Bankruptcy Tangles Enron Contract Disputes >ENRNQ DYN AES
By Lingling Wei, Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--A contract dispute may sound straightforward enough, but it's not so simple when one party involved is in bankruptcy. As many of Enron Corp.'s (ENRNQ) trading partners have recently found out, the company's bankruptcy-protection filing has greatly complicated a kind of contractual dispute that could normally be settled outside court. Over the past two months, a spate of Enron's former business partners, such as Dynegy Inc.(NYSE:DYN) (DYN) and AES Corp.(NYSE:AES) (AES), have found themselves embroiled in legal battles with the fallen energy giant. All raise the question of whether the bankruptcy court should refer the underlying contract controversy to arbitration. For Enron, which wants the issues to stay in the bankruptcy court, more than $ 6 billion could be at stake, as the company is party to thousands of commodities contracts that have arbitration terms. That represents "either the largest or one of the largest remaining assets" of the company's property, Enron's lawyers wrote in a November suit against Dynegy. These two Texas firms have scheduled to argue on Thursday in front of Judge Arthur Gonzalez in the New York bankruptcy court. The dispute between Enron and Dynegy involves a so-called master netting agreement, entered into less than a month before Enron's collapse into bankruptcy in December 2001. Such pacts, common in the energy industry, are designed to allow companies to "net" their contract requirements by offsetting negative balances from one transaction with positive balances from another. Enron brought the lawsuit after Dynegy asked the bankruptcy court to compel the parties to arbitrate their contractual spat. In its objection, Enron has said that request is an attempt to obtain a result "in an arbitration favorable to the Dynegy counterparties that would be prohibited" under the bankruptcy law. If Dynegy's request were granted, Enron has said, Dynegy would have more than $93 million in claims against it. But, according to Enron's calculation, it is Dynegy that owes Enron and its subsidiaries about $230 million. In Enron's view, the case illustrates a situation where a bankruptcy court is asked to refer to arbitration a dispute that involves a "core" bankruptcy function - that is, the resolution of claims against a debtor's bankruptcy estate. "If the debtor (Enron) had to litigate these core issues before multiple arbitrators in multiple jurisdiction, there will be a serious risk about when and whether a reorganization could be effective," says Peter Gruenberger, a partner of Weil, Gotshal & Manges LLP, representing Enron in bankruptcy. Dynegy, on the other hand, has said the contract dispute doesn't raise any core bankruptcy issues, and even if it did, handing the dispute over to arbitration wouldn't interfere with Enron's efforts to repay creditors. David Carlson, a bankruptcy law professor at the Benjamin N. Cardozo School of Law at Yeshiva University in New York, says that in contract cases, where a debtor has negotiated in advance to arbitrate contractual disputes, the bankruptcy court usually weighs two federal policies in deciding whether to enforce the arbitration provision. One being the Bankruptcy Code and the other the Federal Arbitration Act. A conflict could arise, Carlson says, when the pro-arbitration federal mandate intersects with the bankruptcy code's grant of jurisdiction to bankruptcy courts to preside over key bankruptcy matters. "That's a sticky issue," Carlson adds. -By Lingling Wei, Dow Jones Newswires; 201-938-2089; Lingling.Wei@dowjones.com Following the action against Dynegy, Enron has filed suits against Select Energy Inc., a unit of Northeast Utilities (NU), Old Dominion Electric Cooperative (X.ODE), Smurfit-Stone Container Corp.(NASDAQ-NMS:SSCC) (SSCC), AES Corp.(NYSE:AES) (AES), American Coal Co., and Noble Gas Marketing Inc. Though the suits concern different underlying contracts, they all involve the issue of the enforceability of arbitration in the event of bankruptcy. -By Lingling Wei, Dow Jones Newswires; 201-938-2089; Lingling.Wei@dowjones.com Dow Jones Newswires 01-15-031250ET
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