cable television franchises and bankruptcies

1. Miller & Van Eaton Cable Television Franchises and Bankruptcies Kenneth A. Brunetti Gail A. Karish MILLER & VAN EATON SAN FRANCISCO, CA International Municipal Lawyers Association Audio Conference � March 4, 2009

2. Miller & Van Eaton

3. Miller & Van Eaton Chapter 11 or Chapter 7? Chapter 11 is for reorganization Purpose is to reorganize the company and pay creditors over time In Chapter 11, the company usually continues to operate the business Broadstripe and Charter Liquidation under Chapter 11 is not uncommon � i.e. Adelphia Chapter 7 is where company is liquidated from outset Independent Chapter 7 trustee appointed by the bankruptcy court Trustee shuts down business and liquidates debtor�s assets Most companies more likely to file under Chapter 11 At least initially, debtor will usually continue to operate its business May eventually liquidate under plan of reorganization

4. Miller & Van Eaton Where will debtor likely file? Headquarters Charter headquartered in St. Louis, MO Major presence -- New York increasingly popular (Adelphia, Worldcom) -- Charter has a limited presence in New York State of Incorporation Charter incorporated in Delaware Broadstripe filed in Delaware

5. Miller & Van Eaton Filing Notice of Appearance and Request for Notice With the Bankruptcy Court Allows municipality to closely monitor case Will receive notice of any significant motion or proceeding that might affect municipality�s interest Alternative � monitor case docket electronically Issues that may arise Debtor attempt to alter bonds or insurance obligations Deadlines for filing administrative claims Motions to reject certain contracts (i.e. I-Net agreements, service contracts) Motion to sell assets that might include assets belonging to jurisdiction

6. Miller & Van Eaton Proof of Claim For pre-petition debts owed before the bankruptcy filing Not Post-petition Debts � these constitute administrative claim Debtor will set separate deadline for filing administrative claim Debtor required to provide proof of claim form and notice of the bankruptcy filing Deadline for filing a proof of claim is set by the bankruptcy court Typically deadline is several months after commencement of case Broadstripe deadline March 23, 2009 For governmental units not less than 180 days after bankruptcy filing or for tax claim 60 days after debtor files post-petition tax return � FRBP Rule 3002 Broadstripe deadline July 1, 2009

7. Miller & Van Eaton Automatic Stay - 11 U.S.C. � 362 362(a): Filing of bankruptcy petition operates as a stay preventing any entity from filing a lawsuit, attempting to collect a debt, filing a lien against the debtor�s property, attempting to enforce a judgment or take any action to control debtor�s property Includes Legal, administrative or other action to pursue claim against Debtor Municipality should not take any action to attempt to collect franchise or license fees, penalties or any other monies due, or to enforce a judgment, file a lien or exercise control over debtor�s property

8. Miller & Van Eaton Exception: Regulatory Power Exception 11 U.S.C. � 362(b)(4) Filing of petition does not operate as a stay of the commencement or continuation of an action by a government unit to enforce its police and regulatory power, including the enforcement of a judgment other than a money judgment Municipalities are generally exempt from the automatic stay to the extent they are acting to exercise their police or regulatory power Regulatory power exception does not apply to actions to enforce a money judgment, perfect or enforce a lien against debtor�s property Municipality can enforce construction requirements or standards, performance or customer service standards, build-out or upgrade requirements or PEG requirements Provided that municipality is acting to protect the public health, safety and welfare and is not trying to collect a debt or advance its financial interests

9. Miller & Van Eaton Franchising Authority Cannot Revoke or Refuse to Renew Franchise As a Result of Bankruptcy Filing governmental unit may not deny, revoke, suspend or refuse to renew a license, permit, charter, franchise, or other similar grant to a debtor solely because debtor has filed for bankruptcy or has not paid a debt NextWave Decision � U.S. Supreme Court held that FCC could not terminate spectrum licenses as a result of non-payment � FCC v. Nextwave Communications, 537 U.S. 293 Cannot deny renewal merely due to bankruptcy filing

10. Miller & Van Eaton Payment of Franchise Fees Any fees not paid before the bankruptcy filing would be an unsecured claim Municipality cannot take any steps to collect Franchise fees due after the bankruptcy would likely qualify as administrative priority claim, entitled to priority status over unsecured creditors Actual, necessary cost of preserving the estate under 11 U.S.C. � 503(b) Municipality can request that the bankruptcy court order payment of post-petition fees Debtor would be required to pay all franchise fees due if it assumes franchise agreement, including fees due before the bankruptcy case As a practical matter, franchise fees will likely be paid even if they are not paid during the early stages of the bankruptcy Adelphia paid fees Broadstripe (order approving payment of franchise fees entered on January 28)

11. Miller & Van Eaton PROPERTY OF THE ESTATE Bankruptcy estate created upon filing bankruptcy petition Estate includes All legal or equitable interests of the debtor in any property as of the commencement of case Proceeds, product, rents or profits from property of estate Includes fiber, equipment, facilities Includes intellectual property, intellectual property licenses

12. Miller & Van Eaton WHAT HAPPENS TO PROPERTY OF ESTATE? Debtor can keep property, use to reorganize Debtor can sell or lease property in bankruptcy 11 U.S.C �363 Notice and hearing Must provide adequate protection to any entity that has interest in property Can sell free and clear of liens Trustee can sell in Chapter 7 liquidation Debtor or trustee can abandon property 11 U.S.C. �554 - Allows debtor to abandon property Burdensome to estate, inconsequential value Unless risk to public safety - Midlantic case

13. Miller & Van Eaton BONDS, LETTERS OF CREDIT AND SECURITY ACCOUNTS Bonds, letters of credit generally are deemed not to be property of the estate Obligation of third party for benefit of municipality Municipality can therefore make demand against a bond or letter of credit without violating automatic stay Security deposits, security accounts, certificates of deposit may be deemed to be property of estate Decided by state law; may vary from state to state Funds still belong to debtor Municipality may violate automatic stay if it attempts to collect from one of these sources Bonds and letters of credit are better sources of protection for municipalities

14. Miller & Van Eaton Selling/Assigning the Franchise in Bankruptcy Distinguish selling cable system from selling franchise If local franchise is required to operate cable system Debtor will need to assign franchise In states with statewide franchises there may be no need to assign local franchise if buyer has statewide franchise Can Debtor Assign a Franchise over the objection of a municipality? Franchise Agreement constitutes �executory contract� Bankruptcy Code generally allows assignment of �executory contract� over objection of other party to contract Even if term in contract prohibits assignment without consent of other party Exception to this rule where other �applicable law� excuses a party from having to accept performance by another party (Continued)

15. Miller & Van Eaton Selling/Assigning the Franchise in Bankruptcy (Continued) Government franchises may not be assignable without consent of government entity under �applicable law� Provisions in cable ordinance that prohibit assignment may be deemed to be �applicable law� Key is whether ordinance applies generally to all cable providers and not a single cable provider Adelphia � North Carolina Communities example � Bankruptcy Court upheld local ordinances requiring municipal approval to transfer franchise and enforcing right of first refusal to purchase cable system � In re Adelphia, 359 B.R. 65 (Bankr. S.D.N.Y. 2007)

16. Miller & Van Eaton Compliance with State and Local Regulatory Laws 28 U.S.C. Section 959(b) Debtor must manage and operate property according to requirements of valid state laws Example: environmental laws Midlantic National Bank case Debtor could not abandon contaminated property in violation of NJ environmental laws Midlantic National Bank v. NJ Dept. of Environmental Prot., 474 U.S. 494 (1986) Pecuniary claims less likely to be upheld than regulatory laws

17. Miller & Van Eaton Debtor Must Cure all Defaults Under Franchise Before Assigning Debtor may not assume/assign executory contract unless it cures or provides adequate assurance that it will promptly cure any defaults under franchise Gives franchising authority opportunity to assert any defaults, including unpaid franchise fees or other monetary claims Could include penalties for customer service violations or damage claims under franchise, I-Net or PEG Agreements Debtor typically provides cure schedule for all executory contracts it wishes to assume Any disputes in cure amount are resolved by evidentiary hearing Any claims not asserted in bankruptcy could be waived Crucial for franchising authorities to determine any amounts owing by debtor before debtor files motion to assume/assign Perform audits now

18. Miller & Van Eaton Effect in Statewide Franchise Jurisdictions Local jurisdictions may lose ability to restrict assignment of franchise Limited or no local control over transfer of state franchise Even if debtor has local franchise, buyer may have statewide franchise and no need for local franchise � i.e. Charter in CA Debtor could reject local franchise Local jurisdiction may lose valuable I-Net or other rights if franchise or I-Net agreement rejected Will have claim for rejection damages but it will be unsecured claim Local jurisdictions should continue to maintain authority to enforce customer service requirements to the extent they are authorized by state Debtors should continue to pay franchise fees or risk losing statewide franchise

19. Miller & Van Eaton Other Issues I-Net Agreements Service Agreements � Debtor may reject executory contract Local jurisdictions have more protection if indefeasible right-of-use or outright transfer of I-Net PEG Obligations If part of franchise agreement Debtor should continue to meet PEG obligations If separate service agreement Debtor could reject unless it would violate franchise agreement or state law

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