In Re Erving Industries Inc.

• Decision Date: 07 April 2010
• Docket Number: No. 09-30623.,09-30623.
• Parties: In re ERVING INDUSTRIES, INC., et al., Debtors.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

432 B.R. 354

In re ERVING INDUSTRIES, INC., et al., Debtors.

No. 09-30623.

United States Bankruptcy Court,

D. Massachusetts,

Western Division.

April 7, 2010.

COPYRIGHT MATERIAL OMITTED

George I. Roumeliotis, Henry E. Geberth, Jr., Hendel & Collins, P.C., Springfield, MA, for Debtors.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

This case presents an issue of first impression in the First Circuit: whether a creditor's supply of electricity to a debtor within the 20 days preceding the commencement of a bankruptcy case constitutes a sale of goods, entitling the creditor to a priority administrative expense claim under § 503(b)(9) of the United States Bankruptcy Code.¹

I. FACTS AND TRAVEL OF THE CASE

Erving Industries, Inc., debtor and debtor-in-possession, together with certain of its affiliates,² (collectively the “Debtor”) filed a voluntary petition under Chapter 11 of the Bankruptcy Code on April 20, 2009 (the “Petition Date”). On July 2, 2009, at the request of the Debtor, the Court entered an order setting August 7, 2009 as the deadline for creditors to file priority administrative claims under § 503(b)(9) with respect to goods delivered to the Debtor within the 20-day period preceding the Petition Date. Constellation NewEnergy, Inc. (“NewEnergy”) timely submitted such a claim in the amount of $281,667.88 (the “Claim”).

On September 16, 2009, the Debtor filed an objection to NewEnergy's Claim (the “Objection”), to which NewEnergy responded (the “Response”).³ The Debtor and NewEnergy agree that the amount claimed by NewEnergy accurately represents charges for electricity supplied to the Debtor during the relevant time period. But the Debtor objects to the priority asserted for the Claim under § 503(b)(9) on grounds that electricity is not a good covered by the relevant section of the Bankruptcy Code. This is the only issue to be decided.⁴ If the Court concludes that electricity is a good within the meaning of § 503(b)(9), then NewEnergy is entitled to a priority administrative claim of $281,667.88 in the Debtor's Chapter 11 case; if the Court concludes that electricity is not a good, then NewEnergy is left with a general unsecured claim against the Debtor.

II. POSITIONS OF THE PARTIESA. Service or Sale

Section 503(b)(9) provides a priority claim for the value of goods sold to a debtor in the ordinary course of the debtor's business within the 20 days preceding the commencement date of the bankruptcy case. 11 U.S.C. § 503(b)(9). Although courts have divided on certain questions arising under § 503(b)(9), there is no doubt that § 503(b)(9) does not cover creditor claims arising from the provision of services to a debtor.

1. Debtor

The Debtor would have the Court hold that, regardless of the definition of goods under § 503(b)(9), NewEnergy's Claim is not entitled to priority status because NewEnergy provided a service. Relying on a description of the electric industry provided by the Massachusetts Executive Office of Energy and Environmental Affairs, the Debtor argues that the industry is composed entirely of service providers, which categorization includes NewEnergy.

Should the Court conclude that the definition of goods under Article 2 of the Uniform Commercial Code (the “UCC” or “Article 2”) is applicable here, the Debtor further maintains that the Court should apply the “predominant factor test” to determine that the transactions between NewEnergy and the Debtor relate primarily to the rendering of services. The Debtor analogizes this case to Mattoon v. City of Pittsfield, 56 Mass.App.Ct. 124, 775 N.E.2d 770 (2002), in which the Appeals Court of Massachusetts held that the supply of water was predominantly the provision of a service and not the sale of goods. According to the Debtor, “if water ... is predominantly a ‘service,’ then it is difficult to argue that electricity is anything other than a ‘service.’ ” Debtor's Obj. at 9.

In further support of its claim that NewEnergy provided a service, the Debtor characterizes NewEnergy as a “utility provider.” And pointing to the description of utility providers in both Black's Law Dictionary and in § 366 of the Bankruptcy Code, the Debtor emphasizes that utilities are described by both as providing services.

Arguing in support of the Debtor at the January 12, 2010 non-evidentiary hearing on the Objection (the “Hearing”), counsel for the Official Creditor's Committee (“Committee Counsel”) noted that the contract between the Debtor and NewEnergy (the “Agreement”) ⁵ refers in several places to service or services. According to Committee Counsel, this supports the Debtor's contention that the Agreement was understood by both the Debtor and NewEnergy to be a services contract and not a contract for the sale of goods.

2. NewEnergy

NewEnergy maintains that the Debtor's characterization ignores the fact that NewEnergy does not perform the traditional service functions commonly associated with electric utilities. Describing the current partially deregulated electric industry in Massachusetts, NewEnergy differentiates between the delivery of electricity as a service and the sale of electricity as the sale of goods. While regulated utilities are still responsible for the ultimate delivery of electricity to customers, NewEnergy says it has no role in that delivery and is involved solely in the sale of electricity as a “competitive supplier.” NewEnergy notes that the Debtor's arguments are ironically negated by its own practices, i.e., the Debtor pays separately to the local electric utility for delivery of electricity, and NewEnergy's invoices reflect only the charges for the electricity itself.

NewEnergy also disputes the Debtor's characterization of NewEnergy as a “utility provider.” First directing the Court's attention to a “Chart of Massachusetts Electric Utility Providers” maintained by the Commonwealth, NewEnergy notes that it is not listed as an electric utility. In addition, NewEnergy maintains that its activities in relation to the Debtor do not fit within the traditional concept of a providing utilities, as assumed by Black's Law Dictionary and as used in § 366 of the Code, because it does not have a monopoly or exclusive service or franchise area, is not regulated by the government, and is subject to competition from a number of available alternative sources of electricity.

According to NewEnergy, the Agreement supports this analysis. While NewEnergy concedes that the Agreement contains an occasional reference to service, it notes that the Agreement also provides that NewEnergy is not responsible for, and in fact expressly disclaims responsibility for, the transmission and distribution of electricity to the Debtor's location; delivery responsibilities remain in the hands of the regulated local utility.

Finally, NewEnergy contends that the “predominant factor test” has no applicability under § 503(b)(9), because the test applies only in those limited circumstances when a court must characterize an entire transaction or set of transactions as either predominantly the sale of goods or the provision of services. Section 503(b)(9), says NewEnergy, does not require the claimant to demonstrate that, on the whole, its transactions with a debtor were predominantly for the sale of goods. Rather, § 503(b)(9) creates a priority claim for the value of any goods sold to a debtor in the ordinary course of business within the 20 days preceding the bankruptcy filing, even if that sale were part of a larger, predominantly service-oriented transaction. Thus, NewEnergy concludes, the predominant factor test is irrelevant, and the Court should examine only whether the electricity sold to the Debtor by NewEnergy constitutes a sale of goods, entitling NewEnergy to a priority claim under § 503(b)(9).

B. The Definition of Goods under § 503(b)(9) and its Application to Electricity

In the event the Court declines to hold that NewEnergy was merely providing a service, both parties recognize that Court must determine the meaning of goods under § 503(b)(9), since the term goods is not defined in the Bankruptcy Code

1. The Debtor

Relying on the fact that the Bankruptcy Code is a federal statute, the Debtor contends that the Court should not rely on the UCC definition of goods, as application of the UCC to § 503(b)(9) would require reference to disparate state laws, yielding undesired non-uniformity of interpretation. Instead, the Debtor says goods under § 503(b)(9) should be defined with reference to the “ordinary or natural” meaning of the word. Arguing for the Black's Law Dictionary definition of goods as “tangible or movable personal property,” Black's Law Dictionary 762 (9th ed.2009), the Debtor distills the question to whether electricity constitutes “tangible personal property,” urging the Court to adopt a meaning of goods as “anything that could be packaged, shipped, and dropped off at a customer's loading bay.” Hr'g Tr. 4:7-15 (Jan. 12, 2010).

The Debtor contends that electricity is simply not a good because it is an intangible phenomena, the movement of electrical charges, and is devoid of physical form or attributes. The Debtor asks this Court to adopt the analysis of the court in In re Pilgrim's Pride Corp., 421 B.R. 231 (Bankr.N.D.Tex.2009), where the court concluded that electricity is not a good under § 503(b)(9). There, the bankruptcy court applied the UCC definition of goods and held that the provision of electricity was more akin to the transmission of television programming, which is widely held to constitute a service (the distribution of intellectual property) and not the sale of goods under the UCC.

Furthermore, the Debtor maintains that electricity cannot be considered a good under Article 2 of the UCC, because it is not movable at the time it is identified to the contract between the Debtor and NewEnergy, as required under the UCC definition of goods. Drawing upon the analysis of the Pilgrim's Pride court, the Debtor argues that by the time the...