LA Public Service v. Mabey ( 1999 )

REVISED OCTOBER 1, 1999
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 98-31258
_____________________
In the Matter of CAJUN ELECTRIC POWER COOPERATIVE,
INCORPORATED,
Debtor.
___________________________
_________
LOUISIANA PUBLIC SERVICE COMMISSION, and Unofficial
Members Committee,
Appellant,
v.
RALPH R. MABEY, Chapter 11 Trustee for Cajun Electric
Power Cooperative, Inc; RURAL UTILITIES SERVICES;
UNSECURED CREDITORS COMMITTEE,
Appellee.
_________________________________________________________________
Appeal from the United States District Court
for the Middle District of Louisiana
_________________________________________________________________
August 16, 1999
Before KING, Chief Judge, and REAVLEY and BENAVIDES, Circuit
Judges.
KING, Chief Judge:
The Louisiana Public Service Commission appeals an order of
the bankruptcy court enjoining it from reducing, or considering
any argument in support of reducing, the wholesale rates charged
by the debtor, Cajun Electric Power Cooperative, Inc., as a
result of the suspension of debt service occasioned by its filing
under Chapter 11 of the Bankruptcy Code. Because we determine
that the bankruptcy court abused its discretion by issuing such
an injunction, we reverse the district court’s order affirming
the bankruptcy court’s injunction and grant of summary judgment
in favor of appellees and we remand for further proceedings.
I. FACTUAL & PROCEDURAL BACKGROUND
This case involves the latest chapter in a long-running
proceeding arising from Cajun Electric Power Cooperative, Inc.’s
(Cajun) filing of a petition seeking reorganization under Chapter
11 of the Bankruptcy Code on December 21, 1994.1 Cajun has
twelve members, all of whom are electric distribution
cooperatives serving retail customers in Louisiana. Cajun
generates and sells electricity to each member and to non-
members, and each member has contracted to purchase at wholesale
rates all of the member’s electric power requirements from Cajun.
Cajun’s bankruptcy proceeding is a “mega-case,” involving more
than five billion dollars in debt and over seven hundred
creditors. Mabey v. Southwestern Elec. Power Co. (In re Cajun
Elec. Power Coop., Inc.), 150 F.3d 503, 506 (5th Cir. 1998),
1
We have previously considered issues arising from Cajun’s
bankruptcy proceeding on several occasions, and we therefore
summarize only those facts necessary for the disposition of this
appeal. See Mabey v. Southwestern Elec. Power Co. (In re Cajun
Elec. Power Coop., Inc.), 150 F.3d 503 (5th Cir. 1998), cert.
denied, 119 S. Ct. 2019 (1999); Official Comm. of Unsecured
Creditors v. Cajun Elec. Power Coop., Inc. (In re Cajun Elec.
Power Coop., Inc.), 119 F.3d 349 (5th Cir. 1997); United States
v. Cajun Elec. Power Coop., Inc. (In re Cajun Elec. Power Coop.,
Inc.), 109 F.3d 248 (5th Cir. 1997); Cajun Elec. Power Coop.,
Inc. v. Central La. Elec. Coop., Inc. (In re Cajun Elec. Power
Coop., Inc.), 74 F.3d 599 (5th Cir 1996).
2
cert. denied, 119 S. Ct. 2019 (1999). Most of Cajun’s debt is
owed to the Rural Utilities Service of the United States
Department of Agriculture (the RUS), which has filed a claim in
excess of four billion dollars.
On January 23, 1996, the Louisiana Public Service Commission
(the LPSC or Commission), acting pursuant to authority granted by
Louisiana law, reopened a rate investigation of Cajun. See LA.
CONST. art. IV, § 21 (stating that the LPSC “shall regulate . . .
public utilities and have such other regulatory authority as
provided by law”); LA. REV. STAT. ANN. § 45:1163 (stating that the
LPSC “shall exercise all necessary power and authority over
any . . . public utility for the purpose of fixing and regulating
the rates charged or to be charged by and service furnished by
such public utilities”). The LPSC sets the wholesale rates that
Cajun may charge customers (Cajun’s members and others) based on
its current costs, including (as relevant here) the interest
expense that Cajun must pay to service its debt. The LPSC staff
urged the Commission to reduce Cajun’s rates by 8.15 mills per
kilowatt hour (from 45.2 mills to approximately 37 mills per
kilowatt hour), or $48,437,462 per year, “because Cajun is not
paying or accruing interest on its underlying debt during the
pendency of its bankruptcy proceeding.” Ex Parte Louisiana Pub.
Serv. Comm’n, No. U-17735-F, 1996 La. PUC LEXIS 70, at *2, *9-*10
(La.P.S.C. Oct. 16, 1996).
3
An administrative law judge held a hearing regarding the
proposed rate decrease on September 17 and 18, 1996. The LPSC
staff asserted that neither Cajun nor the RUS has accrued
interest in its accounting records with respect to Cajun’s debt,
and that generally applicable accounting principles do not permit
such an accrual. The LPSC staff introduced Cajun’s financial
statements which state in a footnote that “Cajun will recognize
interest expense in the financial statements while in Chapter 11
only to the extent it is ordered to pay interest by the
Bankruptcy Court,” and a consultant hired by Cajun to develop its
revenue requirements testified that “since the appointment of the
trustee, Cajun has not paid or accrued any interest expense on
the underlying debt.” The LPSC staff therefore urged the
administrative law judge that “the amount of the interest expense
should be collected in escrow, subject to refund to the members
upon a determination by the bankruptcy court and/or the
Commission that Cajun has no interest obligation.” Id. at *9-
*10.
The Unofficial Members Committee (the Members Committee),
then consisting of ten of the twelve members but now including
only seven members, agreed with the LPSC staff and took the
position that Cajun’s interest expense should be excluded from
its revenue requirement. See id. at *10. The Members Committee
argued to the administrative law judge that “because Cajun is not
paying interest expense and not accruing interest expense during
4
the pendency of its bankruptcy, it is not appropriate for the
Commission to include interest expense in Cajun’s revenue
requirement for rate making purposes at this time.” Id.
Following the hearing, the administrative law judge recommended
to the Commission that the interest expense component of Cajun’s
rates be collected subject to refund, pending a determination by
the bankruptcy court concerning Cajun’s interest expense
liability during bankruptcy. See id. at *3.
Ralph Mabey, as the Chapter 11 trustee for Cajun, filed this
suit seeking injunctive and declaratory relief in the United
States Bankruptcy Court for the Middle District of Louisiana on
September 11, 1996. Specifically, Mabey sought an injunction
pursuant to 11 U.S.C. § 105(a)2 that would prohibit the Members
Committee “from presenting, and the LPSC from considering, any
arguments that Cajun’s rate should be lowered based solely on the
suspension of debt service occasioned by the filing of its
petition for reorganization in the Rate Docket pending before the
LPSC,” and a judgment declaring that “Cajun’s rates may not be
reduced based solely on the suspension of its debt service
obligations occasioned by the filing of its petition for
reorganization.” Mabey simultaneously filed a motion seeking a
preliminary injunction enjoining the same conduct.
2
Section 105(a) states that a bankruptcy court “may issue
any order, process, or judgment that is necessary or appropriate
to carry out the provisions” of the Bankruptcy Code.
5
The bankruptcy court denied Mabey’s motion for a preliminary
injunction, stating that it had earlier determined that the LPSC
could pursue the rate docket and that “the laws of the state of
Louisiana with respect to the conduct of the rate docket during
the chapter 11 proceeding are neither expressly nor implicitly
preempted by the Bankruptcy Code.” The bankruptcy court noted
that although it would be “sensitive to particular problems that
may result from the conduct of the rate docket,” Mabey had failed
to demonstrate that the estate would suffer irreparable injury
without a preliminary injunction because the administrative law
judge recommended only that the interest portion of the rate be
collected “subject to refund.”
Following the denial of Mabey’s motion for a preliminary
injunction, the LPSC ordered that Cajun may continue to collect
rates which include the interest expense component, subject to
refund of that component, “for up to sixty (60) days–-or longer
if an Order is obtained from the bankruptcy court requiring the
payment of interest or other legitimate bankruptcy-related
expenses not reflected in rates.” Ex Parte Louisiana Pub. Serv.
Comm’n, 1996 La. PUC LEXIS 70, at *31. The LPSC subsequently
amended its order by eliminating the sixty-day requirement,
requiring Cajun to place the interest-expense portion of revenues
in escrow, and stating that “all amounts refunded to the
distribution cooperatives from the escrow account must be in turn
refunded to consumers.” Ex Parte Louisiana Pub. Serv. Comm’n,
6
No. U-17735-H, 1996 La. PUC LEXIS 69, at *4 (La.P.S.C. Nov. 13,
1996). Mabey has appealed the amended rate order in the
Louisiana courts.
The LPSC and the Members Committee filed separate answers to
Mabey’s complaint on November 15, 1996. The Members Committee
counterclaimed, seeking a declaratory judgment that “Cajun does
not, in fact, have an obligation to make or accrue interest
expense payments during the pendency of its bankruptcy
proceeding,” and that therefore Cajun’s rates should be reduced
immediately under the LPSC’s rate order. The Official Committee
of Unsecured Creditors of Cajun and the RUS, each of whom had
intervened in this suit, filed a motion for summary judgment in
January 1998 requesting that the court terminate the escrow and
declare that Cajun’s rates may not be reduced based on the
suspended interest obligation. Both Mabey and the LPSC (joined
by the Members Committee) also sought summary judgment in their
favor.
The bankruptcy court granted Mabey, the Official Committee
of Unsecured Creditors of Cajun, and the RUS (collectively,
appellees) summary judgment on all claims, including the
counterclaim, on April 2, 1998. The court ordered that the
Members Committee and its individual members “are enjoined from
presenting, and the LPSC is enjoined from considering, any
argument that [Cajun’s] wholesale rate to its members should be
lowered during this proceeding based solely upon the suspension
7
of debt service occasioned by the filing of this proceeding,” and
that Cajun’s “wholesale rates to its [m]embers may not be reduced
during this proceeding where such reduction is based solely upon
the filing of this case.” The bankruptcy court denied the LPSC’s
motion to stay and the escrow terminated in April 1998.
The bankruptcy court based its decision on its determination
that postpetition interest “continues to accrue, but generally is
not allowable under applicable provisions of the Bankruptcy
Code.” As support for this proposition, the court cited 11
U.S.C. § 502(b)(2)3 and ruled that the debtor’s ultimate
liability for payment of such interest is not resolved “unless
and until the debtor receives a discharge under bankruptcy law.”
The court found that “there is absolutely no question but that
the RUS is an undersecured creditor,” but that two of the
reorganization plans that were then pending before the bankruptcy
court “may well prevent [Cajun] from receiving a discharge.”
Moreover, the bankruptcy court stated that 11 U.S.C. § 502(b)(2)
is a “mechanism[] by which debtors are given [a] breathing
spell,” and that the purpose of this “breathing spell” is “to
allow the debtor to reorganize, not to allow other parties to
benefit at the expense of others.” Finally, the bankruptcy court
3
Section 502(b)(2) provides that a bankruptcy court shall
determine the amount of a creditor’s claim as of the date of the
filing of the bankruptcy petition, and “shall allow such claim in
such amount, except to the extent that . . . such claim is for
unmatured interest.”
8
determined that any reduction in rates would violate “principles
espoused by the absolute priority rule [that] should and do
permeate the entire chapter 11 case--rights of equity are
subordinate to rights of creditors,” and that any rate reduction
“would result in the [m]embers receiving in excess of $50 million
prior to any distribution to creditors.”4 The United States
District Court for the Middle District of Louisiana affirmed the
bankruptcy court’s order “essentially[] for the reasons found by
the bankruptcy judge” on October 1, 1998. The LPSC timely
appeals.
II. THE REGULATED PUBLIC UTILITY AND CHAPTER 11
The LPSC argues on appeal that the bankruptcy court exceeded
its authority by enjoining it from considering decreasing Cajun’s
rates based on the suspension of Cajun’s obligation to pay
interest during the bankruptcy proceeding and by terminating the
escrow established by the LPSC’s rate order. The LPSC argues
that “no legal basis exists for the injunction” because the
bankruptcy court’s determination that interest continues to
accrue after a petition has been filed under Chapter 11 is
4
Under the absolute priority rule, a plan of reorganization
is considered “fair and equitable” under 11 U.S.C. § 1129(b), and
is thus subject to confirmation despite the rejection of the plan
by one or more classes of claims or interests, if “the holder of
any claim or interest that is junior to the claims of such class
will not receive or retain under the plan on account of such
junior claim or interest any property.” 11 U.S.C.
§ 1129(b)(2)(B)(ii); see Mabey v. Southwestern Elec. Power Co.,
150 F.3d at 519.
9
“flatly inconsistent with the statutes, their history and the
precedents,” and that the bankruptcy court exceeded its statutory
authority under 11 U.S.C. § 105(a) by issuing the injunction
because it sets a particular rate. The LPSC contends that
Congress has preserved state rate-making authority during the
pendency of a bankruptcy proceeding by excepting such rate-making
from the automatic stay provision in 11 U.S.C. § 3625 and
requiring regulatory approval of rates in a reorganization plan
in 11 U.S.C. § 1129(a)(6).6 As further evidence that the
bankruptcy court exceeded its authority under 11 U.S.C. § 105(a),
the LPSC points to the requirement that a bankruptcy trustee
“shall manage and operate the property in his possession . . .
according to the requirements of the valid laws of the State in
which such property is situated, in the same manner that the
owner or possessor thereof would be bound to do if in possession
5
Section 362(a) provides in relevant part that the filing
of a bankruptcy petition “operates as a stay, applicable to all
entities, of . . . the commencement or continuation, including
the issuance or employment of process, of a judicial,
administrative, or other action or proceeding against the debtor
that was or could have been commenced before the commencement of
the case under this title.” Under § 362(b)(4), however, such a
filing “does not operate as a stay . . . of the commencement or
continuation of an action or proceeding by a governmental
unit . . . to enforce such governmental unit’s or organization’s
police and regulatory power.”
6
Under 11 U.S.C. § 1129(a)(6), a reorganization plan shall
be confirmed by the bankruptcy court only if “[a]ny governmental
regulatory commission with jurisdiction, after confirmation of
the plan, over the rates of the debtor has approved any rate
change provided for in the plan, or such rate change is expressly
conditioned on such approval.”
10
thereof,” 28 U.S.C. § 959(b), and the Johnson Act, 28 U.S.C.
§ 1342.7 Finally, the LPSC argues that the Seventh Circuit’s
treatment of a bankrupt public utility cooperative in In re
Wabash Valley Power Ass’n, 72 F.3d 1305 (7th Cir. 1995),
demonstrates that the escrow arrangement ordered by the LPSC is
appropriate and that interest is not owed for the postpetition
period.8
7
Under the Johnson Act,
The district courts shall not enjoin, suspend or restrain
the operation of, or compliance with, any order affecting
rates chargeable by a public utility and made by a State
administrative agency or a rate-making body of a State
political subdivision, where . . . [j]urisdiction is based
solely on diversity of citizenship or repugnance of the
order to the Federal Constitution . . . .
28 U.S.C. § 1342. Relying on our decision in Gulf Water
Benefaction Co. v. Public Util. Comm’n, 674 F.2d 462 app. at 467-
68 (5th Cir. 1982) (per curiam), the LPSC argues that “the
Johnson Act is a limitation on bankruptcy jurisdiction” and that
therefore the bankruptcy court’s order was improper. In Gulf
Water Benefaction, we affirmed the lower courts’ determination
that the Johnson Act deprived them of jurisdiction to consider a
regulated utility’s claim that the rates set by a public utility
commission violated the federal constitution as a taking of
property without just compensation and without affording the
utility due process. See id. app. at 465. Because our
jurisdiction in this case is based on neither diversity of
citizenship nor a constitutional claim, the Johnson Act does not
apply to the claims we consider here. See New Orleans Pub.
Serv., Inc. v. City of New Orleans, 782 F.2d 1236, 1242 (5th
Cir.), modified, 798 F.2d 858 (5th Cir. 1986) (“A statutorily-
based preemption claim will not provide a basis for invoking the
Johnson Act to deprive the federal courts of jurisdiction.”); see
also Public Serv. Co. v. Patch, 167 F.3d 15, 25 (1st Cir. 1998)
(“The statute does not apply to claims based upon a congressional
statute or federal administrative rulings . . . .”).
8
The debtor in In re Wabash Valley Power Ass’n, a
generation and transmission cooperative serving rural electric
11
We need not and do not decide the difficult question whether
the bankruptcy court had any authority under § 105(a) to enjoin
the LPSC’s consideration of a rate decrease based on the
suspension of Cajun’s debt service or to terminate the escrow
established by the LPSC’s rate order.9 Assuming, without
deciding, that the bankruptcy court did have such authority under
§ 105(a), we conclude that in these circumstances the court’s
issuance of such an injunction and termination of the escrow
membership cooperatives, contested its obligation (and its right
under rate regulations) to continue to make payments in service
of its debt during the pendency of its bankruptcy proceeding, and
made these payments into an escrow account. See 72 F.3d at 1308,
1322. The case did not involve a court’s discretion to enjoin a
public utility commission’s consideration of a rate decrease
based on the suspension of debt service or to terminate a
commission’s establishment of an escrow for such funds, and the
decision therefore does not affect our resolution of that issue
in this appeal.
9
Section 105(a) gives bankruptcy courts the equitable power
to issue any order “that is necessary or appropriate to carry out
the provisions” of the Bankruptcy Code, and it is in this section
that bankruptcy courts find their general equitable powers. See
Omni Mfg., Inc. v. Smith (In re Smith), 21 F.3d 660, 665 (5th
Cir. 1994). Those powers, however, “have their limits,” id., and
“can only be exercised within the confines of the Bankruptcy
Code.” Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206
(1988); see Southmark Corp. v. Grosz (In re Southmark Corp.), 49
F.3d 1111, 1116 (5th Cir. 1995) (stating that § 105(a) “does not
authorize the bankruptcy courts to create substantive rights that
are otherwise unavailable under applicable law,” or “to act as
roving commissions to do equity”) (internal quotation marks
omitted); In re Fesco Plastics Corp., 996 F.2d 152, 154 (7th Cir.
1993) (“Under this section, a court may exercise its equitable
power only as a means to fulfill some specific Code provision.
By the same token, when a specific Code section addresses an
issue, a court may not employ its equitable powers to achieve a
result not contemplated by the Code.”) (citations omitted).
12
amounted to an abuse of discretion.10 See Indian Motocycle
Assocs. III Ltd. Partnership v. Massachusetts Hous. Fin. Agency,
66 F.3d 1246, 1249 (1st Cir. 1995) (“A bankruptcy court’s
decision granting or denying injunctive relief pursuant to
Bankruptcy Code § 105(a) is reviewed only for abuse of
discretion.”); Commonwealth Oil Ref. Co. v. United States Envtl.
Protection Agency (In re Commonwealth Oil Ref. Co.), 805 F.2d
1175, 1188 (5th Cir. 1986) (reviewing bankruptcy court’s refusal
to grant stay under § 105(a) for abuse of discretion); see also
Cargill, Inc. v. United States, 173 F.3d 323, 341 (5th Cir. 1999)
(stating that a court abuses its discretion in granting
injunctive relief when it “relies on erroneous conclusions of
law, or . . . misapplies its factual or legal conclusions”).
A. Cajun as a Regulated Utility
We begin our analysis of the bankruptcy court’s injunction
preventing the LPSC from considering a rate decrease based on the
suspension of Cajun’s interest obligation by noting that the
Bankruptcy Code “indirectly suggests continued governmental
10
We emphasize that our determination that the bankruptcy
court abused its discretion is necessarily limited to the
circumstances presented in this appeal. At least one bankruptcy
court has, in effect, intervened in a public utility commission’s
action with respect to rates charged by a debtor. See, e.g., In
re Jal Gas Co., 44 B.R. 91, 93-95 (Bankr. D.N.M. 1984)(enjoining
a rate commission’s order that reduced the debtor’s rate because
the commission’s order was “merely a self-help remedy on the part
of a creditor”). Our disposition of this case does not require
us to determine when, if ever, such an intervention would be
appropriate or what form it would take.
13
regulatory jurisdiction” during the pendency of the bankruptcy
proceeding. Evan D. Flaschen & Michael J. Reilly, Bankruptcy
Analysis of a Financially-Troubled Electric Utility, 59 AM. BANKR.
L.J. 135, 144 (1985). Congress created a specific exception from
the automatic stay of proceedings against the debtor that occurs
upon the debtor’s bankruptcy filing for actions or proceedings by
governmental units to enforce their police and regulatory power.
See 11 U.S.C. § 362(b)(4). Section 1129(a)(6) of the Bankruptcy
Code further provides that any rate change in a reorganization
plan must be approved by governmental regulatory commissions with
proper jurisdiction. See 11 U.S.C. § 1129(a)(6); cf. Frank P.
Darr, Federal-State Comity in Utility Bankruptcies, 27 AM. BUS.
L.J. 63, 89-90 (1989) (stating that a “shift in control” in favor
of public utility commissions in the 1978 Bankruptcy Act,
specifically in § 1129(a)(6), “suggests that the commission
retains significant authority to govern rates throughout the
bankruptcy . . . . [A] regulatory commission retains its
traditional control over rates prior to the finalization of a
plan.”) (footnote omitted).11 Finally, a bankruptcy trustee must
11
Mabey argues on appeal that 11 U.S.C. § 1129(a)(6)
“limit[s] state review of an electric utility’s rates during the
course of a bankruptcy case.” We find no support for such a
narrow reading of § 1129(a)(6). Furthermore, as Flaschen and
Reilly observe, such an argument “ignores the reasons which
mandate [public utility commission] regulation in the first
instance. The [commission] is entrusted to safeguard the
compelling public interest in the availability of electric
service at reasonable rates. That public interest is no less
compelling during the pendency of a bankruptcy than at other
14
“manage and operate the property according to the valid laws of
the State in which such property is situated,” see 28 U.S.C.
§ 959(b), and we agree with our sister circuits that “the import”
of this section is that “‘the general bankruptcy policy of
fostering the rehabilitation of debtors [will not] serve to
preempt otherwise applicable state laws dealing with public
safety and welfare.’” Robinson v. Michigan Consol. Gas Co., 918
F.2d 579, 589 (6th Cir. 1990) (quoting Saravia v. 1736 18th St.,
N.W., Ltd., 844 F.2d 823, 827 (D.C. Cir. 1988)).
The bankruptcy court and the trustee have both recognized
throughout Cajun’s bankruptcy proceeding that Cajun is a
regulated utility and that the LPSC has an obligation under state
law to protect the public interest. The bankruptcy court ruled
in 1996 that “the laws of the state of Louisiana with respect to
the conduct of the rate docket during the chapter 11 proceeding
are neither expressly nor implicitly preempted by the Bankruptcy
Code,” and that “the LPSC is clearly authorized to act during the
Chapter Eleven Proceedings insofar as the rate docket is
concerned.” In fact, the trustee lodged no objection in the
bankruptcy court when, as part of the same rate order we now
consider, the LPSC reduced Cajun’s rates by $21,743,129
immediately, or from approximately 48.9 mills to 45.2 mills per
kilowatt hour, based on various adjustments in Cajun’s expenses
times.” Flaschen & Reilly, supra, at 144.
15
and revenue. See Ex parte Louisiana Pub. Serv. Comm’n, 1996 La.
PUC LEXIS 70, at *35-*38. Nonetheless, the trustee asserts that
“the LPSC is not entitled to lower rates based upon the
suspension of Cajun’s debt service in bankruptcy” and that such a
reduction “would be extraordinary, not traditional, ratemaking,
grounded solely in the happenstance of bankruptcy law.”
Although the Bankruptcy Code suggests that the rate-making
authority of a public utility commission continues during
bankruptcy and the bankruptcy court here has held that the LPSC
continues to have the power to set Cajun’s wholesale rates, the
limits on such authority are unclear, as are the mechanics of how
to deal with an order of a public utility commission that exceeds
any such limits. We are not called upon in this case to define
appropriate boundaries for a public utility commission’s rate-
making authority over a debtor utility. Further, we are not
presented with a case where there is evidence that a public
utility commission’s actions are likely to result in
administrative insolvency or will prevent a bankrupt utility from
successfully reorganizing.12 Rather, it appears that the LPSC
12
The RUS and the Official Committee of Unsecured Creditors
of Cajun argue that the amended rate order “jeopardizes the
prospects for a successful reorganization.” The only evidence
appellees offer on summary judgment that such a problem would
occur, however, is an affidavit of Cajun’s chief financial
officer in which he states that Cajun would become
administratively insolvent if Cajun’s rates were reduced by the
interest expense component and the bankruptcy court were to
subsequently order that interest or other similar payments be
paid upon the secured debt during the bankruptcy proceeding.
16
and appellees disagree as to whether a public utility commission
may properly consider one of the effects of bankruptcy in setting
a debtor utility’s rates. Keeping in mind the role of the LPSC
as a guardian of the public interest and Cajun as a regulated
utility, we proceed to consider this issue.
B. The Interest Quandary
The bankruptcy court relied heavily on its determination
that interest continues to accrue during a bankruptcy proceeding
and that “while the debtor’s obligation with respect to such
accrued interest may well be discharged at some point in time,
that only occurs if and when the debtor obtains such a discharge”
from the bankruptcy court. The bankruptcy court stated that
“[t]he issue of interest on prepetition debt is totally and
completely within the exclusive jurisdiction of this court and
may not be dealt with by the LPSC,” and noted that “the LPSC
Because the amended rate order provides for a refund of the
interest expense collected in escrow to consumers only if the
bankruptcy court discharges Cajun’s obligation to pay
postpetition interest, the contingency that Cajun’s chief
financial officer states may cause Cajun to become
administratively insolvent cannot occur under the amended rate
order. Furthermore, we note from the affidavit that, during the
approximately seventeen months that the escrow was in effect,
Cajun continued to meet its operating expenses without accessing
the interest expense component.
Mabey argues that the creation of an escrow under the rate
order “could create a superpriority administrative claim in favor
of the RUS that would make confirmation of a plan of
reorganization impossible.” The difficulty with this argument is
that it has several premises (some relating to the secured
position of the RUS) that we are simply in no position, on this
record, to evaluate.
17
acknowledged this conclusion . . . [by] removing the 60-day
deadline for determination by this court of the Debtor’s interest
expense liability.”
We agree wholeheartedly with the bankruptcy court’s
determination that a debtor’s obligation with respect to
postpetition interest terminates only “if and when” the debtor
obtains a discharge from the bankruptcy court. See 11 U.S.C.
§§ 727(b), 1141(d). As the Supreme Court stated over eighty
years ago, although as a general rule postpetition interest is
not allowed on undersecured debts, “that is not because the
[debts] had lost their interest-bearing quality during that
period . . . . and if, as a result of good fortune or good
management, the estate proved sufficient to discharge the claims
in full, interest as well as principal should be paid.” American
Iron & Steel Mfg. Co. v. Seaboard Air Line Ry., 233 U.S. 261, 266
(1914); see Kellogg v. United States (In re West Tex. Marketing
Corp.), 54 F.3d 1194, 1203 (5th Cir. 1995) (Smith, J.,
dissenting) (stating that a debtor’s obligation to pay interest
during bankruptcy “is not extinguished, but, for purposes of the
bankruptcy proceedings, is ignored until the time the court
determines whether the debtor’s assets can meet the obligation.
Only upon discharge, see § 727, is the state law obligation to
pay extinguished.”) (footnote omitted).
We fail to understand, however, why the bankruptcy court
determined from these conclusions regarding the timing of the
18
potential discharge of a debtor’s obligation to pay postpetition
interest that an injunction was necessary to carry out the
provisions of the Bankruptcy Code. The court stated that it
“believes the LPSC acknowledged” that the determination of a
debtor’s postpetition interest obligations is “within the sole
and exclusive jurisdiction of the Bankruptcy Court,” and the
amended rate order establishes the escrow “pending a
determination by the United States Bankruptcy Court as to whether
Cajun has an obligation to pay interest expense.” Ex parte
Louisiana Pub. Serv. Comm’n, 1996 La. PUC LEXIS 69, at *2.
Further, in denying appellees’ request for a preliminary
injunction, the bankruptcy court stated that “[t]here appears to
be no risk that [Cajun] will suffer irreparable harm” because the
“net effect of the recommendation of the ALJ . . . is that
portion of the rates paid to Cajun attributable to this interest
factor will be segregated . . . . If, in the final analysis,
these proceeds were improperly collected, a refund to members may
well be in order.” We see no meaningful difference between this
observation and the escrow established by the rate order. The
LPSC does not argue that the funds in escrow should be refunded
immediately to consumers and did not join the Members Committee’s
counterclaim in the bankruptcy court seeking an immediate
determination as to Cajun’s interest obligation during
bankruptcy. Because the LPSC’s amended rate order merely sets
aside and does not purport to make a final disposition of the
19
contested interest expense component, the bankruptcy court’s
conclusion that interest continues to “accrue” postpetition and
that Cajun’s interest obligation terminates only if the
bankruptcy court grants a discharge does not warrant the
injunction that it entered in this appeal. We therefore must
look to the other considerations on which appellees and the
bankruptcy court rely.
C. Breathing Spell
Neither appellees nor the bankruptcy court suggests that any
specific provision of the Bankruptcy Code provides that the
regulation of a bankrupt utility’s rates rests with the
bankruptcy court.13 Cf. Darr, supra, at 64 (noting that “nowhere
13
Mabey does argue in his appellate brief that the LPSC did
not have jurisdiction to enter any order which “deprives or
potentially deprives the estate of its property” because the
bankruptcy court has “exclusive jurisdiction” over Cajun’s assets
and over determinations affecting the value of those assets under
28 U.S.C. § 1334(e). See 28 U.S.C. § 1334(e) (“The district
court in which a case under title 11 is commenced or is pending
shall have exclusive jurisdiction of all of the property,
wherever located, of the debtor as of the commencement of such
case, and of property of the estate.”). In the bankruptcy court,
however, appellees made no mention of 28 U.S.C. § 1334(e) and
asserted that the bankruptcy court had jurisdiction pursuant to
28 U.S.C. § 1334(b). See id. § 1334(b) (providing that “the
district courts shall have original but not exclusive
jurisdiction of all civil proceedings arising under title 11, or
arising in or related to cases under title 11”). If Mabey were
challenging the jurisdiction of the bankruptcy court, we would be
obliged to address his challenge regardless of whether he
asserted it below. Because his argument challenges the
jurisdiction of the LPSC, however, we are not similarly
constrained and we conclude that Mabey waived any argument that
28 U.S.C. § 1334(e) operates to divest the LPSC of jurisdiction
to consider whether Cajun’s wholesale rates are appropriate or
(to the extent that Mabey is making such an argument, which is
20
is it explicitly provided whether the courts or the commissions
are to regulate a utility once a bankruptcy proceeding
commences”). Instead, appellees rely on “fundamental tenets of
bankruptcy law” that “dictate the bankruptcy court’s ruling.”
Specifically, appellees argue that the bankruptcy court properly
relied on 11 U.S.C. § 502(b)(2), 11 U.S.C. § 36214 and the
absolute priority rule in granting them summary judgment and
enjoining the LPSC from considering a rate decrease. Appellees
assert that Cajun is entitled to a “breathing spell” under
§ 502(b)(2) and § 362(a), and that the purpose of such a
“breathing spell” is to “free up” revenues that would otherwise
be used for prepetition debt and interest, thus enhancing the
debtor’s ability to reorganize by paying postpetition
administrative expenses and “by making necessary payments in cash
to priority creditors and sufficient payments to creditors to
induce such creditors to accept a reorganization plan.”15
unclear) to establish the escrow.
14
Appellees do not argue that the LPSC’s consideration of
Cajun’s rates is stayed automatically under § 362, but rather
that § 362, together with § 502(b)(2), is “intended to afford the
debtor an important breathing spell during reorganization” and
that the LPSC’s rate order denied Cajun that “breathing spell.”
15
We are puzzled by appellees’ argument that the bankruptcy
court properly enjoined the LPSC and terminated the escrow to
protect Cajun’s “breathing spell,” and thus “free up” revenues
that would otherwise be used to pay postpetition interest. To
the extent that Cajun is compelled to use these funds to pay
administrative and operating expenses during the pendency of its
bankruptcy proceeding, these funds can hardly be said to be
“free,” and the rate order indicates that escrow funds may be
21
Appellee Mabey’s brief at page 37. Appellees argue that the LPSC
rate order violates the absolute priority rule because it diverts
revenue that would otherwise be subject to the RUS’s secured
claim into an escrow account and, if Cajun eventually obtains a
discharge, it would return that revenue to the members of Cajun.
Finally, appellees contend that any rate decrease based on the
suspension of Cajun’s interest obligation would be a windfall to
its customers “merely by reason of the happenstance of
bankruptcy.”16
We cannot agree with appellees that these “fundamental
tenets” of bankruptcy law provide a proper basis for the
bankruptcy court to exercise any discretion that it may have
under § 105(a) by enjoining the LPSC’s consideration of the
proper impact of the suspension of Cajun’s interest obligation on
its wholesale rates and terminating the escrow provision in the
LPSC’s rate order. Initially, we note that we have previously
explained that the central purpose of 11 U.S.C. § 502(b)(2)’s
suspension of an undersecured debtor’s interest obligations is to
used for “legitimate bankruptcy-related expenses, not recognized
for rate making.” Ex parte Louisiana Pub. Serv. Comm’n, 1996 La.
PUC LEXIS 69, at *2.
16
Even if preventing a windfall for Louisiana consumers
“merely by reason of the happenstance of bankruptcy” were to
provide a sufficient basis for the bankruptcy court’s injunction
under § 105(a), we see no potential for such a windfall when any
refund would be subsequent to the bankruptcy court’s
determination that Cajun has no postpetition interest obligation
and would therefore not use such funds for the purpose for which
they were collected.
22
provide equitable treatment to creditors--“allowing the accrual
of postpetition interest in favor of one creditor would be
‘inequitable’ to other creditors.” United Sav. Ass’n v. Timbers
of Inwood Forest Assocs. (In re Timbers of Inwood Forest
Assocs.), 793 F.2d 1380, 1385 (5th Cir. 1986), aff’d on reh’g,
808 F.2d 363 (1987) (en banc), aff’d, 484 U.S. 365 (1988); see
also Nicholas v. United States, 384 U.S. 678, 683-84 (1966)
(stating that the rule “rests at bottom on an awareness of the
inequity that would result if, through the continuing
accumulation of interest in the course of subsequent bankruptcy
proceedings, obligations bearing relatively high rates of
interest were permitted to absorb the assets of a bankrupt estate
whose funds were already inadequate to pay the principal of the
debts owed by the estate”). Although the effect of suspending
debt service may be to make it possible for the debtor to use
income to pay its current operating expenses and the
administrative expenses of the proceeding, we find no support for
appellees’ claim that § 502(b)(2) is intended to provide the
debtor, a regulated public utility, an unfettered right, vis-a-
vis Louisiana consumers, to build up money to give to its
undersecured and unsecured creditors.17
17
Mabey cites the Seventh Circuit’s opinion in In re Fesco
Plastics Corp., 996 F.2d at 155, and In re Morrissey, 37 B.R.
571, 573 (Bankr. E.D. Va. 1984), as supporting his contention.
These cases simply do not provide any support whatsoever for the
proposition that a regulated debtor’s prices must be preserved
intact throughout a Chapter 11 proceeding so as to build up a pot
23
Appellees’ assertion that Cajun is entitled to a “breathing
spell” to help it reorganize is more properly based on the
automatic stay provision of 11 U.S.C. § 362. See Commonwealth
Oil Ref. Co., 805 F.2d at 1182 (“The purpose of the automatic
stay is to give the debtor a ‘breathing spell’ from his
creditors, and also, to protect creditors by preventing a race
for the debtor’s assets.”); Browning v. Navarro, 743 F.2d 1069,
1083 (5th Cir. 1984) (“The automatic stay is intended to give
‘the debtor a breathing spell from his creditors.’”) (quoting S.
REP. NO. 95-989, at 54-55 (1978), reprinted in 1978 U.S.C.C.A.N.
5787, 5840-41; H.R. REP. NO. 95-595, at 340 (1977), reprinted in
1978 U.S.C.C.A.N. 5963, 6297). Under § 362(a), the filing of a
bankruptcy petition operates as a stay of the commencement or
continuation of a judicial, administrative, or other action or
proceeding against the debtor that was or could have been
commenced before the commencement of the bankruptcy proceeding.
Congress has explicitly provided an exception to the automatic
stay, however, for “the commencement or continuation of an action
or proceeding by a governmental unit . . . to enforce such
governmental unit’s . . . police and regulatory power.” 11
U.S.C. § 362(b)(4).18 Because appellees do not argue that the
for undersecured and unsecured creditors. We have found no cases
suggesting such a rule under § 502(b)(2) or elsewhere.
18
We have previously recognized that significant authority
exists suggesting that courts may properly invoke § 105(a) to
enjoin proceedings that are excepted from the automatic stay
24
rate-making proceeding at issue in this appeal falls within the
automatic stay provided by § 362(a) or outside the exception to
the stay provided by § 362(b)(4), the injunction cannot properly
rest on the “breathing spell” afforded by § 362(a).
D. Absolute Priority Rule
Finally, we conclude that the bankruptcy court’s assertion
that the principles of the absolute priority rule “permeate the
entire chapter 11 case” and that any rate reduction would
“elevate” the members’ equitable interests19 over the interests
under § 362(b)(4). See Commonwealth Oil Ref. Co., 805 F.2d at1188 n.16 (noting that, although “[c]ourts considering the scope
of § 105 have seen it as an avenue available for staying actions
that are found to fall within an exception to the automatic
stay,” a court’s powers under § 105 “are not unlimited.”);
Browning, 743 F.2d at 1084 (“A bankruptcy court has the power to
enjoin proceedings excepted from a § 362 stay under 11 U.S.C.
§ 105[] . . . .”); cf. Javens v. City of Hazel Park (In re
Javens), 107 F.3d 359, 366 (6th Cir. 1997) (“By creating
exceptions for police and regulatory actions, Congress removed
local regulation only from the effect of the automatic stay; it
did not eliminate the bankruptcy court’s power to enjoin the
enforcement of local regulation which is shown to be used in bad
faith.”) (internal quotation marks omitted); Corporacion de
Servicios Medicos Hospitalarios de Fajardo v. Mora (In re
Corporacion de Servicios Medicos Hospitalarios de Fajardo), 805
F.2d 440, 449 n.14 (1st Cir. 1986) (“We reaffirm, however, that a
bankruptcy court does possess the power, in exceptional
circumstances, to enjoin even administrative proceedings that are
exempt from the automatic stay pursuant to section 362(b)(4),
(5).”). Because we conclude that the bankruptcy court abused its
discretion by entering the injunction even if it had proper
authority under § 105(a), however, we do not consider the scope
of a court’s power to enjoin administrative proceedings that are
excepted from the automatic stay.
19
We have previously noted that “there may be some question
as to whether the members’ interests in Cajun constitute ‘equity
interests’ in the strict sense of the term.” Mabey v.
Southwestern Elec. Power Co., 150 F.3d at 515 n.6 (citing Wabash
25
of creditors is similarly insufficient to justify the injunction
that the court entered. By the explicit terms of the amended
rate order, “all amounts refunded to the distribution
cooperatives from the escrow account must be in turn refunded to
consumers.” Ex Parte Louisiana Pub. Serv. Comm’n, 1996 La. PUC
LEXIS 69, at *4. The bankruptcy court’s concern that the LPSC’s
rate order “elevates” the members’ equitable interests and
Mabey’s assertion that the escrow arrangement “violate[s] the
Bankruptcy Code’s distribution scheme” by distributing estate
assets to members are therefore misplaced. See 11 U.S.C.
§ 1129(b)(2)(B)(ii); Bank of Am. Nat’l Trust & Sav. Ass’n v. 203
N. LaSalle St. Partnership, 119 S. Ct. 1411, 1419-22 (1999).
E. Summary
In sum, our careful review of the bankruptcy court’s opinion
and the parties’ arguments leads us to the conclusion that the
bankruptcy court abused its discretion by enjoining the LPSC from
considering a rate decrease based on the suspension of Cajun’s
interest obligation during the pendency of the bankruptcy
proceeding and by terminating the escrow established by the
LPSC’s rate order. The LPSC carefully crafted its rate order so
that it will not infringe on the bankruptcy court’s ultimate
determination as to whether Cajun’s postpetition interest will be
Valley Power Ass’n, 72 F.3d at 1313). For the reasons set forth
in the text, however, the characterization of the members’
interests as equity interests or debt claims does not affect our
analysis in this appeal.
26
discharged, and it has expressed a reasonable concern regarding
the appropriateness of Cajun’s rates during what has already been
a lengthy bankruptcy proceeding.
Mabey, the RUS and the Official Committee of Unsecured
Creditors of Cajun have asked the bankruptcy court for an order
prohibiting the LPSC from even thinking about a central feature
of this (and any other) reorganization proceeding, namely, the
suspension of interest payments on prepetition debt. What is
reality for everyone else involved in this case is something that
the LPSC, charged with protecting the public interest, is to be
precluded from considering. This amounts to an order that would
prohibit the LPSC from exercising the discretion that it is
charged by Louisiana law with exercising. Whatever may be the
limits on the LPSC’s discretion imposed by the Bankruptcy Code,
we see no sufficient basis on this record for the bankruptcy
court’s injunction or its termination of the escrow. We
therefore reverse the district court’s order affirming the
bankruptcy court’s grant of summary judgment in favor of
appellees and vacate the injunction.
27
On appeal to this court,20 Mabey argues that the escrow
account cannot be properly reinstated, however, because the LPSC
failed to seek a stay from the district court21 and, relying on
the Louisiana Supreme Court’s decision in South Cent. Bell Tel.
Co. v. Louisiana Pub. Serv. Comm’n, 594 So. 2d 357 (La. 1992),
Mabey asserts that “funds earned by a utility under a set rate
are the utility’s property until the rate changes, and cannot be
taken back.” See 594 So. 2d at 359 (“Consequently, the revenues
collected under the lawfully imposed rates become the property of
the utility and cannot rightfully be made the subject of a
refund.”). We find these arguments meritless. The amended rate
order clearly reduces Cajun’s wholesale rate by the interest
component, but permits the collection of the interest component
in escrow subject to refund, and thus the interest component
cannot be said to be part of the “lawfully imposed rate.”
Cajun’s only role with respect to these funds has been to
20
Mabey stated in his motion to the bankruptcy court
seeking a preliminary injunction of the LPSC’s consideration of a
rate decrease that the LPSC “will suffer no harm if the requested
injunction is granted” because “[t]he funds will continue to be
deposited into the Excess Funds Account, pursuant to the
[bankruptcy court’s] Cash Collateral Order. If and when the
Court were to determine that Cajun’s members are entitled to the
Excess Funds, the [funds] could be paid to the members at that
time. . . . [T]he LPSC and the Members Committee are not going to
and need not lose any right [they] have to recover the alleged
overcharges.”
21
We find no support for Mabey’s suggestion that the LPSC
waived any claim over such disbursed funds by seeking a stay of
the bankruptcy court’s order terminating the escrow in the
bankruptcy court rather than the district court.
28
function as an escrow agent with bare legal title and an
exceedingly remote contingent interest.
We therefore remand the case to the district court, and by
reference to the bankruptcy court, to reinstate the escrow with
the funds that were collected prior to its termination in April
1998, together with those funds that have been collected since
that time and those funds that will hereafter be collected
pursuant to the amended rate order.
III. CONCLUSION
For the foregoing reasons, we REVERSE the district court’s
order affirming the bankruptcy court’s grant of summary judgment
in favor of appellees, VACATE the injunction, REINSTATE the
escrow, and REMAND the case to the district court, and by
reference to the bankruptcy court, for further proceedings
consistent with this opinion. Costs shall be borne by appellees.
29