Claims Against Enron Must Stay In New York, Bankruptcy Court Rules

by Glen Shapiro, LawAndTax-News.com, New York

05 October 2004

The federal bankruptcy court which is overseeing the compensation of Enron's creditors has ruled that a parallel suit seeking a portion of the collapsed energy firm's assets filed by the Californian authorities in their home state will not be allowed.

Judge Arthur Gonzalez ruled that the state authority's claims against the firm must be heard in his Southern District of New York bankruptcy court, disallowing the California parallel claim, launched earlier this year, on the grounds that the energy trader had already filed for bankruptcy at that point.

"The filing of a bankruptcy petition operates as a stay applicable to all entities regarding the commencement or continuation of judicial proceedings against the debtor," he observed.

According to the New York Law Journal, the Californian authorities attempted to get around the protections enshrined in the US bankruptcy code by arguing that its case represented an exercise of its obligation to protect Californian consumers and prevent fraud, and that the injunctive relief that it was attempting to claim in the California state court would prevent the firm from re-entering the energy trading market.

However, the bankruptcy court dismissed both of these arguments, announcing in regard to the former that:

"Even if a government action is a proper exercise of the police power, the collection of a money judgement is barred. If the purpose of the law relates to the protection of the government's pecuniary interest in the debtor's property, or to adjudicate private rights, the exception is inapplicable."

Judge Gonzalez also suggested that the Californian government's argument that the claim was designed to prevent the firm from re-entering the energy trading market represented a "meaningless request", as regulatory findings made in the wake of the firm's collapse had made it "practically impossible for Enron to resume trading". He additionally observed that its energy trading arm had been sold off.

Observers have suggested that the Californian authorities are likely to have been motivated to file their parallel request in their own courts due to the rolling blackouts and high prices endured by the state's residents, which may have predisposed to the jury to award them a larger portion of Enron's assets.

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