Originally published March 23, 2006
District Court Without Jurisdiction Over Calpine Efforts to Reject Power Contracts
A January 27, 2006 opinion by the U.S. District Court for the Southern District of New York in the bankruptcy case of Calpine Corporation raises potential difficulties for future bankrupt energy companies’ efforts at restructuring. Moreover, if not overturned on appeal, the ruling establishes a conflict with the U.S. Court of Appeals for the Fifth Circuit that could affect where energy companies choose to file their bankruptcies. In Calpine, the district court held that it could not allow the debtor to reject its out-of-the-money power contracts, and that only FERC could rule on the fate of Calpine’s executory wholesale power contracts. The opinion is contrary to existing case law in at least one other jurisdiction, which allowed the bankrupt energy company Mirant to reject its contracts. The story line is not yet complete, however; Calpine has appealed the district court’s opinion to the U.S. Court of Appeals for the Second Circuit.
Before commencing its bankruptcy case, Calpine entered into a number of long-term wholesale power agreements with power marketers, utilities and governmental units (the "Counterparties"). On December 19, 2005, with a Calpine bankruptcy filing imminent, certain Counterparties filed a petition with FERC, seeking an order requiring Calpine to continue performance of its power purchase agreements (the "Power Agreements"). The following day, on December 20, 2005, Calpine filed a Chapter 11 petition for reorganization in the Southern District of New York. Almost immediately, Calpine obtained a temporary restraining order from the bankruptcy court, enjoining FERC from requiring Calpine to perform the Power Agreements. At the same time, Calpine filed a motion in the bankruptcy court, seeking to reject certain energy contracts, including many of the Power Agreements.
The Counterparties requested to have the district court withdraw its reference with respect to the rejection motion to allow the district court to determine the issue. The district court agreed with the Counterparties that the rejection motion implicated both bankruptcy law and the Federal Power Act (the "FPA"), and therefore that the matter should be resolved by the district court rather than the bankruptcy court. On January 27, the district court issued an order vacating the temporary restraining order and dismissing the rejection motion, based on the determination that it lacked jurisdiction to adjudicate the rejection of FERC-jurisdictional contracts.
The district court’s analysis began with the principle that FERC has plenary jurisdiction over the filed rates of energy contracts. The district court further emphasized that FERC’s authority over wholesale power contracts makes them equivalent to federal regulations and that such jurisdiction extends to the terms and conditions of those contracts, not just to the regulation of rates.
The district court next determined that, although bankruptcy courts have substantial authority over property of the estate, the Bankruptcy Code does not allow that authority to be exercised in a manner that interferes with the jurisdiction of a federal regulatory agency, unless otherwise provided in the Code. "The fundamental and dispositive issue," the district court noted, "is whether rejection of the Power Agreements directly interferes with FERC’s exclusive jurisdiction and regulatory authority over wholesale power contracts." The district court answered that question in the affirmative.
The Court’s opinion potentially conflicts with an earlier holding in Mirant Corporation’s bankruptcy. In Mirant, the Fifth Circuit determined that a bankruptcy court maintains jurisdiction over rejection issues because the rejection of such contracts simply constitutes a breach of the agreement and does not alter the rates charged in the power contract. The district court acknowledged the Mirant opinion, but asserted that factual distinctions would warrant the disparate treatment.
At least for now, there is considerably less clarity regarding the jurisdiction over the power contracts of bankrupt energy companies. Calpine has appealed the district court’s opinion to the Second Circuit. Until FERC and/or the Second Circuit (or, potentially, the Supreme Court) issues a final determination on these issues, the fate of the Power Agreements remains uncertain. More broadly, unless overturned on appeal, the Calpine decision could make it more difficult for an energy trading company to restructure through bankruptcy because it may not have the same ability as debtors in other industries to shed its burdensome contracts – which for a bankrupt energy company could be a significant portion of its total liabilities. Moreover, the decision potentially provides one set of unsecured creditors – trading contract counterparties – with a powerful weapon to obtain better treatment than other unsecured creditors by having the ability to require FERC to enforce out-of-the-money contracts. Finally, the geographic disparity in the treatment of a debtor’s ability to reject wholesale power contracts could lead a debtor to conclude that it is better to file for bankruptcy in Texas than in New York.
© 2006 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.
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