District Energy - 2011 4th Quarter

From a Legal
Perspective
What You
Absolutely Need
to Know About
Bankruptcy

Carolyn J. Johnsen, Attorney, Jennings, Strouss & Salmon
dom are affected by them. More critically,
the debtor often seeks court approval
to pay expenses with what is known as
“cash collateral,” i.e., monies generated
from tenants of the property and subject
to a secured lender’s lien. The important
part of this request is whether the debtor
has included DES operator payments as
part of the budget. This will be the initial
indication as to how the debtor intends to
treat the contract.

Editor’s Note: “From a Legal Perspective”
appears regularly in District Energy
magazine to address legal issues of
current importance to the district energy
industry. It is intended for educational
purposes only and does not constitute
legal advice.
The specter of bankruptcy often cre- ates an image of financial demise and a sinking feeling that all is lost
for anyone doing business with the “bank-
rupt” entity. But, in reality, and particularly
in today’s market, bankruptcy is used
as a business tool to restructure debt or
effectuate a sale of assets or a corporate
merger. As a result, the essential day-to-
day business of the entity in bankruptcy
(the “debtor”) often remains unchanged,
the main difference being the fact that its
operations are scrutinized and subject to
approval by a third party – the Bankruptcy
Court. So, the question for district energy
system (DES) operators is how they fit into
the mix of the debtor’s goals and its other
creditors. This article addresses the basic
aspects of a bankruptcy proceeding that
are likely to affect DES operators and their
contracts with the debtor. Many of the
concepts also apply if a DES operator files
a bankruptcy, but the focus here is on the
rights and remedies of an operator doing
business with an entity that has filed.

Overview
To set the stage, a typical scenario
entails a property owner who files a
Chapter 11 bankruptcy (pursuant to the
Federal Bankruptcy Code, which regulates
all bankruptcy proceedings) to restructure
its debt and pay creditors through con-
tinued operations or perhaps to sell the
property. The owner, referred to as the
debtor-in-possession, retains possession of
the property. In unusual cases, if there has
been fraudulent conduct by the owner
or its principals, the court may appoint a
trustee to assume control of the debtor,
but that is not the norm. In either case,
the concepts for purposes of a DES opera-
tor’s rights and remedies do not change.
The first days of the case are spent in
obtaining court permission to pay wages
and utilities and to maintain insurance
and bank accounts. DES operators may
receive notice of these pleadings but sel-
The Automatic Stay
Immediately upon the filing of the
case, an injunction known as the “auto-
matic stay” goes into effect. The stay
prevents creditors and parties to contracts
from proceeding with any action against
the debtor such as a foreclosure, collec-
tions (including letters and phone calls),
perfection of a lien, set-off, lawsuits and
contract termination (including notices of
termination). The policy behind the auto-
matic stay is that the debtor should be
entitled to some ‘breathing room’ while
assets are marshaled or while a reorga-
nization is being developed. For a DES
operator, this means it cannot demand
payment from a debtor or take any action
to enforce or terminate its contract – even
if the contract allows for termination in
the event of a bankruptcy.
Continued Service
In essence, the DES operator is
required to continue providing service
even if the debtor is in default prior to
the filing (“pre-petition”). However,
after filing (“post-petition”), the debtor
is required to maintain its obligations
on a current basis. Failure to do so has
various consequences. First, the unpaid
post-petition obligations are administrative
claims against the debtor, which means
they receive first priority in any distribu-