Negative “Buzz” for Electricity Suppliers Regarding the Applicability of Section 503(b)(9) Priority

Trade creditors who are “plugged in” when it comes to bankruptcy surely are fans of section 503(b)(9) of the Bankruptcy Code. In general, claims for goods sold to a debtor before its bankruptcy filing are treated as general unsecured claims at the bottom of the claims priority ladder. However, section 503(b)(9) elevates unsecured claims for the value of goods sold to and received by a debtor in the ordinary course of business within the 20 days before the debtor’s bankruptcy filing to administrative expense priority status, near the very top of the claims priority ladder. This statutory priority is intended to incentivize (or, rather, avoid punishing) creditors that continue to supply goods to customers on credit despite the customer’s financial distress and impending bankruptcy filing.

The impact of section 503(b)(9) seems simple enough—but, in practice, it often isn’t. For example, there has been much litigation and conflicting court decisions over whether electricity can be characterized as a “good,” since only claims arising from the sale of goods are eligible for priority status under section 503(b)(9). The latest “buzz” on this issue is from a recent decision of the U.S. District Court for the District of Oregon in the Chapter 11 cases of In re North Pacific Canners & Packers, Inc., et al. (“NORPAC”). The district court upheld a bankruptcy court ruling denying a utility’s priority claim asserted under section 503(b)(9) for the electricity it had supplied to the debtor because electricity is not a “good.”