Kirk B. Burkley
In baseball, the utility player is the player on the team that can fill in at almost any position when needed. Having a good utility player on the team provides added depth to management and the ability to mix and match the roster to meet the challenges presented by any particular opponent. Similarly, the utility provider in a consumer bankruptcy needs to be the manage numerous sections of the bankruptcy code and applicable state law in order to effectively deal with the myriad of practical issues that arise in consumer cases. For the average utility, often governed by a maze of state regulations, it isn’t as easy as “shutting off the lights.”
Utilities, providers of such essentials as electricity and gas service, are specially treated by the Bankruptcy Code – 11 U.S.C. § 101, et seq. (the “Code”). On the one hand, Section 366 of the Code requires utilities to provide service to a newly filed bankrupt party even to the point of requiring the utility to reconnect service. 2
However, to compensate for the utility being forced to provide post-petition service, the Code requires debtors to furnish adequate assurance of payment to the utility within 20 days of the petition date. The purpose and policy of 11 U.S.C. 366, as recognized by the Third Circuit Court of Appeals, is to prevent the threat of termination from being used to collect pre-petition debts while not forcing the utility to provide services for which it may never be paid. See, In re Hanratty, 907 F.2d 1418, 1424 (3d Cir. 1990).
If the debtor does not timely provide the adequate assurance, then the utility may discontinue service to the debtor. The question remains, however, on what to do if the debtor provides the adequate assurance and then defaults on payments post-petition. Can the utility terminate service through the normal state procedures without first obtaining relief from stay?
This article will focus on the issues of adequate assurance and termination for post-petition default and will provide a practitioner’s perspective on these issues for Chapter 7 and 13 consumer cases.
The Practicalities of the Security Deposit
Pursuant to Section 366, adequate assurance of future payment must be offered by the debtor to the utility within 20 days of the bankruptcy filing. The Code places the onus of offering adequate assurance on the debtor, but, in practice, in consumer Chapter 7 and 13 cases, many utility companies take the initiative by sending a letter setting forth the adequate assurance demand. While some practitioners may take a different view, in most instances it is advisable to develop a rapport with the debtor’s bar so that they know exactly what is being requested of their clients and have a written demand to discuss with their clients. After all, the goal is typically to get paid as opposed to merely having a reason to shut off service.
Utilities can automatically terminate service if the adequate assurance is not timely provided without court approval. Section 366(b) “has been read by courts as an exception to the automatic stay, allowing a utility to alter, refuse or discontinue service for failure to provide adequate assurance of payment without recourse to the bankruptcy court.” In re Jones, 369 B.R. 745 (1st Cir. 2007). See, In re Carter, 133 B.R. 110, 112 (Bankr. N.D. Ohio 1991) (holding that a utility’s right to terminate service for a debtor’s failure to tender adequate assurance of payment under § 366(b) is “self executing” and that “a formal proceeding by the utility is not required.”)
What constitutes assurance of payment is limited by Section 366 to: a cash deposit, a letter of credit, a certificate of deposit, a surety bond, a prepayment of utility consumption or another form of security that is mutually agreed on between the utility and the debtor or the trustee. See, 11 U.S.C. § 366(b). In consumer cases, the request is always for a security deposit in cash as most consumer debtors are unlikely to be able to provide a bond or letter of credit.
Section 366(b) permits utilities to request security deposits in all cases, regardless of a debtor’s pre-petition payment history and regardless of a utility’s policy toward its non-debtor customers. See e.g., In re Hanratty, 907 F.2d 1418, 1423 (3d Cir. 1990)(Under § 366(b) utility is “expressly” authorized to request a security deposit and may discontinue service if it is not provided within 20 days after filing of a petition); see also, 499 Warren Street Associates Limited Partnership, 138 B.R. 363 (Bankr. N.D. NY 1991)(stating that “[t]he plain language of the statute simply does not limit a utility’s right to adequate assurance on the basis of a debtor’s pre-petition account status.”)
Section 366 is very flexible in that it gives the utility the latitude to ask for a security deposit in every bankruptcy. Section 366 does not limit the amount that the utility can ask for as a deposit. To determine what constitutes an adequate security deposit request, bankruptcy courts generally defer to the state regulations on security deposits. In re Spencer, 218 B.R. 290 (Bankr. W.D. N.Y. 1998).
Most states have a version of a public utility commission that regulates utilities and often have their own rules on what is an acceptable security deposit request by the utility regarding new customers or returning customers. For example, in Pennsylvania, the Public Utility Commission has issued a code provision allowing a utility to charge up to two months of the prospective customer’s estimated average bill3. In practice, a request of a deposit equal to two months of the debtor’s average monthly usage for the prior year (very similar to asking for two months of the new customer’s estimated average monthly bill) is typically a reasonable deposit request and has been found to be reasonable by many bankruptcy courts.
As the Code gives the utility great flexibility in who it can ask for a deposit from and what it can request, the Code gives the debtor the right to challenge the reasonableness of the deposit request. Section 366(b) states that: “[o]n request of a party in interest and after notice and a hearing, the court may order reasonable modification of the amount of the deposit or other security required to provide adequate assurance.”
If the debtor files the motion to modify the deposit within the 20 day timeframe to pay the deposit, that effectively tolls the deposit deadline until the hearing on the motion. The decision on the reasonableness of the deposit is completely at the discretion of the court.
The main arguments made by debtors in such motions are in two forms. One main argument is that the debtor was current with his utility bill at the time of filing. Unlike Chapter 11 bankruptcies, the court is allowed to look at pre-petition payment history in determining reasonableness, but the fact that the debtor was current on his bill at the time of filing is not automatically determinative of whether a deposit request is reasonable and the “utility player” practitioner has many tools in his/her toolbox. The court may look at the debtor’s history of missed or late payments pre-petition and may also look at the debtor’s ability to pay going forward. The debtor’s lack of capacity to pay for future bills can be established by looking at the debtor’s own schedules. For example, the utility can compare the debtor’s Schedule I income versus Schedule J expenses or look at Schedule F to see how many of the debtor’s living expenses were charged to credit cards before the filing. If the debtor’s expenses exceed her income or the debtor has lived on her credit cards to pay expenses, that is good evidence of the debtor’s inability to pay for future utility service, necessitating the deposit request.
The other argument often made by debtors is that the debtor cannot afford the deposit. This is a self-defeating argument, because it shows that the deposit is necessary to protect against anticipated future missed payments. However, it is good practice to develop a workable program that does not put either party at significant risk to allow deposits to be paid in reasonable short installments.
What Happens After the Deposit is Paid?
Assuming the debtor has paid the security deposit, what happens when the debtor falls behind on payments? Can the utility start termination proceedings without first obtaining relief from the automatic stay of 11 U.S.C. § 362? In consumer Chapter 13 and Chapter 7 cases, courts have directly addressed this issue and concluded that utilities are not required to obtain relief from stay before terminating a debtor for failure to pay post-petition bills.
In Chapter 7 cases, courts have routinely allowed utilities to terminate service for post-petition defaults without obtaining relief from stay so long as the utility follows its state law termination proceedings. See, In re Johnson, 80 B.R. 30, 31 (E.D. Pa. 1987); In re Conxus Commons, Inc., 262 B.R. 893 (D. Del. 2001); In re Robinson, 918 F.2d 579, 588 (6th Cir. 1990); In re Allen, 69 B.R. 867, 876 (Bankr. E.D. Pa. 1987). Section 366(a) states that a utility may not terminate service “solely” because of the debtor’s bankruptcy filing or the failure to pay a pre-petition bill. In In re Begley, 760 F.2d 46 (3d. Cir. 1985), the Court stated:
[t]he restriction on termination in section 366(a) bars only those terminations which issue “solely on the basis” that a debt incurred prior to the bankruptcy order, was not paid when due. Thus, by implication, termination for failure to pay post-petition bills would not seem barred by section 366(a).
In re Begley, 760 F.2d at 49 (emphasis in original).
Chapter 13 cases arguably differ from Chapter 7 cases because a debtor’s post-petition income constitutes property of the estate pursuant to 11 U.S.C. § 1306. Terminating utility service would be an act to take possession of the debtor’s income, which would be prohibited by 11 U.S.C. § 362(a)(3).
Bankruptcy courts have specifically rejected this argument and authorized the termination of service in Chapter 13 cases without relief from the automatic stay.
In the case of In re Weisel, 428 B.R. 185 (W.D. Pa. 2010), the utility terminated service post-petition after the debtor accumulated a $1,157.09 post-petition delinquency. The court held that if it were to accept the argument that terminating service for post-petition bills is an exercise of control over property of the estate, would require “any creditor seeking payment of a post-petition bill, invoice, etc. in a Chapter 13 bankruptcy” to seek relief from stay. “This would be unduly burdensome on creditors as well as on the Courts.” In re Weisel, 428 B.R. at 189. Forcing utility providers to seek the authority of the Court every time there is a late or missed payment post-petition would be impractical and burdensome on practitioners involved on all sides of the case. The better and more efficient method of resolving post-petition defaults is to leave these issues off the courthouse steps.
The Weisel Court took notice of the fact that Collier’s, the “leading bankruptcy treatise” did not distinguish between chapters of the Bankruptcy Code in applying § 366(b):
[t]he provision of adequate assurance does not prevent a utility from terminating service to the debtor or the estate if post-petition payments for utility services are not made. Such a termination must follow the procedure prescribed under nonbankruptcy law for utility terminations…
In re Weisel, 428 B.R. at 189, citing 3-366 Collier on Bankruptcy P 366.03(15th Ed. 2009).
The courts in In re Jones, 369 B.R. 745 (1st Cir. 2007) and In re Spencer, 218 B.R. 290 (Bankr. W.D. N.Y. 1998) have similarly concluded that utilities may terminate service for post-petition defaults without relief from the automatic stay for similar reasons.
Utilities are compelled by the Code to provide service to new bankruptcy filers. However, the Code compensates utilities for this requirement by allowing utilities to request a deposit and giving the utilities great latitude in determining the amount of the request. The Code allows utilities to terminate service for non-payment of the deposit and it further allows utilities to terminate for non-payment of post-petition bills without first obtaining relief from stay. Understanding the practical import of Section 366(b) and how it relates to the administration of consumer cases will help create a more stable and efficient system for handling utility bills and defaults in bankruptcy.
- Bernstein-Burkley, P.C.’s Bankruptcy and Restructuring Group provided substantial research and assistance in writing this article.
- Specifically, Section 366 states in part:Except as provided in subsections (b) and (c) of this section, a utility may not alter, refuse, or discontinue service to, or discriminate against, the trustee or the debtor solely on the basis of the commencement of a case under this title or that a debt owed by the debtor to such utility for service rendered before the order for relief was not paid when due.Such utility may alter, refuse, or discontinue service if neither the trustee nor the debtor, within 20 days after the date of the order for relief, furnishes adequate assurance of payment, in the form of a deposit or other security, for service after such date. On request of a party in interest and after notice and a hearing, the court may order reasonable modification of the amount of the deposit or other security necessary to provide adequate assurance of payment.
- For purposes of this subsection, the term “assurance of payment” means–
- a cash deposit;
- a letter of credit;
- a certificate of deposit;
- a surety bond;
- a prepayment of utility consumption; or
- another form of security that is mutually agreed on between the utility and the debtor or the trustee.
- For purposes of this subsection an administrative expense priority shall not constitute an assurance of payment.3 .66 Pa.C.S. 1404(a), which states:
In addition to the right to collect a deposit under any commission regulation or order, the commission shall not prohibit a public utility, prior to or as a condition of providing utility service, from requiring a cash deposit in an amount that is equal to one-sixth of the applicant’s estimated annual bill, at the time the public utility determines a deposit is required
- For purposes of this subsection, the term “assurance of payment” means–