Memorandum Decision Granting in Part and Denying in Part Motion for Relief From Automatic Stay by Enron Broadband Systems, Inc.

   
 
 
 
 
                      UNITED STATES BANKRUPTCY COURT
 
                     NORTHERN DISTRICT OF CALIFORNIA
 
  In re                              ]    Case No. 01-55137-ASW
                                     ]    
  Silicon Valley                     ]    Chapter 11
  Telecom Exchange, LLC,             ]
                                     ]    RS 020144
                      Debtor         ]
                                     ]
 
 
                       MEMORANDUM DECISION
               GRANTING IN PART AND DENYING IN PART
              MOTION FOR RELIEF FROM AUTOMATIC STAY
                 BY ENRON BROADBAND SYSTEMS, INC.
 
      Before the Court is a motion by Enron Broadband Systems, Inc.
  ("EBS"), which is opposed by the Debtor in Possession in this
  Chapter 11 case, Silicon Valley Telecom Exchange, LLC ("Debtor").
      EBS' motion originally included a request for relief from the
  automatic stay of 362(a) to terminate provision of electric
  service to Debtor, but that request was withdrawn during trial.
  The motion now seeks relief from the automatic stay to permit
  recoupment or setoff of amounts owed by EBS against amounts owed by
  Debtor.
      EBS is represented by Jon L. R. Dalberg, Esq. of Andrews &
  Kurth, L.L.P., and Debtor is represented by Marc L. Pinckney, Esq.
  of Campeau Goodsell Diemer, L.C.  The matter has been tried and
  submitted for decision.  This Memorandum Decision constitutes the
  Court's findings of fact and conclusions of law, pursuant to Rule
  7052 of the Federal Rules of Bankruptcy Procedure.  
 
                                I.
                              FACTS
      Debtor filed a Chapter 11 petition in this Court on October 22,
  2001.  EBS filed a Chapter 11 petition in the Bankruptcy Court for
  the Southern District of New York on December 2, 2001.
      Debtor leases a building in San Jose from its owner and
  subleases parts of it to subtenants.  In May 1999, EBS entered into
  a sublease with Debtor for approximately 20,758 square feet of

  space, with rent of approximately $44,487 per month.  At its own
  expense, EBS installed the kind of equipment needed to operate EBS'
  business at the building, including a 200-ampere circuit breaker
  ("Breaker").  Pacific Gas & Electric ("PG&E") supplies the building
  with electric power, which flows through a single meter (billed by
  PG&E to Debtor) into a power distribution frame and then to a
  series of breakers for the various premises in the building.  Under
  the sublease, Debtor is required to provide electric power for the
  building's common areas and "life safety" features (e.g., exit
  lights, parking lot lights, etc.), and EBS is required to reimburse
  Debtor for the amount that Debtor pays to PG&E for the power that
  flows through the meter to EBS' premises.
      In June or July of 2000, an oral agreement was made, providing
  that Debtor could draw power from EBS' Breaker and pay EBS for use
  of the Breaker.  Debtor's Chief Executive Officer, Fernando Don
  Rubio II ("Rubio"), testified that he asked EBS' Manager of

  Wholesale Services, Mark P. Santikos ("Santikos"), for such an
  arrangement -- Santikos testified that he received the initial
  request on behalf of Debtor from "somebody" that he believed worked
  for Cupertino Electric (a contractor that had performed services
  for both Debtor and EBS).  Regardless of who asked Santikos, he
  agreed, and Debtor paid Cupertino Electric approximately $83,000 to
  connect Debtor to EBS' Breaker.
      Debtor began receiving power from EBS' Breaker in August 2000.
  Debtor used some of that power for the building's common areas and
  life safety features, and provided some of it to Debtor's
  affiliate, Silicon Valley Telecom And Internet Exchange ("SVTIX"),
  which supplies telecommunication connections to its customers in
  the basement of the building.  Santikos testified that he
  understood that the power Debtor drew from the Breaker would be
  used only for the building's common areas and life safety features
  -- Rubio testified that he told EBS "from the beginning" that the

  power would also be used for SVTIX' business operations in the
  basement.
      EBS has alleged that Debtor had to obtain power from EBS
  because PG&E would not supply enough due to Debtor's poor credit
  rating, but EBS offered no evidence in support of that and Rubio
  denied it.  Rubio testified that his general policy was to do
  business with his own customers, such as EBS.  He explained that
  Debtor had previously been connected to a breaker owned by another
  tenant -- the other tenant wanted to end that arrangement, so Rubio
  asked EBS for the use of EBS' Breaker.  Rubio said that he wanted
  to receive power from EBS' Breaker instead of PG&E for several
  reasons:  his policy of dealing with his customers when possible;
  EBS was a tenant in the business of supplying power, and "the star
  of the show" that was "going to do it better and bigger"; and EBS
  had a back-up generator that was not available from PG&E.  The use
  of such a generator was "critical" to protect SVTIX and its

  customers against power losses and Rubio believed that it would
  cost $150,000 to install one (which Debtor would have to do if it
  purchased power from PG&E), whereas it would cost only $83,000 to
  connect to EBS' Breaker and thereby receive the use of EBS'
  generator.
      It is undisputed that, when the oral agreement was made for
  Debtor to receive power from EBS' Breaker in exchange for payment,
  the price was not discussed, and no express agreement was ever made
  about price.  Rubio testified that he assumed EBS would charge
  Debtor for the amount of power that Debtor used, because that was
  how PG&E charged Debtor, and that was what Debtor did when "passing
  through" to tenants the charges by PG&E for the power that PG&E
  supplied to the building.  Further, Cupertino Electric installed a
  submeter when connecting Debtor to the Breaker, which Rubio
  believed was for the purpose of measuring Debtor's usage.  Rubio
  testified that Santikos instructed him to have the connection work

  performed by Cupertino Electric, but Santikos denied that and also
  denied that Cupertino Electric was authorized to act as EBS' agent.
  Santikos testified that Cupertino Electric had done work for EBS in
  the past, but he did not believe that there was ever a "regular
  retainer" arrangement -- he characterized the firm as the
  contractor approved by Debtor to do work on the building, and Rubio
  acknowledged that Cupertino Electric had performed services for
  Debtor at the building.  Santikos testified that he had no
  knowledge of anyone at EBS discussing installation of a submeter
  with Cupertino Electric, did not know that a submeter was being
  installed, and did not become aware of the submeter until some
  unrecalled point after installation.
      EBS did not bill Debtor for use of the Breaker until March 6,
  2001.  At that time, EBS sent Debtor a letter stating that Debtor
  owed a flat monthly fee of $11,984 from August 2000, based on the
  Breaker's capacity.  Rubio told Santikos that he was "stunned" to

  be charged so much and never would have used EBS' Breaker had he
  realized the charge would be so high -- Rubio testified that
  Santikos told him to meet with EBS' engineer, Douglas Charles Mohr
  ("Mohr"), and "work it out" with him.  Santikos testified that EBS
  did make an effort to determine whether a different "pricing
  structure" could be used, and Mohr was sent to the building to
  install a submeter, monitor Debtor's actual usage, and make a
  report.  Before Mohr's report was received, EBS filed Chapter 11
  and Mohr's employment was terminated.  
      Mohr testified that he prepared a report after making two
  visits to the building and left it in his computer at EBS.  His
  recommendation was that Debtor should be charged for actual usage
  rather than on the basis of the Breaker's capacity.  He testified
  that the local market was a "volatile" one and the usage rates
  established by PG&E as the "incumbent" regulated utility would
  reflect changes in transmission distribution and seasonal delivery

  costs, whereas a flat rate based on capacity would not -- further,
  it was not the industry standard to use flat rates for services to
  consumers such as Debtor, given the diversity of the loads
  experienced, fluctuating use at different times of day, changing
  loads, and the effects of operating conditions such as the number
  of personnel present, weather, etc.  Mohr said that flat rate
  charges assume that power is delivered in very small increments
  rather than in bulk, and loads that are "flat" rather than cyclical
  -- EBS did not deal with bulk supply and highly cyclical loads so
  its standard charging methods did not reflect those conditions, yet
  those were the conditions that applied to Debtor.
      Santikos testified that he would not have accepted Mohr's
  recommendation had he received it, because it did not comply with
  EBS' policy to charge based on capacity and thereby recover costs.
  Santikos said that he has negotiated many "co-location contracts"
  with EBS' customers to use space in EBS' telecommunication

  facilities and receive power there (primarily DC power, some AC
  power, some with both kinds of power) -- he has "quoted" hundreds
  of such contracts, and negotiated and executed "tens" of them -- in
  his experience, there is no customer buying power from EBS that is
  charged at a rate other than full capacity.  Santikos said that
  EBS' flat rates included the cost of power to EBS, the cost of the
  "infrastructure" (including the cost of all equipment needed), and
  the cost of operating the facility -- a rate based on usage that
  covered EBS' costs "probably" would have been accepted, but Mohr's
  recommendation did not accomplish that.  As described by Santikos,
  Debtor's use of the Breaker permitted Debtor to receive 200 amperes
  of AC power that was "backed up", and involved Debtor's use of EBS'
  infrastructure in the form of the generator and any equipment
  required to deliver the power; he acknowledged that Debtor did not
  use equipment associated with DC power.  Mohr testified that the

  infrastructure typically provided by EBS would include an
  uninterruptible power supply ("UPS"), which was not furnished by
  EBS' generator for the Breaker -- accordingly, the quality of the
  power drawn by Debtor from the Breaker was "much lower" than the
  quality that EBS normally supplied to other customers in exchange
  for payment of a flat rate.
      Mohr calculated what he considered to be a reasonable rate to
  charge Debtor based on actual usage.  He said that a monthly charge
  should reflect actual consumption, plus a "demand charge"
  consisting of "make ready" costs or operating costs to maintain the
  distribution system, plus the cost of installing, operating, and
  maintaining the back-up generator.  He noted that, in this case,
  Debtor had paid the make ready costs -- those are traditionally
  passed on to the customer when the owner has absorbed them, but
  there were no such costs to EBS here -- there was a system and
  infrastructure already in place that had excess capacity, so the

  question was how to determine the value of that excess.  Mohr
  described the excess as a "stranded asset", and noted that EBS was
  selling a 200 ampere breaker with the connected load and generator,
  which was something EBS already had but was not using, and which it
  cost EBS nothing to hold.  Mohr testified that he found the
  submeter to be accurate, and calculated Debtor's consumption charge
  based on 121,088 kilowatt hours used according to the meter
  readings, from the time Debtor was connected to the Breaker through
  March 15, 2002.  He used 15› per kilowatt hour as a reasonable
  rate, based on PG&E's average charge of 13.1› for the last four
  months of 2001.  He calculated a monthly charge for availability of
  the back-up generator at $162.72 -- that figure assumed that the
  generator would cost $3.25 per month to run and maintain based on
  PG&E's history of average "outages" and "downtime" for the area,
  and assumed that $159.47 was needed to recover the cost of the
 

 
 
 
 
 
  generator over a 24 month period.
      Mohr noted that his calculations did not specifically provide
  for a profit, though EBS would receive a profit because one was
  encompassed in the 15› rate per kilowatt hour -- since PG&E was
  charging only 13.1›, that was all that Debtor was passing through
  to EBS for EBS' use of power; if EBS were to charge Debtor 15› per
  kilowatt hour for the power that Debtor received through the
  Breaker, EBS would collect an extra 1.9› per kilowatt hour.  Mohr
  stated that his calculations did not reflect savings that EBS
  experienced by receiving power from PG&E through Debtor, such as
  not having to pay approximately $116,000 to install EBS' own meter,
  and a monthly savings from a discounted rate that PG&E charged
  Debtor for "bundled" services provided in large quantities.  Mohr
  said that a 10%-15% overhead and profit is normal and assumes that
  no savings are associated with the overhead so that, if EBS'
  savings were considered here, there should be a "passthrough" with

  no additional profit (i.e., the savings in expenses would be
  equivalent to a profit).  Mohr testified that he considered
  Debtor's use of EBS' Breaker to be an "accommodation" by EBS,
  rather than EBS' sale of a marketable product, such as selling raw
  bulk AC power to another service provider -- permitting Debtor to
  use the Breaker was not a burden to EBS because EBS had excess
  capacity in the Breaker and the make ready charges usually
  associated with provision of service (which normally have to be
  recovered through a "profit scenario") had not been incurred by EBS
  in this case.  Mohr estimated that EBS had spent approximately
  $22,000,000 on improvements at the building, plus another $500,000
  to buy the back-up generator and another $500,000 to install it.
      Both Santikos and Mohr testified that they were not authorized
  to make any binding commitments on behalf of EBS, and that any
  agreements they made would be subject to final approval by others;
  Rubio said that he realized final approval was needed and he never

  heard that it was received.  Rubio testified that Mohr told him
  after visiting the building that Mohr would recommend that EBS
  charge Debtor some $250 per month based on usage -- Rubio assumed
  that was what would be done, since Santikos told him to "work
  things out" with Mohr, and he thought that Mohr was "high up" in
  EBS.
      Santikos testified that, at some point in 2001, EBS considered
  terminating Debtor's use of the Breaker.  He said that he had to
  discuss "some issues" with Rubio and the power would be shut off if
  he was not able to do talk to Rubio, but he did not think that he
  ever told anyone to "go down and shut the power off".  Derrick
  Joseph Wise ("Wise") testified that he is a Field Engineer for EBS
  and was  told by Santikos in August or September 2001 to "go in and
  turn off the power" because Santikos had been unable to contact
  Rubio.  Wise explained to Santikos that Debtor could not be
  disconnected from the Breaker without eliminating power to the
  building's common areas, and Santikos then withdrew his

  instruction.  Wise testified that he had been present during one or
  two conferences at EBS about what Debtor should be charged and he
  believed that EBS wanted to "maximize" the price.  He also had the
  impression that Santikos and Rubio were not "bosom buddies" and
  that there was "some animosity" between them -- he thought that EBS
  was "very hostile" toward Debtor, and "eager to have things done
  with Rubio".
      It is undisputed that EBS is in default under its sublease with
  Debtor, and EBS' attorney stated at trial that the defaults are as
  set forth in a declaration of Rubio dated March 18, 2002 (Debtor's
  Exhibit 1).  Those total $241,473.75 through March 1, 2002,
  consisting of rent for December 2001 through March 2002, the annual
  management fee for 2001, and common area maintenance charges and
  electric power reimbursements for October 2001 through January
  2002.  The lease provides, inter alia, that, if the landlord
  defaults under the lease, the tenant is entitled to cure the

  default upon written notice to the landlord and deduct the cost of
  cure from rent up to 25% of the monthly rent amount.  EBS' time to
  assume the lease under 365 was extended in EBS' Chapter 11 case
  until March 29, 2002, and the lease has now been rejected by
  operation of law due to EBS' failure to assume by that date.  EBS'
  attorney announced at trial that, due to rejection of its lease,
  EBS will remove its equipment from the building, including the
  Breaker.
 
                               II.
                             ANALYSIS
                                 
                     A.  Debtor's Debt To EBS
      The parties agree that Debtor owes EBS some amount for Debtor's
  use of EBS' Breaker, and they agree that their oral contract for
  such use does not fix the price or a basis upon which the price
  should be calculated.  Rubio assumed that the price would be based
  upon usage, and Santikos assumed that the price would be based upon
  capacity, but neither claims to have expressed his assumption to

  the other until some seven months after Debtor's use began, and
  neither claims to have been misled by the other into making a false
  assumption.
      Since there is no contract price, nor any express or implied
  agreement about the basis for the price, it necessarily follows
  that the appropriate price must be an objectively determined market
  price, see, e.g., In re Thompson, 788 F.2d 560, 563 (9th Cir.
  1986):
           When a lease is ultimately rejected but its
           interim continuance was an actual and necessary
           cost and expense of the estate, the allowable
           administrative expense is valued not according to
           the terms of the lease [citation omitted], but
           under an objective worth standard that measures
           the fair and reasonable value of the lease.
           [Citations omitted]  The rent reserved in the
           lease is presumptive evidence of fair and
           reasonable value [citation omitted], but the
           presumption may be rebutted by demonstrating that

           the reasonable worth of the lease differs from
           the contract rate [citations omitted].  []  The
           actual value or benefit conferred on the debtor
           is not the object of the reasonable worth
           inquiry.  [Citation omitted].  Rather, the fair
           and reasonable value of the lease upon the open
           market must control.  [Citations omitted]
      The question here is "which market"?  Santikos has significant
  experience with EBS' sale of power under co-location agreements
  with customers who use space in EBS' facilities -- he said that
  such power is primarily DC rather than AC, and Mohr testified
  without contradiction that it is typically supplied in very small
  increments rather than in bulk, for flat, rather than cyclical,
  loads.  According to Santikos, all of EBS' co-location customers
  pay flat rates based on capacity rather than for actual usage, and
  it is EBS' policy to include in such flat rates amounts required to
  recover various costs, including the cost of power, the cost of the

  infrastructure and equipment, and the facility operation costs.
  But Debtor is not in the same position as EBS' co-location
  customers.  As Mohr explained, EBS already had the Breaker and
  generator when Debtor connected, and it was Debtor that paid the
  costs of connection to that existing system -- EBS had paid to
  acquire that equipment, but the Breaker was not being used and it
  cost EBS nothing to have it there (i.e., a fixed cost or a
  "stranded asset").  Debtor also differed from the typical co-
  location customer because Debtor received AC power without making
  use of EBS' equipment for DC power, and the power was supplied in
  bulk for cyclical loads.  Further, Debtor was receiving a lesser
  quality of power than that supplied to EBS' co-location customers,
  due to the lack of a UPS system for Debtor.  
      It is apparent that the market composed of EBS' co-location
  customers is not the same as the market represented by Debtor, and
  that EBS had no established practice for dealing with situations

  such as that involving Debtor's use of the Breaker.  Mohr was an
  experienced and knowledgeable witness, and his explanation of the
  differences between the two sets of users and the reasons for
  charging one a flat rate based on capacity versus charging the
  other a rate based on actual usage was very well supported and
  persuasive.  The Court agrees with Mohr that Debtor's use of EBS'
  Breaker was more in the nature of an accommodation by EBS than it
  was in the nature of EBS' sale of a marketable product -- EBS'
  traditional basis for setting sale prices does not apply to the
  different transaction of providing a service in exchange for a fee
  that covers EBS' direct costs to provide the service.
      Mohr's analysis of what Debtor should pay based on usage was
  sound.  With respect to whether the charge to Debtor should include
  a profit component, EBS did not dispute Mohr's conclusion that a
  normal profit of 10% to 15% is fully offset by EBS' savings through
  receiving the benefit of a discounted rate charged by PG&E to

  Debtor (and passed through to EBS by Debtor), and through using
  Debtor's meter rather than installing EBS' own meter.  Further,
  some profit is built in if EBS charges Debtor 15› per kilowatt hour
  as Mohr suggested, since Debtor passed through to EBS only the
  actual amount charged by PG&E, and that averaged 13.1› per kilowatt
  hour during the last four months of 2001.  Insofar as the generator
  expense is concerned, Mohr calculated alternative monthly charges
  depending on whether the cost of the generator was based on an
  industry standard of $400 per kilowatt hour or his estimated actual
  cost of $666.67 per kilowatt hour -- Mohr preferred the former
  because his estimate of actual cost was based only on his
  observation of conditions at the building and had not been
  confirmed by evidence such as invoices.  EBS argued that there
  should be no need to resort to an industry standard when an
  installed generator already exists and actual cost is capable of
  being determined.  EBS' point is well taken, although the fact is

  that evidence of the actual cost has not been presented and that
  figure therefore cannot be determined for purposes of this trial.
  However, the Court has found Mohr's opinion reliable on other
  points, and there is no apparent reason not to rely on his estimate
  of cost based on his observations at the building and his
  experience of such matters, despite the lack of invoices proving
  the actual cost of acquiring and installing the generator.  
  Accordingly, the Court will accept Mohr's calculation that is based
  on estimated cost rather than on industry standard, which is a
  charge of $269.08 per month to cover the cost of acquiring,
  installing, and operating the generator.
 
                          B.  Recoupment
      EBS argues that it should be entitled to recoup all amounts
  that Debtor owes to EBS for use of the Breaker against all amounts
  that EBS owes to Debtor under the sublease.  EBS cites the
  controlling authority on the doctrine of recoupment, Newbery Corp.

  vs. Fireman's Fund Ins. Co., 95 F.3d 1392 (9th Cir. 1996)
  ("Newbery"), which explains the difference between recoupment and
  setoff:
           "The right of setoff (also called 'offset')
           allows entities that owe each other money to
           apply their mutual debts against each other,
           thereby avoiding 'the absurdity of making A pay B
           when B owes A.'"  [Citation omitted]  The
           defining characteristic of setoff is that "the
           mutual debt and claim ... are generally those
           arising from different transactions."  [Citation
           omitted]  [Original emphasis]
 
  Newbery, at 1398.
 
           In contrast to setoff, recoupment "is the
           setting up of a demand arising from the same
           transaction as the plaintiff's claim or cause
           of action, strictly for the purpose of abatement
           or reduction of such claim."  [Citation omitted]
           [Original emphasis]  Under recoupment, a defendant

           is able to meet a plaintiff's claim "with a
           countervailing claim that arose 'out of the same
           transaction.'"  [Citations omitted]  For this
           reason, recoupment has been analogized to both
           compulsory counterclaims and affirmative defenses.
 
  Newbery, at 1399.
 
      Newbery adopted the "logical relationship" test to determine
  whether the parties' claims arose from the "same transaction":
           In deciding whether the relevant claims arose
           from the same transaction, the district court
           applied the "logical relationship" test outlined
           by the Supreme Court in Moore v. New York Cotton
           Exchange, 270 U.S. 593, 46 S.Ct. 367, 70 L.Ed.
           750 (1926).  In Moore, the Court stated that
           "'[t]ransaction' is a word of flexible meaning.
           It may comprehend a series of many occurrences,
           depending not so much upon the immediateness of
           their connection as upon their logical relation

           ship."  Id., 270 U.S. at 610, 46 S.Ct. at 371;
           see also Albright v. Gates, 362 F.2d 928, 929
           (9th Cir.1966) ("In deciding what is a trans-
           action, we take note that the term gets an
           increasingly liberal construction.").
 
  Newbery, at 1402.
      EBS argues that the two claims in this case are logically
  related as both arising from the parties' sublease:  the sublease
  requires Debtor to provide power for the building's common areas
  and life safety features, and Debtor sought to meet that obligation
  by drawing power from EBS' Breaker and thus incurring charges under
  the parties' oral agreement; the sublease also requires EBS to pay
  rent to Debtor; the sublease therefore is the source of each
  party's obligation to the other.
      Debtor argues that its debt to EBS for use of the Breaker
  arises under the oral agreement, which is a completely separate
  transaction from the landlord/tenant transaction that is
  represented by the parties' sublease.  Debtor points out that the

  power Debtor receives from the Breaker is not used solely to meet
  Debtor's obligations under the sublease for the building's common
  areas and life safety features, but also to serve the business
  operated in the basement by SVTIX, which is not a party to the
  sublease between Debtor and EBS.
      As Newbery notes, the logical relationship test is a flexible
  one.  The test is not defeated in this case simply by the fact that
  the sublease creating EBS' obligation to pay rent and the oral
  agreement creating Debtor's obligation to pay for use of the
  Breaker are two separate contracts -- the two obligations still
  might be logically related to each other despite having originated
  from separate contracts, if, for example, the oral agreement was
  made for the purpose of permitting Debtor to meet Debtor's
  obligations under the sublease.  EBS argues that such a connection
  does exist between the sublease and the oral agreement, because
  Debtor could not provide power for the building's common areas and

  life safety features as required by the sublease unless Debtor
  received power under the oral agreement.  However, the fact is that
  Debtor's use of the Breaker under the oral agreement is not limited
  to receiving power for the purpose of meeting Debtor's duties under
  the sublease -- Debtor also uses that power for SVTIX.  Wise
  testified, without contradiction, that it was not possible to
  disconnect Debtor from the Breaker and still maintain power to the
  common areas, so the practical reality is that Debtor's use of the
  Breaker cannot be divided between the use that is necessary to
  enable Debtor to perform under the sublease and the use that is not
  necessary for that purpose.  EBS' claim for Debtor's use of the
  Breaker cannot be wholly attributed to Debtor's performance under
  the sublease because part of the power Debtor receives from the
  Breaker is being applied to SVTIX -- since it is not possible to
  divide the Breaker's provision of power into two parts, EBS' charge

  for use of the Breaker cannot be allocated between parts that do
  not exist.  Accordingly, the logical relationship test fails
  because Debtor's duty to pay under the oral agreement is a duty to
  pay for power that Debtor is using for multiple purposes, only one
  of which is the purpose of enabling Debtor to perform under the
  sublease; the other purpose is to supply SVTIX with power for its
  services to its own customers, which is wholly unrelated to the
  sublease.
 
                            C.  Setoff
      Setoff of "mutual" debts is permitted by 553 and, as explained
  by Newbery, above, the debts need not arise from the same
  transaction.  The term "mutual" means that pre-petition debts
  cannot be set off against post-petition debts.  By its terms, 553
  applies only to pre-petition debts, but that does not mean that
  mutual post-petition debts cannot also be set off against each
  other, see 5 King, Collier on Bankruptcy (15th ed. rev. 2000)
  553.03[6].  Although the common law right of set off is preserved

  by 553, relief from the automatic stay must be received in order
  to exercise that right.  EBS seeks stay relief to set off the
  amount that Debtor owes EBS for use of the Breaker against the
  amount that EBS owes Debtor under the sublease, both pre-petition
  and post-petition; Debtor has not opposed set off of debts in
  either category.  EBS is entitled to perform the setoffs requested,
  with respect to both pre-petition debts and post-petition debts, so
  long as pre-petition debts are not set off against post-petition
  debts.
      Debtor argues that the sublease permits EBS to set off no more
  than an amount equivalent to 25% of each month's rent and requires
  the giving of notice, citing  19.2, which is part of  19 entitled
  "Remedies" and provides as follows:
           Landlord shall be in default of this Lease if
           Landlord shall breach any covenant under this
           Lease and such breach continues for thirty (30)
           days after written notice by Tenant of such

           breach thereof to Landlord, or, in the case of an
           interruption of Tenant's provision of services to
           its customers, such thirty (30) day notice shall
           not be required, unless Landlord has commenced
           the cure within said thirty(30) day period and
           proceeds diligently to completion.  In the event
           of an uncured default by Landlord, Tenant may,
           upon subsequent written notice to Landlord, cure
           the default if it involves the Premises and
           Tenant may offset the cost thereof from Annual
           Rent, not to exceed twenty-five percent (25%) of
           the Monthly Installment of Annual Rent in any one
           (1) month.  [Emphasis supplied]
 
  Although the provision uses the term "offset", it is plain from
  context that what is being discussed is recoupment.  As pointed out
  by Newbery, recoupment involves reducing a party's claim by the
  amount of an opposing party's claim that arises from the same

  transaction as does the first party's claim (akin to the second
  party asserting a defense to the first party's claim) -- setoff, on
  the other hand, involves reducing a party's claim by the amount of
  an opposing party's claim that arises from a different transaction
  than does the first party's claim (i.e., "netting out" the two
  claims, instead of the first party paying 100% to the second party
  and the second party paying 100% to the first party).  The sublease
  describes a situation where the landlord defaults under the lease,
  the tenant gives notice that it will cure the default if the
  landlord does not, the tenant does cure the default at its own
  expense, and the tenant then deducts the amount of the cure expense
  from the next month's rent check (to a maximum of 25% of the rent).
  What the lease describes is the tenant's recoupment, because the
  tenant's obligation to pay rent arises from the lease and so does
  the landlord's obligation to pay for the cure of its own defaults.

  As discussed above, recoupment does not apply to these parties'
  claims against each other, so this provision of the sublease does
  not apply to those claims either.
 
                            CONCLUSION
      The market value of Debtor's use of EBS' Breaker should be
  determined on the basis of Debtor's actual power consumption,
  rather than on the basis of the Breaker's capacity.  The
  appropriate monthly charge to Debtor should be 15› per kilowatt
  hour for Debtor's power consumption according to the submeter, plus
  $269.08 for the availability of the generator.  The evidence at
  trial established totals through March 15, 2002, which figures
  should be adjusted as necessary to account for the period after
  that date until Debtor's use of EBS' Breaker ends.
      The doctrine of recoupment does not apply to EBS' claim for
  Debtor's use of the Breaker, and Debtor's claim for rent and other
  amounts owed by EBS under the sublease, because the two claims are
  not logically related under the test of Newbery.

      EBS is entitled to stay relief to set off its claim for
  Debtor's use of the Breaker against Debtor's claim for rent and
  other amounts owed by EBS under the sublease, both pre-petition and
  post-petition, to the extent that the claims are mutual, i.e., so
  long as pre-petition claims are not set off against post-petition
  claims.  EBS' right of setoff is not limited by  19.2 of the
  sublease, since that paragraph applies to recoupment rather than to
  setoff.  The evidence at trial established EBS' defaults under the
  sublease through March 1, 2002, which figures should be adjusted as
  necessary to account for any charges coming due after that date and
  for any subsequent payments made by EBS.
      Counsel for Debtor shall submit a form of order so providing,
  after review by counsel for EBS as to form.
      Dated:
 
 
 
 
 
                                    ______________________________
                                    ARTHUR S. WEISSBRODT
                                    UNITED STATES BANKRUPTCY JUDGE



CANB DocumentsNorthern District of California