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Enron Mail |
Elizabeth:
We followed up on our discussions last week regarding the consequences of a possible bankruptcy of a municipal counterparty and our ability to terminate and liquidate our positions in such event, without regard to the generally applicable automatic stay. Attached is a brief memo discussing this issue. The principal points to note are as follows: (1) Municipalities, if they were to file for bankruptcy, do so under Chapter 9 of the Bankruptcy Code ("BC")--e.g., Orange County, CA. (2) The "forward contract" exception to the automatic stay found in Sec. 556 of the BC presently is not explicitly made applicable to filings pursuant to Chapter 9. As you recall, Sec. 556 allows termination of a forward contract because of the commencement of a bankruptcy case notwithstanding the general prohibition for termination of executory contracts for such grounds in Sec. 365. This appears to have been an oversight when Sec. 556 was added to the BC in 1982 (according to the National Bankruptcy Review Commission) and probably has not been a "high on the agenda item" to correct due to the fact that Chapter 9 bankruptcies are relatively rare. (3) It appears that the other amendments to the BC dealing with forward contracts are applicable to Chapter 9, such as Sec. 362 (b) (6) which allows the non-defaulting party to setoff or settle without regards to the stay if there is an existing default other than an insolvency event. Also note that Colliers on Bankruptcy, the "Bible" in this area, suggests that one can nonetheless make the argument that the forward contract exception can be read to apply to Chapter 9 filings under present law (see also the discussion at (6) below)--although it is uncertain whether a bankruptcy court would accept this argument to effectively write something into the statute. (4) There currently is pending legislation that has been passed by both the House and the Senate (and is now the subject of a joint House/Senate Conference Committee) that would make it clear that the forward contract exception to the automatic stay shall apply to Chapter 9 bankruptcies. Adding Sec. 556 to Sec. 901 (the section delineating which sections are applicable to Chapter 9 bankruptcies) is not controversial and should survive the joint conference committee since similar provisions exist in both the House and Senate bills. These provisions are part of the overall legislation making fundamental changes in the BC (that has received a lot of press and which is controversial in terms of how it treats individual consumers filing for bankruptcy). Our sense, however, is that the bill will be passed and signed by President Bush. (5) Assuming the amendments to Chapter 9 filings are enacted, under the existing bills they would first become effective for bankruptcy cases filed after 180 days after the legislation is signed by the President. Thus, to the extent that ENA has existing contracts with municipalities, ENA would be permitted to exercise its termination and liquidation rights thereunder without regard to the automatic stay as long as the municipal counter party does not file within 6 months after the date the legislation is signed. (6) It is worth noting that the legislative committee reports describing the changes provide that Congress is "clarifying" that the forward contract provisions of the BC apply to municipal bankruptcies, noting that these provisions "by their terms are intended to apply to all proceedings under Title 11" (which includes Chapter 9 proceedings). The Senate Report goes on to say that: "Although sections...556...provide that they apply in any proceeding under the Bankruptcy Code, this subsection makes a technical amendment in chapter 9 to clarify the applicability of these provisions." (Emphasis added). Thus, this committee language would appear to support an argument that Sec. 556 applies to Chapter 9 bankruptcies under Congress's interpretation of existing law--obviously, the hoped for result from ENA's standpoint. (7) For your information, when Orange County, CA, filed for bankruptcy the County filed under Chapter 9. The investment pool that held the derivatives and other financial contracts initially also made a separate filing under Chapter 9. This filing was dismissed, essentially on the basis the investment pool was not eligible for relief under Chapter 9 because it did not qualify as a "municipality" and it had not been specifically authorized to file under Chapter 9. The dealers and brokerage houses terminated and liquidated their positions shortly after the initial filing, based on their belief that the investment pool's use of Chapter 9 was improper. Their terminations and liquidations were not undone. (8) Lastly, as mentioned above, you should note that even if Sec. 556 is not applicable to Chapter 9 filings under existing law, if ENA terminated a power contract with a municipality prior to the filing date for a reason other than the act of filing a bankruptcy petition (e.g., a bond downgrade; failure to post collateral; a cross default; the existence of a condition where the counterparty is "unable to pay its debts as they come due," etc.), ENA would be permitted to proceed with the liquidation of its position (and it could exercise any set off or settlement rights) without regard to the automatic stay. Hopefully, the pending legislation will be passed and the concern as to the applicability of Sec. 556 to municipalities will be completely eliminated within a relatively short period of time. In the interim, particularly during the upcoming summer (when prices in many locations will be highly volatile and certain parties' credit positions could fluctuate rapidly and materially in some cases, particularly if they are filling open positions in the spot market), it may make sense to alert our credit group to be particularly vigilant in their monitoring of the ongoing financial condition of our municipal counterparties so that we preserve as much flexibility as possible with respect to exercising our termination rights under the contracts on account of defaults other than the filing of a bankruptcy petition by or against our counterparty. Please give me (or Carl, 303 291-2630, or Jim, 303 291-2632) a call if you want to follow up on any of this. Thanks. John "This e-mail, including attachments, contains information that is confidential and it may be protected by the attorney/client or other privileges. This e-mail, including attachments, constitutes non-public information intended to be conveyed only to the designated recipient(s). If you are not an intended recipient, please delete this e-mail, including attachments and notify me by return mail, e-mail or by phone at 212 424-8125. The unauthorized use, dissemination, distribution or reproduction of the e-mail, including attachments, is prohibited and may be unlawful. John Klauberg LeBoeuf, Lamb, Greene & MacRae, L.L.P. 212 424-8125 jklauber@llgm.com - bankr.wpd
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