Summary of a Recent
Judicial
Development in
Bankruptcy
BAPCPA's Definition of Adequate Assurance
Applies Only to Chapter 11 Cases
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In In re Astle, 338 B.R. 855 (Bankr. D. Idaho 2006), the United States Bankruptcy Court for the District of Idaho held that the Bankruptcy Abuse Prevention and Consumer Protection Act's definition of adequate assurance of payment was only applicable to Chapter 11 cases, and the Chapter 12 Debtors had provided adequate assurance of payment to the electric company.
Background
The Debtors, dairy farmers, filed their Chapter 12 petition in November 2006. Id. at 856. In February 2006, the Debtors filed a "Motion for Determination of Utility Deposit with Idaho Power Company and for Providing Secured Credit as Assurance of Payment" because Idaho Power refused to supply energy to their farm unless the Debtors paid a $44,162 deposit. Id. Debtors had offered a secured lien in the value of the deposit on their dairy cattle, but Idaho Power rejected that offer and claimed they were entitled to a cash deposit or other "adequate assurance of payment" as defined by § 366(c) of the Bankruptcy Code. Id.
Arguments
Idaho Power argued at the hearing that it was entitled to adequate assurance of payment in the form of a cash deposit, letter of credit, or surety bond, pursuant to § 366(c) of the Bankruptcy Code. Id.
The Debtors argued that § 366(c) only applied to Chapter 11 cases. Id. at 858. Alternatively, they argued that if § 366(c) did apply, their proposal of a first priority lien secured in the cattle herd and receivables was the legal and/or functional equivalent of a cash deposit or a surety bond. Id.
Analysis and Holdings
The court began by looking at § 366 of the Bankruptcy Code. Id. at 857. Section 366(a) says that utility companies cannot refuse service to a debtor just because he filed for bankruptcy. Id. Section 366(b) says utility companies can demand "adequate assurance" of ability to pay. Id. Section 366(c), which was added by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), defines adequate assurance of payment as follows: cash deposit, letter of credit, certificate of deposit, surety bond, prepayment of utility consumption, or another form of security that is mutually agreed on between the utility and the debtor or the trustee. Id. However, the court concluded that § 366(c) applied only to Chapter 11 cases, because the language "with respect to a case filed under Chapter 11" is found in paragraphs (3) and (4), and there is no other language anywhere in the section to contradict or point otherwise. Id. at 859. Because this was a Chapter 12 case, the Debtors only had to comply with § 366(b), which defines adequate assurance of payment as being "in the form of a deposit or other security." Id. at 860-61. The court held that the Debtors' offer of a secured lien on their dairy cattle was a form of "other security" and met the adequate assurance requirement. Id. at 861.
The case was decided on March 14, 2006.