In the News Texas Lawyer

'We Vacate Them All': Federal Court Blasts Commission for Meddling in Energy Cases

Appeals partner George Hicks is mentioned regarding his work for Gulfport Energy in this article from Texas Lawyer.

The U.S. Court of Appeals for the Fifth Circuit, in a scathing opinion, directed its fire at the Federal Energy Regulatory Commission for the “inexplicable misunderstanding” it displayed toward bankruptcy courts.

At issue is a turf battle over jurisdiction in cases where energy companies regulated by the commission end up in bankruptcy. The Fifth Circuit has held, at least since 2004, that bankruptcy courts have sole discretion over agency-regulated contracts when a petitioner proposes to reject them for reorganization purposes.

In January 2021, Gulfport Energy Corp. brought suit against the energy commission after it issued orders forcing the company to honor $100 million in contracts that it intended to breach in a pending bankruptcy filing.

The dispute with the commission began when Rover Pipeline—the company transporting natural gas for Gulfport, and an intervenor in the bankruptcy—became aware of Gulfport’s intention to file for bankruptcy. Rover preemptively sought and received the commission’s intervention.

Gulfport found itself forced into bankruptcy because the COVID-19 pandemic crushed demand for energy.

U.S. Bankruptcy Code allows debtors to breach and cease performance on contracts. In the past, where contracts require the energy commission’s approval, the commission has argued that such a breach is a change in the contract and thus subject to its authority.

Federal appellate courts disagreed. They have maintained that a breach of contract does not constitute a change of its terms and conditions. A creditor’s recourse, therefore, is limited to a damages claim.

The Fifth Circuit noted that this became settled case law in 2004 within its circuit because of In re Mirant Corp. The Sixth Circuit ruled likewise in a 2019 case, In re FirstEnergy Sols. Corp.

“Nevertheless, FERC persisted,” the Fifth District observed in its Tuesday opinion on Gulfport Energy v. FERC. “The parties dispute how two legal regimes—the Bankruptcy Code and the Natural Gas Act—interact.”

The Fifth District recognized that for a time the commission respected the Mirant decision. This was the case in Lockyer v. Calpine Energy Services, where in 2006 the commission said, “Mirant has now spoken to the issue … and we intend to follow that authority.”

However, in subsequent cases the commission took the position that the rejection of these contracts was legally “unsettled.”

Rover Interferes

With the commission’s support, Rover objected to the bankruptcy court’s subject matter jurisdiction over its contract with Gulfport and successfully moved its contract dispute to federal district court.

“In an emphatic order, the bankruptcy judge urged the district court to deny Rover’s motion … (and) blasted Rover for ‘obtaining an advisory order from FERC’ to obstruct and ‘avoid the court’s proper exercise of its jurisdiction,’ “ the Fifth District opinion recites.

While Gulfport was being briefed, the Fifth Circuit delivered yet another opinion in March — the fact issues in FERC v. Ultra Resources reaffirmed Mirant.

Although the bankruptcy court completed a reorganization plan, a decision on the Rover contracts remained pending in district court until July 13, when the court dismissed Rover’s objections based on the Ultra decision.

George W. Hicks Jr. of Kirkland & Ellis represented Gulfport before the Fifth District panel during the June 9 oral arguments. In his opening remarks he asked the court to bring this tale of “agency mischief and regulatory shenanigans to an inglorious end.”

Carol Banta, general counsel for the commission, argued on behalf of the agency. Scott A. Brister, a Hunton Andrews Kurth partner, represented Rover.

At oral argument, Banta claimed Ultra had the effect of nullifying some, but not all of its orders for Gulfport. And as part of the agency’s claim that it has “parallel exclusive jurisdiction” with bankruptcy courts, Banta said Mirant and Ultra “made clear the bankruptcy court must invite FERC’s participation.”

It is the commission’s position, the Fifth District noted, that bankruptcy courts cannot confirm any reorganization plan that rejects a transportation services agreement unless the commission agrees.

Banta argued that the issues raised should be considered moot because of Ultra, adding the court did not have a “live case” and therefore should not reach the merits. As for the commission being characterized as engaging in “shenanigans,” Banta noted that the commission’s orders were entered before the bankruptcy filing, and that Gulfport is headquartered in Oklahoma and incorporated in Delaware.

“So, I don’t know why we would be assuming that they would file their bankruptcy in Houston and be subject to Mirant,” she said.

During argument, the court had very few questions for Banta, but it had plenty to say in its opinion.

The commission accepted Rover’s claim “to no one’s surprise,” even though the agency acknowledged this would worsen Gulfport’s financial distress, the court said.

“They even purport to bar the bankruptcy court from allowing rejection. Those ambitious holdings assume that rejecting a contract changes or cancels the obligations under that contract. That assumption is wrong. It flouts the Bankruptcy Code, Supreme Court precedent, and the case law of every federal circuit,” the court said.

“Against that crush of contrary authority, FERC cited only itself for the notion that rejection of a filed-rate contract ‘alters its essential terms and conditions,’” the court said.

The Fifth Circuit said it would not defer to the commission’s “bizarre view” of contract rejection, even if the commission somehow had the power to administer the Bankruptcy Code. The court described the agency’s theory of “parallel exclusive jurisdiction” as an illegal oxymoron.

“FERC did have authority to issue the orders. But because the orders rested on an inexplicable misunderstanding of rejection, we vacate them all.