Public Utility Claims In Bankruptcy

Generally, when a utility customer defaults in repayment on a public utility bill outside of parameters of bankruptcy, the utility provider has the option to terminate service, but may be restricted by certain regulations pertaining to health care accounts and other situations. For example, many states prohibit termination of gas or electric service, or at least condition it, during inclement weather or when a user is in financial distress.¹  Most also require some type of notice to the user prior to termination. However, once a bankruptcy case is filed, a utility provider’s rights are governed by 11 U.S.C. §366.

Which Utilities are Governed by §366?   

Public utilities are subject to §366. They provide services that are considered a necessity and if discontinued, would cause a “crippling inconvenience” to the utility customer.² The only public utility that is not subject to §366 is cable television service to an individual.³ However, cable television service to a business may be a necessity. Imagine a sports bar with no cable television!

The First 20 Days – Chapter 7 and Chapter 13 Cases  

During the first 20 days of a Chapter 7 or Chapter 13 bankruptcy case, a provider has few options and is generally required to provide service to the new bankruptcy customer. During this time, Under §366, utility providers may not “alter, refuse, or discontinue service” solely because a bankruptcy was filed or because the customer has a pre-petition default.⁴ This means that utilities must provide these bankrupt customers with utility service during the first 20 days following a bankruptcy petition. In the event the utility service was terminated, it must be restored. If the individual customer accrued a pre-petition default, service may not be terminated upon the filing of a bankruptcy for that reason only, nor may it be terminated simply because a bankruptcy was filed. 

After 20 Days – Adequate Assurance of Payment in Chapter 7 and Chapter 13 

The above being said, utility providers do not have to maintain service indefinitely. Utility providers may discontinue service after lapse of 20 days from the bankruptcy petition, if a Chapter 7 or 13 filer does not provide “adequate assurance” of future payment.⁵ Bankruptcy courts are not required to, but may use state regulations as a guideline to determine when adequate assurance of payment is required and how much is appropriate. If a consumer debtor is not in default at the time of filing, a utility may not require a deposit or other “adequate assurance” of payment.⁶ However, if there is a pre-petition default, a utility may require a security deposit to restore or continue service. If a state regulation governs when a security deposit is required and how much, a utility is safe in applying that regulation to a debtor post-petition. 

The First 30 Days – Chapter 11 Cases  

The rules for continuing service change under chapter 11 of the bankruptcy code. In Chapter 11 cases, utilities can “alter, refuse, or discontinue service” if they do not receive “adequate assurance of payment…that is satisfactory to the utility within 30 days after the bankruptcy is filed.⁷

The First 30 Days –Adequate Assurance of Payment in Chapter 11

In a Chapter 11, the court may require adequate assurance of payment even if the filing customer is not in default of pre-petition payments.⁸

It is routine during the first 30 days of a Chapter 11 case for a customer to request an order prohibiting termination of utility service and approving a form of adequate assurance of payment to utilities. Adequate assurance may be a cash deposit, a letter of credit, a certificate of deposit, a surety bond, a prepayment, or other form of security that both the utility and the customer or trustee agree upon.⁹ Usually, what is adequate assurance is a case-by-case determination. “…[T]he court should consider the  payment history, the filer’s net worth, and the  present and future ability to pay post-petition obligations” when determining adequate assurance under §366.¹⁰ If a bankrupt customer classifies post-petition utility payments as an administrative expense priority, that alone is not adequate assurance of payment.¹¹

A utility provider may challenge an offer of adequate assurance and suggest to the court what it thinks is satisfactory assurance of payment. The court must balance the customer’s need for utility service with the utility provider’s right to be paid for the service

Set-Off and Termination  

Utility providers may set-off pre-petition deposits against pre-petition debts in all Chapters of the bankruptcy code.¹² No court order is necessary and doing so will not violate the automatic stay. In Chapter 13 cases, the utility provider must file a proof of claim to recover the pre-petition default, and will be paid the same dividend that all other general unsecured creditors will be paid through the plan. However, the utility provider is free to apply a deposit held pre-petition to the pre-petition debt before filing its proof of claim.

If the utility customer does not pay a security deposit within the 20 days in Chapters 7 and 13, the service may be terminated. If a Chapter 11 debtor does not provide satisfactory adequate assurance of payment, utility service may also be terminated. However, the utility provider must provide notice of termination in accordance with state regulation prior to shut off. 

Default After Adequate Assurance is Established 

In any Chapter of the bankruptcy code, if a utility customer who has filed for protection defaults on post-petition utility payments after a post-petition deposit has been made, or defaults on an order of adequate assurance, a utility provider may terminate service, after it follows any state law requirements on termination of service. 

Effect of Discharge or Dismissal 

Upon a Chapter 7, Chapter 13, or Chapter 11 discharge (Chapter 11 discharge occurs upon confirmation of a Chapter 11 plan), a utility provider may not pursue a debtor for pre-petition debt. If any case under any Chapter of the bankruptcy code is dismissed without a discharge, a utility provider may seek to collect on all defaulted debt, both pre- petition and post-petition.