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District Court Finds Deposit Representing Two Weeks of Utility Service Constitutes Adequate Assurance of Payment

Wednesday, November 23, 2011

Dena Kaufman | Bloomberg Law In re The Great Atlantic & Pacific Tea Company, Inc., 2011 BL 291498 (S.D.N.Y. Nov. 14, 2011)] The United States District Court for the Southern District of New York affirmed a final order of the bankruptcy court determining that the deposit of an amount representing two weeks of utility service providing utility companies with adequate assurance of payment for future utility service under 11 U.S.C. § 366 and prohibiting utility companies from modifying or discontinuing service. In so ruling, the district court rejected the interpretation of 11 U.S.C. § 366(c) subsequent to its amendment by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") found in In re Lucre, Inc., 333 B.R. 151, 154 (Bankr. W.D. Mich. 2005) and advocated by the utility companies that, to prevent a loss of utility service, the debtor must first "provide the assurance payment in the amount and form demanded by the utility provider" prior to seeking relief from the bankruptcy court to modify the amount.

The Utility Motion and Order

The Great Atlantic & Pacific Tea Company, Inc. and certain of its affiliates (collectively, "Debtors") filed voluntary chapter 11 petitions and a motion for an order determining and establishing procedures for determining adequate assurance of payment for future utility services and preventing utility companies from discontinuing service based on unpaid prepetition invoices (the "Utility Motion") on December 12, 2010. As adequate assurance of payment for future services, Debtors proposed to place an amount signifying approximately two weeks of all of Debtors' utility service into a segregated, interest-bearing bank account ("Adequate Assurance Account"). On December 23, 2010, certain utility providers objected to the Utility Motion, arguing, among other things, that (1) the amount of the proposed adequate assurance payment was insufficient and should be an amount covering two months of utility services as opposed to two weeks and (2) a deposit into a segregated bank account held by someone other than the utility provider did not qualify as an appropriate form of adequate assurance payment under 11 U.S.C. § 366(c)(1)(A). Thereafter, additional utility providers joined the objection and/or filed objections to the Utility Motion. After a hearing, the bankruptcy court granted the Utility Motion, directing the cash deposit of the adequate assurance payment in an amount signifying two weeks of utility services into "a newly-created, segregated, interest-bearing bank escrow account." The utility providers filed various appeals, which were consolidated on May 12, 2011.

Interpretation of Section 366(c)

On appeal, the utility providers argued that, pursuant to § 366(c) post-BAPCPA, a debtor is required to furnish the utility provider with assurance of payment in the amount and form demanded by the utility provider to prevent disruption of utility service prior to seeking relief from the bankruptcy court to modify the amount of such assurance payment. The utility providers found support of such interpretation of § 366(c) in the Lucre case, which held that a debtor can't request court modification of assurance of payment demanded by a utility provider until the debtor first pays the demand. However, the District Court joined the bankruptcy court in rejecting such interpretation of § 366(c) as "unworkable" and potentially leading "to absurd results," holding instead that a plain reading of § 366(c) is that it gives a debtor 30 days from the petition date to agree with its utility provider as to the appropriate adequate assurance of payment or seek court modification of the amount that the utility provider deems satisfactory.

Amount and Form of Adequate Assurance Payment

Additionally, the utility providers contested the sufficiency of the amount of the cash deposit, asserting that the deposit amount should be enough to cover two months as opposed to only two weeks of utility services. Within its argument on the sufficiency of the amount of the adequate assurance payment determined by the bankruptcy court, the utility providers claim that (1) state law tariffs governed the analysis of what qualifies as adequate assurance and (2) the bankruptcy court improperly weighed the evidence in making its determination. In response to this argument, the District Court first noted that bankruptcy courts have been given reasonable discretion in deciding what qualifies as adequate assurance of payment and, in making such a decision, a court need not require a debtor to provide an amount equal to a guaranty of full payment. Then, the District Court observed that several courts have held that federal bankruptcy law, and not state law or regulation, governs the determination of what qualifies as adequate assurance of payment, and, finding no authority holding otherwise, the District Court held that the bankruptcy court did not err in rejecting the utility providers' argument that state tariffs governed such determination. Further, the District Court reviewed the factors considered by the bankruptcy court -- including, Debtors' post-petition finances, the burden of a more substantial deposit on Debtors, the reduction of the risk to utility providers of nonpayment, the ability of the utility providers to request additional assurances in the event of a change of circumstances, and the excessive demands of the utility providers -- and decided that the bankruptcy court did not commit clear error in weighing the evidence by finding that the utility providers were sufficiently protected by the cash deposit. Further, the utility providers disputed the form of the adequate assurance of payment approved by the bankruptcy court, asserting that the segregated escrow account did not constitute "assurance of payment" as it was not a form of payment expressly recognized in § 366(c)(1)(A) and the account was in the possession of someone other than the utility provider. Finding the reasoning of the court in In re Crystal Cathedral Ministries, 454 B.R. 124 (C.D. Cal. 2011), when addressing the same issue, both instructive and persuasive, the District Court held that the bankruptcy court reasonably found "that the Adequate Assurance Account was a cash deposit or akin to a letter of credit within the meaning of [§ 366(c)(1)(A) of] the Bankruptcy Code" and that it was not necessary for the utility provider to control it. Thus, the District Court found no clear error with respect to the amount or the form of the adequate assurance payment ordered by the bankruptcy court.

Extension of Section 366 Statutory Period

Finally, the utility providers asserted that the bankruptcy court's extension of the 30-day statutory time period under § 366 was erroneous. Based on the fact that (i) Bankruptcy Rule 9006(b)(1) authorizes the court to order an enlargement of a time period in its discretion for cause shown except for the time periods established by Bankruptcy Code sections specifically enumerated in Bankruptcy Rule 9006(b)(2) and (ii) Section 366 is not one of the sections of the Bankruptcy Code specified under Bankruptcy Rule 9006(b)(2), the District Court held that a bankruptcy court may, in its discretion and for good cause shown, enlarge the 30-day and 20-day time periods set forth in §§ 366(c)(2) and 366(b), respectively. Continuing its analysis, the District Court found that Debtors' need for uninterrupted utility services for a successful reorganization and the fact that the hearing on the Utility Motion was being heard on the 29th day of the 30-day period which could have made it impossible for Debtors to comply with § 366 constituted good cause for granting such enlargement of time and, as such, concluded that the bankruptcy court's extension of the 30-day period was not erroneous.

District Court Affirms Adequate Assurance of Payment Established By the Bankruptcy Court

In sum, finding no error in the bankruptcy court's order approving a cash deposit representing two weeks of utility services in a segregated bank account as adequate assurance of payment, the District Court affirmed the order of the bankruptcy court. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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