‘A clash of two titans built by Congress’: Fifth Circuit declares bankruptcy court winner of FERC in In re Ultra Petroleum Corporation

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On March 14, 2022, the United States Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) revisited the issue of dismissing rate contracts filed in bankruptcy when such contracts are regulated by the Federal Energy Regulatory Commission ( “FERC”). The ruling marks the first time the Fifth Circuit has addressed the issue since its 2004 ruling in In re Mirant Corp.1 In Federal Energy Regulatory Commission v. Ultra Resources, Incorporated (In re: Ultra Petroleum Corporation)The Fifth Circuit Panel upheld findings issued by the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) that, “in the particular circumstances presented [therein],” (i) FERC cannot require debtor Ultra Resources, Inc. (“Ultra”) to continue performance of a rejected deposit rate contract and (ii) FERC’s approval was not not required under Section 1129(a)(6) of the Bankruptcy Code prior to the bankruptcy court confirming Ultra’s Chapter 11 reorganization plan.

The dispute in FERC v. Ultra Resources centered around a filed tariff contract between Ultra and Rockies Express Pipeline LLC (“REX”) under which Ultra was to pay REX a total of $169 million from December 2019 to December 2026 for reserved capacity on a REX pipeline , whether or not Ultra has used the ability. Due to the sharp drop in oil and gas commodity prices, Ultra had suspended its drilling program in September 2019 and as a result Ultra never used any of its reserved spaces on the REX pipeline. In anticipation of Ultra’s bankruptcy filing, REX asked FERC for a statement that Ultra could not reject the filed rate contract without FERC’s approval, but Ultra filed for bankruptcy and decided to reject the contract before FERC can make a decision.

The first day of the Ultra bankruptcy, Ultra sought to reject the contract at the filed tariff. Resting on Mirant, 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. Finally, the bankruptcy court concluded that the rejection of the contract was not a rate change that would require FERC approval under section 1129(a)(6) of the Bankruptcy Code prior to the confirmation of a Chapter 11 plan.

On appeal, the Fifth Circuit called the dispute a “clash of two congressional-constructed titans” — FERC and the bankruptcy courts. However, the panel noted that “today’s battlefield sits in the shadow of our precedent in [Mirant]and, in light of the behavior Mirant“what the FERC presents as a pitched battle is in fact a settled truce.”

By making a decision in Ultrathe fifth circuit spent a lot of time clarifying the holding of Mirant in order “to avoid the risk that [the] statements in Mirant are read as mere recommendations, rather than commands. Rejecting FERC’s arguments challenging the wording Mirantthe Court concluded that Mirant defended the following propositions:

  • The power of the bankruptcy court to authorize the rejection of a filed rate contract does not conflict with the power of FERC to regulate rates, since the rejection is not a change in rate;
  • As long as the rejection is based on reasons other than that the debtor would prefer a lower rate, the rejection is not a collateral attack on the contract’s deposited rate (and FERC’s jurisdiction in this regard) because the rate is fully applied when determining the damage resulting from the release; and
  • In deciding motions for dismissal, bankruptcy courts must consider whether the dismissal harms the public interest or disrupts energy supplies and weigh those effects against the burden on the bankruptcy estate. View Mirant378 F.3d at 518-525.

Based on this interpretation of Mirantthe Court determined that the result of FERC’s appeal was “simple” since “every element [of Mirant] is satisfied here. In particular, the Court focused on the fact that Ultra “is not only seeking a lower rate, but rather wishes to withdraw from the contract altogether, given the suspension of its drilling program and its non- use of volume reservation”.

The Fifth Circuit rejected FERC’s argument that Mirant forced a bankruptcy court to wait for FERC to issue an opinion on the public interest ramifications of rejecting a rate contract filed through full FERC proceedings, determining rather than Mirant simply requires that the bankruptcy courts invite FERC to participate in the bankruptcy proceedings as an interested party to assist the court in its review of the impact of the dismissal on the public interest. The Fifth Circuit explicitly refused to expand Mirant to require a bankruptcy court to wait for the FERC to render a decision, citing the need for expeditious proceedings in Chapter 11.

Finally, reiterating its earlier decision that the rejection did not constitute a rate change subject to FERC’s 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 changes in Chapter 11 plans be (i) expressly approved by government regulatory commissions with jurisdiction over rates, or ( (ii) conditional on such approval.

Although the Fifth Circuit’s decision appears on the face of it to reinforce its decision of nearly 20 years earlier and to prioritize the power of dismissal over the authority of FERC, the facts in Ultra differ in several important respects from other recent cases concerning the rejection of deposited tariff contracts. Importantly, Ultra had suspended its drilling program and never shipped on the REX pipeline. Therefore, Ultra would not follow the rejection of the contract with an attempt to renegotiate a contract at the filed rate at a more favorable rate. This contrasts sharply with the facts of Gulfport Energyin which the obligor seeking to reject the contract at the filed tariff had used its reserved capacity and had no intention of shutting down that integral part of its business.2 On the other hand, a counterparty to the contract in gulfport obtained a pre-petition ruling from FERC which determined that the public interest did not require the modification or repeal of the contract rate.3

While the parties in gulfport settled before pleading the issue of dismissal, the opinion of the Fifth Circuit in Ultra may be construed as providing some leeway for a different outcome in circumstances similar to those gulfport. Specifically, to determine whether the release into 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 seek to obtain a lower rate, but rather [wanted] entirely out of contract, given the suspension of its drilling program and the non-utilization of the volume reservation. As a result, the Fifth Circuit may come to a different conclusion where the debtor intends to try to re-engage the pipeline immediately after the rejection at a more favorable price.

Finally, the opinion of the Fifth Circuit in Ultra could set the stage for disagreement among the circuit courts over the extent of FERC’s involvement in the rejection process. In Mirant, the Fifth Circuit advised the bankruptcy court to consider the public interest ramifications of rejecting a filed tariff contract. Likewise, in Ultrathe Court recognizes “the expertise that FERC has to offer and the importance that this expertise is considered” during the dismissal proceeding, and goes on to state that “a bankruptcy court must invite FERC to participate in bankruptcy proceedings as an interested party”.

Courts in other circuits have been more deferential to FERC’s determination of what serves the public interest. More specifically, in Calpine Corp.337 BR 27 (SDNY 2006), Judge Richard Casey of the Southern District of New York held that if a court must consider the public interest when determining the fate of contracts regulated by FERC, then “the executive agency FERC should determine that interest.” Judge Casey’s wording could leave FERC as the arbiter of whether the rejection serves the public interest, while the recent Fifth Circuit Ultra opinion concludes that a bankruptcy court must simply” extend the invitation” to FERC to participate as an interested party.

In light of the Fifth Circuit Ultra decision, parties to the contract anticipating the bankruptcy of their counterparties should consider engaging FERC with the aim of obtaining a favorable decision before the onset of bankruptcy. Although the Fifth Circuit has made it clear that it is inviting FERC to participate in the bankruptcy as an interested party, a favorable FERC pre-petition ruling, although likely producing no res judicata effect, may play a role in early establishment that the public interest will not be served by the rejection. Bracewell’s attorneys have been actively involved in litigation arising in the context of the overlapping jurisdiction of FERC and the bankruptcy court. Bracewell represented REX in the gulfport bankruptcy and received an affirmative order from FERC before Gulfport filed for bankruptcy. This has been beneficial to REX as the bankruptcy proceedings progressed. Bracewell attorneys have also argued similar issues arising under the Federal Power Act for various clients in the bankruptcies of NRG Energy, Calpine Corporation., and PG&E Company.

Given the diversity of opinions on this issue, FERC may appeal the Ultra decision in the United States Supreme Court.

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