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Judge relies on physics in ruling that electricity qualifies as ‘goods.’

Courts Divided on Electric Service as ‘Goods’ Under Section 503(b)(9)

Analysis: 

Since judges are more like philosophers than physicists, it’s not surprising that courts disagree on whether electricity qualifies as “goods” entitled to administrative priority when provided within 20 days of filing under Section 503(b)(9).

Finding no ambiguity in the term “goods” and surveying dozens of bankruptcy and non-bankruptcy cases involving electricity, Bankruptcy Judge Thomas B. McNamara of Denver concluded that electricity qualifies as goods under Section 503(b)(9).

In his 40-page, single-spaced opinion on Feb. 10, Judge McNamara was persuaded in large part by expert testimony from a physicist who described electric energy as electrons moving along transmission lines from the generating source to the consumer. Electrons, the expert said, are a “fundamental particle of nature.” The judge also adopted the expert’s nomenclature by using the term “electric energy” rather than “electricity” or “electric service.”

As part of the 2005 amendments, Congress gave administrative priority status to “goods” provided within 20 days of filing. The term “goods,” however, is not defined in the Bankruptcy Code. Although the Uniform Commercial Code defines “goods,” Judge McNamara said that the definition of goods in the bankruptcy context is a question of federal law, not state law emanating from the UCC.

In the first major decision on Section 503(b)(9), In re Pilgrim’s Pride, 421 B.R. 231, 236 (Bankr. N.D. Tex. 2009), now-retired Bankruptcy Judge Michael Lynn of Fort Worth concluded that natural gas and water were goods while electricity, trucking services and sewage disposal services were not. Although state law provides some guidance, Judge Lynn believed that the need for uniformity in bankruptcy law allowed federal courts to make their own rules. With regard to water and natural gas, Judge Lynn ruled that the creditors were entitled to an administrative claim only for the cost of the goods, but not for the cost of transporting them to the debtor’s place of business.

After Pilgrim’s Pride, Judge McNamara said that bankruptcy courts are evenly split on the status of electric energy as goods under Section 503(b)(9).

Before analyzing state law and the UCC, Judge McNamara searched for a federal law definition of “goods” by turning to the dictionary, which defines goods to mean things with value, whether tangible or not, that are produced for sale, including commodities. Since Congress decided to use “an extremely broad word” when it wrote the statute, Judge McNamara found no linguistic basis for limiting goods to substances that can be “packaged and handled,” a formulation employed in Pilgrim’s Pride.

Judge McNamara said that electric energy is “most definitely a ‘thing’” that can be seen, heard, touched, felt and quantified. Given those tangible, physical attributes, he concluded that a claim for electric energy supplied before filing easily qualifies for administrative priority.

Because every court to rule on Section 503(b)(9) has turned to the UCC for guidance, Judge McNamara did too.

Outside of bankruptcy, Judge McNamara said the majority of cases hold that electric energy is goods under UCC § 2-105. Most of the decisions holding otherwise are tort cases, where the issue turns on whether energy is considered goods or services.

New York, he said, is the state where the courts most starkly hold that electricity is not goods. Judge McNamara said that dicta from an intermediate state appellate court had been unthinkingly and incorrectly adopted by other state and federal courts. Pointing out the flaws in cases deciding that electric energy is not goods, Judge McNamara concluded that electric energy qualifies as goods under UCC § 2-105.

Moving beyond the UCC, Judge McNamara surveyed dozens of cases where electric energy is defined as goods in antitrust law, labor law, energy regulatory law, tort law and international treaties.

Judge McNamara also addressed Section 366, which deals with the discontinuation of “utility service.” He rejected the notion that “use of the phrase ‘utility service’ in Section 366 means that electrical energy is not a ‘good’ under Section 503(b)(9).” He said that “every court” to consider the question “has determined that Section 366 is irrelevant.”

Because “services” do not qualify for administrative status under Section 503(b)(9), debtors in the future might contend, following Pilgrim’s Pride, that priority status should be given only to the cost of energy, but not the cost of transmission, if local utility tariffs support the argument.

Judge Name: 
Thomas B. McNamara
Case Citation: 
In re Escalera Resources Co., 15-22395 (Bankr. D. Colo. Feb. 10, 2017)
Case Name: 
In re Escalera Resources Co.
Case Type: 
Business