Hudson Energy Services, LLC v. Great Atlantic & Pacific Tea Co. (In re Great Atlantic & Pacific Tea Co.)

Citation: 538 B.R. 666Docket: No. 15-CV-416 (CS)

Court: District Court, S.D. New York; September 24, 2015; Federal District Court

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Hudson Energy Services, LLC appealed the Bankruptcy Court's November 6, 2014 ruling, which denied its request for administrative priority under 11 U.S.C. § 503(b)(9) for $875,943.90 in electricity sold to the Great Atlantic and Pacific Tea Company, Inc. and its affiliates in the twenty days preceding the bankruptcy petition. The Reorganized Debtors opposed this claim, arguing that electricity does not qualify as 'goods' under the statute. After oral arguments on August 24, 2012, the Bankruptcy Court denied the motion, asserting that electricity did not meet the definition of 'goods' because administrative expense claims must be strictly interpreted. 

Following Hudson's appeal, the ruling was vacated, and the case was remanded for an evidentiary hearing to determine the nature of electricity. On remand, the Bankruptcy Court held an evidentiary hearing on November 6, 2014, and again denied Hudson's claim. The court relied on UCC § 2-105(1), concluding that while electricity could be identified through a meter reading, it was not 'movable' at the time of identification since it had already been consumed by the Reorganized Debtors. The court emphasized that the instantaneous nature of electricity's usage and registration meant there was no meaningful time between identification and consumption, further supporting its determination that electricity did not fit the statutory definition of goods.

The Bankruptcy Court determined that Hudson's administrative priority claim should be denied due to the dispute's unresolvable nature and the principle of narrow construction of such claims. Hudson filed a Notice of Appeal on January 20, 2015, arguing that the Bankruptcy Court erred by: (1) ignoring the Court's direction to apply the framework established in *In re Erving Indus. Inc.*, (2) concluding that electricity does not move as it passes through the meter, (3) asserting that electricity is not identified at that moment, and (4) relying on narrow construction principles. The district court has jurisdiction to hear appeals from bankruptcy court decisions, reviewing factual findings for clear error and legal conclusions de novo. The determination of whether electricity qualifies as a good under Section 503(b)(9) is a legal question, while subsidiary issues, such as the movement of electricity at the meter, are factual. 

Hudson's appeal hinges on the interpretation of a prior order suggesting that evidence was needed to clarify whether electricity, as argued by Hudson, is identified upon passing through the meter. However, the court clarified that its earlier comments were preliminary and did not constitute a definitive ruling. It affirmed that further factual development was required and noted that the Bankruptcy Court found that the electricity was not identified to the contract at the moment it passed through the meter, distinguishing this case from *Erving*, where such identification was determined to occur. Hudson's main contention is, therefore, with the Bankruptcy Court's factual finding regarding the identification of electricity at the meter.

Hudson contends that the Bankruptcy Court erred in its factual findings regarding electricity's movement and identification when passing through a meter. The court's factual determinations are subject to clear error review, meaning reversal is only warranted if there is a firm conviction of a mistake. Hudson's first argument—that electricity is not moving when it passes through the meter—was rejected by the court, which clarified that while electricity is moving, it becomes unmovable once registered by the meter because it has been consumed. The court noted that the electricity "hits the meter before" it is used, but the essential finding was that it ceases to move once consumed.

Regarding Hudson's second argument about whether electricity is identified before consumption, the court recognizes the complexity of this issue, acknowledging both factual and legal components. The court found no clear error in the determination that due to the speed of electricity and limitations of metering technology, a meter cannot record electricity before it is consumed. Expert testimony indicated that the meter may take milliseconds to register usage, and no meter could measure electricity within the time it takes to travel from the meter to the end device. Thus, the findings of the Bankruptcy Court on both points were upheld.

Electricity is metered and measured after it is consumed, as testified by a witness and confirmed by an expert report, indicating that the meter shows zero at the moment electricity passes through it. The Bankruptcy Court found no error in concluding that electricity is identified for contractual purposes when registered by the meter, not when it passes through. The UCC defines "goods" as movable items at the time of identification, and the identification of goods occurs when they are designated in a contract. Since Hudson's meter readings are essential for billing and the meter does not register any electricity until after it has been consumed, the supply of electricity can only be identified when recorded by the meter. Consequently, the electricity supplied by Hudson does not qualify as a good under Section 503(b)(9), as it is not movable at the time of identification due to its consumption prior to measurement.

Hudson contends that the Bankruptcy Court incorrectly embraced the reasoning from Opeo, which suggested that the instantaneous speed of electricity makes the distinction between identification and consumption irrelevant. However, the Bankruptcy Court determined that identification occurs post-consumption, contradicting Opeo's assumption that identification happens when electricity is metered. This distinction, while debated, is deemed unnecessary for resolving the appeal. 

Additionally, Hudson argues that the Bankruptcy Court misapplied the principle of narrow construction in denying its claim. The principle, articulated by the Supreme Court in Howard Delivery Service, states that bankruptcy provisions concerning preferences must be strictly interpreted to achieve equitable distribution. The Bankruptcy Court found that the nuances of the dispute, particularly the minuscule time difference involved, warranted clearer congressional guidance before prioritizing Hudson’s claim. It found ambiguity regarding whether electricity qualifies as "goods" under Section 508(b)(9) of the Bankruptcy Code, given conflicting judicial opinions on the matter. Some rulings argue that electricity is not a good due to its consumption upon metering, while others assert its classification as a good based on its physical movement until consumption. The Bankruptcy Court's decision aligns with the notion that a definitive interpretation is necessary to clarify these distinctions.

Electricity is classified as a good based on precedents, notably in In re Grede Foundries and In re Erving Industries, where it is emphasized that electricity remains in motion and is not simply a static commodity. The Bankruptcy Court affirmed that electricity passes through a customer's meter and remains movable until utilized, highlighting complexities surrounding its classification. The ruling also states that electricity is not considered an 'undivided share in an unidentified bulk of fungible goods' under UCC Section 2-105(4), with Hudson Energy Services, LLC not contesting this aspect on appeal. An expert testified that electricity cannot be moved beyond the circuit drawing it from the grid, but the court found this argument unpersuasive and did not require a determination on whether electricity moving within one circuit disqualifies it as 'movable.' The court noted that while steps to measure electricity occur when it passes through the meter, the measurement itself has not taken place, indicating that unmeasured electricity cannot be 'identified to the contract.' Ultimately, the Bankruptcy Court's order was affirmed, and the case was directed to be closed.