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Commission Watch

Why FERC must yield to bankruptcy law.
Fortnightly Magazine - October 1 2003

continued performance of that contract.

The distinction lay in the wording of the contract. Thus, in the Vermont ruling, FERC denied relief and dismissed VPPSA's complaint because the ET contract (unlike CL&P's) contained a clause providing for its automatic termination upon a bankruptcy filing, which ET had filed in July. 7

Nevertheless, while the result in Vermont squares with bankruptcy principles, the decision further betrays FERC's apparent confusion about the Bankruptcy Code and what the remedy of contract rejection means as a legal matter. By seizing upon the contractual provision of the VPPSA-ET contract that terminated the contract automatically upon the filing of bankruptcy by either party, and contrasting that with the absence of such a clause in the CL&P contract, FERC erred in viewing rejection under the Bankruptcy Code as a contractual matter, instead of the unique statutory right it truly is.

Rejection under Section 365 of the Bankruptcy Code is not the exercise of a contractual right or the modification of a contract. Rather, it is an exercise of a right, granted by the Bankruptcy Code and approved by the bankruptcy court, which permits the debtor to breach the contract in question and makes the debtor liable only for damages, albeit as a general unsecured prepetition claim (except for amounts owed for the creditor's post-petition performance which is entitled to payment by the debtor as an administrative expense). Despite FERC's decision in NRG Marketing, it seems implausible (except where health, safety or reliability is threatened) that the Federal Power Act authorizes FERC to require continuing performance of a contract rejected by a bankruptcy court since the right to reject contracts is a core element of bankruptcy and exclusive jurisdiction over estate assets is vested in the bankruptcy court.

Faced with this precise question, the U.S. Supreme Court ruled, in , 8 that a bankruptcy debtor did not effect an improper unilateral modification to a collective bargaining agreement in violation of Section 8 of the National Labor Relations Act by partially refusing to perform. The Supreme Court ruled the National Labor Relations Board enforcement proceeding to compel performance was improper because a bankruptcy filing modifies all the debtor's executory contracts by operation of law and renders them unenforceable against the debtor until assumed by order of the court under Section 365 of the Bankruptcy Code. That unenforceability, the court ruled, applies equally to regulated contracts as well as private agreements; absent any express exception set forth in Section 365 for such contracts, the debtor could reject the collective bargaining agreement. Although the court specified a debtor must meet a higher standard before obtaining bankruptcy court approval to reject a regulated contract than for an unregulated contract, the court upheld the debtor's rejection. The linchpin of the court's decision is the principle that the right "to reject an executory contract is vital to the basic purpose to a Chapter 11 reorganization, because rejection can release the debtor's estate from burdensome obligations that can impede a successful reorganization." 9

Notwithstanding that ruling, FERC required NRG-PMI to continue performing. As a rationale, the commission