Alternating Current Yields Alternating Decisions On Bankruptcy Priority Treatment

• Jurisdiction: United States,Federal
• Law Firm: Pillsbury Winthrop Shaw Pittman
• Subject Matter: Energy and Natural Resources, Energy Law, Oil, Gas & Electricity, Utilities
• Author: L. James Dickinson, Hugh M. McDonald and Russell DaSilva
• Published date: 23 February 2023

TAKEAWAYS

Bankruptcy courts rely upon the application of the Uniform Commercial Code (UCC) definition of "goods" to determine whether electricity claims receive administrative priority.

Expert opinions on the complex physical nature of electricity inform bankruptcy courts' interpretations.

The characterization of electricity may have broader implications beyond bankruptcy cases and impact contract-based disputes in which parties seek to invoke the UCC.

Scientists have been puzzling over the nature of electricity since as early as 565 B.C., when the Greek philosopher Thales of Miletus experimented by rubbing amber on fur to attract feathers. Thales, however, did not have to ponder the legal nature of the static electricity he observed.

Modern society has grown more reliant on electricity to "power" all aspects of our lives and businesses. However, despite the prevalence of electricity in our everyday lives, open questions remain as to the proper legal characterization of electricity'is it a good or a service or a little bit of both? This characterization affects the applicability of provisions of the Uniform Commercial Code (UCC) and the status of claims in bankruptcy cases for unpaid electric bills.

Federal courts continue to reach contradictory decisions as to whether electricity is a "good" under Bankruptcy Code ' 503(b)(9), which affords administrative priority status to claims for the value of goods, but not services, sold to a debtor in the ordinary course of business, and received within 20 days before the commencement of the bankruptcy case. This question is consequential because administrative priority status usually results in greater recovery on claims, as compared to other general unsecured claims.

The Bankruptcy Code does not define "goods," and so courts look to the UCC Article 2 definition: "'Goods' means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale" (UCC ' 2-105). Many state and federal courts have found that while the transmission and distribution of electricity may be viewed as a service, the electricity itself is a consumable product and thus a "good." Courts reaching contrary conclusions have focused on the complex physical nature of electricity when applying the UCC definition. Recent amendments to the UCC did not change the definition of "goods," leaving its interpretation up to courts usually following litigation.

The U.S. District Court for the District...