Contributed by Doron P. Kenter.
You are . . . electric? You are electric? – Ron Burgundy, Anchorman
Is electricity a “good” for purposes section 503(b)(9) of the Bankruptcy Code? There is a growing debate among a number of courts regarding whether electricity providers can benefit from the administrative priority that is conferred on suppliers of “goods” in the twenty days prior to the commencement of a bankruptcy case. Most recently, the United States Bankruptcy Court for the District of Delaware has weighed in, casting a strong vote in the “no good” column.
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. . . .” 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 NE OpCo, the City of Westfield Gas & Electric Light Department (“Westfield”) sought treatment of unpaid amounts for electricity delivered to the debtors as an administrative expense. The debtors opposed Westfield’s motion. Both sides found supporting authority in other courts, but the Delaware courts had not yet weighed in on the debate.
In concluding that electricity was not a good for purposes of section 503(b)(9), the bankruptcy court undertook a comprehensive analysis of the existing case law on the subject, and the rationale provided for both perspectives. In brief, the court observed that courts have generally looked to one or more of six questions in connection with their analyses:
- Is electricity moveable at the time it is identified as passing through a meter, or is consumption simultaneous with identification?
- Is electricity “comparable” to other “goods” contemplated by the U.C.C.?
- Does section 546(c) of the Bankruptcy Code (which deals with reclamation of “goods”) affect the analysis of whether electricity is a “good” for purposes of section 503(b)(9)?
- Does section 366 of the Bankruptcy Code (which deals with “utility services”) affect an analysis of whether electricity is good or a service (or both)?
- Does the nature of the relationship between the supplier and the consumer affect the analysis of whether electricity is a good or a service?
- Should section 503(b)(9) be strictly construed in light of the material benefits that it confers on those who qualify for such treatment?
Turning to the first question – whether electricity is “moveable” as contemplated by the U.C.C. – the court undertook a detailed review of the existing discussion on electricity’s “moveability.” Courts holding that electricity is a good have generally observed that electricity can be created, measured, stored, and felt (though one may want to avoid doing so) – and that because some “imperceptible” period of time passes between identification of electricity (at the meter) and its use (as power), electricity is therefore moveable and identifiable and is a “good.” The Delaware bankruptcy court, however, concluded that this was “simply the wrong approach.”
In rejecting that approach, the court agreed that “goods” and “services” can be distinguished on the basis of their moveability. However, “in order to do justice to the term [i.e., “good”] as it has developed over 1,000 years, the period between identification and consumption must be meaningful” (emphasis in original). Because electricity travels at close to the speed of light, and the period of time between identification and consumption is just “1/60th of 1/60th of 1/60th of a second” the court concluded that the “infinitesimal delay” was not a meaningful period of “moveability,” electricity should not be considered a “good.”
Though the court recognized that it need not look to the other five questions, it continued its analysis for the sake of completeness, and to observe that in its view, they were either neutral or supported the court’s conclusion.
Turning to the second question – whether electricity is “comparable” to other goods under the U.C.C. – the court concluded that electricity is markedly different from its cousins, water and gas. Because water and gas are precisely the types of “natural inorganic matter” that fit within the U.C.C.’s definition of “minerals or the like” (a contract for the sale of which the U.C.C. says is a “contract for the sale of goods”), they are properly considered goods. In fact, the U.C.C. specifically lists gas as such a mineral. Electricity, on the other hand, is not a “mineral” or “natural inorganic matter,” and cannot be passed back and forth like gas or water. Moreover, water and natural gas stored in tanks are “still water and natural gas,” whereas electricity stored in a battery “is no longer electricity” – but “potential energy stored in materials or chemicals that will produce electricity when they react with each other.” Because it cannot be passed back and forth as water and natural gas can, and does not “rest” in a moveable state, it should not be considered a “good,” as such term is defined in the Uniform Commercial Code.
Third and fourth, the court observed that section 546(c) and 366 of the Bankruptcy Code should have no bearing on whether electricity is a “good.” Even though electricity cannot be a “good” under section 546(c) (because it is inherently not reclaimable), the court concluded that it is only one of many types of things that could be a “good” for purposes of section 503(b)(9), while not qualifying for reclamation pursuant to section 546(c). Similarly, the court concluded that something can be both a “good” pursuant to section 503(b)(9) and a “service” pursuant to section 366 – such as natural gas – and that accordingly, these sections of the Bankruptcy Code do not affect the construction of section 503(b)(9).
Fifth, the court concluded that the nature of the parties’ relationship similarly should not affect an analysis of whether electricity qualifies for administrative priority under section 503(b)(9). The court noted that electricity can be bought and sold in any number of ways, including on a wholesale level, in which case it can be sold as a good and be purchased as a service. This disconnect (no pun intended) suggests that the nature of the parties’ relationship cannot guide whether electricity should be afforded 503(b)(9) priority.
Lastly, the court rejected another court’s suggestion that provisions granting administrative priority should be narrowly construed. Instead, the court simply stated that section 503(b)(9) should neither be strictly construed, nor loosely construed. Rather, the court “should simply apply the law as written and not put a judicially created obstacle in the path of an administrative expense claimant.”
In concluding that electricity is not a “good” that is entitled to administrative priority pursuant to section 503(b)(9), the court based its decision on the fact that mere “microseconds” pass between the moment that electricity is identified (as it passes through a meter) to the time that it is consumed by the user – and that this period of “moveability” is not meaningful enough to render electricity a good, as such term is understood in the U.C.C. Similarly, the U.C.C. itself should not be read to include “electricity” among its cousins water and natural gas – which are, by definition, “minerals” (at least from the legal perspective ), which are expressly considered “goods” under the U.C.C. Even though the court rejected the other four proposed tests for determining whether electricity is a good, its decision is by no means uncertain. The case law is not yet settled, but there is no doubt that NE OpCo will remain a “charged” decision in the coming months.