Curiosity Safe on Mars, Forward Contracts Safe Under Section 546(e) of the Bankruptcy Code
Monday, August 6, 2012

As NASA engineers breathe a sigh of relief after the “seven minutes of terror” that was the rover Curiosity’s landing on Mars, recipients of payments under commodity forward contracts can—at least in the Fifth Circuit—rest assured that agreements that meet the basic definition of forward contract contained in section 101(25) of the Bankruptcy Code will be protected from preference liability should their counterparties find themselves in bankruptcy. Last Thursday, in Lightfoot v. MXEnegry Electric, Inc. (In re MBS Management Servs., Inc.). No. 11-30553 (5th Cir. Aug. 2, 2012), the Fifth Circuit Court of Appeals declined a bankruptcy trustee’s invitation to limit “forward contracts” to contracts that specify a particular quantity or date for performance. 

MBS provided property management services for terrestrial apartment complexes owned by its affiliates. In 2005, MBS agreed to purchase the “full electric requirements” for certain of its affiliates’ properties from Vantage Power Services, LP, at a set rate for a 24 month term. Vantage later sold the agreement to MXEnergy Electric, In. (“MX”). In August of 2007, MBS paid $156,345.43 to MX to cover MBS’ affiliates’ past-due electric bills. MBS filed chapter 11 on November 5, 2007, and the MBS trustee sought to avoid the transfer as a preference. MX argued that the payment was shielded from avoidance under 546(e), which protects payments made pursuant to forward contracts.

The Trustee argued that the agreement did not specify a quantity or a date, and that mere evidence of recurring payments for a commodity is insufficient to fall within the definition of a forward contract. Heeding the Supreme Court’s mandate not to look to outer space to interpret a statute that is coherent and consistent, the court noted that neither the definition of forward contract in section 101(25) nor the exemption from preference liability for forward contracts in section 546(e) contain these kinds of limitations. 

 The second obstacle to MX’s smooth landing on Planet Safe Harbor—the Trustee’s argument that did not contain a maturity date and thus did satisfy 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”—was also overcome. The Court noted that the fact that a contract does not specify a maturity date does not mean it does not have one. Such a conclusion would be akin to concluding that there are no alien life forms simply because the Curiosity has not yet sent a photograph of an alien to Earth through its Mastcam. The court also pointed out that the expert testimony  in the bankruptcy court regarding the purposes of forward contracts—to hedge against price fluctuations—landed the contract squarely within the class covered by sections 101(25) and 546(e) of the Bankruptcy Code.

Third, 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.

Finally, the Trustee argued that the bankruptcy court erred in accepting expert testimony from MX’s president and CEO in the field of commodity trading. The court stated that the Daubert [1] safeguards regarding the reliability of expert testimony are less applicable where the judge, rather than a jury, is the fact-finder. Ultimately, the fact that MX’s CEO was an interested witness affects the weight, not the admissibility, of his testimony. The witness was well-versed in commodity trading, and, unlike the Curiosity’s methods of transmitting data hundreds of millions of miles back to Earth, his testimony did not rest on scientific principles that require scientific substantiation. There was no error in allowing expert testimony from MX’s CEO.

While CNN reports that the scientific instruments aboard the Curiosity are in perfect health, Basis Points is happy to announce that the safe harbor provision for forward contracts contained in section 546(e) of the Bankruptcy Code is, too, in perfect health.

[1] Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) lists indicia of reliability for scientific testimony.


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