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One of the most powerful weapons in a debtor’s Chapter 11 arsenal is the power to reject burdensome executory contracts under � 365 of the Bankruptcy Code. Upon filing a bankruptcy petition, the debtor has the option, subject to bankruptcy court approval under the liberal “business judgment test,” to assume or reject executory contracts. Pending such a decision, and certainly upon rejection of the contract, conventional wisdom is that the debtor is relieved of its obligations to perform under most executory contracts. However, several bankruptcy and district court decisions in 2003 have called into serious question the utility of � 365 for debtors whose power contracts are subject to the Federal Energy Regulatory Commission’s jurisdiction. The Federal Power Act (FPA) designates FERC as the administrative agency with exclusive jurisdiction to ensure the continued provision of electricity at reasonable rates, and in general much deference is given to FERC’s jurisdiction. At issue is whether FERC can order a debtor to continue performing its obligations under a wholesale power contract after a bankruptcy court allows that contract to be rejected. Given the continuing precarious state of the power marketing industry and its ongoing effort to reorganize, the resolution of this issue is central to whether Chapter 11 is a viable option to those reorganization efforts. During this past year, at least two courts have considered the answer to this jurisdictional question. In a 2003 decision as part of the In Re: NRG Power Marketing Inc. Chapter 11 case, currently pending in the U.S. Bankruptcy Court for the Southern District of New York, the bankruptcy court allowed NRG — over FERC’s objection — to reject its power supply contract with Connecticut Light & Power Co. The bankruptcy court, however, refused to decide whether FERC could compel NRG to continue supplying power to CL&P. Shortly after NRG was authorized to reject the contract, FERC issued an order requiring NRG to continue supplying power to CL&P pursuant to the rejected contract terms. NRG then sought its own injunctive relief from FERC’s order in the U.S. district court, but that court refused to issue any injunction. Instead, it deferred to FERC’s jurisdiction and found that “FERC acted within its legal authority, delegated to it under the … [Federal Power Act], when it ordered Plaintiff to continue to comply with its obligations under the Agreement.” That decision in In Re: NRG Energy Inc. is on appeal to the 2nd U.S. Circuit Court of Appeals. In another 2003 decision, part of the In Re: Mirant Corp. Chapter 11 case currently pending in the U.S. Bankruptcy Court for the Northern District of Texas, the bankruptcy court initially reached a contrary conclusion. After seeing the results obtained in NRG at the district court, Mirant pursued a different strategy. Instead of moving to reject its burdensome power contract first and then dealing with FERC second, Mirant commenced an adversary proceeding seeking both a declaration that the power contract was subject to rejection under � 365 and an injunction prohibiting FERC from compelling Mirant to continue performing after the contract was rejected. In response, FERC pointed the bankruptcy court to the NRG district court decision and argued that FERC’s authority over the subject contract was unrestrained by the bankruptcy court’s jurisdiction because of the police power exception to the automatic stay: The government’s power to protect public health and safety trumps the bankruptcy court’s exclusive power to hear cases involving the debtor. Just as the automatic stay, which is imposed by operation of law as soon as a bankruptcy is filed, does not preclude governmental police or regulatory enforcement actions when public safety is involved, FERC argued to the bankruptcy court that its authority under the FPA is likewise excepted from bankruptcy court jurisdiction because FERC regulation of power markets has a direct impact on public health and safety. Mirant, however, argued that the police power exception to the automatic stay has no application to contract rejection because Congress did not incorporate those concepts into � 365. WHO DECIDES? Relying in part on Mirant’s arguments, the bankruptcy court entered a preliminary injunction precluding FERC’s assertion of jurisdiction “to eviscerate the effect of a contract’s rejection.” This decision was based in part on the bankruptcy court’s finding that if Congress had intended to allow FERC’s authority to trump that of the bankruptcy courts, that intention would have been made clear in the Bankruptcy Code itself. Because the Bankruptcy Code contains no such provision, Judge Michael Lynn of the U.S. Bankruptcy Court for the Northern District of Texas in Fort Worth found in September 2003 that “the absence of a provision requiring post-rejection performance of contracts involving supply or purchase of power or dealing with public utilities, strongly suggests Congress intended such contracts to be dealt with the same as other ordinary contracts.” The bankruptcy court also based this ruling on the wide jurisdiction granted to bankruptcy courts by Bankruptcy Code � 105 to issue any order to carry out the provisions of the Bankruptcy Code. In that regard, the bankruptcy court stated that “it is not this court’s wish to test its jurisdictional muscle against that of the [FERC],” it nevertheless issued the � 105 injunction “to serve as a gate keeper, protecting the reorganization process from unfettered interference through initiation of actions in other tribunals.” The bankruptcy court thus entered a preliminary injunction preventing FERC from taking any action to compel Mirant to continue performing under the rejected contract. Shortly after the bankruptcy court issued that injunction, however, the district court withdrew the reference and commenced a new review of the jurisdictional issues. On Dec. 23, 2003, the district court issued an order finding that, in light of the fact that Mirant wanted to reject the contract because the contract power rates were too high, the issue fell squarely within FERC’s FPA jurisdiction. In so finding, the district court joined the NRG court in finding that, although the bankruptcy court is vested with jurisdiction to decide whether a Chapter 11 debtor can reject burdensome executory contracts, FERC has final say as to whether a debtor is relieved of performing under such a rejected contract. In light of the results obtained in Mirant and NRG, companies in the power marketing industry may have second thoughts about seeking Chapter 11 protection if the primary purpose for that filing would be to reject unprofitable wholesale power contracts. While these cases are almost certain to receive additional consideration and analysis by the 2nd and 5th Circuits, it is not presently possible to predict how these jurisdictional questions will be ultimately resolved. Because answers to these questions have an enormous impact on electric customers and Chapter 11 debtors alike, however, it is critical that uniform treatment of regulated power supply contracts be developed, either by the appellate courts or Congress. Melanie Gray is a partner in the litigation department in the Houston office of Weil, Gotshal & Manges (www.weil.com). She also is co-chairwoman of the firm’s bankruptcy litigation practice group, where Stephen T. Loden is an associate. Gray and Loden are involved in the firm’s representation of Enron Corp. in its Chapter 11 proceedings. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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