Numerous bankruptcy court decisions have considered whether electricity is a good under 11 U.S.C. § 503(b)(9).[1] One of the most recent decisions, In re NE Opco Inc.,[2] bucks a recent trend in cases that have held that electricity is a good under § 503(b)(9).[3] Moreover, in ruling that electricity is not a good for this purpose, the NE Opco court adopted a fresh approach to the issue based on the notion of meaningful delay between identification to the contract and consumption.
In NE Opco, Westfield Gas and Electric Light Department, a utility provider, sought allowance of an administrative expense under § 503(b)(9) for electricity and natural gas that Westfield provided to the debtors within 20 days of the debtor’s petition date. The court first noted that § 503(b)(9) only applies to vendors of “goods” and not service providers.[4] The court also noted that like many others courts, it had previously adopted the definition of the term “goods” in Article 2 of the Uniform Commercial Code (UCC) for purposes of § 503(b)(9):
“Goods” means all things … [that] are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities … and things in action….[5]
Is Electricity a Good?
In addressing whether electricity is a “good,” the NE Opco court first surveyed the cases that had considered this issue.[6] The court then offered its own analysis by considering the disparate factors that other courts had considered in addressing the issue, enumerating the following factors:
a. Is electricity moveable at the time that it is identified by passing through the meter, or is it consumed simultaneously with identification?
b. Is electricity “comparable” with other things that are goods under the [UCC]?
c. Does section 546(c) governing [the] reclamation of goods control whether electricity is a good or a service?
d. Does section 366 of the Bankruptcy Code governing “utility services” control whether electricity is a good or a service?
e. Should the nature of the parties’ relationship, e.g., is the claimant acting as a “public utility,” determine whether electricity is a good or a service?
f. Should section 503(b)(9) be strictly construed because it provides an otherwise unsecured creditor with an administrative-expense claim and, if so, to what extent?[7]
NE Opco Factors
Earlier cases have held that electricity came within the definition of the term “good” under the UCC and, hence § 503(b)(9), because some period of time, however imperceptible and even if it reaches the speed of light, must pass between the measurement of electricity at a debtor’s meter and its use.[8] The NE Opco court rejected this approach, reasoning that “it is not necessarily true that there is a period, infinitesimal or not, between identification and use….”[9] Instead, the court adopted an historical and linguistic approach, noting that 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.”[10] Although conceding that to be a good, there must be a period of time between when electricity is identifiable and consumed, the court reasoned that “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.”[11] The court concluded that this was simply not the case with electricity.
After reciting certain scientific facts about electricity, including its speed (that of an electromagnetic wave), its velocity factor in a vacuum and through various media, and the speed of light, the court calculated that in a coaxial cable, electricity travels a kilometer in 4.978 microseconds or 0.000004978 seconds.[12] Based on this analysis, the court held that “[e]lectricity cannot be shoehorned into the definition of a good based on such an infinitesimal delay. Thus, under the plain meaning of section 503(b)(9) … electricity is not moveable at identification and, thus, is not a good because there is not a meaningful delay between identification and consumption.”[13]
Although the court’s determination that electricity is not a good rendered any further analysis unnecessary, it nonetheless analyzed factors that other courts have considered and found that all such factors were either neutral or supported the court’s conclusion.[14] First, the court emphatically answered the question of whether electricity is “comparable” with other things that are goods under the UCC in the negative, disagreeing with the GFI Wisconsin court on whether electricity is different from water and natural gas. The court noted that water and natural gas, after passing through a meter, can be stored in a tank or pipes.[15] The court observed that this is simply not the case with electricity, reasoning that while water and natural gas, when stored, are still water and natural gas, electricity stored in a battery in no longer electricity, but rather, potential energy.[16]
The court next agreed with Erving Industries, GFI Wisconsin, and In re Plastech Engineered Products Inc.,[17] which held that § 546(c) does not control whether electricity is a good or service.[18] Although §§ 503(b)(9) and 546(c) should be consistently interpreted, the court found that they are not on equal footing.[19] The court reasoned that “[w]hile certain goods are subject to reclamation, other non-reclaimable goods are also entitled to an administrative-expense claim. Thus, section 546(c) is irrelevant for purposes of determining whether electricity is a good under section 503(b)(9).”[20] The court likewise rejected that § 366 governs the issue, characterizing this question as the flip side of the issue of whether goods under § 503(b)(9) are limited to those that can be reclaimed under § 546(c).[21] The court agreed with GFI Wisconsin, reasoning that there are items, such as natural gas, that are specifically identified in the UCC as “goods” but that are services for purposes of § 366.[22] Thus, the court held that § 366 was irrelevant to whether electricity was a good or service.[23]
Next, the court asked whether the parties’ relationship should determine the issue, noting that electricity can be bought and sold at a wholesale level, such that the buyer is not the end user but rather, sells the electricity to another wholesale or consumer.[24] If the good-vs.-service determination was based on the parties’ relationship, then an electric current could travel from its point of generation to its point of use, starting as a good but ending as a service.[25] The court also reasoned that since § 366 is unique to the Bankruptcy Code, whether the seller is providing a good or service might depend on if the user is in bankruptcy.[26] Thus, the court determined that the proper course is to determine whether — irrespective of the nature the parties’ relationship — electricity, in and of itself, is a good.[27] The NE Opco court next determined that § 503(b)(9) should not be construed, either strictly or loosely, and that courts should simply apply it as written and not put judicially created obstacles in the path of on a § 503(b)(9) claimant.[28]
Sea Change?
In ruling that electricity is not a good for purposes of § 503(b)(9), the NE Opco court stemmed the tide of recent bankruptcy court decisions that had reached the opposite result. Whether NE Opco and the rationale behind its holding results in a sea change in the jurisprudence on this issue remains to be seen.
[1] See, e.g., In re S. Montana Elec. Generation & Transmission Coop. Inc., 11-62031-11, 2013 WL 85162 (Bankr. D. Mont. Jan. 8, 2013); GFI Wisconsin Inc. v. Reedsburg Util. Comm’n, 440 B.R. 791 (W.D. Wis. 2010); In re Erving Indus. Inc., 432 B.R. 354 (Bankr. D. Mass. 2010); In re Pilgrim’s Pride Corp., 421 B.R. 231 (Bankr. N.D. Tex. 2009); In re Samaritan Alliance LLC, 07-50735, 2008 WL 2520107 (Bankr. E.D. Ky. June 20, 2008).
[2] 501 B.R. 233 (Bankr. D. Del. 2013).
[3] See Andrew L. Turscak, Jr. and James J. Henderson, “Growing Trend? Recent Cases Say that Electricity Is a Good,” XXXI ABI Journal 6, 44-45, 93 (July 2012).
[4] 501 B.R. at 236-37.
[5] Id. at 237; In re Goody’s Family Clothing Inc., 401 B.R. 131, 134 (Bankr. D. Del. 2009); U.C.C. § 2-105(1) (2003).
[6] 501 B.R. at 241-48.
[7] Id. at 249.
[8] Id. at 249-50 (citing Erving Industries, GFI Wisconsin, and In re Great Atl. & Pac. Tea Co. Inc., 498 B.R. 19 (S.D.N.Y. 2013)).
[9] Id. at 250.
[10] Id.
[11] Id. (emphasis in original).
[12 Id. at 251.
[13] Id.
[14] Id.
[15] Id. at 251-52.
[16] Id. at 252.
[17] 397 B.R. 828, 838 (Bankr. E.D. Mich. 2008).
[18] 501 B.R. at 252-55.
[19] Id. at 253.
[20] Id. at 255.
[21] Id.
[22] Id.
[23] Id.
[24] Id.
[25] Id. at 255-56. Cf.S. Montana Elec., 2013 WL 85162, at *3 (“[A] Debtor supplies the power [that] it purchases from provider … to its members, who in turn sell the power to their customers. In this case, neither the Debtor nor its members are the end user, or consumer, of the electricity supplied by [the provider].”).
[26] Id. at 256.
[27] Id.
[28] Id.