AEP Energy Services Gas Holding Co. v. Bank of America, N.A.

08-4196-cv (L); 08-4671-cv (XAP)
AEP Energy Services Gas Holding Company v. Bank of America, NA

1 UNITED STATES COURT OF APPEALS

2 FOR THE SECOND CIRCUIT

3 August Term, 2009

4 (Argued: September 29, 2009 Decided: October 29, 2010)

5 Docket Nos. 08-4196-cv (L); 08-4671-cv (XAP)*

6 -------------------------------------

7 AEP ENERGY SERVICES GAS HOLDING COMPANY, HOUSTON PIPE LINE
8 COMPANY LP, HPL RESOURCES COMPANY LP,

9 Plaintiffs-Counter-Defendants-Appellants-Cross-Appellees,

10 - v -

11 BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT, AS MASTER SWAP
12 COUNTERPARTY, AS SECURED PARTY, AND AS PURCHASER, THE BANK OF NEW
13 YORK, AS TRUSTEE OF THE BAMMEL GAS TRUST,

14 Defendants-Counterclaimants-Appellees-Cross-Appellants.

15 -------------------------------------

16 Before: JACOBS, Chief Judge, SACK and LYNCH, Circuit Judges.**
17
18 Appeal from a summary judgment entered by the United

19 States District Court for the Southern District of New York

20 (Thomas P. Griesa, Judge) in favor of the defendants. The

21 plaintiffs, AEP Energy Services Gas Holding Company, Houston Pipe

22 Line Company, and HPL Resources Company, brought several claims

23 for declaratory and other relief against the defendants, Bank of

24 America, N.A. and the Bank of New York, seeking to establish a

*
08-4671-cv (XAP) has been withdrawn by stipulation filed
January 7, 2009.
**
At the time of oral argument, Judge Lynch was a United
States District Judge for the Southern District of New York,
sitting by designation. He has since joined the Court.
1 right superior to the defendants' to use certain reserves of

2 natural gas and related assets in which Bank of America claimed a

3 vested security interest. Bank of America counterclaimed for

4 conversion, breach of bailment agreement, and replevin, alleging

5 a superior secured interest in the gas, which interest had been

6 infringed when the plaintiffs refused to relinquish possession of

7 the gas upon Bank of America's demand. The district court

8 (Thomas P. Griesa, Judge) granted summary judgment in favor of

9 the defendants on all of the plaintiffs' claims and on Bank of

10 America's conversion-related counterclaims, as to which it

11 awarded damages to Bank of America in excess of $345 million.

12 The district court also denied the plaintiffs' motions to amend

13 the complaint and to defer ruling on the summary judgment

14 motions, which were made during the pendency of summary judgment

15 proceedings. The summary judgment for the defendants is vacated

16 with respect to the plaintiffs' non-declaratory claims. The

17 district court's judgment is affirmed in all other respects.

18

19 Affirmed in part; vacated in part.

20 IRA M. FEINBERG, Hogan & Hartson, LLP
21 (Jenny Rubin Robertson, Toby W. Smith,
22 of counsel; David Dunn, Frank T. Spano,
23 on the briefs) New York, N.Y., for
24 Plaintiffs-Counter-Defendants-
25 Appellants-Cross-Appellees.
26
27 AARON RUBINSTEIN, Kaye Scholer LLP
28 (Robert Grass, W. Stewart Wallace, Lee
29 M. Cortes, Jr., of counsel; Margot B.
30 Schonholtz, Jeffrey A. Fuisz, on the
31 briefs), New York, N.Y., for

2
1 Defendants-Counterclaimants-Appellees-
2 Cross-Appellants.

3 SACK, Circuit Judge:

4 This action stems from a dispute over the rights to

5 natural gas stored in the Bammel Gas Storage Facility, an

6 underground gas reservoir located in Texas. The plaintiffs, AEP

7 Energy Services Gas Holding Company ("AEP"), Houston Pipe Line

8 Company LP ("HPL"), and HPL Resources Company LP ("HPLR")

9 (hereinafter sometimes collectively the "plaintiffs") entered

10 into a complex series of transactions with Enron Corporation or

11 affiliates thereof (hereinafter collectively "Enron"), Bank of

12 America, and the Bank of New York with respect to the right to

13 use certain natural gas and assets contained in the Bammel Gas

14 Storage Facility. The Bammel Gas Storage Facility is owned by

15 the Bammel Gas Trust, a special-purpose entity formed and owned

16 in equal part by Enron and Bank of America, of which the Bank of

17 New York is Trustee.

18 After Enron entered bankruptcy proceedings in the

19 United States Bankruptcy Court for the Southern District of New

20 York in December 2001, Bank of America and the Bank of New York

21 attempted to repossess the gas contained in the Bammel Gas

22 Storage Facility, purportedly pursuant to the terms of the

23 operating agreements among the parties. The plaintiffs refused.

24 Instead, they brought suit against the two banks in the United

25 States District Court for the Southern District of Texas (the

26 "Texas District Court") alleging a superior right to continue to

3
1 use the gas. Bank of America responded by counterclaiming

2 against the plaintiffs for conversion, breach of bailment

3 agreement, and replevin, asserting a superior secured interest in

4 the gas that had vested upon Enron's bankruptcy. Following the

5 approval by the Bankruptcy Court of a settlement agreement among

6 Enron, Bank of America, and the Bank of New York relating to the

7 Bammel Gas transaction at issue in this appeal, the Texas

8 District Court severed the plaintiffs' declaratory claims from

9 their non-declaratory claims, which were based on tort and

10 contract theories, and transferred the declaratory claims, and

11 Bank of America's related counterclaims, to the United States

12 District Court for the Southern District of New York (the "New

13 York District Court"). The Texas District Court retained the

14 plaintiffs' non-declaratory claims and Bank of America's related

15 counterclaims.

16 Upon this transfer, over the plaintiffs' objections and

17 contrary to the express intention of the Texas District Court,

18 the New York District Court adjudicated the entire controversy,

19 including the non-declaratory claims and counterclaims that had

20 been retained by the Texas District Court. Then, in a series of

21 rulings, the New York District Court granted defendant Bank of

22 America's motion for summary judgment as to both the plaintiffs'

23 declaratory claims and non-declaratory claims, and Bank of

24 America's counterclaims, and awarded damages to Bank of America

25 on its counterclaims in the amount of $345,675,000 plus

26 prejudgment interest. At the same time, the district court

4
1 denied the plaintiffs' motions filed during the pendency of the

2 summary judgment proceedings to amend the complaint and to

3 postpone a decision on the summary judgment motions in order to

4 permit the conduct of further depositions.

5 We agree with the district court with respect to the

6 grant of summary judgment as to the declaratory claims and

7 related counterclaims, which had been properly transferred by the

8 Texas District Court to New York, and as to the denial of the

9 plaintiffs' motions to amend and to allow them to take further

10 depositions. We conclude, however, that adjudication of the non-

11 declaratory claims by the New York District Court was an abuse of

12 discretion. The Texas District Court -- in which the claims were

13 first filed -- expressed a clear intention to retain the non-

14 declaratory claims and no special circumstances were present to

15 outweigh the presumption in favor of the first-filed

16 jurisdiction; therefore, the New York District Court should have

17 declined to consider them. Having so determined, we vacate the

18 summary judgment with respect to the non-declaratory claims,

19 which we conclude should be adjudicated in Texas.

20 BACKGROUND

21 The relevant facts are rehearsed in detail in the

22 district court's four lengthy and careful opinions in this case.

23 See AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A., 2007

24 WL 2428474, 2007 U.S. Dist. LEXIS 63421 (S.D.N.Y. Aug. 28, 2007)

25 ("AEP I"); AEP Energy Servs. Gas Holding Co. v. Bank of Am.,

5
1 N.A., 2007 WL 4458117, 2007 U.S. Dist. LEXIS 93022 (S.D.N.Y. Dec.

2 18, 2007) ("AEP II"); AEP Energy Servs. Gas Holding Co. v. Bank

3 of Am., N.A., 2008 WL 925433, 2008 U.S. Dist. LEXIS 30587

4 (S.D.N.Y. Apr. 2, 2008) ("AEP III"); AEP Energy Servs. Gas

5 Holding Co. v. Bank of Am., N.A., 2008 WL 3338203, 2008 U.S.

6 Dist. LEXIS 61264 (S.D.N.Y. Aug. 11, 2008) ("AEP IV"). They are

7 set forth here only insofar as we think it necessary for an

8 understanding of our resolution of this appeal. We construe the

9 evidence in the light most favorable to the plaintiffs, as the

10 non-moving parties, and draw all reasonable inferences in their

11 favor. See, e.g., SCR Joint Venture L.P. v. Warshawsky, 559 F.3d

12 133, 137 (2d Cir. 2009).

13 The 1997 Transaction

14 In November 1997, Enron,1 in an effort to generate off-

15 balance-sheet capital before the end of the year, entered into a

16 series of interrelated agreements (the "Operative Agreements")

17 with Bank of America ("BofA") and the Bank of New York as trustee

18 ("BONY" or the "Trustee"), among other entities, to monetize the

19 natural gas owned by Enron's then-wholly owned subsidiary HPL.

20 At that time, HPL owned and operated an underground natural gas

21 storage reservoir in Harris County, Texas, called the Bammel Gas

22 Storage Facility (the "Storage Facility"). HPL and its own

23 subsidiary, HPLR, owned approximately 80 billion cubic feet

1
Some of the transactions discussed in this opinion were
undertaken by affiliates or subsidiaries of Enron Corporation.
For ease of reference, we refer throughout to all of these
entities collectively as "Enron."
6
1 ("Bcf")2 of natural gas kept in the Storage Facility (the

2 "Storage Gas").

3 In order to achieve its goal of off-balance-sheet

4 financing, Enron and BofA's predecessor in interest in this

5 transaction, NationsBank, N.A.,3 created the Bammel Gas Trust

6 ("BGT" or the "Trust"), a special-purpose entity that was owned

7 in equal parts by the two entities. BONY was designated to act

8 as the Trustee of BGT.

9 Following the creation of BGT, Enron caused HPL and

10 HPLR to sell the Storage Gas to BGT for a purchase price of $232

11 million. The sale was pursuant to a Storage Gas Sale Agreement,

12 which stated, among other things, that the agreement would "serve

13 as a bill of sale for the Storage Gas without the necessity of

14 having any separate bill of sale or other evidence of the

15 transfer of the Ownership of the Storage Gas" from HPL to BGT,

16 and that BONY, as Trustee of BGT, would be "deemed to have taken

17 delivery of the Storage Gas" as of the date of purchase. Storage

18 Gas Sale Agreement dated December 30, 1997 ("1997 Sale

19 Agreement") §§ 2.03, 2.04, Exh. H to the Declaration of Aaron

20 Rubinstein in Support of Defendants' Motion for Summary Judgment

2
Another measure of natural gas quantity, which is used in
the transaction documents and will be referenced in this opinion,
is "MMBtus." The technical distinction between these two
measures is not relevant to our discussion or resolution of the
issues on appeal. Suffice it to say that 80 Bcf of natural gas
is approximately equivalent to 80,000,000 MMBtus.
3
Bank of America acquired NationsBank through a merger in
1998. For convenience, all Bank of America affiliates involved
in this transaction are hereinafter referred to collectively as
"Bank of America" or "BofA."
7
1 ("Rubinstein Decl."), AEP Energy Gas Servs. Holding Co. v. Bank

2 of Am., N.A., No. 05 Civ. 4248 (S.D.N.Y. Aug. 28, 2006). See

3 generally Participation Agreement dated December 30, 1997 ("1997

4 Participation Agreement"), Exh. A to Rubinstein Decl.

5 To fund this purchase, BofA (through its affiliate,

6 Kitty Hawk Funding) loaned BGT approximately $218 million, and

7 BofA and Enron each injected approximately $7 million of equity

8 into BGT, with Enron's equity contribution also financed by

9 BofA.4 As collateral for the loan, BONY, the Trustee of BGT,

10 granted BofA a security interest in all of the assets held in the

11 Trust, including the Storage Gas, pursuant to a Security

12 Agreement. See Security Agreement dated December 30, 1997 ("1997

13 Security Agreement") § 3, Exh. B to Rubinstein Decl.

14 Concurrently with this transaction, BGT granted HPL and

15 HPLR continued use of the Storage Gas and the Storage Facility

16 under a Pressurization and Storage Gas Borrowing Agreement (the

17 "Pressurization Agreement") in exchange for the payment of

18 "pressurization fees" to BGT, which BGT then used to pay the

19 interest on the BofA loan. Pursuant to this agreement, HPL and

20 HPLR could use the Storage Gas to pressurize the Storage

21 Facility, in order to facilitate the storage and withdrawal of

22 other customers' natural gas; HPL and HPLR could also borrow and

4
BofA later syndicated $229 million of the loan to six
other banks. BofA serves as the representative of BONY (the
Trustee of BGT) and as the Administrative Agent for the other
banks.
8
1 withdraw up to a certain quantity of the Storage Gas for other

2 working uses, subject to replacement.

3 The Pressurization Agreement provided that title to and

4 ownership of the Storage Gas remained with the Trustee until such

5 time as the Storage Gas was either withdrawn and sold by the

6 Trust or borrowed by HPL. The Pressurization Agreement also

7 provided that beginning in 2004 (when the loan principal was due

8 to be repaid to BofA), HPL was obligated to withdraw the Storage

9 Gas from the facility and make it available to BGT in accordance

10 with a "Withdrawal Schedule." Enron was then obligated to sell

11 that gas pursuant to a Marketing Agreement and to pay to BGT the

12 Houston Ship Channel Index price5 for the gas, irrespective of

13 the price that Enron actually received from the sale. The

14 proceeds from this sale were to be applied by BGT to repayment to

15 BofA of the principal of the loan.

16 HPL also had the option under this agreement, instead

17 of withdrawing the Storage Gas to be sold pursuant to the

18 Withdrawal Schedule, to supply Enron with "Exchange Gas" of

19 equivalent quality and value to be sold by Enron pursuant to the

20 Marketing Agreement to fund BGT's repayment of the BofA loan, and

21 thereby to continue to use the Storage Gas in the Storage

22 Facility after the 2004 withdrawal date.

5
The Houston Ship Channel Index lists the price at which
natural gas is being sold in the Houston Ship Channel at a
particular point in time. It is generally regarded as reflective
of the prevailing market price of natural gas.
9
1 In addition, through a Performance Guaranty (the

2 "Guaranty"), Enron guaranteed all the obligations of its

3 subsidiaries, including HPL and HPLR, under the Operative

4 Agreements. The Guaranty provided that in the event of a

5 "Guaranty Default," the Trustee had the right to immediate

6 possession of the gas. A Guaranty Default was deemed to exist to

7 the extent that, inter alia, "[a]ny representation or warranty

8 made by Enron under or in connection with this Guaranty shall

9 prove to have been incorrect in any material respect when made

10 and such materiality is continuing" or "Enron or any of its

11 Principal Subsidiaries shall become the subject of a Bankruptcy

12 Event." Performance Guaranty dated December 30, 1997 ("1997

13 Guaranty") §§ 5.01(a), 5.01(c), Exh. E to Rubinstein Decl.

14 Although BGT nominally owned the Storage Gas and the

15 Storage Facility following this transaction, HPL and HPLR's right

16 to use the sold assets continued uninterrupted except for (1) the

17 payment from BGT to HPL for the purchase of the Storage Gas and

18 the Storage Facility, (2) fees paid by HPL to BGT for the use of

19 the Storage Gas and the Storage Facility, and (3) the fact that

20 Enron could now book this as a "sale" for year-end-revenue

21 accounting purposes. In effect, the transaction functioned

22 similarly to a sale and leaseback of the gas.

10
1 The 2001 Transaction

2 In 2000, Enron decided to sell HPL.6 However, for its

3 own accounting advantage, it wanted to keep the existing off-

4 balance-sheet structure in place. AEP expressed interest in

5 purchasing HPL outright, but Enron was unwilling to unwind the

6 1997 transaction structure in order to make the sale of HPL to

7 AEP.

8 In May 2001, Enron and AEP settled on the following

9 transaction structure: Enron created a new subsidiary, BAM

10 LeaseCo ("LeaseCo"), which assumed all of the rights and

11 obligations of HPL under the Operative Agreements, as well as

12 specified assets of HPL, pursuant to an Assignment and Assumption

13 Agreement. Thus LeaseCo effectively stepped into the shoes of

14 HPL with respect to its transaction with BGT, freeing HPL of

15 these rights and obligations. AEP then bought HPL. Soon after,

16 HPL bought approximately 25 Bcf of gas back from BGT for $94

17 million. BofA thereafter agreed to release its security interest

18 in this gas. That left BGT with title to only 55 Bcf of Storage

19 Gas, and BofA with this same amount of Storage Gas as secured

6
Prior to this, in November 1999, there was another
transaction in which HPL entered into a second sale–leaseback
arrangement with another Enron-formed special purpose entity
named Asset Holdings, L.P. ("Holdings"), in which HPL effectively
sold its interest in the Storage Facility and other equipment and
assigned its obligations under the Pressurization Agreement to
Holdings, and Holdings then leased these assets back to HPL.
Holdings was thus among the interested parties in the 2001
restructuring, along with HPL. Because the transaction between
Holdings and HPL does not materially affect the issues on appeal,
however, for purposes of our description of the 2001 Transaction
it will be largely ignored.
11
1 collateral for the loan. LeaseCo then subleased the Storage

2 Facility and associated pipelines and equipment back to HPL for a

3 term of thirty years (with a further twenty-year option), for

4 which AEP prepaid the rent of $274 million to LeaseCo.

5 Additionally, under a "Right To Use Agreement," LeaseCo

6 granted HPL "quiet enjoyment" of the Storage Gas for the entire

7 term of the sublease. Specifically, section 2.01(b) of the Right

8 To Use Agreement provides, in relevant part, that:

9 LeaseCo covenants and agrees that, so long as
10 no HPL Default has occurred and is
11 continuing, and notwithstanding the terms,
12 provisions and restrictions in any
13 Counterparty Agreement, LeaseCo will have
14 sufficient rights in and to the [Storage Gas]
15 to enable it to make, and that it will cause
16 and allow, such [Storage Gas] to be available
17 to HPL at the Storage Facility for HPL's
18 right to Quiet Enjoyment at all times during
19 the Term[ of the sublease]. . . . The
20 existence of a Permitted Lien shall not be a
21 breach by LeaseCo of this Section 2.01(b);
22 provided, however, that LeaseCo covenants and
23 agrees with HPL that LeaseCo shall timely
24 perform and comply with those of its
25 obligations under the Counterparty Agreements
26 to which LeaseCo is a party applicable to the
27 [Storage Gas], and shall timely perform and
28 comply with its obligations hereunder with
29 respect to amounts secured by Permitted
30 Liens, to ensure that HPL has the Quiet
31 Enjoyment of the [Storage Gas] throughout the
32 Term.

33 Right To Use Agreement dated May 31, 2001 ("Right To Use

34 Agreement") § 2.01(b), Exh. W to Rubinstein Decl. Quiet

35 enjoyment is defined in the Right To Use Agreement as "the

36 Enjoyment of the [Storage] Gas free of adverse claims of Third

37 Parties, of any kind or nature, in, to or with respect to the

12
1 [Storage] Gas, or any part thereof, that interfere with, restrict

2 or impede the Enjoyment of the [Storage] Gas." Id. § 1.01

3 (definition of "Quiet Enjoyment"). The BofA secured loan is

4 among the "Permitted Liens" that are contemplated by this

5 provision, id. (definition of "Permitted Liens"), whose existence

6 does not infringe on the right to quiet enjoyment under the

7 agreement.

8 The Right To Use Agreement further provides that

9 "LeaseCo shall use only Exchange Gas to satisfy its obligations

10 under Article III of the Pressurization Agreement [setting forth

11 the requirement to withdraw the gas in 2004 pursuant to the

12 Withdrawal Schedule to be sold by Enron in repayment of the loan]

13 to make withdrawals of Natural Gas from the Storage Facility."

14 Id. § 8.01. This clause effectively provided the mechanism by

15 which LeaseCo and Enron would repay the principal on the BofA

16 loan when it came due in 2004 without interrupting HPL's right

17 under the restructured agreements to quiet enjoyment and

18 continued use of the Storage Gas for the thirty-year term of the

19 sublease.

20 As part of the 2001 Transaction, each of the Operative

21 Agreements executed in 1997 -- including the Participation

22 Agreement, Pressurization Agreement, Security Agreement, and

23 Guaranty -- was amended and restated to replace HPL and HPLR with

24 LeaseCo. See Amended and Restated Participation Agreement dated

25 May 31, 2001 ("2001 Participation Agreement"), Exh. L to

26 Rubinstein Decl.; Amended and Restated Pressurization and Storage

13
1 Gas Borrowing Agreement dated May 31, 2001 ("2001 Pressurization

2 Agreement"), Exh. N to Rubinstein Decl.; Amended and Restated

3 Security Agreement dated May 31, 2001 ("2001 Security

4 Agreement"), Exh. M to Rubinstein Decl.; Amended and Restated

5 Performance Guaranty dated May 31, 2001 ("2001 Guaranty"), Exh. O

6 to Rubinstein Decl. LeaseCo was used as a vehicle for granting

7 HPL (and thereby AEP, which was purchasing HPL) all of the rights

8 that HPL had had under the 1997 Transaction, while Enron

9 continued to retain all of the obligations of HPL under that

10 transaction (via LeaseCo), such that HPL could continue to use

11 and operate the Storage Facility and the Storage Gas, but LeaseCo

12 was now responsible for the payments of fees and other

13 obligations to BGT.

14 All told, AEP paid more than $741 million for HPL and

15 for the right to use the Storage Gas and Storage Facility.

16 As a condition precedent to the 2001 Transaction, BofA

17 signed a Consent and Acknowledgment ("Consent"), consenting to

18 the assignment of HPL's rights and obligations under the

19 Operative Agreements to LeaseCo, and to HPL's use of the Storage

20 Gas and Storage Facility as provided in the sublease and the

21 Right To Use Agreement. The Consent acknowledges that HPL was

22 entering into these transactions "in reliance upon" the execution

23 of this Consent and that "but for" this Consent, AEP would not

24 purchase HPL and HPL would not enter into the agreements with

25 LeaseCo. Consent and Acknowledgment dated May 30, 2001

26 ("Consent") § 2(a)(ii), Exh. X to Rubinstein Decl.

14
1 The Consent contains several provisions of particular

2 relevance to the plaintiffs' claims. Section 2(e) of the

3 Consent, which provides the basis for AEP's non-declaratory tort

4 and contract claims, reads:

5 Estoppel and Release. Each of BofA and the
6 Trustee hereby agrees and acknowledges that
7 each Operative Agreement is in full force and
8 effect and that, to its actual knowledge, no
9 defaults by LeaseCo, Holdings, [Enron],
10 [Enron North America] or [HPL] exist and no
11 events or conditions exist which after the
12 passage of time or the giving of notice or
13 both would constitute a default or Event of
14 Default by LeaseCo, Holdings, [Enron] or
15 [Enron North America] or [HPL] thereunder.

16 Id. § 2(e). Under section 5.01 of the Guaranty, one of the

17 Operative Agreements, any materially incorrect representation

18 made by Enron under the Guaranty constitutes a default. Included

19 among the representations made by Enron under the Guaranty is

20 that:

21 The audited consolidated balance sheet of
22 Enron and its Subsidiaries as of December 31,
23 2000, and the related audited consolidated
24 statements of income, cash flows, and changes
25 in stockholders' equity accounts for the
26 fiscal year then ended and the unaudited
27 consolidated balance sheet of Enron and its
28 Subsidiaries as of March 31, 2001, and the
29 related unaudited consolidated statements of
30 income, cash flows, and changes in
31 stockholders' equity accounts for the fiscal
32 quarter then ended, . . . fairly present, in
33 conformity with GAAP, . . . the consolidated
34 financial position of Enron and its
35 Subsidiaries. . . .

36 2001 Guaranty § 3.01(d)(i). This representation, as it

37 subsequently would be learned, was dramatically false.

15
1 As related to the plaintiffs' declaratory claims,

2 section 2(g) of the Consent provides that:

3 In connection with the assignments referred
4 to in clause (a)(i) of this Section 2
5 [providing for the assignment by HPL and HPLR
6 of all rights and obligations under the
7 Operative Agreements to LeaseCo (hereinafter
8 the "Assigned Obligations")], each of BofA
9 and the Trustee has agreed, and hereby
10 agrees, to enforce payment and performance of
11 the Assigned Obligations solely against
12 LeaseCo and Holdings and has agreed to
13 release, and hereby releases, each of [HPL]
14 and HPLR from all liabilities and obligations
15 under the Operative Agreements. . . .

16 Consent § 2(g). Section 11 further provides, "For avoidance of

17 doubt, nothing herein shall impair the lien and security interest

18 of BofA under the Security Agreement or, except as expressly set

19 forth in Section 2 hereof, reduce the rights and remedies of BofA

20 under the Security Agreement." Id. § 11. Section 2 of the

21 Consent gives HPL, among other things, the right (but not the

22 obligation) to cure any defaults that may arise that affect HPL's

23 right to use the gas, and precludes the Trustee and BofA from

24 exercising any of their rights and remedies granted by the

25 Operative Agreements upon a default absent notice to and failure

26 to cure by HPL. In addition to HPL's right to notice of and the

27 opportunity to cure a default, under a Purchase Option Agreement

28 (another of the Operative Agreements), HPL received from LeaseCo

29 the right to purchase the Storage Gas outright if certain events

30 of default occurred, including but not limited to Enron's entry

31 into bankruptcy proceedings.

16
1 As relevant to this dispute, the rights and remedies of

2 BofA under the Security Agreement include, in the event of a

3 Guaranty Default, the right to obtain the remedies set forth in

4 section 5.02 of the Guaranty. This section permits the Trustee,

5 upon a Guaranty Default, to issue a Settlement Notice to Enron

6 for the payment and settlement of all outstanding fees by a fixed

7 date. If Enron fails thereafter to deliver, or to cause LeaseCo

8 to deliver, Exchange Gas in lieu of the Storage Gas by that date,

9 the Trustee may then, at BofA's direction and provided that

10 neither Enron nor the plaintiffs have since cured the default,

11 take possession of and withdraw the Storage Gas.

12 These restructured transactions all closed concurrently

13 on May 31, 2001.

14 In December 2001, Enron petitioned for bankruptcy under

15 Chapter 11 of the United States Bankruptcy Code in the United

16 States Bankruptcy Court for the Southern District of New York.

17 Enron's petition for bankruptcy constituted a Guaranty Default

18 under the Operative Agreements. See 2001 Guaranty § 5.01(c) ("A

19 'Guaranty Default' shall exist if . . . Enron or any of its

20 Principal Subsidiaries shall become the subject of a Bankruptcy

21 Event.").

22 Texas State Court Proceedings

23 In May 2002, following Enron's filing of its bankruptcy

24 petition, BofA demanded access to the Storage Facility to enforce

25 its security interest under the Operative Agreements by taking

26 possession of the Storage Gas. When the plaintiffs -- AEP, HPL,

17
1 and HPLR -- refused, BofA filed an action against HPL in Texas

2 state court seeking declarations that BofA held a valid and

3 enforceable security interest in the Storage Gas, that it was

4 entitled to pursue contractual remedies against HPL to foreclose

5 on this interest and take possession of the gas, and that HPL's

6 rights to use the Storage Gas were subordinate to BGT's ownership

7 rights and BofA's security interest. HPL then filed a breach of

8 contract counterclaim against BofA, asserting that by bringing

9 this lawsuit against HPL, BofA breached its representation that

10 it would not interfere with HPL's rights to exclusive use and

11 quiet enjoyment of the gas, and sought to enjoin BofA's

12 interference with HPL's continued use of the gas.

13 In December 2003, the Texas state court granted summary

14 judgment in defendant BofA's favor on both its declaratory claims

15 and HPL's counterclaims, concluding that BofA had a valid

16 security interest in the gas that was superior to any rights of

17 HPL to use the gas, and that HPL was "estopped to deny" that BGT

18 was the owner of the gas. See Bank of Am., N.A. v. Houston Pipe

19 Line Co., No. 2002-36488, slip op. at 2 (Tex. Dist. Ct. Dec. 9,

20 2003). HPL appealed. On August 24, 2006, the Texas State Court

21 of Appeals vacated the judgment and ordered BofA's claims

22 dismissed. It concluded that the judgment was void because it

23 violated the automatic stay implemented upon Enron's bankruptcy.

24 Houston Pipeline Co. v. Bank of Am., N.A., 213 S.W.3d 418, 428-31

25 (Tex. App. 2006).

18
1 The Federal Proceedings

2 Meanwhile, in October 2003, AEP filed a complaint in

3 the Texas District Court asserting claims for fraud, breach of

4 contract, and negligent misrepresentation against BofA

5 (collectively, the "Tort and Contract Claims") based on the

6 allegedly false representation contained in section 2(e) of the

7 Consent that BofA had no knowledge of any Enron default existing

8 at the time of the execution of the agreement. On January 8,

9 2004, AEP filed an amended complaint adding five claims for

10 declaratory relief seeking to confirm HPL's superior right to use

11 the gas (the "Declaratory Claims"), and adding HPL and HPLR as

12 plaintiffs and BONY as a second defendant.

13 Meanwhile, over AEP's objections, on January 15, 2004,

14 the Enron bankruptcy court in New York issued an order approving

15 a Settlement Agreement among Enron, BofA, and BONY (the "Enron

16 Settlement Agreement"). The order allowed the claims relating to

17 the Bammel Gas transaction filed by BofA and BONY as creditors in

18 the bankruptcy proceeding, provided that BofA and BONY would

19 "look solely to the proceeds, if any, from any Sale [of the

20 Storage Gas], as paid to [BofA and BONY] pursuant to Section 8.5

21 of the Settlement Agreement, for recovery on any allowed BGT

22 Claim. . . . " Order Approving Settlement Agreement at 9, In re

23 Enron Corp., No. 01-16034 (AJG) (Bankr. S.D.N.Y. Jan. 15, 2004).

24 The order also permitted the automatic bankruptcy stay to be

25 "lifted for the sole purpose of allowing the Secured Party [BofA]

26 and the Trustee [BONY] to attempt to realize upon the value of

19
1 the [Storage] Gas, including allowing the Secured Party and/or

2 the Trustee to cause the issuance of a Settlement Notice and a

3 written notice of an Event of Default (as each such term is

4 defined in the Operative [Agreements])." Id.

5 Pursuant to this order, BofA sent Notices of Default

6 and Settlement Notices, in accordance with the terms of the

7 Guaranty, to Enron and LeaseCo, with copies to AEP and HPL.

8 Enron did not perform its purported obligations under the

9 Guaranty in response to these letters. Nor did AEP exercise its

10 options under the Operative Agreements to cure the default or to

11 purchase the gas. As a result, on May 14, 2004, BofA demanded

12 that AEP withdraw and transfer custody of 55 Bcf of natural gas

13 in the Storage Facility to BofA. AEP refused.

14 Back in Texas, on April 6, 2005, the Texas District

15 Court, adopting a September 14, 2004 memorandum and

16 recommendation of a magistrate judge, severed the plaintiffs'

17 Declaratory Claims from their Tort and Contract Claims and

18 transferred the Declaratory Claims only to the New York District

19 Court pursuant to 28 U.S.C. § 1404(a). The Texas District Court

20 concluded that transfer was proper because the resolution of the

21 Declaratory Claims, insofar as they sought a declaration of the

22 rights and obligations under the Operative Agreements to which

23 Enron was a party, and to the extent that they implicated the

24 terms of the Enron Settlement Agreement, could affect legal

25 interests at issue in the Enron bankruptcy proceeding then

26 pending in the Southern District of New York. The Texas District

20
1 Court retained AEP's Tort and Contract Claims, however, which

2 claims did not implicate the terms of any agreements at issue in

3 the bankruptcy proceedings.

4 That month, BofA filed an answer in the Texas District

5 Court action. It also asserted counterclaims, in its capacity as

6 BONY's representative, against HPL for breach of contract, breach

7 of bailment agreement, conversion/trover, and detinue/replevin

8 (the "Declaratory Counterclaims") and, in its own capacity,

9 against AEP and HPL for fraud and fraudulent inducement (the

10 "Tort Counterclaims") based on those parties' purported

11 misrepresentations that induced BofA to execute the Consent.

12 Shortly thereafter, BofA moved in the Texas District

13 Court to transfer the entire action to the New York District

14 Court. On June 29, 2005, a magistrate judge in the Texas

15 District Court recommended that this motion be granted in part

16 and denied in part. In recommending against the transfer of

17 AEP's Tort and Contract Claims to New York, the magistrate judge

18 explained that "the court's decision [in its previous order] to

19 transfer the declaratory claims and retain all other claims was

20 deliberate" and that "[t]he [declaratory] claims that were

21 transferred are clearly distinct in nature from the [tort and

22 contract] claims retained in this suit." Memorandum,

23 Recommendation and Order at 2, AEP Energy Servs. Gas Holding Co.

24 v. Bank of Am., N.A., Civil No. H-03-4973 (S.D. Tex. June 29,

25 2005). The magistrate judge further concluded that BofA's

26 "reiteration of this transfer argument is improper," noting that

21
1 BofA had made the same argument to the Texas District Court in

2 objecting to the September 14, 2004 recommendation to transfer

3 only the declaratory claims, which argument the district court

4 had "necessarily rejected [at that time] . . . by adopting" the

5 magistrate judge's recommendation to transfer those claims alone.

6 Id. at 3.

7 The magistrate judge recommended, however, that the

8 Declaratory Counterclaims filed by BofA, which paralleled the

9 Declaratory Claims filed by the plaintiffs, be severed from the

10 Tort Counterclaims and transferred to the New York District

11 Court, and that AEP's motion pending in the Texas District Court

12 to amend the complaint to eliminate the Declaratory Claims in

13 conformance with the previous transfer order be granted. On

14 August 31, 2005, the Texas District Court adopted this

15 recommendation in full and ordered the Declaratory Counterclaims

16 severed and transferred to New York.

17 Pursuant to the Texas District Court's initial transfer

18 order, the record in this action, including the original

19 complaint, was administratively transferred from the Texas

20 District Court to the New York District Court to initiate

21 proceedings here. The plaintiffs then moved in the New York

22 District Court, as they had in the Texas District Court, to amend

23 the complaint in order to conform the pleadings to the transfer

24 order. Specifically, the plaintiffs moved, inter alia, to

25 restate the Declaratory Claims that had been transferred to New

22
1 York, to eliminate the Tort and Contract Claims that remained in

2 Texas, and to eliminate AEP as a plaintiff.

3 The New York District Court held two status conferences

4 with the parties to address this issue, during which the court

5 informed the parties that "for reasons of judicial economy, the

6 entire case should be tried in one place." AEP I, 2007 WL

7 2428474, at *6, 2007 U.S. Dist. LEXIS 63421, at *19. To this

8 end, the court suggested that if it were to grant the plaintiffs'

9 motion to amend the complaint to eliminate the Tort and Contract

10 Claims, BofA could simply file a mirror-image third-party

11 complaint on these same issues against AEP in New York in order

12 "to effectively bring those claims before this court." Id. On

13 November 30, 2005, the New York District Court issued a

14 memorandum to the parties inviting defendant BofA to "file a

15 third-party complaint against AEP" in order "to bring all the

16 issues before the court in the New York case," and stating that

17 it deemed AEP "subject to the jurisdiction of the court by virtue

18 of having appeared here as a plaintiff, even though it now seeks

19 to withdraw as such." Memorandum to Counsel at 2, AEP Energy

20 Servs. Gas Holding Co. v. Bank of Am., N.A., No. 05 Civ. 4248

21 (S.D.N.Y. Nov. 30, 2005). BofA then filed that complaint as the

22 court suggested.

23 In light of these developments, as the New York

24 District Court later explained: "Recognizing that it could not

25 avoid litigating the claims in this court, AEP consented to the

26 denial of the part of its May 13 motion [to amend the complaint]

23
1 that related to the elimination of AEP[ as a plaintiff] and the

2 [tort and contract] claims, thereby agreeing to have them remain

3 in the complaint." AEP I, 2007 WL 2428474, at *6, 2007 U.S.

4 Dist. LEXIS 63421, at *19. Accordingly, on January 5, 2006, the

5 New York District Court denied AEP's motion to amend the

6 complaint in these respects, stating only that it had

7 "essentially been agreed" that these motions would be denied.

8 AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A., No. 05

9 Civ. 4248, slip op. at 2 (S.D.N.Y. Jan. 5, 2006). The court did

10 grant plaintiff AEP's motion to amend the complaint in other

11 respects, however, including a restatement of the Declaratory

12 Claims that were properly before the New York District Court. It

13 also dismissed defendant BofA's third-party complaint as moot.

14 Consistent with this order, on January 6, 2006, the plaintiffs

15 filed a second amended complaint in the New York District Court

16 that included the Tort and Contract Claims.

17 Based on what had transpired in New York, and in light

18 of the New York District Court's expressed intention to

19 adjudicate the entire dispute, defendant BofA filed a renewed

20 motion in the Texas District Court to transfer venue of the Tort

21 and Contract Claims and the related Tort Counterclaims to New

22 York. In a September 22, 2006 order, the Texas magistrate judge

23 denied the motion. She emphatically rejected the validity of any

24 purported "new" grounds for transfer:

25 The "recent development" from which all of
26 [BofA]'s arguments flow is the sua sponte
27 decision of the New York court to exercise

24
 1 jurisdiction over the contract and tort
2 claims and counterclaims. However, as far as
3 this court is concerned, this court has
4 retained jurisdiction over those claims.
5 This court severed the declaratory actions
6 from the contract and tort claims and
7 counterclaims and transferred only the former
8 [to New York]. . . .
9
10 BofA makes no attempt to explain how the
11 United States District Court for the Southern
12 District of New York can assert jurisdiction
13 over claims presently before this
14 court. . . . Absent some legal explanation
15 of that court's jurisdiction over the
16 contract and tort claims and counterclaims,
17 this court finds no reason to revisit the
18 transfer issue. In fact, the parties should
19 be concerned whether those claims are
20 properly before the New York court and
21 whether a judgment issued by the United
22 States District Court for the Southern
23 District of New York on the contract and tort
24 claims and counterclaims would be a nullity.
25

26 Order at 4-5, AEP Energy Servs. Gas Holding Co. v. Bank of Am.,

27 N.A., Civil No. H-03-4973 (S.D. Tex. Sept. 22, 2006). On October

28 27, 2006, the Texas District Court adopted this order and denied

29 the motion for transfer.

30 BofA then filed a petition for a writ of mandamus to

31 the Fifth Circuit, seeking to vacate the Texas District Court's

32 order denying the motion to transfer and to compel the Texas

33 District Court "to transfer the remaining claims to the New York

34 Court." Petition for Writ of Mandamus at 2, In re Bank of Am.,

35 N.A., No. 06-20875 (5th Cir. Nov. 13, 2006). On December 5,

36 2006, the Fifth Circuit denied this petition.

37 Back in the Texas District Court after the Fifth

38 Circuit's denial of mandamus, and following three essentially

25
1 failed motions by BofA for a continuance and to stay the trial,

2 the Tort and Contract Claims and related Tort Counterclaims were

3 assigned to District Judge Hittner for trial beginning in April

4 2007. At the same time, in New York, the Tort and Contract

5 Claims along with the Declaratory Claims and Counterclaims

6 proceeded toward summary judgment.

7 On June 16, 2006, the plaintiffs -- AEP, HPL, and HPLR

8 -- moved in the New York District Court for partial summary

9 judgment as to two of the Declaratory Claims and as to the

10 Declaratory Counterclaims. BofA opposed this motion, and also

11 separately moved for summary judgment on all of the claims and

12 counterclaims asserted by the parties.

13 On October 25, 2006 -- shortly after the Texas State

14 Court of Appeals vacated the Texas state trial court's 2003

15 judgment in favor of BofA on the grounds that it violated the

16 automatic bankruptcy stay -- the plaintiffs moved in the New York

17 District Court to file a third amended complaint to add a

18 declaratory claim that the Bammel Gas transaction was not a "true

19 sale" of the gas. They had theretofore been precluded from

20 pleading the claim because the Texas state court judgment then in

21 effect had "estopped" them from denying that BGT was the true

22 owner of the gas. At the same time, the plaintiffs again moved

23 in the New York District Court to strike the Tort and Contract

24 Claims from the complaint.

25 On January 31 and February 1, 2007, the New York

26 District Court held oral argument on the parties' summary

26
1 judgment motions. At its conclusion, the court announced various

2 findings on the record regarding the Declaratory Claims and

3 Counterclaims, but reserved judgment as to the Tort and Contract

4 Claims. On February 20, 2007, prior to the New York District

5 Court's resolution of the Tort and Contract Claims, AEP moved in

6 the Texas District Court to enjoin BofA from seeking rulings on

7 these claims in New York, which motion was denied.

8 On March 12, 2007, the New York District Court held a

9 hearing on the subject of the Tort and Contract Claims. After

10 indicating that it would require significant additional time to

11 resolve these issues, and in response to the parties' inquiry as

12 to how to handle the upcoming Texas trial on these issues

13 scheduled for less than a month later, the New York District

14 Court stated that it would "suggest to [Judge Hittner in Texas]

15 that any [such] trial should be put off" pending resolution of

16 the summary judgment motions in New York. Transcript of Record

17 at 142, AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A.,

18 No. 05 Civ. 4248 (S.D.N.Y. Mar. 12, 2007).

19 The following day, in apparent response to the New York

20 District Court's statement, defendant BofA filed a third motion

21 for continuance in the Texas District Court seeking to postpone

22 the scheduled trial to allow the New York District Court to

23 resolve the pending summary judgment motions. In support, BofA

24 attached and quoted from the relevant portions of the hearing

25 transcript in which Judge Griesa indicated that he would

26 communicate to Judge Hittner "[his] belie[f that] the trial date

27
1 should be continued to allow him to complete his work on the

2 summary judgment motion." Bank of America's Third Motion for

3 Continuance at 2, AEP Energy Servs. Gas Holding Co. v. Bank of

4 Am., N.A., Civil No. H-03-4973 (S.D. Tex. Mar. 13, 2007). On

5 March 14, notwithstanding several prior refusals to continue or

6 stay the trial, Judge Hittner granted BofA's third motion for a

7 continuance "pending the issuance of a summary judgment order" by

8 the New York District Court. Order at 1, AEP Energy Servs. Gas

9 Holding Co. v. Bank of Am., N.A., Civil No. H-03-4973 (S.D. Tex.

10 Mar. 14, 2007).

11 Finally, on March 26, 2007, the plaintiffs filed

12 another motion in the New York action under Federal Rule of Civil

13 Procedure 56(f), seeking to continue the summary judgment motions

14 and to reopen discovery in order to permit the plaintiffs to

15 depose two additional witnesses: former Enron CFO Andrew Fastow

16 and former Arthur Andersen auditor Mary Cilia.

17 The New York District Court's Decisions

18 In a February 22, 2007 memorandum and an August 28,

19 2007 opinion, the New York District Court granted summary

20 judgment in BofA's favor, dismissing all of the plaintiffs'

21 Declaratory Claims and Tort and Contract Claims, and granting

22 BofA relief on its counterclaims for conversion, breach of

23 bailment agreement, and replevin. The remaining counterclaims

24 were contingent on AEP prevailing on its tort claims and were

25 therefore rendered moot by this judgment. See AEP I, 2007 WL

26 2428474, at *1-2, *17, 2007 U.S. Dist. LEXIS 63421 at *3–*7,
28
1 *47–*48; see also Memorandum to Counsel ("Memorandum Op."), AEP

2 Energy Servs. Gas Holding Co. v. Bank of Am., N.A., No. 05 Civ.

3 4248 (S.D.N.Y. Feb. 22, 2007).

4 The district court first rejected the plaintiffs'

5 contention that it lacked jurisdiction to resolve the Tort and

6 Contract Claims, reasoning that "since AEP consented to the

7 arrangement whereby the [tort and contract] claims remained in

8 this court, . . . AEP waived its objection to this court's

9 jurisdiction." AEP I, 2007 WL 2428474, at *8, 2007 U.S. Dist.

10 LEXIS 63421, at *24. The court therefore denied the plaintiffs'

11 renewed motion to amend the complaint to eliminate these claims,

12 reiterating its view that "it is most efficient to have this case

13 tried in one forum." Memorandum Op. at 7-8; see also AEP I, 2007

14 WL 2428474, at *8, 2007 U.S. Dist. LEXIS 63421, at *24. It also

15 denied the plaintiffs' motion to amend the complaint to add a new

16 declaratory claim based on the assertion that there had been no

17 "true sale" of the gas, concluding that such an amendment would

18 be "futile" because the 1997 Transaction "was not a sham" as the

19 plaintiffs had alleged. Memorandum Op. at 7; see also AEP I,

20 2007 WL 2428474, at *8, 2007 U.S. Dist. LEXIS 63421, at *24.

21 The court then turned to the parties' summary judgment

22 motions. With respect to the Declaratory Claims and

23 Counterclaims, the court determined that defendant BofA had a

24 valid, presently enforceable security interest in the Storage Gas

25 that was not subordinated in the 2001 Transaction and that was

26 superior to the plaintiffs' right to use the gas. AEP I, 2007 WL

29
1 2428474, at *1, 2007 U.S. Dist. LEXIS 63421, at *5; see also

2 Transcript of Record at 150, AEP Energy Servs. Gas Holding Co. v.

3 Bank of Am., N.A., No. 05 Civ. 4248 (S.D.N.Y. Feb. 1, 2007). It

4 also concluded that the Enron bankruptcy constituted an event of

5 default under the relevant agreements, and that BofA's right to

6 enforce its security interest upon an event of default was not

7 affected by the Enron Settlement Agreement. AEP I, 2007 WL

8 2428474, at *1, 2007 U.S. Dist. LEXIS 63421, at *5; see also

9 Transcript of Record at 155, AEP Energy Servs. Gas Holding Co. v.

10 Bank of Am., N.A., No. 05 Civ. 4248 (S.D.N.Y. Feb. 1, 2007). In

11 light of these findings, the court concluded that HPL's refusal

12 to relinquish the gas upon BofA's demand constituted conversion,

13 breach of bailment, and replevin, and granted summary judgment to

14 BofA on these claims. See Memorandum Op. at 5.

15 Turning to the Tort and Contract Claims, the court

16 concluded that section 2(e) of the Consent, on which these claims

17 were based, "was an estoppel provision and not a representation"

18 and therefore could not constitute the basis for any

19 misrepresentation-based claims as a matter of law. AEP I, 2007

20 WL 2428474, at *9, 2007 U.S. Dist. LEXIS 63421, at *27. Assuming

21 arguendo that section 2(e) was a representation, however, the

22 court nonetheless rejected these claims on the merits based on a

23 lack of evidence that plaintiff AEP had relied on BofA for such

30
1 accounting judgments related to Enron's financials.7 Id., 2007

2 WL 2428474, at *14, 2007 U.S. Dist. LEXIS 63421, at *39-*40.

3 The district court summed up its views as follows:

4 When all the complexities of these
5 transactions are sorted out in light of the
6 various detailed arguments of the parties,
7 two basic conclusions emerge. BofA dealt
8 with Enron and its related entities on a
9 secured basis. AEP dealt with Enron and its
10 related entities on a non-secured basis and
11 thus took the risks that were unfortunately
12 involved with that dealing. This litigation
13 has been concerned with the effort of AEP to
14 remove BofA from its secured position.
15 However, BofA has done nothing, by contract
16 or otherwise, to relinquish that position.

17 Id., 2007 WL 2428474, at *17, 2007 U.S. Dist. LEXIS 63421, at

18 *48-*49.

19 Finally, in light of its finding that the plaintiffs

20 could not prove reliance with respect to the Tort and Contract

21 Claims, the court denied the plaintiffs' request to continue

22 summary judgment proceedings in order to take two additional

23 depositions to determine the status of defendant BofA's

24 knowledge. See id., 2007 WL 2428474, at *15, 2007 U.S. Dist.

25 LEXIS 63421, at *43.

26 On December 18, 2007, the New York District Court

27 issued a second opinion as to the form and amount of judgment due

7
Because we do not reach the merits of this portion of the
district court's decision in resolving this appeal, we do not
address the district court's conclusion that, in the context of
this case, AEP's breach of contract claim (Count VII) would
require proof of reliance in the same manner in which fraud and
misrepresentation claims normally require this element to be met.
AEP I, 2007 WL 2428474, at *14, 2007 U.S. Dist. LEXIS 63421, at
*39-*40.
31
1 defendant BofA on its conversion counterclaim. See AEP II, 2007

2 WL 4458117, 2007 U.S. Dist. LEXIS 93022. The court concluded

3 that because "AEP converted the gas by refusing to turn it over

4 to BofA when BofA requested it," BofA was entitled either to

5 money damages or to the return of the gas under Texas law. Id.,

6 2007 WL 4458117, at *1, 2007 U.S. Dist. LEXIS 93022, at *2-*3.

7 BofA elected money damages for the value of the gas, which the

8 court determined to be $347,325,000. Id., 2007 WL 4458117, at

9 *1, *4, 2007 U.S. Dist. LEXIS 93022, at *3, *12. This figure

10 represented the Houston Ship Channel market value of the gas on

11 the date of conversion, which the court fixed at May 14, 2004.

12 Id., 2007 WL 4458117, at *1, *4, 2007 U.S. Dist. LEXIS 93022, at

13 *3, *12. The court concluded, however, that this amount was

14 required to be reduced by the cost to BofA of removing the

15 natural gas from the Storage Facility had it elected to take

16 possession rather than money damages. Id., 2007 WL 4458117, at

17 *5, 2007 U.S. Dist. LEXIS 93022, at *13-*14. Those costs were to

18 be determined at a later date. Id., 2007 WL 4458117, at *5, 2007

19 U.S. Dist. LEXIS 93022, at *14.

20 The plaintiffs -- AEP, HPL, and HPLR -- moved for

21 reconsideration of the court's finding that conversion occurred

22 on May 14, 2004, contending that instead the correct date of

23 conversion was July 22, 2002, when the gas's market price was

24 lower. On April 2, 2008, the court denied that motion as

25 untimely because, it found, the plaintiffs had failed to raise

26 this argument prior to the court's December 18 decision. AEP
32
1 III, 2008 WL 925433, at *1-*2, 2008 U.S. Dist. LEXIS 30587, at

2 *3-*5. The court nonetheless then proceeded to address this

3 question on the merits, confirming its view that May 14, 2004,

4 was the correct date of conversion because "BofA had no legal

5 right to demand or obtain custody of the gas until after the

6 automatic stay in the Enron bankruptcy was lifted in 2004." Id.,

7 2008 WL 925433, at *2, 2008 U.S. Dist. LEXIS 30587, at *6.

8 In a fourth opinion, on August 11, 2008, the district

9 court calculated the withdrawal cost of the gas, at three cents

10 per MMBtu, as $1.65 million and set BofA's total damages at

11 $345,675,000 plus prejudgment interest. AEP IV, 2008 WL 3338203,

12 at *1-*2, 2008 U.S. Dist. LEXIS 61264, at *4-*6.

13 The Instant Appeal

14 The plaintiffs -- AEP, HPL, and HPLR -- appeal from

15 these judgments on several grounds. As an initial matter, they

16 contend that the New York District Court lacked jurisdiction over

17 the Tort and Contract Claims in light of the Texas District

18 Court's unambiguously limited transfer orders and therefore erred

19 in adjudicating these claims. The plaintiffs urge us to vacate

20 the grant of summary judgment as to these claims on this ground.

21 In the alternative, the plaintiffs assert that even if

22 the New York District Court did have the power to adjudicate the

23 Tort and Contract Claims, it nonetheless erred in concluding that

24 section 2(e) of the Consent was an estoppel provision rather than

25 a representation and granting summary judgment in favor of BofA

26 on the merits of these claims.
33
1 The court also erred, the plaintiffs assert, in

2 granting summary judgment in favor of BofA on the Declaratory

3 Claims and BofA's Counterclaims and in its determination of the

4 award of damages due to BofA on its counterclaim for conversion.

5 Finally, the plaintiffs contend that the district court

6 erred in denying their motions to amend the complaint to add the

7 "no true sale" claim and to continue summary judgment proceedings

8 in favor of additional depositions.

9 We conclude that in light of the content of the Texas

10 District Court's transfer orders, the New York District Court

11 abused its discretion in compelling the plaintiffs to litigate

12 the Tort and Contract Claims in New York. We therefore vacate

13 the grant of summary judgment as to these claims, which we

14 conclude should properly be adjudicated in Texas. We disagree

15 with the plaintiffs with respect to their remaining contentions

16 on appeal. We conclude that the district court correctly granted

17 summary judgment in favor of BofA on the Declaratory Claims and

18 Counterclaims, which had been properly transferred by the Texas

19 District Court to New York, and properly awarded damages to BofA

20 in the amount of $345,675,000 plus prejudgment interest. We

21 further conclude that the district court's denial of the

22 plaintiffs' motions to amend the complaint to add the "no true

23 sale" claim and to continue summary judgment proceedings was

24 proper. We therefore affirm the district court's judgment in

25 each of these respects.

34
1 DISCUSSION

2 I. Summary Judgment as to the Tort and Contract
3 Claims

4 The plaintiffs -- AEP, HPL, and HPLR -- contend on

5 appeal that because the Tort and Contract Claims and related Tort

6 Counterclaims were never transferred by the Texas District Court

7 to the New York District Court under 28 U.S.C. § 1404, nor were

8 they properly filed in the New York District Court, the New York

9 District Court had no valid basis for exercising jurisdiction

10 over these claims. The defendants take issue with the

11 plaintiffs' interpretation of 28 U.S.C. § 1404 as it relates to

12 jurisdiction, arguing that section 1404 speaks solely to the

13 power of a district court to transfer venue of an action, which,

14 they contend, is different from the question of a district

15 court's power to exercise general subject matter jurisdiction

16 over a dispute. Therefore, they assert, the Texas District

17 Court's decision to transfer venue of only the Declaratory Claims

18 and Counterclaims in no way affected the New York District

19 Court's general "constitutional power" to adjudicate the entire

20 dispute. Appellees' Br. 93-94 (emphasis, citation, and internal

21 quotation marks omitted).

22 We are reluctant to couch our decision in terms of the

23 New York District Court's "jurisdiction" to hear these claims.

24 Cf. Arbaugh v. Y & H Corp., 546 U.S. 500, 511 (2006) (condemning

25 the use of "'drive-by jurisdictional rulings'" that conflate a

26 federal court's subject matter jurisdiction with "the question

35
1 whether the federal court had authority to adjudicate the claim

2 in suit" (quoting Steel Co. v. Citizens for Better Env't, 523

3 U.S. 83, 91 (1998))); Steel Co., 523 U.S. at 90

4 ("'Jurisdiction . . . is a word of many, too many, meanings'"

5 that is often misused to describe "the remedial powers of the

6 court" to adjudicate a claim and to impose penalties (emphasis in

7 original) (quoting United States v. Vanness, 85 F.3d 661, 663 n.2

8 (D.C. Cir. 1996))).

9 Under the circumstances presented, the New York

10 District Court abused its discretion in adjudicating the Tort and

11 Contract Claims and related Tort Counterclaims that remained

12 pending in the Texas District Court. We therefore vacate the New

13 York District Court's grant of summary judgment as to these

14 claims, which we conclude should be adjudicated in Texas.

15 A. Standard of Review

16 A district court's decision whether to stay or dismiss

17 an action on grounds of comity is reviewed for abuse of

18 discretion. See Adam v. Jacobs, 950 F.2d 89, 92 (2d Cir. 1991)

19 (citing Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S.

20 180, 183-84 (1952)).

21 B. The Power to Adjudicate the Tort and Contract Claims

22 To resolve the question whether the New York District

23 Court had the power to adjudicate the Tort and Contract Claims,

24 we must first examine the implications of a transfer of venue

25 under 28 U.S.C. § 1404. Section 1404(a) provides that "[f]or the

26 convenience of parties and witnesses, in the interest of justice,

36
1 a district court may transfer any civil action to any other

2 district or division where it might have been brought." 28

3 U.S.C. § 1404(a); see also Van Dusen v. Barrack, 376 U.S. 612,

4 616 (1964). Pursuant to this provision, the Texas District Court

5 severed the Declaratory Claims and related Counterclaims from the

6 remaining Tort and Contract Claims and Counterclaims, and

7 transferred only the Declaratory Claims and related Counterclaims

8 to the New York District Court. Despite the clear terms of the

9 transfer order, the New York District Court proceeded, over the

10 plaintiffs' objections, to exercise jurisdiction over the entire

11 dispute. It then resolved all claims on summary judgment, even

12 while the Tort and Contract Claims and Counterclaims were still

13 actually pending in the Texas District Court. The question,

14 therefore, is whether the New York District Court had a valid

15 basis for doing so. We conclude that it did not.

16 We begin with the premise that the question whether a

17 district court has subject matter jurisdiction over a dispute, as

18 a general matter, is substantively different from the question

19 whether a district court has, or has acquired, the power to

20 adjudicate a particular dispute. It is well-settled that subject

21 matter jurisdiction "concerns a court's competence to adjudicate

22 a particular category of cases." Wachovia Bank v. Schmidt, 546

23 U.S. 303, 316 (2006); see also Verizon Md. Inc. v. Pub. Serv.

24 Comm'n of Md., 535 U.S. 635, 643 (2002) (explaining that subject

25 matter jurisdiction refers, as a general matter, to "the courts'

26 statutory or constitutional power to adjudicate the case"

37
1 (emphasis and internal quotation marks omitted)). Unlike venue,

2 subject matter jurisdiction "does not entail an assessment of

3 convenience. It poses a 'whether,' not a 'where' question: Has

4 the Legislature empowered the court to hear cases of a certain

5 genre?" Schmidt, 546 U.S. at 316.

6 This action was filed in the Texas District Court

7 pursuant to 28 U.S.C. § 1332(a), which grants federal district

8 courts "original jurisdiction of all civil actions" that meet the

9 requirements for federal diversity jurisdiction enumerated

10 therein. The New York District Court, no less than the Texas

11 District Court, then, has general federal subject matter

12 jurisdiction over the category of cases into which this dispute

13 falls. We have been given no reason to doubt that had this

14 action been properly filed in the New York District Court in the

15 first instance rather than in Texas, the New York District Court

16 would therefore have had the power to adjudicate these claims.

17 But, of course, it was not first filed in New York; it was filed

18 in Texas. As to the New York District Court's power to decide

19 these claims, using the language of Schmidt, id., the question of

20 "whether" has been answered in the affirmative; it is the "where"

21 that remains in issue.

22 Once the Texas District Court severed the Tort and

23 Contract Claims and Counterclaims from the Declaratory Claims and

24 Counterclaims, they became two separate actions. See Wyndham

25 Assocs. v. Bintliff, 398 F.2d 614, 618 (2d Cir. 1968) ("Where

26 certain claims are properly severed, the result is that there are

38
1 then two or more separate 'actions,' and the district court may,

2 pursuant to § 1404(a), transfer certain of such separate actions

3 while retaining jurisdiction of others."). The Texas District

4 Court ordered only the Declaratory Claims transferred to New

5 York, a plainly "deliberate" act on its part. Memorandum,

6 Recommendation and Order at 2, AEP Energy Servs. Gas Holding Co.

7 v. Bank of Am., N.A., Civil No. H-03-4973 (S.D. Tex. June 29,

8 2005). It is also clear that the New York District Court, as the

9 transferee court, could not transfer to itself the Tort and

10 Contract action currently pending before the Texas District

11 Court. As we have explained, the language of section 1404(a)

12 clearly "presupposes that the action to be transferred is pending

13 in the transferor court" and does not therefore allow for an

14 action to be transferred by another district court before whom

15 the action is not then pending. See Nat'l Equip. Rental, Ltd. v.

16 Fowler, 287 F.2d 43, 46-47 (2d Cir. 1961) (noting that "[t]he

17 administration of justice would be chaotic indeed if one district

18 court could order another to divest itself of jurisdiction and to

19 transfer a case properly before it").

20 There is no dispute that the Texas District Court did

21 not validly transfer the Tort and Contract Claims and

22 Counterclaims to New York. And it is undisputed that it intended

23 to, and did, retain jurisdiction over these claims. Indeed, this

24 remained true even after the Texas District Court became aware of

25 "the sua sponte decision of the New York court to exercise

26 jurisdiction over the contract and tort claims and

39
1 counterclaims." Order at 4-5, AEP Energy Servs. Gas Holding Co.

2 v. Bank of Am., N.A., Civil No. H-03-4973 (S.D. Tex. Sept. 22,

3 2006) (perceiving no explanation of "how the United States

4 District Court for the Southern District of New York can assert

5 jurisdiction over claims presently before this court" and

6 cautioning the parties to "be concerned whether those claims are

7 properly before the New York court and whether a judgment issued

8 by the United States District Court for the Southern District of

9 New York on the contract and tort claims and counterclaims would

10 be a nullity").

11 Nor do we conclude that the Tort and Contract Claims

12 and Counterclaims were properly brought in the New York District

13 Court. Following the transfer order, the Texas District Court

14 promptly permitted the plaintiffs to amend their complaint, which

15 included the Tort and Contract Claims, to eliminate the

16 Declaratory Claims that had been transferred to New York; the

17 plaintiffs promptly moved in the New York District Court to amend

18 similarly the transferred complaint to eliminate the Tort and

19 Contract Claims to comport with the transfer order.8

8
We place little weight on the fact that the entire
original complaint, which included the Tort and Contract Claims,
was transferred as part of the record from the Texas District
Court to the New York District Court following the initial
transfer order. This purely ministerial act could not have
endowed the New York District Court with the ability to decide
the Tort and Contract Claims where the Texas District Court's
transfer order explicitly transferred only the Declaratory Claims
to New York. This is especially true in light of the fact that
only one operative complaint existed in the record at the time of
the transfer order.
40
1 To be sure, following the denial of their motion to

2 amend, the plaintiffs filed an amended complaint in the New York

3 District Court that included the Tort and Contract Claims. It is

4 clear from the record, however, that the plaintiffs did not

5 consent to the New York District Court's adjudication of these

6 claims, and in fact repeatedly and vigorously protested it. The

7 plaintiffs' November 10, 2006 letter to the New York District

8 Court, regarding their motion for leave to amend the complaint

9 prior to summary judgment in order to, inter alia, eliminate the

10 Tort and Contract Claims, made their position clear:

11 Plaintiffs never consented to this Court's
12 exercise of subject matter jurisdiction over
13 the AEP[] tort and contract claims, nor could
14 they. . . . Following transfer of the
15 declaratory claims to this Court, Plaintiffs
16 moved for leave to amend the Complaint.
17 Although Plaintiffs informed the Court that
18 AEP[]'s tort and contract claims had not been
19 transferred to New York, the Court
20 nevertheless denied permission to amend the
21 complaint to eliminate reference to the tort
22 and contract claims. The Court indicated
23 that it would allow Defendants to duplicate
24 those claims in this Court through a
25 mirror-image third-party complaint. In order
26 to avoid duplication, Plaintiffs agreed that
27 the most efficient way to implement the
28 Court's decision was to deny the motion to
29 amend as to the tort and contract claims.
30 However, as the Texas court recently pointed
31 out [in its denial of BofA's third motion to
32 transfer these claims], these events were
33 insufficient to convey jurisdiction on this
34 Court that it otherwise does not have.

35 Plaintiffs' Letter to Court at 3, AEP Energy Servs. Gas Holding

36 Co. v. Bank of Am., N.A., No. 05 Civ. 4248 (S.D.N.Y. Nov. 10,

41
1 2006).9 It was only when faced with the Hobson's choice

2 presented to them by the New York District Court that the

3 plaintiffs retained the Tort and Contract Claims in the amended

4 complaint filed in New York.10

9
BofA also memorialized this course of events in a November
23, 2005 letter to the court:

Your Honor may recall that the fact that
there are two separate actions pending
regarding this dispute, one before Your Honor
and the other in the Federal Court in Texas,
wherein the action before Your Honor purports
to address "contract" claims and the action
in the Texas Federal Court purports to
separate out and separately address other
contract claims under the same contract as
well as purported "fraud" claims arising out
of the contract, was described by Your Honor
as "litigation chaos." As a result, Your
Honor indicated that Your Honor "could not
imagine splitting the case in two," noted
that it was Plaintiffs themselves who had
originally filed one action addressing all
such claims and that "Plaintiffs filed one
action and there will be one action here,
that's it", and that there should be one set
of appropriate pleadings "which would allow
the trial of the whole case in New York."

As a result, Your Honor directed that, if
Bank of America chose to do so, it could file
appropriate pleadings, such as declaratory
judgment claims regarding AEP[]'s fraud
claims or other appropriate pleadings, to get
all of the issues before Your Honor. Your
Honor further directed Bank of America to
submit such pleadings by December 12, 2005 or
to send Your Honor a letter by that date
indicating that it was declining to do so.

Defendant Bank of America's Letter to Court at 1–2, AEP Energy
Servs. Gas Holding Co. v. Bank of Am., N.A., No. 05 Civ. 4248
(S.D.N.Y. Nov. 23, 2005).
10
Since BofA's proposed third-party complaint was never
filed, any analysis of it would be speculation at best.
Furthermore, as we explain later in this Section, the New York
42
1 In light of these events, we cannot say that the

2 amended complaint that included the Tort and Contract Claims was

3 properly or voluntarily brought by the plaintiffs in New York.

4 We therefore see insufficient grounds for the New York District

5 Court's adjudication of the Tort and Contract Claims and

6 Counterclaims in this case.

7 We have recognized "the basic proposition that the

8 first court to obtain jurisdiction of the parties and of the

9 issues should have priority over a second court to do so."

10 Fowler, 287 F.2d at 45 (citing Joseph Bancroft & Sons Co. v.

11 Spunize Co. of Am., 268 F.2d 522, 524 (2d Cir. 1959)). Thus, we

12 have held that "where there are two competing lawsuits, the first

13 suit should have priority, absent the showing of balance of

14 convenience or special circumstances giving priority to the

15 second." First City Nat'l Bank & Trust Co. v. Simmons, 878 F.2d

16 76, 79 (2d Cir. 1989) (alterations, citations, and internal

17 quotation marks omitted). Deference to the first filing

18 "embodies considerations of judicial administration and

19 conservation of resources," id. at 80, and recognizes that "a

20 party who first brings an issue into a court of competent

21 jurisdiction should be free from the vexation of concurrent

22 litigation over the same subject matter," Fowler, 287 F.2d at 45

23 (citation and internal quotation marks omitted).

District Court abused its discretion by considering any claim
paralleling those already pending in Texas. Therefore, we
decline to address whether BofA could have properly brought the
Tort and Contract Claims before the New York District Court.
43
1 It is well-established, then, that "when a case is

2 brought in one federal district court[ and the complaint]

3 embraces essentially the same transactions as those in a case

4 pending in another federal district court, the latter court may

5 enjoin the suitor in the more recently commenced case from taking

6 any further action in the prosecution of that case." Fowler, 287

7 F.2d at 45 (affirming order by New York court enjoining later-

8 filed action from proceeding in Alabama); see also Martin v.

9 Graybar Elec. Co., 266 F.2d 202, 204 (7th Cir. 1959) (citing "the

10 established general rule that the party filing later in time

11 should be enjoined from further prosecution of his suit").

12 Even in the absence of such an injunction, however, the

13 second court may be bound to stay its consideration of an action

14 in deference to the first-filed proceedings. While the decision

15 whether or not to stay or dismiss a proceeding rests within a

16 district judge's discretion, normally "[s]ound judicial

17 discretion dictates that the second court decline its

18 consideration of the action before it until the prior action

19 before the first court is terminated," Fowler, 287 F.2d at 45,

20 and "a district court can go 'beyond the allowable bounds of

21 discretion' when it refuses to stay or dismiss a duplicative

22 suit," Adam, 950 F.2d at 92 (quoting Semmes Motors, Inc. v. Ford

23 Motor Co., 429 F.2d 1197, 1204 (2d Cir. 1970) (Friendly, J.)).

24 In this case, the Texas District Court, as the court of

25 first filing, might well have enjoined the Tort and Contract

26 Claims from proceeding in New York. We are not in a position to

44
1 offer a view as to the Texas District Court's action or inaction

2 in this regard. But we need not do so to recognize the separate

3 obligation that the New York District Court had to consider

4 whether to hear the Tort and Contract Claims and Counterclaims

5 that were already pending, and proceeding to trial, in the Texas

6 District Court.

7 We addressed a similar situation in Semmes Motors.

8 There, we considered a New York district court's refusal to stay

9 its consideration of an action pending before it that had first

10 been filed in federal court in New Jersey. Even though the New

11 Jersey court in Semmes Motors, like the Texas District Court in

12 this case, had not acted to enjoin the New York lawsuit from

13 proceeding, we concluded that the New York court had an

14 independent obligation to defer to the primacy of the first-filed

15 suit and had abused its discretion in not doing so. Semmes

16 Motors, 429 F.2d at 1202-03. Although we had "no doubt that the

17 New Jersey court could properly have enjoined prosecution of the

18 New York action . . . , and might even have been bound to do so,"

19 we saw "no reason why the end result should be different when the

20 party seeking to preserve the primacy of the first court moves

21 the second court to stay its hand rather than asking the first

22 court to enjoin prosecution of the second case." Id. at 1202.

23 "Whatever the procedure," we concluded, "the first suit should

24 have priority." Id.

25 In Semmes Motors it was the plaintiff who had

26 instituted both actions and preferred to press the second suit in

45
1 New York, stipulating to discontinue the first in New Jersey,

2 rather than the defendant who attempted to thwart the plaintiff's

3 chosen forum by filing second in the forum of its own choice.

4 Id. at 1202-03. Neither this, nor the fact that "in a vacuum,

5 New York is a more logical forum than New Jersey," were

6 "[]sufficient grounds for departing from the general rule that in

7 the absence of sound reasons the second action should give way to

8 the first." Id. at 1203.

9 And in Adam, we concluded that a New York district

10 court had abused its discretion by failing to abstain from

11 consideration of an action that should have been asserted as a

12 compulsory counterclaim in another, previously filed proceeding.

13 Relying on Fowler and Semmes Motors, we concluded that the

14 failure of the court in which the first filing had been made to

15 enjoin the second action was irrelevant to the second court's

16 obligation to stay its own consideration: "While the normal

17 chronology would have been for the court of first impression --

18 here, the Michigan court -- to have enjoined the second court,

19 this procedure is not mandatory. The same policies are furthered

20 by the second court's exercising judicial self-restraint." Adam,

21 950 F.2d at 93. We also noted that "[f]or us to refuse to stay

22 our own proceedings while exercising a willingness to enjoin

23 parties from litigating in other courts would be inconsistent."

24 Id. at 94.

25 In other words, regardless of the action or inaction of

26 the first court, "[s]ound judicial discretion" ordinarily

46
1 requires that the second court decline consideration of the

2 action in deference to the proceedings pending before the first

3 court. Fowler, 287 F.2d at 45. "The same policies are furthered

4 by the second court's exercising judicial self-restraint" as by

47
1 the first court's issuing an injunction. Adam, 950 F.2d at 93.11

11
As Justice Frankfurter noted in one of his dissents in
Hoffman v. Blaski, 363 U.S. 335 (1960), "[s]urely, a prior
decision of a federal court on the unfundamental issue of venue
ought to receive [preclusive] respect from a coordinate federal
court when the parties and the facts are the same." Id. at 348
(Frankfurter, J., dissenting). Hoffman consisted of two
different cases heard in tandem. See id. at 336-39 (majority
opinion). Justice Frankfurter's language is taken from a dissent
in one of the cases, id. at 345-50 (Frankfurter, J.,
dissenting), expressing a view on the preclusive effect that an
order of the Court of Appeals for the transferor jurisdiction,
upholding a transfer, should have on a subsequent order of the
Court of Appeals for the transferee jurisdiction denying the
propriety of that transfer. Justice Frankfurter dissented from
the judgment of the Court in that case based on the ground that
the decision in that case should have been based on the concerns
underlying the doctrines of res judicata and comity between
sister circuit courts. He went on to note:

The fact that the issue involved is the propriety of a
transfer of the action only makes the case for
deference to the previous decision of a coordinate
court in the same litigation that much stronger. . . .
It perverts those ends [of "convenience" and "justice"
set forth in 28 U.S.C. § 1404(a)] to permit a question
arising under § 1404(a), as here, to be litigated, in
turn, before a District Court and Court of Appeals in
one Circuit, and a District Court and Court of Appeals
in another Circuit. . . .

Id. at 349 (Frankfurter, J., dissenting).

And as the Supreme Court has recognized, in reasoning that
we later employed, "'transferee courts that feel entirely free to
revisit transfer decisions of a coordinate court threaten to send
litigants into a vicious circle of litigation.'" SongByrd, Inc.
v. Estate of Grossman, 206 F.3d 172, 178 n.7 (2d Cir. 2000)
(quoting Christianson v. Colt Indus. Operating Corp., 486 U.S.
800, 816 (1988)); see also Fowler, 287 F.2d at 47 (Lumbard, C.J.,
dissenting in part) (concurring with the general proposition that
the first-filed court may enjoin proceedings in the second-filed
court, but concluding that "[t]he principles of comity and
judicial economy seem to me to require us to hold that [the
plaintiff]'s decision first to litigate in the Alabama federal
court the question of where the dispute should be tried precluded
it from raising the question again in the Eastern District of New
York after the Alabama federal court had ruled against it").
48
1 BofA can identify no special circumstances sufficient

2 to overcome the presumption in favor of adjudication of the Tort

3 and Contract Claims in the Texas District Court. First of all,

4 there is absolutely no evidence that "a manifest wrong or

5 injustice" would have befallen either party had the New York

6 District Court stayed its hand. Joseph Bancroft & Sons, 268 F.2d

7 at 524. In fact, after transferring the Declaratory Claims to

8 New York, the Texas District Court continued to adjudicate the

9 Tort and Contract Claims before finally staying proceedings in

10 anticipation of the New York District Court's ruling. Second,

11 there is no evidence that AEP's initial decision to bring suit in

12 Texas was motivated by forum-shopping. See William Gluckin & Co.

13 v. Int'l Playtex Corp., 407 F.2d 177, 178 (2d Cir. 1969) (finding

14 special circumstances where "forum shopping alone motivate[s] the

15 choice of the situs for the first suit"); Rayco Mfg. Co. v.

16 Chicopee Mfg. Corp., 148 F. Supp. 588, 593-94 (S.D.N.Y. 1957)

17 (deferring to the second jurisdiction because forum shopping

18 motivated the plaintiff's choice of New York). Finally, the Tort

19 and Contract Claims are not so inextricably intertwined with the

20 Declaratory Claims so as to require a court adjudicating one

21 group to reach a conclusion about the other. As a result, they

22 can proceed in parallel litigation before separate courts. We

23 therefore conclude that, under the circumstances presented in

24 this case, it was an abuse of discretion for the New York

25 District Court to adjudicate the Tort and Contract Claims that

49
1 had first been filed, and were in the process of being

2 adjudicated, in the Texas District Court.

3 II. Motion to Amend the Pleadings

4 Before we can address the remaining issues on appeal,

5 we must turn to the plaintiffs' contention that the district

6 court erred in denying their motion to amend the complaint

7 seeking, in relevant part, to add another declaratory claim that

8 the 1997 Transaction did not, in economic substance, constitute a

9 "true sale" of the gas, such that BGT never acquired a legal

10 ownership interest in the gas and could not therefore grant BofA

11 a valid security interest in that property. As the plaintiffs

12 point out, if we were to reverse the district court's judgment on

13 this issue, we must also vacate and remand as to the remaining

14 issues on appeal -- a finding by the district court on remand

15 that the transaction did not constitute a true sale would, the

16 plaintiffs contend, render the defendants' ownership and security

17 interests void and thus compel a finding in the plaintiffs' favor

18 on the remaining Declaratory Claims and Counterclaims. Such a

19 remand is unnecessary in this case, however, because we conclude

20 that leave to amend the complaint was properly denied.

21 We ordinarily review a district court's denial of a

22 motion to amend the pleadings for abuse of discretion. Gorman v.

23 Consol. Edison Corp., 488 F.3d 586, 592 (2d Cir. 2007); Milanese

24 v. Rust-Oleum Corp., 244 F.3d 104, 110 (2d Cir. 2001). However,

25 "if the denial of leave to amend is based upon a legal

50
1 interpretation we review it de novo." Gorman, 488 F.3d at 592

2 (alterations and internal quotation marks omitted).

3 Rule 15 of the Federal Rules of Civil Procedure

4 provides that leave to amend the pleadings should be "freely

5 give[n] . . . when justice so requires." Fed. R. Civ. P.

6 15(a)(2). "The rule in this Circuit has been to allow a party to

7 amend its pleadings in the absence of a showing by the nonmovant

8 of prejudice or bad faith." Block v. First Blood Assocs., 988

9 F.2d 344, 350 (2d Cir. 1993). We have referred to the prejudice

10 to the opposing party resulting from a proposed amendment as

11 among the "most important" reasons to deny leave to amend. State

12 Teachers Ret. Bd. v. Fluor Corp., 654 F.2d 843, 856 (2d Cir.

13 1981) ("Reasons for a proper denial of leave to amend include

14 undue delay, bad faith, futility of amendment, and perhaps most

15 important, the resulting prejudice to the opposing party.").

16 Amendment may be prejudicial when, among other things, it would

17 "require the opponent to expend significant additional resources

18 to conduct discovery and prepare for trial" or "significantly

19 delay the resolution of the dispute." Id.

20 The defendants contend that because the plaintiffs'

21 motion to amend was not made until "three years after they filed

22 their complaint and only after defendants moved for summary

23 judgment," the district court was correct to deny the plaintiffs'

24 "belated attempt to inject a new legal theory" into the case on

25 grounds of undue delay and prejudice. Appellees' Br. 59-60.

26 However, instead of denying the motion as untimely, the court

51
1 denied it on the ground that the proposed amendment would have

2 been "futile," AEP I, 2007 WL 2428474 at *8, 2007 U.S. Dist.

3 LEXIS 63421, at *24, based on its conclusion that "the record

4 does not permit a finding that what the Bank of America did was a

5 sham," Transcript of Record at 49, AEP Energy Servs. Gas Holding

6 Co. v. Bank of Am., N.A., No. 05 Civ. 4248 (S.D.N.Y. Jan. 31,

7 2007). Leave to amend may be denied on grounds of futility if

8 the proposed amendment fails to state a legally cognizable claim

9 or fails to raise triable issues of fact. See Milanese, 244 F.3d

10 at 110-11.

11 It is not altogether clear whether the district court's

12 ruling was based upon a legal interpretation of the plaintiffs'

13 proposed claim or on a factual determination of the claim's

14 ability to withstand summary judgment, which may affect our

15 standard of review. See, e.g., Gorman, 488 F.3d at 592

16 (reviewing denial of motions for leave to amend de novo where

17 district court "denied the motions . . . as futile based on [its]

18 interpretation of the [statute under which the proposed claims

19 were purportedly brought]"); Milanese, 244 F.3d at 110 (reviewing

20 for abuse of discretion district court's determination that

21 amendment, sought in response to summary judgment motions, would

22 be futile because the record did not enable the proposed claim to

23 withstand summary judgment). We need not resolve that question,

24 however, because we decline to affirm the district court's ruling

25 on the ground of futility.

52
1 Based on the record before us, we are unable to

2 conclude that the evidence adduced by the plaintiffs on summary

3 judgment was insufficient to create a triable issue of fact as to

4 whether the Bammel Gas transaction was a sham intended, in sum

5 and substance, to enable Enron to inflate its year-end revenues

6 fraudulently while hiding the true extent of its liabilities and

7 therefore did not involve a "true sale" of the Storage Gas to

8 BGT. On the other hand, doubts have also been raised as to

9 whether the plaintiffs' proposed "no true sale" claim is a

10 legally cognizable theory that would enable them to void the

11 entire transaction and BofA's corresponding security interest

12 therewith. In particular, it is open to question whether a

13 finding that the transaction did not constitute a "true sale" for

14 accounting purposes would necessarily compel the conclusion that

15 it did not effect a legal transfer of property rights under the

16 parties' agreements. And there is a further open issue as to

17 whether the plaintiffs may be estopped from asserting that the

18 transaction was a sham in light of their participation in the

19 2001 restructuring of the transaction and extensive due diligence

20 in connection therewith.

21 We need not reach these difficult issues, however,

22 because we conclude that the denial of AEP's motion to amend its

23 pleadings was not an abuse of discretion. It would be futile to

24 remand to the district court for it to make a discretionary

25 ruling as to which its disposition is so clearly sound. The

26 plaintiffs filed the motion to amend on October 25, 2006, three

53
1 years after the commencement of the lawsuit and several months

2 after cross-summary judgment motions had been filed. As the

3 plaintiffs concede on appeal, the resolution of their proposed

4 "no true sale" claim may well have been dispositive of all other

5 claims and counterclaims that had, until then, been the subject

6 of extensive discovery and litigation between the parties. And

7 at the time the plaintiffs sought to introduce this new claim,

8 the defendants had already filed summary judgment papers,

9 including in support of their motion and in opposition to the

10 plaintiffs' motion, consisting of thousands of pages addressing

11 the existing claims and counterclaims at issue. In other words,

12 the impact of the proposed new claim on the existing proceedings

13 would have been substantial. Its assertion would undoubtedly

14 have required the defendants "to expend significant additional

15 resources" to defend and would have "significantly delay[ed] the

16 resolution of the dispute." Block, 988 F.2d at 350.

17 The plaintiffs offer a credible reason for their delay:

18 that they were estopped from challenging BGT's ownership of the

19 gas until the reversal of the Texas state court judgment in

20 August 2006. The fact that there may have been good reason for

21 them to have acted as they did is not alone sufficient to

22 discount the significant prejudice resulting from permitting them

23 to file their amended complaint in light of the circumstances

24 presented, the length and complexity of these proceedings, and

25 the late stage of litigation at which the motion was made. We

26 therefore conclude that it was not an abuse of discretion for the

54
1 district court to deny the motion to amend. See Ansam Assocs.,

2 Inc. v. Cola Petroleum, Ltd., 760 F.2d 442, 446 (2d Cir. 1985)

3 (affirming denial of motion to amend as "especially prejudicial

4 given the fact that discovery had been completed and [the

5 defendant] had already filed a motion for summary judgment"); see

6 also Krumme v. WestPoint Stevens, Inc., 143 F.3d 71, 88 (2d Cir.

7 1998) (same where "case was near resolution and discovery had

8 been completed").

9 We therefore affirm the district court's denial of the

10 plaintiffs' motion to amend the complaint to add the "no true

11 sale" claim.

12 III. Summary Judgment as to the Plaintiffs' Declaratory
13 Claims and BofA's Related Counterclaims

14 The plaintiffs -- AEP, HPL, and HPLR -- have asserted

15 six claims (Counts I-VI of their Second Amended and Supplemental

16 Complaint) seeking declarations that the defendants may not

17 foreclose on or otherwise interfere with the plaintiffs' right to

18 use the Storage Gas in the Storage Facility, that BofA's security

19 interest is limited to the "personal property" natural gas

20 contained in the Storage Facility as of May 2001, and that the

21 defendants released or waived their rights to the gas under the

22 Operative Agreements by virtue of the Enron Settlement Agreement.

23 Following oral argument before it, the district court

24 concluded that defendant BofA held a "valid, presently-

25 enforceable security interest in 55 billion cubic feet of gas

55
1 that was not subordinated in the 2001 transaction in any way."

2 AEP I, 2007 WL 2428474, at *1, 2007 U.S. Dist. LEXIS 63421, at

3 *5. The court further concluded that Enron's petition in

4 bankruptcy constituted a default under the Operative Agreements,

5 and that the Enron Settlement Agreement that resolved BofA's

6 claims in the bankruptcy court did not affect BofA's right to

7 enforce its security against the plaintiffs. Id., 2007 WL

8 2428474, at *1, 2007 U.S. Dist. LEXIS 63421, at *5. The district

9 court therefore granted summary judgment to the defendants on all

10 of the Declaratory Claims. It also granted summary judgment in

11 BofA's favor on its counterclaims for conversion, breach of

12 bailment, and replevin. Id., 2007 WL 2428474, at *2, 2007 U.S.

13 Dist. LEXIS 63421, at *6–*7.12

14 For the reasons set forth below, we agree with the

15 district court that BofA retained a valid security interest in

16 the Storage Gas under the Operative Agreements that vested upon

17 Enron's bankruptcy, and that the plaintiffs' refusal to return

18 the gas thereafter constituted conversion. We therefore affirm

19 the grant of summary judgment to BofA on the plaintiffs'

20 Declaratory Claims and on the counterclaims for conversion,

21 breach of bailment, and replevin.

22 A. Standard of Review

12
The conversion-based counterclaims, being in response to
the plaintiffs' Declaratory Claims, had been transferred by the
Texas District Court and were properly before the New York
District Court for adjudication.
56
1 We review the district court's grant of summary

2 judgment de novo, "construing the evidence in the light most

3 favorable to the non-moving party and drawing all reasonable

4 inferences in its favor." Fincher v. Depository Trust & Clearing

5 Corp., 604 F.3d 712, 720 (2d Cir. 2010) (citation and internal

6 quotation marks omitted). "Summary judgment is appropriate where

7 there exists no genuine issue of material fact and, based on the

8 undisputed facts, the moving party is entitled to judgment as a

9 matter of law." Oneida Indian Nation of N.Y. v. Madison County,

10 605 F.3d 149, 156 (2d Cir. 2010) (alteration and internal

11 quotation marks omitted); see also Fed. R. Civ. P. 56(c).

12 B. The Use of Extrinsic Evidence

13 The parties agree that the relevant transaction

14 documents are governed by Texas law.13 They dispute, however,

15 whether these agreements are ambiguous on their face, such that

13
However, section 10 of Appendix B to the Participation
Agreement, which recites the governing provisions for all of the
Operative Agreements, provides that, unless otherwise stated, the
Participation Agreement, the Security Agreement, and the Guaranty
"shall be governed by and interpreted in accordance with the laws
of the State of New York" and the Pressurization Agreement, Sale
Agreement and Marketing Agreement "shall be governed by the laws
of the State of Texas." 2001 Participation Agreement, app. B §
10 (emphasis removed). In addition, the Enron Settlement
Agreement is also governed by New York law. And the Right To Use
Agreement and the Consent -- to which the parties apparently
refer in stipulating to the use of Texas law -- are expressly
governed by Texas law, with the exception of the "rights, duties,
obligations, benefits, protections, and immunities of the
Trustee" under the Consent, which "shall be governed by the laws
of the State of New York." Consent § 12(d) (emphasis removed).

Because Texas law and New York law are substantially similar
in the relevant respects, this distinction does not affect our
resolution of the issues concerning these agreements on appeal.

57
1 extrinsic evidence is necessary to determine the parties' intent.

2 Under Texas law, whether a contract is ambiguous is a

3 question of law for the court to decide "by looking at the

4 contract as a whole in light of the circumstances present when

5 the contract was entered." Coker v. Coker, 650 S.W.2d 391, 394

6 (Tex. 1983). A contract is ambiguous if it is subject to more

7 than one reasonable interpretation. See Nat'l Union Fire Ins.

8 Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995). Only

9 if a contract is ambiguous on its face or when applied to the

10 context at hand may extrinsic evidence be considered to explain

11 the terms of the contract. Id. Of course, a contract is not

12 rendered ambiguous simply because the parties disagree about its

13 meaning. Seagull Energy E&P, Inc. v. Eland Energy, Inc., 207

14 S.W.3d 342, 345 (Tex. 2006). When there is conflicting extrinsic

15 evidence, summary judgment is inappropriate. See Sec. Sav. Ass'n

16 v. Clifton, 755 S.W.2d 925, 931 (Tex. App. 1988).14

14
New York law is substantially similar to Texas law in
this regard. Under New York law, "[w]hether or not a writing is
ambiguous is a question of law to be resolved by the courts."
W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157, 162, 566
N.E.2d 639, 642, 565 N.Y.S.2d 440, 443 (1990). A contract is
unambiguous if "on its face [it] is reasonably susceptible of
only one meaning." Greenfield v. Philles Records, Inc., 98
N.Y.2d 562, 570, 780 N.E.2d 166, 171, 750 N.Y.S.2d 565, 570
(2002). On the other hand, "[a] contract is ambiguous if the
provisions in controversy are reasonably or fairly susceptible of
different interpretations or may have two or more different
meanings." N.Y.C. Off-Track Betting Corp. v. Safe Factory
Outlet, Inc., 28 A.D.3d 175, 177, 808 N.Y.S.2d 70, 73 (1st Dep't
2006) (citations and internal quotation marks omitted). Only
where a contract is ambiguous may extrinsic evidence be used to
determine the parties' intent. Greenfield, 98 N.Y.2d at 569, 780
N.E.2d at 171, 750 N.Y.S.2d at 569. In such a circumstance,
58
1 Based on our review of the Operative Agreements, we

2 conclude that there is no indication that these agreements are

3 ambiguous on their face or in the context of this dispute, either

4 individually or when read together. The district court therefore

5 properly declined to consider extrinsic evidence in interpreting

6 these contracts.

7 C. The Scope of the Parties' Rights Under the Operative
8 Agreements

9 "If there is no ambiguity, the construction of the

10 written instrument is a question of law for the court." Myers v.

11 Gulf Coast Minerals Mgmt., 361 S.W.2d 193, 196 (Tex. 1962); see

12 also Seagull, 207 S.W.3d at 345. The "primary concern when

13 interpreting a contract is to ascertain and give effect to the

14 intent of the parties as that intent is expressed in the

15 contract." Seagull, 207 S.W.3d at 345. "To discern this intent,

16 we 'examine and consider the entire writing in an effort to

17 harmonize and give effect to all the provisions of the contract

18 so that none will be rendered meaningless.'" Id. (emphasis in

19 original) (quoting Coker, 650 S.W.2d at 393). In doing so,

20 "'[n]o single provision taken alone will be given controlling

21 effect; rather, all the provisions must be considered with

22 reference to the whole instrument.'" Id. (quoting Coker, 650

23 S.W.2d at 393). Where contemporaneous documents exist, these

24 documents should be construed together to discern the parties'

summary judgment is inappropriate. See Hartford Accident &
Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 172, 305 N.E.2d 907,
909, 350 N.Y.S.2d 895, 898 (1973).

59
1 intent. See Tex. Commerce Bank Nat'l Ass'n v. Nat'l Royalty

2 Corp., 799 F.2d 1081, 1083 (5th Cir. 1986).15

3 The plaintiffs urge us to conclude that the district

4 court erred in deciding that the Operative Agreements granted

5 defendant BofA a valid, enforceable security interest in the gas

6 that gained priority over the plaintiffs' rights upon Enron's

7 bankruptcy. They point to the fact that the Right To Use

8 Agreement, executed between HPL and Enron with BofA's consent,

9 gave HPL the right to "quiet enjoyment" of the Storage Gas "free

10 of adverse claims of Third Parties, of any kind or nature" for

11 the duration of the sublease. Appellants' Br. 75 (quoting Right

12 To Use Agreement § 1.01 (definition of "Quiet Enjoyment")). In

13 order to guarantee such unfettered use of the gas, they contend,

14 Enron (through LeaseCo) agreed to use only "Exchange Gas," not

15 the Storage Gas contained in the Storage Facility, to satisfy any

16 obligations to BofA that may arise under the Operative

17 Agreements. Id. (citing Right To Use Agreement § 8.01). The

18 plaintiffs also note that in the Consent itself, BofA expressly

15
Similarly, under New York law, when the terms of a
contract are clear and unambiguous, the construction of the
contract presents a question of law to be determined by the
court. Town of Harrison v. Nat'l Union Fire Ins. Co., 89 N.Y.2d
308, 316, 675 N.E.2d 829, 832, 653 N.Y.S.2d 75, 78 (1996).
"[A]greements are construed in accord with the parties' intent."
Greenfield, 98 N.Y.2d at 569, 780 N.E.2d at 171, 750 N.Y.S.2d at
569. Accordingly, "a written agreement that is complete, clear
and unambiguous on its face must be enforced according to the
plain meaning of its terms." Id. at 569, 780 N.E.2d at 171, 750
N.Y.S.2d at 569. Where the terms of a contract are clear, the
court may properly grant summary judgment as a matter of law.
See Wesolowski, 33 N.Y.2d at 172, 305 N.E.2d at 909, 350 N.Y.S.2d
at 898.
60
1 released plaintiffs HPL and HPLR "'from all liabilities and

2 obligations under the Operative Agreements, whether now or in the

3 future existing or arising,'" and agreed to enforce the

4 obligations imposed by these agreements "'solely against'" Enron.

5 Appellants' Br. 76 (quoting Consent § 2(g)). The plaintiffs

6 argue that, together, these provisions evince an intent to give

7 HPL and HPLR unfettered use of the gas to the exclusion of any

8 preexisting rights or security interest of BofA, and to direct

9 all recourse in any event solely against Enron. We do not think,

10 though, that this piecemeal reading of the transaction documents

11 accurately reflects the manifest intent of the parties.

12 It seems to us clear from the plain language of the

13 Operative Agreements that the intent of the Right To Use

14 Agreement and the Consent was to provide the plaintiffs with

15 unfettered use of the Storage Gas for the duration of the

16 sublease in all ordinary circumstances absent an event of default

17 -- the same rights as HPL had under the original 1997 agreements,

18 before HPL was sold to AEP. Once a default occurred when Enron

19 filed its petition in bankruptcy, see 2001 Guaranty § 5.01(c) ("A

20 'Guaranty Default' shall exist if . . . Enron or any of its

21 Principal Subsidiaries shall become the subject of a Bankruptcy

22 Event."16) (emphasis removed); 2001 Participation Agreement

16
A "Bankruptcy Event" occurs with respect to an entity if

(a) such [entity] shall generally not pay such
[entity]'s debts as such debts become due . . . ; or
(b) any proceeding shall be instituted by or against
such [entity] seeking to adjudicate such [entity] as
61
1 § 8.01(e) (stating that an event of default includes when "[a]

2 Guaranty Default occurs"), there is nothing in the documents that

3 purports to negate or subordinate the defendants' rights,

4 remedies, or interest in the gas that they would otherwise have

5 under the Operative Agreements.

6 The Right To Use Agreement, which grants HPL the right

7 to use the gas for the duration of the sublease, provides that

8 "notwithstanding the terms, provisions and restrictions in any

9 [of the Operative Agreements], LeaseCo . . . will cause and

10 allow[ the Storage Gas] to be available to HPL at the Storage

11 Facility for HPL's right to Quiet Enjoyment at all times during

12 the [t]erm [of the sublease]." Right to Use Agreement § 2.01(b).

13 The plaintiffs are correct that pursuant to this agreement,

14 LeaseCo granted HPL "Quiet Enjoyment" of the Storage Gas "free of

15 adverse claims of Third Parties, of any kind or nature, in, to or

16 with respect to the [Storage] Gas, or any part thereof, that

17 interfere with, restrict or impede the Enjoyment of the [Storage]

bankrupt or insolvent, or seeking liquidation, winding-
up, reorganization, rearrangement, adjustment,
protection, relief, or recomposition of such [entity]
or such [entity]'s debts under any Bankruptcy Law, or
seeking the entry of an order for relief or the
appointment of a receiver, trustee, or other similar
official for such [entity] or for any substantial part
of such [entity]'s property and, in the case of any
such proceeding instituted against such [entity] (but
not instituted by such [entity]), shall not be
controverted within 45 days and shall remain
undismissed or unstayed for a period of 90 days after
such proceeding is filed.

2001 Participation Agreement, app. A (definition of "Bankruptcy
Event").
62
1 Gas." Id. § 1.01 (definition of "Quiet Enjoyment"). But we do

2 not read this clause as restricting the existing security

3 interest held by BofA in the gas. The parties explicitly carved

4 out the existing security interest from this prohibition by

5 designating it a "Permitted Lien" under the agreement, "[t]he

6 existence of [which] shall not be a breach by LeaseCo of [its

7 obligation to provide HPL with quiet enjoyment of the gas]." Id.

8 § 2.01(b); see also id. § 1.01 ("'Permitted Liens' means . . .

9 [inter alia] the Lien of the Existing Security Agreement."

10 (emphasis removed)). The Pressurization Agreement appears to

11 reinforce this understanding by providing, in the covenants, that

12 "[t]he Trustee shall not create any Lien on the Storage Gas

13 (other than the Lien in favor of [BofA] under the Security

14 Agreement)." 2001 Pressurization Agreement § 5.02(a).

15 The Right To Use Agreement was subject to BofA's

16 consent. See Consent at 2 ("[T]he execution and delivery of this

17 Consent by each of the Consent Parties [including BofA] is a

18 condition precedent to the effectiveness of . . . the Sublease

19 and the Right to Use Agreement."). However, the Consent executed

20 by BofA is not helpful to the plaintiffs. It makes clear that

21 the scope of this consent extended to "the use of the [Storage]

22 Gas by [HPL] as contemplated by the Right to Use Agreement . . .

23 [and] to any and all agreements related thereto," but only "so

24 long as such related agreements do not increase the obligations

25 or reduce the rights of the Trustee . . . or BofA under the

26 Operative Agreements." Consent § 2(a)(iii) (emphasis added).

63
1 Accordingly, BofA consented to the plaintiffs' right to use the

2 gas only to the extent that this arrangement did not alter, to

3 the defendants' detriment, the defendants' existing rights and

4 obligations under the Operative Agreements then in place; and by

5 implication, then, BofA withheld its consent to any aspect of the

6 right-to-use arrangement that would have the effect of increasing

7 the defendants' obligations or, more importantly, reducing their

8 rights to the gas in any way under the Operative Agreements.

9 Indeed, section 11 of the Consent unambiguously

10 forecloses the plaintiffs' argument that the parties intended by

11 these agreements to subordinate BofA's security interest to the

12 plaintiffs' rights in the gas. It provides that "[f]or avoidance

13 of doubt, nothing herein shall impair the lien and security

14 interest of BofA under the Security Agreement or, except as

15 expressly set forth in Section 2 hereof, reduce the rights and

16 remedies of BofA under the Security Agreement." Consent § 11.

17 The only limitation set forth in "section 2 [t]hereof" on the

18 rights and remedies of BofA under the Security Agreement was that

19 prior to exercising these rights upon an event of default, BofA

20 and the Trustee were required first to afford the plaintiffs

21 notice of the default and an opportunity to cure it.17

17
In this regard, any reliance the plaintiffs may place on
the exception clause of section 11, providing that the terms set
forth in section 2 of the Consent may act to "reduce the rights
and remedies of BofA under the Security Agreement," is therefore
misplaced. Section 2 of the Consent grants the consent to the
Right To Use Agreement and provides, in relevant part, for notice
and cure rights to the plaintiffs in the event of a default. See
Consent §§ 2(b)(ii)-(iii) (providing that "[i]n the event of a
default . . . [HPL] shall have the right (but not the obligation)
64
1 Accordingly, we look next to the Security Agreement to

2 determine the rights and remedies of BofA with respect to the

3 gas. Section 3 of the Security Agreement delineates the relative

4 priority of the parties' rights and interest in the gas before

5 and after a default: "With respect to the [secured portion of

6 the Storage Gas] only, the Security Interest of the Secured Party

7 therein . . . until the Trustee (or its designee) exercises its

8 rights under Section 5.02 of the Guaranty, shall be subordinate

9 to [the plaintiffs'] right to borrow and use such Natural Gas in

10 accordance with the terms of the Pressurization Agreement." 2001

11 Security Agreement § 3(c)(ii)(emphasis added). Section 6 of the

12 agreement, entitled "Remedies upon Event of Default," further

13 clarifies the interplay between the parties' respective rights to

14 the gas before and after a Guaranty Default occurs:

15 Notwithstanding any provisions to the
16 contrary in this Agreement, so long as no
17 Guaranty Default shall have occurred and be
18 continuing, neither the Secured Party [BofA]

to cure such Default within the applicable cure periods," and
that the Trustee "shall not exercise any remedies under the
Operative Agreements in respect of any Default" unless and until
written notice of default and an opportunity to cure has been
afforded to HPL, and HPL has not cured); see also id. § 2(c)
(same rights and obligations with respect to BofA).
Therefore, section 2 of the Consent "reduces" the rights and
remedies of BofA only insofar as it forestalls the exercise of
these rights and remedies in the event of default until after
notice and an opportunity to cure has been provided. It does
not, as the plaintiffs contend, negate these rights and remedies
altogether or subordinate them absolutely to the consent to use.
And in fact, section 2 of the Consent further stipulates that the
parties have "agreed and acknowledged that any 'Guaranty Default'
. . . is an Event of Default which could affect [the plaintiffs']
rights under or pursuant to the Right to [U]se Agreement." Id.
§ (2)(c)(i).
65
 1 nor any Note Purchaser or Bank Lender shall
2 exercise its remedies (and the Note
3 Purchasers and Bank Lenders shall not request
4 the Secured Party to exercise such remedies)
5 under any provision of this Agreement or
6 otherwise available at law or in equity
7 against or affecting the Storage Gas. . . .
8 Upon the occurrence of a Guaranty Default,
9 the Secured Party's rights and remedies with
10 regard to the [secured portion of the Storage
11 Gas] shall be limited to those specified in
12 Section 5.02 of the Guaranty.
13 Id. § 6(b) (emphasis added).

14 The Security Agreement thus provides that the security

15 interest of BofA in the Storage Gas is subordinate to HPL's right

16 to use this gas, but only until a Guaranty Default occurs.

17 Thereupon, BofA's exclusive recourse lies in the Trustee's

18 exercise of its rights and remedies under section 5.02 of the

19 Guaranty (or in BofA's assumption and exercise of these rights

20 itself as a representative of the Trustee, see id. § 6(a)(ii)).

21 Section 5.02 of the Guaranty permits the Trustee, "[u]pon the

22 occurrence and during the continuance of a Guaranty

23 Default, . . . to exercise all rights and remedies available at

24 law, in equity, by statue, by agreement or otherwise including,

25 without limitation, the right to give Enron the Settlement

26 Notice." 2001 Guaranty § 5.02. Upon such notice, if Enron fails

27 to cure the default by delivering Exchange Gas of equivalent

28 value to the Trustee, "Enron shall, at the Trustee's request (at

29 the direction of [BofA]), cause the Trustee to have such access

30 and rights to the Storage Facility . . . to permit the Trustee or

31 its designee to withdraw Storage Gas from the Storage Facility."

32 Id. § 5.02(b). In addition, both the Guaranty and the
66
1 Pressurization Agreement unambiguously provide that upon the

2 Trustee's exercise of its rights and remedies under section 5.02

3 of the Guaranty, the Pressurization Agreement -- and therefore

4 the plaintiffs' rights to use the gas -- terminates. See id.

5 § 5.03(b); 2001 Pressurization Agreement § 6.03(b).

6 In sum, we conclude that the Operative Agreements, when

7 read together, provided the plaintiffs with the right to quiet

8 enjoyment and use of the gas for the duration of the sublease so

9 long as no event of default had occurred or any default had been

10 cured. Upon an event of default, the plaintiffs' right to use

11 the gas was subordinated to BofA's security interest and the

12 defendants became entitled to exercise their rights and remedies

13 under the Operative Agreements to foreclose on this interest.

14 And we find nothing in the Operative Agreements that acted in the

15 2001 Transaction to negate or subordinate the security interest

16 that BofA was granted in the Storage Gas in the event of a

17 default.

18 We have considered the remainder of the plaintiffs'

19 arguments based on the law of contracts and find them without

20 merit.18

18
For example, the plaintiffs cite section 8.01 of the
Right To Use Agreement in support of their claim that BofA
relinquished all rights to the Storage Gas in the 2001
Transaction and was required thereafter to look only to "Exchange
Gas" from Enron in satisfaction of any obligation. But this
section cannot reasonably be read as broadly as the plaintiffs
suggest. Section 8.01 states that "LeaseCo shall use only
Exchange Gas to satisfy its obligations under Article III of the
Pressurization Agreement to make withdrawals of Natural Gas from
the Storage Facility." Right To Use Agreement § 8.01 (emphasis
added). Article III of the Pressurization Agreement required
67
1 D. Summary Judgment as to The Declaratory Claims

LeaseCo to withdraw the Storage Gas from the Storage Facility
pursuant to a fixed schedule over a period of months in 2004 --
or, at its option, permit LeaseCo to provide Exchange Gas instead
-- to give to Enron to sell on the open market. Enron would then
remit the proceeds of the sale to BGT so that BGT could repay to
BofA the principal amount of the $218 million loan. Article III
thus provided the mechanism by which Enron originally intended to
repay the BofA loan at its maturity in 2004. This mechanism was
retained intact from the 1997 Transaction to the 2001
Transaction, regardless of the fact that the 2001 Transaction
granted HPL the right to use the Storage Gas that was supposed to
be sold in 2004 for the next thirty years.

Accordingly, in light of this conflict, section 8.01 of the
Right to Use Agreement alters this mechanism in one simple way:
it makes the option to use Exchange Gas to satisfy the 2004 loan
obligation that was present in the 1997 Transaction mandatory
under the 2001 agreements. This change was intended to provide
LeaseCo an alternate way of satisfying the 2004 loan obligation
without withdrawing the Storage Gas and thereby impacting HPL's
rights to continued use of this gas for the duration of the 30-
year sublease. By its terms, then, this provision requires
LeaseCo to use Exchange Gas to satisfy its obligation to BofA
only in this specific instance; it does not touch upon the
parties' rights and obligations in any other event.

Similarly, the plaintiffs quote the Consent in support of
their assertion that BofA released HPL "from all liabilities and
obligations under the Operating Agreements, whether now or in the
future existing or arising," and agreed "to enforce payment and
performance . . . solely against LeaseCo and [Enron]" in an
effort to subordinate BofA's security interest in the gas and
vest the plaintiffs with exclusive rights to use in all
circumstances. See Consent § 2(g). But the plaintiffs neglect
to point out that this provision, by its terms, refers only to
the specific bundle of obligations assigned to LeaseCo by HPL in
the Assignment and Assumption Agreement entered into as part of
the 2001 Transaction restructuring. See id. ("In connection with
the assignments referred to in clause (a)(i) of this Section 2
[referring to the 'Assigned Obligations' under the Assignment and
Assumption Agreement]. . . ."). It therefore does nothing more
than confirm that, pursuant to this assignment, LeaseCo now
stands in the former shoes of HPL for purposes of the 2001
Transaction. It does not affect the defendants' rights and
remedies in any other respect nor, certainly, in the event of a
default.

68
1 We agree with the district court that Enron's filing in

2 bankruptcy constituted an event of default under the Operative

3 Agreements and that, following this default, BofA had a "valid,

4 presently-enforceable security interest in [the] gas that was not

5 subordinated in the 2001 transaction in any way." AEP I, 2007 WL

6 2428474, at *1, 2007 U.S. Dist. LEXIS 63421, at *5. The terms of

7 the parties' agreements make clear that this security interest

8 was subordinated to the plaintiffs' rights to use the gas only

9 until the Trustee exercised its rights and remedies under section

10 5.02 of the Guaranty in the event of a default. Upon an event of

11 default, however, the plaintiffs were entitled, pursuant to the

12 Consent, to receive notice of and an opportunity to cure the

13 default before the defendants could proceed to exercise their

14 rights and remedies under the Security Agreement and the Guaranty

15 to foreclose on the gas. Accordingly, following the lift of the

16 bankruptcy stay in the wake of the Enron Settlement Agreement,

17 the defendants sent Notices of Default and Settlement Notices to

18 the plaintiffs, and the plaintiffs chose neither to cure the

19 default nor (as was their option under the Purchase Option

20 Agreement) to purchase the Storage Gas outright. At this point,

21 then, pursuant to the contracts, the defendants had the superior

22 right to foreclose upon and withdraw the gas.

23 We also agree with the district court's conclusion that

24 the Enron Settlement Agreement did not affect the defendants'

25 ability to enforce their rights with respect to, and security

26 interest in, the gas. See id., 2007 WL 2428474, at *1, 2007 U.S.

69
1 Dist. LEXIS 63421, at *5. The plaintiffs argue that as part of

2 the Enron Settlement Agreement, the defendants released any and

3 all claims against Enron relating to the Bammel Gas transaction

4 and thereby extinguished any subsequent right of recourse they

5 may have had under the Operative Agreements against the gas. But

6 the Settlement Agreement provides to the contrary.

7 The Settlement Agreement allows the defendants' proofs

8 of claim against Enron relating to the Bammel Gas transaction to

9 be admitted in the bankruptcy proceedings, but only on the

10 condition that the defendants' recovery on these claims must come

11 solely from the proceeds of the sale of the Storage Gas -- which

12 the defendants were then entitled to withdraw and sell under the

13 terms of the Operative Agreements in any event -- and not from

14 any other asset controlled by Enron or at issue in the

15 bankruptcy. In order to effectuate this recovery, the order

16 confirming the Settlement Agreement explicitly lifted the

17 automatic bankruptcy stay "for the sole purpose of allowing [the

18 defendants] to attempt to realize upon the value of the [Storage]

19 Gas," including by sending Settlement Notices and Notices of

20 Default to Enron and to the plaintiffs and thereafter allowing

21 the plaintiffs an opportunity to cure prior to foreclosing on the

22 gas. Order Approving Settlement Agreement at 9, In re Enron

23 Corp., No. 01-16034 (Bankr. S.D.N.Y. Jan. 15, 2004). In return

24 for the allowance and settlement of these claims in this manner,

25 the defendants agreed to release any other claims against Enron

70
1 relating to the Bammel Gas transaction that may then exist or

2 thereafter arise.

3 The Settlement Agreement therefore does not alter or

4 extinguish the defendants' rights under the Operative Agreements

5 to foreclose on and withdraw the Storage Gas following an event

6 of default. Nor does it release the defendants' interest in or

7 claims against the gas in any way. It does no more than limit

8 the defendants' recovery on their allowed claims against Enron to

9 the proceeds of the sale of this gas pursuant to the terms of,

10 and in accordance with their rights under, the Operative

11 Agreements. In doing so, it insulates any other assets held by

12 Enron or otherwise at issue in the bankruptcy proceedings from

13 being the target of the defendants' recovery on their allowed

14 claims.

15 It may be worth noting in this connection that the

16 plaintiffs do not own the Storage Gas; BGT does. BGT leased the

17 rights to use this gas to LeaseCo in the 2001 Transaction, and

18 LeaseCo in turn subleased those rights to HPL. But once Enron

19 filed for bankruptcy, the plaintiffs' rights to use this gas were

20 effectively extinguished. BGT regained the right, as owner, to

21 control and withdraw the gas pursuant to the terms of the

22 Operative Agreements. And BofA gained the right to foreclose

23 upon its security interest in the gas.

24 Moreover, pursuant to the Enron Settlement Agreement,

25 the defendants' recovery on their allowed claims against Enron is

26 contingent on their exercise of these rights. The plaintiffs

71
1 nonetheless continue to retain physical control over the Storage

2 Gas and the Storage Facility. Despite a continuing event of

3 default, the plaintiffs have refused the defendants access to the

4 gas in order to exercise their rights. Thus, contrary to the

5 plaintiffs' arguments, the defendants are not now seeking to

6 recover directly against the plaintiffs for the value of their

7 claims against Enron that were released through the settlement in

8 bankruptcy. Instead, the defendants are simply attempting to

9 exercise their contractual rights.

10 Finally, we agree with the district court that the gas

11 contained in the Storage Facility is properly characterized as

12 "personal property" natural gas and that the plaintiffs are

13 estopped as a matter of law from claiming otherwise.19 AEP I,

14 2007 WL 2428474, at *15-*17, 2007 U.S. Dist. LEXIS 63421, at

15 *43–*48. As BofA concedes, its security interest "is limited to

16 personal property natural gas." Id., 2007 WL 2428474, at *15,

17 2007 U.S. Dist. LEXIS 63421, at *44. And its conversion,

18 bailment, and replevin counterclaims, as a matter of law, may

19 only lie with regard to personal property. See Int'l Freight

20 Forwarding, Inc. v. Am. Flange, 993 S.W.2d 262, 267 (Tex. App.

19
In their briefs on appeal to this Court, the parties
address this issue in connection with the question of damages due
to BofA on the counterclaims, rather than in connection with the
district court's rulings as to liability on the Declaratory
Claims. Notwithstanding this fact, we address this argument in
this section of our opinion, as part of our discussion of the
plaintiffs' Declaratory Claims, because this is the posture in
which it arose in the district court and because it relates to
the district court's grant of summary judgment in favor of BofA
on Count I of the Declaratory Claims. See AEP I, 2007 WL
2428474, at *17, 2007 U.S. Dist. LEXIS 63421, at *48–*49.
72
1 1999) (bailment); Lighthouse Church of Cloverleaf v. Tex. Bank,

2 889 S.W.2d 595, 599 n.4 (Tex. App. 1994) (conversion); Bull v.

3 Jones, 29 S.W. 804, 806, 9 Tex. Civ. App. 346, 349 (1894)

4 (replevin). The plaintiffs contend that the natural gas

5 contained in the Storage Facility constitutes "real property"

6 rather than "personal property," and because the defendants'

7 interest in the gas is limited to "personal property," they have

8 no entitlement to the Storage Gas.

9 As the district court found, however, the plaintiffs

10 have repeatedly represented, in both the transaction documents

11 and in tax and regulatory filings, that the natural gas contained

12 in the Storage Facility constitutes "personal property" natural

13 gas and that no "native gas" -- or "real property" natural gas --

14 existed in the facility after 1996. See, e.g., 1997

15 Participation Agreement § 5.01(m) ("The entire quantity of

16 Natural Gas to be sold . . . constitutes . . . personal property

17 of the Sellers."); see also AEP I, 2007 WL 2428474, at *16, 2007

18 U.S. Dist. LEXIS 63421, at *44–*45 ("From March 1996 to February

19 2003, HPL filed monthly G-3 Forms with the Texas Railroad

20 Commission, where it reported that there was no native gas

21 present in the Bammel Reservoir."). The plaintiffs cannot now

22 seriously claim that the Storage Facility contains only "real

23 property" natural gas to which the defendants have no

24 entitlement. See Coffey v. Singer Asset Fin. Co., 223 S.W.3d

25 559, 570 (Tex. App. 2007) ("[A] party to a contract [may not]

73
1 take a position inconsistent with the contract's provisions, to

2 the prejudice of another.").

3 We further conclude that the two recently created

4 regulatory filings, not submitted by the plaintiffs to the

5 district court until after summary judgment motions were filed,

6 which appear to assert that the Storage Facility contains mostly

7 "native gas," and the plaintiffs' expert report purporting the

8 same conclusion, are insufficient to create a genuine issue of

9 material fact on this question, especially in light of our

10 conclusion regarding the inability of the plaintiffs to make such

11 an assertion contrary to their previous representations in this

12 regard. See generally Margo v. Weiss, 213 F.3d 55, 60-61 (2d

13 Cir. 2000) ("[P]laintiffs cannot defeat a motion for summary

14 judgment by responding with affidavits recanting that earlier

15 testimony."); Trans-Orient Marine Corp. v. Star Trading & Marine,

16 Inc., 925 F.2d 566, 572 (2d Cir. 1991) ("[A] party may not, in

17 order to defeat a summary judgment motion, create a material

18 issue of fact by submitting an affidavit disputing his own prior

19 sworn testimony."); UBS AG v. HealthSouth Corp., 645 F. Supp. 2d

20 135, 145 n.14 (S.D.N.Y. 2008) ("Just as a party may not, in order

21 to defeat a summary judgment motion, create a material issue of

22 fact by submitting an affidavit disputing his own prior sworn

23 testimony, so too [a party] cannot [in litigation] take a

24 position of convenience contrary to its prior statements to

25 [regulatory authorities]." (citations and internal quotation

26 marks omitted)).

74
1 We therefore affirm the district court's grant of

2 summary judgment to the defendants on the plaintiffs' Declaratory

3 Claims.

4 E. Summary Judgment as to the Declaratory Counterclaims

5 In light of its conclusion that the defendants had a

6 superior existing right to the gas, the district court granted

7 summary judgment to BofA, appearing as BONY's representative for

8 purposes of the counterclaims, on its counterclaims for

9 conversion, breach of bailment agreement, and replevin based on

10 the plaintiffs' refusal to relinquish the gas to the defendants

11 when asked. The court concluded that the plaintiffs "converted

12 the gas by refusing to turn it over to BofA when BofA requested

13 it." AEP II, 2007 WL 4458117, at *1, 2007 U.S. Dist. LEXIS

14 93022, at *2–*3.

15 Under Texas law, a bailment is created when (1) the

16 delivery of personal property by one person to another is made in

17 trust for a specific purpose, (2) there is an acceptance of

18 delivery, (3) there exists an express or implied contract that

19 the trust will be carried out, and (4) an understanding exists

20 under the terms of the contract that the property will be

21 returned to the transferor or dealt with as the transferor

22 directs. See Int'l Freight Forwarding, 993 S.W.2d at 267. A

23 plaintiff who establishes breach of a bailment contract may gain

24 relief through an action for conversion. Id. at 269.

25 Conversion, in turn, is the "wrongful assumption and

26 exercise of dominion and control over the personal property of

75
1 another to the exclusion of, or inconsistent with, the owner's

2 rights." Burns v. Rochon, 190 S.W.3d 263, 267-68 (Tex. App.

3 2006) (citing Waisath v. Lack's Stores, Inc., 474 S.W.2d 444, 446

4 (Tex. 1971)). To establish conversion, a plaintiff must prove

5 that: (1) the plaintiff owned or had possession of the property

6 or entitlement to possession; (2) the defendant unlawfully and

7 without authorization assumed and exercised control over the

8 property to the exclusion of, or inconsistent with, the

9 plaintiff's rights as an owner; (3) the plaintiff demanded return

10 of the property; and (4) the defendant refused to return it. Id.

11 at 268.

12 We agree with the district court that summary judgment

13 as to these counterclaims is appropriate. Upon the occurrence of

14 the Guaranty Default, the plaintiffs' superior right to the

15 Storage Gas was extinguished and the defendants were entitled to

16 possession of the gas under the Operative Agreements, subject to

17 the notice and cure provisions. Once the plaintiffs had been

18 provided with notice of the default and failed to exercise their

19 option to cure, BofA became entitled, as the Trustee's

20 representative, to exercise its right to take immediate

21 possession of the Storage Gas. See 2001 Security Agreement

22 § 6(a)(ii). And when BofA demanded access to the gas and AEP

23 refused, that refusal therefore constituted conversion. Because

24 wrongful intent is not an element of conversion under Texas law,

25 see Winkle Chevy-Olds-Pontiac, Inc. v. Condon, 830 S.W.2d 740,

76
1 746 (Tex. App. 1992), the plaintiffs' subjective belief that BofA

2 was not entitled to the gas does not preclude their liability.

3 IV. Summary Judgment as to Damages

4 The plaintiffs identify several errors that they

5 contend the district court made in calculating the damages due to

6 BofA in connection with the counterclaims. They assert that the

7 district court erred as a matter of law in awarding damages to

8 BofA in excess of the amount outstanding on its loan and without

9 taking into account BofA's obligation to mitigate these damages.

10 They also assert an error as to the date of conversion, which the

11 district court fixed at May 14, 2004, but which the plaintiffs

12 contend should have been July 22, 2002. Finally, they contend

13 that the district court improperly weighed conflicting evidence

14 when it granted summary judgment as to the value of the gas and

15 the costs of withdrawing this gas. We find none of these

16 arguments to be meritorious.20

17 A. Damages In Excess of the Loan Amount

18 The plaintiffs contend that the district court erred in

19 permitting BofA to recover damages in excess of the value of its

20 secured loan. The plaintiffs fail to account, however, for the

21 fact that BofA asserted the counterclaims in its capacity as

22 BONY's representative, as was its right under the Operative

20
As discussed in note 19, supra, the plaintiffs also
contend that the district court erred in determining that the
natural gas contained in the Storage Facility constitutes
"personal property" natural gas for the purpose of assessing
damages. For the reasons set forth in our discussion of this
issue in Section III(D), supra, we reject this argument.
77
1 Agreements. See Answer, Defenses and Counterclaims at 25, AEP

2 Energy Servs. Gas Holding Co. v. Bank of Am., N.A., No. 05 Civ.

3 4248 (S.D.N.Y. Jan. 26, 2006) (asserting counterclaims "as

4 Administrative Agent . . . and as representative of the Trustee

5 of the BGT"); 2001 Security Agreement § 6(a)(ii). Therefore,

6 BofA was not limited to the value of its security interest with

7 respect to the damages for conversion.

8 Under Texas law, "[a] plaintiff who establishes

9 conversion is entitled to return of the property" or, in the

10 alternative, "can sue for the value of the property." Winkle

11 Chevy-Olds-Pontiac, Inc. v. Condon, 830 S.W.2d 740, 746 (Tex.

12 App. 1992). If the plaintiff elects the latter, "actual damages

13 are determined by the fair market value at the place and time of

14 conversion together with legal interest thereon." Varel Mfg. Co.

15 v. Acetylene Oxygen Co., 990 S.W.2d 486, 497 (Tex. App. 1999);

16 see also Burns, 190 S.W.3d at 270 ("If the plaintiff in a

17 conversion action elects to recover the value of the property,

18 damages are typically determined by the fair market value at the

19 time and place of conversion."). BGT, as the owner of the gas,

20 was therefore entitled to bring suit by and through the Trustee

21 for the full value of the converted property. It was not limited

22 to the value of BofA's security interest.

23 As the district court explained, "this case is not

24 about BofA's recovery of the value of the loan. The action was

25 commenced to determine who has greater rights with regard to the

26 gas, and damages are to be awarded to BofA based on the value of

78
1 the converted property, not based on the amount due on the loan."

2 AEP II, 2007 WL 4458117, at *5, 2007 U.S. Dist. LEXIS 93022, at

3 *15–*16 (emphasis in original). We agree and conclude that BofA

4 was entitled to recover the full market value of the converted

5 gas as of the date on which it was converted.

6 B. Obligation to Mitigate

7 The plaintiffs assert that the district court erred in

8 failing to find that the defendants had a duty to mitigate

9 damages and that they neglected to do so on two occasions. See

10 AEP II, 2007 WL 4458117, at *6, 2007 U.S. Dist. LEXIS 93022, at

11 *16. First, the plaintiffs contend that BofA failed to mitigate

12 when it released its security interest in the 25 Bcf of gas sold

13 by Enron to AEP during the 2001 Transaction restructuring, and

14 that BofA should have ensured that the $94 million paid by AEP to

15 Enron for this gas was thereafter given to BGT in partial

16 repayment of the loan. Second, the plaintiffs contend that BofA

17 failed to mitigate when it ceased pursuing its claims against

18 Enron in bankruptcy and instead entered into the Enron Settlement

19 Agreement in satisfaction of these claims. We disagree.

20 At the outset, the plaintiffs fail to explain why BofA,

21 as a secured lender in the 1997 Transaction, should not have been

22 permitted to voluntarily release part of its security in order to

23 accomplish the 2001 restructuring, and why it would have been

24 obligated to control the use of any proceeds from the sale of

25 this gas paid to Enron by AEP. More importantly, they do not

26 explain how BofA could have been expected to foresee and mitigate

79
1 unknown future damages years before the conversion took place.

2 See, e.g., Trinity Universal Ins. Co. v. Fuller, 524 S.W.2d 335,

3 338 (Tex. App. 1975) (explaining that the duty to mitigate arises

4 only once the victim of wrongdoing "has knowledge of the fact[s]

5 which make avoidance of the consequences necessary," such as

6 "knowledge of the wrongdoer's breach of contract prior to the

7 occurrence of the damages").

8 The plaintiffs also fail to point to any authority for

9 the proposition that an aggrieved party must mitigate damages

10 when deprived of possession of its property through conversion.

11 And in citing cases involving mitigation by a secured party, they

12 continue to ignore the fact that BofA acts in the counterclaims

13 as BONY's representative, and that its damages are not based upon

14 the value of its security. See, e.g., Bank of N.Y. v. Amoco Oil

15 Co., 35 F.3d 643, 659-60 (2d Cir. 1994) ("Generally, the duty to

16 mitigate is a limitation on consequential damages," and where

17 plaintiffs do not seek such damages, but seek damages for the

18 value of converted property, mitigation is not required.).

19 The plaintiffs also fail to recognize that BofA did not

20 "abandon" its claims relating to the Bammel Gas transaction

21 against Enron in the bankruptcy, but instead settled those claims

22 for value. And it is the recovery of that value -- through the

23 withdrawal and sale of the Storage Gas -- that underlies the

24 instant litigation. Their argument that BofA's recovery in this

25 action "should be reduced by the amount it could have recovered

80
1 in the bankruptcy" had it not abandoned its claims, Appellants'

2 Br. 88, is therefore inapposite.

3 C. The Date of Conversion

4 The plaintiffs next contend that the district court

5 erred in determining the date of conversion to be May 14, 2004,

6 the date on which BofA demanded possession of the gas by means of

7 letter to AEP and HPL following the lifting of the automatic

8 bankruptcy stay in the wake of the Enron Settlement Agreement and

9 after Enron, and the plaintiffs, had failed to cure the default

10 in response to the Notices of Default and Settlement Notices.

11 Rather, the plaintiffs contend, the date of conversion should be

12 fixed at July 22, 2002, when BofA first demanded possession of

13 the gas following Enron's bankruptcy and AEP refused, prompting

14 the filing of the 2002 Texas state court action.21 Using the

15 July 2002 date instead of the May 2004 date, the plaintiffs

16 assert, would reduce the ultimate damage award by approximately

17 $180 million.

18 Under Texas law, a cause of action for conversion

19 accrues "upon the discovery of facts supporting the cause of

20 action, or upon demand and refusal, whichever occurs first."

21
The parties dispute whether the plaintiffs belatedly
raised this issue in the district court for the first time on a
motion for reconsideration, such that it should now be reviewed
for abuse of discretion. However, the district court nonetheless
considered the merits of this argument in the first instance on
the motion to reconsider. We therefore review this issue de
novo. See Lowrance v. Achtyl, 20 F.3d 529, 534 (2d Cir. 1994)
(construing a denial of motion for reconsideration on the merits
as "essentially an affirmance on the merits," and "review[ing] de
novo the [court's] reconsideration, on a motion for
reconsideration, of the merits of the summary judgment motion").
81
1 Nelson v. Am. Nat'l Bank, 921 S.W.2d 411, 415 (Tex. App. 1996).

2 To establish conversion, a plaintiff must establish that "at the

3 time of conversion, he was the owner of the property, had legal

4 possession of it or was entitled to possession." Whitaker v.

5 Bank of El Paso, 850 S.W.2d 757, 760 (Tex. App. 1993).

6 We agree with the district court that "BofA was not

7 entitled to the gas in 2002, because BofA could not have taken

8 possession of the gas until it served a Settlement Notice on

9 Enron[ and] . . . BofA could not serve this Settlement Notice

10 until 2004 when the stay in the Enron bankruptcy was lifted."

11 AEP III, 2008 WL 925433, at *2, 2008 U.S. Dist. LEXIS 30587, at

12 *7. During the pendency of the bankruptcy stay, BofA was not

13 entitled to possession of the gas because it could not enforce

14 its rights to take possession until after the stay was lifted.

15 The Texas Court of Appeals effectively echoed this view when it

16 vacated the 2003 state court judgment in favor of BofA on the

17 grounds that it violated the automatic bankruptcy stay. Because

18 BofA was not entitled to demand possession of the gas until after

19 the stay was lifted in 2004, AEP's refusal of its demand prior to

20 that point did not constitute conversion.

21 Once the stay was lifted, however, BofA was entitled to

22 possession of the gas and to enforce its rights to gain that

23 possession. Accordingly, shortly after the order lifting the

24 stay was issued, BofA sent Notices of Default and Settlement

25 Notices, in conformity with the terms of the Operative

26 Agreements, to Enron and LeaseCo, with copies to AEP and HPL.

82
1 Enron did not perform its obligations under the Guaranty in

2 response to those letters, nor did the plaintiffs exercise their

3 options to cure the default or to purchase the gas. Accordingly,

4 on May 14, 2004, BofA demanded that AEP withdraw and transfer

5 custody of 55 Bcf of Storage Gas in the Storage Facility to BofA.

6 AEP's refusal constituted conversion as of the date of BofA's

7 demand. The district court therefore correctly set the date of

8 conversion as May 14, 2004.

9 D. The Value of the Natural Gas

10 The district court correctly determined that, under

11 Texas law, BofA, as the representative of BONY (the Trustee of

12 the owner of converted property), could elect between the return

13 of the property and money damages. BofA elected money damages.

14 Accordingly, the district court determined that BofA was entitled

15 to $347,325,000, which was the Houston Ship Channel market value

16 of the natural gas on the date of conversion, reduced by the

17 reasonable costs of removal of the gas from the facility. See

18 AEP II, 2007 WL 4458117, at *1, 2007 U.S. Dist. LEXIS 93022, at

19 *3.

20 The plaintiffs do not dispute this calculation. Nor do

21 they dispute the use of the Houston Ship Channel Index to

22 determine the market price of the natural gas on the date of

23 conversion. Indeed, they conceded this fact in the district

24 court. See id., 2007 WL 4458117, at *4, 2007 U.S. Dist. LEXIS

25 93022, at *12 ("AEP does not dispute that the HSC price listed is

26 an accurate reflection of the market price of natural gas on that

83
1 date."). The sole argument they advance on appeal is that the

2 calculation of damages, as a general matter, is inherently

3 inappropriate for summary judgment and that they submitted

4 sufficient evidence to create a genuine dispute of material fact

5 as to the valuation of the gas in this case.

6 But courts do routinely award damages that are readily

7 calculable based on the undisputed facts on summary judgment.

8 See, e.g., Atari, Inc. v. Games, Inc., 2005 WL 1053729, 2005 U.S.

9 Dist. LEXIS 8129 (S.D.N.Y. May 4, 2005), amended on

10 reconsideration on other grounds, 2005 WL 1294403, 2005 U.S.

11 Dist. LEXIS 10457 (S.D.N.Y. May 31, 2005), aff'd, 164 F. App'x

12 183 (2d Cir. 2006); Wells Fargo Bank Nw., N.A. v. Taca Int'l

13 Airlines, S.A., 315 F. Supp. 2d 347 (S.D.N.Y. 2003). Further,

14 the dispute that the plaintiffs point to in this case is not one

15 of fact, but of law: whether the defendants' interest in the gas

16 was restricted, under the transaction documents, to "cushion gas"

17 as opposed to "working gas" as a matter of law.

18 "If the plaintiff in a conversion action elects to

19 recover the value of the property, damages are typically

20 determined by the fair market value at the time and place of

21 conversion." Burns, 190 S.W.3d at 270. The plaintiffs argue

22 that the defendants' interest is restricted to "cushion gas," as

23 opposed to "working gas." "Cushion gas," which has a much lower

24 market value than "working gas" because it cannot be withdrawn

25 from the facility, is the amount of gas that is necessary to

26 pressurize a facility and that must be present at all times when

84
1 the facility is in use. "Working gas" is any gas in the facility

2 above and beyond this amount that can be withdrawn for use at any

3 time. Because cushion gas is the facility's bottommost gas and

4 is often contained within porous rock, the plaintiffs contend,

5 the process of removing this gas from the facility would cost

6 millions of dollars, reducing its market value drastically, and

7 they submitted an expert declaration to this effect.

8 However, the assumption underlying the plaintiffs'

9 expert evidence regarding the market value of the gas -- that the

10 gas should be considered exclusively "cushion gas" in nature --

11 appears to be flawed. The original Participation Agreement,

12 which was amended and restated in the 2001 Transaction,

13 identifies the gas at issue in the transaction as "80,000,000

14 MMBtus of Natural Gas . . . currently stored as recoverable

15 cushion gas and as working gas in the Storage Facility." 1997

16 Participation Agreement at 1 (emphasis added). This is the gas

17 that was pledged to BofA as security. See 1997 Security

18 Agreement §§ 1, 3(a)(vii). When the transaction was restructured

19 in 2001, BofA released its security in 25 Bcf (roughly equivalent

20 to 25,000,000 MMBtus) of this gas, to be sold outright to AEP,

21 and retained a security in the remaining 55 Bcf (approximately

22 55,000,000 MMBtus) of Storage Gas. See 2001 Security Agreement

23 §§ 1, 3(a)(vii) (granting security interest in the "Pledged Gas,"

24 defined as "up to 54,999,965 MMBtus of Storage Gas present in the

25 Bammel Storage Facility in Houston, Texas from time to time").

26 In the event of a default, the Guaranty grants the Trustee the

85
1 right to take custody of and withdraw "the aggregate quantity (in

2 MMBtus) of Storage Gas" contained in the facility. 2001 Guaranty

3 § 5.02(b) (emphasis added).

4 The document signed by BofA in the 2001 Transaction

5 that references "cushion gas" is the Consent. In addition, the

6 Right To Use Agreement, to which BofA was not itself a party,

7 also refers to the gas at issue as "Cushion Gas." See Right To

8 Use Agreement, §§ 1.01, 2.01(b). These documents, we surmise,

9 form the foundation upon which the plaintiffs base their

10 argument. However, the use of the term "cushion gas" in these

11 agreements does not appear to be intended to restrict the

12 defendants' interest in the Storage Gas. Rather, the agreements

13 apparently refer to the gas as "cushion gas" because this is the

14 primary use to which it was contemplated under the Operative

15 Agreements that the Storage Gas would be put. It is for this

16 reason that the Pressurization Agreement is entitled in full,

17 "Pressurization and Storage Gas Borrowing Agreement": because the

18 plaintiffs' right to use the Storage Gas was restricted primarily

19 to keeping it in the facility for pressurization purposes –-

20 i.e., as cushion gas -– and, from time to time, to borrowing a

21 quantity, subject to replacement, for their own working use –-

22 i.e., as working gas. See, e.g., 1997 Participation Agreement,

23 at intro. ("To facilitate the transactions contemplated by this

24 Participation Agreement, (a) [HPL and HPLR] and the Trustee are

25 entering into the Pressurization Agreement . . . pursuant to

26 which the Trustee will permit (i) HPL[] to use the Storage

86
1 Gas . . . for pressurization of the Storage Facility, and (ii)

2 [HPL and HPLR] to borrow, replace, and reborrow the Storage Gas

3 from time to time, in accordance with the operational

4 requirements of the Storage Facility.").

5 Further, the Right To Use Agreement defines "Cushion

6 Gas" in a manner that encompasses the entire quantity of Storage

7 Gas then stored in the facility that would be dedicated to HPL's

8 exclusive "quiet enjoyment," as distinguished from whatever

9 additional quantities of "Working Gas" may be provided from

10 outside sources to be stored in and withdrawn from the facility

11 from time to time. See Right To Use Agreement §§ 1.01, 2.01(a)-

12 (b) (defining "Cushion Gas" as the natural gas currently in the

13 Storage Facility dedicated to HPL's use, and "Working Gas" as

14 "all Natural Gas that, from time to time, is stored in the

15 Storage Facility that is not Cushion Gas"). While these

16 agreements do appear to contemplate that the plaintiffs will use

17 the Storage Gas as cushion gas -- i.e., as the base on which to

18 pressurize the facility for the storage and withdrawal of

19 additional gas -- such a use does not change the inherent nature

20 of the secured property: which is natural gas.22

22
We note, in this regard, the defendants' argument to the
district court that the term "'cushion gas' does not connote a
type of gas but rather a quantity of gas -- the amount needed to
pressurize a facility," see AEP II, 2007 WL 4458117, at *3, 2007
U.S. Dist. LEXIS 93022, at *9 (emphasis in original), and the
plaintiffs' expert's concession that natural gas is physically
fungible for these two purposes.
87
1 We further agree with the district court that the

2 Operative Agreements evinced an understanding that the Storage

3 Gas would be readily removable from the facility, and that this

4 gas was intended to be valued at market rates. See AEP II, 2007

5 WL 4458117, at *4, 2007 U.S. Dist. LEXIS 93022, at *12. The

6 Pressurization Agreement provided for the entire quantity of

7 Storage Gas to be withdrawn and sold in 2004 to repay the BofA

8 loan, and the Marketing Agreement established that this gas was

9 to be valued at the Houston Ship Channel Index price at the time

10 of sale. The Houston Ship Channel market price for natural gas

11 on May 14, 2004 -- the date of conversion -- was readily

12 calculable at $6.315 per MMBtu. From this, the district court

13 calculated the value of the approximately 55 Bcf of natural gas

14 to be $347,325,000. Further, it is undisputed that there was, at

15 the time of the district court's decision, 128 Bcf of gas in the

16 facility, more than enough for the Storage Gas to be removed

17 without creating any pressurization problems.

18 Accordingly, we conclude that the district court did

19 not err in calculating the value of the natural gas on summary

20 judgment.

21 E. The Calculation of Withdrawal Costs

22 The district court reduced the award of damages by the

23 cost the defendants would have incurred had they withdrawn the

24 Storage Gas in May 2004. The plaintiffs claimed a total of $18.7

25 million in costs, consisting of $1.65 million to withdraw the gas

26 from the facility, $1.65 million to transport it to the Houston

88
1 Ship Channel, and a $15.4 million "capacity reservation fee."

2 The defendants contended that the withdrawal would have been

3 cost-free. The district court adopted the plaintiffs' suggestion

4 that it look to the storage and withdrawal contract between the

5 Storage Facility and its largest unrelated commercial storage

6 customer to determine a reasonable withdrawal fee, which was

7 three cents per MMBtu, for a total of $1.65 million. See AEP IV,

8 2008 WL 3338203, at *1, 2008 U.S. Dist. LEXIS 61264, at *3-*5.

9 The defendants do not challenge this conclusion on appeal.

10 However, the district court found the other purported costs

11 proposed by the plaintiffs to be unreasonable and declined to

12 credit them as a matter of law. See id., 2008 WL 3338203, at *2,

13 2008 U.S. Dist. LEXIS 61264, at *5–6.

14 Because neither party challenges on appeal the district

15 court's determination of the withdrawal fee at three cents per

16 MMBtu, we consider only the court's conclusion as a matter of law

17 that the plaintiffs were not entitled to reduce the award by the

18 cost of transportation or a capacity reservation fee. See JP

19 Morgan Chase Bank v. Altos Hornos de Mex., S.A. de C.V., 412 F.3d

20 418, 428 (2d Cir. 2005) (holding that arguments not made in the

21 parties' opening briefs on appeal are waived). We conclude that

22 the district court correctly rejected an award of these costs.

23 As the district court concluded, the fact that the court used the

24 Houston Ship Channel Index price as a reasonable proxy for the

25 market value of the gas does not mean that the defendants would

26 have been required to physically transport the gas to the Houston

89
1 Ship Channel in order to sell it. The unrefuted evidence showed

2 to the contrary that the defendants were entitled to delivery of

3 the gas in the vicinity of the Storage Facility, and could have

4 sold it there, thereby avoiding any cost of transportation. With

5 regard to the purported "capacity reservation fee," the district

6 court properly determined that this cost was not related in any

7 way to the withdrawal of the Storage Gas nor found in any

8 contract between the parties.

9 V. Federal Rule 56(f) Motion to Permit Further
10 Depositions

11 Finally, the plaintiffs appeal from the district

12 court's denial of their motion pursuant to Federal Rule of Civil

13 Procedure 56(f) to continue summary judgment proceedings in order

14 to permit them to take the depositions of two individuals

15 formerly affiliated with Enron, including former Enron CFO Andrew

16 Fastow, who first became available to testify following a 2006

17 plea agreement finalized shortly before summary judgment. These

18 depositions were relevant only to the plaintiffs' Tort and

19 Contract Claims, inasmuch as the plaintiffs represented that they

20 would be material to the question of BofA's knowledge of fraud,

21 and not to the Declaratory Claims. Because we vacate the

22 district court's decision as to the Tort and Contract Claims on

23 procedural grounds, this issue is moot.

90
1 CONCLUSION

2 For the foregoing reasons, we vacate the district

3 court's grant of summary judgment to BofA with respect to the

4 Tort and Contract Claims, concluding that these claims and the

5 related counterclaims should be adjudicated in Texas. We affirm

6 the district court's judgment in all other respects.

91