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A federal bankruptcy judge has ruled in favor of the Yellowstone Valley Electric Cooperative, saying it can recoup from its bankrupt wholesale supplier a bill it says it already paid.

U.S. Bankruptcy Judge Ralph Kirscher's ruling on Friday means Yellowstone Valley still has to pay about $564,102, including interest, to the Bonneville Power Administration for electricity it received in August and September last year, but that the Southern Montana Electric Generation and Transmission Cooperative has to deduct that amount from the co-op's monthly bill.

Southern is a Billings-based wholesaler that supplies power to the Yellowstone Valley co-op, four other rural co-ops in southeastern and central Montana and the city of Great Falls. Southern also built the Highwood Generating Station, a 40-megawatt natural gas-fired power plant near Great Falls.

In another development in Southern's bankruptcy, Yellowstone Valley has asked the judge to allow it to abstain from the proceedings and to restart its lawsuit against Southern in state district court.

Kirscher's ruling on the power bill dispute came just three days after hearing arguments and shortly before BPA's Monday due date.

Kirscher said Yellowstone Valley was entitled to recoup the payment from Southern under the laws.

Yellowstone Valley argued that it paid BPA through its regular monthly billing from Southern but that Southern breached its contract to pay BPA and diverted the money, along with the payments by other members, to other purposes. Yellowstone Valley didn't learn that BPA hadn't been fully paid until after the bankruptcy filing.

"It's a big victory for us, and for the other co-ops, too," said Terry Holzer, retired Yellowstone Valley general manager, on Monday. "We can avoid having to come up with $565,000 a second time and paying a power bill we already paid," he said.

Yellowstone Valley, Holzer said, is negotiating with BPA on the payment and to get a lower interest rate than the 18.5 percent BPA charged up to Feb. 1. Southern then will credit the BPA payment in Yellowstone Valley's April bill.

Southern and Yellowstone Valley agreed in a stipulation that if Yellowstone Valley won, it would wait until April for the bill credit because Southern expects to have more cash by then.

Kirscher found the stipulation to be "fair and equitable."

Although the judge's order did not mention the four other co-ops, Holzer said he assumed they would be seeking to recoup their BPA bills, too.

Beartooth Electric Cooperative supported Yellowstone Valley's position. The three other co-ops -- Fergus Electric, Mid-Yellowstone and Tongue River -- argued against it but wanted also to recoup their bills if Yellowstone Valley won.

Holzer called the three opposing co-ops' position disappointing and disingenuous.

"We expended our attorneys' time and our money to fight this issue. Beartooth supported us, but those other three who fought us are now going to jump on the bandwagon. They need to explain to their members why they took the position they did," he said.

Attorneys for the three co-ops could not be reached for comment on Monday.

John Parks, a Denver attorney for Southern's trustee, said Monday that Southern was disappointed with the ruling but will comply. "We're also in discussion with the other member cooperatives," he said.

The remaining co-ops would not have to seek court permission to recoup their money, Parks said. Southern is encouraging the co-ops to negotiate with BPA for a lower interest rate and has asked them to wait until the May billing for credit, he said.

Southern could credit all of the co-ops in April but wants to wait until May for better cash flow, Parks said.

BPA, which sold power to Southern until September, when its contract ended, is an unsecured creditor seeking $1.2 million. BPA also recently billed each of Southern's co-ops directly for their share, including interest, for a total of $1.17 million.

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BPA sought payment under a contract provision in which the co-op members agreed to pay their individual shares if Southern did not.

Southern said it made a partial payment to BPA but used members' monthly payments to pay other, higher-priority claims as it scrambled to pay bills with dwindling cash shortly before its October bankruptcy filing.

Southern also argued that Yellowstone Valley owed it more money than it sought to recoup and was misinterpreting contracts.

Yellowstone Valley's share of the BPA bill is the largest, at 48 percent; followed by Fergus, at 21.5 percent or $252,670; Beartooth at 12.9 percent or $151,602; Tongue River at 16 percent or $188,034; and Mid-Yellowstone at 1.6 percent or $18,803, court records said.

Meanwhile, Yellowstone Valley is seeking to abstain from the bankruptcy proceedings and to restart its state case against Southern. The suit was halted when Southern sought to reorganize in bankruptcy court.

"It's a big motion for us. We think we have an even stronger case now," Holzer said.

Yellowstone Valley believes state court is the better forum to settle its breach of contract claims against Southern, Holzer said.

Yellowstone Valley sued to leave Southern in 2008 and Southern filed counterclaims. The case was set for trial to start Nov. 9 but was stayed because of the bankruptcy filing.

If Yellowstone Valley were to win in state court, Holzer said, it would ask the bankruptcy judge to consider the ruling and allow Yellowstone to leave Southern.

"That's our whole goal," he said.

Parks said Southern is reviewing Yellowstone Valley's motion and will be responding.

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