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Two-Thirds the Speed of Light – Delaware Bankruptcy Court Holds that Electricity is Not a “Good”

By Justin R. Alberto

On November 1, 2013, Judge Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware held that electricity is not a “good” under section 503(b)(9) of the Bankruptcy Code in In re NE Opco, 2013 WL 5880660 (Bankr. D. Del. Nov. 1, 2013).  In an issue of first impression for the District, Judge Sontchi agreed with the conclusion reached in earlier decisions from bankruptcy courts in Texas and Puerto Rico, but for different reasons.

The background of the dispute was relatively simple.  On June 10, 2013, NE Opco and an affiliated entity (collectively, the “Debtors”) each filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code.  The Debtors subsequently sold substantially all of their assets and commenced a liquidation of their remaining assets.  On August 28, 2013, Westfield Gas & Electric Light Department (“Westfield”) filed a request for allowance of an administrative expense claim under section 503(b)(9) for electricity and natural gas that Westfield alleged it had supplied to the Debtors in the twenty-day period prior to the petition date.  The Debtors did not dispute the delivery of electricity and gas, but objected to Westfield’s request on the basis that electricity and natural gas are not “goods” entitled to administrative priority status.

Section 503(b)(9) of the Bankruptcy Code provides, in pertinent part, that “the value of any goods received by the debtor within the 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” shall be allowed as an administrative expense.  While the Bankruptcy Code does not define the term “goods,” it is widely accepted—including in the District of Delaware, see e.g., In re Goody’s Family Clothing, Inc., 401 B.R. 131 (Bankr. D. Del. 2009)—that for section 503(b)(9) purposes the term is to be construed consistent with the meaning set forth in Article 2 of the Uniform Commercial Code section 105(1).  Under the U.C.C., “goods” are things which are movable at the time of identification to the contract.

A split among courts regarding whether electricity is a good has developed in recent bankruptcy jurisprudence.  Generally, courts holding that electricity is a good have found that electric energy is some “thing” that is “moveable” as it travels through transmission lines to the end user.  Specifically, the Bankruptcy Court for the District of Massachusetts—ironically, Westfield’s “home” district—in In re Erving Indus., Inc., 432 B.R. 354 (Bankr. D. Mass. 2010) found that electricity is movable at the time of identification because it does not reach a customer’s meter and simultaneously cease to exist.  The Court concluded that “logic dictates” that some period of time, however brief, exists from the time the electricity is registered on the meter and ultimately consumed by the end user.  In Hudson Energy Servs., LLC v. Great Atl. & Pac. Tea Co., Inc. (In re Hudson Energy Servs., LLC), 498 B.R. 19 (S.D.N.Y. 2013), the Southern District of New York agreed with the Erving Industries Court that the determinative factor is whether electricity is metered and consumed at the same time or whether some delay occurs between identification and consumption.

On the other hand, twelve days before the Hudson Energy opinion, the Bankruptcy Court for the District of Puerto Rico utilized a different analysis to conclude that electricity is not a good.  There, the Court concluded that the relationship between a utility provider and the debtor is governed by section 366 of the Bankruptcy Code—which refers to utilities as services—and, as a result, found that a utility like electricity simply cannot be considered a good under the U.C.C. and section 503(b)(9).  See In re PMC Mktg. Corp., 2013 WL 4735736 (Bankr. D.P.R. Sept. 4, 2013).  Finally, the Bankruptcy Court for the Northern District of Texas has held that electricity is not a good because it cannot be packaged and handled in the normal sense. See In re Pilgrim’s Pride Corp., 421 B.R. 231 (Bankr. N.D. Tex. 2009).

In NE Opco, Judge Sontchi agreed generally with the logic of the Erving Industries and Great Atlantic & Pacific Tea decisions that some period of time must exist between identification and consumption for a “thing” to be considered a “good,” but added a third factor to the determination, namely that the period of time must be “meaningful.”  Applying this standard to electricity, Judge Sontchi determined that since electricity travels through cables at approximately “two-thirds, or 67% the speed of light,” the time between identification and consumption “renders the separation between the two meaningless” and therefore disqualifies electricity from being considered a good.  Judge Sontchi continued, in dicta, that sections 546(c) (reclamation of goods) and 366 (utility service) are irrelevant to the determination of whether a “thing” is in fact a “good.”  Consequently, the Court denied Westfield’s request for an administrative priority claim based on the provision of electricity during the twenty-day period prior to the petition date.

Separately, Judge Sontchi held that natural gas is expressly recognized by the U.C.C. as a “good” and therefore can be recouped as an administrative expense pursuant to section 503(b)(9) of the Bankruptcy Code.  To determine the amount of Westfield’s administrative claim for natural gas, Judge Sontchi adopted the “apportionment” test over the “predominate purpose” test as the appropriate measure of claim value.  Under the apportionment test, a court must consider individually each line of a provider’s invoice to determine which portion relates to the sale of goods and which portion involves the provision of services.  Judge Sontchi ultimately found that three out of the four line items on Westfield’s invoice related to the provision of services and granted Westfield an administrative expense claim for the nominal amount of the fourth line item.

Judge Sontchi’s decision in NE Opco is significant because it limits an electricity provider’s prospects of receiving an enhanced recovery on its prepetition claim and also establishes new parameters for the relevant inquiry when determining whether a trade claimant’s prepetition claim is entitled to administrative priority treatment.

A copy of the Court’s opinion can be found here.

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