United States: Hudson Energy Denied Administrative Priority For Electricity Sold Pre-Bankruptcy

In a September 18, 2015 order, the U.S. District Court for the Southern District of New York affirmed a bankruptcy court order denying administrative claim treatment to Hudson Energy Services, LLC ("Hudson") for its retail sales of electricity to the debtor.¹ The decision does not address any "safe-harbor" or forward contract issues, but is among a number of decisions providing for inconsistent treatment of such sales.

Hudson filed a claim for administrative priority related to its provision of $875,943.90 in electricity to Great Atlantic & Pacific Tea Company, Inc. ("GAPTC") and its affiliates. In affirming the bankruptcy court's order, the district court agreed that electricity is not a "good" for purposes of the administrative priority provisions of the Bankruptcy Code and, alternatively, that the principle that administrative priority claims should be narrowly construed dictated that Hudson's claim was properly denied.

Background

In April 2012, Hudson filed a motion in the GAPTC bankruptcy proceeding pursuant to 11 U.S.C. § 503(b)(9 seeking allowance and administrative priority for $875,943.90 in electricity it sold to GAPTC and its affiliates within the 20 days before the petition date. Section 503(b)(9) provides for "administrative expenses...[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 business." GAPTC objected to Hudson's motion on the basis that electricity (at least when sold at retail) does not constitute a "good" under Section 503(b)(9) of the Bankruptcy Code. The bankruptcy court recognized that administrative priority claims are narrowly construed and held that electricity did not clearly fall within the definition of "goods" under the Bankruptcy Code. Accordingly, the bankruptcy court denied Hudson's motion for administrative priority. Hudson appealed the bankruptcy court's first ruling on the motion to the district court—which vacated the order and remanded the case for further factual development regarding the nature of electricity.² Upon remand and evidentiary hearing, the bankruptcy court again denied Hudson's motion and found that electricity does not satisfy the definition of "goods" found in the UCC.³ Hudson once again appealed the bankruptcy court's order to the district court, as discussed below.

Hudson's Appeal

Hudson contended that the bankruptcy court had erred as a matter of law by failing to find that electricity is a "good" under the UCC (and, therefore, under Section 503(b)(9) of the Bankruptcy Code) because (i) electricity is moving as it passes through the meter and (ii) electricity is identified at the moment it passes through the meter.

Bankruptcy Court's Findings and Order

The court rejected Hudson's position. The bankruptcy court's findings hinge on the temporal order of events as electricity flows to a load and is measured. The court found (and the district court agreed) that electricity first flows through the meter and, because electricity travels at nearly the speed of light, it is next used by a device on the circuit. Only then, according to the bankruptcy court's findings, does the meter catch up and register the electricity that flowed through it. While the power takes nanoseconds to flow, it takes milliseconds for the meter to register that flow. Additionally, and contrary to Hudson's contention, the bankruptcy court found that the point of identification is when the meter registers the electricity—an event occurring after it had been used. Accordingly, electricity is no longer moving at the time of identification. Therefore, being unable to satisfy the "movable" element of the UCC definition of "goods," electricity cannot properly be categorized as such. The district court held that the bankruptcy court's findings were not clearly erroneous. Moreover, the district court agreed with the bankruptcy court's alternative analysis that, under its command to narrowly construe administrative priority claims, electricity did not clearly fall within the definition of "goods."

Divergent Opinions

As the district court discusses—from a jurisprudential standpoint—electricity's status as a good or a service is far from clear. For example, in addition to courts holding that electricity is not a good under analyses similar to Hudson,⁴ courts have reached the same conclusion by merely weighing electricity's attributes and determining it is more appropriately characterized as a service.⁵ Other courts have held the opposite—that there is no difference between electricity and other utilities like natural gas or water, or that the identification, movement, and consumption are nearly simultaneous and sufficient to satisfy the UCC's definition of "goods."⁶ Moreover, power is measured at several points during its transmission, including by the seller providing power to the grid. The following chart displays several commonly cited bankruptcy cases deciding whether electricity is a good or a service:

Not to be Confused with Safe Harbor Analysis

Frequently, Section 503(b)(9) issues arise in cases that also include safe-harbor questions related to the treatment of forward contracts under the Bankruptcy Code where the electricity is provided under the supply agreements in question. The parties did not raise issues related to the safe-harbor nature of such electricity contracts in the Hudson case. This decision is a pure Section 503(b)(9) case—a point of consideration when comparing Hudson's particular set of facts with other Section 503(b)(9) case law that includes safe-harbor analysis.

Parties to electricity supply agreements—whether the purchaser or the supplier—should closely analyze the state of the law where a purchaser declares bankruptcy and has been supplied with electricity leading up to filing its petition. As the Hudson case highlights, the ability to seek administrative priority for such supply may hinge on whether the bankruptcy courts in that district or circuit have determined that retail sales of electricity involve sales of goods or provision of a service.

Footnotes

1. Hudson Energy Servs., LLC v. Great Atl. & Pac. Tea Co., Inc. (In re Great Atl. & Pac. Tea Co., Inc.), No. 15-CV-416 (CS) (S.D.N.Y. Sept. 18, 2015).

2 . Hudson Energy Servs., LLC v. Great Atl. & Pac. Tea Co., Inc. (In re Great Atl. & Pac. Tea Co., Inc.), 498 B.R. 19 (S.D.N.Y. 2013).

3. UCC § 2-105(1) defines "goods" as "all things . . . which are movable at the time of identification to the contract for sale...."

4. See, e.g., In re Pilgrim's Pride Corp., 421 B.R. 231 (N.D. Tex. 2009).

5. In re Samaritan Alliance, LLC, No. 07-BK-50735, 2008 WL 2520107 (Bankr. E.D. Ky. June 20, 2008).

6. See, e.g., In re S. Montana Elec. Generation & Transmission Coop., Inc., No. 11-62031-11, 2013 WL 85162 (Bankr. D. Mont. Jan. 8, 2013); GFI Wisconsin, Inc. v. Reedsburg Util. Comm'n (In re Grede Foundries), 440 B.R. 791 (W.D. Wis 2010).

7. Lightfoot v. MXEnergy Electric, Inc. is a safe-harbor case determining that electricity is a "commodity" under Section 761(8) of the Bankruptcy Code—and not a Section 503(b)(9) case—but includes discussion of the nature of electricity in the context of forward contracts.

This article is presented for informational purposes only and is not intended to constitute legal advice.