In re EUA Power Corp.

• Decision Date: 07 October 1992
• Docket Number: Adv. No. 91-79.,Bankruptcy No. 91-525
• Citation: 147 BR 634
• Parties: In re EUA POWER CORPORATION, Debtor. OFFICIAL BONDHOLDERS' COMMITTEE, Plaintiff, v. EASTERN UTILITIES ASSOCIATES, Defendant.
• Court: U.S. Bankruptcy Court — District of New Hampshire

147 B.R. 634 (1992)

In re EUA POWER CORPORATION, Debtor.

OFFICIAL BONDHOLDERS' COMMITTEE, Plaintiff, v. EASTERN UTILITIES ASSOCIATES, Defendant.

Bankruptcy No. 91-525, Adv. No. 91-79.

United States Bankruptcy Court, D. New Hampshire.

October 7, 1992.

COPYRIGHT MATERIAL OMITTED

Albert A. Notini, Paul M. McDermott & Mark N. Polebaum, Hale and Dorr, Manchester, N.H., for Official Bondholders' Committee.

Kelley A. Cornish, J. Ronald Trost, Shalom Kohn, Sidley & Austin, New York City, for Eastern Utilities Associates.

Geraldine Brotherton, U.S. Trustee, Boston, Mass., for Franklin E. Childress, UST.

Theodore Orson, Goodwin, Proctor & Hoar, Boston, Mass., for United Illuminating Co., New England Power Co., Canal Elec. Co., Connecticut Light & Power Co.

MEMORANDUM OPINION

JAMES E. YACOS, Bankruptcy Judge.

This proceeding came on for a hearing on May 22, 1992, on cross-motions for summary judgment filed by the plaintiff Official Bondholders' Committee ("committee") and the defendant Eastern Utility Associates ("EUA") as to whether three transactions between Eastern Utility Associates Power Corporation ("debtor" or "EUA Power") and its corporate parent, EUA, were preferential payments avoidable under 11 U.S.C. § 547(b).

The parties have presented diametrically opposed reconstructions of the transactions in question and the issues presented for decision by the parties are: (1) whether the "earmarking" doctrine, as a defense to an alleged preferential transfer, survived enactment of the Code; (2) whether the requisite element of insolvency has been established; (3) whether a corporate parent's guaranty of a third party's loan to a subsidiary debtor can be "new value" for purposes of the 11 U.S.C. § 547(c)(1) defense of new value contemporaneously given; and (4) whether the parent's honoring of that guaranty post-petition can be new value subsequently given for purposes of 11 U.S.C. § 547(c)(4). The following constitutes the Court's findings of fact and conclusions of law in accordance with Fed. R.Bankr.P. 7052.

I. FACTS

Although the facts of this case are quite complex and not so quietly disputed, the following salient facts relating to the challenged transfers are not disputed:

1. The debtor is a wholly-owned New Hampshire corporate subsidiary of the defendant, a Massachusetts association.

2. The debtor owns a 12.1324% interest in the Seabrook nuclear power plant.

3. On April 30, 1990, the Securities and Exchange Commission ("SEC") issued a "borrowing order" as EUA refers to it. It authorized EUA to make open account advances and/or short-term loans to the debtor in an aggregate amount not to exceed $47,000,000. It also authorized the debtor to engage in short-term borrowing from third party lending institutions.

4. On May 15, 1990, EUA transferred to the debtor $14,454,542 in order that the debtor could make the semi-annual interest payment on its outstanding series B and C security notes to the plaintiff bondholders.

5. On November 15, 1990, EUA transferred to the debtor $20,495,000 in order that the debtor could make the semi-annual interest payment on its outstanding series B and C security notes to plaintiff bondholders.

6. On December 13, 1990, the SEC issued an order approving a State of New Hampshire Industrial Development Authority Solid Waste Disposal ("NHIDA") bond issue.

7. On December 28, 1990, EUA issued a guaranty in favor of Citibank which had issued an irrevocable letter of credit in favor of Goldman, Sachs, the underwriter of the bond offering. According to the Loan and Trust Agreement dated as of December 1, 1990 (Committee Exh. 37), Citibank entered into a "Letter of Credit and Reimbursement Agreement" obligating the debtor to reimburse Citibank for any funds advanced to the trustee on Citibank's Letter of Credit. Citibank's Letter of Credit Obligation was in turn secured by a guaranty executed in favor of Citibank. The Form of Guaranty states: "(2) It is a condition precedent to the issuance of the Letter of Credit by the Bank under the Reimbursement Agreement that the Guarantor, as owner of 100 percent of the issued and outstanding shares of stock of the Company, shall have executed and delivered this Guaranty." Comm. Exh. 39.

8. On December 28, 1990, Goldman, Sachs transferred $20,842,500 to the debtor. The transfer represented the net sale proceeds from the purchase of the NHIDA bond issue by Goldman, Sachs.

9. On December 28, 1990, the debtor transferred $20,692,500 to EUA. The plaintiff bondholders allege this transfer was preferential to EUA.

10. On or about December 20, 1990, Connecticut National Bank ("CNB") agreed to make available a $10,000,000 "guidance line of credit for the use of Eastern Utility Associates and various of its subsidiaries. . . ." Comm. Exh. 41.

11. On or about December 31, 1990, Citibank ("CB") agreed to make available an "uncommitted line of credit arrangement to EUA Power Corporation (the `Borrower') in an aggregate amount principal amount outstanding from time to time not exceeding $15,000,000." Comm. Exh. 46.

12. On December 28, 1990, the defendant executed a guaranty in favor of CNB which provided, inter alia, that "You CNB shall have a security interest in any and all deposits, instruments, securities, or other property of the undersigned EUA which are now or may in the future come into your possession, as collateral for the obligations of the undersigned pursuant to this guarantee." Comm. Exh. 42.

13. On December 28, 1990, the defendant executed a guaranty in favor of Citibank ("CB") which provided, inter alia, that "The obligations of the Guarantor under this Guaranty are independent of the Obligations, and a separate action or actions may be brought and prosecuted against the Guarantor to enforce this Guaranty, irrespective of whether any action is brought against the Borrower. . . ." Comm. Exh. 46.

14. On December 31, 1990, the debtor borrowed $5,200,000 from CB.

15. On December 31, 1990, the debtor borrowed $10,000,000 from CNB.

16. On December 31, 1990, the combined borrowing from CB and CNB in the aggregate amount of $15,200,000 was transferred directly to EUA's bank account without ever passing through the debtor's bank account. The plaintiff bondholders allege this transfer was preferential to EUA.

17. From January 1, 1991 through February 28, 1991, the debtor borrowed an additional $3,030,000 from CB and CNB.

18. On February 28, 1991, the debtor filed its bankruptcy petition.

19. On March 1, 1991, EUA made payment on its guaranty to CB in the amount of $8,041,395 and on its guaranty to CNB in the amount of $8,303,983. As pointed out by EUA, the combined amount of payments based on the guarantees actually exceeds the $15,200,000 borrowing of December 31, 1990.

20. On May 30, 1991 the plaintiff bondholders filed this adversary proceeding to recover the alleged preferential transfers identified supra. A useful summary of the loan transactions between the parent and the debtor are summarized in the plaintiff's brief (Court Document No. 47, p. 14) as follows:

                               EUA Loan           EUA Power            Balance Due
                               to EUA             Repayment            from EUA
                  Date         Power                to EUA             Power to EUA
                  ____         ________           _________            ____________
                11/15/90       20,495,000                               39,759,000
                11/20/90           60,000                               39,819,000
                11/26/90                            700,000             39,119,000
                ________                            _______
                11/27/90                            800,000             38,319,000
                ________                            _______
                11/29/90           10,000                               38,329,000
                12/03/90        1,200,000                               39,529,000
                12/13/90                            500,000             39,029,000
                ________                            _______
                12/14/90                            450,000             38,579,000
                ________                            _______
                12/21/90                            450,000             38,129,000
                ________                            _______
                12/24/90                            100,000             38,029,000
                ________                            _______
                12/27/90                          1,000,000             37,029,000
                ________                          _________
                12/28/90                         20,692,500             16,336,500
                ________                         __________
                12/31/90                          5,200,000             11,136,500
                ________                          _________
                12/31/90                         10,000,000              1,136,500
                12/31/90          140,000                                1,276,500
                01/07/91           20,000                                1,296,500
                02/12/91           70,000                                1,366,500
                

The plaintiff seeks to avoid the ten loan repayments underlined in the foregoing summary.

II. APPLICABLE LAW

The Code defines the phrase "new value" at 11 U.S.C. 547(a)(2):

(2) "new value" means money or money\'s worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation.

Under Code section 547(b), the trustee may avoid any transfer of an interest of the debtor in property if such transfer was:

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made —

(A) on or within 90 days before the date of the petition; or

(B) between 90 days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive

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