The extent and scope of the Bankruptcy Code’s automatic suspension and the potential cost a business can incur for violating the suspension grabbed national headlines last week in a dispute between two telecommunications providers, when the court Bankruptcy American overseeing the Windstream bankruptcy case ordered Charter Communications to pay Windstream more than $ 19 million in damages. The automatic stay is triggered immediately when a bankruptcy petition is filed. It is broad and prohibited for other parties to take most actions against a business or individual that has filed for bankruptcy and gives the debtor a break to restructure their business or liquidate their assets. The ruling is a cautionary tale for wholesale providers who provide telecommunications services to a Chapter 11 network services company with which it also competes for end-user customers, suggesting that aggressive actions against the debtor could. carry a significant risk.
Bankruptcy Court found Charter Communications violated automatic stay by terminating “last mile” services to certain Windstream customers based on Windstream’s defaults prior to bankruptcy under the Value Added Reseller Agreement Spectrum Business of the parties and by launching an advertising campaign containing false and misleading information aimed at inducing Windstream customers to terminate their contracts with Windstream. Links to several of the offending ads can be found here, here and here.
Automatic stay prohibits parties from terminating most contracts with a debtor without court approval. In Windstream’s case, Charter Communications argued that the termination of the connectivity service was not intentional but occurred due to non-payment protocols programmed into its computerized billing system. The bankruptcy court rejected this argument, ruling that it is not a legitimate defense for a large, sophisticated company to claim that its computer systems do not contain effective built-in security to prevent it from violating the automatic stay.
Charter Communications’ efforts to poach Windstream customers turned out to be an even more costly mistake and formed the basis for much of the $ 19 million judgment. Charter sought to capitalize on Windstream’s bankruptcy through an advertising campaign meant to create the impression, through mailings designed to make it look like they came from Windstream, that Windstream was in the process of shutting down his doors. The court found that the campaign was intended to interfere with Windstream’s contractual rights with its customers as well as to undermine its goodwill and found Charter Communications in contempt of the automatic stay and ordered it to pay the fees. Windstream damages and attorney fees.
This ruling is a useful reminder of the risks that parties to contracts with debtors as well as debtors’ competitors face when the debtor files for bankruptcy, as well as the need to navigate the automatic stay provisions of the Code of bankruptcy.