Faced with mushrooming costs attendant to construction of the Seabrook nuclear power plant, New Hampshire’s largest electric utility, appellee Public Service Company of New Hampshire (PubServ), sought shelter under Chapter 11 of the Bankrupt cy Code, 11 U.S.C. § 101 et seq. PubServ filed its Chapter 11 petition on January 28, 1988. At that time, it was a party to a pair of contracts with appellant New Hampshire Electric Cooperative (NHEC), a utility which services rural areas of the state. Because these agreements are central to an understanding of this appeal, we offer thumbnail sketches of them:
1. Supply Contract. PubServ and NHEC had a longstanding supply agreement which enabled NHEC to purchase substantially all its electricity requirements from PubServ at wholesale.
2. Sellback Contract. By virtue of a fractional ownership interest in Seabrook, NHEC was entitled to a small share (roughly 2.7%) of the power to be generated when and if the plant went on line. In anticipation thereof, the parties entered an ancillary agreement which obliged PubServ to purchase this power from NHEC if, and to the extent that, it proved to be more than NHEC needed. No performance was due under the Sellback Contract until, among other things, Seabrook began commercial operation and NHEC gave a half-year’s advance notice to PubServ of the amount of excess power it desired to sell.
When PubServ filed for reorganization in the bankruptcy court, Seabrook was not yet operational. At the time, NHEC owed PubServ $4,794,771.74 for prepetition purchases of electricity under the Supply Contract. NHEC admitted that debt, but refused to pay it, asserting an entitlement to
PubServ commenced an adversary proceeding to recover the past-due Supply Contract obligation. The bankruptcy court, unmoved by the setoff claim, entered summary judgment against NHEC for the full amount.
Payment of Primary Indebtedness
As a threshold matter, appellee suggests that, inasmuch as NHEC paid the primary indebtedness pursuant to the bankruptcy court judgment (without seeking a stay), it has rendered itself ineligible to seek a setoff. PubServ seems to be saying that payment erased the underlying obligation so that there is no longer a debt owed to it against which a corresponding debt owed by it can be counterbalanced. We disagree.
NHEC seasonably asserted its right of setoff and has consistently maintained its entitlement thereto. Its payment of the prepetition indebtness was not voluntary and by no means constituted a waiver. Cf. Irons v. FBI,
The situation for the treatment of setoff in a reorganization case is very different than in a liquidation case. In order to accomplish a successful reorganization it is important that business proceed as usual for the debtor. Setoff is an interruption in the conduct of business and may have detrimental effects on the attempted reorganization.
H.R.Rep. No. 595, 95th Cong., 2d Sess. 183, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 6144. To implement the congressional purpose, courts should attempt to minimize the dislocations attendant to setoffs. In the usual case, requiring creditors to pay the debt while leaving them free to pursue their perceived remedy nicely balances the rights and interests of the parties and furthers the goals of the statutory scheme.
For this reason, we rule that NHEC, under the circumstances and notwithstanding the enforced payment of its prepetition debt to PubServ, retained standing to press its alleged offsetting claim. Cf. In re Archer,
Setoffs — Generally
The orderly reorganization of debtors is the paramount objective of Chapter 11. In attaining that objective, it is important — as, indeed, it is important in administering other chapters of the Bankruptcy Code — that creditors should be treated fairly. As Congress recognized, setoffs work against both the goal of orderly reorganization and the fairness principle because they preserve serendipitous advantages accruing to creditors who happen to hold mutual obligations, thus disfavoring other equally-deserving creditors and interrupting the debt- or’s cash flow. See H.R.Rep. No. 595, supra, reprinted in 1978 U.S.Code Cong. & Admin.News 6143-45; see also Boston and Maine Corp. v. Chicago Pacific Corp.,
does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the*14 commencement of the [bankruptcy] case ... against a claim of such creditor against the debtor that arose before the commencement of the case....
11 U.S.C. § 553(a).
It follows that setoff may flourish in bankruptcy proceedings only where mutuality of obligation exists: a prepetition debt, i.e., a debt which arose prior to commencement of the bankruptcy case, is owed by Creditor A to Debtor, while at the same time Creditor A has some claim against Debtor which likewise arose prior to commencement of the bankruptcy case. See, e.g., In re Rinehart,
In addition to the existence of such mutual obligations, Creditor A must also possess a valid right of setoff under some applicable provision of either federal or state substantive law; section 553(a) of the Bankruptcy Code, quoted ante at 13-14, is not an independent source of setoff rights. See United States v. Norton,
We believe that the courts below were correct in concluding that these conditions were not satisfied here; and that, as a result, Creditor A (NHEC) was not entitled to offset any amount against what it owed, prepetition, to Debtor (PubServ). We describe briefly why appellant’s claim failed to fulfill the requirements of the Code.
Non-Existence of Substantive Basis
What NHEC visualizes as its offsetting claim is grounded in the Sellback Contract. But, Seabrook has not begun to produce commercially-usable power. Consequently, NHEC has yet to (1) receive its first kilowatt of Seabrook-generated electricity, (2) declare any electricity surplus (giving appropriate notice and quantifying the ' excess, as the agreement requires), or (3) request that PubServ purchase anything. By the same token, the debtor has yet to (1) repudiate the Sellback Contract, or (2) refuse acceptance of, and payment for, energy tendered to it thereunder. Because performance remains due on both sides, the Sellback Contract comprises a classic example of what the Bankruptcy Code’s framers considered to be a wholly executory contract. See S.Rep. No. 989, 95th Cong., 2d Sess. 58, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5844; H.R.Rep. No. 595, supra, 1978 U.S.Code Cong. & Admin. News at 6303.
The Bankruptcy Code prescribes a set course of treatment for executory contracts. Acting in the debtor’s interest, the trustee, “subject to the court’s approval, may assume or reject any executory contract ... of the debtor.” 11 U.S.C. § 365. Ordinarily, the debtor need not commit itself to assumption or rejection of such a contract until a reorganization plan is confirmed. 11 U.S.C. § 365(d)(2). In the meantime, the executory contract remains in effect and creditors are bound to honor it. See Bordewieck, The Postpetition, Pre-Rejection, Pre-Assumption Status of an Executory Contract, 59 Am.Bankr.L.J. 197, 200, 211-13 (1985). If and when assumed, the contract operates according to its tenor. On the other hand, eventual rejection “constitutes a breach of such contract,” 11 U.S.C. § 365(g); and the breach, in accord with what has been termed the “relation-back” doctrine, is treated as if it had occurred prepetition, that is, before the bankruptcy proceeding began. 11 U.S.C.
In this case, PubServ has neither assumed nor rejected the Sellback Contract. NHEC has never asked the bankruptcy court to set a deadline for an assumption/rejection decision. In such circumstances, the Contract continues in effect— and appellant has no provable claim thereunder against the bankrupt estate. See Matter of Whitcomb & Keller Mortgage Co.,
NHEC portrays the relation-back doctrine as tipping the scales in its favor. We find such reliance to be grossly mislaid. We acknowledge that, when triggered by a timely postpetition rejection, the relation-back rule serves to transform a future action for breach of an executory contract into a prepetition claim subject to setoff. See 11 U.S.C. § 502(g). But the missing link is the event of rejection. The simple fact of this matter is that the debtor has not yet rejected—and may never reject— the Sellback Contract. Courts must deal in the reality of events, not in worst-case visions of what some uncertain future might bring. Because there has been no rejection of the Sellback Contract, no claim or cause of action has at this point accrued thereunder. See, e.g., Cochise College Park,
NHEC’s lament that rejection of the Sellback Contract seems “all but inevitable,” Appellant’s Brief at 6, changes nothing. In this situation, inevitability— like beauty—is largely in the eye of the beholder. The conclusion is best written off as self-serving speculation. Perhaps more important, fear of forthcoming rejection does not excuse NHEC from its interim obligations under the Sellback Contract. A fortiori, such fears cannot excuse payment of monies already due under the (unrelated) Supply Contract.
The Bankruptcy Code places the option of assuming or rejecting executory contracts with the debtor, not with its business partners. To disturb this mechanism would unbalance the Code’s overriding policy favoring debtor reorganization and rehabilitation. Debtors must be afforded breathing space to decide which contracts they wish to assume. See Whitcomb & Keller,
Since appellant does not possess a matured cause of action based on the Sell-back Contract, neither federal nor state law furnishes it a sufficient toehold for its setoff claim. As noted earlier, 11 U.S.C. § 553(a) is not an independent source of setoff rights.
If there are mutual debts or demands between the plaintiff and the defendant at the time of the commencement of the plaintiffs action, one debt or demand may be set off against the other.
N.H.Rev.Stat.Ann. § 515:7. This rule is subject to an equally-straightforward qualifier:
No debt or demand shall be set off as aforesaid unless a right of action existed thereon at the beginning of the plaintiff’s action.
N.H.Rev.Stat.Ann. § 515:8.
Section 515:8 could hardly be clearer: New Hampshire’s general setoff statute “do[es] not apply to debts that are not yet due.” In re Estate of Borkowski,
NHEC strives mightily to undermine this result, but to no avail. It seems to argue that the petition for reorganization under Chapter 11, in itself, constituted an anticipatory breach of the Sellback Contract under New Hampshire law. The Bankruptcy Code, however, provides quite to the contrary: insofar as is possible, there shall be continuation of the debtor’s business as usual, notwithstanding the filing. See, e.g., 11 U.S.C. § 365(e) (invalidating clauses that terminate or modify contracts in the event of bankruptcy). And, since the petition did not “repudiate [the debtor’s] obligations or disable it from performing" on the contract, In re Barton Co.,
Appellant’s last assertion comprises a paean to equity. It is meritless. From a federal perspective, the law is settled that the bankruptcy court, in the guise of “doing equity,” has no power to enlarge setoff rights beyond the dimensions sculpted by non-bankruptcy law or explicitly required by the Code. In re NWFX, Inc.,
Conclusion
We need go no further. For the reasons described above, NHEC was not entitled to a setoff against its prepetition debt to PubServ. There is one thing more: inasmuch as the governing principles of law were carefully elucidated by the courts below, and appellant nonetheless proceeded pervicaciously, without a realistic hope of success, we award appellee double costs under Fed.R.App.P. 38.
Affirmed. Double costs.
Notes
. In hawking a contrary result, appellant places great weight upon In re Verco Industries,
. NHEC's assertion that the bankruptcy court lacked discretion to deny its setoff claim proceeds from its treatment of 11 U.S.C. § 553 as a source of substantive law. That assumption is plainly erroneous. See In re NWFX, Inc.,
. The bankruptcy court's determination on this point was, we note, explicitly affirmed by the district court.