United States: Is Electricity A "Good" Eligible For § 503(b)(9) Priority Status?

Section 503(b)(9) of the Bankruptcy Code grants sellers of goods an administrative-priority claim for the value of goods sold to a debtor received within 20 days of a bankruptcy filing. Since its enactment in 2005, there has been significant litigation concerning nearly every element of § 503(b)(9) that a creditor must prove to obtain priority status for its claim. There is perhaps no other issue concerning eligibility for § 503(b)(9) priority status that has so evenly divided the courts as whether the provision of electricity qualifies as a sale of "goods." The divergent rulings are also notable because of the different approaches that courts have taken to arrive at their holdings. Most recently, courts in Oregon and New York have held that electricity was ineligible for § 503(b)(9) priority because it is not a "good," but those courts took different paths to reach the same result.

In its February 2023 decision in PacifiCorp v. North Pacific Canners & Packers Inc., ¹ the U.S. District Court for the District of Oregon affirmed the bankruptcy court's ruling that electricity is not a "good" after considering extensive expert testimony. Three months later, the U.S. Bankruptcy Court for the Southern District of New York reached the same result in In re Sears Holdings Corp.² without the benefit of any expert testimony. The Sears court instead relied on nonbinding precedent within the district that narrowly construed statutory priorities and noted the lack of consensus among the courts over whether electricity is a good eligible for priority status under § 503(b)(9). As a result of the differing approaches as exemplified by the PacifiCorp and Sears decisions, other courts considering whether electricity is a good eligible for § 503(b)(9) priority status will have to decide whether to rely on complex scientific evidence concerning the nature of electricity.

Section 503(b)(9) Claims

The text of § 503(b)(9) appears relatively straightforward. It affords an administrative-priority claim 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."³ This priority status frequently entitles the holder of an allowed § 503(b)(9) claim to full payment prior to any recovery by general unsecured creditors.

What Are "Goods"?

Key to determining whether a seller has an eligible § 503(b)(9) priority claim is proving that the debtor received "goods" within 20 days prior to the bankruptcy filing. Although the Bankruptcy Code does not define the term "goods," courts have adopted the definition of "goods" from Article 2 of either the model or the state-adopted version of the Uniform Commercial Code (UCC). The model UCC defines "goods" as "all things (including specifically manufactured goods) [that] are movable at the time of identification to the contract for sale."⁴ As such, "Identification of goods occurs when existing goods are designated, or agreed upon, as the goods to which the contract refers."⁵

For the PacifiCorp court, the creditor's inability to present credible expert scientific evidence that the electricity supplied to the debtors was movable at the time of identification to the contract was fatal to the creditor's § 503(b)(9) priority claim. By comparison, the Sears court denied allowance of the creditor's § 503(b)(9) claim because electricity is not a good, without the benefit of any expert testimony.

Courts nationwide have reached conflicting decisions on the question of whether electricity is a "good" in determining eligibility for § 503(b)(9) priority status. These courts have also not reached consensus over what factual evidence is required to prove that electricity is movable at the time of identification to the contract for sale and, as such, is a good.

The PacifiCorp Court Relies on Expert Scientific Evidence

In August 2019, the debtor in PacifiCorp commenced its chapter 11 case.⁶ PacifiCorp, a public utility that supplied electricity to the debtor prior to the petition date, asserted a § 503(b)(9) claim for approximately $206,000.⁷ The debtor objected to priority status for PacifiCorp's claim, arguing that electricity does not qualify as "goods" within the meaning of § 503(b)(9).⁸

Noting that the Bankruptcy Code does not define "goods," the bankruptcy court adopted the model UCC definition.⁹ Accordingly, PacifiCorp carried the burden of proving that the supplied electricity was movable at the time of identification to the contract for sale.

Both the debtor and PacifiCorp submitted expert scientific testimony to support their positions. The bankruptcy court observed that the experts agreed on how electricity is generated and "that meters measure and record the amount of electricity passing through the meter, and the amount a customer will be required to pay for that electricity."¹⁰ The court framed the dispute as "whether the electricity provided to [the] Debtor was movable at the time it was identified to the contract of sale."¹¹

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Footnotes

1. 2023 WL 1765691 (D. Ore. Feb. 3, 2023).

2. 2023 WL 3470475 (Bankr. S.D.N.Y. May 15, 2023).

3. 11 U.S.C. § 503(b)(9).

4. Model U.C.C. § 2-105(1).

5. 2 Anderson U.C.C. § 2-501:4 (3d ed.).

6. In re N. Pac. Canners & Packers Inc., 628 B.R. 337, 339 (Bankr. D. Ore. 2021).

7. Id.

8. Id.

9. Id. at 341 (citing In re PMC Mktg. Corp., 517 B.R. 391-92 (B.A.P. 1st Cir. 2014); In re Pilgrim's Pride Corp., 421 B.R. 231, 236-37 (Bankr. N.D. Tex. 2009) (explaining that use of model UCC, as opposed to UCC version enacted by state, is appropriate to ensure uniformity in interpretation of UCC, as applied to § 503(b)(9)).

10. Id.

11. Id.

Originally published by ABI Journal

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