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  No. 07-2105 Country Hams, Incorporated,

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. 
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-AP00268-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 Niemeyer 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 Carolina, for Appellee. ON BRIEF: Thomas E. Cabaniss, Dion

William Hayes, MCGUIREWOODS, L.L.P., Richmond, Virginia; Robert A. Cox, Jr., MCGUIREWOODS, L.L.P., Charlotte, 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, Matthew 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.

2 In Re: NATIONAL GAS DISTRIBUTORS
James S. Carr, Craig A. Wolfe, Benjamin Blaustein, KELLEY DRYE & WARREN, L.L.P., New York, New York, for

BP Energy Company, BP Canada Energy Marketing Corporation, 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 Carolina, for First Citizens Bank & Trust Company, Amicus Supporting 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 contracts 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

1After 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. 

In Re: NATIONAL GAS DISTRIBUTORS 3
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 commodity" and therefore were not exempt from avoidance. Relying 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 bankruptcy 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 enduser 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 customers to attempt to demonstrate factually and legally that

4 In Re: NATIONAL GAS DISTRIBUTORS
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 purchased natural gas for specific facilities under a series of contracts with National Gas. The contracts consisted of a "Base

Contract for Sale and Purchase of Natural Gas," using Standard Form 6.3.1 of the North American Energy Standards

Board, Inc., and a series of e-mails confirming telephone conversations 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 transferred on exchanges, nor did they even involve the use of brokers 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 customers 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 petition for relief under Chapter 11 of the Bankruptcy Code, and

In Re: NATIONAL GAS DISTRIBUTORS 5
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 intentionally 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 con6 In Re: NATIONAL GAS DISTRIBUTORS
struction of § 101(53B), the court ruled that the natural gas

supply contracts in this case were insufficiently tied to financial 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 "commodity 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 Bankruptcy 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 various 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 contract[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

In Re: NATIONAL GAS DISTRIBUTORS 7
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. Without 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 liquidate volatile contracts and thereby limit their exposure 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 contracts against gains under others with the same counterparty — 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 pay8 In Re: NATIONAL GAS DISTRIBUTORS
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 Bankrupt 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 commodity 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 treatment to transactions involving financial markets, to

In Re: NATIONAL GAS DISTRIBUTORS 9
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 participants" 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 contractual 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 agreement" is now extremely broad, covering several dozen enumerated contracts and transactions, as well as combinations of

them, options on them, and similar contracts or transactions.

10 In Re: NATIONAL GAS DISTRIBUTORS
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 participant" very broadly) with 11 U.S.C. § 101(26) (2000)

(defining "forward contract merchant" narrowly). See generally Morrison & Riegel, supra, at 641-42. The resulting statutory 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 transfers "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 outstanding 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 conditions incorporated by reference in such agreement,

which is — 

* * *

(II) a spot, same day-tomorrow, tomorrow2

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. 

In Re: NATIONAL GAS DISTRIBUTORS 11
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 incorporated by reference therein); and

(II) is a forward, swap, future, or option on

one or more rates, currencies, commodities,

equity securities, or other equity instruments, debt securities or other debt instruments, quantitative measures associated

with an occurrence, extent of an occurrence, or contingency associated with a

financial, commercial, or economic consequence, 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

12 In Re: NATIONAL GAS DISTRIBUTORS
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 Smithfield Packing, invoked the protections of 11 U.S.C. §§ 546(g)

and 548(d)(2)(D), alleging that their natural gas supply contracts with National Gas were "swap agreements" as defined

in 11 U.S.C. § 101(53B) in that they were "commodity forward agreements," a class of transactions listed in the definition 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 provided a definition.

The bankruptcy court, in a staunch effort, conducted an

analysis of § 101(53B) and drew on legislative history to conclude 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 Trustee’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 "forward agreement," apparently making a distinction between

In Re: NATIONAL GAS DISTRIBUTORS 13
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 "forward 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 "agreements" 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 agreement" 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 conjunction 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

14 In Re: NATIONAL GAS DISTRIBUTORS
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 markets" 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 numerous 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 universe 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 protections 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 contract in this case was "simply an agreement by a single enduser to purchase a commodity," which was physically delivered to the purchaser, id., the court explained that a traditional

supply contract is not "swept into the realm of swap agreements":

There is nothing to suggest that the contract between

Smithfield and the debtor was traded on a financial

In Re: NATIONAL GAS DISTRIBUTORS 15
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 agreements," must be traded on exchanges or in financial markets

and that the contracts in this case were simple supply contracts, the court’s position is logically sound. The assumptions, 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 therefore 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 contract" 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.

3National Gas’ customers in this case do not attempt to rely on the position 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 presumably do not claim, at least in this appeal. See 11 U.S.C. § 101(26)

(defining "forward contract merchant"). 

16 In Re: NATIONAL GAS DISTRIBUTORS
§ 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 legislative 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 "forward contracts" be traded on an exchange or in a market, noting 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, various 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 contracts" 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

In Re: NATIONAL GAS DISTRIBUTORS 17
§ 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 Distributors, 369 B.R. at 893, 900. But this assumption is an oversimplification. 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 reliance 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 Congress aimed to protect in BAPCPA. The Seventh Circuit

described this same type of situation in Nagel v. ADM Investor 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, proceeded 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

18 In Re: NATIONAL GAS DISTRIBUTORS
contracts involved the physical delivery of gas, thus distinguishing 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 "winning" party at the specified time. Thus, supply contracts, contemplating 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 agreements" cannot be treated as swap agreements under the Bankruptcy Code), the conclusion that the contracts in this case are

traditional supply contracts overlooks the fact that the contracts in this case contained real hedging elements. The 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.

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 likewise 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 agreements as "forward contracts").

In Re: NATIONAL GAS DISTRIBUTORS 19
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 daytomorrow, 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 agreement," as defined in § 101(53B)(A).

Because the bankruptcy court gave the definition of "commodity 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 agreements" 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 marketplace is creative, designing instruments to fit the needs of the

moment, and Congress sought to anticipate this in BAPCPA.

20 In Re: NATIONAL GAS DISTRIBUTORS
In doing so, however, Congress forwent describing the elements of transactions it sought to exempt from the effects of

bankruptcy. Indeed, its repetitive generalized comments about

protecting financial markets from the instability that bankruptcy proceedings might cause and the potpourri of agreements 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 overarching policy of the Bankruptcy Code is to provide equal distribution 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 participants.

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 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 — we do so only

on the basis of the imperfect statute, recognizing the bankruptcy court’s rational intuitions. Although we do not attempt

to provide a definition ourselves, we can point to certain nonexclusive elements that the statutory language appears to

require.

In Re: NATIONAL GAS DISTRIBUTORS 21
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 fluctuations in commodity prices, from many supply contracts, in

which costs attributable to other factors, such as packaging,

marketing, transportation, service, and similar matters contribute 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 elements 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

4Respectively, Business Brief — Baxter International Inc.: MedicalDevices 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. 

22 In Re: NATIONAL GAS DISTRIBUTORS
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 commodity, security, or currency) at a predetermined price on a set

future date." Merriam-Webster’s Dictionary of Law (contract), 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 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) (emphasis added).

It is undoubtedly true that Congress sought in BAPCPA to

effect greater protections of financial markets from the disrupting effects of bankruptcy and therefore to require a relationship 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 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 to a third party via

another contract).

Thus, insofar as our holding precludes the bankruptcy court

from requiring, in defining a "commodity forward agreement," that the contract be traded in a market or on an

exchange or that it not involve physical delivery of the commodity, our holding does not define that instrument or hold

In Re: NATIONAL GAS DISTRIBUTORS 23
that the contracts in this case are commodity forward agreements. We leave that to further legal and factual development

on remand.

REVERSED AND REMANDED

24 In Re: NATIONAL GAS DISTRIBUTORS