Fifth Circuit Finds that an Electricity Requirements Contract Is a “Forward Contract” Exempt from Bankruptcy Code’s Avoidance Powers

On August 2, 2012, the United States Court of Appeals for the Fifth Circuit held that a requirements contract for electricity is a forward contract for purposes of section 546(e) of the Bankruptcy Code and, therefore, settlement payments made under the contract are exempt from avoidance as preferences. Claude Lightfoot v. MXEnergy Electric, Inc. (MBS Management Services, Incorporated), 690 F.3d 352 (5th Cir. 2012). The Fifth Circuit’s ruling is a boon to electricity providers that receive payments from counterparties that are insolvent at the time of payment and file for bankruptcy protection shortly thereafter.

Background -

MBS Management Services, Incorporated provided management services for various residential properties in Texas and Louisiana. In December 2005, MBS entered into a two year agreement to purchase the “full electric requirements” for certain properties from Vantage Power Services, LP at a fixed rate per kilowatt-hour. The agreement did not specify quantities or delivery dates. Vantage subsequently sold the agreement to MXEnergy Electric, Inc., and in August 2007, MBS paid MXEnergy $156,345.93 to satisfy past-due electric bills owing under the agreement.

On November 5, 2007, MBS commenced a voluntary chapter 11 case in the United States Bankruptcy Court for the Eastern District of Louisiana. MBS’ confirmed chapter 11 plan transferred all of the estate’s potential avoidance actions to a litigation trust, which subsequently initiated an adversary proceeding to recover the $156,345.93 as an avoidable preference pursuant to section 547(b) of the Bankruptcy Code...

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