United States District Court, S.D. New York
October 10, 2004.
ENRON POWER MARKETING, INC., Chapter 11 Plaintiff, Appellee and Cross-Appellant,
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
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 §
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 Party
questioning the Second Party's creditworthiness, financial
responsibility, or performance viability. . . ."
EPMI also correctly notes that parties may agree to vary UCC
principles. (Appellees' Br. at 35-36.) The contract between the
parties here, for example, shortened the 30-day window for
providing adequate assurances to three days. However, such
variances must be explicit, and where uncertainty remains in the
drafting of the contract the UCC exists to fill the gaps. EPMI
claims that no court can inquire into the reasonableness of its initial demand for assurances because the contract determined ex
ante that a credit downgrade was a reasonable basis for
demanding assurances. (Id. at 36-37.) This is incorrect on the
face of the contract, which specifies at the very beginning of
Section 27 that a demand for assurances could be made, "Should a
Party's creditworthiness, financial responsibility, or
performance viability become unsatisfactory to the other Party in
such other Party's reasonably exercised discretion . . ."
(emphasis added). While the parties could have drafted the
contract so the downgrading of one party's credit would trigger
an automatic demand for assurances, they did not.
Nevada argues that a genuine issue of fact exists as to whether
their performance viability was affected. They acknowledge that
their credit rating was downgraded, and that downgrading is
specifically listed in the contract as an example of the kind of
event that may trigger a request for assurances. However, they
claim that at the time of the downgrade they remained viable
entities with net assets including physical assets of $5.6
billion and cash resources of $240 million. In fact, EPMI itself
had attested to Nevada's financial health in proceedings before
the Federal Energy Regulatory Commission ("FERC"), which
pronounced itself satisfied with Nevada's cash flow. (Appellants'
Reply Br. at 15, citing 101 FERC ¶ 65,031 at ¶ 211, ¶ 96
(December 19, 2002).) Moreover, EPMI demanded that Nevada provide the amount of the
Termination Payments as an assurance. Nothing in the contract or
in UCC § 2-609 suggests that assurances should equal the sum of
all prospective damages. The assurances mechanism in UCC § 2-609
was designed to assuage insecurity, not to provide a windfall for
one party. Richmond Leasing, 762 F.2d at 1310; In re Sapolin
Paints, Inc. 5 B.R. 412, 421 (Bankr. E.D.N.Y. 1980).
The Bankruptcy Court found that "EPMI was entitled to request
assurances when the Defendants' rating was down-graded," without
evaluating the reasonableness of the demand This finding is
reversed and remanded for a determination of whether EPMI's
demand was reasonable.
2. Were assurances offered at all?
The Bankruptcy Court also held that "Defendants breached their
respective obligations to provide assurance." In fact, Nevada did
respond to EPMI's demand for assurances, which EPMI acknowledged.
EPMI's memorandum of law in support of its motion for summary
judgment describes the "Interim Liquidity Program" proposed by
Nevada. (EPMI's Mot. Summ. J. at 4-5.) EPMI "declined to accept
[the] Interim Liquidity Program" but that does not mean Nevada
did not offer it. Nor does EPMI's rejection establish that
Nevada's Program could not meet the definition of assurances.
EPMI asserts that it rejected the offer as insufficient, but that rejection does not erase the
Nevada claims, incorrectly, that EPMI was required to give
Nevada "the First Option" under WSPPA § 27. Section 27 does not
require the First Party to give the Second Party the opening move
whenever the First Party demands assurances. However, § 27 does
require that the First Party entertain "reasonably satisfactory
assurances" provided by the Second Party, so long as the Second
Party provides them within three business days of the
Nevada says, and EPMI does not dispute, that on April 24, 2002,
two days after EPMI's letter of demand, Nevada offered the
following assurances to EPMI and its other primary power
Sierra Pacific Nevada's parent company would
continue to make full payment under the contract;
Nevada Power would pay 110% of the market price of
energy delivered between May 1, 2002 and September
15, 2002; then full contract price thereafter plus
quarterly payments to make up the difference, plus
interest, deferred over the summer. (Nevada's
Countercl. at 30.)
EPMI attempts to diminish the significance of Nevada's offer by
conflating assurances with security and security with collateral,
but does not deny that Nevada made an offer. In its Motion for
Summary Judgment, EPMI notes that it "declined to accept
Defendants' `Interim Liquidity Program.'" (EPMI's Mot. Summ. J.
at 5.) EPMI's motion then references its own Statement of
Undisputed Material Facts, which asserts, "Defendants failed to
post the cash collateral or provide any other performance
assurances." (EPMI's Statement of Undisp. Material Facts at ¶
18.) This is misleading, and contrary to EPMI's concession that
Nevada timely made an offer, which EPMI rejected. Over Nevada's
objection (see Counterstatement in Supp. Opp'n to Summ. J. at ¶
55-57), the Bankruptcy Court adopted EPMI's assertion and found,
"Defendants breached their respective obligations to provide
In reviewing the Bankruptcy Court's decision and the record
below, we find that Nevada did offer timely assurances in
response to EPMI's demand We therefore reverse the Bankruptcy
Court's finding and take up the question of whether the
assurances could be found to be "reasonably satisfactory."
3. Were Nevada's assurances "reasonably satisfactory"?
The contract specifies that Nevada was obligated to provide
"reasonably satisfactory assurances of its ability to perform." Section 27 provides a specific, but not exclusive, list of what
those assurances could be: "(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
In response to EPMI's demand for assurances, the Nevada
Companies offered a promise to pay the contract price and a
payment plan by which they would pay less than the contract
price for a period of four and a half months. That payment plan
could not be considered a letter of credit, a cash prepayment,
another collateral or security, or a guarantee agreement.
Obviously, it was not "mutually agreeable" because EPMI rejected
it. However, the fact that EPMI rejected Nevada's proposed
assurance does not mean they had the right to do so. The issue is
whether EPMI was obligated to consider the assurance Nevada
offered in good faith, and whether EPMI acted reasonably in
In other words, EPMI's rejection of Nevada's proposal does not
render that proposal prima facie unreasonable. Under the terms
of the contract, EPMI was free to consider an assurance and
reject it, but that rejection must be based on "reasonably
exercised discretion." WSPPA § 27. The mutuality explicit in the fifth item on WSPPA's list of acceptable assurances makes
plain that the First Party is obligated to consider the assurance
offered by the Second Party. Since I have found that the parties
must act reasonably and in good faith, I turn next to the
adequacy of the assurances, for which the UCC provides a guide.
Between merchants, commercial standards govern the
determination of adequacy. UCC § 2-609(2); Utah Code Ann. §
70A-2-609 (2004). The UCC's requirement of good faith also
governs the assurance process. Richmond Leasing Co. v. Capital
Bank, N.A., 762 F.2d 1303, 1310 (5th Cir. 1985) (". . . the
seller must exercise good faith and observe commercial
There is no absolute definition of adequate assurances; rather,
the adequacy depends on the circumstances. By-Lo Oil Co., Inc.
v. Partech, Inc., 11 Fed. Appx. 538, 545 (6th Cir. 2001)
(finding that the adequacy of an assurance depends on "the
reputation of the promisor, the grounds for insecurity, and the
kinds of assurance available"); Richmond Leasing,
762 F.2d at 1310 ("What constitutes `adequate assurance' is to be determined
by factual conditions . . ."); LNS Inv. Co. v. Phillips 66 Co.,
731 F. Supp. 1484 (D.Kan. 1990); Creusot-Loire Int'l, Inc. v.
Coppus Eng'g Corp., 585 F. Supp. 45 (S.D.N.Y. 1983) (finding
assurances inadequate where seller's product was known to be defective and buyer demanded an extended guarantee and a letter
In appropriate circumstances, a promise to perform can be an
adequate assurance. Puget Sound Energy, 271 B.R. at 643
(affirming bankruptcy court's decision crediting a promise to
perform by an electricity company whose credit downgrade led the
buyer to demand assurances). In addition, assurances may be less
than demanded and still be adequate. By-Lo Oil,
11 Fed. Appx. at 545; Am. Bronze, 456 N.E.2d at 1303-04 (holding that
assurances which met the "commercially reasonable" standard were
adequate, even if less than what the demanding party had sought).
Whether or not the assurances offered were adequate, as per
commercial standards and under the circumstances, is a question
of fact. Therefore, we remand to the Bankruptcy Court for a
determination of whether Nevada's offer could have met the
contract's requirement of "reasonably satisfactory assurances."
4. Did Nevada make a judicial admission as to the appropriate
amount of assurances?
The Bankruptcy Court held:
[I]n its counter-claims, the Defendants detail the
formula for calculating the amount to be requested
for assurance which was the precise formula utilized
by EPMI. Therefore, the Defendants have made a
judicial admission that EPMI used the correct formula
to make the calculation.
In reviewing Nevada's counterclaims, I find them to be
ambiguous. First, in ¶¶ 84-85, Nevada asserts that the assurances
they offered were reasonable. (Nevada's Countercl. at ¶¶ 84-85.)
Then, in ¶¶ 89 and 149, they say that a reasonable demand for
assurances would be based on a reasonable estimate of future
damages under WSPPA § 22.3, which they assert EPMI calculated
incorrectly. (Id. at ¶¶ 89, 90, 149.)
Yet the assurances Nevada offered came nowhere near what the
calculation under § 22.3 would require. Moreover, Nevada does not
admit that the assurances must equal the damage formula in
Section 22.3; Nevada merely specifies that assurances should be
"based on" that formula. Under these circumstances, Nevada's
pleadings are insufficiently clear to conclude that they made a
The court also notes, though neither party raises the point,
that Section 27 of WSPPA limits the demand for assurances to
damages based on Section 21.3 of the contract, not Section 22.3.
When a party makes a demand for assurances, the contract directs
that party to estimate the amount of the demand using the formula
for actual loss § 21.3 not the formula for damages upon
total breach. II. Damages
The Bankruptcy Court found that due to its breach, Nevada owed
EPMI the Termination Payments. The court held:
[B]ecause the Termination Payments were due and owing
once the Defendants breached their respective
obligations to provide assurance, EPMI was not
required to establish an ability to perform in the
future under the contracts. Rather, EPMI then had a
right to payment and had no future performance
obligations to deliver power. Thus, EPMI is entitled
to enforce the contracts and to collect the
While it is true that a party need not continue to perform
after the other party has breached, in order to collect damages
the first party must demonstrate that it was able and willing to
perform under the contract. See Penthouse Int'l, Ltd. v.
Dominion Fed. Sav. & Loan Ass'n, 855 F.2d 963
, 979 (2d Cir.
1988); Record Club of Am., Inc. v. United Artists Records,
Inc., 890 F.2d 1264
, 1275 (2d Cir. 1989).
In any action for breach of contract, the plaintiff must show
"that the breach caused his loss. To do this he must prove that
he intended to and was able to perform when his performance was
due." Scholle v. Cuban-Venezuelan Oil Voting Trust,
285 F.2d 318, 320 (2d Cir. 1960).
If on remand the court finds that Nevada failed to provide
adequate assurances and breached the contract, the court must
also inquire whether EPMI would itself have been able to perform
at the time of breach. See Record Club, 890 F.2d at 1275
(citing Restatement (Second) of Contracts § 254: "A party's duty to pay
damages for total breach by repudiation is discharged if it
appears after the breach that there would have been a total
failure by the injured party to perform his return promise");
Petersen v. Intermountain Capital Corp., 29 Utah 2d 271, 274
(Utah 1973) (citing Corbin on Contracts § 978: "If [the
plaintiff] could not or would not have performed the substantial
equivalent for which the defendant's performance was agreed to be
exchanged, he is given no remedy in damages for the defendant's
non-performance or repudiation.").
III. Post-judgment Interest Calculation
EPMI cross-appealed from the Bankruptcy Court's ruling that the
appropriate post-judgment interest rate for damages is found in
28 U.S.C. § 1961. EPMI argues that an interest rate mentioned in
WSPPA § 9.3 is more appropriate. The Second Circuit has held that
the post-judgment interest rate in Section 1961 is "mandatory,"
and applies to all cases. Blanche (Singapore) Pte., Ltd. v.
Carte Blanche Int'l, Ltd., 888 F.2d 260 (2d Cir. 1989). While
parties may set their own post-judgment interest rate in the
terms of a private contract, when they do so they must make their
intentions explicit. Westinghouse Credit Corp. v. D'Urso,
371 F.3d 96, 102 (2d Cir. 2004) ("Most fundamentally, such contracts
must actually indicate the parties' intent to deviate from § 1961.") WSPPA § 9.3 does not express a clear
intention by the parties to supplant the standard post-judgment
interest rate. WSPPA § 9.3 reads in its entirety:
Amounts not paid on or before the due date shall be
payable with interest accrued at the rate of one
percent (1%) per month, or the maximum interest rate
permitted by law, if any, whichever is less, prorated
by days from the due date to the date of payment
unless and until the Executive Committee shall
determine another rate. Id.
The heading of Section 9 is "Payments," and all of its provisions
refer to regular accounting and billing practices during the
duration of the contract. Nothing in the terms of the contract
suggests that § 9.3 should govern the post-judgment interest
rate. For these reasons, I affirm the Bankruptcy Court's ruling
that post-judgment interest should be calculated at the rate
specified by 28 U.S.C. § 1961.
IV. Motion for Injunction
After the Bankruptcy Court ruled in August 2003, Nevada asked
FERC to rule on the reasonableness of EPMI's actions under WSPPA
§ 27. In July 2004, FERC announced that it plans to hold an
evidentiary hearing on the question of "whether Enron reasonably
exercised its discretion under the section 27 provision." 108
FERC ¶ 61,074. EPMI then moved to enjoin FERC from relitigating
issues previously decided. (EPMI's Mot. Inj. Relief at 1.) I am remanding to the Bankruptcy Court for fact-finding on
precisely the same issue. Without ruling on the merits of the
injunction, I note that if proper, EPMI may renew its motion for
injunctive relief before the Bankruptcy Court.
Accordingly, I vacate the Bankruptcy Court's grant of summary
judgment and remand for further proceedings consistent with this