The Trail of Bankruptcy,
Collections and Bad Debt
for the
Tennessee Valley Public Power Association
2011 Accounting and Finance Conference
October 19-21, 2011
by
Nicholas W. Whittenburg
Miller & Martin PLLC
832 Georgia Ave., Suite 1000
Chattanooga, TN 37402
Phone: (423) 756-6600
Facsimile: (423) 785-8480
nwhittenburg@millermartin.com
Bankruptcy Issues and Trends
1. Post-bankruptcy termination of service
2. Assuring payment for post-bankruptcy service
3. Collecting pre-bankruptcy invoices:
a. Automatic Stay
b. Setoff vs. Recoupment
c. Recovery under LC or Bond
d. Liquidating and filing a Proof of Claim
e. Prosecuting Administrative Claims
4. Electricity: A Product or Service
5. Defending Preferential Transfer Litigation
Post-Bankruptcy Service
The Bankruptcy Code (§366(a)) precludes
a utility from altering, refusing or
discontinuing service or discriminating
against a debtor or trustee solely on the
basis of the filing of bankruptcy or nonpayment of a pre-bankruptcy debt.
When May Service Be Terminated?
1. If the debtor/trustee fails to pay for postpetition service. In re Robinson, 918 F.2d
579 (6th Cir. 1990); In re Begley, 760
F.2d 46 (3d Cir. 1985).
2. If debtor/trustee fails to timely provide
“adequate assurance of future payment.”
3. Termination must be consistent with the
customer’s contract, regulations, and
applicable non-bankruptcy law.
Adequate Assurance in Chapter 7,
12 and 13 Cases
1. Debtor/Trustee required to furnish
“adequate assurance” within 20 days of the
commencement of bankruptcy.
2. Form of “Adequate Assurance” - May be a
security deposit or “other security.”
3. Amount of “Assurance” – Within the
discretion of the Bankruptcy Court. Courts
consider whether pre-bankruptcy security
deposit was paid, payment history,
applicable regulations, and debtor’s financial
condition.
Adequate Assurance in Chapter 11
Following BAPCPA of 2005
1.
2.
3.
4.
Debtor required to furnish adequate assurance “satisfactory to
the utility” within 30 days.
Form of “Adequate Assurance” - (i) cash deposit; (ii) LC; (iii)
CD; (iv) surety bond; (v) prepayment; (vi) or any other form
agreed to by utility.
- BAPCPA overturned In re Caldor, 117 F.3d 646 (2nd Cir.
1997) (holding that administrative priority afforded postbankruptcy providers was “adequate assurance.”)
- Practice developing in large cases of establishing a
segregated utility deposit account containing
50% of the debtor’s estimated average monthly
utility costs.
Absence of prior deposit and payment history irrelevant in
Chapter 11.
Procedural Burdens:
a. Venue – Often New York or Delaware
b. First Day Motions – Inadequate notice and expedited
hearings)
Judicial Decisions
1.
2.
In re Lucre Inc., 333 B.R. 151 (Bankr. W.D. Mich 2005)
Held that, “as a condition to continuing the injunction”
prohibiting utility from discontinuing service and any
modification of “adequate assurance”, the debtor must
first provide a deposit or other security “satisfactory” to
utility.
In re Syroco Inc., 374 B.R. 60 (Bankr. D. Puerto Rico
2007)
a. Held that utilities’ failure to respond to debtor’s offer
to post a deposit equal to average cost of 2 weeks of
service is a tacit acceptance of the debtor’s offer of
adequate assurance.
b. Court declined to follow Lucre.
Court Decisions Cont.
3. In re Bedford Town Condominium, 427 B.R.
380 (Bankr. D. Md. 2010); In re Circuit City
Stores, Inc., 2009 W.L. 484553 (Bankr. E.D.
Va. 2009); In re Beach House Property, LLC,
2008 W.L. 961498 (Bankr. S.D. Fla. 2008)
a. All rejected as absurd the Lucre decision.
b. Held that the court may modify the amount
of adequate assurance demanded by a utility
even though the debtor has not yet paid that
amount.
Court Decisions Cont.
4. In re Viking Offshore (USA) Inc., 2008 W.L. 782449
(Bankr. S.D. Tx 2008)
a. Debtor proposed no adequate assurance. Instead,
proposed a procedure whereby utilities must request
adequate assurance.
b. Court held that the court’s authority to modify the
amount of adequate assurance may not be used to
eliminate entirely the requirement in section 366(c)
that a debtor provide adequate assurance of
payment.
c. Court agreed with Lucre decision noting that it lacks
the power to reverse the statutory framework for
provision of adequate assurance.
Court Decisions Cont.
5.In re New Rochelle Telephone Corp., 397
B.R. 633 (Bankr. E.D. N.Y. 2008)
a. “Adequate assurance . . . is not a
guarantee of payment; rather, it is
intended to guard against the utility
assuming an unreasonable risk of nonpayment.”
b. Required debtor to post a 1 month
security deposit ($150,000).
Collecting Pre-Bankruptcy Invoices
•
A. Customer NOT in Bankruptcy
–
–
–
–
–
–
B.
-
Terminate Service
Demand Payment
Apply security deposit
Enforce LC or Bond
Collection Agency
File Suit
Customer in Bankruptcy
Automatic Stay (11 U.S.C. § 362)
May not terminate service (11 U.S.C. § 366)
File Proof of Claim
Automatic Stay
A.
B.
C.
Scope – Proscribes any action (formal or informal) to:
- collect a pre-bankruptcy debt
- enforce a lien or right of setoff
- exercise control over property of the estate
- exercise control over property of the debtor
Setoff v. Recoupment
- Setoff includes any right to reduce or deduct from a competing
claim
- Recoupment not subject to the automatic stay
- Recoupment is a right of setoff arising from the same
transaction or contract giving rise to the competing claim. In re
McMahon, 129 F.3d 93 (2d Cir. 1997) (holding that utility
company’s application of prepetition security deposit to
debtor’s prepetition utility obligation was recoupment not
subject to the automatic stay)
Relief From Stay. Court may grant relief from automatic stay “for
cause.”
The Bottom Line for Utilities
A.
B.
C.
Upon commencement of bankruptcy by a customer:
- Stop all billing for pre-bankruptcy service and any
other collection devices (e.g. termination notices,
litigation, garnishments);
- Don’t terminate service because of bankruptcy or
failure to pay pre-bankruptcy charges or fees;
- Liquidate pre- and post-bankruptcy debt;
- Recoup pre-bankruptcy security deposit; and
- Draw on Letter of Credit/Surety Bond
Upon commencement of bankruptcy by an employee:
- Cease withholding of garnishment excepting for
“Domestic Support Obligations” and Pension Loans;
- Comply with Chapter 13 Wage Order.
Promptly file Proofs of Claim in Bankruptcy
- Chapter 7, 12 and 13: Deadline is 90 days after first
date set for the meeting of creditors
- Chapter 11: Deadline set by the Bankruptcy Court
Collecting Pre-Bankruptcy Invoices
A.
B.
Secured Claim
1. Right of setoff = secured claim (11 U.S.C.§ 506)
2. Setoff subject to automatic stay
3. Recoupment not stayed
4. Recovery of LC or Surety Bond not stayed
Unsecured Claim (Balance after liquidation of
collateral)
1. Balance owing for pre-bankruptcy service
2. File proof of claim
3. Probable low or no distribution
4. Delayed distribution
C. Administrative Priority Claim
1. Section 503(b)(1)(A) – Administrative Expenses
defined as “actual, necessary costs and expenses
of preserving the [bankruptcy] estate …”
a. Entitled to payment prior to general unsecured
creditors. § 507
b. Applies to post-petition service beneficial to the
bankruptcy estate.
c. Requires filing of a motion with the Bankruptcy
Court seeking allowance.
2. Section 503(b)(9) – Affords administrative status to
claims for the “value” of “goods” received by the
debtor within 20 days of a bankruptcy.
Electricity – A Good or Service
1. Whether electricity is classified as a
“product” or “good” is legally important
because :
a. Strict Liability Statutes;
b. Laws and Regulations governing the
sale of “goods” (e.g. Art. 2 UCC); and
c. Bankruptcy provisions affording priority
treatment to providers of “goods.”
Strict Liability Exposure
a) If electricity is a “product,” then the utility
may be subject to applicable state laws
imposing strict liability for personal
injuries.
b) Judicial decisions are not uniform.
Under Restatement (Second) of Torts § 402A,
Strict Liability applies to:
(1) One who sells any product in a defective condition unreasonably
dangerous to the user or to his property is subject to liability for
physical harm thereby caused to the ultimate user or consumer, or
to his property, if
(a) the seller is engaged in the business of selling such a product, and
(b) it is expected to and does reach the user or consumer without
substantial change in the condition in which it is sold.
Three legal questions must be answered when
analyzing whether strict liability applies to electricity:
• Is electricity a “product”?
• If it is a product, when is it “sold”?
• When does electricity contain a “defect”
that renders it “unreasonably dangerous”?
Jurisdictions holding that Electricity is
NOT a Product:
a. Bowen v. Niagara Mohawk Power Corp.,
590 N.Y. S. 2d 628 (N.Y. App. Div. 1992)
b. Otte v. Dayton Power & Light Co., 523
N.E. 2d 835 (Ohio 1988)
c. Wyrulec Co. v. Schutt, 866 P. 2d 756
(Wyo. 1993)
d. G&K Dairy v. Princeton Elec. Plant Bd.,
781 F. Supp. 485 (W.D. Ky. 1991)
This is the minority view.
Courts that have held that electricity is a
service and not a product have reasoned that
“Electricity is the flow of electrically charged particles
along a conductor” and the utility company “does not
manufacture electrically charged particles, but rather,
sets in motion the necessary elements that allow the
flow of electricity.”
Otte v. Dayton Power & Light Co., 523 N.E. 2d 835,
838 (Ohio 1988).
The majority of courts have held that electricity
IS a “product” and subject to strict liability laws.
a. Monroe v. Savannah Electric & Power
Co., 471 S.E. 2d 854 (Ga. 1996)
b. Bryant v. Tri-County Electric Membership
Corp., 844 F. Supp. 347 (W.D. Ky. 1994)
c. Houston Lighting & Power Co. v.
Reynolds, 765 S.W. 2d 784 (Tex. 1989)
d. Butler v. City of Peru, 733 N.E. 2d 912,
(Ind. 2000).
Other Courts holding that electricity is a product:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Travelers Indem. Co. of America v. Connecticut Light and Power Co.,
2008 WL 2447351 (Conn.Super. 2008)
Mancuso v. Southern Cal. Edison Co., 232 Cal.App.3d 88, (Cal.App. 2
Dist.1991)
Smithbower v. Southwest Cent. Rural Elec. Co-op., Inc., 374 Pa.Super.
46, (Pa.Super.,1988)
Smith v. Home Light and Power Co. 734 P.2d 1051 (Colo.1987)
Public Service Indiana, Inc. v. Nichols, 494 N.E.2d 349 (Ind.App. 4
Dist.1986)
Pierce v. Pacific Gas & Electric Co., 166 Cal.App.3d
(Cal.App.3.Dist.1985)
Carbone v. Connecticut Light and Power Co., 482 A.2d 722,
723 (Conn.Super.1984)
Aversa v. Public Service Elec. and Gas Co., 186 N.J.Super. 130
(N.J.Super.L.,1982)
Ransome v. Wisconsin Elec. Power Co., 275 N.W.2d 641 (Wis. 1979)
Petroski v. Northern Indiana Public Service Co., 354 N.E.2d 736,
747 (Ind.App. 1976)
Courts have held that electricity is a product
because it can be:
•
•
•
•
•
•
•
•
•
Confined
Controlled
Transmitted
Distributed into the stream of commerce
measured
bought and sold
changed in quantity or quality
delivered wherever desired; and
subject to larceny standards
Defenses for when electricity is held to be a
product:
• The electricity must have been “sold” in order for the
utility to be strictly liable
– The majority of courts hold that electricity is not “sold” until it passes
through a customer’s meter. Harm caused by electricity which has not
yet passed through the meter is governed by negligence principles.
– Bryant v. Tri-County Electric Membership Corp., 844 F. Supp. at 351.
• Plaintiff has the burden to prove that the electricity was
“defective” and “unreasonably dangerous.”
– Many courts have held that electric voltage is dangerously defective
when it is “far in excess of the level intended by the utility and expected
by the consumer.”
– Comer v. American Elec. Power, 63 F.Supp.2d at 939 (N.D.Ind.,1999).
UCC Definition of “Goods”
1.
2.
UCC § 2-105 – Defines “goods” as “all things. . .which
are movable at the time of identification to the contract
for sale…”
Is electricity a good?
a. Puget Sound Energy, Inc. v. Pacific Gas & Elec.
Co., (In re Pacific Gas & Electric Co.), 271 B.R. 626
(N.D. Cal. 2002) (holding that electricity is a
movable “good” under the UCC definition)
b. In Re Pilgrim’s Pride Corp. 421 B.R. 231 (Bankr.
N.D. Tex. 2009) (holding that electricity is not a
“good” because it is consumed at time of
identification at the meter); In re Samaritan Alliance,
LLC, 2008 W.L. 2520107 (Bankr. E.D. Ky. 2008)
Electricity as a “Good” and Bankruptcy
Bankruptcy Code Section 503(b)(9) – Allows administrative
expense priority for the “value of any goods received by the
debtor within 20 days before the commencement of a case. . .
in the ordinary course of such debtor’s business.”
a. Electricity is a “Good” – GFI Wisconsin, Inc. v.
Reedsburg Utility Com., 440 B.R. 791 (W.D. Wis. 2010)
(held that electricity received from utilities within 20 days
prior to bankruptcy qualified as a “good” for which utilities
could assert administrative claim); In re Erving
Industries, Inc., 432 B.R. 354 (Bankr. D. Mass. 2010)
(held that electricity supplied by a supplier (not a utility) is
a “good” entitling provider to an administrative expense
for electricity supplied within 20 days of the petition date)
b.Electricity is not a “Good” – In Re Pilgrim’s Pride
Corp., 421 B.R. 231 (Bankr. N.D. Tex. 2009) (held that
electricity was not a “good” under 503(b)(9))
Elements of an Avoidable
Preferential Transfer
• a. Transfer of an interest of the debtor’s
property;
• b. to or for the benefit of a creditor;
• c. for or on account of any antecedent debt;
• d. made while the debtor was insolvent;
• e. made on or within 90 days before the filing of
the petition; and
• f. that enables the creditor to receive more
than it would receive in a liquidation if the
transfer had not been made.
Defenses to Avoidance
• a. Ordinary Course of Business
• b. New Value
• c. Transfers aggregating less than $5,850
in cases involving a debtor whose
debts are not primarily consumer debts.
To be excepted from avoidance under the
“ordinary course of business” defense the
creditor must establish:
a. That the debt was incurred by the debtor in
the ordinary course of business or financial
affairs of the debtor and the creditor; and
b. That the transfer was made –
• In the ordinary course of business of the debtor
and creditor; or
• Made according to ordinary business terms.
New Value Exception
A transfer is excepted from avoidance to the extent
that:
a. After the transfer the creditor gave “new
value” to or for the benefit of the debtor;
b. on an unsecured basis; and
c. on account of such new value the debtor did
not make an otherwise unavoidable transfer.
“New Value” means “money or money’s worth in
goods, services, or new credit…” 11 U.S.C. §
547(a)(2)
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