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.