In re Mirant Corp.

• Decision Date: 13 February 2006
• Docket Number: No. 04-11264.,04-11264.
• Citation: 440 F.3d 238
• Parties: In the Matter of: MIRANT CORPORATION, Debtor. Bonneville Power Administration, Appellant, v. Mirant Corporation, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 238

440 F.3d 238

In the Matter of: MIRANT CORPORATION, Debtor.

Bonneville Power Administration, Appellant, v. Mirant Corporation, Appellee.

No. 04-11264.

United States Court of Appeals, Fifth Circuit.

February 13, 2006.

COPYRIGHT MATERIAL OMITTED

Jeffrey A. Clair (argued), William Kanter, U.S. Dept. of Justice, Civ. Div., Washington, DC, for Appellant.

Thomas E. Lauria, White & Case, Miami, FL, Robin E. Phelan (argued), Amy M. Walters, Frances A. Smith, Haynes & Boone, Dallas, TX, for Appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GARWOOD, SMITH and DeMOSS, Circuit Judges.

DeMOSS, Circuit Judge:

Bonneville Power Administration ("BPA") appeals the district court's affirmance of two orders entered by the bankruptcy court. Debtor Mirant Corporation and related entities filed a petition under Chapter 11 of the Bankruptcy Code, triggering a dispute between the parties regarding the ability of BPA to terminate an executory contract for the future purchase of electric power. On the one hand, the Bankruptcy Code's automatic stay, effective upon the filing of a Chapter 11 petition, precludes any act to obtain possession of or exercise control over property of the estate. See 11 U.S.C. § 362(a). On the other hand, in an executory contract related to the future call of energy purchase by BPA, see generally § 365, the parties agreed to an ipso facto clause that provided for default and a termination payment in the event of a bankruptcy filing, see § 365(e).¹ BPA argues that the Bankruptcy Code (or the "Code") permits it to terminate the executory contract pursuant to the contract's ipso facto clause. See § 365(e)(2)(A). The parties now dispute the priority of the two Chapter 11 provisions: the automatic stay and the termination arguably permitted by the combined effect of the ipso facto clause and § 365(e)(2)(A).

This appeal requires us to address the intersection of three relevant statutory provisions: 11 U.S.C. § 362(a) (the automatic bankruptcy stay); 11 U.S.C. § 365(e)(2)(A) (permitting a nondebtor party to an executory contract to terminate or modify such contract when applicable law excuses the nondebtor from accepting or rendering performance to the trustee or an assignee); and the Anti-Assignment Act (or "the Act"), 41 U.S.C. § 15 (prohibiting transfer of contracts to which the United States is a party).

Concluding that the bankruptcy stay precedes any termination permitted by either the Anti-Assignment Act or the agreement of the parties, we affirm the district court's order declaring BPA to have violated the automatic stay. Finding no abuse of discretion in the court's determination that cause was not shown where the Anti-Assignment Act is not an applicable law under § 365(e)(2)(A), we affirm also the denial of BPA's motion to lift or modify the stay.

I. Background

A. Factual Background

Mirant Corporation is an international energy company that produces and sells electricity in the United States and abroad. Appellee Mirant Americas Energy Marketing, L.P. ("Mirant") is a subsidiary of Mirant Corporation and engages in asset risk management, including commodities, energy, and financial product trading. Mirant is responsible for procuring fuel and selling power for Mirant Corporation's operating facilities.

BPA is a federal power marketing agency within the United States Department of Energy. BPA was created in 1937 by Congress to market low-cost hydroelectric power generated by a series of federal dams along the Columbia River in the Pacific Northwest. See generally Bonneville Project Act of 1937, 16 U.S.C. § 832. Originally, BPA marketed the energy produced for the benefit of the public, particularly domestic and rural customers, giving preference and priority to public bodies and cooperatives. See § 832c(a). For some time, surplus in energy production meant BPA could market freely to all who desired to purchase in the area. In 1980, increasing demands upon the supply triggered, in part, Congress's enactment of the Pacific Northwest Electric Power Planning and Conservation Act, 16 U.S.C. §§ 839-839h, which required BPA to offer new contracts to its customers. See Aluminum Co. of Am. v. Cent. Lincoln People's Util. Dist., 467 U.S. 380, 382, 104 S.Ct. 2472, 81 L.Ed.2d 301 (1984). Thereafter, BPA was authorized to acquire additional resources in order to increase the supply of federal power. See 16 U.S.C. § 839d(a)(2). Accordingly, BPA entered certain contracts related to the marketing of federal power. See § 832a(f).

BPA and Mirant are parties to the Western Systems Power Pool Agreement (the "WSPPA"), a contract the parties agree is standard for electric power sales. The WSPPA is an umbrella agreement governing electric power transactions. Subject to the WSPPA, BPA and Mirant's predecessor in interest (Southern Company Energy Marketing, L.P.²) entered two agreements: (1) the Agreement to Enable Future Purchases, Sales, and Exchanges of Power and Other Services No. 99PB-10588 (the "Enabling Agreement") and (2) an option contract though which BPA purchased a one-time call option for the future purchase of a set amount of firm power from Mirant over a three-year period commencing in 2004 (the "Confirmation Agreement").

Together, the WSPPA, the Enabling Agreement, and the Confirmation Agreement (collectively, the "Agreement") form the sum of the parties' contractual rights and obligations.³ Under the terms of the Agreement, BPA owed no obligation to exercise its option, and if it did not do so, the option expired on the strike date provided, December 23, 2003. The parties agree, and the lower courts noted, that BPA did not exercise and, in practical terms, would not have exercised its option because the option price bargained for in the Agreement exceeded the market price of energy during the relevant period of the Agreement.

The Agreement includes a default provision, or ipso facto clause, that authorizes BPA to terminate the contract and claim liquidated damages if Mirant petitioned for bankruptcy before the option period expired. The Agreement provides that default by the institution of a bankruptcy proceeding triggers the non-defaulting party's "right to terminate all transactions between the Parties under this Agreement upon written notice" and the non-defaulting party's right to a termination payment. Upon termination, the non-defaulting party may liquidate all transactions with the debtor and demand a termination payment equal to the market-based cost of replacing the option contract.⁴ The Agreement also provides that all transactions under the agreement are forward contracts and that the parties are forward contract merchants as defined by the Bankruptcy Code. See 11 U.S.C. § 556.

On July 1, 2003, BPA wrote to Mirant requesting, pursuant to the Agreement, adequate assurances of Mirant's ability to perform. Mirant responded by letter on July 3, stating its willingness to wire assurance but disputing the reasonable estimate of the amount of assurance. On July 7, Mirant wired to BPA $523,389 as adequate assurance of its ability to perform.

B. Procedural Background

On July 14, 2003, Mirant Corporation and 82 of its direct and indirect subsidiaries, including Mirant, filed voluntary Chapter 11 bankruptcy petitions. That day, the court held a hearing and entered an interim order authorizing the Debtors to comply with the terms of prepetition trading contracts and to enter into postpetition trading contracts in the normal course of business and setting a final hearing for the entry of a final order of authorization. The bankruptcy court also approved the joint administration of the Debtors' cases.⁵

Under the Code, Mirant as a debtor remains in possession of its estate. See 11 U.S.C. § 1101.⁶ Mirant continues to conduct its business in the ordinary course. On July 16, 2003, the bankruptcy court ordered the parties, specifically including all governmental units, to comply with the Code's automatic stay provision, § 362, and its provision regarding executory contracts and unexpired leases, § 365 (the "Order to Comply").⁷ The Order to Comply enjoined BPA from multiple acts affecting Mirant or the debtor estate, including interference in any way with any and all of the property of any of the Debtors. The Order to Comply expressed that it had no effect upon any exceptions to the automatic stay, based upon any section of the Bankruptcy Code, or upon the right of any party to seek relief from the automatic stay according to § 362(d).

BPA terminated its Confirmation Agreement with Mirant shortly thereafter, and Mirant characterizes this termination as a violation of the bankruptcy court's order and stay. On July 30, 2003, BPA notified Mirant in writing that the Chapter 11 petition constituted default under the parties' Agreement and that accordingly, BPA terminated all transactions with Mirant. BPA stated that under the terms of the Agreement, both parties were forward contract merchants and that the Agreement was a forward contract for purposes of 11 U.S.C. § 556. BPA also demanded a termination payment from Mirant under the Agreement of $1,085,040⁸ and set forth terms for the payment of that amount in light of the assurance Mirant had already provided and the amount BPA yet owed Mirant under the Agreement. BPA requested payment of the remaining amount allegedly owed by Mirant, $533,026, within three days of receipt of the July 30 letter.⁹

In response to BPA's termination letter and termination payment demand, Mirant wrote to BPA on August 7, 2003, challenging BPA's status as a forward contract merchant under the Code, describing BPA's purported termination of the Agreement as a violation of §§ 362 and 365 of Chapter 11, and demanding that BPA immediately withdraw its purported termination of the Agreement and perform. BPA later responded by letter, notifying Mirant of BPA's refusal to withdraw the termination letter.

On August 27, 2003, the...