The Federal Energy Regulatory Commission is persistent, if not obstinate. In the face of Fifth Circuit authority that could not have been clearer, FERC once again claimed the right to bar chapter 11 debtors from rejecting filed-rate contracts for the transportation of energy.
FERC lost for a third time in a July 19 opinion from the Fifth Circuit reiterating a holding the appeals court had handed down just four months earlier in FERC v. Ultra Resources Inc. (In re Ultra Resources Corp.), 28 F.4th 629 (5th Cir. March 14, 2022). To read ABI’s report on Ultra Resources, click here.
The new opinion by Circuit Judge Jerry E. Smith said that FERC “flouts the Bankruptcy Code, Supreme Court precedent, and the caselaw of every federal circuit” regarding the ability of a bankruptcy court to reject a filed-rate contract under Section 365.
Typical Facts
The facts were typical, but the procedural context was complicated, although straightforward in concept.
The debtor was a gas producer whose business was decimated by the fall in the price of natural gas in the early days of the pandemic. The company announced publicly that it might be required to seek protection in chapter 11.
For the owner of a gas pipeline, the handwriting was on the wall. The debtor would file a chapter 11 petition together with a motion to reject the contract under which the debtor transported its natural gas though the pipeline. By rejection, the debtor could lower the price for transporting its natural gas.
Proactively, the pipeline owner prevailed on FERC to hold a series of hearings. Ultimately, FERC entered orders saying that the debtor could not reject the filed-rate contract in bankruptcy court without FERC’s approval.
In the meantime, the debtor had begun reorganization in chapter 11 and had filed a motion to reject the pipeline contract. Before the bankruptcy court ruled on the rejection motion, the debtor appealed FERC’s orders to the Fifth Circuit. While the appeal was pending, the appeals court handed down Ultra Resources.
Ultra Resources and Mirant
The Fifth Circuit was not writing on a blank slate in Ultra Resources. The New Orleans-based appeals court had ruled definitively 18 years ago on the same issue in In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004).
Mirant 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. Although FERC has jurisdiction over the modification of rates, Mirant held that rejection was a breach, not a change in a filed rate.
Noting that the power of rejection does not contain an exception for power contracts like it does for union contracts, Mirant nixed the idea that the debtor must pay the full amount of rejection damages rather than the bankruptcy discount afforded by the plan.
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.
Hoping to deflect the Fifth Circuit from ruling on the merits, FERC wanted the appeal dismissed, contending that the debtor had no standing, that the appeal was not ripe and that the appeal was moot.
Nine pages later, Judge Smith rejected the arguments regarding appealability. FERC’s argument on mootness was particularly vacuous. The agency argued that the appeal was moot because the Fifth Circuit had ruled definitively months before in Ultra Resources. Although saying the appeal was moot, FERC contended that its orders were nonetheless valid and enforceable. It’s also difficult to understand how FERC could believe that the debtor had no standing to appeal when the appeal dealt with FERC orders pertaining to the debtor.
On the merits, Judge Smith used unmistakable language. He said that FERC’s “orders rested on an inexplicable misunderstanding of rejection.” Later, he said that FERC’s premise was “wrong” and that its orders were “unlawful.” FERC, he said, had a “bizarre view of rejection” that “patently contradicts the Code’s text and established interpretation.”
Judge Smith vacated FERC’s orders. He held that the agency “cannot require continued performance of a filed-rate contract that is validly rejected — whether it purports to do so before, during, or after the bankruptcy proceeding.” He added that FERC “cannot usurp the bankruptcy court’s power to decide [the debtor’s] rejection motions.”
In the judgment, the appeals court directed FERC to pay the debtor’s costs to be taxed by the clerk.
The Federal Energy Regulatory Commission is persistent, if not obstinate. In the face of Fifth Circuit authority that could not have been clearer, FERC once again claimed the right to bar chapter 11 debtors from rejecting filed-rate contracts for the transportation of energy.
FERC lost for a third time in a July 19 opinion from the Fifth Circuit reiterating a holding the appeals court had handed down just four months earlier in FERC v. Ultra Resources Inc. (In re Ultra Resources Corp.), 28 F.4th 629 (5th Cir. March 14, 2022). To read ABI’s report on Ultra Resources, click here.
The new opinion by Circuit Judge Jerry E. Smith said that FERC “flouts the Bankruptcy Code, Supreme Court precedent, and the caselaw of every federal circuit” regarding the ability of a bankruptcy court to reject a filed-rate contract under Section 365.