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Commission Watch

FERC Versus Bankruptcy Jurisdiction:
Fortnightly Magazine - November 2004

in light of their language and purposes. 13

The Code and the FPA

Section 365(a) of the code provides that, subject to certain exceptions, "the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." A "debtor-in-possession" in a Chapter 11 (reorganization) bankruptcy case also may employ that provision. 14 Section 365 contains no express exception for contracts that are within FERC's jurisdiction. 15

Rejection under Section 365 is not nullification of the contract, but a breach that usually entitles the counterparty to file an unsecured damages claim in the bankruptcy. 16 Whether or to what extent that claim has value is another question. Other beneficiaries of the contract may have little or no remedy.

It is well established that FERC has exclusive jurisdiction over approval, modification, and termination of most wholesale electricity sale (and transmission) contracts under the FPA. 17 FERC employs a public interest standard in assessing requests for termination of FERC-jurisdictional rates, one that generally does not permit unilateral termination based on a private party's financial interests absent unusual facts. 18

The Fifth Circuit Decision In

The Fifth Circuit in held that the statutes are not in conflict, essentially on the grounds that rejection is a breach of, rather than a challenge to, FERC-jurisdictional contracts. 19 The U.S. Court of Appeals nonetheless then discussed the business judgment standard generally employed by bankruptcy courts in assessing contract rejection requests and the more demanding public interest standard employed by FERC. The Court of Appeals found the former to be "inappropriate" in light of the public interest in such contracts, but then failed to adopt a standard. 20 It directed the lower court to "consider" whether to apply a "more rigorous standard" than the business judgment standard. 21 The Court of Appeals also remanded the dispute on the additional ground that there were unresolved questions about whether the contracts in question in fact were part of a larger transaction, which might call into question the ability of the debtor to selectively reject the contracts. 22

The Court of Appeals-relying heavily on the Supreme Court's decision in the case, where Section 365 was claimed to conflict with provisions of the NLRA regarding collective bargaining agreements and where the Supreme Court harmonized the statutes by adopting a hybrid standard 23-stated that the lower court "might" adopt a standard that permits rejection only if the debtor shows that the contract burdens the estate, that the balance of the equities favors rejection, and that rejection would further the rehabilitation goal of Chapter 11 of the code. 24 The Fifth Circuit also "presum[ed]" that the lower court would let FERC participate in the case and assist in the balancing of the equities. 25

The Court of Appeals did appear to impose one criterion as part of whatever standard was to be adopted, stating that the lower court should "ensure that rejection does not cause any disruption in the supply of electricity to other public utilities or customers." 26 The Fifth Circuit did not clarify, however, what constitutes