Wednesday, April 19, 2006

Section 366’s Requirements Have Not Changed for Some Debtors

Our prior post, “New Subsection 366(c) Protects Utility's Bargaining Power”, discussed the first case to interpret newly enacted subsection 366(c). The post discussed new barriers for chapter 11 debtors who seek to insure that utilities do not discontinue service following a bankruptcy filing under BAPCPA, on account of new requirements defining adequate assurance of payment and new procedures that take away the debtor’s bargaining power. A subsequent case interpreting the new subsection, In re Astle, 2006 WL 626184 (Bankr. D. Idaho 2006), makes clear that the more onerous forms of adequate assurance required under new section 366(c)(1)(A) apply only to chapter 11 cases. Thus, under Astle, pre-BAPCPA law will continue to govern the assurance of payment that a non-chapter 11 debtor must provide to secure continuity of utility service. Moreover, the decision arguably relieves non-chapter 11 debtors from the procedural uncertainties discussed in the prior posting, by implying that all of the changes to section 366 apply only to chapter 11 cases.

The Astles filed a “family farmer” bankruptcy under chapter 12 in November 2005 . Idaho Power, the Astles’ pre-petition power provider, refused to continue to provide power post-petition unless the Astles prepaid a deposit of $44,162, an amount equal to the Astles projected 2006 utility charges. Unwilling (and unable) to pay this large sum upfront, the Astles moved the bankruptcy court for a determination that a first priority lien in their 220 head dairy herd constituted adequate assurance of payment of the projected 2006 post-petition utility charges. Idaho Power objected to the Astels' motion, arguing that, as a provider of utility service, it was entitled to one of the forms of adequate assurance specified in new subsection 366(c)(1)(A), such as a cash deposit, a letter of credit, or a surety bond.

The court granted the Astles' motion, holding that section 366(c)(1)(A) does not apply to the Astles' case, which was filed under chapter 12. Rather, the court held that the onerous forms of adequate assurance found in new subsection apply only to chapter 11 cases. The first priority lien in the amount of $44,162 (in a herd valued at $390,000) constituted adequate assurance of payment under 366(b), the applicable section in this case, since, under pre-BAPCPA case law, adequate assurance of payment “does not require an absolute guarantee of payment. What is required is that the utility will be protected from unreasonable risk of nonpayment.”

To reach this conclusion, Judge Myers focused on the plain language of new subsection 366(c), rejecting legislative history as unnecessary because “Section 366(c)’s language and meaning are plain enough”. (This is probably true as to the section’s applicability to non-chapter 11 cases. But, as discussed in the prior posting “New Subsection 366(c) Protects Utility's Bargaining Power” the same cannot be said regarding its meaning in chapter 11 cases where the new subsection does apply). The court focused on the language of section 366(c)(1)(A), which states: “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; . . .”. (emphasis added). The court focused on Congress’ use of “this subsection”, rather than “this section”, and concluded that the language “is referring to subsection (c) alone.”

To determine what cases subsection (c) applies to, Judge Myers looked to section 366(c)(2), which “is itself limiting” in that it states: “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.” Thus, Judge Myers found that section 366(c)(1)(A) together with 366(c)(2) together indicate that the newly specified forms of adequate assurance of payment apply only to chapter 11 cases.

Judge Myers’ decision should give non-chapter 11 debtors substantial comfort in bargaining with utilities to continue service post-petition. Moreover, the decision has implications for newly added subsection 366(c)(4), which gives utilities a right to set off against a debtor’s pre-petition security deposit. This provision is also limiting, as it states: “with respect to a case subject to this subsection, a utility may recover or set off against a security deposit . . .”, (emphasis added), and thus may only apply to chapter 11 debtors as well.


Anonymous said...

It's been a month now, and the flood of interesting cases keeps churning. So is the Blog over and done with? That's a shame, because for a while it looked like the Rosetta Stone for this crazy Act. I guess it was nice while it lasted, eh?

Frodnesor said...

Never fear - several updates are in process and will be posted shortly. Lots of material to talk about, it's just tough keeping up!