GFI Wisconsin, Inc. v. Reedsburg Utility CommissionGFI Wisconsin, Inc. v. Reedsburg Utility Commission
OPINION and ORDER
Aрpellant GFI Wisconsin, Inc., formerly known as Grede Foundries, Inc., appeals an order of the bankruptcy court allowing appellees Reedsburg Utility Commission and Wisconsin Electric Power Company to claim administrative priority status under 11 U.S.C. § 503(b)(9) for the value of electricity they supplied to appellant during the 20 days before appellant filed for bankruptcy. Appellant contends that because electricity is not a “good” within the meaning of § 503(b)(9), the bankruptcy court should have disallowed the claim. In addition, appellant contends that even if electricity is a good for purposes of § 503(b)(9), the bankruptcy court erred by failing to apply the “predominant purpose” test and by allowing appellees to recover the value of services that were bundled with the electricity charges.
This court has jurisdiction over the appeal pursuant to 28 U.S.C. § 158(a). The bankruptcy court entered an order on June 1, 2010, denying appellant’s objection to appellees’ § 503(b)(9) claims. This is a final order for purposes of § 158(a) because there is nothing more to do with respect to appellant’s objection.
In re Smith,
I agree with the bankruptcy court that appellees may claim administrative priority for the electricity they provided appellant in the 20-day period before appellant filed its bankruptcy petition. Therefore, I will affirm the decision of the bankruptcy court denying appellant’s objection to the claims.
The following summary of relevant facts and proceedings is drawn from the record of the proceedings before the bankruptcy court. (All citations in the background section are to the bankruptcy court’s docket, In re: Grede Foundries, Inc., 09-14337-rdm.)
BACKGROUND
A. Facts before the Bankruptcy Court
On June 30, 2009, appellant GFI Wisconsin, formerly known as Grede Foundries, Inc., filed a chapter 11 bankruptcy petition in this district. Appellant owned several properties in Wisconsin that received electricity from appellees Reeds-burg Utility Commission and Wisconsin Electric Power Company over a time period that includes the 20 days before the petition date.
On September 25, 2009, appellees submitted claims seeking administrative priority status under § 503(b)(9) for the value of the electricity they provided appellant during the 20-day period. Appellant objected to the claims on several grounds, one of which was that electric services are not goods for purposes of § 503(b)(9). Ap-pellees challenged appellant’s objection and the parties agreed to submit the claims and objections to the bankruptcy court on stipulations of facts and briefs, forgoing an evidentiary hearing.
On March 29, 2010, appellant filed motions to disallow the claims, a brief in
• The electricity supplied by [appellees] to [appellant] during the Twenty-Day Period was metered at [appellant’s] premises as it was being drawn and consumed by [appellant]; and
• Given the regulatory requirement that [appellees] make a pro rata estimate of the charges incurred during the Twenty-Day Period, [appellant] does not object to the amount of the Twenty-Day Claim.
Dkt. # 1887 at ¶ ¶ 7, 15 # 1890 at ¶¶ 7, 13. In its brief, appellant argued that appel-lees’ claims were for electrical services, not goods, because electricity is not movable and identifiable at the time of the contract of sale, as required under the definition of goods found in the Uniform Commercial Code, Wis. Stat. § 402.105(l)(c). Dkt. # 1892 at ¶ 4. Appellant also argued that § 503(b)(9) claims are limited to goods capable of being reclaimed by a creditor, and electricity cannot be reclaimed. Id. at 7.
In their responses, appellees also relied on the UCC definition of goods and argued that electricity is both movable and identifiable at the time it is metered and thus, satisfies the definition of goods under the UCC. Dkt. ## 1949, 1950. Appellees relied heavily on
In re Erving
Industries,
Inc.,
At the time the electricity is identified to the contract [by passing through the meter], it is literally moving, and it remains movable for some period of time thereafter. The electricity continues to move through the customer’s electrical wiring until it is ultimately put to use. This process may occur at speeds so imperceptible that consumption appears to occur simultaneous with identification, but logic compels the conclusion that electricity is moving (and remains in motion) until it reaches the product sought to be electrified.
Id. at 370.
Appellant filed a reply brief, dkt. # 1956, attempting to distinguish Erving Industries and discredit its conclusion. First, significant differences between the Massachusetts and Wisconsin electricity markets made the case distinguishable. Second, as a matter of physics, electricity is not movable after it has been metered. Appellant submitted the affidavit of Kevin Vesper-man, an engineer, to explain the nature of electricity. Dkt. # 1957. Vesperman described the nature of electricity as follows:
[N]o movement of electrons will occur until the customer’s load is connected and a circuit is completed. When the load is connected, the electrons begin to flow and create electric energy, and simultaneously, the electric energy is ‘consumed.’ With no customer load, no electrons move and no electric current is measured. In addition, the movement of electricity (electric energy current) is virtually instаntaneous from one end of the conductor to the other end ... Therefore, when it is consumed, it is simultaneously measured. Movement does not take place after measurement by the meter. The court’s conclusion .[in Erving ] that electricity ‘passes through’ the meter and continues to the customer for use thereafter does not match the actual physics. Electric energy is not like natural gas or water where those materials physically pass through the meter and then to the consumptive use. ... The electric energy is not ‘movable’ after metering; it does not ‘move’ to some other final consumptive use aftermetering. Instead, the consumptive use is simultaneous with the metering.
Id. at ¶ 9.
Finally, appellant argued that even if electricity is a good, appellees’ claims should be disallowed under the “predominant purpose” test, or alternatively, the utility companies should be required to amend their claims to remove all the costs of the electric services they bundled with their electric energy charges.
Appellees filed a motion to strike appellant’s reply brief and Vesperman’s affidavit, along with an alternative motion for leave to file a sur-reply and hold an evi-dentiary hearing, dkt. # 1963. Appellees contended that appellant had raised new factual disputes and legal issues in its reply brief, including the value of the claims and the physics of electric energy. Appellant opposed the motion to strike on the ground that the reрly brief responded to facts introduced by appellees that were inconsistent with the facts to which the parties had stipulated. Dkt. # 1990.
B. Bankruptcy Court Decision
In an order dated June 1, 2010, Bankruptcy Judge Martin denied appellant’s objections and allowed appellees’ § 503(9)(b) claims.. Dkt. # 2001. First, he addressed appellant’s reply brief, stating that it was “problematic in several ways:” “[I]t range[d] far afield from the arguments raised in the utilities’ brief,” it “arguably contravene[d] the parties’ agreement to submit the matter on agreed facts” and it was “far from clear that [Vesperman] would qualify as an expert.” Nevertheless, the court denied appellees’ motion to strike, concluding that “even taking the affidavit at its face value, [appellant’s] motion for disallowancе fails.” Id. at 2.
In determining whether electricity qualified as a good under § 503(b)(9), the court applied the UCC definition of “goods” found in UCC § 2-105 and found that the electricity at issue was movable when it entered the meter and moved from the power source to the meter to appellant’s facilities. Because the electricity was moving, even if the movement was so fast as to be “nonexistent,” it qualified as a good. The court rejected appellant’s argument that electricity cannot be a good because it cannot be reclaimed under § 546(c). The court did not address appellant’s arguments regarding the predominant purpose test, the Wisconsin electricity market, the treatment of utility services under the Bankruptcy Code and Wisconsin law or the bundling of goods and services.
OPINION
Section 503(b)(9) of the Bankruptcy Code 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 debt- or’s business.” 11 U.S.C. § 503(b)(9). Although courts are divided on what constitutes
goods
under § 503(b)(9), the plain language of the statute does not allow creditor claims arising from the provision of
services
to a debtor.
Id.; In re Brown & Cole Stores LLC,
Appellant raises three issues for review: (1) whether the bankruptcy court erred in finding that the electricity provided by ap-pеllees was a good for purposes of § 503(b)(9); (2) whether, even if the electricity was a good for purposes of § 503(b)(9), the bankruptcy court erred by failing to apply the predominant purpose test; and (3) whether, even if the predominant purpose test did not require denial of the claims, the bankruptcy court erred by
As an initial matter, there is some question about the proper standard of review to be applied to the bankruptcy court’s June 1, 2010 order. Appellant challenges the bankruptcy court’s conclusion that electricity is a good. If this conclusion is a question of faсt, it may be set aside only if it is “clearly erroneous.” Fed. R. Bankr.P. 8013. However, if it is a question of law or the application of law to fact, then the review is
de novo. Kovacs v. United States,
The questions whether electricity qualifies a good for purposes of § 503(b)(9), whether the predominant purpose test applies and whether appellees must “unbundle” their administrative claims are questions of law subject to de novo review. The question whether the electricity at issue was moving at the time it was metered is a question of fact subject to review for clear error. Plaintiff contends, however, that because the bankruptcy court adopted facts inconsistent with the parties’ stipulations, relied on facts not contained in the record and disregarded relevant facts in the record, its findings of fact related to whether the electricity was moving should be reviewed de novo. However, plaintiff has cited no legal authority suggesting that facts found by the bankruptcy court would be subject to de novo review. Nonetheless, it would be clearly erroneous for the bankruptcy court to rely on facts with no support in the record.
A. Electricity as a “Good ”
The first question to be answered is what qualifies as a “good” under § 503(b)(9). The Bankruptcy Code does not define goods and there is no controlling ease law construing the term as it is used in this section of the Bankruptcy Code. (The provision was added to the Code in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act and has been analyzed by only a few bankruptcy courts.) Every bankruptcy court to consider the issue, including the court below, has applied the Uniform Commercial Code definition of goods, found in UCC § 2-105. The courts reason that using the UCC definition will support uniformity because forty-nine states have adopted some version of the UCC. In addition, the courts dismiss the idea that they should craft a new definition of goods because “where words are employed in a statute which had at the time a well-known meaning at common law or in the law of this country, they are presumed to have been used in that sense.”
In re Circuit City Stores, Inc.,
It is possible that the meaning of goods for purposes of § 503(b)(9) of the Bankruptcy Code is different from the meaning of goods under the UCC because the laws have different purposes. Section 503(b)(9) is a priority provision, unique to federal law. Presumably, one of the reasons § 503(9)(b) was enacted was to prevent debtors from stockpiling “goods” in the days leading up to their bankruptcy filings.
In re Plastech Engineered Products, Inc.,
However, the bankruptcy court below and the parties in this case assume that the UCC definition applies. Absent a different definition in the Bankruptcy Code or controlling case law, I conclude that it is reasonable to aрply the definition provided by the UCC, as courts often do when interpreting Bankruptcy Code provisions,
In re Peaslee,
The UCC defines “goods” as “all things ... which are movable at the time of identification to a contract for sale.” UCC § 2-105; see also Wis. Stat. § 402.105(l)(c). The term includes future goods, specially manufactured goods, the unborn young of animals, growing crops and other identified things attached to realty as described in § 2-107. The term does not include “information, the money in which the price is to be paid, investment securities under Article 8, the subject matter of foreign transactions, or choses in action.” To constitute goods under § 503(b)(9) then, the thing at issue must be identifiable, movable, have value and be received by the debtor during the 20-day period preceding the petition date.
Having decided the proper test to apply, I turn to the next question, which is whether the electricity delivered by appel-lees to appellant during the 20 days before its chapter 11 petition qualifies as a “good.” The parties agree that the electric energy that is the subject of their contract was “identified to the contract” at the time it was metered, but they dispute whether the electricity was “movable” at the time it was metered.
Courts havе reached different conclusions on whether electricity is a good under the UCC or Bankruptcy Code.
Compare In re MBS Management Services, Inc.,
Appellant contends that the answer to whether electricity is a movable good requires analysis of the physical nature of electricity, as well as the provisions in the Bankruptcy Code addressing utility providers and reclamation rights. Turning
The only facts in the record were those facts stipulated by the parties and those contained in Vesperman’s affidavit. The parties stipulated in the bankruptcy court that the electricity supplied by appellees to appellant during the 20-day period was “metered at [appellant’s] premises as it was being drawn and consumed by [appellant].” Dkt. # # 1887, 1890 (emphasis аdded). Vesperman asserted that the conclusion of the court in Erving Industries “does not match the reality of the physics of electric energy,” because “[m]ovement does not take place after measurement by the meter.” Dkt. # 1957, ¶ 9. Vesperman explained that “the movement of electricity (electric energy current) is virtually instantaneous from one end of the conductor to the other end. Therefore, when it is consumed, it is simultaneously measured.” Id.
Appellant contends that the only finding that could reasonably be drawn from these facts is that electricity is not moving at the time it is metered and is therefore, non-movable. In its order, however, the bankruptcy court found the following:
• “the electricity was movable when it entered the meter”;
• the “meter was installed in the middle of the circuit”;
• “electrons flow rapidly through the circuit from the power sоurce to the load”;
• “the movement [is] ‘virtually instantaneous’ ”;
• “electrons are moving from the power source to the meter to the load”; and
• even though electrical flow is “rapid[ ] and at a subatomic level,” the movement is sufficient to satisfy the definition of goods in the UCC.
Arguably, some of the bankruptcy court’s findings exceed the facts described in Vesperman’s affidavit and the stipulations of the parties, neither of which identifies where on the circuit the meter is located or concedes that electricity flows from the power source to the meter to the load. However, it is clear that the bankruptcy court credited Vesperman’s statement that “the movement of electricity (electric energy current) is virtually instantaneous from one end of the conductor to the other end.” The bankruptcy court relied on this statement to conclude that although the movement of electricity may be rapid and subatomic and “so fast as to be nonexistent,” an electric current is literally moving through the transmission network and continues to move until it is delivered to a customer at the time it is metered and consumed. The bankruptcy court found this movement sufficient for electricity to qualify as a movable good. In addition, the court noted that under the UCC, water and natural gas are considered movable goods, and “there is no principled distinction to be made between natural gas, water, or electricity.” Dkt. # 2001, at 4-5; see also UCC § 2-107(1) (“A contract for the sale of minerals or the like (including oil and gas) ... is a contract for the salе of goods within this Article.... ”).
I conclude that the bankruptcy court ruled correctly that electricity is a “good” within the meaning of § 503(b)(9) of the Code. Determining the physical nature of electricity is complex. It requires an understanding of the nature of electrons and a grasp of quantum physics and special relativity. For the purpose of determining administrative priority under
Initially, the parties in this case appeared to believe that the issue whether electricity is a good could be resolved with little, if any, analysis of facts regarding the physics of electricity and could be decided instead by reviewing 16 stipulated facts containing no details about the physics of electricity. As appellant admits, “the only evidence in the record on the issue whether electricity meets the U.C.C. definition for a good for purposes of § 503(b)(9)” is Vesperman’s testimony, which was not submitted until after appellees cited the discussion in Erving regarding the physical nature of electricity. Appellant’s Br., dkt. # 8, at 4. This shows that the parties did nоt anticipate that opinions of expert engineers or physicists would be needed to decide a question for bankruptcy purposes. Rightly so.
New courts deciding how electricity should be treated under the UCC or other laws focus solely or even primarily on the physics of electricity; rather, they consider the general movability of electricity, common perceptions of electricity and the exchange of electricity as a commodity in the marketplace. For example, the bankruptcy court in
Erving Industries,
Similarly, courts determining whether electricity is “property” or a “product” for purposes of product liability, theft or other purposes, focus on the general physical nature of electricity and its movability.
E.g., Commonwealth v. Catalano,
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 for purposes of the UCC and the Bankruptcy Code. As noted by the bankruptcy court below, electricity begins flowing through power lines when a circuit is
I disagree with the court in
Pilgrim’s Pride,
The fact that the Bankruptcy Code addresses the post-petition rights and obligations of utility services providers in a separate section of the Code does not change my conclusion. Section 366, titled “Utility Service,” provides for the continuation of “utility services” after a debtor has filed for bankruptcy. In the underlying bankruptcy case, appellees requested protection under § 366, representing themselves as utilities that provide services. Appellant argues that because § 366 consistently refers to “utility services,” an interpretation of “goods” under § 503(b)(9) that includes utility services would be inconsistent with the use of the word “services” in § 366.
Just because a seller of goods may also be a utility that is entitled to the protection of § 366 for the sale of utility services post-petition to a debtor does not mean it is prohibited from allowance of a § 503(b)(9) administrative expense claim to the extent that it has sold goods to the debtor that qualify under § 503(b)(9). Section 503(b)(9) addresses the sale of goods pre-petition and § 366 addresses the provision of utility services postpetition. The sections are not mutually exclusive. A utility provider may provide both goods and services within the meaning of each section. In sum, the rights afforded by § 503(b)(9) to a seller of goods are not dependent either explicitly or implicitly upon the availability of other remedies under the Code for the seller.
In re Plastech,
In addition, in deciding whether appel-lees have a claim under § 503(b)(9), it is irrelevant whether Wisconsin’s rules for electrical utilities requires utilities to furnish “adequate service” to their customers, Wis. Admin. Code § PSC 113.0201, or that appellees represent themselves as service providers to the public. That a company provides services does not bar it from sell
Finally, the bankruptcy court was correct to reject appellant’s argument that although the definition of “goods” is governed by the UCC, the term should be limited to goods that are reclaimable. Congress added § 503(b)(9) to the Bankruptcy Code as part of § 1227 of the Bankruptcy Abuse Prevention and Consumer Protection Act, entitled “Reclamation.” Most of § 1227 is devoted to amending § 546 of the Code to provide relief to sellers of goods who failed to give аn effective notice for reclamation. Appellant reads this as an indication that § 503(b)(9) is a reclamation concept and suggests that goods must be reclaimable in order for a seller to have a § 503(b)(9) claim. Appellant contends that once electricity has been metered, it is consumed by the customer and is no longer capable of being reclaimed.
The bankruptcy court rejected this argument, noting that § 546 does not require that goods
must
be reclaimable to fall under § 503(b)(9) and at any rate, electricity might well be reclaimable, as when it is stored in a battery. Dkt. # 2001, at 5. I agree. Nothing in the language of § 503(b)(9) requires a claimant to be entitled to a reclamation right under § 546.
Lamie v. United States Trustee,
In sum, taking into consideration the physical properties of electricity as noted by appellant’s expert and the bankruptcy court, including the fact that electricity is movable, and the parties’ agreement under which the energy usage and consumption were determined by meter readings, I conclude that electricity is a good under the UCC definition and also under the Bankruptcy Code.
B. Predominant Purpose Test and the Bundling of Goods and Services
Appellant contends that even if electricity is a “good” for purposes of § 503(b)(9), the bankruptcy court erred by failing to apply the “predominant purpose” test to determine whether the contract between the parties was predominantly for goods or services. According to appellant, claims arising from transactions relating primarily to the provision of services should, under the predominant purpose test, be excluded from the priority status granted by § 503(b)(9) because appellees provided electric energy generation, transmission, distribution, metering, management and conservation program services, in addition to actual electric energy. The bankruptcy court did not address appel
The predominant purpose test applies where a transaction involves a mixture of goods and services and there is a need to categorize the transaction as either a sale of goods or not.
Ogden Martin Systems of Indianapolis, Inc. v. Whiting Corp.,
At least one bankruptcy court has applied the predominant purpose test in the § 503(b)(9) setting, concluding that priority status applies only to goods sold incident to transactions that were primarily for the sale of goods.
In re Circuit City Stores, Inc.,
As the court explained in Plastech:
If a particular transaction provides for both a sale of goods and a sale of services, and the value of each of them can be ascertained, why should the value of the goods not be entitled to the § 503(b)(9) administrative expense priority and the value of the services bе relegated to an unsecured non-priority claim? In drawing that line, the court does not have to reach a determination whether contracts would be considered sales of goods for purposes of the Uniform Commercial Code, products liability law or tax law, under a predominant purpose test. Under § 503(b)(9), that determination is irrelevant. 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. The predominant purpose test does not inform the court whether a particular thing has been sold is or is not “goods.” Therefore, the predominant purpose test is unnecessary.
In re Plastech,
This conclusion leads directly into appellants’ final argument, which is that even if electricity is movable after metering, and the predominant purpose does not apply, appellees should not receive administrative priority for the full amount of the bills to аppellant during the 20-day period because the electricity itself it is a relatively small portion of the utilities’ bill when compared to the transmission, substation, distribution, metering and other customer service components bundled in the utilities’ charges. Also, even the electricity cost component is not just for the energy generated. It includes a capacity charge, meaning that the customer is charged the
Appellant made this argument regarding the bundling of services for the first time in its reply brief and the bankruptcy court did not address the argument in its order. The bankruptcy court criticized appellant’s reply brief because it “rang[ed] far afield from the arguments raised in the utilities’ brief’ and because it “arguably contravene[d] the parties’ agreement to submit the matter on agreed facts.” Dkt. # 2001, at 2. Although the bankruptcy court declined to strike the entirety of appellant’s reply brief, it did not respond to several of the arguments appellant raised for the first time in its reply brief, suggesting that it deemed those issues to be waived.
Appellаnt contends that it did not waive the argument because it was merely a response to appellees’ reliance on the court’s decision in Erving Industries. In that case, the court was considering an unbundled claim for electric energy. The problem with this argument is that appel-lees’ response brief referred only to the discussion in Erving Industries regarding the nature of electricity, and did not mention anything about the significance of a bundled or unbundled claim. This makes sense, because the only issue before the court was whether electricity is a good. Appellant did not raise the issues whether a contract for both goods and services can gain priority status or whether contracts for goods and services must be unbundled for purposes of § 503(b)(9).
In contrast, in
Erving Industries
the debtor had raised several issues before the court, one of which was that the contract at issue was for services or at most, part-good, part-service.
Erving Industries,
In sum, it was appropriate for the bankruptcy court to disregard this argument, issue a decision on the question presented for consideration and hold that electricity is a good.
ORDER
IT IS ORDERED that the decision of the United States Bankruptcy Court for the Western District of Wisconsin denying appellant GFI Wisconsin Inc.’s objection to the 11 U.S.C. § 503(b)(9) claim filed by appellees Wisconsin Electric Power Com