On January 15, 2019, the US Bankruptcy Court for the Northern District of Ohio, in In re FirstEnergy Sols. Corp., held that an end user of an electricity forward contract was not entitled to the benefits of the safe harbor provisions under section 556 of the Bankruptcy Code (11 U.S.C. § 556) (No. 18-50757, (Bankr. N.D. Ohio Jan. 15, 2019)).

Section 556 provides that a "forward contract merchant" may terminate a forward contract pursuant to its counterparty's bankruptcy filing if permitted under the contract. Absent the safe harbor protection, such a provision is a prohibited ipso facto clause, unenforceable in bankruptcy proceedings, and such termination is subject to the automatic stay under section 362 of the Bankruptcy Code (11 U.S.C. § 362). (For more information on Bankruptcy Code safe harbors for financial contracts, see Guide to Bankruptcy Code Safe Harbors for Financial Contracts: Checklist.)

Meadville Forging Company entered into a power supply agreement with FirstEnergy Solutions under which FirstEnergy supplied electricity to Meadville based on Meadville's needs. Meadville was prohibited from selling or trading the electricity. The agreement also included a clause that allowed Meadville to terminate the agreement if FirstEnergy filed for bankruptcy.

On July 3, 2018, FirstEnergy filed for Chapter 11 bankruptcy protection and sought to enforce the automatic stay seeking to stop Meadville from unilaterally terminating the agreement. Meadville argued that it was free to terminate the agreement under Section 556 because it was a forward contract merchant under section 101(26) of the Bankruptcy Code (11 U.S.C. § 101(26)).

Under Bankruptcy Code section 101(26), a forward contract merchant is either of the following:

The court held that Meadville was not entitled to the benefit of the section 556 safe harbor, as it was not a forward contract merchant under the Bankruptcy Code. The court reasoned that the parties could not contractually agree to confer forward contract merchant legal status on Meadville and bind the court to that conclusion "any more than they could have backed into that status by mutually signing an agreement stipulating that Meadville is a Federal Reserve Bank." (, at *6).

The court rejected Meadville's argument suggesting that the court follow a line of cases adopting a broader interpretation of section 101(26), which only require that one party to the contract be a forward contract merchant. According to the court, "For Meadville to be a forward contract merchant, Meadville's business must consist, in whole or in part, of entering into forward contracts for electricity. Meadville must enter into forward contracts for the purchase and sale of electricity to generate a profit. Merely entering into supply contracts as an end user of electricity is insufficient." (, *10).

The ruling further clarifies the disapplication of the section 556 forward contract merchant safe harbor to commodity end users that are not otherwise in the business of buying and selling such commodity for a profit.