Entrust Energy, Inc. v. Shell Energy N. Am. (U.S.)

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IN RE: ENTRUST ENERGY, INC., et al., Debtors.

ENTRUST ENERGY, INC., et al., v. SHELL ENERGY NORTH AMERICA (US), L.P., et al., Defendants.

No. 21-31070

Adversary No. 21-3930

United States Bankruptcy Court, S.D. Texas, Houston Division

June 6, 2023

CHAPTER 11

MEMORANDUM OPINION

MARVIN ISGUR, UNITED STATES BANKRUPTCY JUDGE

The trustee of the Liquidating Trust in the Entrust chapter 11 bankruptcy filed this adversary proceeding, claiming damages from Shell's allegedly improper termination of its agreements with Entrust during Winter Storm Uri. (ECF No. 154 at 2). Shell filed a motion to dismiss some of Entrust's claims. (ECF No. 157). Shell asks the Court to dismiss Entrust's allegation that it was the Non-Defaulting Party under the EEI Master Agreements (collectively, the "EEI"). (ECF No. 157 at 6). Shell further asks to dismiss Counts II through VII in their entirety. (ECF No. 157 at 6). For the reasons stated below, the Court denies the motion to dismiss Entrust's allegation that it was the Non-Defaulting Party under the EEI, but grants the motion to dismiss Counts II through VII.

BACKGROUND

The parties dispute whether Shell improperly terminated its contractual relationship with Entrust during Winter Storm Uri under the terms of the parties' agreements. Resolving that issue requires an understanding of the terms of the parties' agreements and the parties' actions during Winter Storm Uri.

I. The Agreements

Entrust Energy was a Texas-based retail energy company. (ECF No. 154 at 6). Prior to Uri, Shell and Entrust entered into agreements memorializing an energy financing and supply arrangement in which Shell would provide both financial services and a supply of energy to Entrust. (ECF No. 154 at 7). Agreements effective as of July 31, 2019 memorialized this relationship between the parties. (ECF No. 154 at 8). The agreements relevant to this dispute are the Global Agreement and the EEI Master Agreements.

The Global Agreement governs the contractual relationships between the counterparties in relation to the various other agreements, such as loan and energy supply agreements. (ECF No. 154 at 7). The EEI agreements were entered into pursuant to the Global Agreement. They are central to this adversary proceeding. (ECF No. 154 at 9). Each EEI obligated Shell to sell electric power to Entrust for use in its retail energy business. (ECF No. 154 at 9). The EEI is an industry-standard form with a cover sheet which the parties used to add to or amend some of the form's terms. (ECF No. 154 at 9). According to Entrust, the structure created by the Global Agreement and EEI enabled Entrust to purchase energy at a fixed rate to reduce the risk of exposure to fluctuations in purchase costs from ERCOT-controlled markets. (ECF No. 154 at 9).

The Global Agreement required Entrust to report information concerning its financial affairs to Shell on an ongoing basis. (ECF No. 154 at 9-10). This included periodic reporting on updates to its Risk Policy. (ECF No. 154 at 10). Section 3.17 of the Global Agreement required Entrust to adopt and comply with a Risk Policy and restricted modifications to it absent Shell's consent. (ECF No 30-1). In relevant part, Entrust's Risk Policy mandated that Entrust create load forecasts. Based on the load forecast, Entrust would report to Shell if Entrust's hedging fell out of certain, prescribed ranges.^[1] Entrust was required to seek the approval of certain Entrust principals (e.g., the CEO or VP of Finance) to engage in supply transactions that would restore the hedging to the prescribed ranges.

Section 7.1 of the Global Agreement defines "Event of Default" to mean, among other things, Entrust's violation of the Risk Policy provision or Entrust becoming bankrupt. (ECF No. 30-1 at 13).

Section 10.12 of the Global Agreement provides that any communication or notice required under the EEI must adhere to the noticing requirements in that agreement. If the relevant Transaction Agreement lacks particularized notice requirements, then

such notice or other communication shall be in writing and may be delivered by hand delivery, overnight courier service, facsimile or e-mail. Notice by facsimile, e-mail or hand delivery shall be effective as of the close of business on the day actually received, if received during business hours on a Business Day, and otherwise shall be effective at the close of business on the next Business Day.

(ECF No. 30-1 at 18). The Global Agreement provides specific addresses to which notice must be sent. (ECF No. 30-1 at 19).

The Cover Sheet to the EEI incorporates the term "Event of Default" as defined in the Global Agreement.^[2] (ECF No. 30-2 at 6). It adds to the definition

the failure to perform any material covenant or obligation set forth in this Agreement (except to the extent constituting a separate Event of Default, and except for such Party's obligations to deliver or receive the Product, the exclusive remedy for which is provided in Article Four) if such failure is not remedied within three (3) Business Days after written notice . . .

(ECF No. 30-3 at 18).

This language expressly carves out from the definition of Event of Default the failure to deliver Product.^[3] (ECF No. 30-3 at 18). Instead, section 4.1 of the EEI deals with the parties' remedies for the failure to deliver or receive Product. (ECF No. 30-3 at 17). If Shell failed to deliver Product, Entrust could invoice Shell for the Replacement Price of getting the Product elsewhere. These remedies do not include termination rights or the right to choose an Early Termination Date, which are remedies only available under Article 5. (ECF No. 30-3 at 17).

Upon an Event of Default (capital "E," capital "D"), the Non-Defaulting Party has certain rights under section 5.2 of the EEI. (ECF No. 30-3 at 19). A party is considered the "Non- Defaulting Party" and endowed with such rights only in the event of a defined Event of Default. (ECF No. 30-3 at 19). If an Event of Default occurs, the Non-Defaulting Party may

designate a day, no earlier than the day such notice is effective and no later than 20 days after such notice is effective, as an early termination date ("Early Termination Date") to accelerate all amounts owing between the Parties and to liquidate and terminate all, but not less than all, Transactions (each referred to as a "Terminated Transaction") between the Parties, (ii) withhold any payments due to the Defaulting Party under this Agreement and (iii) suspend performance.

(ECF No. 30-3 at 19).

The EEI then directs the Non-Defaulting Party to "calculate, in a commercially reasonable manner, a Settlement Amount for each such Terminated Transaction as of the Early Termination Date." (ECF No. 30-3 at 19). The Settlement Amount is netted against any amounts owed by the Non-Defaulting party to the Defaulting Party to arrive at a Termination Payment amount. (ECF No. 30-3 at 19). The Non-Defaulting Party must then provide notice to the Defaulting Party of the Termination Payment amount, and payment must be made within two business days after effective notice. (ECF No. 30-3 at 19). The Defaulting Party may challenge the Termination Payment calculation within two business days of receipt of the Non-Defaulting Party's calculation if the Defaulting Party provides a "detailed written explanation of the basis for such dispute." (ECF No. 30-3 at 20).

Section 6.3 of the EEI provides that, if a party disputes an "invoice," any undisputed portion of that invoice must still be made when due. (ECF No. 30-3 at 21).

Section 10.7 (and the related amendments expressed in the cover sheet) lays out the proper termination notice procedure under the EEI:

All notices, requests, statements or payments shall be made as specified in the Cover Sheet. Notices (other than scheduling requests) shall, unless otherwise specified herein, be in writing and may be delivered by hand delivery, United States mail, overnight courier service or facsimile. Notice by facsimile or hand delivery shall be effective at the close of business on the day actually received, if received during business hours on a Business Day, and otherwise shall be effective at the close of business on the next Business Day. Notice by overnight United States mail or courier shall be effective on the next Business Day after it was sent.

(ECF No. 30-3 at 30). The Cover Sheet provides the addresses for properly providing notice of default or termination. (ECF No. 30-2 at 2).

Finally, Shell and Entrust were counterparties to various financial agreements (loan agreements, security agreements, a promissory note, etc.) which Entrust alleges afforded Shell a high degree of control over Entrust's business. (ECF No. 154 at 11-12).

II. Winter Storm Uri

ERCOT (the Electric Reliability Council of Texas) controls the electricity grid for the entire state and oversees the markets that retailers use to purchase and sell energy. (ECF No. 154 at 12). ERCOT, for all intents and purposes, controls the price point for electric power across Texas. Rather than pay ERCOT-controlled market prices, many retailers elect to work with wholesale suppliers, with which the retailer can negotiate a set (or at least more stable) price. Shell acted as a wholesaler: Entrust, a retailer, purchased its supply through Shell's wholesale business reselling the power to end users. (ECF No. 154 at 12).

Winter Storm Uri hit Texas in February of 2021. (ECF No. 154 at 12). Uri forced ERCOT to make quick, difficult decisions regarding the balance between load (demand) and generation (supply) as the events of the storm unfolded. (ECF No. 154 at 12). Because of the high demand for electricity, prices soared to record levels. (ECF No. 154 at 12). Entrust alleges that throughout Uri, and in compliance with...