Sixth Circuit Holds that Bankruptcy Courts Must Permit FERC Participation in Bankruptcy Proceedings Considering Rejection of FERC-Jurisdictional Contracts

On December 12, 2019, the United States Court of Appeals for the Sixth Circuit (“Sixth Circuit”) issued an opinion affirming in part and reversing in part a bankruptcy court’s assertion of exclusive and unlimited jurisdiction over certain of FirstEnergy Solutions’ (“FES”) power purchase agreements that FERC had previously approved under the Federal Power Act (“FPA”) and that FES sought to reject in bankruptcy. While the Sixth Circuit agreed that the bankruptcy court has jurisdiction to decide whether FES may reject the contracts, it rejected the bankruptcy court’s decision to enjoin FERC from taking any action relating to the contracts, and permitting FES to reject the contracts. Characterizing the bankruptcy court’s decision as “a rash and unnecessary overreach,” the Sixth Circuit held that the injunction issued against FERC was overly broad, and the bankruptcy court’s standard for deciding whether to permit FES to reject the contracts too limited. The Sixth Circuit also rejected the bankruptcy court’s sole application of the business judgment rule to decide whether to permit FES to reject the contracts at issue. Rather, the Sixth Circuit held that the court should have also taken public interest considerations into account, and should have invited FERC to participate and provide an opinion in accordance with the FPA. Judge Richard Allen Griffin penned separate opinion dissenting in part, in which he concluded that the bankruptcy court exceeded its jurisdiction and infringed on FERC’s exclusive jurisdiction to decide whether to modify or abrogate a filed rate.

The proceeding began when FES filed for Chapter 11 bankruptcy and filed an adversary complaint against FERC seeking a declaratory judgment that the bankruptcy court’s jurisdiction is superior to FERC’s, and injunctions prohibiting FERC from interfering with its intent to reject certain power purchase agreements which FERC had previously approved. The bankruptcy court agreed that it had exclusive and unlimited jurisdiction to decide whether FES could reject the contracts at issue, and enjoined FERC from: (1) initiating or continuing any proceeding; (2) issuing any order to require FES to continue performing under the contracts or limiting its ability to seek abrogation of the contracts under the FPA; and (3) from interfering with the bankruptcy court’s exclusive jurisdiction over the contracts at issue. The bankruptcy court also held that FES could reject the contracts under the business judgment rule, which allows a debtor to reject any executory contract that is financially burdensome to the debtor’s estate such that it would inhibit the debtor’s Chapter 11 reorganization. FERC, and several other interested parties including counter parties to the rejected contracts, appealed.

On appeal, the Sixth Circuit acknowledged the tension between FERC’s exclusive jurisdiction over “filed rate contracts” and the availability of bankruptcy relief, but ultimately held that the power purchase agreements at issue were susceptible to rejection in bankruptcy because the public necessity of available and functional bankruptcy relief is generally superior to FERC’s need to have complete or exclusive authority to regulate energy contracts and markets. However, the Sixth Circuit rejected the bankruptcy court’s broad injunction that prevented FERC from taking any action on the FES contracts at issue. The Sixth Circuit determined that although FERC’s anticipated action of ordering contract performance could be subject to an automatic stay under the Bankruptcy Code and Sixth Circuit precedent, the bankruptcy court was not entitled to enjoin FERC from conducting its business otherwise mandated by regulation, from issuing orders that would not conflict with the bankruptcy court’s rulings, or from conducting its own proceedings over matters which it believed itself to have jurisdiction, subject to the bankruptcy court’s later jurisdictional determination. The Sixth Circuit emphasized that the Bankruptcy Code did not permit the bankruptcy court to enjoin all of FERC’s regulatory functions with respect to the contracts at issue.

The Sixth Circuit went on to reject the bankruptcy court’s assertion of exclusive jurisdiction, determining instead that the bankruptcy court and FERC have concurrent jurisdiction over the contracts, but that the bankruptcy court’s position in the concurrent jurisdiction is superior to FERC’s position. Finally, the Sixth Circuit rejected the bankruptcy court’s exclusive application of the business judgment rule to decide whether to permit FES to reject the contracts at issue, concluding that in order to accommodate the concurrent jurisdiction between, and the separate interests of, the Bankruptcy Code and the FPA, the bankruptcy court must also consider the public interest and ensure that “the equities balance in favor of rejecting the contract” when deciding whether to grant permission to reject a filed energy contract that is otherwise governed by FERC via the FPA. The Sixth Circuit also held that bankruptcy courts must invite FERC to participate and provide an opinion in accordance with the FPA.

The Sixth Circuit remanded the case to the bankruptcy court, and required the court to consider the impact of the rejection of these contracts on the public interest—including the consequential impact on consumers and any tangential contract provisions concerning decommissioning, environmental management and future pension obligations—to ensure that the equities balance in favor of rejecting the contracts.

In a separate opinion, Judge Griffin concurred with the majority that the bankruptcy court erred by using the business judgement rule in evaluating the motions to reject the power purchase agreements, and agreed that the court’s injunction was overbroad. However, Judge Griffin dissented on how the majority resolved the jurisdictional tension between the FPA and Bankruptcy Code. Judge Griffin held that the decision whether to reject the power purchase agreements lies solely with the bankruptcy court, while the decision whether to abrogate or modify filed rates lies solely with FERC. Thus, Judge Griffin concluded that the bankruptcy court infringed on FERC’s exclusive jurisdiction to consider whether to modify or abrogate the filed rates, and the majority’s opinion ignored the fact that FERC enforces a power company’s obligations under its statutory authority under the FPA, rather than private contract law. Judge Griffin held that these jurisdictional limitations set out a “clear path” for Chapter 11 debtors similarly situated to FES: file a motion in the bankruptcy court to reject the executory contract, and separately petition FERC for relief from its filed-rate obligations.

The Sixth Circuit’s decision is available here.