Opinion ID: 15681
Heading Depth: 2
Heading Rank: 2

Heading: Payments by SWEPCO to the CCM

Text: Sometime prior to November 12, 1996, the date that the bankruptcy court approved all disclosure statements of the plan proponents, SWEPCO offered to pay certain legal fees of the CCM in connection with pursuing the SWEPCO Plan and in connection with an adversary proceeding initiated by the CCM in which it sought a declaration that the All-Requirements Contracts are void or assignable only to a party of the CCM members’ choosing. This offer is evidenced by a memorandum written by David Kleiman, who at the time was the CCM’s attorney, to the CCM members, which provides as follows: I previously advised you that SWEPCO had offered to subvent certain expenses of the Members Committee. Attached is their formal proposal to do so. The only condition is that the members will reimburse SWEPCO if we support another Plan. This seems fair. If we decide to support another Plan, we can negotiate for that Plan proponent to reimburse our expenses. Please indicate your acceptance or rejection of this proposal. Attached to the memorandum was an unsigned draft letter from SWEPCO’s counsel dated November 12, 1996, stating the following: . . . [T]he Members Committee (hereinafter referred to as “Members”) and SWEPCO have mutual and joint interests in pursuing the Joint Plan of Reorganization and Members’ adversary proceeding. The pertinent contract issues . . . will be prominent issues throughout the confirmation process. Based upon the significance of these legal issues to our Joint 4 Plan and in light of the substantial costs continuing to accrue as a result of the Members pursuing these legal issues, SWEPCO is prepared to assist the Members by subvention of certain costs associated with these efforts. The following is a suggested approach, subject to our joint approval. First, SWEPCO has previously offered to reimburse the Members for expenses in the reorganization of up to $1 million, payable solely in the event our Plan of Reorganization is successful. This offer remains in force and effect. On a monthly basis, SWEPCO also offers to pay the percentage set forth below of specified reasonable fees and expenses incurred by the Members Committee in connection with the confirmation and adversary proceeding. SWEPCO suggests that the payment be limited to 50% of the reasonable expenses of [the CCM’s legal fees incurred beginning in September 1996]. In addition to these costs and expenses, SWEPCO would agree to pay for any expert witnesses jointly approved in advance. The Members may retain any expert they desire, at the Members’ expense. This agreement recognizes that the Joint Plan is in the best interest of the Members, SWEPCO and the ratepayers and the purpose of this agreement is to jointly support our Plan of Reorganization. In the event the Members abandon the exclusive support of the Joint SWEPCO/Members[] Plan, then the Members will reimburse SWEPCO all of said costs paid by SWEPCO pursuant to our agreement within 30 days of written notice from SWEPCO. SWEPCO’s commitment may be terminated in SWEPCO’s sole discretion by SWEPCO providing the Members written notice and SWEPCO’s obligation to pay shall continue up to the date of written notice. The Members have no reimbursement obligation in the event of termination by SWEPCO, other than the obligation to reimburse SWEPCO in the event of abandonment of the exclusive support of the Members/SWEPCO[] Plan. The record does not reflect that any of the CCM members accepted this offer. On November 12, 1996, the bankruptcy court approved a master 5 disclosure statement drafted by the Trustee discussing Cajun and the reorganization in general as well as a supplemental disclosure statement from each plan proponent. SWEPCO’s supplemental disclosure statement contains a section styled “Summary of Transactions to Occur Outside the Plan,” which provides in pertinent part as follows: In addition, SWEPCO and the Members have agreed that, in the event the Plan is confirmed and consummated, as soon as practicable after the closing of the transaction whereby [SWEPCO’s affiliate] acquires the Acquired Assets, SWEPCO shall reimburse the Members that are constituents of the Members’ Committee for their reasonable attorneys fees and expenses incurred in this bankruptcy proceeding, not to exceed $1 million in the aggregate. In addition, SWEPCO may agree to pay certain expenses of the Members Committee in regard to certain litigation and the plan confirmation process. By the December 6, 1996 voting deadline, the CCM members had voted overwhelmingly for the SWEPCO Plan and the Enron Plan and overwhelmingly against the Trustee’s Plan. The vast majority of the CCM members listed the SWEPCO Plan as their first preference and the Enron Plan as their second preference; the Trustee’s Plan received no preferential support from the CCM members. Confirmation hearings before the bankruptcy court began on December 16, 1996. That week, Southwest Louisiana Electric Membership Corporation (SLEMCO) and Pointe Coupee Electric Membership Corporation (Pointe Coupee), two members of the CCM, announced in open court that they wished to withdraw their support of the SWEPCO Plan and to change their vote and 6 preference to the Trustee’s Plan. Concordia Electric Cooperative, Inc., another CCM member, shortly followed suit. Thereafter, the CCM was reconstituted to include only seven members. On January 2, 1997, SLEMCO filed a motion to disqualify David Kleiman and his law firm, which had represented the CCM members throughout the bankruptcy, because of a conflict of interest based upon Kleiman’s prior representation of SLEMCO. On January 7, 1997, the bankruptcy court granted SLEMCO’s motion. On the evening of January 7, 1997, SWEPCO’s president, Mike Smith, met with the CCM members who had not withdrawn support for the SWEPCO Plan and offered to pay them $1 million in two $500,000 installments, one of which was payable immediately. The terms of the payments were set forth in a letter dated January 9, 1997 from SWEPCO’s counsel to David Kleiman that provided in relevant part as follows: In light of the action by SLEMCO wherein the Members must now seek other bankruptcy counsel, the Members and the Members’ Committee will incur very substantial transition costs. This will not only require that new bankruptcy counsel spend substantial time in reviewing this long-standing and complicated case, but that your firm take all steps necessary for there to be an orderly and effective transition. These additional costs impose an even greater burden on the cooperatives. In order to assist the Members in paying expenses previously incurred in this bankruptcy proceeding and particularly, for expenses to be incurred during the transition, SWEPCO has agreed to pay and/or reimburse the Members $1 million. These funds will be provided in two equal payments with the first payment provided immediately after receipt of the required agreements by the participating cooperatives 7 and the second payment within approximately one month. These funds will be provided to the Members’ Committee and the Members’ Committees [sic] will distribute the funds as determined appropriate by the Committee. One other proponent has offered to reimburse each of the Member cooperatives expenses. In the event any Member supports another plan or receives reimbursement from any other proponent, then the Member cooperative agrees to promptly reimburse SWEPCO for the respective expenses paid by SWEPCO and received by such Member. The cooperative also agrees to use its best efforts to obtain reimbursement from any other proponent, in the event the said cooperative elects to endorse another plan. SWEPCO acknowledges and agrees that the Members and SWEPCO must and will continue to act in the best interest of their respective ratepayers and Members. We recognize the ongoing financial pressure that has been applied to the Members, particularly in light of the removal of counsel and the incurrence of transition costs, and this offer is intended to address these concerns and allow the parties to continue to pursue the serious bankruptcy issues. I would appreciate it if each Member would acknowledge their agreement to the terms and provisions contained herein in writing via separate correspondence. This agreement is confidential and shall not be disclosed to any third parties without the mutual consent of the parties or as required by law. Some, but not all, of the letters sent out to the CCM members contained a footnote, added at the direction of Kleiman, at the end of the second paragraph quoted above that provided as follows: However, in the event of an adverse court ruling such that the SWEPCO/[]Members Committee Plan is not selected, but rather a different Plan is selected and that Plan proponent does not reimburse the Members’ attorneys’ fees and expert fees, the Members will not have to reimburse SWEPCO. On January 9, 1997, Kleiman also sent a memorandum to the 8 CCM members stating the following: You will recall that [SWEPCO] committed to a payment to the seven (7) Members that continue to support SWEPCO in the total sum of $1 million. The only condition is that the Members will use their best efforts to have that amount repaid in the event that they support a different plan proponent at some date in the future. On January 16, 1997, Kleiman faxed to SWEPCO’s counsel the consent forms whereby the CCM members accepted the terms of the January 9, 1997 letter. The consent forms were accompanied by a letter from Kleiman to SWEPCO’s counsel stating Kleiman’s understanding that the January 9, 1997 letter agreement was to be modified by adding the following text to the end of the paragraph in the letter where Kleiman had previously requested the addition of the footnote discussed above: In the event of an adverse court ruling such that the SWEPCO/[]Members Committee Plan is not approved by the court, but rather a different plan is approved by the court, and the plan proponent does not reimburse the Members’ attorneys fees and expert fees, the Members will have no obligation to reimburse SWEPCO. Likewise, in the event that no plan is confirmed, then in such event the Members shall have no obligation to reimburse SWEPCO. David Shaw, the president of the board of Washington-St. Tammany Electric Cooperative, Inc., one of the remaining CCM members, later informed Jimmy Ewing, Pointe Coupee’s president, about the payments. Thereafter, on April 17, 1997, SWEPCO and the CCM filed with the bankruptcy court a “Joint Report on Certain Transition Payments to the Committee of Certain Members” stating that the payments were made to defray certain legal 9 expenses, particularly in light of Kleiman’s disqualification, and indicating that the payments were “essentially [an] accelerat[ion]” of the $1 million post-confirmation payment described in SWEPCO’s supplemental disclosure statement. On April 21, 1997, SWEPCO filed with the bankruptcy court term sheets signed by SWEPCO and the CCM members setting out the terms and provisions to be included in a wholesale power-supply agreement between Southwestern Wholesale Electric Company (SWECO), an affiliate of SWEPCO, and the CCM members. Paragraph