Link: http://pacer.ca4.uscourts.gov/opinion.pdf/061459.P.pdf

The Fourth Circuit Court of Appeals recently addressed the issue of whether a creditor may allocate a payment made by a non-debtor guarantor first to interest then to principal, thus preserving the unpaid principal for collection in bankruptcy. Nat'l Energy & Gas Transmission, Inc. v. Liberty Elec. Power, LLC (In re Nat'l Energy & Gas Transmission, Inc.), 2007 U.S. App. LEXIS 16263 (4th Cir. 2007).
The Court ruled against this allocation by a non-debtor. Its rationale was to allow the allocation would permit the creditor to collect otherwise disallowed post-petition interest. One could disagree with the outcome of this matter, inasmuch as the Court is limiting the right of a non-debtor to internally allocate a payment made to it by another non-debtor. There is a well reasoned dissent.

The Debtor, National Energy & Gas Transmission Energy Trading Power, L.P. (“ET Power”), was an energy marketing and trading company. Liberty Electric Power, LLC (“Liberty”), an energy-generating company, was a creditor of ET Power. Liberty had two guarantees, one from ET Power’s parent company, NEGT, (also a debtor), and one from GTN (a non-debtor), a subsidiary of NEGT.

After ET Power and NEGT filed voluntary petitions for Chapter 11 relief, they rejected the agreement with Liberty. Liberty was paid $140 million from its non-debtor guarantor, GTN, in full and final satisfaction of GTN’s guarantee. Liberty allocated the payment first to its interest and then to its principal, leaving $17 million in unpaid “principal”. The Debtors argued that the $17 million sought by Liberty was not principal, but instead was post-petition interest and as such was not allowable.

“Liberty seeks to collect $17 million from ET Power notwithstanding the fact that it has already received the full value, $140 million, of the debt which it was owed by ET Power on the petition date...Liberty classifies [this additional $17 million] ... as unpaid principal. It reaches this result by applying GTN’s payment of $140 million first to interest then to principal.”

In addressing, the $17 million in interest, the Fourth Circuit Court of Appeals Justice Shedd and District Justice Wilson, as the majority, concluded that: (1) Under 11 U.S.C. § 502(b)(2), Liberty could not collect in bankruptcy any additional amounts added due to the accrual of interest, and (2) Liberty may not affect the rights of a party in bankruptcy by its classification of a payment received from a non-debtor party.

In a well reasoned dissent, Fourth Circuit Court of Appeals Justice Duncan, contended that “the majority has no support for its conclusion that bankruptcy law governs the contractual relationship between a creditor and a non-debtor guarantor, and ample authority exists to the contrary,” and “the debtors here proffer no authority “for proposition that a non-debtor guarantor is exempt from liability to pay interest accruing after the petition date of the debtor-primary obligor,” under 11 U.S.C. § 502(b)(2).” Justice Duncan applied § 524(e) which provides that the “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” And therefore, “the majority’s holding appears to expressly violate § 524(e), by allowing the bankruptcy filing of the debtors to dictate how Liberty accounts for its contractual payment from GTN.”

Mike & Hunter

H.R. 3093 is currently scheduled to be heard on the House Floor this week. The bill will cut current funding to the Executive Office of the U.S. Trustee by 34.2 million from last year’s budget and $42.9 million less for this year’s budget.

The report states that “the Committee is concerned that excessive resources are being expended on efforts by the U.S. Trustee Program to dismiss cases for insignificant filing defects (thereby creating added burdens on the court and debtors associated with refilings); on the unnecessary use of U.S. Trustee personnel to participate in creditors’ meetings that are already handled and conducted by private trustees; and on making burdensome requests of debtors to provide documentation that has no material effect on the outcome of bankruptcy cases.”

The complete article can be found at:

http://thomas.loc.gov/cgi-bin/cpquery/?&dbname=cp110&sid=cp110LamiD&refer=&r_n=hr240.110&item=&sel=TOC_145245&

Pam