Christopher Cahill’s article, “Commodity Supply Agreements Are Swap Agreements: A Counter-Intuitive But Quite Real Safe Harbor From Preference Avoidance,” has been published in International Corporate Rescue and analyzes a defense for commodity suppliers against the avoidance and recovery of transfers to such suppliers from debtors under the Bankruptcy Code.

Section 546(g) of the Bankruptcy Code exempts from preference or constructive fraudulent transfer the avoidance of any transfer made pursuant to a swap agreement with the Debtor. The Code’s financial derivative safe harbor provisions and related definitions are broadly-worded. The Code’s definition of “swap agreement” includes “commodity forward agreement.” A “commodity forward agreement” is, for the Fourth Circuit Court of Appeals and other courts, a commodity supply agreement for future physical deliveries, which is used as a hedge.

Thus, creditors of United States bankruptcy debtors who supply or receive oil, natural gas, steel, polypropylene or any other commodity may do so pursuant to a contract that can be construed as a “swap agreement” that supports a total defense to avoidance of transfers received from the debtor. Implications with respect to other safe harbor provisions of the inclusion of “commodity forward agreement” within the definition of “swap agreement” will be the subject of a future paper.

This article first appeared in International Corporate Rescue (Volume 8, issue 4) and is reproduced with the kind permission of Chase Cambria Company (Publishing) Limited.

Click here to view article.