Originally published November 9, 2006
The United States District Court for the Southern District of New York issued a significant opinion recently, holding that the Enron bankruptcy court should adjudicate disputes concerning termination payments arising out of terminated Enron contracts. The ruling comes in spite of a provision in the Energy Policy Act of 2005 ("EPAct 2005"), which many thought would require a determination of such issues by the Federal Energy Regulatory Commission ("FERC"). This continuing legal wrangling over the appropriate jurisdictional division between FERC and bankruptcy courts is another example of the relatively unsettled nature of the law in this area.
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Before filing its bankruptcy petition, Enron Power Marketing Inc. ("Enron") entered into a number of long-term electricity contracts. Among the counterparties to the contracts were Luzenac America, Inc. ("Luzenac") and the Public Utility District No. 1 of Snohomish County, Washington ("Snohomish"). The contracts with Luzenac and Snohomish (collectively, the "Defendants") included provisions requiring a payment by the "out of the money" party at the time of a termination – i.e., a "two-way" or "good guy pays" provision. After Enron filed its bankruptcy petition on December 2, 2001, Luzenac and Snohomish terminated their respective contracts. Enron then commenced adversary proceedings, seeking to recover termination payments under the contracts.
On August 8, 2005, President Bush signed EPAct 2005. Included in that legislation was a provision called the Cantwell Amendment applicable to certain contracts executed before June 20, 2001. The Cantwell Amendment provided FERC with "exclusive jurisdiction under the Federal Power Act…to determine whether a requirement to make termination payments for power not delivered by the seller…is not permitted under a rate schedule…or is otherwise unlawful on the grounds that the contract is unjust and unreasonable or contrary to the public interest." After the passage of EPAct 2005, the Defendants filed petitions to have FERC adjudicate the claims relating to their termination payment issues.
Enron had its adversary proceedings removed from the bankruptcy court to the district court, for purposes of determining the jurisdictional issues relating to the Cantwell Amendment. Before the district court issued its ruling, FERC issued an order with respect to Snohomish, determining that Enron should not be allowed to collect a termination payment because, under New York law, Enron had fraudulently induced Snohomish to enter its contract with Enron – a complete defense to Enron’s claim for a settlement payment.
Despite the FERC order, the district court declined to have FERC adjudicate the jurisdictional issues. Rather, it emphasized that FERC does not have the authority to determine the jurisdiction of the courts, and concluded that such issues were best decided by the district court.
Turning to the merits, the district court noted that the Defendants and the United States government argued that FERC had exclusive jurisdiction over all issues relating to the termination payments, including state-law contract claims for termination payments. Enron, on the other hand, argued that the Cantwell Amendment reinforced FERC’s jurisdiction over termination payment disputes arising out of its regulatory authority. Enron further suggested that the Cantwell Amendment would be unconstitutional if it were interpreted as conferring the broader jurisdiction.
The district court generally agreed with Enron’s arguments. The court found that the language of the Cantwell Amendment "unambiguously tie[s] the relief FERC is authorized to grant to its traditional considerations under the" Federal Power Act. Therefore, the court determined, the legislation did not confer additional jurisdiction upon FERC to resolve state-law contract claims. It emphasized that FERC’s order relied on New York law to conclude that Snohomish was fraudulently induced to enter into its Enron contracts. The court also stated that its review of the legislative history and tenets of statutory construction likewise supported its conclusion.
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The district court’s ruling was a significant victory for Enron, in that it returned the adversary proceedings to the bankruptcy court, traditionally a forum viewed as being beneficial to debtors. The legal battles are far from over, however.
First, the Defendants have appealed the district court ruling to the U.S. Court of Appeals for the Second Circuit. Second, Enron filed in the bankruptcy court a motion for summary judgment relating to the adversary proceedings. Snohomish unsuccessfully requested that the bankruptcy court hold the summary judgment motion in abeyance, pending its appeal. Third, Snohomish filed a motion at FERC seeking to have it enforce its order ruling that Enron cannot collect on the relevant termination payments. Fourth, Enron filed a motion in the bankruptcy court, asking it to order Snohomish to cease prosecution of its petition before FERC. On October 30, 2006, the bankruptcy court granted that motion, ruling that Snohomish’s efforts to prosecute its case before FERC amounted to a violation of the automatic stay. On November 1, 2006, Snohomish amended its petition before FERC.
With many legal and procedural matters yet to be decided – and several tribunals being asked to decide them – it appears that the parties’ termination payment issues will not be resolved for quite some time to come. More generally, however, the case suggests that the line between FERC’s and the courts’ jurisdiction over energy trading contracts in an energy bankruptcy continues to be one that is dim and uncertain.
© 2007 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.