BAPCPA’s least appreciated (and understood) changes, despite their enormous impact on financial markets generally, are the changes designed to strengthen and clarify the enforceability of various types of financial derivatives contracts. To provide enhanced protection to the financial services industry, Congress added or .jpg)
expanded the Code’s definitions for such industry staples as "forward contracts" (§101(25)), "repurchase agreements" (§101(47)), and "swap agreements" (§101(53B)). Various other Code provisions were amended or added to reflect Congress’s desire to enable a nondebtor party–without hesitation–to terminate, liquidate or accelerate its securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements or master netting agreements with the debtor. (See generally, these few pages of professor, lawyer, Code co-architect, and energy healer Ken Klee’s excellent summary of BAPCPA’s amendments to the Code’s business-related provisions).
Columbia Law professor Edward Morrison, with Columbia GSB economics legend Franklin Edwards, argue in a Winter 2005 article entitled Derivatives and the Bankruptcy Code: Why the Special Treatment? that BAPCPA’s extension of the Code’s protections for the financial services industry "to include a broader array of financial contracts, all in the name of reducing systemic risk … is a mistake." Rather, they argue, "[a] better, efficiency-based reason for treating derivatives contracts differently arises naturally from the economic theory underlying the automatic stay [i.e., derivative contracts are rarely needed to preserve a firm’s going-concern surplus]." Still, they warn (at p.1):
There are, however, downsides to treating derivatives contracts differently (creditors, for example, would like to disguise loans as derivatives contracts). These downsides are probably not signficant, but they highlight the fragility of the Code’s treatment of derivatives contracts, which should worry members of Congress as they consider arguments to expand the Code’s exemptions for derivatives contracts.
After BAPCPA became law, Professor Morrison teamed with Columbia LLM candidate (and now Davis Polk associate) Joerg Riegel to author another article entitled Financial Contracts and the New Bankruptcy Code: Insulating Markets from Bankrupt Debtors and Bankruptcy Judges. They wrote that BAPCPA did not just "eliminate longstanding uncertainty surrounding the protections available to financial contract counterparties, especially counterparties to repurchase transactions and other derivatives contracts" Rather, they observed, "the ambit of the reforms is much broader," especially because of the newly expanded definition of "swap agreement," which they termed "so broad that nearly every derivative contract is subject to the Code’s protection." (p.1). Notably, however, this conclusion was later called into question (though not expressly) by Thompson & Knight’s Rhett Campbell in a 2005 article entitled Financial Markets Contracts and BAPCPA. He wrote that "even though the definitions themselves are often nothing more than a listing of labels with little attempt at a functional definition, the legislative history shows an intent to prevent parties from obtaining the benefits of financial contracts safe harbors merely by the judicious use of labels." 79 Am. Bankr. L. J. 697, 705 (2005).
In commenting on the impact of these reforms on the bankruptcy judiciary, Morrison and Riegel concluded (pp. 4-5):
Equally important, the amendments limit judicial discretion to assess the economic substance of financial transactions, even those that resemble ordinary loans or that retire a debtor’s outstanding debt or equity. The reforms of 2005 direct judges to apply a formalistic inquiry based on industry custom: a financial transaction is a "swap," "repurchase transaction," or other protected transaction if it is treated as such in the relevant financial market….
Indeed, if anything is clear from the new Code, it is that judges are strongly discouraged from engaging in functional analysis of financial contracts. The Code’s protections encompass contracts or combinations of contracts that differ little in substance from unprotected transactions, such as secured loans. They are protected because they are recognized in financial markets as financial contracts. Any judicial effort to distinguish protected and unprotected contracts based on their "substance" is doomed to failure and can only generate significant uncertainty in the very markets the Code seeks to protect. By relying on broad market definitions, the Act gets judges out of the (largely futile) business of second-guessing financial contracts. Absent evidence of intent to defraud a debtor’s creditors, which remains ground for denying protection to payments under a financial contract, the new role of judges is to apply industry custom to financial contracts in much the same way that they would apply custom to interpret a contract under the Uniform Commercial Code.
Maybe it’s just Professor Morrison’s year of clerking for Justice Scalia that has jaded him, but most bankruptcy judges I know don’t "apply a formalistic inquiry," especially when it comes to interpreting BAPCPA! (See also, the opinions of Judge Bruce A. Markell (here and here) and the 60 pages of handouts on principles of statutory construction that the Southern District of Ohio’s Chief Bankruptcy Judge, Thomas F. Waldron, penned for last year’s NCBJ confab). In this regard, it’s worth considering the words of the Eastern District of North Carolina’s Chief Bankruptcy Judge A. Thomas Small in In re Donald, 343 B.R. 524 (Bankr. E.D.N.C. 2006) (pdf), where he had this to say about interpreting BAPCPA:
Unfortunately, the BAPCPA amendments … are confusing, overlapping, and sometimes self-contradictory. They introduce new and undefined terms that resemble, but are different from, established terms that are well understood. Furthermore, the new provisions address some situations that are unlikely to arise. Deciphering this puzzle is like trying to solve a Rubik’s Cube that arrived with a manufacturer’s defect. [Ed. Note: This one is sure to work.] Fortunately, after many twists and turns, a few patches of solid color emerge. Id. at 529.
Judge Small’s opinion last week in Hutson v. Smithfield Packing Co. (In re Nat’l Gas Distributors, LLC), 2007 WL 1531616 (Bankr. E.D.N.C. 5/24/07) (pdf) partially resolved BAPCPA’s puzzle regarding the scope of the "swap agreement" amendments to the Code surprisingly easily, but not because he "appl[ied] a formalistic inquiry." Rather, in deciding whether BAPCPA’s expanded definition of "swap agreement" to include "forward agreements" would preempt an avoidance action against a nondebtor customer who received natural gas from the debtor under a below-market commodity contract, Judge Small concluded:
Time to catch up on more "Picks of the Month." These picks are for April 2007:
The following bankruptcy business-related scholarly papers, arranged by SSRN abstract ID number, can be downloaded from the 
Having finally wrapped up 
my picks for March 2007.
Time to catch up on the ever-popular "Picks of the Month." These picks are for February 2007.
To me, the greatest benefit of blogging is that it has enabled me to meet and befriend so many in the profession (lawyers, judges, and professionals alike) whom I otherwise likely would never have even met. 
As reported in my prior post last January
The following bankruptcy-related scholarly papers, arranged by SSRN abstract ID number, can be downloaded from the 
The following bankruptcy finance-related working papers, arranged by abstract ID number, can be downloaded from the 