Fifth Circuit Holds that Supply Agreement is a “Forward Contract” for Bankruptcy Avoidance Protection

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On August 2, 2012, the United States Court of Appeals for the Fifth Circuit issued a decision in the bankruptcy case for MBS Management Services, Inc. (the “Debtor”). The Fifth Circuit affirmed the district court’s opinion finding that an electric requirements agreement was a “forward contract” and, therefore, that payments made on the agreement were exempt from avoidance under the Bankruptcy Code.

I. Factual Background -

The Debtor provided management services for apartment complexes in Texas and Louisiana. In 2005, it agreed to purchase the “full electric requirements” for specified properties from MCEnergy Electric, Inc.’s (“MX”) predecessor for twenty four months at a set price based on actual usage. In 2007, the Debtor paid $156,345.93 to MX to cover past-due electric bills.

Shortly thereafter, the Debtor filed a voluntary petition under chapter 11 of the Bankruptcy Code. The Trustee initiated an adversary proceeding in the bankruptcy court to recover the $156,345.93 from MX as an avoidable preferential transfer under 11 U.S.C. § 547(b).

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