detriment of other creditors.’” Dean v. Trans World Airl<strong>in</strong>es, Inc., 72 F.3d 754, 755-56 (9 th Cir. 1995), cert denied,117 S. Ct. 169 (1997).66 11 U.S.C. §§362(b)(6), 546(e), 555, 556 (address<strong>in</strong>g commodity <strong>and</strong> forward contracts); 11 U.S.C. §§362(b)(17),546(g), 560 (address<strong>in</strong>g swaps). Please note that some concern exists that these provisions may not be enforceable<strong>in</strong> a proceed<strong>in</strong>g under Chapter 9 of the Bankruptcy Code filed by a municipality.67 11 U.S.C. § 101(25).68 In re Olympic Natural Gas Company, 258 B.R. 161, 164-65 (Bankr. S.D. Tex. 2001),Aff’d 294 F.3d 737 (5 th Cir.2002). Physical commodity contracts, specifically gas, are “eligible f<strong>in</strong>ancial contracts” under Canadian law, astatus analogous to forward contracts under U.S. laws. Enron Capital & trade Resources Canada Corp. v. BlueRange Resource Corporation, 2000 ABCA 239 (Ct. of Appeal Alberta).69 11 U.S.C. § 101(53B).70 Courts have “recognized that derivative contracts are a legitimate method of manag<strong>in</strong>g risk <strong>and</strong> as a matter ofpublic policy should not be dealt with <strong>in</strong> a manner that affects their efficiency either <strong>in</strong> non-solvency or <strong>in</strong>solvencysituations. ‘If the right to term<strong>in</strong>ate contemplated <strong>in</strong> the agreement . . . is not enforceable, the whole structure of riskmanagement for the swaps <strong>and</strong> other transactions is weakened or may fall apart.’” Id. at para. 27, cit<strong>in</strong>gConfederation Treasury Services Ltd. (Trustee of) v. Hees International Bancorp Inc. (1997), 45 C.B.R. (3d) 204(Ont. Gen Div.).“Quite apart from the unfairness of cherry-pick<strong>in</strong>g, other undesirable consequencesfollow. In order to determ<strong>in</strong>e credit availability, risk management companiesaccount for “out of the money” transactions by deduct<strong>in</strong>g the value of “<strong>in</strong> themoney” transactions. This practice is only appropriate if term<strong>in</strong>ation <strong>and</strong> nett<strong>in</strong>gout provisions are enforceable, <strong>and</strong> unaffected by an <strong>in</strong>solvency. If forward gascontracts are not exempt from the … stay provisions <strong>and</strong> no offsett<strong>in</strong>g deductionsare permitted, available credit will quickly be gobbled up. As a result, riskmanagement companies will limit the capital they can allocate to the market, or askcash- strapped [sic] gas producers to put up additional security to cover any shortfalls[sic]. The unfortunate effect will be reduced availability of physical forwardgas sales contracts to small producers, who are most <strong>in</strong> need of hedges to manageprice risks.”Id. at para. 30. Although Blue Range lacks precedential value <strong>in</strong> the United States, its reason<strong>in</strong>g is importantbecause Canadian law relat<strong>in</strong>g to <strong>in</strong>solvency <strong>and</strong> the exemption for forward <strong>and</strong> swap agreements from theautomatic stay provisions has been <strong>in</strong>tentionally drafted to closely follow United States law. Id. at para. 8.71As described by a Canadian bankruptcy court, a bankrupt party may “term<strong>in</strong>ate <strong>and</strong> breach contracts withimpunity, forc<strong>in</strong>g the non-default<strong>in</strong>g party to claim damages as an unsecured creditor <strong>in</strong> the [bankruptcy]proceed<strong>in</strong>gs. The ability to selectively repudiate contracts is disda<strong>in</strong>fully known as ‘cherry-pick<strong>in</strong>g’. The debtorcompany could, for example, reta<strong>in</strong> ‘out of the money’ transactions, speculat<strong>in</strong>g that they might improve <strong>in</strong> value,but know<strong>in</strong>g full well that it would not be able to pay if the market moved <strong>in</strong> the other direction. At the same time itmight term<strong>in</strong>ate “<strong>in</strong> the money” transactions, trigger<strong>in</strong>g a cash payment by the non-default<strong>in</strong>g party.” [citationomitted]. Enron Capital & Trade Resources Canada Corp. v. Blue Range Resource Corporation, at para. 28. Somemaster agreements, <strong>in</strong>clud<strong>in</strong>g the EEI, attempt to address the risk of cherry-pick<strong>in</strong>g <strong>in</strong> a bankruptcy proceed<strong>in</strong>g by<strong>in</strong>clud<strong>in</strong>g a provision stat<strong>in</strong>g that the master agreement <strong>and</strong> all transactions are a s<strong>in</strong>gle agreement.72 “Without enforceable term<strong>in</strong>ation <strong>and</strong> nett<strong>in</strong>g out provisions, the <strong>in</strong>solvent company ma<strong>in</strong>ta<strong>in</strong>s complete control<strong>and</strong> may repudiate a contract at any time without notice. Because the non-default<strong>in</strong>g party cannot count onperformance, it cannot effectively re-hedge its risk by enter<strong>in</strong>g <strong>in</strong>to an offsett<strong>in</strong>g contract <strong>in</strong>corporat<strong>in</strong>g similarterms. Given the volatility of the market, the non-default<strong>in</strong>g party is exposed to excessive <strong>and</strong> unmanageable risk.”[Footnote deleted]. Id. at para. 29.73 Edison Electric Institute, Survey of the Legal L<strong>and</strong>scape Applicable to Master Nett<strong>in</strong>g Agreements, October 25,20002 draft, available at http://www.eei.org/issues/contract/mna/legal_l<strong>and</strong>scape_10-25-O2.pdf (last visitedNovember 7, 2002).74 See 11 U.S.C. 553; Citizens Bank of Maryl<strong>and</strong> v. Strump, 516 U.S. 16, 18, 116 S.Ct. 286, 289, 133 L.Ed.2d 258(1995); In re Bennett Fund<strong>in</strong>g Group, Inc., 146 F.3d 136, 138-39 (2d Cir. 1998). This illustrates the importance ofproper contract draft<strong>in</strong>g, as a party will have no rights to term<strong>in</strong>ate <strong>and</strong> liquidate forward <strong>and</strong> swap contractsregardless of the provisions of the Bankruptcy Code if this right is not specifically created <strong>in</strong> the contract.75 11 U.S.C. § 362(b)(17), which references mutual debts, <strong>and</strong> 11 U.S.C. § 560, which does not reference debts.76 11 U.S.C. § 362(b)(6), which references mutual debts.18
77 “Except as otherwise provided <strong>in</strong> this section <strong>and</strong> <strong>in</strong> sections 362 <strong>and</strong> 363 of this title, this title does not affect anyright of a creditor to offset a mutual debt ow<strong>in</strong>g by such creditor to the debtor that arose before the commencementof the case under this title aga<strong>in</strong>st a claim of such creditor aga<strong>in</strong>st the debtor that arose before the commencement ofthe case . . . .” 11 U.S.C. § 553(a).78 In re Westchester Structures, Inc., 181 B.R. 730, 739 (Bankr. S.D.N.Y. 1995).79 11 U.S.C. § 542(b).80 11 U.S.C. § 547(b).81 11 U.S.C. § 548(a)(1)(A).82 11 U.S.C. § 548(a)(1)(B).83 In re Olympic Natural Gas Company, at 165-66.84 Id. at 166.85 11 U.S.C. § 546(g).86 11 U.S.C. § 548(a)(1)(A).87 11 U.S.C. § 548(a)(1)(B).88 11 U.S.C. § 548(s)(2)(D).89 11 U.S.C. § 365(e)(1).90 11 U.S.C. § 556 (forward contracts) <strong>and</strong> 11 U.S.C. § 560 (swap agreements).91 An example of an ipso facto provision is the right <strong>in</strong> Section 6(c)(ii) of the ISDA of the non-default<strong>in</strong>g party tosuspend payment to the default<strong>in</strong>g party upon the occurrence of an event of default. While this is permissible forany non-bankruptcy event of default, this is an impermissible ipso facto provision if the event of default is thebankruptcy of the default<strong>in</strong>g party.92 E.g. , a provision <strong>in</strong> a master agreement permitt<strong>in</strong>g a non-default<strong>in</strong>g party to withhold payment upon theoccurrence of an event of default would be enforceable if the event of default was a failure to make payment but notif the event of default was the bankruptcy of the default<strong>in</strong>g party.19
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