Fed. Energy Regulatory Comm'n v. Ultra Res., Inc. (In re Ultra Petroleum Corp.)

• Decision Date: 14 March 2022
• Docket Number: No. 20-20623 consolidated with No. 21-20126,20-20623 consolidated with No. 21-20126
• Citation: 28 F.4th 629
• Parties: IN RE: ULTRA PETROLEUM CORPORATION, Debtor, Federal Energy Regulatory Commission, Appellant, v. Ultra Resources, Incorporated, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

28 F.4th 629

IN RE: ULTRA PETROLEUM CORPORATION, Debtor,Federal Energy Regulatory Commission, Appellant,

v.Ultra Resources, Incorporated, Appellee.

No. 20-20623 consolidated with No. 21-20126

United States Court of Appeals, Fifth Circuit.

FILED March 14, 2022

Jeffrey A. Lamken, Lucas M. Walker, Lauren Marguerite Weinstein, MoloLamken, L.L.P., Washington, DC, Lauren F. Dayton, Mark W. Kelley, Molo Lamken, L.L.P., New York, NY, Scott Ediger, Federal Energy Regulatory Commission, Washington, DC, for Appellant.

George W. Hicks, Jr., C. Harker Rhodes, IV, Kirkland & Ellis, L.L.P., Washington, DC, for Appellee.

Kenneth W. Irvin, Sidley Austin, L.L.P., Washington, DC, for Amicus Curiae Rockies Express Pipeline, L.L.C.

Scott A. Brister, Esq., Hunton Andrews Kurth, L.L.P., Austin, TX, for Amicus Curiae Rover Pipeline, L.L.C.

Before King, Graves, and Ho, Circuit Judges.

King, Circuit Judge:

We are asked to determine whether Ultra Resources, Inc.'s rejection of a filed-rate contract in bankruptcy relieves it of its obligation to continue performance absent the approval of FERC (the Federal Energy Regulatory Commission). We are also asked to consider whether, under 11 U.S.C. § 1129(a)(6), the bankruptcy court was required to obtain the approval of FERC before confirming Ultra Resources's reorganization plan. We hold that under the particular circumstances presented here, Ultra Resources is not subject to a separate public-law obligation to continue performance of its rejected contract, and that 11 U.S.C. § 1129(a)(6) did not require the bankruptcy court to seek FERC's approval before it confirmed Ultra Resource's reorganization plan. We therefore AFFIRM.

I.

Ultra Resources, Inc. ("Ultra") is an energy company whose primary business is the production of natural gas. It contracted with Rockies Express Pipeline LLC ("REX") to reserve space on REX's pipeline for Ultra's natural gas. Under the contract, Ultra would pay a monthly reservation charge to reserve a certain amount of space in the pipeline, regardless of how much gas it actually shipped (or even if it ultimately shipped no gas). The contract was made in the shadow of REX's application to FERC to construct a new pipeline, and Ultra was one of the "anchor shippers" whose commitments partially induced REX to construct its pipeline.

The original agreement between Ultra and REX was made in 2008. In 2016, after Ultra failed a creditworthiness check, REX sued for damages in Texas state court and asserted that the contract had been terminated based on Ultra's failure to meet creditworthiness requirements. Ultra then filed for Chapter 11 bankruptcy, and Ultra and REX settled REX's contract claim. Ultra and REX also agreed to a new contract which is the subject of the instant case. The new agreement was slated to run from 2019 until 2026, and reserved space on the REX pipeline for Ultra's natural gas at a rate of $169 million over the life of the agreement—a price Ultra was required to pay whether or not it used the pipeline. Shortly before this new agreement went into effect, Ultra suspended its drilling program; it later filed again for Chapter 11 bankruptcy. Anticipating the bankruptcy filing, REX had previously petitioned FERC for a declaration that Ultra could not reject the contract between Ultra and REX without FERC's approval; Ultra filed for bankruptcy before FERC issued a decision.

As part of the bankruptcy proceedings, Ultra sought permission from the bankruptcy court to reject its natural gas shipping contract with REX. REX objected and requested that the bankruptcy court refrain from issuing a decision until proceedings could occur before FERC, which would decide whether rejecting the contract was in the public interest, arguing that FERC had exclusive authority to decide whether Ultra should be relieved of its obligations under the filed-rate contract with REX. The bankruptcy court denied that request, but asked FERC to "participate as a party-in-interest in" the bankruptcy proceedings and "comment on whether the rejection of [the contract] would harm the public interest."

FERC responded by filing a motion for reconsideration with the bankruptcy court, arguing that proceedings before FERC were required because FERC could only speak through its orders, occurring after said proceedings, and could not comment on the public interest through counsel in the bankruptcy proceedings. The bankruptcy court denied FERC's motion. Following an evidentiary hearing (which FERC ultimately participated in through counsel), the bankruptcy court authorized Ultra to reject its contract with REX. In its opinion, the bankruptcy court stated that: (1) it had the authority to approve rejection of the contract under our precedent in In re Mirant Corp. , 378 F.3d 511 (5th Cir. 2004) ; (2) even giving the rejection question heightened scrutiny and considering the effect on the public interest, as required under Mirant , rejection was still appropriate as it would not harm the supply of natural gas and would significantly benefit Ultra's estate; (3) any concerns that rejection would allow Ultra to "free ride" on the pipeline and "still be able to ship natural gas along the REX pipeline, only for substantially less than the cost imposed under [the contract]" were a result of FERC's regulations, not rejection itself, and did not counsel against allowing Ultra to reject the contract; and (4) rejection "neither modif[ied] nor abrogate[d] the [contract]" and therefore did not amount to a rate change requiring approval under 11 U.S.C. § 1129(a). The bankruptcy court also confirmed Ultra's reorganization plan over FERC's objection.

II.

The question at the heart of this case is one of law and therefore is reviewed de novo. In re Glenn , 900 F.3d 187, 189 (5th Cir. 2018). That question concerns a clash of two congressionally constructed titans, FERC and the bankruptcy courts. Congress has imbued each entity with a significant wellspring of authority.

The bankruptcy court's power derives from the Bankruptcy Code. "Congress intended to grant comprehensive jurisdiction to bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate." Celotex Corp. v. Edwards , 514 U.S. 300, 308, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995). Specifically, Chapter 11 sets out the framework for restructuring a bankrupt business. In re Mirant Corp. , 378 F.3d 511, 517 (5th Cir. 2004). One of the options available to a bankrupt business is the rejection of an executory contract—that is, a contract in which performance remains due on both sides. 11 U.S.C. § 365(a) ; Mirant , 378 F.3d at 518 n.3. Rejection of contracts "is vital to the basic purpose of a Chapter 11 reorganization, because rejection can release the debtor's estate from burdensome obligations that can impede a successful reorganization." Mirant , 378 F.3d at 517 (quoting In re Nat'l Gypsum Co. , 208 F.3d 498, 504 (5th Cir. 2000) ). Rejection is subject to the bankruptcy court's approval and is generally considered by the court under the deferential "business judgment" standard. Mission Prod. Holdings, Inc. v. Tempnology, LLC , ––– U.S. ––––, 139 S. Ct. 1652, 1658, 203 L.Ed.2d 876 (2019). The rejection of an executory contract is a breach of contract, with "the same effect as a breach outside bankruptcy." Id. at 1666. Rejection leaves the counterparty to the contract with "a claim against the estate for damages resulting from the debtor's nonperformance." Id. at 1658. Due to the nature of bankruptcy and the insolvency of the debtor, however, this claim is rarely paid in full and the counterparty "may receive only cents on the dollar." Id. Additionally relevant to the Chapter 11 reorganization process described herein is 11 U.S.C. § 1129(a)(6), which states that a reorganization plan can be confirmed only if "[a]ny governmental regulatory commission with jurisdiction, after confirmation of the plan, over the rates of the debtor has approved any rate change provided for in the plan, or such rate change is expressly conditioned on such approval."

Next, because "the business of transporting and selling natural gas ... is affected with a public interest," 15 U.S.C. § 717(a), the Natural Gas Act grants FERC "exclusive jurisdiction over the transportation and sale of natural gas in interstate commerce for resale," Schneidewind v. ANR Pipeline Co. , 485 U.S. 293, 300–01, 108 S.Ct. 1145, 99 L.Ed.2d 316 (1988). Part of FERC's responsibility is to ensure that all rates charged by natural-gas companies are "just and reasonable." 15 U.S.C. § 717c(a). All rates, even those arising from private contract negotiations, are "filed" with FERC, 15 U.S.C. § 717c(c), and cannot be modified or abrogated absent FERC's approval, see Mirant , 378 F.3d at 518.¹ The requirement that FERC approve any changes to a filed rate applies not only to the parties to the contract, but also to the courts—the "filed rate doctrine" prevents both parties and courts from modifying the filed rate contained in a tariff. Id. When FERC is considering whether to change a filed rate, it follows the Mobile - Sierra doctrine, and will change a rate only if the existing contract "adversely affect[s] the public interest."

Fed. Power Comm'n v. Sierra Pac. Power Co. , 350 U.S. 348, 355, 76 S.Ct. 368, 100 L.Ed. 388 (1956) ; United Gas Pipe Line Co. v. Mobile Gas Serv. Corp. , 350 U.S. 332, 344–45, 76 S.Ct. 373, 100 L.Ed. 373 (1956). FERC may not modify a filed rate simply because a party finds continued performance unprofitable. See Mirant , 378 F.3d at 518.

III.

It is also important to note that this is not the first time these two titans have clashed. Instead, today's battlefield lies in the shadow of our precedent in In re Mirant Corp. , 378 F.3d 511 (5th Cir. 2004). In that case, our court considered "whether a district court may authorize the rejection of an executory contract for the purchase of electricity as part of a bankruptcy reorganization, or whether Con...