Article

Note: Morgan Stanley Capital Group, Inc. (MSCG), alleging failure to deliver for purchase of 25,000 barrels of gasoline, sued Trafigura AG for breach of contract and sought recovery of US$3,362,625 plus interest and costs. The U.S. District Court for the Southern District of New York, Cote, J., entered judgment for Trafigura, holding that delivery was made effective through Book Transfer.

A Book Transfer Chain is a practice used to settle commodity trades in the petroleum products market by allowing multiple parties to transfer title of an underlying asset without organizing physical transfer of that asset. Parties to a Book Transfer Chain simply record their shifts in position and each Buyer executes a wire transfer to its Seller.

The Book Transfer Chain in question involved 25,000 barrels of gasoline and a circle of 5 companies: Glencore sold to Trafigura, which sold to MSCG, which sold to SemFuel, which sold to QuikTrip, which in turn sold to Glencore, thereby completing the circle. Each buyer was to execute a wire to its corresponding seller for the agreed upon full purchase price. Each Seller has the option of contracting with its buyer to demand some form of security for payment, typically cash collateral or an irrevocable standby letter of credit.

In the instant case, Trafigura obtained a standby in favor of Glencore, but MSCG chose not to exercise its right to demand an LC from SemFuel because, at the time, SemFuel had a $10 million line of credit with MSCG that covered the transaction. The Book Transfer Chain broke down when Moody's Investor Services downgraded SemFuel's credit rating on July 17, 2008. This caused MSCG to rescind SemFuel's line of credit, leaving MSCG exposed to SemFuel on the Book Transfer.

On Friday, July 18, 2008, in an attempt to obtain collateral and eliminate their exposure to SemFuel, MSCG made a last minute request to postpone the effective date of the Book Transfer Chain from Monday, July 21, 2008 until July 24, 2008. MSCG notified Trafigura and SemFuel of its desire to reschedule the Book Transfer Chain, but it failed to notify and obtain approval from QuikTrip and Glencore. All parties of a Book Transfer Chain must approve an amendment to the effective date of the transaction. Absent unanimous consent, title to the gasoline transferred between the parties effective at 12:01 AM on July 21, 2008.

MSCG claimed that the Book Transfer Chain was broken when an agreement could not be reached between the parties to postpone the effective date, and as a result, Trafigura had a contractual obligation to make physical delivery of the gasoline barrels. The Judge decided that there was no agreement between Trafigura and MSCG that amended the Book Transfer prior to the effective date, and, so, the Book Transfer was valid and there was no breach of contract.

[JEB/sdc]

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