ML022900466

Memorandum of Points and Authorities in Support of Debtor'S Motion for Order Approving Entry Into Rescission Agreement and Mutual Release Between Debtor and Rcn Telecom Services

ML022900466
Person / Time
Site:	Diablo Canyon
Issue date:	10/07/2002
From:	Zapparoni C 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: ML022900466 (8)

Text

1 JAMES L. LOPES (No. 63678)

WILLIAM J. LAFFERTY (No. 120814) 2 CEIDE ZAPPARONI (No. 200708)

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 10 SAN FRANCISCO DIVISION 11 In re Case No. 01 30923 DM 12 PACIFIC GAS AND ELECTRIC Chapter 11 Case 13 COMPANY, a California corporation, HCNRD RuE Date: November 5, 2002 E 14 Debtor. Time: 9:30 a.m.

eRA4(IN Place: 235 Pine Street, 22nd Floor AP_.1*. 15 Federal I.D. No. 94-0742640 San Francisco, California 16 17 18 MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEBTOR'S MOTION FOR ORDER APPROVING ENTRY INTO RESCISSION AGREEMENT AND 19 MUTUAL RELEASE BETWEEN DEBTOR AND RCN TELECOM SERVICES 20 [Notice of Motion and Declaration of Lori I. Austin in Support Filed Concurrently Herewith]

21 22 23 24 25 26 27 V4&'! (0e 28 0o00 MPA ISO MOT FOR ORDER APPROVING RESCISSION AGREEMENT

1 1.

2 INTRODUCTION 3 Pacific Gas and Electric Company ("PG&E" or "Debtor"), the debtor and debtor in 4 possession in the above-captioned Chapter 11 case, seeks the Court's approval of the 5 Debtor's entry into an agreement with telecommunications company RCN Telecom Services 6 ("RCN"), which rescinds a lease agreement with RCN and resolves potential disputes 7 between the parties. On November 20, 2000, PG&E and RCN entered into a "Master 8 Conduit and Facilities License and Lease Agreement" ( "Master Agreement"). Under the 9 Master Agreement, PG&E agreed to lease certain deactivated PG&E gas pipelines in San 10 Francisco to RCN to run fiber optic and coaxial cables and associated equipment. The 11 Master Agreement required RCN to make a series of graduated payments reflecting the 12 number of miles of gas pipeline utilized by RCN up to a total of 100 miles over the life of 30 miles of gas pipeline and 13 the 99-year lease. Under the Master Agreement, RCN reserved

, 14 paid PG&E $876,170.72 in January 2001. RCN did not install any telecommunications

&PAWl Z-.a.mz 15 equipment in the reserved lines. Subsequently, RCN told PG&E that its financial condition 16 was such that it was unable to pay the next installment of $248,384.50 due on January 1, 17 2002 or make any payments thereafter. RCN failed to make the January payment. On 18 March 21, 2002, PG&E notified RCN that it was in default under the Master Agreement and 19 gave notice of termination. Under the Master Agreement, upon termination PG&E would be 20 required to refund approximately $832,000 of the $876,170.72 (19/20 or 95%) RCN had 21 paid PG&E.

22 PG&E's underground gas pipelines are in San Francisco streets pursuant, in part, 23 to a gas franchise agreement with the City and County of San Francisco ("CCSF"). CCSF 24 has challenged PG&E's rights to lease its former gas pipelines to RCN, alleging that the 25 Master Agreement breached the franchise agreement and violated the local ordinance 26 incorporating the franchise agreement into CCSF's municipal code.

27 28 MPA ISO MOT FOR ORDER APPROVING RESCISSION AGREEMENT 1 In view of RCN's default and CCSF's claims, PG&E seeks the Court's 2 authorization to compromise the dispute with RCN by rescinding the Master Agreement on 3 terms beneficial to both parties on the basis that such a result would best promote the 4 business interests of PG&E's estate.

5 6 II.

7 FACTS AND PROCEDURAL HISTORY1 8 PG&E has the right to run underground gas pipelines in San Francisco pursuant, 9 in part, to a franchise agreement with the City and County of San Francisco ("CCSF"),

10 which is codified in CCSF Municipal Code (the "CCSF Gas Franchise"). On November 20, 11 2000, PG&E entered into the Master Agreement with RCN. The Master Agreement was 12 designed to provide RCN with the right to install and maintain telecommunications cables HiCAA 13 such as fiber optic cable and associated equipment in certain deactivated PG&E gas RKI D 14 pipelines in San Francisco for a period of up to 99 years. Id.. at ¶ 1.1.

EtRtIflC

.4,,*,b 15 Under the Master Agreement, RCN was to reserve a minimum amount of gas line 16 each year and make an up-front payment for each section of gas line reserved. In addition, 17 RCN was required to make annual payments for each section of deactivated gas line 18 reserved. The amounts payable by RCN were calculated using a formula set forth in the 19 Master Agreement, which was based (in part) on how much of pipeline RCN reserved.

20 Master Agreement ¶8.1. The first amount due under the Master Agreement represented a 21 20-year payment for 30 miles of pipeline. For each of the next 9 years of the Master 22 Agreement, RCN would pay an amount representing a 20-year payment for 8 miles of 23 pipeline, until RCN reached the maximum of 100 miles of pipeline for which RCN had 24 contracted. After the first 20 years of the Master Agreement had elapsed, RCN was required 25 to pay an amount every 10 years representing 10 years of use of 100 miles of pipeline. Thus, 26

'The evidentiary basis and support for the facts set forth herein are contained in the 27 Declaration of Lori I. Austin In Support of Debtor's Motion For Order Approving Rescission Agreement And Muualelease Beteen Debtor And RCN Telecom Services 28 filed concurrently herewith.

MPA ISO MOT FOR ORDER APPROVING RESCISSION AGREEMENT 1 it was anticipated that RCN's use of pipeline would increase over the term of the Master 2 Agreement. If the Master Agreement were terminated by either party before the end of the 3 term, the parties agreed that PG&E would refund RCN the prorata portion of the payments 4 received that were allocable to future use. Master Agreement ¶ 8.1 (d).

5 On January 1, 2001, RCN made its first payment of $876,553.92 under the 6 Master Agreement. A further $248,384.50 was due under the Master Agreement on 7 January 1, 2002. In November 2001, RCN told PG&E that its financial situation had 8 deteriorated, and it would not be making the January 2002 payment or any other payments.

9 Moreover, RCN told PG&E that its pipeline capacity needs had decreased substantially, and 10 the Master Agreement provided for pipeline capacity far in excess of RCN's anticipated 11 needs. RCN did not make the January payment and has made no subsequent payments. In 12 March 2002, PG&E notified RCN that it proposed to terminate the Master Agreement due to HOWAD RhC 13 RCN's default.

O 14 After the Master Agreement was executed, CCSF claimed that the Master

• PABKWN 15 Agreement was in violation of the CCSF Gas Franchise.2 PG&E's San Francisco pipeline 16 use was limited, CCSF claimed, to gas-related uses, not telecom-related uses.

17 In view of RCN's failure to make the January payment, statements regarding its 18 financial position and lack of need for the pipeline capacity for which it had contracted, the 19 Master Agreement provision requiring PG&E to return to RCN on termination 20 approximately 19/20 (or 95%) of the $876,533.92, and CCSF's allegations that PG&E was 21 not authorized to enter into the Master Agreement, PG&E concluded that maintaining the 22 Master Agreement was not in PG&E's business interests. Accordingly, PG&E negotiated an 23 agreement with RCN to rescind the Master Agreement to resolve any dispute with RCN and 24 also avoid any potential dispute with CCSF (the "Rescission Agreement"). The Rescission 25 Agreement provides for PG&E to refund $873,170.72 (the amount RCN paid PG&E 26 27 2CCSF has filed a claim in PG&E's bankruptcy action (Claim No. 12640), which included a claim for an "unknown" amount relating to PG&E's proposed lease of its 28 abandoned gas lines to RCN.

MPA ISO MOT FOR ORDER APPROVING RESCISSION AGREEMENT 1 pursuant to 18.1 of the Master Agreement, less certain costs iricurred by PG&E under the 2 Master Agreement), without any requirement that PG&E pay interest to RCN. Furthermore, 3 the Rescission Agreement provides for mutual releases of liability and makes explicit that 4 the entry into the Rescission Agreement is not a rejection of the Master Agreement for 5 Bankruptcy purposes; and, therefore, PG&E is not liable to pay rejection damages.

6 Rescission Agreement ¶¶4-5. The Rescission Agreement provides a reasonable resolution of 7 the issues and potential disputes that arose out of the Master Agreement in a manner that is 8 beneficial to PG&E and fair to RCN.

9 10 I.

11 ARGUMENT 12 A. The Rescission Agreement Compromises The Potential Dispute With RCN Under Terms Fair To Both Parties Without The Expense And Diversion Of 13 Resources Involved In Litigation And Should Be Authorized Pursuant To RKE Bankruptcy Rule 9019.

"CV" 14 EUK 15 Bankruptcy law favors compromises, which are considered "a normal part of the 16 process of reorganization." Protective Comm. for Indep. Stockholders of TMT Trailer Ferry 17 Inc. v. Anderson, 390 U.S. 414, 424 (1968). Accordingly, the Bankruptcy Court has great 18 latitude in approving compromise agreements. See Martin v. Kane (In re A & C Props.),

19 784 F.2d 1377, 1380-81 (9th Cir. 1986). The Court's discretion is not, however, unlimited.

20 See Arden v. Motel Partners (In re Arden), 176 F.3d 1226, 1228 (9th Cir. 1999). The Court 21 may approve a compromise only if it is "fair and equitable." Protective Comm. for Indep.

22 Stockholders of TMT Trailer Ferry Inc., 390 U.S. at 424. In evaluating any proposed 23 compromise, the Court must consider the following factors:

24 25 26 27 28 MPA ISO MOT FOR ORDER APPROVING RESCISSION AGREEMENT 1 (a) The probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter of collection; (c) the complexity 2 of the litigation involved, and the expense, inconvenience and delay necessarily attending it; (d) the paramount interest of the creditors and 3 a proper deference to their reasonable views in the premises.

(Woodson v. Fireman's Fund Ins. Co. (In re Woodson), 839 F.2d 610, 4 620 (9th Cir. 1988) (quoting In re A & C Props., 784 F.2d at 1381).

5 Courts weigh these factors to determine whether the compromise is in the best interests of 6

the estate. See A & C Props., 784 F.2d at 1382 (court must "weigh certain factors to determine whether the compromise is in the best interest of the bankrupt estate").

8 Bearing these points in mind, each of the A & C Properties factors weighs in 9 favor of authorizating of PG&E's entry into the Agreement and Release. RCN's 10 unequivocal inability and/or unwillingness to fulfill its obligations under the Master 11 Agreement coupled with CCSF's allegations that PG&E was not empowered to lease its gas 12 pipelines for telecom purposes would raise a number of potentially difficult disputed issues V 13 if PG&E were to seek to enforce the Master Agreement against RCN. Litigating such issues t NU CA "14 EqK against RCN (and, potentially, CCSF) would undoubtedly prove time-consuming and costly, AOd,4* 15 and a successful legal outcome is by no means assured. Moreover, since RCN has 16 unequivocally defaulted on its payment obligations due to financial constraints, there is 17 significant doubt that pursuing litigation against RCN would result in any recovery.

18 Additionally, if PG&E had proceeded to terminate the Master Agreement, it 19 would have been required to refund 95% of the money RCN had paid to date anyway. For 20 only a small amount more than the amount it would have to pay upon termination, PG&E 21 obtains the benefit of mutual liability releases and a limitation on payment of any rejection 22 damages or interest. Therefore, rescinding the Master Agreement is a fair and equitable 23 resolution of potential disputes and in the best interests of PG&E's estate.

24 25 26 27 28 MPA ISO MOT FOR ORDER APPROVING RESCISSION AGREEMENT I B. The Court Should Approve The Payment To RCN Under The Rescission Agreement Pursuant To Section 363 Of The Bankruptcy Code Because 2 Sound Business Justifications Exist For The Refund.

3 Moreover, the Court should approve the refund of $873,170.72 to RCN pursuant 4 to its powers under Section 363(b)(1) of the Bankruptcy Code to authorize the use of estate 3

5 property.

6 Pursuant to Section 363(b)(1), the court may authorize the debtor in possession to 7 use property of the estate "other than in the ordinary course of business." In determining 8 whether to authorize a transaction under Section 363(b)(1), courts require a debtor to show 9 that a sound business purpose justifies such actions, applying the "business judgment" test.

10 See, L._., Stephens Indus., Inc. v. McClung, 789 F.2d 386, 389-90 (6th Cir. 1986);

11 Committee of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 12 1063-64 (2d Cir. 1983); 3 Lawrence P. King, Collier on Bankruptcy §363.02[1][g] (15th ed.

HOIMD 13 rev. 1998).

RC14 The burden of establishing a valid business purpose for a transaction outside the ordinary course of business falls upon the debtor. See In re Lionel Corp., 722 F.2d at 1070

&IRAW~N 15 16 71. Once the debtor has articulated a rational business justification, however, a presumption 17 attaches that the decision was made on an informed basis, in good faith and in the honest of 18 belief that the action was in the best interest of the debtor. See, e.g*, Official Comm.

19 Subordinated Bondholders v. Integrated Res., Inc. (In re Integrated Res., Inc.), 147 B.R. 650, 20 656 (S.D.N.Y. 1992) (citing Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985)).

21 As discussed in detail above, sound business justifications exist for PG&E to 22 rescind the agreement with RCN. Enforcing the Master Agreement is fraught with difficulty 23 and unlikely to result in a profitable outcome for PG&E. Moreover, the Rescission 24 Agreement allows PG&E to resolve or avoid disputes under the Master Agreement and 25 3Arguably, PG&E's decision to refund the money RCN has paid under the Master 26' Agreement to rescind a contract which has proved unlikely to benefit the company is within the ordinary course of business for any enterprise. Thus, the payment may be made without 27 resort to the Court pursuant to Section 363(c)(1) of the Bankruptcy Code. However, to eliminate any uncertainty, and to fulfill the terms of the Rescission Agreement, PG&E seeks 28 an Order of this Court pursuant to Section 363(b).

MPA ISO MOT FOR ORDER APPROVING RESCISSION AGREEMENT 1 obtain a release of liability without the payment of interest or rejection damages for the 2 payment of a sum only slightly higher than PG&E was obliged to pay upon termination 3 based on RCN's default in any event. See Rescission Agreement, ¶¶ 4-5.

4 Accordingly, pursuant to its authority under Section 363(b)(1), the Court should 5 authorize PG&E to enter into the Rescission Agreement.

6 IV.

7 CONCLUSION 8 For all of the foregoing reasons, PG&E respectfully requests that this Court grant 9 the Motion and enter its Order approving the said Rescission Agreement and Mutual Release 10 as an appropriate compromise in the interests of the estate pursuant to Bankruptcy Rule 9019 11 and authorize the payment of $873,170.72 pursuant to Section 363(b)(1) of the Bankruptcy 12 Code.

HOVARD 13 DATED: October r, 2002.

RICE Respectfully, EamI Nivuom' 14 HOWARD, RICE, NEMEROVSKI, CANADY, 15 FALK & RABKIN A Professional Corpor 16 By: _11--2 "

BCEIDE ZAPPARONI 17 18 Attorneys for Debtor and Debtor in Possession PACIFIC GAS AND ELECTRIC COMPANY 19 20 WD 100702V1-1419909/cec/l0275131vl 21 22 23 24 25 26 27 28 MPA ISO MOT FOR ORDER APPROVING RESCISSION AGREEMENT