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fact remained as to the second element. Based upon the contracts at issue, it is not clear whether the parties entered into them more than two days before delivery of the gas: the usual practice between Soffee and the Debtor was a very informal one and involved phone calls and emails near the end of each month. With respect to the third element, the court said that "construction of what the court of appeals meant by 'specified quantity' overreaches, and the court's use of the word 'fixed' in no way engenders semantic confusion." The Fourth Circuit's holding strongly indicates that 'fixed quantity' or 'fixed price' in the normal sense of the word means a specified quantity and
price, not a widely varying range. Here, Soffee did not specify a quantity in the contracts at issue in this adversary proceeding. And, that was not due to the intrinsic nature of the good being traded natural gas but due to the decision to leave quantity open to change due to Soffee's business needs. In other words, Soffee chose a form of variable quantity delivery. "The court of appeals made clear that the fact of physical delivery does not disqualify a contract from being a commodity forward agreement, but the court at no point suggested that a buyer's choice to receive physical delivery without specifying a set quantity negates the quantity requirement." Thus, the Trustee is entitled to summary judgment on this issue and the contracts do not qualify as commodity forward agreements.
Facts: National Gas Distributors, LLC (the "Debtor") filed for chapter 11 relief in January 2006 at the request of its state court receiver. Richard M. Hutson was appointed as chapter 11 trustee (the "Trustee"). Pre-petition, the Debtor was in the business of buying and distributing natural gas. The Trustee sued various customers of the Debtor, including the Army, to avoid and recover transfers made by the Debtor. The Trustee's theory was that the Debtor, in a fraudulent scheme, sold gas to some of its customers at below market rates. The Trustee was trying to recover the difference between the market price of each sale and the below market price at which the Debtor sold the gas. According to the Army, it bought natural gas from the Debtor for Fort Bragg. The purchases were made in long term 'strip' purchases and short term 'spot' purchases. All the purchases were made for a fixed price and a fixed quantity of natural gas. The Army moved for summary judgment arguing that their agreements with the Debtor to purchase gas are 'swap agreements' or, more specifically, 'commodity forward agreements' that fall within the definition of 'swap agreements' as defined in the Bankruptcy Code and, as such, are immune from avoidance. Alternatively, the Army requests summary judgment on two other grounds, both of which were denied because factual disputes remain on those issues.
Issue: Are the contracts between the Debtor and the Army 'swap agreements'?
Holding: The contracts are, with certain exceptions, swap agreements.
Rule: The Fourth Circuit has provided a list of four elements that, although not exclusive, encompass the distinguishing characteristics of a commodity forward agreement: "First, the subject of a commodity forward agreement must be a commodity. ... Second, a forward commodity contract, in being 'forward,' must require a payment for the commodity at a price fixed at the time of contracting for delivery more than two days after the date the contract is entered into. [A maturity date in the future means that the benefit or detriment from the contract depends on future fluctuations in the market price of the commodity]... Third, as a forward agreement in relation to a commodity, in addition to the price element, the quantity and time elements must be fixed at the time of contracting.... Finally, while the broad class of 'swap agreements' includes contracts that are readily assignable and therefore tradable, 'swap agreements' also include forward contracts, which are not necessarily assignable.... It is undoubtably true that Congress ... require[s] a relationship between a commodity forward agreement and the financial markets. But this relationship need not be defined by trading in a market or on an exchange...."
Reasoning: In addition to the four elements outlined above, the Fourth Circuit has held that, to be considered a commodity forward agreement, an agreement need not be traded in a market or on an exchange. Additionally, the agreement need not involve a settlement by physical delivery. Here, the Army entered into contracts in which both the price and the quantity of the gas was fixed. Moreover, the contracts were part of the Army's energy cost
©2010 Leif M. Clark
