Energy is not a “Good” Under Section 503(b)(9) of the Bankruptcy Code

Mari Bijimenian

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

            Section 503(b)(9) of title 11 of the United States Code (the “Bankruptcy Code”) provides that claimants should be granted an administrative expense claim for the value of any goods received by the debtor within twenty days before the commencement of a bankruptcy case.^[1] In In re Sears Holding Corp., the United States Bankruptcy Court in the Southern District of New York (the “Bankruptcy Court”) held that electric energy is not a good under the Uniform Commercial Code (“the UCC”) and, therefore, is not a good for purposes of Section 503(b)(9) of the Bankruptcy Code.^[2]

            In 2018, Kmart Corporation and Sears, Roebuck de Puerto Rico, Inc. (collectively “the Debtors”) filed for relief under Chapter 11 of the Bankruptcy Code.^[3] Approximately one year after the Debtors filed for Chapter 11 relief, the Puerto Rico Electric Power Authority (“PREPA”) filed administrative priority claims against the Debtors seeking over $500,000 in unpaid pre-petition electricity charges (the “Claims”).^[4] The charges in question were based upon electricity provided to the Debtors, by PREPA, in the twenty days prior to the Debtors’ filing for bankruptcy.^[5] The Debtors sought to reclassify the Claims as general unsecured claims under the contention that electric energy is not a “good” under Section 503(b)(9) of the Bankruptcy Code and, therefore, should not be accorded priority status as an administrative expense claim.^[6]

            Section 503(b)(9) provides, “after notice and a hearing, there shall be allowed administrative expenses, … the value of any goods 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.”^[7] While the Bankruptcy Code does not explicitly define “goods,” the definition of goods has been determined to be a matter of federal, not state, interpretation, because Section 503(b)(9) is federal law.^[8]

Congress defined goods twice in other sections of the U.S. Code: (i) 49 U.S.C. § 8010(3) and (ii) 29 U.S.C. § 203(i). Here, the Bankruptcy Court found that these sections are unhelpful for analysis in the case at hand.^[9] Bankruptcy courts have looked to other sources for guidance on what constitutes a good, namely the Uniform Commercial Code (“UCC”), particularly Article 2.^[10] Article 2 of the UCC defines a good as something that is moveable.^[11] The UCC definition satisfies a core principle of bankruptcy law, which is uniform treatment of creditor claims.^[12]

            Applying the UCC definition, the Bankruptcy Court granted the Debtors’ objection that electric energy is not a good under Article 2 of the UCC. Concomitantly, the Bankruptcy Court found that it is also not a good for Section 503(b)(9) purposes and the Claims are not entitled to administrative priority.^[13] In coming to its conclusion, the Bankruptcy Court rejected PREPA’s argument to ignore the precedent cited by the Bankruptcy Court.^[14] PREPA argued that a majority of bankruptcy courts have ruled that electricity is a good for purposes of Section 503(b)(9), including courts within the 1st, 7th, 9th, and 10th Circuits.^[15] PREPA further argued that Puerto Rico law should be applied, citing a particular case, In re Enron Corp..^[16] The Bankruptcy Court found that PREPA mischaracterizes the nature of the circuit split because an even amount of cases have reached the opposite conclusion as well.^[17] The Bankruptcy Court further distinguishes the instant case from In re Enron Corp. because that was a state law breach of contract claim for unpaid electricity, not a Section 503(b)(9) claim.^[18] Further, the Bankruptcy Court states that if PREPA’s argument was to be accepted, and state law was to be applied, it would lead to unequal application of the law because debtors in multiple states could face different priorities for the same claim by the same provider, simply because the electricity was delivered in different jurisdictions.^[19]

            This case solidifies the bankruptcy court precedent of abiding by the UCC’s definition for purposes of Bankruptcy Code Section 503(b)(9).^[20]  The holding further solidifies that electricity is a good for purposes of bankruptcy proceedings.