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Seventh Circuit Rules Utility Company Violated the Automatic Stay by Sending Delinquency Notices and Reporting Unpaid Charges to the City

Thursday, August 11, 2011

Reedsburg Utility Commission v. Grede Foundries, Inc. (In re Grede Foundries, Inc.), No. 10-2509, 2011 BL 184438 (7th Cir. July 13, 2011) The United States Court of Appeals for the Seventh Circuit affirmed a bankruptcy court’s ruling enforcing the automatic stay against a utility company that sought to collect on a debtor’s pre-petition utility charges by sending delinquency notices and reporting the unpaid charges to the city for collection. In affirming the decision, the Seventh Circuit concluded that the utility’s actions did not fall within any exception to the automatic stay, including the exception for perfecting a pre-petition interest in property under 11 U.S.C. § 362(b)(3), for determining the existence of a tax liability and providing notice of the tax liability under § 362(b)(9), and for creating or perfecting a lien for a special tax or a special assessment on the real property under 11 U.S.C. § 362(b)(18). As a consequence of the decision, the utility company will be prevented from taking any further steps provided for under state law to perfect and collect the debtor’s $1.3 million in unpaid utility charges.

Reedsburg Utility Commission’s Attempt to Collect Pre-Petition Utility Charges against Debtor

Grede Foundries, Inc. (“Debtor”), a smelting plant in Wisconsin, received utility services from the Reedsburg Utility Commission (“Reedsburg”), a municipal utility. Given that the utility services provided by Reedsburg to Debtor were critical to Debtor’s operations, Debtor’s utility bills were substantial, approximating $600,000 to $700,000 per month. On June 30, 2009, Debtor filed for chapter 11 bankruptcy, thereby triggering the automatic stay. At the time, Debtor owed Reedsburg several months in unpaid utility bills, totaling $1,312,314.09. Notably, under a yearly process provided for under Wisconsin law, a delinquent utility charge “becomes a lien” only after: (1) notice is provided on October 15th, (2) a list of properties in arrears is furnished to municipal officials, (3) the arrearage remains unpaid by November 15th, and (4) the municipal officials file a list with the county clerk on November 16th. Wis.Stat. § 66.0809(3). Pursuant to this law, on October 15, 2009, Reedsburg provided nineteen separate written notices to Debtor regarding the unpaid, pre-petition utility charges. Additionally, on November 3, 2009, Reedsburg reported all delinquent charges, including Debtor’s, to the City and, on November 12, 2009, the City reported all delinquent utility charges to the County Treasurer, including Debtor’s arrearage.

Bankruptcy Court Concludes Reedsburg Violated the Automatic Stay

In response to Reedburg’s actions, Debtor filed a motion to enforce the stay and to hold Reedsburg in contempt for violating the stay (“Stay Motion”). In its initial ruling, the bankruptcy court held that Reedsburg was not in contempt, but deferred deciding whether Reedsburg had violated the stay. In the interim, the bankruptcy court ordered Reedsburg, the City, and the County to refrain from taking actions “to create, file, perfect, or enforce any lien against Debtor’s real property or to place any unpaid utility charges for utility services on the property tax roll…” As a result of the bankruptcy court’s decision, Debtor’s unpaid utility charges were left off Debtor’s 2009 property tax bill. Thereafter, on December 21, 2009, the bankruptcy court issued its final decision and held that Reedsburg had violated the automatic stay and that none of the § 362(b) exceptions applied. Following Reedsburg’s subsequent appeal to the district court, which affirmed the bankruptcy court’s decision, Reedsburg appealed the lower courts’ decisions to the Seventh Circuit.

Overview of the Automatic Stay and Applicable Exceptions

Rendering its decision on appeal, the Seventh Circuit began by explaining that the automatic stay prohibits “any act to create, perfect, or enforce any lien against property of the estate” or “any act to collect, assess, or recover a claim.” See 11 U.S.C. §§ 362(a)(4) and (a)(6). As the Seventh Circuit observed, in the present case, Reedsburg abandoned arguing on appeal that it did not act to perfect or create a lien and instead maintained that a § 362(b) exception applied to its actions. Specifically, Reedsburg relied upon the exception for perfecting a pre-petition interest in property under § 362(b)(3), for determining the existence of a tax liability and providing notice of the tax liability under § 362(b)(9), and for creating or perfecting a lien for a special tax or a special assessment on the real property under § 362(b)(18).

Section § 362(b)(3) Exception for Perfection of Pre-petition Interests

Focusing first on the exception for perfection of a pre-petition interest under § 362(b)(3), the Seventh Circuit observed that the narrow purpose of the exception is to perfect a lien in “an interest in property” that would have been perfected under state law but for the intervening bankruptcy filing. In re Parr Meadows Racing Ass’n, Inc., 880 F.2d 1540 (2d Cir. 1989). Concluding that the exception did not apply in the present case, the Seventh Circuit resolved that Reedsburg did not have the required “interest” in Debtor’s property when Debtor filed for bankruptcy because, by mailing the October 15 notices, Reedsburg had only taken the first of a series of steps required under Wis.Stat. § 66.0809(3) to obtain a perfected tax lien. In so holding, the Seventh Circuit rejected Reedsburg’s reliance on the Parr Meadows decision, in which the court held that a county obtains § 546(b) interest in property on a statutorily-mandated date when all properties are assessed. Parr Meadows, 880 F.2d at 1546-47. The Seventh Circuit found that, unlike the property taxes in Par Meadows, Reedsburg’s sending utility bills or providing utility services did not fix “a real and identifiable interest” in Debtor’s property which could not “be erased or altered by subsequent events” because Debtor’s payment of its utility bills prior to October 1st would have wiped out Reedsburg’s ability to attach any interest in Debtor’s property. Id. at 1547-8. Employing similar logic, the Seventh Circuit also declined to follow AR Accessories Grp., Inc., 345 F.3d 454 (7th Cir. 2003), in which the court held that the effective date of a lien arising under the Wisconsin wage statute was when the debtor’s employees performed the last unpaid services and not when notice of the claim was provided to the county clerk. Unlike the wage lien which arises automatically, the Seventh Circuit found that Wis. Stat. § 66.0809(3) dictates that a delinquent utility charge “becomes a lien” only after the identified steps are performed. Accordingly, the Seventh Circuit held that Reedsburg’s actions did not fall within the exception to the stay under § 362(b)(3).

Section 362(b)(9) Exception for Providing Notice of a Tax Liability

Turning next to § 362(b)(9), the Seventh Circuit observed that this exception to the automatic stay permits governmental entities to determine the amount of tax due and send the bill to the taxpayer/debtor without violating the automatic stay. Applying this provision to Reedsburg’s utility charges, the Seventh Circuit found that although Wis. Stat. § 66.0809(2) provides that arrears for utility services “will be levied as a tax,” the charges were not, in fact, a “tax” because they were not a source of revenue that provides general benefits to the public and did nothing more than recover Reedsburg’s costs of delivering utility services. See, e.g., Hager v. City of W. Peoria, 84 F.3d 865 (7th Cir. 1996). As such, the Seventh Circuit held Reedsburg’s efforts to collect the unpaid utility charges did not fall within the exception relating to the collection of taxes under § 362(b)(9).

Section 362(b)(18) Exception for Perfecting a Lien for a Special Tax or Special Assessment

Lastly, the Seventh Circuit resolved that the exception set forth in § 362(b)(18) for the creation or perfection of a statutory lien for a special tax or special assessment also did not apply to Reedsburg’s actions because the unpaid utility charges did not constitute either a special tax or special assessment. In this regard, the Seventh Circuit referenced its earlier finding that unpaid utility charges are not taxes and further determined that the utility charges did not constitute a “special assessment” because they were regular delinquent charges for routine utility services and did not defray the cost of improving Debtor’s property or benefit Debtor’s property. Illinois Central R.R. v. city of Decatur, 147 U.S. 190 (1893). As a result, the Seventh Circuit held that Reedsburg’s actions were not protected under § 362(b)(18).

Seventh Circuit Affirms Lower Courts’ Decisions

Ultimately affirming the lower courts’ rulings, the Seventh Circuit that Reedsburg’s actions in sending delinquencies notices to Debtor and reporting the unpaid charges to the City constituted a violation of the automatic stay. As a result of the decision, Reedsburg’s claim for in excess of $1,300,000 in unpaid, pre-petition utility charges will be classified as a general unsecured claim. Disclaimer This 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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