MBS Management Services, Inc. Revisited (Again): Do Retail Electricity Agreements Constitute Forward Contracts?

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In the case of In re MBS Management Services, Inc., the United States Bankruptcy Court for the Eastern District of Louisiana (the "Bankruptcy Court") analyzed whether payments made by MBS Management Services, Inc. ("MBS") to MX Energy, Inc. ("MX") under a retail electricity contract (the "Contract") were recoverable by the MBS bankruptcy trustee (the "Trustee") pursuant to fraudulent conveyance and preference actions. The Bankruptcy Court ultimately held that (i) the Contract qualifies as a forward contract under the U.S. Bankruptcy Code (the "Code"); and (ii) as a result, all payments made by MBS to MX thereunder constitute "settlement payments" exempt from the Trustee's avoidance actions. The United States District Court for the Eastern District of Louisiana (the "District Court") affirmed the Bankruptcy Court's holding.

The Trustee appealed to the United States Court of Appeals for the Fifth Circuit (the "Fifth Circuit"). On August 2, 2012, the Fifth Circuit issued an opinion (the "Opinion") affirming the prior courts' holdings that payments under the Contract were settlement payments under a "forward contract" and therefore expressly exempt from the Code's preference provision under 11 U.S.C. ยง 546(e).

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Published In: Bankruptcy Updates, General Business Updates, Energy & Utilities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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