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.
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 ...