Originally published April 26, 2004
A legal decision arising out of the Mirant bankruptcy finds that Federal, State, and Municipal governmental entities (e.g., Bonneville Power, TVA, CDWR) are not forward contract merchants under the Bankruptcy Code. What this means is that they cannot terminate their physical power and gas contracts if their counterparty files for bankruptcy, unless the court specifically allows the termination.
On December 23, 2003, the U.S. Bankruptcy Court for the Northern District of Texas issued a decision in which it determined that governmental entities, such as federal power marketing, state, and municipal agencies, are excluded from the definition of forward contract merchant. As such, they are subject to the automatic bankruptcy stay preventing them from terminating a forward contract, even if they have a contractual right to do so. This memorandum briefly describes the decision in the Mirant bankruptcy. In re Mirant Corp. et al. (No. 03- 46590).
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Mirant Americas Energy Marketing ("Mirant") and Bonneville Power Administration ("BPA") entered into an Enabling Agreement for purchases and sales of electricity. The Enabling Agreement incorporated the terms of the Western Systems Power Pool Agreement ("WSPPA"), in which all signatories represent that they are "forward contract merchants." The Bankruptcy Code defines forward contract merchant as a "person whose business consists in whole or in part of entering into forward contracts as or with merchants as a commodity . . . ." Section 101(26). The WSPPA also makes a party’s filing for bankruptcy an event of default, allowing the non-defaulting party to declare an early termination and to liquidate and terminate the executory transactions under the WSPPA between the parties.
The specific transaction at issue in the case involved BPA’s purchase of a three-year option for power. On July 14, 2003, Mirant filed petitions for bankruptcy protection under Chapter 11 of the Bankruptcy Code. On July 30, 2003, BPA sent a letter terminating the transaction based on Mirant’s bankruptcy default. BPA stated that the automatic stay of the Bankruptcy Code did not prevent such action because BPA is a forward contract merchant for purposes of the Code’s exemption of the termination and liquidation of forward contracts.
On October 17, 2003, Mirant filed a motion to enforce the automatic stay against BPA and for contempt for BPA’s willful violation of the stay. In Mirant’s view, BPA did not qualify for the forward contract exemption of Section 556 because BPA was not a forward contract merchant. Specifically, Mirant argued that BPA was a "governmental unit" and therefore not a "person"; the definition of person under the Bankruptcy Code specifically excludes governmental unit from its scope, except for certain enumerated purposes. Section 101(41).
BPA argued that it could not have been Congress’ intent to exclude BPA and similarly-situated entities from the protections of the Section 556 exemption from the automatic stay. Moreover, according to BPA, because it had represented that it is a forward contract merchant in the WSPPA, it should receive the benefit of those protections.
The bankruptcy court ruled in favor of Mirant on November 14, 2003, finding that BPA violated the automatic stay imposed by the Bankruptcy Code when Mirant filed its bankruptcy petition. The court determined that, based on a plain reading of the statute, BPA was not a person and therefore could not qualify as a forward contract merchant. Consequently, BPA could not terminate and liquidate the parties’ contract, absent approval from the court.
BPA then revoked its termination letter and sought the bankruptcy court’s permission to terminate the transaction. On December 23, 2003, the bankruptcy court denied BPA’s request, finding that BPA was no differently situated than most non-debtors with an executory contract with a bankruptcy estate. Because the Bankruptcy Code stay prevents a counterparty from treating a bankruptcy filing as a default, Mirant retained the ability either to assume or reject the BPA contract.
BPA appealed the November 14, 2003 order and the December 23, 2003 to U.S. District Court for the Northern District of Texas. The district court has consolidated those appeals but has yet to issue a decision.
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Sutherland Asbill & Brennan LLP