Tough Times

1
Tough Times

• An Electric Utilitys Rights and Obligations When
  a Customer Files for Bankruptcy.

2
US Bankruptcy Trend

• U.S. consumer bankruptcy filings rose 37 in May
  compared with the same period last year,
  according to figures released by the American
  Bankruptcy Institute.
• The figures show total filings in May were
  124,838, up from 91,214 recorded in May 2008.
• At that pace, the ABI expects more than 1 million
  will seek bankruptcy protection by December.

3
US Bankruptcy Trend

• US business bankruptcy filings are also on the
  rise, having nearly doubled from this time last
  year.
• According to Automated Access to Court
  Electronic Records (AACERs) count, there were
  over 7,500 commercial bankruptcy filings for the
  month of May, or 375 business filings per day.

4
US Bankruptcy Trend

• The weak economy and its repercussions are all
  playing a role in the big increase
• Rising unemployment,
• Lower pay,
• Fewer people with health insurance, and
• The mortgage and foreclosure crises
• However, the biggest factor in the current spate
  of filings may be the tightening of credit both
  businesses and consumers are unable to borrow to
  stay out of bankruptcy.

5
Customer Bankruptcy

• When petitioning for bankruptcy, both individual
  and business debtors often require the
  continuation of utility services.
• Recognizing the distinct characteristics of
  utility service provision and the particular
  needs of debtors, Congress enacted a
  utility-specific provision in the Federal
  Bankruptcy Code. (11 U.S.C. 366)

6
Section 366(a)

• In general, 366(a) prohibits a utility from
  altering, refusing, or discontinuing service to,
  or discriminating against, a debtor solely on the
  basis of
• the commencement of a bankruptcy case, or
• that a debt owed to the utility for service
  rendered before the order for relief was not paid
  when due.
• In other words, a utility may not discontinue
  service based on pre-bankruptcy debt owed to it
  by the debtor.

7
Section 366(b)-(c)

• This prohibition, however, is conditioned on
  366(b), which requires that the debtor furnish to
  the utility "adequate assurance of payment" for
  post-bankruptcy utilities service within 20 days
  after the filing of the petition.
• Under 366(c), the prohibition against altering,
  refusing, or discontinuing service for cases
  filed under Chapter 11 is extended to 30 days
  after the filing of the petition.

8
Adequate Assurance of Payment

• If the debtor fails to provide the utility with
  adequate assurance of payment within the
  specified time, the utility may alter, refuse, or
  discontinue service, subject to state
  requirements.
• Notwithstanding the ability to demand adequate
  assurance of payment, a utility is still
  prohibited from discriminating against the debtor
  just because of the bankruptcy or pre-bankruptcy
  debt.

9
Other Valid Reasons

• The 366(a) prohibition is limited to actions
  taken solely on the basis of the commencement of
  the case or because the debtor has not paid for
  pre-petition services.
• If the utility has any other valid reason, the
  366(a) prohibition should not prevent the
  utility from terminating service.
• Valid pre-petition reasons may include tampering,
  theft, or breach of another contract provision.

10
Post-Petition Utilities Service

• Post-petition service is not covered by the
  366(a) prohibition and a utility is permitted to
• Terminate service for failure to provide adequate
  assurance of payment as specified in 366(b)-(c)
• Terminate service based on failure to pay
  post-petition utilities charges
• Apply a deposit provided to supply adequate
  assurance to satisfy post-petition charges
  without advance approval from the court
• Pursue non-bankruptcy remedies to collect unpaid
  post-petition charges

11
What is Adequate Assurance of Payment?

• Adequate assurance of payment may include
• A cash deposit
• A letter of credit
• A certificate of deposit
• A surety bond
• A prepayment of utility consumption
• In a case filed under Chapter 11, granting
  administrative expense priority does not
  constitute adequate assurance of payment.

12
Offering Adequate Assurance of Payment

• Under 366, the debtor will make an offer of
  assurance within the specified time period.
• A utility has the ability to refuse the offer and
  demand whatever adequate assurance it deems
  appropriate.
• However, the debtor is entitled to have the
  bankruptcy court reasonably modify the adequate
  assurance required by the utility.

13
Determining If Assurance of Payment is Adequate

• In a case filed under chapter 11, a court
  determining whether assurance of payment is
  adequate may not consider
• The absence of security before the date of the
  petition
• The payment by the debtor of charges for utility
  service in a timely manner before the date of the
  filing of the petition or
• The availability of an administrative expense
  priority

14
Standard Deposit Requirement

• Evidence of a standard or regulated deposit
  requirement would be relevant in a hearing on
  adequate assurance.
• However, nothing in the Code indicates that
  deposit requirements fixed by local utilities are
  binding upon the bankruptcy court in an adequate
  assurance hearing.

15
Debtor Discrimination

• 366 appears to allow a utility the unfettered
  ability to demand and receive whatever adequate
  assurances it wants.
• However, a utility is still prohibited from
  discriminating against a debtor because of the
  bankruptcy filing.

16
Debtor Discrimination

• A charge or condition imposed on a debtor in
  bankruptcy is obviously not discriminatory if
  others who fail to pay for utility service or all
  new customers of the utility are treated the same
  way.
• A best practice might be to make the amount of
  the adequate assurance demanded equal to the
  security demanded of other similarly situated
  customers not in bankruptcy (i.e., a deposit
  requirement that tracks a customers credit
  rating, payment timeliness history, etc.).

17
Notice of Filing

• Within 7-10 business days of the filing of the
  bankruptcy petition, the bankruptcy court mails a
  notice of the bankruptcy filing to all creditors
  listed in the bankruptcy petition and schedules.
• Once a utility has been notified of a bankruptcy
  filing, they must immediately stop all
  collections efforts against the debtor.

18
Filing Proof of Claim

• A proof of claim informs all parties of your
  claim against the debtor and is required in order
  to receive any distribution from the bankruptcy.
• There are deadlines for filing of proofs of claim
  and late filings may not share in distributions.
  
• A proof of claim must be accompanied by
  documentation of the debt owed.
• There are severe penalties for filing a false
  proof of claim, so care should be taken in
  ascertaining the exact details of a claim before
  filing.

19
Pre-petition Deposits

• With respect to a Chapter 11 case, 366(c)(4)
  specifically permits a utility to recover or set
  off against a pre-petition deposit without notice
  or order of the court.
• This right to offset is not specifically granted
  in the Bankruptcy Code for cases filed under
  Chapters 7 or 13.
• However, FL case law suggests that a utility can
  apply a pre-petition deposit to pre-petition debt
  under a theory of recoupment.
• See Checkers Drive-In Restaurant v. Tampa
  Checkmate Food Services, 858 So.2d 1080 (FL 2nd
  DCA 2003).

20
Preferential Payments

• A utility may be required to turn over to the
  estate money improperly received in payment of a
  pre-petition debt.
• Under 547, a trustee may recover payments made
  90 days before the bankruptcy filing where the
  payment gave the creditor more than other,
  similarly situated, creditors would get through
  the bankruptcy process. 
• This is called a preferential payment or
  preference.

21
Ordinary Course of Business Exception

• The most important exception to the preference
  rule is for transfers made in the ordinary
  course of business.
• A transfer is not preferential if
• the debt was incurred in the ordinary course of
  both the debtor and the transferee,
• the transfer itself was made in the ordinary
  course of both the debtor and the transferee, and
  
• the transfer was made according to ordinary
  business terms.  

22
Terminating Utility Service Under Florida Law

• Although not binding on municipal utilities, the
  PSC has established procedural requirements for
  terminating electric utility service.
• A utility may refuse or discontinue service
• For non-payment of bills or non-compliance with
  the utilitys rules and regulations, and
• only after there has been a diligent attempt to
  have the customer comply,
• including at least 5 working days written notice
  to the customer, such notice being separate and
  apart from any bill for service.

23
Medically Essential Service

• Florida law also requires public utilities to
  follow special procedures for terminating
  electric service that is medically essential.
• 366.15 provides that -
• A public utility must notify the customer by
  telephone 24 hours before any scheduled
  disconnection for nonpayment of bills.
• If the customer cannot be reached by telephone,
  the public utility shall send a representative to
  the customer's residence no later than 4 p.m. on
  the day before scheduled disconnection.
• If contact is not made, the public utility may
  leave written notification at the residence
  advising the customer of the scheduled
  disconnection.
• Thereafter, the public utility may disconnect
  service on the specified date.

24
Questions?

• Contact
• Jody Lamar Finklea, Esq.
• [phone]
• jody.finklea_at_fmpa.com