Amanda Gazzo
St. John's University School of Law
American Bankruptcy Institute Law Review Staff
In Gulfport Energy Corp. v. FERC, the Fifth Circuit Court of Appeals held that the Federal Energy Reserve Commission (FERC) had authority to issue certain prepetition declaratory orders to the petitioner, Gulfport Energy Corporation, a producer of natural gas.[1] However, when those declaratory orders by the FERC usurp the bankruptcy court’s power to permit rejection of executory contracts they must be vacated.[2]
The petitioner and debtor in this case, Gulfport Energy Corporation, produces natural gas and, through transportation service agreements (TSAs), Rover Pipeline (“Rover”) agreed to transport the gas through its pipelines.[3]The TSAs governed the daily quantity of gas the petitioner could push through the pipeline and the rates Rover could charge the petitioner for their services.[4] Due to the COVID-19 pandemic, petitioner warned Rover that decreased commodity prices had impaired its ability to refinance its indebtedness.[5] This warning worried Rover because if the petitioner failed and had to reject the TSAs, it might result in monetary loss for Rover.[6] As a result, Rover petitioned to the respondent, FERC, for FERC to have exclusive jurisdiction over the agreements so that petitioner would have to get FERC’s approval before rejecting those TSAs in any potential bankruptcy.[7] FERC approved of Rover’s petition for exclusive jurisdiction and stated that the bankruptcy court could not confirm any plan of reorganization that authorized petitioner’s rejection of a TSA without FERC’s prior approval.[8]
Later on, petitioner filed for bankruptcy and asked the bankruptcy court to allow it to reject the TSAs.[9] The bankruptcy court confirmed the petitioner’s plan of reorganization, which included rejection of the TSAs.[10] In making this decision, the court followed the controlling precedent of the Mirant Court[LS1] , which held, “a bankruptcy court can authorize rejection of a filed-rate contract, and post-rejection, FERC cannot require continued performance on that rejected contract.”[11] However, FERC denied a rehearing of the order that granted themselves exclusive jurisdiction over the TSAs, and as a result, petitioner requested review from the 5th Circuit.[12]
The Bankruptcy Code “allows debtors to breach and cease performing executory contracts if the bankruptcy court approves,” known as rejecting the contract.[13] Counterparties to a contract or agreement which has been rejected in a bankruptcy are entitled to a claim for damages.[14] Essentially, the debtor’s future non-performance converts to a claim for damages.[15] In this case, FERC issued its orders against the petitioner prior to the bankruptcy filing, meaning that it did not violate the bankruptcy court’s superiority at time of issuance, nor did the FERC exceed its authority under the law.[16] Nonetheless, the FERC’s orders issued against the petitioner were, according to the Fifth Circuit, unlawful because they asserted “parallel, exclusive jurisdiction” over petitioner’s filed-rate contract, and purported “to bar the bankruptcy court from allowing rejection.”[17] Here, FERC’s orders attempted to bind the petitioner to the TSAs, even though the bankruptcy court gave the petitioner a right to reject them.[18]
The Fifth Circuit concluded that because FERC cannot “countermand” a debtor’s bankruptcy law rights or the bankruptcy court’s powers, the Fifth Circuit would grant the petitioner’s request and vacate the four orders issued by FERC, purporting to bind the petitioner to continue performing its gas transit contracts even though they were rejected during bankruptcy.[19] Through this decision, the Fifth Circuit strengthened the importance and precedent of the Mirantcourt.[20] In striking down FERC’s arguments, the Fifth Circuit reinforced the principle that FERC “cannot usurp the bankruptcy court’s power to decide” whether or not to allow a bankruptcy petitioner to reject a contract or agreement.[21]
[1] Gulfport Energy Corp. v. FERC, 41 F.4th 667, 681 (5th Cir. 2022).
[2] Id.
[3] Id. at 673.
[4] Id.
[5] Id.
[6] Id. (“If Gulfport failed, it might reject the TSAs and, being insolvent, pay Rover cents on the dollar for its due under those contracts.”).
[7] Id.
[8] Id. at 674.
[9] Id.
[10] Id. at 675.
[11] Id. (citing In re Mirant Corp., 378 F.3d 511 (5th Cir. 2014)).
[12] Id. at 674.
[13] Id. at 671.
[14] Id. at 672.
[15] Id. at 684.
[16] Id. at 681–82.
[17] See id. at 682–83 (“[I]t flouts the Bankruptcy Code, Supreme Court precedent, and the caselaw of every federal circuit.”).
[18] Id. at 684–85.
[19] Id. at 671.
[20] See id. at 684–85.
[21] Id. at 685.