Fifth Circuit Clarifies When Bankruptcy Courts Must Abstain From Complex State Law Issues In Chapter 15 Proceedings

• Jurisdiction: United States,Federal,Texas
• Law Firm: Winston & Strawn LLP
• Subject Matter: Energy and Natural Resources, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Energy Law
• Author: Katherine A. Preston, Carey Schreiber and Elysa J. Chew
• Published date: 22 March 2023

Two years ago, winter storm Uri raged across the southern United States, devastating the energy grid in Texas. In the aftermath, several energy companies filed for bankruptcy. A recent Fifth Circuit opinion from one case highlights a tension that can arise when bankruptcy courts confront complex issues of state law as part of a restructuring'especially in the context of chapter 15 proceedings, which allow a company pursuing insolvency proceedings in a foreign jurisdiction to file bankruptcy in the United States as well.¹

Chapter 15 proceedings provide significant protection to debtors, such as imposing an automatic stay on all U.S. litigation and requiring any disputes to instead go through the bankruptcy court. What's more, in chapter 15 cases, federal law generally prohibits courts from abstaining from legal issues under 28 U.S.C. ' 1334(c) ("section 1334(c)").² This further streamlines chapter 15 proceedings by helping to ensure that the bankruptcy court serves as the single forum for disputes. At the same time, when complex state issues arise in connection with a chapter 15 bankruptcy case, federal courts may question whether those disputes belong in state court, rather than federal court.

Recently, the Fifth Circuit confronted this exact scenario in the context of a post-Uri chapter 15 case and held that abstention should have prevailed. Just Energy Group Inc. ("Just Energy") filed insolvency proceedings in Canada under the Companies' Creditors Arrangement Act and then filed ancillary chapter 15 proceedings in the Southern District of Texas. In connection with its chapter 15 cases, Just Energy sought to challenge amounts it had paid to ERCOT (the Electric Reliability Council of Texas) in the wake of Uri.

The backdrop of the Just Energy opinion is the state of Texas's uniquely insular energy system. Texas's Public Utility Regulatory Act established ERCOT as an independent operator of Texas's state-specific electrical grid. ERCOT's role is to manage the wholesale electricity market and set market-clearing prices for energy in Texas. Just Energy and others like it buy their power from ERCOT at the price ERCOT sets. During Uri, the interrupted supply and immense demand for energy strained the entire Texas energy system, leading ERCOT to set the price at $9000 per megawatt hour for more than 80 hours. This price caused Just Energy to face a $335 million bill from ERCOT, which Just Energy was unable to pay and ultimately led to the bankruptcy filing.

Just...