Utility Alert - Charter Communications Chapter 11 Bankruptcy
On Friday, March 27, 2009, Charter Communications filed a prearranged Chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the Southern District of New York. In relation to the filing, Charter represents that it has the support of a majority of lenders holding debt that will be affected by the plan. The plan proposes to erase approximately $8 billion of Charter's $21.7 billion debt load and maintain continuity in its operations. Charter's petition is relevant to Troutman Sanders LLP utility clients for several reasons.
- First, to the extent that a utility provider may be considered a trade creditor, the filing may affect collection of amounts due under contracts and tariffs for pole attachment rental charges. Charter proposes to continue to pay its trade creditors for prepetition goods and services as charges for these come due in the ordinary course. However, to the extent a trade creditor "refuses to extend credit terms consistent with the past practice between the parties, [Charter reserves its right] not to pay prepetition amounts and to recover any previous postpetition payments made for prepetition claims for [the] estates’ benefit." Accordingly, utility clients should consult counsel prior to altering credit terms with Charter.
- Second, the filing may affect surety bonding, insurance coverage and creditors’ rights with respect to cash collateral in relation to electric service and pole attachments. The Debtors have filed motions, however, seeking (i) authority to enter into a new surety bond program with Travelers, and (ii) authority to maintain uninterrupted insurance coverage by, among other things, paying prepetition obligations. The grant of such relief will be important to utility providers and counsel needs to monitor the aforesaid motions and be prepared to possibly seek relief if these motions are not approved, in whole or in part, by the bankruptcy court.
- Third, the Debtors’ proposed chapter 11 plan provides that all executory contracts and unexpired leases not specifically rejected shall be assumed. Although the plan does not appear to call for the rejection of any electric service agreements or pole attachment agreements, the Debtors have reserved the right to amend their current schedule of agreements to be rejected. Utility counsel should monitor the proceeding for possible amendments to this schedule.
- Fourth, in order to protect utility providers, Charter has filed a “Utilities Motion” which proposes to pay postpetition utility obligations from cash flow and to establish a $5 million utility service Adequate Assurance Deposit Account. This account will provide additional payment assurance in an amount that Charter states is equal to approximately two weeks total service charges. The Bankruptcy Code, however, allows individual utilities to seek additional payment assurance. Charter has proposed a comprehensive procedure by which utilities can assert demands for additional adequate assurance. Utilities seeking additional protection are required to submit a written request including, among other things, the Debtors’ payment history, the amount of any security deposits and a statement explaining why the assurances proposed by the Debtors are insufficient. Such written requests must be received by the parties listed in the Debtors’ motion no later than ten (10) days after entry of a final order approving the relief requested in the Debtors’ motion. Charter is seeking a court order providing that "Utility Providers . . . be prohibited from altering, refusing, or discontinuing utility services to the Debtors absent further order of the Court." Utilities should consult with counsel concerning (i) the proposed deadlines imposed on creditors seeking additional adequate assurance, and (ii) whether an objection to the motion would be appropriate.
- Fifth, although the Debtors’ bankruptcy filings include references to a number of electric utilities holding substantial deposits from Charter, the Utilities Motion is silent on how such deposits may be applied post-petition. To the extent that these deposits relate specifically to utility service, the Bankruptcy Code allows utility providers to offset prepetition deposits of a debtor against prepetition debts of such debtor. Application of a prepetition deposit against a post-petition debt would require bankruptcy court approval. Utility providers who hold deposits relating to pole attachment rental agreements do not have an automatic right under the Bankruptcy Code to offset prepetition deposits against prepetition debts. Such providers may want to consider whether they may be able to reach the same result through the equitable remedy of recoupment. Clients should consult with counsel before attempting to recoup or setoff any collateral against obligations of the Debtors.
- Sixth, the Debtors’ bankruptcy filings recognize a substantial amount of pending litigation involving the Debtors, both as plaintiff and defendant. Where a debtor is a defendant, the bankruptcy filing constitutes an absolute stay of prepetition litigation (the “automatic stay”) and only the bankruptcy court can authorize its resumption following notice and a hearing. A bankruptcy court may lift the automatic stay in order to, among other reasons, liquidate a plaintiff-creditor’s claim. The automatic stay does not generally halt proceedings in which a debtor is a plaintiff. A creditor should always consult with counsel before taking any action against a debtor to ensure that the automatic stay is not violated. In addition to the foregoing, under certain circumstances, debtors and creditors have the right to seek to remove an action to or from bankruptcy court. A party’s ability to remove is subject to certain time constraints based on, among other things, when the action was filed and whether the automatic stay has been lifted. Furthermore, a removed action is, upon objection, subject to remand back to the original court.
Our team at Troutman Sanders includes members of our Telecom & Technology Practice and Bankruptcy Practice Groups who have extensive experience in representing utilities in chapter 11 bankruptcy cases.