596 B.R. 631
Bankr. N.D. Ohio2019Background
- FES and Meadville entered a Customer Supply Agreement (CSA) for Meadville’s electricity requirements; the CSA contained an ipso facto clause (para. 24) and a clause stating both parties were "forward contract merchants."
- FES filed chapter 11 on March 31, 2018; Debtors argue the automatic stay and 11 U.S.C. § 365(e) barred Meadville from terminating the CSA after the bankruptcy filing.
- Meadville notified FES it would terminate the CSA and switched one service address to a new supplier in June 2018; Meadville claimed § 556 (safe harbor for forward contract merchants) allowed termination.
- Parties stipulated electricity is a commodity and the CSA is a forward contract; no live testimony was presented—decision rests on stipulated facts and witness declarations.
- Court issued a preliminary order enjoining further switches pending final determination; at final hearing, court found § 365(e) barred the ipso facto termination and that Meadville violated the automatic stay.
Issues
| Issue | Plaintiff's Argument (FES / Debtors) | Defendant's Argument (Meadville) | Held |
|---|---|---|---|
| Whether Meadville could invoke § 556 safe harbor to terminate CSA after bankruptcy filing | § 365(e) and the automatic stay bar termination; only a forward contract merchant may use § 556 | Meadville asserted CSA language and its commodity dealings made it a forward contract merchant, so § 556 permits termination | Meadville is not a forward contract merchant; § 556 does not apply; termination was prohibited |
| Whether contractual stipulation that parties are "forward contract merchants" can create that legal status | Statutory definitions govern; parties cannot contractually confer status that would alter statutory protections | CSA¶41 explicitly designates both parties as forward contract merchants, so Meadville argued the contract created status | Court held parties cannot contractually create forward-merchant status; ¶41 unenforceable as to statutory entitlement |
| Proper scope of "forward contract merchant" in §101(26) | Narrow reading: business must, in whole or in part, consist of entering into forward contracts (Mirant approach) | Broad reading: many commercial counterparties qualify because statute uses "in whole or in part" | Court adopted the narrower Mirant-style test and found Meadville’s business (end-user manufacturer) does not qualify |
| Whether Meadville’s participation in demand-response/ancillary arrangements makes it a forward contract merchant | FES argued demand-response participation is ancillary and does not make Meadville a merchant in the forward-contract trade | Meadville argued EnerNOC/PJM participation and other commodity contracts show forward-contract activity | Court found demand-response and procurement were incidental to Meadville’s manufacturing end‑user business and insufficient to make it a forward contract merchant |
Key Cases Cited
- Computer Communications Corp. v. Codex Corp. , 824 F.2d 725 (9th Cir. 1987) (automatic stay prevents nondebtor unilateral termination of executory contracts)
- Mirant Americas Energy Mktg., L.P. v. Kern Oil & Refining Co. , 310 B.R. 548 (Bankr. N.D. Tex. 2004) (narrow definition of "forward contract merchant"—merchant must trade in the market rather than merely be an end-user)
- In re Borden Chem. & Plastics Operating L.P., 336 B.R. 214 (Bankr. D. Del. 2006) (broader view of forward contract merchant in the context of safe harbors)
- In re Clear Peak Energy, Inc., 488 B.R. 647 (Bankr. D. Ariz. 2013) (addressed forward-merchant status under §556; court discussion of contractual designation)
- In re Pease, 195 B.R. 431 (Bankr. D. Neb. 1996) (prepetition contracts cannot waive or override bankruptcy-created rights such as the automatic stay)