FERC v. Ultra Resources, Incorporated ( 2022 )

Case: 20-20623 Document: 00516237520 Page: 1 Date Filed: 03/14/2022
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
March 14, 2022
No. 20-20623
consolidated with Lyle W. Cayce
No. 21-20126 Clerk
In Re: Ultra Petroleum Corporation,
Debtor,
Federal Energy Regulatory Commission,
Appellant,
versus
Ultra Resources, Incorporated,
Appellee.
Appeal from the United States Bankruptcy Court
for the Southern District of Texas
USBC No. 20-32631
Before King, Graves, and Ho, Circuit Judges.
King, Circuit Judge:
We are asked to determine whether Ultra Resources, Inc.’s rejection
of a filed-rate contract in bankruptcy relieves it of its obligation to continue
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performance absent the approval of FERC (the Federal Energy Regulatory
Commission). We are also asked to consider whether, under 11 U.S.C.
§ 1129(a)(6), the bankruptcy court was required to obtain the approval of
FERC before confirming Ultra Resources’s reorganization plan. We hold
that under the particular circumstances presented here, Ultra Resources is
not subject to a separate public-law obligation to continue performance of its
rejected contract, and that 11 U.S.C. § 1129(a)(6) did not require the
bankruptcy court to seek FERC’s approval before it confirmed Ultra
Resource’s reorganization plan. We therefore AFFIRM.
I.
Ultra Resources, Inc. (“Ultra”) is an energy company whose primary
business is the production of natural gas. It contracted with Rockies Express
Pipeline LLC (“REX”) to reserve space on REX’s pipeline for Ultra’s
natural gas. Under the contract, Ultra would pay a monthly reservation
charge to reserve a certain amount of space in the pipeline, regardless of how
much gas it actually shipped (or even if it ultimately shipped no gas). The
contract was made in the shadow of REX’s application to FERC to construct
a new pipeline, and Ultra was one of the “anchor shippers” whose
commitments partially induced REX to construct its pipeline.
The original agreement between Ultra and REX was made in 2008. In
2016, after Ultra failed a creditworthiness check, REX sued for damages in
Texas state court and asserted that the contract had been terminated based
on Ultra’s failure to meet creditworthiness requirements. Ultra then filed for
Chapter 11 bankruptcy, and Ultra and REX settled REX’s contract claim.
Ultra and REX also agreed to a new contract which is the subject of the
instant case. The new agreement was slated to run from 2019 until 2026, and
reserved space on the REX pipeline for Ultra’s natural gas at a rate of $169
million over the life of the agreement—a price Ultra was required to pay
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whether or not it used the pipeline. Shortly before this new agreement went
into effect, Ultra suspended its drilling program; it later filed again for
Chapter 11 bankruptcy. Anticipating the bankruptcy filing, REX had
previously petitioned FERC for a declaration that Ultra could not reject the
contract between Ultra and REX without FERC’s approval; Ultra filed for
bankruptcy before FERC issued a decision.
As part of the bankruptcy proceedings, Ultra sought permission from
the bankruptcy court to reject its natural gas shipping contract with REX.
REX objected and requested that the bankruptcy court refrain from issuing a
decision until proceedings could occur before FERC, which would decide
whether rejecting the contract was in the public interest, arguing that FERC
had exclusive authority to decide whether Ultra should be relieved of its
obligations under the filed-rate contract with REX. The bankruptcy court
denied that request, but asked FERC to “participate as a party-in-interest in”
the bankruptcy proceedings and “comment on whether the rejection of [the
contract] would harm the public interest.”
FERC responded by filing a motion for reconsideration with the
bankruptcy court, arguing that proceedings before FERC were required
because FERC could only speak through its orders, occurring after said
proceedings, and could not comment on the public interest through counsel
in the bankruptcy proceedings. The bankruptcy court denied FERC’s
motion. Following an evidentiary hearing (which FERC ultimately
participated in through counsel), the bankruptcy court authorized Ultra to
reject its contract with REX. In its opinion, the bankruptcy court stated that:
(1) it had the authority to approve rejection of the contract under our
precedent in In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004); (2) even giving
the rejection question heightened scrutiny and considering the effect on the
public interest, as required under Mirant, rejection was still appropriate as it
would not harm the supply of natural gas and would significantly benefit
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Ultra’s estate; (3) any concerns that rejection would allow Ultra to “free
ride” on the pipeline and “still be able to ship natural gas along the REX
pipeline, only for substantially less than the cost imposed under [the
contract]” were a result of FERC’s regulations, not rejection itself, and did
not counsel against allowing Ultra to reject the contract; and (4) rejection
“neither modif[ied] nor abrogate[d] the [contract]” and therefore did not
amount to a rate change requiring approval under 11 U.S.C. § 1129(a). The
bankruptcy court also confirmed Ultra’s reorganization plan over FERC’s
objection.
II.
The question at the heart of this case is one of law and therefore is
reviewed de novo. In re Glenn, 900 F.3d 187, 189 (5th Cir. 2018). That
question concerns a clash of two congressionally constructed titans, FERC
and the bankruptcy courts. Congress has imbued each entity with a
significant wellspring of authority.
The bankruptcy court’s power derives from the Bankruptcy Code.
“Congress intended to grant comprehensive jurisdiction to bankruptcy
courts so that they might deal efficiently and expeditiously with all matters
connected with the bankruptcy estate.” Celotex Corp. v. Edwards, 514 U.S.
300, 308 (1995). Specifically, Chapter 11 sets out the framework for
restructuring a bankrupt business. In re Mirant Corp., 378 F.3d 511, 517 (5th
Cir. 2004). One of the options available to a bankrupt business is the rejection
of an executory contract—that is, a contract in which performance remains
due on both sides. 11 U.S.C. § 365(a); Mirant, 378 F.3d at 518 n.3. Rejection
of contracts “is vital to the basic purpose of a Chapter 11 reorganization,
because rejection can release the debtor’s estate from burdensome
obligations that can impede a successful reorganization.” Mirant, 378 F.3d at
517 (quoting In re Nat’l Gypsum Co., 208 F.3d 498, 504 (5th Cir. 2000)).
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Rejection is subject to the bankruptcy court’s approval and is generally
considered by the court under the deferential “business judgment” standard.
Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652, 1658 (2019).
The rejection of an executory contract is a breach of contract, with “the same
effect as a breach outside bankruptcy.” Id. at 1666. Rejection leaves the
counterparty to the contract with “a claim against the estate for damages
resulting from the debtor’s nonperformance.” Id. at 1658. Due to the nature
of bankruptcy and the insolvency of the debtor, however, this claim is rarely
paid in full and the counterparty “may receive only cents on the dollar.” Id.Additionally relevant to the Chapter 11 reorganization process described
herein is 11 U.S.C. § 1129(a)(6), which states that a reorganization plan can
be confirmed only if “[a]ny governmental regulatory commission with
jurisdiction, after confirmation of the plan, over the rates of the debtor has
approved any rate change provided for in the plan, or such rate change is
expressly conditioned on such approval.”
Next, because “the business of transporting and selling natural
gas . . . is affected with a public interest,” 15 U.S.C. § 717(a), the Natural Gas
Act grants FERC “exclusive jurisdiction over the transportation and sale of
natural gas in interstate commerce for resale,” Schneidewind v. ANR Pipeline
Co., 485 U.S. 293, 300–01 (1988). Part of FERC’s responsibility is to ensure
that all rates charged by natural-gas companies are “just and reasonable.” 15
U.S.C. § 717c(a). All rates, even those arising from private contract
negotiations, are “filed” with FERC, 15 U.S.C. § 717c(c), and cannot be
modified or abrogated absent FERC’s approval, see Mirant, 378 F.3d at 518. 1
1
Although Mirant considered a power contract regulated by FERC under the
Federal Power Act (FPA), the Natural Gas Act is “in all material respects substantially
identical.” Ark. La. Gas Co. v. Hall, 453 U.S. 571, 577 n.7 (1981) (quoting FPC v. Sierra
Pacific Power Co., 350 U.S. 348, 353 (1956)). Courts “therefore follow [the] established
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The requirement that FERC approve any changes to a filed rate applies not
only to the parties to the contract, but also to the courts—the “filed rate
doctrine” prevents both parties and courts from modifying the filed rate
contained in a tariff. Id. When FERC is considering whether to change a filed
rate, it follows the Mobile-Sierra doctrine, and will change a rate only if the
existing contract “adversely affect[s] the public interest.” Fed. Power
Comm’n v. Sierra Pac. Power Co., 350 U.S. 348, 355 (1956); United Gas Pipe
Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 344–45 (1956). FERC may
not modify a filed rate simply because a party finds continued performance
unprofitable. See Mirant, 378 F.3d at 518.
III.
It is also important to note that this is not the first time these two titans
have clashed. Instead, today’s battlefield lies in the shadow of our precedent
in In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004). In that case, our court
considered “whether a district court may authorize the rejection of an
executory contract for the purchase of electricity as part of a bankruptcy
reorganization, or whether Congress granted [FERC] exclusive jurisdiction
over those contracts.” Mirant, 378 F.3d at 514. The Mirant court answered
yes to the question regarding rejection of an executory contract, id., and
FERC does not dispute that holding. The question faced by the Mirant court
arose in a similar context to the instant case. After Mirant filed for Chapter
11 bankruptcy, it sought to reject an electricity-purchase agreement. Id. at
515–16. The contract included filed rates that could only be modified by
FERC. Id. at 515. The bankruptcy court found that it could reject the contract
not withstanding FERC’s regulatory authority, and additionally enjoined
practice of citing interchangeably decisions interpreting the pertinent sections of the two
statutes.” Id.6
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FERC from not only enforcing the specific contract at issue, but also acting
in any way to enforce “all of Mirant’s wholesale electric contracts” without
ten days’ notice. Id. at 516. The district court then withdrew the reference to
the bankruptcy court and found that “the Bankruptcy Code does not provide
an exception to FERC’s authority . . . and that Mirant must seek relief from
the filed rate . . . in a FERC proceeding.” Id. The district court therefore
denied the motion to reject the contract and “vacated the bankruptcy court’s
injunctive relief because it would interfere with the performance of FERC’s
regulatory oversight functions.” Id. at 516–17.
Our court first acknowledged that “FERC has the exclusive authority
to determine wholesale rates” and that any attempt to “modify the rates” or
“abrogate [the contract]” would have to go through FERC. Id. at 519.
However, we distinguished the action in the bankruptcy court because
“Mirant’s rejection of the [contract] is a breach of that contract” and FERC
does not have exclusive authority over a breach of contract claim; “[w]hile
the FPA does preempt breach of contract claims that challenge a filed rate,
the district courts are permitted to grant relief in situations where the breach
of contract claim is based upon another rationale.” Id. Thus, rejection was
allowed since rejection “would only have an indirect effect upon the filed
rate” and the “unsecured claim against the bankruptcy estate would be based
upon . . . the filed rate.” Id. at 519–20. Rejection therefore was not a challenge
to the filed rate that was under the exclusive jurisdiction of FERC. This was
so even though part of the reason Mirant sought rejection was that the rate
was too high, as Mirant additionally stated “it [did] not need the electricity
purchased under the [contract] to fulfill its obligations to supply electricity.”
Id. at 520.
Our court additionally based its holding that rejection of a power
contract was allowed on the fact that “[t]he Bankruptcy Code does
not . . . include an exception prohibiting rejection of, or providing other
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special treatment for, wholesale electric contracts subject to FERC
jurisdiction.” Id. at 521. This lack of an exception signaled a congressional
intent to permit rejection since other areas featured “specific limitations on
and exceptions to the § 365(a) general rejection authority.” Id. at 521; see also
NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522–23 (1984) (“Obviously,
Congress knew how to draft an exclusion for collective-bargaining
agreements when it wanted to; its failure to do so in this instance indicates
that Congress intended that § 365(a) apply to all collective-bargaining
agreements covered by the NLRA.”).
We also rejected FERC’s argument that the bankruptcy court needed
to ensure that Mirant paid “the full amount of any damages resulting from
the breach” because any other result would represent a challenge to the filed
rate. Mirant, 378 F.3d at 520. We stated that payment of less than the full
damages amount would be “entirely dependent upon Mirant’s bankrupt
status” and the fact that the amount ultimately paid would “depend solely
upon the terms applicable to the unsecured creditors as a class under the
reorganization plan” and not from the act of “rejection itself.” Id. at 520–21.
Our court then considered the scope of the district court and
bankruptcy court’s injunctive power over FERC since “the district court also
vacated all of the injunctive relief that the bankruptcy court entered.” Id. at
522. We stated: “We recognize that some injunctive relief is necessary to
bring finality to Mirant’s rejection decisions and allow the reorganization
process to proceed, but the injunctive relief as previously entered [by the
bankruptcy court] was overly broad.” Id. at 522–23. Our court accepted that
a limited injunction was appropriate under 11 U.S.C. § 105(a) because “[t]he
concern that the bankruptcy court expressed—that FERC could negate
Mirant’s rejection of an executory power contract by ordering Mirant to
continue performing under the terms of the rejected contract—is certainly a
legitimate basis for injunctive relief.” Id. at 523. However, we also noted that
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a bankruptcy court’s power under § 105(a) is limited and should be used
sparingly; therefore, the bankruptcy court exceeded its authority because it
“attempted to accomplish the narrow goal of protecting Mirant’s right to
reject executory contracts by prohibiting FERC from taking any action”
against Mirant. Id. at 524. Instead, any injunction had to be limited to
protecting Mirant from FERC’s attempts to compel Mirant to perform under
the particular contract that the court enabled Mirant to reject.
We last considered the standard a court should use when deciding
whether to approve rejection of a power contract. We stated that “Supreme
Court precedent supports applying a more rigorous standard” than the
normal business judgment standard. Id. In addition, “[u]se of the business
judgment standard would be inappropriate in this case because it would not
account for the public interest inherent in the transmission and sale of
electricity.” Id. at 525. We thus recommended that the district court or
bankruptcy court, on remand, should “carefully scrutinize the impact of
rejection upon the public interest and should . . . ensure that rejection does
not cause any disruption in the supply of electricity to other public utilities or
to consumers.” Id. We further counseled that the courts should “welcome
FERC’s participation,” which the bankruptcy court had already signaled it
would, by “includ[ing] FERC as a party in interest for all purposes.” Id. at
525–26.
In summary, Mirant teaches the following. First, “the power of the
[bankruptcy] court to authorize rejection of [a filed-rate contract] does not
conflict with the authority given to FERC to regulate rates.” Id. at 518.
Second, and related, rejection “is not a collateral attack upon [the] contract’s
filed rate because that rate is given full effect when determining the breach of
contract damages resulting from the rejection.” Id. at 522. Third, in ruling
on a rejection motion, bankruptcy courts must consider whether rejection
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harms the public interest or disrupts the supply of energy, and must weigh
those effects against the contract’s burden on the bankrupt estate. Id. at 525.
IV.
In light of Mirant, then, what FERC casts as a pitched battle is actually
a settled truce. Mirant balances the interests of the bankruptcy courts (which
are ultimately in charge of the rejection decision) and FERC (by requiring
that rejection of a filed-rate contract is considered under a higher standard
that considers the public interest and by allowing FERC to participate in the
bankruptcy proceedings). As a panel of this court, we are bound by our
precedent in Mirant, which holds that a bankruptcy court can authorize
rejection of a filed-rate contract, and that, post-rejection, FERC cannot
require continued performance on the rejected contract. “It is well-
established in this circuit that one panel of this Court may not overrule
another.” United States v. Segura, 747 F.3d 323, 328 (5th Cir. 2014) (quoting
Cent. Pines Land Co. v. United States, 274 F.3d 881, 893 (5th Cir. 2001)). We
are not permitted to stray from Mirant’s holding even if we were so inclined
(which we are not).
As stated earlier, FERC has no quarrel with the proposition that
Mirant allows a bankruptcy court to approve rejection of a filed-rate contract.
FERC, however, argues that any statements in Mirant about the
consequences of such a rejection (including the statement that FERC could
not enforce full performance and payment under a rejected contract) were
dicta. However, that portion of the Mirant decision was not dicta, and it
controls here. We have previously stated that “[a] statement is not dictum if
it is necessary to the result or constitutes an explication of the governing rules
of law.” Segura, 747 F.3d at 328 (quoting Int’l Truck & Engine Corp. v. Bray,
372 F.3d 717, 721 (5th Cir. 2004)). By contrast, “[a] statement is dictum if it
could have been deleted without seriously impairing the analytical
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foundations of the holding and being peripheral, may not have received the
full and careful consideration of the court that uttered it.” Id.The language in Mirant regarding the effects of rejection, and a
bankruptcy court’s powers if it approves rejection of a filed-rate contract, is
the former; that is, it was necessary to our holding in Mirant. We can glean
so first from the procedural history of Mirant. FERC puts great weight on the
fact that no filed-rate contract was ever rejected in Mirant, and that therefore
any commentary on FERC’s regulatory authority post-rejection was not
essential to Mirant’s holding. However, FERC’s argument arises from an
incomplete recounting of the facts facing us in Mirant. When considered in
context, the single fact that no contract was ever actually rejected buckles
under the weight that this argument asks it to bear.
Mirant came to our court after consideration by two separate courts—
the bankruptcy court and the district court. The bankruptcy court concluded
that “it had the power to enjoin FERC” as well as “the authority to authorize
Mirant to reject” the contract. Mirant, 378 F.3d at 516. In addition, the
bankruptcy court had issued an injunction that prevented FERC from taking
any action to compel Mirant to honor not only the contract for which it was
seeking rejection, but any of Mirant’s wholesale electric contracts. Id.The district court then found that neither it nor the bankruptcy court
had the authority to reject a filed-rate contract. The court therefore denied
the motion to reject and “vacated the bankruptcy court’s injunctive relief
because it would interfere with the performance of FERC’s regulatory
oversight functions.” Id. at 516–17.
Mirant “appeal[ed] each of the district court’s orders.” Id. at 517(emphasis added). And in the decretal language of our opinion, we made clear
that we had answered each question: the “portion of the district court’s order
dismissing [the] case for lack of jurisdiction to authorize the
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rejection . . . [was] REVERSED” while “the portion of that order vacating
the bankruptcy court’s injunctive relief [was] AFFIRMED,” and the case
was “REMANDED to the district court for proceedings not inconsistent
with [the] opinion”—the entirety of the opinion. Mirant, 378 F.3d at 526.
Therefore, the questions before us in Mirant were not only whether the
contract could be rejected, but also the consequences of that rejection and
the scope of the injunctive relief that could be issued by the bankruptcy court
following that rejection. Mirant’s answer to that question—that the
bankruptcy court had the power to enjoin FERC from enforcing the rejected
contract, but did not have the authority to issue an injunction preventing
FERC from taking any action pursuant to its broad regulatory power—was
not dicta.
Instead, that language was essential to our holding in Mirant. First and
foremost, the language regarding the division of authority between the
bankruptcy courts and FERC was “an explication of the governing rules of
law.” Segura, 747 F.3d at 328 (quoting Int’l Truck, 372 F.3d at 721). In
Mirant, we were deciding: (1) whether a filed-rate utility contract could be
rejected; (2) if so, what rules of law governed that rejection; and (3) the
bankruptcy court’s authority to enforce that rejection. Analysis of the effects
that rejection would have cannot be “deleted without seriously impairing the
analytical foundations of the holding.” Id. (quoting Int’l Truck, 372 F.3d at
721). The consequences of rejection of a filed-rate contract are central to the
decision to allow rejection of said contracts, and the governing rules of law
related to those consequences required explication; that discussion was not
dicta.
Otherwise, should the bankruptcy court or district courts have
rejected the contract, they would have been left adrift when considering how
to enforce that rejection thereafter. Could either court issue the same
widespread, near-all-encompassing injunction that the bankruptcy court had
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previously enacted? Were they blocked from issuing any injunction at all? Or
was the answer somewhere in between? Knowing that the case would be
remanded, it was of paramount importance that we establish the proper
bounds of authority. We did so, notably picking the middle road—that some
injunctive relief was proper to “bring finality to Mirant’s rejection decisions
and allow the reorganization process to proceed,” but that an injunction
implicating any regulatory action taken by FERC (as had been “previously
entered”) was “overly broad.” Mirant, 378 F.3d at 522–23. Having
“provid[ed] guidance on remand,” we then “l[eft] the task of crafting the
language of [the] injunctive relief . . . to the bankruptcy court.” Id. at 522.
Those words of guidance were not merely suggestions, but instructions the
bankruptcy court was required to follow. See Harris v. Sentry Title Co., 806
F.2d 1278, 1280 n.1 (5th Cir. 1987) (concluding that guidance directed to the
parties and district court on remand “may not be summarily dismissed as
dictum”); Cole Energy Dev. Co. v. Ingersoll-Rand Co., 8 F.3d 607, 609 (7th
Cir. 1993) (“[E]xplicit rulings on issues that were before the higher court and
explicit directives by that court to the lower court concerning proceedings on
remand are not dicta.”).
Moreover, our determination in Mirant that rejection has only an
“indirect effect upon the filed rate” and “is not a collateral attack upon [the
filed rate]” was a necessary prerequisite to our holding that a debtor can
reject a filed-rate contract in bankruptcy. Id. at 519–20, 522. FERC would
only have authority to enforce continued performance if rejection challenged
the filed rate and represented an attempt to change the filed rate itself, since
the filed-rate doctrine provides that “courts lack authority to impose a
different rate than the one approved by [FERC].” Ark. La. Gas Co. v. Hall,
453 U.S. 571, 578 (1981). Since Mirant clearly holds that rejection of a
contract is not a collateral attack on the filed rate, FERC does not have the
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authority to compel continued performance and continued payment of the
filed rate after a valid rejection.
We finally note that the above approach is not just the Mirant
approach—it is also the FirstEnergy approach. The Sixth Circuit
independently reached the same result as we did in In re FirstEnergy Solutions
Corp., 945 F.3d 431 (6th Cir. 2019). In doing so, the Sixth Circuit also viewed
Mirant’s language regarding FERC’s authority post-rejection as binding. It
stated that “[f]ully and properly applied, Mirant teaches that once the
bankruptcy court determined that the anticipated FERC action would
directly interfere with [the debtor’s] request to reject the contracts, 11 U.S.C.
§ 105(a) gave it the power to enjoin FERC from issuing any such
contradictory order.” Id. at 451. The Sixth Circuit also specifically rejected
the argument that payment of a filed-rate is a public-law obligation that
survives rejection. Id.“We are always chary to create a circuit split” and doubly so “in the
context of bankruptcy, where uniformity is sufficiently important that our
Constitution authorizes Congress to establish ‘uniform laws on the subject
of bankruptcies throughout the United States.’” In re Ultra Petroleum Corp.,
943 F.3d 758, 763–64 (5th Cir. 2019) (first quoting United States v. Graves,
908 F.3d 137, 142 (5th Cir. 2018), then quoting In re Marciano, 708 F.3d 1123,
1135 (9th Cir. 2013) (Ikuta, J., dissenting)). To view Mirant in the manner
that FERC asks us and then hold that payment of a filed rate is still required
even if a contract is rejected would create just such a circuit split. We decline
to do so.
Given that it is clear that the challenged language in Mirant is binding,
the result of this case is straight forward. A district court (and, by extension,
a bankruptcy court) has the “power . . . to authorize rejection of” a filed-rate
contract and such rejection “does not conflict with the authority given to
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FERC to regulate rates.” Mirant, 378 F.3d at 518. Because such a rejection
“would only have an indirect effect upon the filed rate,” id. at 519–20, it is
“not a collateral attack upon that contract’s filed rate” that is prohibited
outside of a hearing before FERC. Id. at 522. That is true so long as the
rejection is based on other reasons beyond the fact that the debtor would like
to pay a lower rate (as is the case here), since either modification of the rate
or full abrogation of the agreement requires FERC’s approval. Id. at 519.
Each element is satisfied here. The bankruptcy court considered and
granted rejection of the contract. That rejection did not collaterally attack the
rate filed with FERC because the rate was still used to set the damage award
that REX (the creditor) was entitled to after rejection. Ultra (the debtor) did
not seek to reject the contract because the rates were excessive (which would
represent a prohibited collateral attack on the rate itself). Instead, Ultra has
“suspended its drilling program[,] . . . has never shipped natural gas on the
REX pipeline” under the current contract, and has been “releas[ing] its REX
pipeline capacity to other natural gas shippers.” Ultra is not just seeking to
secure a lower rate, but instead wants out of the contract altogether, given
the suspension of its drilling program and its nonuse of the volume
reservation. That rejection is valid, and, under Mirant, does not undermine
FERC’s exclusive authority to set rates.
In addition, the bankruptcy court did not consider rejection under the
normal business judgment standard, but instead explicitly considered the
public interest in reaching its decision. In applying this higher standard, the
bankruptcy court stated it was employing “Mirant Scrutiny.” We agree with
the bankruptcy court that Mirant requires consideration of the public interest
before rejection of a filed-rate contract can be approved but, to dispel any
confusion, we again reiterate that the use of a higher standard is required. A
court must determine whether “the equities balance in favor of rejecting”
the filed-rate contract. Mirant, 378 F.3d at 525 (quoting NLRB v. Bildisco &
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Bildisco, 465 U.S. 513, 526 (1984)). Specifically, a court must “ensure that
rejection does not cause any disruption in the supply of electricity,” natural
gas, or whatever regulated commodity is the subject of the contract under
consideration. Id. Because the bankruptcy court did so here, its rejection
decision was proper.
V.
FERC advances two additional arguments for why the bankruptcy
court’s rejection decision was improper. It first argues that Mirant requires a
bankruptcy court to allow FERC to comment on the public-interest
ramifications of rejecting a filed-rate contract, and that because FERC “is a
deliberative body that speaks through its orders,” ANR Pipeline Co. Columbia
Gas Transmission, LLC, 173 FERC ¶ 61, 131 (2020), the only way to satisfy
that requirement is for FERC to conduct full proceedings before the
Commission. However, Mirant does not include such a requirement. As
stated above, Mirant does indeed require consideration of the public interest
before a filed-rate contract can be rejected. But Mirant makes clear that
“courts should carefully scrutinize the impact of rejection upon the public
interest,” not FERC. Mirant, 378 F.3d at 525 (emphasis added). We further
noted that “the bankruptcy court ha[d] already indicated that it would
include FERC as a party in interest for all purposes in this case” and
“presume[d] that the district court would also welcome FERC’s
participation, if this case is not referred back to the bankruptcy court.” Id. at
525–26. That way, “FERC [would] be able to assist the court in balancing
these equities.” Id. at 526 (emphasis added).
Nothing in that language can be read as requiring a bankruptcy court
to allow FERC to conduct a hearing before the court can decide on rejection.
To be sure, FERC’s insight is highly beneficial when a court is weighing the
complex and interwoven questions at the heart of the decision of whether to
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c/w No. 21-20126
reject a filed-rate contract. Therefore, to again avoid the risk that our
statements in Mirant are read as mere recommendations, rather than
commands, we make clear here that a bankruptcy court must invite FERC to
participate in the bankruptcy proceedings as a party-in-interest. Whether
FERC ultimately decides to participate is up to it, but the court must at least
extend the invitation. The bankruptcy court did so here, welcoming FERC to
participate as a party-in-interest, which FERC ultimately did. The
requirements of Mirant were satisfied.
In addition, under the circumstances presented by this case, we
decline to expand beyond our dictates in Mirant by requiring a bankruptcy
court to halt its progress and allow FERC to hold a hearing on the public-
interest ramifications of the rejection of a filed-rate contract. We fully
recognize the expertise FERC has to offer and the importance of ensuring
that expertise is considered when rejection of a filed-rate contract is being
contemplated. However, in a Chapter 11 bankruptcy, time is of the essence
and delay drains the coffers of all involved (except, of course, for those of the
lawyers who would be paid to hurry up and wait). See Volume G Collier
on Bankruptcy App. Pt. 44−590 (Richard Levin & Henry J. Sommer
eds., 16th ed. 2021) (“An oft-cited goal of Chapter 11 is to encourage swift
and successful reorganizations with lower transaction costs.”); James J.
White, The Virtue of Speed in Bankruptcy Proceedings, 40 L. Quad. Notes,
no. 3, 1997, at 76, 79 (“Speed is an antidote to many of the substantive ills in
Chapter 11. That speed will benefit not only secured creditors, but unsecured
creditors as well.”). The current approach balances the benefits of providing
the bankruptcy court with FERC’s insight with the necessity for swift and
efficient bankruptcy proceedings.
FERC last argues that the bankruptcy court erred because the
rejection of the REX contract amounted to a rate change, and its inclusion in
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c/w No. 21-20126
Ultra’s confirmed reorganization plan violated 11 U.S.C. § 1129(a)(6). 11
U.S.C. § 1129(a)(6) states that a reorganization plan cannot be confirmed
unless “[a]ny governmental regulatory commission with jurisdiction . . . over
the rates of the debtor has approved any rate change provided for in the plan,
or such rate change is expressly conditioned on such approval.” FERC
asserts that a rate change has occurred because Ultra will not actually pay the
full amount owed on the contract after it is rejected.
However, we made clear in Mirant that an impermissible rate change
occurs only if the actual filed rate found in the contract is changed. Such a
change does not occur here because “the damages calculation from the
rejection of [the] contract . . . is based upon the filed rate.” Mirant, 378 F.3d
at 520. FERC in fact made a variation of its § 1129(a)(6) argument to us when
we were deciding Mirant, asserting that “anything less than full payment
would constitute a challenge to the filed rate.” That argument did not carry
the day then, and does not carry the day now. We previously held that “any
effect on the filed rates from a motion to reject would result not from the
rejection itself, but from the application of the terms of a confirmed
reorganization plan to the unsecured breach of contract claims.” Id. at 521.
We therefore made clear that the filed rate itself is separate from full payment
of that rate. Since the bankruptcy court did not change the actual rate and
used it to calculate the damages claim that would result from rejection of the
contract, the confirmation of the reorganization plan did not violate 11 U.S.C.
§ 1129(a)(6).
For the foregoing reasons, we AFFIRM.
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