In Hutson v. E.I. du Pont de Nemours & Co. (In re National Gas Distributors, LLC),1 the United States Court of Appeals for the Fourth Circuit interpreted the definition of “swap agreement” under the Bankruptcy Code.2 The Fourth Circuit found that a privately negotiated agreement for the future delivery of a commodity can constitute a swap agreement that qualifies for the Bankruptcy Code’s safe harbor protections applicable to financial contracts, even if the agreement is not traded on a financial exchange and contemplates actual delivery of the commodity in question.3 The Fourth Circuit’s decision marks the first time that a Court of Appeals has interpreted this definition since it was expanded by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”).4

Under BAPCPA, in order to mitigate systemic risk, Congress broadened the statutory safe harbors that permit nondefaulting counterparties to exercise termination, acceleration, liquidation, netting and other contractual rights without violating the automatic stay or ipso facto prohibitions of sections 362(a) and 365(e) of the Bankruptcy Code.5 On direct appeal, the Fourth Circuit overruled the bankruptcy court’s narrow interpretation of the term “swap agreement,” and offered a broader interpretation that should expand the scope of financial contracts eligible for safe harbor protection.

Applicable Law

Under section 548 of the Bankruptcy Code, trustees are authorized to avoid transfers of property of a debtor’s estate “made or incurred on or within 2 years before the date of filing of the petition,” which are deemed fraudulent.6 Under BAPCPA, however, Congress exempted transfers pursuant to qualified financial contracts from these avoidance actions. Specifically, sections 546(g) and 548(d)(2) of the Bankruptcy Code exempt from avoidance any transfer “made by or to a swap participant or financial participant, under or in connection with any swap agreement.”7 The term “swap agreement,” as expanded by BAPCA, includes many types of contracts such as “commodity future agreements” and “commodity forward agreements.”8 Although the Bankruptcy Code does not define either term, it does define “forward contract,” which includes, among other things, any “contract [other than a commodity contract] for the purchase, sale, or transfer of a commodity . . . 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.”9

Facts and Procedural History

National Gas Distributors, LLC (“National Gas”) engaged in the business of distributing natural gas to customers, including du Pont, Smithfield Packing and Stadler’s Country Hams.10 Within the year prior to its petition date, National Gas entered into certain agreements with various commodities customers. These contracts were comprised of a base contract11 and a series of confirmations that fixed the price of future deliveries of natural gas during certain time periods. 12 Each contract’s term began more than two days after its date of formation and fixed the price for a period of months.13 During this period, the contract obligated the seller to sell and deliver gas at the contract price and obligated the customer to purchase at the contract price, notwithstanding market fluctuations, “or to pay the difference between the contract price and the market price”.14 These contracts were not effected through an exchange or through any broker or other intermediary.15

On January 20, 2006, National Gas filed for bankruptcy under chapter 11 of the Bankruptcy Code. Shortly afterward, the bankruptcy court appointed a chapter 11 trustee.16 The trustee filed complaints against numerous customers, including du Pont and Smithfield Packing, alleging that constructive fraudulent transfers had occurred under section 548 of the Bankruptcy Code when the debtor, while insolvent, contracted to sell its product at a below-market price.17 Alternatively, the trustee alleged that the debtor’s former management had engaged in intentionally fraudulent transfers under section 548(a) of the Bankruptcy Code.18

Both du Pont and Smithfield Packing filed motions to dismiss or for summary judgment on the grounds that the transfers under these contracts were protected under sections 546(g) and 548(d)(2) of the Bankruptcy Code as a “commodity forward agreement” that constituted a safe harbored “swap agreement” under section 101(53B) of the Bankruptcy Code.19

Bankruptcy Court Decision

After analyzing the “swap agreement” definition of section 101(53B) of the Bankruptcy Code and its legislative history, the bankruptcy court determined that all of the agreements or transactions listed in section 101(53B)(A)(i) were “financial instruments traded in the swap markets.” 20 Because each contract in National Gas was directly negotiated between the seller and purchaser, required physical as opposed to cash settlement, and was not traded in financial markets, the bankruptcy court held that each agreement was “simply an agreement by a single end user to purchase a commodity” and was not protected as a “swap agreement” under the Bankruptcy Code.21 From the bankruptcy court’s perspective, exempting these contracts from avoidance actions would not serve Congress’s intent to protect the financial markets from the destabilizing effects of bankruptcy.22

Upon request, the defendants received authorization to appeal the bankruptcy court’s decision directly to the Fourth Circuit.23

Appellate Decision

Although the Fourth Circuit acknowledged that Congress, in structuring the safe harbors applicable to swap agreements, did not intend to cover simple supply contracts, it found that “the bankruptcy court in this case construed ‘commodity forward agreements’ too narrowly— i.e., by requiring that they be traded on an exchange and not involve physical delivery of the commodity.”24

The Fourth Circuit’s decision was based primarily on statutory interpretation. First, the Court compared the statutorily-defined “forward contract” with the meaning of the term “forward agreement,” which is used but not defined by the Bankruptcy Code. Citing Black’s Law Dictionary, the Fourth Circuit noted that the term “agreement” includes “contracts,” such that the term “forward agreement” must include a “forward contract.” According to the Fourth Circuit’s logic, “[i]f a forward contract need not be traded on an exchange or in a financial market, it follows that neither does a forward agreement.”25

The Fourth Circuit then noted that the definition of forward contract excludes “commodity contracts,” which are defined in section 761(4) of the Bankruptcy Code to include contracts “on, or subject to the rules of, a contract market or board of trade.”26 The Fourth Circuit reasoned that “[b]y 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.”27 In support, the Fourth Circuit cited decisions that did not require “forward contracts” to be traded in financial markets or exchanges and non-bankruptcy courts that used “forward agreement” to refer to non-market traded, private agreements.28

Additionally, the court emphasized the distinction between “forward contracts” and “futures contracts.” The Fourth Circuit cited the Chicago Mercantile Exchange’s definition of “forward contract,” which provides that “[i]n contrast to futures contracts, forward contracts are not standardized and not transferable,” such that they are unsuitable for trading in financial markets.29 Black’s Law Dictionary adds that “[u]nlike a futures contract, a forward contract is not traded on a formal exchange.”30 In light of these financial industry definitions, the Fourth Circuit concluded that an agreement need not be traded on the financial markets to be a “forward contract.” Therefore, the Court of Appeals held that because every “forward contract” is also a “forward agreement,” it follows that “commodity forward agreements” do not necessarily need to be market-traded.

The Fourth Circuit added that despite the bankruptcy court’s findings, “commodity forward agreements” could contribute to the destabilization of the financial markets — even if they are not traded on an exchange — because they may be cornerstones in a broader hedging strategy in a commodities marketplace. Accordingly, such agreements served the purpose of the Bankruptcy Code’s safe harbors and deserved their protections.31 The Court of Appeals noted that National Gas’s contracts contained “real hedging elements” because “[t]he contracts 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 difference between the contract price and the market price.”32 With respect to physical settlement, the Court noted that “[n]othing in the Bankruptcy Code or its legislative history suggests a requirement that a forward agreement cannot involve the actual delivery of the commodity.”33 The Court therefore determined that because forward contracts could be physically settled, forward agreements could be physically settled.34

According to the Fourth Circuit, in order to be considered a “commodity forward agreement” and be eligible for safe harbor protection as a swap agreement, the relevant agreement need only (a) involve a commodity; (b) fix a price at the time of contracting for delivery more than two days after the date the contract is entered into; and (c) fix quantity and time elements also at the time of contracting.35

With respect to the first criterion, i.e., that the subject of the agreement must be a “commodity”, the Court of Appeals emphasized that “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.”36 In that manner, a “commodity forward agreement” would be distinguishable from a simple supply contract in which other costs, such as those incurred for packaging, marketing, transportation and the like, play a greater role. With respect to the second and third criteria, the Court noted that the requirement that the contract price be fixed at least two days after the contract date demonstrates that the contract’s benefit derives from future fluctuations in the commodity’s market price (as do fixing the quantity and timing requirements upon entering into the contract). The Fourth Circuit also emphasized that in order to qualify as a “swap agreement”, a forward need not be tradeable because “nonassignable contracts can easily become tied into the broader financial market when one party turns around and passes along some of its price-volatility risks through [another contract with a third party].”37

Thus, the Fourth Circuit ultimately determined that despite being privately negotiated, contemplating actual delivery,38 and not being traded in financial markets, the contracts at issue in National Gas could be “commodity forward agreements” protected under the Bankruptcy Code’s safe harbors. The Fourth Circuit did not decide, however, whether these agreements in fact constituted “commodity forward agreements”, nor did it direct the bankruptcy court to do so. Instead, it remanded the case to the bankruptcy court for further consideration of the issue in light of the Fourth Circuit’s opinion.


Although National Gas only directly addresses commodity forward agreements, the Fourth Circuit’s approach may have broader implications and suggests that in construing the scope of the Bankruptcy Code’s safe harbors, courts may defer to Congress’s general legislative intent in expanding the safe harbors under BAPCPA to widen the protections afforded to parties to financial contracts.