## Facts

- National Gas Distributors, L.L.C. sold natural gas to industrial and other customers.
- Within one year before bankruptcy, National Gas entered into natural gas supply contracts with customers including DuPont and Smithfield.
- The contracts fixed future prices over periods of months and functioned as hedges against natural gas price changes.
- Under the contracts, National Gas was obligated to deliver gas at the fixed price or, depending on contract structure, pay the price difference between the contract price and market price.
- After the Chapter 11 filing, the trustee brought adversary proceedings under 11 U.S.C. §§ 548(a) and 550(a) to avoid the contracts and related transfers as fraudulent conveyances, alleging below-market transfers while the debtor was insolvent.
- The customers moved to dismiss or for summary judgment, arguing the contracts were “swap agreements,” specifically “commodity forward agreements,” triggering Bankruptcy Code safe harbors, including 11 U.S.C. §§ 546(g) and 548(d)(2)(D).
- The bankruptcy court denied the motions, reasoning the contracts were not swap agreements because they were end-user purchase agreements and, in its view, swap agreements required market trading and excluded physical delivery.
- The customers appealed directly to the Fourth Circuit.

## Issues

1. Whether the bankruptcy court erred by narrowing the statutory meaning of “swap agreement,” including “commodity forward agreement,” by adding requirements not found in 11 U.S.C. § 101(53B).
2. Whether a “commodity forward agreement” may qualify as a swap agreement even if it is individually negotiated and contemplates physical delivery.
3. Whether the proper classification of the contracts as swap agreements should be decided on the pleadings or on a developed factual record.

## Decision

- The Fourth Circuit reversed the bankruptcy court’s orders and remanded.
- The court held the bankruptcy court’s construction of “commodity forward agreement” was too narrow and inconsistent with the statutory text.
- The court rejected requirements that such agreements must be traded in financial markets or must exclude physical delivery.
- The court did not decide that the specific contracts were swap agreements; it directed the bankruptcy court to determine, on a fuller record, whether the contracts qualify as “commodity forward agreements” or other “swap agreements” within the Code’s definitions and related safe harbors.

## Legal Principles

- The Bankruptcy Code defines “swap agreement” in exceptionally broad terms, and courts may not impose extra-statutory limitations inconsistent with 11 U.S.C. § 101(53B).
- “Commodity forward agreements” are expressly included within the statutory definition of swap agreement; exchange trading is not a textual prerequisite.
- An agreement may fall within “commodity forward agreement” even if it is privately negotiated and contemplates or results in physical delivery.
- Legislative purpose concerns (including market stability) cannot override the statute’s plain, inclusive language by adding unstated conditions.
- Whether a contract is a “commodity forward agreement” depends on its economic substance and functional characteristics (including forward pricing and risk management), and often requires fact-specific development beyond a motion-to-dismiss record.
- If the contracts qualify as swap agreements, the safe harbor in 11 U.S.C. § 546(g) and related provisions may limit a trustee’s avoidance powers, subject to the statutory requirements.

## Conclusion

The Fourth Circuit held that the bankruptcy court improperly narrowed the Bankruptcy Code’s definition of “swap agreement” by requiring market trading and excluding physically settled contracts, and it remanded for a fact-based determination of whether the challenged natural gas contracts qualify as “commodity forward agreements” and thus receive safe-harbor protection from avoidance.


In re Nat'l Gas Distribs., L.L.C., 556 F.3d 247 (4th Cir. 2009)