New York Court Rules (Sort Of) On Whether Electricity Is A Good Or A Service

It seems only fitting that recent decisions by the United States District Court for the Southern District of New York and its bankruptcy court regarding the nature of electricity should have sent, at least initially, a jolt through the energy community. Perhaps the Southern District court would lead the charge for one side or the other in an ongoing debate over whether electricity constitutes goods or services—a controversy that has potentially far-reaching implications (in bankruptcy cases, concerning the priority of claims of electricity providers, and, in ordinary transactions, for the tort liability of electricity providers). In the end, however, the outcome of the litigation was something less than electrifying. Here's what happened.

After The Great Atlantic and Pacific Tea Company, Inc., better known as A&P, filed its first chapter 11 petition at the end of 2010,[i] Hudson Energy Services sought to take advantage of section 503(b)(9) of the Bankruptcy Code, which confers administrative priority over general unsecured claims on claims for "the value of any goods received by the debtor within 20 days before the date of the 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." Asserting rights under section 503(b)(9), Hudson filed an administrative claim seeking payment of over $875,000 for electricity provided to A&P during the twenty days prior to its bankruptcy filing. The bankruptcy court denied Hudson's claim for priority on the grounds that electricity did not "clearly fall" within the meaning of "goods" for purposes of section 503(b)(9) and that, since administrative expense claims "must be tightly construed," [ii] it was not appropriate to grant administrative priority to a claim that did not "clearly fit within the statute's provisions."[iii] Hudson appealed to the district court.

The district court began its analysis by noting that, although section 503(b)(9) did not define "goods," there was "consensus" that the definition of "goods" under the UCC should apply. This, however, did not resolve the question in the case of electricity because, although "the majority of courts hold that electricity is a good under UCC Section 2-105(1), a strong minorityled by decisions of the New York Court of Appeals, the Second Circuit, and this Courtdisagrees."[iv] The Second Circuit, for example, had stated flatly that the "UCC does not apply to sale of...