BARGAIN HUNTING: WHAT HAPPENS WHEN CARRIERS GO BANKRUPT WHAT SHOULD A MUNICIPALITY DO TO EXPLORE ITS OPTIONS WHEN A LO

1. Miller & Van Eaton BARGAIN HUNTING: WHAT HAPPENS WHEN CARRIERS GO BANKRUPT? WHAT SHOULD A MUNICIPALITY DO TO EXPLORE ITS OPTIONS WHEN A LOCAL CARRIER GOES UNDER? Kenneth A. Brunetti, Esq. Law Offices of MILLER & VAN EATON SAN FRANCISCO, CA December 2 and 3, 2002 Seattle

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 Chapter 7 is where company is liquidated 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

4. Miller & Van Eaton Where will debtor likely file? Headquarters Major presence (New York increasingly popular) State of Incorporation (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 May be inundated with paperwork Alternative is to monitor case docket electronically

6. Miller & Van Eaton Proof of Claim For debts owed before the bankruptcy filing 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

7. Miller & Van Eaton Automatic Stay - 11 U.S.C. § 362 362(a): Filing of bankruptcy petition operates as a stay, applicable to all entities, of: (1) commencement or continuation, including the issuance or employment of a process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title; (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; (4) any act to create, perfect, or enforce any lien against property of the estate; (Continued)

8. Miller & Van Eaton Automatic Stay - 11 U.S.C. § 362 (Continued) (5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title; (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; Generally prevents any entity from filing a lawsuit, attempting to collect a debt, filing a lien against the debtor’s property, enforce a judgment or take any action to control property of the bankruptcy estate 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

9. Miller & Van Eaton Exception: 362(b)(4): "Regulatory Power Exception" Filing of petition does not operate as a stay "under paragraph (1), (2), (3) or (6) of subsection (a) of this section, of the commencement or continuation of an action or proceeding by a government unit . . . to enforce such governmental unit's or organization's police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit's or organization's police or regulatory power." 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 362(a)(4) and (5) and does not allow for enforcement of money judgment 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

10. Miller & Van Eaton Section 525 -- Licenses and Franchises: Protection Against Discriminatory Treatment 11 U.S.C. § 525: “governmental unit may not deny, revoke, suspend or refuse to renew a license, permit, charter, franchise, or other similar grant to . . . discriminate with respect to such a grant against, . . . a person that is or has been a debtor under this title or a bankrupt . . . solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt . . . or has not paid a debt that is dischargeable in the case under this title . . .” NextWave Decision – U.S. Court of Appeals for the D.C. Circuit held that FCC could not terminate spectrum licenses as a result of non-payment On appeal before U.S. Supreme Court – decision expected any day Adelphia New Hampshire cities deny renewal when Adelphia files Adelphia moves Bankruptcy Court to order renewal, or to reinstate negotiations

11. 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 – franchise, license, row fees generally being paid by bankrupt telecoms and Adelphia

12. Miller & Van Eaton PROPERTY OF THE ESTATE Bankruptcy Estate created upon filing bankruptcy petition Estate comprised of property that vests in estate - 11 U.S.C. §541, including 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

13. Miller & Van Eaton BONDS, LETTERS OF CREDIT AND SECURITY ACCOUNTS Bonds, letters of credit generally are not deemed 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 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 Burdensom to estate, inconsequential value Unless risk to public safety - Midlantic case

15. Miller & Van Eaton Selling the Franchise in Bankruptcy Can Debtor Sell 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 for contracts that are personal in nature, where the identity of the parties is material to the contract, or where other “applicable law” excuses a party from having to accept performance by another party Examples of personal service contracts: artist, professional ballplayer, architect, contractor, membership in a private club What other “applicable law” excuses a party from having to accept performance? Patent license, contract with the United States Government (Continued)

16. Miller & Van Eaton Selling the Franchise in Bankruptcy (Continued) Municipalities can argue that franchises are personal in nature and cannot be assigned without consent of franchising authority Provisions in Cable Ordinance that prohibit assignment may be deemed to be “applicable law” Government franchises may not be assignable without consent of government entity under “applicable law” Uncertain outcome

17. Miller & Van Eaton Municipal Takeover of Cable System Depends in part on whether terms of franchise agreement and cable ordinance allow Cannot takeover system unless franchise is revoked or otherwise terminates Municipality cannot revoke franchise solely because of bankruptcy May be able to revoke franchise if other material defaults under franchise agreement or cable ordinance If Debtor rejects franchise, municipality may be able to take over

18. Miller & Van Eaton Compliance with State 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 Pecuniary claims less likely to be upheld than regulatory laws

19. Miller & Van Eaton RECAPTURING TELECOMMUNICATIONS FACILITIES ABANDONED IN THE PUBLIC RIGHTS-OF-WAY

20. Miller & Van Eaton WHAT HAPPENED IN METRICOM? Ricochet Service High Speed Internet Access Mobile, wireless modems Radio antennas placed on light and utility poles Poletop agreements with cities, utilities Wired Access Points - placed on roofs of buildings Right-of-way agreements with local governments (Continued)

21. Miller & Van Eaton WHAT HAPPENED IN METRICOM? (Continued) Metricom Bankruptcy - Chapter 11 Liquidation Attempted to sell all assets - no buyers Sold in pieces Rejected poletop, right-of-way/franchise agreements Abandoned poletop radios, WAPS Equipment left to municipalities, private landlords (subject to liens) 11 U.S.C. §554 - Allows debtor to abandon property Burdensom to estate, inconsequential value Unless risk to public safety - Midlantic case Metricom determined value of equipment less than cost of removal Metricom sold intellectual property to Aerie Networks (Continued)

22. Miller & Van Eaton WHAT HAPPENED IN METRICOM? (Continued) Opportunity for cities: Internal communication system Mobile transmission, effective for emergency transmission of data, traffic and parking enforcement, meter reading, etc. Commercial partnership Cities negotiate with Aerie Netwoks Strong bargaining position Denver Commercial Service in operation 1000 modems, free service to City Additional Opportunities Telecommunications companies Cable

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