Fifth Circuit Doubles Down on Right to Reject Filed-rate Contracts, but With an Exception
by | posted in: Bankruptcy, Chapter 11 | 0

By Ronald Silverman, John Beck and Katherine Lynn (Hogan Lovells)

Ronald Silverman
John Beck
Katherine Lynn

The Fifth Circuit recently issued an opinion, Federal Energy Regulatory Commission v. Ultra Resources, Inc., in which it relied on and affirmed its prior 2004 decision — In re Mirant — and held that bankruptcy courts have the authority — at least in many common contexts — to reject filed-rate contracts without the approval of the Federal Energy Regulatory Commission (FERC). The court reasoned that rejection of such contracts only has an indirect effect on the filed-rate and is not a collateral attack, and therefore can be done without FERC’s approval.

Further, the Fifth Circuit held that rejection of a filed-rate contract does not violate 11 U.S.C. § 1129(a)(6) of the Bankruptcy Code because rejection does not change the rate itself, it merely ceases payment of the rate.  Thus, the decision further empowers debtors to reject filed-rate contracts in bankruptcy cases, so long as rejection does not amount to a rate change. 

However, the court did identify an exception to the general rule.  The opinion states that if a debtor seeks to reject a filed-rate contract, but still needs the capacity and seeks to secure a lower rate through rejection, such rejection would be impermissible without FERC’s approval, although that was not the situation in Ultra.  Left for future cases will be the determination of what particular circumstances will require FERC’s permission to reject a filed-rate contract.

Read the full article here.

Courts in Puerto Rico Case Adopts Alternative Test to Find Settlement Agreements Were Executory
by | posted in: Chapter 11, Statutory Interpretation | 0

By John Beck and Jennifer Lee (Hogan Lovells)

John Beck
Jennifer Lee

A debtor can elect to either assume or reject an executory contract under section 365 of the Bankruptcy Code. Because the Bankruptcy Code does not define “executory”, courts have historically overwhelmingly applied the “Countryman” test – which asks whether the contract parties have remaining unperformed obligations such that the failure of either party to complete performance would constitute a material breach of the agreement – to determine if a contract is executory.  In a recent decision, however, Judge Laura T. Swain, the district court judge presiding over the 2017 Puerto Rico Oversight, Management, and Economic Stability Act proceedings, declined to utilize the Countryman test and adopted the alternative “functional approach” to determine whether the agreements at issue were executory. The “functional approach” focuses on the post-petition benefit to the debtor from assumption or rejection of a contract instead of the pre-petition obligations under the contract.  The decision is the latest among a string of recent cases that have relied on non-Countryman tests to determine whether a contract is executory, with the “functional approach” emerging as the prevailing alternative. Read the full article here.