Subject: [NEXTEL-1] Miller & Van Eaton, P.L.L.C. Feature of the Month-Bankruptcy

From: Marcel <[email-masked]>
Date: Fri, 03 Jan 2003 10:15:52 -0500

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Bankruptcy

INTRODUCTION

The recent bankruptcy filings by Adelphia Communications and WorldCom have
understandably caused considerable concern for local governments throughout the
nation. Of course, telecom bankruptcies are no longer uncommon. In the past two
years, no fewer than sixty companies that provide telecommunication and broadband
services have filed for bankruptcy, and local communities' interests may have been
affected in any of these cases. (For examples, see the List of Recent Bankruptcies of
Telecommunication and Cable Companies on this site.) But the Adelphia and
WorldCom bankruptcies have raised the stakes considerably. The sheer size and
complexity of the two bankruptcies are almost without precedent. In terms of assets
and liabilities, WorldCom and Adelphia represent the first and sixth largest
bankruptcy cases in U.S. history.

More importantly, these two cases are likely to have a direct impact on municipalities
due to the fact that both companies use local communities' public rights-of-way. The
Adelphia and WorldCom cases could impact not only a community's contractual
rights (such as its right to be paid for that use), but also its police and regulatory
powers. For example, the surety company that issued franchise and performance
bonds to franchising authorities on behalf of Adelphia recently sought bankruptcy
court permission to cancel these bonds. For the time being, as of mid-August, the
surety company had withdrawn its motion. But it would obviously put communities at
financial risk if the bonding company were allowed to terminate these bonds or if the
bankruptcy court excused Adelphia from having to continue to post a bond. Such a
result would directly conflict with the community's regulatory powers to protect the
public rights-of-way.

If you have any questions concerning these or other cable or telecommunications
bankruptcies, please call or e-mail us at [email-masked]

 http://www.millervaneaton.com/feature_month.html

Bankruptcy

ISSUES RAISED BY CABLE AND TELECOM BANKRUPTCIES

The Adelphia and WorldCom bankruptcies raise many questions. For example, what
happens now that these companies are in bankruptcy? Will these companies
continue to operate or will they shut down? In the case of Adelphia, what happens
where there is no other cable provider? Will subscribers be left without cable service?
What should local officials tell subscribers or customers who call? Should they
continue to pay their bills? Will these companies continue to pay franchise fees
and/or taxes? What effect does the automatic stay have on local governments? Can
a community declare a default under a franchise as a result of the bankruptcy? Can
communities continue to exercise their regulatory powers over these companies or
are these powers cut off by the bankruptcy? What happens if these companies are
committing violations that affect the public health and safety? Can a community
revoke the franchise and take over the system? Will Adelphia and WorldCom try to
sell their systems to other cable operators or telecom providers? If so, what role, if
any, will a community have in reviewing and approving a franchise transfer in light of
the bankruptcy? How does the bankruptcy affect renewals? Should communities
discontinue renewal negotiations as a result of the bankruptcy? What happens if
these companies abandon their assets in the public rights-of-way?

Some of these questions can be answered now and some will only be answered in
time. Below is a brief discussion of some of the basics of bankruptcy and some of
the issues that may arise in connection with a telecom or cable company
bankruptcy. What happens in the WorldCom and Adelphia bankruptcy cases remains
to be seen. The discussion below is meant only to identify some of the issues that
may arise. By no means is this discussion intended to identify every issue that may
arise, nor is it meant to give specific legal advice as to how a particular community
should protect its interests. How a particular community is affected by the Adelphia
or WorldCom cases, or any other bankruptcy case, depends not only on what the
debtor does, but also on the particulars of a community's local laws and the terms of
its contract with the debtor.

We strongly advise communities that may be affected by the Adelphia and/or
WorldCom bankruptcies to confer with legal counsel about how to protect their rights
and interests. At a minimum, affected communities will need to monitor these cases
closely to ensure that they receive notice of any actions taken in the cases that
might negatively impact their rights or interests. While the bankruptcy laws require
that notice be given to any parties affected by an action in the case, it is not
uncommon for the notice period to be extremely short or for the notice to be given to
the wrong person. One way to attempt to avoid this problem is to file a notice of
appearance in the bankruptcy case, designating specific individuals that should
receive notice. Communities should consider having their attorneys, whether in-house
or outside counsel, monitor the case.

http://www.millervaneaton.com/bankruptcy2.html

Bankruptcy

SPECIFIC ISSUES FOR MUNICIPALITIES

Chapter 11 - Reorganization. Both Adelphia and WorldCom have filed for protection
under Chapter 11 of the Bankruptcy Code. In a Chapter 11 case, the debtor usually
continues to operate the business in bankruptcy, and this is what is happening for
both Adelphia and WorldCom. The usual goal in a Chapter 11 case is to reorganize
the company by reducing the company's debts and coming up with a payment plan
for the remaining debt, known as plan of reorganization. The reorganized debtor will
typically emerge from bankruptcy in a much healthier financial condition.

One strategy that is common in Chapter 11 is for the debtor to sell certain of its
assets to pay down its debt. There has been widespread speculation that both
WorldCom and Adelphia will sell off certain of their assets. It is also not uncommon
for a debtor to sell off substantially all of its assets in Chapter 11. This was done in
the past year in both the Metricom and e.spire bankruptcy cases. It remains to be
seen what Adelphia and WorldCom will do in their cases or whether they will emerge
from bankruptcy, but for the time being it can be expected that both companies will
continue to operate their businesses according to the status quo.

Automatic Stay. A debtor in bankruptcy is protected by the automatic stay, which
generally prevents any entity from filing or continuing to pursue a lawsuit, attempting
to collect a debt, enforcing a judgment, filing or enforcing a lien, or taking any other
action to control property of the bankruptcy estate. Generally, the automatic stay
would apply to municipalities. However, there is a very narrow exception to the
automatic stay for government entities to the extent they are enforcing their police
and regulatory powers. Thus, the automatic stay will not prevent a community from
protecting the public health, safety or welfare by, for example, enforcing construction
requirements, performance standards or customer service standards. Local
communities should consult with counsel before taking any action against a debtor to
ensure that their actions fall within this narrow police and regulatory exception. The
bankruptcy court is empowered to issue sanctions against any entity that violates the
automatic stay.

Revocation. Bankruptcy laws generally prohibit government entities from revoking a
franchise, license, charter or similar grant solely because a debtor is insolvent, has
failed to pay a debt or has filed for bankruptcy. This does not necessarily prevent
revocation on other grounds.

Franchise Fees and Taxes. Both Adelphia and WorldCom have received permission
from the bankruptcy court to pay all pre-petition regulatory taxes and fees (including
franchise fees). It is anticipated that both companies will continue to pay these fees
on an ongoing basis.

Selling Franchises in Bankruptcy. A common question that has been raised by
communities is whether Adelphia and WorldCom would be permitted to sell their
rights under franchise or right-of-way agreements over the objections of local
communities in conjunction with a sale of some or all of their assets. The answer to
this question is not clear. In the case of Adelphia at least, it would seem that before
any sale of a franchise is approved, the transfer must first go through a community's
transfer and approval process. This could be construed as an exercise of the
community's police and regulatory powers, as permitted under local laws as well as
federal cable laws. But this may be an area where a community finds itself running
head-on into conflicting bankruptcy law. The Bankruptcy Code allows the debtor to
assign executory contracts to which it is a party, even if such a contract provides that
it cannot be assigned without the other party's approval. Thus, if the bankruptcy court
finds that a franchise or right-of-way agreement qualifies as an executory contract (a
contract where both parties have continuing obligations), the court could approve a
sale even over the objection of a local government.

On the other hand, in the case of a franchise, a community might be able to argue
that the rights involved are more than just contractual rights - that the franchise is a
unilateral grant of authority by the community that cannot be transferred to another
person. Moreover, there is an exception to the bankruptcy rule that permits a debtor
to assign executory contracts where the identity of the parties is material to the
contract, or where other "applicable law" excuses a party from having to accept
performance by another party. A community may be able to argue that a franchise or
right-of-way agreement cannot be assigned because "applicable law" excuses the
community from having to accept performance by another entity. Ultimately, this
issue will be decided depending on the facts and circumstances of a particular case.

Municipal Takeover of a Cable or Telecommunications System. Another
common question that has been raised is whether a community can take over
operation of Adelphia's cable system or WorldCom's telecommunications system,
now that the companies have filed for bankruptcy protection. The simple answer is
no, at least not initially. Any attempt to take over the debtor's assets would violate
the automatic stay. But the ultimate answer to this question will depend on several
factors, including whether the municipality has the right to take over operation of the
system under the franchise agreement and/or local ordinance, and the actions the
debtors take.

Renewal. For those municipalities that are in or approaching renewal negotiations
with Adelphia, the question arises as to whether they should continue with such
negotiations in light of the bankruptcy. This question raises a host of issues and will
depend on the particular facts and circumstances of each case. Municipalities should
be aware that just as a government entity cannot terminate a franchise or as a result
of the bankruptcy, it may similarly be prohibited from refusing to renew a franchise
solely as the result of the bankruptcy or the company's failure to pay a debt.

http://www.millervaneaton.com/bankruptcy3.html
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Bankruptcy

SPECIFIC ISSUES FOR MUNICIPALITIES

Chapter 11 - Reorganization. Both Adelphia and WorldCom have filed for protection under Chapter 11 of the Bankruptcy Code. In a Chapter 11 case, the debtor usually continues to operate the business in bankruptcy, and this is what is happening for both Adelphia and WorldCom. The usual goal in a Chapter 11 case is to reorganize the company by reducing the company's debts and coming up with a payment plan for the remaining debt, known as plan of reorganization. The reorganized debtor will typically emerge from bankruptcy in a much healthier financial condition.

One strategy that is common in Chapter 11 is for the debtor to sell certain of its assets to pay down its debt. There has been widespread speculation that both WorldCom and Adelphia will sell off certain of their assets. It is also not uncommon for a debtor to sell off substantially all of its assets in Chapter 11. This was done in the past year in both the Metricom and e.spire bankruptcy cases. It remains to be seen what Adelphia and WorldCom will do in their cases or whether they will emerge from bankruptcy, but for the time being it can be expected that both companies will continue to operate their businesses according to the status quo.

Automatic Stay. A debtor in bankruptcy is protected by the automatic stay, which generally prevents any entity from filing or continuing to pursue a lawsuit, attempting to collect a debt, enforcing a judgment, filing or enforcing a lien, or taking any other action to control property of the bankruptcy estate. Generally, the automatic stay would apply to municipalities. However, there is a very narrow exception to the automatic stay for government entities to the extent they are enforcing their police and regulatory powers. Thus, the automatic stay will not prevent a community from protecting the public health, safety or welfare by, for example, enforcing construction requirements, performance standards or customer service standards. Local communities should consult with counsel before taking any action against a debtor to ensure that their actions fall within this narrow police and regulatory exception. The bankruptcy court is empowered to issue sanctions against any entity that violates the automatic stay.

Revocation. Bankruptcy laws generally prohibit government entities from revoking a franchise, license, charter or similar grant solely because a debtor is insolvent, has failed to pay a debt or has filed for bankruptcy. This does not necessarily prevent revocation on other grounds.

Franchise Fees and Taxes. Both Adelphia and WorldCom have received permission from the bankruptcy court to pay all pre-petition regulatory taxes and fees (including franchise fees). It is anticipated that both companies will continue to pay these fees on an ongoing basis.

Selling Franchises in Bankruptcy. A common question that has been raised by communities is whether Adelphia and WorldCom would be permitted to sell their rights under franchise or right-of-way agreements over the objections of local communities in conjunction with a sale of some or all of their assets. The answer to this question is not clear. In the case of Adelphia at least, it would seem that before any sale of a franchise is approved, the transfer must first go through a community's transfer and approval process. This could be construed as an exercise of the community's police and regulatory powers, as permitted under local laws as well as federal cable laws. But this may be an area where a community finds itself running head-on into conflicting bankruptcy law. The Bankruptcy Code allows the debtor to assign executory contracts to which it is a party, even if such a contract provides that it cannot be assigned without the other party's approval. Thus, if the bankruptcy court finds that a franchise or right-of-way agreement qualifies as an executory contract (a contract where both parties have continuing obligations), the court could approve a sale even over the objection of a local government.

On the other hand, in the case of a franchise, a community might be able to argue that the rights involved are more than just contractual rights - that the franchise is a unilateral grant of authority by the community that cannot be transferred to another person. Moreover, there is an exception to the bankruptcy rule that permits a debtor to assign executory contracts where the identity of the parties is material to the contract, or where other "applicable law" excuses a party from having to accept performance by another party. A community may be able to argue that a franchise or right-of-way agreement cannot be assigned because "applicable law" excuses the community from having to accept performance by another entity. Ultimately, this issue will be decided depending on the facts and circumstances of a particular case.

Municipal Takeover of a Cable or Telecommunications System. Another common question that has been raised is whether a community can take over operation of Adelphia's cable system or WorldCom's telecommunications system, now that the companies have filed for bankruptcy protection. The simple answer is no, at least not initially. Any attempt to take over the debtor's assets would violate the automatic stay. But the ultimate answer to this question will depend on several factors, including whether the municipality has the right to take over operation of the system under the franchise agreement and/or local ordinance, and the actions the debtors take.

Renewal. For those municipalities that are in or approaching renewal negotiations with Adelphia, the question arises as to whether they should continue with such negotiations in light of the bankruptcy. This question raises a host of issues and will depend on the particular facts and circumstances of each case. Municipalities should be aware that just as a government entity cannot terminate a franchise or as a result of the bankruptcy, it may similarly be prohibited from refusing to renew a franchise solely as the result of the bankruptcy or the company's failure to pay a debt.

INTRODUCTION

ISSUES RAISED BY CABLE AND TELECOM BANKRUPTCIES

SPECIFIC ISSUES FOR MUNICIPALITIES

Miller & Van Eaton, P.L.L.C.
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