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A federal bankruptcy judge in New York has barred California from pursuing its claims in a pending suit against the Enron Corp. arising from that state’s energy crisis a few years ago. Judge Arthur Gonzalez, who also presides over the WorldCom bankruptcy, held that California, like most of the other Enron creditors and claimants, must adjudicate its claims in his Southern District bankruptcy court. From May 2000 to June 2001, California’s residents suffered from rolling blackouts and unusually high electricity prices. The state accused Enron of participating in — if not causing — the crisis at the expense of consumers. It joined a long list of claimants in filing with the bankruptcy court on Oct. 11, 2002. Earlier this year, California filed a separate action in a California state court mirroring its claims filed in Judge Gonzalez’s court. Enron asked Judge Gonzalez to stop the parallel suit, and he did in In re Enron Corp., No. 01-16034. “The filing of a bankruptcy petition operates as a stay applicable to all entities regarding the commencement or continuation of judicial proceedings against the debtor,” the court explained. The bankruptcy code calls for a broad and mandatory stop to all pending and potential suits against a debtor. The goal is to centralize all claims to allow one bankruptcy court, Judge Gonzalez’s in this case, to fairly and efficiently distribute the assets among creditors rather than allowing competing suits to spring up across the nation. There are a few exceptions. The most common allows governments to file separate actions to protect consumers or police wrongdoing — a police power exception to stop or prevent fraud. California argued that its action fell in this category. Courts have construed the exception narrowly, Judge Gonzalez noted in rejecting California’s argument. “[E]ven if a government action is a proper exercise of the police power, the collection of a money judgment is barred,” he wrote. California could not reach for Enron’s assets outside the bankruptcy system in another jurisdiction under the guise of a policing action, he said. “[I]f the purpose of the law relates to the protection of the government’s pecuniary interest in the debtor’s property, or to adjudicate private rights, the exception is inapplicable,” the court held. If the suit has a dual purpose, as was the case here, then it is up to the court to determine the primary purpose of the suit. Based on press reports in which the California attorney general said the purpose of the action was to seek damages, Judge Gonzalez found that the stay applied. California countered that besides the monetary claims, the injunctive relief it sought would preclude Enron from reentering the energy trading market in California and would deter other market participants from manipulating electric supplies in a similar fashion. ‘MEANINGLESS REQUEST’ The court called this a “meaningless request.” Findings by regulators made it “practically impossible for Enron to resume trading,” the court held, and the company’s energy trading arm has been sold off. Criminal prosecutions, countless news reports and government investigations into the energy crisis adequately deterred others from following in Enron’s footsteps, diminishing any deterrence effect of California’s lawsuit, Judge Gonzalez wrote. “The request for injunctive relief … is an attempt to portray the [lawsuit] as a police and regulatory action when it is in fact solely brought in furtherance of the State of California’s pecuniary interest,” he wrote. Enron’s lawyer, Mark Ellenberg of the Washington, D.C., office of Cadwalader, Wickersham & Taft, said parallel suits similar to California’s are not rare. For example, he said, the Atlanta transit system also unsuccessfully filed a suit against Enron in Georgia. Ellenberg said California probably filed the suit in that state to win a large judgment in front of an angry jury rather than through the bankruptcy process. The potentially giant verdict would allow it to receive a larger portion of Enron’s assets when they were divided among its creditors. California’s outside lawyer, Sacramento-based Steven Felderstein of Felderstein, Fitzgerald, Willoughby & Pascuzzi, said the California attorney general sued because it was appropriate for that state’s judicial system to adjudicate its state laws. Gonzalez held that, through its suit, California “was nothing more than seeking to adjudicate [its] pecuniary interest in the forum of its choice.” He rejected it as an “exercise in forum shopping.”

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