"Update: Fifth Circuit Addresses Bankruptcy Safe Harbor Protection for Commodity Requirements Contracts"

In previous Stroock Special Bulletins, we have reported on court decisions addressing whether an agreement to supply a purchaser's requirements of a commodity qualifies for the "safe harbor" protections of the United States Bankruptcy Code.  These safe harbor protections include:

· the ability to exercise contractual rights to terminate the contract as a result of the debtor's insolvency or bankruptcy filing,

· the ability to exercise setoff or netting rights and to apply collateral free of the automatic stay, and

· immunity from preferential or constructively fraudulent transfer actions.

Courts have disagreed on the scope of these safe harbor protections.  This Stroock Special Bulletin looks at the August 2, 2012 decision of the Court of Appeals for the Fifth Circuit in In re MBS Management Services, Inc., in which the court concluded that electricity forward contracts often do not limit the quantity sold, but do provide a hedge against price fluctuations.  Thus, the court held, such contracts between a forward contract merchant and industry participant are squarely within the protection of section 546(e).