In re National Gas Distributors, LLC

• Decision Date: 11 February 2009
• Docket Number: No. 07-2105.,07-2105.
• Citation: 556 F.3d 247
• Parties: 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, 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.
• Court: U.S. Court of Appeals — Fourth Circuit

556 F.3d 247

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, 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.

No. 07-2105.

United States Court of Appeals, Fourth Circuit.

Argued October 28, 2008.

Decided February 11, 2009.

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. 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.

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.

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 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 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 customers to attempt to demonstrate factually and legally that 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 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 construction 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...