A recent decision of the United States Bankruptcy Court for the District of Massachusetts in the Erving Industries, Inc. chapter 11 cases(1) held that electricity sold by a supplier that was not a utility constituted “goods” for the purposes of section 503(b)(9) under either the meaning of the “goods” in section 2-105(1) of the model Uniform Commercial Code or the “common understanding” of the term advanced by the debtor. The case marks a decision of first impression in the First Circuit on the issue of whether a creditor’s supply of electricity to a debtor in the 20 days preceding commencement of a bankruptcy case entitles such a creditor to a priority administrative claim under section 503(b)(9) of the Bankruptcy Code. This advisory will summarize the court’s decision and its impact on the interpretation of “goods” under section 503(b)(9) of the Bankruptcy Code.
In Erving, creditor Constellation NewEnergy, Inc. (“NewEnergy”) timely filed a priority administrative claim under section 503(b)(9) of title 11 of the United States Code (the “Bankruptcy Code”) with respect to goods delivered to the debtor Erving Industries, Inc. and its affiliates (the “Debtor”) within the 20-day period preceding the filing of the bankruptcy cases. The Debtor objected to the priority asserted for NewEnergy’s claim on the grounds that electricity is not a “good” covered by section 503(b)(9) of the Bankruptcy Code. Since there was no dispute over the amount of the claim this was the only issue to be decided.
Section 503(b)(9) of the Bankruptcy Code grants a creditor a priority claim against the bankrupt estate for the value of goods sold to a debtor in the ordinary course of the debtor’s business within the 20 days prior to the commencement of the case.(2) In support of its position the Debtor contended, inter alia, that (i) regardless of the definition of “goods”, NewEnergy’s claim was not entitled to priority status because NewEnergy provided a “service”; (ii) if the court were to conclude that NewEnergy was not providing a service, the court should not rely on the definition of “goods” under Article 2 of the Uniform Commercial Code (the “UCC”) but rather the Black’s Law Dictionary definition of “goods” as “tangible or movable personal property”;(3) and (iii) even if the court were to apply the UCC definition, that it adopt the analysis of the bankruptcy court in In re Pilgrim’s Pride Corp.(4) and conclude that electricity is not a “good”. In defense, NewEnergy argued that it had no role in the delivery or service of electricity and recommended that the court join a majority of courts that have concluded that under section 503(b)(9) of the Bankruptcy Code “goods” should be interpreted in accordance with the definition in the UCC. Section 2-105 of the UCC defines “goods” as “things that are moveable at the time they are identified to the contract for sale.”(5)
In its opinion, the court first dismissed the Debtor’s contention that NewEnergy’s claim was not entitled to priority status because NewEnergy did not “sell” anything, but merely provided a “service”. The court viewed NewEnergy as a “competitive supplier” that contracts with electricity generators to buy electricity and then separately contracts with its customers to sell the electricity to the customer. The customer is then responsible for contracting with a local utility to have the electricity delivered. Accordingly, the court found that NewEnergy was in the business of selling electricity that had been independently generated, and was not providing a service. Of note, in determining that NewEnergy had sold electricity the court also relied on the fact that NewEnergy was not listed among those entities classified as “utilities” in Massachusetts, was not subject to governmental regulation, and its agreement with the Debtor consistently referred to the Debtor’s “purchase” and NewEnergy’s “sale” of electricity.
The court then turned to the question of whether electricity constitutes a “good” under section 503(b)(9) of the Bankruptcy Code. Recognizing that the term “goods” is not defined in the Bankruptcy Code, the court first determined what framework should be applied for assessing whether a thing is or is not a “good” under section 503(b)(9) of the Bankruptcy Code. The court rejected the Debtor’s argument for adopting the Black’s Law Dictionary definition of “goods” and reasoned that “[g]iven the wide usage and acceptance of goods found in the UCC at section 2-105(1), it is hardly plausible that Congress expected bankruptcy judges to roll up their sleeves and set to work re-inventing the proverbial wheel and divining a more amorphous ‘common understanding’ of the term.”(6) As a result, the court concluded that the meaning of “goods” under section 503(b)(9) of the Bankruptcy Code is primarily informed by the meaning in the UCC and went on to adopt the bankruptcy court’s analysis in the Goody’s Family Clothing cases that “[g]iven the near unanimous nationwide adoption of Article 2 of the UCC, the Court concludes that the term ‘goods’ in section 503(b)(9) conforms with the meaning given in U.C.C. section 105(1)….”(7) In the court’s view the model UCC meaning fostered uniformity, the definition was consistent with the ordinary non-legal meaning of “goods”, and the Debtor’s proposed alternative definition would not have changed the outcome.
Consequently, the court then addressed whether electricity fell within the UCC’s definition of “goods”. The court agreed with NewEnergy that electricity is tangible and therefore is some “thing” that can be felt, created, measured and stored. With respect to whether electricity is movable at the time it is identified to the contract for sale, the court also reasoned that at the time the electricity is identified to the contract, it is literally moving and continues to do so until it is put to use. Since the court was able to conclude that electricity is movable at the time it is identified to the contract, the court held that electricity constitutes a “good” within the meaning of the UCC and section 503(b)(9) of the Bankruptcy Code.
The decision in Erving marks a stark deviation from the recent bankruptcy court decision in Pilgrim’s Pride. As noted in Erving, the court in Pilgrim’s Pride contended that “UCC section 2-105 does not suggest that the provision’s drafters had intended that ‘goods’ would include things which cannot be packaged and handled … things that, like manufactured goods, clearly occupy space and can be moved about….”(8) The Pilgrim’s Pride court analogized electricity to television or radio which are not considered “goods” under the UCC and therefore concluded that electricity should be excluded from the category of “goods” under the UCC and section 503(b)(9) of the Bankruptcy Code. In its decision, the Erving court distinguished electricity from such telecommunication signals on the grounds that telecommunications signals are properly considered services because they are mechanisms by which other non-goods such as intellectual property, sounds, and music are sent from one location to another while electricity is not a medium of delivery, but a thing to be purchased.
Since many suppliers, whether listed as public utilities or not, do not bill their customers separately for the sale of their goods and the service with respect to such goods it remains to be seen how courts will address future claims under section 503(b)(9) of the Bankruptcy Code. Still, regardless of the divergent holdings in Erving and Pilgrim’s Pride as to whether electricity is in fact a good, it is becoming more and more apparent that where a sale has been made, whether of electricity, raw materials, natural gas, or some other commodity, when interpreting the meaning of “goods” under section 503(b)(9) of the Bankruptcy Code courts will look to apply the definition of “goods” in section 2-105 of the UCC to achieve uniformity. Hence, Erving sets a precedent for a supplier to argue that its sale of electricity constitutes a “good” for the purposes of asserting a priority claim under section 503(b)(9) of the Bankruptcy Code.
(1) In re Erving Indus., Inc., 2010 Bankr. LEXIS 1069 (Bankr. D. Mass. Apr. 7, 2010).
(2) 11 U.S.C. § 503(b)(9).
(3) Black’s Law Dictionary 762 (9th Ed. 2009).
(4) In re Pilgrim’s Pride Corp., 421 B.R. 231 (Bankr. N.D. Tex. 2009).
(5) U.C.C. § 2-105.
(6) In re Erving Indus., Inc., 2010 Bankr. LEXIS 1069 at *29.
(7) In re Goody’s Family Clothing, Inc., 401 B.R. 131, 134 (Bankr. D. Del. 2009).
(8) In re Pilgrim’s Pride Corp., 421 B.R. at 239.