WRF Attorneys Author New Bankruptcy Telecommunications Manual

In 2003, members of Wiley Rein & Fielding's highly regarded Bankruptcy and Communications practices authored The Bankruptcy Telecommunications Manual to assist the industry in addressing the important questions raised by the intersection of these two complex bodies of law.

In the past three years, courts have continued to address many of the important issues addressed in that primer. In addition, the 2005 amendments to the Bankruptcy Code set forth in The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) have significantly impacted bankruptcy cases affecting the telecom industry.

The second edition of The Bankruptcy Telecommunications Manual, edited by H. Jason Gold, Valerie P. Morrison and Peter D. Shields, was published in July 2006 by the American Bankruptcy Institute. The second edition provides an up-to-date, straightforward and concise overview of both areas of law, and includes a comprehensive glossary, statutory appendixes and a discussion of key issues in telecommunications bankruptcies. This article briefly highlights several of the issues that have been updated in the second edition.

Post-Petition Relationships
Section 366 of the Bankruptcy Code provides that a utility may not discriminate against, alter or discontinue service to a debtor solely on the basis of an unpaid pre-petition debt or the filing of a bankruptcy petition. BAPCPA was intended to provide increased protections to utility companies through amendments to Section 366 of the Bankruptcy Code.

Prior to the 2005 amendments, bankruptcy courts in major telecommunications cases would often require only minimal "protections" to telecoms in bankruptcy cases where many millions of dollars were owed to incumbent local exchange carriers (ILEC). These "protections" often took the form of merely allowing administrative priority to post-petition claims (which is already provided for by other sections of the Bankruptcy Code), ordering prompt payment of undisputed post-petition invoices, shortening billing cycles, requiring the debtor to provide regular financial disclosures to utilities and expediting dispute resolution. Many reorganization cases failed, resulting in administrative insolvencies and leaving utility companies exposed to large and valueless unpaid post-petition claims, often running into many millions of dollars.

Section 366 was amended to limit the risk to utility companies, including common carriers, in bankruptcy cases. Specifically, the section now lists acceptable adequate assurance, such as cash deposits, letters of credit, certificates of deposit, surety bonds and prepayment. Moreover, the amendments specifically preclude the bankruptcy court from considering many factors that were often (mis)used under the prior law; namely, whether the debtor had posted a security deposit pre-petition, whether the debtor had made timely payments for utility services pre-petition and whether an administrative priority status is available for the utilities' post-petition claims. In addition, Section 366 now explicitly authorizes utility creditors to exercise their right of setoff against any deposit without any independent express authorization and to preserve pre-petition security deposits as adequate assurance for post-petition payment.

Despite the new requirements of specific and concrete assurances, debtors not surprisingly seek to minimize their obligations under this new statute by, inter alia, proposing small amounts for cash deposits. In addition, recent case-law has also raised the issue of whether services provided by ILECs even constitute a "utility service" under Section 366. Indeed at least one court has ruled that the term "utility service" in the new Section 366 means only traditional services that the debtor in possession itself consumes in contrast to other services and rights provided by the utility, such as interconnection agreement services. These issues are explored thoroughly in the second edition.

New Privacy Considerations
Also among the changes to the Bankruptcy Code is a legislative response to the Toysmart bankruptcy case. In Toysmart, the debtor-in-possession sought bankruptcy court authority to sell assets, including customer lists and information. Toysmart's proposed sale of its customer list promptly triggered strong public criticism. The attorneys general of Texas, New York and 39 other states, led by Massachusetts, also objected to the proposed sale on the grounds that it would violate their states' respective consumer protection laws. In addition, the Federal Trade Commission filed suit against Toysmart, alleging that the proposed sale would violate Toysmart's website privacy statement and, therefore, would constitute a false or deceptive trade practice. Many other objections were filed to this request, most on the basis that Toysmart had promised in its privacy policy never to sell information that it collected. The motion was ultimately withdrawn and the assets sold without the customer lists.

Although a reorganizing debtor is authorized to sell assets under Section 363 of the Bankruptcy Code, BAPCPA now imposes conditions on a debtor-in-possession's right to sell customer data that is subject to privacy policies. Specifically, the amendments address situations where the debtor had disclosed in a privacy policy in effect on the petition date that certain information would not be transferred to unaffiliated third persons. In such cases, the debtor-in-possession may only sell the customer data (a) if such sale is consistent with the non-disclosure policy or (b) if inconsistent, the court after appointing a customer "privacy ombudsman" to advise the bankruptcy court on privacy issues, upon notice and a hearing, finds that the proposed sale would not violate applicable non-bankruptcy laws. Among the specific non-bankruptcy laws is Section 222 of the Telecommunications Act of 1996, which deals with customer lists and other information and imposes a duty on every telecommunications carrier "to protect the confidentiality of proprietary information of, and relating to, other telecommunications carriers, equipment manufacturers, and customers, including telecommunications carriers reselling telecommunications services provided by a telecommunications carrier." The second edition examines the interplay of these privacy issues and telecom law in the context of a bankruptcy case.

Provisions Concerning Fraud
Allegations of fraud have played a significant role in many recent high-profile bankruptcy cases, including those in the telecom field, such as Adelphia and WorldCom, and well publicized fraud indictments and convictions have emboldened prosecutors. While the Federal Communications Commission (FCC) has not passed any rules specifically addressing the types of frauds that have led to telecommunications bankruptcies, the Act provides a private right of action for individuals alleging that they have been financially harmed by a common carrier by authorizing them to file suit in federal court or file a Section 208 complaint with the Commission.

These allegations may become an issue when a licensee requests FCC permission to transfer a license since under Section 310(d) of the 1996 Act, the FCC must determine, as a threshold matter, whether the assignor and assignee meet the requisite qualifications to hold an FCC license. While the FCC generally will not re-evaluate the qualifications of the assignor, it may designate the issue of the assignor or assignee's character for hearing if the issue is raised to a sufficient extent in petitions.