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

> United States Bankruptcy Court, S.D. Texas · April 6, 2023

URL: https://www.frixlaw.com/law-library/cases/10462724

## Case

- **Court:** United States Bankruptcy Court, S.D. Texas
- **Decided:** April 6, 2023
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10462724. Public record. Not legal advice.