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Of Hogs, Electricity and Gas

By Yitzhak Greenberg
April 25, 2011

A split among bankruptcy courts has called into question whether supply contracts for commodities such as hogs, electricity and gas will receive the same protection that has been extended to swaps and other financial contracts under ' 546 of the Bankruptcy Code. That section provides a safe harbor to transfers made pursuant to financial contracts. The stability of these contracts is deemed so essential to the health of the nation's financial markets that they are broadly excepted from avoidance as preferences and fraudulent transfers. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) further clarified the broad intent and application of the safe harbor of ' 546.

Businesses' ability to rely on ' 546 to insulate their supply agreements (i.e., contracts that do not specify an amount of the commodity) from the potentially disruptive effects of a bankruptcy filing by their counterparties has been called into question. Recently, two bankruptcy courts had the opportunity to apply BAPCPA to forward supply contracts and agreements and came to very different conclusions. In one line of decisions, the Louisiana Bankruptcy Court looked to the purpose of the specific agreements and industry usage and found that the supply forward contracts qualified as a “forward contract” protected by ' 546(e) (addressing forward contracts). See In re MBS Management Services, Inc., 430 B.R. 750, 757 (Bankr. E. D. La. 2010) (hereinafter, “MBS I“); see also In re MBS Management Services, Inc., 432 B.R. 570, 577 (Bankr. E.D. La. 2010) (hereinafter, “MBS II“) (finding that the subject contracts were protected by the safe harbor of ' 546(e)).

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