Fifth Circuit Rescinds FERC Orders and Affirms Contract Refusal Powers in Bankruptcy – Wilson Sonsini Goodrich & Rosati | Vette Leader

On July 19, 2022, the U.S. Court of Appeals for the Fifth Circuit added a number of recent decisions affirming a debtor’s right to refuse regulated energy contracts in bankruptcy, even over objection from the Federal Energy Regulatory Commission (FERC). In its ruling, the court overturned two FERC orders that were made prior to the actual bankruptcy proceedings, which were intended to require a natural gas producer to continue performing under a contract even if those orders were denied in a bankruptcy proceeding.1

background

The Bankruptcy Act empowers Chapter 11 debtors to “reject” enforceable contracts with court approval.2 A pending contract is generally defined as a contract in which continuing material performance is owed by both parties. Contrary to popular belief, refusal does not constitute termination or withdrawal from the contract. Rather, refusal is treated as a breach of contract and while the debtor is released from the obligation to continue performing the contract, any unfulfilled obligations are converted into a claim for damages.

Outside of bankruptcy, the Federal Power Act and the Natural Gas Act give FERC broad jurisdiction to regulate the tariffs, terms and conditions of contracts for the transmission or sale of electricity and natural gas, respectively. Relying on this case law, FERC has repeatedly challenged the ability of bankruptcy courts to unilaterally authorize rejection of energy-related contracts without their consent. In an emerging consensus, several courts, including the U.S. Circuit Courts of Appeals for the Fifth and Sixth Circuits, have concluded that energy contracts can be denied based on FERC’s appeal in the bankruptcy proceedings.3

Gulfport’s energy decision

Gulfport Energy Corporation (Gulfport), a natural gas producer, had Rover Pipeline ship its gas through its pipelines at prices set forth in certain Transportation Service Agreements (TSAs) as the COVID-19 pandemic depressed demand for energy and depressed prices on oil and Gas, Gulfport issued going concern warnings in its public filings. In anticipation of a possible bankruptcy filing by Gulfport and hoping to avert adverse consequences from a resulting rejection by the TSAs, Rover requested FERC to announce that it has exclusive jurisdiction over the TSAs, so Gulfport would need FERC’s approval to before these contracts are rejected. In addition, at Rover’s request, FERC issued an executive order requiring Gulfport to continue acting under the TSAs. Gulfport filed for bankruptcy shortly thereafter, attempting to disown the TSAs. In the subsequent bankruptcy proceedings, the bankruptcy court approved the rejection despite objections and assertion of jurisdiction by FERC regarding the pre-bankruptcy resolutions and confirmed Gulfport’s reorganization plan. The district court upheld the bankruptcy court’s authority to authorize the TSAs’ rejection. Gulfport then petitioned the Fifth Circuit to vacate the FERC orders, which the FERC continued to defend as final.

These facts indicate that Rover sought to circumvent adverse existing case law by obtaining the FERC orders earlier on Gulfport’s bankruptcy filing, and FERC asserted that the distinguishing factor of having issued orders prior to bankruptcy distinguished this pattern of facts from previous judgments on the subject, and supported their position that the TSAs could not be challenged without their consent. When it entered the Fifth Circuit appeal, Rover also took that position. Rover also attempted to delineate this case on the grounds that the appeals orders were not bankruptcy court orders as in the precedents, but FERC orders. As discussed below, the Fifth Circle was unconvinced by these arguments.

The Fifth Circuit overturned the FERC orders on the grounds that they were “based on an inexplicable misunderstanding of denial.” The unanimous three-judge panel found that the FERC decisions “assume that rejection of a contract modifies or eliminates the obligations under that contract,” noting, “That assumption is incorrect.”

The court reiterated that “[w]As with other contracts, refusal is a breach and has only its consequences, namely the conversion of the debtor’s future performance into an unsecured claim for damages. The claim for damages will be evaluated at the submitted rate, which will not change. Although Gulfport is unlikely to pay this claim in full, the refusal does not change the contractual terms of the submitted interest rate itself, so FERC may not stand in the way of the bankruptcy proceedings.

The Fifth Circuit further disputed Rover’s efforts to distinguish this case from previous decisions on procedural grounds. In finding no basis for a procedural distinction, the court clarified that the competent forum for resolving FERC’s objections in such a matter is the bankruptcy court. Finally, the court rejected Rover’s argument that the Supreme Court overruled previous decisions on the issue Mission Prod. Holdings, Inc. v. Tempnology, LLCwhich, as the court found, had upheld the view that the refusal was nothing more than an infringement.4

Concluding that FERC can only determine “whether the actual modification or cancellation of a submitted collective agreement is in the public interest,” and noting its obligation to “overturn administrative action” that is “not in accordance with the law,”5 the Fifth Circuit reversed the orders in question.

snack

This decision marks another victory for the bankruptcy regime in a series of disputes involving the interaction of the bankruptcy law and the regulator of FERC. Although few appellate courts have ruled on the issue, emerging case law shows that bankruptcy courts have significant jurisdiction to deny FERC-regulated bankruptcy contracts so long as the submitted rate is used to calculate denial damages. Parties entering into filed interest rate contracts should bear in mind that the regulatory regime will most likely not prevent such contracts from being rejected in a bankruptcy proceeding.

For more information on this decision or any other bankruptcy-related matter, please contact a member of the restructuring Practice at Wilson Sonsini Goodrich & Rosati.


[1] Gulfport Energy Corp. v. FERCNo. 21-60017 (5th circle, July 19, 2022).

[2] 11 U.S.C. §365(a).

[3] Off. Comm. of unsecured creditors of Mirant Corp. v. Potomac Elec. power co (Regarding Mirant Corp.), 378 F.3d 511, 515 (5th circle 2004); FERC v. First Energy Sole. corp (Regarding FirstEnergy Sols., Corp.)945 F.3d 431, 446 (6th Circle 2019); FERC against Ultra Res., Inc. (regarding Ultra Petroleum Corp.)28 F.4th 629, 634 (5th Circ. 2022).

[4] Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S.Ct. 1652 (2019). See WSGR Alert, May 21, 2019, https://www.wsgr.com/en/insights/supreme-court-rules-that-trademark-license-rights-survive-rejection-in-bankruptcy-resolving-circuit-split. html.

[5] 5 U.S.C. § 706(2)(A).

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