Cite as: Keith M. Lundin, Lundin On Chapter 13, § 68.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
Section 366 of the Bankruptcy Code applies in Chapter 13 cases: a utility may not refuse or discontinue service to a Chapter 13 debtor if the debtor furnishes adequate assurance of payment in the form of a deposit or other security within 20 days after the petition.1
The salutary effects of § 366 in Chapter 13 cases are amply demonstrated in Tarrent v. Douglas, GA (In re Tarrent).2 A municipal electric company shut off the debtor’s service on the day it received notice of the Chapter 13 filing. The debtor’s attorney faxed the utility a copy of § 366, but the city refused to reinstate service. The debtor tendered a new deposit of $125 but was advised he had to pay prepetition account balances to restore electric service. The bankruptcy court found that the city violated the utility stay in § 366 and the automatic stay in § 362 and imposed substantial damages, including $190 for spoiled food and $32 for alternative lodging:
Section 366 places an affirmative duty on utilities to reinstate previously terminated services upon notice that a customer has filed a bankruptcy petition. . . . The City has a duty to restore power upon receiving notice of the bankruptcy filing without first seeking payment of any claims it had against the Debtor. The City failed to do so and thereby violated 11 U.S.C. § 366(a). . . . The City was not permitted to cut off power for a 20 day period following the petition. After the expiration of the 20 day period the City could only terminate Debtor’s service if it had not received adequate assurance of payment for post-petition services. The amount constituting adequate assurance of payment may be initially set by the utility, but if the debtor objects, the Court will determine what amount is reasonable after notice and a hearing. The City violated section 366(a) by refusing to immediately restore power, and then section 366(b) when the City established its own adequate assurance of payment prior to reconnection in the face of Debtor’s objection. . . . The City violated the automatic stay of section 362 by pursuing collection efforts of a pre-petition debt after receiving notice of Debtor’s bankruptcy petition. . . . The complete absence of any legal authority to support the legal positions taken by the City . . . places the City in violation of Fed. R. Bankr. P. 9011. The City will be held liable for Debtor’s actual damages incurred as a result of his loss of power, reasonable attorney’s fees incurred in bringing this adversary proceeding and punitive damages pursuant to 11 U.S.C. § 362(h). The City will also be required to return those funds Debtor paid in order to obtain restoration of utility service.3
Chapter 13 debtors are often delinquent in their utility payments at the petition. Sometimes it is the cutoff of electricity, gas or water that inspired the debtor to seek a bankruptcy lawyer. In some jurisdictions, the utility companies are enlightened about Chapter 13 and know that they cannot disconnect service, refuse to continue existing service, or refuse to restore already disconnected service during the protected 20-day period in § 366. A utility cannot discontinue service merely because the debtor proposes to compromise the repayment of prepetition delinquencies. The utility can discontinue service postpetition if the debtor fails within 20 days to provide adequate assurance of payment of postpetition bills. As one court stated, § 366 is “self-executing”—the utility provider can unilaterally terminate services without the necessity of stay relief if the debtor fails to timely furnish adequate assurance of payment.4 Typically, adequate assurance of payment of postpetition bills takes the form of a deposit.
Some utility companies have tariffs or written policies governing whether a new security deposit is required of a Chapter 13 debtor and in what amount. In some jurisdictions, there are local rules or general orders that fix the calculation of security deposits for utility companies in Chapter 13 cases.5 It has been held that the bankruptcy court is not bound by a state law that fixes a specific deposit for utilities in cases of delinquent residential customers.6
Typically, utility companies have a formula for calculating deposits based on some percentage or multiple of prior months’ service. The debtor may be required to make a cash deposit with utilities within 20 days of the petition to ensure continued service. Coming up with cash deposits at an early stage of the case is difficult, and debtor’s counsel should prepare the debtor for the problem.
If the debtor already has a security deposit with the utility, counsel may be able to negotiate continued service without an additional deposit. However, the utility may be entitled to relief from the stay to set off a prepetition security deposit against the prepetition delinquency.7
One reported opinion approves a clever mechanism for providing adequate assurance of future performance with respect to utilities in a Chapter 13 case. The plan in In re Epling8 offered adequate assurance of future payment of utilities through the debtor’s payments to the Chapter 13 trustee: “Any utility provider requiring an adequate assurance payment in the nature of a deposit shall file a separate claim with the Trustee for such deposit which shall be paid by the trustee as an administrative expense. No deposit shall be required of the Debtor(s) directly.”9 The bankruptcy court overruled a natural gas supplier’s objection to confirmation of this plan:
It seems entirely reasonable to this Court to permit debtors to include in their plan payments an allowance for any deposit demand a utility company may make. . . . [A] debtor’s plan provision which essentially earmarks a portion of the funds paid to the chapter 13 trustee for payment of any required deposit is adequate assurance of payment under § 366(b). . . . Rule 3015 of the Federal Rules of Bankruptcy Procedure requires the chapter 13 plan to be filed with the petition or within 15 days thereafter. That time frame is within the 20 days required by § 366 for the furnishing of adequate assurance. It is the proposed earmarking, followed by the actual payment to the trustee, that provide[s] the adequate assurance.10
In response to the gas company’s argument that dismissal of the Chapter 13 case would defeat its rights under § 366(b), the bankruptcy court replied: “Columbia would have a valid objection to any chapter 13 case in which the plan is not confirmed if the plan language fails to provide for the allowance under § 503(b)(1)(A) of any properly claimed utility deposit.”11
Another court granted motions that waived the postpetition deposit requirement for an electric utility in exchange for the following agreement:
The debtor agrees to continue paying prepetition and postpetition electrical service bills directly to Alabama Power Company in the ordinary course of business as adequate assurance of future payment under Section 366 of the United States Bankruptcy Code. The debtor further agrees that the automatic stay does not apply to Alabama Power Company’s efforts to collect electrical service debt. . . . Alabama Power Company would have a right to request a deposit postpetition but for the agreement. . . . The Court concludes that the agreement is reasonable, not prejudicial to other creditors, and is a fair bargain considering the law.12
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA),13 amended § 366(c) to define “assurance of payment” to exclude administrative expense priority.14 Although not completely clear, this prohibition against use of administrative expense priority to provide assurance of future utility payments probably applies only in Chapter 11 cases.15 If the 2005 amendments to § 366(c) are interpreted to apply only in Chapter 11 cases, Chapter 13 debtors are armed to argue congressional intent that administrative expense priority is an available form of assurance of payment in a Chapter 13 case. This same logic would require a utility to seek relief from the stay before recovering or setting off against a security deposit in a Chapter 13 case.16
Counsel should advise the debtor of the importance of the timely payment of postpetition utility bills. The regular payments for utilities should be budgeted in Schedule J to Official Bankruptcy Form 6.17 A debtor’s failure to make postpetition utility payments indicates there will be trouble proving feasibility at confirmation and trouble completing payments under the plan.18
Chapter 13 debtors engaged in business sometimes have special problems dealing with utilities. A debtor engaged in business will often have guaranteed or posted a deposit for the utility service to the debtor’s business. The business itself may or may not also be in bankruptcy. If the debtor’s business is a sole proprietorship, § 366 applies and a utility may not refuse or discontinue service to the business within 20 days after the petition but may require assurances of future payment after the 20 days. If the business is a separate entity from the debtor (a corporation, for example), the utility stay in the debtor’s Chapter 13 case may be no protection from utilities serving the business. If the debtor has guaranteed utility service to a (nondebtor) business, the guarantee agreement is an asset (or liability) of the Chapter 13 estate, and it has been held that the automatic stay prohibits action by a prepetition creditor to alter or terminate the debtor’s guaranty.19
The reach of the utility stay in § 366 is limited to services that qualify as utilities. The Bankruptcy Code does not define the term utility. In one Chapter 13 case, a debtor argued that a cable TV franchise was a utility that could not refuse service without violating § 366. The bankruptcy court concluded that the cable franchise was not a utility for § 366 purposes, explaining as follows:
The Bankruptcy Code does not define the term “utility” but the legislative history indicates that this section was intended to cover those utilities that have a 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 the debtor cannot easily obtain comparable services from another utility.” . . . [T]he Time Warner franchise with the City of Lexington . . . is a nonexclusive franchise. Even if the court were to find that Time Warner had a monopoly as the provider of cable services, Time Warner would not come under the umbrella of 11 U.S.C. § 366 and would be free to terminate or disconnect services provided to the Debtor. . . . [C]able television does not rise to the level of importance of the other utilities listed under the legislative history. . . . Cable television is not a necessity.20
1 11 U.S.C. § 366, as amended by Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005), provides, in part:
(a) Except as provided in subsection (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.
(b) 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.
2 190 B.R. 704 (Bankr. S.D. Ga. 1995).
3 190 B.R. at 707–12.
4 Weisel v. Dominion Peoples Gas Co. (In re Weisel), 400 B.R. 457 (Bankr. W.D. Pa. Feb. 9, 2009) (Agresti).
5 See, e.g., Tabor v. General Tel. Co., 46 B.R. 677 (Bankr. S.D. Ohio 1985) (General orders of bankruptcy court fix $75 as adequate assurance of future payments for a public utility. Utility that disconnected phone service after the petition and applied a payment from the Chapter 13 trustee’s office to the debtor’s prepetition delinquency was found in contempt for demanding a $600 deposit.).
6 In re Spencer, 218 B.R. 290, 293–94 (Bankr. W.D.N.Y. 1998) (Although bankruptcy court is not bound by state law which fixes a two-month maximum deposit for utilities in cases of delinquent residential customers, “I hold that absent extraordinary circumstances . . . public utilities . . . can pursuant to Section 366(b), require from a residential customer debtor who was delinquent prepetition, . . . a security deposit . . . equal to the sum of the highest two monthly statements, without late charges, during the previous twelve months of service, or during the actual period of service if it has been for less than twelve months.” In addition, utility may seek an order on shortened notice for immediate termination of service if a Chapter 13 debtor fails to pay a postpetition monthly statement within 10 days of its due date.).
7 See In re Coleman, 52 B.R. 1 (Bankr. S.D. Ohio 1985). See also §§ 72.1 [ Setoffs and Recoupments ] § 58.12 Setoffs and Recoupments and 437.1 [ Utility Stay Uncertainty ] § 68.2 Utility Stay Uncertainty after BAPCPA.
8 255 B.R. 549 (Bankr. S.D. Ohio 2000).
9 255 B.R. at 551.
10 255 B.R. at 552–53.
11 255 B.R. at 553. See also §§ 64.7 [ Compensation When Case Is Dismissed or Converted before Confirmation ] § 54.9 Compensation When Case Is Dismissed or Converted before Confirmation and 338.1 [ In General ] § 153.1 In General.
12 In re Wells, 280 B.R. 701, 702 (Bankr. S.D. Ala. 2001).
13 Pub. L. No. 109-8, 119 Stat. 23 (2005).
14 11 U.S.C. § 366(c)(1)(B), discussed in § 437.1 [ Utility Stay Uncertainty ] § 68.2 Utility Stay Uncertainty after BAPCPA.
15 See § 437.1 [ Utility Stay Uncertainty ] § 68.2 Utility Stay Uncertainty after BAPCPA.
16 See 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.
17 See §§ 35.10 [ Schedules I and J—Income and Expenditures ] § 36.16 Schedules I and J—Income and Expenditures, 470.1 [ Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Applicable Median Family Income ] § 93.1 Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income, 474.1 [ In General ] § 95.1 In General and 484.1 [ Home Energy Costs ] § 95.27 Home Energy Costs.
18 See § 198.1 [ Able to Make Payments and Comply with Plan ] § 111.1 Able to Make Payments and Comply with Plan.
19 Schnippel v. City of Piqua (In re Schnippel), 121 B.R. 784 (Bankr. S.D. Ohio 1990).
20 In re Moorefield, 218 B.R. 795, 796–97 (Bankr. M.D.N.C. 1997). Accord Darby v. Time Warner Cable, Inc. (In re Darby), 470 F.3d 573, 575 (5th Cir. Nov. 14, 2006) (Jones, Smith, Stewart) (“Cable service is only a convenience, not a necessity. . . . Therefore, cable service is not covered by § 366, and Time Warner is not required to reinstate Darby’s service despite his offer of adequate assurance of future payments.”).