Does Electricity Supplied Within 20 Days of a Bankruptcy Qualify for Section 503(b)(9) Priority Status? Recent Decisions Say “No”

Nelson Mullins Riley & Scarborough LLP

Nelson Mullins Riley & Scarborough LLP

Section 503(b)(9) Overview

Ever since its addition to the Bankruptcy Code in 2005, there has been an ongoing debate as to whether electricity is a “good” or a “service” for purposes of section 503(b)(9). If electricity is determined to be a “good,” it is entitled to section 503(b)(9) priority claim status. By contrast, if electricity is determined to be a “service,” it is not entitled to such priority status and instead treated as a general unsecured claim.[1]

Split between the Courts

To date, six bankruptcy court decisions have found electricity to be a good, qualifying for priority claim status under section 503(b)(9). See, e.g., In re Wometco de P.R. Inc., 2016 WL 155393, at *2 (Bankr. D.P.R. Jan. 12, 2016) (court “concludes that because electricity is movable at the time of identification to the contract, the purchased electricity constitutes a good under 11 U.S.C. § 503(b)(9)”); In re S. Mont. Elec. Generation and Transmission Coop., Inc., 2013 WL 85162, at *5 (Bankr. D. Mont., Jan. 8, 2013) (“electricity is movable, tangible and consumable” and is “goods” under Section 503(b)(9)); In re Escalera Res. Co., 563 B.R. 336, 353 (Bankr. D. Colo. 2017); In re Erving Indus., Inc., 432 B.R. 354, 365 (Bankr. D. Mass. 2010) (“Electricity easily meets the movability requirement .... After it is generated, the electric current moves through a huge network of transmission and distribution systems before ultimately reaching the customer's location. Like movability, the identifiability of electricity is subject to little debate .... Courts have generally held that electricity is identifiable because it can be measured at the point it passes through the meter.”); In re Grede Foundries, Inc., 435 B.R. 593 (Bankr. W.D. Wis. 2010) (allowing a section 503(b)(9) administrative expense priority claim and holding that “[n]either the Bankruptcy Code nor the UCC require that particles move at any particular speed before they can be deemed ‘moveable.’ ”); GFI Wis., Inc. v. Reedsburg Util. Comm'n, 440 B.R. 791, 797 (W.D. Wis. 2010) (“I agree with those courts concluding that electricity is movable, tangible and consumable, that it has physical properties, that it is bought and sold in the marketplace and thus, that it qualifies as a good for purposes of the UCC and the Bankruptcy Code.”).

Meanwhile, prior to 2023, four bankruptcy court decisions had found that electricity is a service and does not qualify for section 503(b)(9) priority status. See, e.g., Hudson Energy Serv., LLC v. Great Atl. & Pac. Tea Co., Inc. (In re Great Atl. & Pac. Tea Co., Inc.), 538 B.R. 666, 673–74 (S.D.N.Y. 2015); In re NE Opco, Inc., 501 B.R. 233, 237 (Bankr. D. Del. 2013); In re Pilgrim's Pride Corp., 421 B.R. 231, 236 (Bankr. N.D. Tex. 2009); In re Samaritan All., LLC, 2008 WL 2520107, at *4 (Bankr. E.D. Ky. June 28, 2008).

Two 2023 decisions, however, have officially evened the split among the courts. First, on February 3, 2023, the United States District Court for the District of Oregon issued an opinion on this issue, making it the highest court to date to consider the issue. PacifiCorp v. N. Pac. Canners & Packers, Inc., No. 6:21-CV-00863-AA, 2023 WL 1765691, at *4 (D. Or. Feb. 3, 2023).

In that case, the district court adopted the definition of “goods” found in the UCC (i.e., “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale[.]” U.C.C. § 2-105(1)).  Having resolved the definition of goods, the court next turned to whether electricity meets this standard. In rejecting the reasoning of the “majority” of courts to have considered the issue, the district court instead relied on the reasoning of In re Great Atlantic & Pacific Tea Co, finding: “Electricity 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. The electricity is not, therefore, movable at the time of identification.” PacifiCorp, 2023 WL 1765691, at *4–5.

More recently, on May 15, 2023, the United States Bankruptcy Court for the Southern District of New York, in In re Sears Holdings Corp., No. 18-23538 (SHL), 2023 WL 3470475 (Bankr. S.D.N.Y. May 15, 2023) reached the same conclusion, relying on its prior decision in In re Great Atlantic & Pacific Tea Co. Id. at *4. Moreover, the court also found persuasive cases addressing whether electricity is a good outside of section 503(b)(9), noting: “Finally, if this Court sought guidance in decisions outside of Section 503(b)(9), it appears that courts do not uniformly treat electricity as a good under the UCC. Most state courts applying the UCC Article 2 definition of goods outside of bankruptcy hold that electricity is a service while in transmission but constitutes a good once metered and identifiable.” Id. at *5 (citing Puget Sound Energy, Inc. v. Pac. Gas & Elec. Co. (In re Pac. Gas & Elec. Co.), 271 B.R. 626, 639–40 (N.D. Cal. 2002) (summarizing case law); see also Cincinnati Gas & Elec. Co. v. Goebel, 502 N.E.2d 713, 715 (Ohio Mun. Ct., Hamilton Cty. 1986) (“We distinguish electricity in its raw state from metered amounts passing through utility-owned conduits and into the homes of consumers. The latter-described form of electricity is ‘goods’ as defined in the Uniform Commercial Code.”); Yoby v. Cleveland, 155 N.E.3d 258, 279 (Ohio Ct. App., Cuyahoga Cty. 2020) (finding that electricity, regardless of meter status, is a service); Otte v. Dayton Power & Light Co., 523 N.E.2d 835, 839 (Ohio Sup. Ct. 1988) (“Consumers, moreover, do not pay for individual electrically charged particles. Rather, they pay for each kilowatt hour provided. Thus, consumers are charged for the length of time electricity flows through their electrical systems. They are not paying for individual products but for the privilege of using ... service.”); Lilley v. Cape Hatteras Elec. Membership Corp., 13 U.C.C. Rep. Serv. 2d 82 (E.D. N.C. 1990), judgment aff'd on other grounds, 960 F.2d 146 (4th Cir. 1992) (holding the sale of electricity was not a transaction in “goods” under the North Carolina enactment of UCC Section 2-105)).

Neither of these two recent decisions have been appealed, and the time to appeal has since passed. Given the even split of authority on this issue, it remains to be seen how future bankruptcy courts will come out on the issue. And because the dollar amounts involved in such disputes are often relatively small (a $206,009.81 issue in PacifiCorp and a $166,948.95 issue in Sears), there is usually little incentive for parties to seek further relief before the Circuit Court of Appeals, thereby reducing the likelihood of higher court decisions weighing in to resolve the split.

[1] Section 503(b)(9) provides: “there shall be allowed administrative expenses…, including (a) the value of any goods received by the debtor within 20 days before the 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.”

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Nelson Mullins Riley & Scarborough LLP

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