Deirdre Carey Brown was interviewed by Amy Geise on the podcast Beyond Hourly regarding how litigation finance can help plaintiffs come out ahead against a bankrupt defendant. This was a fantastic interview and Forshey Prostok, LLP wanted to post the transcript of the interview on our website for easy access. Please Click Here to download the transcript.

A severe winter storm left Texans without essential utilities for days, causing some of Texas’ largest electricity providers to file for bankruptcy seeking relief from debts owed to the Electric Reliability Council of Texas (“ERCOT”). Additionally, more than one year after the emergence of COVID-19, restrictions are starting to lift and businesses in Texas are returning to near-normal activity. The true impact of government restrictions on businesses during the COVID pandemic has yet to be fully seen in the bankruptcy courts.

The Utility Bankruptcies

Most of Texas operates on its own independent power grid. ERCOT is a member-based, nonprofit entity that regulates generation and energy management in Texas. To greatly simplify the electrical power supply chain, most commercial and residential customers in Texas buy electricity from the electric providers. The electric providers purchase power from ERCOT, which in turn obtains its power from generation companies.

When the February storm caused wholesale electricity prices to reach unprecedented levels—$9,000/MWh in some cases—the shock was felt at all points on the supply chain. The aftershock of this event is now making its way into Texas’ bankruptcy courts. First, the electric providers do not have the funds available to pay ERCOT the total debt incurred over the several days of storms. Second, the retail customers cannot afford to pay their several thousand-dollar bills (sometimes more than $10,000). Third, Texas politicians are pushing to fix what appears to be a broken system. Last, the electric providers are facing mounting litigation by its customers as well as investigations and lawsuits from the Texas Attorney General. These issues have a potential cascading effect.

As of April 12, 2021, three electric providers have filed for bankruptcy protection: Brazos Electric, Texas’ largest and oldest electric power cooperative, filed on March 1, 2021, scheduling a disputed $1.8 billion owed to ERCOT; Just Energy filed on March 9, 2021, scheduling $250 million owed to ERCOT; and Griddy Energy filed on March 16, 2021, with a listed debt of $29 million owed to ERCOT.

In the Griddy Energy reorganization, customers who had already paid some of their massive bills sought to have their interests represented by a separate official committee. The United States Trustee declined to appoint the special committee, concluding that power customers could be adequately represented by the official committee of unsecured creditors. However, the U.S. Trustee ordered that the committee must include three former customers as members, with the lead plaintiff in the proposed customer class action suit to serve as chairperson. The idea of appointing an additional official committee to better and more specifically represent a uniquely situated class of parties in a complex chapter 11 case is not a new concept; however, because of the special characteristics of utility reorganizations, we can expect that additional committees will be more often requested and used as more utilities seek relief in chapter 11.

Brazos Electric is an electrical co-operative composed of 16 electrical co-ops who provide power to their members, who are the ultimate consumers of the electricity.  Brazos Electric can only pay the disputed bill to ERCOT by passing the charges through to the member co-ops, who in turn can only raise the necessary cash to pay Brazos Electric by passing the charges on to the members of the 16 co-ops.  The co-ops can only pass reasonable charges through to their members who are the ultimate retail customers.  This threatens to create a cascade effect if the co-ops which compose Brazos Electric cannot pass these expenses through to their members.

All of these factors make it likely that a new financial storm is on the way as Texas struggles to address the financial fallout of the winter storm.

The (Continued) Coronavirus Pandemic

It was widely projected that the coronavirus pandemic and government-ordered shutdowns were going to create a tidal wave of business bankruptcies. However, as of early April 2021, this apocalyptic event has not yet occurred. Instead, what the bankruptcy courts saw were businesses already on the brink of insolvency finally pushed over the edge seeking restructuring in Chapter 11.

For example, a number of the largest bankruptcies last year had been the subject of rumors of restructuring for some time: Chesapeake Energy, J.C. Penney, Neiman Marcus, Frontier Communications, and McDermott International. The only truly surprising large bankruptcy case for which one could arguably blame the COVID pandemic was Hertz Corporation, Case No. 20-11218 (Bankr. D. Del.).

Action by the federal government providing direct funds to businesses via the Economic Injury Disaster Loan and two rounds of the Paycheck Protection Programs minimized the damage and prevented a flood of bankruptcies and liquidations. Businesses also implemented their own mitigation strategies to survive including furloughing unnecessary workers, offering earlier retirement to employees, cutting costs, and closing unprofitable locations. Landlords and lenders similarly assisted by voluntarily entering into agreements to temporarily alleviate burdens on business owners. Ultimately, for many businesses, a combination of government intervention, quick action, and simple goodwill prevented disaster.

However, the United States economy and its businesses are not out of the woods yet. While the rollout of vaccines and the easing of onerous government restrictions give cause for optimism, many businesses may be taken by surprise when unforgiven debt becomes due.

Indeed, a clear example that Congress understands that the financial impact of the pandemic is far from over is the recent enactment of the COVID-19 Bankruptcy Relief Extension Act (the “BREA”). The BREA was signed on March 27, 2021, and has extended for one year the personal and small business bankruptcy relief provisions that were part of last year’s CARES Act. Most notably, a company with debts as high as $7.5 million can still qualify for Subchapter V reorganization.

As a result of the extensions provided by BREA, small businesses in particular now have additional time to consider options by which to repay their delayed pre-coronavirus debt and/or their additional debt incurred during the pandemic. The extension of the increased debt limit makes Subchapter V available to many businesses that would have exceeded the original Subchapter V debt limit from pandemic-related borrowing alone.

Conclusion

In the current economic climate, it is reasonable to expect that Texas and the United States will see an increase in business bankruptcies throughout 2021 and the foreseeable future. The unresolved issues of liability in the Texas energy sector from the February 2021 storms will likely lead to additional electric providers seeking relief. Although we have yet to see the expected increase in COVID-shutdown-related business bankruptcies, the extension of the CARES Act should incentivize many small business owners to evaluate their financial conditions and determine if reorganization under efficient and debtor-friendly terms is the best course of action. Bankruptcy professionals should expect to be busy and dealing with the aftereffects of the February storms and the pandemic for a long time to come.

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