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Enron Power Marketing, Inc. v. Luzenac America

August 31, 2006


The opinion of the court was delivered by: Loretta A. Preska, United States District Judge


Plaintiff Enron Power Marketing, Inc. ("EPMI") brought adversary proceedings in its bankruptcy against Luzenac America, Inc. (05 Civ. 9244) and Public Utility District No. 1 of Snohomish County (05 Civ. 10129)*fn1 (collectively, "Defendants") to recover termination payments provided for in their respective long-term power supply contracts. EPMI moves for a determination that the bankruptcy court--rather than the Federal Energy Regulatory Commission ("FERC")--can and should resolve the state-law termination-payment issues that relate to the state-law contract matters under § 1290 of the Energy Policy Act of 2005 (the "Cantwell Amendment") because, it argues, the Cantwell Amendment is merely a clarifying statute that affirms the traditional division of power between FERC and the courts.*fn2

Defendants cross-move to dismiss or stay the adversary proceedings. Defendant Luzenac cross-moves to transfer the proceedings to FERC, and the Government, as intervenor, argues that the constitutionality of the "Cantwell Amendment" is not ripe for review.


During 2000-2001, EPMI had a long-term contract to deliver electric power to each Defendant. The contracts contained a provision requiring a termination payment--a payment by the party "in the money" at the time of termination based on the difference between the contract price and market price for a replacement contract--in the event that either party terminated the contract prior to its full term. During the contract terms, the Western United States underwent a power crisis that "was subjected to artificial manipulation on a massive scale." Lockyer v. FERC, 383 F.3d 1006, 1014 (9th Cir. 2004). After numerous Enron debtors, including EPMI, filed Chapter 11 bankruptcy petitions on December 2, 2001, Defendants terminated their contracts with EPMI. EPMI thereafter filed adversary proceedings in the bankruptcy court to recover the termination payments from those Defendants. While those actions were in mediation in the bankruptcy court, the parties made a number of motions in the bankruptcy court and FERC in which the bankruptcy judge held, inter alia, that the bankruptcy court maintained jurisdiction over the state-law contract issues and FERC had jurisdiction over issues of disgorgement of EPMI profits. See Comet Decl.,*fn3 Ex. Y, bankruptcy court proceeding in a related trading case involving Nevada Power Co. and Sierra Pacific Power Co., No. 01-16034, at 16-21, 24-27 (Jan. 4, 2005).*fn4

The issue over the termination payments to Enron drew political attention in the West. On August 8, 2005, the President signed into law the Energy Policy Act of 2005, which included the Cantwell Amendment. The Cantwell Amendment, named for Senator Maria Cantwell of Washington State, provides:


(a) Application.--This section applies to any contract entered into the Western Interconnection prior to June 20, 2001, with a seller of wholesale electricity that the Commission has--

(1) found to have manipulated the electricity market resulting in unjust and unreasonable rates; and

(2) revoked the seller's authority to sell any electricity at market-based rates.

(b) Relief.--Notwithstanding section 222 of the Federal Power Act (as added by section 1262), any provision of title 11, United States Code, or any other provision of law, in the case of a contract described in subsection (a), the Commission shall have exclusive jurisdiction under the Federal Power Act (16 U.S.C. 791a et seq.) to determine whether a requirement to make termination payments for power not delivered by the seller, or any successor in interest of the seller, is not permitted under a rate schedule (or contract under such a schedule) or is otherwise unlawful on the grounds that the contract is unjust and unreasonable or contrary to the public interest.

(c) Applicability.--This section applies to any proceeding pending on the date of enactment of this section involving a seller described in subsection (a) in which there is not a final, non-appealable order by the Commission or any other jurisdiction determining the respective rights of the seller. 119 Stat. at 983-84.

After the Cantwell Amendment passed, the Defendants filed petitions to have FERC resolve the termination-payment claims. Snohomish argued that it was fraudulently induced into entering contracts with Enron and that Enron could not collect termination payments under the Federal Power Act ("FPA") or state law; Luzenac argued that Enron could not collect a termination payment under its revoked rate schedule and terminated tariff and that permitting Enron to collect a termination payment would be unjust and unreasonable or contrary to the public interest. In response, EPMI 1) moved in this Court*fn5 to withdraw the reference to the bankruptcy court as to Luzenac to enable a court--not FERC--to construe the Cantwell Amendment and, if required, determine its constitutionality, and 2) moved in the bankruptcy court to enforce the automatic stay and mediation order and to enjoin Luzenac's proceeding before FERC. By order dated November 2, 2005, the bankruptcy court denied EPMI's motion for injunctive relief, explaining that the Cantwell Amendment provides exclusive jurisdiction to FERC, including state-law disputes regarding termination payments. See Rabinowitz Decl., Ex. 14, bankruptcy court proceeding, No. 01-16034, at 5-6.*fn6 EPMI appealed the November 2 Order to this Court (05 Civ. 10438), which is now pending but stayed by consent and Order dated February 14, 2006. On December 15, 2005, this Court granted, on consent, EPMI's motion to withdraw the reference with respect to issues relating to the Cantwell Amendment; the stipulation included Defendants' right to argue that FERC first should decide the Cantwell Amendment issues.

On June 28, 2006, FERC issued an Order in the EPMISnohomish matter in which FERC 1) determined that EPMI should not collect termination payments based on New York state contract law, finding there to have been fraud in the inducement, and 2) deferred any decision on the constitutionality of the Cantwell Amendment in the expectation that it would be decided by this Court. Public Utility Dist. No. 1 of Snohomish County, Washington, 115 FERC ¶ 61,375, No. EL05-139-000, 2006 WL 1757334 ¶¶ 83, 27.


A. Cross-motions to Dismiss, Stay, or Transfer Proceedings

I will first address the Defendants' cross-motions to dismiss, stay or transfer the proceedings, as a decision in Defendants' favor would obviate the need for a decision on EPMI's motion. Similarly, I will next address the Government's argument that a decision on the constitutionality of the Cantwell Amendment is not ripe for review. For the reasons discussed below, Defendants' motions are denied.

Defendants cross-move to stay or dismiss this action because (1) EPMI did not seek rehearing of FERC's conclusions on the Cantwell Amendment, which is a statutory prerequisite to judicial review, and thus failed to preserve its claims on the scope and constitutionality of the Cantwell Amendment; (2) EPMI raised the same issue with FERC that it now raises with this Court and, thus, should appeal that action to the Court of Appeals rather than have two actions proceeding simultaneously before a district court and a Court of Appeals; (3) FERC appeals are properly before the appropriate Court of Appeals, as required by 16 USCS § 825l(b),*fn7 and not this Court; (4) exhaustion of remedies requires that FERC first rule on the matter;*fn8 (5) EPMI's constitutional challenge must first be heard by FERC to develop a record for review to determine if a further ruling is necessary based on how FERC rules;*fn9 and (6) EPMI does not meet the requirements for injunctive relief.*fn10

Here, as to Defendants' first argument, EPMI contends that this "would create the ultimate Catch-22" because FERC specifically deferred to the district court on the constitutionality issue, and now Defendants ask that this Court defer to FERC on the very issue FERC refused to decide. EPMI Response to the Government's Memorandum, dated July 21, 2006, at 2. Indeed, it would be fruitless to send this matter back to FERC to determine a matter that it already has decided that it will not determine. Further, an Article III court---not FERC--should construe and, if necessary, decide the constitutionality of the Cantwell Amendment. Determining the constitutionality of legislation is not in the domain of an agency, and it is precisely the role of an Article III court.

As to the Defendants' second and third arguments, the Court of Appeals has held that it did not have jurisdiction to hear an appeal by an order of the Federal Power Commission ("FPC," the predecessor agency of FERC) when the FPC issued a ruling that was not "under" the FPA. Greene County Planning Bd. v. Federal Power Comm'n, 528 F.2d 38, 40 (2d Cir. 1975). Instead, the Court of Appeals explained, the district court would be the appropriate court to which to appeal such a decision. Id. at 46. Here, FERC exclusively applied New York state contract law in its June 28 Order. See Snohomish County, 115 FERC ¶ 61,375, No. EL05-139-000, 2006 WL 1757334. By issuing a decision that did not implicate the FPA, this particular FERC ruling might not be subject to direct review by a Court of Appeals, as FERC's decisions traditionally are. Thus, jurisdiction might not lie with a Court of Appeals. Accordingly, I find that Defendants' first three arguments for the cross-motion are without merit and the last three are moot.

Defendant Luzenac urges transfer of the action to FERC, rather than a stay or dismissal, because a transfer would create a more complete record with FERC having ruled on its own jurisdiction under the Cantwell Amendment and all rulings would then become appealable to an appropriate Court of Appeals. Unlike a stay or dismissal, the appeal of a transfer order would be interlocutory and non-final, thus precluding a conflicting ruling from this Court. I agree with EPMI, however, that there is no authority that permits transfer of the sort that Luzenac proposes; instead, the statute authorizes transfer from one district to another with respect to venue "[f]or the convenience of parties and witnesses, in the interest of justice." 28 U.S.C. § 1404. That is not the situation here. Transferring this action from an Article III court to an Article I agency would be improper because, as Judge Richard Conway Casey explained earlier this year, "FERC does not have the authority to determine the Court's jurisdiction." In re Calpine Corp., 337 B.R. 27, 37 n.8 (S.D.N.Y. 2006). Thus, I decline to transfer the proceeding to FERC.

Next, Defendants and the Government argue that the question of the constitutionality of the Cantwell Amendment is not ripe and that ruling on it would not be prudent, as the underlying actions are still in the bankruptcy court or could be appealed.*fn11

The Government argues that the question of the constitutionality of the Cantwell Amendment is not ripe or prudent for review because (1) the matter is not fit for decision because a factual record must still be developed, courts want to avoid inconsistent decisions and multiple proceedings, and a decision may be unnecessary, and (2) there is no hardship to EPMI in waiting for the actions to be final. While the Government may be accurate in the traditional case where the clear "next step" would occur soon, this matter is sui generis. Here, there is too much uncertainty. The mandatory process of appealing the FERC action to the full commission, and then requesting a rehearing through FERC, and then seeking judicial review in the appropriate Court of Appeals, see DiLaura v. Power Auth. of N.Y., 982 F.2d 73, 79 (2d Cir. 1992), could take some time, and it is in the best interest of the bankrupt entities and their creditors that bankruptcy litigation be decided quickly, see, e.g., Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995) ("'Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate.'"); In re Soloway & Katz, 234 F. 67, 68-69 (2d Cir. 1916) ("A proceeding in bankruptcy is intended to get the assets as speedily as possible into the hands of the creditors."). As to the fitness for review, there is no factual record for FERC to develop further, as FERC did not hold an evidentiary hearing but decided the matter on state-law contract grounds on the record before it. As to avoiding multiple proceedings, they seem to be inherent in the statutory scheme. As noted above, FERC has ruled in the Snohomish matter, but the Luzenac matter still is pending before the agency. Because an appeal from FERC may be taken either in the circuit where the licensee or public utility to which the order relates is located or has its principal place of business or to the Court of Appeals for the District of Columbia Circuit, there might well be appeals from FERC rulings on termination payments pending in two different Courts of Appeals. In addition, EPMI already has appealed to this Court the bankruptcy court's November 2, 2005 Order ruling that FERC has exclusive jurisdiction over state-law contract claims for termination payments (05 Civ. 10438) and FERC's June 28, 2006 Order in the EPMI-Snohomish matter ruling that EPMI should not collect termination payments based on state contract law (06 Civ. 5542).

In sum, the unusual proliferation of proceedings here, the uncertainty of the timing and venue of the appeals from the June 28, 2006 FERC Order in the Snohomish matter and the yet-to-be-issued FERC order in the Luzenac matter, the clear jurisdiction in this Court to construe and decide the constitutionality of the Cantwell Amendment, and the public interest in prompt resolution of the affairs of bankrupt entities persuades me that a prompt ruling by this Court is the preferred course.

B. FERC Jurisdiction Under the Cantwell Amendment

Defendants and the Government read the Cantwell Amendment as granting FERC exclusive jurisdiction over all of the issues relating to termination payments, including the state-law contract claims for termination payments. EPMI reads the Cantwell Amendment as granting exclusive jurisdiction to FERC only in matters of termination-payment disputes involving federal regulatory authority governed by the FPA, which, in effect, affirms the power that FERC already had under the FPA. If the Cantwell Amendment is read to give FERC exclusive jurisdiction over more than the termination-payment disputes governed by the FPA, EPMI argues that this ...

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