- Case Type:
- Case Status:
- 20-20623 c/w 21-20126 (5th Circuit, Mar 14,2022) Published
- The Bankruptcy Code does not require the debtor, an energy company whose primary business is the production of natural gas, to obtain FERC's approval of its chapter 11 plan or its decision to reject a filed-rate contract that falls under FERC’s jurisdiction. Further, FERC cannot compel the debtor to continue paying on the pipeline contract that the debtor rejected during its case.
- Procedural context:
- Appeal from bankruptcy court orders granting the debtor’s motion to reject a filed-rate contract regulated by the Federal Energy Regulatory Commission (FERC) and confirming the debtor’s chapter 11 plan.
- The debtor, Ultra Resources, was in the business of producing and selling natural gas. To that end, it entered into a long-term contract with Rockies Express Pipeline (REX) to reserve space in REX’s pipeline in exchange for paying $169MM over the life of the contract, regardless of how much reserved space it actually used. The Debtor was an “anchor shipper” that REX relied on in making its decision to construct the pipeline and obtain FERC approval of rates. Sensing trouble coming, REX petitioned FERC for a ruling that the debtor could not reject its contract in bankruptcy without FERC’s approval, but did not obtain a ruling from FERC before the debtor filed its petition for relief.
The bankruptcy court allowed the debtor to reject the contract after conducting an evidentiary hearing and applying the heightened scrutiny to the request to reject a filed-rate contract that is required by In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004). The bankruptcy court also confirmed the debtor’s chapter 11 plan.
The Fifth Circuit looked at this dispute as a clash of “two congressionally constructed titans, FERC and the bankruptcy courts,” and determined that the outcome of this particular battle was predetermined by its prior opinion in Mirant. 378 F.3d 511 (5th Cir. 2004). Mirant teaches that FERC’s exclusive jurisdiction over the rates for a filed-rate contract does not curtail a bankruptcy court’s jurisdiction to approve a debtor’s rejection of its filed-rate contract. The Ultra Petroleum opinion reiterates the directive in Mirant that rejection of a filed-rate contract is only allowed after the bankruptcy court has determined that the equities weigh in favor of rejection; the typical business-judgment standard does not apply. Specifically, a court must “ensure that rejection does not cause any disruption in the supply of electricity,” natural gas, or whatever regulated commodity is the subject of the contract under consideration. Because the bankruptcy court weighed the equities as required by Mirant, the decision to allow rejection of the contract was affirmed.
- King, Graves, Ho
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