Talen Energy Supply, LLC and Norfolk Southern Railway Company <b><font color="red">File only in Remaining Case 22-90339.</font></b>

IN THE UNITED STATES BANKRUPTCY COURT April 06, 2023

FOR THE SOUTHERN DISTRICT OF TEXAS Nathan Ochsner, Clerk

HOUSTON DIVISION

IN RE: §

§ CASE NO: 22-90054

TALEN ENERGY SUPPLY, LLC, et al., §

Debtors. § Jointly Administered

§ CHAPTER 11

MEMORANDUM OPINION

Talen Energy Supply, LLC and its affiliated debtors request that the Court retroactively

reject certain executory contracts. If the Court were to grant the Debtors’ motion, various

counterparties to those executory contracts would fail on their asserted administrative expense

claims. The Debtors argue that these counterparties are not entitled to administrative expense

claims. The Court agrees. Because the counterparties are only entitled to unsecured claims, the

date of rejection does not affect the treatment of the counterparties’ claims, and the Debtors’

motion for a retroactive rejection date is moot.

BACKGROUND

Talen is one of the largest energy and power generation companies in North America.

(ECF No. 15 at 3). Talen and its affiliated debtors filed bankruptcy on May 9, 2022 (the “Petition

Date”). (ECF No. 1). On May 10, 2022, the Debtors moved for authorization to reject executory

contracts. (ECF No. 15). In particular, the Debtors sought to reject: (i) electricity purchase

agreements between Talen Energy Marketing, LLC (“TEM”) and various counterparties (“Retail

Purchase Agreements”); and (ii) related broker agreements (“Retail Broker Agreements” and

together with the Retail Purchase Agreements, the “Retail Agreements”) because TEM lost money

supplying electricity under the Retail Purchase Agreements. (ECF No. 15 at 1–2, 5). The Debtors

request that Retail Agreements be rejected “effective nunc pro tunc to the Petition Date.” (ECF

No. 15 at 11).

Energy brokers Richards Energy Group, Inc. and URA, Inc., and energy purchasers

Masonic Villages of the Grande Lodge of Pennsylvania and Conestoga Wood Specialties Corp.

(the “Respondents”), object to the Debtors’ motion.1 (ECF Nos. 342; 344). The Respondents

argue that the equities weigh against retroactive rejection because the Debtors failed to provide

reasonable notice of intent to reject prior to the Petition Date. (ECF Nos. 342 at 1, 3; 344 at 1). In

addition, the Debtors allegedly provided electricity below market rates through hedge contracts.

(ECF Nos. 342 at 4; 344 at 4). The Debtors allegedly sold those hedge contracts at a significant

profit prior to filing bankruptcy and distributed the proceeds to an affiliated non-Debtor entity.

(ECF Nos. 342 at 4; 345 at 5).

On June 15, 2022, the Debtors proposed to reject the Retail Purchase Agreements as of

certain “Pick-Up Dates” instead of the Petition Date. (ECF No. 554 at 2). A Pick-Up Date is when

“a retail counterparty’s electric account has been transitioned to service with the Public Utility.”

(ECF No. 554 at 2). The Debtors allege that they transitioned to the Public Utilities post-petition

in accordance with each state’s public utility commission’s rules and regulations or tariff rules for

transitioning electricity accounts. (ECF No. 15 at 6). The Debtors also allege that they could not

have notified the Respondents prior to the Petition Date because doing so would have risked

harming TEM. (ECF No. 554 at 8).

The parties argued the motion on June 17, 2022. The Court asked the parties to brief

whether the Debtors’ breach of the Retail Agreements gives rise to administrative claims,2 which

1 Other parties also objected to the Debtors’ motion. See ECF Nos. 230; 332; 334; 335; 341; 387; 421; 428;

439; 444; 458; 485; 528; 582; 583; 584; 585; 586. By the Court’s invitation for any party to submit post-hearing

briefing and the silence of these objecting parties, the Court deems them to rely on the Respondents’ post-hearing

briefing.

2 THE COURT: What I think the law is -- and this is what I need you to brief for me -- is that unless

that contract is assumed, that the Debtors’ post-petition breach of a pre-petition contract is merely

an unsecured claim, which means that the outcome is the same no matter what date we pick, the

economic outcome is the same. That’s the briefing question.

could determine whether the Court needs to decide the nunc pro tunc motion.3 (ECF No. 662 at

44–45). Following the hearing,4 the Court entered an order stating:

[T]he Retail Purchase Agreements set forth on Schedule 1 and the Retail Broker

Agreements set forth on Schedule 2 are hereby rejected as of June 17, 2022 (the

“Rejection Date”); provided, that the Rejection Date may be deemed to be an

earlier date upon a subsequent order of the Court after further briefing, which

briefing shall be due on July 1, 2022 at 5:00 p.m. (Prevailing Central Time) or such

later date as determined by the Court.

[Counsel for the Respondents]: Yes, Your Honor. And I would agree with you, we would like the

opportunity to brief that. We believe that the Debtors’ obligations post-petition but pre-rejection

or assumption continue under the contract and that their failure to provide the [electricity] post-

petition but pre-assumption or pre-rejection would give rise to a claim so I think that is our exact

point.

THE COURT: Just to be sure that you’re briefing everything, I agree it gives rise to a claim, but I

think it’s a claim that’s a pre-petition claim. And are you telling me that you think it gives rise to

a claim that is administrative in nature?

[Counsel for the Respondents]: We do, Your Honor.

THE COURT: Okay. That’s the briefing question.

(ECF No. 662 at 44–45) (emphasis added).

3 The Court made clear that the post-trial briefing was meant for the Respondents to explain how they are

entitled to administrative claims:

THE COURT: . . . [I]f, in fact, I issue an opinion up front that addresses that question, it goes much

further than what you’re even asking me to do. It may be against [the Debtors] and you may be the

one appealing it instead of [the Respondents], but we get it all addressed up front. So if I determine,

for example, that it is administrative and I issue an opinion that says this does matter, there is an

issue before me because that could give rise to an administrative claim and I’m only going to allow

the rejection . . . as of entry date, then he would need to appeal that up front and we resolve it all.

If, on the other hand, my initial inclination that it’s all a pre-petition claim is right, I put that in the

opinion at which point they’re going to need to appeal it rather than pushing this off and having 80

claim objections that come later. So I would just rather confront the problem now. I don’t see any

downside in confronting it now.

(ECF No. 662 at 45–46).

4 The declaration of Ryan Omohundro, an advisor to the Debtors, was admitted into evidence without

objection at the hearing. (ECF Nos. 662 at 35; 542-4).

(ECF No. 616 at 2). The Respondents and the Debtors filed post-hearing briefs. (ECF Nos. 831;

834). The Respondents focus on their potential entitlement to administrative claims and the

impropriety of nunc pro tunc relief. (ECF No. 831). The Debtors focus on the Respondents’

inability to assert administrative claims. (ECF Nos. 834; 835). The Respondents then objected

that the Debtors’ argument is improper because the underlying rejection motion seeks nunc pro

tunc relief, not a finding that the Respondents cannot assert administrative claims. (ECF No. 906

at 3). The Debtors filed a reply, and the Court took the matter under advisement. (ECF No. 1012).

JURISDICTION

The Court has jurisdiction over this matter under 28 U.S.C. § 1334. This matter is a core

proceeding under 28 U.S.C. § 157(b)(2)(A). Venue is proper in this District under 28 U.S.C. §§ 1408

and 1409.

DISCUSSION

The Respondents do not meet their burden to establish that they are entitled to

administrative expense claims, so the Debtors’ nunc pro tunc motion is moot.

I. CONSIDERING ENTITLEMENT TO ADMINISTRATIVE EXPENSE CLAIMS NOW

The Respondents argue that it is premature to discuss their entitlement to administrative

expense claims. This argument contradicts the substance of the June 17, 2022 hearing. At the

hearing, the Respondents asked for the opportunity to brief whether they are entitled to

administrative expense claims. (ECF No. 662 at 45). The Court clearly informed the parties it

intended to determine whether the Respondents could be entitled to administrative expense claims

based on the post-hearing briefing because such a finding would inform the necessity of ruling on

the nunc pro tunc motion. (See ECF No. 662 at 39–41, 45–46). The Court also informed the

parties that the Court’s ruling would be universal: “Anyone that doesn’t brief, I’m not going to

decide this question differently for people that brief and don’t brief. It’s going to be a universal

ruling . . . .” (ECF No. 662 at 56). No party objected then or in the initial post-hearing briefing.

Only after the Debtors filed their post-hearing briefing in which they argue that the Respondents

are unable to make administrative expense claims did the Respondents object. The Respondents

were given a full opportunity to argue that they are entitled to administrative expense claims. The

Respondents’ contention that “[t]he Rejection Date is the sole issue before the Court” is wrong in

light of the June 17, 2022 hearing. Entitlement to administrative expense claims is properly before

the Court in the context of the nunc pro tunc motion.5

II. ENTITLEMENT TO ADMINISTRATIVE EXPENSE CLAIMS

Under 11 U.S.C. § 507(a), administrative expenses under 11 U.S.C. § 503(b) are given

priority over all other unsecured claims other than domestic support obligations and certain trustee

expenses not relevant in this case. 11 U.S.C. § 507(a). The Respondents have the burden of

showing that are entitled to administrative expense claims. Nabors Offshore Corp. v. Whistler

Energy II, L.L.C. (In re Whistler Energy II, L.L.C.), 931 F.3d 432, 441 (5th Cir. 2019) (“The

claimant seeking administrative expenses bears the burden of proof.” (citing Toma Steel Supply,

Inc. v. TransAmerican Nat. Gas Corp. (In re TransAmerican Nat. Gas Corp.), 978 F.2d 1409, 1416

(5th Cir. 1992))).

Section 365 of the Bankruptcy Code governs rejection of executory contracts and expired

leases. The parties agree that the Retail Agreements are executory contracts and that the Debtors

rejected the Retail Agreements. Rejection of an executory contract constitutes breach of the

contract “immediately before the date of the filing of the petition.” 11 U.S.C. § 365(g)(1); Mission

5 The Respondents also argue that “[t]he relief the Debtors and the UCC would like the Court to take would

likely constitute an advisory opinion, as Respondents have not filed an application for administrative expenses yet.”

(ECF No. 906 at 3). But some parties to the Retail Agreements, including Respondents Conestoga (Claim No. 1870)

and Masonic (Claim No. 1879), have submitted claims referencing entitlement to administrative expense status for

breach of contract damages under the Retail Agreements. (See also Claim Nos. 592; 1849; 2114).

Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652, 1661 (2019) (“[A] rejection is a

breach.”). A party aggrieved by a rejected contract may assert a general unsecured claim for

damages. Id. at 1658 (“By thus giving the counterparty a pre-petition claim, Section 365(g) places

that party in the same boat as the debtor’s unsecured creditors, who in a typical bankruptcy may

receive only cents on the dollar.” (citing N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 531–32

(1984))); 11 U.S.C. § 502(g)(1); see Pearl-Phil GMT (Far E.) Ltd. v. Caldor Corp., 266 B.R. 575,

582 (S.D.N.Y. 2001) (“[C]ourts consistently hold that a post-petition breach of a pre-petition

contract gives rise only to a pre-petition claim.” (citing In re Riodizio, Inc., 204 B.R. 417, 424 n.

6 (Bankr. S.D.N.Y. 1997))). The Respondents’ claims are simply unsecured claims. Their claims

are not elevated to administrative expense status because they are not “actual, necessary costs and

expenses of preserving the estate” and they do not fall within the exception for damages inflicted

on innocent third parties through a trustee’s operation of a bankruptcy estate. See Reading Co. v.

Brown, 391 U.S. 471 (1968).

A. Actual, Necessary Costs And Expenses Of Preserving The Estate

Administrative expense priority exists to address a specific business problem. “Once

bankruptcy proceedings are underway, ‘[t]hird parties might refuse to extend credit to debtors-in-

possession for fear that their claims would not be paid.’” Whistler, 931 F.3d at 441–42

(quoting TransAmerican, 978 F.2d at 1416). Thus, administrative priority encourages third parties

to provide goods and services to the debtor-in-possession so that it may continue its business and

generate funds with which to pay pre-petition creditors. See id. at 442. Consistent with that policy,

administrative expenses under § 503(b)(1)(A) include “the actual, necessary costs and expenses of

preserving the estate.” In general, an “‘actual and necessary cost’ under section 503(b)(1)(A) . . .

must have arisen post-petition and as a result of actions taken by the trustee that benefitted the

estate.” Total Minatome Corp. v. Jack/Wade Drilling, Inc. (In re Jack/Wade Drilling, Inc.), 258

F.3d 385, 387 (5th Cir. 2001) (citing TransAmerican, 978 F.2d at 1416)). “Section

503(b)(1)(A) claims, therefore, generally stem from voluntary transactions with third parties who

lend goods or services necessary to the successful reorganization of the debtor’s estate.” Id. (citing

TransAmerican, 978 F.2d at 1415).

To qualify as an administrative expense, the goods or services must have been delivered or

provided pursuant to a post-petition transaction; “it is not enough that payment becomes due after

the petition date if the transaction was entered into with the debtor prepetition.” In re Northstar

Offshore Grp., LLC, 628 B.R. 286, 299 (Bankr. S.D. Tex. 2020) (quoting 4 COLLIER ON

BANKRUPTCY ¶ 503.06[3][a] (Richard Levin & Henry J. Sommers eds., 16th ed.); see Berliner

Handels-Und Frankfurter Bank v. E. Tex. Steel Facilities, Inc., (In re E. Tex. Steel Facilities, Inc.),

117 B.R. 235, 242 (Bankr. N.D. Tex. 1990) (“[T]he Court looks to the time the agreement was

consummated, not the time which the performance was made. ‘It is established that a debt is not

entitled to priority as a cost and expense of administration simply because the claimants’ right to

payment arises after the debtor-in-possession has taken some action.’” (quoting Cramer v.

Mammoth Mart, Inc. (In re Mammoth Mart, Inc.), 536 F.2d 950, 955 (1st Cir. 1976))).

The Retail Agreements are pre-petition contracts for which the Debtors (as debtors-in-

possession) gave notice of rejection on the first day of bankruptcy. Although the Debtors

continued performing under the Retail Purchase Agreements until the Pick-Up Dates, they did so

because it would have violated state rules and regulations to cease performance any earlier. In any

event, the Respondents seek administrative expense status for the breach of contract damages

under the Retail Purchase Agreements incurred after the Pick-Up Dates. Regarding the Retail

Broker Agreements, the Debtors assert, and the Respondents do not dispute, that the unpaid fees

are for services performed prior to the Petition Date. (ECF No. 1012 at 4). The Retail Agreements

are not post-petition transactions.

The issue of whether the debtor-in-possession engaged in post-petition activity for the

purpose of benefitting the estate is “a way of testing whether a particular expense was truly

‘necessary’ to the estate: If it was of no ‘benefit,’ it cannot have been ‘necessary.’” Northstar, 628

B.R. at 299 (quoting Tex. v. Lowe (In re H.L.S. Energy Co. Inc.), 151 F.3d 434, 437 (5th Cir.

1998)); see also TransAmerican, 978 F.2d at 1416 (“The words ‘actual’ and ‘necessary’ have been

construed narrowly: the debt must benefit the estate and its creditors.” (quoting NL Indus., Inc. v.

GHR Energy Corp., 940 F.2d 957, 966 (5th Cir. 1991), cert. denied, 502 U.S. 1032 (1992)))

(cleaned up). The focus is on the benefit to the bankruptcy estate and not the loss to the creditor.

Whistler, 931 F.3d at 442–43 (“[A]n administrative priority claim ‘must have arisen from a

transaction with the debtor in possession,’ as opposed to the pre-petition debtor.” (quoting Lasky

v. Phones for All, Inc. (In re Phones for All, Inc.), 288 F.3d 730, 732 (5th Cir. 2002))).

There is no evidence that the Respondents provided any benefit to the estates under the

Retail Agreements after the Pick-Up Dates. Indeed, the Debtors immediately sought to reject the

Retail Agreements because they were losing money on the Retail Purchase Agreements. (ECF

No. 542-4 at 5–6). Continued performance under the Retail Purchase Agreements would have

resulted in net cash losses of approximately $500,000,000.00 on an undiscounted basis between

May 2022 through the end of 2025, approximately $217,000,000.00 of which was “expected to

crystallize” between May 2022 and October 2022. (ECF No. 542-4 at 5–6). Even if the Debtors

lost money because they exited hedging positions pre-petition, the Respondents still did not

provide any benefit to the estates by participating in a contract in which the Debtors would lose

significant sums. And there is no benefit to continuing the Retail Broker Agreements if the Debtors

intended to discontinue performance under the Retail Purchase Agreements. The Respondents

provided no post-Pick-Up Date benefit that was necessary to the preserving the estates. These

claims do not fit within the usual definition of “actual, necessary costs and expenses of preserving

the estate.”

B. The Reading Exception

Actual and necessary costs are not just the costs without which rehabilitation would be

impossible. Reading, 391 U.S. at 483. Indeed, administrative expense claims may arise from

damages resulting from the wrongdoing of a trustee or entity acting as trustee. Id. at 485

(“[D]amages resulting from the negligence of a receiver acting within the scope of his authority as

receiver give rise to ‘actual and necessary costs’ of a Chapter XI arrangement.”); see Al Copeland

Enters. v. Tex. (In re Al Copeland Enters., Inc.), 991 F.2d 233, 238 (5th Cir. 1993)

(“[A]dministrative expenses entitled to first priority status are not necessarily confined to those

enumerated at 11 U.S.C. § 503(b).’” (quoting In re Flo-Lizer, Inc., 107 B.R. 143, 145 (Bankr. S.D.

Ohio 1989), aff’d, 916 F.2d 363 (6th Cir.1990))); Jack/Wade Drilling, 258 F.3d at 387 (“When a

third party is damaged by the wrongful conduct of a receiver in the course of operating the debtor’s

estate, however, the Court concluded that it would be unfair to force that party to share equally

with those creditors for whose benefit the estate was being operated.” (citing Reading, 391 U.S. at

478)).

In Reading Co. v. Brown, the Supreme Court held that tort claims arising from the

bankruptcy receiver’s negligence to be actual and necessary costs of the bankruptcy despite the

lack of an actual benefit to the estate. Reading, 391 U.S. at 485. The Supreme Court recognized

the statutory objective of “fairness to all persons having claims against an insolvent,”6 but

6 There is a general presumption in bankruptcy favoring equality in distribution. Jack/Wade Drilling, 258

F.3d at 387–88 (quoting Nathanson v. NLRB, 344 U.S. 25, 29 (1952)).

determined that it would be unfair to treat a third party damaged by the wrongful conduct of a

receiver in the course of operating the debtor’s estate the same as creditors for whose benefit the

estate was being operated. Id. at 477–78 (finding that the “petitioner did not merely suffer injury

at the hands of an insolvent business: it had an insolvent business thrust upon it by operation of

law.”). Notably, the Fifth Circuit identified fairness as the principle underlying the Reading

exception, not a trustee’s wrongdoing:

We do not hold that a claimant must necessarily show a wrongful act committed in

the course of a trustee’s operation of a business in an attempt to improve the

position of the existing creditors in order to obtain administrative expense priority

under the Reading exception. We simply hold that, in this case, fairness does not

compel the granting of administrative priority to TMC’s claim for attorney fees.

The driving force behind the Supreme Court's decision in Reading was the great

injustice that would result to the claimant if it were denied its right to recover its

fire damages; the real result of forcing it to collect a pro rata share of the estate with

the existing creditors.

Jack/Wade Drilling, 258 F.3d at 390 n.4.

The potential unfairness in Reading does not exist in this case. The Debtors rejected

executory contracts they were permitted to reject using their sound business judgment. And the

Debtors did not leave any party in the lurch by immediately ceasing their electricity supply.

Instead, the Debtors transitioned the Respondents to certain Public Utility providers while

following state rules and regulations for transitioning electricity accounts. The Debtors continued

to sell the electricity at unfavorable rates under the Retail Purchase Agreements during this time.

Following the Pick-Up Dates, the Respondents were back in the public markets, but (other than

breach of contract damages) they were not damaged. There is no equitable reason that the

Respondents should be entitled to better treatment than other unsecured creditors. And the

Respondents’ simple reference to Copeland as the Fifth Circuit “extend[ing] the allowability of

administrative expenses which did not benefit the estate in the normal sense” does nothing to

change this reality.7 (See ECF No. 831 at 6).

C. 11 U.S.C. § 363(d)(3)

The Respondents compare § 365(d)(3)’s command to “perform all obligations related to

any unexpired lease of nonresidential real property until it is assumed or rejected” with §365(g) as

evidence of a “pre- and post-petition distinction.” (ECF No. 831 at 3). The Respondents admit

that with respect to executory contracts (as distinct from unexpired leases of nonresidential real

property), “a § 365(g)(1) rejection similarly constitutes a pre-petition breach, conferring a claim

for unsecured damages.” However, the crux of the Respondents’ argument rests upon a cite

describing a “limbo-like state” for executory contracts pre-rejection. (ECF No. 831 at 3–5);

Sumitomo Tr. & Banking Co., Ltd., v. Holly’s, Inc. (In re Holly’s, Inc.), 140 B.R. 643, 672 (Bankr.

W.D. Mich. 1992). Yet the Respondents only describe these administrative expense rights as

“potential” rights. (ECF No. 831 at 2–6). They do not explain how those administrative expense

rights actually arise.

7 The Fifth Circuit has declined to grant administrative expense status to non-defaulting parties to a contract

under the Reading exception without the potential for injustice:

TMC’s damages, however, did not stem from any act by the trustee that could be considered either

as wrongful or as unilateral as that which the Court considered in Reading. TMC chose to deal with

Jack/Wade prior to the bankruptcy and voluntarily entered into the contract on which the trustee

based his lawsuit. We admit that TMC was likely unaware that Jack/Wade would be unable to meet

its financial obligations. Contracting parties, however, are expected to understand the risks

associated with making agreements with others. The degree of “innocence” which contributed to

the extreme injustice that would have resulted in Reading does not seem to be present in the present

case.

Jack/Wade Drilling, 258 F.3d at 390. Moreover, in Copeland, the Fifth Circuit determined that the interest on state

sales tax revenues the debtor-in-possession wrongfully withheld should be classified as administrative expenses.

Copeland, 991 F.2d at 240. This sort of wrongdoing, and inherent injustice by the failure to grant administrative

expense status, is not present here.

The Court requested briefing so the Respondents could describe how those “potential”

administrative expense rights come to be: “I think it’s a claim that’s a pre-petition claim. And are

you telling me that you think it gives rise to a claim that is administrative in nature? . .. That’s the

briefing question.” (ECF No. 662 at 45). The Respondents’ argument that they may be entitled

to administrative expense status because landlords of unexpired leases of nonresidential real

property are sometimes so entitled is not persuasive. This case does not involve landlords and

tenants who attempt to benefit from a pre-rejected nonresidential lease. Here, the Debtors

promptly informed the Respondents of their intent to reject the Retail Agreements on the first day

of the bankruptcy case. The Debtors then transitioned the Respondents to new electricity suppliers

on the Pick-Up Dates. It is insufficient to simply state that “contract claims are not without

statutory rights, as that ‘gap period’ may give rise to an administrative expense application under

§ 503(b)” and hope that an analogy can be drawn to the treatment landlords receive under § 365(d).

(See ECF No. 831 at 4). Far more was required.

CONCLUSION

A separate order will be entered.

SIGNED 04/06/2023

—~

fff

Marvin Isgur

United States Bankruptcy Judge

12/12