Providing Utility Services Post-Petition and Post-BAPCPA
by Brian G. Rich
Berger Singerman, PA; Tallahassee & Fort Lauderdale, Fla.
and by Douglas A. Bates
Berger Singerman, PA; Miami
There can be little doubt that utility companies rank among the most successful constituencies in terms of new rights received under the Bankruptcy Abuse Prevention Consumer Protection Act of 2005 (BAPCPA). Much maligned for its “devastating effects” on average consumer bankruptcy filings, BAPCPA’s amendments to 11 U.S.C. §366 established a new and sometimes nonsensical battleground early in chapter 11 business bankruptcy cases. Unfortunately for business debtors, BAPCPA appears to have provided utility companies significant powers that can be exercised within extremely limited time frames. However, to take advantage of BAPCPA’s broad grant of authority related to these new provisions, a company must meet the definition of “utility.”
Of course, telecommunications providers wish to be defined as a “utility” so that they might take advantage of the broad protections available in §366. These protections include, among other things, adequate assurance from the debtor in a form that is “satisfactory to the utility.” Based on the plain language of §366, the amount and type of adequate assurance that must be provided by the debtor is left entirely to the whim of the utility. The shortened time frame in which the debtor must provide the adequate assurance, and the rather short list of ways that a debtor can do so, gives debtors good reason to put up a fight and dispute the assertion by a telecommunication provider that it is in fact a “utility.”
The fight often begins in the “first day motions” wherein debtors will suggest a form of adequate assurance and a procedure for utility companies to object to that adequate assurance as unreasonable under the circumstances. It has become popular in many chapter 11 cases for debtors to file an emergency first day motion seeking to prohibit utilities from altering or discontinuing services and seeking to establish certain procedures for determining the reasonableness of requests by utility companies for additional assurance of payment. As part of the first day motion, debtors typically offer 50 percent of the debtor’s monthly utility expenditures as adequate assurance to utility companies. Debtors will escrow funds equal to 50 percent of the monthly expenditure in a separate “utility deposit account,” and it is from this account that utility companies will be allowed to draw if a debtor fails to meet its monthly payment obligations post-petition. If a telecommunications provider is deemed by the bankruptcy court to be a utility, then upon the debtor’s default the telecommunications provider will be allowed to draw from the utility deposit account.
The question of whether an entity is a utility for purposes of §366 of the Bankruptcy Code is not a new one. Arguably, the BAPCPA amendments to §366 do not make pre-BAPCPA law inapposite in respect of making this determination. Generally, courts have applied an expansive definition of the term utility. As such, courts have found that “traditional” utilities, such as providers of telecommunications services and landlords who provide various utility services to their tenants, fall within the Bankruptcy Code’s definition of utility within the meaning of §366. See, e.g., In re One Stop Realtor Place Inc., 268 B.R. 430 (E.D. Pa. 2001) (competitive local exchange carrier is a utility); In re Good Time Charlie’s Ltd., 25 B.R. 226 (Bankr. E.D. Pa. 1982) (shopping mall that provided electricity to tenants is a utility); In re Hobbs, 20 B.R. 488 (Bankr. E.D. Pa. 1982) (condominium owners’ association that sells electricity to condominium owner is a utility).
Courts have held that telecommunications providers, which are public utilities licensed by both state and federal governmental agencies, are utilities for the purposes of §366 protections. For example, in One Stop, the court easily concluded that Allegiance Telecom Inc., a local exchange carrier that provided local telephone service to the debtor, was a utility within the meaning of §366 based on the plain language of the statute. Furthermore, the court found no ambiguity in the language of §366 and looked to the ordinary meaning of the term utility as found in Merriam-Webster’s Collegiate Dictionary, Tenth Ed. 2001, finding that utility is “a service (such as light, power or water) provided by a public utility.” One Stop, 268 B.R. at 435. Applying the plain meaning, the court found that Allegiance was a utility “since it provides telephone service to the public and is subject to regulation by the FCC and the Pennsylvania PUC.” Id. at 436. Cases like One Stop create a heavy presumption for debtor to overcome if those debtors wish to argue that telecommunications providers are not utilities entitled to the broad protections of §366.
While debtors may agree that a telecommunications provider is a “utility,” the interesting counter argument available to debtors is that telecommunications providers are not providing “utility services” to the debtor. Although post-BAPCPA law on this topic is scant, one reported decision is of note as it determined that the new §366(c) makes a distinction between “services” and “utility services” and considers whether debtors consume those other services and rights provided by a utility such as interconnection agreement services. In re Lucre Inc., 333 B.R. 151 (Bankr. W.D. Mich. 2005).
Standing contrary to Lucre, legislative history to §366, which is admittedly pre-BAPCPA, states as follows:
this section [366] is intended to cover utilities that have some special position with respect to the debtor, such as an electric company, gas supplier or telephone company that is a monopoly in the area so that the debtor cannot easily obtain comparable services from another utility.”
One Stop, 268 B.R. at 435 (emphasis supplied) (citing House Report No. 95-595, 95th Cong., 1st Sess, p. 350 (1977), U.S. Code Cong. & Admin.News, 1978, pp. 5787, 6306).
Assuming that a telecommunications provider is a utility providing utility services to the debtor, BAPCPA’s burdens on the debtor set in immediately upon the filing of the bankruptcy petition. BAPCPA requires that debtors provide, at the earliest stages of the chapter 11 case, adequate assurance that is satisfactory to the utility. Specifically, §366 provides in pertinent part that:
[s]ubject to paragraphs (3) and (4), with respect to a case filed under chapter 11, a utility referred to in subsection (a) may alter, refuse or discontinue utility service, if during the 30-day period beginning on the date of the filing of the petition, the utility does not receive from the debtor or the trustee adequate assurance of payment for utility service that is satisfactory to the utility.
11 U.S.C. §366(c)(2) (emphasis added). “Assurance of payment” means (i) a cash deposit; (ii) a letter of credit; (iii) a certificate of deposit; (iv) a surety bond; (v) a prepayment of utility consumption; or (vi) another form of security that is mutually agreed on between the utility and the debtor or trustee. 11 U.S.C. §366(c)(1)(A). It is important to note that an administrative expense claim can no longer constitute adequate assurance. 11 U.S.C. §366(c)(1)(B).
While it might seem Draconian, §366’s language “satisfactory to the utility” appears to be unconditional, effectively vesting in utilities the right to determine, on their own, whether the adequate assurance proposed by the debtor is sufficient. That said, §366(c)(2) provides that the court may modify the amount of an assurance of payment only upon the request of a party in interest and after notice and a hearing. Does this mean that a modification may only be made after the debtor makes an adequate assurance payment to the utility company? Based on the decision in Lucre, the answer is apparently yes. See Lucre, 333 B.R. at 154 (the ability to request modification of adequate assurance arises “only after the adequate assurance has been agreed upon by the parties”).
As a practical matter for debtors, this creates a somewhat illogical scenario where a financially distressed entity, that might be completely current with respect to its obligations to a utility company and may be providing in an interim budget the funding necessary to stay current with the utility company, will have to provide whatever form of adequate assurance a utility company wants first, and then seek the relief from the court. Obviously, this creates a major pressure point for debtors who want to make sure that the phones continue to ring.
Utility companies and debtors alike must continue to ask, what is reasonable? Pre-BAPCPA case law holds that “adequate assurance” requires that the debtor demonstrate that the utility “is not subject to an unreasonable risk of nonpayment for post-petition services.” In re Adelphia Business Solutions Inc., 280 B.R. 63, 80 (Bankr. S.D.N.Y. 2002). See also Mass. Elec. Co. v. Keydata Corp. (In re Keydata Corp.), 12 B.R. 156, 158 (B.A.P. 1st Cir. 1981) (adequate assurance requires that utility be protected from an unreasonable risk of non-payment). As noted above, utility procedures implemented through first day motions and orders in various post-BAPCPA cases provide that the debtor will place half of one month’s total utility outlay into a separate utility deposit account, to be utilized in the event that the debtor defaults in its obligations to any particular utility company post-petition.
With sparse decisional law on the books post-BAPCPA, one is led to the conclusion that many of the §366 issues regarding what is reasonable are, like so many chapter 11 issues, finding their ultimate end point in settlements and compromises between debtors and utility companies. Even so, the powers granted to utility companies through new §366 cannot be ignored by debtors, as they will always be a source of leverage for those entities meeting the definition of a utility.