Summary
In Miami Wind, the court held the failure of seller's wind turbines during Winter Storm Uri did not constitute force majeure under their contract to sell electricity.
Summary of this case from Mieco LLC v. Pioneer Nat. Res. U.S.Opinion
Index No. 652094/2021
12-22-2022
J.P. Morgan Ventures Energy Corporation, Plaintiff, v. Miami Wind I, LLC, Goldthwaite Wind Energy LLC, Defendant.
KING & SPALDING LLP Alvin Lee Counsel for Plaintiff CROWELL & MORING LLP Gary A. Stahl Scott Winkelman Attorneys for Defendants
Unpublished Opinion
KING & SPALDING LLP
Alvin Lee
Counsel for Plaintiff
CROWELL & MORING LLP
Gary A. Stahl Scott Winkelman
Attorneys for Defendants
Robert R. Reed, J.
ROBERT R. REED, J.S.C.
The following e-filed documents, listed by NYSCEF document number (Motion 002) 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 92, 93, 94, 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113, 114, 115, 116, 117, 118, 119, 120, 121, 122, 123, 124, 125, 126, 127, 128, 129, 130, 131, 132, 133, 134, 135, 136, 137, 138, 139, 140, 141, 142, 143, 144, 145, 146, 147, 148, 149, 150, 151, 152, 153, 154, 155, 156, 157, 158, 159, 160, 161, 162, 163, 164, 165, 166 were read on this motion for SUMMARY JUDGMENT (AFTER JOINDER).
In this breach of contract and declaratory judgment action, plaintiff moves for summary judgment in its favor on the complaint and to dismiss defendants' counterclaims. Defendants oppose the motion.
BACKGROUND
Plaintiff J.P. Morgan Ventures Energy Corporation (the Buyer) is an energy trading company. Defendants Miami Wind I, LLC (Miami Wind) and Goldthwaite Wind Energy LLC (Goldthwaite Wind)(together the Sellers) each own windfarms located in the state of Texas. Each Seller entered into a hedge agreement with the Buyer, pursuant to which they promised to sell and deliver a fixed quantity of energy to the Buyer in exchange for a fixed price per megawatt hour (MWh). From February 13 through February 19, 2021, the Sellers failed to sell and deliver the quantity of energy promised. The main issue in this action is whether a winter storm that swept through Texas during that time period triggered the force majeure provisions in the hedge agreements, thereby excusing the Sellers' non-performance.
By way of background, the Electric Reliability Council of Texas (ERCOT) operates the wholesale energy market in Texas. Through published protocols, ERCOT defines various points where energy can be bought and sold, which include hundreds of "nodes" on the electrical grid where energy is taken from, or added to, the grid. In addition, ERCOT defines regional "hubs" where energy can be traded.
The Sellers provide ERCOT with electricity generated from their windfarms at their assigned nodes, in exchange for which ERCOT pays them a price per MWh. The price established by ERCOT at each node is based on prevailing market conditions and is subject to a $9,000/MWh cap.
The Hedge Agreements
Apart from selling electricity generated by their windfarms to ERCOT, the Sellers entered into separate hedge agreements with the Buyer, pursuant to which the Sellers promised to sell and deliver fixed quantities of energy to the Buyer at a fixed price per MWh (together the hedge agreements) (NYSCEF Doc. Nos. 68-76). In order to satisfy their obligations under the agreements, the Sellers scheduled the delivery of energy to the Buyer's delivery point at specified ERCOT hubs. The Sellers would pay ERCOT for the scheduled energy delivery at the price per MWh established by ERCOT, again based on prevailing market conditions and subject to the $9,000/MWh cap (Goldstein Affidavit at ¶ ¶ 17-20, NYSCEF Doc. No. 99). In exchange, the Buyer would provide the Sellers with a fixed contract payment per MWh - $30.00 to Miami Wind and $35.45 to Goldthwaite Wind.
The hedge agreements were executed in 2013 and are governed by New York law. Each agreement consists of multiple documents comprising a single agreement governed by an ISDA Master Agreement (NYSCEF Doc. Nos. 68-69). The hedge agreements are materially identical, except for the location of delivery, the quantity of energy to be delivered to the Buyer by each Seller, and the agreed upon price per MWh.
As is relevant here, the hedge agreements provide for the following in the event of a Sellers' failure to schedule and/or deliver the agreed upon quantity of energy:
"If Seller fails to Schedule and/or deliver all of part [of the agreed upon energy, then the Seller must pay the Buyer] an amount for such deficiency equal to the positive difference, if any, obtained by subtracting the Contract Price from the Replacement Price[. The Buyer shall provide an] invoice for such amount [which] shall include a written statement explaining in reasonable detail the calculation of such amount"(ISDA Scheds. Part 6 [c] [i], NYSCEF Doc. No. 70). They define "Replacement Price," in part, as follows:
"(A) the price at which Buyer, acting in a commercially reasonable manner, purchases at the Delivery Point a replacement for any Product... not delivered by Seller, plus (i) costs reasonably incurred by Buyer in purchasing such substitute Product and (ii) additional transmission charges, if any, reasonably incurred by Buyer to the Delivery Point, or at Buyer's option, (B) the market price at the Delivery Point for such Product not delivered as determined by Buyer in a commercially reasonable manner"(id. at Part 6 [c] [i] [iv]).
The agreements excuse a party's performance in the event it is unable to carry out its contractual obligations by reason of "Force Majeure" (id. at Part 6 [b] [iii]). They define "Force Majeure" as follows:
"an event or circumstance which prevents the Claiming Party from performing its obligations..., which event or circumstance was not anticipated as of the date the Power Transaction was agreed to, which is not within the reasonable control of, or the result of the negligence of, the Claiming Party, and which, by the exercise of due diligence, the Claiming Party is unable to overcome or avoid or cause to be avoided"(id. at Part 6 [c] [i] [iv]). The hedge agreements exclude the following from the definition of "Force Majeure":
"(i) the loss of Buyer's markets; (ii) Buyer's inability economically to use or resell the Product purchased hereunder; (iii) the loss or failure of Seller's supply; or (iv) Seller's ability to sell the Product at a price greater than the Contract Price"(id. [emphasis added]).
The Force Majeure Notices
In February 2021, Winter Storm Uri brought sustained, below-freezing temperatures to the State of Texas. On February 13, 2021, the Sellers issued force majeure notices to the Buyer asserting:
"Seller hereby delivers notice to Buyer of the occurrence of a Force Majeure event, the details of which are as follows:
Due to extreme weather events beyond Seller's control involving the [Seller's windfarm] (the 'Project'), the Project has experienced icing on the blades of all wind turbines, which has prohibited the Project from generating more than negligible quantities of energy and which will continue to limit the Project's ability to generate energy until the weather conditions giving rise to the icing abate. The aforementioned Force Majeure event has impacted the Project's bilateral energy trades through ERCOT for the period beginning on February 13, 2021 and expected to continue through February 17, 2021. Seller has pursued diligent efforts to remediate the impacts of the Force Majeure event, including without limitation continually evaluating and resetting wind turbine faults to ensure turbine availability and manually pitching wind turbine blades and executing brake tests to shed ice accumulation.
The impacts of the Force Majeure event are ongoing and may prevent Seller from performing its obligations to sell deliver and schedule delivery of Product under the Agreement..., as a result of such Force Majeure event and during its continuance, Seller shall be excused from the performance of any and all such obligations. Further, as a result of such Force Majeure event, Seller expects that deliveries of the Product will not be scheduled under the Agreement for the period beginning on February 13, 2021 and continuing until the conclusion of the Force Majeure event"(NYSCEF Doc. No. 81).
On February 17, 2021, the Sellers issued updated force majeure notices stating:
"The extreme weather events described in our prior correspondence are now of substantially greater geographic scope, reaching into numerous states well beyond Texas. This event of Force Majeure has substantially interfered and continues to substantially interfere with multiple modes of energy production and transportation (including without limitation natural gas and wind power) and has substantially disrupted the normal operation of energy markets and caused rolling blackouts in as many as fourteen states as of this writing. The Force Majeure event continues to prevent us from performing under the Agreement, including because the severely adverse weather conditions continue to prevent wind turbines at the project site from operating at normal capacity and because the storms have upended and seized up the ERCOT energy market, severely restricting the availability of electric energy.
We expect the impacts of the Force Majeure event will continue to affect the performance of Seller under the Agreement until further notice"(NYSCEF Doc. Nos. 82 & 83). The Sellers thereafter notified the Buyer that the conditions giving rise to the force majeure event abated on February 19, 2021 (NYSCEF Doc. Nos. 86 & 87).
The Buyer rejected the Sellers' force majeure notices (NYSCEF Doc. Nos. 84 & 85) and on March 18, 2021, invoiced the Sellers for the power they failed to deliver (NYSCEF Doc. Nos. 89 & 90). The invoices sought over $ 90 million from Miami Wind and over $ 46 million from Goldthwaite Wind as the Replacement Price (id.). On March 22, 2021, the Sellers rejected the invoices on the ground that their non-performance under the hedge agreements was caused by a force majeure event.
The Instant Action
On March 30, 2021, the Buyer commenced this action against the Sellers alleging a cause of action sounding in breach of contract and seeking a declaratory judgment that (1) the Sellers' force majeure notices were invalid and did not excuse their non-performance and (2) the Sellers' failure to pay the invoices gave rise to an event of default under the hedge agreements (NYSCEF Doc. No. 001).
On June 7, 2021, the Sellers submitted an amended answer and asserted two counterclaims (NYSCEF Doc. No. 60). The first counterclaim is for breach of contract based upon, inter alia, the Buyer's alleged wrongful rejection of their force majeure notices. In the second counterclaim, the Sellers seek a declaratory judgment that (1) the force majeure notices were valid, (2) no default occurred and (3) the Buyer improperly retained $7 million as a set-off from amounts due and owing to the Sellers.
On April 29, 2021, the Sellers moved by order to show cause for a preliminary injunction enjoining and restraining the Buyer, during the pendency of this action, inter alia, from exercising self-help remedies under the hedge agreements or otherwise over the Sellers' assets (NYSCEF Doc. No. 15). The Sellers ultimately withdrew the motion (NYSCEF Doc. Nos. 61, 62, 106). The Buyer now moves for summary judgment in its favor on the complaint and dismissing the Sellers' counterclaims. For the reasons that follow the motion is denied.
DISCUSSION
It is well settled that on a motion for summary judgment, "the facts must be viewed in the light most favorable to the non-moving party and every available inference must be drawn in the [non-moving party's] favor" (Matter of Eighth Jud. Dist. Asbestos Litig., 33 N.Y.3d 488, 496 [2019][internal quotation marks and citations omitted]). "[T]he proponent of [the] motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact" (Matter of New York City Asbestos Litig., 33 N.Y.3d 20, 25 [2019][internal quotation marks and citation omitted]). "The moving party's [f]ailure to make [a] prima facie showing... requires a denial of the motion, regardless of the sufficiency of the opposing papers" (Vega v Restani Constr. Corp., 18 N.Y.3d 499, 503 [2012] [internal quotation marks and citation omitted, emphasis in original]).
Where the moving party makes a prima facie showing of entitlement to summary judgment, it falls to the non-moving party "to establish the existence of material issues of fact which require a trial of the action" (Matter of Eighth Jud. Dist. Asbestos Litig., 33 N.Y.3d at 496 [internal quotation marks and citation omitted]). The motion "should not be granted where there is any doubt as to the existence of a factual issue or where the existence of a factual issue is arguable" (Matter of New York City Asbestos Litig., 33 N.Y.3d at 25 [internal quotation marks and citation omitted]).
Here, the Buyer correctly contends that the Sellers cannot rely on their inability to generate electricity at their respective windfarms during the storm to excuse their nonperformance. The hedge agreements specifically provide that "the loss or failure of Seller's supply" does not constitute a force majeure event (ISDA Scheds. Part 6 [i] [iv], NYSCEF Doc. No. 70; see generally Constellation Energy Servs. of NY, Inc. v New Water St. Corp., 146 A.D.3d 557, 558 [1st Dept 2017]["(W)hen the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure"][quotation marks and citation omitted]). Moreover, it is undisputed that in order to fulfill their obligations, the Sellers purchased and scheduled delivery of energy to the Buyer through ERCOT. Therefore, their windfarms' ability to generate electricity during the storm does not excuse their failure to perform (see Stephens Ranch Wind Energy, LLC v Citigroup Energy Inc., Index No. 652078/2021 [Sup Ct, NY County][April 8, 2021], Tr 84-85, NYSCEF Doc. No. 94][in the context of the same winter storm and similar force majeure language, the windfarm plaintiffs explored the availability of other supply sources thereby evincing that they "understood that it was their obligation under the agreement to cause to be delivered or scheduled for delivery to a hub... an amount of energy that was compliant with the contract" notwithstanding that at the time, they were unable to generate their own energy]).
The Buyer also correctly contends that, to the extent the Sellers failed to fulfill their obligations due to financial considerations brought about by the storm, such as an increase in the price of energy, these circumstances do not constitute a force majeure event. The definition of "Force Majeure" in the hedge agreements does not expressly mention an increase in the price of energy and states that it is an "event or circumstance... not anticipated as of the date the" contracts were entered into. Price fluctuation is clearly an event or circumstance anticipated by the parties inasmuch it is the circumstance underlying the entire purpose of the contract (see Kel Kim Corp v Central Markets, 70 N.Y.2d 900, 902-903 [1987]["only if the force majeure clause specifically includes the event that actually prevents a party's performance will that party be excused"]). The impact of weather on the ability of a windfarm to produce electricity also cannot be viewed as an unanticipated event.
Furthermore, financial hardship is not a basis, in and of itself, for avoiding performance under a contract (see id. at 902 ["the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract"]; see also 407 East 61st Garage, Inc. v Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 281-282 [1968]["where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, performance of a contract is not excused"]; Warner v Kaplan, 71 A.D.3d 1, 5 [1st Dept 2009]["where performance is possible, albeit unprofitable, the legal excuse of impossibility is not available"]; Macalloy Corp. v Metallurg, Inc., 284 A.D.2d 227, 227-228 [1st Dept 2001]["Plaintiff shut down its plant voluntarily due to financial considerations brought about by environmental regulations. Those are not circumstances constituting a force majeure event, and financial hardship is not grounds for avoiding performance under a contract"]).
Similarly, an increase in the price of energy occasioned by the storm cannot form the basis for a frustration of purpose defense (see General Electric Co. v Metals Resources Group Ltd., 293 A.D.2d 417, 418-419 [1st Dept 2002]["The inducing circumstance for the subject contract was prospective instability in the price of cobalt, the commodity 'swapped' under the contract. Plaintiff sought to insulate itself from cobalt price increases by shifting the risk of such increases to defendant and defendant, in exchange, sought to shift the risk of cobalt price decreases to plaintiff. That the price of cobalt increased due to market forces did not frustrate the contract's purpose; to the contrary, it constituted an instance of the very market instability whose prospect induced the contract in the first instance"]).
The Buyer asserts that it is entitled to summary judgment because the Sellers have admitted that their failure to perform was predicated on financial considerations. In support of this contention, the Buyer relies on the affidavit of Michael Goldstein, the Vice President of the LLC that manages and operates the Sellers' windfarms (NYSCEF Doc. No. 99). The Sellers submitted Goldstein's affidavit in support of their motion for a preliminary injunction. As is relevant here, Goldstein attests to the following:
"[ ] In order to schedule the delivery of energy through ERCOT, ERCOT has credit requirements that require buyers and sellers to post sufficient collateral for the difference between the required credit amount and any unsecured credit ERCOT may grant them.
...
[ ] When a generation resource sells its energy to ERCOT in the real-time market at its assigned node, the collateral requirements, very generally speaking, are normally not significant because under these circumstances, ERCOT typically pays the generator....Things are different for entities that purchase from ERCOT. [Those entities] can at times be subject to significant credit requirements (and ultimately significant collateral requirements) based on the volume of the purchase and expected price of the energy it is seeking to purchase, among other items.
...
[ ] Due to the high energy prices resulting from the winter storm, ERCOT sent a collateral call requesting additional collateral from [the Sellers] on February 12, 2021.
[ ]... Both companies forecasted that the cash collateral ERCOT would require (above the unsecured credit amounts granted by ERCOT) based on skyrocketing prices and each company's short position at the hub and low production at the node would far exceed the cash each company had.
[ ] As the Texas storm persisted and, forced all types of energy providers off-line across Texas, the Texas energy grid lost power and the price of electricity continued to skyrocket.
[ ] After forecasting that the collateral requirements that would result from continuing to schedule energy to the hub would exceed the cash each company had, [the Sellers] stopped scheduling any energy for delivery to [the Buyer] for February 13th through 15th. When the [Sellers] resumed scheduling, each could then only schedule the delivery to [the Buyer] of an amount of energy equal to the relatively small amounts of energy they were generating at their wind farms until February 19th.
...
[ ] At the same time that [the Sellers] were experiencing significant outages, so were much of the other wind, gas and other generation in the State of Texas. At one point, according to reports, approximately 50% of the generation in all of ERCOT was offline. ...
[ ] This produced a significant shortfall in the amount of energy available to satisfy demand.
[] As a result of this significant generation shortfall, ERCOT declared its highest state of emergency, known as an Emergency Energy Alert Level 3, which directed transmission operators in the region to initiate rolling blackouts.
[ ] On February 16, 2021, the Public Utilities Commission of Texas ('PUCT') by administrative order, raised the selling price for electricity to $9,000/MWh, which was some 300 times higher than normal. The PUCT reportedly did so to induce additional energy generation.
...
[ ] Extreme market illiquidity continued at least through February 17, 2021, at which time increasing temperatures caused ice to melt and increased the amount of generation available in ERCOT. Despite the increased availability of electricity, ERCOT maintained its $9,000/MWh price through February 19, 2021, even while it ordered certain wind generators not to run.
...
[ ] The [Hedge] Agreements are predicated on a liquid ERCOT market, one where prices reflect a prevailing market price. A liquid market, generally speaking, is one with sufficient buyers and sellers, and sufficient buying and selling, to produce market prices that reflect the fundamental principles of supply and demand.
[ ] During the Texas winter storm, and the time span covered by [the Sellers'] force majeure notices, the ERCOT markets did not meet this most basic operating premise - that the parties to the [Hedge] Agreements would transact through a liquid market. Roughly half of the resources available to sell into the ERCOT market were out of service, decimating the market and ending any semblance of a liquid market"(Goldstein Affidavit at 4-10, NYSCEF Doc. No. 99).
Goldstein's affidavit demonstrates that the Sellers could not perform their obligations under the hedge agreements due to the price of energy during the storm. The Sellers urge the court to disregard Goldstein's affidavit inasmuch as it was submitted in the context of a prior motion. However, the sworn affidavit is part of the record, and, in any event, the Sellers' amended answer includes similar statements. In this regard, the Sellers allege in their amended answer that during the period of force majeure, "neither [Seller] was able to procure power. ERCOT's credit requirements for such purchases, combined with ERCOT's decision to raise the price to $9,000/MWh, made this impossible" (Amended Answer at ¶ 150, NYSCEF Doc. No. 105). For the reasons already discussed, this cannot excuse the Sellers' failure to perform.
That said, as the Sellers point out in their opposition papers, "one potentially critical issue is whether the nonperforming party even could have delivered during the time period in which it was claiming force majeure" (Mem of Law in Opp at 9-10, NYSCEF Doc. No. 150). Along these lines, the Buyer alleged in its complaint that the energy needed was available to be scheduled and delivered at the delivery points on the terms required by the hedge agreements during the period of February 13 through 19, 2021 (Complaint at ¶ ¶ 67-69, NYSCEF Doc. No. 001). In their amended answer, the Sellers deny these allegations (Amended Answer at ¶ ¶ 67-69, NYSCEF Doc. No. 105). The Buyer submitted no evidence demonstrating that it was possible for the Sellers to schedule and deliver the energy to the delivery points set forth in the hedge agreements during the force majeure period.
It is ultimately the Sellers' burden to demonstrate force majeure (see Phillips Puerto Rico Core, Inc. v Tradax Petroleum, Ltd., 782 F.2d 314, 319 [2d Cir 1985]). But, on the Buyer's motion for summary judgment, the Buyer has the initial burden of eliminating questions of fact and its motion must be supported by an affidavit showing "that there is no defense to the cause of action or that the... defense has no merit" (CPLR 3212 [b]; see also Belgium v Mateo Prods., Inc., 138 A.D.3d 479, 480 [1st Dept 2016]). Here, this burden includes demonstrating, as a matter of law, that scheduling and delivering the energy at the delivery points on the terms required by the hedge agreements during the period of February 13 through 19, 2021 was, in fact, possible.
Goldstein's affidavit establishes that purchasing the supply needed to satisfy the Sellers' obligations under the hedge agreements was financially unfeasible for the Sellers and that their decision not to fulfill their obligations rested on financial considerations. However, Goldstein's affidavit does not establish, in and of itself, that it was possible under the circumstance for the Sellers to schedule and deliver energy in accordance with their obligations - a question put in issue by the pleadings (see generally Pierrelouis v Kuten, 207 A.D.3d 485, 487 [2d Dept 2022]["CPLR 3212 (b) requires the proponent of a motion for summary judgment to demonstrate the absence of genuine issues of material fact on every relevant issue raised by the pleadings, including any affirmative defenses"][quotation marks and citation omitted]; Aimatop Rest. v Liberty Mut. Fire Ins. Co., 74 A.D.2d 516, 516 [1st Dept 1980][CPLR 3212 (b) "requires movant to demonstrate the absence of genuine issues of material fact on every relevant issue raised by the pleadings, including any affirmative defenses"]).
The motion at bar is distinguishable from Stephens Ranch because in that case, the sellers were moving for a preliminary injunction. In that procedural posture, the burden was on the sellers to demonstrate, inter alia, "a likelihood of success on the merits" "by clear and convincing evidence" (Uber Tech., Inc. v American Arbitration Assn., Inc., 204 A.D.3d 506, 508 [1st Dept 2022]). On this motion, the burden is on the buyer to make a prima facie case. Also, in Stephens Ranch, the buyer submitted proof that it procured the replacement energy in the amount promised from the same hub where the sellers were obligated to deliver under the parties' agreement (see Tr at 22, 43, 44-47, NYSCEF Doc. No. 94]). In other words, some evidence existed showing that the seller's performance, despite being financially impracticable, was possible. That is not the case here. Here, the papers submitted in support of the motion do not establish that it was possible, in the first instance, for the Sellers to schedule and deliver the energy pursuant to the terms of the hedge agreements. Although the burden on this issue will ultimately rest with the Sellers, it is the Buyer's burden on this motion to demonstrate the absence of genuine issues of material fact (see generally Pierrelouis v Kuten, 207 A.D.3d at 487; Aimatop Rest. v Liberty Mut. Fire Ins. Co., 74 A.D.2d at 516).
Thus, the Buyer's motion is denied regardless of the sufficiency of the Sellers' opposing papers (see Winegrad v New York Univ. Med. Ctr., 64 N.Y.2d 851, 853 [1985]).
For the foregoing reasons, it is hereby
ORDERED that the motion by plaintiff J.P. Morgan Ventures Energy Corporation for summary judgment in its favor on the complaint and dismissing defendants' counterclaims is denied.
This constitutes the decision, order, and judgment of the Court.