Section 503(b)(9) of the Bankruptcy Code grants certain creditors that sell goods to debtors in the twenty days prior to the bankruptcy filing an administrative claim. Since its enactment in 2005, the scope of Section 503(b)(9) has been a source of debate among bankruptcy courts and practitioners. 1Congress enacted Section 503(b)(9) as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. In re The Great Atlantic & Pacific Tea Co., Inc., Case No. 12-CV-7629 (CS), 2013 BL 248503 (S.D.N.Y. Sept. 16, 2013). In particular, a split of authority has developed as to exactly what constitutes a “good” for the purposes of Section 503(b)(9), a term which is not defined by the Bankruptcy Code.
As a result of the ambiguity with respect to the meaning of goods, creditors who would seemingly hold only a general unsecured claim are asserting administrative claim priority under Section 503(b)(9). Utility providers are among the creditors that have attempted to use Section 503(b)(9) to elevate their general unsecured claims to administrative status. Although courts appear to be in agreement that water and natural gas are goods, they have split as to whether electricity is a good or merely a service. 2See, e.g., In re Pilgrim’s Pride Corp., 421 B.R. 231 (Bankr. N.D. Tex. 2009); GFI Wis. Inc. v. Reedsburg Utility Comm’n, 440 B.R. 791 (Bankr. D. Mass. 2010); 5 Collier on Bankruptcy ¶ 503.16[1] (16th ed. 2011).
Surprisingly, many bankruptcy courts have not addressed whether an electricity provider is entitled to a Section 503(b)(9) claim for electricity sold to a debtor prior to its bankruptcy filing. The Bankruptcy Court for the District of Delaware recently weighed in on the issue for the first time in NE Opco, Inc. and took a slightly different approach than other courts considering the issue. 3In re NE Opco, Inc., Case No. 13-11483 (CSS), 2013 BL 303956 (Bankr. D. Del. Nov. 1, 2013).
A. Case Law Prior to NE Opco, Inc.
A creditor is entitled to an administrative claim under Section 503(b)(9) if: (i) the creditor sold goods to the debtor; (ii) the debtor received the goods within twenty days prior to filing; and (iii) the creditor sold the goods to the debtor in the ordinary course of business. 4In re Goody’s Family Clothing, Inc., 401 B.R. 131, 133 (Bankr. D. Del. 2009). Because the Bankruptcy Code does not define the term “good,” courts have turned to the definition provided by Article 2 of the U.C.C. 5See, e.g., GFI Wis. Inc., 440 B.R. at 799-800; In re Pilgrim’s Pride Corp., 421 B.R. at 235-36; In re Plastech Engineered Prods., 397 B.R. 828, 835 (Bankr. E.D. Mich. 2008). Section 2-105 of the U.C.C. defines a “good” as a thing that is movable at the time of identification to the contract for sale. 6U.C.C. §2-105 (2012). Section 2-107 of the U.C.C. specifically provides that natural gas falls within the definition of goods. 7Id. § 2-107; see also In re Pilgrim’s Pride Corp., 421 B.R. at 240-41.
Despite the consensus that the term “good” should be given the meaning ascribed to it in the U.C.C., courts are not in agreement as to whether electricity falls within the U.C.C.’s definition. Some courts have held that electricity is a good because it is movable at the time of identification to the contract—i.e. when it is measured by the meter. 8In re Erving Indus., Inc., 432 B.R. 354 (Bankr. D. Mass. 2010); GFI Wis. Inc. v. Reedsburg Utility Comm’n, 440 B.R. 791, 800 (Bankr. D. Wis. 2010); Puget Sound Energy, Inc. v. Pac. Gas & Elec. Co. (In re Pac. Gas & Elec. Co.), 271 B.R. 626, 639-40 (N.D. Cal. 2002). In Erving, for instance, the Bankruptcy Court for the District of Massachusetts explained that “at the time electricity is identified to the contract, it is literally moving, and it remains movable for some period of time thereafter.” 9In re Erving Indus., Inc., 432 B.R. at 370 (emphasis in original). Although the process “may occur at speeds so imperceptible that consummation appears to occur simultaneous with identification,” the court found that electricity does continue to move until it reaches the end product. 10Id. In addition, at least one court held that the determination of whether electricity is a good depends on the “general movability of electricity, common perceptions of electricity, and the exchange of electricity as a commodity on the marketplace.” 11GFI Wis. Inc., 440 B.R. at 800. In GFI Wisconsin, the District Court for the Western District of Wisconsin reasoned that because electricity is “movable, tangible and consumable,” “has physical properties,” and is “bought and sold in the marketplace[,]” it is a good under the U.C.C. 12Id. at 800-01.
Other jurisdictions have concluded that electricity does not fall within the U.C.C.’s definition of goods because it is not movable at the time for identification to the contract. 13In re Pilgrim’s Pride Corp., 421 B.R. 231 (Bankr. N.D. Tex. 2009); In re Samaritan Alliance, LLC, Case No. 07-50735, 2008 BL 129819 (Bankr. E.D. Ky. June 20, 2008). According to the United States District Court for the District of Texas in Pilgrim’s Pride, “[o]nce electricity has been ‘identified’ by measurement at the meter, it has already been consumed by the end user.” 14In re Pilgrim’s Pride Corp., 421 B.R. at 239. In addition, a more recent decision from the Bankruptcy Court for the District of Puerto Rico, PMC Marketing, concluded that whether or not electricity is a good depends on the relationship between the electric company and the customer. 15In re PMC Mktg., Case No. 09-02048, 2013 BL 234851 (Bankr. D.P.R. Sept. 4, 2013). In this case, because the electric company was a public corporation that was the sole provider of electricity (unlike the alternative energy provider in Erving), the court held that the electric company was a utility provider governed by Section 366 of the Bankruptcy Code. 16Id. As a result, the court concluded that the electric company provided services, not goods. 17 Id.
B. The NE Opco, Inc. Decision
In NE Opco, Inc., Westfield Gas & Electric Light Department (“Westfield”) filed a motion seeking allowance and payment of an administrative claim pursuant to Section 503(b)(9) for electricity and natural gas it provided to the debtors in the twenty days prior to the petition date. 18In re NE Opco, Inc., Case No. 13-11483 (CSS), 2013 BL 303956, at *1-2 (Bankr. D. Del. Nov. 1, 2013). Although some of the charges included in Westfield’s motion related to services, Westfield argued that since it sold goods to the debtors, Section 503(b)(9) applied to all the charges. 19See id. at *6-7, *37-38.
In response, the debtors argued that electricity is a service, not a good, under the U.C.C., and Westfield’s administrative claim must be denied. 20Id. at *7. Moreover, although the Debtors did not dispute that natural gas was a good under the U.C.C., they argued that Westfield was only entitled to an administrative claim for charges related to the sale of goods. 21Id. at *37-38. Thus, other costs included on Westfield’s invoices, such as delivery, distribution, maintenance, and customer service charges, were not entitled to administrative priority under Section 503(b)(9). 22Id.
The court addressed two primary issues in its opinion: (i) whether electricity is a good and (ii) whether Westfield’s entire claim was entitled to priority or merely the portion attributable to goods. 23Id. at *2.
I. Electricity As a Good Under the U.C.C.
After a lengthy examination of precedent from other jurisdictions on the issue, the court held that electricity is not a good for the purposes of Section 503(b)(9). 24Id. at *8-26. Like other decisions, the court started with the language of Section 2-105 of the U.C.C., and, in particular, the requirement that in order to be a good, electricity must be movable at the time of identification to the contract. 25Id. at *24-25.
The court’s analysis took a slightly different turn from that in other decisions, however. According to the Court, “the inclusion of movability as an element in the definition of a good goes back to the inception of the term almost 1,000 years ago. . . . A service is not movable property but, rather, it is performed and consumed simultaneously.” 26Id. The court went on to find that “in order for electricity to be a good, there must be a period between when electricity is identifiable and consumed. But, in order to do justice to the term as it has developed over 1,000 years, the period between identification and consumption must be meaningful.” 27Id. at *25 (emphasis in original).
According to the court, the “infinitesimal” time between the identification and consumption of electricity—1/60th of 1/60th of 1/60th of a second, to be exact—rendered the separation meaningless. 28Id. at *26. Because there is no meaningful delay between identification and consumption of electricity, the court held that electricity is not a good under a plain reading of the statute. 29Id.
The court turned to other arguments made by Westfield and the Debtors. First, the court rejected the rationale set forth in GFI Wisconsin and espoused by Westfield that electricity must be a good given its similarities with other goods such as water and natural gas. 30Id. at *27-29. Unlike water and natural gas, electricity cannot be stored in its current form for an indefinite period of time. 31Id. at *28-29. Although electricity may be stored in a battery, it does not retain its form. 32Id. Rather, it becomes “potential energy, stored in materials or chemicals that will produce electricity when they react with each other.” 33Id. at *29.
The court also rejected the debtors’ attempts to use other sections of the Bankruptcy Code to limit the meaning of goods. First, the court held that it is not necessary for a good to be reclaimable in order to be given administrative priority under Section 503(b)(9), reasoning that “[g]oods under section 503(b)(9) cannot and are not defined by the exception to the rule. While certain goods are subject to reclamation, other non-reclaimable goods are also entitled to an administrative expense claim.” 34Id. at *32-33. The court also found that Section 366 of the Bankruptcy Code has no bearing on whether electricity is a good or service. 35Id. at *33-34. Section 503(b)(9) “addresses the sale of goods pre-petition while section 366 addresses the provision of utility services post-petition.” 36Id. at *33.
Finally, the court rejected the reasoning set forth in PMC Marketing that the relationship between the debtor and the utility provider must be examined to determine if electricity is a good. 37Id. at *34-35. The court reasoned that this approach would result in electricity starting as a good but ending as a service, particularly where the purchaser is a wholesaler, not an end user. 38Id. at *35.
II. Predominant Purpose v. Apportionment Test
The second issue addressed by the court was whether Westfield was entitled to the full amount of its claim for natural gas charges or only the portions of the bill relating to the sale of goods. Westfield argued that the “predominant purpose” test should be adopted, which provides that if the transaction predominantly involves goods, then the seller’s entire claim is entitled to administrative priority, including any service-related charges. 39Id. at *37-38. The debtors argued, however, that the court should apportion the bill between service-related and goods-related charges and only allow a Section 503(b)(9) claim for the goods-related charges. 40Id. at *38.
The court agreed with the debtor, noting that “[t]he only relevant determination under [Section] 503(b)(9) is the value of the ‘goods’ that were delivered, irrespective of whether the contract also called for the delivery and sale of services.” 41Id. at *39 (citing In re Plastech Engineered Prods., 397 B.R. 828, 837 (Bankr. E.D. Mich. 2008)). Thus, the court rejected the “winner take all” approach and closely examined the charges on the debtors’ natural gas bill. 42Id. at *39-40. Ultimately, the court concluded that only a small portion of the natural gas bill was for the sale of goods. 43Id. at *40.
C. Impact
NE Opco, Inc. is an important decision that provides much needed clarity to debtors and creditors on the scope of Section 503(b)(9) claims. The court’s ruling that electricity is not a good and its adoption of the apportionment test is a significant win for debtors in the District of Delaware and potentially other jurisdictions. The court took a novel approach in its analysis of whether electricity is a good for the purposes of Section 503(b)(9) that has not been addressed in other seminal decisions on the issue, such as Erving and GFI Wisconsin. These cases concluded that electricity was movable at the time of identification to the contract; however, they also concluded that the time between identification and consumption was imperceptible. In light of the ruling in NE Opco, Inc. that the period between identification and consumption of a good must be meaningful, perhaps these jurisdictions will reconsider their conclusion that electricity is a good.
