Fifth Circuit doubles down on right to reject filed-rate contracts, but with an exception

The Fifth Circuit recently issued an opinion, Federal Energy Regulatory Commission v. Ultra Resources, Inc., in which it relied on and affirmed its prior 2004 decision — In re Mirant — and held that bankruptcy courts have the authority — at least in many common contexts — to reject filed-rate contracts without the approval of the Federal Energy Regulatory Commission (FERC), and a bankruptcy plan that rejects such contracts is not in violation of 11 U.S.C. §1129(a)(6) because rejection does not effectuate a modification of the filed-rate. This opinion further empowers debtors to reject filed-rate contracts in bankruptcy cases, so long as rejection does not amount to a rate change.

However, the Fifth Circuit also pronounced that where the purpose of rejection is to avoid paying an above market rate pursuant to a contract in circumstances where the capacity provided by the contract is actually needed, such rejection would constitute a prohibited collateral attack on a filed-rate. The Fifth Circuit suggested, in reference to the Mirant decision, that where the purpose for rejection is both to avoid a high contract rate and to shed unneeded capacity, such rejection could be permissible. What may remain to be determined in the future is where the line that separates permissible capacity reduction from impermissible rate reduction will fall.

Ultra Resources, Inc. (Ultra), an energy company whose primary business was oil and gas production, filed for bankruptcy protection in the Bankruptcy Court for the Southern District of Texas in 2020. Before its bankruptcy, Ultra had contracted with Rockies Express Pipeline LLC (REX) to reserve space on REX’s pipeline for transportation of its natural gas. Such contracts are subject to regulation by FERC, and FERC must approve the rate charged including the rate charged for the use of capacity on the pipeline. Once approved by FERC, the rate becomes a “filed-rate” that, in effect, is akin to a federal statute that cannot be modified absent approval by FERC. During its bankruptcy, Ultra sought permission from the bankruptcy court to reject the filed-rate contract, to which REX objected. REX requested the bankruptcy court refrain from rejecting the contract until FERC could hear the issue and decide whether rejection of the contract was in the public’s interest. REX argued that since the contract was a filed-rate contract, FERC had the exclusive authority to decide whether Ultra could reject its contract with REX, as only FERC has jurisdiction to approve modifications to filed-rate contracts.
 

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Authored by Ronald Silverman, John Beck, and Katherine Lynn.

Contacts
Ronald Silverman
Partner
New York
John Beck
Partner
New York
Katherine Lynn
Associate
New York

 

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