Fifth Circuit Holds That Fixed Quantities Are Not Required To Satisfy The 'Forward Contracts' Safe Harbor Defense

On August 2, 2012, the United States Court of Appeals for the Fifth Circuit held that a requirements contract for the supply of electricity constituted a "forward contract" under the Bankruptcy Code and, therefore, was exempt from preference avoidance actions. The Fifth Circuit held that the contract in this case met the plain language definition of a "forward contract," notwithstanding the fact that it lacked fixed quantity and delivery date terms. Lightfoot v. MXEnergy Elec., Inc. (In re MBS Mgmt. Servs., Inc.), 2012 WL 3125167 (5th Cir. Aug. 2, 2012).

Section 546(e) Safe Harbor for Forward Contracts

The Bankruptcy Code's "safe harbor" provisions insulate certain types of contracts from avoidance actions under chapter 5 of the Bankruptcy Code. Section 546(e) of the Bankruptcy Code provides that, among other things, a trustee may not avoid a settlement payment made by or to a "forward contract merchant...in connection with....a forward contract" that is made before the commencement of the case. 11 U.S.C. § 546(e). A "forward contract" is defined as a contract "for the purchase, sale, or transfer of a commodity...with a maturity date more than two days after the contract is entered into...." 11 U.S.C. § 101(25)(A).

Certain courts have held, either implicitly or explicitly, that a contract need not specify the quantities purchased to qualify as a "forward contract" as defined in section 101(25)(A). See Lightfoot v. MXEnergy, Inc., 2011 WL 1899764 (E.D. La. May 19, 2011); In re Magnesium Corp. of America, 460 B.R. 360 (Bankr. S.D.N.Y. 2011). At least one court, however, has held that a contract that does not require the delivery of a specified quantity of a commodity was not protected by the safe harbor under section 546(g), which pertains to swap agreements, not forward contracts. See In re Nat'l Gas Distrib., LLC, 556 F.3d 247, 260 (4th Cir. 2009). The Nat'l Gas Court held that such a contract would not constitute a "forward agreement," a term used in the definition of swap agreements at section 101(53B) of the Bankruptcy Code. However, the term "forward agreement" is not defined in the Bankruptcy Code and relates to a separate safe harbor for swap agreements. Consequently, the term "forward agreement" is distinguishable from the term "forward contract" at issue in the MBS Mgmt. case.

Background

MBS Management Services, Inc. provided management services for apartment complexes in Texas and Louisiana. In December 2005, MBS entered into a...