Determinations as to whether electricity is a “good” for purposes of § 503(b)(9) remains an intensely fact-driven exercise with a lack of consistency coming from the courts. This inconsistency was evidenced by four recent written decisions addressing the issue.
It’s the Facts? It’s the Facts!
In In re Great Atlantic & Pacific Tea Co. Inc.,[1] the district court determined that the issue of whether electricity was a good under § 503(b)(9) was not solely an issue of law. In this case, a wholesale electricity purchaser asserted an administrative-expense claim for the sale of electricity. The bankruptcy court, relying solely on written submissions and oral argument, concluded that electricity was not clearly a “good” because it is simply a stream of electrical energy identified at the point of delivery and disappearing into use the moment that it reaches the meter. Finding that administrative-expense claims must be tightly construed, the bankruptcy court granted the debtor’s objection to the claim.[2]
On appeal, the district court considered the bankruptcy court’s factual findings, identifying several factual disputes: whether electricity (1) was identifiable when purchased for resale; (2) disappeared immediately upon reaching a meter for use; and (3) constituted an identifiable bulk of goods, as well as considering whether it was inappropriate to make factual findings without an evidentiary hearing.[3] The debtor argued that the arguments were meritless and an evidentiary hearing was not required because the nature of electricity is a constant or legislative fact — an established truth, fact or pronouncement that does not change.[4] Citing the varying conclusions reached by other courts, the district court rejected this argument, stating that the physics of electricity might be constant but the economic arrangements are not. Thus, the district court concluded that the nature of electricity — at least for purposes of § 503(b)(9) — is not an established truth that does not change.[5] Accordingly, the district court remanded for further fact-finding.
Nothing Happens Until Something Moves Electricity
In In re Southern Montana Electric Generation & Transmission Cooperative Inc.,[6] the bankruptcy court considered whether electricity was a good where the debtor purchased and resold electricity. Distinguishing cases involving an end user or consumer of electricity, the court stated that “determining whether a particular thing qualifies as a good and deserves administrative priority should be a straightforward assessment, taking into consideration the nature and common understanding of the thing, but also considering its similarities” to items that are undisputed goods under the Uniform Commercial Code (UCC).[7] The court rejected the notion that determining the meaning of “goods” should involve quantum physics, how fast electrons are moving or even where a debtor’s meter is located.[8]
The court then found that electricity moves at least until it is metered, at which point it is identified for sale. Thus, the court concluded that even if the electricity was moving at the speed of light, the requirements for a good — movability and identification — were met. Accordingly, the court found that electricity has physical properties, is movable, consumable, and purchased and sold in the marketplace, which qualifies it as a “good” for purposes of the UCC and § 503(b)(9).[9] Therefore, the court upheld the § 503(b)(9) claim arising from the sale of electricity.[10]
It Is All About the Meaning of a “Utility”
In In re PMC Marketing Corp.,[11] the bankruptcy court concluded that a utility provider was not entitled to administrative-expense priority for electricity that was provided to a debtor. The court opined that the issue was fact-driven, concluding that a court must carry out an inquiry into each case’s unique facts. The court then took judicial notice of the electricity provider’s description of itself on its website, which stated that it was a government agency (1) providing practically all the electric power used in Puerto Rico and (2) seeking to provide utilities to the residents of Puerto Rico.[12]
The bankruptcy court then considered the definition of the term “utility” (“a service (such as light, power, or water) provided by a public utility”) and a “public utility” (“a business organization (as an electric company) performing a public service and subject to special governmental regulation”).[13] Focusing on the nature of the relationship among the parties, the court noted that it was governed by § 366. After considering § 366’s legislative history, the court concluded that the term “utility” ordinarily refers to a business organization performing a public service.[14] Thus, the court concluded that the creditor’s provision of electricity was a service rather than a good[15] and denied the request for an administrative-expense claim.
One of These Things Is Not Like the Others
In In re NE Opco Inc., the bankruptcy court rejected the approaches that were taken by other courts and determined that electricity was not a good for purposes of § 503(b)(9) because it (1) traveled too fast to be identifiable and (2) was not like other goods.[16] The court started with the proposition that every element of the definition of a “good” mattered and concluded that “there must be a period between when electricity is identifiable and consumed” and “the period between identification and consumption must be meaningful.”[17] The bankruptcy court then found that electricity moved at such speeds that the time between identification and consumption was meaningless. Therefore, the court determined that electricity was not a “good”.[18]
In addition, the bankruptcy court noted that electricity was distinguishable from other goods, such as water and natural gas, because contracts for the sale of water or natural gas are referred to by the UCC as “contracts for the sale of goods.”[19] The court also noted that unlike electricity, both water and natural gas could be identified long before consumption and can be stored, transferred and even theoretically returned. While the court recognized that electricity could be “stored” in batteries, it found that electricity ceased to be electricity when it is stored. Based on these differences, the court further affirmed its decision.[20]
Conclusion
With the lack of consistency, it is difficult to distill a common theme in determining whether a supplier of electricity will be entitled to an administrative-expense claim. Accordingly, electric suppliers and their counsel should be cognizant of the various holdings and variations in the event that they find themselves seeking administrative-expense treatment for the provision of electricity.
[1] In re Great Atlantic & Pac. Tea Co. Inc., 498 B.R. 19 (S.D.N.Y. 2013).
[2] Id. at 26-28.
[3] Id. at 26-27.
[4] Id. at 29 (quoting United States v. Hernandez-Fundora, 58 F.3d 802, 812 (2d Cir. 1995)).
[5] Id. at 30.
[6] In re S. Mont. Elec. Generation & Transmission Cooperative Inc., No. 11-62031-11, 2013 WL 85162, at *1 (Bankr. D. Mont. Jan. 8, 2013).
[7] Id. at *3-4 (distinguishing In re Pilgrim’s Pride Corp., 421 B.R. 231 (Bankr. N.D. Tex. 2009); quoting GFI Wisc. Inc., 440 B.R. at 799-801)).
[8] Id. at *4 (quoting GFI Wisc. Inc. v. Reedsbrug Util. Comm’n, 440 B.R. 791, 799-801 (W.D. Wis. 2010)).
[9] Id. at *5.
[10] Id. at *6.
[11] In re PMC Marketing Corp., 501 B.R. 17 (Bankr. D.P.R. 2013).
[12] Id. at 23.
[13] Id. at 24 (citing Merriam-Webster’s Collegiate Dictionary (10th ed. 2001)).
[14] Id. (quoting One Stop Realtour Place Inc. v. Allegiance Telecom Inc. (In re One Stop Realtour Place Inc.), 268 B.R. 430, 435 (Bankr. E.D. Pa. 2001)).
[15] Id. at 24.
[16] In re NE Opco Inc., 501 B.R. 233, 249-52 (Bankr. D. Del. 2013).
[17] Id.
[18] Id. at 251.
[19] Id. at 251-52.
[20] Id. at 252.