PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: NATIONAL GAS
DISTRIBUTORS, LLC,
Debtor.
RICHARD M. HUTSON, II, Trustee
for National Gas Distributors,
LLC,
Plaintiff-Appellee,
v.
E.I DU PONT DE NEMOURS AND
COMPANY, INCORPORATED;
SMITHFIELD PACKING COMPANY,
INCORPORATED, f/k/a Stadler’s
Country Hams, Incorporated, No. 07-2105
Defendants-Appellants.
INTERNATIONAL SWAPS AND
DERIVATIVES ASSOCIATION, INC.; BP
ENERGY COMPANY; BP CANADA
ENERGY MARKETING CORPORATION;
NEXEN MARKETING; NEXEN
MARKETING U.S.A. INC .,
Amici Supporting Appellants,
FIRST CITIZENS BANK & TRUST
COMPANY,
Amicus Supporting Appellee.
2 In Re: NATIONAL GAS DISTRIBUTORS
Appeal from the United States Bankruptcy Court
for the Eastern District of North Carolina, at Wilson.
A. Thomas Small, Bankruptcy Judge.
(8-06-AP-00266-ATS; 8-06-AP-00267-ATS; 8-06-AP-
00268-ATS)
Argued: October 28, 2008
Decided: February 11, 2009
Before NIEMEYER and MICHAEL, Circuit Judges, and
Richard D. BENNETT, United States District Judge for the
District of Maryland, sitting by designation.
Reversed and remanded by published opinion. Judge Nie-
meyer wrote the opinion, in which Judge Michael and Judge
Bennett joined.
COUNSEL
ARGUED: Earle Duncan Getchell, Jr., MCGUIREWOODS,
L.L.P., Richmond, Virginia, for Appellants. John Arlington
Northen, NORTHEN BLUE, L.L.P., Chapel Hill, North Caro-
lina, for Appellee. ON BRIEF: Thomas E. Cabaniss, Dion
William Hayes, MCGUIREWOODS, L.L.P., Richmond, Vir-
ginia; Robert A. Cox, Jr., MCGUIREWOODS, L.L.P., Char-
lotte, North Carolina, for Appellants. David M. Rooks, Vicki
L. Parrott, Stephanie Osborne-Rodgers, NORTHEN BLUE,
L.L.P., Chapel Hill, North Carolina, for Appellee. Joshua
Cohn, Hugh McDonald, Anna Taruschio, Erika Singer, Mat-
thew North, ALLEN & OVERLY, L.L.P., New York, New
York; David M. Warren, POYNER & SPRUILL, L.L.P.,
Rocky Mount, North Carolina, for International Swaps and
Derivatives Association, Inc., Amicus Supporting Appellants.
In Re: NATIONAL GAS DISTRIBUTORS 3
James S. Carr, Craig A. Wolfe, Benjamin Blaustein, KEL-
LEY DRYE & WARREN, L.L.P., New York, New York, for
BP Energy Company, BP Canada Energy Marketing Corpora-
tion, Nexen Marketing, and Nexen Marketing U.S.A. Inc.,
Amici Supporting Appellants. Michael P. Flanagan, Paul A.
Fanning, WARD AND SMITH, P.A., Greenville, North Caro-
lina, for First Citizens Bank & Trust Company, Amicus Sup-
porting Appellee.
OPINION
NIEMEYER, Circuit Judge:
On December 14, 2006, the Trustee in this Chapter 11
bankruptcy of National Gas Distributors, LLC, a distributor of
natural gas to industrial, governmental, and other customers,
commenced these adversary proceedings under 11 U.S.C.
§§ 548(a) and 550(a) against three of National Gas’ customers
by filing complaints to avoid numerous natural gas supply
contracts entered into with these customers during the year
before the bankruptcy petition was filed. The Trustee alleged
that the contracts and transfers of natural gas were fraudulent
conveyances because they were made for less than market
value and when the debtor was insolvent.
The customers, E.I. du Pont de Nemours and Company, the
Smithfield Packing Company, Inc., and Stadler’s Country
Hams, Inc.,1 filed motions to dismiss the Trustee’s complaints
or alternatively for summary judgment, claiming that the con-
tracts were "swap agreements," which would provide them
with a complete defense to the Trustee’s complaints under the
Bankruptcy Code, 11 U.S.C. §§ 546(g), 548(c), and
548(d)(2)(D). Specifically, they claimed that the contracts
1
After entering into the contracts in question, Stadler’s Country Hams
and Smithfield Packing merged, and Smithfield Packing is a party as to
its own contracts, as well as those of Stadler’s Country Hams.
4 In Re: NATIONAL GAS DISTRIBUTORS
were "commodity forward agreements," which are included in
the definition of "swap agreements." See 11 U.S.C.
§ 101(53B)(A)(i)(VII). They also claimed that they had taken
the transfers in good faith, an assertion that the Trustee does
not dispute.
The bankruptcy court denied the motions by orders dated
May 24, 2007, finding that the contracts in question were not
"swap agreements" as defined in 11 U.S.C. § 101(53B) but
simply "agreement[s] by a single end-user to purchase a com-
modity" and therefore were not exempt from avoidance. Rely-
ing mostly on legislative history, the court concluded that in
exempting "swap agreements," Congress intended to protect
financial markets from the destabilizing effects of bankruptcy
and that because the natural gas supply contracts in this case
were physically settled and not traded in financial markets,
exempting them from avoidance proceedings would not serve
Congress’ purposes.
The customers thereafter filed motions requesting the bank-
ruptcy court to amend its orders insofar as the court made
conclusions about the supply contracts that appeared to be
factual in nature. The bankruptcy court denied the motions by
orders dated June 20, 2007, noting that it had not decided the
boundaries of what a swap agreement was under § 101(53B)
but rather concluded, as a matter of law, that each contract at
issue in this case was "simply an agreement by a single end-
user to purchase a commodity" and therefore was not a swap
agreement.
In this direct interlocutory appeal from the bankruptcy
court’s orders, we conclude that the grounds given by the
bankruptcy court in finding that the contracts in this case were
not swap agreements are not supported by the definition of
"swap agreement" in 11 U.S.C. § 101(53B). Accordingly, we
reverse and remand for further proceedings, allowing the cus-
tomers to attempt to demonstrate factually and legally that
In Re: NATIONAL GAS DISTRIBUTORS 5
their natural gas supply contracts were swap agreements
based on any classification included in § 101(53B).
I
During the year before National Gas filed its petition, du
Pont, Smithfield Packing, and Stadler’s Country Hams pur-
chased natural gas for specific facilities under a series of con-
tracts with National Gas. The contracts consisted of a "Base
Contract for Sale and Purchase of Natural Gas," using Stan-
dard Form 6.3.1 of the North American Energy Standards
Board, Inc., and a series of e-mails confirming telephone con-
versations between representatives of the parties in which
they fixed the price of future deliveries of natural gas during
specified time periods. Performance of the contracts formed
in this way always commenced more than two days after the
contract’s formation and fixed the price of gas for a period of
months for each designated facility. The contracts required
National Gas to sell and deliver the gas and the customer to
receive and purchase the gas at the specified price, regardless
of the market price of natural gas, or to pay the difference
between the agreed-upon price and the market price.
In this manner, these natural gas supply contracts provided
a hedge against fluctuations in the market price of natural gas
and the adverse effects such fluctuations might have on the
customers’ operations. Although the contracts were not trans-
ferred on exchanges, nor did they even involve the use of bro-
kers or middlemen, the customers did use them, along with
other forwards and derivatives, to manage their commodity
risks.
There is no suggestion in this case that any party breached
any one of the contracts, and the Trustee agrees that the cus-
tomers in this case acted in good faith both in entering into the
contracts and in receiving transfers under them.
On January 20, 2006, National Gas filed a voluntary peti-
tion for relief under Chapter 11 of the Bankruptcy Code, and
6 In Re: NATIONAL GAS DISTRIBUTORS
shortly thereafter, the bankruptcy court appointed Richard M.
Hutson, II, as Trustee. The Trustee thereafter filed complaints
against more than 20 former customers of National Gas,
including du Pont and Smithfield Packing, seeking to avoid
the contracts under 11 U.S.C. § 548(a) and to recover the
transfers from the customers pursuant to 11 U.S.C. § 550(a)
on the ground that the contracts and transfers were fraudulent.
The Trustee alleged that National Gas entered into contracts
to sell natural gas to the customers at below market prices and
that at the time of the transfers, National Gas was insolvent,
thereby resulting in a constructively fraudulent conveyance.
See 11 U.S.C. § 548(a)(1)(B). In the alternative, the Trustee
alleged that the former management of National Gas inten-
tionally used the contracts to "hinder, delay, or defraud"
National Gas’ creditors, thereby engaging in an actually
fraudulent conveyance. See 11 U.S.C. § 548(a)(1)(A). The
Trustee sought to recover the cash value of the difference
between the market prices when the customers took delivery
and the prices they paid under the contracts, which the
Trustee alleged is over $4 million.
The customers, du Pont and Smithfield Packing, filed
motions to dismiss the complaints or for summary judgment,
contending that the Trustee cannot avoid the contracts and
transfers because "each Transfer was made by or to a swap
participant under or in connection with a swap agreement"
and was thus not avoidable under 11 U.S.C. §§ 546(g) and
548(d)(2)(D). As they asserted, a "swap agreement" is defined
in § 101(53B) to include a "commodity forward agreement,"
which they allege covers the natural gas supply contracts in
this case. The customers also contended that they received the
transfers for value and that, as conceded by the Trustee, they
received such transfers "in good faith."
The bankruptcy court denied the customers’ motions by
orders dated May 24, 2007, concluding that the natural gas
supply contracts in this case were not "commodity forward
agreements." Based on legislative history, as well as its con-
In Re: NATIONAL GAS DISTRIBUTORS 7
struction of § 101(53B), the court ruled that the natural gas
supply contracts in this case were insufficiently tied to finan-
cial markets to be commodity forward agreements. In re Nat’l
Gas Distributors, LLC, 369 B.R. 884, 897-900 (Bankr.
E.D.N.C. 2007). More particularly, the court found that "com-
modity forward agreements" must be "regularly the subject of
trading" in financial markets and must be settled by financial
exchanges of differences in commodity prices, whereas the
contracts in this case were directly negotiated between the
seller and purchaser and contemplated physical delivery of the
commodity to the purchasers. Id. at 898-99.
The customers filed motions to amend the May 24 orders,
requesting the court to eliminate or clarify certain statements
in its opinion that could be construed as factual findings and
to leave open factual issues for later development. By orders
dated June 20, 2007, the bankruptcy court denied the motions
to amend, stating that it had "not endeavor[ed] to determine
the defining boundaries of ‘swap agreements’ under the Bank-
ruptcy Abuse Prevention and Consumer Protection Act of
2005, or anything approaching an issue that broad." The court
noted that it had only decided "whether, as a matter of law,
the contract between the parties came within the newly
expanded definition of swap agreement," i.e., "within the
parameters of a swap agreement as defined by § 101(53B)."
After pointing out that it did not purport to construe the vari-
ous types of agreements that qualified as swap agreements, it
said that it "determined, after review of the pleadings, the
contract and related documents submitted by [the customers],
the relevant statutes, and the legislative history, that the con-
tract[s] at issue here [are] simple supply contract[s]" and that
the contracts were "not in that league" of agreements defined
as "swap agreements."
The district court granted the customers permission to file
an interlocutory appeal with respect to both the May 24 and
June 20 orders and certified the questions to this court for
8 In Re: NATIONAL GAS DISTRIBUTORS
direct appeal. We authorized direct appeal and accordingly
have jurisdiction pursuant to 28 U.S.C. § 158(d)(2).
II
Since enactment of the 1978 Bankruptcy Code, Congress
has provided safe harbors from the destabilizing effects of
bankruptcy proceedings for parties to specified commodities
and financial contracts in order to protect financial markets.
To do this, Congress limited the application to these parties
of Bankruptcy Code provisions such as the automatic stay and
trustee avoidances of preferences and fraudulent conveyances.
It was thought that financial market stabilization would be
achieved under the following rationale:
These exceptions or "safe harbors" are necessary, it
is thought, for the protection of financial markets,
including over-the-counter ("OTC") markets on
which most derivatives contracts are executed. With-
out these safe harbors, markets might suffer serious
shocks — perhaps even a systemic liquidity crisis,
causing markets to collapse — when debtors enter
bankruptcy. Counterparties to financial contracts
would find themselves subject to the automatic stay
for extended periods. They would be unable to liqui-
date volatile contracts and thereby limit their expo-
sure to market movements. Additionally, a debtor in
bankruptcy would be free to "cherrypick" multiple
contracts with the same party. Instead of netting the
contracts — i.e., setting-off losses under some con-
tracts against gains under others with the same coun-
terparty — the debtor could dispose of the contracts
independently. "In-the-money" contracts could be
assumed; "out-of-the-money" contracts could be
rejected. In this way, the debtor could lock-in gains
on profitable contracts and (due to its insolvency)
limit liability for losses under unprofitable ones. The
counterparty to these contracts would find itself pay-
In Re: NATIONAL GAS DISTRIBUTORS 9
ing in full on the assumed contracts and receiving
only a fraction of its claim on the rejected. Losses
from indefinite exposure to market movements and
from cherrypicking could produce financial distress
in the counterparty itself, forcing it to default on its
own contracts with other parties. As one distressed
party infects another, a domino effect could ensue,
undermining the entire financial market.
Edward R. Morrison & Joerg Riegel, Financial Contracts and
the New Bankruptcy Code: Insulating Markets From Bank-
rupt Debtors and Bankruptcy Judges, 13 Am. Bankr. Inst. L.
Rev. 641, 642 (2005) (footnotes omitted).
This explanation appears to be an accurate description of
the basis on which Congress relied to justify providing safe
harbors to participants in financial derivatives markets. As the
House Report in connection with the 1982 Amendments to
the Bankruptcy Code stated:
Due to the structure of the clearing system in the
commodities industry and the sometimes volatile
nature of the commodities market, the Bankruptcy
Code, as enacted in 1978, expressly provides certain
protections to the commodities market to insure the
stability of the market. These protections are
intended to prevent the insolvency of one commod-
ity firm from spreading to other brokers or clearing
agencies and possibly threatening the collapse of the
market.
H.R. Rep. No. 97-420, at 2 (1982), reprinted in 1982
U.S.C.C.A.N. 583, 584 (citation omitted). And similarly, in
connection with the 1990 Amendments to the Bankruptcy
Code, the House Report stated:
U.S. bankruptcy law has long accorded special treat-
ment to transactions involving financial markets, to
10 In Re: NATIONAL GAS DISTRIBUTORS
minimize volatility. Because financial markets can
change significantly in a matter of days, or even
hours, a non-bankrupt party to ongoing securities
and other financial transactions could face heavy
losses unless the transactions are resolved promptly
and with finality.
H.R. Rep. No. 101-484, at 2 (1990), reprinted in 1990
U.S.C.C.A.N. 223, 224.
With the 2005 Amendments to the Bankruptcy Code,
adopted in the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23
(2005) ("BAPCPA"), Congress substantially expanded the
protections it had given to financial derivatives participants
and transactions by expanding the definition of "swap partici-
pants" and "swap agreements" that are exempted from the
automatic stay and from trustees’ avoidance powers. As the
House Report attached to the 2005 bill explained,
As amended, the definition of "swap agreement" will
update the statutory definition and achieve contrac-
tual netting across economically similar transactions
that are the subject of recurring dealings in the swap
agreements.
The definition of "swap agreement" originally was
intended to provide sufficient flexibility to avoid the
need to amend the definition as the nature and uses
of swap transactions matured. To that end, the phrase
"or any other similar agreement" was included in the
definition.
H.R. Rep. No. 109-31, pt. 1, at 121 (2005), reprinted in 2005
U.S.C.C.A.N. 88, 183. The current definition of "swap agree-
ment" is now extremely broad, covering several dozen enu-
merated contracts and transactions, as well as combinations of
them, options on them, and similar contracts or transactions.
In Re: NATIONAL GAS DISTRIBUTORS 11
See 11 U.S.C. § 101(53B)(A). And the Code now protects all
counterparties to these agreements, whereas before 2005, the
Code’s safe harbors protected only certain counterparties.
Compare 11 U.S.C. § 101(53C) (2006) (defining "swap par-
ticipant" very broadly) with 11 U.S.C. § 101(26) (2000)
(defining "forward contract merchant" narrowly). See gener-
ally Morrison & Riegel, supra, at 641-42. The resulting statu-
tory scheme may be summarized readily, although its
application proves more difficult.2 Under the Bankruptcy
Code, trustees are authorized to avoid contracts and transfers
of debtors’ property "made or incurred on or within 2 years
before the date of the filing of the petition" when the contract
or transfer amounts to a fraudulent contract or transfer, as
fraudulent is defined in the Code. 11 U.S.C. § 548(a). The
Code, however, exempts from this avoidance authority trans-
fers "made by or to a swap participant or financial participant,
under or in connection with any swap agreement." 11 U.S.C.
§ 546(g); see also 11 U.S.C. § 548(d)(2)(D). The term "swap
participant" is defined to mean "an entity that . . . has an out-
standing swap agreement with the debtor." 11 U.S.C.
§ 101(53C). And "swap agreement," in turn, is defined to
mean, as relevant here:
(i) any agreement, including the terms and condi-
tions incorporated by reference in such agreement,
which is —
* * *
(II) a spot, same day-tomorrow, tomorrow-
2
In this case, we refer to and apply the 2005 statutory language in effect
at the time this case was commenced, unless otherwise indicated.
Although Congress did make a number of technical and clarifying changes
to the language, effective December 12, 2006, it expressly stated those
changes should not apply to cases commenced before the enactment date.
Pub. L. No. 109-390, § 7, 120 Stat. 2692, 2700 (2006). This case was
commenced by the filing of a voluntary petition on January 20, 2006.
12 In Re: NATIONAL GAS DISTRIBUTORS
next, forward, or other foreign exchange or
precious metals agreement;
* * *
(VII) a commodity index or a commodity
swap, option, future, or forward agreement;
or
* * *
(ii) any agreement or transaction that is similar to
any other agreement or transaction referred to in this
paragraph and that —
(I) is of a type that has been, is presently,
or in the future becomes, the subject of
recurrent dealings in the swap markets
(including terms and conditions incorpo-
rated by reference therein); and
(II) is a forward, swap, future, or option on
one or more rates, currencies, commodities,
equity securities, or other equity instru-
ments, debt securities or other debt instru-
ments, quantitative measures associated
with an occurrence, extent of an occur-
rence, or contingency associated with a
financial, commercial, or economic conse-
quence, or economic or financial indices or
measures of economic or financial risk or
value;
(iii) any combination of agreements or transactions
referred to in this subparagraph; . . . .
11 U.S.C. § 101(53B)(A). Most of the transactions listed in
the definition, however, are not defined in the Bankruptcy
In Re: NATIONAL GAS DISTRIBUTORS 13
Code. As a result, courts must rely on normal principles of
statutory interpretation, including dictionary definitions and
legislative history.
In this case, National Gas’ customers, du Pont and Smith-
field Packing, invoked the protections of 11 U.S.C. §§ 546(g)
and 548(d)(2)(D), alleging that their natural gas supply con-
tracts with National Gas were "swap agreements" as defined
in 11 U.S.C. § 101(53B) in that they were "commodity for-
ward agreements," a class of transactions listed in the defini-
tion of "swap agreement." 11 U.S.C. § 101(53B)(A)(i)(VII).
"Commodity forward agreement," however, is not itself
defined in the Bankruptcy Code, and no case to date has pro-
vided a definition.
The bankruptcy court, in a staunch effort, conducted an
analysis of § 101(53B) and drew on legislative history to con-
clude that a "commodity forward agreement" has to be traded
in a financial market and cannot involve physical delivery of
the commodity to an end user. In re Nat’l Gas Distributors,
369 B.R. at 898-99. Concluding that the contracts in this case
were not traded in financial markets but were simply natural
gas supply contracts, the bankruptcy court held that they were
not "commodity forward agreements" exempt from the Trust-
ee’s avoidance authority. Id. at 900.
In this case of first impression, we are therefore left to
define "commodity forward agreement" without being given
any definition by the Bankruptcy Code.
III
At the outset, we note that the Bankruptcy Code and the
financial marketplace recognize differences in the definitions
of terms that common parlance might not recognize. Thus, the
Bankruptcy Code uses both "forward contract" and "forward
agreement" but defines only "forward contract," and not "for-
ward agreement," apparently making a distinction between
14 In Re: NATIONAL GAS DISTRIBUTORS
the terms. The House Report that accompanied the 2005
Amendments enacted as part of BAPCPA appears to confirm
this:
The use of the term "forward" in the definition of
"swap agreement" is not intended to refer only to
transactions that fall within the definition of "for-
ward contract." Instead, a "forward" transaction
could be a "swap agreement" even if not a "forward
contract."
H.R. Rep. 109-31, pt. 1, at 122, reprinted in 2005
U.S.C.C.A.N. at 184. And this legislative history comports
with the distinction made between "contracts" and "agree-
ments" in Black’s Law Dictionary. As Black’s states, "[t]he
term ‘agreement,’ although frequently used as synonymous
with the word ‘contract,’ is really an expression of greater
breadth of meaning and less technicality. Every contract is an
agreement; but not every agreement is a contract." Black’s
Law Dictionary 74 (8th ed. 2004) (internal quotation marks
and citation omitted).
A distinction also exists in the meanings of a "future agree-
ment" and a "forward agreement." Even though both are
included in the definition of a "swap agreement," 11 U.S.C.
§ 101(53B)(A), the marketplace makes a distinction, at least
where the terms "future" and "forward" are used in conjunc-
tion with "contract." The Chicago Mercantile Exchange’s
online glossary’s definition states that "[i]n contrast to futures
contracts, forward contracts are not standardized and not
transferable." CME Glossary of Terms, http://www.cme.com/
glossary/F.html (last visited Jan. 16, 2009).
In holding in this case that the natural gas supply contracts
are not "commodity forward agreements" exempt from the
Trustee’s avoidance efforts, the bankruptcy court concluded
that all of the agreements or transactions listed in 11 U.S.C.
§ 101(53B)(A)(i) were "financial instruments traded in the
In Re: NATIONAL GAS DISTRIBUTORS 15
swap markets," and therefore, if any agreement was not traded
on an exchange or in a financial market, it could not be a
"swap agreement." In re Nat’l Gas Distributors, 369 B.R. at
898-99. To support its conclusion, the court referred to
repeated references in the legislative history to "swap mar-
kets" and relied on its construction of the language of 11
U.S.C. § 101(53B):
It is true enough that § 101(53B)(A)(i) lists numer-
ous agreements that fall within the definition of
"swap agreement." Section 101(53B)(A)(ii) provides
for additional agreements or transactions that are
"similar" to those referred to in § 101(53B)(A)(i)
and are the subject of recurrent dealings in the swap
market and are forwards, swaps, futures, or options
"on one or more rates, currencies, commodities,
equity securities, or other equity instruments . . ."
The word "similar," rather than expanding the uni-
verse of agreements that come within the umbrella of
swap agreements, actually limits the agreements to
those that "bear[] a family resemblance" to the other
agreements and transactions that enjoy the protec-
tions of the Bankruptcy Code. The other agreements
described in § 101(53B)(A)(i) are found in financial
markets. They do not include contracts between a
seller and an end-user for delivery of a product that
happens to be a recognized commodity.
Id. at 899 (citation omitted). After concluding that each con-
tract in this case was "simply an agreement by a single end-
user to purchase a commodity," which was physically deliv-
ered to the purchaser, id., the court explained that a traditional
supply contract is not "swept into the realm of swap agree-
ments":
There is nothing to suggest that the contract between
Smithfield and the debtor was traded on a financial
16 In Re: NATIONAL GAS DISTRIBUTORS
market, so in this case only the debtor’s estate and
Smithfield would be affected by a recovery.
Id.
If one were to assume, as the bankruptcy court did, that all
swap agreements, including "commodity forward agree-
ments," must be traded on exchanges or in financial markets
and that the contracts in this case were simple supply con-
tracts, the court’s position is logically sound. The assump-
tions, however, do not withstand closer scrutiny.
Because the term "agreement" is broader than the term
"contract," as discussed above, a forward contract must also
be a forward agreement (although it does not follow that
every forward agreement is a forward contract). We can there-
fore look to the Bankruptcy Code’s definition of "forward
contract," see 11 U.S.C. § 101(25), to determine whether the
bankruptcy court gave too restrictive a definition for "forward
agreement." If a forward contract need not be traded on an
exchange or in a financial market, it follows that neither does
a forward agreement need to be traded on an exchange or in
a financial market.3
The Bankruptcy Code does not require that a "forward con-
tract" be traded on an exchange or in a market. Section
101(25)(A) defines "forward contract" to mean "a contract
(other than a commodity contract)," distinguishing a "forward
contract" from a "commodity contract." The term "commodity
contract" specifically includes contracts "on, or subject to the
rules of, a contract market or board of trade." 11 U.S.C.
3
National Gas’ customers in this case do not attempt to rely on the posi-
tion that the natural gas supply contracts are "forward contracts," as
defined in 11 U.S.C. § 101(25). The classification of the contracts in this
case as "forward contracts" provides little advantage to a party who does
not claim to be a "forward contract merchant," which the customers pre-
sumably do not claim, at least in this appeal. See 11 U.S.C. § 101(26)
(defining "forward contract merchant").
In Re: NATIONAL GAS DISTRIBUTORS 17
§ 761(4). By explicitly excluding "commodity contracts" from
the definition of "forward contracts," Congress apparently
intended that "forward contracts" need not be traded on any
exchange or in any financial market. See In re Borden Chems.
& Plastics Operating LP, 336 B.R. 214, 218 (Bankr. D. Del.
2006). Congress reinforced this reading in 2006, when it
amended § 101(25)(A) to include "as defined in section 761"
in the parenthetical after "commodity contract." Pub. L. No.
109-390, § 5(a)(1), 120 Stat. 2692, 2695 (2006). The legisla-
tive history stated that this was a "technical and clarifying
change[]." H.R. Rep. No. 109-648, pt. 1, at 6-7 (2006),
reprinted in 2006 U.S.C.C.A.N. 1585, 1591-92. See generally
5 Collier on Bankruptcy ¶ 556.02[2] (15th ed. rev. 2008).
Courts have accordingly found no requirement that "for-
ward contracts" be traded on an exchange or in a market, not-
ing that they may be directly negotiated, in much the same
manner as the contracts in this case. See, e.g., In re Olympic
Natural Gas Co., 294 F.3d 737, 741 (5th Cir. 2002). And, var-
ious non-bankruptcy cases have used "forward agreement" to
refer to non-market traded, private agreements. See Donoghue
v. Centillium Communications, Inc., No. 05 Civ. 4082
(WHP), 2006 WL 775122, at *2 (S.D.N.Y. Mar. 28, 2006);
Breyer v. First Nat’l Monetary Corp., 548 F. Supp. 955, 962
(D.C.N.J. 1982).
Finally, Black’s Law Dictionary distinguishes a "forward
contract" from a "futures contract" on the basis that a futures
contract is traded on a formal exchange. "Unlike a futures
contract, a forward contract is not traded on a formal
exchange." Black’s Law Dictionary 345 (8th ed. 2004).
The weight of authority thus indicates that "forward con-
tracts" are not found only in the financial markets. Rather,
they may be directly negotiated, as were the contracts in this
case. Because we conclude that every "forward contract" is
also a "forward agreement," it follows that we must reject the
district court’s assumption that all of the agreements in
18 In Re: NATIONAL GAS DISTRIBUTORS
§ 101(53B)(A)(i) must be "found in the financial markets."
See In re Enron Corp., 306 B.R. 465, 469 (Bankr. S.D.N.Y.
2004) (characterizing directly negotiated natural gas hedging
agreements as "swap agreements"); see also In re Interbulk,
Ltd., 240 B.R. 195, 197 (Bankr. S.D.N.Y. 1999) (agreements
negotiated by telephone were "swap agreements").
The bankruptcy court also assumed that the contracts in this
case were "simple supply contract[s]," which are not within
the definition of a swap agreement. In re Nat’l Gas Distribu-
tors, 369 B.R. at 893, 900. But this assumption is an oversim-
plification. Although the contracts in this case did provide a
supply of gas to the customers’ facilities, they also were part
of a series of contracts by which the customers hedged their
risk of future fluctuations in the price of natural gas. Although
it is true that these particular contracts were not traded in
financial markets — and perhaps were not even assignable —
they nonetheless could have an influence on markets in which
participants enter into hedging agreements. A business can
enter into a forward agreement with a party who then, in reli-
ance on that forward agreement, enters into another contract
with yet another market participant, who in turn may enter
into even other contracts. And so a simple forward agreement
may readily become tied into the broader markets that Con-
gress aimed to protect in BAPCPA. The Seventh Circuit
described this same type of situation in Nagel v. ADM Inves-
tor Servs., Inc., 217 F.3d 436, 438-39 (7th Cir. 2000), where
farmers entered into forward contracts with grain merchants
who, in reliance upon their contracts with the farmer, pro-
ceeded to turn around and enter into futures contracts on
established commodities markets. In this case, the customers
claim a similar relationship with markets, alleging that their
contracts with National Gas were hedging contracts that were
only a part of a larger risk management program in which the
customers "regularly use[d] forwards and other derivatives."
The bankruptcy court’s conclusion that these contracts
were simple supply contracts also rested on the fact that the
In Re: NATIONAL GAS DISTRIBUTORS 19
contracts involved the physical delivery of gas, thus distin-
guishing them from contracts settled financially. The court
concluded that a "commodity forward agreement" must have
a financial settlement, such as when settlement occurs by the
"losing" party transferring cash or financial assets to the "win-
ning" party at the specified time. Thus, supply contracts, con-
templating physical delivery of the commodity to purchasers,
could not qualify as "commodity forward agreements."
Although the legislative history of BAPCPA does provide
support for the notion that traditional supply agreements are
not "swap agreements," see H.R. Rep. No. 109-31, pt. 1, at
122, reprinted in 2005 U.S.C.C.A.N. at 183 (noting that
"[t]raditional commercial arrangements, such as supply agree-
ments" cannot be treated as swap agreements under the Bank-
ruptcy Code), the conclusion that the contracts in this case are
traditional supply contracts overlooks the fact that the con-
tracts in this case contained real hedging elements. The con-
tracts obliged the customers to buy, and National Gas to sell,
gas on a future date at a price fixed at the time of contracting,
regardless of fluctuations in the market price. And if either
party did not perform, that party was required to pay the dif-
ference between the contract price and the market price.
Nothing in the Bankruptcy Code or in its legislative history
suggests a requirement that a forward agreement cannot
involve the actual delivery of the commodity. Numerous
courts have found that "forward contracts" may be physically
settled, and it follows that "forward agreements" may like-
wise be physically settled. See In re Olympic Natural Gas
Co., 294 F.3d at 742 (observing that there was "no reason to
adopt the interpretation the Trustee advocates, and distinguish
between ‘financial’ forward contracts, and ‘ordinary purchase
and sale’ forward contracts, when the statutory language
makes no such distinction"); In re Borden, 336 B.R. at 223
(characterizing physically settled natural gas supply agree-
ments as "forward contracts").
20 In Re: NATIONAL GAS DISTRIBUTORS
Congress’ inclusion of "spot" commodity transactions in
the definitions contained in § 101(53B) further refutes the
bankruptcy court’s position that "swap agreements" cannot
involve physical delivery. The definition of a spot agreement
is one in which the commodity is "available for immediate
delivery after sale." Merriam-Webster’s Collegiate Dictionary
1208 (11th ed. 2007) (emphasis added). The definition of
"swap agreement" in the BAPCPA includes "spot, same day-
tomorrow, tomorrow-next, forward, or other foreign exchange
or precious metals agreement." 11 U.S.C. § 101(53B)
(A)(i)(II) (emphasis added). Similarly, in 2006, as part of the
"technical and clarifying changes," Congress added "spot
transaction" in the catchall clause in § 101(53B)(A)(ii). Pub.
L. No. 109-390, § 5, 120 Stat. at 2696; H.R. Rep. No. 109-
648, pt. 1, at 6-7, reprinted in 2006 U.S.C.C.A.N. at 1591-92.
We thus conclude that Congress did not preclude physical
delivery in connection with a "commodity forward agree-
ment," as defined in § 101(53B)(A).
Because the bankruptcy court gave the definition of "com-
modity forward agreement" a more narrow reading than the
statute bears, we reverse its orders of May 24, 2007, and June
20, 2007, and remand for further proceedings consistent with
this opinion.
IV
In remanding, we do not direct the bankruptcy court to find
that the contracts in this case are "commodity forward agree-
ments" or "swap agreements." Rather, we return this case for
further consideration of the issue in light of the law and the
facts. In determining whether the contracts in this case are
"commodity forward agreements," the bankruptcy court will
not, unfortunately, have the benefit of developed case law, nor
even the benefit of clear marketplace definitions. The market-
place is creative, designing instruments to fit the needs of the
moment, and Congress sought to anticipate this in BAPCPA.
In Re: NATIONAL GAS DISTRIBUTORS 21
In doing so, however, Congress forwent describing the ele-
ments of transactions it sought to exempt from the effects of
bankruptcy. Indeed, its repetitive generalized comments about
protecting financial markets from the instability that bank-
ruptcy proceedings might cause and the potpourri of agree-
ments included in the term "swap agreement" barely
distinguish any major commercial contract from a swap
agreement.
Moreover, the policies informing these provisions of the
Bankruptcy Code are often in tension. Even though an overar-
ching policy of the Bankruptcy Code is to provide equal dis-
tribution among creditors, see Howard Delivery Serv., Inc. v.
Zurich Am. Ins. Co., 547 U.S. 651, 667 (2006), in enacting 11
U.S.C. §§ 546(g) and 548(d)(2)(D), Congress intended to
serve a countervailing policy of protecting financial markets
and therefore favoring an entire class of instruments and par-
ticipants.
Notwithstanding the language of the Bankruptcy Code and
the generalized language of the legislative history, courts and
academics have attempted to define swap agreements based
on the functioning of markets. See, e.g., In re Enron Corp.,
328 B.R. 58, 69-70 (Bankr. S.D.N.Y. 2005) (quoting In re
Interbulk, 240 B.R. at 201). But consulting these generalized
definitions may not always contribute much to the appropriate
interpretation of 11 U.S.C. § 101(53B), which contains its
own counterintuitive definitions, as well as inconsistencies.
In concluding that the bankruptcy court in this case con-
strued "commodity forward agreements" too narrowly — i.e.,
by requiring that they be traded on an exchange and not
involve physical delivery of the commodity — we do so only
on the basis of the imperfect statute, recognizing the bank-
ruptcy court’s rational intuitions. Although we do not attempt
to provide a definition ourselves, we can point to certain non-
exclusive elements that the statutory language appears to
require.
22 In Re: NATIONAL GAS DISTRIBUTORS
First, the subject of a commodity forward agreement must
be a commodity. That is, substantially all of the expected
costs of performance must be attributable to the expected
costs of the underlying commodity, determined at the time of
contracting. This element, which is inherent in the word
"commodity," distinguishes a commodity forward agreement,
in which the benefits or detriments depend on future fluctua-
tions in commodity prices, from many supply contracts, in
which costs attributable to other factors, such as packaging,
marketing, transportation, service, and similar matters con-
tribute to a greater portion of the costs.
Second, a forward commodity contract, in being "forward,"
must require a payment for the commodity at a price fixed at
the time of contracting for delivery more than two days after
the date the contract is entered into. Cf. 11 U.S.C.
§ 101(25)(A) (requiring the same of "forward contracts"). A
maturity date in the future means that the benefit or detriment
from the contract depends on future fluctuations in the market
price of the commodity.
Third, as a forward agreement in relation to a commodity,
in addition to the price element, the quantity and time ele-
ments must be fixed at the time of contracting. See, e.g., In
re Olympic Natural Gas Co., 294 F.3d at 739 (the forward
contract at issue contained "the price, quantity, timing, and
delivery point for the natural gas"); In re Borden, 336 B.R. at
221 (the forward contracts at issue contemplated "a specified
quantity of natural gas . . . at a fixed price"). Where The Wall
Street Journal has used the term "forward agreement" and
provided details of the transaction, it has always described
fixed quantities and prices: "35 million shares," "$250,000 of
marks," and "$1 million of bonds."4 Non-bankruptcy case law
4
Respectively, Business Brief — Baxter International Inc.: Medical-
Devices Company to Settle Forward Agreements, Wall St. J., Nov. 13,
2002; Steven E. Levingston, Chicago Merc Begins Trade of Currency
‘Forwards’, Wall St. J., Sept. 15, 1994, at C1; Randall Smith & Steven
Lipin, Beleaguered Giant: As Derivatives Losses Rise, Industry Fights To
Avert Regulation — Stigma Has Already Stalled ‘Exotic’ End of Business,
Where Most of Profit Is — Now a $35 Trillion Market, Wall St. J., Aug.
25, 1994, at Al.
In Re: NATIONAL GAS DISTRIBUTORS 23
also accords the same meaning to "forward agreement."
Donoghue, 2006 WL 775122, at *1 (involving quantity of
300,000 shares of stock). These requirements are confirmed
by the common meaning given to a "forward contract" as "a
privately negotiated investment contract in which a buyer
commits to purchase something (as a quantity of a commod-
ity, security, or currency) at a predetermined price on a set
future date." Merriam-Webster’s Dictionary of Law (con-
tract), available at http://dictionary.reference.com/browse/
contract (last visited Jan. 16, 2009).
Finally, while the broad class of "swap agreements"
includes contracts that are readily assignable and therefore
tradable, "swap agreements" also include forward contracts,
which are not necessarily assignable. The Chicago Mercantile
Exchange’s online glossary’s definition states that "[i]n con-
trast to futures contracts, forward contracts are not standard-
ized and not transferable." CME Glossary of Terms,
http://www.cme.com/glossary/F.html (last visited Jan. 16,
2009) (emphasis added).
It is undoubtedly true that Congress sought in BAPCPA to
effect greater protections of financial markets from the dis-
rupting effects of bankruptcy and therefore to require a rela-
tionship between a commodity forward agreement and the
financial markets. But this relationship need not be defined by
trading in a market or on an exchange, as we have shown.
See, e.g., Nagel, 217 F.3d at 438-39 (describing how nonas-
signable contracts can easily become tied into the broader
financial market when one party turns around and passes
along some of its price-volatility risks to a third party via
another contract).
Thus, insofar as our holding precludes the bankruptcy court
from requiring, in defining a "commodity forward agree-
ment," that the contract be traded in a market or on an
exchange or that it not involve physical delivery of the com-
modity, our holding does not define that instrument or hold
24 In Re: NATIONAL GAS DISTRIBUTORS
that the contracts in this case are commodity forward agree-
ments. We leave that to further legal and factual development
on remand.
REVERSED AND REMANDED