UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE DIVISION

IN RE:

JOHNSON COUNTY GAS COMPANY,

A Kentucky Corporation

DEBTOR CASE NO. 83-00002

CHAPTER 11

KENTUCKY WEST VIRGINIA

GAS COMPANY PLAINTIFF

VS. ADV. NO. 91-0149

JOHNSON COUNTY GAS COMPANY DEFENDANT

MEMORANDUM OPINION

This matter is before the Court on the plaintiff's Motion for Summary Judgment filed herein on December 4, 1991, and the defendant's response thereto. The issue to be decided is whether the plaintiff is entitled to collect from the defendant a surcharge for gas sold and whether that debt was discharged by the Chapter 11 plan of reorganization consummated and confirmed in this case. This Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334(b); no allegation concerning the core nature of this proceeding has been made.

The plaintiff initiated this matter by the filing of a Petition for Declaration of Rights pursuant to 28 U.S.C. '2201 on June 27, 1991. The defendant filed its Answer on July 30, 1991. The parties filed their Joint Stipulations on November 1, 1991, and an Agreed Order of Submission was entered on November 6, 1991. The plaintiff filed its Motion for Summary Judgment on December 4, 1991. The defendant responded to the Motion for Summary Judgment on December 6, 1991. The plaintiff filed its Reply Memorandum and the defendant its Rebuttal Brief on December 18, 1991.

The record in this case indicates that a Chapter 11 plan of reorganization was confirmed on March 6, 1986, an involuntary petition having been filed by three of the defendant's creditors on January 18, 1983. According to the Joint Stipulation submitted herein, the defendant had purchased natural gas from the plaintiff pursuant to a series of gas purchase contracts since 1972. The Federal Energy Regulatory Commission ("FERC"), formerly the Federal Power Commission, sets, reviews, and enforces the rates to be paid for the sale and transportation of natural gas pursuant to 42 U.S.C. '7172 et seq. The plaintiff could not collect, or attempt to collect, a rate in excess of that set by the FERC. See 15 U.S.C. '717c.

During the course of the defendant's involuntary Chapter 11 proceeding, neither the defendant nor the Chapter 11 trustee rejected the defendant's executory gas purchase contract with the plaintiff. At the time of filing of the petition, the defendant was current in its payments to the plaintiff, and the plaintiff continued to provide gas to the defendant throughout the course of the Chapter 11 proceeding. The defendant paid all amounts that the plaintiff was authorized at the time to collect. Sometime later, the FERC authorized the plaintiff to impose a prospective surcharge to collect additional rates denied by the FERC on past sales.

The plan of reorganization contained two provisions, Article IV and Article VI, that are of particular significance in this case. Article IV provides as follows:

Any executory contracts or unexpired leases in effect in the within action as of the date of Consummation shall be assumed by the reorganized corporation, if not in default thereto. If in default, the curing of same shall be accomplished by a grant of a '507(a)(1) priority, and will be paid at Consummation immediately prior to payments to creditors in Class I.

Article VI provides as follows:

Notwithstanding provisions in the United States Bankruptcy Code to the contrary, the confirmation of this plan shall vest all of the property of the estate of the Debtor in the reorganized corporation, free and clear of all claims and interest of any creditors, equity security holders and stockholders, and shall discharge the Debtor from any debts (other than those specifically treated under this Plan) that arose before the date of such confirmation, any debt of a kind specified in Sections 502(g), (h) and (i) of the United States Bankruptcy Code, whether or not a proof of claim based upon said debt was filed or deemed filed under Section 501 of United States Bankruptcy Code and whether or not the holder of such claim has accepted the plan, and confirmation shall terminate all rights and interests of equity security holders and the stockholders, as provided for by the Plan, and that the provisions of subsections (sic) 2 of Section 1141 of the United States Bankruptcy Code are not controlling.

The plaintiff bases its contention in this matter on the language of Article IV, the defendant on Article VI.

It is the plaintiff's position that Article IV of the plan of reorganization effected the assumption of its executory gas purchase contract with the defendant. The plaintiff specifically contends that the surcharge is an obligation under an executory contract and was therefore not discharged. The defendant concedes that the contract was executory in nature. As noted above, the contract was not rejected. As the plaintiff points out, the contract was expressly assumed by the terms of Article IV.

Even if the contract were not expressly assumed, however, obligations pursuant to its terms would not be discharged. "An unrejected executory contract survives confirmation of the Plan of Reorganization and becomes binding on the reorganized corporation." International Union v. Miles Machinery Co., 34 B.R. 683 (U.S.D.C. E.D.Mich. 1982), citing Federal's Inc. v. Edmonton Investment Co., 555 F.2d 577 (6th Cir. 1977). These and other cases cited by the plaintiff uphold this principle.

The defendant contends that the plaintiff had a pre-petition contingent claim for the gas surcharge that was discharged by the plan. The defendant maintains that the plaintiff was therefore required to file a claim. As the plaintiff points out, a claim does not arise until an existing executory contract has been rejected. The court in In re Continental Country Club, Inc., 114 B.R. 763 (Bkrtcy.M.D.Fla. 1990), quoted from Consolidated Gas Electric Light v. United Railways, 85 F.2d 799 (4th Cir. 1936) in addressing this issue:

As noted by the Consolidated court, the party to an executory contract 'would find it difficult to state a claim under the contract before it had been broken.' Id. at 805. 'There would be no way such a claim could be scheduled.' Id. 'There would be no way a claimant could file a proof of claim, nor could such a party participate for purposes of distribution...' Id. 'Simply put, no breach has occurred, no damages have resulted, there is nothing upon which a claim could be based.' Id.

The Continental Country Club court concluded that absent a breach in fact or of bankruptcy law as of the date of confirmation of a plan of reorganization, a debt pursuant to an executory contract

would not be discharged. At 767.

The defendant also contends that requiring it to pay the surcharge would alter or modify the plan, and that such a requirement would be inequitable. This Court does not find any merit in these contentions. All of the defendant's extensive arguments have failed to counter the simple fact that its contract with the plaintiff was an executory contract that was expressly assumed by the provisions of Article IV of its own plan of reorganization and which was never rejected. The defendant continued to buy gas and pay for it under the contract. The defendant cannot get out from under the contract because it now includes a provision that is going to cost it more money.

In consideration of all of the above, it is therefore the opinion of this Court that the plaintiff has carried forward its burden of demonstrating that there is no genuine issue as to any material fact and that it is entitled to judgment as a matter of law. The plaintiff's Motion for Summary Judgment will therefore be sustained by separate order of this Court.

Dated:

By the Court -

________________________________

Judge

Copies to:

Michael D. Baker, Esq.

W. Thomas Bunch, Esq.

mjcogas.opi