United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
For the Fifth Circuit February 13, 2006
Charles R. Fulbruge III
Clerk
No. 04-11264
IN THE MATTER OF: MIRANT CORPORATION,
Debtor,
BONNEVILLE POWER ADMINISTRATION,
Appellant,
VERSUS
MIRANT CORPORATION,
Appellee.
Appeal from the United States District Court
For the Northern District of Texas
Before GARWOOD, SMITH, and DeMOSS, Circuit Judges.
DeMOSS, Circuit Judge:
Bonneville Power Administration (“BPA”) appeals the district
court’s affirmance of two orders entered by the bankruptcy court.
Debtor Mirant Corporation and related entities filed a petition
under Chapter 11 of the Bankruptcy Code, triggering a dispute
between the parties regarding the ability of BPA to terminate an
executory contract for the future purchase of electric power. On
the one hand, the Bankruptcy Code’s automatic stay, effective upon
the filing of a Chapter 11 petition, precludes any act to obtain
possession of or exercise control over property of the estate. See
11 U.S.C. § 362(a). On the other hand, in an executory contract
related to the future call of energy purchase by BPA, see generally
§ 365, the parties agreed to an ipso facto clause that provided for
default and a termination payment in the event of a bankruptcy
filing, see § 365(e).1 BPA argues that the Bankruptcy Code (or the
“Code”) permits it to terminate the executory contract pursuant to
the contract’s ipso facto clause. See § 365(e)(2)(A). The parties
now dispute the priority of the two Chapter 11 provisions: the
automatic stay and the termination arguably permitted by the
combined effect of the ipso facto clause and § 365(e)(2)(A).
This appeal requires us to address the intersection of three
relevant statutory provisions: 11 U.S.C. § 362(a) (the automatic
bankruptcy stay); 11 U.S.C. § 365(e)(2)(A) (permitting a nondebtor
party to an executory contract to terminate or modify such contract
when applicable law excuses the nondebtor from accepting or
rendering performance to the trustee or an assignee); and the Anti-
Assignment Act (or “the Act”), 41 U.S.C. § 15 (prohibiting transfer
of contracts to which the United States is a party).
Concluding that the bankruptcy stay precedes any termination
permitted by either the Anti-Assignment Act or the agreement of the
1
See BLACK’S LAW DICTIONARY 847 (8th ed. 2004) (defining ipso
facto clause as a “contract clause that specifies the
consequences of a party’s bankruptcy”).
2
parties, we affirm the district court’s order declaring BPA to have
violated the automatic stay. Finding no abuse of discretion in the
court’s determination that cause was not shown where the Anti-
Assignment Act is not an applicable law under § 365(e)(2)(A), we
affirm also the denial of BPA’s motion to lift or modify the stay.
I. Background
A. Factual Background
Mirant Corporation is an international energy company that
produces and sells electricity in the United States and abroad.
Appellee Mirant Americas Energy Marketing, L.P. (“Mirant”) is a
subsidiary of Mirant Corporation and engages in asset risk
management, including commodities, energy, and financial product
trading. Mirant is responsible for procuring fuel and selling
power for Mirant Corporation’s operating facilities.
BPA is a federal power marketing agency within the United
States Department of Energy. BPA was created in 1937 by Congress
to market low-cost hydroelectric power generated by a series of
federal dams along the Columbia River in the Pacific Northwest.
See generally Bonneville Project Act of 1937, 16 U.S.C. § 832.
Originally, BPA marketed the energy produced for the benefit of the
public, particularly domestic and rural customers, giving
preference and priority to public bodies and cooperatives. See §
832c(a). For some time, surplus in energy production meant BPA
could market freely to all who desired to purchase in the area. In
3
1980, increasing demands upon the supply triggered, in part,
Congress’s enactment of the Pacific Northwest Electric Power
Planning and Conservation Act, 16 U.S.C. §§ 839-839h, which
required BPA to offer new contracts to its customers. See Aluminum
Co. of Am. v. Cent. Lincoln People’s Util. Dist., 467 U.S. 380, 382
(1984). Thereafter, BPA was authorized to acquire additional
resources in order to increase the supply of federal power. See 16
U.S.C. § 839d(a)(2). Accordingly, BPA entered certain contracts
related to the marketing of federal power. See § 832a(f).
BPA and Mirant are parties to the Western Systems Power Pool
Agreement (the “WSPPA”), a contract the parties agree is standard
for electric power sales. The WSPPA is an umbrella agreement
governing electric power transactions. Subject to the WSPPA, BPA
and Mirant’s predecessor in interest (Southern Company Energy
Marketing, L.P.2) entered two agreements: (1) the Agreement to
Enable Future Purchases, Sales, and Exchanges of Power and Other
Services No. 99PB-10588 (the “Enabling Agreement”) and (2) an
option contract though which BPA purchased a one-time call option
for the future purchase of a set amount of firm power from Mirant
over a three-year period commencing in 2004 (the “Confirmation
Agreement”).
Together, the WSPPA, the Enabling Agreement, and the
2
Mirant Corporation was originally a wholly owned subsidiary
of Southern Company Energy Marketing.
4
Confirmation Agreement (collectively, the “Agreement”) form the sum
of the parties’ contractual rights and obligations.3 Under the
terms of the Agreement, BPA owed no obligation to exercise its
option, and if it did not do so, the option expired on the strike
date provided, December 23, 2003. The parties agree, and the lower
courts noted, that BPA did not exercise and, in practical terms,
would not have exercised its option because the option price
bargained for in the Agreement exceeded the market price of energy
during the relevant period of the Agreement.
The Agreement includes a default provision, or ipso facto
clause, that authorizes BPA to terminate the contract and claim
liquidated damages if Mirant petitioned for bankruptcy before the
option period expired. The Agreement provides that default by the
institution of a bankruptcy proceeding triggers the non-defaulting
party’s “right to terminate all transactions between the Parties
under this Agreement upon written notice” and the non-defaulting
party’s right to a termination payment. Upon termination, the non-
defaulting party may liquidate all transactions with the debtor and
demand a termination payment equal to the market-based cost of
3
Although the parties below disputed the integration of the
contracts, some of which were executory in nature and others of
which were not, the bankruptcy court assumed without deciding
that the Confirmation Agreement was an executory contract and
that the three contracts formed a single agreement. In their
briefings to this Court, both parties treat the three contracts
as an integrated agreement.
5
replacing the option contract.4 The Agreement also provides that
all transactions under the agreement are forward contracts and that
the parties are forward contract merchants as defined by the
Bankruptcy Code. See 11 U.S.C. § 556.
On July 1, 2003, BPA wrote to Mirant requesting, pursuant to
the Agreement, adequate assurances of Mirant’s ability to perform.
Mirant responded by letter on July 3, stating its willingness to
wire assurance but disputing the reasonable estimate of the amount
of assurance. On July 7, Mirant wired to BPA $523,389 as adequate
assurance of its ability to perform.
B. Procedural Background
On July 14, 2003, Mirant Corporation and 82 of its direct and
indirect subsidiaries, including Mirant, filed voluntary Chapter 11
bankruptcy petitions. That day, the court held a hearing and
entered an interim order authorizing the Debtors to comply with the
terms of prepetition trading contracts and to enter into
postpetition trading contracts in the normal course of business and
setting a final hearing for the entry of a final order of
authorization. The bankruptcy court also approved the joint
4
As a practical matter, the bankruptcy court noted that the
peculiar facts of this case mean the primary dispute between the
parties is the termination payment. Because market prices were
lower than the option price of the Agreement during the relevant
period, both parties acknowledged that the Agreement would never
have been performed. According to the bankruptcy court, BPA
seeks to declare Mirant’s default and thereby obtain a claim
against Mirant in bankruptcy proceedings for the amount of the
termination payment.
6
administration of the Debtors’ cases.5
Under the Code, Mirant as a debtor remains in possession of
its estate. See 11 U.S.C. § 1101.6 Mirant continues to conduct
its business in the ordinary course. On July 16, 2003, the
bankruptcy court ordered the parties, specifically including all
governmental units, to comply with the Code’s automatic stay
provision, § 362, and its provision regarding executory contracts
and unexpired leases, § 365 (the “Order to Comply”).7 The Order to
Comply enjoined BPA from multiple acts affecting Mirant or the
debtor estate, including interference in any way with any and all
of the property of any of the Debtors. The Order to Comply
expressed that it had no effect upon any exceptions to the
automatic stay, based upon any section of the Bankruptcy Code, or
upon the right of any party to seek relief from the automatic stay
according to § 362(d).
5
The United States Trustee for the Northern District of
Texas appointed three official committees in the jointly
administered cases.
6
A debtor in possession “means debtor except when a person
that has qualified under section 322 of this title is serving as
trustee in the case.” 11 U.S.C. § 1101.
7
Section 362 provides for automatic stay of, among other
actions, “any act to obtain possession of property of the estate
or of property from the estate or to exercise control over
property of the estate,” 11 U.S.C. § 362(a)(3), and provides
exceptions to the automatic entry of stay, § 362(b).
Section 365 provides for the administration of contracts,
such as the one at issue here, including the debtor’s assumption
or rejection of such a contract. 11 U.S.C. § 365(a).
7
BPA terminated its Confirmation Agreement with Mirant shortly
thereafter, and Mirant characterizes this termination as a
violation of the bankruptcy court’s order and stay. On July 30,
2003, BPA notified Mirant in writing that the Chapter 11 petition
constituted default under the parties’ Agreement and that
accordingly, BPA terminated all transactions with Mirant. BPA
stated that under the terms of the Agreement, both parties were
forward contract merchants and that the Agreement was a forward
contract for purposes of 11 U.S.C. § 556. BPA also demanded a
termination payment from Mirant under the Agreement of $1,085,0408
and set forth terms for the payment of that amount in light of the
assurance Mirant had already provided and the amount BPA yet owed
Mirant under the Agreement. BPA requested payment of the remaining
amount allegedly owed by Mirant, $533,026, within three days of
receipt of the July 30 letter.9
In response to BPA’s termination letter and termination
payment demand, Mirant wrote to BPA on August 7, 2003, challenging
BPA’s status as a forward contract merchant under the Code,
describing BPA’s purported termination of the Agreement as a
violation of §§ 362 and 365 of Chapter 11, and demanding that BPA
8
BPA calculated the termination payment based upon market
quotes for replacement transactions on July 30, 2003.
9
By its own description, the July 30 letter constituted a
contracting officer’s final decision under 41 U.S.C. § 605,
permitting Mirant to appeal the decision to either the Department
of Energy Contract Board of Appeals or the United States Court of
Federal Claims.
8
immediately withdraw its purported termination of the Agreement and
perform. BPA later responded by letter, notifying Mirant of BPA’s
refusal to withdraw the termination letter.
On August 27, 2003, the bankruptcy court entered its final
authorization order to Debtors, permitting compliance with
prepetition trading contracts and entrance into post-petition
trading contracts in the ordinary course of business, providing
credit support for trading contracts, and authorizing assumption of
prepetition trading contracts. This final authorization order
contemplated the possible future event of a creditor, such as BPA,
demanding acceptance or rejection of a trading option contract.
Before the bankruptcy court, on October 17, 2003, Mirant filed
a motion to enforce the automatic stay and for contempt, arguing
(1) that the transmission of BPA’s July 30 termination letter
violated the automatic stay, 11 U.S.C. § 362(a), because the act
constituted an attempt to obtain possession of property of the
estate and to exercise control over the estate; and (2) that BPA,
as an entity of a government agency, cannot be a forward contract
merchant under the Code’s definition (the “Motion to Enforce”).
BPA responded that under the Code, it was a forward contract
merchant and that the Anti-Assignment Act, 41 U.S.C. § 15, bars any
assignment of the Agreement, thus permitting BPA’s termination of
the Agreement consistent with 11 U.S.C. § 365(e)(2)(A). The
9
bankruptcy court heard argument on November 12, 2003,10 ruled that
BPA had violated the stay, and offered BPA an option either to
rescind its termination or to return for a continued hearing on the
motion for contempt related to that violation.11
On November 17, 2003, the court entered an order, to which the
parties had agreed in the interim, declaring that BPA had violated
the automatic stay, denying the relief sought by BPA, ordering BPA
to rescind its termination of the Confirmation Agreement, and
returning the parties to the status quo that existed immediately
prior to the delivery of the Termination Letter (the “Stay
Violation Order”).12 BPA appealed the Stay Violation Order to the
10
During the hearing, BPA represented that the only basis
for Mirant’s default under the Agreement was the filing of a
bankruptcy petition.
11
The bankruptcy court also ruled BPA was not a forward
contract merchant. A forward contract merchant must be a person
under the plain text of the Code. 11 U.S.C. § 101(26). The
bankruptcy court reasoned that because a governmental entity is
not a person under the code, see §§ 101(26), 101(41), BPA could
not be a forward contract merchant. As such, the court
concluded, BPA is not authorized by the Code to enjoy the
exceptions to automatic stay provided to forward contract
merchants under §§ 362(b)(6) and 556. BPA waived its challenge
to the bankruptcy court’s interpretation of “forward contract
merchant” on appeal to this Court.
12
BPA subsequently wrote to counsel for Mirant, withdrawing
its Termination Letter and reinstating the Confirmation
Agreement. BPA noticed its retention of rights under the
Agreement and applicable law and expressed that its compliance
with the Stay Violation Order did not constitute waiver of those
rights. The issue of waiver — whether BPA waived its challenge
to the Stay Violation Order by agreeing to withdraw its
termination — was presented to the district court, which
concluded that BPA did not waive its challenge to the Stay
Violation Order because the bankruptcy court had already ruled
10
district court. During this period, other creditors, aside from
BPA, filed motions for modification of the stay and motions to
require Mirant’s assumption and assignment or rejection of various
trading contracts, and they received bankruptcy court rulings on
those motions.
On December 5, 2003, BPA filed a motion to modify the
automatic stay retroactively to permit termination of the
Confirmation Agreement (the “Motion to Modify Stay”). At that
time, the option of the Confirmation Agreement was soon to expire
on December 23. The bankruptcy court held a December 17 hearing on
the motion and responses, and the court subsequently denied the
Motion to Modify Stay. In its memorandum opinion, the bankruptcy
court cited the Ninth Circuit in holding that (1) the stay applies
to prevent unilateral termination even if a contract is unassumable
and contains a valid ipso facto clause and (2) the stay must be
modified before the ipso facto clause may be invoked. See Computer
Commc’ns, Inc. v. Codex Corp. (In re Computer Commc’ns), 824 F.2d
725, 729-30 (9th Cir. 1987); 3 COLLIER ON BANKRUPTCY ¶ 365.06[1][f]
(15th ed. rev. 2005). The bankruptcy court clarified that its
refusal to modify the stay stemmed from BPA’s failure to make a
sufficient showing of cause as required by § 362(d)(1). BPA could
that BPA violated the stay when the court presented BPA the
option of either rescission of the termination letter or
continuation on the motion for contempt. Mirant does not argue
BPA waived its ability to challenge the Stay Violation Order on
appeal to this Court.
11
not, according to the court’s holding, show cause in the absence of
Mirant’s default and even if the ipso facto clause could be
enforced to trigger default, BPA failed to demonstrate cause for
relief where BPA would suffer no harm by the continued enforcement
of the stay.
BPA appealed the order denying the Motion to Modify Stay, and
the district court consolidated BPA’s appeals of the two bankruptcy
court orders. The district court affirmed the bankruptcy court’s
Stay Violation Order and denial of BPA’s Motion to Modify Stay on
August 13, 2004. BPA timely appealed to this Court.
II. Discussion
A. Standard of Review
We review questions of law, including the interpretation of
statutory language, de novo. See, e.g., Fed. Trade Comm’n v. Nat’l
Bus. Consultants, Inc., 376 F.3d 317, 319 (5th Cir. 2004); United
States v. Bridges, 894 F.2d 108, 111 (5th Cir. 1990). Our review
of a bankruptcy court’s findings of fact is for clear error. Zer-
Ilan v. Frankford (In re CPDC, Inc.), 337 F.3d 436, 440-41 (5th
Cir. 2003). “This Court may affirm if there are any grounds in the
record to support the judgment, even if those grounds were not
relied upon by the courts below.” Bustamante v. Cueva (In re
Cueva), 371 F.3d 232, 236 (5th Cir. 2004) (internal quotation marks
omitted).
The bankruptcy court’s denial of a motion for modification of
12
a stay is reviewed for abuse of discretion. See, e.g., Chunn v.
Chunn (In re Chunn), 106 F.3d 1239, 1242 (5th Cir. 1997).
B. The Parties’ Arguments
The parties agree that the Confirmation Agreement here is an
executory contract under the Bankruptcy Code and that therefore the
Code’s provision for executory contracts applies. See 11 U.S.C. §
365.13 Generally, § 365(e) of the Code bars the enforcement of ipso
facto clauses in executory contracts, such as the ipso facto clause
in the Agreement here. § 365(e)(1).14 However, an exception to this
general rule appears in subsection (e)(2)(A),
(2) Paragraph (1) of this subsection does not apply to
an executory contract . . . , if –
13
“[T]he legislative history of § 365(a) indicates that
Congress intended the term [executory contract] to mean a
contract ‘on which performance remains due to some extent on both
sides.’” NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522 n.6
(1984)(quoting H.R. Rep. No. 95-595, at 347 (1977)), superseded
by statute on other grounds, 11 U.S.C. § 1113 (1984). We accept
the parties’ characterization of the Agreement and assume,
without addressing the issue, that the Agreement is an executory
contract under Chapter 11.
14
Section 365(e)(1) provides the general rule,
(1) Notwithstanding a provision in an executory
contract or unexpired lease, or in applicable law, an
executory contract or unexpired lease of the debtor may
not be terminated or modified, and any right or
obligation under such contract or lease may not be
terminated or modified, at any time after the
commencement of the case solely because of a provision
in such contract that is conditioned on –
. . .
(B) the commencement of a case under this title . . . .
§ 365(e)(1).
13
(A)(i) applicable law excuses a party, other than the
debtor, to such contract or lease from accepting
performance from or rendering performance to the trustee
or to an assignee of such contract or lease, whether or
not such contract or lease prohibits or restricts
assignment of rights or delegation of duties; and
(ii) such party does not consent to such assumption or
assignment . . . .
§ 365(e)(2)(A) (emphasis added).
BPA argues that the subsection (e)(2)(A) exception applies to
this case, permitting the Agreement’s ipso facto clause to have
effect, terminating the Agreement as of Mirant’s Chapter 11 filing,
and precluding any review by the bankruptcy court. According to
BPA, the exception applies because the Anti-Assignment Act is an
“applicable law” under the text of § 365(e)(2)(A) that excuses BPA
“from accepting performance from or rendering performance to the
trustee or to an assignee” of the Agreement. § 365(e)(2)(A).
The Anti-Assignment Act provides,
No contract or order, or any interest therein, shall be
transferred by the party to whom such contract or order
is given to any other party, and any such transfer shall
cause the annulment of the contract or order transferred,
so far as the United States is concerned.
41 U.S.C. § 15(a).
BPA explains the Act’s application to this Agreement as
follows. BPA argues that § 365(e)(2)(A) carves out a class of
executory contracts whose ipso facto clauses may be given effect
when nonbankruptcy, applicable law renders the contract
unassignable (in the abstract as opposed to upon a factual showing)
to “the trustee or an assignee” without consent of the nondebtor
14
party. This Agreement is such an executory contract, according to
BPA, because the Anti-Assignment Act excuses the United States from
accepting performance from an assignee. In this vein, BPA asks this
Court to join other circuits that have held that § 365(e)(2)(A)
creates a hypothetical test, under which a debtor is precluded from
assuming or assigning an executory contract even if the applicable
law would not bar assignment in the actual circumstances before the
court but does bar assignment to a hypothetical third party, “i.e.,
under the applicable law, could the government refuse performance
from [an assignee].” See In re West Elecs., Inc., 852 F.2d 79, 83
(3d Cir. 1988); see also Perlman v. Catapult Entm’t, Inc. (In re
Catapult Entm’t, Inc.), 165 F.3d 747, 750 (9th Cir. 1999).15
BPA asks this Court to hold that under a hypothetical test, §
365(e)(2) permits automatic termination of the Agreement prior to
15
BPA secondarily argues that if the Act must be applied to
the facts, rather than in the abstract, then the assignment here
occurs as a result of Mirant’s change in status from prepetition
entity to debtor in possession. But before the bankruptcy court,
BPA conceded there was no assignment on this record from Mirant
prepetition to Mirant as debtor in possession. BPA argued
instead that subsection (e)(2)(A)’s text contemplates a
hypothetical, rather than actual, test of assignment.
THE COURT: “[A] debtor is not an assignee when property
passes to an estate, not for tax purposes, not for
anything. In fact, there is no assignee here? Who’s
the assignee?”
COUNSEL FOR BPA: “Your Honor, there isn’t one. But
that’s what (a)(2) contemplates. It’s a hypothetical
test.”
15
judicial review and prior to the entry of automatic stay, or in the
alternative, that § 365(e)(2) requires a bankruptcy court to lift
the automatic stay in order for the ipso facto clause to be
enforced. Accordingly, BPA challenges both the bankruptcy court’s
entry of automatic stay and denial of a modification to the stay
because the ipso facto clause and the Anti-Assignment Act permit
BPA to terminate the Agreement automatically upon Mirant’s Chapter
11 filing prior to any review by or approval of the bankruptcy
court under § 365(e)(2)(A).
Mirant responds that the automatic stay provision, § 362(a),
is violated by BPA’s termination of the Agreement, that is, BPA’s
attempt to exercise control of property of the estate without the
oversight of the bankruptcy court. Mirant argues the bankruptcy
court did not abuse its discretion in entering the stay because the
stay is automatic and either the Anti-Assignment Act does not apply
because there was no transfer or, even if the Act does apply, the
stay’s automatic entry precedes any termination permitted by the
combined effect of the Act, § 365(e)(2)(A), and the ipso facto
clause of the Agreement. Mirant also argues the bankruptcy court
did not err in denying BPA’s motion to modify the stay because BPA
failed to show the cause required under § 362(d)(1). In support,
Mirant urges this Court to adopt an actual, or as-applied, analysis
to determine whether the Anti-Assignment Act applies to this case
and to conclude that it does not (thereby foreclosing termination
via the ipso facto clause) because no assignment occurred here.
16
C. Analysis
1. Hypothetical vs. Actual Test
We begin by addressing the question that affects each of the
issues raised by BPA, that is, whether this Circuit adopts the
actual or hypothetical approach to the text of § 365(e)(2)(A). The
hypothetical test was first announced and adopted in the sole
circuit opinion to address the conjunctive effect of § 365 and the
Anti-Assignment Act. West, 852 F.2d at 82. In West, a divided
panel addressed similar facts and held the bankruptcy court abused
its discretion in denying a lift of the Chapter 11 stay, which had
the effect of preventing the government from terminating an
executory contract under the two statutes. 852 F.2d at 82.
Addressing § 365(c),16 as opposed to § 365(e)(2) at issue here, the
West majority created a hypothetical test for the determination of
whether the Anti-Assignment Act was an “applicable law” such that
the government could refuse performance under the Act. The West
majority rejected an as-applied determination of whether assignment
16
Section 365(c) precludes a trustee from assuming or
assigning an executory contract if “(1)(A) applicable law excuses
a [nondebtor] party . . . to such contract or lease from
accepting performance from or rendering performance to an entity
other than the debtor or the debtor in possession . . . and (B)
such party does not consent to such assumption or assignment.”
11 U.S.C. § 365(c)(1). Although the language of subsections
(c)(1) and (e)(2) of § 365 are similar, they are by no means
parallel overall or identical in effect. The two are not
sufficiently similar that caselaw interpreting the one should be
given any more than informative weight in interpreting the other.
17
had occurred under the Act. Id. Concluding that hypothetically
speaking the Anti-Assignment Act was an “applicable law” because it
made the contract generally unassignable, the majority in West held
that § 365(c)(1) foreclosed the debtor’s ability to assume the
contract. Id. at 83. The majority reasoned:
We think that by including the words “or the debtor in
possession” in 11 U.S.C. § 365(c)(1) Congress anticipated
an argument like the one here made and wanted that
section to reflect its judgment that in the context of
the assumption and assignment of executory contracts, a
solvent contractor and an insolvent debtor in possession
going through bankruptcy are materially distinct
entities. While the relevant case law is very sparse, it
supports our understanding of the interplay between . .
. § 365(c)(1) and 41 U.S.C. § 15.
Id. (footnote omitted).
In other words, under the Third Circuit’s hypothetical
approach, which rested on language in § 365(c)(1) that does not
appear in § 365(e)(2)(A), a court must ask whether BPA could refuse
to accept performance of the Agreement from any assignee because
the Anti-Assignment Act makes the Agreement unassignable as a
matter of law. If so, then irrelevant is the fact that the debtor
did not actually assign, intend to assign, or attempt to assign the
contract, and consequently the executory contract is terminable by
its ipso facto provision under § 365(c). See id.; see also RCI
Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257
(4th Cir. 2004) (addressing § 365(c) and copyright law); Catapult,
165 F.3d at 747 (addressing § 365(c) and federal patent law); City
18
of Jamestown v. James Cable Partners, L.P. (In re James Cable
Partners, L.P.), 27 F.3d 534, 537 (11th Cir. 1994) (addressing §
365(c) and a municipal ordinance regarding franchise rights).
In contrast, the West dissent believed that Congress did not
intend for “a ‘solvent contractor and an insolvent debtor in
possession going through bankruptcy’ [to be] different entities for
the purposes of the [Anti-Assignment Act].” West, 852 F.2d at 84
(Higginbotham, J., dissenting in part) (citation omitted).
Likewise, those courts that have rejected West’s hypothetical
analysis adopt an actual test to determine a law’s applicability
under § 365. See Summit Inv. & Dev. Corp. v. Leroux, 69 F.3d 608,
613 (1st Cir. 1995); see also Cajun Elec. Members Comm. v. Mabey
(In re Cajun Elec. Power Coop., Inc.), 230 B.R. 693, 705 (Bankr.
M.D. La. 1999); In re Lil’ Things, Inc., 220 B.R. 583, 587 (Bankr.
N.D. Tex. 1998); Texaco Inc. v. La. Land & Exploration Co., 136
B.R. 658, 669 (Bankr. M.D. La. 1992) (concluding the West
hypothetical test is incorrect for three primary reasons); In re
Hartec Enters., Inc., 117 B.R. 865, 871 (Bankr. W.D. Tex. 1990)
(stating that the West hypothetical test “does not fulfill the
purposes of the non-assignment statutes it seeks to enforce,
creates inherent inconsistencies in the language of . . . the Code,
and fails to adequately account for” amendments to the Code),
vacated by settlement, 130 B.R. 929 (W.D. Tex. 1991).
The actual or as-applied determination of whether a law is
19
“applicable” under § 365(c) and (e)(2)(A) was first adopted by the
First Circuit. Summit Inv., 69 F.3d at 613. The actual test
requires on a case-by-case basis a showing that the nondebtor
party’s contract will actually be assigned or that the nondebtor
party will in fact be asked to accept performance from or render
performance to a party — including the trustee — other than the
party with whom it originally contracted. Id. at 612. The actual
test contemplates that in a case where no assignment has taken
place, § 365(e)(2)(A)’s exception is not available and, as such, an
ipso facto clause is invalidated. See id.; see also Institut
Pasteur v. Cambridge Biotech Corp., 104 F.3d 489, 493 (1st Cir.
1997), abrogated on other grounds by Hardemon v. City of Boston,
144 F.3d 24 (1st Cir. 1998); In re Cardinal Indus. Inc., 116 B.R.
964, 982 (Bankr. S.D. Ohio 1990).
Although this Circuit has addressed § 365(c)(1), we have yet
to address § 365(e) or to name the test we apply to the
determination of whether a nonbankruptcy law applies under either
§ 365(c)(1) or § 365(e)(2)(A). See Stumpf v. McGee (In re
O’Connor), 258 F.3d 392, 402 (5th Cir. 2001); Pension Benefit Guar.
Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700
F.2d 935, 943 (5th Cir. 1983). Review of this Circuit’s law,
however, reveals that our adoption today of the actual test, in
resolving the availability of § 365(e)(2)(A)’s exception, is
consistent with prior caselaw. In O’Connor, a panel of this Court
20
determined that a Louisiana statute regarding partnership was an
applicable law under § 365(c) and engaged in an as-applied analysis
to determine whether an exception to the general rule applied to
the case at hand to permit the assumption of the executory
contract. 258 F.3d at 403-04 (concluding that the exception was
not applicable and declaring the contract unassumable). In
Braniff, a nondebtor objected to the district court’s order that
authorized the debtor in possession to assign its lease agreements
with the United States for use of space at Washington National
Airport to a different airline under the version of § 365 (c) that
existed prior to the 1984 amendment. 700 F.2d at 942. Reversing
the district court and prohibiting the assignment of the lease, the
panel concluded that the broad language of § 365(c) was not limited
in application solely to personal service contracts. Id. at 943.
The Braniff court held that the Code of the District of Columbia
and a federal regulation enacted pursuant to that Code were
“applicable law” under § 365(c), which prevented the lease’s
assignment because, in fact, the assignment had been attempted and
ordered by the district court and the assignee airline had not been
approved to perform by the agency vested with the authority for
such approval. Id. at 942-43. Braniff did not address the
hypothetical approach; indeed, the split between actual and
hypothetical approaches had not yet emerged nor had any court yet
approved a hypothetical approach to the determination of whether a
21
law is applicable. Instead, Braniff addressed the language of §
365(c) prior to its amendment in 1984. However, the pre-amendment
language of § 365(c) more closely tracks the current language of §
365(e)(2)(A) than it does the current form of § 365(c).17 Thus, the
approach taken in Braniff informs our approach to § 365(e)(2)(A) on
this record, even in light of the statutory amendment to § 365(c)
and the post-amendment development of a split between the
hypothetical and actual tests.
The plain text of § 365(e)(2)(A) requires an actual test for
determining whether a law is “applicable” under the exception,
permitting enforcement of an ipso facto clause. According to the
statute’s plain language, an executory contract’s ipso facto clause
may be enforced if “applicable law excuses a [nondebtor] party . .
. from accepting performance from or rendering performance . . . to
an assignee of such contract” and that non-debtor party does not
consent to “such assumption or assignment.” 11 U.S.C. §
17
“Before the 1984 amendment, the pivotal language in
section § 365(c) read precisely like the current version of
section 365(e)(2); that is, it adverted to the ‘applicable law
excus[ing] a party, other than the debtor, to such contract or
lease from accepting performance from or rendering performance to
the trustee or to an assignee of such contract or lease . . . .’”
Summit Inv., 69 F.3d at 613 (alteration in original). In 1984,
Congress made no change to the statute we address today, §
365(e)(2)(A), and with respect to § 365(c), it replaced the
phrase “to the trustee or to an assignee of such contract or
lease” that still appears in § 365(e)(2)(A) with the phrase “to
an entity other than the debtor or debtor in possession.” See
Leasehold Management Bankruptcy Amendments Act of 1983, Pub. L.
No. 98-353, § 362, 98 Stat. 333, 361 (July 10, 1984); see also
Summit Inv., 69 F.3d at 613.
22
365(e)(2)(A). Congress might have chosen the exception to apply if
any law prohibited the assignment, but instead Congress tethered
the exception to “applicable” law that “excuses a party.” It is
axiomatic that an applicable law must apply to a set of
circumstances; BPA creates smoke and erects mirrors when it argues
that a contract not assignable as a matter of law, even if no such
assignment existed in fact and no excuse existed in fact for the
nondebtor party to refuse acceptance or performance in a particular
situation, satisfies the language chosen by Congress in drafting
the § 365(e)(2)(A) exception. The law that releases a nondebtor
from the general rule foreclosing the enforcement of an ipso facto
clause must apply to something and must excuse the nondebtor from
some specific performance or acceptance, see § 365(e)(2)(A); thus,
if the debtor demonstrates that no application exists or that no
excuse obtains on a given record, then the congressional language
announces such a circumstance is material, making the §
365(e)(2)(A) exception unavailable. The applicability of the law
under § 365(e)(2)(A) is determined not in the abstract but on the
record at hand. See Cajun Elec., 230 B.R. at 705; Lil’ Things, 220
B.R. at 587; Texaco, 136 B.R. at 669; Cardinal Indus., 116 B.R. at
974-75.
That applicability is determined based upon the case is
supported also by the congressional choice to structure the
exception as a two-part test, the second portion of which requires
23
a fact-based showing. See 11 U.S.C. § 365(e)(2)(A)(i)-(ii).
Subsection (ii) provides that the § 365(e)(2)(A) exception lies
only where “such [nondebtor] party does not consent to such
assumption or assignment.” § 365(e)(2)(A)(ii). The combination of
the plain text and the overall structure of the test that must be
met in order for the exception to arise communicates that Congress
intended § 365(e)(2)(A) to apply to a given factual situation
rather than to a class of executory contracts as BPA urges.
BPA argues that the use of the adjective “such” merely refers
to the assumption and assignment provided in the preceding
subsection and does not demand that Congress intended an actual
test would determine the exception’s availability. We are not
persuaded that standing alone, Congress’s use of the adjective
“such” to modify “assignment” in § 365(e)(2)(A)(ii) mandates the
use of an actual test. The modifier “such” references the
assignments provided in the preceding subsection and does not, on
its own, require an as-applied approach to the determination of
whether a law applies to permit an ipso facto clause’s enforcement.
However, in combination with the other factors that demand a case-
by-case inquiry into whether a nonbankruptcy law applies to permit
termination by ipso facto clause, we cannot agree with so broad an
analysis as permitted by the entirely theoretical approach
countenanced by those courts adopting the hypothetical approach.
Finally, the plain text of the law proffered by BPA as
24
applicable here, the Anti-Assignment Act, cuts against the broad
application advanced by BPA. In theory, a law of such general
applicability might exist to merit application in most if not all
circumstances under § 365(e)(2)(A), but the Anti-Assignment Act is,
by its own terms, not so broadly applicable. Subsection (a) of the
Act provides a general rule for annulment of a public contract upon
a transfer by a party other than the United States. 41 U.S.C. §
15(a). Subsection (b), though, limits the application of the
general rule, and the limitation applies on the basis of specific
facts. “The provisions of subsection (a) of this section shall not
apply in any case in which the moneys due or to become due from the
United States . . . under a contract providing for payments
aggregating $1,000 or more, are assigned to a bank, trust company,
or other financing institution” given other fact-based
circumstances. § 15(b) (emphasis added). Both the text of the
Anti-Assignment Act and the text of § 365(e)(2)(A) require a case-
by-case inquiry into the application of the Act to the executory
contract or lease at issue in the bankruptcy proceeding. As such,
we hold that with respect to § 365(e)(2)(A) and the Anti-Assignment
Act, the actual test must be used to determine the Act’s
applicability to a given case.18 When the law to be applied to a
18
Although we join the First Circuit in requiring an actual
test to determine whether a law applies under § 365(e)(2)(A), we
do not entirely join its reasoning. See Summit Inv., F.3d at
612-14. Interpreting § 365(e)(2)(A), the First Circuit found
that the statute’s plain text permitted both the actual and
25
§ 365(e)(2)(A) determination cannot apply to the case and the
record before the bankruptcy court in fact or law, then §
365(e)(2)(A)’s exception cannot give effect to an ipso facto
clause.
2. Automatic Stay
Given that the actual test applies based upon the plain
language of § 365(e)(2)(A), we next conclude that the automatic
stay must precede any enforcement of an ipso facto clause
ultimately permitted by a bankruptcy court under § 365(e)(2)(A).
Section 362 provides for an automatic but not permanent stay
against “any act to obtain possession of property of the estate”
from which a party may seek relief “for cause, including the lack
of adequate protection of an interest in property.” 11 U.S.C. §
362(a)(3), (d)(1); Cueva, 371 F.3d at 236; see also Computer
Commc’ns, 824 F.2d at 729. The Code itself requires that the
stay’s effect be automatically triggered upon the filing of a
petition for bankruptcy. See § 362(a); Cueva, 371 F.3d at 236.
Section 541(c)(1) provides that a debtor’s estate includes the
debtor’s interest in property that becomes property of the estate
“notwithstanding any provision in an agreement, transfer
hypothetical tests and adopted the actual test on the basis of
legislative history and a determination that no assignment
existed when prepetition debtors became debtors in possession
under the Bankruptcy Code. Id. at 612-13. Instead, Congress’s
choice to trigger § 365(e)(2)(A)’s exception upon the application
of a law to a particular case dictates that an abstract approach
should not be read into the statute.
26
instrument, or applicable nonbankruptcy law” that is conditioned
upon the commencement of a bankruptcy case. § 541(c)(1). Recently,
Chief Judge Jones explained the principle at issue,
Sweeping all of the debtor’s property into the bankruptcy
estate created at filing is the means by which the Code
achieves effective and equitable bankruptcy
administration. Only through a comprehensive
administration of the debtor’s property, wherever located
and by whomever controlled, can the court shield the
property from creditors’ unauthorized grasp; prevent
harassment of debtors; and ultimately ensure equal
distribution among creditors.
Burgess v. Sikes (In re Burgess), No. 04-31089, ___ F.3d ___, 2006
WL 205043, at *15 (5th Cir. Jan. 27, 2006) (Jones, C.J.,
dissenting).
Furthermore, this Court has recognized the automatic stay’s
broad application and noted that such breadth reflects a
congressional intent that courts will presume protection of
property when faced with uncertainty or ambiguity. Brown v.
Chesnut (In re Chesnut), 422 F.3d 298, 303 (5th Cir. 2005).
Likewise, the bankruptcy court’s discretion to grant a modification
or lift of the automatic stay is broad. Cueva, 371 F.3d at 236.
Here, Mirant’s interest in the Agreement, even if it were
ultimately terminable, became property of the estate upon Mirant’s
filing on July 14, 2003. Accordingly, the Agreement was subject to
review by the bankruptcy court, and a party with an interest in an
executory contract or lease must come before the bankruptcy court
to move for a modification or lift of the stay under § 362(d) in
27
order to effect the terms of an ipso facto clause under §
365(e)(2)(A).
The Bankruptcy Code, which must be read and must function as
a whole, demands this conclusion. The Ninth Circuit has noted
three compelling reasons to read the Code in this manner. See
Computer Commc’ns, 824 F.2d at 730 (citing Wegner Farms Co. v.
Merchants Bonding Co. (In re Wegner Farms Co.), 49 B.R. 440, 444
(Bankr. N.D. Iowa 1985)). First, § 362(b) provides particular
exceptions to the entry of automatic stay, but no exception is
provided in the case of executory contracts. Id.; see also 11
U.S.C. § 362(b). Second, “elsewhere in the [Bankruptcy Code],
Congress expressly overrode the stay provision but did not do so in
§ 365; and finally . . . not exempting this brand of executory
contracts is consistent with the purposes and policies underlying
the staying of actions against a debtor postpetition.” Computer
Commc’ns, 824 F.2d at 730-31 (internal quotation marks omitted).
Moreover, on this record, the interplay of the Bankruptcy Code
and the Anti-Assignment Act in particular comports with the
conclusion that the automatic stay must precede any termination
permitted by an ipso facto clause and § 365(e)(2)(A). While the
Bankruptcy Code and this Court’s caselaw interpreting it require
that the initiation of the broad automatic stay is immediate upon
filing, such automatic triggering is absent from the text of the
Anti-Assignment Act and caselaw interpreting the Act. According to
28
BPA, the termination permitted by § 365(e)(2)(A) and the ipso facto
clause of the Agreement here is automatic upon Mirant’s filing for
relief under the Bankruptcy Code and precedes the entry of
automatic stay. We disagree. The Anti-Assignment Act, instead,
provides the government with an option to rescind its contracts
upon transfer. The Anti-Assignment Act permits the United States to
elect its response to the transfer of a contract to which it is a
party. The United States may either waive its rights under the Act
and continue performance, or it may terminate the contract. See
Tuftco Corp. v. United States, 614 F.2d 740, 744 (Ct. Cl. 1980)
(permitting the United States to waive the Anti-Assignment Act's
prohibition of transfer where the government was aware of, assented
in writing to, and recognized the assignment); see also NRG Co. v.
United States, 31 Fed. Cl. 659, 661 (1994). Thus, the Act does not
provide for automatic recision of the public contract upon
transfer; annulment of the contract at issue requires a response by
the United States. The Anti-Assignment Act, and its effect on a
given executory contract, may be raised by the government after the
entry of a bankruptcy court’s automatic stay under, at a minimum,
the provision for stay modification. See 11 U.S.C. § 362(d).
Accordingly, the automatic stay prohibited BPA from
terminating the Agreement. Even when § 365(e)(2)(A) will
ultimately permit a nondebtor party to terminate an executory
contract by virtue of the combined effect of § 365(e)(2)(A),
29
applicable law, and an ipso facto clause, the nondebtor party must
seek relief from the stay before the bankruptcy court under §
362(d). Therefore, we affirm the bankruptcy court’s Stay Violation
Order.
3. The Denial of Modification to Stay
We next address BPA’s contention that the lower courts erred
in failing to lift or modify the stay under § 362(d)(1). Based
upon our conclusion that the Anti-Assignment Act has no application
on this record, we cannot say the bankruptcy court abused its
discretion in denying BPA’s Motion to Modify Stay. The bankruptcy
court denied BPA’s motion because the court concluded that BPA
failed to show cause for relief from stay under § 362(d)(1),
although a portion of the court’s conclusion also necessarily
rested upon the legal determination that the Anti-Assignment Act is
not an applicable law under § 365(c)(1) or (e)(2)(A).
The Bankruptcy Code does not precisely define “cause” under §
362(d)(1), and in the past we have noted that this lack of
definition affords “flexibility to the bankruptcy courts.” Little
Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek
Dev. Co.), 779 F.2d 1068, 1072 (5th Cir. 1986) (explaining that
lack of good faith is sufficient for “cause” and discussing the
inherent balancing required for the court’s determination of
whether a stay should be lifted under § 362(d)). Mirant argues
that a contractual right to terminate does not constitute
30
sufficient cause to grant relief from the automatic stay. See
Elder-Beerman Stores Corp. v. Thomasville Furniture Indus. Inc. (In
re Elder-Beerman Stores Corp.), 195 B.R. 1019, 1023 (Bankr. S.D.
Ohio 1996). The exception provided by § 365(e)(2)(A) discredits
such a broad understanding of the limits on a potential relief from
stay, and a bankruptcy court’s discretion is not so broad as Mirant
argues. Although the district court did not abuse its discretion
here to deny the stay’s modification, on a record differing in
fact, procedure, or both, a bankruptcy court’s discretion is
limited by the text of § 365(e)(2)(A), that is, in the case in
which a law proffered as applicable under § 365(e)(2)(A) is
determined to apply to the case, then the stay must be lifted or
modified in such a way that permits the entitled nondebtor party to
exercise its termination option accordingly.
Here, BPA has not demonstrated cause because the Anti-
Assignment Act is not an applicable law on this record because here
there has been no transfer. In order for the Act to apply to this
case, it must be said that the Agreement was “transferred” within
the meaning of the Act. See 41 U.S.C. § 15. The caselaw, however,
does not support BPA’s reading of transfer under the Act. On this
record, the Anti-Assignment Act cannot apply because no assignment,
which would be prohibited by the Act, occurred between prepetition
debtor and debtor in possession for three salient reasons. First,
Mirant never affirmatively assumed or rejected the Agreement. See
31
11 U.S.C. § 365(a).19 According to § 365(f)(2)(A), assumption must
precede assignment. See § 365(f)(2)(A); see also Cinicola v.
Scharffenberger, 248 F.3d 110, 120 (3d Cir. 2001). Here, Mirant
did not assume the Agreement. Second, BPA might have moved under
§ 365(d)(2)20 for the court to order Mirant to determine, within
time constraints, whether it would assume or reject the Agreement.
But BPA never so moved the court, nor did it make any effort
apparent on the record (other than the letter, sent to Mirant,
unilaterally terminating the Agreement) to either the bankruptcy
court or with opposing counsel to resolve the question of
assumption or rejection. Finally, BPA conceded to the bankruptcy
court that there was no assignee in fact. On such a record, no
transfer – prohibited by the Anti-Assignment Act – has occurred or
even been attempted, and therefore the Act is not an applicable
law.
19
We have previously recognized that in Chapter 11
proceedings, an executory contract might be neither assumed,
rejected, nor assigned and that in such a circumstance, the
contract would ride through the proceedings, leaving the
nondebtor’s claim to survive the bankruptcy. Century Indem. Co.
v. NGC Settlement Trust (In re Nat’l Gypsum Co.), 208 F.3d 498,
504 n.4 (5th Cir. 2000).
20
Section 365(d)(2) vested BPA with the procedure to demand
Mirant’s action with respect to the Agreement. “[T]he court, on
the request of any party to such contract or lease, may order the
trustee to determine within a specified period of time whether to
assume or reject such contract or lease.” § 365(d)(2). This
statutory provision, as the bankruptcy court noted, offered BPA
the means to obtain the information it needed, whether Mirant
would assume or reject the Agreement after filing for bankruptcy,
and in the time in which BPA urged that an answer was needed.
32
The parties dispute whether, as a matter of law, a transfer or
assignment occurs as a result of the change in status from
prepetition debtor to debtor in possession. If the change in the
status produces a transfer of the executory contract, then
according to BPA, the Anti-Assignment Act applies. If the change
in status is nominal only and there is no transfer or assignment as
a matter of law, then, as Mirant argues, the Anti-Assignment Act
may have no applicability in the absence of a transfer. See 41
U.S.C. § 15 (providing that “any such transfer shall cause the
annulment of the contract or order transferred, so far as the
United States is concerned”). We need not, on this record, resolve
this res nova question.21 We hold only what this record permits,
that is, no transfer occurs under the Anti-Assignment Act where the
21
Though other courts have concluded no assignment exists
with respect to an executory contract or lease as a result of the
change in status between a prepetition debtor and a debtor in
possession, see Summit Inv., 69 F.3d at 613-14 (discussing
Bildisco, 465 U.S. at 528); United States v. Gerth, 991 F.2d
1428 (8th Cir. 1993), we cannot agree that the Supreme Court has
conclusively resolved this question. Instead, in Bildisco, the
Court merely stated, “[f]or our purposes, it is sensible to view
the debtor-in-possession as the same ‘entity’ which existed
before the filing of the bankruptcy petition, but empowered by
virtue of the Bankruptcy Code to deal with its contracts and
property in a manner it could not have done absent the bankruptcy
filing.” 465 U.S. at 528. That “sensible view,” necessary only
for the purposes of that case, does not support in all cases the
proposition that no assignment or transfer occurs as a matter of
law between prepetition debtor and debtor in possession.
Accordingly, neither the Supreme Court nor this Circuit has
resolved the argument presented by BPA that rights obtained in
bankruptcy require that a debtor in possession be treated as a
distinct legal entity from a prepetition debtor.
33
debtor neither assumes nor attempts to assume the executory
contract, the nondebtor concedes there is no assignment in fact,
and the nondebtor, seeking to invoke the combined effect of the
Anti-Assignment Act and § 365(e)(2)(A), fails to move for
assumption or rejection under § 365(d)(2). In such a circumstance,
where no party has moved to assume the executory contract before
the bankruptcy court, no assignment occurs between prepetition
debtor and debtor in possession with respect to the Anti-Assignment
Act and § 365(e)(2)(A).
III. Conclusion
For the foregoing reasons, the bankruptcy court correctly
determined that a Chapter 11 automatic stay must precede the
enforcement of any eventual right a nondebtor may have to terminate
an executory contract under § 365(e)(2)(A). Accordingly, we affirm
the bankruptcy court’s Stay Violation Order. Also, the bankruptcy
court did not abuse its discretion to deny modification or lift of
stay where no assignment or transfer had occurred or been
attempted. On such a record, the Anti-Assignment Act is not an
applicable law under § 365(e)(2)(A).
AFFIRMED.
34