March 01, 2014

Laura Napoli Coordes
Arizona State University; Phoenix
Legal proceedings where courts have been required to determine the classification of electricity as either a “good” or a “service” under § 503(b)(9) of the Bankruptcy Code have been the subject of recent “charged” debates. Under § 503(b)(9), the creditor receives “administrative expense” priority status 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.”[1] “Services” do not enjoy this benefit. As the Bankruptcy Code does not define “goods,” creditors have turned to the courts for clarification. Although civil courts have consistently used § 2-105(1)[2] of the Uniform Commercial Code (UCC) to define “goods,” the interpretation among bankruptcy courts has been inconsistent.[3]

The Source of Confusion

Neil Steinkamp
Stout; New York
Unlike other subsections of § 503, which create administrative priority for post-petition debt, subsection (b)(9) applies to pre-petition debt. Some explain this apparent discrepancy by arguing that § 503(b)(9) was intended for goods that are in the debtor’s possession prior to filing, but which are generally used by the debtor in possession post-petition in order to continue its operations. Under this premise, electricity should not be considered a good covered under § 503(b)(9) as all electricity in the company’s possession pre-petition would be used pre-petition. However, there are many other ways to consider electricity and the intentions of the Bankruptcy Code.

Reclamation?

Alexandra Pierce
Stout; New York
Others have argued that § 503(b)(9)’s legislative history suggests that it was intended to provide relief to sellers who failed to give the required notice under the reclamation section of the Bankruptcy Code, § 546(c).[4] This would suggest that electricity ought not to be interpreted as a “good” as it is typically not considered reclaimable. Other courts, however, have expressly stated that a creditor’s claim under § 503(b)(9) is not linked to or conditioned upon the creditor’s rights of reclamation under § 546(c).[5] Because sellers have a much broader range of rights under § 503(b)(9) than they do under reclamation, it does not seem correct to limit application of § 503(b)(9) to only those goods that can be reclaimed.

What About Natural Gas?

If we are to accept the premise that electricity should not be considered a “good” for purposes of § 503(b)(9) on the grounds that electricity provides no benefit to a post-petition estate, what should we think about natural gas? Natural gas seems similar to electricity in many ways: It is generally consumed at the same time that it is provided, and gas suppliers are awarded utility privileges under § 366. However, case law definitively recognizes natural gas as a good for the purposes of § 503(b)(9).[6] Courts have agreed that natural gas meets the definition of a “good” as it is movable at the time it is identified for sale.[7]

The ability to store natural gas for future use is frequently used to differentiate its status as a “good.” Although electricity can be stored in batteries for future use (including, more recently, in electric vehicles), this is not typically considered relevant when determining whether electricity should be considered a good.[8]

Is There Guidance in Other Contexts?

Bankruptcy courts are not alone in their struggle to characterize electricity as a good or service. Neither the General Agreement on Tariffs and Trade (GATT),[9] which explicitly covers goods, nor the General Agreement on Trade in Services (GATS),[10] which explicitly covers services, clearly define electricity, nor do they explicitly decide on its inclusion or exclusion. The GATS comes close, as it includes a section entitled “Services Incidental to Energy Distribution.”[11]

There are ongoing discussions related to the inclusion of an energy sector under the GATS, and the U.S. has explicitly requested its inclusion by the WTO as a service,[12] but no energy sector exists at this time.[13] Seemingly in contrast, the WTO included an article in its 2010 “World Trade Report,” which states that “electricity energy is thus considered to qualify as a good and by that subject to the rules of the … WTO.”[14] In addition, the North American Free Trade Agreement appears to consider energy a good, as classified under the Harmonized System.[15] Interestingly, electrical energy is an “optional heading,” meaning that it is not always clearly identified as a good, and countries can choose whether to exclude or include it as a commodity or good for trade purposes.[16]

Does Anyone Know What Electricity Is?

The scientific community, and certain bankruptcy court opinions,[17] can provide a detailed analysis of the properties of electricity and electrical currents. However, similar to how light can be considered both a wave and a particle, electricity is considered either a good or a service in different circumstances. Although the law is still unsettled in this area, perhaps the clarity that we seek can be found in a deeper analysis of the cardinal rules of the Bankruptcy Code. As the dissent in In re Brown & Cole Stores LLC reminds us, Code provisions “should be interpreted in light of the remainder of the statutory scheme.”[18] Perhaps the question should be the following: If we were to define “electricity” in a particular way for purposes of § 503(b)(9), does that advance the goals of the bankruptcy process? Although every court might believe that it is interpreting § 503(b)(9) in light of the Code’s overall purpose, a more explicit analysis of this section’s place in the Bankruptcy Code seems to be missing from the current body of law.

[1] 11 U.S.C. § 503(b)(9).

[2] U.C.C. § 2-105(1) defines goods in the context of a sale as follows: “‘Goods’ means all things (including specialty manufactured goods) … which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (chapter 8 of this title)… and things in action. ‘Goods’ also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be served from realty (§ 47-2-107). U.C.C. § 2-105(1) (2003).”

[3] Certain courts have also considered U.C.C. § 2-101(2), which provides additional commentary on “goods,” stating that “[g]oods must be both existing and identified before any interest in them can pass. Goods [that] are not both existing and identified are ‘future’ goods. A purported present sale of future goods or of any interest therein operates as a contract to sell.”

[4] See In re Brown & Cole Stores LLC, 375 B.R. 873, 875 n.3 (B.A.P. 9th Cir. 2007); Shirley S. Cho, “The Intersection of Critical Vendor Orders and Bankruptcy Code § 503(b)(9),” 29 Cal. Bankr. J. 7, 11 (2007) (citing the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8 at § 1227 (amending § 546(c) to provide that “[i]f a seller of goods fails to provide notice [of a reclamation demand], the seller still may assert the rights contained in section 503(b)(9)”)).

[5] In re Commissary Operations Inc., 421 B.R. 873 (Bankr. M.D. Tenn. 2010).

[6] See In re NE Opco Inc., 501 B.R. 233 (Bankr. D. Del. 2013) (noting that it is “undisputed” that natural gas is a good).

[7] See, e.g., In re Plastech Eng’d Prod. Inc., 397 B.R. 828, 839 (Bankr. E.D. Mich. 2008).

[8] For example, the court in NE Opco concluded that storage in a battery was irrelevant because “electricity stored in a battery is no longer electricity.” NE Opco, supra n.8 at 252.

[9] The GATT was a globally recognized agreement that was created in 1948. The GATT set the standard for international trade agreements for 47 years and eventually resulted in the creation of the World Trade Organization (WTO) in 1995. The WTO served as an overhaul to the GATT and the workings of the GATT agreement that is now the responsibility of the Council for Trade in Goods (Goods Council) within the WTO. See www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm and www.wto.org/english/tratop_e/gatt_e/gatt_e.htm.

[10] Founded in 1995, the GATS was created to globally extend multi-lateral trading capabilities in the service sector. The GATS agreement is now the responsibility of the Council for Trade in Services (Services Council) within the WTO. See www.ustr.gov/trade-agreements/wto-multilateral-affairs/-world-trade-orga... and www.wto.org/english/tratop_e/serv_e/s_coun_e.htm.

[11] WTO Services Sectoral Classification List, MTN.GNS/W/120, July 10, 1991.

[12] GATS Communication from the United States – Council for Trade in Services Special Session, Dec. 18, 2000.

[13] World Trade Organization, Energy Services, available at www.wto.org/english/tratop_e/serv_e/energy_e/energy_e.htm (last visited Jan. 29, 2014).

[14] Leonardo Macedo, “Electricity, Energy and the WTO Customs Valuation Agreement,” WTO’s World Trade Report, 2010.

[15] North American Free Trade Agreement, Chapter 6: Energy and Basic Petrochemicals, Article 602, Copyright 2014 SICE, available at www.sice.oas.org/trade/nafta/chap-06.asp.

[16] Electrical Energy is Code 2716.00 in the Harmonized Commodity Description and Coding System, World Customs Organization HS Nomenclature, 2012 Edition. As defined at www.foreign-trade.com/reference/terms_h.cfm, the Harmonized Code and Harmonized System are used internationally to identify industries. Harmonized Code: An internationally accepted and uniform description system for classifying goods for customs, statistical and other purposes. Harmonized System: A key provision of the international trade bill, effective Jan. 1, 1989, that established international uniformity for classifying goods moving in international trade under a single commodity code.

[17] See In re NE Opco Inc., 501 B.R. 233 (Bankr. D. Del. 2013).

[18] Brown & Cole Stores, supra n.4 at 882.