For the second day in a row, we are reporting on a case that could be understood to mean that a debtor does not have a property interest in its customers.
Today, we report on a decision by Bankruptcy Judge Marvin Isgur of Houston, who held that a retail power company in Texas had no property interest in its customers when state regulators terminated the debtor’s right to sell electricity. Yesterday, we reported on a decision by a district judge in New York who held that the estate had a property interest in contracts with its customers, but not in the customers themselves. To read yesterday’s report, click here.
The case before Judge Isgur resulted from the power crisis in Texas during the winter of 2021. With power plants shut down right and left, state regulators raised the price for almost 90 hours to some $9,000/MWh.
The debtor was a power retailer that sold electricity to its customers at a small markup to whatever the debtor paid for power. In his October 6 opinion, Judge Isgur said that most of the debtor’s customers failed to pay for the high-cost power.
Consequently, the debtor failed to pay the operator of the power grid in Texas. Under state regulations, the grid operator terminated the right of the debtor to be a so-called market participant. In plain English, the debtor was no longer permitted to sell power to retail customers.
After terminating the debtor’s ability to sell power, the grid operator transferred the debtor’s 10,000 customers to other power retailers. One retailer took on some 2,300 of the debtor’s customers.
The debtor filed a chapter 11 petition and confirmed a plan. The plan created a plan administrator authorized to pursue avoidance actions. The plan administrator sued the competitor that took the 2,300 customers. The complaint alleged that the customer transfers were constructively fraudulent under Section 548(a)(1)(B).
The competitor responded with a motion to dismiss, contending that the debtor had no property interest in the customers when the transfers occurred. The competitor won, and Judge Isgur dismissed the complaint.
Section 548(a)(1) permits a trustee to avoid “an interest of a debtor in property.” Judge Isgur therefore said that the plan administrator “must show that the debtor had an existing interest in the property at the time of its transfer.”
While the Bankruptcy Code does not define “an interest of a debtor in property,” Judge Isgur said that the term in Section 548 “is limited to the debtor’s pre-petition property that, but for the transfer, would have become ‘property of the estate’ under 11 U.S.C. § 541.” He also said, “State law determines the existence and scope of a debtor’s pre-petition property interests.”
When the grid operator terminated the debtor’s ability to sell electricity, the debtor’s “ability to service its customers ended at that moment,” Judge Isgur said. He therefore held that the debtor “did not have a property interest in its customers under Texas law at the time of the mass transition to the [competitor].”
Finding that the debtor had no interest in its customers and no right to sell electricity, Judge Isgur dismissed the fraudulent transfer complaint because the “right to do business with the customers would not have become property of [the debtor’s] estate regardless of the transfers.”
Observations
The Texas and New York opinions share an analytically similar approach: A debtor has an interest in contracts, not in customers.
If there is no contract, there is no estate property nor the possibility of a stay violation.
But wait, you say, courts routinely sanction defendants for theft of customers. This writer submits that those courts issue sanctions for interfering with the underlying contracts or stealing proprietary information.
For the second day in a row, we are reporting on a case that could be understood to mean that a debtor does not have a property interest in its customers.
Today, we report on a decision by Bankruptcy Judge Marvin Isgur of Houston, who held that a retail power company in Texas had no property interest in its customers when state regulators terminated the debtor’s right to sell electricity. Yesterday, we reported on a decision by a district judge in New York who held that the estate had a property interest in contracts with its customers, but not in the customers themselves.
The case before Judge Isgur resulted from the power crisis in Texas during the winter of 2021. With power plants shut down right and left, state regulators raised the price for almost 90 hours to some $9,000/MWh.
The debtor was a power retailer that sold electricity to its customers at a small markup to whatever the debtor paid for power. In his October 6 opinion, Judge Isgur said that most of the debtor’s customers failed to pay for the high-cost power.