Benchnotes Nov 2004

Benchnotes Nov 2004

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Louisiana Judgment Deemed "Foreign" in Florida

In In re Alford, 308 B.R. 563 (Bankr. S.D. Ala. 2002), Bankruptcy Judge Margaret A. Mahoney held that a Louisiana judgment was a "foreign judgment" within the meaning of Florida's Uniform Enforcement of Foreign Judgments Act (UEFJA). The court held that while the purpose of the UEFJA is to treat a registered foreign judgment as equivalent to a domestic judgment, Florida had a five-year limitations period for taking an "action on a judgment." The court held that an action seeking to declare that a Louisiana federal district court judgment was non-dischargeable constituted "an action on a judgment," and as it was not filed within five years, the action and the claim were barred under the UEFJA.

Gov't. Crop Disaster Payments Are Property of the Estate

In In re Bracewell, 310 B.R. 472 (Bankr. M.D. Ga. 2004), Bankruptcy Judge John T. Laney III held that crop disaster payments were property of the estate where the disaster occurred pre-petition but the legislation was passed post-petition. "The right to the disaster payment was a pre-petition inchoate right that vested or became choate post-petition upon enactment of the legislation. Upon the occurrence of the [pre-petition] disaster, [the debtor] had the right to collect disaster payments from the government, if such legislation was passed."

Electric Co. Executory Contract Can Be Rejected by Debtor

In In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004), the issue before the court was whether or not the district court could authorize the rejection of an executory contract for the purchase of electricity as part of a bankruptcy reorganization, or whether the Federal Energy Regulatory Commission (FERC) had exclusive jurisdiction over such contracts. The debtor utility used the filed rates applicable to its power purchase agreements as a criterion in deciding which agreements to reject. The Fifth Circuit held that this did not convert the debtor's permissible decision to reject a power-purchase agreement into a prohibited collateral attack on a filed rate preempted by the Federal Power Act. The debtor, along with the Unsecured Creditors' Committee and the Official Committee of Equity Security Holders, argued that the district court's jurisdiction over the debtor's reorganization under chapter 11 allowed the court to authorize the rejection of the power contracts. FERC, on the other hand, argued that because the Federal Power Act grants FERC the exclusive authority to regulate the wholesale rates in contracts for the interstate sale of electrical power, any rejection of those contracts must occur in a FERC administrative proceeding. The district court held that it lacked jurisdiction to authorize the debtor to reject the contract in question. The Fifth Circuit, however, held that the court can properly authorize the rejection of an executory power contract in bankruptcy.

The district court found that the debtor's rejection was a prohibited "attempt to avoid their electric energy purchase payment obligations under the Back-to-Back Agreement at the filed rates FERC has found to be just and reasonable." The district court then held that the Bankruptcy Code had to yield to FERC's authority under the Federal Power Act in that the debtor would have to seek relief from the filed rate in a FERC proceeding. Thus, the debtor's motion to reject the contract (the Back-to-Back Agreement) was denied.

Thus, the Fifth Circuit was faced with an apparent conflict between two statutes. Under the so-called "Filed Rate Doctrineâ" developed under the statutory and regulatory scheme established by the Federal Power Act, "[t]he reasonableness of rates and agreements regulated by FERC may not be collaterally attacked in state or federal courts. The only appropriate forum for such a challenge is before the Commission or a court reviewing the Commission's order." Mississippi Power & Light Co. v. Mississippi ex rel Moore, 108 S.Ct. 2428. FERC argued that the FPA preempts the district court jurisdiction in the bankruptcy case because the debtor's effort to reject the agreement was actually a collateral attack on a filed rate. (Recall that the debtor considered the filed rate as part of the process in determining whether or not to assume or reject the contract). The debtor claimed that 28 U.S.C. §1334 and 11 U.S.C. §365 permit it, subject to the district court's approval, to reject any executory contract, including the so-called Back-to-Back Agreement. The court concluded that the power of the district court to authorize rejection of the contract does not conflict with the authority given to FERC to regulate rates in the interstate sale of electricity. While FERC had the exclusive authority to determine wholesale rates, the Bankruptcy Code permits the debtor to reject the contract in question and provides that such rejection is a "breachâ" of the contract. See 11 U.S.C. §365(g). Thus, the question became whether or not the FPA preempts a district court's jurisdiction over claims of breach related to executory power contracts. The court then found that while the FPA does preempt breach-of-contract claims that challenge a filed rate, the district courts are permitted to grant relief in circumstances where the breach of the contract has some other basis in fact. In Gulf States Utils. Co. v. Ala. Power Co., 824 F.2d 1465 (5th Cir. 1987), the court held that courts may set aside an energy contract that was obtained unconscionably or by fraud without interfering with FERC's rulemaking power, so long as that order was not based on a theory that the filed rate was too high. And while the Gulf States opinion recognized that setting aside a contract "will affect the filed rates by eliminating them," it also held that the FPA does not preempt such indirect effects. Gulf States at 1472, n. 9.

The Fifth Circuit concluded that the FPA does not preempt the debtor's rejection of the Back-to-Back Agreement "because it would only have an indirect effect upon the filed rate. When an executory contract is rejected in bankruptcy, the nonbreaching party receives an unsecured claim against the bankruptcy estate for an amount equal to its damages from the breach...." Mirant at 519-520. The court further observed that if the debtor's rejection of the agreement is approved, then the other contracting party's unsecured claim against the bankruptcy estate would be based on the amount of electricity it would have otherwise sold to the debtor under the agreement at the filed rate, and thus that the damages calculation from the rejection of the contract under the Bankruptcy Code is analogous to the damages calculation previously approved in the Fifth Circuit's opinion in Gulf States because the award calculation is based on the filed rate. See Gulf States, 824 F.2d at 1471.

Section 365(a) permits the debtor to select, within certain limits, which executory contracts it will reject and which it will assume. See In re Topco Inc., 894 F.2d 727, 741 (5th Cir. 1990) (as relied upon by the Fifth Circuit in Mirant at 520) ("In effect, §365 allows debtors to pick and choose among their agreements and assume those that benefit their estates and reject those that do not.") The court in Mirant went on to observe that "presumably, a contract's filed rate will be a relevant factor to the bankruptcy estate when it makes this determination (of whether or not to reject the contract or to assume it) (citations omitted)." Mirant at 520.

The Fifth Circuit then concluded that "in light of the numerous specific exceptions to the general §365(a) authority to reject contracts that Congress chose to include in the Bankruptcy Code, including those for other contracts subject to extensive regulation, and the absence of any exception for contract subject to FERC jurisdiction, it is clear that Congress intended §365(a) to apply to contracts subject to FERC regulation. Cf. NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522-23, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984)." Mirant at 522. The court then concluded that "the FPA does not preempt a district court's jurisdiction to authorize the rejection of an executory contract subject to FERC regulation as part of a bankruptcy proceeding. A motion to reject an executory power contract is not a collateral attack upon that contract's filed rate because that rate is given full effect in determining the breach of contract damages resulting from rejection. Furthermore, there is nothing within the Bankruptcy Code itself that limits a public utility's ability to choose to reject an executory contract subject to FERC regulation as part of its reorganization process." Mirant at 522.

With respect to the actual decision by a district court on whether or not to permit the rejection of such a contract (the Back-to-Back Agreement), the Fifth Circuit gave the following instructive review: "Upon remand, the district court should consider applying a more rigorous standard (than the business judgment rule) to rejection of the Back-to-Back Agreement. If the district court decides that a more rigorous standard is required, then it might adopt a standard by which it will authorize rejection of an executory power contract only if the debtor can show that it ‘burdens the estate...that, after careful scrutiny, the equities balance in favor of rejecting' that power contract, and that rejection of the contract would further the chapter 11 goal of permitting the successful rehabilitation of debtors. See Bildisco, 465 U.S. at 526-27, 104 S.Ct. 1188. When considering these issues, the courts should carefully scrutinize the impact of rejection upon the public interest and should, inter alia, ensure that rejection does not cause any disruption in the supply of electricity to other public utilities or to consumers." Mirant at 525.

"Evergreenâ" Retainers Permissible

In In re Pan American Hosp. Corp., 312 B.R. 706 (Bankr. S.D. Fla. 2004), the chapter 11 debtor's attorneys filed an interim fee application, which was objected to by the U.S. Trustee's office. The U.S. Trustee objected to the "evergreenâ" nature of the retainer claimed by the attorneys. In reviewing the matter, the court summarized the different types of retainers. The "classic retainerâ" is payment to an attorney irrespective of whether or not the attorney provides any service to the client. Essentially, this type of retainer is entirely earned by the attorney upon payment, with the client retaining no interest in the funds. A special retainer, on the other hand, can take one of three forms: "security retainer," "advance-fee retainerâ" or "evergreen retainer." Under the "security retainer," money is given to an attorney not as present payment for future services, but to hold as security for payment of fees in the future for services to be provided to the client in the future. Any unearned funds then are turned back to the client. Until the services actually have been rendered and charges have been applied for those services from the retainer, the retainer remains the property of the client. Under the "advance fee retainer," the client pays in advance for some or all of the services that the attorney is expected to perform on the client's behalf. The difference between an advance fee retainer and a security retainer is that ownership of the retainer is intended to pass to the attorney at the time of payment in the case of an advance fee retainer. This is in exchange for the attorney's commitment to provide legal services. The "evergreen retainerâ" is one that is given to the attorney with the intention that it shall remain intact and that the attorney interim fees, such as those for representing a debtor in bankruptcy, would be paid from debtor's operating capital. Thus, professionals holding evergreen retainers do not look to the retainer payment until such time as a final fee application is presented and approved by the bankruptcy court. In this case, the court holds that subject to approval as to their reasonableness, evergreen retainers are permissible for professionals in chapter 11 cases.


  • In re Hayden, 308 B.R. 428 (9th Cir. BAP 2004) (refusal to surrender vehicle in order to maintain or continue perfection of possession lien for towing and storage charges, as opposed to enforcement of lien, is not a violation of automatic stay);
  • In re Wheatfield Business Park LLC, 308 B.R. 463 (9th Cir. Bankr. 2004) (chapter 11 debtor didn't violate automatic stay by objecting to creditor's proof of claim where creditor was also a debtor);
  • In re Fashion Accessories Ltd., 308 B.R. 592 (Bankr. N.D. Ga. 2004) (revocable beneficiary of life insurance policy that paid premiums but didn't own policy did not have a beneficial interest of a kind to recover policy proceeds paid to owner's wife after owner exercised his right to change beneficiary);
  • In re Bli, 309 B.R. 295 (Bankr. E.D. Mich. 2004) (debtors whose farming operation was conducted through a joint venture was still a "farmerâ");
  • In re FV Steel and Wire Co., 310 B.R. 390 (Bankr. E.D. Wis. 2004) (under Illinois version of old Article 9, financing statement that was filed under debtor's trade name rather than under true corporate name was ineffective to perfect creditor's security interest);
  • In re Grammer, 310 B.R. 423 (Bankr. E.D. Ark. 2004) (if notice is adequate, value of collateral for purposes of determining secured claim can be determined on motion prior to confirmation, at confirmation as part of a trial of a contested plan or at a separate hearing on the creditor's claim);
  • In re Whitcomb, 310 B.R. 428 (Bankr. W.D. Ark. 2004) (self-employed chapter 13 debtors who did not incur trade debt were not "engaged in businessâ" and thus were not statutorily required to file monthly operating reports); and
  • In re Media Properties Inc., 311 B.R. 244 (Bankr. W.D. Wis. 2004) (post-petition proceeds from the sale of broadcast license approved by FCC were required to be distributed to creditor, which filed pre-petition security agreement and financing statement perfecting a security interest in general intangibles).
Journal Date: 
Monday, November 1, 2004