In re Sharon Steel Corp., Bankruptcy No. 87-00207E
| Decision Date | 23 November 1987 |
| Docket Number | Bankruptcy No. 87-00207E,Motion No. 87-838E. |
| Citation | 79 BR 627 |
| Parties | In re SHARON STEEL CORPORATION, Debtor. |
| Court | U.S. Bankruptcy Court — Western District of Pennsylvania |
Stanley Levine, Pittsburgh, Pa., for debtor.
The matter comes to be heard on the motion of Sharon Steel Corporation ("Sharon") seeking court approval of its Rejection of an Executory Contract with National Fuel Gas Distribution Corporation ("NFG") dated June 15, 1976.
Sharon, a manufacturer of steel and steel products, filed its voluntary petition pursuant to Chapter 11 of the Bankruptcy Code on April 17, 1987 and since that time has remained in possession of its property and in control of its affairs as debtor-in-possession.
NFG is a natural gas public utility which serves, among other places, the market area of northwest Pennsylvania where Sharon's Wheatland Borough and Farrell, Pennsylvania plants are located.
On or about June 15, 1976, Sharon and NFG entered into a natural gas service agreement. Under this service agreement, NFG agreed to provide natural gas service to Sharon's facilities in Wheatland Borough and Farrell, Pennsylvania. As a result of Sharon's large demand for natural gas, NFG agreed to provide Sharon with natural gas service under a special rate schedule for Large Industrial Service (the "LIS Rate"). The LIS Rate provided a lower price per Mcf of natural gas in exchange for Sharon's agreement to pay a monthly demand charge and take a minimum amount of gas each month. This service agreement was amended in 1979 and 1983 which together with the original agreement will be collectively referred to as the "Service Agreement."
In December 1985, Sharon exercised a termination option contained in the Service Agreement. The termination option contains a two-year notice period. Thus, the Service Agreement is to expire in December, 1987.
Prior to the filing of its petition, Sharon had been making payments to NFG weekly in advance for the natural gas pursuant to an order of the Pennsylvania Public Utility Commission ("PUC"). Upon the filing of the petition, NFG, as a public utility, filed a motion for an order requiring Sharon to immediately furnish adequate assurance of payment pursuant to 11 U.S.C. § 366. At a hearing on NFG's motion on April 30, 1987, a stipulation was read into the record. The stipulation provided that Sharon was to continue making weekly payments in advance under the existing arrangement ordered by the PUC. The stipulation was incorporated into a written stipulation and approved by this court on May 22, 1987.
Sharon is currently the only customer purchasing natural gas from NFG under the LIS Rate. NFG does, however, provide natural gas to other industrial customers. These large volume industrial customers are provided natural gas under a different rate schedule referred to as the LVIS Rate. Sharon would be eligible for service under the LVIS Rate in the absence of its current Service Agreement. At the time Sharon filed its petition, gas service under the LVIS Rate was no lower at Sharon's average monthly usage level than for service under the LIS Rate pursuant to the Service Agreement. On August 1, 1987, new LVIS rate schedules became effective pursuant to an annual PUC ruling. The new LVIS Rate substantially reduced the cost of gas and made the LVIS Rate far more attractive to Sharon than the LIS Rate provided for in the Service Agreement. The LVIS rate would become applicable to Sharon when it is no longer bound by its agreement to purchase gas at the LIS rate.
On August 12, 1987, Sharon filed a motion seeking court approval of its rejection of the Service Agreement. The motion sought to reject the Service Agreement as of the date immediately prior to the filing of Sharon's petition for relief under Chapter 11, or, in the alternative, as of August 1, the date on which the new LVIS Rate became effective. In addition, Sharon argued that NFG is entitled to an administrative claim only for the reasonable value of the benefit Sharon has received from the natural gas service or alternatively, the fair market value of the natural gas service which NFG has provided since the date of the filing of the petition. Sharon further asserts that if it has paid a sum in excess of the administrative claim to which NFG is entitled, then Sharon requests that excess sum be applied to its future obligations to NFG.
NFG argues that the stipulation constituted a post-petition contract which could not be rejected or, alternatively, the Service Agreement has been assumed by virtue of the court-approved stipulation. NFG further contends that the Service Agreement, as a public utility contract, should not be regarded as an executory contract for purposes of § 365 of the Bankruptcy Code. In addition, NFG alleges that Sharon acted in bad faith and should be precluded from rejecting the Service Agreement. Finally, if Sharon is permitted to reject the Service Agreement, NFG asserts that the effective date of the rejection should be the date an order is entered approving the rejection.
As a public utility, NFG had the right to demand adequate assurance of payment under § 366. If Sharon did not provide for adequate assurance within 20 days after the date of the order for relief, NFG had the right to discontinue natural gas service to Sharon under 11 U.S.C. § 366(b). This court approved a stipulation for adequate assurance pursuant to § 366 which essentially provided for the same terms and conditions (i.e., advance payments) under which the parties were performing prior to the filing of the petition. We find no merit in NFG's argument that the adequate assurance stipulation provided by Sharon pursuant to § 366 constituted a post-petition contract. The stipulation approved by this court provided only adequate assurance for payment of postpetition service under § 366(b).
NFG further argues that the stipulation constituted an assumption of the Service Agreement. This court has not been presented with a motion to assume the contract under 11 U.S.C. § 365(a) nor has there been notice thereof to creditors, nor a hearing held thereon, nor has a plan of reorganization been confirmed. Accordingly, we dismiss this contention as without merit. We also decline to hold that an implied or defacto assumption occurred with court approval. The facts and equities in the instant case do not support such a finding.
NFG does, however, raise an issue not directly addressed by this court before. NFG contends the Service Agreement should not be regarded as an executory contract for purposes of rejection under § 365. There are relatively few cases discussing the treatment of utility service contracts under § 365. See Wheeling-Pittsburgh Steel Corp. v. West Penn Power Co. (In re Wheeling-Pittsburgh Steel Corp.), 72 B.R. 845 (Bankr.W.D.Pa.1987); Peoples Gas System, Inc. v. Thatcher Glass Corp. (In re Thatcher Glass Corp.), 59 B.R. 797 (Bankr.D.Conn.1986); Crownover v. Alabama Gas Corp. (In re Central Foundry Co.), 62 B.R. 52 (Bankr.N.D.Ala.1985); and In re California Steel Co., 24 B.R. 185 (Bankr.N.D.Ill.1982). In Wheeling-Pittsburgh, the utility company did not dispute that the contract was an executory contract for purposes of assumption or rejection under § 365. We held that in determining, under the business judgment test, the propriety of a debtor's decision to reject a public utility contract, we will not weigh the effect of rejection on the public utility, its customers, or state laws regulating public utilities. 72 B.R. 845 (Bankr.W.D.Pa. 1987).
In Thatcher Glass, the issue before the court was the determination of the appropriate rate for calculating the administrative expense after the debtor rejected a natural gas service contract. 59 B.R. 797 (Bankr.D.Conn.1986). In both Wheeling-Pittsburgh and Thatcher Glass, the parties did not dispute the status of the utility service contract. The public utility contracts involved in these cases were presumed to be executory contracts for the purposes of 11 U.S.C. § 365.
In California Steel, the court directly addressed the status of a utility service contract, and held that such a contract fell within the scope of § 365. 24 B.R. 185 (Bankr.N.D.Ill.1982). We are in agreement with California Steel insofar as the executory nature of a utility service agreement is concerned. There is no question that performance remains due to some extent by both NFG and Sharon. The Service Agreement calls for performance in the future by both parties: NFG is required to provide natural gas service and Sharon is obligated to pay for a minimum of 400,000 Mcf of natural gas at the specified LIS Rate.
NFG argues that the interplay of 11 U.S.C. § 365 and § 366 together with the rate as fixed by the PUC dictate that the Service Agreement should not be regarded as an executory contract. Rather, NFG contends the Service Agreement should be regarded as a rate schedule subject to the jurisdiction of the PUC. We find no basis in the legislative history nor the Bankruptcy Code to exempt a utility service contract from the provisions of § 365. Nor do we believe that contracts with public utilities should receive more favorable treatment in light of the protections afforded under § 366 and for the reasons set forth in our decision in Wheeling-Pittsburgh. Any adverse effects on the utility and its customers may be pertinent in determining the amount of prepetition damages resulting from the rejection. We therefore conclude that public utility contracts are subject to the provisions of 11 U.S.C. § 365.
Having concluded the Service Agreement may be rejected pursuant to § 365, Sharon's motion to reject will be approved for the reasons set forth in Wheeling-Pittsburgh Steel Corp. v. West Penn Power Co., (In re Wheeling-Pittsburgh Steel Corp.), 72 B.R. 845 (Bankr.W. D.Pa.1987). The record does not support NFG's contention that Sharon's decision...
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