By: Brian P. King
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Broadly interpreting the forward contracts definition, the District Court for the Eastern District of Louisiana, in Lightfoot v. MXEnergy, Inc.[1] held, for the first time, that a requirements contract to provide energy to a purchaser, absent a specific quantity, was a ‘forward’ contract.[2] As a result, payments made under that contract were not avoidable as preferences pursuant to 11 U.S.C § 547[3] because they were deemed to be settlement payments[4] related to a forward contract. The issue arose under an agreement between MBS Management Services, Inc. (“MBS” or the “Buyer”), a real-estate management company and MXEnergy, Inc. (“MX” or the “Supplier”) who agreed to supply all of the energy requirements for apartments managed by MBS. Following MBS’s bankruptcy filing,[5] the court appointed trustee, Lightfoot, initiated an adversary proceeding to avoid payments made by the Buyer to the Supplier on the basis that those payments were preferences under 11 U.S.C § 547.[6] The defendants asserted that, as a forward contract merchant,[7] the payments made by MBS were settlement payments made pursuant to a forward contract and, as such, they could not be avoided under section 547 based on the limitations set forth in 11 U.S.C § 546(e).[8] The court agreed.
The focus and impact of the holding rest on the novel interpretation of the two key terms: forward contract and forward contract merchant. The court held that the MBS contract with MX satisfied all the elements of a forward contract under 11 U.S.C. § 101(25) which meant that MX would be treated as a forward contract merchant pursuant to 11 U.S.C. § 101(26).[9] Contrary to the Fourth Circuit holding in In re National Gas Distributors, LLC,[10]the Lightfoot court dismissed the premise that forward contracts must explicitly set terms for, among other things, quantity.[11] According to the court, requiring a quantity term would only serve to impose an artificial limitation on section 546(e) and unnecessarily unwind statutorily-protected, settled financial transactions. Rather, the court adopted the Fifth Circuit’s view established in In re Olympic Natural Gas Co.[12] There, the court held that a contract is a forward contract even when it is not traded on an exchange but as a negotiated agreement between market participants.[13] The Lightfoot court accepted that definition and eliminated the requirement imposed in National Gas Distributors that a forward contract must include a specific quantity term.
In its recognition of a new non-avoidable type of forward contract for utility suppliers,the Lightfoot court’sdecision imposes another avoidance hurdle for bankruptcy trustees to navigate. Given the broad definition of commodity set forth in 7 U.S.C. § 1(a),[14] there are a host of potential products that may fall under that heading moving forward.[15] Given the lucrative markets that these potential commodities would create, a debtor’s inability to avoid and recover payments made on forward contracts to procure them could be a substantial boon to creditors operating in these arenas. Relying on Lightfoot, creditors on the supply side of such requirements contracts will be secure in the knowledge that payments made toward those contracts will be theirs to keep.
[1] Lightfoot v. MXEnergy, Inc., 2011 WL 1899764 (E.D. La. May 19, 2011).
[2] 11 U.S.C. § 101(25) (defining a forward contract as “a contract . . . for the purchase, sale, or transfer of a commodity . . . or any similar good, article, service, right, or interest which is presently or in the future becomes the subject of dealing in the forward contract trade, or product or byproduct thereof, with a maturity date more than two days after the date the contract is entered into, including, but not limited to, a repurchase or reverse repurchase transaction . . . consignment, lease, swap, hedge transaction, deposit, loan, option, allocated transaction, unallocated transaction, or any other similar agreement.”).
[3] 11 U.S.C. § 547.
[4] 11 U.S.C. § 101(51A).
[5] See Lightfoot, 2011 WL 1899764at 1.
[6] Id. at 1.
[7] 11 U.S.C. § 101(26) (“The term “forward contract merchant” means a Federal reserve bank, or an entity the business of which consists . . .of entering into forward contracts . . . in a commodity”).
[8] 11 U.S.C. § 546(e).
[9] 11 U.S.C. § 101(26).
[10] 556 F.3d 247 (4th Cir. 2009).
[11] Id. at 260 (distinguishing from Natural Gas Distributors further than previous cases which have held that time and place of delivery need not be included within the specific terms of a forward contract).
[12] Williams v. Morgan Stanley Capital Group, Inc. (In re Olympic Natural Gas Co.), 294 F.3d 737 (5th Cir. 2002).
[13] Id. at 741 (recognizing the existence of forward contracts off commodities exchanges, between private parties).
[14] 7 U.S.C. § 1(a) (2010) (including in the broad definition of commodity “all other goods and articles . . . and all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in.”).
[15] It is not inconceivable that things such as potable water, bandwidth and satellite signal space will swept under the broad commodity header in the near and intermediate future.