Blawgletter scanned a Fourth Circuit decision last week. It looked dull.

Something to do with a bankruptcy trustee's power to undo pre-bankruptcy transfers from a debtor. Yowza!

But on second viewing, a wondrous thing twinkled from the electronic page -- yet another way Congress aided and abetted the financially poison credit default swaps industry.

[Recall here that CDSs may have caused the financial meltdown that started in earnest last September.]

Federal bankruptcy law cuts a big swath of the U.S. Code. It even owns its own title -- lucky 11. And does it go on for miles. Section 101 alone hews more than 55 separate definitions into our legal firmament.

Which may explain why you didn't realize four years ago that Congress vastly expanded protections for a "swap agreement", which appears to include CDSs. See 11 U.S.C. 101(53B). The amendatory statute, you'll recall, bears the fetching -- and inaccurate -- name of Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

The legislative expansion broadened the definition of "swap agreement" to just about any type of derivative instrument. The new scope in turn exempted lots more swap agreements from the bankruptcy "automatic stay", which generally stops creditors from enforcing obligations of the bankrupt entity, and prohibited actions under the Bankruptcy Code to set aside preferences and constructively fraudulent transfers involving a much wider variety of swap transactions.

The Fourth Circuit case arose from supply contracts that National Gas Distributors signed with several gas purchasers, including chemical giant E.I. du Pont, during the year before NDG filed for bankruptcy protection. Apparently the contracts locked in the prices NGD could charge for future deliveries of gas -- which price commitment proved a bad bet when spot gas prices rose. The bankruptcy court concluded that the contracts didn't fit within the new "swap agreement" definition and that therefore NGD's trustee could pursue claims to avoid them.

The Fourth Circuit praised the bankruptcy judge's paper (he made a "staunch effort") but gave him a failing grade anyway. Congress didn't mean to pinch the scope of "swap agreement" to cover only instruments that trade on active markets and that don't result in physical delivery of a commodity. No. It purposed to "protect[] financial markets from the instability that bankruptcy might cause" if swap agreements didn't get special favors. In re National Gas Distributors LLC (Hutson v. E.I. du Pont de Nemours & Co., Inc.), No. 07-2105 (4th Cir. Feb. 11, 2009).

We don't rightly know how granting even more preferences to complex financial instruments like CDSs could avoid "instability" in financial markets. As best we can tell, the deregulation of CDS transactions in 2000 contributed mightily to the deep turmoil the markets now find themselves in.

Perhaps the law of getting consequences you don't intend applies?