The Bottom Line

In FERC v. FirstEnergy Solutions Corp. (In re FirstEnergy Solutions Corp), Case No. 18-3787 (6th Cir. Dec. 12, 2019), the Sixth Circuit affirmed the bankruptcy court’s jurisdiction over the rejection of certain power purchase agreements (PPAs) but found the bankruptcy court should have considered the public interest in the standard for rejection and remanded to the bankruptcy court for further consideration under a heightened standard. Further, the court held that the bankruptcy court’s injunction against the Federal Energy Regulatory Commission (FERC), restricting FERC from making any ruling regarding the power contracts, was overly broad.

What Happened?

Background

Prior to filing for bankruptcy, FirstEnergy Solutions Corp. (FES) was party to certain PPAs, including an inter-company power agreement” (ICPA) with 12 other companies (collectively referred to as OVEC, for Ohio Valley Electric Corporation). Under the ICPA, each participant agreed to (i) purchase a proportionate stake in electricity production and (ii) pay its proportionate stake in management, maintenance and decommissioning costs. FES’ stake in the ICPA was 4.85 percent for the remaining term of the contract until 2040.

One day after filing for bankruptcy, FES initiated an adversary proceeding against FERC, seeking (i) a declaratory judgment that the bankruptcy court had sole jurisdiction to reject the PPAs and (ii) a preliminary and permanent injunction prohibiting FERC from interfering with the Debtors’ rights to reject wholesale electricity contracts, including commencing any proceeding before FERC concerning the contract. FES also filed a motion seeking to reject certain PPAs, including the ICPA, arguing that FES no longer required the electricity from each of the contracts and the prices were above market.

FERC, as well as OVEC and various members of OVEC, responded to FES’ request for a declaratory judgment and injunction against FERC. The regulator argued that the Federal Power Act gave FERC exclusive jurisdiction over energy contracts because the “filed-rate doctrine” holds that FERC (and only FERC) can modify or abrogate a power contract. Further, because rejecting the contract constituted a modification of the contract (i.e., a modification of the “filed rate”), in FERC’s view, its jurisdiction was implicated. Therefore, if FES intended to modify the contract by rejecting it, FERC should have at least concurrent jurisdiction, if not exclusive jurisdiction. Moreover, FERC argued that the Chapter 11 automatic stay did not limit FERC’s jurisdiction because it would be acting within the regulatory powers exception.

Ultimately, the bankruptcy court (i) issued a temporary restraining order and then a permanent injunction enjoining FERC from making any ruling on the contract, whether contrary to or congruent to the bankruptcy court’s ruling, (ii) found that the bankruptcy court had exclusive jurisdiction over the rejection of the ICPA and (iii) approved the Debtors’ rejection of the ICPA holding that rejection was a reasonable exercise of the Debtors’ business judgment and, thus, appropriate.

FERC, OVEC and several individual members of OVEC appealed the bankruptcy court decision on all three issues directly to the Sixth Circuit.

Sixth Circuit Opinion

Almost six months after oral argument, the Sixth Circuit issued its ruling, which reversed the rejection and remanded the case to the bankruptcy court for further consideration of rejection pursuant to a heightened standard that considers the public interest.

1. Bankruptcy Court Jurisdiction

The Sixth Circuit first considered whether the bankruptcy court had jurisdiction to reject power contracts. OVEC and FERC argued the ICPA effectively became a federal regulation, as a result of the filed-rate doctrine under the Federal Power Act. The court disagreed and found that the ICPA was an “ordinary contract” and not a de jure regulation due to its relationship with FERC’s regulatory duties over energy markets. The court found that the bankruptcy court’s determination that the contract was ordinary was reasonable and in line with prior authority governing FERC’s authority over similar contracts. Further, the Sixth Circuit held that FERC’s jurisdiction over the contract was not exclusive and, therefore, the bankruptcy court had jurisdiction over the contract due to the “public necessity of available and functional bankruptcy relief.” In essence, because the ICPA was an ordinary contract, FERC did not retain exclusive jurisdiction.

The court also concluded, however, that the bankruptcy court had gone too far in construing the reach of its jurisdiction and in precluding FERC from having any role in the rejection determination.

2. FERC Injunction

The Sixth Circuit analyzed whether FERC’s proceedings related to the ICPA were barred under the automatic stay under the Bankruptcy Code and whether the “regulatory powers exception” to the automatic stay applied. Applying the Sixth Circuit’s “public policy” test as articulated in Chao v. Hospital Staffing Services, Inc., 270 F.3d 374 (6th Cir. 2001), the court found that the bankruptcy court’s injunction of FERC was overly broad in that it enjoined FERC from doing anything at all. Although, the Sixth Circuit agreed the bankruptcy court was not necessarily wrong to conclude FERC’s actions in this particular circumstance would only “incidentally serve public interests but more substantially adjudicate private rights” and would therefore fail the public-interest test to avoid the stay, the Sixth Circuit did not agree that FERC’s interest in preventing bankruptcy rejection of any contract will always be substantially private and only incidentally public. Moreover, Chao, the very case the bankruptcy court relied on, permitted non-bankruptcy courts to enter orders not inconsistent with the terms of the bankruptcy court’s automatic stay or any other orders regarding the automatic stay. In other words, the Sixth Circuit found that FERC should have been permitted to hold its own hearings or carry out its processes and “run the risk” that a court of appeals might later disagree with its jurisdictional determination and render its entire proceeding void ab initio. Accordingly, the bankruptcy court was not entitled to enjoin FERC from risking its own jurisdictional decision, conducting its business or issuing orders that would not conflict with the bankruptcy court’s rulings.

Second, the Sixth Circuit reviewed the bankruptcy court’s authority under Section 105(a) to reject the ICPA, and determined this section of the Bankruptcy Code was not intended “to prohibit FERC from taking any action whatsoever or enjoin all of FERC’s regulatory functions.” Here, the court agreed with the Fifth Circuit ruling in In re Mirant Corporation, which held that the bankruptcy court may enjoin FERC from negating the rejection of a contract by requiring continued performance. 378 F.3d. 511 (5th Cir. 204). In Mirant, as in FirstEnergy, rejection of the contract would be only a breach of the contract, rather than a modification (which would implicate FERC’s jurisdiction). Further, the court distinguished In re Calpine Corp., a case that had found that rejection of a contract did trigger FERC’s exclusive jurisdiction. 337 B.R. 27 (S.D.N.Y. 2006). In Calpine, unlike in Mirant or the present case, the Debtor wished to reject an unfavorable contract, rather than reject a contract that was no longer required for the business. Taking these two rulings together, the Sixth Circuit concluded that Section 105(a) gives bankruptcy courts power to enjoin FERC from directly interfering with a debtor’s rejection of a filed-rate contract, but that the bankruptcy court did not have unlimited power.

3. Rejection Standard

Finally, the court rejected the bankruptcy court’s application of the business judgment standard to the rejection determination and concluded that upon remand, the bankruptcy court must consider its decision under a higher standard that would consider the impact of the rejection on the public interest, including the consequential impact on consumers and any tangential contract provisions concerning decommissioning, environmental management and future pension obligations, to ensure that the equities balance in favor of rejection. The court also held that FERC should be permitted to participate in the bankruptcy court proceedings in determining whether rejection of the ICPA met this standard. The Sixth Circuit determined that the heightened standard best accommodates the bankruptcy court and FERC’s concurrent jurisdiction. The court also recognized that the bankruptcy court “need only provide FERC with a reasonable accommodation or suffer a reasonable delay” in providing FERC with an opportunity to provide an opinion on the public interest. However, the court recognized that in this case the “reasonable” delay in this remand will be much longer due to the previous injunction that prevented FERC from taking any action in connection with the ICPA.

Concurrence

Judge Griffin concurred in part and dissented in part in the judgment, differing, in particular, with the majority’s decision that the bankruptcy court had the power to abrogate FES’ obligations under both the private contract and filed rate and to enjoin FERC from compelling FES to perform under the ICPA/PPA. Judge Griffin supported the position that the filed-rate doctrine was implicated in the rejection. Judge Griffin argued that the majority holding contravenes the filed-rate doctrine even though the Supreme Court has made clear that when FERC enforces a regulated entity’s obligations (i.e., OVEC) under a filed rate, it acts under “statutory authority” and not simply under the authority of a private contract. Judge Griffin noted that while the bankruptcy court has the authority to reject PPAs, only FERC has the authority to modify or abrogate filed rates. Not surprisingly, Judge Griffin disagreed that the bankruptcy court’s jurisdiction is primary or superior to FERC’s position. In conclusion, Judge Griffin asserted that the majority holding creates a conflict between the Federal Power Act and the Bankruptcy Code when none exists. Judge Griffin concurred, however, with the majority’s holding that the business judgment standard is not sufficient for evaluating a motion to reject a PPA, and further agreed that the bankruptcy court exceeded its jurisdiction with a broad enjoinment of FERC.

Why This Case Is Interesting

The balance between a bankruptcy court’s and FERC’s jurisdiction has been the subject of regular controversy, with similar disputes having arisen in the bankruptcies of, among others, Mirant, Calpine and, most recently, PG&E. As in FES, the PG&E bankruptcy court ruled that FERC did not have concurrent jurisdiction over the rejection of PPAs in bankruptcy. The bankruptcy court’s decision was also appealed directly to the Ninth Circuit, and FERC and PG&E are briefing the issue now. In light of the Mirant decision in the Fifth Circuit and now the Sixth Circuit weighing in on the issue, it remains to be seen whether the Ninth Circuit will also grant the bankruptcy court jurisdiction to reject power contracts, and whether it will adopt the heightened standard required by the Fifth and Sixth Circuits. It also remains unclear how this issue will be resolved in the FirstEnergy bankruptcy, as parties may petition the Sixth Circuit for rehearing or the Supreme Court for writ of certiorari. Notably, because FERC is an agency, it is permitted 45 days (instead of 14 days) to petition for rehearing.