In a case involving the pending Chapter 11 proceeding of FirstEnergy Solutions Corp. (FES), a three-judge panel of the U.S. Court of Appeals for the Sixth Circuit ruled that bankruptcy courts possess primary jurisdiction over rejection of Federal Energy Regulatory Commission-jurisdictional contracts.
But in its Dec. 12 opinion, the court also said that a bankruptcy court’s jurisdiction is not exclusive and that FERC should be given an opportunity to provide its view on whether contract rejection is in the public interest.
Bankruptcy court issued broad injunction in FES proceeding
In May 2018, the U.S. Bankruptcy Court for the Northern District of Ohio issued a broad injunction prohibiting FERC from interfering with FES’s intended rejection of certain FERC-jurisdictional contracts. The bankruptcy court determined that it had exclusive jurisdiction over rejection of the contracts and that any order FERC might issue relating to FES’s continuing obligations under the contracts would be void.
The bankruptcy court also found that it was not required to consider any broader public interest factors in determining whether to allow FES to reject the contracts.
Sixth Circuit ruling
While the Sixth Circuit in its ruling disagreed with much of the bankruptcy court’s analysis, it ultimately determined that the bankruptcy court has the final say over whether the FES contracts may be rejected.
FERC and other parties challenging the bankruptcy court decision argued that, unlike ordinary private contracts, agreements filed with FERC under the Federal Power Act effectively become federal regulations.
While acknowledging this line of precedent, the court of appeals held that the public necessity of available and functional bankruptcy relief is generally superior to the necessity of FERC’s having complete or exclusive authority to regulate energy contracts and markets. This means that the FES contracts at issue are ordinary contracts susceptible to rejection in bankruptcy.
The court went on to conclude that, although the bankruptcy court’s jurisdiction is not exclusive, its position in the concurrent jurisdiction is nonetheless primary or superior to FERC’s position.
Therefore, the bankruptcy court has jurisdiction to decide whether FES, as a Chapter 11 debtor-in-possession, can reject the relevant contracts, “meaning that FES can reject the contracts subject to proper bankruptcy court approval and FERC cannot independently prevent it,” the appeals court said.
The court also faulted the bankruptcy court for applying the “ordinary business judgment” standard in considering contract rejection. Following a 2004 ruling involving Mirant Corporation, the court concludes that the bankruptcy court should apply a higher standard for contract rejection, “considering and deciding the impact of the rejection of these contracts on the public interest—including the consequential impact on consumers and any tangential contract provisions concerning such things as decommissioning, environmental management, and future pension obligations.”
In making such a public interest assessment, moreover, the bankruptcy court should provide a reasonable opportunity for FERC to provide an opinion on the public interest, the court said.
Judge offers partial dissent
Judge Richard Griffin partially dissented from the decision, arguing that “the bankruptcy court exceeded its jurisdiction and infringed on FERC’s exclusive jurisdiction to decide whether to modify or abrogate a filed rate.”
Griffin criticized the majority for failing to follow U.S. Supreme Court precedent standing for the proposition that FERC enforces a power company’s obligations under a filed rate pursuant to statutory authority, not private contract law.
He argued that the majority opinion conflicts with Congress’s decision to deny federal-court jurisdiction over the abrogation or modification of a filed rate.
Similar questions pending in the Ninth Circuit
A case pending in the U.S. Court of Appeals for the Ninth Circuit involving the bankruptcy of Pacific Gas and Electric Company raises issues similar to the Sixth Circuit case. The Ninth Circuit is slated to review a June 2019 ruling by a judge for the U.S. Bankruptcy Court for the Northern District of California finding that the bankruptcy court possesses exclusive jurisdiction to consider rejection of power purchase agreements in bankruptcy proceedings. If the Ninth Circuit were to take a different view of the jurisdictional issues than the Sixth Circuit, it could tee up review of the issue by the U.S. Supreme Court.
