Delaware Bankruptcy Court Cuts Off Electricity Providers’ Access to Section 503(b)(9) of the Bankruptcy Code

November 13, 2013

The Bankruptcy Court for the District of Delaware recently ruled in In re NE OPCO, INC., 2013 Bankr. LEXIS 4569 (Bankr. D. Del. Nov. 1, 2013), that electricity is not a “good” for purposes of 11 U.S.C. § 503(b)(9). This provision of the Bankruptcy Code gives administrative priority to creditors to the extent of “the value of any goods received by the debtor within 20 days before the date of commencement of a [bankruptcy case] in which the goods have been sold to the debtor in the ordinary course of the debtor’s business.” Section 503(b)(9) is a departure from the standard distribution scheme in bankruptcy in which similarly situated creditors must receive the same treatment, and instead gives limited priority to those creditors that continued supplying goods to the debtor in the 20 days immediately preceding the bankruptcy case. The result of the Delaware Bankruptcy Court’s decision is that electricity providers cannot take advantage of this provision to gain priority for at least part of their claim.

In deciding the question of whether electricity provided by a municipal utility supplier constituted “goods” under Section 503(b)(9), the Delaware Bankruptcy Court first reviewed the existing case law on the question. The Bankruptcy Code does not define “goods,” leading to a split among bankruptcy courts. Many courts have looked to the definition given in Section 2-105(1) of the Uniform Commercial Code, which states that goods are “movable at the time of identification to the contract for sale … .” Those bankruptcy courts that have then found that electricity is a good have analyzed the scientific properties of electricity and concluded that the miniscule amount of time between the moment when the electricity courses through the customer’s meter and when it reaches the electrical appliance qualifies it as a good under the UCC definition. Other considerations toward this conclusion have included the general movability and measurability of electricity, the comparability of electricity to other utilities such as natural gas and water, common perceptions of electricity as a physical thing, and the exchange of electricity as a commodity in the marketplace. Finally, these bankruptcy courts have discounted the applicability of other parts of the Bankruptcy Code that involve utilities, namely Sections 366 (“Utility Service”) and 546(c) (discussing reclamation rights). On the other side, those bankruptcy courts that find that electricity is not a good have found that the plain meaning of Section 2-105(1) in fact dictates that electricity cannot be a good because it is not a tangible (and thus not a movable) item. Other courts agreeing with this result have considered the fact that the electricity is being provided as a “utility service” as identified in Section 366 (and therefore, as a service, cannot be a good) and the fact that Bankruptcy Code provisions giving priority to certain creditors should be read narrowly.

The Delaware Bankruptcy Court ultimately found that electricity is not a good, based on its understanding that electricity was simultaneously moveable, identifiable and consumable. Although the Delaware Bankruptcy Court recognized that there may be a miniscule amount of time between the electricity’s running through the meter and its reaching the consumer’s appliance, it found this amount of time is so small as to be insignificant and incapable of classifying electricity as a good based on the UCC definition. In addition, the Delaware Bankruptcy Court determined that the physical and storage properties of water and natural gas — which indisputably are goods — meant that electricity in comparison was not a good. The Delaware Bankruptcy Court otherwise discounted the remaining analyses used by other bankruptcy courts, relying solely on its understanding of electricity as contrasted to the UCC definition of a good.

In addition, the Delaware Bankruptcy Court also discussed how to apply Section 503(b)(9), as the utility provider in this case also had supplied natural gas to the debtors within 20 days of the bankruptcy case. The Delaware Bankruptcy Court found that natural gas is clearly a “good” for purposes of Section 503(b)(9), but only permitted priority for the precise value of the natural gas actually provided. Bankruptcy courts have split on the question of whether Section 503(b)(9) allows for priority treatment for only the value of the goods themselves or also services associated with the goods (for example, preparation and delivery of the natural gas). These differing approaches are referred to, respectively, as the apportionment test and the predominate purpose test. The Delaware Bankruptcy Court followed the apportionment test, separating out the value of the natural gas itself and permitting only administrative priority for that amount. (The predominate purpose test, on the other hand, would have allowed priority for the entire billed amount as long as the underlying transaction involved predominately goods.)

Finally, the Delaware Bankruptcy Court examined the evidence produced as to the value of the natural gas provided. The 20-day period preceding the bankruptcy case did not correspond to the billing cycle, and therefore the utility company had been forced to estimate from two invoices how much natural gas it furnished during the relevant time period. One invoice applied only to dates completely within the 20-day period, but the other corresponded to dates before and after the 20-day period. Moreover, the bills showed only the starting and ending meter readings, thus making it impossible to know how much natural gas had been provided at any given point during that billing cycle. Consequently the Delaware Bankruptcy Code found that only the invoice that covered days fully within the 20-day period could establish the value of “goods” delivered to the debtors during that time period. The unsubstantiated estimation from the other bill was insufficient to support administrative priority under Section 503(b)(9). In a final blow to the utility provider, the Delaware Bankruptcy Court did not require immediate payment of the amount entitled to priority, noting that apart from the general concern that all administrative claims would not be paid in full, the utility company had not proven the “necessity of payment” to support the need for immediate payment.