Absolute Priority: The Blog for Business Bankruptcy, Insolvency and Restructuring

After much litigation and legal maneuvering, the Senior Secured Lenders prevailed at the auction for Philadelphia Newspapers.  The Lender’s winning bid is for approximately $139 million, and the parties expect to close on the sale by late June.  To read a summary of the sale, click here and here.

While this Blog generally focuses on bankruptcy-related issues, I thought it would be interesting to provide some of the key information about the Government’s fraud investigation into Goldman Sachs; after all, the subprime debacle caused the most severe financial collapse since the Great Depression.  There is no doubt that the Government on both sides of the aisle is looking for blood from Goldman Sachs, but more than that, the Government is currently seeking financial reform. 

Whether Goldman Sachs contributed to the financial collapse (and if so, to what extent) likely will be debated for years to come.  Information is still unfolding.  Here is a link to watch the Goldman Sachs live testimony before Congress:  Live Testimony via C-Span.   Here is SEC’s Complaint against Goldman Sachs (essentially alleged that Goldman Sachs didn’t disclose that it was shorting positions in CDOs it was selling) and here are 900 pages of the US Government’s Exhibits against Goldman Sachs, including internal emails from Goldman Sachs.  Here is a good article from the Wall Street Journal explaining the SEC charges against Goldman Sachs.

The issue for Goldman Sachs is not so much the financial cost to, or punishment that may or may not be imposed on, it, but rather the damage to its reputation.  It will be interesting to see if the Government pursues other financial institutions that were involved in the subprime crisis.  While Wall Street is an easy target, what we are watching is really less of a witch-hunt and more of a grand show to support changes in financial regulations.

In In re Erving Industries, Inc. et al., the Court held that the supply of electricity constituted the sale of goods so that the electric supplier was entitled to assert a 503(b)(9) administrative expense claim.  The Court’s opinion is very well-reasoned and its opinion along with a substantial appendix on the electric industry can be found here.   

In short, Erving Industries, Inc., along with certain of its affiliates, filed for Chapter 11 on April 20, 2009.  Constellation NewEnergy, Inc. filed an administrative expense claim under 503(b)(9) in the amount of $281,667.88 (the “Claim”).  The Debtors and NewEnergy agreed that the amount sought in the Claim accurately represented the charges for electricity supplied to the Debtors during the relevant 20 day period, but the Debtors objected to the Claim on the grounds that electricity is not a good within the meaning of 503(b)(9).  The Debtors also contended that NewEnergy was a utility provider. 

NewEnergy maintained that it did not perform the traditional service functions commonly associated with electric utilities.  It argued that while regulated utilities are responsible for the ultimate delivery of electricity to customers, NewEnergy says it has no role in the delivery and is involved solely in the sale of electricity as a “competitive supplier.” 

The Court began its analysis by defining “goods” under 503(b)(9).  The Debtors insisted that electricity is not a good because it is an intangible phenomena and devoid of physical form.  This position, according to the Debtors, is supported by the decision in In re Pilgrim’s Pride Corp., 421 B.R. 231 (Bankr. N.D. Tex 2009), where that court analogized electricity to the transmission of television programming, which is considered to be a service (here’s the Pilgrim’s Pride Opinion). 

NewEnergy argued that the term good should be defined as it is under Section 2-105 of the Uniform Commercial Code.  Section 2-105 states that a good is something that is movable at the time it is identified to the contract for sale.  NewEnergy insisted that electricity is movable, and indeed, moves along transmission lines and distribution systems from the location where it is generated, and ultimately arrives at the customer’s location after traveling along those transmission lines and distribution systems.  NewEnergy also noted that electricity is identifiable because it can be measured by a meter upon delivery.  Finally, NewEnergy argued that electricity is tangible because the touching of it can and usually does create a physical consequence (i.e., electrocution). 

After considering arguments by both the Debtors and NewEnergy, the Court analyzed the legislative history of 503(b)(9), the term “good”, the agreement between the parties, and the electric industry, and concluded that electricity is a good under section 503(b)(9).  The opinion (click here) is very well-reasoned, and will likely be persuasive authority in other jurisdictions.  In businesses that use mass amounts of electricity that is purchased from outside suppliers (i.e., not traditional utilities), debtors and debtors’ counsel will have to consider the implications of 503(b)(9) on what they previously would have viewed as just a prepetition general unsecured claim of a utility provider.