NAESB Contract Not Protected By Bankruptcy Code Safe Harbor Provisions

The decision of the U.S. Bankruptcy Court in Hutson v. Smithfield Packing Co. (In re National Gas Distributors, LLC)¹ poses potentially serious problems for parties trading gas under the North American Energy Standards Board (NAESB) base contract. The U.S. Court of Appeals for the Fourth Circuit will soon review this case of first impression about what constitutes a “swap agreement” under the expanded definition included in the U.S. Bankruptcy Code after the 2005 amendments. That ruling could affect market participants trading gas and other physical commodities, as the International Swaps and Derivatives Association, Inc., (ISDA) recently warned:

[T]he Bankruptcy Court’s narrowing of the scope of the Bankruptcy Code’s “safe harbors” with respect to derivative transactions will have a disruptive and deleterious effect on the financial markets. . . . The Bankruptcy Court’s ruling as a matter of law that the contract between National Gas Distributors and Smithfield was