Fifth Circuit Finds That An Electricity Requirements Contract Is A 'Forward Contract' Exempt From Bankruptcy Code's Avoidance Powers

On August 2, 2012, the United States Court of Appeals for the Fifth Circuit held that a requirements contract for electricity is a forward contract for purposes of section 546(e) of the Bankruptcy Code and, therefore, settlement payments made under the contract are exempt from avoidance as preferences. Claude Lightfoot v. MXEnergy Electric, Inc. (MBS Management Services, Incorporated), 690 F.3d 352 (5th Cir. 2012). The Fifth Circuit's ruling is a boon to electricity providers that receive payments from counterparties that are insolvent at the time of payment and file for bankruptcy protection shortly thereafter.

Background MBS Management Services, Incorporated provided management services for various residential properties in Texas and Louisiana. In December 2005, MBS entered into a two-year agreement to purchase the “full electric requirements” for certain properties from Vantage Power Services, LP at a fixed rate per kilowatt-hour. The agreement did not specify quantities or delivery dates. Vantage subsequently sold the agreement to MXEnergy Electric, Inc., and in August 2007, MBS paid MXEnergy $156,345.93 to satisfy past-due electric bills owing under the agreement.

On November 5, 2007, MBS commenced a voluntary chapter 11 case in the United States Bankruptcy Court for the Eastern District of Louisiana. MBS' confirmed chapter 11 plan transferred all of the estate's potential avoidance actions to a litigation trust, which subsequently initiated an adversary proceeding to recover the $156,345.93 as an avoidable preference pursuant to section 547(b) of the Bankruptcy Code.

The parties stipulated that all of the requirements of a preference action were satisfied - specifically, the payments had been made while MBS was insolvent and within 90 days of its bankruptcy filing, and the payments entitled MXEnergy to a greater recovery than it would have received in a chapter 7 liquidation. MXEnergy argued, however, that the agreement was a forward contract as defined by the Bankruptcy Code and, accordingly, the payments at issue were settlement payments exempt from avoidance pursuant to section 546(e) of the Bankruptcy Code.

Both the Bankruptcy and District Courts held that the agreement was a forward contract and the payments in question constituted settlement payments that were shielded from avoidance under section 546(e). The trustee for MBS' litigation trust subsequently appealed the District Court's determination that the agreement was a...