Thursday, August 11 2022

On March 14, 2022, the United States Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) reviewed the issue of rejection of rate contracts filed in bankruptcy when such contracts are governed by the Federal Energy Regulatory Commission (“FERC”). The ruling marks the first time the Fifth Circuit has addressed this issue since its 2004 decision in In re Mirant Corp.1 On Federal Energy Regulatory Commission v. Ultra Resources, Incorporated (Re: Ultra Petroleum Corporation)the Fifth Circuit panel upheld the findings of the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) that, “under the particular circumstances presented [therein]”, (i) FERC may not require the debtor Ultra Resources, Inc. (“Ultra”) to proceed with the execution of a rejected submitted rate contract and (ii) FERC approval was not required under section 1129(a)(6) of the Bankruptcy Code before the Bankruptcy Court confirms Ultra’s Chapter 11 reorganization plan.

The dispute in FERC vs. Ultra Resources focused on a filed tariff agreement between Ultra and Rockies Express Pipeline LLC (“REX”) under which Ultra was required to pay REX a total of $169 million from December 2019 through December 2026 for reserved capacity on a REX pipeline, regardless of whether Ultra used the ability. Due to the large drop in commodity prices for oil and gas, Ultra suspended its drilling program in September 2019, and as a result, Ultra never used any of its reserved slots on the REX pipeline. In anticipation of Ultra’s bankruptcy filing, REX applied to FERC for a statement that Ultra could not reject the tariff contract submitted without FERC’s approval, but Ultra filed for bankruptcy and rejected the contract before FERC could issue a decision. .

The first day of Ultra bankruptcy, Ultra sought to reject the submitted rate contract. Depend on lookout, the Bankruptcy Court determined that it had the authority to approve the rejection of the contract. The Bankruptcy Court also ruled that rejection of the contract did not amount to a rate change that would conflict with FERC’s undivided authority over such rate changes under the Natural Gas Act. Ultimately, the Bankruptcy Court found that the contract rejection was not a rate change that would require FERC approval under Bankruptcy Code section 1129(a)(6) prior to confirmation of a Chapter 11 plan.

On appeal, the Fifth Circuit characterized the dispute as a “clash of two titans built by Congress”: the FERC and the bankruptcy courts. However, the panel noted, “today’s battlefield stands in the shadow of our precedent in [Mirant]” and, in light of the retention in lookout“what FERC presents as a pitched battle is actually a settled truce.”

Upon reaching your decision on Ultrathe Fifth Circuit spent a lot of time clarifying the celebration in lookout to “avoid the risk that [the] statements in lookout they read as mere recommendations, rather than orders.” Rejecting FERC’s arguments that question the language in lookoutthe Court found that lookout He defended the following propositions:

  • The bankruptcy court’s power to authorize the rejection of a submitted rate contract does not conflict with the FERC’s authority to regulate rates, because the rejection is not a rate change;

  • As long as the rejection is based on reasons beyond the fact that the debtor would prefer a lower rate, the rejection is not a collateral attack on the rate presented in the contract (and FERC’s jurisdiction over it) because the rate is fully applied in determining damages resulting from rejection; and

  • In deciding on motions to dismiss, bankruptcy courts must consider whether the rejection harms the public interest or disrupts the supply of energy and weigh those effects against the burden on the bankruptcy estate. See Mirant378 F.3d at 518-525.

Based on this interpretation of lookoutthe Court determined that the outcome of the FERC appeal was “simple” as “each element [of Mirant] is satisfied here.” In particular, the Tribunal focused on the fact that Ultra “not only seeks to secure a lower rate, but wants to opt out of the contract altogether, given the suspension of its drilling program and the lack of use of the volume reserve. ”.

The Fifth Circuit rejected the FERC’s argument that lookout required a bankruptcy court to wait until FERC issued an opinion on the public interest ramifications of rejecting a rate contract filed through full FERC proceedings, rather than finding that lookout it simply requires that bankruptcy courts invite FERC to participate in bankruptcy proceedings as an interested party to assist the court in its consideration of the impact of rejection on the public interest. The Fifth Circuit explicitly refused to extend lookout require a bankruptcy court to wait for the FERC to issue a decision, citing the need for expedited proceedings in Chapter 11.

Finally, reiterating its earlier determination that the rejection did not constitute a rate change subject to FERC approval, the Court rejected FERC’s argument that the Chapter 11 plan in Ultra violated section 1129(a)(6) of the Bankruptcy Code, which requires that any rate change in Chapter 11 plans be (i) expressly approved by the government regulatory commissions with jurisdiction over rates, or (ii) conditioned to such approval.

While the Fifth Circuit’s decision appears at first glance to further cement its decision of nearly 20 years earlier and prioritize the power of repeal over the authority of the FERC, the facts in Ultra they differ in several important respects from other recent cases involving the rejection of presented rate contracts. Importantly, Ultra had suspended its drilling program and had never embarked on the REX pipeline. Accordingly, Ultra would not follow up the contract rejection with any attempt to renegotiate a submitted rate contract to a more favorable rate. This is in stark contrast to the facts in Gulfport Energyin which the debtor who sought to reject the interposed rate contract had used his reserved capacity and had no intention of closing this integral part of his business.two In further contrast, a contract counterparty in gulf port obtained a preliminary ruling from the FERC that determined that the public interest did not require the modification or repeal of the contract rate.3

While the parts in gulf port resolved before litigating the denial issue, the Fifth Circuit’s opinion in Ultra can be read as providing some scope for a different outcome in circumstances similar to those of gulf port. Specifically, by addressing whether rejection in Ultra was a collateral attack on the filed rate, the Fifth Circuit noted that, due to the suspension of its drilling program, “Ultra [was] not only looking to secure a lower rate, but [wanted] out of the contract entirely, given the suspension of its drilling program and its non-use of the volume reserve.” Consequently, it is possible that the Fifth Circuit could reach a different conclusion when the debtor attempts to rehire the pipeline immediately after rejection at a more favorable price.

Finally, the opinion of the Fifth Circuit in Ultra could set the stage for a disagreement among circuit courts over the extent of FERC’s involvement in the rejection process. On lookout, the Fifth Circuit advised the bankruptcy court to consider the public interest ramifications of rejecting a filed rate contract. Likewise, in Ultrathe Court acknowledges the “expertise that FERC has to offer and the importance that is taken into account” during rejection proceedings, and goes on to direct that “a bankruptcy court must invite FERC to participate in bankruptcy proceedings as part interested”.

Courts in other circuits have been more respectful of the FERC’s determination of what serves the public interest. Specifically in Calpina Corporation., 337 BR 27 (SDNY 2006), Judge Richard Casey of the Southern District of New York opined that if a court must consider the public interest in determining the fate of FERC-regulated contracts, then “the FERC executive agency should determine that interest. Judge Casey’s wording could leave FERC as the arbiter of whether rejection serves the public interest, while the Fifth Circuit’s recent Ultra opinion determines that a bankruptcy court simply needs to “extend the invitation” to FERC to participate as interested part.

In light of the Fifth Circuit ruling Ultra decision, contracting parties who anticipate the bankruptcy of their counterparties should consider engaging FERC in an effort to receive a favorable decision prior to commencement of bankruptcy. Although the Fifth Circuit has made it clear that it invites FERC to participate in the bankruptcy as an interested party, a favorable ruling on the FERC prepetition, while likely to produce no Juged thing Indeed, it may play a role in establishing early that the public interest will not be served by rejection. Bracewell attorneys have been actively involved in litigating matters that have arisen in the context of the overlapping jurisdiction of the FERC and the bankruptcy courts. Bracewell represented REX in the following gulf port bankruptcy and received a positive order from the FERC before Gulfport filed for bankruptcy. This was beneficial to REX as the bankruptcy proceeding progressed. Bracewell’s attorneys have also litigated similar matters arising under the Federal Energy Act for various clients in the bankruptcies of NRG energy, calpine corporation., and PG&E Corporation.

Given the diversity of opinion on this issue, the FERC may appeal the Ultra decision to the Supreme Court of the United States. Bracewell will continue to monitor for updates related to the Ultra decision.

1. In re Mirant Corp.378 F.3d 511 (5th Cir. 2004) (“lookout”).

two. In relation to Gulfport Energy Corp.Case No. 20-35562 (DRJ) (Bankr. SD Tex. 2020) (“gulf port”).

3. Rockies Express Pipeline LLC Paper Hearing Order, 173 FERC ¶ 61,099 (2020).


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