Decision Date15 October 1999
Docket NumberBankruptcy No. 96-10335. Adversary No. 97-1005.
Citation240 BR 476
PartiesIn re VERMONT ELECTRIC GENERATION & TRANSMISSION COOPERATIVE, INC., Debtor. White Current Corp., Plaintiff, v. Rural Utility Service, U.S. Dept. of Agriculture, Defendant.
CourtU.S. Bankruptcy Court — District of Vermont

William J. Donahue, White River Junction, VT, for plaintiff.

Lloyd Randolph, Matthew J. Troy, J. Christopher Kohn, James G. Bruen, Jr., Civil Division, U.S. Dept. of Justice, Washington, DC, David W. Ogden, Charles R. Tetzlaff, Melissa A.D. Ranaldo, United States Attorney's Office, Burlington, VT, for defendant.



ROBERT L. KRECHEVSKY, Bankruptcy Judge.1


The matter before the court, a motion for summary judgment filed by the defendant, Rural Utility Service ("RUS")2, an agency of the United States Department of Agriculture, draws into question a course of dealing over the past 22 years of RUS in assisting local cooperatives, such as the debtor, to produce and distribute electricity in rural communities. White Current Corp. ("WCC") raises the specific issue — equitable subordination — in a complaint it filed against RUS in the Chapter 7 case of Vermont Electric Generation and Transmission Corporation, Inc. ("the debtor"). WCC alleges, in the complaint filed on January 16, 1997, that the actions taken by RUS over a period of two decades are such that this court should subordinate the senior secured claims RUS holds on the debtor's property to WCC's junior claim on such property. See 11 U.S.C. § 510(c)(1).3

WCC has not filed a cross-motion for summary judgment but objects to the granting of RUS's motion contending either that there are genuine issues as to material facts or, if not, that RUS is not entitled to judgment as a matter of law. The parties have undertaken extensive discovery and have filed voluminous briefs. WCC has not submitted a separate, concise statement of the material facts as to which it contends that there exists a genuine issue to be tried, but instead has filed a statement either agreeing or disagreeing with the statement of RUS setting forth its proposed undisputed material facts.


The complaint generally asserts that WCC, located in Vermont, is in the business of owning and operating hydroelectric generating facilities; that the debtor and Vermont Electric Cooperative, Inc. ("VEC"), on March 6, 1981, contracted with WCC to purchase electricity from WCC and that following the debtor's and VEC's repudiation of the contract, WCC, on November 17, 1994, received a final court judgment of $3,401,195, secured by a prejudgment attachment properly filed on April 8, 1987 against the debtor's property; that in 1983 and 1984, the debtor granted RUS various mortgages on the debtor's property to secure loans; that over the years, RUS exercised control over the debtor and VEC, as an "insider," in a "pattern of self-dealing," or with inadequate supervision, or in an "arbitrary" and "capricious" manner, such that under principles of equitable subordination, the court should subordinate the RUS senior mortgage liens to the junior judgment lien of WCC. The complaint alleges that the debtor's property is of substantially less value than the amount due on the RUS mortgages.


Although WCC's papers filed in this proceeding are lengthy, containing multifarious propositions, the court finds that there is no meaningful dispute as to the following factual background. Congress established RUS under the Rural Electrification Act of 1936 ("REAct"), 7 U.S.C. §§ 901-950b, to provide financing, in the form of either direct loans or guarantees, to cooperatives formed to produce or distribute electricity at a reasonable cost to underserved rural communities. In this capacity, RUS provided financing to both VEC and the debtor.

WCC is a Vermont corporation engaged in the business of owning and operating hydroelectric generating facilities. WCC owns a hydroelectric plant downstream from one owned and operated by the debtor. In 1981, WCC entered into a contract with the debtor and VEC (together "the cooperatives"), under which the cooperatives agreed to purchase all of WCC's net electrical output. The cooperatives never purchased power under the contract and, on February 27, 1987, WCC filed a breach of contract suit in the Vermont state court. WCC recorded its writ of attachment against the debtor's facility on April 8, 1987. On November 17, 1994, WCC received a final judgment for $3,401,195 jointly and severally against the cooperatives.

VEC is a non-profit rural electric distribution cooperative that sells electricity to its members. In 1977, RUS approved a $15,816,000 insured loan to VEC to finance its acquisition of percentage ownership interests in six nuclear generating facilities. RUS approved additional financing of $9,900,000 for the nuclear facilities in 1981. In 1980 and 1981, RUS approved loans of $500,000 and $13,406,000 to VEC for the construction of a hydroelectric generating plant.

RUS secured each of the loans and guarantees by liens on VEC's real and personal property. For each loan, the RUS Administrator certified that, in his judgment, the security was adequate and the loan was likely to be repaid within its specified term. The Vermont Public Service Board ("PSB")4 approved each loan.

VEC caused the debtor to be incorporated in 1979 as a generation and transmission cooperative for the purpose of transferring to it VEC's generation assets and associated indebtedness. VEC did so for two overriding reasons. First, as a distribution (retail) cooperative, VEC's mortgage required it to produce revenues of at least 1.5 times the interest payable on its debt ("TIER" or "times interest earned ratio"). Because of the high interest costs associated with the generation assets (both the nuclear and hydroelectric facilities), VEC was unable to meet its TIER requirement. However, as a generation and transmission (wholesale) cooperative, the debtor was permitted to maintain a TIER of 1.0. The second reason for the formation of the debtor was to preserve VEC's tax-exempt status. Based on its members' anticipated usage, VEC had entered into contracts to purchase electricity. When members' demands fell short of expectations, VEC sold its excess output to non-members. These sales to non-members jeopardized VEC's tax-exempt status as a non-profit distribution cooperative. The debtor, which was organized as a generation and transmission cooperative, could sell to non-members without jeopardizing VEC's tax status.

In 1983, with RUS's approval, VEC transferred its generation assets to the debtor ("the transfer") and the debtor assumed the outstanding indebtedness of approximately $40,000,000 thereon. The debtor gave RUS mortgage and security interests in the transferred assets and in the all-requirements contract ("the ARC"), under which VEC agreed to purchase all of its power requirements from the debtor. Payments to the debtor from VEC under the ARC were expected to provide the primary source of funds for the debtor's repayment of its indebtedness to RUS. The PSB approved the formation of the debtor, the transfer of the generation assets, and the debt incurred by the debtor.

In September, 1983, RUS approved an additional loan guarantee commitment of $24,220,000 to the debtor to cover additional costs associated with the nuclear facilities ("the A8 loan"), after determining that termination of the debtor's interests in the nuclear facilities would have been several times more costly, and would have forced the debtor out of business. The amounts approved were allocated among the various nuclear facilities in which the debtor had acquired (or was in the process of acquiring through the transfer) an ownership interest.

The A8 loan was placed under special control and no funds were to be advanced without prior approval of the PSB. The PSB approved advances of $2,020,380 on July 12, 1984; $2,500,000 on November 30, 1984; $1,532,000 on May 16, 1985; and $1,367,480 on October 30, 1985. In April, 1984, one of the nuclear facilities to which the A8 loan commitment applied, Seabrook 2, was cancelled and its fuel, parts and common facilities were transferred to another such facility, Seabrook 1. Subsequently, in 1986, the debtor asked RUS to reclassify the A8 loan to permit funds originally intended for Seabrook 2 to be reallocated among the remaining nuclear facilities ("the reclassification"). The reclassification did not increase the amount of the total commitment under the A8 loan. No funds were advanced at that time, and PSB approval was not obtained.

In 1985, VEC defaulted on its payments to the debtor under the ARC and the debtor, in turn, defaulted on its loans made or guaranteed by RUS. The defaults continued while RUS and the debtor engaged in extensive negotiations in an attempt to restructure the debt. Twice during that time they reached an agreement, but, in both instances, the PSB rejected the resulting agreement.

31 U.S.C. § 3713 provides that the representative of an insolvent entity who pays such entity's other creditors before paying the amounts it owes to the United States becomes personally liable to the United States for the entity's debts.5 In order to facilitate the restructuring negotiations, the Department of Justice ("the DOJ") issued assurances not to sue to the debtor to permit it to pay its day to day operating expenses and certain other debts as authorized by RUS., The DOJ issued no assurance not to sue with regard to any payment to WCC in connection with WCC's breach of contract suit.

On April 1, 1996, the debtor filed its Chapter 7 petition and VEC filed a Chapter 11 petition in this court. The amount of secured indebtedness owed by the debtor to RUS exceeds the value of the debtor's assets, and RUS's security interests were perfected before WCC...

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