IN RE ENRON CORP

ARTHUR GONZALEZ, Bankruptcy Judge

Before the Court is the motion, dated October 31, 2003 (the "Motion"), filed by Enron Corp. ("Enron"), as debtor and debtor in possession, seeking entry of an Order, pursuant to 11 U.S.C. § 365, approving the assumption and assignment of that certain Capital Stock Agreement, dated June 30, 1986, as amended (the "Agreement") by Enron Corp. to Crosscountry Energy Corp., or its Designee. The parties to the Agreement are El Paso Corporation ("El Paso"), as successor in interest to Sonat Inc. by virtue of a merger; Enron Corp., as successor in interest to InterNorth Inc. by virtue of a name change and successor in interest to Houston Natural Gas Corporation by virtue of a merger; and Citrus Corp. ("Citrus"). Through a subsidiary, Citrus indirectly owns and operates a pipeline which transports natural gas from South Texas to South Florida. Southern Natural Gas Company ("Southern Natural"), a subsidiary of El Paso, and Enron each own fifty percent of the capital stock of Citrus.

The Court has subject matter jurisdiction over the Motion pursuant to 28 U.S.C. § 1334(b) and the General Reference to this Court, dated July 10, 1984 (Ward, Acting C.J.). This matter is core pursuant to 28 U.S.C. § 157(b)(2)(A) (O).

The Agreement sought to be assumed and assigned pursuant to the Motion contains the parties' agreements relating to the corporate management of Citrus and its board of directors and the ownership and disposition of their capital stock in Citrus. The Agreement provides that it is to be governed and construed in accordance with the laws of Delaware. (Agreement, section 19). Under the terms of the Agreement, each party's Citrus stock may only be owned either directly, or indirectly through their respective subsidiaries. (Agreement, section 3(a)). Section 3(b) of the Agreement governs transfers of Citrus shares from Enron or El Paso to their respective subsidiaries and authorizes a principal to transfer stock to a subsidiary if the subsidiary "agrees to be bound by all the terms and provisions of the Agreement applicable to its Parent." If the subsidiary that owns the stock ceases to be a subsidiary, it must transfer the stock back to the principal. (Agreement, section 3(b)(iv)). Section 3(c) of the Agreement governs disposition of the Citrus shares and only authorizes such disposition upon the receipt of the written consent of the other principal or as expressly permitted by section 3 or 16 of the Agreement. In addition, the purchaser is required to pay the purchase price in cash and not undertake any other obligations or liabilities under the terms of the sale. (Agreement, section 3(c)). Under section 3(d) of the Agreement, if a principal desires to sell all of the Citrus stock it directly or indirectly owns, the other principal has a right of first refusal to purchase such stock If the other principal refuses to purchase the Citrus stock, any sale to a third-party must be to a single purchaser at a fixed price, payable in cash. (Agreement, section 3(c)). Excluded from the requirements concerning the disposition or sale of shares of Citrus are those instances when there is a transfer pursuant to a sale or lease of all or substantially all the assets of either principal or when there is a merger or consolidation of either principal, as long as any transferee or successor shall by agreement, or operation of law, be bound by the terms and provisions of the Agreement. (Agreement, section 3(c)). Section 16 of the Agreement concerns a situation in which there is a change in control of one of the principals, in which case the other principal is afforded the option of purchasing the shares of Citrus stock of the principal encountering the change of control. Section 21 of the Agreement provides that it "may not be assigned by any party without the consent of the other party."

The Agreement contains provisions relating to the on-going duties of El Paso and Enron in connection with the business of Citrus. These obligations include (i) providing notice of any intent to sell or transfer the Citrus capital stock under certain circumstances, (ii) providing a right of first refusal, (iii) nominating the Chairman of the Board and using best efforts to cause the election of the persons so nominated, (iv) holding informal meetings to discuss and resolve such matters not agreed upon by the Citrus Board of Directors and implementing such resolutions, (v) voting as a stockholder of Citrus, (vi) providing prompt written notice to the other party regarding whether either such party has undergone a Change of Control, at which such time the other party may have the option to purchase all the Capital Stock owned by the party experiencing a Change of Control, (vii) electing, as the party intending to purchase the other party's shares, to have an appraisal of the fair market value of the shares of Capital Stock, as well as to engage its investment banker as promptly as practicable for such purpose, and (viii) bearing fifty percent of the cost of employing a third investment banker if the parties' respective investment bankers disagree on the fair market value of such stock

Pursuant to an earlier motion (the "Crosscountry Motion") filed by Enron and certain affiliated entities (collectively, the "Moving Entities"), the Moving Entities sought entry of an order approving the formation of Crosscountry Energy Corp. ("Crosscountry"), a Delaware corporation and subsidiary of Enron and the Moving Entities. In addition, pursuant to the Cross Country Motion, the Moving Entities sought, inter alia, approval of their request to contribute to Crosscountry their respective equity interests in three pipeline companies, including Enron Corp.'s interest in Citrus. Pursuant to an amended joint plan of reorganization (the "Amended Plan") filed by Enron and its affiliated debtors (collectively, the "Debtors"), the Debtors propose to distribute Crosscountry capital stock to the Debtors' creditors.

Initially, El Paso and Southern Natural (collectively, the "El Paso Entities") objected to the CrossCountry Motion arguing that Enron's capital stock interest in Citrus could only be transferred in accordance with the stock transfer provisions contained in the Agreement. The El Paso Entities contended that any attempt by Enron to sell the Citrus capital stock to a third-party or transfer the stock as proposed in the Amended Plan would constitute a material breach of the Agreement. Upon receiving assurances that Enron and the El Paso Entities would reserve fully their respective rights with respect to the Agreement, the El Paso Entities withdrew their objection to the CrossCountry Motion. The Court entered an order approving the relief sought in the Cross Country Motion and authorized consummation of the transaction contemplated therein (the "CrossCountry Transaction"). Subsequently, the Court approved certain other relief which Enron and affiliated entities sought in preparation of consummating the CrossCountry Transaction. Accordingly, Enron and certain of its affiliates assert that they are now prepared to proceed with the consummation of the CrossCountry Transaction, including the transfer of the Citrus capital stock to CrossCountry. In connection with that decision, Enron filed this Motion seeking authorization to assume and assign the Agreement to CrossCountry, or its designee.

In the Motion, Enron noted that upon closing, the current CrossCountry entity may be replaced by a Delaware limited liability company.

The El Paso Entities object to the relief sought and argue that the proposed assignment of the Agreement does not comply with the conditions contained therein governing transfers of the Citrus stock by Enron to its subsidiaries. The El Paso Entities contend that the proposed assignment violates the terms of the Agreement because rather than binding Crosscountry along with Enron under the Agreement, the proposed assignment seeks to replace and remove Enron as an entity bound under the Agreement. In addition, the El Paso Entities contend that the Agreement will be further breached when the Citrus stock is not returned by Crosscountry to Enron, at the time the Crosscountry capital stock is distributed to the Debtors' creditors under the proposed Amended Plan. The El Paso Entities argue that the Agreement itself provides the only basis upon which these requirements can be circumvented and that is when there is a large scale corporate transaction such as a merger or sale of substantially all of the counter-party's assets. Thus, the El Paso Entities argue that Enron is attempting to have important parts of the Agreement rewritten by substituting Crosscountry in place of Enron in various parts of the Agreement.

Enron contends that the relief it seeks to assume and assign the Agreement is in compliance with the requirements of the Bankruptcy Code governing assumptions and assignments of contracts.

DISCUSSION

Section 365(a) of the Bankruptcy Code provides, in relevant part, that a "trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." If a trustee elects to assume an executory contract or unexpired lease, the trustee may then assign such contract or lease if it establishes that it has met the requirements of section 365(f)(2) of the Bankruptcy Code which provides, in relevant part, that

The trustee may assign an executory contract or unexpired lease of the debtor only if —

(A) the trustee assumes such contract or lease in accordance with the provisions of this section; and

(B) adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.

Indeed, if a trustee establishes that the requirements of section 365(f)(2) are met, the trustee may complete the assignment even if there is a provision in such "executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease." 11 U.S.C. § 365(f)(1). Thus, if the requirements of section 365(f)(2) are met, the inclusion of an anti-assignment provision in a contract is not an impediment to its assignment. Section 365 of the Bankruptcy Code, however, does restrict a debtors' ability to assume or assign an executory contract absent consent of a party to that contract, in instances where applicable law excuses such party from "accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties." 11 U.S.C. § 365(c)(1).

Further, section 365(k) of the Bankruptcy Code provides, in relevant part, that "[a]ssignment by the trustee to an entity of a contract or lease assumed under this section relieves the trustee and the estate from any liability for any breach of such contract or lease occurring after such assignment."

Section 365 of the Bankruptcy Code concerns the assumption and assignment of "executory" contracts. As noted by the court in In re Teligent, Inc., 268 B.R. 723, 729-30 (Bankr. S.D.N.Y. 2001), there are generally three approaches to determine whether a contract is executory. Many courts have adopted the definition propounded by Professor Countryman under which an executory contract is "a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other." Vern Countryman, Executory Contracts in Bankruptcy: Part 1, 57 Minn. L.Rev. 439, 460 (1973). This test focuses on "material breach" and finds a contract to be executory when "both sides are still obligated to render substantial performance." In re Rodizio, 204 B.R. 417, 421 (Bankr. S.D.N.Y. 1997). If only one side has performance obligations, the contract is not executory and, thus, cannot be either assumed or rejected. Id. A less stringent test adopted by other courts has been gleaned from the legislative history in which it was noted that although there is no precise definition of an executory contract, such "generally includes contracts on which performance remains due to some extent on both sides." H.R. REP. No 95-595, at 347 (1977); S.REP. No. 95-989, at 58 (1978), U.S. Code Cong. Admin.News 1978, pp. 5787, 5844, 6303. The final approach utilized by some courts is referred to as the functional approach and focuses on the benefit or burden to the estate of assuming or rejecting the contract. Cohen v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 138 B.R. 687, 696 (Bankr. S.D.N.Y. 1992). The functional approach is more lenient than either the "material breach" test or the "some performance due" test. Teligent, 268 B.R. at 732.

The Agreement contains several provisions related to ongoing obligations and duties of the parties in connection with the business of Citrus. Under certain circumstances, notice of any intent to sell or transfer the Citrus capital stock must be provided. In addition, a party encountering a change of control must provide notice to that effect, at which time the counter-party may have the option to purchase its capital stock in Citrus. See Rodizio, 204 B.R. at 425 (finding an option contract to be an executory contract). The Agreement also provides each counter-party with a right of first refusal in the case of the sale of the Citrus stock by the other. A contract that constitutes a right of first refusal — in that it obligates a party to give notice to the counterparty of any offer to purchase property and to sell it to that counterparty if it matches the price, and that requires the counterparty to exercise or waive the right of first refusal within a specified time — is an executory contract. In re Kellstrom Indust., Inc., 286 B.R. 833, 835 (Bankr. Del. 2002); see also In re Teligent, Inc., 268 B.R. 723, 729 n. 7 (Bankr. S.D.N.Y. 2001) (noting that a requirement to offer a right of first refusal prior to consummation of a sale is an unperformed obligation of a contract containing such condition). These and several other affirmative, performance-based obligations contained in the Agreement requiring the parties to participate in the ongoing affairs of Citrus and comply and perform in accordance with certain affirmative obligations render the Agreement an executory contract.

The Agreement has not been terminated, is valid and binding, in full force and effect, enforceable in accordance with its terms, and is property of Enron's estate pursuant to section 541(a) of the Bankruptcy Code. Enron is not in default of the Agreement, either on the basis of a monetary default or otherwise.

With respect to the requirement under section 365(f)(2) of the Bankruptcy Code that there be adequate assurance of future performance by the assignee, the Court finds that adequate assurance of future performance has been provided. After the assignment of the Agreement to Crosscountry and the concurrent closing of the Crosscountry Transaction, Crosscountry will own a network of North American pipeline systems and related shared services assets worth almost 1.5 billion dollars. This affords Crosscountry the financial strength to perform under the Agreement. With respect to obligations to perform corporate governance functions, Crosscountry has a board of directors in place that is prepared to participate in the governance of Citrus. The same team that oversees the operation of the pipeline under Enron will be operating it under Crosscountry. Enron has shown that, pursuant to section 365 of the Bankruptcy Code, Crosscountry provides the El Paso Entities with adequate assurance of future performance thereunder.

Nevertheless, the El Paso Entities urge that the Court not approve the assumption and assignment of the Agreement. The El Paso Entities argue that Enron could not have transferred the Citrus stock to Crosscountry without complying with the requirements for transfer of the stock to a subsidiary pursuant to the Agreement. Thus, the El Paso Entities contend that to allow Enron to bifurcate the transaction, by first obtaining approval for the transfer of the stock under section 363 of the Bankruptcy Code claiming compliance with the Agreement and then seeking to assume and assign the Agreement under section 365 of the Bankruptcy Code, would place form over substance. This is because Enron could establish that it complied with the requirements under the Agreement for transferring the Citrus stock to its subsidiary Crosscountry when seeking Court approval pursuant to section 363 of the Bankruptcy Code for that aspect of the transaction. However, if Enron were to subsequently obtain Court approval for the section 365 assumption and assignment of the Agreement, the result would be that Enron would have transferred the Citrus stock to Crosscountry without complying with the terms of the Agreement. The El Paso Entities note that if the assignment is approved, Enron will not owe any obligations to El Paso under the Agreement and Crosscountry will not have any obligation to return the stock to Enron. Pursuant to the proposed Amended Plan, Crosscountry's stock will be distributed to Enron's creditors, thus, the El Paso Entities contend that Enron will have circumvented all of the requirements for transfer of the Citrus stock The El Paso Entities argue that they bargained for any transfer to a third-party to occur only if El Paso were afforded a right of first refusal to purchase the Citrus stock or in instances where they were certain that the entity that would undertake Enron's obligations under the Agreement was of the size and quality of Enron such as where there was a transfer pursuant to a sale or lease of all or substantially all of Enron's assets or when Enron merged or consolidated with another entity.

Enron contends that because it has filed for bankruptcy protection, it must maximize assets for the benefit of its estate. Enron asserts that to reach this goal, section 365 of the Bankruptcy Code allows a debtor to assume executory contracts that would benefit the estate and reject those that may burden the estate. Further, section 365 of the Bankruptcy Code allows a debtor to assign any such assumed executory contract even if the contract includes a provision that precludes the assignment of such contract.

Section 365 of the Bankruptcy Code sets forth the elements that must be established to obtain approval for such assumption and assignment. Where a debtor establishes these elements, the interests of the counter-party are protected by the requirement that adequate assurance be provided that the assignee can perform in the future under the terms of the contract. As previously noted, adequate assurance has been provided that Crosscountry can perform in the future under the contract. Further, section 365(k) of the Bankruptcy Code relieves Enron from liability for any breach of the Agreement occurring after its assumption and assignment. Moreover, Crosscountry assumes the contract with its burdens and must comply with any term concerning the right afforded El Paso of first refusal when selling the shares of Citrus.

The El Paso Entities argue that the essence of the exclusionary clause of the Agreement will not be complied with because Enron is a much larger enterprise than Crosscountry. Thus, even if CrossCountry must comply with the terms of the Agreement when it disposes of the pipelines, the El Paso Entities contend that the exclusion contained in the Agreement, concerning the disposition or sale of shares of Citrus in those instances when there is a transfer of all the assets of Enron or a merger with Enron, envisioned an entity the size and quality of Enron undertaking to fulfill Enron's obligations under the Agreement. The El Paso Entities note that CrossCountry's assets will consist of three pipelines and therefore CrossCountry can avail itself of the exclusionary clause by selling those three pipelines as a block, thereby depriving El Paso of its right of first refusal, whereas Enron would be required to sell its entire enterprise in one transaction to deprive El Paso of that privilege. Thus, the El Paso entities contend that the entity undertaking the counter-party's obligations under the Agreement will not be as large or of the quality of Enron.

Nevertheless, pursuant to section 365(f)(1), any provision that would limit the ability of Enron, as a debtor, to assign the executory contract does not preclude Enron from assuming and assigning the contract as long as it establishes that it meets the requirements of section 365(f)(2). Moreover, the Court finds that under the circumstances of this case, there is compliance with the essence of the bargained for exclusionary clause. Under the Agreement, each party took the risk that the size of the other could fluctuate. Indeed, after entering into the Agreement, Enron expanded substantially. However, there was no proscription on how Enron could dispose of its other assets prior to the disposition of the Citrus stock Thus, at any time, Enron could theoretically have disposed of all of its other assets except for the three pipelines or even retained only its stock in the Citrus pipeline and eventually sold its remaining assets as a block without offering a right of first refusal. Moreover, it appears that the El Paso Entities are not focusing on the size and quality of Enron at either the time they entered into the Agreement when, as the parties concede, Enron may not have been much larger than a company owning three pipelines, or even the present time but, rather, at some interim period when Enron was a multinational, diversified corporation perceived as a very successful enterprise. In any case, a determination that there is adequacy of future performance under section 365 of the Bankruptcy Code does not include a guaranty that every expectation concerning a counter-party to the contract will be fulfilled by the entity to whom the contract is assigned.

Although the El Paso Entities acknowledge that the Agreement is not a partnership arrangement, they argue that their concern is the identity of the co-owner of the pipeline. However, the El Paso Entities have not directed the Court's attention to any applicable law that would excuse them from accepting performance from or rendering performance to Crosscountry and, thereby, bring them within the exclusionary language of section 365(c)(1) of the Bankruptcy Code.

In reviewing a trustee's or debtor-in-possession's decision to assume or reject an executory contract, a court considers the contract and surrounding circumstances and "appl[ies] its best `business judgment' to determine if it would be beneficial or burdensome to the estate to assume it." In re Orion Pictures Corp., 4 F.3d 1095, 1099 (2d Cir. 1993). In this regard, the court generally defers to the business judgment of the debtor's management. In re Rodizio, 204 B.R. 417, 424 (Bankr. S.D.N.Y. 1997).

Enron contends that it has exercised its sound business judgment and determined that the assumption and assignment of the Agreement is in the best interest of its estate and creditors. Enron notes that binding Crosscountry to the Agreement was contemplated favorably at the hearing concerning the Crosscountry Transaction, and that the assignment provides certainty with respect to the Citrus Capital Stock and, therefore, value to Enron's estate.

Enron has shown that it is an exercise of its sound business judgment to assume and assign the Agreement to CrossCounry, and the assumption and assignment of such Agreement in accordance with section 365 of the Bankruptcy Code is in the best interests of Enron, its estate and creditors. The assumption and assignment is also necessary in connection with the Crosscountry Transaction. Therefore, Enron's assumption and assignment of the Agreement pursuant to section 365 of the Bankruptcy Code is authorized and approved.

The Court has considered the pleadings filed and the record of the hearing held on November 20, 2003 and the record of the entire case. Based upon the foregoing, and it appearing that due and proper notice of the Motion has been given and no further notice is required, and good and sufficient cause appearing, and the Court having determined that all objections to the Motion and the relief requested therein that have not been withdrawn, waived or settled, and all reservations of rights included therein, are overruled on the merits; it is hereby

Ordered, the Motion is granted; and it is further

Ordered, that Enron is authorized to execute and deliver to Crosscountry such documents or other instruments as may be necessary to assign and transfer the Agreement to Crosscountry in accordance with this Order; and it is further

Ordered, that the Agreement shall be transferred to, and remain in full force and effect for the benefit of, Crosscountry in accordance with its terms, notwithstanding any provision in the Agreement that prohibits, restricts, or conditions such assignment or transfer, including without limitation, the consent provision in Section 21 of the Agreement, which constitutes an unenforceable anti-assignment clause, and those described in sections 365(b)(2) and (f) of the Bankruptcy Code; and it is further

Ordered, that pursuant to section 365(k) of the Bankruptcy Code, upon assumption and assignment of the Agreement by Enron to Crosscountry, (a) the Debtors and their respective estates are relieved from any further obligation or liability for any breach of the Agreement occurring after such assumption and assignment, (b) Crosscountry shall be substituted for Enron, and shall assume all of Enron's rights and obligations, as a Principal under the Agreement, including where any references occur to either Enron or INI in the Agreement, as applicable, and (c) Enron shall be fully released, and shall cease to have any rights or obligations pursuant to the Agreement (as such rights and obligations will be assigned to Crosscountry); and it is further

Ordered, that upon the Assignment of the Agreement by Enron to Crosscountry, the El Paso Entities shall be forever barred from asserting cure or other amounts with respect to the Agreement against the Debtors, and Crosscountry shall have no liability or obligation with respect to any default or obligation arising or accruing under the Agreement prior to such date; and it is further;

Ordered, that Crosscountry is not assuming, nor shall it in any way whatsoever be liable or responsible as a successor or otherwise, for any liabilities, debts, commitments or obligations (whether known or unknown, disclosed or undisclosed, absolute, contingent, inchoate, fixed or otherwise) of any party to the Agreement in any way whatsoever relating to or arising from the Agreement on or prior to the assignment of the Agreement by Enron to Crosscountry; and it is further

Ordered, that no person or entity shall take any action to prevent, enjoin or otherwise interfere with the consummation of the transaction contemplated by the Motion; and it is further

Ordered, that the Bankruptcy Court shall retain jurisdiction to hear and determine all matters arising from the interpretation, implementation and enforcement of this Order, the assumption and assignment of the Agreement by Enron to Crosscountry, the Agreement and any disputes arising from, and all documents executed, in connection therewith.