Reliant Energy Services v. Enron Canada Corp.

• Decision Date: 29 October 2003
• Docket Number: No. 02-20447.,02-20447.
• Citation: 349 F.3d 816
• Parties: RELIANT ENERGY SERVICES, INC., Plaintiff-Appellant, v. ENRON CANADA CORP., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

349 F.3d 816

RELIANT ENERGY SERVICES, INC., Plaintiff-Appellant, v. ENRON CANADA CORP., Defendant-Appellee.

No. 02-20447.

United States Court of Appeals, Fifth Circuit.

October 29, 2003.

Richard Earl Griffin (argued), H. Victor Thomas, Jr., Curt Michael Langley, Jackson

Walker, Houston, TX, for Plaintiff-Appellant.

John B. Strasburger, Weil, Gotshal & Manges, Houston, TX, Gregory Scott Coleman (argued), John F. Greenman, Weil, Gotshal & Manges, Austin, TX, for Defendant-Appellee.

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

Before DeMOSS and STEWART, Circuit Judges, and FALLON^*, District Judge.

DeMOSS, Circuit Judge:

Under a Master Netting, Setoff, and Security Agreement ("Netting Agreement"), Reliant Energy Services, Inc. ("RES") and Reliant Energy Services Canada, Ltd. ("RESC") (collectively, "Reliant" or "Reliant Parties") sought $78,468,996.60 from Enron Canada Corporation ("Enron Canada"). Reliant filed a breach of contract claim in federal court against Enron Canada seeking a declaratory judgment that the terms of the Netting Agreement made Enron Canada jointly liable for $78,468,996.60 and an injunction requiring Enron Canada to pay this amount into the registry of the court. Enron Canada moved to dismiss the claim asserting lack of personal jurisdiction and, in the alternative, that Reliant violated a 11 U.S.C. § 362(a) bankruptcy stay. The district court found that personal jurisdiction was not lacking, but agreed that the bankruptcy stay extended to the Enron Corporation also extended to its subsidiary, Enron Canada under the "unusual circumstances" exception articulated in A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir.1986). The district court also found that the terms of the Netting Agreement imposed no liability on Enron Canada for the debts of other Enron entities and denied Reliant's request for a preliminary injunction. For the following reasons, we conclude that the terms of the Netting Agreement are ambiguous, and therefore we vacate the district court's decision and remand for further consideration.

BACKGROUND

The dispute arises from a history of trading between Reliant and five subsidiaries of the Enron Corporation. Reliant and Enron North America Corp. ("ENA"), Enron Broadband Services, L.P. ("EBA"), ENA Upstream Company, LLC ("ENAUPSCOM"), Enron Canada, and Enron Power Marketing, Inc. ("EPMI") (collectively, "Enron" or "Enron Parties") executed and performed various master sales agreements that set forth the terms and conditions under which they traded, purchased and sold natural gas, electricity, and broadband data capacity ("underlying master agreements"). Each agreement was between a single Enron party and a single Reliant party and laid out the terms of their dealings in a single commodity or product.

Reliant and the various Enron subsidiaries performed under these underlying master agreements without incident for several years. In October 2001, however, news agencies began publishing reports that questioned the Enron Corporation's accounting practices and the accuracy of their financial statements. At that time, the Enron Parties approached the Reliant Parties with the proposed Netting Agreement which effectively combined all of the existing underlying master agreements into "one single integrated agreement" governing payment, settlement, collateral, security interests, defaults and other terms.¹ On November 8, 2001, the Reliant Parties and the Enron Parties executed the Netting Agreement.

The Netting Agreement provides that if one of the parties to an underlying master agreement defaulted on its obligations, the non-defaulting party could declare all of the underlying master agreements in default, otherwise referred to as cross-default. After giving all the parties notice of the default to the other parties, under section 2(b), the "Underlying Master Agreements Close-Out" provision of the Netting Agreement, the non-defaulting party has the right to take the following actions:

(i) accelerate, terminate, and liquidate, or otherwise close-out all Transactions under its Underlying Master Agreements as of such designated date; (ii) exercise rights of setoff, netting and/or recoupment in accordance with the terms of its Underlying Master Agreements; (iii) retain any Collateral; (iv) with respect to each Defaulting Party, withhold payment and performance of each Non-defaulting Party's Obligations to each Defaulting Party to pay, secure, setoff against, net, and/or recoup such Defaulting Party's Obligations to such Non-Defaulting Party; (v) convert any Obligation from one currency into another currency as set forth in Section 5; and (vi) take any other action permitted by law or in equity or by its Underlying Master Agreements or any Transactions thereunder necessary or appropriate to protect, preserve, or enforce its rights or to reduce any risk of loss or delay.

The exercise of the Section 2(b) right to close-out the transactions under the underlying master agreements results in a "Settlement Amount" for each underlying master agreement. The term "Settlement Amount" is defined as "the net amount that is due and payable by one Party to the other Party in respect of an Underlying Master Agreement upon the exercise by the Non-defaulting Party of the rights set forth in Section 2(b)." (emphasis added). The Netting Agreement provides that "`Party' means ENA, EPMI, EBS, ENAUPSCOM, ECC (Enron Canada), RES, and RESC as the context indicates, and `Parties' means all of the foregoing." Section 4 of the Netting Agreement provides for a netting or offsetting of the settlement amounts derived from each underlying master agreement to arrive at a final settlement amount that is payable by the group from whom such payment is due. Moreover, it sets forth the procedure by which the final settlement amount is to be remitted.²

On November 30, 2001, Reliant issued notice to the Enron parties, pursuant to Section 2 of the Netting Agreement that EPMI was in default on the Master Power Purchase and Sale Agreement, an underlying master agreement; and therefore, that all of the Enron Parties were in default under the Netting Agreement. On December 2, 2001, the Enron Parties, except for Enron Canada, filed for Chapter 11 bankruptcy protection. Thereafter, these Enron Parties were protected from suit through the automatic stay provision of 11 U.S.C. § 362(a). After netting the settlement amount as required by Section 4, Reliant determined that the final settlement amount payable by the Enron Group to be $78,468,996.60.³ On February 19, 2002, Reliant sent notice to EPMI through ENA stating that a "final settlement amount" was due, but that no funds were forthcoming. The very next day, Reliant sent a letter stating that "[n]othing contained in the [February 19 letter] was intended to be, nor should be construed to have been a violation of 11 U.S.C. § 362(a)," the automatic stay provision of Chapter 11 bankruptcy protection.

On February 26, 2002, Reliant filed suit against Enron Canada, the only Enron party which had not filed for bankruptcy protection.⁴ Reliant claimed that Enron Canada breached the Netting Agreement, seeking inter alia, injunctive relief and a declaration that Enron Canada was jointly liable for the $78,468,996.60 under the Netting Agreement. Enron Canada filed a motion to dismiss, arguing, among other things, that it was not subject to the court's jurisdiction, that Reliant's suit was subject to the automatic stay in bankruptcy, and that Enron Canada was not liable for the debts of its affiliates under the Netting Agreement. The district court dismissed Reliant's suit, finding that it was subject to the automatic stay and that Enron Canada did not owe $78,468,996.60 to Reliant under the Netting Agreement.

DISCUSSION

Does the Netting Agreement impose joint liability upon the Enron parties?

The district court determined that generally the Netting Agreement does not impose an affirmative obligation on one party to cover all the debts of another. Thus, as part of its analysis of whether to extend the bankruptcy stay to Enron Canada, the district court determined that the Netting Agreement limits the forms of recovery to which Reliant is entitled. In particular, the district court determined that the language of the Netting Agreement unambiguously includes the right to terminate, liquidate, net, setoff, and apply collateral; and does not include the right to impose joint liability on Enron Canada.

We review the district court's interpretation of the Master Netting Agreement de novo. A determination of whether a contract is ambiguous and the interpretation of a contract are questions of law, which on appeal are reviewed de novo. Stinnett v. Colorado Interstate Gas Co., 227 F.3d 247, 254 (5th Cir.2000). As this litigation involves the free trade of commodities with Canada, a free trade area country, federal jurisdiction is based on 28 U.S.C. § 2201; and therefore, federal law governs the interpretation of the Netting Agreement. See United States v. Taylor, 333 F.2d 633, 638 (5th Cir.1964) ("[I]t is clear that federal law will control contracts between private parties if there is sufficient federal interest.").⁵ A contract is ambiguous only if its meaning is susceptible to multiple interpretations. The mere fact that the parties may disagree on the meaning of a contractual provision is not enough to constitute ambiguity. When a contract is expressed in unambiguous language, its terms will be given their plain meaning and will be enforced as written. Certain Underwriters at Lloyd's London v. C.A. Turner Constr. Co., 112 F.3d 184, 186 (5th Cir.1997). "When interpreting a contract, the question is what was the parties' intent, [because] courts are compelled to give effect to the parties' intentions." Pennzoil Co. v. FERC, 645 F.2d 360, 388 (5th Cir. 1981). To determine intent, we look to the plain language of the contract, its commercial...