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Bankruptcy Tangles Enron Contract Disputes >ENRNQ DYN AES

By Lingling Wei, Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--A contract dispute may sound straightforward enough, but it's not so simple when one party involved is in bankruptcy.

As many of Enron Corp.'s (ENRNQ) trading partners have recently found out, the company's bankruptcy-protection filing has greatly complicated a kind of contractual dispute that could normally be settled outside court.

Over the past two months, a spate of Enron's former business partners, such as Dynegy Inc.(NYSE:DYN) (DYN) and AES Corp.(NYSE:AES) (AES), have found themselves embroiled in legal battles with the fallen energy giant. All raise the question of whether the bankruptcy court should refer the underlying contract controversy to arbitration.

For Enron, which wants the issues to stay in the bankruptcy court, more than $ 6 billion could be at stake, as the company is party to thousands of commodities contracts that have arbitration terms. That represents "either the largest or one of the largest remaining assets" of the company's property, Enron's lawyers wrote in a November suit against Dynegy.

These two Texas firms have scheduled to argue on Thursday in front of Judge Arthur Gonzalez in the New York bankruptcy court.

The dispute between Enron and Dynegy involves a so-called master netting agreement, entered into less than a month before Enron's collapse into bankruptcy in December 2001. Such pacts, common in the energy industry, are designed to allow companies to "net" their contract requirements by offsetting negative balances from one transaction with positive balances from another.

Enron brought the lawsuit after Dynegy asked the bankruptcy court to compel the parties to arbitrate their contractual spat. In its objection, Enron has said that request is an attempt to obtain a result "in an arbitration favorable to the Dynegy counterparties that would be prohibited" under the bankruptcy law.

If Dynegy's request were granted, Enron has said, Dynegy would have more than $93 million in claims against it. But, according to Enron's calculation, it is Dynegy that owes Enron and its subsidiaries about $230 million.

In Enron's view, the case illustrates a situation where a bankruptcy court is asked to refer to arbitration a dispute that involves a "core" bankruptcy function - that is, the resolution of claims against a debtor's bankruptcy estate.

"If the debtor (Enron) had to litigate these core issues before multiple arbitrators in multiple jurisdiction, there will be a serious risk about when and whether a reorganization could be effective," says Peter Gruenberger, a partner of Weil, Gotshal & Manges LLP, representing Enron in bankruptcy.

Dynegy, on the other hand, has said the contract dispute doesn't raise any core bankruptcy issues, and even if it did, handing the dispute over to arbitration wouldn't interfere with Enron's efforts to repay creditors.

David Carlson, a bankruptcy law professor at the Benjamin N. Cardozo School of Law at Yeshiva University in New York, says that in contract cases, where a debtor has negotiated in advance to arbitrate contractual disputes, the bankruptcy court usually weighs two federal policies in deciding whether to enforce the arbitration provision.

One being the Bankruptcy Code and the other the Federal Arbitration Act. A conflict could arise, Carlson says, when the pro-arbitration federal mandate intersects with the bankruptcy code's grant of jurisdiction to bankruptcy courts

to preside over key bankruptcy matters.

"That's a sticky issue," Carlson adds.

-By Lingling Wei, Dow Jones Newswires; 201-938-2089; Lingling.Wei@dowjones.com

Following the action against Dynegy, Enron has filed suits against Select Energy Inc., a unit of Northeast Utilities (NU), Old Dominion Electric Cooperative (X.ODE), Smurfit-Stone Container Corp.(NASDAQ-NMS:SSCC) (SSCC), AES Corp.(NYSE:AES) (AES), American Coal Co., and Noble Gas Marketing Inc.

Though the suits concern different underlying contracts, they all involve the issue of the enforceability of arbitration in the event of bankruptcy.

-By Lingling Wei, Dow Jones Newswires; 201-938-2089; Lingling.Wei@dowjones.com

NEWS WRAP: Dynegy, ChevronTexaco End Trading Contracts

HOUSTON (AP)--ChevronTexaco Corp. (CVX) is ending its natural gas marketing contracts with Dynegy Inc.(NYSE:DYN) (DYN) by Feb. 1 as the oil giant takes over the business the energy merchant is exiting, the companies announced Friday.

Dynegy paid ChevronTexaco, the country's second-largest petroleum company, $11 million to unravel the contracts and assume certain third-party deals.

ChevronTexaco's new wholesale natural gas marketing unit, ChevronTexaco Natural Gas, will be fully operational by April.

"We are looking forward to re-establishing ourselves in the domestic wholesale natural gas marketing business," said Ray Wilcox, vice president of ChevronTexaco Corp.(NYSE:CVX) and president of ChevronTexaco North America Upstream.

Dynegy will help ChevronTexaco with transition services through March 31.

The move was expected after Dynegy announced last year that it was scrapping its money-losing trading operations. The Houston-based company, which has struggled to survive amid dramatically lower power prices and industrywide fallout from Enron Corp.'s accounting scandal, is focusing on its power generation and natural gas liquids as well as its Illinois utility to regain its financial footing.

Dynegy's trading unit had been buying substantially all of ChevronTexaco's lower-48 U.S. natural gas production and supplying the natural gas requirements of the oil company's refining and power facilities through the agreements, which were scheduled to run through 2006.

ChevronTexaco will continue to be Dynegy's largest natural gas processing and liquids customer.

"This transition in our business is consistent with Dynegy's strategy of exiting our third-party marketing and trading activities and thereby reducing collateral requirements" by about $180 million, said Bruce Williamson, Dynegy's president and chief executive.

Dynegy shares were down 10 cents to $2.52 in midday trading Friday on the New York Stock Exchange. ChevronTexaco shares were up 15 cents to $68.47 on the NYSE.