Section 366 of the Bankruptcy Code gives debtors and debtors-in-possession protection against post-petition disconnection of services through providing utility providers with an ‘adequate assurance’ of payment.  Subject to other provisions of the Bankruptcy Code, utilities 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 under this title or that a debt owed by the debtor to such utility for service rendered before the order for relief was not paid when due.”  11 U.S.C. § 366(a).  Notwithstanding such protections, a utility may alter, refuse, or discontinue service if, within 20 days after an order for relief, the debtor or trustee fails to furnish adequate assurance of payment.  11 U.S.C. § 366(b).

In deciding what constitutes “adequate assurance” in a given case, a bankruptcy court must “focus upon the need of the utility for assurance, and to require that the debtor supply no more than that, since the debtor almost perforce has a conflicting need to conserve scarce financial resources.” In re Penn Jersey Corp., 72 B.R. 981, 985 (Bankr.E.D.Pa.1987).  Prior to the 2005 BACPA revisions a bankruptcy judge had a great deal of latitude in determining what was, and was not, adequate assurances of payment.  See In re Astle, 338 B.R. 855 (Bankr. D.Idaho 2006) (adequate assurance provided in form of first position, secured lien in amount of $44,162 in debtors’ cattle).  The Second Circuit observed that “in bankruptcy proceedings substance should not give way to form,” and “a bankruptcy judge must not be shackled with unnecessarily rigid rules when exercising the undoubtedly broad administrative power granted him under the [Bankruptcy] Code.” In re Financial News Network Inc., 980 F.2d 165, 169 (2d Cir.1992).

Prior to BACPA the bankruptcy courts often looked to the prepetition conduct of the debtor to consider the appropriateness of the monetary value of proposed adequate assurances of payment.  See, In re Best Products Co., 203 B.R. 51 (Bankr. E.D.Va. 1996) (adequate assurance in form of deposit of one half month average statement where debtor regularly made its utility payments in past and no default as of petition); In re 499 W. Warren Street Associates Ltd. Partnership, 138 B.R. 363 (Bankr. N.D.N.Y. 1991) (adequate assurance in form of deposit of one month average statement due to debtor’s solvency and ability to meet postpetition obligations); In re Spencer, 218 B.R. 290 (Bankr. W.D.N.Y. 1998) (adequate assurance in form of deposit of two months average monthly statement due to debtor’s prepetition defaults).  Post-BACPA Chapter 11 debtors in possession are required to provide assurance of payment through one of six forms: (i) cash deposit, (ii) letter of credit, (iii) certificate of deposit, (iv) surety bond, (v) prepayment of utility consumption, or (vi) another form mutually agreeable to utility and debtor or trustee.  11 U.S.C. 366(c)(1)(A).  Moreover, Section 366(c)(3)(B) now prohibits the consideration of prepetition payment history in addition to the absence of security before the date of the filing of the petition and the availability of an administrative expense priority.

When determining what constitutes adequate assurance of payment for continuing utility service, the bankruptcy court must engage in a fact-driven analysis to balance the utility provider’s need to be free from unreasonable risk of nonpayment and the debtor’s scarce financial resources during bankruptcy. In re Great Atlantic & Pacific Tea Co., Inc., 2011 WL 5546954 (Bankr. S.D.N.Y. Nov. 14, 2011) (citing to In re Adelphia Bus. Solutions, Inc., 280 B.R. 63, 81 (Bankr.S.D.N.Y.2002) (indicating that a two-week deposit was sufficient)).  “Courts will approve an amount that is adequate enough to insure against unreasonable risk of nonpayment, but are not required to give the equivalent of a guaranty of payment in full.” Great Atlantic, 2011 WL 5546954 at *5.  Great Atlantic also approved of the factor test used by the bankruptcy judge in arriving at the two-week deposit: (i) the debtor’s post-petition finances, (ii) the burden that an additional deposit would impose on the debtor, (iii) the presence of other accounts or funds which may protect the interests of the utilities, (iv) the ability of the utility to petition the court for additional assurances should case circumstances change; and (v) whether the utility providers were seeking assurances that were more than necessary.  Id.


E. Philip Groben
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