Background of the Case

            Winter storm “Uri” devastated the State of Texas during the week of February 13, 2021 through February 17, 2021, leaving many of the state’s residents without electricity for prolonged periods and leading to the death of an estimated 246 residents. In response to the strain on the state’s power grid, ERCOT significantly raised the set price of electricity to the maximum allowed price of $9,000/MWh. On orders from the Public Utility Commission of Texas (the “PUCT”), ERCOT also ordered cuts in electricity consumption in the form of forced power outages across the state.

            One of the retail energy providers affected by ERCOT’s management of the electricity market during Uri was Just Energy Group, Inc. (“Just Energy”). As a result of ERCOT’s pricing of electricity, Just Energy claimed it received invoices from ERCOT totaling approximately $335 million for the operating days of February 13, 2021 through February 20, 2021. Lacking sufficient liquidity to pay the ERCOT invoices, Just Energy filed bankruptcy proceedings in Canada and then filed ancillary Chapter 15 proceedings in the Bankruptcy Court. Under protest, Just Energy eventually paid the charges to ERCOT, disputing around $274 million of the invoiced amounts through the commencement of an adversary proceeding in the Bankruptcy Court.  In response ERCOT filed a motion to dismiss arguing, among other things, that notwithstanding 28 U.S.C. §1334(c), mandatory abstention under the Burford doctrine required the Bankruptcy Court to dismiss Just Energy’s complaint because of the state law issues raised by Just Energy.  The Bankruptcy Court granted in part and denied in part ERCOT’s motion to dismiss.  ERCOT timely appealed the Bankruptcy Court’s partial dismissal directly to the Fifth Circuit based on the Bankruptcy Court’s certification of a direct appeal.

            The Fifth Circuit determined that abstention was appropriate, vacated the Bankruptcy Court’s order, and remanded the adversary proceeding with instructions to determine the appropriate trajectory of this case after abstention.  The Bankruptcy Court abstained and issued an order staying the adversary proceeding pending further proceedings in Texas state court.  The Fifth Circuit’s ruling hinged on the application of the Burford doctrine in the bankruptcy context and the determination that four of the five Burford factors (discussed below) weighed in favor of abstention.

Burford Analysis

            I.  Applying Burford to bankruptcy

The Fifth Circuit began by analyzing whether Burford applied to the bankruptcy case at hand. In Burford v. Sun Oil Company,[2] the United States Supreme Court ruled that federal courts may abstain from ruling on matters involving state law that are of great importance to the state if a federal ruling would undermine state affairs. Also, when timely and adequate review by a state court is available, a federal court sitting in equity should decline to interfere. The Fifth Circuit refuted Just Energy’s argument that Burford was inapplicable as it was subsumed by 28 U.S.C. § 1334(c). This statute provides that except with regard to Chapter 15 cases, a federal court may abstain from hearing cases involving state law that arise under title 11 of the United States Code (as amended, the “Bankruptcy Code”). Section 1334(c) also permits a federal court to abstain from hearing a case related to but not arising under title 11 if a party makes a timely motion.

The Fifth Circuit held that Section 1334(c) and Burford were two distinct forms of abstention and stand alone. Thus, as ERCOT only argued for abstention under Burford, the Court upheld its previous decisions that Burford, while fairly rare in bankruptcy, still applied in the bankruptcy context.

II. Weighing each of the five Burford factors

In deciding Burford, the Supreme Court created five factors for federal courts to consider when determining whether to abstain from the matter: (1) whether the plaintiff raised state or federal claims; (2) whether the case involved unsettled state law or detailed local facts; (3) the importance of the state’s interest in the case; (4) the need for the state to have coherent policy in the area of law; and (5) whether there is a particular or special state forum for judicial review. Here, the Fifth Circuit found that four of the five factors weighed in favor of abstention.

The first factor was not satisfied because the claims invoked Canadian and federal law. Therefore, this factor did not weigh in favor of abstention because of exclusive federal jurisdiction over bankruptcy matters.

The second factor was satisfied because the merits of the case significantly required a review of a state agency’s decision in an area in which the agency was an expert. Thus, because the Bankruptcy Court would have to determine whether ERCOT appropriately acted within its state authority and within ERCOT’s area of expertise, the significant involvement of state law weighed in favor of abstention.

The third factor also weighed in favor of abstention. The state had a clear interest in a case determining the legal authority and legitimacy of a state agency’s actions under state law. The involvement of state legislation such as the Texas Public Utility Regulatory Action (“PURA”) and the question of state administrative actions heavily weighed in favor of abstention.

The fourth factor’s concentration on preventing the disruption of state regulatory scheme from federal involvement made this factor also weigh in favor of abstention. Federal involvement from the Bankruptcy Court in this matter would fundamentally disrupt the state regulatory scheme under PURA, which is precisely what Burford abstention was designed to prevent.

Finally, the fifth and final factor required the existence of a special state forum to hear the case so that abstention was proper. Here, the Fifth Circuit determined a special state forum did exist: the Travis County district court. Under Texas law, the challenges to ERCOT’s invoices and regulatory actions must first be filed with ERCOT, then appealed to the PUCT, and then finally to the Travis County district court. Therefore, state law provided for a special state forum to hear the matters at issue in this case and thus weighed in favor of abstention.

            Therefore, as four of the five Burford factors weighed in favor of abstention, the Fifth Circuit determined the Bankruptcy Court erred in failing to abstain and that the Court should have transferred the case to the Travis County district court.

What This Means For You

            The Fifth Circuit’s decision to vacate the Bankruptcy Court’s ruling clarified the application of Burford in the bankruptcy context. This provides more clarity of the limits on federal authority over cases involving substantial state law components, even if the case invokes federal law. The Fifth Circuit provided greater deference to the preservation of the state administrative and regulatory schemes, along with the ways in which federal courts may intervene in those schemes. Bankruptcy practitioners now also have a defined separation between the types of abstention available to possibly apply in future matters.

Conclusion

            The Fifth Circuit clarified the application of Burford abstentions in the bankruptcy context by vacating the Bankruptcy Court’s decision in In re Just Energy Group, Inc. The evaluation of the impact of ERCOT’s management of electricity pricing during winter storm Uri, even in the matter of cases arising under federal law, still required abstention by the Bankruptcy Court to allow for a more equipped state forum to make the appropriate ruling.

[1] 57 F.4^th 241, 2023 WL 111207 (5^th Cir., Jan. 5, 2023).

[2] 319 U.S. 315 (1943).

[View source.]