ROBERT E. GERBER, Bankruptcy Judge.
In this avoidance action adversary proceeding under the umbrella of the chapter 7 case of Magnesium Corporation of America ("
The parties cross-move for summary judgment. The Trustee seeks judgment for the recovery of the preferential payments that MagCorp had made (net of new value Williams provided),
The Trustee's motion for plaintiff's summary judgment requires little discussion. It raises factual issues for which a determination now is premature, and hence must be denied in any event.
Williams' motion for defendant's summary judgment, on the other hand, is
Prior to its bankruptcy filing, MagCorp operated a magnesium plant in Salt Lake City, Utah and was one of the largest producers of magnesium in the United States. Its manufacturing operations required it to consume natural gas.
In August 1998, MagCorp entered into a four-year "Base Contract for Sale and Purchase of Natural Gas" (the "
The Base Contract was a form contract with its origins in a form produced by the Gas Industry Standards Board, which was widely used in the natural gas industry. The Base Contract did not refer to itself as a "forward contract." According to Lee Brown, MagCorp's representative who negotiated with Barrett Resources, the purpose of the Base Contract, from MagCorp's perspective, was to get natural gas, which was essential to MagCorp's production of magnesium, at the lowest cost possible.
Williams' Vice President of Marketing and Trading, Bryan Hassler, explained that Williams not only produced natural gas but was also a natural gas marketer or natural gas intermediary engaged in natural gas trading activities. According to Hassler, these trading activities involved buying and selling natural gas at prices and volumes that management anticipated would yield profit due to anticipated changes in natural gas prices.
The Base Contract did not by itself specify the amount of gas to be sold each month or the actual price at which the gas would be sold. Rather, under the Base Contract, MagCorp would provide monthly nominations a few days prior to the first day of each month advising Barrett Resources
MagCorp never resold or marketed any excess natural gas that it acquired from its suppliers.
On May 21, 2001, June 21, 2001, and July 20, 2001, MagCorp made three payments to Williams totaling approximately $4.073 million (the "
The Trustee seeks to avoid and recover the May, June, and July 2001 Payments pursuant to sections 547 and 550 of the Bankruptcy Code. The Trustee credited Williams with that same $665,531.19 for "new value" based on its proof of claim,
Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."
In determining a summary judgment motion, it is well settled that the court should not weigh the evidence or determine the truth of any matter, and must resolve all ambiguities and draw all reasonable inferences against the moving party.
The standards for determining a summary judgment motion apply equally to cases, like the instant one, in which each side moves for summary judgment.
First, the Trustee moves for "plaintiff's" summary judgment awarding him the recovery for which he sued. This aspect of the pending motions raises no difficult issues, and must be denied.
In responding to the Trustee's claims, Williams came back with two defenses— the section 546(e) defense and a garden-variety "ordinary course" defense.
First, for reasons described above and below, Williams may turn out to have a section 546(e) defense, but that cannot be determined on this record, and the Court cannot now rule on it in favor of the Trustee any more than it can rule on it in favor of Williams. Second, the ordinary course defense, by its nature, is a fact-intensive one. Here, as in the great majority of the cases in which it is raised, it should be decided only after trial.
As discussed above, Williams contends (1) that the Payments Barrett Resources received were "settlement" payments under a commodity forward contract subject to section 546(e), and (2) that Barrett Resources should be deemed to have been a commodity "forward contract merchant" within the meaning of that section. Thus, Williams contends, section 546(e) provides it with a complete defense to the Trustee's avoidance claims.
As usual, the Court begins with textual analysis. Section 546, captioned "Limitations on avoiding powers," provides an array of exceptions to the general ability of trustees and other estate representatives to recover money or property for the benefit of the creditor community generally. Section 546(e), twice amended since the time MagCorp's chapter 11 case was filed, provided (and still provides) this "safe harbor" to a variety of different types of avoidance actions (most significantly, fraudulent conveyance and preference actions), as applied to a number of different types of transactions (including those involving securities and commodities). But as relevant here (to a section 547 preference action, with respect to a commodity transaction), and as the Code read at the relevant time, section 546(e) provided, in relevant part:
Under familiar principles, "[t]he starting point in discerning congressional intent ... is the existing statutory text...."
Similarly, as the Second Circuit, speaking through Judge Feinberg, observed in Capital Communications Federal Credit Union v. Boodrow:
Applying those principles, the Court first examines what the Code tells the reader about what "settlement payment[s]"
Section 101 of the Code, captioned "Definitions," includes a reference to "settlement payment" that must be considered in any analysis of what a settlement payment is. Section 101(51A) provides, in full:
But this is all the Code says about what a forward contract "settlement payment" is. Many may regard it as a definition in name only, and as circular as its counterpart dealing with settlement payments in the securities transaction area.
The section 101(51A) "definition," making reference as it does to the "forward contract provisions of this title" (of which section 546(e) plainly is one), and to the catchall in its last clause, strongly indicates that only payments "used in the forward contract trade" qualify. But while "forward contract" is defined in the Code,
Particularly where transactions are not routine, courts have had to confront the meaning of "settlement payment" repeatedly, in each of the securities
The Court likewise must consider whether either MagCorp or Barrett Resources was a "forward contract merchant." "Forward contract merchant" likewise appears in the "Definitions" of section 101. As applicable to the time when MagCorp's chapter 11 case was filed, section 101(26) provided, in full:
This provision, in turn, requires the Court to consider compliance with each of the subsection's elements:
Flip-flopping the order and taking the two elements in order of difficulty, consideration of Element # 2, on the facts here, is easy. While section 761(8) of the Code requires the reader to refer to the Commodity Exchange Act, and to find out what constitutes a "commodity" under the latter, both sides agree, understandably,
But Element # 1 requires more extensive textual analysis. At first blush, language in the middle of Element # 1, saying "in whole or in part," seems to suggest that an entity may become a "forward contract merchant" with only a peppercorn of activity in entering into commodity forward contracts. But aside from its illogic, that suggestion is unpersuasive, because "in whole or in part" is only a portion of what Element # 1 says. As caselaw discussed below confirms, the "business" must be, in whole or in part, entering into forward contracts, and "as or with merchants in a commodity."
The statute could have been drafted to avoid reference to the "business" "of entering into forward contracts," and "as or with merchants," if isolated entry into a forward contract were to be sufficient. Under the principles discussed above, Element # 1 must be read to give all of its words meaning.
Then, application of Element # 1 (expressly requiring a forward contract merchant to be in the business of "entering
The Code defines "forward contract" in section 101(25):
Some of that can be pruned for easier understanding. The most essential part can be read as saying:
But additional text that follows, which is preceded by the word "including," may be argued to cast light on what Congress intended a "forward contract" to be:
As a textual matter, then, a "forward contract" is a contract for the sale of a commodity with a "maturity date" more than two days after the date the contract is entered into—and which isn't a "commodity contract." As a conceptual matter (if one has a basis for going beyond plain meaning), a contract, if it is to be a "forward contract," may have to be more than that. But since the additional text, quoted above, does not actually modify the language that precedes it (and may instead be read merely as providing examples for the avoidance of doubt), Williams has the better of the argument from a pure textual analysis perspective, before any relevant caselaw is considered.
The term "maturity date," used in section 101(25), is not defined in the Code. Its meaning must be divined by caselaw, definitions imported from business practice, legislative history, or some other means.
The term "commodity contract"—identifying a different kind of a contract with respect to the sale of a commodity, which is carved out from the definition of "forward contract"—was not expressly defined for section 101(25) purposes at the time MagCorp's chapter 11 case was filed.
At the same time, another section of the Code, section 761 (in a subchapter dealing with commodity broker liquidations), then had (and still has) a definition for "commodity contract"—providing, in its subsection (4), a variety of definitions for "commodity contract," two of which (with respect to a "futures commission merchant" and "clearing organization," respectively), provide that it is a
In 2006, as one of a number of changes in the Code's safe harbor provisions, section 101(25) was amended to expressly incorporate a reference to section 761 into section 101(25).
The Trustee argues that until the Code was amended in 2006, the term "commodity contract" was not as narrow as it would be if it were defined under one or another of the definitions in section 761, and, by plain meaning analysis, an exclusion of a "commodity contract" would also exclude garden variety supply agreements for the purchase of a commodity.
With the Code then silent, at the relevant time, as to the extent to which a definition taken from section 761 would apply to cases other than commodity broker liquidations, former section 101(25)'s definition of "commodity contract" may fairly be regarded as ambiguous in that respect. But of course it is a strong candidate for rules of construction that call for use of similar definitions, whenever possible, across the Bankruptcy Code—a conclusion that is borne out in the caselaw and Collier, discussed below.
Ultimately only some of the issues can be resolved by textual analysis—and the two most important—whether the Payments were "settlement payment[s]," and especially whether Barrett Resources was a "forward contract merchant"—cannot be decided by textual analysis alone. That is especially true in light of the Trustee's principal contention—that the Payments here were simply for ordinary purchases of product that happened to be a commodity, under an ordinary supply contract, in a transaction that the Trustee says did not involve financial markets, hedging, or any of the concerns to be addressed under the safe harbor provisions. The interpretive and factual uncertainties require consideration of the caselaw, and, ultimately, more evidence.
Textual analysis has indicated that the two principal issues, as matters of statutory construction, are whether Barrett Resources was a "forward contract merchant,"
But caselaw and secondary authorities, when juxtaposed with the language of the Code, address most of the issues, constraining this Court in achieving equal treatment amongst creditors to the extent the Court would otherwise prefer. Taking the issues in order of increasing difficulty, the Court considers the caselaw gloss on these matters.
As noted above, the Trustee contends that with "commodity contract" not defined in section 101(25), that term should be construed in accordance with its plain meaning—which would cover any contract for the purchase of a commodity, including the Base Contract here—and thus that the section 546(e) safe harbor would not apply. The Trustee recognizes that section 761 of the Code, in subsection (4), gives "commodity contract" a variety of special meanings—two of which refer to a "contract for the purchase or sale of a commodity for future delivery on, or subject to the rules of, a contract market or board of trade"— but notes that any definitions based on section 761 were not then incorporated into section 101(25). And while the Trustee notes that 2006 amendments to the Code thereafter expressly incorporated a reference to section 761 into section 101(25), he regards this as a change in the law. Though the Trustee's argument is hardly frivolous, the Court ultimately cannot agree.
This issue has now been judicially considered several times, with courts almost unanimously having determined, even in pre-2006 law cases, that the exception, in section 101(25), for a "commodity contract" means only a "commodity contract" as defined in sections 761(4)(A) and 761(4)(D).
Though the Court does not regard the issue as one-sided as the weight of the caselaw would suggest—particularly in light of the Supreme Court's repeated reminders as to the importance of "plain meaning,"
Thus, even in this pre-2006 case, the Court must take the meaning of "commodity contract" from section 761 of the Code, and as relevant here, from 761(4)(A) and 761(4)(D) of the Code.
As noted above, section 101(25) of the Code, defining "forward contract," requires the contract to have "a maturity date more than two days after the contract is entered into." But neither that section nor any other defines "maturity date." The Trustee does not seem to argue that this requirement isn't satisfied; the Court understands him to argue, instead, that it isn't conclusive when a contract otherwise fails to have the necessary financial characteristics.
Because the Court believes that summary judgment must be denied for other reasons, this issue need not be decided definitively now. The Court observes, however, that unless the Trustee can make this Court aware of new facts or facts this Court missed, Williams will be able to show that it has satisfied section 101(25)'s requirements as to "maturity date."
Though "maturity date" isn't defined in the Code, it necessarily calls for an examination of the time at which the underlying commodity is to be delivered. Here orders were placed at the beginning of each month for deliveries of gas throughout the month. The Court believes that the Base Contract can best be regarded as giving rise to many individual contracts, by reason of monthly nominations of desired product, and then with many deliveries— all at the price fixed at the outset of each month—all or the bulk of which would be for delivery more than two days later. Each of those delivery dates would at least seemingly be appropriately regarded as the "maturity date," and most, if not all, of the various times for performance would be far enough out in time to qualify.
To the extent there is law on point, it supports analysis of this character. In Mirant, Judge Lynn considered what "maturity date" should be deemed to mean, in the context of a single netting agreement, and with the recognition that standards to apply, even from Black's and the leading treatises, were lacking.
As noted above, to secure the safe harbor of section 546(e), Williams must also show that each of the Payments to Barrett Resources was a "settlement payment." If, as the Court is likely ultimately to find, the Base Contract (or more precisely, each of the monthly nominations, at the prices then set under them) was a "forward contract," the Court will then be able to find that each of the Payments passes muster as a "settlement payment."
As noted above in the Court's textual analysis, "settlement payment" is effectively undefined under section 101(51A), except in the subset of cases where it fits under one of the enumerated examples. But "settlement payment" must mean something. And while the meaning of "settlement payment" is subject to fair debate in the securities area, especially when parties enter into unusual transactions that are a far cry from the evils Congress intended to address,
An issue could be argued to exist, of course, with respect to whether a "settlement payment" would have to be made through a centralized system. But this contention was rejected, in the commodity forward context, in Olympic Natural Gas,
The most critical issue here is whether Barrett Resources was a "forward contract merchant" as a matter of law, based on the showing made to date. Ultimately, the Court cannot decide this on the present record.
Once again, analysis in Mirant is helpful. Judge Lynn denied summary judgment in Mirant based on his view that there were issues of fact as to whether a party was a "forward contract merchant,"
As Judge Lynn observed in Mirant, the key portion of the definition of forward contract merchant is "a person whose business consists in whole or in part of entering into forward contracts as or with a merchant...."
Then noting that neither "merchant" nor "business" is defined in the Code, Judge Lynn looked elsewhere to fill the gaps. Taking the word "merchant" first, he concluded that a merchant is one that is not acting as either an end-user or a producer. Rather, he noted, a merchant is one that buys, sells or trades in a market.
Then, and significantly, in analyzing the Fifth Circuit's decision in Olympic Natural Gas, Judge Lynn further noted that even if an entity were a forward contract merchant with respect to some transactions, that would not be dispositive, unless it were also shown that the entity acted as
This Court agrees with the analysis in Mirant in each of the above respects. Williams may be able to invoke the section 546(e) defense if, but only if, it can show that Barrett Resources was a merchant in the forward contract trade, entering into such contracts to generate a profit—and, of course, that Barrett Resources entered into the Base Contract with MagCorp and received the Payments as part of that business in the forward contract trade.
Looking at the facts now before the Court, the Court cannot now rule in Williams' favor on this issue as a matter of law.
At oral argument and in the papers, Williams characterized Barrett Resources as a trading operation that also had an exploration business. It argued that:
Williams relied, in part, on an affidavit by Bryan Hassler, Barrett Resources' Senior Vice President of Marketing from 1999 to 2000, who stated that:
Randall O'Neal, who never worked at Barrett Resources, but worked for Williams since it began its trading operations,
And in passing, without support by affidavit or other proof, or further detail, Williams' counsel told the Court that Williams had recently "sold its trading book to Bear Stearns."
Evidence of this character (or part of it) may help support an ultimate Williams victory, but it doesn't tell the Court enough at this point. Williams may have taken over Barrett Resources, but it is what Barrett Resources' business was at the relevant times that matters, not Williams'. And while Williams presumably hereafter will be able to introduce financial statements for Barrett Resources' business (after laying a proper foundation), Williams cannot now secure summary judgment based on its own SEC filings, which are hearsay,
As importantly or more so, other evidence in the record raises issues of fact with respect to whether Barrett Resources dealt with MagCorp as a forward contact merchant. Deposition testimony by Sharon Pomerantz could be found to support a finding that the relationship between Barrett Resources and MagCorp was merely that of a supplier to a customer:
When asked to explain the term "equity gas," Pomerantz explained that "[e]quity gas is gas that is owned by the company from wells that the company has drilled and owns a hundred percent of."
In short, the evidence is now inconclusive. The Court has insufficient information concerning the extent of Barrett Resources' trading, its intentions with respect to its trading, or the trading's profitability. And if it is the case that different divisions or personnel at Barrett Resources did its
It may turn out that Williams will be able to fill in these gaps. But Williams has not done so yet. For failure to show at least yet that Barrett Resources was a "forward contract merchant," and that MagCorp dealt with Barrett Resources in that capacity, summary judgment must now be denied.
The most difficult issue is the extent to which a contract, in order to be a forward contract, must have (in addition to the requisite maturity) financial characteristics. Textual analysis tends to favor Williams. But canons of statutory interpretation, legislative history, and the important bankruptcy policy of equal treatment amongst creditors tend to favor the existence of the requirement argued by the Trustee. Williams appropriately notes that the Code expresses no "financial characteristics" requirement. The Trustee appropriately notes that section 101(25) sets forth many types of commodity forward contracts that are included within the definition and that these shed light on the types of contracts that Congress had in mind.
Though the question is fairly debatable,
Though the volatility of the natural gas market might (and likely would) vary over time (sometimes being more significant than at other times), the single monthly fixed price for each delivery would substitute for the array of spot prices that would otherwise apply, providing price constancy, and predictability, for that month. Though setting the price for periods of 30 days likely did not subject the parties to the potential risks that setting the price for a year might, it still substituted a single known price for 30 subsequent individual prices, under circumstances where the latter might go up or down.
Assuming that financial characteristics were required,
For the foregoing reasons, both parties' motions for summary judgment are denied. The parties are to finalize the matters necessary to get the issues teed up for trial. SO ORDERED.
