On August 2, 2012, the US Court of Appeals for the Fifth Circuit (Fifth Circuit), in Lightfoot v. MXEnergy Electric, Inc. (In re MBS Management Services, Inc.), affirmed a decision of the US District Court for the Eastern District of Louisiana (District Court) determining that a requirements contract that did not specify any quantity of goods to be delivered or a delivery date qualifies as a forward contract that is expressly exempt from avoidance as a preferential transfer under the safe harbor provision of section 546(e) of the Bankruptcy Code.

The debtor, a real estate management company, had contracted prepetition with a power company, MXEnergy Electric, Inc., to purchase "full electric requirements" for its properties for 24 months at a specified rate based on actual usage. The debtor paid about $156,000 to MX to cover its affiliates' past-due electric bills. The debtor then filed for bankruptcy within 90 days of the MX payment. The bankruptcy trustee then brought an action to recover the MX payment as an avoidable preferential transfer under section 547(b) of the Bankruptcy Code. While the payment undoubtably qualified as preferential, MX claimed that the transfer was made on a forward contract as defined under the Bankruptcy Code and was therefore protected by the safe harbor provision of section 546(e) of the Bankruptcy Code.

Section 546(e) exempts from recovery through avoidance actions settlement payments made by or to a forward contract merchant in connection with a forward contract. A forward contract is defined in section 101(25)(A) of the Bankruptcy Code as a contract for the purchase, sale or transfer of a commodity with a maturity date more than two days after the date of the contract.

The trustee argued that to meet the Bankruptcy Code definition of a forward contract, an agreement must specify exact quantities of the commodity and specific delivery dates. This argument reflects concerns expressed in earlier cases that payments made on "ordinary supply contracts" should not be protected from preference litigation.

Relying on a strict reading of the Bankruptcy Code's definition, the Fifth Circuit affirmed the District Court's ruling that the absence of a fixed quantity or a specified delivery date in a contract is not a dispositive factor in considering whether a contract is a forward contract as defined under the Bankruptcy Code. Because the contract in question was a forward contract, payments made under the contract were protected from avoidance as a preferential transfer by the safe harbor provision of section 546(e) of the Bankruptcy Code.

In affirming this decision, the Fifth Circuit applied the safe harbor provision according to the literal interpretation of the language of the Bankruptcy Code. The Fifth Circuit clarified that its task is "to apply the statutory provisions as Congress wrote them." This decision is especially relevant for parties that supply electricity or other commodities on a requirements basis and rely on the safe harbor provision of section 546(e) of the Bankruptcy Code for payments made under their contracts.