In re Wheeling-Pittsburgh Steel Corp.
| Decision Date | 22 April 1987 |
| Docket Number | Bankruptcy No. 85-793PGH,Motion No. 86-5290. |
| Citation | 72 BR 845 |
| Parties | In re WHEELING-PITTSBURGH STEEL CORPORATION, et al., Debtors. WHEELING-PITTSBURGH STEEL CORPORATION, et al., Movants, v. WEST PENN POWER COMPANY, Respondent. |
| Court | U.S. Bankruptcy Court — Western District of Pennsylvania |
Gary Philip Nelson, Buchanan Ingersoll, P.C., Pittsburgh, Pa., for debtors.
John H. Riordan, Jr., and C. Andrew McGhee, Rose, Schmidt, Chapman, Duff & Hasley, Pittsburgh, Pa., for West Penn Power Co., respondent.
The debtor requests summary judgment on its Motion to reject an electrical supply contract with West Penn Power Company, on the ground that there is no genuine issue as to the only material fact under the business judgment test viz. whether rejection of the contract will benefit the estate. West Penn Power Company argues that public utility contracts are special types of executory contracts, the rejection of which requires consideration of additional facts viz. the effect of rejection on the public utility, its customers, and the state laws regulating public utilities.
For the reasons discussed below,1 we hold that the effect of rejection on the public utility, its customers, and the state laws regulating public utilities is not a material fact to be weighed under the business judgment test. We further hold that there is no genuine issue as to any fact material under the business judgment test, and that the debtor is entitled to reject its contract with West Penn Power Company as a matter of law. Therefore, we will grant the debtor summary judgment on its motion to reject its contract with West Penn Power Company.
Wheeling-Pittsburgh Steel Corporation ("Wheeling-Pittsburgh" or the "debtor") filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on April 16, 1985, and is currently operating as a debtor-in-possession pursuant to § 1108.2 West Penn Power Company ("West Penn Power") is a public utility regulated by the Pennsylvania Public Utility Commission.
On December 19, 1966, Pittsburgh Steel Corporation, a predecessor of the debtor, entered into a contract (the "Contract") with West Penn Power for the supply of electricity to the debtor's Monessen and Allenport, Pennsylvania steelmaking facilities. The Contract requires West Penn Power to provide electricity to the debtor for an initial ten year period and thereafter until one of the parties gives two years written notice of an intent to terminate the Contract.
Due to the then-existing large demand for electrical power at the Monessen and Allenport facilities, the Contract provided for lower than customary price rates in exchange for a guaranteed minimum rate of consumption. Thus, the debtor agreed to pay a minimum "demand charge" each month, whether or not the minimum amount of electricity was actually used. The demand charges and other charges are set forth in the Contract's accompanying "Rate Schedule 46," a rate schedule specifically designed for large industrial users such as the debtor.
On October 24, 1986, the debtor filed a motion to reject the Contract under § 365. We held a hearing on December 18, 1986, after which the parties submitted briefs and affidavits. Thereafter, the debtor requested summary judgment pursuant to Bankruptcy Rule 7056, made applicable to this contested matter by Bankruptcy Rule 9014.
In determining the propriety of a debtor's decision to reject a prepetition executory contract, the traditional test is the "business judgment" test. N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513, 104 S.Ct. 1188, 1195, 79 L.Ed.2d 482 (1984). The business judgment test "requires only that the trustee or debtor-in-possession demonstrate that rejection of the executory contract will benefit the estate." In re Stable Mews Assoc., Inc., 41 B.R. 594, 596 (Bankr. S.D.N.Y.1984) (citations omitted). West Penn Power does not dispute that the Contract is an executory contract for purposes of assumption or rejection under § 365, and both parties concede the general applicability of the business judgment test. The instant dispute centers on what facts are material facts for the court to weigh under the business judgment test.
The parties agree that under the business judgment test, a material fact for the debtor to establish is that rejection of the Contract will benefit the estate. The debtor essentially argues that this is the only material fact that it must establish under the business judgment test.
West Penn Power, on the other hand, argues that public utility contracts are special types of executory contracts, the rejection of which deserves a greater degree of judicial scrutiny than that given to ordinary executory contracts under the business judgment test. Therefore, West Penn Power urges us to additionally weigh the hardship that rejection of the Contract would cause to itself, its customers, and the enforcement of state laws regulating public utilities. In substance, then, West Penn Power asks us to weigh facts that are not ordinarily weighed under the business judgment test. The debtor has requested summary judgment on the ground that West Penn Power's allegations do not create a genuine issue as to any fact material under the business judgment test.
We can grant the debtor summary judgment only if there is no genuine issue as to any material fact and the debtor is entitled to judgment as a matter of law. Bankruptcy Rule 7056. Applying this standard to the dispute before us, the issues are as follows:
1. In determining, under the business judgment test, the propriety of a debtor's decision to reject an executory contract with a public utility, is the hardship that rejection may cause to the public utility, its customers, and the state laws regulating public utilities a material fact to be weighed by the court?
2. If not, is there a genuine issue as to the only remaining material fact viz. whether rejection will benefit the estate?
West Penn Power argues first that rejection of the Contract would result in an unfair benefit to the debtor at the expense of West Penn Power and its customers. Second, West Penn Power argues that the damage and hardship which would be suffered by West Penn Power and its utility customers as a result of rejecting the Contract would be disproportionate to any benefits derived by the estate. And third, West Penn Power argues that rejection of the Contract would contravene and interfere with Pennsylvania's Public Utility laws, to the detriment of West Penn Power's customers. West Penn Power has offered no legal authority for the proposition that public utility contracts should be treated any differently than ordinary executory contracts for purposes of assumption or rejection.
We understand West Penn Power's concerns. However, assuming arguendo that West Penn Power's factual allegations are true, they cannot govern the outcome of this dispute.
As discussed below, under the traditional business judgment test, absent any allegation that the debtor's decision to reject is motivated by bad faith or gross mismanagement, the sole focus is the effect of rejection on the debtor's estate. Once the debtor establishes that rejection will benefit the estate, our inquiry ends. The burden that rejection may visit upon other entities is not a material fact to be considered by the court under the business judgment test. As succinctly stated by the Court of Appeals for the Fourth Circuit:
It cannot be gainsaid that allowing rejection of such contracts as executory imposes serious burdens upon contracting parties such as Lubrizol. Nor can it be doubted that allowing rejection in this and comparable cases could have a general chilling effect upon the willingness of such parties to contract at all with businesses in possible financial difficulty. But under bankruptcy law such equitable considerations may not be indulged by courts in respect of the type of contract here in issue. Congress has plainly provided for the rejection of executory contracts, notwithstanding the obvious adverse consequences for contracting parties thereby made inevitable. Awareness by Congress of those consequences is indeed specifically reflected in the special treatment accorded to union members under collective bargaining contracts, see Bildisco, 465 U.S. at 519-27, 104 S.Ct. at 1193-96, and to lessees of real property, see 11 U.S.C. § 365(h). But no comparable special treatment is provided for technology licensees such as Lubrizol. They share the general hazards created by § 365 for all business entities dealing with potential bankrupts in the respects at issue here.
Lubrizol Enterprises v. Richmond Metal Finishers, 756 F.2d 1043, 1048 (4th Cir. 1985), cert. denied, ___ U.S. ___, 106 S.Ct. 1285, 89 L.Ed.2d 592 (1986) (technology license agreement). See also In re Logical Software Inc., 66 B.R. 683, Bankr.L.Rep. (CCH) ¶ 71,639 (Bankr.D.Mass.1986) ().
Congress has not placed public utility contracts on par with collective bargaining agreements (§ 1113) and certain real property leases (§ 365). Therefore, in determining the propriety of the debtor's decision to reject the Contract, we are not free to deviate from a traditional business judgment analysis and weigh the effect of rejection on West Penn Power or its customers. See In re Chi-Feng Huang, 23 B.R. 798, 801-02 (9th Cir. BAP 1982) () See also Borman's, Inc. v. Allied Supermarkets, Inc., 706 F.2d 187, 189 (6th Cir.1983), cert. denied, 464 U.S. 908, 104 S.Ct. 263, 78 L.Ed.2d 247 (1983) (...
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