The breadth and scope of the Bankruptcy Code’s automatic stay and the potential cost a company may face for violating the stay made national news last week in a dust-up between two telecom providers, when the U.S. Bankruptcy Court overseeing Windstream’s 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 enjoins other parties from taking most actions against a company or individual who has filed a bankruptcy petition and gives the debtor breathing space to restructure its business or to liquidate its assets.  The ruling provides a cautionary tale for wholesale providers that provide telecom services to a network services firm in Chapter 11 with which it also competes for end user customers, suggesting that aggressive actions against the debtor could carry significant risk.

The Bankruptcy Court found that Charter Communications had breached the automatic stay by terminating “last mile” services to certain of Windstream’s customers based on Windstream’s pre-bankruptcy defaults under the parties’ Spectrum Business Value Added Reseller Agreement and by running an advertising campaign containing false and misleading information aimed at inducing Windstream’s customers to terminate their contracts with Windstream.  Links to several of the ads at issue can be found here, here and here.

The automatic stay bars 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 because of nonpayment protocols programmed into its computerized billing system.  The Bankruptcy Court rejected that argument finding that it is not a legitimate defense for a large and sophisticated company to argue that its computer systems do not contain an effective fail-safe to prevent it from violating the automatic stay.

Charter Communications’ efforts to poach Windstream’s customers proved to be an even costlier mistake and was the basis for the bulk of the $19 million judgment.  Charter sought to capitalize on Windstream’s bankruptcy through an advertising campaign that was intended to create the impression, through mailings designed to seem that they were coming from Windstream, that Windstream was going out of business.  The Court found that the campaign was intended to interfere with Windstream’s contract rights with its customers as well as to impair its goodwill and it held Charter Communications in contempt of the automatic stay and ordered it to pay Windstream’s damages and attorneys’ fees. 

This decision is a useful reminder about the risks that parties to contracts with debtors as well as competitors of debtors face when the debtor files a petition in bankruptcy, as well as the need to navigate the Bankruptcy Code’s automatic stay provisions.