|Legal Opinion: |
Text of Document: May 18, 2007
Dear Water Superintendent:
You have the following question: What remedy does the city have against the owner of a single-metered mobile home court with 80 mobile homes who owes a water bill of $16,000 and who has filed for bankruptcy?
Based on our telephone conversation about this problem, you realize that in the short run the utility might not be able to cut off the water to the mobile home court.
Application of the U.S. Bankruptcy Code
The Bankruptcy Code underwent major changes under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which went into effect on October 17, 2006. 11 U.S.C.A. § 366 of the Bankruptcy Code (which I have attached for your reading) generally governs the rules under which utilities can require “adequate assurance” from debtors who have filed bankruptcy as a condition of continued utility service. That statute underwent some modification in the BAPCPA. Only one of the cases I have cited herein was decided under that new law, but the remaining cases I have cited herein are either still consistent with the amended version of § 366, or I have in bold letters indicated where they are inconsistent .
I do not know under what chapter of the bankruptcy law the mobile home court owner filed his bankruptcy, but I assume he filed as a small business owner under Chapter 11. As I will point out below, that question may be important with respect to what remedies the city has under 11 U.S.C.A. § 366 of the Bankruptcy Code. As amended by BAPCPA, Subsection (a) provides with exceptions provided in subsection (b) and (c), a utility cannot “alter, refuse, or discontinue service to, or discriminate against, the trustee or debtor” after the debtor has filed for bankruptcy, or with respect to a “debt owed by the debtor to the utility for service rendered before the order for relief was not paid when due.”
Under subsection (b), the utility:
...may alter, refuse, or discontinue service if either the trustee nor the debtor within 20 days after the date of the order for relief furnishes adequate assurance of payment, in the form of a deposit or other security for service after such date.
[Note below the difference in time under subsection (c) if the Bankruptcy is filed under Chapter 11.]
“On the request of a party in interest,” which I take to mean either the debtor or the utility, and after notice and a hearing, the court can order a “reasonable modification of the amount of the deposit or other security necessary to provide adequate assurance of payment.”
It appears that the utility is not required to petition the bankruptcy court before it sets the amount of deposit or other adequate assurance, or, presumably, if the bankruptcy is a Chapter 11 bankruptcy, the form of adequate assurance. If the debtor is unhappy with the form and amount of the adequate assurance, it may petition the bankruptcy for a modification of that assurance. See In re Stagecoach Enterprises, Inc., 1 B.R. 372 (M.D. Fals. 1979). However, I would advise the utility to discuss the question of adequate assurance with the bankruptcy trustee before it makes a decision as to its amount and form.
In Robinson v. Michigan Consolidated Gas Co. Inc, 918 F.2d 579 (6th Cir. 1990), the U.S. Sixth Circuit Court of Appeals, which includes, and whose cases apply to, Tennessee, said this about § 366:
The intended effect of section 366(a) is to prevent a utility from withholding post-petition service in order to enforce payment of pre-petition debts, so long as the debtor or trustee provided adequate security for payment of future bills. See 2 L. King, Collier on Bankruptcy, § 366.01-03 (15th ed. 1990) while a utility may not terminate service for failure to pay pre-petition arrearages and may not refuse to provide service during the 20 days following the filing of a bankruptcy petition, see In re Whittaker, 882 F.2d 791, 794 (3rd Cir. 1989), [it may terminate service if, after expiration of the 20-day period, the debtor or trustee fails to post adequate assurance of payment for post- petition service. [NOTE BELOW THAT WITH RESPECT TO BANKRUPTCIES FILED UNDER CHAPTER 11, IT IS 30 DAYS.]
Furthermore, it is well-established that section 366(b) does not, by itself, bar a utility from terminating service to a debtor or trustee who has posted adequate assurance but fails to make a post- petition payment. See Begley v. Philadelphia Elec. Co., 760 F.2d 46, 49 (3rd Cir. 1985); in re Security Investment Properties, Inc., 559 F.2d 1321, 1325 (5th Cir. 1977); 2 L. King, Collier on Bankruptcy, §§ 366.01-03 (15th ed. 1990). Section 366 did not, therefore prevent Michcon from terminating service to 445 Fisher Freeway for failure to pay post-petition bills. [At.588.]
Subsection (c)(1) provides the types of “assurance of payment[s] that are permissible for the utility to require from the debtor if the bankruptcy is filed under Chapter 11: cash deposit, letter of credit, certificate of deposit, surety bond, prepayment of utility consumption, or another form of security mutually agreed on between the utility and the debtor or the trustee.
Subsection (c)(2) also provides that:
Subject to paragraphs (3) and (4), with respect to a case filed under chapter 11, a utility referred to in subsection (a) may alter, refuse, or discontinue utility service, if during the 30-day period beginning on the date of the filing of the petition, the utility does not receive from the debtor or trustee adequate assurance of payment for utility service that is satisfactory to the utility.
Subsection (c)(4) also provides that with respect to cases filed under chapter 11, “a utility may 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.”
If the mobile home court owner paid a security deposit to the utility before filing bankruptcy, it appears that the city can “tap” that security deposit without notice to, or approval of, the bankruptcy court.
It was held by the U.S. Bankruptcy Court In re Castle, 338 BR. 855 (D. Idaho 2006), that, subsection (c) applied only to Chapter 11 bankruptcies. In that case, the debtors had filed for bankruptcy under Chapter 12 (small farmers). Because the bankruptcy was not a Chapter 11 bankruptcy, declared the Court, subsection (b) applied, which provides for “adequate assurance
of payment in the form of a deposit or other security.” The Bankruptcy court declared that a first lien given by dairy farmers on their dairy herd was a sufficient form of “other security.”
My point in citing that case is that the city needs to make sure that the bankruptcy was filed under Chapter 11 before it seeks to require “adequate assurance” in the forms prescribed by subsection (c)(1).
You indicated that the debtor gave the utility an $8,000 check. I do not know for what purpose that was done. Needless to say, if it was payment for pre-bankruptcy petition utility services, that payment may be a problem for the utility. If it was adequate assurance for post- petition utility service, the utility may already have its adequate assurance. Again, I would check with the bankruptcy trustee to insure that everyone is on the same page as to the purpose of the $8,000 payment.
Under state law
From both a legal standpoint under state law, and from a practical standpoint, it may be difficult to cut-off the water service to the mobile home court, if the owner of the trailer court or the bankruptcy trustee does not give adequate assurance, or defaults on the utility payments after having given adequate assurance, under § 366. In Robinson, above, the gas utility that supplied gas to an apartment complex in Detroit cut off the gas supply due to the failure of the complex to pay its gas bills. The apartment complex subsequently filed bankruptcy, and as adequate assurance under § 366, the bankruptcy court ordered the bankruptcy trustee to contract with the gas company for gas service, and to pay for the gas service from the proceeds of apartment rentals. The apartment rentals were inadequate to pay the gas bill, the trustee became arrears in the gas payments, and the gas company again shut off the gas, without giving the tenants of the apartment notice, or informing them how they could obtain gas service. Certain tenants filed a claim in state court, alleging the gas company violated various provisions of the state law and of the Detroit Municipal Code governing utility terminations. The utility claimed that § 366 or other bankruptcy law preempted such state-based claims.
The Court rejected the utility’s argument, reasoning that:
This Section makes no provisions, however, concerning the procedures a utility must follow when terminating debtor. Nor does the legislative history contain any mention of termination procedures. [Citation omitted by me.] The scope of jurisdiction granted by section 366 to the bankruptcy court is explicitly limited to ordering “reasonable modification of the amount of deposit or other security necessary to provide adequate assurance of payment,” 11 U.S.C. § 366(b), in case the debtor or trustee and the utility cannot reach agreement on the amount. As the third Circuit explained, once the termination remedy has been sought by the utility in a post-petition context, the “adequate assurance provision of section 366(b), “no longer has vitality.” Begley, 760 F.2d at 50.
Although 11 U.C. § 366(b) does not stand in the way of utility termination in this case, it does not control the procedure by which such termination may occur. It does not, therefore, preempt state and municipal procedural regulations. See Begley, 760 F.2d at 60; accord in Whitaker, 882 Fe2d at 794. [At 588]
Michigan state law and the Detroit Municipal Code contained much stricter laws governing utility cut off notices to apartments and other residences whose utilities were provided though a single meter arrangement than are found in Tennessee state law or in the City’s Municipal Code. But there is no question that under Robinson, the City is required to give notice and an opportunity for a hearing before it cuts off the utilities to the mobile homes. The questions is, to whom must it give notice? Although it may not be technically required under state law, I would advise the giving of notice to each mobile home dweller that includes an opportunity to be heard, and notice as to how the mobile home might receive service through its own meter, if that is a feasible option.
The U.S. Supreme Court case of Memphis Light, Gas and Water Division v. Craft, 436 U.S. 1 (1978), declares that utilities have the common law right to terminate utility service where the utility bill is not paid, and that Tennessee follows that common law rule. But that case involved the adequacy of the notice prior to termination of services, where the termination of services involved tenants who had disputed bills (tenants were erroneously being billed for charges for two separate meters). However, even though the “customer” in the case of the mobile home complex is technically the owner of the complex, the language in that case is broad enough for the mobile home dwellers to argue that they have a property right in their service which entitles them to individual notice of termination before utility service is cut.
There is a surprising lack of cases in the United States on the question of liability of a utility that cuts off service at a single meter, leaving the tenants of the structure in question without utilities. What cases there are in this area generally involve the application of state statutes that address the rights of tenants in such cases. [Robinson, above, for example, involved both a Michigan state law and a Detroit ordinance.] Tennessee has no comparable state law. In Alabama Water Co. v. Knowles, 124 So. 96 (Ala. 1929) the Alabama Supreme Court held that where the landlord of a singe-metered premise did not pay the water bill, tenants in the premise had a right to obtain water service from the utility under the utility service policies of the city.
The Court said that:
As relates to water companies this rule has been announced: “Otherwise stated, the right of the citizen to be supplied with water by a public water company is qualified by the duty of the citizen to pay or tender the customary rents and provide the means of conveying the water from the water mains onto his property. Citation omitted by me.] [At 102]
I have not read the City’s regulations governing utility service, but they may require that you provide individual mobile home tenants the opportunity to obtain service from the utility through their own meter.
An unusual case handed down by the U.S. District Court for the District of Columbia in Messina v. Washington, 315 F. Supp. 529 (1970), involved a landlord who refused to pay the water, gas and electric bills on a single-metered apartment complex of 165 units. The tenants asked for equitable relief directing the utility services to be continued. The Court found that the city was partially responsible for the multitude of problems that existed in the apartment complex, including the utility cut-offs themselves, and its failure to enforce various building and housing codes. It ordered the city to provide free utilities until the complex was foreclosed, condemned by the city, or the tenants were moved elsewhere. It did so on the ground that the city had an “inherent power to abate public nuisances.” [At 532.]
Such a draconian remedy is not likely to come out of a Tennessee court, but where 80 mobile homes billed through a single meter are involved, the deprivation of utility service to the mobile homes, but particularly of water, which from a practical standpoint also includes sewer, might steer a court to prohibit the cut off of the water until some other housing arrangement, or water connections, for the tenants could be made.
Sidney D. Hemsley
Senior Law Consultant