Provide the Electric Service and Keep the Money: The Latest Development in Bankruptcy Law Involving Payments Made to an Electric Supplier

On August 2, 2012, the Court of Appeals for the 5th Circuit issued a decision in Lightfoot v. MXEnergy Electric, Inc. (In re MBS Management Servs., Inc.). No. 11-30553, (5th Cir. Aug. 2, 2012).  The case considered whether payments made for retail electricity service represented preference payments, which turned primarily upon whether the contract at issue was a forward contract that is protected from claims that payments thereunder can be avoided because they represent preference payments.  MBS, a property manager, had agreed to purchase the “full electric requirements” for certain of its affiliates’ properties.  MXEnergy Electric, Inc. (“MX”) supplied the electricity.  In August of 2007, MBS paid MX for various past-due electric bills.  MBS filed for Chapter 11 protection on November 5, 2007, and the MBS Trustee sought to avoid the transfer of funds as a preference.

MX argued that the payment was shielded from avoidance pursuant to 546(e) of the Bankruptcy Code, which protects payments made pursuant to forward contracts from being considered preference payments.  The Trustee argued that the agreement was not a forward contract because it did not specify a quantity or a date of delivery, and that mere evidence of recurring payments for a commodity is insufficient to demonstrate that the contract is a forward contract.  The court rejected the notion that a forward contract requires the inclusion of a quantity and delivery date.  The court similarly rejected the Trustee’s argument that the contract could not be deemed a forward contract because it did not specify a maturity date in light of Bankruptcy Code section 101(25)(A)’s requirement that a forward contract contain a “maturity date more than two days after the date the contract is entered into.”  The court considered both the payment terms and expert testimony regarding the purposes of forward contracts—to hedge against price fluctuations— in determining that the contract falls within the class covered by sections 101(25) and 546(e) of the Bankruptcy Code.  The court noted that Congress did not differentiate between ordinary supply contracts and “financial” forward contracts in drafting sections 101(25) and 546(e) of the Bankruptcy Code, and that both categories of agreements are protected from avoidance as preferences by the Bankruptcy Code.