In re Mirant Corp.

• Decision Date: 17 May 2004
• Docket Number: Bankruptcy No. 03-46590-DML-11.,Adversary No. 04-4040.
• Citation: 310 B.R. 548
• Court: U.S. Bankruptcy Court — Northern District of Texas
• Parties: In re MIRANT CORPORATION, et al., Debtors. Mirant Americas Energy Marketing, L.P., Plaintiff, v. Kern Oil & Refining Co., Defendant.

310 B.R. 548

In re MIRANT CORPORATION, et al., Debtors Mirant Americas Energy Marketing, L.P., Plaintiff, v. Kern Oil & Refining Co., Defendant.

Bankruptcy No. 03-46590-DML-11.

Adversary No. 04-4040.

United States Bankruptcy Court, N.D. Texas, Fort Worth Division.

May 17, 2004.

COPYRIGHT MATERIAL OMITTED

Amy M. Walters, Frances Anne Smith, Judith Elkin, Mark Joseph Elmore, Robin Eric Phelan, Haynes and Boone, Dallas, TX, Bryan A. Merryman, Maria K. Pum, Thomas E. Lauria, White and Case LLP, Miami, FL, Ian T. Peck, Haynes and Boone, Jeff P. Prostok, Forshey and Prostok, John David Penn, Haynes and Boone, LLP, Fort Worth, TX, John H. Sturc, Gibson, Dunn and Crutcher, Washington, DC, Michelle C. Campbell, White & Case, Los Angeles, CA, Paul B. Carberry, White and Case LLP, New York, NY, Vincent R. FitzPatrick, Jr., for Debtors.

Erin Marie Schmidt, George McElreath, William T. Neary, Dallas, TX, for U.S. Trustee.

Gregory M. Petrick, Cadwalader, Wickersham and Taft, New York, NY, Thomas Rice, Cox & Smith, San Antonio, TX, Edward S. Weisfelner, Berlack, Israels & Liberman, New York, NY, Eric J. Taube, Mark Taylor, Hohmann, Taube & Summers, L.L.P., Austin, TX, for Creditors Committee.

Ian T. Peck, Haynes and Boone, Ft. Worth, TX, for Plaintiff.

Debra K. Simpson, Jones Day, Dallas, TX, Michelle Morgan Harner, Jones Day, Chicago, IL, for Defendant.

Hirtzan Joseph Acosta, Jones Day, Dallas, TX, for Defendant/Counter-Claimant.

Jeff P. Prostok, Forshey and Prostok, Ft. Worth, TX, for Plaintiff/Counter-Defendant.

MEMORANDUM OPINION

DENNIS MICHAEL LYNN, Bankruptcy Judge.

Before the court is Plaintiff's Motion for Partial Summary Judgment (the "Motion") filed in the captioned adversary proceeding (the "Adversary") by Mirant Americas Energy Marketing, L.P. ("Plaintiff" or "MAEM") and the Cross-Motion for Partial Summary Judgment (the "Cross MSJ") made by Kern Oil & Refining Co. ("Defendant" or "Kern").¹ Plaintiff filed its Brief in Support of Plaintiff's Motion for Partial Summary Judgment (the "MAEM Brief"). Kern has filed its Brief in Opposition to Plaintiff's Motion for Partial Summary Judgment (the "Kern Brief") to which Plaintiff filed a reply (the "MAEM Reply").

Plaintiff submitted affidavits made by Dr. Cindy Ma ("Ma"),² and John Hogan ("Hogan"; the "Hogan Affidavit"), Director of Gas and Fuel Procurement for Mirant Corporation ("Mirant"), and certain contracts, other documents and pleadings filed in these chapter 11 cases (the "MAEM Summary Judgment Evidence"), which will be identified and described as appropriate below. Defendant filed with the court an affidavit made by Alan Kornicks ("Kornicks"; the "Kornicks Affidavit"), Kern's Vice President. Defendant also requested that the court take judicial notice of Rule 35, Southern California Gas Company Rules (the "SoCal Rules")³ and certain briefs filed in the United States Court of Appeals for the Fifth Circuit in unrelated but precedentially relevant cases. At the hearing held on the Motion on March 24, 2004 (the "March Hearing"), the court granted Defendant's request (the items thus admitted, together with the Kornicks Affidavit and its attachments, are hereinafter referred to as the "Kern Summary Judgment Evidence," which, together with the MAEM Summary Judgment Evidence, constitutes the "Summary Judgment Evidence").

The parties argued their initial positions at the March Hearing. Thereafter, the court determined further argument respecting the effect on the Adversary of certain of its orders would be useful. By letter dated April 19, 2004, the court posed several questions to the parties. The court heard additional argument on those questions on April 21, 2004 (the "April Hearing"). During the April Hearing, with the agreement of the parties, the court supplemented the record with additional filings from these chapter 11 cases.

The Adversary is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (M) and (O). It is therefore subject to this court's jurisdiction in that it involves disposition of the underlying chapter 11 case and matters "arising under title 11, or arising in ... cases under title 11." 28 U.S.C. § 1334(b). This Memorandum Opinion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr.P. 7052.

I. Background

Resolution of the Adversary depends on whether the Bankruptcy Code⁴ or certain orders of this court (or both) provided to Kern the ability to offset against amounts owed to MAEM damages Kern would suffer by reason of termination of MAEM's status as Kern's supplier of natural gas. If Kern was entitled by law to protect itself, the Adversary also questions whether Kern acted beyond the law's permit. The Motion and Cross MSJ require that the court determine whether or not, based on undisputed facts, Kern's rights (or lack thereof) are essentially clear as a matter of law. In order to do so, the court must first establish the context in which the Motion and Cross MSJ are presented.

A. Prepetition Relationship between Kern and MAEM

Kern is a small, independent California oil refining company which produces and sells certain "environmentally superior" products. (Kornicks Affidavit ¶¶ 3-4). As a result of the volatile energy market in 2000, Kern determined to construct an electric cogeneration facility to protect itself against future substantial fluctuations in energy prices. (Id. ¶ 5). In order to power this facility, Kern required an assured supply of natural gas at an affordable price.

The Mirant Entities (as hereafter defined) are in the business of producing, marketing and trading various energy products. MAEM is the subsidiary of Mirant through which trading and supply of such products, including natural gas, have been carried out. It was to MAEM that Kern turned to secure its natural gas supply for its cogeneration facility. Consequently, Kern and MAEM in February, 2002, entered into a Gas Master Service Agreement (the "GMSA") and a Transaction Agreement (the "TA"), both with terms running from January 1, 2003, to December 31, 2005, pursuant to which MAEM was to supply to Kern through the Southern California Gas Company ("SoCal") 50,000 MMBtu of gas at a fixed price of $3.951/MMBtu.⁵

MAEM and Kern's previous dealings included supply to Kern by MAEM of natural gas. In August of 2001, MAEM and Kern entered into a Master Monthly Netting, Close-Out Netting and Margin Agreement (the "Netting Agreement" and with the GMSA and the TA, the "Agreements"). (Id. ¶ 7). The Netting Agreement provided it would apply "to certain obligations arising out of all existing and future agreements between [MAEM and Kern] relative to the sale, purchase, or exchange of Commodities."⁶ (See Netting Agreement, pmbl. See also ¶ 14.) The Netting Agreement was effective for one year, i.e., through August 21, 2002, and thereafter evergreen, terminable on 30 days' notice. See Netting Agreement ¶ 12. Paragraph 11 of the Netting Agreement states that "a Contract, as defined in this [Netting] Agreement, shall constitute a `forward contract' within the meaning of the United States Bankruptcy Code." "Contract" is defined as "any verbal or written agreement that pertains to the sale, purchase or exchange" of natural gas. See Netting Agreement ¶ 1(b). The Netting Agreement includes an ipso facto default provision of the kind referred to in section 365(e)(2)(A)(i) of the Code. See Netting Agreement ¶ 3.

Neither the TA nor the GMSA makes reference to the Netting Agreement. The TA does, however, incorporate by its terms the GMSA. As reflected in the Summary Judgment Evidence, the Agreements were the only operative contract between MAEM and Kern in the period leading up to MAEM's chapter 11 filing. The function of the Netting Agreement — which was designed to allow parties to net out reciprocal transactions — was thus limited. MAEM supplied Kern with natural gas to be used in Kern's cogeneration facility which Kern then paid for as contemplated by the TA and the GMSA.

B. Postpetition Events

On July 14 and 15, 2003, Mirant and 74 of its direct and indirect subsidiaries, including MAEM, filed chapter 11 petitions in this court.⁷ On July 14, MAEM requested and was granted an emergency hearing on its Motion for Interim Order Authorizing the Debtors to (i) Comply With Terms of Prepetition Trading Contracts, (ii) Enter Into Postpetition Trading Contracts in the Ordinary Course of Business, (iii) Provide Credit Support Relating to Both Pre- and Post-Petition Trading Contracts, and (iv)[sic] Setting a Final Hearing to Consider the Entry of a Final Order Affirming the Interim Order and Authorizing Assumption of Prepetition Trading Contracts (the "Trading Motion"). By the Trading Motion, MAEM asked that the court authorize certain protections for parties to transactions with MAEM that were entitled to the benefits of sections 362(b)(6) and 556 or 560 of the Code.⁸ Those provisions essentially allow persons dealing with a debtor in commodity contracts, forward contracts and similar instruments to enforce ipso facto default provisions contained in those contracts and liquidate their positions vis-a-vis the debtor notwithstanding section 362(a) (providing for automatic stay) and section 365(e)(1) (neutralizing ipso facto default provisions) of the Code.

Though the court understood from the Trading Motion and the hearing conducted on July 14 that MAEM sought only to protect persons who might invoke sections 362(b)(6), 556 or 560, and though the court intended to so limit the relief granted, the order entered by the court on July 15, 2003, (the "Interim Order") by its terms provides much broader coverage.⁹ The Interim Order extended at least some protection to MAEM's counterparties in "master agreements, `long-term confirmation agreements,' netting agreements, master netting agreements ... and any transaction thereunder...." Interim Order ¶ F.

Any counterparty (as defined in the Interim Order) that continued to deal with Debtors postpetition...