Governmental Units Not Forward Contract Merchants

Originally published April 26, 2004

A legal decision arising out of the Mirant bankruptcy finds that Federal, State, and Municipal governmental entities (e.g., Bonneville Power, TVA, CDWR) are not forward contract merchants under the Bankruptcy Code. What this means is that they cannot terminate their physical power and gas contracts if their counterparty files for bankruptcy, unless the court specifically allows the termination.

On December 23, 2003, the U.S. Bankruptcy Court for the Northern District of Texas issued a decision in which it determined that governmental entities, such as federal power marketing, state, and municipal agencies, are excluded from the definition of forward contract merchant. As such, they are subject to the automatic bankruptcy stay preventing them from terminating a forward contract, even if they have a contractual right to do so. This memorandum briefly describes the decision in the Mirant bankruptcy. In re Mirant Corp. et al. (No. 03- 46590).