On June 7, 2019, Judge Dennis Montali of the U.S. Bankruptcy Court of the Northern District of California San Francisco Division found that FERC’s finding that it had concurrent jurisdiction with the U.S. bankruptcy court over wholesale power agreements was “unenforceable in bankruptcy court and of no force on the parties before it.” Judge Montali further noted that if necessary, the U.S. bankruptcy court will “enjoin FERC from perpetuating its attempt to exercise power it wholly lacks.” At issue, on review by the bankruptcy court, was whether, pursuant to 28 U.S.C. 2201, the bankruptcy court has exclusive jurisdiction over Pacific Gas & Electric Company’s and Pacific Gas & Electric Corporation’s (collectively “Debtors”) right to reject a power purchase agreement (“PPA”) under Section 365 of the Bankruptcy Code, and whether FERC has concurrent jurisdiction to grant or deny PG&E’s rejection of any PPAs.
As a matter of background, on January 14, 2019, in accordance with California law, Debtors announced their intent to file for bankruptcy protection prior to filing for bankruptcy. In response, various PPA counterparties initiated administrative proceedings where FERC issued two orders granting declaratory relief, finding that Debtors would need to obtain FERC approval before effectively abrogating FERC-jurisdictional wholesale power agreements even if the bankruptcy court authorized rejection. Debtors then filed for bankruptcy under Chapter 11 and commenced an adversary proceeding against FERC in bankruptcy court on January 29, 2019. In the adversary proceeding, Debtors sought three forms of relief: (1) declaratory relief confirming the bankruptcy court’s exclusive jurisdiction under Section 365; (2) enforcement of the automatic stay under section 362; and (3) a preliminary and permanent injunction under section 105 of the Bankruptcy Code. On each issue, except the issue of exclusive jurisdiction, the bankruptcy court ultimately ruled it did not need to render a determination because the issue was not yet ripe for consideration.
On February 25, 2019, Debtors sought rehearing of the two FERC orders. FERC consolidated the requests for rehearing into one final decision and denied rehearing on May 1, 2019 (“FERC Denial”). Thereafter, FERC and several counterparties in the bankruptcy proceeding moved to withdraw the matter from the bankruptcy court and move it to the district court under 28 U.S.C. § 157(d). Debtors opposed the motions. On March 11, 2019, the district court denied the motions to withdraw the reference, ruling this was a core proceeding. No party appealed.
At a hearing on the Debtors’ motion for preliminary injunction on April 10, 2019, Judge Montali asked the parties to attempt to stipulate to the terms of an order disposing of the adversary proceeding and bypassing the need to rule on a preliminary injunction. The parties filed a stipulation that did not resolve the adversary proceeding. Instead, they allowed the court to skip the preliminary injunction and enter final judgment based on the record before the judge without any further briefing or hearings, as supplemented by FERC’s May 1 order denying rehearing.
In rendering his decision, Judge Montali acknowledged that the issue before the bankruptcy court is unsettled law. He noted that three prior cases had made rulings on the concurrent jurisdiction of FERC and the bankruptcy court, but that none began with FERC issuing orders before the bankruptcy cases were filed, as it did here. Judge Montali noted, “[i]f FERC’s view prevails, it could effectively veto the [bankruptcy] court’s decision to permit rejection under the business judgment test. Instead, it would permit rejection only if the affected rate is no longer just and reasonable and as long as the abrogation or interest modification is necessary to protect the public.”
Accordingly, the bankruptcy court determined that Debtors had standing to bring an action for declaratory judgment relative to whether FERC or the Bankruptcy Court had jurisdiction to determine the status of rejected PPAs. The court determined there is an inherent conflict between the public policy governing FERC, and the rights and responsibilities of debtors-in-possession under the Bankruptcy Code.
Judge Montali further noted that that the bankruptcy code includes several specific provisions where Congress altered portions of Chapter 11 reorganization and that Congress is well-versed in crafting rules for special circumstances. Judge Montali concluded that because Congress did not make such alterations here, the bankruptcy court has exclusive jurisdiction over this matter.
The bankruptcy court determined there is an inherent conflict between the public policy governing FERC, and the rights and responsibilities of debtors-in-possession under the bankruptcy code. Judge Montali noted that if FERC’s view prevails, it could effectively veto the court’s decision to permit rejection under the business judgment test. He further noted that it is not necessary to review public policy when applying the business judgment rule and a federal statute is in question.
FERC asserted it is entitled to sovereign immunity or has exclusive jurisdiction over rate setting; and in response, the bankruptcy court found that Congress failed to provide any express exceptions to the jurisdiction of the bankruptcy court in FERC-related matters. The court observed that rejection of PPAs would result in breach of contract claims for damages under affected PPAs. Those claims would constitute creditor claims in the pending bankruptcy case; and, as a result, the bankruptcy court would have exclusive jurisdiction over the prioritization of such claims.
Judge Montali found that if FERC were to preempt the bankruptcy court’s jurisdiction, then PPAs would be treated with the same priority as administrative claims and would therefore be paid in full. Montali ruled such prioritization of PPA claims is in direct violation of the bankruptcy code’s treatment of creditors of rejected contracts. The bankruptcy court noted that nothing in the Federal Power Act or the Bankruptcy Code grants FERC concurrent jurisdiction with this court over Section 365 motions to reject executory contracts covering federal power matters. For these reasons and others, the bankruptcy court concluded that debtors are entitled to the bankruptcy court’s declaratory judgment that (1) FERC does not have concurrent jurisdiction over the bankruptcy court’s decision to permit Debtors to reject (or assume) executory contracts under Section 365; and (2) that the FERC rulings described above are of no force and effect and are not binding on Debtors in these cases.
NextEra Inc., Consolidated Edison Inc., and Calpine Corp said they will appeal Judge Montali’s ruling. Both the Debtor’s appeal from the FERC Orders, and the appeal from Judge Montali’s ruling, will likely be consolidated before the Ninth Circuit Court of Appeals. To prosecute the appeal of the FERC Orders, Debtors and other parties have sought relief from the bankruptcy code’s automatic stay of legal proceedings. The hearing on these motions is scheduled for June 26th before Judge Montali.
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