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United States District Court, S.D. New York

November 17, 2004.

In re: ENRON CORP., et al., Debtors. DYNEGY MARKETING AND TRADE, et al., Appellants,
ENRON CORP., et al., Appellees.

The opinion of the court was delivered by: LEWIS KAPLAN, District Judge


Dynegy Marketing and Trade and affiliated entities*fn1 (collectively, "Dynegy") appeal from an order of the Bankruptcy Court (the "Stay Order")*fn2 barring Dynegy under the automatic stay provision of the Bankruptcy Code from proceeding with arbitration against several affiliates of Enron Corp. that have not filed for bankruptcy*fn3 (the "Enron Non-Debtors" or "Non-Debtors"). Enron Corp. and affiliates that have filed for bankruptcy*fn4 (the "Enron Debtors" or "Debtors") move to dismiss the appeal. The Court concludes that the Stay Order was interlocutory, dismisses the appeal, and denies leave to appeal.*fn5


  At the center of this dispute is a Master Netting Agreement (the "MNA") of November 8, 2001 between Dynegy and the Enron companies. The MNA references numerous pre-existing trading agreements among Dynegy and Enron entities and, upon the occurrence of a default under one of those agreements, allows a global netting of obligations so that all amounts owed by all affiliates under the referenced agreements are reduced to a "Final Settlement Amount," a single dollar figure for which either all of the Enron parties or all of the Dynegy parties are jointly and severally liable. All disputes under the MNA are to be resolved by arbitration, with Enron and Dynegy each selecting one arbitrator and those two arbitrators selecting the third.*fn6

  In late November 2001, Dynegy declared a default by the Enron parties.*fn7 Over the next year, a dispute developed as to the Final Settlement Amount.*fn8 On December 2, 2001 and several following dates, the Enron Debtors filed voluntary petitions for relief under the Bankruptcy Code in the Southern District of New York Bankruptcy Court.

  On October 18, 2002, Dynegy commenced arbitration against the Enron Non-Debtors seeking determination and payment of the Final Settlement Amount,*fn9 which Dynegy now claims is $68 million.*fn10 Dynegy moved also to lift the automatic stay in order to commence arbitration against the Enron Debtors.*fn11 Soon thereafter, the Enron Debtors initiated an adversary proceeding against Dynegy in the Bankruptcy Court seeking, among other things, a declaration that the MNA is avoidable under the Bankruptcy Code.*fn12

  On December 10, 2003,*fn13 the Enron Debtors moved, based on the automatic stay*fn14 and the court's equitable powers,*fn15 to bar Dynegy from prosecuting the arbitration against the Non-Debtors.*fn16 They argued that, as the MNA is a netting mechanism, an arbitration ostensibly against only the Non-Debtors would affect the property of the Debtors' estates. An arbitration panel that enforced the MNA against the Non-Debtors necessarily would have to reduce any award to Dynegy by any amounts that Dynegy entities owe the Debtors. The result could be to take the Debtors' property in violation of 11 U.S.C. §§ 362(a)(3) and (7).*fn17 Dynegy countered that the stay could not apply to the Non-Debtors because there was no evidence that the arbitration would take the property of the Debtors' estates or have "immediate adverse consequences" on the estates.*fn18

  The Bankruptcy Court agreed with the Enron Debtors.*fn19 It issued the Stay Order on March 11, 2004, the same day it denied Dynegy's motion to lift the automatic stay to allow arbitration against the Debtors.*fn20 In ruling on the motion to lift the stay against the Debtors, the Court stated:

"The Court finds that Dynegy's request to lift the stay to proceed with arbitration should be denied at this juncture. . . . [T]he Debtors' opposition . . . has directed [the Court] to various Bankruptcy Code sections raising issues regarding the underlying enforceability of the master netting agreement. The Court finds that before it reaches a decision as to whether arbitration should proceed, a determination should be made as to the underlying enforceability of the master netting agreement under the Bankruptcy Code. . . . By this decision, the Court does not deny the ultimate relief sought, that is, compelling arbitration, but denies such at this time to adjudicate whether the agreement itself is enforceable under the Bankruptcy Code. If it is ultimately determined to be enforceable, Dynegy may at that time seek to enforce the arbitration under the applicable case law considering a valid arbitration agreement."*fn21
  The Court then announced the ruling barring arbitration against the Non-Debtors, reciting the reasons memorialized in the Stay Order.*fn22


  This Court may not consider this appeal unless the order being appealed from is final or the Court grants leave to appeal an interlocutory order.*fn23

  A. Finality of the Stay Order

  Dynegy argues that the Stay Order is final for two reasons. First, the bankruptcy judge did not state explicitly that he would revisit the issue. Second, several Second Circuit decisions have held that orders denying relief from the automatic stay are final for purposes of appeal. Both arguments fail.

  It is true that the court below did not state explicitly that it would revisit the Stay Order.*fn24 It did, however, make it absolutely clear that it intends to revisit the applicability of the automatic stay to arbitration against the Debtors. It simply is unimaginable that a bankruptcy judge in this context would consider whether an agreement is enforceable against debtors without also considering whether it is enforceable against non-debtors jointly and severally liable on the same agreement.*fn25 That would be to extend, nonsensically, greater bankruptcy protection to non-debtors than debtors. Because the court clearly intends to revisit the question of the enforceability of the MNA against the debtors — a point that it made clear in ruling on the motion to lift the stay to allow arbitration against the Debtors and that Dynegy has not really disputed — and because a finding that the MNA is enforceable against the Debtors would appear to require a finding that the MNA is enforceable against the Non-Debtors, the Stay Order is interlocutory.

  The Second Circuit decisions cited by Dynegy do not compel a contrary conclusion. Lomas Financial Corp. v. Northern Trust Co. (In re Lomas Financial Corp.)*fn26 involved a "preliminary injunction" that the bankruptcy court issued under Sections 362(a) and 105 to stay a fraud action against corporate officers of the debtor. The Second Circuit was uncertain whether the injunction was final because it could not determine whether the term "preliminary injunction" meant that the bankruptcy court contemplated a further hearing on whether the fraud action should be enjoined (in which case the injunction would have been an interlocutory order) or only further proceedings regarding the reorganization, which could of course impact the need to enjoin the fraud action, in which case the injunction would have been a final order.*fn27 In this case, the Court is certain, because the Bankruptcy Court so stated, that that Court contemplates further proceedings on whether arbitration under the MNA should proceed. Under Lomas, then, the Stay Order is interlocutory.

  Pegasus Agency, Inc. v. Grammatikakis (In re Pegasus Agency, Inc.)*fn28 likewise does not avail. Insofar as it addresses the finality of a bankruptcy court order for purposes of appeal to the district court, Pegasus says that "[a] bankruptcy judge's order is final if it `completely resolve[s] all of the issues pertaining to a discrete claim.'"*fn29 In light of Judge Gonzalez's expressed intention to revisit the issue of the stay vis-a-vis the Debtors after further consideration of the enforceability of the MNA, it is clear that he has not completely resolved the issues pertaining to the claim that arbitration should not proceed against the non-debtors.

  Finally, Sonnax Industries, Inc. v. Tri Component Products Corp. ( In re Sonnax Industries, Inc.)*fn30 does not control. The holding in that decision, which was rendered before Lomas, that "the denial of relief from an automatic stay in bankruptcy is equivalent to a permanent injunction and is thus a final order"*fn31 remains good law, but the statement is incomplete. It does not cover a situation, like that discussed in Lomas and present here, in which the bankruptcy judge contemplates further proceedings with respect to the automatic stay. B. Leave to Appeal

  Dynegy contends that this Court should grant leave to appeal if the Stay Order is interlocutory.

  The parties agree on the legal standard that governs whether to grant leave to appeal in this case: it is the standard set forth in Section 1292(b) of the Judicial Code,*fn32 which governs interlocutory appeals from the district courts to in the Courts of Appeals. That is, leave should be granted only if the order (1) "involves a controlling question of law" (2) "as to which there is substantial ground for difference of opinion," and (3) "an immediate appeal from the order may materially advance the ultimate termination of the litigation."*fn33 Each of these three factors must be present. The Court finds that two are missing, and therefore does not consider the third.

  "[A] question of law is `controlling' if reversal of the [lower] court's order would terminate the action."*fn34 The Second Circuit recently found that an interlocutory appeal of a bankruptcy court order did not raise a controlling question of law because there may have been an alternative legal basis for the order.*fn35 Here there were two alternative bases for the order being appealed. The Bankruptcy Court rested the Stay Order on Section 362 and expressly declined to decide whether the order could be supported, as the Enron Debtors had argued, by the court's general equitable powers under Section 105.*fn36 If this Court were to reverse the Stay Order, the bankruptcy judge would be required to consider the alternative basis for it. The appeal of the Stay Order therefore does not involve a controlling question of law.

  Nor would an appeal materially advance the ultimate termination of the litigation. Affirmance of the Stay Order would not expedite the litigation. Reversal would be likely to complicate it. If this Court were to allow arbitration against the Non-Debtors, there would be questions about the effect of that arbitration on the Debtors' liabilities. As the Enron Debtors point out, there could be parallel proceedings in bankruptcy court and in arbitration, each simultaneously adjudicating amounts due under the MNA, a point that Dynegy's counsel effectively admitted at oral argument in the Bankruptcy Court.*fn37


  The motion to dismiss the appeal [docket item 5] is granted. Leave to appeal is denied.


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