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In re Enron Corp.

August 23, 2006

IN RE ENRON CORP. ET AL, DEBTORS.
TAUNTON MUNICPAL LIGHTING PLANT, APPELLANT,
v.
ENRON CORP. ET AL., APPELLEES.



The opinion of the court was delivered by: John G. Koeltl, District Judge

OPINION AND ORDER

The appellant, Taunton Municipal Lighting Plant ("Taunton"), appeals from an order of the United States Bankruptcy Court for the Southern District of New York (Arthur J. Gonzalez, J.) disallowing and expunging Taunton's proof of claim filed against the debtors/appellees, Enron Corporation and certain of its affiliates (collectively "Enron"). The Bankruptcy Court's decision is published at 330 B.R. 387 (Bankr. S.D.N.Y. 2005) under the title In re Enron Corp. For the reasons explained below, the order of the Bankruptcy Court is affirmed.

I.

When reviewing an order of the Bankruptcy Court, this Court acts as an appellate court. Accordingly, this Court reviews the Bankruptcy Court's conclusions of law de novo but accepts that court's findings of fact unless they are "clearly erroneous." See Fed. R. Bankr. P. 8013; see also In re Halstead Energy Corp., 367 F.3d 110, 114 (2d Cir. 2004).

II.

The Bankruptcy Court made the following findings of fact, which this Court accepts because they are supported by the record and no party has argued that they are clearly erroneous.

Taunton is a Massachusetts municipal public power utility licensed by the Commonwealth of Massachusetts to provide electricity to the residents of the city of Taunton, Massachusetts, and several neighboring towns. In re Enron Corp., 330 B.R. at 388. On November 2, 2001, Taunton entered into a contract with a subsidiary of Enron that provided for Enron to sell electricity to Taunton from January 1, 2002 until December 31, 2007. Id. at 387-88. On December 2, 2001, one month after entering into this contract, Enron commenced the bankruptcy action in which Taunton's current claim arose. Id. at 388. Despite Enron's filing of a bankruptcy petition, Taunton honored the contract and bought electricity from Enron at the price established in the contract, although electricity was available to Taunton from other sources at a lower price in early 2002. Id.

During 2002 the parties discussed soliciting replacement suppliers to provide electricity to Taunton but Enron continued to deliver electricity to Taunton during those negotiations. Id. On December 17, 2002, after electricity prices had risen higher than the price established in its contract with Taunton, Enron rejected the contract and ceased delivering electricity to Taunton on December 31, 2002. Because the contract specified that damages in the event of breach would be calculated based on the actual economic loss to the non-breaching party at the time of the breach, Taunton requested bids from other power providers and, based on the bids received, calculated that it had sustained damages of $6,658,885.00 (including $64,000 in costs). On November 24, 2003, Taunton filed its claim against Enron in that amount with the Bankruptcy Court, and Enron filed an objection to Taunton's claim on February 16, 2005. On September 21, 2005, the Bankruptcy Court issued its decision sustaining Enron's objection. On October 7, 2005, the Bankruptcy Court entered the order disallowing the claim. As explained in greater detail below, the Bankruptcy Court concluded that the plain language of Section 502(g) of the Bankruptcy Code required that damages resulting from the rejection of the contract be calculated as of the last business day before the filing of the bankruptcy petition on December 2, 2001, and that, using that date, there were no damages to Taunton. See In re Enron, 330 B.R. at 389 & nn.3 & 4, 392.

On this appeal, Taunton does not dispute that it suffered no damages from Enron's breach of its contract to supply Taunton with electricity for the duration of the contract, if those damages are determined on the last business day before Enron filed its bankruptcy petition. Taunton contends that the date of rejection of the contract should be the appropriate measuring date for determining damages from the breach. The Bankruptcy Court correctly concluded that damages should be measured from the last business day before filing the petition and not on the day the debtor rejected the contract.

III.

A.

The effective date of Enron's rejection of its contract with Taunton is established by Section 365(g)(1) of the Bankruptcy Code, which provides that the rejection of an executory contract "constitutes a breach of such contract ... immediately before the date of the filing of the petition" in the Bankruptcy Court. 11 U.S.C. § 365(g)(1). This provision is intended to allow a debtor, after filing a bankruptcy petition, to reject a contract rather than continue to abide by the contract.

Section 502(g) of the Bankruptcy Code, in the version in force at the time of Taunton's claim, further provided that a

"claim arising from the rejection, under section 365 of this title ... of an executory contract ... shall be determined, and shall be allowed under subsection (a), (b), or (c), of this section or disallowed under subsection (d) or (e) of this section, the same as if ...


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