Windstream Holdings, Inc. v. Charter Communications, Inc. (In re Windstream Holdings, Inc.) (Bankr. S.D.N.Y. 2021)

The following is a case update written by Leonard Gumport analyzing a recent case of interest.

Summary

In Windstream Holdings, Inc. v. Charter Communications, Inc. (In re Windstream Holdings, Inc.), 627 B.R. 32 (Bankr. S.D.N.Y. 2021) (“Windstream III”), the bankruptcy court awarded $19.1 million in civil contempt sanctions against Charter Communications, Inc. (“Charter Communications”) and Charter Communications Operating, LLC (“Operating”) (collectively, “Charter”) for violating the automatic stay in the chapter 11 cases of debtors Windstream Holdings, Inc. (“Windstream Holdings”) and 204 affiliates (collectively, the “Windstream Debtors” or “Windstream”). Charter has appealed to the district court. To read the bankruptcy court’s decision in Windstream III, click here. 

In Windstream III, the bankruptcy court ruled that Charter violated the automatic stay by conducting a deceptive advertising campaign against Windstream and by terminating services to Windstream’s customers. The court held Charter in civil contempt because there was no fair ground of doubt that Charter’s conduct violated the automatic stay. The contempt sanctions awarded against Charter included Windstream’s lost profits, attorney’s and expert witness fees, plus damage mitigation expenses, including the cost of corrective advertising.

Background

Charter and Windstream are telecommunications companies. In or about 2018, Charter Communications and Windstream Holdings entered into an agreement (the “VAR Agreement”) in which, among other things, Charter Communications agreed to give 30 days notice before terminating services to Windstream’s customers.   

On February 25, 2019, the Windstream Debtors filed chapter 11 petitions in the United States Bankruptcy Court for the Southern District of New York. On February 28, 2019, the bankruptcy court ordered joint administration. On March 15, 2019, in Item 1A of a Form 10-K annual report filed with the Securities and Exchange Commission (“SEC”), Windstream disclosed that its operations would be subject to the “risks and uncertainties” associated with bankruptcy.

On April 5, 2019, the Windstream Debtors filed a complaint against Charter. The complaint alleged that Charter recently began a deceptive direct-mail ad campaign to injure Windstream’s business and promote Charter’s Spectrum brand. The complaint included a copy of Charter’s allegedly deceptive ad. The ad stated in part: “Windstream Customers, Don’t Risk Losing Your Internet and TV Services. Windstream has filed for Chapter 11 bankruptcy, which means uncertainty. Will they be able to provide the Internet and TV services you rely on in the future? To ensure that you are not left without vital Internet and TV services, switch to Spectrum. . .. Goodbye, Windstream. Hello, Spectrum.”  

According to Windstream, it had obtained $1 billion in DIP financing and did not plan or expect to liquidate. The complaint alleged that Charter had mailed its ad in envelopes that were deceptively marked to make them appear to be from Windstream instead of Charter. The complaint further alleged that, on March 14, 2019, Charter disconnected service to approximately 350 customers of Windstream in an effort to collect prepetition debts from Windstream and to manufacture a problem with Windstream’s services.

The complaint asserted seven claims for relief. Counts I-IV alleged that Charter’s ad campaign violated the Lanham Act and state laws against deceptive trade practices. Count V alleged that Charter was liable for breach of contract by violating the VAR Agreement. Count VI alleged that Charter’s deceptive ad campaign and termination of services to Windstream customers violated the automatic stay. Count VII alleged that any and all claims of Charter should be equitably subordinated. The complaint’s prayer asked for injunctive relief, damages, attorney’s fees, costs, and equitable subordination. 

On May 8, 2019, Charter answered the complaint. Charter denied wrongdoing and demanded a jury trial on all issues triable by a jury. Charter alleged that it did not consent to entry of final orders by the bankruptcy court.

On January 15, 2020, in the form of a revised transcript of a tentative bench ruling made on December 18, 2019, the bankruptcy court filed a decision (“Windstream I”) granting a motion by Windstream for partial summary judgment against Charter on liability on Counts I-VII. The bankruptcy court ruled that Charter’s ad campaign was intentionally deceptive and that Charter breached the VAR Agreement by terminating services to Windstream’s customers without providing 30 days notice. The bankruptcy court also ruled that Charter’s conduct violated the automatic stay and was inequitable.

In Windstream I, the bankruptcy court also ruled that genuine issues required a trial of: (a) the amount of any damages to be awarded against Charter on Counts I-V, (b) whether Charter should be held in contempt on Count VI, and (c) whether the misconduct of Operating, which had filed 36 proofs of claim, resulted in any harm justifying equitable subordination on Count VII. On March 3, 2020, the bankruptcy court entered an order granting the partial summary judgment.

On March 17, 2020, in Windstream Holdings, Inc. v. Charter Communications, Inc. (In re Windstream Holdings, Inc.), 2020 Bankr. LEXIS 708 (Bankr. S.D.N.Y. 2020) (“Windstream II”), the bankruptcy court decided that it would proceed with a bench trial of the remaining issues in Counts VI and VII, not Counts I-V. The bankruptcy court denied Charter’s motion to postpone the trial by reason of Charter’s right to a jury trial on the damages issues in Counts I-V. In late April and early May 2020, during the COVID-19 pandemic, the bankruptcy court remotely conducted a bench trial of the remaining issues on Counts VI-VII.

On April 8, 2021, the bankruptcy court filed its decision in Windstream III on Counts VI-VII. On Count VI, the bankruptcy court held Charter in civil contempt and awarded $19,184,658.30 in compensatory civil contempt sanctions against Operating and Charter Communications, jointly and severally. On Count VII, the bankruptcy court equitably subordinated the 36 proofs of claim that Operating had filed. On April 15, 2021, the bankruptcy court entered its judgment. On April 29, 2021, Charter filed an appeal to the district court.  

Reasoning

In Windstream III, the bankruptcy court began its contempt analysis by discussing the standard for civil contempt for violations of the automatic stay.

The automatic stay has the effect of a court order for purposes of the contempt power. Windstream III, 627 B.R. at 39 (citing, inter alia, Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1191 (9th Cir. 2003)). In general, federal courts consider whether the alleged contemnor had notice of the order and complied with it. Id. at 39. In addition, the movant must establish that: (1) the order is clear and unambiguous, (2) the proof of noncompliance is clear and convincing, and (3) the alleged contemnor did not diligently attempt to comply in a reasonable manner. The alleged contemnor has the burden of “clearly, plainly, and unmistakably” proving an inability to comply. Id. at 39 (citing and quoting Second Circuit precedent). “[A]n additional finding of bad faith or willfulness is not required.” Id. at 39 (citing, inter alia, Taggart v. Lorenzen, 139 S. Ct. 1795, 1802 (2019)) (“Taggart”). In Taggart, which involved an alleged contempt of the discharge injunction, the Supreme Court held that “civil contempt should not be resorted to where there is a fair ground of doubt as to the wrongfulness of the defendant’s conduct.” Windstream III, at 39 (quoting Taggart, at 1801).   

The bankruptcy court held Charter in civil contempt for violating the automatic stay by terminating services to Windstream’s customers based on Windstream’s default under the VAR Agreement. Windstream III, at 41. Charter had notice of Windstream’s bankruptcy and the automatic stay, and Charter terminated services in the belief that the Windstream Debtors were in default of their prepetition obligations to Charter. Section 362(a)(6) unambiguously stayed that conduct, and a “reasonable person would not think otherwise.” Id. at 41.

It was not a defense for a large and sophisticated entity like Charter, which provides services to many customers, some of whom will inevitably file bankruptcy, to argue that its computer did not have an effective fail-safe to prevent it from continuing to seek to collect from Windstream. Charter did not contend that it lacked the capacity to adopt systems to override automated collection activity when a customer filed bankruptcy. Id. at 41.

In addition, the bankruptcy court held Charter in contempt for violating section 362(a)(3) by interfering with Windstream’s customer contracts and goodwill by means of the deceptive ad campaign. Section 362(a)(3) protects a debtor’s executory contracts, which are property of the debtor’s estate. Section 362(a)(3) also protects a debtor’s goodwill, which is “well recognized” as property of a debtor’s bankruptcy estate. Id. at 42 (citing, inter alia, Cyganowski v. Biolitec U.S., Inc. (In re Biolitec, Inc.), 2015 Bankr. LEXIS 228, at *31-32 (Bankr. D.N.J. 2015)).

There was no fair ground of doubt that Charter’s conduct violated section 362(a)(3). No reasonable person would believe that Charter’s deceptive ad campaign “protected a legitimate interest of Charter’s and did not harm property interests of Debtors.” Windstream III, at 47. Legitimate advertising by a competitor does not exercise control of a debtor’s property, but “improper advertising such as the Defendants’ clearly and objectively interfered with the Debtors’ customer contracts and goodwill and thus clearly was precluded by section 362(a)(3)’s plain terms and the caselaw applying them.” Ibid. The First Amendment did not prohibit applying section 362(a)(3) and (6) to Charter’s intentionally deceptive commercial speech. Id. at 45. Charter’s subjective intent was not a defense to civil contempt under Taggart’s objective standard, and Charter was responsible for the automatic stay violations committed by its agents, including its advertising agency. Id. at 44.   

As a remedy for Charter’s civil contempt, the bankruptcy court awarded $19,184,658.30 in compensatory sanctions against Charter for five categories of damages: (1) $5,278.85 for credits that Windstream provided to customers whose service was temporarily disconnected by Charter; (2) $5,100,000 for lost profits from customers who switched to Charter; (3) $862,775 for the expense of corrective advertising to maintain customers; (4) $4,033,425  for the expense of a promotional campaign to recover market share (or to recover new customer momentum); and (5) $9,183,179,45 for the fees and costs of outside counsel and expert witnesses related to enforcing the automatic stay and recovering damages. Id. at 50, 56-57, and 59-60.

By reason of Operating’s inequitable conduct, the bankruptcy court also decided to order equitable subordination of Operating’s 36 proofs of claim, totaling $16,974,706.43.  Without subordination, Operating’s maximum projected distribution on those claims was only $21,218.34. Id. at 61.

Author’s Comments

The outcome in Windstream III shows that an alleged contemnor’s opposition to contempt sanctions may increase them. The award against Charter resulted in significant part from the expense of post-violation litigation between Charter and Windstream. Of the $19 million award, approximately $9 million consisted of attorney’s fees and other litigation expenses incurred by Windstream in enforcing the automatic stay and seeking contempt sanctions against Charter. Similarly, Charter’s failure to take corrective measures increased the sanctions awarded to Windstream. Approximately $4.9 million of the sanctions were awarded to compensate Windstream for corrective ads and other damage control efforts.  

The decisions in Windstream I-III reflect the bankruptcy court’s view that “the automatic stay is of fundamental importance in the collective, multi-party context of bankruptcy cases.” Windstream III, at 40. In denying Charter’s motion to postpone the trial-setting conference, the bankruptcy court stated: “”Any breach of the stay whose effects are not promptly corrected by enforcement and the imposition of sanctions to restore the status quo thus deprives debtors and their creditors of a fundamental bankruptcy protection.” Windstream II, at *13. The analysis in Windstream II supports expediting litigation to enforce the automatic stay. In Windstream III, the bankruptcy court cautioned, however, that a plaintiff has a duty to mitigate damages and “a debtor should not recover extensive attorneys’ fees, for example, for litigating a stay violation that was voluntarily corrected before other damages accrued,” or that could have been avoided by a “simple phone call or by invoking a well-established, court-approved procedure for addressing such violations short of litigation.” Id. at 49.     

In Windstream III, the bankruptcy court addressed a nuance in Second Circuit precedent that does not exist in the Ninth Circuit. The bankruptcy court noted that some courts, including courts in the Second Circuit, have stated that a court lacks discretion to deny compensatory civil contempt sanctions. Id. at 48. The bankruptcy court concluded that “courts should have some discretion to decide whether further warnings are warranted before imposing a compensatory sanction in the light of the complexity of the issues and the risk of harm to the non-breaching party.” Id. at 49. The bankruptcy court stated that “when a court can manage the parties’ conduct to avoid more conflict, it may and sometimes should give the alleged contemnor the chance to comply without imposing a monetary sanction.” Id.; see Taggart, 139 S. Ct. at 1802 (“On the flip side of the coin, a party’s good faith, even where it does not bar civil contempt, may help to determine an appropriate sanction.”). A bankruptcy court has far less discretion to deny compensatory relief when 11 U.S.C. § 362(k)(1) applies. It mandates an award of actual damages, including attorney’s fees and costs, to an individual injured by a willful violation of the automatic stay. Windstream could not and did not invoke section 362(k)(1) because Windstream was not an individual.

These materials were written by Leonard L. Gumport of Gumport Law Firm, PC in Pasadena (lgumport@gumportlaw.com). Editorial contributions were provided by M. Douglas Flahaut of Arent Fox LLP (douglas.flahaut@arentfox.com).