Gulfport Energy Corp. v. Fed. Energy Regulatory Comm'n

Citation41 F.4th 667
Decision Date19 July 2022
Docket Number21-60017 consolidated with No. 21-60200
Parties GULFPORT ENERGY CORPORATION, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

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

Carol Jayne Banta, Robert Harris Solomon, Esq., Solicitor, Federal Energy Regulatory Commission, Washington, DC, for Respondent.

Scott A. Brister, Esq., Cameron Davis, Hunton Andrews Kurth, L.L.P., Austin, TX, for Intervenor Rover Pipeline, L.L.C.

Before Davis, Smith, and Engelhardt, Circuit Judges.

Jerry E. Smith, Circuit Judge:

The Bankruptcy Code allows debtors to breach and cease performing executory contracts if the bankruptcy court approves. We thus have held that debtors may "reject" regulated energy contracts even if the Federal Energy Regulatory Commission ("FERC") would not like them to. Off. Comm. of Unsecured Creditors of Mirant Corp. v. Potomac Elec. Power Co. (In re Mirant Corp. ), 378 F.3d 511, 515 (5th Cir. 2004). A sister circuit agrees, FERC v. FirstEnergy Sols. Corp. (In re FirstEnergy Sols., Corp. ), 945 F.3d 431, 446 (6th Cir. 2019), and we confirmed our view mere months ago, FERC v. Ultra Res., Inc. (In re Ultra Petroleum Corp. ), 28 F.4th 629, 634 (5th Cir. 2022).

Nevertheless, FERC persisted. Anticipating the petitioner's insolvency, FERC issued four orders purporting to bind the petitioner to continue performing its gas transit contracts even if it rejected them during bankruptcy. The petitioner asks us to vacate those orders. Because FERC cannot countermand a debtor's bankruptcy-law rights or the bankruptcy court's powers, we grant the petitions for review and vacate the orders.

I.

We start with legal background. We then turn to the facts. After addressing the facts developed in the agency proceedings, we review the history of Gulfport's bankruptcy, which began after FERC issued the subject orders.

A.

The parties dispute how two legal regimes—the Bankruptcy Code and the Natural Gas Act—interact. But their dispute is narrow. The question is how a bankrupt debtor's power to reject executory contracts interacts with FERC's power to decide whether a party may change or cancel filed-rate contracts, which the agency regulates. To answer that question, we must review what rejection does and then explain how it relates to the Natural Gas Act.

The Bankruptcy Code empowers debtors, "subject to the court's approval," to "assume or reject any executory contract." 11 U.S.C. § 365(a).1 That means that a debtor may choose either to perform (assume) or "breach" (reject), § 365(g), any contract "that neither party has finished performing," Mission Prod. Holdings, Inc. v. Tempnology, LLC , ––– U.S. ––––, 139 S. Ct. 1652, 1657, 203 L.Ed.2d 876 (2019).

That tool might seem unhelpful. Breaching a contract does not erase that contract; it entitles the contract's counterparty to seek damages for the debtor's nonperformance. Id. at 1658. But here's the rub: Most debtors are broke and cannot pay in full that damages claim. Ibid. So "in a typical bankruptcy," the counterparty to a rejected contract "may receive only cents on the dollar" for its claim against the debtor, yet the debtor will retain the benefit of having ceased performance. Ibid. In that way, "rejection can release the debtor's estate from burdensome obligations that can impede a successful reorganization." Ultra , 28 F.4th at 636 (quoting Mirant , 378 F.3d at 517 ).

The Natural Gas Act ("NGA") regulates firms that move and sell natural gas in interstate commerce. 15 U.S.C. § 717(a). When those firms contract to move or sell gas, they must file the rates they charge with FERC. § 717c(c). The NGA conditions any change to those filed rates on FERC's approval. § 717c(d), (e); see also § 717d(a). The Federal Power Act ("FPA") imposes materially identical requirements on power companies.2

About two decades ago, FERC tried to assert its rate-setting authority under the FPA to block Mirant, a power company, from rejecting filed-rate contracts in bankruptcy. Mirant , 378 F.3d at 514–15. Because the FPA says a power company cannot "modify" or "abrogate" its rates without FERC's approval, FERC declared that Mirant needed its permission to reject any filed-rate contract. Id. at 519.

This court disagreed. Id. at 515. We explained that FERC had misconstrued the effect of rejection. Rejection does not change or cancel a contract; it breaches that contract, id. at 519, giving the debtor's counterparty a damages claim for the value of the debtor's continued performance, id. at 520. The contract itself does not change; nor does the filed rate. No change is wrought where the counterparty's claim for damages is "calculated using the filed rate," id. at 519, even if the debtor cannot pay that claim in full, id. at 521. Thus, the panel concluded, Mirant did not need FERC's consent to reject its filed-rate contracts, and FERC could not "negat[e]" a rejection by requiring Mirant to continue performance. Id. at 523.

At first, FERC acknowledged Mirant.3 But three years ago, FERC decided that Mirant need not be followed. FERC declared that Pacific Gas & Electric would need its approval before rejecting its filed-rate power purchase agreements in bankruptcy.4 FERC did the same in other cases, including ETC Tiger Pipeline, LLC , 171 FERC ¶ 61,248, at ¶ 20, reh'g denied , 172 FERC ¶ 61,155 (2020), which addressed contracts filed per the NGA, like the gas transit contracts in this case.

FERC's decrees pressed the rationale that Mirant repudiated: namely, that rejection "modif[ies] or abrogate[s]" a filed-rate contract. ETC Tiger , 172 FERC ¶ 61,155, at ¶ 4. To justify that position, FERC claimed that the effect of rejection on filed-rate contracts is legally "unsettled," citing a 2006 district-court opinion from New York5 and, curiously, Mission Product Holdings, Inc. v. Tempnology, LLC ,6 in which the Supreme Court confirmed that "rejection is breach and has only its consequences."7 FERC offers the same reasons to justify the orders before this court.

B.

Our petitioner, Gulfport Energy Corporation, produces natural gas. Through transportation service agreements ("TSAs"), Rover Pipeline, who intervened in this appeal, agreed to transport Gulfport's gas through its pipelines. The TSAs are executory contracts. They establish the "maximum daily quantity" of gas that Gulfport may push through Rover's pipelines, as well as the rates Rover may charge for that service.

The COVID-19 pandemic crushed demand for energy and, with it, the price of oil and natural gas. That shock strangled many energy producers, including Gulfport. By summer 2020, Gulfport's financial outlook was grim: In its quarterly financial filing, Gulfport warned that decreased commodity prices "ha[d] significantly impaired the Company's ability to access capital markets and to refinance its existing indebtedness." Gulfport's management doubted "the Company's ability to continue as a going concern."

That revelation worried Rover. If Gulfport failed, it might reject the TSAs and, being insolvent, pay Rover cents on the dollar for its due under those contracts. Preferring to get paid in full for moving Gulfport's gas, Rover petitioned FERC. Rover asked FERC to announce that it had exclusive jurisdiction over the TSAs, so that Gulfport would have to get FERC's approval before rejecting those contracts in bankruptcy. Rover also asked the agency to hold an expedited paper hearing to determine whether continued performance of the TSAs would harm the public interest.

In two orders, FERC gave Rover everything it wanted.

FERC first granted Rover's petition for a declaratory order. After noting that the TSAs are filed-rate contracts, FERC asserted "parallel, exclusive jurisdiction" over them. It then declared, contrary to Mirant , that "rejection" of a filed-rate contract "in bankruptcy court alters the essential terms and conditions" of that contract. And because "the Commission's approval is required to modify or abrogate [a] filed rate," FERC continued, Gulfport would need FERC's approval before rejecting any TSA during bankruptcy. FERC also stated that the bankruptcy court could not confirm any reorganization plan that rejected a TSA "unless and until the Commission agrees, or the plan ... is made contingent on Commission approval." And FERC agreed to hold an expedited paper hearing "to determine whether the public interest presently requires that th[e] [TSAs'] filed rates should be abrogated or modified."

A month later, after a flurry of filings, FERC issued an order in the promised paper hearing. FERC found "that the public interest does not presently require the modification or abrogation of the Gulfport TSAs," because the rates "currently on file and in effect remain just and reasonable" under the MobileSierra standard.8 Again asserting exclusive jurisdiction to allow rejection of filed-rate contracts, FERC purported to require Gulfport to continue performing the TSAs.

FERC then denied rehearing of the first order. The next day, Gulfport filed for bankruptcy and moved the bankruptcy court to allow it to reject the TSAs.9 Two months later, FERC denied rehearing of the second order. Gulfport timely petitioned this court for review10 of both orders and the denials of rehearing.11 We review those four orders here.

C.

While awaiting our decision on its petitions, Gulfport continued trying to reject the TSAs in its bankruptcy proceedings. But Rover objected that the bankruptcy court "lacked exclusive subject matter jurisdiction over [Gulfport's] rejection request" because FERC had already asserted jurisdiction. Rover also moved to "withdraw the reference"—in other words, to push its objection to the district court for initial decision.12

In an emphatic order, the bankruptcy judge urged the district court to deny Rover's motion to withdraw the reference. The bankruptcy court blasted Rover for "obtaining an advisory order from...

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