In re Santa Clara Circuits West, Inc., Bankruptcy No. 82M-02022.

• Citation: 27 BR 680
• Decision Date: 10 December 1982
• Docket Number: Bankruptcy No. 82M-02022.
• Parties: In re SANTA CLARA CIRCUITS WEST, INC., a Utah corporation, Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Utah

27 B.R. 680 (1982)

In re SANTA CLARA CIRCUITS WEST, INC., a Utah corporation, Debtor.

Bankruptcy No. 82M-02022.

United States Bankruptcy Court, D. Utah.

December 10, 1982.

Thomas E. Lowe, Swaner & Taylor, Salt Lake City, Utah, for debtor.

Patricia S. Drawe, Salt Lake City, Utah, for Mountain Fuel Supply Co.

MEMORANDUM DECISION

GLEN E. CLARK, Bankruptcy Judge.

This case requires the Court to determine whether a utility may demand a cash deposit of a debtor when the pre-petition default in the debtor's account is de minimus and to decide what conditions will provide the utility in this case with adequate assurance of payment.

FACTUAL AND PROCEDURAL BACKGROUND

Santa Clara Circuits West, Inc., (debtor), a manufacturer and seller of electronic circuit boards, filed a Chapter 11 petition on August 13, 1982. Mountain Fuel Supply Company (Mountain Fuel) is a utility which supplies natural gas to debtor's plant.

By letter dated September 3, 1982, Mountain Fuel's business office representative notified debtor that as of the date of debtor's filing, Mountain Fuel would open a new account for debtor. The letter went on to state that:

Because of this filing, it is our policy to request new Gas Service Agreements and security deposits on each account. Please be advised that we base our deposits on an estimated 90 day\'s billing. The amount required is as follows:

                  2034 W. 23rd S.            $  600.00
                  2036 W. 23rd S.            $  850.00
                                             _________
                  Total                      $1,450.00
                

Enclosed you will find Gas Service Agreement cards. Please fill in the spaces indicated by the "x," sign, notarize, and return them with your check in the postage-paid envelope that is provided.

The receipt of these items by September 17, 1982 will insure continuous gas service. Your prompt attention to this matter is appreciated. Should there be any questions, please call me at 534-5016.

On the date of debtor's filing, it owed Mountain Fuel $29.00.

On September 24, 1982, debtor filed a motion requesting the Court to rule that Mountain Fuel had no right to demand a security deposit or, in the alternative, to determine what security is necessary in this case to provide Mountain Fuel adequate assurance of payment. On October 4, Mountain Fuel filed its memorandum. On October 5, the Court held an evidentiary hearing on debtor's motion.

At the hearing, the parties submitted, by stipulation, copies of Mountain Fuel's records of debtor's gas usage and payments between January 23, 1981 and August 27, 1982. Exhibit 1. The parties also submitted, by stipulation, copies of two guarantees of payment of the debtor's accounts with Mountain Fuel. Exhibit 2. The debtor submitted a list of its monthly expenses. Exhibit 3.

Earl Patterson, an officer of the debtor, testified that the list of monthly expenses was accurate, that the debtor billed $30,000 in September for work completed, that debtor employs 20 to 25 persons, and that he is an officer of Pen-Tec Enterprises, Inc., the guarantor of debtor's accounts.

The debtor requested judicial notice of its post-petition financing arrangement under which it is to receive 80% of its accounts receivable in exchange for a priority lien in favor of the financing party.

The Court now files this memorandum decision on the issues raised by debtor's motion.

PROPRIETY OF MOUNTAIN FUEL'S DEMAND FOR A DEPOSIT

Debtor argues that Mountain Fuel is not entitled to demand a security deposit, reasoning that Mountain Fuel's demand unlawfully discriminated against it because of its Chapter 11 filing. In debtor's view, a demand for a security deposit based solely on the fact of a Chapter 11 filing is prohibited by 11 U.S.C. § 525. The debtor argues that where a debtor owes at filing only a de minimus amount for services, "the protection provided by Section 366(b) is not available to a utility company." Debtor's memorandum, p. 5. Debtor also argues that in this case, Section 362(a) prohibited Mountain Fuel's demand.

Mountain Fuel contends that although it is authorized to do so, it did not request a security deposit solely because of debtor's filing. In Mountain Fuel's view, debtor's payment history shows "numerous missed and late payments," and "unpaid balances carried over almost every month in the past two years." Mountain Fuel's memorandum, p. 2, 4. For purposes of this discussion, however, the Court will assume that Mountain Fuel's demand was prompted exclusively by debtor's Chapter 11 filing.

1. Demand for a security deposit and the automatic stay

Debtor does not indicate which subsection of 11 U.S.C. § 362(a) it believes might prohibit a utility's demand for a security deposit. Mountain Fuel's deposit requirement is not designed to serve as a device for collecting a pre-petition debt. In fact, exhibit 1 shows that Mountain Fuel has written off debtor's pre-petition debt. Thus, subsections (1) and (6) of Section 362(a) are inapplicable. Subsection (3), however, prohibits "any act to obtain . . . property from the estate." A demand for a security deposit may be an act to obtain property from the estate.

Although Section 362(a)(3), by its terms, arguably prohibits a utility from seeking to obtain property from the estate by means of a security deposit, a utility's demand for security is specifically authorized by Section 366(b) as explained below. The Court must presume that Congress intended these two provisions to be consistent with one another and that, therefore, a demand for security authorized by Section 366(b) does not violate Section 362(a)(3). See Morton v. Mancari, 417 U.S. 535, 551, 94 S.Ct. 2474, 2483, 41 L.Ed.2d 290 (1974) ("The courts are not at liberty to pick and choose among congressional enactments, and when two statutes are capable of co-existence, it is the duty of courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective.") The bankruptcy court for the Southern District of Ohio has reached a similar conclusion, holding that a utility's demand for security under Section 366(b) is not violative of the automatic stay of Section 362(a)(3). Hennen v. Dayton Power & Light Co. (In re Hennen), 17 B.R. 720 (Bkrtcy.S.D.Ohio 1982). None of the other subsections of Section 362(a) appear to apply in these circumstances.

2. Section 366 and Mountain Fuel's demand for a security deposit

Section 366 provides that:

(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 that a debt owed by the debtor to such utility for service rendered before the order for relief was not paid when due.

(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.

Debtor relies on Collier's statement that "discrimination against the debtor or trustee is flatly precluded by subsection 366(a) and not mentioned in subsection 366(b) which suggests that discrimination against a debtor simply because it has sought relief under the Bankruptcy Act is improper." 2 Collier on Bankruptcy ¶ 366.03, at 366-4 (15th ed.1982). While it is true that Section 366(a) prohibits a utility from altering service to, refusing service to, discontinuing service to, or discriminating against the trustee or the debtor solely because a debt for pre-order-for-relief service was not paid when due, Section 366(a) is expressly made subject to Section 366(b).

Section 366(b) permits a utility to alter, refuse, or discontinue service if the debtor fails to furnish adequate assurance of payment for post-order-for-relief services. A judicial determination of what constitutes adequate assurance of payment is not made a prerequisite to alteration, refusal, or discontinuation of service. Thus, a utility may make an independent determination of what security is necessary to provide adequate assurance. It follows that a utility may notify the debtor of what it requires. If the debtor disagrees, it may ask the court to modify the utility's demand. Accord, In re Robmac, Inc., 8 B.R. 1 (Bkrtcy.N.D.Ga.1979); In re Hennen, supra; In re Stagecoach Enterprises, 1 B.R. 732, 734 (Bkrtcy.M.D.Fla.1979). But if neither the debtor nor any other party in interest requests a hearing, the utility may alter, refuse, or discontinue service if in the utility's subjective judgment it has not been given adequate assurance of payment.

This Court disagrees with In re Coury, 22 B.R. 766 (Bkrtcy.W.D.Pa.1982). See also Demp v. Philadelphia Electric Co. (In re Demp), 22 B.R. 331 (Bkrtcy.E.D.Pa.1982) (following Coury). In Coury, a utility demanded security deposits of debtors who were not delinquent in their payments at the time of filing their bankruptcy petitions. The court read Sections 366(a) and (b) to mean that a utility could demand security of a debtor only when there had been a pre-filing default:

Section 366(b) can only be read in conjunction with Section 366(a). Section 366(a) states that a utility can only discriminate against a debtor who has defaulted prior to filing pursuant to Section 366(b); that is, by demanding security. The utility cannot read Section 366(b) as giving rights to security if there has been no default.

22 B.R. at 767. This reading inverts Sections 366(a) and 366(b). Section 366(a) is not a limitation on Section 366(b). Instead, Section 366(b) is an exception to the prohibitions of Section 366(a). If Coury were correct, a utility could not alter, refuse, or discontinue service to a debtor in cases where the debtor was not in default...