Sixth Circuit Gives Primacy to the Bankruptcy Court in Rejecting Power Contracts

Reversing the bankruptcy court, the Sixth Circuit ruled 2/1 that the bankruptcy court shares jurisdiction with FERC, the Federal Energy Power Commission, when a chapter 11 debtor moves to reject a power purchase agreement, or PPA. Nonetheless, the Sixth Circuit held that FERC may not bar the bankruptcy court from ordering the rejection of a PPA.

In deciding whether the debtor may reject a PPA, the appeals court adapted the standard from Bildisco in ruling that the bankruptcy court must consider the public interest alongside the traditional business judgment test. NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984).

The dissenter would not have permitted rejection without approval from regulators.

The Bankruptcy Court’s Injunction

The appeal arose from the reorganization of FirstEnergy Solutions Corp. and affiliates. The companies generated, purchased and sold electric energy to retail and wholesale customers. Immediately after filing their chapter 11 petitions, the debtors filed motions to reject several PPAs with renewable energy sources that FERC had previously approved under the Federal Power Act, 16 U.S.C. § 791a, et. seq.

The debtors also initiated an adversary proceeding where they asked the bankruptcy judge to declare that FERC has no jurisdiction over the rejection of PPAs and to enjoin FERC from taking any action regarding rejection of the PPAs.

The bankruptcy court entered a temporary restraining order, followed in May 2018 by a preliminary injunction under the Section 362 automatic stay and Section 105(a), the bankruptcy version of the All Writs Act.

The injunction barred FERC from commencing or continuing any proceedings regarding rejection of the PPAs or requiring the debtors to continue performing. The order also enjoined FERC from interfering with the bankruptcy court’s “exclusive jurisdiction” with regard to the rejection motions.

The Sixth Circuit accepted a direct appeal.

The Majority Opinion

In the December 12 opinion for herself and Circuit Judge Bernice B. Donald, Circuit Judge Alice M. Batchelder began her legal analysis by emphasizing how the bankruptcy case was a reorganization, not a liquidation. Were it a liquidation, she said that “neither FERC nor anyone else could compel the defunct debtor to keep performing the contracts or prevent the debtor from breaching the contracts by nonperformance.”

With regard to the power of a bankruptcy court in a reorganization, FERC and the power producers contended that filed-rate contracts are equivalent to regulations or statutes that a court has no power to overturn. Judge Batchelder agreed that several circuit courts have said that filed rates have the force of a regulation or statute, “at least insofar as to keep a district court or a state court from messing with them.” But she did not go that far.

Instead, Judge Batchelder said that “the public necessity of available and functional bankruptcy relief is generally superior to the necessity of FERC’s having complete or exclusive authority to regulate energy contracts and markets. This means,” she said, that “the PPAs are . . . ordinary contracts susceptible to rejection in bankruptcy.”

Consequently, Judge Batchelder held that FERC and the bankruptcy court exercise concurrent jurisdiction. Still, she decided that the bankruptcy court is the top dog with the power to decide whether a debtor can reject a PPA. Once the debtor receives “proper bankruptcy court approval,” Judge Batchelder said that “FERC cannot independently prevent it.”

Next, Judge Batchelder said the bankruptcy court “went too far” under Section 105(a) by enjoining FERC from doing anything at all.

To apportion power between FERC and the bankruptcy court, Judge Batchelder examined the “two apparently conflicting federal statutes” and decided how to “harmonize” them.

Judge Batchelder recognized that a reorganization must “be expeditious and possibly unfair or harmful to other concerned parties, even including the general public. It would not be reasonable in all cases to permit public-interest concerns to overrule a restructuring decision, or even to wait for FERC to conduct a full hearing to identify, assess, and opine on those concerns.” She added that “bankruptcy judges are capable of comprehending public interests, particularly when FERC has provided an opinion.”

Giving veto power to both the bankruptcy court and FERC “is not the only way . . . to harmonize the two statutes,” Judge Batchelder said.

To harmonize the two statutes, Judge Batchelder held that “the bankruptcy court may, based on the particular facts and circumstances before it, enjoin FERC from issuing an order (or compelling an action) that would directly conflict with the bankruptcy court’s orders or interfere with its otherwise-authorized authority, but the bankruptcy court may not enjoin FERC from risking its own jurisdictional decision, conducting its (otherwise regulatory mandated) business, or issuing orders that do not interfere with the bankruptcy court.”

In other words, the bankruptcy court erred by enjoining FERC from doing anything at all, including holding hearings to advise the bankruptcy court where the public interest lay.

Finally, Judge Batchelder confronted the question of the standard the bankruptcy court must employ in ruling on the rejection of a PPA. Naturally, the debtor contended that the bankruptcy court should use the ordinary business judgment standard.

Judge Batchelder adopted the Supreme Court’s Bildisco standard for dealing with the rejection of labor contracts. She quoted the high court as saying that a debtor carries the burden of showing “that after careful scrutiny, the equities balance in favor of rejecting” the contract. Id. at 526.

Adapting the Bildisco standard to the case at hand, Judge Batchelder remanded the matter for the bankruptcy court to “reconsider its decision under this higher standard, considering and deciding the impact of the rejection of these contracts on the public interest — including the consequential impact on consumers and any tangential contract provisions concerning such things as decommissioning, environmental management, and future pension obligations — to ensure that the ‘equities balance in favor of rejecting the contracts,’” citing Mirant Corp. v. Potomac Electric Power Co. (In re Mirant Corp.), 378 F.3d 511, 525 (5th Cir. 2004).

At the end of her opinion, Judge Batchelder again said in substance that the bankruptcy has primacy. The bankruptcy court, she said, need only give FERC a “reasonable accommodation” and suffer only a “reasonable delay” while FERC is deciding on its recommendation to the bankruptcy court about the public interest in a PPA rejection.

To recap, Judge Batchelder said that the “bankruptcy court must consider the public interest and ensure that the equities balance in favor of rejecting the contract, and it must invite FERC to participate and provide an opinion in accordance with the ordinary FPA approach (e.g., under the Mobile–Sierra doctrine), within a reasonable time.”

The Dissent

Circuit Judge Richard Allen Griffin dissented. He said that chapter 11 “provides a shield against an insolvent company’s creditors, not its regulators.” He therefore believes that the “Bankruptcy Code does not authorize a debtor to violate its obligations under the FPA or a filed rate any more than the criminal code or securities laws.”

Judge Griffin did agree with the majority’s holding that the bankruptcy court erred in applying only the business judgment standard. Of course, he also agreed that the bankruptcy court’s injunction was too broad.

Because the automatic stay does not apply to the enforcement of police or regulatory powers under Section 362(b)(4), Judge Griffin would have held that the bankruptcy court “exceeded its jurisdiction and infringed on FERC’s exclusive jurisdiction to decide whether to modify or abrogate a filed rate.” Conversely, he said that FERC would have no power under the FPA to enjoin a bankruptcy court from rejecting executory contracts.

Procedurally, Judge Griffin would have the debtor file a rejection motion to be evaluated under the “heightened standard.” In addition, he would require the debtor to petition FERC for relief from the filed rate.

Judge Griffin believes that a filed rate has the force of law, and the bankruptcy court has no authority to decide whether a rate is “just and reasonable.” Instead, he saw the FPA as giving FERC the exclusive power to modify or abrogate a filed rate on public-necessity grounds, subject to appellate review.

Observations

The majority endeavored to craft a decision in accord with Mirant from the Fifth Circuit. The New Orleans-based appeals court gave the bankruptcy court power to reject a PPA under a heightened standard, together with the power to bar FERC from preventing rejection.

The majority attempted to distinguish In re Calpine Corp., 337 B.R. 27 (S.D.N.Y. 2006), where the court held that FERC’s authority over filed rates is superior to the bankruptcy court’s power over executory contracts. The majority noted that Calpine dealt with a debtor who moved to reject just because power could be purchased more cheaply. FirstEnergy, on the other hand, simply did not need the power.

In dissent, Judge Griffin was not persuaded by Mirant. He said that the Fifth Circuit adopted “an unreasonably narrow view of the powers granted to FERC by the FPA.”

The vigorous dissent may give rise to a petition for rehearing en banc, but the lack of a clearly defined circuit split does not bode well for a successful certiorari petition, unless the Sixth Circuit rejects Mirant en banc by holding that FERC has the power to bar rejection of a PPA.