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When a bankrupt energy company asks for relief from a money-losing contract to buy or sell power, should the decision be made by the bankruptcy court, employing the oh-so-deferential “business judgment” rule under � 365(a)? Or should the decision be made by the Federal Energy Regulatory Commission in the exercise of its regulatory responsibility to ensure that consumers receive adequate supplies of energy at reasonable prices? This question arose in two Chapter 11 cases in the latter part of this year and was answered in two ways. In NRG Energy, Inc., (SDNY 2003), bankruptcy jurisdiction yielded to the “exclusive” jurisdiction of FERC over wholesale power contracts, while in Mirant Corp., (Bankr. N.D. Tex. 2003), the bankruptcy court took the view that the contract rejection issue was within its own core jurisdiction and issued an injunction prohibiting FERC from taking any action, a decision now under review by the district court. The ultimate resolution of this jurisdictional collision may have far-reaching consequences not only for the energy industry, but for any industry where a regulatory agency or other body has its own jurisdiction over the affairs of a debtor in bankruptcy. NRG and Connecticut Light & Power were parties to a power sales agreement that required NRG to provide a fixed amount of energy to CL&P at a fixed price. On May 14, 2003, NRG gave notice to CL&P of its intent to terminate the agreement. On the same day, NRG filed a voluntary petition for relief under Chapter 11 and simultaneously filed a motion under � 365(a) for authorization to reject the agreement. On May 15, the Connecticut attorney general petitioned FERC to enjoin NRG’s termination of the agreement, and on May 16, FERC ordered NRG to continue to provide service to CL&P pursuant to the agreement until FERC had sufficient opportunity to evaluate the effects of the proposed termination on the public interest. Meanwhile, the NRG bankruptcy court conducted hearings on NRG’s rejection motion and, on June 2, issued an order finding that the money-losing character of the agreement satisfied the business judgment standard for rejection of an executory contract. However, the bankruptcy court declined to issue an injunction against FERC and instead directed NRG to seek appropriate relief in a FERC proceeding. Apparently preferring its home-court advantage in bankruptcy, however, NRG spurned the FERC route and filed a motion in the district court for declaratory and injunctive relief that it be permitted to cease performance in view of the bankruptcy court order authorizing rejection. On June 25, following both the rejection order and the filing of NRG’s district court motion, FERC issued a second order mandating that NRG continue to provide service to CL&P, and specifically finding that FERC possessed jurisdiction and was not required to forgo its regulatory responsibilities as a result of NRG’s bankruptcy. NRG argued to the district court that the issue was simply a dispute between two parties to a financial arrangement and that the only relevant interests to be evaluated were those held by its creditor body. But the district court rejected that argument. It found that the power supply agreement was a wholesale power contract within the meaning of the Federal Power Act, 16 U.S.C. � 824 et seq., and was therefore within the exclusive original jurisdiction of FERC. Nor could the district court exercise its bankruptcy jurisdiction to review the FERC order of May 16, because under the FPA, actions taken by FERC are reviewable only by the federal courts of appeal. Accordingly, on June 30, 2003, the district court dismissed NRG’s motion for lack of subject matter jurisdiction. Two weeks later, another energy company, Mirant Corp., filed a Chapter 11 petition in the U.S. Bankruptcy Court for the Northern District of Texas. Mirant was a party to a “Back-to-Back Agreement” with Potomac Electric Power Co. (Pepco) that obligated Mirant to purchase power from Pepco at prices now above market. Mirant had obviously studied the playbook in the NRG case, and so it tried a different tactic in seeking relief from its agreement with Pepco. Rather than first issue a notice of intent to terminate and risk the entry of an FERC order compelling it to continue to perform, NRG filed a motion for authorization to reject the agreement and simultaneously filed an adversary complaint and motion for an ex parte temporary restraining order to prohibit FERC from taking any action to require Mirant to perform under the agreement. Mirant justified this move as necessary to protect its right to reject the agreement under � 365(a). The bankruptcy court was persuaded to issue the ex parte TRO that day, and later expanded it to a preliminary injunction. The court maintained that it had the power to prevent FERC from taking steps to force NRG to perform the agreement, but that it did not wish to “test its jurisdictional muscle” against FERC, but only to serve as a gatekeeper by protecting the reorganization process from interference by other tribunals. FERC and Pepco reacted to the TRO by filing a joint motion to withdraw the reference with respect to both the rejection motion and the adversary action. On Sept. 29, the bankruptcy court issued its Report and Recommendation Regarding Withdrawal of Reference, in which it recommended withdrawal as to the adversary action, where the conflict in jurisdiction between FERC and the courts of bankruptcy was “starkly presented,” but not with respect to the rejection motion, which it considered to be within the exclusive bankruptcy jurisdiction and requiring no consideration of any law other than the bankruptcy code. The district court accepted the recommendation to withdraw the adversary action, but decided also to withdraw the rejection motion from the bankruptcy court. Both matters are now pending in the district court. The report and recommendation provide some intriguing insight into the bankruptcy court’s view of its power. First, it refuses to acknowledge any limitation on its authority to deal with the power supply agreement. � 1334, it states, grants exclusive jurisdiction to the district courts, referred to the bankruptcy courts, with respect to cases under Title 11 and property of the estate, which includes contracts. Second, it is evident that the bankruptcy court felt some frustration with FERC and its own refusal to acknowledge any limit on its authority. Despite what the court intended as a narrowly drawn injunction, FERC twice failed to comply with its terms, and the court granted NRG’s contempt motion and directed FERC to cure its violations. When FERC claimed a grant of exclusive jurisdiction over wholesale power contracts, the court hastened to point out that neither � 824(a) nor � 824(b) of Title 16 contain the word “exclusive.” When FERC pointed to the body of case law holding that its jurisdiction is exclusive, including decisions of the U.S. Supreme Court, the bankruptcy court was derisive, stating: “It is worth noting that the FPA — and whatever jurisdiction it conferred on the Commission — antedated enactment of Section 1334 by almost 50 years. It seems unlikely that Congress meant the unambiguous language of Section 1334 be superseded by the judicial gloss on the jurisdictional grant … to the commission” (emphasis added). In other words, the Mirant court took the view that when Congress omits to provide for primary jurisdiction in another agency (or, more likely, fails to anticipate the possibility of conflict), � 1334 trumps all. Equally revealing are FERC’s “comments” on the rejection motion, filed in the district court, where it stated that “this court has neither the jurisdiction nor the expertise necessary to consider the FPA public interest factors” (emphasis added). FERC also stated that nothing in the bankruptcy code prevents it from evaluating the public interest considerations that have been entrusted to it. The NRG and Mirant cases provide a remarkable case study of jurisdictional territorialism and the potential for developing tunnel vision when it comes to fulfilling a regulatory or judicial mission. FERC’s essential charge is to promote a dependable and affordable supply of energy, while the essential charge of a Chapter 11 court is to rehabilitate the debtor. The conflict between these charges arises not only in connection with rejection motions, but also in the confirmation of a plan of reorganization. In Pacific Gas and Electric Co. v. People of the State of California, (9th Cir., Nov. 19, 2003), the court held that the express pre-emption language of � 1123 of the bankruptcy code, which allows a reorganization plan to make certain provisions “notwithstanding otherwise applicable nonbankruptcy law,” does not pre-empt all nonbankruptcy laws applicable to the restructuring transactions , e.g., utility regulatory schemes, but rather is limited to applicable nonbankruptcy law related to financial condition. This decision appears to fortify the arguments on the FERC side of the battle line. If the district court in the Mirant case follows NRG and cedes jurisdiction to FERC, the conflict may end there. But if Mirant diverges from NRG and allows bankruptcy jurisdiction to prevail, we may witness a vigorous course of judicial and legislative attacks and counterattacks in this ongoing jurisdictional battle. Francis J. Lawall is a partner in the Philadelphia office of Pepper Hamilton (www.pepperlaw.com) and focuses on national bankruptcy and creditors’ rights issues. Bonnie MacDougal Kistler is a contract attorney concentrating in bankruptcy and commercial litigation. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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