IN RE: DANSKAMMER HOLDCO LLC (2026)

Chapter 11

Related to Docket No. 57

MEMORANDUM ORDER

Before the Court is The New York Independent System Operator, Inc.’s Motion for Relief from Stay to Effectuate a Setoff (the “Motion”).¹ By the Motion, New York Independent System Operator, Inc. (“NYISO”) seeks relief from the automatic stay pursuant to sections 362(d) and 553 of the Bankruptcy Code (the “Code”) to set off undisputed amounts it owes the above-captioned debtors and debtors-in-possession (the “Debtors”) in partial payment of a capacity shortfall penalty (the “Penalty”) it has assessed against the Debtors. The Debtors oppose the Motion on three independent grounds.² They argue that the NYISO has no right to set off the Penalty under New York law, that the Code prevents the setoff because the debt NYISO wishes to apply towards the Penalty arose postpetition, and finally, that stay relief is not appropriate due to the totality of the circumstances. For the reasons set forth below, the Court concludes that the Debtors’ first argument is correct – New York law does not permit NYISO to set off the amounts it currently owes to the Debtors against the Penalty. Therefore, the Court need not address the Debtors’ remaining arguments and will deny the Motion.³

I. FACTUAL BACKGROUND

The Debtors own and operate the Danskammer Generating Station, a natural gas generating facility in Newburgh, New York. NYISO manages New York's bulk electric grid and administers its wholesale energy and capacity markets. The relationship between NYISO and the Debtors is governed by the NYISO Market Administration and Control Area Services Tariff (the “Services Tariff”) and the NYISO Open Access Transmission Tariff (the “OATT Tariff” and, together with the Services Tariff, the “Tariffs”) approved by the Federal Energy Regulatory Commission (“FERC”).⁴

To generate revenue, the Debtors sell capacity on the “Installed Capacity” or “ICAP” spot market operated by NYISO. Each month, NYISO conducts auctions where suppliers like the Debtors can submit bids to supply capacity the following month (the “Obligation Period”). Suppliers that receive an award following an auction are paid from NYISO on account of that award during the Obligation Period. NYISO will later conduct an audit and if a supplier is found to have not provided the awarded capacity during a particular Obligation Period, NYISO may assess a capacity shortfall penalty. The supplier may dispute the penalty using the three-tiered dispute resolution procedure of the Tariffs – an informal resolution process, mediation or arbitration, and legal proceedings before FERC or a court of competent jurisdiction.⁵

Prior to their bankruptcy filing on June 10, 2026 (the “Petition Date”), the Debtors received capacity awards from numerous ICAP spot market auctions, including the May 2026 auction which gave rise to an award of $3,277,855 (the “May Auction Award”). Although NYISO states that the May Auction Award became liquidated, non-contingent, and owing to the Debtors on May 28, 2026 (the date of the award),⁶ NYISO never paid it to the Debtors in the June Obligation Period as required.

In January 2026, NYISO assessed the Penalty for the Debtors’ alleged capacity shortfalls between 2021 and 2025. The Debtors dispute the Penalty. In accordance with the Tariff's dispute resolution procedures, the parties engaged in informal discussions to settle the matter consensually.⁷ Notwithstanding those efforts, NYISO informed the Debtors on June 5, 2026 that it found no basis to reduce or eliminate the Penalty and would proceed to invoice and collect the Penalty in its fully assessed amount of $13,450,921.50.⁸ It then issued a notice of default on June 9, 2026, informing the Debtors that the failure to pay the Penalty was an event of default under the applicable provisions of the Tariffs, and gave the Debtors one day to cure.⁹ The Debtors responded to NYISO less than one hour later, stating their understanding that a final determination regarding the Penalty remained pending.¹⁰ NYISO replied the next day, informing the Debtors that while it had been open to receiving additional information from the Debtors, the Debtors failed to provide the information NYISO needed to modify the Penalty.¹¹ The Debtors commenced their chapter 11 proceedings that same day.

As of the Petition Date, NYISO owed the Debtors $3,283,950.50 (the “Unpaid Revenue”), primarily on account of the May Auction Award.¹² After learning of the chapter 11 cases, NYISO continued to withhold payment of the Unpaid Revenue, placed a provisional administrative hold on it,¹³ and sought relief from the stay to set off the Unpaid Revenue against the Penalty.

II. LEGAL STANDARD

“In the simplest terms, ‘setoff’ (or ‘offset’) allows parties to cancel mutual debts.”¹⁴ “[N]o federal right of setoff is created by the Bankruptcy Code.”¹⁵ Rather, section 553(a) of the Code preserves, with limited exception, whatever right of setoff a creditor may have prepetition under applicable nonbankruptcy law.

Even though the Code preserves a prepetition right of setoff, a creditor seeking to exercise that right during a bankruptcy proceeding is prohibited from unilaterally doing so by the automatic stay that arises under section 362 of the Code the instant a bankruptcy petition is filed.¹⁶ Section 362(d)(1) of the Code allows the Court to lift the stay so that a setoff can occur if cause is shown. Showing cause requires a movant to establish its right to set off under applicable nonbankruptcy law ¹⁷ and then that the separate requirements of section 553 of the Code are met.¹⁸ Under section 553, the debts to be set off must have arisen prepetition and be mutual.¹⁹

III. DISCUSSION

The Debtors argue that NYISO has no right to set off the Penalty against the Unpaid Revenue under New York law. NYISO disagrees, arguing that its right to set off arose prior to the Petition Date from section 7.1.2 of the Services Tariff, which provides that “all outstanding payment obligations under this [Tariff] ․ may be netted, offset, set off, or recouped[.]”²⁰ NYISO contends that it may set off the Penalty against the Unpaid Revenue because the Penalty has been liquidated, non-contingent, and outstanding since it was assessed in January 2026.²¹

The Debtors contend that NYISO has no right to set off the Penalty under New York law, which applies to the Tariffs by their own terms,²² because the Penalty is not a final debt. The Debtors disputed the Penalty prepetition, continue to dispute it, and possess the right to pursue tiers two and three of the Tariffs’ dispute resolution procedures. Because the final amount of the Penalty (if any) is not yet known, it is the Debtors’ position that it cannot be set off against the Unpaid Revenue and that, accordingly, the Unpaid Revenue must be immediately turned over to the estates.

Upon review of the cases Debtors rely upon to support their argument, the Court agrees that New York law does not permit the setoff of a claim that is disputed and thus not final. The landmark case of De Camp v. Thomson is frequently cited as the origin of this principle. In De Camp, the New York Court of Appeals observed that:

The authorities seem to be quite uniform to the effect that a judgment to be available as a set-off must be a valid, subsisting obligation and final in its nature, and, hence, that judgments cannot be set off against each other, where one of them has been appealed from and the appeal is still pending and undetermined.

It seems quite obvious that the plaintiff, at the time of the trial, had no absolute legal right to the set-off sought to be enforced by this action. His judgment was not then, and indeed might never become payable or enforceable. Whether it would or not depended entirely upon the future action of the court to which the appeal had been taken. Although it was in form an absolute claim against the defendants, yet, in fact, it was contingent, depending upon the action of the court to render it efficient and enforceable. Hence, we think the mutuality necessary to authorize such a set-off did not exist.23

The other cases on which Debtors rely are in accord.²⁴ NYISO has cited no decisions containing a contrary interpretation of New York law.

NYISO attempts to distinguish the New York cases by arguing that the Penalty has been assessed, is in a fixed dollar amount, and is not dependent on future events. The challenge of the Penalty by the Debtors, NYISO contends, does not modify the fact that the Penalty is outstanding, due, and owing, thereby eligible for setoff. In support, NYISO points the Court to Mazzeo v. United States, where the Second Circuit Court of Appeals observed that, under the Bankruptcy Code, a debt is not contingent merely because the debtor disputes the claim.²⁵ NYISO's argument here misses the mark. The court in Mazzeo is discussing “contingent” claims in bankruptcy proceedings. But New York's “finality” requirement for set off eligibility applies broadly to claims that, in bankruptcy parlance, are noncontingent and asserted in a liquidated amount but are disputed. Under New York law, these are not final and are ineligible for set off.²⁶

NYISO also argues that the Tariffs expressly provide that the dispute resolution process has no effect on the validity or enforceability of the Penalty. It relies on section 11.8 of the Services Tariff that provides that “[t]he pendency of a Dispute Resolution Proceeding ․ shall not relieve the Parties of any duty to perform their respective obligations under the ISO Tariffs, ISO Procedures, or relevant agreement.”²⁷ The record, however, is far from clear on the Debtors’ duty to pay the Penalty under the Tariffs in light of the dispute.

The Tariffs are best described as labyrinthine, highly technical documents that span thousands of pages. The Court cannot confidently determine on its own the Debtors’ payment obligations – nor should it do so. NYISO points the Court to no provisions of the Tariffs (or other applicable procedures or agreements) to explain the Debtors’ payment obligation for the disputed Penalty other than sections 4.1.2 and 7.1.2 of the Services Tariff.²⁸ Section 4.1.2 is entitled “Independent System Operator Authority” and does not discuss the obligation to pay disputed capacity shortfall penalties.²⁹ Section 7.1.2 is entitled “Right to Net or Set Off Obligations Owed” and likewise does not address the obligation to pay disputed capacity shortfall penalties.³⁰ Indeed, in a 2008 Opinion, FERC concluded that certain “tariff-authorized sanctions” imposed by NYISO need not be paid by market participants until after the conclusion of any dispute resolution process provided for in the Services Tariff or petition to FERC for review.³¹ NYISO argues that this FERC Order applies to a penalty regime established under the Tariffs different from and inapplicable to capacity shortfall penalties like the Penalty. Even so, it lends support for the Court's conclusion that NYISO has failed to adequately show the Debtors’ obligation to pay the Penalty while in dispute under the Tariffs.³²

In sum, New York law requires that the Penalty be final to be eligible for set off against the Unpaid Revenue. NYISO concedes that the Tariffs’ dispute resolution process is ongoing and that the Penalty could be consensually modified or even overturned by a reviewing authority.³³ Under these facts, the Penalty is not final, and New York law does not permit it to be set off against the Unpaid Revenue.

IV. CONCLUSION

For the forgoing reasons, it is hereby ORDERED that the Motion is DENIED.

Dated: October 1, 2026 Wilmington, Delaware

FOOTNOTES

1.   D.I. 57.

2.   D.I. 131 (Objection of the Debtors to the NYISO's Motion for Relief from Stay).

3.   At the hearing, the Court took evidence and heard arguments on the Debtors’ first two points of opposition. The Court held in abeyance evidence and arguments on the third.

4.   D.I. 132 (Declaration of Thomas M. Gray in Support of Debtors’ Objection) ¶¶ 5-6; Motion ¶¶ 7-9.

5.   Joint Exhibits Admitted During September 8, 2026 Hearing (“Hearing Exhibits”), Ex. 23, Services Tariff § 11.

6.   Motion ¶ 17; D.I. 149 (Transcript of September 8, 2026 Hearing (“Transcript”) at 35:18-20).

7.   Hearing Exhibit 17. At the hearing, NYISO's counsel objected to the admission of this exhibit, as well as the testimony about it, on the grounds that it is protected by Federal Rule of Evidence 408, which precludes the admission of certain evidence obtained during or relating to settlement discussions. The Court overruled the objection at the hearing, indicating that it would hear the evidence and then determine its weight and relevance, if any. Having read the exhibit in its entirety, the Court reaffirms that the objection is overruled and holds that the exhibit may be considered for the purpose of establishing the timing of the NYISO's assessment, invoicing, garnishment, and default notice as well as the occurrence of settlement discussions regarding the Penalty.

8.   Id.

9.   Id.

10.   Id.

11.   Id.

12.   Motion ¶ 18. NYISO also owes $6,095.50 to the Debtors on account of prepetition energy sales that the Debtors made to NYISO.

13.   Citizens Bank v. Strumpf, 516 U.S. 16, 21 (1995); Motion ¶ 19.

14.   In re WL Homes LLC, 471 B.R. 349, 351-52 (Bankr. D. Del. 2012).

15.   Strumpf, 516 U.S. at 20.

16.   See 11 U.S.C. § 362(a)(7).

17.   See In re Orexigen Therapeutics, Inc., 596 B.R. 9, 14-15 (Bankr. D. Del. 2018) (“[T]he party seeking setoff must acquire such right prepetition under applicable nonbankruptcy law.”).

18.   WL Homes, 471 B.R. at 52.

19.   Univ. Med. Ctr. v. Sullivan (In re Univ. Med. Ctr.), 973 F.2d 1065, 1079 (3d Cir. 1992) (“The doctrine of setoff, as incorporated in Bankruptcy Code section 553, gives a creditor the right ‘to offset a mutual debt owing by such creditor to the debtor,’ provided that both debts arose before commencement of the bankruptcy action and are in fact mutual.” (quoting In re Davidovich, 901 F.2d 1533, 1537 (10th Cir. 1990)).

20.   Hearing Exhibit 28, Services Tariff § 7.1.2.

21.   Transcript at 51:18-22.

22.   Hearing Exhibit 28, Services Tariff § 14.5.

23.   De Camp v. Thomson, 159 N.Y. 444, 448 (1899).

24.   Willett v. Lincolnshire Mgmt., 302 A.D.2d 271, 756 N.Y.S.2d 9, 10 (App. Div. 1st Dept. 2003) (“The obligation purportedly owing from plaintiff to LMI is currently being disputed and ‘there is no right to set off a possible, unliquidated liability against a liquidated claim that is due and payable.’ ”) (quoting Spodek v Park Prop. Dev. Assocs., 263 A.D.2d 478, 478-79 (N.Y. Sup. Ct. 1999)); Cytec Indus., Inc. v. Allnex (Lux.) & CY S.C.A., No. 14-cv-1561 (PKC), 2015 U.S. Dist. LEXIS 82273, at *32-33 (S.D.N.Y. May 15, 2015) (“Cytec's affirmative claims asserted in the Complaint may be liquidated in the sense that they are calculable, but they are vigorously dispute[d]. Cytec, therefore, is not entitled to offset the tax indemnifications that it undisputedly owes Allnex.”); Ferguson v. Lion Holding, Inc., 312 F. Supp. 2d 484, 505 (S.D.N.Y. 2004) (Obligations “must be due for setoff to apply. Here, no payments for indemnity to defendants are due from plaintiffs. The parties dispute plaintiffs’ obligation to indemnify defendants, and are litigating this dispute in New York State Supreme Court. Setoff therefore presents no bar to summary judgment at this stage.”); Felton v. Noor Staffing Grp., LLC (In re Corp. Res. Servs. Inc.), 564 B.R. 196, 201 (Bankr. S.D.N.Y. 2017) (interpreting New York law and providing that “[e]ven when a lawsuit has been filed, claims that are not finally adjudicated are contingent.”).

25.   Mazzeo v. United States (In re Mazzeo), 131 F.3d 295, 303 (2d Cir. 1997) (“We cannot view a debt as contingent merely because the debtor disputes the claim, for that would make the word ‘contingent,’ in the definition of ‘claim,’ redundant.”).

26.   See infra notes 23-24 and accompanying text.

27.   Trial Exhibit 28, Services Tariff § 11.8.

28.   See Motion at 8 ¶ 32 (“Danskammer owes the Penalty under the Services Tariff. See id. §§ 4.1.2, 7.1.2”).

29.   Section 4.1.2 states:The ISO shall provide all Market Services in accordance with the terms of the ISO Services Tariff and the ISO Related Agreements. The ISO shall be the sole point of Application for all Market Services provided in the NYCA. Each Market Participant that sells or purchases Energy, including Special Case Resources and Emergency Demand Response Program participants, sells or purchases Capacity, or provides Ancillary Services in the ISO Administered Markets utilizes Market Services and must take service as a Customer under this Tariff and enter into a Service Agreement under the Tariff, as set forth in Attachment A; each entity that withdraws Energy to supply Load within the NYCA or provides Installed Capacity to an LSE serving Load within the NYCA utilizes the Control Area Services provided by the ISO and benefits from the reliability achieved as a result of ISO Control Area Services, must take service as a Customer under this Tariff and enter into a Service Agreement under this Tariff, as set forth in Attachment A; and each entity that has its virtual bids accepted and thereby engages in Virtual Transactions and each entity that purchases Transmission Congestion Contracts, excluding Transmission Congestion Contracts that are created prior to January 1, 2010, utilizes Market Services and must take service as a Customer under this Tariff and enter into a Services Agreement under this Tariff, as set forth in Attachment A. Each Customer that utilizes Market Services also utilizes Transmission Service and shall obtain Transmission Service under the ISO OATT.Trial Exhibit 28, Services Tariff § 4.1.2.

30.   Section 7.1.2 states:Unless otherwise specifically set forth in this ISO Services Tariff, if for any settlement period the ISO is required to pay any amount to the Customer and the Customer is required to pay any amount to the ISO under this ISO Services Tariff or the ISO OATT, such amounts should be netted, and the party owing the greater aggregate amount shall pay to the other party the difference between the amounts owed. Additionally, all outstanding payment obligations under this ISO Services Tariff and the ISO OATT between the ISO and the Customer may be netted, offset, set off, or recouped, and payment shall be owed as set forth above.Trial Exhibit 28, Services Tariff § 7.1.2.

31.   In re N.Y. Indep. Sys. Operator, 124 F.E.R.C. P61, 301 at ¶ 105 (Sept. 30, 2008).

32.   NYISO also does not argue that the Tariffs preempt New York law on setoff eligibility. So even if the Tariffs require the Debtors to pay the Penalty while in dispute, the question of whether New York law would still prevent it from setting off the Penalty against the Unpaid Revenue remains unaddressed by NYISO. See In re WL Homes LLC, 471 B.R. 349, 352 (Bankr. D. Del. 2012) (denying motion to lift stay to allow setoff and stating that movant's “say-so is simply not enough to establish – as is [movant's] burden – that [applicable non-bankruptcy] law would permit this type of contingent claim to serve as the basis for setoff.”) (emphasis in original).

33.   Motion at ¶ 21; D.I. 140 (Reply of NYISO in Support of Its Motion for Relief From Stay to Effectuate a Setoff) at ¶ 1.

Karen B. Owens Chief Judge