham, 134 B.R. at 505. In making this determination, significant 13 deference may be given to the informed judgment of the debtor in possession and its counsel 4
14 that a proposed compromise is fair and equitable. Martin, 91 F.3d at 395; Nellis, 165 B.R. at 15 122; Purofied Down 150 B.R. at 522-23; Drexel Burnham, 134 B.R. at 505.
16 Over the years, four significant criteria have been developed by the courts for 17 consideration in determining whether a proposed settlement falls below the lowest point in 18 the range of reasonableness: (1) the probability of success on the merits; (2) the difficulties, 19 if any, to be encountered in the matter of collection; (3) the complexity of the litigation 20 involved, and the expense, inconvenience and delay necessarily attending it; and (4) the 21 paramount interest of the creditors and a proper deference to their reasonable views. A & C 22 Pros., 784 F.2d at 1381; see also Martin, 91 F.3d at 393; Nellis, 165 B.R. at 122; 23 Pennsylvania Truck Lines, 150 B.R. at 598. As demonstrated below, each of the applicable 24 criteria is satisfied here.8 25 26 27 8The second factor typically considered by courts--difficulty associated with 28 collection-is not applicable here.
MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI 1
- 1.
The Probability Of Success On The Merits.
2 The Agreements fully and finally resolve numerous disputes between the Debtor and 3
SPI without the need for expensive, distracting and time-consuming litigation. Although the 4
Debtor believes that its positions with respect to SPI's non-contractual claims have 5
considerable merit and that, if litigated, the Debtor would have prevailed on the issues in 6
dispute, no litigation is without risk. Moreover, SPI's contractual claims and request for 7
approximately $86 million in lost profits presented a considerably higher risk to the Debtor 8
given the preliminary rulings of both the Sacramento Superior Court and this Court on the 9
issues of PG&E's alleged breach and force maJeure defense.
10 11
- 2.
The Complexity Of The Litigation, And The. Expense, Inconvenience And Delay Attending It.
12 13 As set forth above, the Settlement Agreement resolves numerous complex issues A
14 between the Debtor and SPI, including all causes of action in the State Court Action, the 15 Appeal, and SPI's Claim. SPI asserted eight contractual claims, and numerous complex 16 non-contractual claims, including antitrust violations and claims for unfair business 17 practices. The litigation of these and other disputes between the parties in multiple fora 18 could easily cost the Debtor millions of dollars in legal fees alone, as well as delay 19 resolution of an over $1 billion claim in this bankruptcy case. Accordingly, in agreeing to 20 the Settlement and Assumption Agreements, the Debtor has made what it believes is an 21 economically prudent business judgment that the estate's assets are better utilized in 22 facilitating a settlement rather than defending the State Court Action and Claim and 23 prosecuting its Appeal.
24 25
- 3.
The Settlement Is In The Best Interest Of The Creditors.
26 The last criteria considered by bankruptcy courts reviewing a proposed settlement is 27 the paramount interest of creditors, with a deference to their reasonable views. A & C 28 Props., 784 F.2d at 1381; Drexel Burnham, 134 B.R. at 505-06. While a creditor's objection MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI 1
to a proposed settlement must be considered, it is not controlling and will not bar approval of 2
settlements that "do not fall below the lowest point in the range of reasonableness." A & C 3
Props., 784 F.2d at 1382; Drexel Burnham, 134 B.R. at 505.
4 The compromises reached in the Settlement Agreement benefit not only the estate but 5
all creditors. To begin with, the Settlement Agreement calls for the dismissal of the State 6
Court Action and the Appeal (Middlekauff Decl., Ex. 1 §4.1), as well as the withdrawal of 7
SPI's Claim, all of which will preserve estate assets by avoiding further litigation costs. Id.
8 Ex. 2 at 4. As well, given the risks of the State Court Litigation and the Claim (14. Ex. A to 9
Ex. 1 ¶4), the terms of the Settlement Agreement-which provide for the cure of defaults 10 under the PPAs, but no payment of lost profits or other damages-potentially save tens of 11 millions of dollars in estate assets for the creditors.
12 HO"N 13 B.
The Court Should Approve The Assumption Agreement.
ý 14 In addition, the Court should approve the Assumption Agreement, which is an integral P1EK A
W.d*-.
15 part of the settlement. The Bankruptcy Code does not provide courts with a standard to use 16 in determining the propriety of a debtor in possession's decision to assume executory 17 contracts. 3 Lawrence P. King, Collier on Bankruptcy ¶365.03[2], at 365-22 (15th ed. rev.
18 2000). Absent statutory guidance, the widely accepted test adopted by the courts is the 19 business judgment standard. See NLRB v. Bildisco & Bildisco, 465 U.S. 513, 523 (1984);
20 Group of Institutional Investors v. Chicago, Milwaukee, St. Paul & Pac. R.R. Co., 318 U.S.
21 523, 550 (1943) ("[T]he question whether a lease should be rejected and if not on what terms 22 it should be assumed is one of business judgment"). Under this rule, courts accord great 23 deference to a debtor in possession's decision to assume an executory contract. See, e.g.,
24 Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 25 1098 (2d Cir. 1993) ("At heart, a motion to assume should be considered a summary 26 proceeding..."); Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc. (In re Richmond 27 Metal Finishers, Inc.), 756 F.2d 1043, 1046 (4th Cir. 1985) ("the bankrupt's decision... is 28 to be accorded the deference mandated by the sound business judgment rule as generally MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI 1
applied by courts to discretionary actions or decisions of corporate directors"); In re III 2
Enters., Inc., 163 B.R. 453, 469 (Bankr. E.D. Pa. 1994) ("We will not substitute our own 3
business judgment for that of the Debtor... unless 'the decision is so unreasonable that it 4
could not be based on sound business judgment, but only on bad faith or whim"'), aff'd, 169 5
B.R. 551 (E.D. Pa. 1994); Summit Land Co. v. Allen (In re Summit Land Co.), 13 B.R. 310, 6
315 (Bankr. D. Utah 1981) ("[C]ourt approval under Section 365(a), if required, except in 7
extraordinary situations, should be granted as a matter of course. To begin, this rule places 8
responsibility for administering the estate with the trustee, not the court..
9 The Ninth Circuit, in accordance with the widely accepted standard prevailing in other 10 jurisdictions, also has adopted the business judgment rule for reviewing Section 365(a) 11 motions. Robertson v. Pierce (In re Chi-Feng Huang), 23 B.R. 798, 800 (B.A.P, 9th Cir.
12 1982) ("We believe the 'business judgment' rule is the standard which controls the court's 1A 13 right to disapprove the [debtor in possession's] decision to reject an executory contract....
'~mix 14 Virtually all recent Bankruptcy Court decisions follow this rule"); Turbowind. Inc. v. Post 15 Street Mgmt., Inc. (In re Turbowind. Inc.), 42 B.R. 579, 585 (Bankr. S.D. Cal. 1984) ("The 16 debtor has met its burden under the liberal 'business judgment' standard"). Under the rule as 17 generally formulated and applied in corporate litigation, courts defer to decisions of 18 corporate directors regarding matters entrusted to their business judgment except upon a 19 finding of bad faith or gross abuse of business discretion. See Lubrizol, 756 F.2d at 1047; 20 Lewis v. Anderson, 615 F.2d 778, 782-83 (9th Cir. 1979).
21 Applying the foregoing precedents to this case, it is clear that PG&E's decision to 22 assume SPI's reinstated and amended PPAs as part of the global settlement of the parties' 23 disputes is neither made in bad faith nor a gross abuse of its business discretion. To the 24 contrary, PG&E's decision is based on fundamentally sound business reasons. To begin 25 with, PG&E's decision to assume the amended PPAs on the terms in the Agreements was 26 integral to an effective compromise of the State Court Action, the Appeal and SPI's Claim.
27 In addition, the compromises reached in the Assumption Agreement with respect to the 28 setting of interest and the payment of prepetition defaults benefit the estate and all creditors MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI 1
to the extent that they preserve estate assets by: (i) providing for an interest rate wnicn is 2
favorable to the estate by any objective measure; and (ii) avoiding the cost of additional 3
litigation.
9 4
Accordingly, the Court should approve the Assumption Agreement as an integral part 5
of the Settlement Agreement.
6 7
CONCLUSION 8
The Debtor has carefully considered the risks, complexity and expense associated with 9
further litigation of the disputes between it and SPI.
In the Debtor's sound business 10 judgment, these factors tip the scale heavily in favor of approval of the proposed Settlement 11 and Assumption Agreements as fair, reasonable and equitable and in the best interests of the 12
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21 22 9The Debtor acknowledges that the interest provisions in the Settlement and Assumption Agreements are slightly more generous than the rate provided almost all other 2 ualifying facilities who have signed assumption and interest agreements with PG&E.
23 Although the rate of interest is the same-five percent-the current Settlement and Assumption Agreements call for monthly compounding, while agreements with other qualifyml facilities do not. PG&E believes that i light of the fact that the Settlement and Assumption Agreements provide for no payment of lost profits or other damages, the 25 monthly compounding of interest-which allowed PG&E to reach settlement and obtain the various waivers, withdrawals and releases contained in the Ageements-is in the best 26 interests of the estate as well as all creditors, including other qualifying facilities. Moreover, pursuant to Section 2.1 of the Settlement Agreement, SPI wiltpay PG&E the same monthly 27 compounded interest rate on the $912,050 it owes PG&E for energy and energy related 28 services provided by PG&E. MiddlekauffDecl., Ex. 1 at §2.1.
MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI 1
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&RVC estate and its constituencies. For these reasons, the Debtor respectfully requests that the Court grant its Motion and approve the Settlement and Assumption Agreements in the forms attached to the Middlekauff Declaration at Exhibit 1 and Exhibit A to Exhibit 1.
DATED: August k 2002.
Respectfully, HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN A Professional Corporation KIMBERLI A. BLISS Attorneys for Debtor and Debtor in Possession PACIFIC GAS AND ELECTRIC COMPANY WD 0S0602/F-141992WY8/1013807/vl MOTION FOR ORDER AUTH. ASSUMP. OF PPAS AND COMPROMISE OF CLAIMS WITH SPI