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In re Verso Corp.

United States District Court, D. Delaware

July 29, 2019

IN RE VERSO CORPORATION, et al., Debtors.
v.
VERSO CORPORATION, et al., Appellees. UPPER PENINSULA POWER COMPANY, Appellant,

          MEMORANDUM OPINION

          NOREIKA, U.S. DISTRICT JUDGE

         This dispute arose in the Chapter 11 cases of debtor Verso Corporation (“Verso”) and certain affiliates (together, “Debtors”). Before the Court is an appeal by Upper Peninsula Power Company (“UPPCO”) from the Bankruptcy Court's May 3, 2017 order (B.D.I. 1690)[1] (“Order”) denying UPPCO's motion for allowance and payment of an administrative expense claim (B.D.I. 1660) (“Motion”). For the reasons set forth herein, the Order is affirmed.

         I. BACKGROUND

         A. UPPCO Agreements and SSR Claims

         UPPCO is a Michigan corporation that operates as an electric utility provider in upper Michigan. (APP19).[2] On February 28, 2013, prior to the bankruptcy proceedings, UPPCO entered into a Power Purchase Agreement with debtor Escanaba, an indirect subsidiary of Verso, whereby UPPCO agreed to supply Escanaba with electric power generated from a hydroelectric generation project on the Escanaba River in exchange for an annual fixed price per MWh, subject to a true up. (APP48). Midcontinent Independent System Operator (“MISO”) runs a large wholesale electric market and requires certain generating facilities (including UPPCO) that have been designated as system support resources (“SSR”) to continue operations to maintain the reliability of the electric grid. (APP21). The cost of the continued operation of the SSR facilities is shared among the other electric generating facilities on the grid, including UPPCO, according to an allocation formula set by MISO and approved by the Federal Energy Regulatory Commission (“FERC”). (Id.). UPPCO passes those charges through to its customers, including the Debtors, as transmission charges as part of UPPCO's overall charges (“tariffs”). (APP130-131).

         On February 19, 2015, FERC issued an order that required MISO to submit a revised SSR allocation method. (APP67-74). On May 20, 2015, MISO proposed an allocation method that reallocated and imposed higher charges for SSR on certain electric companies, including UPPCO, for their share of the 2014 and 2015 SSR charges (“SSR Cost Reallocation”). (APP75-84). On September 17, 2015, FERC entered an order approving the basic elements of the SSR Cost Reallocation (“September 2015 Order”), and directed MISO to make an additional compliance filing, which was accepted by FERC on May 3, 2016. (APP111-122, 152 FERC ¶ 61, 216 at 33-41; APP123-129, 155 FERC ¶ 61, 134 at 6-10). As a result of the September 2015 Order, MISO allocated to UPPCO a greater share of the SSR charges.

         This appeal concerns UPPCO's Motion seeking payment of the reallocated SSR charges for 2014 and 2015 that arose out of the SSR Cost Reallocation that UPPCO would have passed through to the Debtors as part of UPPCO's tariffs (“SSR Claims”).

         B. Chapter 11 Cases and Stipulation

         On January 26, 2016 (the “Petition Date”), each of the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. In the Chapter 11 cases, UPPCO timely filed proofs of claim asserting claims against Debtors NewPage Wisconsin System Inc. (“NWSI”) and Escanaba for the prepetition delivery of energy to the Debtors (“UPPCO Claims”). The UPPCO Claims did not mention, or preserve, UPPCO's rights with respect to any other claims that UPPCO held against the Debtors. (SA259-294). On June 13, 2016, the Debtors filed a Notice of (A) Cure Amounts, If Any, Related to Executory Contracts and Unexpired Leases to be Assumed by the Debtors Pursuant to the Plan; and (B) Related Procedures in Connection Therewith (B.D.I.1099) (“Cure Notice”), which, among other things, identified the Debtors' executory contracts with UPPCO (“UPPCO Agreements”) to be assumed under the Plan with a cure amount of $486, 254.86. (SA75, SA97). On June 22, 2016, UPPCO filed its objection to the Debtors' Cure Notice, alleging that the cure amount in connection with the assumption of the UPPCO Agreements should be $547, 279.18. (SA100).

         On June 23, 2016, the Bankruptcy Court entered an order (B.D.I. 1223) (“Confirmation Order”) confirming the Debtors' plan of reorganization (B.D.I. 1177) (“Plan”). (SA2). The Plan became effective and the Debtors emerged from bankruptcy on July 15, 2016 (the “Effective Date”) (B.D.I. 1322). (SA71). Among other things, the Plan established August 15, 2016 as the deadline for claimants to assert an administrative expense claim against the Debtors. (B.D.I. 1322).

         On August 2, 2016, the Reorganized Debtors and UPPCO entered into the Stipulation, which (i) provided for the assumption of the UPPCO Agreements subject to payment of the agreed cure amount in satisfaction of any prepetition defaults under the UPPCO Agreement, and (ii) disallowed and expunged all of UPPCO's claims against the Debtors that arose before the Effective Date, whether or not reflected in a proofs of claim. (APP16-17). Specifically, paragraph 4 of the Stipulation provides that:

Any and all claims held by UPPCO arising on or before the Effective Date, including, without limitation, the UPPCO Claims, whether or not evidenced by one or more filed proofs of claim, against any of the Debtors are hereby disallowed and expunged in their entirety without need for further action by UPPCO or the Reorganized Debtors or further Bankruptcy Court approval.

(APP16). On August 3, 2016, the Bankruptcy Court approved the Stipulation. (APP10-11).

         C. UPPCO's Motion and Order

         On April 7, 2017, UPPCO filed its Motion seeking allowance and payment of the SSR Claims as an administrative expense[3] in the amount of $629, 248. (See APP19-33). UPPCO asserted that, due to the SRR Cost Reallocation, UPPCO was unable to calculate the Debtors' share of SSR until it received information from MISO in September 2016. (APP22). UPPCO further asserted that, “because of the uncertainty and actual inability to calculate, the Debtors and UPPCO agreed that the Debtors' payment for the SSR Cost Reallocations would not be due until UPPCO was billed by MISO.” (Id.). “UPPCO received information from MISO in September 2016” and “calculated the Debtors' share of SSR charges and included such charges in monthly invoices to the Debtors as the Debtors requested. Since September 2016 however, the Debtors have refused to pay their allocated SSR charges to UPPCO, asserting that portion of the obligation was discharged in the bankruptcy.” (Id.). Although the parties' Stipulation clearly “disallowed and expunged” “any and all claims held by UPPCO arising on or before the Effective Date” of the Plan (which occurred on July 15, 2016), UPPCO appeared to argue that the Debtors' obligation to pay the SSR Claims arose post-Effective Date, in September 2016, and only “once MISO provided information to enable calculation of the SSR [C]harges allocated to the Debtors.” (APP23). UPPCO argued that the Debtors' failure to pay the SSR charges was a post-assumption breach giving rise to an administrative claim. UPPCO further argued that that the doctrine of laches barred Debtors from asserting that the SSR Claims were discharged because, according to UPPCO, the Debtors ...


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