PETER J. MESSITTE, District Judge.
TransCanada Pipelines Ltd. ("TransCanada") has appealed a decision of the United States Bankruptcy Court, rendered following a nine-day bench trial, issued in In re USGen New England, Inc. ("USGen"), Reorganized Debtor, Case No. 03-30465 (Bankr. Md.). USGen has cross-appealed. The Court has jurisdiction over the parties' appeals pursuant to 28 U.S.C. § 158(a). For the following reasons, the Court
The facts of the case are set out in great detail in the Bankruptcy Court's opinion of April 1, 2010. See In re USGen New England, Inc., Reorganized Debtor, 429 B.R. 437 (Bankr.Md.2010). Rather than engaging in a similarly exhaustive recitation here, the Court will relate only those facts it considers critical to the disposition of this appeal. The Court will begin with a synopsis of the undisputed and disputed facts, summarize the findings of the Bankruptcy Court that have been challenged on appeal, then address the Bankruptcy Court's ultimate conclusions.
The undisputed facts are these:
TransCanada is a Calgary, Alberta-based company engaged in the natural gas pipeline business. Among other activities, it owns and operates the Canadian Mainline pipeline (the "Mainline"), a 14,898-kilometer natural gas transmission system that extends from the Alberta-Saskatchewan border in the west to the Quebec-Vermont border in the east, where it connects with other natural gas pipelines in Canada and the United States. The Mainline transports natural gas from west to east using a series of compressors installed at various points along its path. TransCanada contracts with customers, known as "shippers," who provide natural gas for TransCanada to transport at specified receipt points; TransCanada then delivers the gas in the amounts provided at delivery points designated by contract. Generally speaking, a shipper pays a charge, known as a demand toll, for the right to ship gas up to a maximum amount specified in its contract with TransCanada.
TransCanada sells most of its capacity on the Mainline through an auction process known as an "existing capacity open season." By posting an existing capacity open season notice, TransCanada announces to potential shippers the amount of capacity available along a particular segment of the Mainline and specifies the date by which bids for that capacity must be received. At the close of an existing capacity open season, TransCanada ranks the bids submitted and awards posted capacity in accordance with procedures outlined in its Transportation Access Procedure (the "TAP"). The bid-ranking procedures are designed to maximize TransCanada's revenue over the long term and ensure that capacity is awarded to the shippers that desire it the most.
Most of TransCanada's operations, including operation of the Mainline, are regulated by the National Energy Board of Canada (the "NEB"). Among other things, the NEB: (1) reviews and approves, for each calendar year, the tolls that TransCanada will charge its shippers for the transport of natural gas along the Mainline;
Pursuant to this regulatory scheme, TransCanada may not ordinarily sell capacity on the Mainline unless it first posts
Although expansion of capacity via the construction of new facilities requires NEB approval, TransCanada may, without regulatory approval, temporarily increase capacity on the Mainline through a mechanical alteration process known as "re-aeroing." As noted supra, the Mainline transports natural gas from west to east using a series of compressors installed at various points along its path. TransCanada may "re-aero"—i.e., mechanically alter—any one of these compressors either to: (1) increase pipeline efficiency and operational flexibility, with a resulting reduction in pipeline capacity; or (2) increase pipeline capacity, but with a resulting reduction in pipeline efficiency and operational flexibility.
USGen was a Bethesda, Maryland-based energy company that owned electricity-generating facilities in New England and bought and sold electricity and energy-related products. Beginning in 1992, USGen entered into a contract with TransCanada, whereby USGen reserved 53,904 GJ/d of capacity on the Mainline from a receipt point at Empress, Alberta to a delivery point near Waddington, New York (the "Empress to Iroquois path"). The contract, which was to run from early 1992 through October 31, 2006, obligated USGen to pay demand tolls reflecting the cost of transporting gas from Empress to Iroquois, as well as a commodity charge whenever it actually shipped gas. The contract is governed by Canadian law.
On July 8, 2003 (the "petition date"), USGen filed a voluntary petition in the Bankruptcy Court of this District, seeking relief under Chapter 11 of the Bankruptcy Code.
At the time the USGen contract was rejected, TransCanada was in the middle of a "combined open season," so called because it was both an existing capacity open season and a new capacity open season. Prior to the rejection of the USGen contract, TransCanada had posted the availability of 100,000 GJ/d of capacity on the Empress to Iroquois path. On September 15, 2003, three days after the Bankruptcy Court authorized rejection of the USGen contract and three days before the combined open season was scheduled to end, TransCanada amended its open season notice to announce an increase in available capacity on the Empress to Iroquois path of 50,000 GJ/d, resulting in 150,000 GJ/d of total available capacity. The purpose of the amendment was to include the 53,904 GJ/d—rounded to 50,000 GJ/d—of capacity "turned back" by USGen as a result of the contract rejection (the "turnback capacity"). Six days after the combined open season ended, TransCanada issued a notice declaring, "TransCanada Open Season a Success." That notice read, in part: "Given market interest in the open season, we are pleased to share some of the preliminary results. Although specific details cannot be revealed until final contracts are signed, there was considerable interest expressed for space on the Mainline, and in some areas, available capacity was oversubscribed." Bankr. R., TransCanada Ex. 114K, at 1.
Pursuant to the bid-ranking methodology outlined in the TAP,
----------------------------------------------------------------------------------------- Demand Toll Volume (Monthly Duration Evaluation (Toll Rank Shipper (GJ/d) $ per GJ) (Months) × Duration) ----------------------------------------------------------------------------------------- 1 St. Lawrence Gasa 3,400 $35.73 60 $ 2,143.77 ----------------------------------------------------------------------------------------- 2 Gaz Metro 40,000 $10.53 120 $ 1,263.47 ----------------------------------------------------------------------------------------- 3 Gaz Metro 20,000 $ 8.33 120 $ 999.60 ----------------------------------------------------------------------------------------- 4 NJR Energy Services 40,000 $ 8.53 89 $ 8.82 ----------------------------------------------------------------------------------------- 5 Nexen 2,500 $34.51 17 $ 86.68 ----------------------------------------------------------------------------------------- 6 Nexen 12,500 $32.80 17 $ 557.58 -----------------------------------------------------------------------------------------
Because, following these awards, TransCanada still had capacity available on the Empress to Iroquois path, it subsequently initiated a "daily open season,"
On October 20, 2003, TransCanada issued notice of another existing capacity open season, which included the posting of an additional 38,800 GJ/d of capacity along the Empress to Iroquois path. However, just three days later, on October 23, 2003, TransCanada realized that it had miscalculated the remaining available capacity from Empress to Iroquois and that, in fact, no such capacity remained. Accordingly, it amended its open season notice to show zero available capacity from Empress to Iroquois. It also issued the following message: "TransCanada is revising this open season for firm capacity. Upon further assessment and analysis, it has been concluded that there is no more capacity available to Iroquois. The posted capacity from Empress to Iroquois has been amended to zero. We apologize for any inconvenience this may have caused." Bankr. R., TransCanada Ex. 114O, at 1.
From November 2003 through October 2006, when TransCanada's contract with USGen would have expired, TransCanada issued numerous open season notices, none of which offered existing capacity from Empress to Iroquois. In December 2003, however, TransCanada initiated a new capacity open season, which offered new capacity to commence on November 1 in each of the three years 2004, 2005, and 2006. In February 2004, it issued another new capacity open season offering new
The disputed facts relate to the question of whether, and to what extent, USGen is entitled to mitigation credit for contracts TransCanada entered into with other shippers after the Bankruptcy Court authorized rejection of the contract between TransCanada and USGen.
According to TransCanada, any contracts consummated after rejection of the USGen contract do not constitute mitigation because, absent USGen's breach, TransCanada could have serviced both those additional contracts and USGen's contract. Accordingly, on appeal, TransCanada challenges several of the Bankruptcy Court's findings:
First, the Bankruptcy Court found that there was "surging demand" for capacity on the eastern end of the Mainline and in the U.S. northeast in late 2003 and early 2004, such that, if TransCanada had offered additional available capacity for sale during that time period, it would have sold it. In support of this finding, the Bankruptcy Court noted, among other things, that: (a) TransCanada quickly sold the capacity it offered for sale on the Empress to Iroquois path, including the USGen turnback capacity, in the September 2003 combined open season and the October 2003 daily open season; (b) during the October 2003 daily open season, Nexen purchased all 38,800 GJ/d of capacity on the Empress to Iroquois path on the same day that it was posted; (c) in February 2004, TransCanada posted and successfully sold 100,000 GJ/d of new capacity on the Empress to Iroquois path; (d) TransCanada's own notices to shippers indicated that there was "considerable interest expressed for space on the Mainline" in September 2003, Bankr. R., TransCanada Ex. 114K, at 1, and that the capacity offered on the Empress to Iroquois path during the October 2003 daily open season had "sold out," id. at TransCanada Ex. 114M, at 1; (e) in September 2003, Craig Few, TransCanada's Vice President—Gas Transmission East, stated in a notice to shippers that "[t]here is no question that we are connected to strong and growing markets in eastern Canada and the U.S. northeast, which we anticipate will drive requirements for additional capacity," id. at TransCanada Ex. 114K, at 1; and (f) a TransCanada witness testified at trial that, in late 2003, TransCanada was "seeing increased demand for capacity [on] the eastern end of its system," id. at Trial Tr. 1648:18-1649:1, Mar. 10, 2008 (testimony of Thomas Robinson).
Second, the Bankruptcy Court found that: (a) the September 2003 and October 2003 Nexen contracts represented the last capacity sold on the Empress to Iroquois
Third, the Bankruptcy Court rejected TransCanada's factual assertion that, absent USGen's breach, it could have satisfied both the USGen contract and the Nexen contracts by re-aeroing the Stittsville compressor and thereby increasing capacity on the Mainline. The Bankruptcy Court rejected TransCanada's re-aeroing theory because: (a) TransCanada's assertion that it could have re-aeroed the Stittsville compressor was not credible since, despite surging demand in late 2003 and early 2004, it did not in fact pursue re-aeroing during that time period;
Fourth, the Bankruptcy Court rejected TransCanada's assertion that it could have treated Gaz Metro's bids as bids for new capacity (as opposed to existing capacity), thus freeing up the 60,000 GJ/d allocated to Gaz Metro and permitting TransCanada to service the Nexen contracts even without the USGen turnback capacity. The Bankruptcy Court based its rejection of this theory on, among other evidence, the testimony of USGen's expert, who opined that the Gaz Metro bids constituted bids for existing—as opposed to new—capacity, see Bankr. R., Trial Tr. 1002:2-9, Mar. 6, 2008 (testimony of Peter Milne), and also on one of TransCanada's own documents,
Fifth, and finally, the Bankruptcy Court rejected as factually unsupportable TransCanada's assertion that, if USGen is entitled to any mitigation credit at all, its credit should be limited to an amount reflecting only a very short distance along the Mainline. As noted supra, the Mainline is some 14,898 kilometers in length and runs from Empress, Alberta in the west to the Quebec-Vermont border in the east, where it connects with other natural gas pipelines in Canada and the United States. According to TransCanada, it had, both at the time of USGen's breach and throughout the remainder of the term of its contract with USGen, substantial excess capacity in the western segments of the Mainline—from Empress in the far west to the so-called "Triangle," a loop of interconnecting pipe near the eastern end of the Mainline that includes the Stittsville compressor and Iroquois. TransCanada further claims that the "bottleneck" on the Mainline occurred near the Stittsville compressor, which is only a short distance from the end of the Empress to Iroquois path, and that—because tolls on the Mainline are primarily distance-based—USGen should receive mitigation credit, if at all, only for the amount of the Nexen contracts attributable to the short distance along the far eastern end of the Mainline. The Bankruptcy Court, however, rejected this assertion, concluding that "[n]othing in the record supports the notion that Nexen Marketing would have accepted a contract in September or October 2003 only from Empress to [the Triangle]. Indeed, the record establishes that such a notion is factually unsupportable." USGen, 429 B.R. at 487. Specifically, the Bankruptcy Court found no plausible evidence in the record suggesting that Nexen would have accepted a contract for delivery at any point short of its contracted-for delivery point east of Iroquois. The Bankruptcy Court further noted that, were it to adopt TransCanada's partial mitigation theory, TransCanada would, contrary to Canadian law, end up in a better position than it would have been in absent USGen's breach, since it would receive the full value of its contract with USGen and all but a small portion of certain contracts (the Nexen contracts) it could not have obtained absent the breach. For these reasons, the Bankruptcy Court concluded that TransCanada's partial mitigation theory had no basis in the evidence or in Canadian contract law.
After making the factual findings outlined above and applying relevant law, the Bankruptcy Court concluded that: (1) USGen was entitled to mitigation credit for the combined value of the September 2003 and October 2003 Nexen contracts; (2) the value of TransCanada's claim should be discounted to the petition date; (3) TransCanada's claim should be converted to U.S. dollars as of the petition date;
This appeal followed.
On appeal, TransCanada argues that: (1) USGen is not entitled to any mitigation credit; (2) the Bankruptcy Court erroneously applied the Canadian legal standard for mitigation and, in so doing, improperly shifted the burden of proof from USGen to TransCanada; (3) the factual findings supporting the Bankruptcy Court's conclusion that TransCanada could not have serviced the Nexen contracts absent USGen's breach were clearly erroneous;
USGen argues that the Bankruptcy Court's decision should be affirmed in all respects, save one. According to USGen, TransCanada is not entitled to any damages at all—not even the $4,643,700 that the Bankruptcy Court ultimately awarded— because TransCanada's regulatory system fully insulated it from the consequences of USGen's breach. Thus, USGen asks the Court to reverse the Bankruptcy Court and deny TransCanada's claim in its entirety.
A district court reviews conclusions of law made by a bankruptcy court de novo. See Cypher Chiropractic Ctr. v. Runski, 102 F.3d 744, 745 (4th Cir.1996). The bankruptcy court's findings of fact, however, "shall not be set aside unless clearly erroneous." Fed. R. Bankr.P. 8013; see also In re Bryson Props., XVIII, 961 F.2d 496, 499 (4th Cir.1992). A finding of fact is clearly erroneous when, "although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)). The clearly erroneous standard "plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have decided the case differently." Bessemer City, 470 U.S. at 573, 105 S.Ct. 1504. Indeed, the "reviewing court oversteps the bounds of its duty ... if it
A bankruptcy court's determination of foreign law is a conclusion of law and is therefore subject to de novo review. See In re Qimonda AG Bankr. Litig., 433 B.R. 547, 565 n. 28 (E.D.Va.2010) (stating that foreign law determinations by bankruptcy courts are treated as questions of law requiring de novo review); see also Fed. R. Bankr.P. 9017 (stating that Federal Rule of Civil Procedure 44.1 applies in bankruptcy proceedings); Fed.R.Civ.P. 44.1 (stating that a court's determination of foreign law "must be treated as a ruling on a question of law"). When determining foreign law, a court "may consider any relevant material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence." Fed.R.Civ.P. 44.1; see also Faggionato v. Lerner, 500 F.Supp.2d 237, 244 (S.D.N.Y.2007) ("In acting under Rule 44.1, a court may reject even uncontradicted expert testimony and reach its own decisions on the basis of independent examination of foreign legal authorities.").
The Court considers the various arguments advanced by TransCanada.
The crucial issue in this case is whether, and to what extent, USGen is entitled to mitigation credit for contracts TransCanada entered into with other shippers after the Bankruptcy Court authorized rejection of the contract between TransCanada and USGen. Because the parties agree that their contract is governed by Canadian law, resolution of this issue requires consideration of Canadian mitigation rules.
Under Canadian law, a non-breaching party has a duty to "take reasonable steps to mitigate its loss." British Columbia v. Canadian Forest Prods. Ltd., [2004] 2 S.C.R. 74, ¶ 106 (Can.). Thus, "[w]hen mitigation yields a sum of money equal to or greater than the original loss, the plaintiff has made himself whole, and cannot claim further from the defendant." Id.
To determine whether a non-breaching party has mitigated its loss by entering into a contract with a third party, Canadian law applies a "could have" test, meaning that, if the non-breaching party "could have" entered into the third-party contract even without the breach, then the third-party contract does not constitute mitigation reducing the amount owed. If, on the other hand, the non-breaching party could not have entered into the third-party contract absent the breach, then the third-party contract serves to reduce the amount of the breaching party's liability. The Supreme Court of Canada has articulated the standard thus:
Dawson v. Helicopter Exploration Co. Ltd., [1958] 12 D.L.R. (2d) 1, 10 (Can.) (emphasis added); see also Canadian Forest Prods., [2004] 2 S.C.R. 74, ¶ 107 ("[If] the plaintiff could, even in the absence of the wrong, have made the disputed profit[,]... it is treated as collateral. If not, it goes to reduce the plaintiff's loss." (quoting S.M. Waddams, The Law of Damages ¶ 15.800 (4th ed. 2004))).
In the present case, the parties agree that the "could have" test governs the determination of whether, and the extent
In TransCanada's view, USGen must prove not only that TransCanada sold the USGen turnback capacity and thereafter had no additional capacity available for sale; USGen must also show that TransCanada could not—under virtually any circumstances—have entered into the Nexen contracts absent USGen's breach. For instance, according to TransCanada, USGen must prove that TransCanada could not have taken certain hypothetical actions—such as re-aeroing the Stittsville compressor in late 2003 or early 2004, or treating the Gaz Metro bids as bids for new capacity—that might have enabled it to service these contracts absent the breach. TransCanada maintains that the Bankruptcy Court misapplied the mitigation standard and, in so doing, improperly shifted the burden of proof from USGen to TransCanada.
USGen's take as to the burden of proof is markedly different. Although it concedes that it has the burden of proving mitigation, it maintains that it met that burden by establishing that TransCanada in fact sold the USGen turnback capacity in the fall of 2003, and that TransCanada thereafter had no remaining capacity available for sale. Beyond that, says USGen, the burden of demonstrating that TransCanada could have taken certain hypothetical actions enabling it to service additional contracts absent USGen's breach would rest solely with TransCanada.
On this point, the Bankruptcy Court sided with USGen. Because neither party cited a case explicitly addressing whether a breaching party must disprove alternatives hypothetically available to the non-breaching party, the Bankruptcy Court relied in part on a widely-cited Canadian treatise on damages by Professor Stephen Waddams, a law professor at the University of Toronto. See S.M. Waddams, The Law of Damages (4th ed. 2004) (the "Waddams treatise").
Waddams, supra, at ¶ 13.120 (emphasis added). Thus, viewed in the context of the Canadian "could have" test described supra, see Dawson, [1958] 12 D.L.R. (2d) at 10, the mitigation standard articulated by the Waddams treatise essentially comes to this: Although the breaching party has the burden of proving mitigation, it initially discharges its burden by: (1) proving that the non-breaching party sold the goods or services in question at a price equal to or greater than the contract price; and (2) showing, based on reasonably obtainable information, that the non-breaching party did not have the ability (i.e., the capacity) to make the purportedly mitigating sale in the absence of the breach. At that point, in order to overcome the breaching party's showing, the non-breaching party would have to come forth with evidence that it in fact suffered a loss of profit by reason of the breach, i.e., that, absent the breach, it could have made two sales—one sale to the breaching party, and another sale to the party that ultimately purchased the goods or services in issue.
The Bankruptcy Court concluded that USGen's articulation of the Canadian mitigation standard, as set forth in the Waddams treatise, was essentially correct. See USGen, 429 B.R. at 479-80. It reached this conclusion for two reasons: First, in the Bankruptcy Court's view, none of the cases cited by TransCanada was consistent with the broad standard it urged the Bankruptcy Court to adopt. Id. at 471, 474. Second, the Bankruptcy Court concluded that adoption of TransCanada's understanding of the mitigation standard would impose a virtually insurmountable burden on a breaching party:
Id. at 471-72.
The Bankruptcy Court thus concluded that USGen had met its mitigation burden by proving that: (1) TransCanada sold the USGen turnback capacity in the fall of 2003; and (2) TransCanada thereafter had no remaining capacity available for sale because it: (a) had already sold everything it had posted, and (b) was barred from selling additional capacity without first posting it for sale in an open season. See id. at 479. The Bankruptcy Court then proceeded to consider the evidence relating to TransCanada's assertion that it could have serviced the Nexen contracts even without the USGen turnback capacity by either re-aeroing the Stittsville compressor or treating the Gaz Metro bids as bids for new capacity. See id. at 479-80.
In so holding, the Court emphasizes that it does not mean to suggest that the breaching party need only show that a subsequent sale was made. As the "could have" test would seem to require, and as the Waddams treatise suggests, the breaching party must also make at least some showing, based on reasonably obtainable information, that the non-breaching party did not have the ability (i.e., the capacity) to make the purportedly mitigating sale in the absence of the breach. See Manthos, [1994] 100 B.C.L.R. (2d) 76, ¶ 33 ("While the onus of establishing mitigation is upon the wrongdoer, ... that burden was discharged when the evidence disclosed re-rental, possibly at the same rate, and full or nearly full occupancy. After that, it became necessary for the lessor to prove its damages ....") (emphasis added). In other words, despite TransCanada's assertions to the contrary, the standard recognized by the Bankruptcy Court does not ignore the "could have" test; rather, it fully embraces that test insofar as it requires the breaching party to make at least some showing of the non-breaching party's lack of capacity for additional sales.
Here, USGen has shown more than just the fact that the turnback capacity was resold. It has also shown that,
That said, even if the Bankruptcy Court's interpretation of the Canadian mitigation standard was wrong—and the Court concludes that it was not—any error was almost certainly harmless. See In re Travelstead, 227 B.R. 638, 644 (D.Md.1998) (noting that the harmless error doctrine applies to a district court's review of the decision of a bankruptcy court). This is so for several reasons.
For one, it is undisputed that, at the close of USGen's case-in-chief, TransCanada moved for judgment on partial findings, pursuant to Federal Rule of Civil Procedure 52(c), on the grounds that USGen had failed to meet its burden of proof.
Moreover, it is well-established that, where both parties have offered evidence, and where there is no "evidentiary tie," any improper assignment of the burden of proof is harmless since "the party supported by the weight of the evidence will prevail regardless of which party bore the burden of persuasion, proof, or preponderance." Blodgett v. Comm'r, 394 F.3d 1030, 1039 (8th Cir.2005); see also Belk v. Charlotte-Mecklenburg Bd. of Educ., 269 F.3d 305, 328-29 (4th Cir.2001) (noting that, if the trial court improperly assigns the burden of proof on a particular issue, the error is harmless so long as the court's decision ultimately turned on the weight of all the evidence in the record and not on burden of proof rules) (internal citations omitted). In this case, while certain of the Bankruptcy Court's various factual determinations may have presented "close calls," this Court concludes that none was "clearly erroneous," and, on balance, that the sum of the evidence tilts in USGen's favor.
Finally, the Bankruptcy Court's decision reveals that it: (1) ultimately gave full consideration, over USGen's objection, to TransCanada's re-aeroing and Gaz Metro theories, see USGen, 429 B.R. at 480-87; and (2) concluded, based on the accumulation of evidence presented by both parties, that TransCanada could not in fact have serviced additional contracts either by reaeroing the Stittsville compressor or by treating the Gaz Metro bids as bids for new capacity, see id. at 480, 487. Absent some showing that those findings were clearly erroneous—a matter the Court addresses in more detail infra—reversal would not be appropriate.
The Court concludes that the Bankruptcy Court correctly applied the Canadian mitigation of damages standard, that the burden of proof on that issue was properly applied, and that, even if the Bankruptcy Court erroneously shifted the burden of proof, any error was harmless.
The Court next considers the extent to which, if at all, the Bankruptcy Court was clearly erroneous in its factual findings in support of its conclusion that TransCanada could not have serviced the Nexen contracts but for USGen's breach.
The Court begins with the Bankruptcy Court's factual finding that there was "surging demand" for capacity on the eastern end of the Mainline and in the U.S. northeast in late 2003 and early 2004.
The Bankruptcy Court based its finding primarily on the following observations: (1) TransCanada quickly sold the capacity
TransCanada argues that the Bankruptcy Court's finding of "surging demand" in late 2003 and early 2004 was wrong to the point of being clearly erroneous. It invites the Court's attention to the following record evidence: (1) a TransCanada witness testified at trial that, in the first half of 2003, there had been "a significant reduction in contracts on the [Mainline]," and that there was capacity available throughout the system, including on the Mainline's eastern end, see Bankr. R., Trial Tr. 1417:5-1424:4, Mar. 7, 2008 (testimony of Dean Ferguson);
To conclude that the Bankruptcy Court clearly erred in finding that there was "surging demand" on the eastern end of the Mainline in late 2003 and early 2004, the Court must be "left with [a] definite and firm conviction that a mistake has been committed." Bessemer City, 470 U.S. at 573, 105 S.Ct. 1504 (emphasis added). Indeed, under the clearly erroneous standard, the "reviewing court oversteps the bounds of its duty ... if it undertakes to duplicate the [fact-finding] role of the lower court." Id. Based on this standard of review, and the record evidence, the Court concludes that the Bankruptcy Court's factual determination on this particular issue was not clearly erroneous. While it is true that some evidence points away from a finding that demand for capacity on the Mainline was "surging" in the latter third of 2003, other substantial evidence shows that there was "significant market interest" in capacity during that period, and that TransCanada had little trouble selling the capacity it offered for sale on the Empress to Iroquois path in the September 2003 combined open season and the October 2003 daily open season. In short, the Court is not "left with a definite and firm conviction that a mistake has been committed" with respect to the Bankruptcy Court's finding that the demand for capacity on the eastern end of the Mainline in late 2003 and early 2004 was robust, which is to say, "surging."
TransCanada also challenges the Bankruptcy Court's use of TransCanada's bid-ranking procedures to determine which contracts were the last awarded in late 2003 and could not have been entered into absent the USGen turnback capacity, and which therefore should constitute mitigation of TransCanada's damages resulting from the breach. The Bankruptcy Court reasoned as follows:
USGen, 429 B.R. at 468-69.
Applying the TAP-mandated bid-ranking procedures, the Bankruptcy Court determined that the Nexen contracts were, as viewed by TransCanada itself, the least valuable to TransCanada and thus plausibly represented the last awarded on the Empress to Iroquois path during the fall of 2003. The Bankruptcy Court consequently used the value of the Nexen contracts—some $58.8 million
On appeal, TransCanada argues that the Bankruptcy Court's use of TransCanada's bid-ranking procedures was erroneous for at least three reasons. First, it argues that the TAP procedures "have nothing to do with mitigation," and are merely used to "ensure fair and equitable treatment" of all shippers bidding for TransCanada's services. Second, TransCanada maintains that the results produced by application of the TAP procedures do not necessarily mirror the revenue that TransCanada actually receives from its contracts, presumably because the amount of revenue ultimately realized will depend upon certain factors that cannot be determined at the time of contract award, such as whether shippers later decide to renew their contracts for longer periods of time.
Simply put, the Bankruptcy Court's task with respect to the issue of mitigation was to determine which contracts TransCanada could not have obtained absent USGen's breach. See Dawson, [1958] 12 D.L.R. (2d) at 10 (noting that, with respect to mitigation, the question is whether "the interest acquired by the damaged person is something he could not have been able to obtain if the contract had been carried out"). To complete that task, the Bankruptcy Court applied the very bid-ranking procedures TransCanada was required to apply, apart from the fact of the USGen breach. In so doing, the Bankruptcy Court in effect concluded that: (1) if USGen had not breached, TransCanada would only have had 100,000 GJ/d of capacity available for sale in the September 2003 combined open season so that, pursuant to its bid-ranking procedures, it would have had to turn away the two Nexen bids received during that period because those bids were ranked lower than all others and would have resulted in a total award in excess of the 100,000 GJ/d of capacity
TransCanada next challenges the Bankruptcy Court's rejection of its re-aeroing theory, i.e., that, absent USGen's breach, it "could have" satisfied both the USGen contract and the Nexen contracts by re-aeroing the Stittsville compressor, thereby increasing capacity on the Mainline. The Bankruptcy Court rejected this theory for three reasons—two factual and one legal. First, the Bankruptcy Court concluded, as a factual matter, that TransCanada's re-aeroing theory was not credible because, despite surging demand in late 2003 and early 2004, it did not in fact undertake re-aeroing during that time period. Second, also as a matter of fact, the Bankruptcy Court found that TransCanada could not have sold additional capacity theoretically available through re-aeroing because it did not post such capacity for sale in the fall of 2003, and there was a regulatory requirement prohibiting TransCanada from selling capacity on the Mainline without first posting the capacity for sale in an open season. Third, and finally, the Bankruptcy Court concluded as a matter of law that, assuming TransCanada somehow "could have" and "would have" re-aeroed the Stittsville compressor to increase capacity, the fact that it did not do so, and did not post such capacity for sale in late 2003, would have amounted to a failure to fulfill its duty to mitigate its damages resulting from USGen's breach, which, in consequence, may well have precluded it from recovering any damages it could have mitigated through re-aeroing.
Although TransCanada takes several exceptions to these findings, its principal argument is that they conflict with the "could have" test because they focus on what TransCanada "actually did," as opposed to what it "could have" done. The Court is unmoved. First, as USGen notes, what TransCanada "actually did" or did not do in the fall of 2003 is certainly probative of—and thus relevant to—what it "could have" done. After all, if TransCanada could in fact have re-aeroed the Stittsville compressor without much trouble in the fall of 2003, it presumably would have done so, given the high demand for capacity on the eastern end of the Mainline during that time period. Second, despite TransCanada's suggestion to the contrary, the Bankruptcy Court found as a matter of fact that TransCanada could not have increased its capacity through re-aeroing in the fall of 2003—both because TransCanada's evidence was deemed less than credible and because TransCanada did not post additional capacity for sale during that period. Third, and finally, TransCanada does not adequately address the Bankruptcy Court's conclusion that, even if TransCanada could have increased capacity by re-aeroing the Stittsville compressor, its failure to do so, given "surging demand" on the eastern end of the Mainline, would have amounted to a failure to mitigate its damages, thus barring much of its recovery. It is beyond dispute that Canadian law imposes a duty to mitigate on a non-breaching
To be sure, TransCanada cites some evidence—primarily witness testimony—suggesting that, without much difficulty, it could have re-aeroed the Stittsville compressor in the fall of 2003. See Bankr. R., Trial Tr. 1600:12-1602:9, 1642:5-1645:16, Mar. 10, 2008 (testimony of Thomas Robinson); id. at Trial Tr. 990:3-991:15, Mar. 6, 2008 (testimony of Peter Milne). However, aside from the fact that the Bankruptcy Court, as trier of fact, was in a position to reject or minimize any testimony it deemed not credible,
TransCanada next challenges the Bankruptcy Court's finding that TransCanada could not have freed up additional capacity by treating the Gaz Metro bids as bids for new capacity. Here, too, TransCanada fails to demonstrate that the Bankruptcy Court's finding was clearly erroneous.
The Bankruptcy Court based its rejection of TransCanada's Gaz Metro theory not only on the testimony of USGen's expert, who opined that the Gaz Metro bids constituted bids for existing—as opposed to new—capacity, see Bankr. R., Trial Tr. 1002:2-9, Mar. 6, 2008 (testimony of Peter Milne), but also on one of TransCanada's own documents, which suggested that there was but a single bid for new capacity during the September 2003 combined open season, and that that bid plainly was not a Gaz Metro bid, see Bankr. R., TransCanada Ex. 43, at 2-3. The Bankruptcy Court noted that no witness testified that the Gaz Metro bids included the requisite new capacity documentation
As with its re-aeroing theory, TransCanada maintains that the Bankruptcy Court's finding with respect to the Gaz Metro bids erroneously relied on what TransCanada "actually did," as opposed to what it "could have" done, citing the testimony of its Vice President, Dean Ferguson, who stated at trial that TransCanada "could have added ... new capacity" in order to accommodate the Gaz Metro contracts. See Bankr. R., Trial Tr. 1455:9-1456:9, Mar. 7, 2008 (testimony of Dean Ferguson).
As before, however, faced with at best competing evidence, the Bankruptcy Court committed no clear error in reaching a conclusion that did not favor TransCanada. The Bankruptcy court relied on: (1) expert testimony that the Gaz Metro bids did not qualify as bids for new capacity; (2) a document suggesting that there was only one bid for new capacity in September 2003, and that the single new capacity bid was not submitted by Gaz Metro; and (3) the absence of any evidence showing that Gaz Metro had submitted certain new capacity documentation required by the TAP. Again, the Court is not "left with a definite and firm conviction" that the Bankruptcy Court erred when it found that TransCanada could not have made additional sales by treating the Gaz Metro bids as bids for new capacity.
TransCanada further submits that, if USGen is entitled to any mitigation credit at all, the credit should be limited to an amount reflecting a very short distance along the Mainline, viz., between the beginning of the "Triangle" and Iroquois, a distance of approximately 430 kilometers. See Bankr. R., Trial Tr. 1755:8-1758:21, Mar. 10, 2008 (testimony of Robert Whitmore).
TransCanada maintains that, both at the time of USGen's breach and throughout the remainder of the term of its contract with USGen, TransCanada had substantial excess capacity on the western segments of the Mainline—from Empress in the far west to the Triangle, the loop of interconnecting pipe near the eastern end of the Mainline that includes the Stittsville compressor and Iroquois. TransCanada claims that the "bottleneck" on the Mainline occurred near the Stittsville compressor, which is a mere short distance from the end of the Empress to Iroquois path, and that—because tolls on the Mainline are primarily distance-based—USGen should receive mitigation credit, if any at all, only for the amount of the Nexen contracts attributable to the short distance along the far eastern end of the Mainline. In other words, TransCanada argues that, because the capacity bottleneck that might have prevented it from awarding additional contracts did not begin until a point near the very end of the Mainline, any mitigation credit awarded to USGen should be limited to the revenue from the Nexen contracts attributable to the short distance between the bottleneck and the end of the line.
On appeal, TransCanada argues that the Bankruptcy Court's decision to award full mitigation credit for the Nexen contracts resulted in a windfall for USGen, since, "if TransCanada needed any of USGen's turnback capacity to enter into the Nexen contracts[,] it was only at the portion of the Mainline that was constrained." The argument fails to persuade. TransCanada may be correct in its assertion that its capacity constraints were in some measure attributable to a bottleneck spanning only a small segment of the Mainline. However, assuming that to be true, and taking into account the Bankruptcy Court's other findings, the fact remains that—absent the USGen turnback capacity—TransCanada's capacity constraints would have prevented it from awarding the Nexen contracts at all. In other words, whether the technical problem that gave rise to constrained capacity is associated with a large or small percentage of the Mainline is irrelevant. The relevant inquiry is this: Would the capacity constraints have prevented TransCanada from awarding the Nexen contracts absent the USGen turnback capacity? The Bankruptcy Court answered that question in the affirmative, making the distance between the bottleneck and Iroquois beside the point.
TransCanada maintains that the Bankruptcy Court also erred when it ruled
As the Bankruptcy Court noted in its opinion, the plain language of the U.S. Bankruptcy Code requires it to value the amount of a claim arising from a rejected contract "as of the date of the filing of the petition." 11 U.S.C. § 502(b) ("[T]he court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition...."); see also In re CF & I Fabricators of Utah, Inc., 150 F.3d 1293, 1300 (10th Cir.1998) (citing 11 U.S.C. § 502(b)) ("To insure the relative equality of payment between claims that mature in the future and claims that can be paid on the date of bankruptcy, the Bankruptcy Code mandates that all claims for future payment must be reduced to present value."). Citing this rule, the Bankruptcy Court concluded that it was obliged to discount not only the value of the payments TransCanada would have received if its contract with USGen had not been rejected, but also the payments that Nexen made to TransCanada during the same period that serve as mitigation. See USGen, 429 B.R. at 491. In other words, the Bankruptcy Court concluded that it was required to discount the net amount owed TransCanada to the petition date.
TransCanada argues on appeal, as it did in the Bankruptcy Court, that discounting to the petition date is inappropriate in cases like the present one, where the debtor turns out to be solvent and unsecured creditors' claims are paid in full. This is so, TransCanada says, because the rationale behind discounting claims to the petition date—i.e., compliance with 11 U.S.C. § 502(b)(2)'s prohibition against the payment of post-petition interest—does not apply where creditors are in fact paid in full with interest. TransCanada cites In re Oakwood Homes Corp., 449 F.3d 588 (3d Cir.2006), in which the Third Circuit essentially held that § 502(b) does not require discounting in every case. See id. at 598 ("Viewing the Bankruptcy Code holistically, we cannot say that the language of 11 U.S.C. § 502(b) clearly and unambiguously requires the same discounting to present value as is required in other sections of the Code.").
The Court has several problems with TransCanada's argument. First, while TransCanada cites authority suggesting that § 502(b) does not necessarily require discounting in every circumstance, it cites no authority for the proposition that a Bankruptcy Court is necessarily prohibited from discounting to the petition date whenever a debtor turns out to be solvent. Second, TransCanada interprets the ruling of Oakwood Homes too broadly. There, the Third Circuit expressly limited its holding to cases, unlike the present one, in which interest on a claim has already been expressly disallowed. See Oakwood Homes, 449 F.3d at 598.
The Court concludes that the Bankruptcy Court acted properly in discounting the value of TransCanada's claim to the petition date.
As a final argument, TransCanada maintains that the Bankruptcy Court erred when it determined that TransCanada's claim should be converted to U.S. dollars using the exchange rate in effect on the petition date—as opposed to the rate in effect at the time of entry of final judgment. The Court reviews this proposition of law de novo.
Title 11, § 502(b) of the United States Code requires the Bankruptcy Court to value the amount of a claim arising from a rejected contract "in lawful currency of the United States as of the date of the filing of the petition." 11 U.S.C. § 502(b) (emphasis added). In this case, the Bankruptcy Court converted TransCanada's claim from Canadian dollars to U.S. dollars at the rate in effect on the petition date, citing authority for that conclusion. See In re Global Power Equip. Group, Inc., Case No. 06-11045, 2008 WL 435197, at *4, 2008 Bankr.LEXIS 455, at *12 (Bankr.Del. Feb. 14, 2008) ("[Section 502(b)'s] plain language requires the Court to determine the allowed amount of a claim, which is denominated in foreign currency, in United States currency by using the exchange rate that prevails on the petition date."); see also Finanz AG Zurich v. Banco Economico S.A., 192 F.3d 240, 250 (2d Cir. 1999) (noting that, under U.S. bankruptcy law, claims in a foreign currency are determined by converting them to U.S. dollars as of the date of the filing of the petition).
TransCanada takes issue with the Bankruptcy Court's conclusion, citing Zimmermann v. Sutherland, 274 U.S. 253, 47 S.Ct. 625, 71 L.Ed. 1034 (1927), an 84-year-old case in which the U.S. Supreme Court effectively established the "judgment day rule," which holds that, when a contractual obligation is payable in a foreign country in that country's currency, the amount owed should be converted at the rate in effect on the date of judgment. See Zimmermann, 274 U.S. at 255-56, 47 S.Ct. 625; see also In re Good Hope Chem. Corp., 747 F.2d 806, 810 (1st Cir.1984). TransCanada notes that at least one court has recognized the judgment day rule in the bankruptcy context. See Good Hope, 747 F.2d at 810-12.
As USGen notes, however, no authority TransCanada cites has applied the judgment day rule following adoption of the modern Bankruptcy Code, which was promulgated in 1978 and which inaugurated § 502(b). Indeed, Good Hope, the only bankruptcy case TransCanada cites in support of its position that the judgment day rule should apply, was decided under the Bankruptcy Act of 1898. See Good Hope, 747 F.2d at 807.
Because the plain language of § 502(b) states that any claim must be converted to U.S. currency at the exchange rate in effect on the petition date, and because TransCanada has cited no authority decided in the § 502(b) context that suggests otherwise, the Court finds that the Bankruptcy Court correctly determined that TransCanada's claim should be converted to U.S. dollars using the exchange rate in effect on the petition date.
Finally, the Court considers USGen's argument that TransCanada is not entitled to any damages at all—not even the $4,643,700 the Bankruptcy Court ultimately awarded—because TransCanada's
The Court briefly revisits the process by which TransCanada determines the tolls it charges its shipper-customers for service on the Mainline. As discussed in footnote 3, supra, TransCanada's NEB-approved tolls are essentially determined via a two-step process. In the first step, estimates of TransCanada's prudently incurred costs are determined and then an amount representing a reasonable rate of return for TransCanada's investors is added; the sum of these two figures constitutes TransCanada's annual revenue requirement. In the second step, TransCanada's revenue requirement is divided by its "allocation units," which represent the total of the known GJ/d shipping units in all of TransCanada's contracts in existence at the time of NEB approval of TransCanada's annual tolls. From this calculation, tolls for all receipt and delivery points on the Mainline are derived for the upcoming year.
Because the cost and revenue estimates that TransCanada submits in its annual toll applications are just that—estimates—costs actually incurred and revenues actually earned sometimes vary—and materially so—from TransCanada's projections. Recognizing this, TransCanada's regulatory regime calls for the maintenance of so-called "deferral accounts," into which TransCanada deposits amounts representing either deficient revenue (from, say, shipper defaults) or surplus revenue (from, say, amounts recovered as the result of litigation). Deferral account balances are carried forward from one year to the next and, if approved by the NEB, may result in higher or lower tolls than would otherwise result.
USGen argues that, given this regulatory scheme, TransCanada was fully insulated— through its deferral account carry-overs—from the effects of USGen's breach and, therefore, should not be entitled to any recovery at all.
USGen made this argument before the Bankruptcy Court, but the Bankruptcy Court found that Canadian Forest Products was distinguishable, for at least two important reasons. First, it concluded that the regulatory system at issue here, unlike that in Canadian Forest Products, is not truly revenue neutral, since it merely provides TransCanada with the opportunity—without any guarantees whatsoever—to recover lost revenue in future years. See USGen, 429 B.R. at 498. Indeed, any request to recoup lost revenue in future tolls is subject to approval by the NEB, and such approval is given, if at all, only after review by "numerous shippers, shipper organizations, and others who are interested in minimizing the cost to ship gas on the Mainline." Id. Second, the Bankruptcy Court found that, unlike the plaintiff in Canadian Forest Products, TransCanada has an NEB-imposed duty of prudence that in effect requires it to pursue defaulting shippers, and that any failure to do so might well subject it to NEB review through a so-called "review and variance proceeding." See id. at 499-500. Given these distinguishing factors, the Bankruptcy Court concluded that the basic rationale of Canadian Forest Products does not apply here. See id. at 498.
This Court concludes that the Bankruptcy Court was correct in distinguishing Canadian Forest Products and determining that that decision does not control the present case. Canadian Forest Products was clearly limited to the unique factual scenario at issue there—namely, a regulatory scheme that completely insulated a government entity from loss, one that placed no duty on that entity to pursue tortious or breaching licensees. Moreover, in the present case, it may well be that the benefit of any amounts ultimately recovered by TransCanada in this litigation will be passed on to shippers in the form of lower rates in future years—meaning that, unlike in Canadian Forest Products, any success TransCanada might have in recovering lost amounts is unlikely to result in any sort of "double recovery." Further, the Court notes that a more recent decision of the Supreme Court of Canada, Kingstreet Investments Ltd. v. New Brunswick, suggests that Canadian Forest Products should not be read to permit the broad availability of the "passing on" defense, since such a defense "is inconsistent with the basic principles of restitutionary law." [2007] 1 S.C.R. 3, ¶¶ 42-51 (Can.).
USGen's argument that TransCanada's recovery is completely barred by reason of the Canadian Forest Products decision is rejected.
For the foregoing reasons, the decision of the Bankruptcy Court is
USGen, 429 B.R. at 450.
To illustrate: The St. Lawrence Gas bid, which had a monthly demand toll of $35.73 per gigajoule (rounded to the nearest penny) and a duration of 60 months, resulted in an evaluation of $2,143.77 per gigajoule over the duration of the contract, which is the product of $35.73 (before rounding) and 60. Primarily due to its high demand toll, the St. Lawrence Gas bid outranked all others, despite the fact that the volume it requested (3,400 GJ/d) was comparatively small.
USGen, 429 B.R. at 481. As noted supra, TransCanada did eventually re-aero the Stittsville compressor, completing the process in October 2004.
In any event, the Court is unpersuaded by TransCanada's suggestion that USGen somehow turned the tables on it as to this, either at trial or during this appeal. TransCanada, for instance, argues that, had it known prior to trial that it would bear the burden of fleshing out its re-aeroing and Gaz Metro theories, it would have put on additional evidence or otherwise altered its trial strategy. This argument merits little sympathy. For many months prior to trial in the Bankruptcy Court, TransCanada was aware of USGen's mitigation theory, viz., that the Nexen contracts served to mitigate the damages resulting from USGen's breach. TransCanada had every opportunity to prepare and present whatever evidence might be relevant to an appropriate defense, particularly evidence peculiarly within its knowledge with respect to the feasibility vel non of re-aeroing or sound reasons why the Gaz Metro bids could be treated as bids for new capacity. Indeed, TransCanada did provide some evidence in support of those theories. That it may not have provided more may have been a function of its trial strategy. On the other hand, that it may not have produced more may also reflect that additional evidence was not there to be produced.
Bankr. R., TransCanada Ex. 81, at 7-8. The Bankruptcy Court found as a fact that the record did not establish that Gaz Metro had submitted all of the documentation required as part of a bid for new capacity.
