Introduction

On January 14, 2009, Gottschalks Inc., the California-based department store, filed for bankruptcy in Delaware (read the Gottschalks bankruptcy petition here).  One of Gottschalks’ first motions filed with the Delaware Bankruptcy Court was its Motion Prohibiting Utility Providers from Discontinuing Service (the "Utilities Motion").  The Utilities Motion seeks various forms of relief,  however, the purpose of this post is to look at the statutory basis for prohibiting a utility from discontinuing service.  Additionally, this post looks at some of the issues that arise when a debtor files such a motion.

Basis For Relief Under the Bankruptcy Code

Section 366(a) of the Bankruptcy Code provides that a "utility may not alter, refuse or discontinue service" to a debtor who files for bankruptcy.  Section 366(a) further prohibits a utility from discontinuing service to a debtor in bankruptcy even if the debtor owes the utility for services provided prior to its filing for bankruptcy. 

Fortunately for utility providers,  section 366(c)(2) allows the provider to discontinue service to the debtor within thirty days following the filing for bankruptcy unless the debtor provides the utility provider with "adequate assurance of payment for utility service that is satisfactory to the utility."  When deciding whether a debtor has provided a utility with adequate assurance of payment, the Bankruptcy Code prohibits the court from considering "the absence of security before the petition date,"  the debtor’s prior payment history or the availability of an administrative expense claim to the provider. 

Bankruptcy Court’s routinely grant the type of relief sought by debtors in Gottschalks’ Utilities Motion.  As indicated in the Motion,  the court in the Linens Holding Co. bankruptcy found that the debtor’s creation of an interest bearing account holding 50% of the debtor’s monthly utility costs satisfied the Bankruptcy Code’s requirement of adequate assurance of future performance.  In re Linens Holding Co., Case No. 08-10832 (CSS)(Bankr.D.Del. May 27, 2008).  Likewise, in the Pliant Corp. bankruptcy,  the court found that a two week deposit by the debtor provided its utilities with adequate assurance of future performance.  In re Pliant Corp., Case No. 06-10001 (MFW)(Bankr.D.Del. Jan. 4, 2006). 

Conclusion

It is often stated that one of the purposes of the Bankruptcy Code is to provide the debtors who file for bankruptcy with "breathing room" from creditors.  The relief provided to debtors in utility motions under section 366 is an example of such relief.  Section 366 allows debtors to receive some assurance that their utilities will continue to provide service, even if the debtor has been delinquent on prior payments.  Like with other sections of the Bankruptcy Code,  section 366 provides the creditor constituency, the utility providers in this instance, with adequate assurance of future performance.  Although the Bankruptcy Code does not define "adequate assurance,"  bankruptcy courts are very good at determining what is a fair and reasonable result given the circumstances of a particular case.