Benchnotes Nov 2004

Journal Issue

Nov 2004

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<h4>Louisiana Judgment Deemed "Foreign" in Florida</h4>

In In re Alford, 308 B.R. 563 (Bankr.
S.D. Ala. 2002), Bankruptcy Judge Margaret A. Mahoney held that a
Louisiana judgment was a "foreign judgment" within the meaning of
Florida's Uniform Enforcement of Foreign Judgments Act (UEFJA). The
court held
that while the purpose of the UEFJA is to treat a registered foreign
judgment
as equivalent to a domestic judgment, Florida had a five-year
limitations
period for taking an "action on a judgment." The court held that an
action
seeking to declare that a Louisiana federal district court judgment was
non-dischargeable constituted "an action on a judgment," and as it was
not
filed within five years, the action and the claim were barred under the
UEFJA.

<h4>Gov't. Crop Disaster Payments Are Property of the Estate</h4>

In In re Bracewell, 310 B.R. 472 (Bankr. M.D. Ga. 2004),
Bankruptcy Judge John T. Laney III held that crop disaster
payments were property of the estate where the disaster
occurred pre-petition but the legislation was passed post-petition. "The
right
to the disaster payment was a pre-petition inchoate right that vested or
became
choate post-petition upon enactment of the legislation. Upon the
occurrence of
the [pre-petition] disaster, [the debtor] had the right to collect
disaster
payments from the government, if such legislation was passed."

<h4>Electric Co. Executory Contract Can Be Rejected by Debtor</h4>

In In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004), the issue
before the court was whether or not the district court could authorize
the
rejection of an executory contract for the purchase of electricity as
part of a
bankruptcy reorganization, or whether the Federal Energy Regulatory
Commission
(FERC) had exclusive jurisdiction over such contracts. The debtor
utility used
the filed rates applicable to its power purchase agreements as a
criterion in
deciding which agreements to reject. The Fifth Circuit held that this
did not
convert the debtor's permissible decision to reject a power-purchase
agreement
into a prohibited collateral attack on a filed rate preempted by the
Federal Power
Act. The debtor, along with the Unsecured Creditors' Committee and the
Official
Committee of Equity Security Holders, argued that the district court's
jurisdiction over the debtor's reorganization under chapter 11 allowed
the
court to authorize the rejection of the power contracts. FERC, on the
other
hand, argued that because the Federal Power Act grants FERC the
exclusive
authority to regulate the wholesale rates in contracts for the
interstate sale
of electrical power, any rejection of those contracts must occur in a
FERC
administrative proceeding. The district court held that it lacked
jurisdiction
to authorize the debtor to reject the contract in question. The Fifth
Circuit,
however, held that the court can properly authorize the rejection of an
executory
power contract in bankruptcy.

The district court found that the
debtor's rejection was a prohibited "attempt to avoid their electric
energy
purchase payment obligations under the Back-to-Back Agreement at the
filed
rates FERC has found to be just and reasonable." The district court then
held
that the Bankruptcy Code had to yield to FERC's authority under the
Federal
Power Act in that the debtor would have to seek relief from the filed
rate in a
FERC proceeding. Thus, the debtor's motion to reject the contract (the
Back-to-Back Agreement) was denied.

Thus, the Fifth Circuit was faced
with an apparent conflict between two statutes. Under the so-called
"Filed Rate
Doctrineâ" developed under the statutory and regulatory scheme
established by
the Federal Power Act, "[t]he reasonableness of rates and agreements
regulated
by FERC may not be collaterally attacked in state or federal courts. The
only
appropriate forum for such a challenge is before the Commission or a
court
reviewing the Commission's order." Mississippi Power & Light Co.
v.
Mississippi ex rel Moore, 108 S.Ct. 2428.
FERC argued that the FPA preempts the district court jurisdiction in the
bankruptcy case because the debtor's effort to reject the agreement was
actually a collateral attack on a filed rate. (Recall that the debtor
considered the filed rate as part of the process in determining whether
or not
to assume or reject the contract). The debtor claimed that 28 U.S.C.
§1334 and
11 U.S.C. §365 permit it, subject to the district court's approval,
to reject
any executory contract, including the so-called Back-to-Back Agreement.
The
court concluded that the power of the district court to authorize
rejection of
the contract does not conflict with the authority given to FERC to
regulate
rates in the interstate sale of electricity. While FERC had the
exclusive
authority to determine wholesale rates, the Bankruptcy Code permits the
debtor
to reject the contract in question and provides that such rejection is a
"breachâ" of the contract. See 11
U.S.C. §365(g). Thus, the question became whether or not the FPA
preempts a
district court's jurisdiction over claims of breach related to executory
power
contracts. The court then found that while the FPA does preempt
breach-of-contract claims that challenge a filed rate, the district
courts are
permitted to grant relief in circumstances where the breach of the
contract has
some other basis in fact. In Gulf States Utils. Co. v. Ala. Power
Co., 824 F.2d 1465 (5th Cir. 1987), the
court held that courts may set aside an energy contract that was
obtained
unconscionably or by fraud without interfering with FERC's rulemaking
power, so
long as that order was not based on a theory that the filed rate was too
high.
And while the Gulf States opinion
recognized that setting aside a contract "will affect the filed rates by
eliminating them," it also held that the FPA does not preempt such
indirect
effects. Gulf States at 1472, n. 9.

The Fifth Circuit concluded that the FPA does not preempt the
debtor's rejection of the Back-to-Back Agreement "because it would only
have an indirect effect upon the filed rate. When an
executory contract is rejected in bankruptcy, the nonbreaching party
receives
an unsecured claim against the bankruptcy estate for an amount equal to
its
damages from the breach...." Mirant at
519-520. The court further observed that if the debtor's rejection of
the
agreement is approved, then the other contracting party's unsecured
claim
against the bankruptcy estate would be based on the amount of
electricity it
would have otherwise sold to the debtor under the agreement at the filed
rate,
and thus that the damages calculation from the rejection of the contract
under
the Bankruptcy Code is analogous to the damages calculation previously
approved
in the Fifth Circuit's opinion in Gulf States because the award
calculation is based on the filed rate. See Gulf States, 824 F.2d
at 1471.

Section 365(a) permits the debtor to
select, within certain limits, which executory contracts it will reject
and
which it will assume. See In re Topco Inc., 894 F.2d 727, 741
(5th Cir. 1990) (as relied upon by the Fifth Circuit in Mirant at
520) ("In effect, §365 allows debtors to pick and
choose among their agreements and assume those that benefit their
estates and
reject those that do not.") The court in Mirant went on to
observe that "presumably, a contract's
filed rate will be a relevant factor to the bankruptcy estate when it
makes
this determination (of whether or not to reject the contract or to
assume it)
(citations omitted)." Mirant at
520.

The Fifth Circuit then concluded
that "in light of the numerous specific exceptions to the general
§365(a)
authority to reject contracts that Congress chose to include in the
Bankruptcy
Code, including those for other contracts subject to extensive
regulation, and
the absence of any exception for contract subject to FERC jurisdiction,
it is
clear that Congress intended §365(a) to apply to contracts subject
to FERC
regulation. Cf. NLRB v. Bildisco & Bildisco, 465 U.S. 513,
522-23, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984)." Mirant at 522.
The court then concluded that "the
FPA does not preempt a district court's jurisdiction to authorize the
rejection
of an executory contract subject to FERC regulation as part of a
bankruptcy
proceeding. A motion to reject an executory power contract is not a
collateral
attack upon that contract's filed rate because that rate is given full
effect
in determining the breach of contract damages resulting from rejection.
Furthermore, there is nothing within the Bankruptcy Code itself that
limits a
public utility's ability to choose to reject an executory contract
subject to
FERC regulation as part of its reorganization process." Mirant at
522.

With respect to the actual decision
by a district court on whether or not to permit the rejection of such a
contract (the Back-to-Back Agreement), the Fifth Circuit gave the
following
instructive review: "Upon remand, the district court should consider
applying a
more rigorous standard (than the business judgment rule) to rejection of
the
Back-to-Back Agreement. If the district court decides that a more
rigorous
standard is required, then it might adopt a standard by which it will
authorize
rejection of an executory power contract only if the debtor can show
that it
â€˜burdens the estate...that, after careful scrutiny, the equities
balance in
favor of rejecting' that power contract, and that rejection of the
contract
would further the chapter 11 goal of permitting the successful
rehabilitation
of debtors. See Bildisco, 465 U.S. at
526-27, 104 S.Ct. 1188. When considering these issues, the courts should
carefully scrutinize the impact of rejection upon the public interest
and
should, inter alia, ensure that
rejection does not cause any disruption in the supply of electricity to
other
public utilities or to consumers." Mirant at 525.

<h4>"Evergreenâ" Retainers Permissible</h4>

In In re Pan American Hosp. Corp., 312 B.R. 706 (Bankr. S.D.
Fla.
2004), the chapter 11 debtor's attorneys filed an interim fee
application,
which was objected to by the U.S. Trustee's office. The U.S. Trustee
objected
to the "evergreenâ" nature of the retainer claimed by the attorneys. In
reviewing the matter, the court summarized the different types of
retainers.
The "classic retainerâ" is payment to an attorney irrespective of
whether or not
the attorney provides any service to the client. Essentially, this type
of
retainer is entirely earned by the attorney upon payment, with the
client
retaining no interest in the funds. A special retainer, on the other
hand, can
take one of three forms: "security retainer," "advance-fee retainerâ" or
"evergreen retainer." Under the "security retainer," money is given to
an
attorney not as present payment for future services, but to hold as
security
for payment of fees in the future for services to be provided to the
client in
the future. Any unearned funds then are turned back to the client. Until
the
services actually have been rendered and charges have been applied for
those
services from the retainer, the retainer remains the property of the
client.
Under the "advance fee retainer," the client pays in advance for some or
all of
the services that the attorney is expected to perform on the client's
behalf.
The difference between an advance fee retainer and a security retainer
is that
ownership of the retainer is intended to pass to the attorney at the
time of
payment in the case of an advance fee retainer. This is in exchange for
the
attorney's commitment to provide legal services. The "evergreen
retainerâ" is
one that is given to the attorney with the intention that it shall
remain
intact and that the attorney interim fees, such as those for
representing a
debtor in bankruptcy, would be paid from debtor's operating capital.
Thus,
professionals holding evergreen retainers do not look to the retainer
payment
until such time as a final fee application is presented and approved by
the
bankruptcy court. In this case, the court holds that subject to approval
as to
their reasonableness, evergreen retainers are permissible for
professionals in
chapter 11 cases.

<h4>Miscellaneous</h4>

<ul>
<li>In re Hayden,
308 B.R. 428 (9th Cir. BAP 2004) (refusal to surrender vehicle in order
to
maintain or continue perfection of possession lien for towing and
storage
charges, as opposed to enforcement of lien, is not a violation of
automatic
stay);

</li><li>In re Wheatfield Business Park LLC, 308
B.R. 463 (9th Cir. Bankr. 2004) (chapter 11 debtor didn't violate
automatic
stay by objecting to creditor's proof of claim where creditor was also a
debtor);

</li><li>In re Fashion Accessories Ltd., 308 B.R. 592
(Bankr. N.D. Ga. 2004) (revocable beneficiary of life insurance policy
that
paid premiums but didn't own policy did not have a beneficial interest
of a
kind to recover policy proceeds paid to owner's wife after owner
exercised his
right to change beneficiary);

</li><li>In re Bli, 309 B.R. 295 (Bankr. E.D. Mich.
2004) (debtors whose farming operation was conducted through a joint
venture
was still a "farmerâ");

</li><li>In re FV Steel and Wire Co., 310 B.R. 390
(Bankr. E.D. Wis. 2004) (under Illinois version of old Article 9,
financing
statement that was filed under debtor's trade name rather than under
true
corporate name was ineffective to perfect creditor's security interest);

</li><li>In re Grammer, 310 B.R. 423 (Bankr. E.D.
Ark. 2004) (if notice is adequate, value of collateral for purposes of
determining secured claim can be determined on motion prior to
confirmation, at
confirmation as part of a trial of a contested plan or at a separate
hearing on
the creditor's claim);

</li><li>In re Whitcomb, 310 B.R. 428 (Bankr. W.D.
Ark. 2004) (self-employed chapter 13 debtors who did not incur trade
debt were
not "engaged in businessâ" and thus were not statutorily required to
file
monthly operating reports); and

</li><li>In re Media Properties Inc., 311 B.R. 244
(Bankr. W.D. Wis. 2004) (post-petition proceeds from the sale of
broadcast
license approved by FCC were required to be distributed to creditor,
which
filed pre-petition security agreement and financing statement perfecting
a
security interest in general intangibles).

</li>

Journal Authors

Deborah D. Williamson

Ronald Hornberger

Journal Date

Monday, November 1, 2004 - 12:00

Bankruptcy Rule

2004