UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ______________________________ ) In re: ) Chapter 11 ) MERVYNS HOLDINGS, LLC, ) Case

No. 08-11586 (KG) et al., ) Debtors. ) ) Jointly Administered ) ______________________________)

Re: Docket Nos. 6 & 48 Hearing: August 26, 2008 at 10:00 a.m. Objections By: August 19, 2008, by 4 p.m.

MOTION AND MEMORANDUM OF CERTAIN UTILITY COMPANIES TO: (A) VACATE, AND/OR RECONSIDER, AND/OR MODIFY ORDER, INTER ALIA, ESTABLISHING PROCEDURES FOR DETERMINING ADEQUATE ASSURANCE OF PAYMENT FOR FUTURE UTILITY SERVICES; AND, (B) DETERMINE ADEQUATE ASSURANCE OF PAYMENT TO THE UTILITIES PURSUANT TO 11 U.S.C. 366(c) Southern California Edison Company (SCE), Salt River Project (SRP), and San Diego Gas & Electric Company (SDGE) (collectively, the Utilities), by counsel, hereby move this Court, pursuant to Rule 60 of the Fed. R. Civ. P., made applicable in Bankruptcy under Rule 9024 of the Federal Rules of Bankruptcy Procedure, and Del. Bankr. L.R. 9013-1(m)(v) to: (A) vacate and/or reconsider and/or modify the Order, Inter Alia, Establishing Procedures For Determining Adequate Assurance Of Payment For Future Utility Services (the Utility Order) entered by the Court on July 30, 2008; and, (B) determine adequate assurance of payment to the Utilities pursuant to 11 U.S.C. Section 366(c).
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In support of their Motion, the Utilities set

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forth the following:

Introduction Section 366, as amended, requires a debtor to provide utilities with adequate assurance of payment that is satisfactory to the utility within 30 days of the Petition Date. If a debtor

believes the amount of the utilitys request is unreasonable or needs to be modified, the debtor can file a Motion with the Court seeking to modify the amount of the utilitys request (a Modification Motion). Moreover, if the debtor acts promptly,

it can file and schedule the Modification Motion to be heard before the 30 day period expires. Instead of waiting to receive deposit requests from their utility providers and follow the express requirements and procedures set forth in Section 366, the Debtors subverted the requirements of Section 366 by filing the Debtors Motion For Entry Of An Order, Inter Alia, Establishing Procedures For Determining Adequate Assurance Of Payment For Future Utility Services (the Utility Motion), requesting that as adequate assurance of payment this Court approve, on an ex parte basis, an escrow account containing $1.6 million (the Escrow Account), which is supposedly equal to the Debtors estimated sum of their monthly utility charges from all of the Debtors utility companies. Simply put, this case is one of the most egregious 2
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examples of a debtors subversion of the express provisions of Section 366(c) which very clearly requires the Debtors to provide adequate assurance of payment that is satisfactory to the Utilities, not the other way around. Moreover, Section 366(c)(3)

only permits the Debtors an opportunity to seek modification of the form and the amount of adequate assurance of payment that is satisfactory to the Utilities after notice and a hearing. Therefore, because the Utility Motion does not even address the Utilities deposit requests, and it does not seek to modify the amount of those requests, the Utility Motion was not properly before the Court, and for that reason and for the reasons that follow, the Utility Order, granted on an ex parte basis only one day after the filing of the Utility Motion on the Petition Date, must be vacated as to the Utilities. The Utilities have filed this Motion to Vacate the Utility Order because: (1) The Utility Order is a final order as no objection deadline nor final hearing date was scheduled within the 30 day period of Section 366(c); (2) the Utility Order was entered on an ex parte basis without proper notice to the Utilities in violation of their rights to Due Process; (3) there was no reason for the Debtors to have the issue of adequate assurance of payment determined on the 2nd day of their bankruptcy cases when Section 366(c) clearly provides the Debtors with 30 days to address the issue; and, (4) the provisions of the 3
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Utility Order are contrary to the express provisions of Section 366 in a multitude of different ways as further detailed herein. Jurisdiction and Venue 1. This Court has jurisdiction over this Motion under 28

U.S.C. 1334(b). 2. This matter is a core proceeding within the meaning of

28 U.S.C. 157(b)(2)(A) & (M). 3. Venue of this Motion is proper in this district

pursuant to 28 U.S.C. 1409. Procedural Facts The Utility Order 4. On July 29, 2008 (the Petition Date), the Debtors

commenced their cases under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. 101 et seq. (the Bankruptcy Code) that are now pending with this Court. The Debtors continue to

operate their businesses and manage their properties as debtors in possession pursuant to Bankruptcy Code sections 1107(a) and 1108, and the Debtors bankruptcy cases are being jointly administered. 5. Motion. 6. No notice, however, of the Utility Motion was given to On the Petition Date, the Debtors filed the Utility

the Debtors utilities. 7. Thus, because the Utilities were never served with the 4
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Utility Motion, the Utilities had no opportunity to respond to the Utility Motion, despite the fact that the Utilities were known entities that provided continuous prepetition utility goods and/or services to the Debtors and have continued to provide continuous post-petition utility goods and/or services to the Debtors. 8. Through the Utility Motion, the Debtors sought to avoid

the procedural and substantive requirements of Section 366. Instead of responding to adequate assurance demands of their utility companies, the Debtors elected to file the Utility Motion and seek burdensome procedures and ex parte Court approval for the Escrow Account. 9. The Debtors obtained an expedited ex parte hearing on

the Utility Motion that took place on July 30, 2008 a mere one day after the filing of the Utility Motion on the Petition Date. 10. Also on July 30, 2008, the Court granted the Utility

Motion and entered the Utility Order which authorized the Debtors to fund the Escrow Account in the amount of $1.6 million, an amount supposedly equal to the Debtors estimated two-weeks of utility charges from all of the Debtors utility providers, as adequate assurance of payment to the Debtors utility companies pursuant to Section 366 of the Bankruptcy Code. 11. The Utility Order also provides that if a utility

company seeks additional adequate assurance from the Debtors, it 5

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shall be required to make a request in writing for additional assurance of payment, served upon the Debtors and their counsel, that sets forth: (i) the locations(s) for which utility services are provided; (ii) the account number(s) for such location(s), (iii) the outstanding balance for each account; and, (iv) a summary of the Debtors payment history on each account. 12. Further, the Utility Order provides that if a utility

company makes an additional assurance request and the Debtors believe that the request is unreasonable, the Debtors shall file a motion for determination of adequate assurance of payment (a Determination Motion) within 30 days after receipt of such request. 13. Moreover, in direct contravention of the express

language of Section 366, which allows a utility to offset a prepetition deposit against a debtors prepetition debt, the Utility Order provides that pending notice and a hearing on the Determination Motion the Debtors utility companies that submit a request for additional adequate assurance may not recover or set off against a prepetition deposit. 14. Lastly, the Utility Order is a final order that does

not provide for the scheduling of either a Final Hearing on the Utility Motion or a deadline by which the Utilities may object to the Utility Motion. Rather, the Utility Order provides that the

terms and conditions of the Utility Order shall be immediately 6

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effective and enforceable upon entry.

7
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Facts Regarding the Debtors 15. Debtors operate 177 retail stores in California and six

states in the southwestern United States selling a selection of national brands, private-label apparel and housewares. Affidavit

Of Charles R. Kurth, Executive Vice President And Chief Financial And Administrative Officer Of The Debtors, In Support Of First Day Motions at 6 (hereinafter Kurth Aff. at __). 16. For the fiscal year ended February 2, 2008, the Debtors

recorded net sales of approximately $2.5 billion and incurred a net loss of approximately $64 million. 17. Kurth Aff. at 8.

Under the Debtors Prepetition Senior Loan Facility,

Debtors had access to a loan facility of up to $600 million consisting of a $550 million revolving loan A facility and a $50 million revolving loan B facility. The amounts provided under

the Prepetition Senior Loan Facility are secured by a first priority security interest in all or substantially all of the Debtors real and personal property (the Prepetition Collateral). As of the Petition Date, the amounts outstanding

under the Prepetition Senior Loan Facility totaled an aggregate amount of approximately $329,381,571.02 plus interest, costs and expenses. Kurth Aff. at 9 & 10. 18. In addition to the Prepetition Senior Loan Facility,

Debtors are party to a Subordinated Promissory Note in the aggregate principal amount of $30 million dated as of November 8
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27, 2007, secured by a second lien in the Debtors Prepetition Collateral. Kurth Aff. at 11. (The Prepetition Senior Loan

Facility and the Subordinated Promissory Note are collectively referred to herein as the Prepetition Obligations). 19. Since the first quarter of 2008, Debtors have

experienced a sharp decline in the Debtors profitability and liquidity. Kurth Aff. at 12.

Events Leadings to the Debtors Filing Their Chapter 11 Cases 20. External factors contributing to Debtors liquidity

problems are reduced consumer spending, decline in the housing market and tightening of credit terms from the Debtors suppliers. All of these external factors have worsened in recent months severely negatively impacting Debtors ability to pay suppliers, maintain an uninterrupted flow of merchandise into the stores and service debts. 21. Kurth Aff. at 13.

As of early July 2008, Debtors liquidity problems

continued to worsen leading the Debtors to ultimately file their bankruptcy cases in an effort to address their liquidity issues and maximize the value of their estates with the objective of ultimately reorganizing the Debtors as profitable entities. Kurth Aff. at 14. 22. As an initial alternative, Debtors anticipate filing

motions with the Bankruptcy Court to auction and close a selected number of underperforming and unprofitable stores. 9
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Kurth Aff. at

 17. Post-Petition Financing 23. On the Petition Date, Debtors filed the Debtors' Motion

for Interim and Final Orders (A) Authorizing Debtors to Obtain Postpetition Financing and Grant Security Interests and Superpriority Administrative Expense Status Pursuant to 11 U.S.C. Sections 105 and 364(c); (B) Modifying the Automatic Stay Pursuant to 11 U.S.C. Section 362; (C) Authorizing Debtors to Enter Into Agreements with Wachovia Capital Finance Corporation (Western), in its Capacity as Administrative and Collateral Agent for Itself and Certain Other Lenders; (D) Authorizing Debtors to Use Collateral Subject to Liens and Security Interests Including Cash Collateral and Granting Adequate Protection in Respect Thereof and (E) Scheduling Interim and Final Hearings Pursuant to Bankruptcy Rule 4001 (the DIP Motion) seeking access to DIP financing with maximum credit limits totaling $465 million. 24. On July 31, 2008, the Court held a hearing on the DIP

Motion and thereupon entered an order granting the motion on an interim basis (the Interim DIP Order). 25. As part of the Courts findings and as indicated by

the Interim DIP Order, the Debtors do not have sufficient available sources of working capital in which to operate their businesses in the ordinary course of their business without the financing requested under DIP Motion. 10
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Interim DIP Order at

E(ii). 26. Further, the Interim DIP Order indicates that the

Debtors have prepared and provided to the DIP Lenders an initial Budget, the Debtors strict adherence to which the DIP Lenders are relying for purposes of providing the DIP financing (the Budget). Interim DIP Order at E(iv). To date, however,

Debtors have not filed a copy of the Budget with the Court nor have the Debtors otherwise made a copy of the Budget available to the Utilities. Debtors assert in the Utility Motion that Debtors

spend approximately $3.2 million each month on utility costs. Utility Motion at 15. Without a copy of the proposed Budget,

however, the Utilities have no way to verify Debtors allocations from the DIP financing for payment of Debtors monthly utility costs. Furthermore, the Budget, as defined under the

Ratification and Amendment Agreement attached as Exhibit 1 to the DIP Motion, is to be delivered in form and substance satisfactory to the Agent of the DIP Lender. 1.1(d). 27. Debtors are obtaining their DIP financing from the Kurth Aff. at 123. Under the DIP Motion, Exhibit 1 at

Debtors Prepetition Lenders.

Interim DIP Order, Debtors are authorized to pay Debtors Prepetition Lenders all of their prepetition obligations in accordance with the terms of the DIP facility. at 1.4. 11
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Interim DIP Order

28.

Further, Debtors are authorized and directed to make

all payments and transfers of estate property to the DIP Lenders which shall be applied first to the Prepetition Obligations until those debts are paid in full and completely satisfied, followed by payment to the Debtors Postpetition Obligations to the DIP Lenders. In addition, and without further order from the Court,

the Debtors are authorized and directed to pay or reimburse the DIP Lenders for all present and future costs and expenses, including without limitation, all professional fees, consultant fees and legal fees and expenses paid or incurred the DIP Lenders in connection with providing the DIP facility. at 1.5. 29. To secure the prompt payment and performance of the Interim DIP Order

Debtors under the terms of the DIP facility, the DIP Lenders are granted valid and perfected first priority security interests and liens in all of the prepetition and postpetition collateral of the Debtors along with a Superpriority Administrative Claim in all of the Debtors bankruptcy cases, subject to the Carve-Out. Interim DIP Order at 2.1.1 & 2.2. 30. The Carve-Out in the Budget includes all unpaid and

outstanding professional fees and expenses incurred on or after the Petition Date that are approved by the Court for Debtors attorneys, accountants or other professionals, less any retainers then held by said professionals, in a cumulative aggregate sum 12
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not to exceed $4,000,000.00.

Accordingly, the Carve-Out

seemingly is designed to sufficiently secure the payment of the Debtors professional fees, including fees incurred to Debtors counsel. Interim DIP Order at 2.3.1(c). Further, prior to an

occurrence of an event of default, Debtors are authorized to pay allowed professional fees in accordance with the Budget with the payment of those professional fees causing no corresponding reduction in the amount of the Carve-Out. 2.5.1. 31. Under the Interim DIP Order, the Court has scheduled a Interim DIP Order at

final hearing on the DIP Motion for August 26, 2008. Facts Concerning The Utilities 32. Each of the Utilities provided the Debtors with

prepetition utility goods and/or services and has continued to provide the Debtors with utility goods and/or services since the Petition Date. 33. Under the Utilities billing cycles, the Debtors

receive approximately one month of utility goods and/or services before the Utility issues a bill for such charges. Once a bill

is issued, the Debtors have approximately 15 to 30 days to pay the applicable bill. If the Debtors fail to timely pay the bill,

a past due notice is issued and a late fee is subsequently imposed on the account. If the Debtors fail to pay the bill

after the issuance of the past due notice, the Utilities issue a 13
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notice that informs the Debtors that they must cure the arrearage within a certain period of time or their service will be disconnected. Accordingly, under the Utilities billing cycles,

the Debtors could receive 2 to 3 months of unpaid charges before the utility could cease the supply of goods and/or services of for the post-petition payment default. 34. Subject to a reservation of the Utilities rights to

supplement their post-petition deposit requests if additional accounts belonging to the Debtors are subsequently identified, the Utilities post-petition deposit requests are currently as follows (the Requests): Utility SCE SRP SDGE No. of Accts. 51 9 21 Prepet. Debt Est. $372,990 $192,966.35 $78,696 Dep. Request $755,285 (2-months) $243,205 (2-months) $155,418(2-months)

35.

SRP maintained a pre-petition deposit on the Debtors

accounts totaling $219,582.00 that SRP will recoup against the Debtors pre-petition debt pursuant to Section 366(c)(4).

14
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Discussion A. THE UTILITY ORDER SHOULD BE VACATED BECAUSE IT WAS ENTERED WITHOUT PROVIDING THE UTILITIES WITH NOTICE AND AN OPPORTUNITY TO BE HEARD IN VIOLATION OF THE UTILITIES CONSTITUTIONALLY PROTECTED RIGHTS OF DUE PROCESS.

The Debtors failed to provide any notice to the Utilities concerning the Utility Motion1, and the expedited ex parte hearing on the Utility Motion conducted one day after filing of the Utility Motion on the Petition Date - was a final hearing because: (a) no objection deadline to the Utility Motion was established, and (b) no final hearing date was set within the 30 day period of Section 366(c). Moreover, the Court instructs the

Debtors to serve the Utility Order upon the utility companies identified by the Debtors via first-class regular United States mail within five (5) business day after the date of entry of the Utility Order. For the following reasons, the Utilities believe

that this type of service is not undertaken in a manner

1 In the Utility Motion, Debtors represented that they were going to provide notice of the Utility Motion to several parties, including the Utilities, pursuant to Del. Bankr. L.R. 9013-1(m). Rule 9013-1(m)(iii) imposed, in pertinent part, the following service requirements upon the Debtors for service of the Utility Motion:

The debtor shall serve (a) all motions . . . that the debtor asks be heard under this Local Rule . . . and (b) the agenda upon . . . any party directly affected by the relief sought in such applications and motions, at least twenty-four (24) hours in advance of a hearing on such applications and motions, unless otherwise ordered by the Court, and shall file a certificate of service to that effect within forty-eight (48) hours. On July 30, 2008, Debtors noticing agent filed an affidavit of service of only the agenda, not the accompanying motions, and does not indicate service of that document upon any of the Utilities. [See Docket No. 42].

15
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reasonably calculated to apprise the Utilities of the relief sought under the Utility Motion. See Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950) (holding, in part, that the Due Process requires reasonable notice and opportunity for hearing appropriate to the pending matter which is to be provided finality). First of all, the Utility Motion instigates a contested matter governed by Rule 9014 of the Federal Rules of Bankruptcy Procedure, which provides, in pertinent part: (a) Motion. In a contested matter not otherwise governed by these rules, relief shall be requested by motion, and reasonable notice and opportunity for hearing shall be afforded the party against whom relief is sought. Accordingly, Rule 9014(a) not only incorporates the Mullane requirement for Due Process but mandates that such procedure shall be followed in a contested matter pending before the Court. Debtors, on the other hand, not only failed to abide by

the service requirements of Rule 9013-1(m), but in order to prosecute the Utility Motion, Debtors grossly misapplied the rule. Rule 9013-1(m)(ii) specifically provides that the scope

of relief afforded under Rule 9013-1(m) shall be confined to matters of a genuinely emergent nature. Under Section

366(c)(2), the Debtors have thirty (30) days to provide adequate assurance of payment that is satisfactory to the Utilities before risking any termination of service by the Utilities for 16
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failing to do so.

Thus, the relief requested by the Debtors

under the Utility Motion was not a matter of a genuinely emergent nature. Accordingly, there was no need for the Court

to hold an expedited final hearing on the Utility Motion and thereupon enter the final Utility Order only 1 day after the Petition Date all without ensuring proper notice to the Utilities. Further, Rule 9014(b) of the Federal Rules of Bankruptcy Procedure specifically requires that service of the Utility Motion shall be done in a manner provided for service of process pursuant to Rule 7004 of the Federal Rules of Bankruptcy Procedure. Namely, Debtors were required to serve the Utility

Motion upon a specifically named officer, managing or general agent, or any other agent authorized by appointment or by law to receive service of process on behalf of the Utilities. Indeed,

with a minimal amount of effort, the same effort that the Debtors were supposedly willing to exert for determining the Utilities facsimile numbers, the Debtors could have very easily located the name and address of an officer or registered agent for each one of the Utilities and thereupon properly served the Utility Motion. Accordingly, due to Debtors failure to properly serve

the Utility Motion in accordance with the applicable Federal Rules of Bankruptcy Procedure and the Debtors breach of the Utilities fundamental rights of Due Process as set forth by the 17
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United States Supreme Court in Mullane, the relief provided under the Utility Order is void. As a result and pursuant to Rule

60(b)(4) of the Federal Rules of Civil Procedure, made applicable in the Debtors bankruptcy cases under Rule 9024 of the Federal Rules of Bankruptcy Procedure, the Court must vacate the Utility Order, grant the Utilities relief from that order and allow the Utilities to be heard on the issues raised in the Utility Motion and in this Motion. B. THE UTILITY ORDER SHOULD BE VACATED AS TO THE UTILITIES BECAUSE IT CONTAINS ADEQUATE ASSURANCE OF PAYMENT PROCEDURES THAT VIOLATE THE EXPRESS PROVISIONS OF SECTION 366.

Sections 366(b) and (c) of the Bankruptcy Code, in pertinent part, provide: (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. (c)(1)(A) For purposes of this subsection, the term assurance of payment means (i) a cash deposit; (ii) a letter of credit; (iii) a certificate of deposit; (iv) a surety bond; (v) a prepayment of utility consumption; or (vi) another form of security that is mutually agreed upon between the utility and the debtor or the trustee. (B) For purposes of this subsection an administrative expense priority shall not constitute an assurance of payment, 18
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(2) Subject to paragraphs (3) and (4), with respect to a case filed under chapter 11, a utility referred to in subsection (a) may alter, refuse, or discontinue utility service, if during the 30-day period beginning on the date of the filing of the petition, the utility does not receive from the debtor or the trustee adequate assurance of payment for utility service that is satisfactory to the utility; (3)(A) On request of a party in interest and after notice and a hearing, the court may order modification of the amount of an assurance of payment under paragraph (2). (B) In making a determination under this paragraph whether an assurance of payment is adequate, the court may not consider (i) the absence of security before the date of the filing of the petition; (ii) the payment by the debtor of charges for utility service in a timely manner before the date of the filing of the petition; or (iii) the availability of an administrative expense priority. (4) Notwithstanding any other provision of law, with respect to a case subject to this subsection, a utility may recover or set off against a security deposit provided to the utility by the debtor before the date of the filing of the petition without notice or order of the court. 11 U.S.C. 366. As set forth by the United States Supreme Court, [i]t is well-established that when the statute's language is plain, the sole function of the courts--at least where the disposition required by the text is not absurd--is to enforce it according to its terms. Lamie v. United States Trustee, 540 U.S. 526, 534, 124 S. Ct. 1023, 157 L. Ed. 2d 1024 (2004) (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N. A., 530 U.S. 1, 19
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6, 120 S. Ct., 1942, 147 L. Ed. 2d 1 (2000)).

Rogers v. Laurain

(In re Laurain), 113 F.3d 595, 597 (6th Cir. 1997) (Statutes . . . must be read in a straightforward and commonsense manner.). A plain reading of Section 366(c)(2) makes clear that a debtor is required to provide adequate assurance of payment satisfactory to its utilities on or within thirty (30) days of the filing of the petition. If a debtor believes the amount of

the utilitys request needs to be modified, then the debtor can file a motion under Section 366(c)(3) requesting the court to modify the amount of the utilitys request. Under Section

366(c), the Debtors have the burden of proof as to whether the utilitys adequate assurance of payment request should be modified. See In re Stagecoach Enterprises, Inc., 1 B.R. 732, 734 (Bankr. M.D.Fla. 1979) (holding that the debtor, as the petitioning party at a Section 366 hearing, bears the burden of proof). In this case, the Debtors completely ignored the Utilities adequate assurance requests. Instead, the Debtors filed the

Utility Motion to improperly shift the focus of their obligations under Section 366(c) from modifying the amount of the Utilities adequate assurance requests to establishing the form and the amount of adequate assurance of payment acceptable to the Debtors. Moreover, in an effort to improperly extend the thirty20
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day time period required under Section 366(c)(2), the Debtors request to have additional time beyond the first thirty days of their bankruptcy cases in which to consider an Additional Assurance Request by the Utilities and then additional time to file a modification motion with the court and request a Determination Hearing pursuant to Section 366(c)(3)(A). See In

re Beach House Property, LLC, 2008 WL 961498 at *1 (Bankr. S.D.Fla. Apr. 8, 2008) (holding that adequate assurance sufficient to meet the requirements of 366 must be paid within 30 days of the Chapter 11 petition date.). Accordingly, this

Court should not reward the Debtors for their failure to comply with the requirements of Section 366(c) and must vacate the Utility Order as to the Utilities. 1. The Court should not have approved the Debtors Escrow Account.

The Escrow Account is an improper and otherwise unreliable form of adequate assurance of future payment for the following reasons: (i) This Court only has authority under Section 366(c)(3) to modify the amount of the Utilities deposit requests. Neither the Debtors nor this Court have the authority to establish the form of adequate assurance of payment, i.e., the creation of an escrow account as opposed to adequate assurance in the form of cash deposits that the Utilities are requesting from the Debtors. The Utilities bill monthly in arrears so any requests upon the Escrow Account will be, at a minimum, for monthly bills. Accordingly, the Escrow Account that would merely contain the estimated cost 21

(ii)

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of two weeks of utility charges would be undercapitalized from the outset. Furthermore, it is not clear if the Debtors correctly estimated their monthly post-petition utility expenses. (iii) There is no limit on what a utility can demand from the Escrow Account, so it could be depleted by the requests of several large utilities. The Escrow Account would favor utilities with early monthly billing cycles or earlier due dates that can make demand before other utilities with later billing cycles and/or due dates. The Debtors have failed to propose any procedures as to when and how the Utilities can obtain funds from the Escrow Account. Presumably, the Utilities would have to incur legal fees and costs to file and litigate an application for payment of post-petition administrative expenses, which would be for at least one months service because the Utilities bill the Debtors on a monthly basis. The Escrow Account apparently would not continue to be funded if the Debtors default on their DIP loan. Under the Utility Order, the Escrow Account applies to telephone companies, internet service providers, waste management companies and any other utility of like kind even though these entities are probably not utility companies entitled to the protections of Section 366. Accordingly, there are numerous entities that would have access to the Escrow Account that are not entitled to post-petition security pursuant to Section 366.

(iv)

(v)

(vi) (vii)

Accordingly, the Court should not have approved the Escrow Account on an ex parte basis through entry of the Utility Order because it is not the form of adequate assurance requested by the Utilities herein, and because it is an otherwise unreliable form of adequate assurance. 2. The Utility Order Improperly Approved Procedures That Add Time Consuming And Burdensome 22

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Requirements That Are Not Found In Section 366. In addition to seeking to avoid the time limitations established by Section 366(c), through the Utility Motion and resulting Utility Order, the Debtors requested, and the Court approved, procedures designed to make the adequate assurance of payment process more time consuming and burdensome to the Utilities while Debtors simultaneously continue to enjoy uninterrupted utility services from the Utilities. For example,

even though Section 366 now defines assurance of payment, it contains no provisions requiring utilities to make demands for adequate assurance within certain time periods nor does it establish requirements for the content of any such request. Despite the foregoing, under the Utility Order, the Court is now requiring that any request for additional adequate assurance must be submitted in writing to the Debtors and to Debtors counsel and: (i) set forth the location(s) for which utility services are provided; (ii) the account number(s) for such locations; (iii) the outstanding balance for each account; and, (iv) a summary of the Debtors payment history on each account. The Debtors presumably have access to the same account information as the Utilities, especially if Debtors are supposedly able to accurately estimate their monthly utility charges. Accordingly, the Debtors are merely seeking to impose

these requirements and procedures upon the Utilities to dissuade 23

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the Utilities from making requests for adequate assurance of payment pursuant to Section 366 of the Bankruptcy Code. Simply

put, such burdensome procedures are not contained in Section 366 and must be rejected by this Court. Additionally, Debtors

proposed and the Court approved procedure providing the Debtors with the discretionary authority to unilaterally distinguish between reasonable and unreasonable additional assurance requests defies every conceivable interpretation of Section 366(c)(2). Rather than attempting to contact the Utilities to determine their requests for adequate assurance, Debtors chose to present this Court with an ex parte motion for providing adequate assurance in a form and in an amount that is satisfactory to the Debtors a position clearly in violation of the express provisions of Section 366(c)(2). See In re Viking Offshore

(USA), Inc., 2008 WL 782449 at *3 (Bankr. S.D.Tex. Mar. 20, 2008) (The relief requested by Debtors would reverse the burden, by making an advance determination that the proposed assurance was adequate. . . . the court lacks the power to reverse the statutory framework for provision of adequate assurance of payment.) The Utilities recognize that on the one hand it may not have been possible for the Debtors to consult with all of their utilities listed on Exhibit B to the Utility Motion within the thirty (30) day period set forth in Section 366(c). 24
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If that is

in fact the case, then the Debtors should have proceeded with a Motion stating that they were unable to comply with the requirements of Section 366(c) and ask the Court for relief in that regard and then provide their utilities with an opportunity to address and/or to oppose the relief sought under the Utility Motion and provided in the Utility Order. Accordingly, this

Court must vacate the Utility Order as to the Utilities and reject the Debtors requested procedures as to the Utilities. 3. The Utility Order Improperly Enjoins The Utilities From Asserting Their Rights Of Recoupment.

As set forth herein above, Section 366(c)(4) expressly provides that the Utilities may recover or set off against any prepetition security deposits provided by the Debtors without notice or order of the court. Under the Utility Order, however,

the Court improperly enjoins the Utilities from asserting their rights of recoupment by providing that any utility subject to an additional assurance request, pending notice and a hearing on the Determination Motion, may not recover or set off against a prepetition deposit. Utility Order at p. 3.

Simply stated, to obtain an injunction, Debtors are required to file an adversary proceeding against the Utilities pursuant to Rule 7001(7). Obviously, Debtors have not brought an adversary

proceeding against the Utilities to enjoin the Utilities from exercising their rights of recoupment to reduce the amount of the prepetition debt owed by the Debtors. 25
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Until the Debtors

successfully litigate such an action, it is improper and inappropriate for the Court to provide Debtors with this relief. Moreover, the ex parte injunctive relief granted by this Court was in violation of the express language of Section 366(c)(4). Accordingly, the Court should vacate the injunctive relief in the Utility Order. C. THE COURT SHOULD VACATE THE UTILITY ORDER AS TO THE UTILITIES AND ORDER THE DEBTORS TO PROVIDE THE ADEQUATE ASSURANCE OF PAYMENT REQUESTED BY THE UTILITIES HEREIN PURSUANT TO SECTION 366 OF THE BANKRUPTCY CODE.

Section 366(c) was amended to overturn decisions such as Virginia Electric and Power Company v. Caldor, Inc., 117 F.3d 646 (2d Cir. 1997), that held that an administrative expense, without more, could constitute adequate assurance of payment in certain cases. Section 366(c)(1)(A) specifically defines the forms that

assurance of payment may take as: (i) a cash deposit; (ii) a letter of credit; (iii) a certificate of deposit; (iv) a surety bond; (v) a prepayment of utility consumption; or (vi) another form of security that is mutually agreed upon between the utility and the debtor or the trustee. 11 U.S.C. 366(c)(1)(A). A determination of adequate assurance is within the courts discretion, and is made on a case-by-case basis, subject to the new requirements of Section 366(c). See In re Utica Floor 26
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Maintenance, Inc., 25 B.R. 1010, 1016 (Bankr. N.D.N.Y. 1982); In re Cunha, 1 B.R. 330, 332-33 (Bankr. E.D. Va. 1979). Section 366

of the Bankruptcy Code was enacted to balance a debtors need for utility services from a provider that holds a monopoly on such services, with the need of the utility to ensure for itself and its rate payers that it receives payment for providing these essential services. See In re Hanratty, 907 F.2d 1418, 1424 (3d Cir. 1990). The deposit or other security should bear a

reasonable relationship to expected or anticipated utility consumption by a debtor. In re Coastal Dry Dock & Repair Corp., In making such a

62 B.R. 879, 883 (Bankr. E.D.N.Y. 1986).

determination, it is appropriate for the Court to consider the length of time necessary for the utility to effect termination once one billing cycle is missed. (3d Cir. 1985). In re Begley, 760 F.2d 46, 49

Based on the Debtors anticipated utility

consumption, the minimum period of time the Debtors could receive utility service and/or goods from the Utilities before termination of such goods and/or services for non-payment is approximately two (2) months. Accordingly, the two-month

deposits requested by the Utilities are reasonable. See In re Stagecoach, 1 B.R. at 735-36 (holding that a two month deposit is appropriate where the debtor could receive sixty (60) days of service before termination of services because of the utilities' billing cycle.); see also In the Matter of Robmac, Inc., 8 B.R. 27
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1, 3-4 (Bankr. N.D. Ga. 1979). As set forth above, the Requests are based on: (1) the Utilities billing exposure created by respective state law tariffs and/or regulations (the Tariffs); and, (2) amounts that applicable public service commissions, which are neutral thirdparty entities, permit the Utilities to request from its customers. Although the Utilities recognize that this Court is

not bound by the Tariffs, the Tariffs are extremely relevant information of a determination made by an independent entity on the appropriate amount of security that should be paid to the Utilities. In contrast, the Debtors do not provide an objective much less an evidentiary basis for their proposed adequate assurance in the form of an Escrow Account containing the equivalent of Debtors estimated two-week deposits. Furthermore, the Debtors

assert their intention to fully pay all postpetition obligations for utility service in a timely manner. Utility Motion at 28. Debtors assertion, however, is statutorily irrelevant under Section 366. Section 366(c)(3)(B)(iii) specifically provides

that in making a determination under Section 366, a court may not consider the availability of an administrative expense priority. Moreover, as indicated above, any administrative expense claim that the Utilities may have against the Debtors is subject to the Superpriority claim of the DIP Lenders and the $4 million Carve28
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Out provided to the Debtors professionals. Debtors admit that their liquidity problems and financing crisis are severe. Recognizing that the Debtors financial

situation is dire, Debtors counsel has ensured that the payment of Debtors counsel and other professionals post-petition fees are secured through a $4 million Carve-Out in the Debtors proposed DIP Budget. Indeed, Debtors counsel may have even more

security allocated within the Budget for payment of fees and expenses, but Debtors have not provided a copy of the Budget for the Utilities review. If insiders with information on the

Debtors finances, such as Debtors counsel, believe such security is necessary to secure the payment of their fees, certainly the Utilities should receive post-petition security to secure the payment of their post-petition invoices. As evidenced by the Interim DIP Order, Debtors borrowings and further debts continue to deepen. Debtors seek availability

for post-petition secured funding in the maximum credit amount of $465 million. Given the secrecy of the Budget, the Superpriority

Claim of the DIP Lenders, the Debtors pre-petition maximized debt-load and the Debtors obligation to apply cash collateral first to fully repay the Prepetition Obligations followed by payment of the Postpetition Obligations under the DIP facility, there is no guarantee that Debtors will have remaining assets or proceeds therefrom sufficient to pay for the Debtors other 29
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administrative expenses. Accordingly, not only have the Debtors failed to satisfy their statutory burden under Section 366 as to why the Requests should be modified, but Debtors have also failed to demonstrate why their alternative adequate assurance of payment proposal should be accepted by the Utilities and approved by the Court. Hence, for all of the foregoing reasons the Court must vacate the Utility Order and require the Debtors to immediately pay the Utilities the adequate assurance deposit amounts requested herein. Conclusion WHEREFORE, the Utilities respectfully request that this Court enter an order: 1. 2. Vacating the Utility Order as to the Utilities; Require the Debtors to provide the Utilities with the proposed adequate assurance of payment that is satisfactory to the Utilities; and 3. Awarding such other and further relief as the Court deems just and appropriate. Dated: August 8, 2008 STEVENS & LEE, P.C. /s/ John D. Demmy John D. Demmy (DE Bar No. 2802) 1105 N. Market Street, 7th Floor Wilmington, Delaware 19801 Phone: (302) 425-3308 Fax: (610) 371-8515 Email: jdd@stevenslee.com 30
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and Russell R. Johnson III John M. Merritt 2258 Wheatlands Drive Manakin-Sabot, Virginia 23103 Phone: (804) 749-8861 Counsel for Southern California Edison Company, Salt River Project, and San Diego Gas & Electric Company

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