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IN RE ENRON POWER MARKETING

January 8, 2003

IN RE: ENRON POWER MARKETING, INC., DEBTOR. ENRON POWER MARKETING, INC., PLAINTIFF,
v.
CITY OF SANTA CLARA, A CHARTERED CALIFORNIA MUNICIPAL CORPORATION D/B/A/ SILICON VALLEY POWER, DEFENDANT.



The opinion of the court was delivered by: Harold Baer, Jr., United States District Judge

OPINION & ORDER

The City of Santa Clara d/b/a/ Silicon Valley Power ("defendant" or "the City") moves both (1) to withdraw the reference of this adversary proceeding ("proceeding"), brought by Enron Power Marketing, Inc. ("plaintiff" or "Enron") in the Bankruptcy Court for the Southern District of New York, pursuant to 28 U.S.C. § 157(d); and (2) upon such withdrawal, to refer certain issues to the Federal Energy Regulatory Commission ("the FERC") for determination under the doctrine of primary jurisdiction. For reasons detailed more fully below, defendant's motion to withdraw the reference is denied, and I decline to exercise jurisdiction over defendant's motion to refer certain issues to the FERC.

PROCEDURAL BACKGROUND

On July 22, 2002, plaintiff commenced this action in the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court") to recover post-petition debts owed by the City under a pre-petition agreement and subsequent individual agreements that were entered into for the purchase and sale of electrical power. Specifically, the Complaint alleges that the City breached the clear terms of the agreement by (1) failing to post margin as required under the agreement; (2) failing to pay plaintiff for power supplied by plaintiff to the City; (3) improperly suspending performance under the agreement; and (4) failing to pay plaintiff immediately an early termination payment in the amount of $146,261,529.50 due as a result of plaintiffs early termination of the agreement. The second, third, and fourth breaches occurred after plaintiff filed its petition for relief in Bankruptcy Court on December 2, 2001. The City moves to withdraw the reference to the Bankruptcy Court claiming that, in concert with 28 U.S.C. § 157(d), this Court, pursuant to the Federal Power Act ("FPA"), must forward the matter to the FERC. Alternatively, the City contends that the reference should be withdrawn because the adversary proceeding, according to defendant, is not a "core" proceeding and because the defendant is entitled to a jury trial as it would be in any other breach of contract action — something which the Bankruptcy Court cannot do in the absence of both parties' consent, which is not present here. Finally, the City urges the Court to refer certain issues to the FERC for resolution under the doctrine of primary jurisdiction.

FACTUAL BACKGROUND

On September 10, 1999, the parties entered into the agreement, under which they entered into a number of transactions to buy or sell electric power at a fixed price for a fixed time period. (Ward Decl. ¶ 2). The parties entered into a number of transactions following the execution of the agreement, which transactions were generally for a term of three months or less. Specifically, on August 29, 2000 and April 17, 2001, the parties entered into individual long-term transactions ("transactions"), under which plaintiff agreed to sell to the City, and the City agreed to pay for, energy delivered by plaintiff at a fixed price. Such transactions were memorialized by written confirmation letters which stated that "[t]he rates for services specified herein shall remain in effect for the term of this Confirmation Letter, and shall not be subject to change through the application of the Federal Energy Regulatory Commission pursuant to provisions of Section 205 and 206 of the Federal Power Act absent the agreement of all parties to this Confirmation Letter." (Id. ¶¶ 9, 10, Exs. B, C).

Section 4.1 of the agreement provides a list of "Events of Default." The parties agreed that if at any point during the term of the agreement, regardless of whether or not an event of default has occurred, the market price of electricity moved such that the early termination payment that would be owed to plaintiff was more than $15 million, then plaintiff could request that the City provide performance assurance — in other words, to post margin — in an amount equal to the early termination payment in excess of the $15 million. On the other hand, if at any point during the agreement the early termination payment that would be owed to the City was more than $20 million, then the City may request that plaintiff provide performance assurance in an amount equal to the early termination payment in excess of the $20 million. (Ward Decl. ¶ 8).

Between the time that the parties entered into the transactions and November 2001, the price of electricity dropped dramatically. Consequently, at the end of November 2001 and pursuant to the agreement, plaintiff determined that the City's net obligation to plaintiff as of November 26, 2001 was $94,176,291. (Ward Decl. ¶ 12). Accordingly, on November 27, 2001, plaintiff sent the City a letter requesting that the latter make a margin payment of $79,250,000 as required under the terms of the agreement. (Id.). This failure by the City to make the payment triggered an event of default under the agreement. (Id. ¶ 13).

Plaintiff filed for bankruptcy on December 2, 2001. Shortly after plaintiffs call for margin, the City triggered the second event of default when it suspended performance under the agreement. More precisely, by letter dated November 29, 2001, the City requested that plaintiff provide it with performance assurance in the form of a letter of credit in the amount of $31,750,000. (Id. ¶ 14). Then, on December 3, 2001, the City informed plaintiff that as of December 5, 2001, the City was suspending further performance under the agreement because plaintiff was in default of the agreement for failure to provide the City with the requested performance assurance. (Id.). Finally, on December 11, 2001, the City triggered yet another event of default when it informed plaintiff that the City would not be paying the monies it owed plaintiff — $1,010,439.50 for electricity purchases during the month of November 2001 — because it was applying a set off to a portion of the amount it conceded that it owed and was withholding the remaining amount owed as security against plaintiffs future payment obligations. Plaintiff points out that the agreement does not contain a provision that would permit the City to suspend performance or withhold payment. (Id. ¶ 16).

On December 21, 2001, plaintiff informed the City that it was in default under the agreement. (Id. ¶ 17, Ex. H). After the City failed to cure the defaults, plaintiff sent a letter to the City on December 28, 2001 informing it that plaintiff was terminating any outstanding transactions under the agreement and setting January 2, 2002 as the early termination date. (Id. ¶ 18). Nearly five months later, on May 30, 2002, plaintiff informed the City that, based on plaintiffs application of the early termination payment calculation formula described in section 4.3 of the agreement, and because the market price for energy had dropped between the date of the transactions and the early termination date, plaintiff was entitled to an early termination payment from the City the amount of at least $146,261,529.50. (Id. ¶ 19, Ex. J). The City has not yet provided plaintiff with an early termination payment, and for this reason plaintiff filed this adversary proceeding in the Bankruptcy Court on July 22, 2002. The Complaint asserts a claim for turnover of property under 11 U.S.C. § 542(b) and breach of contract, and seeks the immediate payment and turnover of the early termination payment. Plaintiff claims that this payment is property of its estate and critical to the administration and reorganization of the estate in bankruptcy. (Id. ¶ 20).

ANALYSIS

1. Standard Under Title 28 U.S.C. § 157

28 U.S.C. § 157 sets forth, inter alia, the circumstances under which a bankruptcy court may hear cases under Title 11 and any proceedings arising under Title 11. Specifically, that statute provides, in relevant part, that "[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title." 28 U.S.C. § 157(b)(1). "Core proceedings" include, inter alia, "(A) matters concerning the administration of the estate; (B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11 . . . Id. § 157(b)(2)(A-B). Under subsection (c), a bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. That subsection states, in pertinent part, that "[i]n such proceedings, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." Id. § 157(c). Under subsection (d) of the statute, "[t]he district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown." Id. § 157(d). Finally, under subsection (e), "[i]f the right to a jury trial applies in a proceeding that may be heard under this section by a bankruptcy judge, the bankruptcy judge may conduct the jury trial if specially designated to exercise such jurisdiction by the district court and with the express consent of all the parties." Id. § 157(e). Whereas this last section ratified the Second Circuit's holding in In re Ben Cooper, Inc. that bankruptcy judges could conduct jury trials in core matters, it also made clear that they could only do so with the express consent of all the parties. See 896 F.2d 1394, 1398 (2d Cir.), vacated and remanded, 498 U.S. 964 (1990), reinstated on remand, In re Ben Cooper. Inc., 924 F.2d 36 (2d Cir.), cert. denied, 500 U.S. 928 (1991). However, regardless of whether a proceeding is deemed core or non-core and, relatedly, whether a party is entitled to a jury trial, a judge sitting in, bankruptcy may still conduct pre-trial matters — especially if a district court concludes that the case is unlikely to reach trial, if the jury demand is without merit, or if the case will necessitate protracted discovery. See Keene Corp. v. Williams Bailey & Wesner. L.L.P., 182 B.R. 379, 384 (S.D.N.Y. 1995) (quoting In re Orion Pictures Corp, 4 F.3d 1095, 1101-02 (2d Cir. 1993)).

The City maintains that withdrawal of the reference to Bankruptcy Court in this case is necessary for the following reasons: (1) withdrawal is mandatory under subsection (d) of the statute; and (2) the reference may be withdrawn for a number of "cause[s] shown" under subsection (d). In addition, upon withdrawal from the Bankruptcy Court, the City ...


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