Is Electricity A "Good" Eligible For ' 503(b)(9) Priority Status?

• Published date: 06 November 2023
• Subject Matter: Energy and Natural Resources, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Energy Law, Oil, Gas & Electricity
• Law Firm: Lowenstein Sandler
• Author: Mr Bruce S. Nathan and Scott Cargill

Section 503(b)(9) of the Bankruptcy Code grants sellers of goods an administrative-priority claim for the value of goods sold to a debtor received within 20 days of a bankruptcy filing. Since its enactment in 2005, there has been significant litigation concerning nearly every element of ' 503(b)(9) that a creditor must prove to obtain priority status for its claim. There is perhaps no other issue concerning eligibility for ' 503(b)(9) priority status that has so evenly divided the courts as whether the provision of electricity qualifies as a sale of "goods." The divergent rulings are also notable because of the different approaches that courts have taken to arrive at their holdings. Most recently, courts in Oregon and New York have held that electricity was ineligible for ' 503(b)(9) priority because it is not a "good," but those courts took different paths to reach the same result.

In its February 2023 decision in PacifiCorp v. North Pacific Canners & Packers Inc., ¹ the U.S. District Court for the District of Oregon affirmed the bankruptcy court's ruling that electricity is not a "good" after considering extensive expert testimony. Three months later, the U.S. Bankruptcy Court for the Southern District of New York reached the same result in In re Sears Holdings Corp.² without the benefit of any expert testimony. The Sears court instead relied on nonbinding precedent within the district that narrowly construed statutory priorities and noted the lack of consensus among the courts over whether electricity is a good eligible for priority status under ' 503(b)(9). As a result of the differing approaches as exemplified by the PacifiCorp and Sears decisions, other courts considering whether electricity is a good eligible for ' 503(b)(9) priority status will have to decide whether to rely on complex scientific evidence concerning the nature of electricity.

Section 503(b)(9) Claims

The text of ' 503(b)(9) appears relatively straightforward. It affords an administrative-priority claim for "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."³ This priority status frequently entitles the holder of an allowed ' 503(b)(9) claim to full payment prior to any recovery by general unsecured creditors.

What Are "Goods"?

Key to determining whether a seller has an eligible ' 503(b)(9) priority claim is proving...