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In re Enron Corporation

United States District Court, S.D. New York
Apr 2, 2004
Case No. 01-16034 (AJG) Jointly Administered, 03 Civ. 5584 (BSJ) (S.D.N.Y. Apr. 2, 2004)

Opinion

Case No. 01-16034 (AJG) Jointly Administered, 03 Civ. 5584 (BSJ)

April 2, 2004


OPINION


Appellant, the Connecticut Resources Recovery Authority ([FNW] CRRA"), appeals from a decision of the Bankruptcy Court dismissing Appellant's Complaint and denying Appellant's request to amend its Complaint. For the reasons set forth below, the Bankruptcy Court's decision is AFFIRMED in its entirety.

BACKGROUND

Appellant is a non-profit, quasi-public, Connecticut state agency, which manages the infrastructure for the disposal of municipal solid waste in the state of Connecticut. In 1985, CRRA entered into an agreement with Connecticut Light Power ("CLP") — the details of which are unnecessary to recount here — under which CLP was obligated to purchase steam from CRRA at the above market rate of 8.5C per kilowatt-hour ("kWh"). In 1998, CLP began negotiations with CRRA to inter alia "buy-down" their above market contracts. These negotiations resulted in a tentative agreement pursuant to which CLP agreed to pay CRRA a lump sum of approximately $290 million in order to buy-down the 8.5C kWh rate. The lump sum appears to have been further negotiated to approximately $280 million. Of the $280 million, $60 million was used to purchase some property and perform environmental work.

In an attempt to earn an adequate return on the remaining $220 million lump sum payment to replace its previous stream of income from CLP, CRRA entered into negotiations with Enron Power Marketing, Inc. ("EPMI"), an entity affiliated with Enron Corp. ("Enron" and collectively "Debtors" or "Appellees") to create an investment strategy that would not run afoul of statutory investment prescriptions to which CRRA was subject. This investment strategy and the resulting series of agreements that were entered into by CRRA, CLP, and EPMI during the year 2000 ("the 2000 Agreements") can be described as follows.

CRRA agreed to release CLP from its 8.5C kWh contract through the implementation of a series of contracts whereby CRRA agreed to sell power to EPMI, and EPMI agreed to sell power to CLP. lender these agreements, CLP paid $220 million to EPMI in exchange for power over a twelve-year period, at the reduced price of 3.0* — 3.3C kWh of electricity. EPMI agreed to make payments to CRRA over the course of twelve years, in twice-monthly installments totaling approximately $ 2.375 million each month.

CRRA alleges that although EPMI was brought into the negotiations as an ostensible third-party to the restructuring transactions, in reality, EPMI served as nothing more than an investment vehicle for CRRA. According to CRRA, EPMI's role was to accept $220 million of the eventual $280 million buy-down payment from CLP to CRRA, and then pay that money back to CRRA in installments over a 12-year period, at the rate of $2.375 million a month. CRRA alleges that while the appearance was that of a legitimate energy transaction, this arrangement was in substance a $220 million loan to EPMI at an interest rate of 7% per annum to be repaid in full over 12 years. CRRA was prohibited by statute from making such a loan.

Eventually, Debtors became insolvent and EPMI stopped making the twice-monthly installments to CRRA. CRRA filed a complaint against Debtors, seeking to impose a constructive trust on the $220 million paid by CLP to EPMI on the theory that the agreements entered into with EPMI violated relevant Connecticut statutes restricting CRRA's investment opportunities and were thus voidab initio and a nullity. The Bankruptcy Court dismissed the Complaint in a Memorandum Decision dated March 27, 2003 on the grounds that (a) if the 2000 Agreements were void ab initio, they could not form the basis for CRRA's claim that it was the owner of the money transferred by CLP to EPMI; and (2) CRRA could not establish that there was a resulting trust. See Conn. Res. Recovery Auth. v. Enron Corp. (in Re Enron Corp.), 2003 Bankr. LEXIS 238 (Bankr. S.D.N.Y. Mar. 27, 2003).

During oral argument before this Court, as well as in its brief on appeal, CRRA clarified that it is not seeking a resulting trust. Therefore, this Court will not address the Bankruptcy Court's holding on this issue.

CRRA subsequently filed a motion before the Bankruptcy Court seeking reargument and reconsideration of the Bankruptcy's decision dismissing the Complaint. CRRA contended that the Bankruptcy Court erred by construing the 2000 Agreements as an integrated transaction rather than two separate and distinct transactions: a buy-down between CRRA and CLP and a disguised loan transaction between CRRA and EPMI. CRRA also sought leave to amend its Complaint. In an Order dated June 23, 2003, the Bankruptcy Court denied the motion. This appeal followed.

DISCUSSION

When determining the sufficiency of a plaintiff's complaint, a court "must accept as true all of the factual allegations set out in plaintiff's complaint, draw inferences from those allegations in the light most favorable to plaintiff, and construe the complaint liberally."Gregory v. Daly, 243 F.3d 687, 691 (2d Cir. 2001) (citations omitted). The Court reviews the Bankruptcy Court's dismissal of the Complaint de novo because the decision turns on solely legal determinations. See Miller v. Worloff Abramson, L.L.P., 321 F.3d 292, 300 (2d Cir. 2003); Raine v. Lorimar Productions, Inc., 71 B.R. 450, 452 (S.D.N.Y. 1987).

On appeal, CRRA reiterates the argument made in its motion for reconsideration — that is, the Agreements consisted of two distinct transactions: (1) a legitimate buy-down transaction, and (2) an illegalultra vires loan from CRRA to Enron "which was voidab initio." (Appellant's Br. at 9). The Bankruptcy Court rejected this argument, stating that as a matter of law, the Agreements must be interpreted as an integrated transaction. This Court agrees.

Regardless of whether CRRA and CLP reached a prior a agreement as to certain terms of the transaction as a result of the buy-down negotiations prior to negotiations with EPMI, the prior agreement was clearly superceded and integrated into the final 2000 Agreements. Indeed, basic principles of contract law dictate that oral and other agreements made prior to a final agreement are merged with, and superceded by, the terms of the final agreement. Moreover, it is clear from the face of the 2000 Agreements that the parties intended them to supercede all prior agreements. In fact, the Mid-Connecticut Project Termination, Assignment and Assumption Agreement ("MCPTA") explicitly states that the 2000 Agreements "set forth the entire agreement between the Parties,including the Memorandum of Understanding." (MCPTA § 21.2) (emphasis added). Because, as a matter of law, the agreements between the parties must be interpreted as an integrated transaction, the Bankruptcy Court was correct in concluding that "there would be no purpose in permitting CRRA to amend its Complaint to allege that the agreements were separate and distinct."

The MCPTA is the umbrella agreement that sets forth all aspects of the 2000 Agreements, including the transfer and payment of money among the parties. It was signed by CRRA, CLP, and EPMI. (Appellees' Br. at 10).

Just as CRRA may not rely on the terms of agreements i entered into prior to the 2000 Agreements, it likewise may not rely on certain parts of the 2000 Agreements, as if the final transaction consisted of two separate and severable transactions, to establish its entitlement to the funds transferred from CLP to EPMI. Connecticut law requires the Court to construe the various parts of the 2000 Agreement as an integrated whole. See, e.g., Orange Improvements Partnership v. Cardo, Inc., 984 F. Supp. 85, 92 (D. Conn. 1997) (holding that where parties execute multiple writings concerning the same subject matter, contracts are viewed as a whole and interpreted together). Contrary to CRRA's contention, interpreting the 2000 Agreements as an integrated whole does not elevate form over substance. Aside from the fact that all the documents were executed by the parties on the same day and that they cross-reference each other, CRRA admits in its Complaint that it was after "extensive negotiations" with Enron during 2000 that "induced CRRA" to release CLP from its obligation to pay CRRA directly. (Complaint ¶ 16)

CRRA points to a paragraph in one of the agreements that indicates that, in the event a provision in the 2000 Agreements is found to be illegal or invalid, the rest of the provisions should not be impaired. However, this provision does not save Appellant's argument, as the ruling by the Bankruptcy Court — which has been reviewed and affirmed by this Court — invalidates the entire agreement. Because CRRA did not have the authority to enter into the transaction, and because the transaction was integrated as a matter of law, the entire 2000 Agreements — rather than a mere provision — has been invalidated and therefore none of the 2000 Agreement may stand.

Because the integrated 2000 Agreements is void ab initio, any rights arising from these agreements are unenforceable. CRRA can not — without relying on the void 2000 Agreements — establish that it is the holder of the equitable title to the funds transfered by CLP to EPMI, or that it has a property interest in these funds sufficient to impose a constructive trust over Debtors.

[A] constructive trust arises . . . against one, who by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or questionable means, or who in any way against equity and good conscience, either has obtained or holds legal title to property which he ought not, in equity and good conscience, hold and enjoy.
In re Carrozzella Richardson, 278 B.R. 691, 696 (Bankr. D.Conn. 2001) (quoting Zack v. Guzauskas, 368 A.2d 193 (Conn. 1976)). In addition to proving fraud or other unconscionable conduct, a claimant "must trace his own property into a product in the hands of the wrongdoer" in order to have constructive trust imposed in his favor. See United States v. Peoples Benefit Life Ins. Co., 271 F.3d 411, 416 n. 4 (2d Cir. 2001) (emphasis added) (citations omitted); see also In re Carrozzella Richardson, 247 B.R. 595, 600-01 (B.A.P.2d Cir. 2000) (stating that, pursuant to Connecticut law, "an alleged beneficiary of a trust must tracehis property to a particular trust res") (emphasis added).

At oral argument before this Court, Appellant argued that the money paid by CLP to EPMI belonged to CRRA, and thus it was entitled to impose a constructive trust. In making this argument, Appellant analogized CLP co. a bank paying CRRA's money to EPMI. (See Tr. at 11). However, Judge Gonzales properly rejected this argument in denying CRRA's motion for reconsideration.

As the funds were CLP's funds prior to the transfer to EPMI, CRRA could not trace its own funds to EPMI, which is a necessary prerequisite for imposing a constructive trust. The most that CRRA alleges is that CLP owed those funds to CRRA. There is no allegation that CRRA had custody or ownership of the funds, nor was CLP holding the funds in constructive trust for CRRA. Under the separate `understanding' scenario, CLP and CRRA had a debtor-creditor relationship. Thus, it was CLP's. funds that were transferred to EPMI. . . [B]ecause CLP's funds were transferred to EPMI, CLP would be the [proper] party to attempt to raise a constructive trust theory.

The Bankruptcy Court was entirely correct.

As the Bankruptcy Court explained, to the extent Appellant "is attempting to establish that when CLP transferred its funds to EPMI, it was intended for the benefit of CRRA, CRRA is actually seeking to establish a resulting trust." As Appellant has indicated that it is not seeking a resulting trust, the Bankruptcy Court properly dismissed the Complaint.

Because CRRA can not establish that it had custody or ownership of the $220 million paid by CLP to EPMI, CRRA is not entitled to impose a constructive trust over Debtors, and the Bankruptcy Court properly dismissed Appellant's Complaint.

CONCLUSION

For the foregoing reasons, the decision of the Bankruptcy Court is affirmed. The Clerk of the Court is directed to close this case.

SO ORDERED.


Summaries of

In re Enron Corporation

United States District Court, S.D. New York
Apr 2, 2004
Case No. 01-16034 (AJG) Jointly Administered, 03 Civ. 5584 (BSJ) (S.D.N.Y. Apr. 2, 2004)
Case details for

In re Enron Corporation

Case Details

Full title:In re ENRON CORP., et al., Debtors, Chapter 11,; THE CONNECTICUT RESOURCES…

Court:United States District Court, S.D. New York

Date published: Apr 2, 2004

Citations

Case No. 01-16034 (AJG) Jointly Administered, 03 Civ. 5584 (BSJ) (S.D.N.Y. Apr. 2, 2004)

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