Electricity is a “good,” not a “service.” As a result, electric utilities have administrative priority status under 11 U.S.C. 503(b)(9) for electricity provided during the 20 days prior to a business customer’s filing for bankruptcy.
The Nov. 10 opinion by U.S. District Court Judge Barbara B. Crabb is also relevant to other debts, providing guidance whenever it is contested whether a contract involves goods or services.
Judge Crabb held that the “predominant purpose” test — which determines whether a contract is for goods or services under the Uniform Commercial Code — does not apply in bankruptcy court.
Quoting a bankruptcy court in Michigan, Crabb iterated, “The only relevant determination is the value of the ‘goods’ that were delivered, irrespective of whether the contract also called for the delivery and sale of services.” In re Plastech, 397 B.R. 828, 837-838 (Barnkr.E.D.Mich.2008).
The debtor, GFI Wisconsin, Inc., filed a Chapter 11 bankruptcy petition in 2009. GFI owned properties that received electricity from Reedsburg Utility Commission and Wisconsin Electric Power Company.
The utilities submitted claims seeking administrative priority status for the value of electricity provided during the 20 days prior to filing, and the bankruptcy court allowed the claims.
GFI appealed, but Judge Crabb affirmed.
Section 503(b)(9) provides administrative priority to recovery of “the value of goods received by the debtor within the 20 days before the commencement [of the bankruptcy case] in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”
Judge Crabb held that electricity is a good, without delving into the physical nature of electricity.
“For the purpose of determining administrative priority under the Bankruptcy Code, the meaning of ‘goods’ … should not depend on quantum physics, how fast electrons are moving at a particular time or even where a debtor’s meter is located on an electrical circuit.”
Instead, Crabb said the determination should be based on “the nature and common understanding of the thing.”
Applying that test, Crabb opined, “I agree with those courts concluding that electricity is movable, tangible and consumable, that it has physical properties, that it is bought and sold in the marketplace and thus, that it qualifies as a good.”
The court rejected the conclusion of other courts that electricity is more similar to television, radio, telephone and internet signals that are not considered goods under the UCC.
Judge Crabb explained, “electricity can be moved …; it can be consumed …; and there is no suggestion that electricity cannot be packaged and handled, such as in a battery.”
Crabb also rejected the argument that electricity cannot be a good, because the bankruptcy code treats it as a utility service after the petition is filed.
Section 366 of the code, entitled “Utility Service,” provides for the continuation of utility services, including electricity, after a debtor has filed for bankruptcy.
But Judge Crabb concluded, “The sections are not mutually exclusive. A utility provider may provide both goods and services within the meaning of each section.”
The court next concluded that the predominant purpose test is inapplicable in bankruptcy.
The UCC provides an array of rights and obligations on buyers and sellers that require an all or nothing approach – categorizing a transaction as either for goods or services. But Crabb concluded there is no need for making such a distinction in bankruptcy courts.
Crabb found that, when necessary, courts can simply give administrative priority to the value of any goods involved, while excluding the value of any services.
Here, however, GFI never made an argument that the utilities provided any services apart from the actual electricity. Accordingly, Crabb affirmed the bankruptcy court holding that the entire value of the debt was entitled to priority.
What the Court Held
Case: GFI Wisconsin, Inc., v. Reedsburg Utility Commission, No. 10-cv-388.
Issues: Is electricity a good or a service under the bankruptcy code?
Does the predominant purpose test apply in bankruptcy?
Holdings: Electricity is a good, rather than a service.
No. If a contract is for both goods and services, the value attributable to goods and services can be segregated.
David Ziemer can be reached at email@example.com.