Is Electricity a Good or a Service Under § 503(b)(9)? The Divide Among the Bankruptcy Courts Continues to Deepen in 2023

Section 503(b)(9) of the Bankruptcy Code creates a priority status for claims for “goods” that were delivered to the debtor within the 20-day window preceding the filing of a bankruptcy action. These claims typically get paid in full and ahead of other claims, thus § 503(b)(9) claims status is highly coveted. Significantly, though, § 503(b)(9) does not apply to “services.” This distinction has created a deep divide of opinion where electricity is concerned, with some bankruptcy courts finding that electricity is a “good,” while others have determined it to be a “service.” That divide has widened even further the first half of this year when two more decisions found electricity to be a service, thus denying it the coveted § 503(b)(9) priority claim status.

The debate over electricity spans back to the 2005 addition of § 503(b)(9) to the Bankruptcy Code. Over the course of the 17 years following its inclusion, six bankruptcy court decisions emanating from Colorado, Massachusetts, Montana, the Western District of Wisconsin and Puerto Rico have held electricity to be a good [1], thus qualifying it for priority claims treatment. Meanwhile, four bankruptcy court decisions from Kentucky, Delaware, the Northern District of Texas and the Southern District of New York have held that electricity is a service and does not qualify [2]. In the first half of 2023, two more courts have weighed in on the topic, both holding that electricity is a service and not a good, consequently evening the score to six to six.

The first of these decisions was rendered on Feb. 3, 2023, by the U.S. District Court sitting in the District of Oregon in In re Pacificorp d/b/a Pacific Power & Light v. North Pacific Canners & Packers Inc [3]. This is the highest court to date to render an opinion on the subject, and while the matter appeared at the time to be headed to the Ninth Circuit, no further appeal has been taken. The second 2023 decision was rendered on May 15 by the Southern District of New York in In re Sears Holdings Corp [4].

Application of § 503(b)(9) to Goods Only

In understanding the issue, it is helpful to start with the language of § 503(b)(9). The section grants a heightened, priority status to a claim for

the value of any goods received by the debtor within 20 days before the date of 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.

Unfortunately, however, the bankruptcy court does not define the term “goods.” As a result, many courts faced with the issue of whether electricity is a “good” have turned to the Uniform Commercial Code (UCC) for guidance. The UCC defines the term “goods” as all things “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.…” In reaching the holding that electricity is not a “good,” the U.S. District Court sitting in Oregon not only focused its attention on this specific language of the UCC in its recent In re Pacificorp decision, but put the issue under a scientific lens that hinges on the current state of technology. By doing so, it is arguable that the decision is somewhat fluid, based on technological abilities at any given time to measure electricity.

Pacificorp

In Pacificorp, the utility company, Pacific Power & Light, supplied electricity to the debtor at multiple locations and was owed $502,230 at the time of the bankruptcy filing. Of that amount owed, $206,009 was for electricity received by the debtor within the 20-day window immediately preceding the filing of the bankruptcy action. Pacific Power & Light asserted a priority claim under § 503(b)(9) in that amount. The debtor objected, arguing that § 503(b)(9) priority claim status could not apply to electricity, as the requirement of a “good” was not met. An evidentiary hearing ensued, with both parties presenting expert witness testimony on the subject that focused heavily on the physical nature of electricity, how it is delivered, and the ability to measure it, including the timing of such measurements. Thereafter, the bankruptcy court sided with the debtor, drawing on the scientifically technical opinions presented at the hearing and concluding that electricity is not a “good.” Consequently, Pacific Power & Light’s claim was denied priority claim status. Pacific Power & Light appealed to the district court.

The district court began its analysis by turning to the UCC’s definition of “goods” and concluding that it was faced with a mixed question of law and fact. The question of whether electricity is a good for purposes of § 503(b)(9) is a question of law. However, applying the UCC definition requires a determination of whether electricity is movable at the time it is identified, and that is a question of fact. Once again, the district court turned to the scientific analysis presented to the bankruptcy court. Specifically, the district court placed great weight on the expert testimony presented by the debtor’s expert, Dr. Howard Scott:

Of note, Dr. Scott reported that “[e]lectricity travels near the speed of light, and electricity meters operate at a much slower speed than that,” and “though all widely used forms of electric meters do measure the amount of electricity that passed through them, they only do so after the electricity was consumed.”

The district court took note of the fact that Dr. Scott’s report stated that electricity is “a form of energy transferred via waves carried over the electric utility’s wires,” and that the waves “have no mass, nor do they have a solid form.” Rather, the waves “merely transfer energy.” The court further noted from Dr. Scott’s report that there is currently “no commercially available method for storing electricity in the form that exists in the power grid.” Since the current state of technology provides no method for storing electricity, once it “passes through the revenue meter, it can only be consumed by the devise that closed the circuit, permitting electricity to flow through the meter.” The meter then measures the amount of electricity that passed through it, but does so on a delayed timetable due to the fact that the meter cannot respond at the same speed that electricity travels. We simply do not have those capabilities today [5].

Thus, the court found that all widely used forms of electric meters are incapable of identifying the amount of electricity consumed before it is actually consumed, as required by the UCC’s definition of “goods.” Again, the UCC’s definition requires that the goods be movable at the time of identification to the contract for sale. The district court found that the identification of electricity “is impossible until, at the earliest, the quantity of electricity delivered is registered and displayed on the meter,” and by that time, the electricity has already been consumed and is, thus, no longer “movable.” Accordingly, based on this finding, the district court determined that electricity could not qualify as a “good” for purposes of § 503(b)(9) claim status.

In re Sears Holdings Corp.

The utility company in the In re Sears Holdings Corp. case supplied commercial electric power to the debtors’ more than 20 Kmart Corp. locations and close to 20 Sears Roebuck de Puerto Rico locations across Puerto Rico. As of the date of the bankruptcy filing, the utility company was owed approximately $167,000 for electric power provided to the debtors within the 20-day period preceding the bankruptcy filing. The utility company filed a § 503(b)(9) claim in the amount, which was objected to by the debtors. The bankruptcy court sitting in the Southern District of New York noted the divergent judicial opinions on the issue, including the application of the UCC definition.

The court failed to find compelling grounds to part from the holding of the preceding decision in the Southern District of New York [6], and thus followed that precedent, holding that electricity is not a good for purposes of § 503(b)(9). The court noted that most states’ courts that have applied the UCC definition of “goods” outside of the bankruptcy context have found that “electricity is a service while in transmission but constitutes a good once metered and identifiable.” Nevertheless, the court noted the discrepancies of opinion in deciding to stay the course with the prior Southern District of New York ruling on the issue.

Other Courts

As noted by the Sears Holding Corp. court, the Pacificorp case parts ways with many other courts that have also applied the UCC definition of “goods” to electricity and reached the opposite conclusion. The bankruptcy court sitting in the District of Massachusetts determined that “electricity easily falls within” the UCC’s definition of “goods” for purposes of § 503(b)(9) [7]. The bankruptcy court in Puerto Rico also reached the same conclusion that electricity is a “good” when applying the UCC’s definition of “goods.” [8]

Other courts have rejected the UCC’s definition entirely in this context. The District of Colorado Bankruptcy Court has stated that the definition of “goods” in the context of bankruptcy is a question of federal law, and it is not appropriate to apply state law emanating from the UCC. Judge McNamara in the In re Escalera Resources Co. case searched for a federal definition of the term “goods” by starting with the dictionary. Pursuant to the standard dictionary definition, “goods” means things with value, whether tangible or not, that are produced for sale, including commodities. Judge McNamara noted that by employing the term “goods,” Congress made the decision to use “an extremely broad word” in drafting § 503(b)(9).

Consequently, he found no linguistic basis for placing a restrictive definition on the term. He noted that electricity has tangible, physical attributes. It can be seen, heard, touched, felt and quantified. Moreover, electricity has been treated as a “good” under other areas of the law, such as antitrust law, labor law, energy regulatory law, tort law and international treaties [9].

Conclusion

Decisions finding that electricity is not a “good” on the basis that, because of its speed, it is consumed before the meters can register it are clearly grounded in the current state of technology and a strict academic reading of the UCC definition of “goods.” Yet we know that technology is fluid and constantly developing. Thus, these decisions may become obsolete as the technology upon which they are based becomes obsolete.

It is highly predictable that with technological advances and future capabilities, electricity may someday soon be identified in faster ways or by different methods. Thus, these decisions may ultimately need to be revisited.