In June 2007, I wrote here about Judge Small’s opinion that BAPCPA’s expanded "safe-harbor" definition of "swap agreement" did not apply to ordinary supply agreements in which a seller and an end-user entered into a contract "for delivery of a product that happen[ed] to be a recognized commodity." As such, Judge Small held, these contracts were not exempt from avoidance as fraudulent transfers (on the theory that the supply contracts were made for less than market value when the debtor was insolvent).
Well, to the delight of the ISDA, which filed an amicus brief in support of the appellant-purchasers of natural gas under various supply contracts with the debtor, the 4th Circuit yesterday reversed Judge Small and remanded with instructions that the Bankruptcy Court "allow the customers to attempt to demonstrate facutally and legally that their natural gas supply contracts were swap agreements based on the classification included in § 101(53B)." Hutson v. E.I. du Pont de Nemours and Co. (In re Nat’l Gas Distribs., LLC), 2009 WL 325436 (4th Cir. 2/11/09) (pdf)
In reaching this decision, the 4th Circuit undertook to determine the meaning of "commodity forward agreements," and ultimately concluded that "the bankruptcy court in this case construed ‘commodity forward agreements’ too narrowly–i.e., by requiring that they be traded on an exchange and not involve physical delivery of the commodity." In so doing, the 4th Circuit found:
- First, that "the Bankruptcy Code does not require that a ‘forward contract’ [which necessarily is narrower in scope than "forward agreements"] be traded on an exchange or in a market";
- Second, that the contracts at issue were not "simple supply contracts" because "they also were part of a series of contracts in which the customers hedged their risk of future fluctuations in the price of natural gas … that were only a part of a larger risk management program in which the customers ‘regularly use[d] forwards and other derivatives."
- Third, that while BAPCPA’s legislative history, which Judge Small quoted, "does provide support for the notion that traditional supply agreements are not ‘swap agreements’ … the conclusion that the contracts in this case are traditional supply contracts overlooks the fact that the contracts in this case contained real hedging elements … [and thus] Congress did not preclude physical delivery in connection with a ‘commodity forward agreement,’ as defined in § 101(53B)(A)."
Notably, however, the Court "[did] not direct the bankruptcy court to find that the contracts in this case are ‘commodity forward agreements’ or ‘swap agreements.’" Recognizing that § 101(53B) "contains its own counterintuitive definitions, as well as inconsistencies," the 4th Circuit would not attempt to provide its own definition. Instead, it "point[ed] to certain nonexclusive elements that the statutory language appears to require," those being: