Unfinished Business: Swap Participants Gain Ground

On Feb. 11, 2009, the United States Court of Appeals for the Fourth Circuit recognized the broad protections afforded to swap agreements under the Bankruptcy Code. See Hutson v. E.I. du Pont de Nemours and Co. (In re Nat'l Gas Distribs., LLC), 556 F.3d 247 (4th Cir. 2009). The court, in a case of first impression, held that a “commodity forward greement” (which is included in the definition of a swap agreement) is not required to be traded on an exchange or in a market and may involve the physical delivery of the underlying commodity. The court also established non-exclusive elements that the definition appears to require, recognizing that by fixing the price, quantity and time elements of the agreement at the time of contracting, a commodity forward agreement provides hedging against fluctuations in commodity prices. The court's decision, if followed, could provide parties to physically settled commodity transactions with the protections afforded by the safe harbor provisions of the Bankruptcy Code, regardless of whether they are end-users, producers, or merchants that trade in such agreements. The court, however, missed an opportunity to provide a bright-line definition of commodity forward agreement, leaving unanswered questions instead.