Hanratty, In re, s. 89-2070 and 89-2071

CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)
Citation907 F.2d 1418
Docket NumberNos. 89-2070 and 89-2071,s. 89-2070 and 89-2071
Parties23 Collier Bankr.Cas.2d 1043, 20 Bankr.Ct.Dec. 1235, Bankr. L. Rep. P 73,519 In re HANRATTY, Kevin F. Hanratty, Patricia, Debtor. HANRATTY, Kevin F., Hanratty, Patricia v. PHILADELPHIA ELECTRIC CO. and Edward Sparkman, Trustee. Appeal of Kevin and Patricia HANRATTY. In re MUCERINO, Dennis, Mucerino, Dorothy v. PHILADELPHIA ELECTRIC CO. and Edward Sparkman, Trustee. Appeal of Dennis and Dorothy MUCERINO.
Decision Date18 July 1990

Margaret E. Taylor (argued), Eric L. Frank, Community Legal Services, Inc., Philadelphia, Pa., for appellants.

T.H. Maher Cornell (argued), Philadelphia, Pa., for appellee.

Before GREENBERG, ALITO and WEIS, Circuit Judges.


GREENBERG, Circuit Judge.

These matters are before this court on appeal from an order of the district court of November 15, 1989, reversing an order of the bankruptcy court of April 26, 1989, which granted summary judgment to Kevin and Patricia Hanratty and Dennis and Dorothy Mucerino, the debtors. See Hanratty v. Philadelphia Elec. Co., 107 B.R. 55 (E.D.Pa.1989). The essential facts in this case are not in dispute.

On November 16, 1988, and December 5, 1988, the Mucerinos and the Hanrattys filed voluntary petitions in bankruptcy under Chapter 13 of the Bankruptcy Code. The debtors are residents of Philadelphia and, as they were indebted to Philadelphia Electric Company for residential electric service, each listed Philadelphia Electric as a creditor. Philadelphia Electric is their only source of electrical service.

On December 5, 1988, Philadelphia Electric sent a letter to Dennis J. Mucerino reading as follows:

Re: Assurance of Payment $90.00 Acct # 23-16-43-1353 File: 88-14028

Dear Mr. Mucerino:

We have been advised that you have filed a petition under the Bankruptcy Code. As a result all bills for service prior to the date of petition will be subject to the jurisdiction of the court.

The Code provides, in part, that a utility may require adequate assurance of payment from the debtor. Therefore, the sum of $90.00 is hereby being requested in accordance with the Bankruptcy Code, on or before January 13, 1989. Failure to comply with this request shall result in termination of service.

You are further advised that all costs for utility service incurred after the date of your filing a petition as aforesaid, are due and payable when rendered, and are not dischargeable under the provision of the code.

Should you have any questions concerning the foregoing, kindly contact the Credit Services Department before the date specified above at 841-6063 or 841-6047.

On December 28, 1989, Philadelphia Electric sent a letter to the Hanrattys identical to that sent to Mucerino except that it made reference to different account and file numbers and requested a $100 deposit on or before February 6, 1989.

On December 16, 1988, the Mucerinos brought an adversary proceeding against Philadelphia Electric "seeking declaratory and injunctive relief to enforce the provisions of 11 U.S.C. Sec. 366, requiring [Philadelphia Electric] to continue utility service to [their] residence without the payment of a security deposit." 1 They alleged that while a $90 deposit had been requested from them, Philadelphia Electric does not require a deposit from new residential customers who are not bankruptcy debtors unless they owe a prior debt to Philadelphia Electric. They charged that Philadelphia Electric, by requiring a deposit from them while not requiring the same from new customers, "has engaged in discriminatory conduct in violation of 11 U.S.C. Sec. 366." They therefore asked that the court declare the requirement for a deposit to be discriminatory under 11 U.S.C. Sec. 366 and that Philadelphia Electric be enjoined from terminating their electric service. On January 17, 1989, the Hanrattys filed a complaint against Philadelphia Electric which tracked that of the Mucerinos, with modifications to reflect the changes in the dates and amount of deposit.

Following the filing of the adversary proceedings, Philadelphia Electric stipulated, though the deposits had not been made, that it would not terminate service to the debtors during the pendency of the adversary proceedings. Furthermore, the parties agreed that the matters could be decided on a consolidated basis on a summary judgment motion.

On April 26, 1989, the bankruptcy court granted the debtors summary judgment. In its memorandum, the bankruptcy court quoted the following answer to an interrogatory by Philadelphia Electric explaining its policy regarding deposits from customers not filing for bankruptcy:

[Philadelphia Electric] requests a security deposit at the time of application for commercial service for those commercial customers who have not established a credit history or who have an unsatisfactory credit history. For applicants for residential service, while [Philadelphia Electric], as a matter of tariff, may require a deposit or other guarantee satisfactory to the company as security for the payment of final bills and compliance with the company's rules and regulations before the company will furnish service where an applicant's credit is not established, the company as a matter of policy and practice, has chosen, in its discretion, not to request security deposits from applicants for residential service. 2

The bankruptcy court then indicated that it was this policy of requiring a deposit only from commercial customers but not "from new residential customers" which underlies this case. It said that the debtors argued that Philadelphia Electric could not demand a deposit from residential customers in bankruptcy if it did not do so from new residential customers, because it was precluded from discriminating against bankruptcy debtors by 11 U.S.C. Sec. 366(a) which provides:

(a) Except as provided in subsection (b) of this section, a utility may not alter, refuse, or discontinue service to, or discriminate against, the trustee or the debtor solely on the basis of the commencement of a case under this title or that a debt owed by the debtor to such utility for service rendered before the order for relief was not paid when due.

The bankruptcy court noted that Philadelphia Electric urged that it was permitted to request the security deposits by 11 U.S.C. Sec. 366(b) which provides:

(b) Such 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. 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.

The bankruptcy court indicated that the purpose of 11 U.S.C. Sec. 366(a) is to provide for utility service without interruption. See In re Monroe Well Service, Inc., 83 B.R. 317, 321 (Bankr.E.D.Pa.1988). It then said that 11 U.S.C. Sec. 366(a) forbids a utility from discriminating against a debtor on the basis of a preexisting debt as well as by reason of the commencement of a bankruptcy case. Thus, in its view, "to demand a deposit from a debtor when the utility company would not make the same demand of a new customer is to discriminate based upon the prepetition claim."

The bankruptcy court acknowledged, however, that Philadelphia Electric's position "is not without support," as 11 U.S.C. Sec. 366(b) states in its first sentence that a utility company may discontinue service if a security deposit is not furnished within 20 days. The court then indicated that, predicated "upon a literal reading of this sentence," a number of courts have allowed a utility to demand a deposit even though its own regulations or state law do not support the demand. In this regard it cited the following cases: In re Smith, Richardson & Conroy, Inc., 50 B.R. 5 (Bankr.S.D.Fla.1985); In re Marion Steel Co., 35 B.R. 188 (Bankr.N.D.Ohio 1983); In re Santa Clara Circuits West, Inc., 27 B.R. 680 (Bankr.D.Utah 1982); In re Northwest Recreational Activities, Inc., 8 B.R. 7 (Bankr.N.D.Ga.1980).

Ultimately, the bankruptcy court decided that the purposes of 11 U.S.C. Sec. 366, to limit the leverage a utility "could wield in collecting prepetition debts," while at the same time affording it "adequate protection for payment of postpetition services rendered," could be "achieved by requiring the utility to view the debtor as a new customer without any prior credit history with that utility." The court concluded that 11 U.S.C. Sec. 366 "clearly was not intended ... to provide utilities with greater protection in dealing with debtors than they possessed in their dealings with non-debtors." Thus, a "debtor should be treated as a new customer, no better and no worse." Therefore, as Philadelphia Electric "does not seek deposits from new residential customers it cannot demand deposits from these debtors."

Finally, the bankruptcy court indicated that 11 U.S.C. Sec. 366 does not leave the utility without protection, as the debtor may be as well situated to pay the current bill as a similarly situated individual who has not received a discharge. Furthermore, it cited its own decision in In re Kiriluk, 76 B.R. 979, 984 (Bankr.E.D.Pa.1987), for the proposition that upon the timely request of the utility, the court has the discretion to require the posting of a security deposit. It indicated that:

[t]he burden, however, is upon the utility to present evidence of the need for such protection--which would not be met by simply showing that the individual filed a bankruptcy petition. (Where state law or company policy permits the utility to demand a deposit from new customers, then it is the debtor who must present evidence that such a deposit, in whole or in part, is...

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