In re Mirant Corp.
| Decision Date | 04 August 2004 |
| Docket Number | No. 04-10001.,No. 04-10094.,No. 04-10004.,04-10001.,04-10004.,04-10094. |
| Parties | In the Matter of: MIRANT CORP., Debtor. (Matter of Debtor's Motion for Order Authorizing the Debtor to Reject the Back-to-Back Agreement Dated December 19, 2000, and Amendments Thereto, With Potomac Electric Power Company as Executory Contracts). Mirant Corp.; MLW Development LLC; Mirant Americas Energy Marketing LP; Mirant Americas Generation LLC; Mirant Mid-Atlantic LLC; et al. and Official Committee of Unsecured Creditors of Mirant Corporation, Appellants, v. Potomac Electric Power Co.; Federal Energy Regulatory Commission, Appellees, and Official Committee of Equity Security Holders, Intervenor. In the Matter of: Mirant Corporation; Et Al., Debtors. Mirant Corp.; MLW Development LLC; Mirant Americas Energy Marketing LP; Mirant Americas Generation LLC; Mirant Mid-Atlantic LLC; et al. and Official Committee of Unsecured Creditors of Mirant Corporation, Appellants, v. Potomac Electric Power Co.; Federal Energy Regulatory Commission Appellees and Official Committee of Equity Security Holders, Intervenor. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Judith Elkin, William Alan Wright, Anne M. Johnson, Haynes & Boone, Dallas, TX, Thomas E. Lauria (argued), White & Case, Miami, FL, Wayne Cross, Robert A. Milne, Jack E. Pace, J. Christopher Shore, Luke A. McGrath, White & Case, New York City, for Mirant Corp., MLW Development LLC, Mirant Americas Energy Marketing LP, Mirant Americas Generation LLC, Mirant Mid-Atlantic LLC, et al.
Roger Frankel (argued), Jonathan P. Guy, Timothy A. Ngau, Swidler, Berlin, Shereff & Friedman, Washington, DC, Sander L. Esserman, Jo E. Hartwick, Stutzman, Bromberg, Esserman & Plifka, Dallas, TX, for Potomac Elec. Power Co.
Dennis Lane (argued), Beth Guralnick Pacella, Federal Energy Regulatory Com'n.
Eric Jay Taube, Mark Curtis Taylor, Hohmann, Taube & Summers, Austin, TX, Edward S. Weisfelner, Andrew Dash, Leslie H. Scharf, Brown, Rudnick, Berlack, Israels, New York City, Howard L. Siegel, Brown, Rudnick, Berlack, Israels, Hartford, CT, for Official Committee of Equity Sec. Holders.
Jason S. Brookner (argued), Andrews & Kurth, Dallas, TX, Paul N. Silverstein, Andrews & Kurth, Mark Thompson, Simpson, Thacher & Bartlett, New York City, Kendall Matthew Gray, Andrews & Kurth, Houston, TX, Kenneth L. Wiseman, Mark F. Sundback, Andrews & Kurth, Washington, DC, for Official Committee of Unsecured Creditors of Mirant Corp.
Appeal from the United States District Court for the Northern District of Texas.
Before BARKSDALE, EMILIO M. GARZA and PICKERING, Circuit Judges.
The issue in this case is 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 Congress granted the Federal Energy Regulatory Commission ("FERC") exclusive jurisdiction over these contracts. Mirant Corporation, its various subsidiaries, the Official Committee of Unsecured Creditors of Mirant Corporation, and the Official Committee of Equity Security Holders as an intervenor (collectively "Mirant") argue that the district court's jurisdiction over Mirant's reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. (the "Bankruptcy Code"), allows it to authorize the rejection of certain power contracts. In contrast FERC and the Potomac Electric Power Company ("PEPCO") maintain that because the Federal Power Act, 16 U.S.C. § 792 et seq. (the "FPA"), grants FERC the exclusive authority to regulate the wholesale rates in contracts for the interstate sale of electric power, any rejection of those contracts must occur in a FERC administrative proceeding. The district court in this case agreed with FERC's position, found the disputed contract to be within FERC's jurisdiction, and held that it lacked jurisdiction to authorize Mirant to reject this contract. Instead the district court held that a FERC proceeding was the proper forum for Mirant to seek relief from any of its power contracts. For the reasons described below, we find that the district court's jurisdictional ruling is erroneous, and that the district court may properly authorize the rejection of an executory power contract in bankruptcy.
Mirant is one of the largest regulated public utilities in the United States. It generates, buys, and sells electricity for use by utilities, municipalities, electric-cooperative utilities, and generators across the country. PEPCO is also a regulated public entity responsible for servicing the power needs of residential and commercial consumers in the District of Columbia and Maryland.
Pursuant to state deregulation legislation, PEPCO agreed to sell its electric generation facilities and assign most of its purchase power agreements ("PPAs")1 to Mirant in June 2000 for approximately $2.65 billion in the Asset Purchase and Sale Agreement. The Asset Purchase and Sale Agreement allowed PEPCO to assign all of its PPAs to Mirant, however, a number of the PPAs contained contract language that required PEPCO to obtain the PPA supplier's consent before it could assign that particular PPA. The Asset Purchase and Sale Agreement addressed the possibility that some PPA suppliers would not consent to the assignment of their contracts with PEPCO. The parties agreed to reduce the purchase price by almost $260 million if PEPCO could not obtain consent to assign certain PPAs. They also agreed that any unassigned PPAs would be governed by the terms of a schedule attached to the Asset Purchase and Sale Agreement ("Schedule 2.4"). Under the terms of that schedule, PEPCO would comply with the terms of any unassigned PPAs listed in Schedule 2.4, and Mirant agreed to purchase from PEPCO an amount of electricity equal to PEPCO's obligation under those unassigned PPAs at the rates set in those contracts.
PEPCO did not receive consent to assign two of its PPAs and invoked its Schedule 2.4 rights. The parties filed Schedule 2.4, and FERC approved the rates contained therein. The Schedule 2.4 payments relating to these unassigned PPAs are referred to by the parties, the bankruptcy court, and the district court as the Back-to-Back Agreement. We adopt that term for the sake of consistency. The parties agree that the Back-to-Back Agreement's rate for electricity is higher than the market rate, causing Mirant significant financial losses.
In July 2003, Mirant filed for Chapter 11 bankruptcy. As part of its Chapter 11 reorganization, Mirant filed two motions in an adversary proceeding against FERC and PEPCO. First, Mirant filed a motion to reject the Back-to-Back Agreement, but not the Asset Purchase and Sale Agreement, as an executory contract. Second, Mirant sought, and received, an ex parte temporary restraining order preventing FERC or PEPCO from taking any actions to "require or coerce [Mirant] to abide by the terms of the Back-to-Back Agreement." Mirant subsequently initiated a second adversary proceeding to obtain another temporary ex parte injunction, which prevented FERC from "taking any action directly, or indirectly, to require or coerce [Mirant] to abide by the terms of any Wholesale Contract" on which Mirant either was substantially performing or was not performing pursuant to a court order without giving Mirant ten days advance notice. As this second injunction applied to all of Mirant's wholesale electric contracts and not just to the Back-to-Back Agreement, the parties recognize that this order would implicate hundreds of power contracts that are subject to FERC regulation.
After a hearing before the bankruptcy court, it held that it had the power to enjoin FERC; the authority to authorize Mirant to reject the Back-to-Back Agreement; and that an injunction was necessary in this case to protect its jurisdiction. Specifically, the bankruptcy court recognized that it was not the proper forum to challenge a FERC order, but found that an injunction was needed to protect the reorganization process because any regulatory action FERC took with regard to a particular contract would divest the court of its jurisdiction over that contract. Consequently, the bankruptcy court converted both temporary restraining orders into preliminary injunctions, but did not rule on the merits of Mirant's motion to reject the Back-to-Back Agreement.
The district court then withdrew the reference to the bankruptcy court and held new hearings.2 It concluded that FERC has exclusive authority to determine the reasonableness of the wholesale rates charged for electric energy sold in interstate commerce, and that those rates can only be challenged in a FERC proceeding, not through a collateral attack in state or federal court. The district court found that the only business justification supporting Mirant's motion to reject the Back-to-Back Agreement was the losses it suffered because the rate for electricity that FERC approved for that agreement exceeds the market rate. Based upon this analysis, the district court found that Mirant's rejection motion was a prohibited "attempt to avoid their electric energy purchase payment obligations under the Back-to-Back Agreement at the filed rates FERC has found to be just and reasonable." The district court then held that the Bankruptcy Code does not provide an exception to FERC's authority under the FPA and that Mirant must seek relief from the filed rate in the Back-to-Back Agreement in a FERC proceeding. Based upon this analysis, the district court denied Mirant's motion to reject the Back-to-Back Agreement as well as its request for permanent injunctive relief. In a subsequent order, the district court vacated the bankruptcy court's injunctive relief because it would interfere with the performance of FERC's regulatory oversight functions. It then dismissed the case for failure to state a claim upon which relief could be granted. Mirant appeals...
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