In re Ultra Petroleum Corp. – Fifth Circuit: Debtors May Reject FERC-Approved Gas Transportation Agreements

1. A debtor may reject a filed rate contract without the Federal Energy Regulatory Commission’s (“FERC”) approval, despite the fact that such a filed rate contract is subject to FERC’s jurisdiction because a rejection in bankruptcy is not a modification or alteration of such filed rate;
2. Consistent with Mirant, the rejection may be enforced through a narrow injunction issued by the bankruptcy court against FERC’s enforcement of the filed rate contract;
3. The result of the rejection of the filed rate contract is a breach of such contract and an ordinary, general unsecured claim.

This decision highlights the authority of bankruptcy courts to impact other federal interests for the benefit of the estate and its creditors in the absence of clear statutory direction in the Bankruptcy Code itself.

Background

In 2008, Ultra Resources, Inc. (“Ultra”) contracted with Rockies Express Pipeline LLC (“REX”) to transport natural gas from Ultra’s oil fields in Wyoming to Ohio.³ Ultra’s original contract, in part, justified REX’s economic investment in the pipeline.⁴ In 2016, Ultra filed its first chapter 11 bankruptcy case and settled a breach of contract dispute related to its obligations with REX pursuant to its plan of reorganization.⁵

In 2017, Ultra and REX executed a second Transportation Service Agreement and Firm Transportation Negotiated Rate Agreement (the “Firm Rate Contract”), which required that Ultra pay a reservation fee of approximately $169 million over the life of the contract for its capacity on REX’s pipeline, regardless of whether or not it was utilized.⁶ The rates established under the Firm Rate Contract were a “filed rate,” subject to FERC’s exclusive jurisdiction under the Natural Gas Act.⁷

In 2020, Ultra filed a second chapter 11 bankruptcy case, where it sought to reject the Firm Rate Contract pursuant to section 365 of the Bankruptcy Code.⁸ FERC opposed Ultra’s proposed rejection on the grounds that rejection constituted a de facto abrogation of the filed rate, which fell within FERC’s sole jurisdiction.⁹

Judge Marvin Isgur of the United States Bankruptcy Court for the Southern District of Texas held that the Fifth Circuit’s Mirant decision was controlling precedent, requiring that the bankruptcy court consider the impact on public interest from Ultra’s proposed rejection of the Firm Rate Contract. Although Judge Isgur invited FERC to participate in the bankruptcy case to weigh in on the public interest issue, he held that FERC’s consent was not needed to permit the contract rejection and that FERC would be bound by the bankruptcy court’s decision.¹⁰ After conducting an evidentiary trial, Judge Isgur concluded that Ultra’s proposed rejection of the Firm Rate Contract did not negatively implicate the public interest because it had no discernible impact on natural gas customers served by REX’s pipeline, nor on the supply of natural gas.¹¹ As a result, the bankruptcy court authorized Ultra’s proposed rejection of the Firm Rate Contract.¹²

FERC appealed the bankruptcy court’s ruling, and the United States District Court for the Southern District of Texas granted Ultra’s motion for direct appeal to the Fifth Circuit Court of Appeals.¹³

Fifth Circuit’s Opinion

The Fifth Circuit Panel noted that the “question concerns a clash of two congressionally constructed titans, FERC and the bankruptcy courts.”¹⁴ The Natural Gas Act grants FERC exclusive jurisdiction to ensure natural gas rates are “just and reasonable” and empowers FERC with authority to regulate private contracts for the public’s benefit.¹⁵ However, a debtor’s power, subject to bankruptcy court approval, to reject executory contracts is a powerful tool of the Bankruptcy Code, that often allows a debtor to reject burdensome contracts and treat the resulting breach as a general unsecured claim, which, as the United States Supreme Court recently noted, “may receive only cents on the dollar.”¹⁶

The Fifth Circuit Panel observed that “this is not the first time these two titans have clashed. Instead, today’s battlefield lies in the shadow of our precedent in In re Mirant Corp.”¹⁷ Mirant involved a debtor’s proposed rejection of an electricity-purchase agreement, which included filed rates pursuant to the Federal Power Act that only FERC could modify.¹⁸ The Natural Gas Act and the Federal Power Act both apply the filed rate doctrine. The bankruptcy court in Mirant authorized the rejection of the electricity purchase agreement and enjoined FERC from taking any action to enforce all electric contracts with the debtor.¹⁹

On appeal, the Fifth Circuit Court of Appeals in Mirant (the “Mirant Court”) concluded that the rejection of a filed rate contract was merely a breach of contract rather than a challenge to FERC’s exclusive jurisdiction to change the rate of the contract.²⁰ Thus, the Mirant Court held that no tension existed between the Bankruptcy Code and Federal Power Act because “[the] rate is given full effect when determining the breach of contract damages resulting from the rejection.”²¹ However, the Mirant Court also required that bankruptcy courts consider the consequences of any rejection of a FERC regulated contract on the public interest or any disruption to energy supply against the benefit to the debtor of rejecting such contract.²²

The Fifth Circuit Panel in Ultra Petroleum upheld the bankruptcy court’s decision and determined that the bankruptcy court satisfied Mirant’s requirements by inviting FERC to participate in the bankruptcy process and expressly considering the impact on public interest from Ultra’s rejection of the Firm Rate Contract.²³ In addition, the Fifth Circuit Panel noted that where Congress intended there to be limits on rejection of specific types of contracts, the statutory exceptions are clear.²⁴ Also, in rejecting FERC’s arguments to distinguish Mirant, the Fifth Circuit Panel (i) dismissed FERC’s assertions that certain language in Mirant that would enjoin FERC after plan confirmation was dicta;²⁵ (ii) clarified that the prohibition in section 1129(a)(6) of the Bankruptcy Code requiring FERC approval of “rate changes” under a chapter 11 plan did not apply;²⁶ and (iii) ruled that the bankruptcy court’s determination of the public interest did not require a full hearing before FERC, but rather was satisfied by a hearing with FERC’s participation.²⁷

Key Takeaways

In Ultra Petroleum, the Fifth Circuit Panel settled the jurisdictional dispute FERC raised in other chapter 11 cases, ruling that rejection of a filed rate contract under the Bankruptcy Code did not modify or abrogate the FERC-regulated rate and thus FERC’s jurisdiction was not implicated. This decision is consistent with the Sixth Circuit’s decision in FirstEnergy Solutions Corp.²⁸ Further, the Fifth Circuit Panel emphasized that Mirant remains binding precedent and requires that a bankruptcy court faced with a proposed rejection of a FERC-regulated contract allow FERC to participate and weigh the benefits of rejection against the impact of rejection on the public interest.²⁹ Finally, the Fifth Circuit Panel has spoken strongly regarding the importance of a debtor’s ability to reject executory contracts, and its general aversion to limit that power absent clear limitations in the Bankruptcy Code itself.³⁰ This ruling is likely to embolden potential debtors considering utilizing an in-court restructuring process to, among other things, reject FERC-regulated agreements.

¹ Federal Energy Regulatory Commission v. Ultra Resources, Inc. (In re Ultra Petroleum Corp.), No. 20-20623 (5th Cir. Mar. 14, 2020).

² See In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004).

³ See Rockies Express Pipeline LLC v. Ultra Resources, Inc. (In re Ultra Petroleum Corp.), 621 B.R. 188, 192 (Bankr. S.D. Tex. 2020).

⁴ Id. 

⁵ Id. at 193.

⁶ Id. at 194.

⁷ 15 U.S.C. § 717c(a); see also Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 300–01 (1988).

⁸ In re Ultra Petroleum Corp., 621 B.R. at 194–95.

⁹ Id. at 204.

¹⁰ Id. at 200. 

¹¹ Id. at 201–02. 

¹² Id. at 205.

¹³ See Rockies Express Pipeline LLC v. Ultra Resources, Inc., Case No. 4:20-CV-2306 (S.D. Tex. Dec. 10, 2020). 

¹⁴ Federal Energy Regulatory Commission v. Ultra Resources, Inc. (In re Ultra Petroleum Corp.), No. 20-20623, at *4–6 (5th Cir. Mar. 14, 2020).

¹⁵ Id. at *5.

¹⁶ Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652, 1658 (2019).

¹⁷ In re Mirant Corp., 378 F.3d at 514.

¹⁸ In re Ultra Petroleum Corp., No. 20-20623, at *6. 

¹⁹ Id. at *6–7. 

²⁰ Id. at *9 (citing In re Mirant Corp., 378 F.3d at 522). 

²¹ Id. at *9. 

²² Id. at *9–10 (citing In re Mirant Corp., 378 F.3d at 525) (“[I]n ruling on a rejection motion, bankruptcy courts must consider whether rejection harms the public interest or disrupts the supply of energy, and must weigh those effects against the contract’s burden on the bankrupt estate.”).

²³ Id. at *15.

²⁴ Id. at *7–8 (referring to statutory limitations on the rejection of collective bargaining agreements under section 1113 of the Bankruptcy Code).

²⁵ Id. at *10.

²⁶ Id. at *18.

²⁷ Id. at *10.

²⁸ See In re FirstEnergy Solutions Corp., 945 F.3d 431 (6th Cir. 2019).

²⁹ In re Ultra Petroleum Corp., No. 20-20623, at *17.

³⁰ Id. at 7–8.