UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT
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No. 01-20950
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In The Matter Of: OLYMPIC NATURAL GAS CO,
Debtor
RANDY W WILLIAMS, Trustee,
Appellant,
versus
MORGAN STANLEY CAPITAL GROUP INC,
Appellee.
Appeal from the United States District Court
For the Southern District of Texas
June 28, 2002
Before DAVIS, EMILIO M. GARZA, and STEWART, Circuit Judges.
EMILIO M. GARZA, Circuit Judge:
Trustee Randy W. Williams (the “Trustee”) appeals the district court’s judgment affirming
the bankruptcy court’s grant of summary judgment in favor of Morgan Stanley Capital Group, Inc.,
(“Morgan Stanley”). On appeal, we must decide whether the Trustee is precluded from avoiding
certain payments made by the debtor to Morgan Stanley pursuant to 11 U.S.C. § 546(e) of the
Bankruptcy Code (the “Code”), which immunizes from avoidance settlement payments made by a
forward contract merchant.
In 1995, Morgan Stanley entered into a Natural Gas Sales and Purchase Contract (the
“Contract”) with GM Hydrocarbons, Ltd., who later assigned its interest in the Contract to Olympic
Natural Gas Co. and Olympic Gas Marketing, Inc. (collectively, “Olympic”). Pursuant to this
Contract, each month the parties would enter into a series of individual transactions, in which each
would act sometimes as buyer and sometimes as seller, after agreeing on the price, quantity, timing,
and delivery point for the natural gas. Because the parties conducted numerous transactions each
month, acting as both buyer and seller, the Contract provided for a single net payment to be made in
settlement of each month’s trading.
From January to May of 1997, a series of trades and payments occurred between Morgan
Stanley and Olympic. At the end of each month’s transactions, both parties paid the gross amount
due to one another. Pursuant to the Contract’s terms, Olympic transferred to Morgan Stanley cash
in the amount of $817,919.60 and $1,000,000 on April 11 and April 15, 1997, in payment for the
February transactions. Then, on April 29, 1997, Olympic transferred $10,850 to Morgan Stanley,
representing the gross amount owing from the March transactions. Finally, on May 22, 1997,
Olympic paid $48,000 to Morgan Stanley, in payment for the April transactions.
On June 6, 1997, an involuntary Chapter 7 petition was filed against Olympic Natural Gas
Co., and on June 13, 1997, Olympic Gas Marketing, Inc., filed a voluntary Chapter 11 petition. The
bankruptcy court subsequently consolidated both cases under Chapter 7 and appointed the Trustee.
The Trustee filed a complaint against Morgan Stanley seeking avoidance of the $1.8 million in
payments made by Olympic to Morgan Stanley for the February, March, and April natural gas
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transactions (collectively, the “Payments”). The Trustee alleged that the Payments were avoidable
as preferential transfers under 11 U.S.C. § 547(b)1 or fraudulent transfers under 11 U.S.C. § 548.2
As a defense, Morgan Stanley argued that the Payments were “settlement payments” made by a
“forward contract merchant” within the meaning of 11 U.S.C. § 546(e), and were therefore exempt
from avoidance. The bankruptcy court agreed, and granted summary judgment in favor of Morgan
Stanley. The district court subsequently affirmed the decision of the bankruptcy court, and the
Trustee now appeals.
We review the district court’s decision, as well as the underlying bankruptcy court
determination, de novo. In re Carney, 258 F.3d 415, 418 (5th Cir. 2001).
Section § 546(e) of the Code provides forward contract merchants with a complete defense
to avoidance claims brought by a Trustee.3 11 U.S.C. § 546(e). In order to qualify for the
exemption, a party must establish both that it is a “forward contract merchant,” and that the transfer
sought to be avoided is a “settlement payment.” Id. Thus, in order to determine whether the Trustee
1
11 U.S.C. § 547(b)(4)(A) provides:
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer
of an interest of the debtor in property--
(4) made--
(A) on or within 90 days before the date of the filing of the petition.
11 U.S.C. § 547(b)(4)(A).
2
The Trustee voluntarily dismissed its § 548 fraudulent transfer claims prior to this appeal.
3
11 U.S.C. § 546(e) provides:
Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the
trustee may not avoid a transfer that is a margin payment, as defined in section 101,
741, or 761 of this title, or settlement payment, as defined in section 101 or 741 of
this title, made by or to a commodity broker, forward contract merchant,
stockbroker, financial institution, or securities clearing agency, that is made before the
commencement of the case, except under section 548(a)(1)(A) of this title.
11 U.S.C. § 546(e) (emphasis added).
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can avoid the Payments made to Morgan Stanley, we must analyze whether Morgan Stanley is a
“forward contract merchant” and whether t he contested Payments are “settlement payments” as
provided in 11 U.S.C. § 546(e).
First, we must decide whether Morgan Stanley is a “forward contract merchant.” In order
to do so, we must determine whether it entered into a “forward contract” with the debtor. The term
“forward contract” is defined in 11 U.S.C. § 101(25), which provides:
“forward contract” means a contract (other than a commodity
contract) for the purchase, sale, or transfer of a commodity, as defined
in sect ion 761(8) of this title, or any similar good, article, service,
right, or interest which is presently or in the future becomes the
subject of dealing in the forward contract trade, or product or
byproduct thereof, with a maturity date more than two days after the
date the contract is entered into, including, but not limited to, a
repurchase transaction, reverse repurchase transaction, consignment,
lease, swap, hedge transaction, deposit, loan, option, allocated
transaction, unallocated transaction, or any combination thereof or
option thereon.
11 U.S.C. § 101(25) (emphasis added). The parties have offered opposing interpretations of this
definition, focusing on the inclusion of the parenthetical “other than a commodity contract” in the
first line. The Trustee co ntends that the transactions at issue in this case were not “forward
contracts,” but rather ordinary commodity contracts, which are exempted from the definition of
“forward contract” by the parenthetical. In essence, the Trustee claims that the Bankruptcy Code
divides the “world of commerce in commodities” into three parts: (1) futures, or on-exchange
financial instruments; (2) forwards, or off-exchange financial instruments; and (3) ordinary commodity
contracts (i.e. contracts for the commercial supply of goods with a future delivery date). Morgan
Stanley, on the other hand, argues that § 101(25)’s parenthetical simply reinforces the established
practice of distinguishing off-exchange forward contracts from on-exchange futures, or
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“commodities” contracts, and that no third category of “ordinary commodity contracts” exists.
We agree with Morgan Stanley, and conclude that the transactions here fall within the scope
of § 101(25)’s definition of forward contract. The commodities market is divided into only two
categories: (1) on-exchange futures transactions; and (2) off-exchange forward contracts. See 5
COLLIER ON BANKRUPTCY ¶ 556.02[2], at 556-5 (Lawrence P. King ed., 15th ed. 2002) (“Thus, the
terms ‘commodity contract’ and ‘forward contract,’ taken together, seamlessly cover the entirety of
transactions in the commodity and forward contract markets, whether exchange-traded, regulated,
over-the-counter or private.”). The term “commodity contract” “encompasses purchases and sales
of commodities for future delivery on, or subject to the rules of, a contract market or board of trade,
and leverage transactions.” Id. at 556-4. In contrast, “forward contracts” are “contracts for the
future purchase or sale of commodities that are not subject to the rules of a contract market or board
of trade.” Id. at 556-5.
With this background in place, we believe § 101(25)’s parenthetical reinforces the commonly-
understood distinction between on- and off-exchange transactions, by clarifying that not all contracts
with a delayed-delivery component are included within the definition of “forward contract.” By
exempting “commodities contracts” from the definition of “forward contract” in § 101(25), the Code
retains a distinct definition of “commodities contracts.” See 11 U.S.C. § 761(4) (defining
“commodity contract”).4 We decline to adopt an interpretation of “commodity contract” in § 101(25)
4
11 U.S.C. § 761(4) provides: “commodity contract” means--
(A) with respect to a futures commission merchant, contract for the purchase or sale
of a commodity for future delivery on, or subject to the rules of, a contract market or
board of trade;
(B) with respect to a foreign futures commission merchant, foreign future;
(C) with respect to a leverage transaction merchant, leverage transaction;
(D) with respect to a clearing organizati on, contract for the purchase or sale of a
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that would conflict with a definition set forth in another portion of the Code. See United States Nat’l
Bank of Oregon v. Indep. Ins. Agents of America, Inc., 508 U.S. 439, 460 (1993) (“Presumptively,
identical words used in different parts of the same act are intended to have the same meaning.”)
(internal quotations and citations omitted).
Furthermore, our interpretation is in accord with the traditional definition of “forward
contract.” Although the Trustee points to the fact that the transactions at issue here contemplated
actual delivery as evidence that they are not true “forward contracts,” courts in other circuits have
repeatedly stated that one of the distinguishing characteristics of a forward contract is that the parties
expect to make actual delivery. See, e.g., Nagel v. ADM Investor Servs., Inc., 217 F.3d 436, 441 (7th
Cir. 2000) (when eventual delivery of commodity is reasonably assured, contract is a forward); CFTC
v. Co Petro Marketing Group, Inc., 680 F.2d 573, 579 (9th Cir. 1982) (forward contract is
“predicated upon the expectation that delivery of the actual commodity by the seller to the original
contracting buyer will occur in the future”); Grain Land Coop v. Kar Kim Farms, Inc., 199 F.3d 983,
990 (8th Cir. 1999) (“[T]he contemplation of physical delivery of the subject commodity is the
hallmark of an unregulated cash-forward contract.”).
In sum, we see no reason to adopt the interpretation the Trustee advocates, and distinguish
between “financial” forward contracts, and “ordinary purchase and sale” forward contracts, when the
commodity for future delivery on, or subject to the rules of, a contract market or
board o f trade that is cleared by such clearing organization, or commodity option
traded on, or subject to the rules of, a contract market or board of trade that is cleared
by such clearing organization; or
(E) with respect to a commodity options dealer, commodity option.
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statutory language makes no such distinction.5 Thus, we conclude that Morgan Stanley is a “forward
contract merchant,” and that the transactions between the parties were in fact “forward contracts.”
We must next consider whether the Payments at issue were “settlement payments.” Section
101(51A) provides: “‘settlement payment’ means, for purposes of the forward contract provisions
of this title, a preliminary settlement payment, a partial settlement payment, an interim settlement
payment, a settlement payment on account, a final settlement payment, a net settlement payment, or
any other similar payment commonly used in the forward contract trade.” 11 U.S.C. § 101(51A)
(emphasis added).6 We believe that the definition of “settlement payment” in § 101(51A)
encompasses payments made in settlement of forward contract transactions, such as the Payments
at issue here. See 5 COLLIER ON BANKRUPTCY ¶ 546.06[2][b], at 546-48 (stating that “settlement
payment” should be interpreted very broadly); Kaiser Steel Corp. v. Pearl Brewing Co. (In re Kaiser
Steel Corp.), 952 F.2d 1230, 1240 (10th Cir. 1991) (advocating broad interpretation of “settlement
payment,” and holding that consideration paid to shareholders for their stock in connection with a
leveraged buyout would qualify as settlement payments under § 546(e)). We reject the Trustee’s
5
The Trustee argues that the immunization provision in § 546(e) was intended only to prevent
disruptions in the securities markets, and therefore off-exchange sales transactions between private
parties should not be exempt from avoidance, as they are not conducted on an exchange, and do not
impact the financial derivatives market. The legislative history of § 546(e) indicates that the provision
was intended “to minimize the displacement caused in the commodities and securities markets in the
event [of] a major bankruptcy affecting those industries.” H. R. REP. NO. 97-420, at 1 (1982),
reprinted in 1982 U.S.C.C.A.N. 583. More specifically, Congress sought to prevent the “ripple
effect” created by “the insolvency of one commodity or security firm from spreading to other firms
and possibly threatening the collapse of the affected industry.” Id. By including references to both
the commodities and the securities markets, it seems clear that Congress meant to exclude from the
stay and avoidance provisions both on-market, and the corresponding off-market, transactions.
6
The Bankruptcy court concluded that the Payments were not “settlement payments” as
defined in 11 U.S.C. § 741(8). Thus, we will analyze only whether the Payments fit within the
definition of “settlement payments” included in 11 U.S.C. § 101(51A).
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argument that in order to be exempt from avoidance, a “settlement payment” must be made on a
financial derivative contract, and be cleared or settled through a centralized system. See In re Resorts
Int’l, Inc., 181 F.3d 505, 515-16 (3d Cir. 1999) (holding payment for securities made in conjunction
with leveraged buyout is settlement payment, regardless of whether clearing agency was involved).
Thus, we hold that the Payments made pursuant to the Contract were “settlement payments” as
defined in the Code.
Because we conclude that the Payments made by the debtor were settlements payments made
to a forward contract merchant, we hold that pursuant to § 546(e), the Trustee cannot seek avoidance
of these Payments. For the foregoing reasons, we AFFIRM the district court’s order affirming the
bankruptcy court’s grant of summary judgment in favor of Morgan Stanley.
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