Restructuring

Contributed by Doron P. Kenter.

“Why is electricity so expensive these days? Why does it cost so much for something I can make with a balloon and my hair?” – Dennis Miller

And so we return to the debate about whether electricity is a “good” for purposes of section 503(b)(9) of the Bankruptcy Code – this time featuring our good friends at the Puerto Rico Electric Power Authority.  As we’ve noted on several occasions, the growing debate continues regarding whether electricity providers can benefit from the administrative priority that is conferred on suppliers of “goods” in the 20 days prior to the commencement of a bankruptcy case.  Most recently, the Bankruptcy Appellate Panel for the First Circuit Court of Appeals declined to decide the issue, but its analysis sends a clear message regarding the nature of the analysis to be applied in connection with any such assessments.
A brief recap: Section 503(b)(9) of the Bankruptcy Code confers administrative expense status for “the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”  Section 503(b)(9), then, confers a significant benefit on any providers of “goods” – as this section can move a large portion of their unpaid prepetition claims to the front of the line for payment from the debtor.  In turn, the definition of “goods” is often defined by reference to the Uniform Commercial Code, which provides that “goods” means “all things . . . which are movable at the time of identification to the contract for sale. . . .” Despite the increasing number of courts to have faced the issue, it is not yet settled whether “electricity” is a “good” for purposes of the Uniform Commercial Code and/or the Bankruptcy Code.
In In re PMC Marketing Corp., PREPA moved the Puerto Rico bankruptcy court for payment of an administrative expense in PMC’s chapter 7 case, contending that the amounts owed to it for electricity supplied to the debtor in the ordinary course of business in the 20-day period prior to the commencement of the bankruptcy case warranted treatment as an administrative expense under section 503(b)(9). The bankruptcy court denied the motion, ruling that in delivering the electricity to the debtor, PREPA provided a “service,” rather than a “good.” The bankruptcy court distinguished the case before it from the decision of its sister court in Massachusetts in In re Erving Indus., Inc., noting that even though that court had concluded that electricity was a “good,” rather than a “service,” PREPA’s situation was different, insofar as it was a regulated public utility that dominated the electricity market in Puerto Rico, whereas in Erving, the energy provider was just one of a number of choices available to consumers in that market. Citing to the legislative history, the Puerto Rico court observed that section 366 of the Bankruptcy Code, which specifically addresses utility providers (discussed, in part, here), is designed to cover “utilities that have some special position with respect to the debtor, such as an electric company . . . that is a monopoly in the area so that the debtor cannot easily obtain comparable service from another utility.” Accordingly, the court reasoned, section 366 was designed to cover “service providers” such as PREPA. The court also noted that the plain dictionary meaning of “utility” refers to “a service . . . provided by a public utility.” Finally, the court noted that PREPA’s own website refers to company as a “service provider.” In light of this understanding of PREPA’s position as a “utility” provider – and therefore a “service” provider – the bankruptcy court ruled that PREPA’s electricity was a service, and not a good, and was therefore not entitled to administrative priority under section 503(b)(9).
On appeal, the appellate panel did not decide whether the amounts owed to PREPA qualified for administrative priority under section 503(b)(9), but vacated the bankruptcy court’s judgment on the basis that the bankruptcy court’s analysis was fundamentally flawed, insofar as it did not focus on the definition of the term “good” in section 503(b)(9). The bankruptcy court failed to consider the merits of the Erving decision, or of the cases disagreeing with Erving, and instead applied a “totality of the circumstances” inquiry, which “seemed focused” on the differentiating factors between PREPA and the electricity provider in Erving and on the premise that electricity cannot be both a “service” in the general sense (and pursuant to section 366) and a “good” pursuant to section 503(b)(9). This distinction, however, has been uniformly rejected by the various courts to have addressed the question of whether electricity is a “good” for purposes of section 503(b)(9) – both those that hold that it is a “good” and those that hold that it is not. Moreover, the appellate panel recognized that the relationship between the electricity provider and the consumer cannot be determinative of whether electricity qualifies for 503(b)(9) status, particularly because the electric current could, in the course of its transmission, transform from a good to a service (for example, if electricity is a “good” to the provider and a “service” to the consumer) – a plainly unworkable result.
For all of these reasons, the appellate panel noted that it was “persuaded by the vast weight of authority that a proper analysis of whether electricity constitutes a ‘good’ for purposes of § 503(b)(9) administrative priority must begin with an analysis of the term ‘good’ itself.” Though the appellate panel did not dictate how the term should be defined (other than to say that it is generally informed by the Uniform Commercial Code), it vacated the bankruptcy court’s judgment and remanded the matter back to the bankruptcy court to undertake a proper analysis.
The bankruptcy court’s analysis, though perhaps tempting – especially in light of the dual protections potentially afforded to electricity providers in the form of section 366 and section 503(b)(9), if a utility is determined to have delivered “goods” to the debtor – was ultimately unfounded and did not withstand scrutiny on appeal. The analysis, then, is relatively simple:

• What is a “good” for purposes of section 503(b)(9)?
• Is the definition of “good” in the Uniform Commercial Code determinative of whether electricity is a good?
• Does that definition include unpaid charges (no pun intended) for electricity provided to the debtor in the ordinary course of business in the 20 days prior to commencement of the bankruptcy case?

Confused? See our prior posts on other courts’ analyses of the subject as we await further guidance from the courts.