In 1997, a complex series of deals between Enron and Bank of America helped Enron inflate its income. The welter of agreements created an entity that Enron and Bof A owned 50-50, the Bammel Gas Trust. BGT paid Enron subsidiaries Houston Pipe Line and HPL Resources $232 million for 80 billion cubic feet of Storage Gas in the Bammel Gas Storage Facility. HPL operated the facility and had the right, so long as the loan remained current, to use the Storage Gas as it wished subject to its duty to replace any Storage Gas it withdrew.
Funding for the purchase came from a $218 million BofA loan plus $14 million in equity from Enron and BofA. BofA took a security interest in the Storage Gas as collateral for the loan. Enron guaranteed payment of the debt.
In 2001, Enron sold HPL and HPLR to AEP Energy Services. But Enron remained a guarantor of the BofA loan.
Enron's bankruptcy in December 2001 triggered a Guaranty Default. After much wrangling and eventual lifting of the automatic bankruptcy stay, in May 2004 BofA gave Enron notice of the default and its intent to foreclose on the security interest in the Storage Gas. AEP balked.
Litigation — and a lot of it — ensued, both in Houston and New York. The federal judge in Houston sent much of the case to the Southern District of New York, site of the Enron bankruptcy, but kept tort and breach of contract claims. The S.D.N.Y. judge at length granted summary judgment to BofA and awarded it $345,675,000 plus interest. AEP, HPL, and HPLR appealed.
The Second Circuit largely affirmed. AEP Energy Resources Gas Holding Co., L.P. v. Bank of Am., N.A., No. 08-4196-cv (2d Cir. Oct. 29, 2010). The district court abused its discretion, the panel held, by ignoring the limits on the S.D. Tex. judge's transfer order, which retained the tort and contract claims and sent to New York only those relating to declaratory relief. But the district court did not err in concluding, under Texas law, that BofA gained rights superior to those of AEP, HPL, and HPLR in the Storage Gas upon giving proper notice of Enron's Guaranty Default and allowing them time to cure, the panel ruled.
Blawgletter recommends the opinion to anyone who papers financing of energy deals or litigates disputes arising from them. Page 55 to the end of the 91-page tour de force address and resolve a great many of the issues that may arise.
The damages figure, by the way, resulted from the fact that BofA sued partly on behalf of BGT's trustee, the Bank of New York. Because the trustee owned the gas, the refusal to allow BGT to take possession constituted conversion and entitled the trustee to damages equal to the market value of the Storage Gas as of the date of conversion. The fact that the value exceeded the amount owing to BofA thus didn't matter, the court held.