On a question where the courts are divided, Bankruptcy Judge Sean H. Lane of New York declined a utility company’s invitation to hold that electricity “received” by a debtor within 20 days of bankruptcy is entitled to administrative priority under Section 503(b)(9).
Instead, Judge Lane sided with another judge on the same bench by holding that electricity isn’t “goods” and therefore doesn’t command a priority claim.
In the 20 days before the debtor’s chapter 11 filing, the electric utility in Puerto Rico supplied power worth more than $500,000 to the debtor’s stores on the island. The utility filed a claim seeking administrative priority for goods supplied within 20 days of filing under Section 503(b)(9). The section 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 debtor objected to the claim of priority. Judge Lane sustained the objection in an opinion on May 15, 2023.
Judge Lane began by stating that the Bankruptcy Code does not define “goods” and that there is little legislative history to accompany Section 503(b)(9). In the “absence of guidance from Congress,” he said that courts have looked to the Uniform Commercial Code for a definition.
Section 2-105(1) of the UCC 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 . . . .
The UCC’s definition, Judge Lane said, “satisfies one of the core principles of federal bankruptcy law, namely, ensuring uniform treatment of creditor claimants.” Even so, courts looking to the UCC have arrived at different conclusions regarding administrative priority. He cited bankruptcy courts in the First, Seventh, Ninth and Tenth Circuits for holding that 20-day claims for electricity are entitled to priority.
Judge Lane sided with another bankruptcy judge in New York who was upheld in district court after ruling that electricity is not goods and gives rise to no priority claim. See Hudson Energy Services, LLC v. The Great Atl. & Pac. Tea Co., Inc. (In re The Great Atl. & Pac. Tea Co., Inc.), 538 B.R. 666 (S.D.N.Y. 2015). In A&P, Judge Lane characterized the bankruptcy court as having said that “statutory priorities must be construed narrowly, especially when there is ambiguity.”
Judge Lane said that the statute’s ambiguity “is supported by the stark split of opinion on this question.” The district court’s affirmance in A&P concurred, saying it was “far from clear” that electricity falls within the meaning of “goods” in Section 503(b)(9). Id. at 647.
The utility company urged Judge Lane to apply the law of Puerto Rico in deciding whether electricity qualifies as “goods.” He responded by saying that reliance on state law would produce “absurd results,” because “multi-state footprints could face different priorities for the same claim by the same provider, simply because the electricity was delivered in different jurisdictions.”
Judge Lane also rejected the idea that he should apply Puerto Rico’s law because the utility had no minimum contacts with New York. Given the utility’s concession that the bankruptcy court had jurisdiction, he said it would be “inappropriate to conduct a ‘minimum contacts’ analysis to decide the priority of [the utility’s] Claims.”
Judge Lane ended his opinion by looking at how courts define electricity under the UCC in nonbankruptcy cases. He said that most state courts applying the UCC “hold that electricity is a service while in transmission but constitutes a good once metered and identifiable.”
Judge Lane rejected the analogy because it did “not provide any useful guidance in determining the priority of these Claims.”
Judge Lane ruled that the claim was not entitled to administrative priority.
Recent Authority
Among courts concluding that electricity does not qualify as goods, Judge Lane cited Pacificorp v. North Pacific Canners & Packers Inc., 21-00863, 2023 WL 1765691, at *5 (D. Ore. Feb. 3, 2023). The utility company did not launch an appeal to the Ninth Circuit. To read ABI’s report, click here.
On a question where the courts are divided, Bankruptcy Judge Sean H. Lane of New York declined a utility company’s invitation to hold that electricity “received” by a debtor within 20 days of bankruptcy is entitled to administrative priority under Section 503(b)(9).
Instead, Judge Lane sided with another judge on the same bench by holding that electricity isn’t “goods” and therefore doesn’t command a priority claim.