The Fifth Circuit reaffirmed its Mirant decision from 2004 by holding that the bankruptcy court has power to reject a filed-rate contract with a natural gas pipeline without authorization from FERC, the Federal Energy Regulatory Commission.
Bound by Mirant, Circuit Judge Carolyn Dineen King said in her March 14 opinion that the “pitched battle” mounted by FERC was actually “a settled truce.” Mirant, she said, “holds that a bankruptcy court can authorize rejection of a filed-rate contract, and that, post-rejection, FERC cannot require continued performance on the rejected contract.”
The Gas Pipeline Contract
The debtor was a producer of oil and natural gas. The debtor had a seven-year contract to transport the gas it produced through a particular pipeline. The contract called for the debtor to pay the pipeline owner $169 million over the life of the contract, whether or not the debtor shipped any natural gas.
In chapter 11, the debtor moved to reject the pipeline contract, having stopped producing natural gas. FERC objected, contending that its approval was required before the bankruptcy court could reject. Even if the contract were rejected, FERC argued that the debtor was obligated to pay rejection damages in full, not with the discount afforded by the plan. FERC also objected to confirmation of the debtor’s chapter 11 plan.
Bankruptcy Judge Marvin Isgur authorized rejection of the pipeline contract and confirmed the plan. FERC appealed, and the Fifth Circuit accepted a direct appeal, overstepping an intermediate appeal to the district court.
Mirant and the Dueling Regulatory Schemes
Judge King characterized the appeal as “a clash of two congressionally constructed titans, FERC and the bankruptcy courts.” FERC, she said, has exclusive jurisdiction over the interstate transportation of natural gas. Rates approved by FERC cannot be modified or abrogated without the commission’s consent.
Judge King made the following points about In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004):
· The case dealt with an electricity-purchase agreement. The bankruptcy court allowed rejection, but the district court reversed, believing that FERC’s approval was required. The circuit reversed the district court.
· Although FERC has jurisdiction over the modification of rates, Mirant said that rejection was a breach, not a change in a filed rate.
· The rejection power, Mirant said, does not contain an exception for power contracts like it does for union contracts.
· Mirant rejected the idea that the debtor must pay the full amount of rejection damages and not with the bankruptcy discount afforded by the plan.
· Rejection can be accompanied by an injunction aimed at FERC, but is limited to prohibiting FERC from compelling performance under the rejected contract.
· Akin to the rejection of a union contract, the bankruptcy court must apply a more rigorous standard considering public interest and the disruption of energy supplies.
· Rejection is not a collateral attack on the filed rate because the filed rate forms the basis for fixing rejection damages.
Mirant Controls
Bound by Mirant, Judge King said that “a bankruptcy court can authorize rejection of a filed-rate contract, and that, post-rejection, FERC cannot require continued performance on the rejected contract.” She dismissed FERC’s argument that many of the statements in Mirant were dicta, not holding. Everything in Mirant pertinent to the case on appeal was necessary to the decision in Mirant.
Judge King noted that the Sixth Circuit concurred with Mirant in In re FirstEnergy Solutions Corp., 945 F.3d 431 (6th Cir. 2019). To read ABI’s report on FirstEnergy, click here. [Note: FirstEnergy was a 2/1 decision in the Sixth Circuit.]
Applying Mirant to the case on appeal, Judge King said,
Given that it is clear that the challenged language in Mirant is binding, the result of this case is straightforward. A district court (and, by extension, a bankruptcy court) has the ‘power . . . to authorize rejection of’ a filed-rate contract . . . .
Judge King added that rejection was not a collateral attack on the filed rate, because the filed rate would be the basis for fixing the pipeline’s rejection damages. Furthermore, she said, the debtor was “not just seeking to secure a lower rate, but instead wants out of the contract altogether, given the suspension of its drilling program.”
The bankruptcy court, Judge King said, had not allowed rejection under the business-judgment standard but had “explicitly considered the public interest.”
Judge King said that the bankruptcy court had properly invited FERC to participate in the rejection proceedings as a party-in-interest. She declined “to expand beyond our dictates in Mirant by requiring a bankruptcy court to halt its progress and allow FERC to hold a hearing on the public-interest ramifications of the rejection of a filed-rate contract.”
Judge King ended her decision by saying there was no violation of Section 1129(a)(6), which requires governmental regulatory approval of rate changes. She said there was no rate change because rejection damages would be based on the filed rate.
The Fifth Circuit reaffirmed its Mirant decision from 2004 by holding that the bankruptcy court has power to reject a filed-rate contract with a natural gas pipeline without authorization from FERC, the Federal Energy Regulatory Commission.
Bound by Mirant, Circuit Judge Carolyn Dineen King said in her March 14 opinion that the “pitched battle” mounted by FERC was actually “a settled truce.” Mirant, she said, “holds that a bankruptcy court can authorize rejection of a filed-rate contract, and that, post-rejection, FERC cannot require continued performance on the rejected contract.”
The debtor was a producer of oil and natural gas. The debtor had a seven-year contract to transport the gas it produced through a particular pipeline. The contract called for the debtor to pay the pipeline owner $169 million over the life of the contract, whether or not the debtor shipped any natural gas.