Contributed by Nelly Almeida
Under certain circumstances, section 503(b)(9) of the Bankruptcy Code affords certain trade creditors an allowed administrative expense for the value of goods received by a debtor within twenty (20) days prior to the commencement of its bankruptcy case. This section was added to the Bankruptcy Code as part of Section 1227 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Since its adoption, bankruptcy courts have tackled many unanswered questions, including what constitutes a “good.” Because the term “good” is not defined in the Bankruptcy Code, in answering this question, bankruptcy courts have almost always turned to Article 9 of the Uniform Commercial Code for guidance. In a recent decision, the United States Bankruptcy Court of the District of Montana did just that when grappling with whether a provider of electricity was properly granted a section 503(b)(9) administrative expense.
The debtor in In re Southern Montana Electric Generation and Transmission Cooperative, Inc. is a wholesale supplier of electricity that, pursuant to a Power Purchase and Sales Agreement, dated September 17, 2004, was obligated to purchase power from PPL EnergyPlus, LLC. Prior to the commencement of the debtor’s chapter 11 case, PPL supplied the debtor with electricity, which PPL alleged was valued at $374,863,708.19. PPL believed that, of the foregoing amount, $2,492,412 was entitled to priority as a section 503(b)(9) administrative expense. The court allowed PPL’s request for an administrative expense in the amount of $2,492,412 but the court’s order was subsequently challenged by the chapter 11 trustee, unsecured creditors’ committee, and certain note holders.
The challenging parties sought to vacate the court’s order, contending that electricity is not a “good” as contemplated by section 503(b)(9) and that, even if electricity were a “good,” the value of the electricity was less than the price called for under the September 17, 2004 Power Purchase and Sales Agreement, which would lessen the value of PPL’s section 503(b)(9) claim. The court ultimately denied the challenging parties’ motion and issued a Memorandum of Decision relating thereto. The court began by discussing In re Pilgrim’s Pride Corp., where the Bankruptcy Court for the Northern District of Texas found, among other things, that electricity received by the debtors within the twenty-day period immediately preceding the petition date was not a good. The court promptly distinguished Pilgrim’s Pride, however, by noting that the debtors in that case were end users of electricity, making electricity more akin to a service provided than a “good.” In the instant case, “neither the Debtor nor its members are the end user, or consumer, of the electricity supplied.” The court then turned to cases where electricity was ultimately treated as a “good.” Specifically, the court relied on GFI Wisconsin, Inc. v. Reedsburg Utility Comm’n, where the Bankruptcy Court for the Western District of Wisconsin looked to the Uniform Commercial Code in considering what constitutes a good. The court noted, among other things, how “electricity begins flowing through power lines . . . and continues moving at least until it is metered” and found that these characteristics, among others, made electricity more comparable to goods that undisputedly fall under the UCC definition. Indeed, after an extensive analysis of the “nature and common understanding” of electricity, the Bankruptcy Court for the Western District of Wisconsin found that because electricity is a movable, tangible, and consumable thing with physical qualities, it qualifies as a “good” and not a service.
Finding the reasoning in GFI Wisconsin more persuasive than that of Pilgrim’s Pride, the court in In re Southern Montana Electric Generation and Transmission Cooperative, Inc. determined that electricity is a “good” for purposes of section 503(b)(9). The court also found that the challenging parties failed to present persuasive evidence proving the value of the electricity was anything less than the $2,492,412 asserted by PPL.
This case should serve as warning to trade creditors. Although the bankruptcy court ultimately found electricity to be a “good,” this finding may be limited to situations where the debtor is not the “end user.” Moreover, bankruptcy courts continue to disagree on whether particular products are “goods” and, therefore, until there is more clarity on the subject, trade creditors seeking to assert a 503(b)(9) priority claim should be aware that whether their claim is successful may depend on whether the bankruptcy court finds the “good” at issue is actually a “good.”
Disclosure: Weil, Gotshal & Manges, LLP represented the debtor in In re Pilgrim’s Pride Corporation.
Copyright © 2019 Weil, Gotshal & Manges LLP, All Rights Reserved. The contents of this website may contain attorney advertising under the laws of various states. Prior results do not guarantee a similar outcome. Weil, Gotshal & Manges LLP is headquartered in New York and has office locations in Beijing, Boston, Dallas, Frankfurt, Hong Kong, Houston, London, Miami, Munich, New York, Paris, Princeton, Shanghai, Silicon Valley, Warsaw, and Washington, D.C.