By: J. Ellsworth Summers, Jr. & Scott St. Amand
Because debtors may avoid certain transfers and contracts entered into during the ninety days before they filed their bankruptcy petition, trade creditors are understandably nervous about entering into contracts with customers who may appear to be on the edge of insolvency. Such anxiety is especially acute when the nature of the creditor’s business necessitates entering into numerous contracts during that period.
Utilities companies often are in the business of providing services under “forward contracts,” which is a contract for the purchase, sale, or transfer of a commodity with a maturity date more than two days after the date the contract is executed. Fortunately for such companies, the Fifth Circuit has recently issued an opinion in which they found that even “ordinary” forward contracts may not be avoided under § 546(e) of the Bankruptcy Code.
Although not earth shattering upon first glance, the Fifth Circuit’s opinion should not be ignored by creditors. Initially § 546(e) was intended to provide a safe harbor to securities and commodities brokers in order to protect the financial and securities markets from disruption. Nevertheless, the decision expands the safe harbor protection afforded by § 546(e) to reach “ordinary” forward supply contracts for commodities.