Virginia Elec. & Power Co. v. Caldor, Incorporated-New York, 96-5096

• Decision Date: 10 June 1997
• Docket Number: No. 96-5096,96-5096
• Parties: , 38 Collier Bankr.Cas.2d 128, 30 Bankr.Ct.Dec. 1228, Bankr. L. Rep. P 77,510 VIRGINIA ELECTRIC & POWER COMPANY; Jersey Central Power & Light Company; Yankee Gas Services Company; Public Service Electric & Gas Company; Baltimore Gas & Electric Company; Orange & Rockland Utilities Inc.; Niagara Mohawk Power Corp.; and Consolidated Edison Company of New York, Inc., Appellants, v. CALDOR, INC.-NY; The Caldor Corporation; Caldor, Inc.-Cal-Leasing, Inc.; Cal-Silver Spring L.L.C.; Calfax; Lacdor Realty Corp.; Premier Service Programs, Inc.; and Tri-State Advertising Agency, Inc.;, Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 646

117 F.3d 646

65 USLW 2819, 38 Collier Bankr.Cas.2d 128,

30 Bankr.Ct.Dec. 1228, Bankr. L. Rep. P 77,510

VIRGINIA ELECTRIC & POWER COMPANY; Jersey Central Power &amp Light Company; Yankee Gas Services Company; Public Service Electric & Gas Company; Baltimore Gas & Electric Company Orange & Rockland Utilities Inc.; Niagara Mohawk Power Corp.; and Consolidated Edison Company of New York, Inc., Appellants, v. CALDOR, INC.-NY; The Caldor Corporation; Caldor Inc.-Cal-Leasing, Inc.; Cal-Silver Spring L.L.C.; Calfax Lacdor Realty Corp.; Premier Service Programs, Inc.; and Tri-State Advertising Agency, Inc.;, Appellees.

No. 96-5096.

United States Court of Appeals, Second Circuit.

Argued Feb. 25, 1997.

Decided June 10, 1997.

Paul B. Phinney III, Pearl River, NY, Russell R. Johnson III, Richmond, VA, for Appellants.

Michael J. Crames (Stephen W. Milo, Benjamin Mintz, Kaye, Scholer, Fierman, Hays & Handler, LLP, New York City), for Appellees.

Before: VAN GRAAFEILAND, MESKILL, and CABRANES, Circuit Judges.

JOSE A. CABRANES, Circuit Judge.

Appellees ("Caldor") filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq., on September 18, 1995. Appellants are eight of Caldor's utility suppliers ("Utilities"), who appeal a decision of the United States District Court for the Southern District of New York (Sidney H. Stein, Judge), affirming an order of the United States Bankruptcy Court for the Southern District of New York (James F. Garrity, Judge), enjoining the Utilities from refusing, altering or terminating service to Caldor pending the approval of Caldor's plan for reorganization. The bankruptcy court determined that, in light of Caldor's prepetition payment history and their postpetition liquidity, the Utilities had "adequate assurance of payment" for their continued service, as required under 11 U.S.C. § 366(b) (" § 366(b)"), ¹ with the following safeguards in place: (1) an "administrative expense priority"; (2) an expedited procedure for relief in the event of a payment default by Caldor; and (3) an order requiring Caldor to convey their monthly operating statements directly to the Utilities. The Utilities urge on appeal that these safeguards cannot, as a matter of law, satisfy § 366(b)'s requirement that utility suppliers enjoy an "adequate assurance of payment, in the form of a deposit or other security." Id. (emphasis supplied). The three safeguards put into place by the bankruptcy court, the appellants contend, do not fall within the definition of a "deposit or other security" traditionally employed in the "utility/customer" context. In any event, the Utilities urge, these safeguards were otherwise available to them in the normal course and, therefore, cannot alone meet the "deposit or other security" requirement.

We hold that, even assuming that the forms of payment assurance ordered by the bankruptcy court were otherwise available to the Utilities, they do not fail as a matter of law to satisfy § 366(b)'s requirement that utility suppliers receive "adequate assurance of payment" from debtors in bankruptcy.

I.

The appellees together form a substantial retail enterprise in the eastern United States. On September 18, 1995, they filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. This case arises from their efforts to ensure continued utility services between the time of the filing of their Chapter 11 petition and the ultimate approval of their reorganization plan.

Section 366(a) of the Bankruptcy Code, 11 U.S.C. § 366(a), ² prohibits utility suppliers from altering or discontinuing services to a customer because the customer files for bankruptcy. Section 366(b), however, establishes an exception to this prohibition in cases where the debtor fails to provide its utility suppliers, within the first twenty days after the debtor files its petition in bankruptcy, with "adequate assurance" that the debtor will continue to meet its payment obligations to the supplier. This subsection provides, specifically, that a "utility may alter, refuse, or discontinue service if neither 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." 11 U.S.C. § 366(b) (emphasis supplied). If the debtor and its utility fail to agree as to what will constitute "adequate assurance," however, either party may file a motion requesting the bankruptcy court to settle the question: "On request of a party in interest and after notice and a hearing, the court may order reasonable modification of the amount of the deposit or other security necessary to provide adequate assurance of payment." 11 U.S.C. § 366(b); see also 3 COLLIER ON BANKRUPTCY p 366.03, at 366-3 to -4 (1997).

Here, Caldor claims, the sheer number of its utility suppliers, comprising more than 400 utility companies, made it difficult for it to engage in negotiations to provide each supplier with the "adequate assurance of payment" necessary to guarantee continued service under § 366. Caldor explains that it was also concerned that, if it were to engage in separate negotiations with its utility providers, the utilities would capitalize on Caldor's vulnerable position by requiring unreasonably high security deposits. Accordingly, on September 26, 1995, Caldor bypassed the negotiations contemplated by § 366 and filed an application with the bankruptcy court, seeking to enjoin its many utility suppliers from altering or discontinuing service pending confirmation of Caldor's Chapter 11 reorganization plan. Caldor urged in its application that its utility suppliers be so enjoined without requiring Caldor to post any "deposit or other security." Caldor maintained that, in light of its $250 million "debtor-in-possession financing facility," its utility suppliers would have "adequate assurance of payment" in the "administrative expense priority" for which they are eligible under §§ 503(b)(1)(A) ³ and 507(a)(1) ⁴ of the Bankruptcy Code.

Following a hearing on November 16, 1995, at which twenty-two utility suppliers who wished to challenge Caldor's proposed order ("Objecting Utilities") appeared, the bankruptcy court granted Caldor's request to extend the 20-day period during which utilities cannot cancel or alter service to run until the time that Caldor's reorganization plan is confirmed. Citing Caldor's prepetition payment history and its postpetition financial condition, the court found that Caldor "is probably the best risk customer available to the utilities," and concluded that there was "no reason to doubt that [Caldor's] prepetition history of making [utility] payments on a [timely] and current basis [would] not continue postpetition." Accordingly, the court agreed with Caldor that the utility suppliers enjoyed "adequate assurance of payment" without any "deposit or other form of security." Instead, the bankruptcy court directed that each of Caldor's utilities be afforded administrative expense priorities under §§ 503(b) and 507(a); provided for an expedited process whereby Objecting Utilities may petition the court for immediate payment and for an order requiring Caldor to post a deposit in the event that Caldor defaults on any utility payment; and ordered Caldor to provide counsel for each Objecting Utility with copies of Caldor's monthly operating statements within two business days after each statement is filed with the bankruptcy court. The bankruptcy court concluded that, with these safeguards in place, "the utilities are adequately protected without the payment of [any] deposits."

Thirteen of the twenty-two Objecting Utilities challenged the bankruptcy court's order in the district court pursuant to 28 U.S.C. § 158(a). They did not contest the bankruptcy court's findings of fact, including its determination that the safeguards it put into place provide the Objecting Utilities with "adequate assurance of payment." Rather, the thirteen utility suppliers argued that § 366(b) requires a debtor to post some "deposit or other security" to "adequate[ly] assur[e]" payment of its postpetition utility bills, and that the bankruptcy court erred as a matter of law in directing them to continue their service to Caldor without an assurance of payment in this prescribed form.

In an Opinion and Order filed July 10, 1996, Judge Stein rejected the Utilities' reading of § 366(b). See In re Caldor, Inc., 199 B.R. 1 (S.D.N.Y.1996). Rather than adopt the reasoning of the bankruptcy court that Caldor was not being required to post any security or other deposit, however, the district court read the term "other security" to include the safeguards provided by the bankruptcy court. Id. at 3. To read the term "other security" so that it does not encompass such safeguards, the court explained, would be to restrain unreasonably a bankruptcy court's much-needed flexibility in fashioning utility-debtor security arrangements. Id.

The Utilities, eight of the thirteen Objecting Utilities that challenged the bankruptcy court's decision in the district court, here appeal from the judgment entered by the district court on the basis of Judge Stein's Opinion and Order upholding that decision. They claim that, because the phrase "other security" is not defined in the statute, ⁵ the phrase should be given its "ordinary and customary meaning," which, in the "utility/customer" context, is "prepayment or expedited payment of bills, a letter of credit, surety bond or some similar device." Brief for Appellants at 9-10. None of the safeguards put into place by the bankruptcy court, the Utilities contend, falls within this definition. In any event, the Utilities urge, they would have been entitled to an administrative expense priority as a matter of course; § 366(b) itself already provides them with a default procedure similar to what the bankruptcy court put into place; ⁶ and...