§ 136.8     Utilities before BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 136.8, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Unpaid prepetition utility debts are ordinary unsecured claims. Postpetition utility bills, like postpetition taxes,1 present a collision of the Code provisions for payment of administrative expenses under §§ 507(a)(2) and 503(b) and the treatment of postpetition claims under § 1305.2 Under § 1305(a)(2), postpetition utilities can be a “consumer debt, that arises after the date of the order for relief . . . that is for . . . services necessary for the debtor’s performance under the plan.” On the other hand, postpetition utility services might constitute “actual, necessary costs and expenses of preserving the estate,” entitled to administrative expense status under § 503(b)(1)(A) and second priority under § 507(a)(2).3

[2]

If postpetition utilities are characterized as § 1305 claims, then the claim holder can file proof of its postpetition claim and participate through the plan or decline to file a proof of claim, avoid discharge and perhaps seek relief from the stay.4 It is generally held that the debtor is powerless to force a postpetition claim holder to participate in the plan.5 There is little incentive for a utility supplier with a claim allowable under § 1305 to participate by filing a proof of claim unless the plan pays postpetition claims in full with whatever interest or other fees are allowed by contract or local tariffs.

[3]

The Chapter 13 trustee could be an obstacle to the allowance of a postpetition utility claim. To be allowable under § 1305(a)(2), the supplier of the postpetition utility services must obtain the “prior approval” of the Chapter 13 trustee, if the claim holder “knew or should have known” that such approval “was practicable.”6 What utility routinely asks the trustee’s permission before providing postpetition services to a Chapter 13 debtor? On the other hand, what utility knows in advance that the debtor is not going to pay? A pattern of unpaid postpetition utility bills would be evidence of an ongoing budget problem that might get the trustee’s attention to object to allowance.

[4]

If postpetition utilities are characterized as administrative expenses, some courts conclude that the debtor is obligated to provide full payment through the plan to satisfy § 1322(a)(2).7 This outcome is not compelled by the Code: there is no reference to administrative expenses in § 1322(a)(2); but the listing of administrative expenses as second priority in § 507(a)(2) has inspired many debtors’ attorneys and courts to treat administrative expenses the same as priority claims in Chapter 13 cases. This characterization can benefit the debtor, since treating the unpaid utility as a priority claimant means full payment under § 1322(a)(2) but without postpetition interest.8

[5]

If the utility bill is an administrative expense, then the supplier may “timely” file a request for payment under § 503(a) or may “tardily file such request if permitted by the court for cause.”9 Nobody knows exactly what timely means in this context, nor does the Code specify a consequence if the request is untimely filed.

[6]

The strategies for utility suppliers are not attractive. Section 366 entitles the utility to adequate assurance of payment during the case.10 If the debtor does not provide assurance of payment within 20 days of the petition, the utility “may alter, refuse, or discontinue service” without seeking relief from the automatic stay.11 The problem comes for the utility when the debtor provides assurance of payment within 20 days of the petition but then defaults in payment of postpetition utilities—at least temporarily, the utility may be trapped by the automatic stay, supplying services without payment. Under those circumstances, the utility is best advised to immediately request relief from the stay.

[7]

Detailed elsewhere,12 the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)13 amended § 366(c) to provide a new definition of “assurance of payment” for postpetition utility services. The new 2005 definition specifically states that “an administrative expense priority shall not constitute assurance of payment.”14 New § 366(c)(4) also permits a utility to “recover or set off against a security deposit provided to the utility by the debtor before the date of the filing of the petition without notice or order of the court.”15 It is arguable that these 2005 amendments to § 366(c) are applicable only in Chapter 11 cases. If that argument holds, then Chapter 13 debtors may argue by negative implication that administrative expense priority is an available form of “assurance of payment” in a Chapter 13 case and that a utility may recover or set off against a security deposit in a Chapter 13 case only after first obtaining relief from the stay from the bankruptcy court.16

[8]

A postpetition request for relief from the stay by a utility is likely to provoke a modification of the plan to pay the debt in full.17 Priority treatment under §§ 503, 507 and 1322(a)(2) won’t get the utility postpetition interest or relief from the stay, but it may get the postpetition bill paid quickly because administrative expenses are typically, but not necessarily, paid ahead of other unsecured claims in Chapter 13 cases.18 If the postpetition utility supplier does not file a proof of claim or a (timely?) request for payment of an administrative expense, its debt may survive discharge.19

[9]

Characterization of postpetition utilities is further complicated by § 1327. Under § 1327(b), except as provided in the plan or order of confirmation, all property of the estate vests in the debtor at confirmation.20 Several courts have concluded that the estate disintegrates at confirmation; thus, there is no estate to be preserved, and postconfirmation utilities cannot meet the administrative expense definition in § 503(b).21 If postconfirmation utility bills cannot be administrative expenses because there is no estate to preserve under § 503(b), can such bills be allowable postpetition claims under § 1305?

[10]

And there are other interpretations of the “vesting effect” of confirmation under § 1327(b) that allow the estate to continue after confirmation or refill the estate with property—including wages—acquired after confirmation.22 The extent of the automatic stay and the extent to which a utility supplier could claim an administrative expense for services after confirmation will be different depending on the conception of the vesting effect in a district. This leaves the utility provider with anything but clarity about the nature of its claim for postconfirmation services. The risk of a stay violation is significant if the utility guesses incorrectly. Again, the safest strategy for the utility is to seek relief from the stay before discontinuing services based on a postconfirmation default in payments. If the estate continues to exist and if the plan provides full payment for administrative expenses, the utility may “request” full payment of its postconfirmation utility bills and couple that request with an alternative request for relief from the stay. The combination is likely to either get the debt paid or free the utility to stop supplying services.

[11]

Given that the Chapter 13 estate does exist between the filing of the case and confirmation, it is certainly arguable that postpetition, preconfirmation utility bills are administrative expenses under § 503(b) to the extent necessary for preservation of the estate. At confirmation, if the plan or order of confirmation does not provide otherwise, the vesting of property in the debtor under § 1327(b) might eliminate the administrative expense characterization, leaving only the possibility that utilities are postpetition claims under § 1305. On this construction, the utility supplier would have different rights and different routes to payment depending upon whether the postpetition utility expense arose before or after confirmation.

[12]

If the plan or order of confirmation preserves the estate,23 utility expenses necessary for preservation of the estate could arise at any time during the Chapter 13 case. Characterization of those charges as either administrative expenses under § 503(b)(1)(A) or postpetition claims under § 1305(a)(2) could create a patchwork of changing rights and strategies for the debtor and the supplier. Are postpetition utilities to heat a debtor’s home or cook food for the debtor’s table “necessary [for] . . . preserving the estate” under § 503(b)(1)(A) or merely “necessary for the debtor’s performance under the plan” under § 1305(a)(2)? Does the utility file a proof of claim or a request for payment? Is there a bar date or timeliness consideration?24 How many times does the debtor have to fail to pay a postpetition utility bill before the gas company or the electric company must talk to the trustee before supplying further service if the utility wants an allowable postpetition claim?25

[13]

If the Chapter 13 case is dismissed, characterization of the postpetition utility debt could make quite a difference for the utility supplier. If the case fails before confirmation and if unpaid postpetition utility services are administrative expenses under § 503(b), then the utility supplier can demand payment from any funds held by the Chapter 13 trustee before refund to the debtor under § 1326(a)(2).26 The utility must act quickly to request payment of its administrative expense. If postpetition utility services are postpetition claims under § 1305, the supplier will have only its state law remedies against the debtor and will have no rights in the funds held by the Chapter 13 trustee.

[14]

If the Chapter 13 case is converted to Chapter 7, characterization of the unpaid postpetition utilities again makes a difference for the supplier. If postpetition utilities were administrative expenses in the Chapter 13 case under § 503(b), then the utility debt has third priority of distribution, just behind the holders of domestic support obligations and administrative expenses in the Chapter 7 case under 11 U.S.C. § 726(b).27 Bankruptcy Rule 1019(6), consistent with § 503 of the Code, requires the utility with an administrative expense to request payment “before conversion or a time fixed by the court,” else the utility must prove cause for filing a tardy request.28 Typically a utility will not know that it has an unpaid administrative expense until long after it gets notice that a Chapter 13 case has converted to Chapter 7. Bankruptcy Rule 1019(6) contemplates that notice of the time fixed by the court for filing a request for payment of an administrative expense will be sent to all entities on the schedule of unpaid debts incurred during the Chapter 13 case.29

[15]

If postpetition utility services in the Chapter 13 case were postpetition claims under § 1305, upon conversion, § 1305 claims become ordinary unsecured claims in the Chapter 7 case under 11 U.S.C. § 348(d).30 Absent assets to liquidate and distribute, a § 1305 claim for postpetition utilities arising during the Chapter 13 case will be discharged without payment after conversion to Chapter 7.

[16]

The postpetition supplier of utility services is in an awkward position. If not being paid, the supplier may be better off requesting an administrative expense, unless the plan treats administrative expenses as priority claims—full payment without interest. The supplier would rather file proof of a § 1305 postpetition claim if the plan pays postpetition claims in full with interest. If the case fails, the postpetition utility would rather hold an administrative expense under § 503(b), in order to assert rights in the money held by the Chapter 13 trustee at dismissal, or to argue for (third) priority of distribution at conversion to Chapter 7. Neither characterization avoids discharge when the case converts to Chapter 7.31


 

1  See §§ 292.1 [ Taxes ] § 136.2  Taxes before BAPCPA, 302.1 [ Postpetition Claims ] § 137.1  Postpetition Claims before BAPCPA, 513.1 [ Taxes ] § 136.3  Taxes after BAPCPA and 524.1 [ Postpetition Claims ] § 137.2  Postpetition Claims after BAPCPA

 

2  See §§ 281.1 [ Postpetition Claims ] § 132.9  Postpetition Claims, 302.1 [ Postpetition Claims ] § 137.1  Postpetition Claims before BAPCPA, 350.1 [ Postpetition Claims ] § 158.6  Postpetition Claims, 513.1 [ Taxes ] § 136.3  Taxes after BAPCPA, 516.1 [ Utilities ] § 136.9  Utilities after BAPCPA and 524.1 [ Postpetition Claims ] § 137.2  Postpetition Claims after BAPCPA.

 

3  The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005), amended § 507(a), inserting domestic support obligations as first priority in § 507(a)(1) and moving administrative expense priorities to § 507(a)(2). See §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA and 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA.

 

4  See §§ 204.1 [ Providing for Postpetition Claims ] § 113.6  Providing for Postpetition Claims, 281.1 [ Postpetition Claims ] § 132.9  Postpetition Claims, 302.1 [ Postpetition Claims ] § 137.1  Postpetition Claims before BAPCPA and 350.1 [ Postpetition Claims ] § 158.6  Postpetition Claims.

 

5  See § 302.1 [ Postpetition Claims ] § 137.1  Postpetition Claims before BAPCPA.

 

6  11 U.S.C. § 1305(c). See § 302.1 [ Postpetition Claims ] § 137.1  Postpetition Claims before BAPCPA.

 

7  See §§ 98.1 [ Plan Must Provide Full Payment ] § 73.1  Plan Must Provide Full Payment, 99.1 [ What Claims Are Priority Claims? ] § 73.2  What Claims Are Priority Claims? and 291.1 [ Treatment of Priority Claims ] § 136.1  Treatment of Priority Claims.

 

8  See §§ 100.1 [ Deferred Payments Are Permitted ] § 73.4  Deferred Payments Are Permitted, 100.2 [ Interest Not Required, with Exceptions ] § 73.5  Interest Not Required, with Exceptions, 299.1 [ Postpetition Interest on Priority Claims ] § 136.16  Postpetition Interest on Priority Claims before BAPCPA and 516.1 [ Utilities ] § 136.9  Utilities after BAPCPA.

 

9  11 U.S.C. § 503(a). See §§ 275.2 [ In General: Filing is Required for Allowance ] § 132.2  In General: Filing is Required for Allowance, 279.1 [ Priority Claims, Including Requests for Payment of Administrative Expenses ] § 132.6  Priority Claims, Including Requests for Payment of Administrative Expenses, 281.1 [ Postpetition Claims ] § 132.9  Postpetition Claims and 524.1 [ Postpetition Claims ] § 137.2  Postpetition Claims after BAPCPA.

 

10  See §§ 91.1 [ Utility Stay and Continuing Service ] § 68.1  Utility Stay and Continuing Service and 437.1 [ Utility Stay Uncertainty ] § 68.2  Utility Stay Uncertainty after BAPCPA.

 

11  11 U.S.C. § 366(b). See Weisel v. Dominion Peoples Gas Co. (In re Weisel), 400 B.R. 457 (Bankr. W.D. Pa. Feb. 9, 2009) (Agresti) (Section 366 is self-executing and does not require stay relief when debtor fails to provide adequate assurance of payment within 20 days of the petition.).

 

12  See §§ 437.1 [ Utility Stay Uncertainty ] § 68.2  Utility Stay Uncertainty after BAPCPA and 524.1 [ Postpetition Claims ] § 137.2  Postpetition Claims after BAPCPA.

 

13  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

14  11 U.S.C. § 366(c)(4), as amended by Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

15  11 U.S.C. § 366(c)(4), discussed in §§ 437.1 [ Utility Stay Uncertainty ] § 68.2  Utility Stay Uncertainty after BAPCPA and 524.1 [ Postpetition Claims ] § 137.2  Postpetition Claims after BAPCPA.

 

16  See §§ 437.1 [ Utility Stay Uncertainty ] § 68.2  Utility Stay Uncertainty after BAPCPA and 524.1 [ Postpetition Claims ] § 137.2  Postpetition Claims after BAPCPA.

 

17  See §§ 245.1 [ Postpetition Claims and Relief from the Stay ] § 124.5  Postpetition Claims and Relief from the Stay and 261.1 [ To Provide for Postpetition Claims ] § 127.4  To Provide for Postpetition Claims.

 

18  See §§ 204.2 [ Order of Payments to Creditors ] § 113.7  Order of Payments to Creditors before BAPCPA and 501.1 [ Order of Payments to Creditors ] § 113.8  Order of Payments to Creditors after BAPCPA.

 

19  See §§ 350.1 [ Postpetition Claims ] § 158.6  Postpetition Claims and 359.1 [ On Administrative Expenses ] § 162.5  On Administrative Expenses. There is another possibility that confuses the issue more than resolves it. Postpetition utility services that do not meet the definition of postpetition claims under § 1305(a)(2) and do not meet the definition of administrative expenses under § 503(b)(1)(A) fall into a third category of debts arising after the petition that does not even have a name in Chapter 13 practice.

 

20  See § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate.

 

21  See, e.g., Martinez v. Public Serv. Co. (In re Martinez), 92 B.R. 916 (Bankr. D. Colo. 1988) (Postpetition, preconversion unpaid utility debts are not entitled to administrative priority under § 503 because, upon confirmation, the Chapter 13 estate revested in the debtor, and utility services thereafter could not be expenses for preservation of the estate.); In re Criss, 85 B.R. 459 (Bankr. N.D. Ohio 1988) (After confirmation there is no estate to be preserved, and thus unpaid postconfirmation utility bills cannot give rise to an administrative expense under § 503.).

 

22  See § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate.

 

23  See § 207.1 [ Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b) ] § 113.11  Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b).

 

24  See § 281.1 [ Postpetition Claims ] § 132.9  Postpetition Claims.

 

25  See 11 U.S.C. § 1305(c), discussed in § 302.1 [ Postpetition Claims ] § 137.1  Postpetition Claims before BAPCPA.

 

26  See §§ 314.1 [ On Postpetition Claims ] § 142.5  On Postpetition Claims, 315.1 [ In Cases Filed before October 22, 1994 ] § 143.1  In Cases Filed before October 22, 1994, 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2  In Cases Filed after October 22, 1994, 338.1 [ In General ] § 153.1  In General and 534.1 [ Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) ] § 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA. See also § 64.7 [ Compensation When Case Is Dismissed or Converted before Confirmation ] § 54.9  Compensation When Case Is Dismissed or Converted before Confirmation.

 

27  See §§ 314.1 [ On Postpetition Claims ] § 142.5  On Postpetition Claims and 534.1 [ Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) ] § 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA.

 

28  If the utility provider is a governmental unit, a maximum of “180 days after the date of the conversion” is allowed to request payment of an administrative expense. Fed. R. Bankr. P. 1019(6).

 

29  See § 314.1 [ On Postpetition Claims ] § 142.5  On Postpetition Claims.

 

30  See §§ 302.1 [ Postpetition Claims ] § 137.1  Postpetition Claims before BAPCPA and 314.1 [ On Postpetition Claims ] § 142.5  On Postpetition Claims.

 

31  See § 314.1 [ On Postpetition Claims ] § 142.5  On Postpetition Claims.