Contributed by Victoria Vron
The Fifth Circuit in MBS Mgmt. Serv., Inc. v. MXEnergy Elect., Inc., No. 11-30553, 2012 WL 3125167 (5th Cir. Aug. 2, 2012) recently provided some guidance on whether an electricity requirements contract is a forward contract that is exempt from avoidance pursuant to section 546(e) of the Bankruptcy Code. The answer, at least on the facts of MBS Mgmt., is yes.
MBS Management Services, Inc. was a provider of management services for apartment complexes. It entered into a contract with Vantage Power Services, LP to purchase full electric requirements for specified apartment complexes for twenty-four months for a set price per kilowatt hour, based on actual metered usage. Vantage ultimately sold this contract to MXEnergy Electic, Inc. Several months after MXEnergy purchased this contract, MBS filed a voluntary petition under chapter 11 of the Bankruptcy Code and a trustee was appointed. The trustee commenced an adversary proceeding to recover as a preference under section 547(b) of the Bankruptcy Code approximately $156,000.00 that MBS paid to MXEnergy within 90 days prior to the chapter 11 filing to cover past-due electric bills. MXEnergy disputed the adversary proceeding.
Although the parties stipulated that all requirements for a preference action had been met, MXEnergy argued that the payment was shielded from avoidance pursuant to section 546(e) of the Bankruptcy Code because the contract with MBS is a preexisting forward contract and the payment made was a settlement payment to a forward contract merchant.
The bankruptcy court and the district court held that the payment was made on a forward contract and thus was exempt from avoidance pursuant to section 546(e) of the Bankruptcy Code. Note that the trustee did not appeal the bankruptcy court’s determination that the payment was a “settlement payment” within the meaning of section 546(e); accordingly, the Fifth Circuit did not address this question and only addressed whether the electricity requirements contract is a forward contract.
Section 101(25)(A) of the Bankruptcy Code defines a forward contract as a “contract (other than a commodity contract . . . ) for the purchase, sale, or transfer of a commodity . . . with a maturity date more than two days after the contract is entered into . . .”. The trustee’s primary argument on appeal was that the contract is not a forward contract because it does not contain a specific quantity of electricity to be purchased, specific delivery dates or a maturity date. The Fifth Circuit found all these arguments unpersuasive. Using a textual approach to statutory interpretation, the Fifth Circuit looked at the plain language of sections 101(25)(A) and 546(e) and held that neither section requires that a forward contract must expressly specify quantities of the commodity to be purchased, delivery dates or a maturity date. The Fifth Circuit recognized, however, that section 101(25)(A) requires that a forward contract must have a maturity date more than two days after the date the contract is entered into. It determined, however, that the electricity requirements contract at issue in MBS had a maturity date, even if it did not specify what that date was. It was sufficient for purposes of section 101(25)(A) that no delivery of electricity was scheduled to occur less than two days after the contract was entered into. Accordingly, the Fifth Circuit held that the electricity requirements contract was a forward contract that was exempt from avoidance pursuant to section 546(e).
In reaching its holding, the Fifth Circuit considered the expert testimony provided in the bankruptcy court on the issue of how forward contracts are typically structured in the industry. The trustee argued that MXEnergy’s expert’s testimony should not be admitted because MXEnergy’s expert witness was its president and chief-executive officer. The Fifth Circuit held that the fact that the expert was an insider of MXEnergy and testifying on behalf of MXEnergy went to the weight of his testimony and not to the admissibility of the testimony. The Fifth Circuit thus found MXEnergy’s expert’s testimony to be admissible.
Finally, the Fifth Circuit noted that its decision left open the issue of whether a residential consumer who has a contract with his local utility company to lock in a favorable rate, and who then files for bankruptcy, has entered into a contract that is shielded from avoidance pursuant to section 546(e) of the Bankruptcy Code. While not addressing this issue, the Fifth Circuit stated in dicta that even if the answer to this open issue is yes, it would not be a dissimilar protection that utilities already enjoy under section 366 of the Bankruptcy Code. This of course begs the question of whether utilities with contracts should be afforded similar protections to those set forth in section 366, which many would argue was intended to protect both debtors and utilities in situations where debtors do not have contracts with the utility providers.