Client Alert

Lockyer v. Mirant Summary

2/25/2005

In Lockyer v. Mirant Corporation, __ F.3d __, 2005 WL 310897 (February 10, 2005), the Ninth Circuit allowed an antitrust claim brought by Attorney General Bill Lockyer against Mirant to move forward despite Mirant’s pending Chapter 11 bankruptcy.  The Ninth Circuit held that the district court erred in staying the case because: 1) the district court had jurisdiction to decide whether the bankruptcy court’s automatic stay applied to Lockyer’s claim; and 2) the claim fell within the "police or regulatory power" exception to the automatic stay.  Accordingly, the court vacated the district court’s stay and remanded to allow the Attorney General’s suit to proceed.

Mirant purchased three San Francisco Bay Area power plants from Pacific Gas & Electric in 1999, in connection with California’s deregulation of the electricity industry.  In 2002, the Attorney General sued Mirant, claiming that its ownership of these plants allowed it to exercise market power in violation of section 7 of the Clayton Act.  See 15 U.S.C. §18.  Then on July 14 and 15, 2003, Mirant filed Chapter 11 petitions in the U.S. Bankruptcy Court for the Northern District of Texas, and the district court in this case later granted a stay as requested by Mirant.

Generally, when a company files for bankruptcy, an automatic stay operates to prevent creditors from continuing litigation against the company.  In issuing its stay, the district court was concerned it lacked jurisdiction to determine applicability of the automatic stay to Lockyer’s suit.  The Ninth Circuit pointed out that a state court has the authority to decide whether the automatic stay applies to its proceedings, but its holding may not be given preclusive effect by the bankruptcy court.  It then said "[t]here is no reason why a federal court should have less power than a state court to decide whether its proceeding comes within the scope of the automatic stay."  Therefore, the court held that the district court did have jurisdiction to determine whether the automatic stay applied to the Attorney General’s suit or whether it fell under an exception.

11 U.S.C. § 362(b)(4) creates such an exception to the automatic stay for "an action or proceeding by a governmental unit . . . to enforce such governmental unit’s . . . police or regulatory power."  Mirant first implicitly argued that the exception didn’t apply because Lockyer was seeking to enforce a federal law.  The Ninth Circuit summarily rejected this argument as unfounded, saying that "[a] number of cases make clear that the §362(b)(4) exception extends to a government’s enforcement of laws enacted by other governments."  Mirant also said that because Section 16 of the Clayton Act authorized private suits, a government unit suing to enforce that section could not fit under §362(b)(4).  The court said that Section 16 also authorizes suits by state governments and knew of no authority to support Mirant’s claim.

Mirant argued further that Lockyer’s suit failed to satisfy either of the two tests for the "police or regulatory power" exception.  The first is the "pecuniary purpose" test, which asks whether the action relates primarily to protection of pecuniary interest or to public safety and health.  The Ninth Circuit found that the Attorney General’s suit clearly satisfied this test since its sole remaining claim sought Mirant’s divestiture of the three power plants to protect northern California’s electricity consumers from excessive charges, rather than any monetary recovery.  The suit also satisfied the "public purpose" test, because its goal was to protect the interests of northern California electricity consumers.  Thus, the Ninth Circuit held that Lockyer’s suit did fall within the "police or regulatory power" exception to the automatic stay.

The Ninth Circuit acknowledged that certain circumstances justify a district court’s exercising its discretion to stay its own proceedings.  The Court of Appeals noted the risk of continuing harm to northern California electricity consumers if the stay continued, while Mirant’s only hardship would be proceeding with the suit.  In addition, it was highly unlikely that the Bankruptcy Court in Texas would resolve the Attorney General’s antitrust claim, and thus narrow the issues to be resolved by the district court.  Furthermore, the court said it was aware of no case in which a district court stayed a suit in which the "police or regulatory power" exception applied.

While Lockyer v. Mirant Corporation recently settled, according to a recent article in the San Francisco Daily Journal, Attorney General Lockyer’s office hopes that this ruling will influence similar cases, such as a commodities fraud case against Enron.

Close

Feedback

Disclaimer

Unsolicited e-mails and information sent to Morrison & Foerster will not be considered confidential, may be disclosed to others pursuant to our Privacy Policy, may not receive a response, and do not create an attorney-client relationship with Morrison & Foerster. If you are not already a client of Morrison & Foerster, do not include any confidential information in this message. Also, please note that our attorneys do not seek to practice law in any jurisdiction in which they are not properly authorized to do so.