October 19, 2010
PREPAID HOME HEATING OIL CONTRACTS
By: Lee R. Hansen, Legislative Analyst II
You asked (1) about Connecticut statutes and regulations regarding prepaid home heating oil contracts, (2) how surrounding states regulate these contracts, and (3) how the Connecticut laws have been applied to fuel oil suppliers that filed for bankruptcy.
Connecticut law on prepaid home heating oil contracts (1) requires certain terms in the contracts, (2) specifies how the oil dealer must secure the oil promised for delivery, and (3) requires the oil dealer to report to the Department of Consumer Protection (DCP). A violation of these requirements can lead to both civil and criminal penalties, although such cases typically take several years to resolve and can result in only partial restitution for injured consumers.
The surrounding states regulate prepaid heating oil contracts in various ways. Some have no laws specifically regulating their use, leaving enforcement to broader criminal and consumer protection statutes. Other states have laws similar to Connecticut's, although Connecticut appears to have the most detailed law in the region.
By law, a prepaid heating oil contract between the dealer and consumer must indicate the amount paid by the consumer, the maximum amount of oil that the dealer is committed to deliver, and how the dealer has insured the supply of oil to be delivered. The contract's terms cannot last longer than eighteen months and must state that the consumer will be reimbursed for any undelivered oil within 30 days after the contract expires (CGS § 16a-23n(e)).
Since 2005, the law requires oil dealers using prepaid contracts to secure the oil they have promised for delivery by either (1) maintaining heating oil futures contracts for at least 80% of the amount of heating oil they have promised to deliver or (2) obtaining a surety bond of at least 50% of the total amount of funds they have received as prepayment. As the dealer fulfills the prepaid contracts, the amount of the futures contracts or surety bonds can decrease to reflect the amount of oil delivered (CGS § 16a-23n(c)).
Since 2008, the law requires a dealer to notify the DCP commissioner in writing of how and with whom it has secured the required futures contracts or surety bonds. The dealer must also notify the commissioner whenever the amount of its futures contracts falls below the 80% threshold (CGS § 16a-23n(f)). As an additional safeguard, the entities from which the dealer has obtained its futures contracts must notify the commissioner if the dealer cancels its contracts (CGS § 16a-23n(g)).
Violation of any of the above requirements is an unfair trade practice under the Connecticut Unfair Trade Practices Act (CUTPA). As such, DCP can investigate and fine an offending dealer. The attorney general can also file a civil lawsuit to recover actual and punitive damages from the dealer (CGS § 16a-23r). Please see OLR Reports 2003-R-0060 (www.cga.ct.gov/2003/rpt/2003-R-0060.htm) and 2005-R-0261 (www.cga.ct.gov/2005/rpt/2005-R-0261.htm) for further discussion of CUTPA provisions and penalties.
Oil dealers who fail to deliver prepaid heating oil can also be subject to criminal charges. A knowing violation of the law's prepaid contract provisions is a class A misdemeanor, punishable by up to one year in prison, a fine of up to $2000, or both (CGS § 16a-23r). The state's attorney can also prosecute dealers for various other related criminal charges, including larceny, conspiracy, and corrupt organization activity.
Connecticut law additionally prioritizes the repayment of consumers who have entered into prepaid home heating oil contracts with dealers that become insolvent or are placed in receivership. In either event, the law requires that consumers receive repayment of any unused portion of their deposits before any other general liabilities are paid, except for wages or taxes (CGS § 52-400f and CGS § 52-512).
LAWS IN SURROUNDING STATES
A survey of the surrounding states indicates that Connecticut's laws regarding prepaid home heating oil contracts are the most detailed in the region. Neither Massachusetts nor New York have any statutes specifically aimed at regulating such contracts, although both have consumer protection laws that have been applied in civil and criminal cases.
Rhode Island law limits prepaid heating oil contracts to twelve months, but contains no other specific regulations on the contracts or the dealers employing them (R.I. Gen. Laws § 5-82-1).
Both New Hampshire and Maine have enacted laws specifically regarding prepaid heating oil contracts (N.H. Rev. Stat. § 339: 79 and Me. Rev. Stat. tit. 10 § 1110). Like Connecticut, both states require these contracts to indicate the amount the consumer paid, the maximum amount of oil that the dealer is committed to deliver, how the dealer secured the supply of oil to be delivered, and that the consumer will be reimbursed for any undelivered oil.
Both states also require oil dealers to obtain securities on their contractually promised oil deliveries, however they only require dealers to obtain futures contracts worth 75% (not 80%, as in Connecticut) of the total amount of oil they have promised to deliver. In addition to futures contracts and surety bonds, dealers in these states can also secure their obligations through a letter of credit for 100% of the cost of the fuel they have committed to deliver. New Hampshire law further specifies that the surety bond or letter of credit must be made payable to the attorney general.
Unlike Connecticut, neither New Hampshire nor Maine requires a dealer to notify a government agency of how it has secured its obligations, nor do they require any securing entities to report when a dealer has cancelled its securities.
Maine law contains no specific indication of how a violation of its law's provisions would be punishable, but a dealer who failed to deliver oil for prepaid contracts was recently found guilty of breaking the state's Unfair Trade Practices law, fined $250,000, and settled with the state's attorney general for another $394,000 in restitution. In New Hampshire, dealers that fail to obtain or maintain securities for their contracted oil deliveries
or make false claims regarding their securities are guilty of a class A misdemeanor (punishable by up to one year in prison, a fine of up to $2000, or both). They can also be held accountable under the state's consumer protection law.
APPLICATION OF CONNECTICUT'S LAWS
According to Frank Greene, director of DCP's Division of Food and Standards, DCP annually audits oil dealers for compliance with the law's prepaid contract provisions. DCP also conducts random onsite audits throughout the year and dealers who fail to comply with the law can have their licenses suspended. He states that DCP has only three inspectors to monitor over 600 oil dealers and the financial difficulties and noncompliance of some dealers can avoid detection.
Over the past decade, several oil dealers in Connecticut have gone out of business and filed for bankruptcy prior to delivering the home heating oil for which their customers had already paid. The attorney general, DCP, and state's attorney have successfully prosecuted many of these dealers in civil, criminal, and bankruptcy courts. Cases typically take several years and result in the injured consumers receiving only a portion of the money they have lost, often due to the complexity of a bankrupt dealer's debts, the nature of the judicial process, the protections afforded by federal bankruptcy laws, and the limited assets of a dealer who has gone out of business.
Below are brief synopses of some of the well publicized cases from the past several years.
When Newtown Oil went out of business and filed for bankruptcy in December 2002, it had entered into about 1,400 prepaid contracts with consumers for the 2002-2003 heating season. DCP and the Attorney General's Office investigated and brought a civil suit in May 2003. The case settled in 2007 for $260,000, with $250,000 of it for consumer restitution. The restitution represented 60% of the total owed to consumers for undelivered oil.
The state's attorney's office also pursued criminal charges against the husband and wife former owners of the company. They were arrested in August 2007 and charged with first degree larceny, second degree larceny, conspiracy, and corrupt organization activity. In November 2008, the husband was sentenced to a 25 year suspended sentence with five years on probation, while the wife received a 15 year suspended sentence with five years of probation. As a condition of their suspended sentences, the court ordered that they immediately pay an additional $121,000 to the victims in the criminal case and that the balance of the civil settlement with the attorney general be paid on time and in full. (Press Release, Connecticut Attorney General's Office, Attorney General, DCP Commissioner Announce $260,000 Settlement with Defunct Newtown Heating Oil Dealer (June 19, 2007); Andrew Gorosko, Newtown Oil Defendants Found Guilty in Heating Fuel Scam, THE NEWTOWN BEE, August 21, 2008; Ethan Fry, Former Newtown Oil Execs Escape Jail, Must Pay Back over $100,000, THE NEWS TIMES (Danbury, CT), November 7, 2008).
Accurate Heating and Cooling
In September 2006, the owner of Accurate Heating and Cooling was arrested and charged with second degree larceny for failing to deliver heating fuel to customers who had prepaid contracts with the company. The company had gone out of business and filed for bankruptcy the previous April. The owner was convicted of 2nd degree larceny and violation of the prepaid oil contracts law and sentenced to a suspended sentence of five years in prison, with three years of probation.
Beyond the criminal case, in 2008 the attorney general won a $773,332 civil suit against the company for failing to provide oil and assure sufficient supply for its prepaid agreements. The judgment included $496,000 in civil penalties and $138,666 in restitution for 150 customers. In addition, the decision barred the company's owner from any further business activities in the oil business until the money had been repaid. (Press Release, Department of Consumer Protection, Owner of Home Heating Fuel Company Arrested Over Unsecured Pre-Paid Contracts (September 12, 2006); Press Release, Connecticut Attorney General's Office, Attorney General, DCP Sue East Haven Oil Company for Failing to Fulfill Delivery, Service Contracts (August 10, 2007); Press Release, Connecticut Attorney General's Office, Attorney General Blumenthal Wins $773,332 from East Haven Heating Oil That Defrauded Consumers (March 4, 2008).)
F & S Oil
F & S Oil went out of business and declared bankruptcy in March 2008, leaving over 2,500 customers who had prepaid contracts for heating oil. Soon after, the attorney general filed a civil suit against the (1) company for CUTPA violations and (2) company's former president for illegally selling prepaid contracts and fraudulently transferring the title of his home to his wife. In December 2009, the attorney general settled the case against F & S for $1 million to be distributed among the former customers. The settlement represented about 1/3 of $3.1 million that the costumers lost. The case against the former president is ongoing and may lead to additional restitution for the customers. (Luther Turmelle, Ex-president of F & S Oil, Wife Named in Lawsuit: No Fuel to Back Up Prepaid Contracts, Fraudulent Title Transfer, State Says, NEW HAVEN REGISTER, April 12, 2008; Turmelle, F & S Oil Must Pay Ex-Clients $1M, NEW HAVEN REGISTER, December 24, 2009; Turmelle, F & S Oil Customers Closer to Getting Reimbursed, NEW HAVEN REGISTER, March 5, 2010.)
Bernie's Fuel Oil
Most recently, Bernie's Fuel Oil filed Chapter 7 bankruptcy in May 2010, after news of its involvement in three lawsuits seeking more than $2 million became public. The company's bankruptcy filing showed less than $50,000 in assets. The attorney general, DCP, and New London police have all opened investigations, although no civil or criminal court proceedings have been initiated yet. Frank Greene of DCP stated that the investigation could take three to five years to complete. DCP instructions for customers who had prepaid contracts with the company can be found at www.ct.gov/dcp/lib/dcp/pdf/forms/bernies_oil_package3.pdf.
Bankruptcy court proceedings over the past summer revealed that Bernie's owes customers roughly 200,000 gallons of heating oil for the 2009-2010 heating season, with residential customers seeking about $693,195 in restitution. The trustee appointed to oversee the case stated that customers who put down deposits are entitled to priority claims and will be paid before any general unsecure claims. However, the company and its owner appear to have limited assets and other large secured debts will take precedence over the customers' claims. (Lee Howard, Bernie's Fuel Oil Files for Bankruptcy, THE DAY (New London, CT), May 3, 2010; Patricia Daddona, Authorities Investigate Bernie's Collapse, THE DAY, May 7, 2010; Daddona, Bernie's Owner Tells of Financial Problems, THE DAY, June 8, 2010; Daddona, Bernie's Owner Owes Bank $3.9 Million in Personal and Business Loans, THE DAY, June 9, 2010; Daddona, Creditors Question Bankrupt Bernie's Owner, THE DAY, July 13, 2010.)