Nevertheless, FERC Persisted

When U.S. Sen Elizabeth Warren continued to speak at the confirmation hearing for AG Jeff Sessions after being cautioned by Majority Leader Mitch McConnell, it gave rise to the feminist slogan, "Nevertheless, she persisted." A new opinion from the Fifth Circuit adapts that slogan to the Federal Energy Regulatory Commission's attempts to prevent debtors from rejecting regulatory energy contracts. Judge Jerry Smith's opinion in Case No. 21-60017, Gulfport Energy Corporation v. Federal Energy Regulatory Commission (5th Cir. 7/19/22) points out that the Fifth Circuit and others have held that debtors "may 'reject' regulated energy contracts even if (FERC) would not like them to." Noting that FERC continued to press the issue, Judge Smith noted that "Nevertheless, FERC persisted." While many believe that Sen. Warren got the better of Majority Leader McConnell in their exchange, the Bankruptcy Code came out on top in the Fifth Circuit's new decision.

Judge Smith ably summed up the issue in the case:

The parties dispute how two legal regimes—the Bankruptcy Code and the Natural Gas Act—interact. But their dispute is narrow. The question is how a bankrupt debtor’s power to reject executory contracts interacts with FERC’s power to decide whether a party may change or cancel filed-rate contracts, which the agency regulates. To answer that question, we must review what rejection does and then explain how it relates to the Natural Gas Act.

Opinion, p. 2.  Skipping ahead to the end, the Natural Gas Act gives FERC the power to decide whether to "change or cancel filed-rate contracts."  Rejection, on the other hand, allows the debtor to breach an executory contract and excuses future performance. Those are different things and they don't conflict.

What Does Rejection Mean?

The opinion has a good explanation of what rejection means. 

The Bankruptcy Code empowers debtors, “subject to the court’s approval,” to “assume or reject any executory contract.” 11 U.S.C. § 365(a). That means that a debtor may choose either to perform (assume) or “breach” (reject), § 365(g), any contract “that neither party has finished performing,” That tool might seem unhelpful. Breaching a contract does not erase that contract; it entitles the contract’s counterparty to seek damages for the debtor’s nonperformance. But here’s the rub: Most debtors are broke and cannot pay in full that damages claim. So “in a typical bankruptcy,” the counterparty to a rejected contract “may receive only cents on the dollar” for its claim against the debtor, yet the debtor will retain the benefit of having ceased performance. Ibid. In that way, “rejection can release the debtor’s estate from burdensome obligations that can impede a successful reorganization.” 

Opinion, pp. 2-3. 

Under the Natural Gas Act, FERC has the right to approve or reject changes to filed-rate contracts. Rejecting a contract does not terminate or cancel the contract. Therefore, rejection does not conflict with the Natural Gas Act. As explained by the Court:

Rejection does not change or cancel a contract; it breaches that contract, giving the debtor’s counterparty a damages claim for the value of the debtor’s continued performance. The contract itself does not change; nor does the filed rate. No change is wrought where the counterparty’s claim for damages is “calculated using the filed rate,” even if the debtor cannot pay that claim in full.

Opinion, pp. 3-4. The opinion goes on for another 23 pages. However, the excerpts above contain the important lessons about what it means to reject a contract. 

Nevertheless, FERC Persisted

What should we make of the Court's Elizabeth Warren reference?  On the one hand, it's kind of clever. It takes a phrase from public discourse and adapts it to a dull bankruptcy issue. Because of my politics, I think that Sen. Warren was well-justified in persisting and the purchasers of many tshirts and bumper stickers seem to agree. Judge Smith is definitely trying to send a message to FERC to stay in its lane and not interfere with bankruptcy jurisdiction, which I appreciate as a bankruptcy practitioner. Finally, given that Elizabeth Warren is a bankruptcy expert, inserting a Warren reference into a bankruptcy opinion is even more clever. 

The bottom line is that this case will be useful to practitioners needing to explain what rejection means. We have progressed so far from the days when it was assumed that rejection vaporized the contract.