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Debtors Want Their MTV

posted by Bob Lawless

Filing bankruptcy can be harsh, but to lose one's cable TV on top of it. In a recent case from the U.S. Court of Appeals for the Fifth Circuit, a debtor tried to use the Bankruptcy Code to require the local cable television company to continue providing service. After the debtor filed bankruptcy, the cable provider disconnected his service. Bummer. The debtor then invoked Bankruptcy Code § 366, which states that a utility may not "alter, refuse, or discontinue service" solely because of the commencement of a bankruptcy case. That same section also provides that the utility can refuse to continue service unless the debtor gives adequate assurance of future payment. Fine, the bankruptcy court reasoned, the cable company was entitled to a superpriority payment from the debtor's bankruptcy estate if the debtor did not pay the bill.

Although the dollar amount at issue could not have been large, the cable company would face this issue in future cases and appealed the bankruptcy court's decision. The case ended up in the Fifth Circuit, turning on the momentous issue of whether cable television is a "utility" within the meaning of the Bankruptcy Code.

The Fifth Circuit decided that cable television was not a utility, reasoning that it was not a necessity like a telephone, electricity, or water. On this one, the Fifth Circuit got the right result for the wrong reason. The Bankruptcy Code gives the debtor special rights against a utility not because utilities are necessities but because the debtor has no other choice in finding the service. In turn, utilities get special rights against debtors, having the right to demand adequate assurance of future payments. The Fifth Circuit even cited a relevant passage from the legislative history making precisely this point, but then the court got off the beam by asking how necessary cable television was to daily life. Some might question whether one could get by without a telephone.

In the case of cable television, whether it was a utility in 1978 when the Code was passed, it is not a utility now. The availability of satellite service providers give consumers a reasonable alternative. Again, one might make the same point about telephone companies. In 1978, the consumer's only choice was AT&T, but the availability of alternatives now draws into question whether bankrupt debtors need the protection of section 366 to secure telephone service.

The Fifth Circuit case only involved the federal bankruptcy issue, but I always have wondered about a bankrupt debtor's state law rights against a utility that cut off service. I'm no utility lawyer, but I have talked to people who are. Based on that extensive background, I understand that utilities often have a something akin to a common carrier obligation, which requires them to provide service to any customer willing to pay their rates. For cable television operators, they can be subject to regulations that require them to accept all subscribers. For example, the Champaign, IL, city ordinances says this about cable television operators who are granted a franchise to operate in the city:

It shall be the right of all subscribers to continue receiving service insofar as their financial and other obligations to the grantee are honored. In the event that the grantee elects to rebuild, modify, or sell the system, or the grantor gives notice of intent to terminate or not to renew the franchise agreement, the grantee shall act so as to ensure that all subscribers receive service so long as the franchise agreement remains in force.

Under the ordinance, a "subscriber" includes both future and current subscribers. Granted, this is not exactly rock-solid language that the cable television provider has to continue providing service, but it bolsters the case that the cable company has to provide service to all willing customers in its service area. Are there stronger requirements for traditional utilities like power, gas, and water?

Of course, a bankrupt debtor often will be delinquent on utility bills, and the law never has required a utility to accept a customer who will not pay for services received. The Champaign ordinance specifically makes an exception for customers not honoring their financial obligations to the cable television operator. If a bankrupt debtor is current with the utility, why can't the debtor rely on these state-law rights to prevent the shutoff of utilities during the bankruptcy?

The bankruptcy mavens in our audience--well, let's face it, bankruptcy mavens are the only ones still reading at this point--will know that Congress toughened the utility section (§ 366) in the 2005 amendments. The question revolves around what is adequate assurance of future performance. Before the 2005 amendments, bankruptcy courts would routinely find that a debtor's likely ability to repay in the future constituted adequate assurance. The 2005 amendments, however, require the debtor to make a substantial financial commitment, such as a cash deposit or letter of credit, to show adequate assurance. Section 366 applies to both small consumer and large business cases, and in a big chapter 11, the adequate assurance requirements may present a substantial hurdle. Here is the bankruptcy planning question this discussion presents. If feasible, why not pay off the utilities before filing bankruptcy and then fall back on these state-law rights to prevent utility shutoff? The prebankruptcy payoff to the utility often could be recovered later as a preference.

This analysis depends largely on the strength of these state-law rights to require the utility to continue providing service, and I will repeat my disclaimer that I know very little about utility law. One of the advantages of a blog, however, is just to throw out ideas such as this for discussion. 

PS--The Fifth Circuit case is Darby v. Time-Warner Cable, Inc. (In re Darby), No. 05-20931 (5th Cir. Nov. 14, 2006)

Comments

"The Bankruptcy Code gives the debtor special rights against a utility not because utilities are necessities but because the debtor has no other choice in finding the service."

Does this mean that my electricity provider should not be deemed a "utility" if the market allows me to choose among a handful of providers (which I can do in Houston)?

or that cable should be a utility if the market does not allow choice in cable providers (like in subdivisions that only have the equipment for one cable provider)?

One has to question the continued relevance of Section 366 as technology continues to innovate. What if a debtor uses his cable company to provide phone service? What if a debtor uses an Internet connection and a service such as Vonage that transforms his computer into a phone? There are thousands, if not millions, of people who have eschewed traditional phone service in favor of cell phones. Many companies would crater if they lost their Internet access or had their email addresses disrupted.

We have to reconsider and redefine our notions of what a utility is. How about a two part test: 1) reasonably available alternatives, and 2) necessity to the debtor?

I filed a motion for contempt against Time-Warner in the W.D.Tex. (Austin) under similar circumstances about two years ago, and Judge Monroe poured me out. Time-Warner was all over this issue, they sent down two expensive gray suits all the way from Connecticut to defend them. I still fail to comprehend how a phone company is a "utility" but a cable company that provides phone service is not a utility. My debtor client, an outside salesman, got completely shut down when TWC pulled the plug on his phone and his email. It was a disaster. And I got nowhere with Judge Monroe.

I'm with Craig....Congress needs to tweak the law to conform to modern times, and a "personal necessity" prong of the test would certainly be helpful.

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