In a bankruptcy case, 28 U.S.C. § 1334(c) isn’t the only basis for permissive or mandatory abstention. If a lawsuit in bankruptcy court involves state regulation, so-called Burford abstention can apply in “rare instances,” the Fifth Circuit said in an opinion on January 5.
Quoting its own precedent fleshing out Burford v. Sun Oil Co., 319 U.S. 315 (1943), the Fifth Circuit said in its January 5 opinion that
Burford abstention “allows federal courts to avoid entanglement with state efforts to implement important policy programs” [by giving] “[federal] courts . . . discretion to abstain from deciding unclear questions of state law arising in complex state administrative schemes when federal court intervention would undermine uniform treatment of local issues.” [Citations omitted].
The appeal in the Fifth Circuit involved regulation of the electric energy market in Texas. The bankruptcy court believed that abstention under Section 1334(c) entirely subsumed Burford. Circuit Judge Kurt D. Engelhardt reversed and directed the bankruptcy court to abstain.
The Debilitating Winter Storm in Texas
The electric energy grid in Texas is not connected to the rest of the nation, giving Texas exclusive regulatory authority over its electric market. The state regulator sets electric energy prices paid by power retailers.
During the winter storm in February 2021, temperatures fell so low that electric generation in the state was crippled. During the height of the storm and in its aftermath, the state regulator set prices as high as $9,000 per MWh. After the peak, the price immediately fell to $27 per MWh and then to $5 per MWh.
A Canada-based electric power retailer in Texas was socked with a $335 million bill for just one week in February 2021. The retailer paid the bill under protest and filed arrangement proceedings the next month in Canada under the Companies’ Creditors Arrangement Act. The same day, the retailer filed a chapter 15 case in Houston.
In November 2021, the retailer filed an adversary proceeding against the Texas regulator, alleging that the rates set by the regulator were unlawful. The bankruptcy court granted the regulator’s motion and dismissed all of the claims except those alleging preferences under the CCAA. The bankruptcy court authorized a direct, interlocutory appeal to the Fifth Circuit.
Burford Abstention
Governing permissive abstention, Section 1334(c)(1) says:
Except with respect to a case under chapter 15 of title 11, nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11. [Emphasis added.]
Citing the “Except with” language in Section 1334(c)(1), the debtor contended in the circuit that the bankruptcy court properly declined to abstain because Section 1334(c)(1) does not apply in chapter 15 cases.
Accepting that Section 1334(c)(1) did not apply in the chapter 15 case, the regulator argued that Burford abstention was nonetheless available and that the bankruptcy court should have abstained altogether.
The debtor contended that Burford was inapplicable because Section 1334(c) subsumes Burford.
Judge Engelhardt said that the Fifth Circuit had “already decided that § 1334(c) does not subsume Burford abstention” and that Burford applies in the bankruptcy context. He explained that the Fifth Circuit had only proscribed Section 1334(c)(1) abstention in a chapter 15 case that did not involve Burford abstention.
Judge Engelhardt laid out the five requisites of Burford abstention: (1) whether the suit involves federal or state claims; (2) whether the case involves unsettled state law; (3) the importance of the state’s interest; (4) the state’s need for a coherent policy; and (5) the existence of a state forum for judicial review.
The regulator argued that the bankruptcy court should have abstained altogether under Burford. Judge Engelhardt agreed.
Only the first factor cut against Burford abstention because the debtor raised claims under Canadian law. That factor, though, “does not settle the issue,” Judge Engelhardt said. The other four factors favored Burford abstention, he concluded.
Judge Engelhardt held that the lower court abused its discretion in declining to abstain. He vacated the bankruptcy court’s order and remanded “with instructions to determine the appropriate trajectory of this case after abstention.”
In a bankruptcy case, 28 U.S.C. § 1334(c) isn’t the only basis for permissive or mandatory abstention. If a lawsuit in bankruptcy court involves state regulation, so-called Burford abstention can apply in “rare instances,” the Fifth Circuit said in an opinion on January 5.
Quoting its own precedent fleshing out Burford v. Sun Oil Co., 319 U.S. 315 (1943), the Fifth Circuit said in its January 5 opinion that
Burford abstention “allows federal courts to avoid entanglement with state efforts to implement important policy programs” [by giving] “[federal] courts . . . discretion to abstain from deciding unclear questions of state law arising in complex state administrative schemes when federal court intervention would undermine uniform treatment of local issues.” [Citations omitted].
The appeal in the Fifth Circuit involved regulation of the electric energy market in Texas. The bankruptcy court believed that abstention under Section 1334(c) entirely subsumed Burford. Circuit Judge Kurt D. Engelhardt reversed and directed the bankruptcy court to abstain.