N AT I O N A L A S S O C I AT I O N O F C R E D I T M A N A G E M E N T A P R I L 2 0 1 3 THE PUBLICATION FOR CREDIT & FINANCE PROFESSIONALS $7.00 S e l e c t e d t o p i c Bruce NathaN, esq. Electricity is a Good Subject to Section 503(b)(9) Priority Status: A Shocking Development? B Bankruptcy Code Section 503(b)(9) litigations have Hear Bruce as he sometimes yielded “shocking results.” Tiere is no pun presents, or co-presents: intended here. Tiis article discusses a recent case where the United States Bankruptcy Court for the District of 22048. Bankruptcy Rumblings: Montana waded into the spine tingling issue of whether Identifying and Mitigating Risk electricity is a good that is subject to Section 503(b)(9) of a Financially Troubled administrative priority status. In In re Southern Mon- Customer Headed toward Bankruptcy tana Electric Generation and Transmission Cooperative, 22062 & 22072. Bankruptcy Reform Town Inc., the Montana bankruptcy court ruled that electric- Hall from the Perspective of the Credit ity is a good, and granted a seller of electricity an Executive and Other Constituencies allowed Section 503(b)(9) administrative priority claim for the electric power the debtor had purchased from Learn more about this and other legal the seller and received within 20 days of bankruptcy, educational sessions on pp. 38-53. based on the contract price for the electricity agreed to between the parties. However, not all courts have concurred with this hold- Tie stakes for trade creditors are high. Creditors have ing. Tie courts are actually divided over whether elec- an increased likelihood of collecting their Section tricity is a good, subject to Section 503(b)(9) priority 503(b)(9) priority claims for the goods they had sold to status, or a service that is not granted priority status. a debtor that were received within 20 days of the debt- Bottom line: Tiere will be plenty more litigation on this or’s bankruptcy fjling. Creditors are not relying on their jolting issue. reclamation rights that have been gutted where the debtor had previously sold or consumed the goods sub- section 503(b)(9) 20-Day Goods Priority claims ject to reclamation, or where the debtor’s inventory is Section 503(b)(9) grants goods sellers an administrative already encumbered by a blanket inventory lien secur- priority claim for: ing their lender’s claim. “...the value of any goods received by the debtor While Section 503(b)(9)’s terms appear to be straight- within 20 days before the date of commencement of forward, debtors, secured lenders and trade creditors a case under this title in which the goods have been continue to litigate over their meaning. Tiat includes sold to the debtor in the ordinary course of such the meaning of “goods,” which are the subject of Section debtor’s business.” 503(b)(9)’s priority. 1 B U S I N E S S C R E D I T A P R I L 2 0 1 3
the Facts of the southern Montana electric case refmect the lower spot market prices for electric power during Tie debtor, Southern Montana Electric Generation and the 20-day period prior to the petition date, compared to the Transmission Cooperative, Inc., fjled a Chapter 11 petition on contract price PPL had charged the debtor under the electric- October 21, 2011 in the Montana bankruptcy court. A Chap- ity supply agreement. ter 11 trustee was ultimately appointed in the debtor’s Chapter 11 case, a rare development, but that is a story for another day. the Bankruptcy court’s Decision in the southern Montana electric case Prior to the petition date, the debtor and PPL EnergyPlus LLC Tie Southern Montana Electric court held that the electric entered into a power purchase and sales agreement dated Sep- power supplied by PPL is a good and not a service. Tie court tember 17, 2004 (the “electricity supply agreement”). Tie elec- relied on the decision of the United States District Court for tricity supply agreement required PPL to sell and the debtor to the Western District of Wisconsin, in GFI Wisconsin, Inc. f/k/a/ purchase fjxed quantities of electric power in individual trans- Grede Foundries Inc. v. Reedsburg Utility Commission, which actions evidenced by confjrmations that they had entered into involved utilities asserting Section 503(b)(9) priority claims for from time to time. electricity provided to a debtor. Tie court in the Grede Found- ries case relied on UCC Article 2 (UCC § 2-105(1)) in deter- During the 20-day period prior to the petition date, PPL had mining what constitutes a “good.” Tie court noted that elec- sold and delivered 49,160 megawatts of electric power to the tricity is tangible and satisfjes the identifjcation and movability debtor at an average price, based on the electricity supply requirements of UCC Article 2. Electricity is metered (which agreement, of $50.77 per megawatt, totaling $2,492,412 worth satisfjes the identifjcation requirement) and moves through a of electric power. PPL fjled a proof of claim, which included an circuit (which satisfjes the movability requirement). administrative claim under Section 503(b)(9) for its 20-day claim. PPL had also fjled an application with the bankruptcy Tie court also relied on the fact that the electricity supply court for the allowance and payment of the 20-day claim as an agreement provided that the debtor is not an end user of the administrative claim under Section 503(b)(9). Tie bankruptcy electric power it had purchased, but was instead purchasing court granted PPL an allowed administrative expense claim in electric power, as a wholesale customer, from PPL. Tie debtor the amount of $2,492,412. However, the Chapter 11 trustee, in turn supplied the power it had purchased from PPL to its unsecured creditors’ committee and certain noteholders sub- members, who, in turn, sold the power to their customers. As sequently challenged the court’s order. a result, neither the debtor nor its members were end users or consumers of the electricity that PPL had supplied. PPL argued that electricity is a good and is, therefore, entitled to priority status under Section 503(b)(9). PPL relied on Uni- Tie court distinguished this case from Pilgrim’s Pride (in the form Commercial Code (UCC) Section 2-105(1) in asserting United States Bankruptcy Court for the Northern District of that anything “movable,” such as electric power, is a good. PPL Texas), where the court held that electricity is not a good, sub- also argued that it had acted as a goods wholesaler, selling ject to Section 503(b)(9) priority status, but instead is a ser- goods, consisting of fjxed quantities of electricity at fjxed pric- vice, and not subject to Section 503(b)(9). Tie Southern Mon- es, to the debtor. Tie debtor in turn acted as a goods middle- tana Electric court noted that, unlike Pilgrim’s Pride, Southern man by reselling the electricity to others. PPL also denied that Montana Electric was not an end user or consumer of the it had acted as a traditional utility providing electricity as a electricity it had purchased from PPL. In contrast to Pilgrim’s service to the debtor as an end user. Pride, the debtor in this case was in the business of buying and selling electric power. PPL next argued that the value of the goods to which it was entitled to an allowed Section 503(b)(9) administrative prior- Tie Southern Montana Electric court also upheld PPL’s calcu- ity claim is presumed to be the contract price of the goods, lation of its Section 503(b)(9) administrative priority claim based on the electricity supply agreement. PPL rejected the based on the contract price of $2,492,412 that PPL could debtor’s reliance on lower spot market prices for electricity charge under the electricity supply agreement. Tie court during the 20-day period prior to the petition date to reduce refused to apply the lower market value of electricity based the amount of PPL’s allowed Section 503(b)(9) priority claim. upon spot purchases in the market during the 20-day period prior to the petition date because the debtor had lacked suffj- Tie Chapter 11 trustee and his allies opposed granting PPL an cient cash to be able to pay for any such spot purchases. allowed Section 503(b)(9) administrative priority status for the 20-day claim. First, the trustee argued that electricity is a conclusion service and not a good and, therefore, is not entitled to prior- Tie court’s decision in the Southern Montana Electric contin- ity status under Section 503(b)(9). Tie trustee also argued that the amount of PPL’s 20-day claim should be based on ues the trend of court holdings (including the courts’ deci- sions in Grede Foundries and In re Erving Industries, a bank- what it would have cost the debtor to have obtained similar goods (electric power) on the open market during the 20-day ruptcy case in Massachusetts) that electricity is a good, and period prior to the petition date. Tiat would have required a not a service, and, therefore, is eligible for Section 503(b)(9) reduction of PPL’s Section 503(b)(9) administrative claim to priority status. However, the Southern Montana Electric 2 B U S I N E S S C R E D I T A P R I L 2 0 1 3
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