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Publication

February 14, 2006Client Alert

New Rights for Utilities With Customers in Bankruptcy

Effective in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") created the most sweeping overhaul to the Bankruptcy Code since it was adopted in 1978. While special provisions have always applied to utility service for customers in bankruptcy, BAPCPA made substantial and important alterations that strengthen the rights available to a utility when its customer files for bankruptcy protection.

When a bankruptcy is filed, the law automatically imposes a stay against most activities by creditors against the bankrupt debtor and its property. In the past, that stay applied to utility service for a limited period of time after the filing. Before BAPCPA, a utility was allowed to alter, refuse or discontinue service if neither the trustee nor the debtor, within 20 days after the date of the order for relief in the bankruptcy case, furnished "adequate assurance of payment," in the form of a deposit or other security, for service after such date. Usually this meant that the utility made its "adequate assurance of payment" demand, and if debtor thought the demand was unreasonable, debtor would go to the Bankruptcy Court, and after notice and a hearing, the Court could order reasonable modification of the amount of the deposit or other security necessary to provide adequate assurance of payment. 11 U.S.C. § 366(b).

Courts interpreting the "adequate assurance" requirement under pre-BAPCPA law would consider the debtor's payment history, the deposit approved or required by a state regulatory commission, the debtor's net worth, and the debtor's present and future ability to pay post-petition obligations. In re 499 W. Warren Street Assocs. Ltd. Partnership, 138 Bankr. 363, 366 (B.R. N.D.N.Y. 1991); In re Caldor, Inc., 199 B.R. 1, 2 (S.D.N.Y. 1996), aff'd sub. nom. Virginia Electric & Power Company v. Caldor, Inc., 117 F.3d 646 (2d Cir. 1997).

Often, the Court would rule that no security deposit or other "assurance" was necessary due to debtor's steady payment history, or determine that an administrative expense claim in favor of the utility for post-petition services was "assurance" enough.

BAPCPA changed this process by specifically defining the term "adequate assurance of payment" to exclude administrative expense priority as an option, and instead to mean one of the following: a cash deposit, a letter of credit, a certificate of deposit, a surety bond, prepayment of utility consumption, or another form of security mutually agreed on between the utility and the debtor or trustee. 11 U.S.C. § 366(c)(1). A utility may now alter, refuse or discontinue utility service if it does not receive assurance of payment satisfactory to the utility during the 30-day period beginning on the date of the filing of the bankruptcy petition. 11 U.S.C. § 366(c)(2). While a debtor may still request assistance from the Court if the utility company's demand seems unreasonable, the Court is now specifically forbidden to consider the absence of security before the bankruptcy filing, the debtor's pre-bankruptcy payment history, or the availability of an administrative expense priority. 11 U.S.C. § 366(c)(3). In addition to more powerful "adequate assurance" remedies, and unlike other creditors, utilities are now specifically allowed by BAPCPA to recover or set off against a security deposit provided to the utility by the debtor before the bankruptcy without notice or Bankruptcy Court order. 11 U.S.C. § 366(c)(4).

Because of the limitations imposed by BAPCPA on what constitutes "adequate assurance of payment," utility deposits or other "adequate assurance" can create a significant burden on the debtor early in cases where utility usage is substantial. Utilities should become familiar with their new rights, and exercise those rights especially when commercial, industrial or other large utility users utilize the bankruptcy process.

For more information on this or other bankruptcy questions, please contact Ann Ustad Smith at 608.283.2251, or ausmith@michaelbest.com, or Paul A. Lucey at 414.270.2719, or palucey@michaelbest.com.

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