Tuesday, November 29, 2005

New Subsection 366(c) Protects Utility's Bargaining Power

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA) amended 11 U.S.C. 366, by adding a new subsection (c) that provides additional protections for utilities. The first decision interpreting the new subsection will leave Chapter 11 debtors uncertain of how to insure that utilities do not discontinue service following a bankruptcy filing.

In In re Lucre, Inc., __ B.R. __, 2005 WL 3111078 (Bankr. W.D. Mich. 11/9/05), the debtor, a Competitive Local Exchange Carrier, filed an emergency motion thirteen days after filing its Chapter 11 petition seeking to extend the automatic injunction imposed by section 366(a) to prevent its power company and several telecommunications companies from discontinuing or refusing service. The debtor argued that the injunction should be continued notwithstanding new subsection 366(c) because the debtor made an offer of adequate assurance, and the utilities failed to respond.

The new addition of 366(c) creates a complicated timeline. Under subsection (a), a utility is basically prohibited from refusing or discontinuing service to a debtor, except as provided under subsection (b) and new subsection (c). Under subsection (b), the utility may not refuse or discontinue service if within 20 days after an order for relief, the debtor furnishes adequate assurance of payment (i.e. a deposit or other security) for service after that date; on request, the court can order reasonable modification of the amount of the deposit or other security. Under 366(c), in a Chapter 11 case, a utility may refuse or discontinue service, if within 30 days after the petition date, the utility does not receive adequate assurance of payment for utility service "that is satisfactory to the utility;" on request, the court may also order modification of the amount of such assurance of payment under 366(c).

With respect to the 10 day “gap” between section 366(b) and 366(c), the court explained that the debtor’s offer of adequate protection “stands on its own” and that the utility had the burden of seeking modification if it was not satisfied. However, the Lucre court refused to consider the Debtor's request to extend the subsection (a) injunction beyond the 30 days, on the basis that the statute requires "as a condition to continuing the injunction" either the utility's acceptance of the debtor's proposed adequate assurance, or the debtor's acceptance of the adequate assurance proposed by the utility. According to Judge Hughes, the debtor "has no recourse to modify the adequate assurance payment the utility is demanding until the [debtor] actually accepts what the utility proposes."

Thus, the court effectively held that new subsection 366(c) prevents a Chapter 11 debtor from moving quickly to determine adequate assurance of payment, and protects the bargaining power of the utility. Unfortunately, it does not quite answer the question of what to do when the utility simply refuses to negotiate. The court does suggest that a utility might be subject to an implicit obligation to bargain in good faith with the debtor before electing to discontinue service, and that a debtor may have the right to seek to enjoin the utilities from exercising their rights to discontinue under subsection (c). This seems to really ratchet up the burden on the debtor and the court, presumably requiring the filing of an adversary proceeding for injunctive relief and a motion for preliminary injunction before the 30th day if the debtor doesn't want to wait around and see if the lights go dark.

At the same time, the court limited the group of utility companies entitled to the benefits of new subsection (c). Judge Hughes pointed to the distinction between the use of “service” in subsections (a) and (b) and “utility service” in new subsection (c). The court held that this distinction indicated Congress’ intent that the new subsection only apply to utilities that provide services that the debtor itself actually consumes. In this case, two of the utilities provided wholesale telecommunications services, which were purchased by the debtor and passed on to its own customers, and for whom the debtor also provided reciprocal services under an interconnection agreement. The court held that these utilities did not provide “utility service” to the Debtor within the meaning of subsection (c), and are not entitled to the “more stringent” requirements of that subsection.

1 comment:

David Katzen said...

A utility ignoring an offer, thereby forcing suit for a TRO etc., might lose ground on the merits of "adequate assurance of payment." If the goal is getting paid, conscious stonewalling seems irrational--but bureaucratic inefficiency is always a risk.