Basin Elec. Power Co-op. v. Midwest Processing Co.
| Decision Date | 14 December 1984 |
| Docket Number | Civ. No. A4-84-148. |
| Citation | 47 BR 903 |
| Parties | BASIN ELECTRIC POWER COOPERATIVE, Dakota Fire and Safety Equipment Company, Inc., and Pump Systems, Inc., Petitioners and Appellees, v. MIDWEST PROCESSING COMPANY, Debtor and Appellant. |
| Court | U.S. District Court — District of South Dakota |
Neal L. Wolf and Robert R. Steffek, Jr., Chicago, Ill., Timothy Q. Davies, Fargo, N.D., William P. Westphal, U.S. Trustee, Minneapolis, Minn., for debtor and appellant.
Bruce E. Bohlman, Grand Forks, N.D., for Basin Elec. Power Co-op.
Jack McDonald, Jr., Bismarck, N.D., for Dakota Fire & Safety Equipment Co.
Michael Maus, Dickinson, N.D., for Pump Systems, Inc.
This is an appeal from a May 24, 1984 order for relief entered by the United States Bankruptcy Court for the District of North Dakota. On March 29, 1984, Basin Electric Power Cooperative (Basin) filed an involuntary petition against Midwest Processing Company (Midwest) under Chapter 11 of the Bankruptcy Code. Midwest opposed that petition. The contested petition was tried to the Bankruptcy Court on May 4 and 5, 1984, and the order now on appeal was entered following that trial. On Midwest's motion, the Bankruptcy Court stayed its order for relief pending this appeal.
Midwest was formed in 1979 and has operated a sunflower processing plant near Velva, North Dakota since June of 1982. (R.A. 33 at 2).1 Midwest's stock is currently owned by Pillsbury Company (46%), A.E. Staley Company (46%), and Neshem-Peterson & Associates (8%). (R.A. 51 at 231).
Basin is a non-profit supplier of wholesale electric power. One of Basin's generating plants, the William J. Neal Station (Neal Station), is located near Velva, North Dakota and is an integral part of Midwest's operation. The Neal Station is a lignite coal-fired base load generating station. (R.A. 51 at 204).
On December 12, 1980, Midwest and Basin executed agreements whereby Basin was to supply Midwest with processed steam and demineralized water and Basin in turn was to purchase sunflower seed hulls from Midwest. The sunflower seed hulls were to be burned through Basin's generating operations. To accomodate those agreements, it was necessary for Basin to undertake a construction project at the Neal Station to make steam and water related improvements and to construct hull handling facilities. Basin invested approximately $5.8 million in these improvements (R.A. 51 at 100); that cost was to be recovered through charges to Midwest, including charges for depreciation and interest on Basin's investment cost, charges for steam and water used by Midwest (R.A. 51 at 258), and "capacity payments" to cover that portion of Basin's operating and maintenance costs attributable to Midwest's operation. (R.A. 51 at 211). The agreements provided that Basin would give a one year notice of termination. (R.A. 51 at 145).
To secure Basin's investment, Midwest maintained a $4 million deposit at First National Bank of Minneapolis from June, 1982 through August, 1982. (R.A. 51 at 131). Beginning in August, 1982, Basin's investment was secured through a $5 million letter of credit at Continental Illinois National Bank and Trust Company of Chicago (Continental Illinois). That letter of credit was renewed in April, 1983 and was to expire on March 31, 1984. (R.A. 51 at 132). In conjunction with the letter of credit, Basin and Midwest entered into an escrow agreement detailing the terms under which the parties could draw on the letter of credit. One of the conditions under which Basin could draw on the letter of credit was if a petition in bankruptcy was filed against Midwest and if that petition was not dismissed for a period of sixty days. (R.A. 51, Ex. 12).
Basin made a tax benefit transfer of the facilities constructed to accomodate Midwest's operation. That tax benefit transfer generated approximately $2.5 million in revenue to Basin. (R.A. 51 at 183).
Midwest has outstanding long-term debt in the amount of $45 million, 90% of which is guaranteed by the Farmers Home Administration (FmHA). (R.A. 51 at 142). The portion of the long-term debt which is not guaranteed is held by sixteen area financial institutions. Midwest is obligated to make semi-annual interest payments on its long-term debt of approximately $2.8 million and to begin repayment of principal in 1985. Midwest did not make the interest payment due on February 28, 1984. (R.A. 51 at 142). Prior to initiation of the bankruptcy proceedings, Midwest had been negotiating a restructuring of its long-term debt. (R.A. 51 at 344).
Sometime in February, 1984, Midwest shut down its sunflower processing operation and laid off some of its employees. Because of Midwest's plant shut down, Basin was concerned for the security of its investment. (R.A. 51 at 134). For several months prior to this time, the parties had been discussing renewal of the Continental Illinois letter of credit. Basin argues that the agreements between it and Midwest require that Midwest maintain either a payment bond or a letter of credit in an amount and in a form reasonably acceptable to Basin as security for receipt of the payments Midwest is required to make under their agreements. Midwest did not provide Basin the assurances it desired that a letter of credit would be maintained. On February 28, 1984, Basin gave notice that it considered Midwest's failure to provide those assurances a default under the agreements. (R.A. 51, Ex. 15).
On March 20, 1984, Midwest's financial situation was discussed at a meeting between representatives of Midwest, Basin, Pillsbury Company, and A.E. Staley Company. Midwest outlined its efforts to restructure its long-term debt, Pillsbury Company's efforts to buy out the unguaranteed long-term note holders, and Pillsbury Company's efforts to sell its interest in Midwest to A.E. Staley Company. Midwest sought Basin's assurance that it would continue to provide services for a three-and-one-half year period as well as a reduction in Basin's steam and water charges. On March 23, 1984, Midwest informed Basin that Midwest did not intend to renew the letter of credit. By letter dated March 29, 1984, Basin gave notice of termination of the agreements based on Midwest's failure to cure the default asserted in Basin's February 28, 1984 letter. (R.A. 51 at 149). Basin demanded that Midwest pay the entire outstanding principal and interest due on the cost of the Neal Station improvements, an amount Basin calculated to be approximately $5.3 million. Midwest disputed its contract obligation to maintain the letter of credit, and disputed Basin's assertion that the failure to provide such letter of credit gave rise to default under the parties' agreements. The effect of Basin's draw on the letter of credit was to make Continental Illinois a creditor of Midwest and so to reduce the funds available for payment of other creditors. (R.A. 51 at 158). After Basin's draw on the letter of credit, Midwest's only remaining debt to Basin is approximately $300,000, and that debt is in dispute.
The parties agree that Midwest made all payments required under their agreements except for the accelerated balance which is disputed. (R.A. 51 at 108). Midwest, however, vigorously disputes its obligation to pay the accelerated balance arising by virtue of Basin's declaration of default and termination of the agreements. (R.A. 51 at 103). That dispute is the subject of state court litigation. Midwest was current on payments to other creditors with the exception of the interest on its long-term debt. (R.A. 51 at 289-90).
The Neal Station is, at least at certain times, Basin's costliest generating facility. Midwest asserts that Basin has determined it would be in Basin's best interest if Midwest were to cease operation so that Basin would no longer have any contractual obligation to keep the Neal Station operational. (R.A. 51 at 215-26).
On March 29, 1984, the same day on which it declared Midwest to be in default, Basin filed the bankruptcy petition against Midwest. No other Midwest creditors joined in the petition. Midwest moved to dismiss the petition for lack of three creditors as required under 11 U.S.C. § 303(b)(1). The Bankruptcy Court denied that motion without prejudice and gave Basin an opportunity to solicit intervening creditors. The Bankruptcy Court directed that notice of the proceedings be given to other creditors. (R.A. 49 at 20).
On April 30, 1984, Dakota Fire and Safety Equipment Company, Inc. (Dakota) moved to intervene. Midwest had owed Dakota $206.69 on the date the petition was filed; that debt was paid on April 13, 1984. Also on April 30, 1984, Apollo Piping Supply, Inc. and Minot Auto Supply moved to join in the petition; Apollo Piping Supply, Inc. and Minot Auto Supply both later withdrew their motions. On May 4, 1984, Pump Systems, Inc. (Pump Systems) moved to intervene. Midwest had owed Pump Systems $90.28 on the date the petition was filed; that amount was paid in full shortly thereafter. Both Dakota and Pump Systems entered into indemnity agreements with Basin which protected them from costs associated with the bankruptcy proceeding. (R.A. 51 at 71). Both Dakota and Pump Systems have joined in Basin's brief on appeal.
At trial, Midwest submitted affidavits of eleven of the sixteen financial institutions which hold Midwest's unguaranteed debt; each affidavit stated that the institution desired that the bankruptcy proceedings be dismissed. (R.A. 23). Midwest also submitted an affidavit of FmHA stating that it was involved in discussions regarding restructuring of Midwest's long-term debt and that it desired a resolution outside the bankruptcy proceedings. (Attachment to R.A. 21).
At the close of Basin's presentation at trial, Midwest moved to dismiss the petition on grounds that Basin had known of the existence of more than twelve Midwest creditors at the time it filed the involuntary petition but had...
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