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December 31, 2003.


The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge


American Home Assurance Co. ("American Home") and Federal Insurance Co. ("Federal") (collectively, the "Sureties") appeal from the order of the Bankruptcy Court (Gonzalez, J.) denying summary judgment for the Sureties and dismissing the Complaint.*fn1 At issue is approximately $33.5 million in excess margin collateral monies ("Excess Collateral") to which the Sureties allege they are entitled. The Bankruptcy Court concluded that the Sureties were not entitled to the Excess Collateral under either the terms of their agreement or subrogation principles. The Sureties bring this appeal pursuant to 28 U.S.C. § 158, which grants the district courts jurisdiction to hear appeals from final judgments or orders of bankruptcy judges. For the reasons set forth below, the Bankruptcy Court's order is affirmed.


  A. The Agreements

  1. Gas Purchase Agreement

  On April 8, 1999, Enron Natural Gas Marketing Corp. ("ENGMC") entered into a twelve-year Gas Purchase Agreement ("GPA") with American Public Energy Agency ("APEA"), a Nebraska political subdivision.*fn2 Under the agreement, APEA pre-paid the full price for the twelve-year natural gas supply — approximately $287 million.*fn3 This payment was funded through the issuance of public municipal bonds. In the event of ENGMC's default, the GPA provided for two types of damages. First, ENGMC would be obligated to pay an early termination payment ("Termination Payment")*fn4 to compensate APEA for the balance of the natural gas owed to it under the GPA.*fn5 Second, the disadvantaged party would be entitled to the payment of "Market Exposure Damages."*fn6 As discussed in some detail below,*fn7 to secure payment of the Termination Payment, ENGMC was required under the GPA to purchase a surety bond. Moreover, to secure payment of the Market Exposure Damages, ENGMC was required to enter into a Margin Agreement with APEA,

  The GPA contained several provisions relating to the rights of the parties in the event of a default. First, pursuant to article 4.4 of the GPA, the parties preserved "all rights, set-offs, counterclaims and other remedies and defenses consistent with Section 8.3*fn8 . . . arising from or out of [the GPA]; provided, however, that amounts due as the Termination Payment or as Market Exposure Damages shall not be subject to rights of setoff."*fn9 Second, pursuant to article 3.6 of the GPA, the parties agreed that the Termination Payment was to be payable "from the proceeds of the Surety Bond; provided, however, that proceeds of the Surety Bond shall not be applied to the payment of any amounts due as Market Exposure Damages."*fn10 Similarly, "[t]he obligation of [ENGMC] to pay Market Exposure Damages shall be secured by the Margin Agreement. Amounts payable pursuant to the Margin Agreement shall be applied solely to payment of Market Exposure Damages."*fn11 "The Termination Payment shall be payable on the Early Termination Date, and shall be payable solely from the proceeds of the Surety Bond."*fn12

  2. Surety Bond

  ENGMC was required to provide APEA with a "Surety Bond," which is described in the GPA as the bond "posted by [ENGMC] to support performance of its obligations to make Termination Payments under [the GPA]."*fn13

  Accordingly, ENGMC, American Home, and Federal provided APEA with a surety bond dated April 15, 1999.*fn14 The Surety Bond states that payment by each surety constitutes "satisfaction in full of all of its obligations. . . . Such payment shall be the exclusive remedy of [APEA] under this Bond. Upon payment by a Surety, [APEA] shall assign its rights to payment against [ENGMC] under the [GPA] to such Surety."*fn15 As noted earlier, section 3.6 of the GPA specifically states that the Termination Payment shall be payable from the Surety Bond, provided that the proceeds from such bond are not applied to the payment of Market Exposure Damages.*fn16

  On April 5, 1999, in connection with the Surety Bond, ENGMC and Enron Corp. executed indemnity agreements with the Sureties.*fn17 Under these agreements, ENGMC had agreed to indemnify the Sureties for any payments they might make under the Surety Bond.*fn18 While the indemnity agreements provided for ENGMC to post collateral to cover the Surety Bond,*fn19 ENGMC never provided such collateral. Under the indemnity agreements, ENGMC and Enron Corp. had waived "all right to claim any property, including homestead as exempt from levy, execution, sale or other legal process under the law of any state, province or other government as against the right of the surety to proceed against the same for indemnity."*fn20

  3. Margin Agreement

  Pursuant to the GPA, ENGMC and APEA entered into the Margin Agreement on April 8, 1999.*fn21 The Margin Agreement states that "[a]s security for the payment of the Market Exposure Damages due or that may become due from [ENGMC] to [APEA], [ENGMC] hereby grants to [APEA] a security interest in all Margin from time to time delivered to [APEA] pursuant to this Agreement."*fn22 The Margin Agreement provided that if ENGMC failed to pay Market Exposure Damages, APEA or its designee could liquidate any non-cash margin.*fn23 Importantly, the Margin Agreement stated that if, during the pendency of the agreement, the fair market value of the margin exceeded the value of the margin required to be maintained under the agreement, ENGMC could request the return and/or release of the margin upon written request.*fn24

  APEA contemporaneously executed a Swap Agreement; with The Chase Manhattan Bank ("Chase"), assigning to Chase its (APEA's) rights under the Margin Agreement (i.e. APEA's right to recover Market Exposure Damages),*fn25 Damages under the Swap Agreement were triggered by the ...

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