Opinion
No. 04 Civ. 8177 (RCC).
November 22, 2004
OPINION ORDER
Defendants California Power Exchange Corp. ("CalPX"), Pacific Gas Electric Co. ("PGE"), and Southern California Edison Co. ("SCE") move for an order withdrawing the reference of the above-captioned adversary proceeding, Adv. Pro. No. 04-3091 (AJG), to the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court"), in accordance with 28 U.S.C. § 157(d). Plaintiff and debtor Enron Power Marketing, Inc. ("Enron") opposes Defendants' motion. For the following reasons, the motion to withdraw is GRANTED.
I. BACKGROUND
Prior to seeking relief in the Bankruptcy Court in 2001, Enron participated in wholesale power markets operated in the State of California by CalPX, a public utility regulated by the Federal Energy Regulatory Commission ("FERC"). In accordance with a tariff-and-rate schedule approved by the FERC, Enron arranged for several banks to post letters of credit in favor of CalPX. (See Defendants' Mem. Supp. Motion to Withdraw, Oct. 1, 2004 ("Mem. Supp."), Ex. 1, CalPX FERC Electric Service Tariff No. 2 ("CalPX Tariff"), June 7, 2000, Schedule 2 § 2 (requiring market participants to "post collateral for 100% of its requirements in excess of the unsecured line of credit"); id. § 2.1 (allowing "collateral" to take the form of cash, surety bonds, parent guarantees, or letters of credit).) In January 2001 and November 2001, as the letters of credit posted by Enron were about to expire, CalPX drew down approximately $136 million on them.
Enron petitioned for relief under chapter 11 of the Bankruptcy Code on December 2, 2001; the Enron bankruptcy proceedings are pending before the Honorable Arthur J. Gonzales.
On October 10, 2002, CalPX filed Proof of Claim No. 9112 in Enron's bankruptcy case before Judge Gonzales, asserting that the approximately $136 million in letter-of-credit proceeds, which CalPX is currently holding in a segregated escrow account, secure a $16,221.36 market-activity claim against Enron as well as "other amounts to which CalPX is entitled under applicable law and the [CalPX] Tariff." The FERC has ordered that CalPX retain collateral posted under the CalPX Tariff pending completion of certain FERC proceedings. See infra pp. 5-6.
On May 26, 2004, Enron filed an adversary complaint and objection to the proof of claim in the Bankruptcy Court, seeking turnover of the letter-of-credit proceeds. (See Enron's Adversary Complaint and Objection to CalPX's Proof of Claim, May 26, 2004 ("Complaint") at ¶¶ 1-3.) Specifically, Enron seeks a judgment from the Bankruptcy Court declaring that the approximately $136 million in letter-of-credit proceeds are the property of the Enron bankruptcy estate and that CalPX lacks a valid, perfected security interest in the funds. (Id. at ¶¶ 1-2, 11, 47.)
Two motions to dismiss and one motion for summary judgment have been filed in the matter before Judge Gonzales. On July 1, 2004, CalPX moved to dismiss Enron's complaint in the underlying adversary proceeding on the ground that the Bankruptcy Court lacks subject matter jurisdiction — arguing that such jurisdiction properly lies with the FERC, not the federal courts, because Enron's claims turn on the tariff-and-rate schedule, approved by the FERC pursuant to the FERC's exclusive jurisdiction under the Federal Power Act, 16 U.S.C. § 824 et seq. On August 26, 2004, with Enron's consent, SCE and PGE were allowed to intervene as defendants. As their responsive pleading, SCE and PGE filed a motion to dismiss on four grounds: that the Bankruptcy Court lacks subject matter jurisdiction; that Enron's claims are barred by res judicata; that Enron's complaint represents an improper collateral attack on the CalPX Tariff as interpreted by the FERC; and that the Bankruptcy Court should defer to the FERC under the doctrine of primary jurisdiction. On September 27, 2004, Enron filed a motion for partial summary judgment.
On October 18, 2004, CalPX, PGE, and SCE ("Defendants") filed this Motion to Withdraw the Reference to the Bankruptcy Court in accordance with Federal Rule of Bankruptcy Procedure 5011, requesting that this Court grant either mandatory or discretionary withdrawal under 28 U.S.C. § 157(d). The Court heard oral argument on this motion on November 18, 2004.
II. DISCUSSION
The Court has subject matter jurisdiction under 28 U.S.C. §§ 1334 and 157(d). Under a standing order issued in July 1984 by then — Acting Chief Judge Ward pursuant to 28 U.S.C. § 157(c), Chapter 11 cases in the Southern District of New York are automatically referred to the Bankruptcy Court. See Enron Corp. v. Belo Co. (In re Enron Corp.), No. 04 Civ. 1861 (MBM), 2004 WL 2480405, at *1 (S.D.N.Y. Nov. 4, 2004); Enron Power Marketing, Inc. v. Holcim, Inc (In re Enron Corp.), No. 04 Civ. 509 (MBM), 2004 WL 2149124, at *2 (S.D.N.Y. Sept. 23, 2004); see also 28 U.S.C. § 157(a) (indicating that the Bankruptcy Court derives its authority from the reference of the district court). A party can move to withdraw the reference to the Bankruptcy Court under 28 U.S.C. § 157(d), which provides for both discretionary and mandatory withdrawal:
The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.28 U.S.C. § 157(d) (emphasis added). Defendants move for both mandatory and permissive withdrawal of the reference of the adversary proceeding to the Bankruptcy Court.
The mandatory-withdrawal provision of 28 U.S.C. § 157(d) requires withdrawal of the reference to a bankruptcy court for any proceeding "that would otherwise require a bankruptcy court judge to engage in significant interpretation, as opposed to simple application, of federal laws apart from the bankruptcy statutes." City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir. 1991). "The purpose of § 157(d) is to assure that an Article III judge decides issues calling for more than routine application of [federal laws] outside the Bankruptcy Code."Eastern Airlines, Inc. v. Air Line Pilots Ass'n Int'l (In re Ionosphere Clubs, Inc.), No. 89 Civ. 8250 (MBM), 1990 WL 5203, at *5 (S.D.N.Y. Jan. 24, 1990). Courts in this Circuit have construed § 157(d) narrowly to prevent litigants using it as an "escape hatch" out of bankruptcy court. In re Enron, 2004 WL 2149124, at *4. Mandatory withdrawal is appropriate, however, in "cases where substantial and material consideration of non-Bankruptcy Code federal [law] is necessary for the resolution of the proceeding." Shugrue v. Air Line Pilots Ass'n Int'l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 995 (2d Cir. 1990) (internal quotation marks and citation omitted). To satisfy the substantial-consideration test, the issues of non-bankruptcy law raised by the proceeding need not be unsettled or involve matters of "first impression." McCrory Corp. v. 99¢ Only Stores (In re McCrory Corp.), 160 B.R. 502, 505 (S.D.N.Y. 1993) (noting that what is at issue is "the degree to which the bankruptcy judge would have to consider the federal [non-bankruptcy] law" (emphasis added)). It is not clear that only a "simple application" of federal non-bankruptcy law is required of the Bankruptcy Court here.See Exxon, 932 F.2d at 1026.
The CalPX Tariff under which the letters of credit were initially posted indicates that the collateral was meant to cover settlement of each market participant's outstanding liabilities in the CalPX-administered power markets. Id. § 2.2 (declaring that participants "shall maintain sufficient collateral to cover the estimated potential . . . aggregate outstanding liabilities to and from [CalPX] between cash clearing cycles or during the true-up period in which the liabilities are incurred and when payment is billed and settled"); id. § 2.3 (declaring that participants' market activity would be reviewed daily and compared to posted collateral to ensure that each participant met the collateral requirement). Federal tariffs "have the force of [federal] law and are not simply contractual." ATT v. City of New York, 83 F.3d 549, 552 (2d Cir. 1996).
On July 30, 2002, the FERC interpreted Schedule 2, Section 2.2 of the CalPX Tariff in Constellation Power Source, Inc. v. Cal. Power Exch. Corp., 100 F.E.R.C. ¶ 61,124, 2002 WL 1764921, to deny a market participant's request that the FERC direct CalPX to release three letters of credit that had been provided as collateral under the CalPX Tariff, stating:
[T]he disbursement of the collateral, or any disposition of jurisdictional property . . . must be consistent with the CalPX tariff and, to the extent applicable, subject to review and approval by this Commission under Section 203 of the FPA.Id. ¶ 48; see also id. ¶ 12, 27-28 (directing the order to all CalPX market participants on the ground that the "billed and settled" language in the CalPX Tariff required collateral to be retained pending the FERC's determination of outstanding liabilities arising from the California energy crisis).
The FERC has denied several requests from individual market participants to release CalPX collateral and funds on the ground that proper allocation cannot be made until the FERC resolves who owes what to whom in the wake of the California energy crisis.See Pacific Gas Electric Co. v. F.E.R.C., 373 F.3d 1315, 1317 (D.C. Cir. 2004) (noting further that those denials by the FERC are currently on appeal to the D.C. Circuit); see also Pacific Gas Electric Co. v. Cal. Power Exch. Corp., 109 F.E.R.C. ¶ 61,027, 2004 WL 2260894, ¶ 47 (Oct. 7, 2004) ("[T]he disbursement of funds should wait until a final computation of who owes what to whom."); Powerex Corp. v. Cal. Power Exch. Corp., 102 F.E.R.C. ¶ 61,328, 2003 WL 1605933, ¶ 38 (Mar. 27, 2003) (denying a market participant's request to direct CalPX to release a letter of credit posted as collateral under the CalPX Tariff). The FERC's interpretation of the tariff is that the CalPX collateral covers "outstanding liabilities" arising from CalPX market transactions, including as-yet-to-be-determined refunds:
Based on our review of CalPX's tariff, we find that the tariff language provides a basis for retaining the collateral, since outstanding liabilities have not been billed and settled, as required by the tariff. Under the provisions of CalPX's tariff, a market participant is required to post collateral as security for potential defaults arising from this participant's failure to pay its outstanding liabilities to CalPX. Outstanding obligations are not extinguished until they are billed and settled. . . . [T]he final billing and settlement has not yet taken place given the numerous ongoing contested proceedings regarding the transactions that occurred in the CalPX markets. . . . Only after its completion can the Commission begin to determine the liabilities of each supplier. Until those figures are determined, the process of final billing and settling cannot start.PGE Trading-Power, LP v. Cal. Power Exch. Corp., 102 F.E.R.C. ¶ 61,091, 2003 WL 245787, ¶ 14 (Jan. 30, 2003). In requesting that the Bankruptcy Court order CalPx to turn over the letter-of-credit proceeds, Enron invites the Bankruptcy Court to interpret the CalPX Tariff contrary to repeated FERC orders that CalPX retain collateral until all outstanding obligations are billed and settled.
As a threshold issue, it must be determined who has jurisdiction over the collateral at issue. Such a determination requires an examination of the interrelation between the bankruptcy and federal energy regulatory laws and the spheres of authority that enforce those laws. Under the Federal Power Act, the FERC has the exclusive authority to pass upon the reasonableness of the structure, terms, and conditions pertaining to the sale and distribution of wholesale electric rates, see 16 U.S.C. §§ 824, 824d and 824e, but Enron casts its requested relief in non-regulatory terms and asserts that the Bankruptcy Court is confronted with a simple bankruptcy case — nothing more than a contractual dispute between the parties raising security-interest issues — such that the Bankruptcy Court can make the determination of whether to turn over the proceeds "under the provisions of the Bankruptcy Code governing secured claims, applicable nonbankruptcy law, and the terms of [Enron's] contractual agreements with [CalPX]."
A federal district court in Texas recently granted a defendant's motion to withdraw the reference from bankruptcy court in a case with virtually identical facts. See Mirant Americas Energy Marketing, LP v. Pacific Gas Electric Co. (In re Mirant Corp.), No. 04-CV-557-A, slip op. at 2 (N.D. Tex. Oct. 22, 2004). In Mirant, a participant in the California energy markets that had deposited $333,905.34 as "collateral" under the CalPX Tariff filed a complaint against CalPX in its bankruptcy case, Adv. Proc. No. 04-4242 (Bankr. N.D. Tex.), seeking an order directing CalPX to turn the collateral over, despite FERC orders "that no distributions be made until [the FERC's] further order."Id. In withdrawing the reference, the district court concluded that "the bankruptcy court would necessarily have to consider the Federal Power Act in ruling on the adversary complaints" and that such consideration would be "more than de minimis." Id. at 1-2.
The Bankruptcy Court cannot adjudicate this objection and determine whether the letter-of-credit proceeds must be turned over to Enron's bankruptcy estate without substantial and material consideration of federal law beyond Title 11 to determine, at the outset, whether the funds at issue fall within the FERC's exclusive jurisdiction or whether this is a garden-variety bankruptcy case. Accordingly, Defendants' motion to withdraw the reference is granted on mandatory-withdrawal grounds so that this Court may resolve the threshold jurisdictional issues in accordance with applicable non-bankruptcy federal law. The Court need not address the parties' permissive-withdrawal arguments in light of its decision.
III. CONCLUSION
For the aforementioned reasons, Defendants' Motion to Withdraw the Reference of this adversary proceeding to the Bankruptcy Court is GRANTED.
So Ordered.