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In Re: Resource Technology Corp v. State of Illinois

February 10, 2011


The opinion of the court was delivered by: Matthew F. Kennelly, District Judge:


Chiplease, Inc. appeals from a bankruptcy court order granting the State of Illinois an administrative claim against the Chapter 7 bankruptcy estate of Resource Technology Corporation (RTC). Illinois opposes Chiplease's appeal and has cross-appealed seeking reversal of the bankruptcy court's ruling to the extent that it did not include reimbursement for tax credits given prior to June 6, 2006 as part of Illinois's allowed administrative claim. For the reasons set forth below, the Court affirms the bankruptcy court's order.


This appeal involves the application of an Illinois statute designed to encourage alternate energy production. Under 220 ILCS 5/8-403.1, entities that own certain types of electricity-generating facilities can apply to the Illinois Commerce Commission (ICC) for designation of these facilities as qualified solid waste energy facilities (QSWEFs). Once a facility is classified as a QSWEF, the ICC requires the QSWEF's local electric utility to enter into a long-term power purchase agreement (PPA) obligating the utility to purchase electricity from the QSWEF at an elevated "retail rate" exceeding the rate established under federal law. See generally 220 ILCS 5/8-403.1(c)-(d). Illinois then compensates the utility for this added expense by giving the utility a tax credit for the difference in cost between the retail rate and the federal rate. 220 ILCS 5/8-403.1(d). When a triggering event later occurs, the QSWEF must reimburse Illinois for the tax credits received by the utility. Id. Under current law, a QSWEF's duty to reimburse is triggered by the earliest of three events: (1) the QSWEF's full repayment of the capital costs it incurred in developing the facility; (2) the QSWEF's cessation of operations; or (3) the termination of the underlying PPA. Id. However, prior to the June 6, 2006 effective date of a statute that amended section 8-403.1, the only trigger for this duty was a QSWEF's full repayment of its capital costs.

Illinois thus subsidizes the development of QSWEFs with what is effectively an indirect, interest-free loan. Section 8-403.1 enables a QSWEF to sell electricity to utilities at an elevated price. The extra revenue yielded by this transaction is retained by the QSWEF until a triggering event obligates the QSWEF to remit it to Illinois in the form of a tax credit reimbursement.

RTC was the owner and operator of a number of electricity-generating facilities. In 1997, two years before RTC's bankruptcy proceedings began, the ICC issued an order granting QSWEF status to ten energy-producing facilities owned by RTC.

Pursuant to the ICC's order, Commonwealth Edison (ComEd), the local electric utility, entered into three PPAs with RTC. These PPAs governed ComEd's purchases of electricity from RTC's QSWEFs at Lyons, Congress/Hillside, and Pontiac.

On November 15, 1999, creditors of RTC filed an involuntary Chapter 7 petition against RTC. Thereafter, RTC continued to produce electricity at the Lyons, Congress/Hillside, and Pontiac facilities as a debtor-in-possession. Pursuant to the PPAs, RTC received payment from ComEd at the retail rate. In January 2000, RTC consented to an order converting its case from a Chapter 7 proceeding to a Chapter 11 proceeding, effective February 11, 2000. RTC continued to operate the facilities as a debtor-in-possession until the bankruptcy court appointed a Chapter 11 trustee on August 26, 2003. The trustee then continued operations until September 21, 2005, when the bankruptcy court entered an order converting the case to a Chapter 7 proceeding. The court appointed a Chapter 7 trustee and authorized the new trustee to continue operating RTC's QSWEFs.

In October 2005, the trustee filed a lawsuit against Chiplease, Scattered Corporation, Leon Greenblatt and other entities for breach of fiduciary duty and other causes of action. On February 17, 2006, the trustee filed a motion for authority to settle the lawsuit. The settlement agreement proposed, among other things, the assignment of certain leases and executory contracts to Chiplease and Scattered and/or their respective designees. The bankruptcy court granted the trustee's motion and approved the agreement on March 16, 2006. On March 28, 2006, the trustee transferred these assets to Chiplease, Scattered, and/or their designees pursuant to the settlement agreement. The trustee also ceased the RTC estate's operations at the Lyons, Congress/Hillside, and Pontiac QSWEFs. However, RTC continued producing electricity at the Pontiac location under the operation of other individuals until July 2006. Between March 28, 2006 and July 2006, RTC received payments at the retail rate from ComEd for electricity produced at the Pontiac location. These payments were sent to RTC's bankruptcy "lockbox" in accordance with a court-approved debtor-in-possession financing agreement.

On January 4, 2007, Illinois filed its first motion for allowance and payment of a Chapter 7 administrative expense claim. On June 24, 2009, Illinois filed an amended motion. Chiplease objected to both motions. The amended motion sought a total of $1,518,048.72 for reimbursement of tax credits taken by ComEd in connection with its purchase of electricity from QSWEFs at Pontiac, Congress/Hillside, and Lyons pursuant to the PPAs, as well as $14,358.82 for a separate tax-related claim. Chiplease and Illinois entered into a stipulation regarding the facts, and the case was submitted for trial before the bankruptcy court.

On April 27, 2010, the court issued its first ruling. Because Chiplease did not oppose Illinois's separate tax-related claim, the court allowed it without discussion. The court then considered Illinois's tax credit reimbursement claim and rejected all of Chiplease's arguments opposing the claim's allowance. However, the court independently raised the issue of whether the 2006 amendments to section 8-403.1 might limit the amount of Illinois's claim. Recognizing that the 2006 amendments created new triggers for a QSWEF's duty to reimburse, the court noted that no facts in the record suggested that RTC satisfied the trigger that applied prior to the enactment of the 2006 amendments. The court reasoned that if the 2006 amendments apply only prospectively, RTC would have no duty to reimburse Illinois for tax credits taken by ComEd prior to June 6, 2006. By contrast, if the amendments apply retroactively as well as prospectively, RTC would be required to reimburse Illinois for tax credits taken both before and after the amendments' effective date. To consider this issue, the court delayed ruling on whether the tax credit reimbursement claim should include tax credits taken prior to June 6, 2006. The parties later submitted briefing on the potential retroactivity of the 2006 amendments.

On June 8, 2010, the court issued its second ruling on the administrative claim. The court held that the 2006 amendments were not intended to apply retroactively, and therefore Illinois's administrative claim was limited to reimbursement for tax credits taken by ComEd between June 6, 2006 and July 2006. The court concluded that the 2006 amendments did not explicitly state that they were intended to apply to tax credits received by a utility prior to their effective date. As such, Illinois's default statutory rule against retroactivity controlled the court's construction of the 2006 amendments. See 5 ILCS 70/4. The court also rejected Chiplease's argument that the 2006 amendments should not apply prospectively, concluding that prospective changes to a statute do not implicate a party's constitutional rights. The court entered an order allowing as Chapter 7 administrative expenses Illinois's claims for reimbursement of tax credits taken after June 6, 2006, totaling $175,710.58.

Chiplease and Illinois both appealed. Chiplease argues that the bankruptcy court should not have allowed Illinois's administrative expense claim. Illinois argues on cross-appeal that the bankruptcy court should not have ...

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