Bankruptcy Adequate Assurance for Utilities

Utilities typically face two related problems when customers file bankruptcy: Collection of any pre-petition payments and the expectation that the utility continue to provide service during the post-petition period.  11 U.S.C. §366 of the Bankruptcy Code allows utilities to require adequate assurance from debtors who have filed bankruptcy as a condition of continued utility service.  These adequate assurance payments prevent the threat of service termination to collect delinquent pre-petition debts while not forcing the utility to provide services that may never be paid, and §366 seeks to protect debtors by providing that "a utility may not alter, refuse, or discontinue service to, or discriminate against, the trustee or the debtor solely on the basis of the commencement of a case ..." § 366(b) also mitigates the risk to the utility by allowing the utility to "alter, refuse, or discontinue service" twenty days after the petition if a debtor does not provide "adequate assurance of payment." If the adequate assurance demanded by the utility is deemed too high, § 366(b) allows a party in interest to request a reasonable modification of the amount.

In Robinson v. Michigan Consolidated Gas Co. Inc., 918 F.2d 579 (6th Cir. 1990), the Sixth Circuit Court of Appeals commented that "[t]he intended effect of section 366(a) is to prevent a utility from withholding post-petition service in order to enforce payment of pre-petition debts, so long as the debtor or trustee provided adequate security for payment of future bills." Moreover, while a utility may not terminate service for failure to pay pre-petition arrearages and may not refuse to provide service during the 20 days following the filing of a bankruptcy petition, it may terminate service if the debtor or trustee fails to post adequate assurance of payment for post-petition service after expiration of the 20-day period.

Corporate debtors often enter into contracts with utility providers and where Chapter 11 allows these corporate debtors to reorganize and continue their business after the bankruptcy, it is important for utility providers to file a proof of claim and review the debtor's schedule of assets and liabilities for appropriate treatment.  Where a residential customer files bankruptcy, it is important to review any outstanding debt and the utility's available remedies, as water and sewerage charges may be secured debt, but most other utility pre-petition debt is an unsecured claim against the estate.  For this reason, it is prudent for the utility to file a proof of claim covering all pre-petition debt owed, because only those creditors who have filed a proof of claim prior to the bar date will receive money distributed by the trustee to unsecured creditors. If a utility does not file a proof of claim, or does not file its claim in a timely manner, it may not receive any money through the bankruptcy proceedings.  It is also important to attach copies of any utility service contracts and all outstanding bills to the proof of claim form in support of the pre-petition claim.