Electricity is not a “Good” Under 11 U.S.C. § 503(b)(9)

Zhiqian Ke

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

Under section 503(b) of Title 11 of the United States Code (“Bankruptcy Code”), allowed administrative expenses have priority status in receiving distributions from the bankruptcy estate.[1] Section 503(b)(9) states that after notice and a hearing, administrative expenses should be allowed for “the value of any good[s] received by the debtor within 20 days before the date of 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.”[2] In PacifiCorp v. N. Pac. Canners & Packers, Inc, Oregon District Court affirmed the bankruptcy court’s decision that electricity is not a "good" for purposes of section 503(b)(9).[3]  

PacifiCorp is a public utility that supplied electricity to North Pacific Canners & Packers Inc. (“NORPAC”), a frozen fruits and vegetables producer, that filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. During the bankruptcy case, PacifiCorp filed proof of claim against NORPAC in the amount of $502,230.73 for electricity provided to NORPAC prepetition.[4] According to PacificCorp, $206,009.81 of that amount was entitled to priority under section 507(a)(2) because it was for electricity delivered during the 20 day period preceding the bankruptcy filing and as such an administrative expense claim allowed under section 503(b)(9).[5] NORPAC objected to PacifiCorp’s claim, and asserted that electricity is not a “good” within section 503(b)(9). Thus, according to NORPAC, PacificCorp held a non-priority, general unsecured claim.[6] After hearing testimony from competing experts, the bankruptcy court sustained NORPAC’s objection and concluded that PacifiCorp’s claim was not entitled to priority treatment as a “good” under section 503(b)(9).[7] The bankruptcy court rejected the testimony from PacifiCorp’s expert that electricity is a good because it is identifiable when it passes through a meter and can be stored without transforming into another form of energy.[8] Instead, the bankruptcy court was persuaded by NORPAC’s expert and concluded that electricity is not movable when it flows through a meter since it can only be consumed by the device closing the circuit.[9] PacifiCorp appealed the bankruptcy court’s decision to the Oregon District Court.[10]

On appeal, the district court addressed two principal issues.[11] First, the court determined what definition to apply to the term “goods” in section 503(b)(9).[12] Given that goods is not defined in the Bankruptcy Code, the bankruptcy court considered the definition of “goods” set forth in the Uniform Commercial Code (the “UCC”).[13] On appeal, PacifiCorp argued that the bankruptcy court erred by not considering other plausible definitions of “goods.”[14] However, the district court reasoned that the bankruptcy court appropriately used the UCC because it was enacted before section 503(b)(9), has been widely accepted and used, and properly applied in the context of section 503(b).[15]

Second, the district court determined whether electricity was a good as defined  under the UCC.[16] Under the UCC, “goods” encompass “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale.”[17] The bankruptcy court adopted the Southern District Court of New York’s reasoning in In re Great Atl. & Pac. Tea Co., that electricity is not identified until measured by the meter.[18]According to the bankruptcy court, electricity moves at nearly the speed of light and would have already been consumed by the time the meter records it.[19] Moreover, electricity would not be movable at the time of identification since it would already be used.[20] The bankruptcy court found In re Great Atl. & Pac. Tea Co’s reasoning to be persuasive and concluded that electricity is not movable at the time of identification and that PacifiCorp has not met its burden to demonstrate its claim was entitled to priority treatment.[22] Thus, the Court affirmed the bankruptcy court’s decision and dismissed the appeal.[22]

Under the Bankruptcy Code, a supplier of goods is entitled to priority treatment for goods supplied within 20 days of the bankruptcy filing. According to the Oregon courts, electricity is not a good, and therefore a supplier is not entitled to a priority claim for electricity supplied prior to a bankruptcy filing.