Talen Mont. v. PPL Corp. (In re Talen Energy Supply, LLC)

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IN RE: TALEN ENERGY SUPPLY, LLC, et al., Debtors.

TALEN MONTANA, LLC, et al., v. PPL CORP., et al., Defendants.

No. 22-90054

ADVERSARY No. 22-9001

United States Bankruptcy Court, S.D. Texas, Houston Division

June 14, 2023

CHAPTER 11

MEMORANDUM OPINION

Marvin Isgur United States Bankruptcy Judge

Talen Montana, LLC brought suit against PPL Corp. ("PPL"), PPL Capital Funding, Inc., PPL Electric Utilities Corp., and PPL Energy Funding Corp. (the "PPL Parties") to recover alleged fraudulent transfers. The PPL Parties moved for partial summary judgment on the basis that the statute of repose in Section 18-607(c) of the Delaware Limited Liability Company Act prevents Talen Montana from bringing its claims more than three years after a transfer. Because Montana law applies to the fraudulent transfer claims, the PPL Parties are not entitled to summary judgment.

BACKGROUND

Talen Montana (formerly PPL Montana, LLC) seeks to avoid transfers of approximately $900,000,000.00 to its former parent companies-the PPL Parties-following its sale of hydroelectric assets to NorthWestern Corporation. (ECF No. 1 at 2). Talen Montana alleges that the PPL Parties directed PPL Montana to complete the transfers knowing that it had hundreds of millions of dollars of liabilities and no means to satisfy them beyond the assets it sold to NorthWestern. (ECF No. 1 at 2).

I. PPL Montana

In 1997, Montana deregulated its electricity market. (ECF Nos 56 at 6; 65 at 8). In 1999, PPL, a Pennsylvania utility acquired Montana Power Company's generating assets via its subsidiary, PPL Montana. (ECF Nos. 1 at 2-3, 5; 65 at 8). Talen Montana alleges that PPL Montana transferred at least $325,000,000.00 to PPL and its affiliates through 2012. (ECF No. 1 at 2).

By 2012, PPL Montana faced significant pension and environmental remediation liabilities, especially with respect to a coal-fired power plant in Colstrip, Montana. (ECF Nos. 1 at 2, 6; 65 at 3). Environmental regulatory conditions severely devalued the Colstrip plant: at one point, NorthWestern bid $740,000,000.00 for PPL Montana's hydroelectric assets and $400,000,000.00 for PPL Montana's hydroelectric and coal-fired assets together. (ECF Nos. 1 at 9; 65 at 15). The offer for the joint acquisition at a price lower than the offer for the hydroelectric assets apparently reflected the environmental clean-up costs associated with the coal-fired assets. In September 2013, PPL Montana sold its hydroelectric assets to NorthWestern for approximately $900,000,000.00. (ECF Nos. 1 at 3, 10; 65 at 4). Under PPL's direction, PPL Montana distributed the proceeds to PPL entities starting November 17, 2014. (ECF Nos. 1 at 3, 10; 65 at 17). At the time of the transfer, PPL or its affiliates employed all of PPL Montana's Board of Managers and almost all of its officers. (ECF Nos. 1 at 10; 65 at 18). Talen Montana alleges that after this distribution, PPL Montana only owned the coal-fired assets and was unable to fund its pension and environmental obligations. (ECF No. 1 at 3).

II. The Spin Agreements

While selling PPL Montana's hydroelectric assets, Talen Montana alleges that PPL began the process of divesting its merchant power business to focus on becoming a "pure-play regulated utility." (ECF No. 1 at 11). To meet this goal, PPL entered into a transaction with Riverstone Holdings LLC in which Riverstone would contribute certain of its competitive power-generating assets and PPL would contribute its "Energy Supply Business" (including PPL Montana) to Talen Energy Corporation and Talen Energy Holdings, Inc. (the "Spin Agreements"). (ECF Nos. 56 at 15; 65 at 53; 68 at 14). The negotiations over the Spin Agreements overlapped with PPL Montana's sale of hydroelectric assets to NorthWestern:

• On September 26, 2013, PPL Montana and NorthWestern executed a sale agreement;

• On June 9, 2014, Riverstone and PPL entered into the Spin Agreements;

• On November 17, 2014, the NorthWestern sale was consummated; and

• On June 1, 2015, the Spin Agreements were consummated.

(ECF Nos. 65 at 52-53, 61; 68 at 14; 145 at 18). As a result of the Spin Agreements, PPL Montana became a subsidiary of Talen Energy Corporation and was renamed Talen Montana, LLC. (ECF Nos. 1 at 3-4; 65 at 20). PPL's public shareholders took 65% of Talen Energy Corporation's ownership and Riverstone took 35%. (ECF Nos. 65 at 53; 145 at 8).

On June 2, 2016, Riverstone signed an Agreement and Plan of Merger to take Talen Energy Corporation private. (ECF No. 65 at 64). Riverstone fully assumed control of Talen Energy Corporation in December 2016. (ECF Nos. 65 at 66; 145 at 9).

III. Post-Spin Litigation and Talen's Bankruptcy

Talen Montana and its affiliates filed for bankruptcy on May 9, 2022. (Case No. 22-90054, ECF No. 1). Talen Montana brought this complaint quickly thereafter asserting actual and constructive fraudulent transfers. (ECF No. 1 at 15-17).

A. The Rosebud and Delaware Lawsuits

On October 29, 2018, Talen Montana Retirement Plan and Talen Energy Marketing^[1] filed a class action complaint in Rosebud County, Montana against the PPL Parties for actual and constructive fraudulent transfers (the "Rosebud Action"). (ECF No. 1 at 13). The Montana state court later stayed the Rosebud Action pending resolution of a lawsuit in the Delaware Court of Chancery in which the PPL Parties filed suit against Talen Montana and Riverstone (the "Delaware Action"). (ECF Nos. 1 at 14; 63 at 2). In the Delaware Action, the PPL Parties assert that (i) PPL Montana was solvent at the time of the Spin; (ii) claims arising out of the distribution to PPL are time-barred; (iii) Talen Montana and its affiliates breached provisions of the Spin Agreements; and (iv) the PPL Parties are entitled to indemnification. (ECF No. 1 at 14).

PPL removed the Rosebud Action to the United States District Court for the District of Montana on December 10, 2018. (ECF Nos. 89 at 16; 89-33). On September 13, 2019, the district court remanded the matter to state court. Talen Mont. Ret. Plan v. PPL Corp., No. CV-18-174-BLG-SPW, 2019 WL 4410347, at *1 (D. Mont. Sept. 16, 2019). The Ninth Circuit Court of Appeals denied PPL's petition for permission to appeal under 28 U.S.C. § 1453(c). Talen Mont. Ret. Plan v. PPL Corp., No. 19-80132, 2019 WL 8301814, at *1 (9th Cir. Nov. 21, 2019). Once this adversary proceeding was filed, the Rosebud Action was: (i) again removed to federal court; (ii) transferred to the Southern District of Texas on June 16, 2022; and (iii) referred to the Bankruptcy Court on July 22, 2022. (S.D. Tex. Case No. 22-1990, ECF Nos. 1; 35; 40). The Delaware Action was also removed, transferred, and referred to the Bankruptcy Court. (S.D. Tex. Case No. 22-2037, ECF Nos. 1; 5; 8; 15).

B. Proceedings Before This Court

The Court consolidated the Rosebud Action and the Delaware Action into this adversary proceeding on August 3, 2022. (ECF No. 53). Talen Montana and Talen Energy Supply later filed an amended complaint against the PPL Parties and CEP Reserves, Inc. on August 24, 2022. (ECF No. 56). The amended complaint pleads the following counts:

Count 1: Actual fraudulent transfer under the Bankruptcy Code and Montana law against all of the PPL Parties;

Count 2: Constructive fraudulent transfer under the Bankruptcy Code and Montana law against all of the PPL Parties;

Count 3: Breach of contract for a failure to indemnify against PPL;

Count 4: Disallowance of the PPL Parties' claims under 11 U.S.C. § 502(b)(1);

Count 5: Disallowance of the PPL Parties' claims under 11 U.S.C. § 502(d); and

Count 6: Equitable subordination of the PPL Parties' claims under 11 U.S.C. § 510(c).

(ECF No. 56 at 19-26).

On September 23, 2022, the PPL Parties filed their answers and affirmative defenses as well as: (i) counterclaims against Talen Montana and Talen Energy Supply; and (ii) third-party claims against Riverstone, Talen Energy Corporation, Talen Energy Holdings, Inc., Raven Power Holdings, LLC, C/R Energy Jade, LLC, and Sapphire Power Holdings, LLC. (ECF No. 65). The PPL Parties plead the following counts:

Count I: Breach of the Spin Agreements against Talen, Talen Energy Holdings, and Talen Energy Supply for allowing Talen Montana to file actions in Montana state court; Count II: Declaratory and injunctive relief against all of the defendants for the failure to commence an action to recover the proceeds of the NorthWestern sale within three years as required by Delaware law;

Count III: Breach of the Spin Agreements against Talen Energy Corporation, Talen Energy Holdings, Talen Energy Supply, Talen Montana, Raven, Jade, and Sapphire for filing the Montana actions and this adversary proceeding and thereby indicating they would not fulfill their obligations to indemnify the PPL Parties;

Count IV: Tortious interference against Riverstone for causing its affiliates to interfere with and breach the Spin Agreements; and

Count V: Declaratory judgment that PPL is not obligated to indemnify the defendants.

(ECF No. 65 at 87-97).

On September 30, 2022, the PPL Parties filed a motion for partial summary judgment on Counts 1 and 2 of the amended complaint and Count II of the counterclaims and third-party claims. (ECF No. 68 at 10). The PPL Parties argue that Talen Montana and Talen Energy Supply cannot proceed on Counts 1 and 2 because they are time-barred by the three-year statute of repose under Section 18-607(c) of the Delaware Limited Liability Company Act. (ECF No. 68 at 12). In connection with the motion for partial summary judgment, the PPL Parties filed a motion for certification to the Delaware Supreme Court to determine whether the three-year statute of repose in Section 18-607(c) applies to creditors of Delaware LLCs asserting claims under state fraudulent transfer law. (ECF No. 71...