In re: La Paloma Generating Company, et al.,
Filing
25
MEMORANDUM OPINION. Signed by Judge Matthew W. Brann on 7/31/2018. (nmg)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
CALIFORNIA AIR RESOURCES
BOARD,
No. 1:17-CV-1698
(Judge Brann)1
Appellant
v.
LA PALOMA GENERATING
COMPANY, LLC,
Appellee/Debtor
LNV CORPORATION,
Appellee
OFFICIAL COMMITTEE OF
UNSECURED CREDITORS,
Appellee.
MEMORANDUM OPINION
JULY 31, 2018
I.
BACKGROUND
Appellant California Air Resources Board (“CARB”) filed an appeal 2 of the
decision of the District of Delaware’s Bankruptcy Court to this Court on
1
An Article III Judge in the Middle District of Pennsylvania sitting by designation in the
District of Delaware in lieu of the vacant judgeship in that district.
2
Although CARB did not docket its statement of issues on appeal in the above captioned
appeal, a review of the docket in the United States Bankruptcy Court’s docket reveals its
statement of issues on appeal. These are:
November 22, 2017.3 Appellee/Debtor, La Paloma Generating Company, LLC
(“La Paloma”), owns a natural gas fired electricity generation facility in the state of
California,4 which releases greenhouse gases into the atmosphere. Under the
California statutory framework, 5 La Paloma, as part of a cap and trade program,
was required to acquire an estimated $63 million dollars’ worth of compliance
instruments on the open market in order to satisfy its state emission surrender
obligations.6 LNV had been a secured lender to La Paloma, whose debts to LNV
totaled over $300 million dollars in credit secured by substantially all of LNV’s
assets, including the facility referenced herein.7
Because a dispute arose over La Paloma’s $63 million dollars worth of
compliance instrument liability, it also received two offers from third parties to
1.
Did the Bankruptcy Court err when it held that a California court would rule that the
California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms
Regulation, 17 California Code of Regulations (“C.C.R.”), §§ 95801 et. seq. (“Cap-andTrade Regulation”) unambiguously provides that a purchaser of a natural gas power
generation facility has no obligation to surrender cap-and-trade compliance instruments on
account of pre-transfer greenhouse gas emissions?
2. Did the Bankruptcy Court err in holding that the obligation to surrender compliance
instruments under the Cap-and-Trade Regulation on account of pre-transfer greenhouse gas
emissions is an “interest” under 11 U.S.C. § 363(f)?
United States Bankruptcy Court for the District of Delaware Docket Number 16-12700
(CSS) ECF No. 942.
3
ECF No. 1.
4
ECF No. 1-1 at 3.
5
California Global Warming Solutions Act of 2006, Health and Safety Code, §§ 38500 et seq.
6
ECF No. 1-1 at 3-5.
7
Br. of LNV, ECF No. 7 at 6.
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purchase the electricity generation facility, one for $25 million and one for $75
million. Both offers were conditioned on a determination by the Bankruptcy Court
that the purchaser would not be liable for the $63 million dollars in Debtor
Emission Surrender Obligations. 8
In the end, LNV purchased all of La Paloma’s assets, as La Paloma’s
secured creditor, through a $150 million dollar credit bid, i.e., a reduction in the
amount of LNV’s secured claim. 9 “At LNV’s insistence, so that it would have
certainty upon the closing of the contemplated transaction, LNV and CARB agreed
to submit their dispute regarding the Debtor Emisison Surrender Obligations to the
Bankruptcy Court…”10
La Paloma subsequently filed a petition for a voluntary reorganization under
Chapter 11 of the Bankruptcy Code. A plan was submitted for Bankruptcy Court
approval to permit LNV Corporation (“LNV”) to assume substantially all of La
Paloma’s assets.11 As relevant here, La Paloma, LNV, and CARB all presented the
issue of whether the transfer of assets, including the electricity generation facility,
could be transacted free and clear of any obligations to surrender compliance
8
Id. at 7.
9
Id.
10
Id.
11
ECF No. 1-1 at 6.
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instruments under the California Cap-and-Trade Program. 12 In a thorough and
well-reasoned opinion, the Bankruptcy Judge reviewed the relevant California
statutes and determined that LNV did not assume successor liability for the Debtor
Emission Surrender Obligations prior to its acquisition of the Debtor’s assets, and,
resultantly, confirmed the plan. 13
CARB then appealed to this Court. On January 19, 2018, LNV filed a
motion to dismiss the appeal, arguing that it is moot pursuant to Section 363(m) of
the United States Bankruptcy Code. Having reviewed the parties’ submissions and
the relevant statutory and case law, LNV’s motion will be granted, and the case
dismissed. 14
II.
DISCUSSION
A.
Standard of Review
A District Court sits as an appellate tribunal when presented with an appeal
from a final order of a United States Bankruptcy Court. 15 This Court’s standard of
review is to “review factual findings for clear error, and [] exercise plenary review
over legal determinations.” 16 “We review basic and inferred facts under the clearly
12
ECF No. 1-1 at 6.
13
ECF No. 1-1 at 6-21.
14
The Official Committee of Unsecured Creditors of La Paloma Generating Company, LLC, as
intervenor, agreed with the position taken by LNV.
15
See 28 U.S.C.A. § 158, Fed. R. Bankr. P. 8001(a).
16
In re Udell, 454 F.3d 180, 183 (3d Cir. 2006).
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erroneous standard.” 17 “We exercise plenary review over legal issues.”18 “In
reviewing ultimate facts, which are a ‘mixture of fact and legal precept’, we must
‘break down’ the questions of law and fact and “apply the appropriate standard to
each component.” 19
B. 11 U.S.C. § 363(m) compels the conclusion that the appeal is moot.
The text of 11 U.S.C. § 363(m) reads as follows:
The reversal or modification on appeal of an authorization under
subsection (b) or (c) of this section of a sale or lease of property does
not affect the validity of a sale or lease under such authorization to an
entity that purchased or leased such property in good faith, whether or
not such entity knew of the pendency of the appeal, unless such
authorization and such sale or lease were stayed pending appeal.
“We have referred to section 363(m) as a ‘statutory mootness’ provision.” 20 “In
construing section 363(m), we have rejected a per se rule ‘mooting appeals absent
a stay of the sale or lease at issue,’ and instead require that two conditions be met
before an appeal becomes moot under section 363(m): (1) the underlying sale or
lease must not have been stayed pending appeal, and (2) reversing or modifying
the authorization to sell or lease would affect the validity of the sale or lease.”21
17
In re Fegeley, 118 F.3d 979, 982 (3d Cir. 1997) (all internal citations omitted).
18
Id.
19
Id. (internal citations omitted).
20
In re Rickel Home Centers, Inc., 209 F.3d 291, 298 (3d Cir. 2000) (Sloviter, J.).
21
Id. (internal citations omitted).
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The holding by United States Court of Appeals for the Third Circuit in In re
Rickel Home Centers, Inc. has been expounded on as such: “[t]o promote certainty
and finality with respect to these sales and encourage parties to bid for assets, §
363(m) ‘prohibits the reversal of a sale to a good faith purchaser of bankruptcy
estate property ... if a party fails to obtain a stay of the sale.’” 22 “Our Court of
Appeals rejects the per se rule of other Circuits where every appeal not
accompanied by a stay is moot.” 23 “Instead, our Court of Appeals interprets §
363(m) to require “two conditions must be satisfied before an appeal may be
dismissed as moot ...: (1) the sale was not stayed pending appeal, and (2) reversal
or modification of the Bankruptcy Court’s authorization would affect the validity
of the sale.”“24
In the matter at hand, the parties dispute whether or not CARB sought a stay
of the sale order prior to the appeal. CARB filed its notice of appeal on November
20, 2017. 25 The next day it moved to stay pending appeal. 26 United States
Bankruptcy Judge Christopher S. Sontchi held a hearing on the issue on January 9,
22
Matter of Metro. Steel Indus., Inc., No. CV 16-5392, 2017 WL 126120, at *2 (E.D. Pa. Jan.
12, 2017) (all internal citations omitted) (Kearney, J).
23
Id.
24
Id.
25
United States Bankruptcy Court for the District of Delaware Docket Number 16-12700
(CSS) ECF No. 898.
26
Id. at ECF No. 900.
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2018. 27 Judge Sontchi denied the motion the same day. 28 Although CARB
attempted to stay the sale, this request was denied. However, in the Third Circuit
District Courts do not cease analysis based solely on a denial of a stay.
Consequently, I turn to the second step of the Third Circuit’s two-part test. I
find that reversal or modification of the Bankruptcy Court’s authorization to sell
the La Paloma electricity generation facility without the encumbrance of its
surrender obligations of would affect the validity of the sale of the facility. “In
short, the validity prong of our test provides a narrow exception that may lie for
challenges to the Sale Order that are so divorced from the overall transaction that
the challenged provision would have affected none of the considerations on which
the purchaser relied.”29
Two cases are illustrative of this principle. The Third Circuit has found that
when the office supply behemoth, Staples, assumed a lease pursuant to a court
order under Section 363 of the Bankruptcy Code, possession and expenditure of
substantial funds to renovate and redesign the property, was sufficient to satisfy the
criteria that “revocation of the authorization would adversely affect the validity of
the assignment.” 30 Additionally, the Eastern District of Pennsylvania found that in
27
Id. at ECF No. 999.
28
Id. at ECF No. 1000.
29
In re Pursuit Capital Mgmt., LLC, 874 F.3d 124, 139 (3d Cir. 2017) (Jordan, J.).
30
In re Rickel Home Centers, Inc. at 305.
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the sale of a steel manufacturer’s assets pursuant to 11 U.S.C. § 363, the
“specifically bargained for right not be bound by contracts…and for protection
against successor liability claims” affected the validity of the sale. 31
Here, I conclude that a $63 million dollar liability on what was essentially a
$150 million dollar bid, substantially devalues the purchased assets. The Third
Circuit has explained that “a challenge to an authorized transaction will necessarily
impact that transaction’s validity if it seeks to affect ‘the validity of a central
element,’ such as the sale price.”32 Because both third party offers were
conditioned on the Bankruptcy Court finding no successor liability, it is clear that a
reversal at this stage of the proceedings would explicitly impact the settled
transaction’s validity. The $150 million dollar reduction in LNV’s secured claim
would likely have been further reduced, and substantially so, by the imposition of
$63 million dollars of compliance instruments. 33 LNV intentionally agreed with
CARB to have the issue of the Debtor Emission Surrender Obligations submitted
to the Bankruptcy Court to ensure the protections that 11 U.S.C. § 363(m) is
designed to effectuate, specifically “to promote certainty and finality with respect
to these sales and encourage parties to bid for assets.” 34 After all, Section 363(m)
31
In re: Matter of Metropolitan Steel Industries, Inc., at *3.
32
In re Alabama Aircraft Indus., Inc., 514 F. App’x 193, 195 (3d Cir. 2013) citing Pittsburgh
Food & Beverage v. Ranallo, 112 F.3d 645, 649 (3d Cir.1997).
33
See Declaration of James Erwin, Senior Officer at LNV.
34
In re Rickel Home Centers, Inc., 209 F.3d at 298.
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provides “not only ... finality to the judgment of the bankruptcy court, but
particularly ... finality to those orders and judgments upon which third parties
rely… its certainty attracts investors and helps effectuate debtor rehabilitation.”35
CARB cites to a case which is seemingly beneficial to its argument. The
reason it is seemingly beneficial to CARB is because the Third Circuit determined
that the issue was not mooted by Section 363(m), and continued to address the
issue on its merits. However, that court nevertheless affirmed the decisions of the
Bankruptcy Court and the District Court, albeit on a different bases than the lower
courts. The Third Circuit explained that “while § 363(m) aims to make sales of
estate property final and inject predictability into the sale process, we don’t think it
does so at all costs and certainly not for non-purchasers.”36
The instant matter is distinguishable. First, having reviewed the Bankruptcy
Judge’s decision interpreting whether or not LNV would have successor liability
under California’s statutory framework, I would affirm that substantive opinion.
Judge Sontchi correctly decided the issue based on the plain language of
California’s statute, rather than on CARB’s recommended, self-serving
interpretation of the legislative intent of the emissions statute. Second, in CARB’s
unpersuasive case citation, there was an escrow fund in place from the purchaser,
35
In re Pursuit Capital Mgmt., LLC, 874 F.3d 124, 133 (3d Cir. 2017) (Jordan, J.).
36
In re ICL Holding Co., Inc., 802 F.3d 547, 554 (3d Cir. 2015).
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to which the Government was appealing in order to obtain it’s asserted slice of the
pie. Thus, there was no effect on either the sale itself or the sale price of the
property. The only issue was which of the creditors were entitled to a portion of
that escrow account.
In the case at bar, there is no such escrow account at issue. CARB’s asserted
slice of the pie would have greatly affected the sales price LNV would have been
willing to negotiate to obtain the property had Judge Sontchi decided LNV was
responsible for successor liability for emissions from the facility. CARB’s
citation is, on its face, on-point. However, a thorough review of that case and its
comparison to the instant matter belies that more superficial analysis.
III.
CONCLUSION
For the foregoing reasons, the motion to dismiss the appeal as moot will be
granted by separate Order and the appeal of the November 9, 2017 Order of the
United States Bankruptcy Court for the District of Delaware dismissed.
An appropriate Order follows.
BY THE COURT:
s/ Matthew W. Brann
Matthew W. Brann
United States District Judge
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