In re Nat. Energy & Gas Transmission, Inc.

• Decision Date: 10 July 2007
• Docket Number: No. 06-1459.,06-1459.
• Citation: 492 F.3d 297
• Parties: In re NATIONAL ENERGY & GAS TRANSMISSION, INCORPORATED, formerly known as PG & E National Energy Group, Inc., Debtor. National Energy & Gas Transmission, Inc. (f/k/a PG & E National Energy Group, Inc.); NEGT Energy Trading Power, L.P. (f/k/a PG & E Energy Trading Power, L.P.), Plaintiffs-Appellants, and Gas Transmission Northwest Corporation, Plaintiff, v. Liberty Electric Power, LLC, Defendant-Appellee, John L. Daugherty, Trustee, Trustee-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

492 F.3d 297

In re NATIONAL ENERGY & GAS TRANSMISSION, INCORPORATED, formerly known as PG & E National Energy Group, Inc., Debtor National Energy & Gas Transmission, Inc. (f/k/a PG & E National Energy Group, Inc.); NEGT Energy Trading Power, L.P. (f/k/a PG & E Energy Trading Power, L.P.), Plaintiffs-Appellants, and Gas Transmission Northwest Corporation, Plaintiff, v. Liberty Electric Power, LLC, Defendant-Appellee John L. Daugherty, Trustee, Trustee-Appellee.

No. 06-1459.

United States Court of Appeals, Fourth Circuit.

Argued: March 13, 2007.

Decided: July 10, 2007.

ARGUED: Steven Wilamowsky, Bingham & McCutchen, L.L.P., New York, New York, for Appellants. Lawrence M. Handlesman, Stroock, Stroock & Lavan, New York, New York, for Appellee. ON BRIEF: Jessica S. Etra, Matthew V. Wargin, Willkie, Farr & Gallagher, L.L.P., New York, New York; Kenneth Oestreicher, Susan J. Roberts, Whiteford, Taylor & Preston, L.L.P., Baltimore, Maryland, for Appellants. Lisa Bittle Tancredi, Venable, L.L.P., Baltimore, Maryland; Melvin A. Brosterman, Harold A. Olsen, Stroock, Stroock & Lavan, New York, New York, for Appellee.

Before SHEDD and DUNCAN, Circuit Judges, and SAMUEL G. WILSON, United States District Judge for the Western District of Virginia, sitting by designation.

Reversed by published opinion. Judge SHEDD wrote the opinion. Judge WILSON wrote an opinion concurring in the judgment. Judge DUNCAN wrote a dissenting opinion.

OPINION

SHEDD, Circuit Judge.

In this bankruptcy appeal, we must decide whether a creditor may allocate a payment made by a non-debtor guarantor first to interest then to principal, thus preserving the unpaid principal for collection in bankruptcy. Because we find that the allocation of a payment in this manner would permit the creditor to collect an amount otherwise disallowed as post-petition interest, we reverse the judgment of the district court which permitted collection of the additional amount.

I

National Energy & Gas Transmission Energy Trading Power, L.P. ("ET Power"), a debtor here, previously operated as an energy marketing and trading company. As such, it bought and sold electric power, natural gas, coal, and other physical energy commodities. ET Power also engaged in energy-based financial and hedging transactions such as future contracts, swaps, options, and derivatives. As part of its regular course of business, ET Power entered into an electricity tolling agreement (the "Agreement") with Liberty Electric Power, LLC ("Liberty"), an energy-generating company. Under the Agreement, ET Power obtained an option to purchase energy from Liberty in return for a monthly payment to Liberty as well as certain other variable costs based on the actual amount of energy which ET Power purchased. In essence, this permitted ET Power to provide natural gas necessary to generate electricity and then to purchase the electricity which was generated.

To back up its agreement with ET Power, Liberty obtained two guarantees: one from National Energy & Gas Transmission, Inc. ("NEGT"), ET Power's corporate parent (and also a debtor in this bankruptcy); and one from Gas Transmission Northwest Corporation ("GTN"), a subsidiary of NEGT (and a non-debtor). Each guarantee contained the same terms, and in each the respective guarantor guaranteed:

[A]s primary obligor and not merely as surety, the prompt payment when due, in accordance with the terms of the Agreement, of all amounts payable by [ET Power] under the Agreement . . . including . . . Termination Payment . . . and damage awards arising by reason of [ET Power's] breach of its performance obligations under the Agreement or otherwise.

J.A. 98. Each guarantor's liability was capped at $140 million.

On July 8, 2003, NEGT, ET Power, and other debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code and a motion seeking to reject the Agreement.¹ After ET Power and Liberty consented, the bankruptcy court granted the motion rejecting the Agreement. As a result of the rejection, Liberty sought $140 million as a termination payment and approximately $5.4 million in unpaid invoices. Liberty's claim for $140 million proceeded to arbitration pursuant to the terms of the Agreement, and an arbitration panel awarded Liberty the full $140 million plus interest accruing from the date of the Agreement's rejection and continuing subsequent to the arbitration award.²

During the pendency of the arbitration proceedings, NEGT agreed to sell GTN to TransCanada Corporation. As part of the transaction, $140 million was reserved in escrow to provide for any liability to Liberty under the guarantee. After the arbitration award, the dispute between Liberty and the debtors shifted back to the bankruptcy court, while interest continued to accrue on the $140 million arbitration award. To stop the accrual of interest, which had reached approximately $17 million, the parties agreed that Liberty should receive immediate payment of the amount held in escrow after the GTN sale, and the bankruptcy court approved this disbursal. Accordingly, Liberty was paid $140 million from the GTN sale escrow in full and final satisfaction of the GTN guarantee.

Upon receipt of payment from GTN, Liberty allocated the $140 million first to interest, then to principal. Meanwhile, Liberty continued to assert claims in bankruptcy against NEGT and ET Power for $140 million each.³ Liberty reasoned that it could continue to assert the full value of the award against the debtors, notwithstanding the fact that it had already received payment of $140 million from GTN, because the debtors remained jointly and severally liable until it received full payment of the total debt. At the same time, Liberty recognized that it could not collect more than the approximately $17 million needed to make it whole on ET Power's debt. In seeking this amount, Liberty contended that the amount did not represent disallowed post-petition interest but rather unpaid principal—the interest portion of the award having been paid by GTN.

The debtors objected to Liberty's claims, arguing that the $17 million which Liberty sought to collect had to constitute post-petition interest because Liberty had already received $140 million from GTN. Additionally, the debtors maintained that Liberty should not be permitted to assert a claim for $140 million when it had received $140 million and currently was owed only an additional $17 million. Otherwise, the judgment would not accurately reflect what Liberty was owed.

The bankruptcy court agreed with Liberty's position, allowing the claim for $140 million against ET Power but providing that the "maximum amount of distribution payable to Liberty" would be limited to the additional $17 million which it seeks to collect. J.A. 322. On appeal to the district court, the bankruptcy court order was affirmed. The debtors once again appeal. Because this appeal presents only questions of law, our review is de novo. In re Bunker, 312 F.3d 145, 150 (4th Cir. 2002).

II

A.

We initially consider the debtors' contention that the value of Liberty's claim must be reduced by the $140 million it received from GTN in order to reflect accurately the amount currently owed to Liberty. Because Liberty is currently owed only approximately $17 million, the debtors argue its claim should be limited to this amount.

The debtors' argument is foreclosed by the combination of Ivanhoe Building & Loan Ass'n of Newark v. Orr, 295 U.S. 243, 55 S.Ct. 685, 79 L.Ed. 1419 (1935), and New York law, which governs pursuant to the Agreement. In Ivanhoe, the Supreme Court held that a creditor need not deduct from his claim in bankruptcy an amount received from a non-debtor third party in partial satisfaction of an obligation. Thus, as a matter of bankruptcy law, ET Power's debt to Liberty is not reduced by the amount which Liberty received from GTN. However, this merely leads to the question of what the value of ET Power's debt is, and New York law provides the answer to this question. See Travelers Cas. & Sur. Co. of America v. Pacific Gas & Elec. Co., ___ U.S. ___, 127 S.Ct. 1199, 1205, 167 L.Ed.2d 178 (2007) ("[W]e have long recognized that the basic federal rule in bankruptcy is that state law governs the substance of claims [.]") (internal punctuation omitted).

New York law provides:

The amount or value of any consideration received by the obligee from one or more of several obligors, or from one or more of joint, or of joint and several obligors, in whole or in partial satisfaction of their obligations, shall be credited to the extent of the amount received on the obligations of all co-obligors to whom the obligor or obligors giving the consideration did not stand in the relation of a surety.

N.Y. Gen. Oblig. L. § 15-103. Under this statute, whether GTN's payment to Liberty must be deducted from ET Power's obligation turns on whether GTN was a surety or a co-obligor.

In Chemical Bank v. Meltzer, 93 N.Y.2d 296, 690 N.Y.S.2d 489, 712 N.E.2d 656 (1999), the New York Court of Appeals concluded that the relationship between the guarantor and the primary obligor must determine the guarantor's status as a co-obligor or a surety, notwithstanding language in the contract purporting to render the guarantor a co-obligor. Using this approach, the court found that a surety-ship existed. The relationship between ET Power and GTN is nearly identical to that of the guarantor and primary obligor in Meltzer. Therefore, we conclude that, despite language in the guarantee purporting to make GTN a co-obligor, GTN was a surety for ET Power's obligations to Liberty. Accordingly, the value of ET Power's debt to Liberty under state law is not reduced by the $140 million received from GTN.

B.

We next turn to the more fundamental question presented by this appeal: whether the Bankruptcy Code bars Liberty from collecting the $17 million it now seeks. Section 502(b)(2) of the Code provides that a claim shall not be...