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Delaware Bankruptcy Court Holds that Electricity Is Not a "Good" Qualifying for 20-Day Priority Status Under Section 503(b)(9)

November 6, 2013

Last week, the Delaware bankruptcy court issued a written opinion holding that electricity is not a “good” for purposes of section 503(b)(9) of the Bankruptcy Code, which confers administrative expense priority status upon claims for goods received by a debtor within 20 days of a bankruptcy filing. In re NE Opco, Inc., Case No. 13-11483 (CSS) (Bankr. D. Del. Nov. 1, 2013). The opinion also adopted the “apportionment” test for determining how to attribute administrative expense status to claims that involve a combination of goods and services provided during the 20-day pre-petition period. The decision is noteworthy because bankruptcy courts across the country have been divided on whether electricity constitutes a “good” or a “service” for purposes of section 503(b)(9), and no court in the Third Circuit had previously written an opinion on the issue.

Westfield Gas & Electric Light Department (“Westfield”), a utility provider of National Envelope (the “Debtors”), filed a request for allowance and payment of a section 503(b)(9) claim for electricity and natural gas provided to the Debtors during the 20 days preceding the bankruptcy. The Debtors objected, arguing that electricity was not a “good” for purposes of section 503(b)(9), and that Westfield had failed to carry its burden of showing that the unpaid charges it claimed correlated to the actual gas or electricity provided, as opposed to charges for delivery, transmission and other costs. The bankruptcy court framed the three issues before it as: (i) whether electricity and natural gas are goods under section 503(b)(9); (ii) whether the details of Westfield’s bills were adequate under the apportionment test to establish the amount of any allowed section 503(b)(9) claim; and (iii) whether the court should require immediate payment of any section 503(b)(9) claim.

The bankruptcy court observed that there is a split of authority regarding whether electricity is a good under section 503(b)(9) of the Bankruptcy Code and section 2-105 of the Uniform Commercial Code. The court applied U.C.C. principles and looked to whether electricity is moveable at the time it is identified, or whether it is consumed simultaneously with identification. A service, explained the court, is not moveable property, but rather is performed and consumed simultaneously, such as washing another’s car. In order for something to be a good, the court held that there must be some meaningful period between identification and consumption, which is not the case with electricity. Noting the infinitesimal delay between identification and consumption based on the speed at which electricity travels, the court held that such delay was not meaningful, and therefore electricity was not moveable and thus not a good under section 503(b)(9) of the Bankruptcy Code.

The court found further support for its holding that electricity is not a good by looking to whether electricity is comparable to other things that have been held to be goods under the U.C.C. The court disagreed with courts that had found electricity indistinguishable from water or natural gas. Those items, according to the court, were more readily stored, transferred or returned than electricity and therefore not comparable. Thus, it held that electricity is not a good under section 503(b)(9).

Because, unlike for electricity, the Debtors had conceded that natural gas is a good, the bankruptcy court next turned to whether to apply the “predominate purpose” or the “apportionment” test to determine the proper amount of administrative expense attributable to a so-called hybrid transaction that involves both goods and services. Observing that this issue also had generated a split of authority, Judge Sontchi rejected the winner-take-all predominate purpose test in favor of the pro rata apportionment test. Here, Westfield’s natural gas bills were broken down into a customer charge, a transportation charge, a distribution charge and a gas supply charge, with only the gas supply charge for goods and the rest for services. Accordingly, Westfield was only entitled to an administrative expense claim under section 503(b)(9) for the value of natural gas that Westfield could prove was supplied in the 20-day prepetition period.

The bankruptcy court last addressed the appropriate timing of payment of Westfield’s claim. The court stated that Westfield had not presented any evidence to support the necessity of immediate payment or that it would suffer a hardship from a delay in payment, and the record showed that immediate payment would unduly prejudice the Debtors. Noting that courts have discretion to determine when an administrative expense claim must be paid, the court declined to require immediate payment of Westfield’s claim.

Judge Sontchi’s decision is the first opinion by a bankruptcy court in Delaware or the Third Circuit concerning whether electricity is a good for purposes of section 503(b)(9) of the Bankruptcy Code. His decision will lend clarity to future disputes with utility providers, at least in the District of Delaware.