Natixis Funding Corp. v. GenOn Mid-Atlantic, L.L.C. (In re GenOn Mid-Atlantic Dev., L.L.C.)

42 F.4th 523

IN RE GENON MID-ATLANTIC DEVELOPMENT, L.L.C. Debtor,

Natixis Funding Corporation, Appellant,

v.GenOn Mid-Atlantic, L.L.C., Appellee.

No. 21-20557

United States Court of Appeals, Fifth Circuit.

FILED July 29, 2022

Mark R. Trachtenberg, Natasha Belle Breaux, Haynes & Boone, L.L.P., Houston, TX, Neil Stephen Binder, Binder & Schwartz, L.L.P., New York, NY, Daniel Luke Geyser, Esq., Haynes & Boone, L.L.P., Dallas, TX, for Appellant.

Zack Allen Clement, Esq., Houston, TX, Ravi Subramanian Shankar, Kirkland & Ellis, L.L.P., Chicago, IL, for Appellee.

Before Smith, Wiener, and Southwick, Circuit Judges.

Jerry E. Smith, Circuit Judge:

GenMa is a power company that, long ago, leased two coal-fired power plants from the Lessors. To comply with those leases, GenMa paid NFC $130 million to insure the Lessors up to that sum if GenMa didn't pay rent. Too late, NFC realized it had promised the Lessors more than $130 million. The Lessors forced NFC to honor its promise, and NFC sued GenMa and others for its losses.

GenMa removed NFC's claims to the Southern District of New York, which then transferred those claims to a bankruptcy court in Texas. After losing there and at the district court, NFC appeals. It says that its claims against GenMa should return to New York state court because the federal court lacked jurisdiction or because federal law required abstention. NFC also insists, pressing four contract-law theories, that GenMa must cover NFC's losses.

We disagree. The district court had jurisdiction; abstention was not required; and NFC's claims lack merit.

I.

The defendant-appellee is GenOn Mid-Atlantic—GenMa for short. GenMa operates several power plants in Maryland.¹ The firm is a subsidiary of GenOn Energy and NRG Energy, one of the largest retail power companies in America.

About two decades ago, GenMa leased two coal-fired power plants from various entities, whom we will call the Lessors.² In those leases, GenMa made two promises. First , GenMa agreed not to grant any liens on its assets. Second , GenMa agreed to obtain credit for the Lessors to secure six months' worth of rent payments, but GenMa would not grant liens on its own assets to collateralize that credit. That restriction ensured that the Lessors' drawing that credit would not diminish GenMa's ability to pay rent.

For years, GenMa got that credit support from its corporate parent, GenOn Energy ("GenOn"). Things changed in 2016. GenMa had obtained, for the Lessors, letters of credit from JP Morgan Chase. But those letters were expiring soon, and GenOn, which had backed them, was struggling to pay its own bills. Because of GenOn's distress, NRG, which owned GenOn and GenMa, declined to back new letters of credit. And GenMa had no other investment-grade affiliates that could guarantee its rent.

Needing another way to post credit for the Lessors, GenMa turned to its strengths. At the time, it was financially stable and had some cash on hand, so it decided to buy a letter of credit.

GenMa took its proposal to Natixis Funding Corporation ("NFC"), the plaintiff-appellant. A subsidiary of a large French bank, NFC sells letters of credit and other structured financial products. Mindful of the leases, GenMa insisted on "structur[ing]" its purchase "as a prepayment" and not as "a cash collateralized instrument." GenMa even shared its leases with NFC's team, highlighting the "qualifying credit support requirements." Both sides engaged sophisticated representatives for the negotiations.

Two months later, after exchanging multiple drafts, GenMa and NFC inked the Payment Agreement, under which GenMa paid NFC $130 million plus a $1.4 million letter-of-credit fee. The $130 million sum reflected the greatest amount of credit that GenMa had to provide the Lessors in one lease period. In exchange, NFC promised to obtain letters of credit from its New York affiliate, which we will call Natixis, for the Lessors. If the letters went undrawn, NFC would pay up to $130 million in rent to the Lessors on GenMa's behalf. If the letters were drawn, NFC would reimburse Natixis for those draws.

Reflecting GenMa's need to avoid creating a lien, which its leases proscribed, the Payment Agreement repeatedly disclaimed GenMa's interest in the $130 million payment to NFC. That payment, the Agreement stressed, was "in full," upfront, and "irrevocabl[e]." GenMa, it continued, renounced any "interest, claim, reversionary or residual interest" in the payment. The Agreement also assured that NFC would bear all risk and reward on the payment. NFC would receive "any returns, interest, gains[,] or other earnings" that accrued and would assume all risk of the payment's loss. And the parties "understood and agreed that ... the [$130 million] has been indefeasibly paid by [GenMa] to NFC." (Emphasis added.)

The Agreement protected NFC in three relevant ways.

First , the Agreement capped NFC's duty to pay rent or to allow credit draws at each Lessor's share of $130 million—GenMa's payment amount. The Agreement called that share the "Excess Capacity of Lessor." Letter-of-credit draws by, or lease payments to, a Lessor would reduce its "Excess Capacity." When that capacity reached zero, NFC's duties to pay rent or to provide letters of credit to that Lessor would cease.

Second , GenMa warranted that the Payment Agreement didn't breach its promises to the Lessors, including the promise not to incur liens to secure their credit support. If GenMa breached that warranty, it would indemnify NFC against costs incurred to enforce its rights under the agreement.

Third , GenMa agreed to indemnify NFC against losses from "judicial proceeding[s] ... brought or threatened" by third parties. But that indemnity excluded, among other things, "any reimbursement obligation to ... any ... Person in respect of any" lease payment or letter-of-credit disbursement.

After NFC and GenMa executed the Payment Agreement, Natixis issued letters of credit to the Lessors. But those letters covered all lease periods—over $2 billion in rent—and did not cap draws as the Agreement allowed.

Immediately, several Lessors questioned whether the Natixis letters complied with the leases' credit-support requirement. They objected that GenMa had used its own cash to buy the letters. In early 2017, five Lessors noticed GenMa's default and directed their representative, the indenture trustee, to draw $125 million on the JP Morgan letters of credit before they expired. The trustee duly drew the funds and escrowed the proceeds.

After those draws, GenMa and the Lessors sued each other in New York state court, disputing whether the Natixis letters of credit complied with GenMa's leases.³ The Lessors' suit included, as defendants, GenMa's corporate parents, GenOn and NRG.

In June 2017, days after the Lessors sued, GenOn and several subsidiaries—but not GenMa—filed for bankruptcy in the Southern District of Texas. GenOn soon moved the bankruptcy court to estimate the value of the Lessors' claims against it at zero dollars. That motion required the bankruptcy court to examine the credit-support requirement in GenMa's leases. After discovery, the bankruptcy judge held a ten-day trial and granted GenOn's motion, valuing the Lessors' claims against GenOn at zero dollars.

In December, the parties to the state-court suits—notably GenMa, GenOn, and the Lessors—outlined the terms of a settlement. They agreed to release all claims against each other. In exchange, GenMa promised to pay off the Lessors' debt on the leases with cash and debt, keeping at least $25 million in cash on hand.⁴ The bankruptcy court then enshrined the settlement term sheet in GenOn's reorganization plan. The settlement, the court explained, thwarted "complex and protracted litigation" that could "derail the Debtors' reorganization efforts."

Flashback to June, just after GenOn's bankruptcy filing. When GenMa's rent came due at the end of that month, GenMa asked the Lessors' trustee to use the proceeds of the JP Morgan letters, which remained escrowed, to cover its rent. The trustee refused and, when GenMa did not pay rent, drew $125 million on Natixis's letters. Natixis honored those draws, which NFC duly repaid.

At that point, NFC and Natixis realized that they were overexposed. They already had paid the Lessors $125 million. Yet they had promised the Lessors tens of millions more in credit support for the next lease period. So if the Lessors drew on the letters again, the liability of NFC and Natixis could far exceed $130 million.

Alarmed, Natixis terminated the letters of credit, giving sixty days' notice as the letters required. But before that time could run, the Lessors tried to draw another $50 million on the letters. Natixis refused to honor those draws. Instead, Natixis and NFC sued the Lessors, the indenture trustee, and GenMa, in New York state court.

This appeal concerns only NFC's claims against GenMa.⁵ NFC asserted two contract claims: NFC first claimed that GenMa had breached its warranty that their Agreement did not break GenMa's promises to the Lessors—namely, GenMa's promise not to use its own assets to secure the Lessors' credit support. NFC next asserted a breach of the implied covenant of good faith and fair dealing.

Contending that those claims "related to" GenOn's bankruptcy, 28 U.S.C. § 1334(b), GenMa removed them to the Southern District of New York under § 1452. GenMa then moved to transfer those claims to the Southern District of Texas for resolution before the bankruptcy judge managing GenOn's reorganization. GenMa pointed out that the bankruptcy judge had evaluated the Lessors' claims regarding the same lease provisions during the claims-estimation trial. "No court," GenMa reasoned, "is more familiar with the legal and factual issues underlying the Removed Claims than the Texas Bankruptcy Court."

NFC moved to remand to state court. It pointed out that GenOn, not GenMa, was bankrupt, and that GenOn had confirmed its reorganization plan. NFC also claimed that the dispute...