• Courts Continue to Question Meaning of "Forward Contract Merchants"
  • January 14, 2005 | Authors: Craig R. Enochs; Bruce J. Ruzinsky
  • Law Firm: Jackson Walker L.L.P. - Houston Office
  • The Bankruptcy Court for the Northern District of Texas recently issued an Order questioning whether the actions a non-defaulting party took to collect payment from a defaulting party under a natural gas purchase and sale agreement rendered the non-defaulting party ineligible to utilize the safe harbor protections of the Bankruptcy Code.

    In Aurora Natural Gas, LLC, v. Texas Eastern Transmission Corporation, et al., 316 B.R. 481 (Bank. N.D. Tex. 2004), Aurora's Chapter 7 trustee brought an adversary proceeding to avoid a pre-petition payment to Duke Energy Field Services (DEFS). DEFS moved for summary judgment under Section 546(e) of the Bankruptcy Code which immunizes a forward contract merchant's receipt of a settlement payment (or margin payment) from avoidance as a preferential transfer (or constructive fraudulent transfer). The Bankruptcy Court denied DEFS' motion for partial summary judgment, in part because it held that a genuine issue of material fact existed concerning whether DEFS acted as a forward contract merchant or as a debt collector when it engaged in activities to collect amounts owed to it by Aurora. The Bankruptcy Court suggested that if DEFS was acting as a debt collector, and not a forward contract merchant, then DEFS may not be entitled to the safe harbor protections afforded to forward contract merchants under the Bankruptcy Code.

    This decision comes shortly after the holding in Mirant Americas Energy Marketing, L.P., v. Kern Oil & Refining Co., 310 B.R. 548 (Bank. N.D. Tex. 2004), where the Bankruptcy Court rejected Kern Oil & Refining Company's suggestion that it was entitled to be treated as a forward contract merchant simply because it entered into a forward contract in connection with its business (See Jackson Walker Energy E-Alert dated August 3, 2004).

    These two recent cases interpret the term "forward contract merchant" in a way that appears to be more limiting than the strict language of the statute. In addition, the Aurora case can be interpreted as a further erosion of the safe harbor protections of the Bankruptcy Code by suggesting that even if a party is considered to be a forward contract merchant under a transaction at the time of contract formation or delivery of the commodity, that party may lose its status as a forward contract merchant based on that party's later actions.