On January 8, in In re Southern Montana Electric Generation and Transmission Cooperative, No. 11-62031-11, 2013 Bankr. LEXIS 62 (Bankr. D. Mont. 2013), the U.S. Bankruptcy Court for the District of Montana entertained argument by the Chapter 11 trustee, the debtor's official committee of unsecured creditors, and certain individual creditors (collectively, the movants) in a motion aimed at defeating the administrative claim of a competing creditor, PPL EnergyPlus LLC. The court was unpersuaded by the movants' "unconventional" position, and upheld PPL's administrative expense claim. In doing so, the court rejected the movants' argument that electricity was not a "good" within the meaning of 11 U.S.C. § 503(b)(9), which formed the basis for PPL's administrative expense claim.

The Facts

In September 2004, the debtor, Southern Montana Electric Generation and Transmission Cooperative Inc., entered into a prepetition power purchase and sales agreement with PPL that required the debtor to purchase electricity wholesale from PPL on a monthly basis; the debtor then resold the electricity to its own customers. The debtor filed for Chapter 11 bankruptcy protection October 21, 2011. PPL filed a proof of claim in July 2012, asserting a claim of nearly $375 million it claimed to be owed by the debtor under the power purchase and sales agreement. PPL's proof of claim asserted that approximately $2.5 million of its total claim was entitled to priority status under 11 U.S.C. § 507(a)(2), which, in turn, grants priority status to administrative expenses as defined in 11 U.S.C. § 503(b). Accordingly, PPL also filed an application for allowance and payment of administrative claim pursuant to 11 U.S.C. § 503(b)(9). Satisfied with PPL's filings, the court entered an order allowing PPL an administrative expense claim for the $2.5 million. Three days later, the movants responded by filing a "joint motion to vacate administrative expense order and fix objection deadline," according to the opinion, in which they argued that the court's order was mistakenly entered due to PPL's alleged failure to comply with the notice provisions contained in Montana Local Rule of Bankruptcy Procedure 9013-1(e). The court was sufficiently persuaded to schedule a hearing for December 18, 2012, to allow the movants to prosecute their motion and present argument as to why PPL's administrative expense claim should be denied. At the December 18 hearing, the movants argued for the first time that electricity was not a "good" within the meaning of 11 U.S.C. § 503(b)(9), which allows administrative claims for "goods" received within 20 days before the petition date.

The Court's Analysis

Under 11 U.S.C. § 503(b)(9), an administrative expense claim shall be allowed for "the value of any goods received by the debtor within 20 days before the [petition] date" where "the goods have been sold to the debtor in the ordinary course of such debtor's business." Of PPL's nearly $375 million claim, $2.5 million represented the value of the electricity that had been supplied to the debtor in the 20 days before the Chapter 11 filing. The movants argued that the electricity was outside the scope of § 503(b)(9) because it was not a "good."

The court first distinguished the facts before it from those in In re Pilgrim's Pride Securities Litigation, 421 B.R. 231 (Bankr. N.D. Tex. 2009), in which the U.S. Bankruptcy Court for the Northern District of Texas had held that electricity sold to end users was not a "good" for the purposes of § 503(b)(9). In defining "good," the Pilgrim's Pride court had looked to the Uniform Commercial Code, which requires that goods be movable at the time they are identified. The Texas court found that electricity was not "movable" at the moment of identification: Any electricity would be identified by a meter reading, and once that electricity passed through a meter, it would no longer be "movable," because it would have been consumed by the end user at that moment. In the instant case, the court examined the power purchase and sales agreement and reasoned that the debtor was not an end user of power, but rather a supplier that purchased electricity wholesale from PPL and resold the electricity to its customers.

Having established that it was not beholden to the Pilgrim's Pride decision, the court instead adopted the reasoning of the U.S. Bankruptcy Court for the Western District of Wisconsin in GFI Wisconsin v. Reedsburg Utility Commission, 440 B.R. 791 (W.D.Wis. 2010). Taking a different approach than the court in Pilgrim's Pride, the GFI court declined the parties' invitation to explore the realm of metaphysics, stating that the meaning of "goods" for purposes of § 503(b)(9) and under the Uniform Commercial Code "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, the GFI court — and, in turn, the Southern Montana court — favored a "straightforward assessment" that accounted for "the nature and common understanding of the thing, but also considering its similarities to goods that fall undisputedly under the [Uniform Commercial Code] and would receive administrative priority under § 503(b)(9)." The GFI court also considered prior decisions that concluded that electricity constituted "property" or a "product" in the contexts of products liability and theft.

Ultimately, the Southern Montana court was persuaded by the GFI court's holding 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 for purposes of the [Uniform Commercial Code] and the Bankruptcy Code." Accordingly, the court held that the power supplied by PPL to the debtor was a good and thus granted its administrative priority claim for the value of the power supplied to the debtor in the 20 days preceding its bankruptcy filing.

Law Still Unsettled

As the Southern Montana court's review of existing case law indicates, the law is unsettled with regard to whether electricity and similar intangibles are "goods" within the purview of the Bankruptcy Code and the Uniform Commercial Code. Despite the holdings of Pilgrim's Pride and its predecessors, the Southern Montana court joined a growing line of cases that answer this question in the affirmative. Southern Montana is valuable not just for its ultimate holding and its endorsement of the more practical rationale contained in GFI, but also for its subtle distinction from Pilgrim's Pride on the grounds that utilities purchased for resale to end users may be legally distinguishable from utilities purchased by consumers.

Rudolph J. Di Massa Jr. is a partner at Duane Morris and a member of the business reorganization and financial restructuring practice group. He concentrates his practice in the areas of commercial litigation and creditors' rights.

James G. Schu Jr. practices in the area of business reorganization and financial restructuring at the firm. He also has experience with premises liability, products liability and class action litigation.