A public utility in Oregon seems intent on having the Ninth Circuit decide whether electric power supplied within 20 days of bankruptcy is “goods” entitled to priority under Section 503(b)(9).
The courts are divided, but District Judge Ann Aiken of Eugene, Ore., upheld Bankruptcy Judge Peter C. McKittrick by holding that electric power is not “goods” and does not give rise to a priority claim.
A public utility supplier of electricity filed a claim for some $500,000. The claim included administrative priority under Section 503(b)(9) for more than $200,000 in electricity provided within 20 days of bankruptcy. The debtor objected to priority status.
Bankruptcy Judge McKittrick held an evidentiary hearing at which he heard testimony from physicists from both sides. He sustained the debtor’s objection to priority status.
Judge McKittrick reasoned that electricity, traveling at the speed of light, is not movable and is therefore not goods within the definition of the Uniform Commercial Code because it will have been consumed by the device that used the electricity before the usage could be recorded by the electric meter.
The power company appealed.
The Standard of Review
The bankruptcy judge credited the testimony from the debtor’s physicist. Should District Judge Aiken review for clear error? Or does the definition of “goods” contained in Section 503(b)(9) lead to de novo review?
Judge Aiken accepted the approach taken by a district judge in New York who held on an identical appeal that administrative status is a question of law for review de novo. See In re Great Atlantic & Pacific Tea Co., Inc., 538 B.R. 666 (S.D.N.Y. 2015).
The Statutes
Section 503(b)(9) affords priority to a 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.
The Bankruptcy Code does not define “goods.” Most courts refer to the UCC, which defines goods as
all things (including specially manufactured goods) which 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 (Article 8) and things in action . . . . [Emphasis added.]
Citing the Ninth Circuit Bankruptcy Appellate Panel, Judge Aiken said that priorities are to be “strictly construed” because creditors are entitled to priority “only when clearly authorized by Congress.” In re Lorber Indus. of Cal., 373 B.R. 663, 667-68 (B.A.P. 9th Cir. 2007).
Although courts agree on using the UCC definition, Judge Aiken said in her February 3 opinion that they reach “starkly contradictory results” when applying the definition to electricity. The debtor stood behind Great Atlantic & Pacific while the power company urged Judge Aiken to follow In re Escalera, 563 B.R. 336 (Bankr. D. Colo. 2017). To read ABI’s report on Escalera, click here.
Judge Aiken was persuaded by Great Atlantic & Pacific. She reasoned that
[e]lectricity is not “identified” until it has been recorded by the meter and, because of the speed that electricity moves through the wire and the comparative slowness of the meter, the electricity has been consumed by the time that identification occurs.
Holding that “electricity is not, therefore, movable at the time of identification,” Judge Aiken upheld Bankruptcy Judge McKittrick’s conclusion that the claim was not entitled to priority.
A public utility in Oregon seems intent on having the Ninth Circuit decide whether electric power supplied within 20 days of bankruptcy is “goods” entitled to priority under Section 503(b)(9).
The courts are divided, but District Judge Ann Aiken of Eugene, Ore., upheld Bankruptcy Judge Peter C. McKittrick by holding that electric power is not “goods” and does not give rise to a priority claim.
A public utility supplier of electricity filed a claim for some $500,000. The claim included administrative priority under Section 503(b)(9) for more than $200,000 in electricity provided within 20 days of bankruptcy. The debtor objected to priority status.
Bankruptcy Judge McKittrick held an evidentiary hearing at which he heard testimony from physicists from both sides. He sustained the debtor’s objection to priority status.
Judge McKittrick reasoned that electricity, traveling at the speed of light, is not movable and is therefore not goods within the definition of the Uniform Commercial Code because it will have been consumed by the device that used the electricity before the usage could be recorded by the electric meter.
The power company appealed.