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Www.rubinrudman.comOctober 14, 2011 A Workshop on Customer Bankruptcies David C. Fixler, Esquire This communication may be considered attorney advertising.

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Presentation on theme: "Www.rubinrudman.comOctober 14, 2011 A Workshop on Customer Bankruptcies David C. Fixler, Esquire This communication may be considered attorney advertising."— Presentation transcript:

1 www.rubinrudman.comOctober 14, 2011 A Workshop on Customer Bankruptcies David C. Fixler, Esquire This communication may be considered attorney advertising under the rules of some states. The information and materials contained herein have been provided as a service by the law firm of Rubin and Rudman LLP for informational purposes only and do not, and are not intended to, constitute legal advice. Neither transmission nor receipt of such information and materials will create or constitute any attorney-client relationship. Users are advised not to take, or refrain from taking, any action based upon the information and materials contained herein without consulting legal counsel engaged for a particular matter. Copyright © 2011 Rubin and Rudman LLP

2 Bankruptcy and the Rationale for Bankruptcy Protection Bankruptcy Code - Title 11 of the United States Code governs bankruptcy proceedings. Bankruptcy is federal law. If there is a direct conflict with state law, the Bankruptcy Code controls since it is federal law. Gives the Debtor a fresh start; (i.e., an individual Debtor receives a “Discharge” -- i.e., no longer legally obligated to pay the debt). Puts similarly situated creditors on an equal footing. Provides for an orderly distribution of assets. 2

3 Types of Bankruptcies That Typically Confront Utilities Chapter 7 - a straight liquidation, the most common form of bankruptcy. An appointed Trustee reduces all assets to cash and distributes the proceeds, if any, pro rata to creditors. Chapter 11 - better known as a “reorganization.” Here, the business is maintained in place while an attempt is made by management to formulate a Plan to restructure debt. Creditors vote to either accept or reject the Plan. Under a Plan, unsecured creditors receive a percentage of the amount they are owed, secured creditors receive an amount equal to the value of the security. Chapter 13 - also called a wage earner’s Plan. It enables eligible individuals with regular income to develop a Plan (typically over three to five years) to repay all or part of their debts. During this time, the law forbids creditors from starting or continuing collection efforts on pre-petition claims. 3

4 What Happens When a Bankruptcy is Filed A bankruptcy “estate” is created consisting of all the legal and equitable interests of the Debtor as of the commencement of the case. Subject to certain property that an individual Debtor can claim as exempt, the estate is liquidated to pay administrative claims and creditor claims. The bankruptcy filing results in an “Automatic Stay” (Section 362 of the Bankruptcy Code). Upon the filing of a bankruptcy case, any action to collect a debt or obtain property is prohibited. This is a very important tool for the Debtor. Freeze on Pre-Petition Debt Repayment - not only are creditors prevented from collecting pre-petition debt, but the Debtor is generally prohibited from paying the debt. Generally, there are three types of creditors. Administrative (individuals and entities working on behalf of the bankruptcy estate or providing a service to the bankruptcy estate), secured creditors and unsecured creditors. A secured creditor is a creditor with rights in collateral and has additional protections provided by the Bankruptcy Code for the claim that is secured by that collateral. The secured claim is equal to the value of such collateral. 4

5 11 U.S.C. Section 366 Section 366 of the Bankruptcy Code governs the alteration, refusal, or discontinuance of utility service to, and the discrimination by a utility against, the bankruptcy Trustee or the Debtor. 5

6 What Constitutes a Utility Under Section 366 of the Bankruptcy Code The Bankruptcy Code’s legislative history states that Section 366 is intended to cover utilities that have some special position with respect to the Debtor, such as an electric company, gas supplier, or telephone company that is a monopoly in the area so that the Debtor cannot easily obtain comparable services from another utility. Courts are applying Section 366 in situations where it would have been difficult to switch to another service provider. 6

7 Restrictions on Utility Services Section 366(a) affords the Trustee or the Debtor protection against discontinuance of future service by a public utility solely on the basis of the commencement of a bankruptcy case or a debt owed to the utility for service provided before the bankruptcy filing. This is consistent with pre-bankruptcy code case law that a public utility could not use its position to force preferred treatment over other creditors to recover pre-petition claims as a condition for future service. 7

8 Protections for Utilities Section 366(b) protects the utility by requiring the Trustee or Debtor to provide (in a Chapter 7 or Chapter 13 case), within 20 days after the bankruptcy filing, adequate assurance of payment, in the form of a deposit or other security, for services after such date. In a Chapter 7 or Chapter 13 case, court has discretion to determine what is adequate assurance of payment. If the Debtor’s estate is sufficiently liquid, the guarantee of an administrative expense priority might constitute adequate assurance. A security deposit is not required in all cases. Courts have held that a utility may terminate service to a Debtor for failure to pay for post-petition service without first obtaining relief from the Automatic Stay. 8

9 Adequate Assurance in Chapter 11 Cases In cases arising under Chapter 11, Section 366(c) provides for a 30-day window for a Debtor to provided adequate assurance that must be satisfactory to the utility. Section 366(c) provides further protection to utilities regarding the provision of Adequate Assurance. In a Chapter 11 case, Adequate Assurance consists of a cash deposit, a letter of credit, a certificate of deposit, a surety bond, a pre-payment of utility consumption, or another form of assurance agreed upon between the Debtor and the utility. Congress has stated that the mere holding of an administrative expense priority claim is not sufficient for assurance of future performance. If the utility is not satisfied with the Debtor’s proposed Adequate Assurance, the burden is on the Debtor to seek a determination as to the adequacy of the proposed assurance of payment. In making this determination, the court may not consider the fact that the utility did not have a security deposit before the filing of the petition, the Debtor had made timely payments pre-petition, or the availability of an administrative expense priority. 9

10 What Happens if Adequate Assurance is Not Provided? The utility may, subject to state law, alter or discontinue service if adequate assurance is not provided within the 20-day (Chapter 7 or Chapter 13) or 30-day (Chapter 11) window. 10

11 Other Unique Rights that Utilities Have in Bankruptcy Because a utility’s demand for Adequate Assurance is specifically authorized under Section 366, courts have held that such a demand is not a violation of the automatic stay. In a Chapter 11 case, the utility has the right to apply a pre-petition security deposit against unpaid pre-petition charges, without notice or order of the court. This is why it is very important to have a security deposit. 11

12 Written Contractual Agreements with Customers Presents a conflict between Section 366 and Section 365 of the Bankruptcy Code (the Bankruptcy Code Section relating to executory contracts). Under Section 365, the contract can be assumed simply by curing existing defaults. Section 366 requires adequate assurance for the utility service to be continued post-petition. The majority of courts appear to have held utilities to their contractual agreements and have refused to provide the additional assurance provided under Section 366. 12

13 20-Day Administrative Claim Section 503(b)(9) provides for an administrative claim for the value of goods received by the Debtor within 20 days prior to bankruptcy. These goods must be sold to the Debtor in the ordinary course of the Debtor’s business. Applicable to utilities if electricity is defined as a “good.” 13

14 Preference Actions The Trustee or Debtor can avoid: Any transfer of an interest of the Debtor in property; To or for the benefit of a creditor; For or on account of an antecedent debt owed by the Debtor before such transfer was made; Made while the Debtor was insolvent; Made on or within 90 days before the bankruptcy filing (one year for transfers to insider creditors); 14

15 Preference Actions (continued) That enables the creditor to receive more than such creditor would receive if –a case were a Chapter 7 case; –the transfer had not been made; –such creditor received payment to the extent provided by other provisions of the Bankruptcy Code. 15

16 Preference Defenses Ordinary Course of Business The Trustee may not avoid a transfer - To the extent Transfer was in payment of a debt incurred by the Debtor in the ordinary course of business or financial affairs of the Debtor and the creditor; and Made in the ordinary course of business or financial affairs of the Debtor and the creditor; or Made according to ordinary business terms. 16

17 Contemporaneous Exchange of New Value Trustee may not avoid transfer to the extent - Transfer was intended by the Debtor and creditor to be contemporaneous exchange for new value given to the Debtor; and Transfer was in fact a substantially contemporaneous exchange. 17

18 New Value Given after Transfer Trustee may not avoid transfer to the extent transfer was - To or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the Debtor; –not secured by an otherwise unavoidable security interest; –on account of which new value the Debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor. 18

19 Safe Harbor Protections from Trustee’s Avoidance Powers The Bankruptcy Code includes special protections for counterparties to certain commodity and derivative contracts including forward contracts (a contract for the purchase or sale of a commodity with a maturity date more than 2 days after the contract is entered into) (“Safe Harbor Provisions”). Parties protected by the Safe Harbor Provisions include forward contract merchants (an entity whose business consists in whole or in part in entering into forward contracts as or with merchants in a commodity or similar good, article service, right or interest which is or become the subject of dealing in the forward contract trade). Section 546 of the Bankruptcy Code protects Safe Harbor counterparties from avoidance of certain pre-petition transfers (including preference actions) under or in connection with the Safe Harbor contract. 19

20 Pre-Bankruptcy Strategies Obtain a sufficient security deposit at the outset, particularly with retail customers that will likely have significant electricity usage. Stay on top of your customer accounts to ensure that they are current. If customer is not current, do not sit on your rights -- take immediate action. 20

21 David C. Fixler, Esquire Rubin and Rudman LLP 50 Rowes Wharf Boston, MA 02110 Telephone: (617) 330-7099 (Direct) Facsimile: (617) 330-7550 E-Mail: Web: 21

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