Water Utility Cannot Avoid Large Unsecured Claim in Bankruptcy Case

A case involving the bankruptcy of a public utility in New Mexico providing water and sewer services to residential consumers demonstrates how a debtor cannot avoid certain legal requirements imposed on particular enterprises by the State and then use the lack of state action to avoid contractual obligations which reference the State’s involvement.  Debtor Picacho Hills Utility Company, Inc. is a small water and sewer utility in Las Cruces that provides water and sewer service to approximately 1000 houses in and around the Picacho Hills development near Las Cruces, New Mexico. The Debtor had entered into a Water and Sewer Extension Agreement with Bright View Land Company to  to construct and convey to Debtor certain water and sewer lines needed to extend utility service to Bright View’s “Coronado Ridge” subdivision in Picacho Hills and agreed to reimburse Bright View, over time, for the cost of construction.

The Agreement contained the following proviso regarding Debtor’s obligation to pay the Reimbursement Obligation:

[I]n the event the Public Regulation Commission for the State of New Mexico determines that the cost of said sewer and water lines may not be included in PHUC’s rate base, then in such event, PHUC shall have no further obligation to make the payments due under the terms of this paragraph.

Later in the bankruptcy case of the utility company, Bright View filed a proof of claim against the Debtor for the amount of $931,547.91, to which the Debtor objected. The utility company claimed that it did not owe Bright View the funds as the Public Regulation Commission did not affirmatively exclude the cost to build the water and sewer lines in to the rate base for consumers. Bright View argued that the reason it was not included in the rate base had nothing to do with a decision by that Commission Rather the Debtor failed, in this instance and many others, to submit the cost for inclusion in the rate base to the Commission as state law required. They argued successfully that, in a bankruptcy case, a company cannot avoid a claim just because it failed to comply with the law which would have activated the trigger for determining if the contractual provision even applies.  The bankruptcy court accepted the argument and overruled the Debtor’s objection. Accordingly, this Chapter 11 bankruptcy action – which may be converted to a Chapter 7 case – will have to address how to deal with Bright View’s sizable claim.

In Albuquerque, Giddens & Gatton Law, PC has bankruptcy attorneys who offer expert handling of Chapter 7, Chapter 11, Chapter 12 and Chapter 13 bankruptcy cases and can provide advice over which type of bankruptcy action fits one’s particular needs. The firm represents many debtors and creditors in Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. Contact Giddens & Gatton Law, PC at (505) 633-6298 to set up an appointment or visit the firm’s website at giddenslaw.com. Giddens & Gatton Law, PC is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico.