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Printer-friendly versionUNITED 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service to Debtor, but that request was withdrawn during trial.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