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ENRON POWER MARKETING, INC. v. NEVADA POWER COMPANY

October 10, 2004.

ENRON POWER MARKETING, INC., Chapter 11 Plaintiff, Appellee and Cross-Appellant,
v.
NEVADA POWER COMPANY and SIERRA PACIFIC POWER COMPANY, Defendants, Appellants, and Cross-Appellees. In re ENRON CORP., et al., Debtors.



The opinion of the court was delivered by: BARBARA JONES, District Judge

Opinion

Appellants, Nevada Power Company and Sierra Pacific Power Company (collectively, "Nevada"), seek review of a decision by the Bankruptcy Court (Gonzalez, J.) granting summary judgment and awarding damages on breach of contract claims brought against them by Enron Power Marketing, Inc. ("EPMI"). EPMI sued Nevada to collect "Termination Payments" it claimed it was owed under the Western Systems Power Pool Agreement ("WSPPA" or "the contract"), which governs power purchase and sale transactions between the parties, and certain separate confirmation agreements, which detail the specific transactions for the sale of power by EPMI. The Bankruptcy Court also dismissed Nevada's counterclaims and affirmative defenses based on allegedly excessive rates under the filed rate doctrine, "the filed rate claims," as well as claims based on "non-filed rate issues": fraudulent inducement, waiver, and reliance. Nevada seeks reversal of all three sets of issues, but notes that if this Court finds in its favor on the summary judgment question, there is no need to consider their appeal of the dismissed claims.

When reviewing a Bankruptcy Court decision, this court reviews conclusions of law de novo and findings of fact under a clearly erroneous standard. In re Ionosphere Clubs, Inc., 922 F.2d 984, 988-89 (2d Cir. 1990); Reich v. Rep. of Ghana, 2002 U.S. Dist. LEXIS 1541 (S.D.N.Y. 2002) (Jones, J.).

  Summary judgment is proper when no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c), Celotex v. Catrett, 477 U.S. 317 (1986). It is appropriate only if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," when viewed in the light most favorable to the non-moving party, "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986). Nevada argues that summary judgment was inappropriate given that EPMI's entitlement to the Termination Payments depends on answers to several questions of fact. I agree. I reverse the bankruptcy court's grant of summary judgment on the breach of contract claim and remand for fact-finding on several questions.

  I. Breach of Contract Claim

  EPMI filed an action for breach of contract, contending that Nevada defaulted on its obligations under WSPPA. EPMI moved for summary judgment soon after filing, alleging that Nevada failed to deliver demanded assurances on the contract, as required by WSPPA § 27, and as a result had defaulted on the contract and now owed the full amount of the Termination Payments specified in WSPPA § 22.3 ("Termination Payments"). The Bankruptcy Court granted summary judgment, finding that no issues of material fact existed as to EPMI's right to request assurances, whether Nevada met its obligation to provide them, and whether what Nevada offered was adequate. In reviewing the Bankruptcy Court's decision, I address each of these issues in turn.

  a. Applicable Law

  In evaluating the parties' claims we look first to the contract itself, which we evaluate under Utah law, as specified in WSPPA § 24 and agreed to by the parties. (Appellants' Br. at 18.) To fill in undefined provisions of the contract, we turn to Article 2 of the Uniform Commercial Code ("UCC"). Utah courts have not ruled on whether electricity should be considered a good covered by Article 2. However, they have held that other states' interpretations of identical UCC provisions are relevant. Power Sys. & Controls, Inc. v. Keith's Elec. Constr. Co., 765 P.2d 5, 10 n. 2 (Utah Ct. App. 1988). In other jurisdictions the sale of electricity is considered a good, and UCC Article 2 governs. See In re Pac. Gas & Elec. Co., 271 B.R. 626 (N.D. Cal. 2002); see also Norcon Power Partners, L.P. v. Niagara Mohawk Power Corp., 92 N.Y.2d 458, 467 (holding that although New York does not consider electricity a good, UCC § 2-609 should apply as a matter of policy).

  UCC § 2-609, the "Right to Adequate Assurance of Performance," governs the process by which one party to a contract can demand assurances from the other when it feels insecure about the prospects for performance. This mechanism is a UCC innovation designed to solve the problem of anticipatory breach. Instead of breaching a contract when one party fears the other will not perform, the first party can demand assurances from the second. UCC § 2-609 and its interpretive case law are thus helpful to understanding the assurances procedure set forth in WSPPA § 27. See generally Reich, 2002 U.S. Dist. LEXIS 1541 (Jones, J.) (applying UCC § 2-609 to bankruptcy appeal). b. WSPPA's Assurances Procedure

  WSPPA § 27 sets out the assurances procedure for parties to the power-trading contract. This section of the contract outlines when a party may demand assurances, what the other party may offer in response, and how to evaluate the adequacy of that offer. Section 27 allows one party to demand assurances when it is unsatisfied with the other party's "creditworthiness, financial responsibility, or performance viability." Events which may trigger insecurity on the part of the first party "include but are not limited to" a list of five events, one of which is the downgrading of the second party's debt. In response to a demand, the second party has three business days to provide "such reasonably satisfactory assurances of its ability to perform" as those described in the contract's first paragraph. Such assurances are "either (1) the posting of a Letter of Credit, (2) a cash prepayment, (3) the posting of other acceptable collateral or security by the Second Party, (4) a Guarantee Agreement executed by a creditworthy entity; or (5) some other mutually agreeable method of satisfying the First Party."

  Reasonableness is demanded throughout Section 27. The first party may require assurances from the second, but only when its "reasonably exercised discretion" permits it to do so. The second party must provide assurances that are "reasonably satisfactory." Thereafter, the first party may accept or reject the offered assurances "based upon reasonably exercised discretion." The contract itself does not define "reasonably," so we look to the UCC's assurance mechanism for definition. UCC § 2-609 specifies, "Between merchants, the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards." The Official Comment on § 2-609 notes that in addition to commercial standards, the obligation of good faith is equally applicable. Good faith between merchants means "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." UCC § 2-103(1)(b).

  1. Did EPMI have reasonable grounds for insecurity?

  The first requirement of the assurances process is that a party's grounds for demanding assurances be reasonable. The UCC allows a broad definition of the circumstances that could give rise to a party's insecurity, including concern about the solvency of the other party. UCC § 2-609, Official Comment (4). However, the seller's dissatisfaction with the defendant's financial standing must not be false or arbitrary; there must be a real want of satisfaction with the buyer's financial responsibility. Id.; see also Puget Sound Energy Inc. v. Pac. Gas and Elec. Co., 2002 U.S. Dist. LEXIS 1350 (N.D. Cal. 2002) ("Because the reasonableness of a party's insecurity is determined by commercial standards, there must be an objective factual basis for the insecurity, rather than a purely subjective fear that the party will not perform.") The Restatement of Contracts notes that even when one party's insecurity results from the other's insolvency, payment or performance viability must be materially affected. RESTATEMENT (SECOND) OF CONTRACTS § 251.

  Whether a buyer has a reasonable ground for insecurity is a question of fact. Puget Sound, 2002 U.S. Dist. LEXIS at 640. Am. Bronze Corp. v. Streamway Prod., 456 N.E.2d 1295 (Ohio App. 1982). EPMI claims that no reasonableness requirement need apply to its demand for assurances because the basis of the demand — the downgrading of Nevada's credit — is specifically listed in WSPPA § 27 as an "Even[t] which may trigger the First ...


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