In re Hubbard Power & Light
| Decision Date | 18 November 1996 |
| Docket Number | Bankruptcy No. 895-86600-478. |
| Parties | In re HUBBARD POWER & LIGHT, Debtor. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York |
Rivkin, Radler & Kremer by Scott Y. Stuart, Uniondale, NY, for Debtor.
Windels, Marx, Davies & Ives by Michael Moriarity, New York City, for Oak Re.
Albanese, Albanese & Fiore, by Thomas Sherwood, Garden City, NY, for Enron Power Marketing, Inc.
Theodore Sklar & Robert Garfinkel, Hauppauge, NY, for The County of Suffolk.
Michael J. Eng, Hicksville, NY, for Long Island Lighting Co.
Gilmartin, Opster & Schafto by Howard C. Buschman III, New York City, for Hubbard Sand & Gravel.
This case comes before the Court pursuant to an Order to Show Cause and Application made by Hubbard Power & Light, Inc., the debtor (the "Debtor" or "HPL") seeking authorization for HPL to incur $750,000 of post-petition financing from Enron Capital & Trade Resources Corp. ("Enron") pursuant to sections 364(c) and (d) of the Bankruptcy Code. The Debtor filed a Memorandum of Understanding executed by both Enron and the Debtor memorializing the proposed loan transaction which proposes to provide to Enron a super-priority lien in exchange for the loan to the Debtor. Opposition was interposed by the New York State Department of Environmental Conservation ("DEC"); Oak Re, who represents the bondholders holding a lien on all of the Debtor's real and personal property, and who is the Debtor's senior secured creditor; and Hubbard Sand & Gravel Corp. (the "Landlord"). In addition, the County of Suffolk, New York (the "County"), an alleged lienholder on the Debtor's real property, strongly objected to the proposed financing, although it did not file any opposition papers with the Court. The Court scheduled interim and final hearings.
An evidentiary hearing was conducted on November 6, 1996. After the hearing, this Court issued an oral decision from the bench granting the Debtor's motion and approving the financing. At that time, a request was made that a written decision be provided to the parties. This opinion constitutes the Court's Memorandum Decision.
HPL is a New York corporation engaged in the production of electrical power under an agreement entered into in 1988 with the Long Island Lighting Co. ("LILCO") called the Parallel Generation Agreement (the "PGA"). The Debtor's president and sole shareholder is James Solano ("Solano"). HPL's power generation facility is located on approximately two (2) acres of land in Bay Shore, New York (the "Bay Shore property"), which real property is owned by the Debtor. In conjunction with its operations, it also leases adjoining property from the Landlord. HPL's main business activity is the collection of wood debris which it sorts, cuts and makes into wood chips and then burns at its plant to produce steam which, in turn, generates electricity that HPL sells to LILCO under the PGA.1
The Debtor's Bay Shore property sits adjacent to two larger pieces of land, one of which is owned by the Landlord. The Debtor has two other related entities, Quality Resource Recovery Corp. and Quality Resource Corp., which operate in conjunction with HPL. One of these is located on the adjacent parcel which the Debtor leases. Both entities have their own Chapter 11 cases pending before this Court.
In early June, 1995 the DEC inspected HPL's power producing plant and found that the Debtor was in violation of the special conditions of its operating permit issued by the DEC. Under the DEC permit, HPL was required to separate and remove all painted or treated wood chips and burn only clean, unadulterated wood chips. On June 28, 1995 the DEC commenced an action in New York State Supreme Court, Suffolk County to enjoin the Debtor from burning adulterated wood in violation of the New York State Environmental Conservation Law. HPL and the DEC later agreed to a Consent Order including a temporary restraining order that effectively shut down HPL's plant. The Debtor's plant has been non-operational since July 1995.
In August 1995, the wood chip piles that had accumulated at the Bay Shore property prior to the shut down caught fire and burned for several days. The fire spread to the adjacent pieces of property as well. The Town of Islip, the municipality in which HPL's facility sits, expended over $1,000,000 to fight the fire and for emergency clean-up costs on the Debtor's property and on the adjoining property. To secure repayment of the fire-related and clean-up expenses, the Town of Islip assessed a real property tax lien against the Debtor's Bay Shore property for the entire amount of the clean-up costs.2 Pursuant to various local legislative requirements, the County later reimbursed the Town of Islip for the clean-up costs and has now asserted its rights as lienholder on the Bay Shore property, in place of the Town of Islip.
On September 11, 1995, the Debtor agreed to a Consent Order with the DEC which, inter alia, requires the Debtor and its related entities to develop a work plan to clean up its site. HPL and its related entities filed a clean-up plan with the DEC on October 17, 1995.
Because of the injunction that resulted from the DEC's litigation and the subsequent Consent Order entered into by the Debtor, the Debtor was required to expend substantial sums to do the necessary clean-up. However, the Debtor had ceased operating and did not have the necessary funds to adequately clean-up the property so as to remove the injunction obtained by DEC. The Debtor filed its Chapter 11 petition on November 14, 1995.
The DEC approved HPL's work plan on November 17, 1995.
As part of its overall attempt to reorganize, the Debtor has sought financing from several entities in the energy producing field in order to obtain sufficient funds to clean-up its property and recommence operations. Though many firms expressed initial interest in making a loan, or a purchase of the Debtor's business, only Enron has made an offer to lend funds to the Debtor. The necessity for substantial sums of money to be expended to perform the clean-up before the Debtor can resume its operations appears to have inhibited any other lender from coming forward.
Among other provisions, the pertinent terms of the financing, as outlined in the Memorandum of Understanding, are as follows. Enron will loan the Debtor a maximum of $750,000. HPL will be able to draw down money against the $750,000 fund pursuant to a mutually agreeable draw down schedule. The loan is payable one year from the date on which HPL recommences operations. The rate of interest, to be set two days before the closing, will be 820 basis points over the 1 year United States Treasury Rate. There will be a 3% structuring fee (of the total loan amount) for the making of the loan, payable to ECT Securities Corp. on the closing date from the loan proceeds. There is also a 0.5% commitment fee on any unused amount of the loan. As security for the loan, Enron will receive a super priority administrative claim under § 364(c) of the Code and pursuant to Section 364(d), a priming lien on all of the Debtor's assets, as well as an assignment of and a first priority security interest in all revenues the Debtor receives from the sale of electric power. In addition to other conditions set forth in Attachment A to the Memorandum of Understanding, the closing of the contemplated transaction is subject to satisfactory resolution of the Debtor's disputes with LILCO and its landlord and entry of a final nonappealable order providing for the consent of the DEC to the resumption of HPL's power producing business.
There is presently pending and as yet undetermined, a challenge by Oak Re as to the extent and priority of the County's lien. However, for the purpose of this motion, the decision is based on the facts as they presently exist and were raised before the Court.
Out of the loan proceeds the Debtor has budgeted approximately $300,000-$400,000 for the clean-up of the Debtor's Bay Shore property to the satisfaction of the DEC, and the balance shall be used for Debtor's start-up operational needs.
The bondholders are represented by Oak Re and its counsel. Oak Re has a valid perfected first lien on all of the Debtor's property, real and personal. Although Oak Re initially objected to the proposed financing, following the Debtor's amendment of the Enron financing by the filing of a supplemental application and revised Memorandum of Understanding, it has agreed to subordinate its claim to Enron pursuant to the Financing Agreement, and support its approval. Though papers were also submitted in opposition by the DEC and the landlord, the only party that raised significant opposition to the approval of the financing arrangement was the County which claims a lien on the Debtor's property in a sum in excess of one million dollars. They did not file papers in opposition, but orally raised substantial objections claiming that their one million dollar lien should not be subordinated to the loan being made by Enron as they are not being provided with adequate protection for their lien.
There were several scheduled hearings, which were adjourned to enable the parties to present evidence to the Court as to the issues raised both in support and in opposition to the Debtor's motion to have this Court approve the financing to be provided by Enron on the terms outlined, which included a super priority lien. At the evidentiary hearing, the Debtor presented evidence to support its application. The County, although it had adequate opportunity to do so, chose not to present any contradictory evidence or other independent evidence on its behalf, but relied upon its cross-examination of the Debtor's witnesses and its oral arguments made at the hearing. In short, there was no contradictory evidence introduced by the County.
The Debtor filed a voluntary petition for reorganization...
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