Cite as: Keith M. Lundin, Lundin On Chapter 13, § 68.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)1 made changes to the utility stay in § 366 that are of uncertain effect in Chapter 13 cases.
Detailed elsewhere,2 a utility cannot alter, refuse or discontinue service to a Chapter 13 debtor for 20 days after the petition, and this special protection continues if the debtor “furnishes adequate assurance of payment, in the form of a deposit or other security, for service after such date.”3 Prior to BAPCPA, it was common for debtors to offer an administrative expense priority as adequate assurance of payment of postpetition utility bills. BAPCPA added a new subsection (c) to § 366 that eliminates administrative expense priority as a permitted form of adequate assurance and provides new setoff rights as follows:
(c)(1)(A) For purposes of this subsection, the term “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 the trustee.
(B) For purposes of this subsection an administrative expense priority shall not constitute an assurance of payment.
(2) Subject 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.
(3)(A) On request of a party in interest and after notice and a hearing, the court may order modification of the amount of an assurance of payment under paragraph (2).
(B) In making a determination under this paragraph whether an assurance of payment is adequate, the court may not consider—
(i) the absence of security before the date of the filing of the petition;
(ii) the payment by the debtor of charges for utility service in a timely manner before the date of the filing of the petition; or
(iii) the availability of an administrative expense priority.
(4) Notwithstanding any other provision of law, with respect to a case subject to this subsection, a utility may 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.4
The obvious first issue is whether new § 366(c) applies in Chapter 13 cases. The introductory phrase “for purposes of this subsection” in § 366(c)(1)(A) arguably refers to subsection (c) only. Section 366(c)(2) then addresses the provision of adequate assurance of payment for utility service but only “with respect to a case filed under chapter 11.”5 There being no reference in new subsection 366(c) to Chapter 13, a convincing argument is available that the definition of the term “assurance of payment” is not changed in other subsections of § 366 and is not changed for cases under any chapter other than Chapter 11. In a Chapter 12 case, one court has read the statute just this way to conclude that the new definition of adequate assurance of payment of a utility in § 366(c) applies only in Chapter 11 cases.6
The “legislative history”7 of new § 366(c) is not quite so clear:
Utility Service. Section 417 amends section 366 of the Bankruptcy Code to provide that assurance of payment, for purposes of this provision, includes a cash deposit, letter of credit, certificate of deposit, surety bond, prepayment of utility consumption, or other form of security that is mutually agreed upon by the debtor or trustee and the utility. It also specifies that an administrative expense priority does not constitute an assurance of payment. With respect to chapter 11 cases, section 417 permits a utility to alter, refuse or discontinue service if it does not receive adequate assurance of payment that is satisfactory to the utility within 30 days of the filing of the petition. The court, upon request of a party in interest, may modify the amount of this payment after notice and a hearing. In determining the adequacy of such payment, a court may not consider: (1) the absence of security before the case was filed; (2) the debtor’s timely payment of utility service charges before the case was filed; or (3) the availability of an administrative expense priority. Notwithstanding any other provision of law, section 417 permits a utility to recover or set off against a security deposit provided prepetition by the debtor to the utility without notice or court order.
H.R. Rep. No. 109-31(I), 109th Cong., 1st Sess. 88 (2005).
If § 366(c) only applies in Chapter 11 cases, then the 2005 changes to the utility stay offer interesting arguments to Chapter 13 debtors by negative implication. For example, if the exclusion of administrative expense status as an available form of “assurance of payment” in § 366(c)(1)(B) is only applicable in Chapter 11 cases, then Chapter 13 debtors are not subject to the same limitation and Chapter 13 debtors can furnish “adequate” assurance of payment by offering administrative expense priority for postpetition utility services.8 If adequate assurance of payment must be “satisfactory to the utility” only in Chapter 11 cases under § 366(c)(2), then a different measure of satisfaction applies in Chapter 13 cases. New § 366(c)(3)(B) dramatically restricts consideration of prepetition payment history or the prepetition security deposit arrangement to determine adequate assurance of payment after the petition. If this provision applies only in Chapter 11 cases, then Chapter 13 debtors have greater leeway to prove the adequacy of an offer of assurance of payment based on prepetition performance. Similarly, if § 366(c)(4) allows a utility to set off against a security deposit “without notice or order of the court” only in Chapter 11 cases, then, by negative implication, utilities in Chapter 13 cases must give notice and must get court orders (relief from the stay?) before they exercise setoff rights in any prepetition deposit. Some will see in § 366(c) as amended by BAPCPA a set of special rules for Chapter 11 practice that changed nothing about the utility stay in Chapter 13 cases. Others will see the law of unintended consequences at work.
If new § 366(c) is interpreted to apply in Chapter 13 cases, managing utility service will become more complicated. Chapter 13 debtors will have to offer a cash deposit or one of the equivalents listed above during the 20 days after the petition to be positioned to argue that adequate assurance has been furnished to a utility.
If “case subject to this subsection” reaches a Chapter 13 case, new § 366(c)(4) authorizes a utility to gobble up any prepetition security deposit by setoff against any prepetition debt for utility service owed by the debtor. No notice or order is required for this setoff, and “notwithstanding any other provision of law” could provide an exception to the automatic stay and to the codebtor stay for utility setoff of a prepetition security deposit in Chapter 13 cases.
If applied to Chapter 13 cases, the BAPCPA changes to § 366 foretell that Chapter 13 debtors will have more problems with utilities. Debtors’ counsel will need to advise debtors that a deposit may be necessary during the early weeks of the Chapter 13 case for each utility, especially if the debtor comes into the Chapter 13 case with prepetition utility arrearages. Cash is more likely to be the required assurance of future payment than before BAPCPA. Pre-BAPCPA arguments that a prepetition security deposit continues to provide adequate assurance of payment are weightless if there is any prepetition arrearage against which a setoff can now proceed without court approval.
Without regard to whether BAPCPA changed the rules for assurance of payment of utilities, it is clear that § 366(b) puts a Chapter 13 debtor at great risk of losing utility services if the debtor does nothing during the 20 days after the petition. In Weisel v. Dominion Peoples Gas Co. (In re Weisel),9 the bankruptcy court concluded that § 366(b) is “self-executing” and does not require stay relief. When the debtor in Weisel failed to furnish adequate assurance of future payments within 20 days of the petition, the utility provider was free to unilaterally terminate services.
It is also worth mentioning that nothing in the BAPCPA amendments to § 366 changed the obligation of a Chapter 13 debtor to pay postpetition utility bills. In a post-BAPCPA decision, the bankruptcy court in In re Jones10 concluded that the cutoff of gas by a utility based on lack of security and failure to pay postpetition bills is consistent with § 366 and does not violate any stay. As stated by the court:
[I]f the discontinuance of post-petition service for lack of adequate security does not require court authorization, then neither does discontinuance of postpetition service for lack of both security and payment. . . . [Section] 366 . . . does expressly authorize discontinuance of service in the circumstances of this case.11
The message for Chapter 13 debtors is that the 20-day respite with respect to utilities in § 366 is not an excuse for failure to pay postpetition utility bills. The BAPCPA amendments to § 366(c) may be interpreted to make dealing with utilities more complicated but also offer new opportunities for debtors to argue that the utility stay is more robust in Chapter 13 cases than in Chapter 11 cases.
1 Pub. L. No. 109-8, 119 Stat. 23 (2005).
3 11 U.S.C. § 366(b), discussed in § 91.1 [ Utility Stay and Continuing Service ] § 68.1 Utility Stay and Continuing Service.
4 11 U.S.C. § 366(c), as amended by Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005).
5 11 U.S.C. § 366(c)(2).
6 See In re Astle, 338 B.R. 855 (Bankr. D. Idaho 2006).
7 See § 361.1 [ A Short History, Including “Legislative History,” of BAPCPA ] § 2.2 Brief History, Including “Legislative History,” of BAPCPA.
8 See also §§ 91.1 [ Utility Stay and Continuing Service ] § 68.1 Utility Stay and Continuing Service, 295.1 [ Utilities ] § 136.8 Utilities before BAPCPA, 516.1 [ Utilities ] § 136.9 Utilities after BAPCPA and 524.1 [ Postpetition Claims ] § 137.2 Postpetition Claims after BAPCPA.
9 400 B.R. 457 (Bankr. W.D. Pa. Feb. 9, 2009) (Agresti).
10 No. 06-10105-RS, 2006 WL 2865237 (Bankr. D. Mass. Oct. 5, 2006) (unpublished).
11 2006 WL 2865237, at *1, aff’d, 369 B.R. 745, 752 (B.A.P. 1st Cir. June 8, 2007) (“[A] utility does not run afoul of the automatic stay provisions in a Chapter 13 bankruptcy case by terminating service based on a debtor’s failure to pay for post-petition service. . . . [W]e . . . acknowledge that in spite of our decision, Chapter 13 debtors are not stripped of all protection against termination based on post-petition defaults. . . . [F]aced with a notice of termination, a debtor could seek to modify the Chapter 13 plan to include the post-petition arrears within the plan.”).