Discontinuing Utility Services when Customer Files for Bankruptcy

Utility Jones arrives for work as a water and sewer utility fee collection agent for a local government. He is met at the door by an irate customer, Dell Linquent, who claims that her water was shut off illegally the day before. Utility checks Dell’s account records and discovers that her water account is 35 days overdue. Utility confirms with Dell that she received both the original bill and a second notice warning that, according to the unit’s utility management ordinance, service would be disconnected 30 days after the bill became due if it was not paid in full. Dell, growing increasingly angry, continues to insist that the disconnection was unlawful. She threatens legal action against the local government and Utility himself if he does not turn her water back on immediately. Upon further questioning, Utility discovers that Dell filed a petition for Chapter 13 bankruptcy about a week ago. Dell maintains that because she filed for bankruptcy the local government is no longer allowed to disconnect her utility service for any reason. What should Utility Jones do?

Utility Jones should reconnect Dell’s water service immediately. Federal bankruptcy law—specifically 11 U.S.C. § 366(a)—prohibits a utility providing utility services, once a customer has filed a petition for bankruptcy, from “altering, refusing, or discontinuing service to, or discriminating against, a trustee or a debtor solely on the grounds that the debtor had not paid its prepetition debts when due.” The prohibition, however, only applies for a limited time and only applies with respect to delinquencies incurred before the bankruptcy filing. Thus, Dell is not correct that the local government is no longer allowed to disconnect her utility service for any reason. Let us look at the federal statutory requirements more closely.

Federal Bankruptcy Code

Very generally, bankruptcy is a process in which individuals and businesses eliminate or repay some or all of their debts under the protection of the federal bankruptcy court. There are six types of bankruptcy under the United States Bankruptcy Code, located at Title 11 of the United States Code and designated by chapter number: Chapter 7 (governs basic liquidation for individuals and businesses); Chapter 9 (governs municipal bankruptcies); Chapter 11 (governs rehabilitation or reorganization, primarily by business debtors but sometimes by individuals with substantial debts and assets); Chapter 12 (governs rehabilitation for family farmers and fishermen); Chapter 13 (governs rehabilitation with a payment plan for individuals with a regular source of income); and Chapter 15 (governs ancillary and other international cases). The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. Corporations and other business entities often file under Chapter 7 or Chapter 11. 11 U.S.C. § 366(a)’s (temporary) prohibition against disconnecting or refusing utility services to a customer who has filed for bankruptcy applies to all six bankruptcy methods. But, to what types of utility services does the statutory provision apply? The Bankruptcy Code does not define the term “utility services,” but

the legislative history indicates that [Section 366] was intended to cover utilities that have a special position with respect to the debtor, “such as an electric company, gas supplier, or telephone company that is a monopoly in the area so the debtor cannot easily obtain comparable services from another utility.” Such services as water, electricity, gas, and phones are typically regarded as necessary to meet minimum standards of living.

In re Moorefield, 218 B.R. 795, 796 (Bankr. M.D.N.C. 1997) (internal citations omitted). Based on this understanding, water, wastewater, electricity, and natural gas services provided by a local government likely constitute utility services for purposes of Section 366(a).

Terminating Services because of Pre-petition Debts

All Bankruptcies Except Chapter 11. For all bankruptcies other than those under Chapter 11, the prohibition against terminating utility services in Section 366(a) is conditioned on Section 366(b), which requires that the trustee or debtor furnish “adequate assurance of payment” for services provided after the bankruptcy petition is filed (post-petition services) to the utility within twenty days after the filing of the petition. Such adequate assurance may be in the form of a deposit with the utility or it may be given by some “other security,” either of which may be modified by order of court on request of a party in interest after notice and a hearing. Note that the adequate assurance of payment does not refer to payment of utility debts incurred before the bankruptcy petition is filed. (11 U.S.C. § 362(a) imposes an automatic stay on “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of” the bankruptcy petition.) It applies to payments for post-petition utility services. Furthermore, an adequate assurance of payment does not require an absolute guarantee of payment for post-petition services; what is required is that the utility be protected from an unreasonable risk of future nonpayment. During the twenty-day period, a local government may issue a demand letter for a deposit or other form of security, but it does not have to do so as a precondition to terminating service according to its usual policy if it does not receive some form of adequate assurance by the end of the twenty days. See In re Weisel, 400 B.R. 457 (Bankr. W.D.Pa. 2009). Section 366(a) temporarily protects a debtor’s access to utility services, whereas Section 366(b) affords some protection to the utility of receiving payment for services provided to a debtor after a bankruptcy petition is filed. Bankruptcy courts typically consider the particular facts of each case when determining the amount or type of assurance—balancing the interests of the debtor and the utility service provider. Chapter 11 Bankruptcies. Section 366(b) does not apply to a debtor who files a Chapter 11 petition; instead, Section 366(c) governs. If the debtor files a petition for bankruptcy under Chapter 11, a utility “may alter, refuse, or discontinue utility service, if during the thirty-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.” Unlike Section 366(b), Section 366(c) specifically defines the term "assurance of payment," as it applies to Chapter 11 debtors, to include a cash deposit, letter of credit, certificate of deposit, surety bond, prepayment of utility consumption, or another form of security that is mutually agreed on between the utility and the debtor or the trustee. (The statute explicitly states that administrative expense priority does not constitute an assurance of payment.) Thus, utility providers have greater protection with respect to Chapter 11 debtors. No matter what assurance of payment is agreed upon, however, it still may be modified by court order after a hearing. Note that Section 362(a) also imposes an automatic stay on collecting the pre-petition debts of Chapter 11 debtors. However, Section 366(c)(4) authorizes a utility to “recover or set off against a security deposit provided to the utility by the debtor before the date of the filing of the petition without notice or order of the court.”

Terminating Services because of Post-petition Debts

The provisions of 11 U.S.C. § 366 apply only to utility debts incurred before a bankruptcy petition is filed (pre-petition debts); it does not apply to delinquent utility payments that arise after the filing of the petition for bankruptcy. With respect to post-petition utility delinquencies, unless the local government utility and debtor-customer agree otherwise, the local government may pursue any remedies for collecting delinquencies authorized by state law and local ordinance or policy, including the discontinuance of utility services. See Jones v. Boston Gas Co., 369 B.R. 745 (B.A.P. 1st Cir. 2007). So, what should Utility Jones do? As stated above, Utility should reconnect Dell’s water service. Dell has 20 days from the date she filed her bankruptcy petition to provide some form of assurance to the local government that she will make future utility payments. She could offer to pay a deposit or provide another form of security. If the local government does not consider Dell’s offer of assurance adequate to protect its interests, it may seek modification from the bankruptcy court. If the local government does not receive any offer of assurance from Dell, it may terminate her service at the expiration of the 20-day period. Likewise, if Dell fails to make her post-petition utility payments, the unit may terminate her service according to its usual policies and procedures.