Because debtors may avoid certain transfers and contracts entered into during the ninety days before they filed their bankruptcy petition, trade creditors are understandably nervous about entering into contracts with customers who may appear to be on the edge of insolvency. Such anxiety is especially acute when the nature of the creditor’s business necessitates entering into numerous contracts during that period.

Utilities companies often are in the business of providing services under “forward contracts,” which is a contract for the purchase, sale, or transfer of a commodity with a maturity date more than two days after the date the contract is executed. Fortunately for such companies, the Fifth Circuit has recently issued an opinion in which they found that even “ordinary” forward contracts may not be avoided under § 546(e) of the Bankruptcy Code.

Although not earth shattering upon first glance, the Fifth Circuit’s opinion should not be ignored by creditors. Initially § 546(e) was intended to provide a safe harbor to securities and commodities brokers in order to protect the financial and securities markets from disruption. Nevertheless, the decision expands the safe harbor protection afforded by § 546(e) to reach “ordinary” forward supply contracts for commodities.

By looking only to the plain language of the statute, the Fifth Circuit held that § 546(e), made no distinction between “financial” forward contracts and “ordinary purchase and sale” forward contracts. This broad interpretation of § 546(e) may signify a trend which other courts are likely to follow. Already the Second Circuit and its lower courts have expanded the safe harbor provision beyond its financial and securities roots, and in doing so they have protected creditors from debtors’ claw back attempts.

Although the Eleventh Circuit has not yet issued an opinion on the subject, creditors facing an avoidance action should keep these cases in their back pocket, and discuss with their attorneys whether safe harbor may be found in a broader reading of § 546(e).