Creditor Twenty-Day Claims and the Bankruptcy Code: "Goods" or "Services"?

That business you sold 50,000 units of the latest and greatest widget to last week has filed for bankruptcy.  Surely you have a priority administrative claim for the value of the goods received under § 503(b)(9) of the Bankruptcy Code, right?

After all, 11 U.S.C. §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 twenty (20) days preceding the commencement date of the case (commonly referred to as “Twenty-Day Claims”).

But does your Twenty-Day Claim stand up if, instead of selling that latest and greatest widget, your “widget” wasn’t a widget at all, but was, say, something less physically tangible, like electricity?

Given the express language of § 503(b)(9), it is well settled that a priority administrative claim is given for the value of “goods” sold, rather than services provided.  Thus, whether or not a creditor has a valid Twenty-Day Claim may depend on whether the creditor provided the debtor with goods or services.  The first question that comes to every lawyer’s mind is how the bankruptcy code defines” goods.” Interestingly, the Bankruptcy Code does not define the term “goods,” although there is case law regarding the issue, and recently by a First Circuit bankruptcy court.

In the case of In re Erving Indus., Inc., 432 B.R. 354, 357 (Bankr. D. Mass. 2010), creditor Constellation NewEnergy, Inc. (“Creditor”) timely filed a priority administrative claim under § 503(b)(9) with respect to goods delivered to the debtor Erving Industries, Inc. and its affiliates (“Debtor”) within the 20-day period preceding the filing of the bankruptcy cases. The Debtor objected to the priority asserted for Creditor’s claim on the grounds that electricity is not a “good” covered by § 503(b)(9) of the Bankruptcy Code.

The Erving court considered the argument of the debtor that the “common understanding” of a “good” is defined as a “tangible personal property,” and therefore, electricity was not a “good.”  The court disagreed holding that the meaning of “goods” under § 503(b)(9) is primarily informed by the meaning of “goods” under Article 2 of the Uniform Commercial Code (UCC).  In turn, UCC § 2-105 defines “goods” as “all things…which are moveable at the time of identification to the contract for sale.”  The court held that electricity is indeed “tangible” in the ordinary sense since it is perceptible by touch and that it is a form of personal property – that electricity was not simply facilitating the delivery of a communications signal (such as television or radio), but that electricity was the “thing that the customer [sought] to purchase.”

The holding in Erving marked a stark deviation from a prior bankruptcy court decision which held that electricity was not a “good”; analogizing electricity to television or radio broadcast signals (not considered “goods” under the UCC).  (See In re Pilgrim’s Pride Corp., 421 B.R. 231 (Bankr. N.D. Tex. 2009).)

Often, distinguishing a good or service under the definition provided by the UCC is a simple proposition.  However, as can be seen in Erving and Pilgrim’s Pride, this determination can be murky.

Distressed businesses and aggrieved creditors should consult with a business or bankruptcy attorney to discuss available options, and their possible consequences.  As seen in the cases briefly discussed above, facts and circumstances may open the door to potential unintended litigation, or create an opportunity to seek satisfaction of claims.