In Re: Windstream Holdings, Inc.
Appearances:
Terence P. Ross
Shaya Rochester
Robert T. Smith
Eric T. Werlinger
Timothy H. Gray
Katten Muchin Rosenman
New York, New York
Washington, D.C.
Counsel for Plaintiffs-Appellees
Susheel Kirpalani
Benjamin I. Finestone
Quinn Emanuel Urquhart & Sullivan, LLP
New York, New York
Counsel for Defendants-Appellants
Seibel, J.
Before the Court is the appeal of Defendants-Appellants Charter Communications Inc. and Charter Communications Operating, LLC (together, “Charter“) from the Bankruptcy Court‘s April 15, 2021 judgment holding Charter in contempt for violation of the automatic stay under
I. BACKGROUND
Plaintiffs-Appellees Windstream Holdings Inc. and its debtor affiliates (collectively, “Windstream“) and Charter are telecommunications service providers. (Bankr. Dkt. 1 (“Adv. Compl.“) ¶¶ 11-12.) Windstream filed for Chapter 11 reorganization on February 25, 2019. (Id. ¶ 14.) By operation of
Charter competes with Windstream in providing residential and commercial voice and data communication services in certain locations. (Id. ¶¶ 11-13.) In March 2019, Charter launched a direct-mail advertising campaign directed at Windstream customers. (Id. ¶¶ 18-19.) The initial mailing had text on the front of the envelope that stated: “Important Information Enclosed for Windstream Customers.” (Bankr. Dkt. 341-7.) Inside was a two-sided advertisement for Spectrum (which is Charter‘s residential internet brand). (Bankr. Dkt. 341-6 at 1-2.) Text on the front of the ad stated in large text: “Windstream Customers, Don‘t Risk Losing Your Internet and TV Services.” (Id. at 1.) In smaller text below that, the advertisement read (in relevant part): “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 you are not left without vital Internet and TV services, switch to Spectrum. . . . Windstream has a 2-year contract. With Spectrum there are no contracts. Plus, we will buy you out of your current contract up to $500.” (Id.) The back of the advertisement stated, among other things, “Windstream‘s future is unknown, but Spectrum is here to stay . . . .” (Id.) Windstream alleges that this advertising was knowingly false, in that Charter was aware that Windstream‘s bankruptcy was not going to result in any interruption of service to its customers. (Adv. Compl. ¶¶ 3-4.)
Charter mailed this advertisement to 800,000 residences in geographic markets that it determined were likely to include Windstream subscribers. (See Bankr. Dkt. 343-35 at 26:6-14, 32:13-33:9.) At trial,
On April 5, 2019, Windstream initiated an adversary proceeding before the Bankruptcy Court, bringing seven claims. (Adv. Compl.)3 On the same day it sought a temporary restraining order and preliminary injunction against Charter‘s advertising campaign. (Bankr. Dkt. 2.) On April 16, 2019, the Bankruptcy Court granted Windstream‘s request for a temporary restraining order and enjoined the direct mail campaign, (Bankr. Dkt. 25), and on May 16, 2019 issued the requested preliminary injunction providing the same relief, (Bankr. Dkt. 61).
On October 9, 2019, Charter filed in this Court a motion to withdraw the reference on Counts I through V of the Adversary Complaint. (No. 19-CV-9354, ECF No. 1; Bankr. Dkt. 104.) On October 14, Charter filed in the Bankruptcy Court a motion for judgment on the pleadings on Count VI of the Adversary Complaint and a motion to dismiss Count VII. (Bankr. Dkt. 109.) On November 15, 2019, while Charter‘s motion to withdraw the reference as to Counts I through V was pending, the parties filed cross-motions for summary judgment in the Bankruptcy Court: Charter moved for summary judgment on Counts I through V, (Bankr. Dkt. 129), and Windstream moved for summary judgment on all counts, (Bankr. Dkt. 122). On December 18, 2019, the Bankruptcy Court held a hearing on the parties’ motions and issued rulings from the bench, including denying Charter‘s motion for summary judgment, (Bankr. Dkt. 237 (“SJ Hr‘g“) at 132:6-156:9; see Bankr. Dkt. 275); denying Charter‘s motion for judgment on the pleadings as to Count VI and denying in part and granting in part Charter‘s motion to dismiss Count VII, (SJ Hr‘g at 54:8-61:10; see Bankr. Dkt. 259); granting Windstream‘s motion for summary judgment on Counts I-V as to liability (SJ Hr‘g at 136:24-151:21); and granting in part and denying in part Windstream‘s motion for summary judgment on Counts VI-VII, (id. at 151:22-154:24; see Bankr. Dkt. 274). With respect to Count VI, the Bankruptcy Court determined that Charter was liable for violating the automatic stay through its advertising campaign, which the Bankruptcy Court described as “an act to control property of the estate, namely, the debtors’ customers or contracts with those customers.” (SJ Hr‘g at 152:7-14.)4 The Bankruptcy Court
In May 2020, the Bankruptcy Court held a four-day trial on Counts VI and VII to determine, as relevant to this appeal, whether Charter should be held in contempt for violation of the automatic stay and, if so, what sanctions should be imposed. On April 8, 2021, the Bankruptcy Court issued a memorandum of decision (the “Order“) noting its prior summary judgment rulings as to Counts VI and VII and setting out its decisions on the remaining issues on those counts. (See Bankr. Dkt. 332.) As relevant to this appeal, the Order noted the Bankruptcy Court‘s previous holding that Charter had breached the automatic stay by its “literally false and intentionally misleading advertising campaign that wrongfully interfered with the Debtors’ customer contracts and goodwill” and held that Charter should be (1) held in contempt for that violation and (2) sanctioned $19,179,329.45 for the losses caused thereby. (Order at 3.) On April 15, 2021, the Bankruptcy Court entered Judgment on Counts VI and VII of the Adversary Complaint in favor of Windstream. (Bankr. Dkt. 334.) On April 29, 2021, Charter timely filed a notice of appeal. (Bankr. Dkt. 337.)
II. LEGAL STANDARD
This Court has jurisdiction pursuant to
“When reviewing for clear error, [the Court] may reverse only if [it is] left with the definite and firm conviction that a mistake has been committed.” United States v. Bershchansky, 788 F.3d 102, 110 (2d Cir. 2015) (cleaned up). “Thus, if the factual findings of the bankruptcy court are plausible in light of the record viewed in its entirety, this Court may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently.” Savage & Assocs., P.C. v. Williams Commc’ns (In re Teligent Servs., Inc.), 372 B.R. 594, 599 (S.D.N.Y. 2007) (cleaned up). “[W]here there are two permissible views of the evidence, the factfinder‘s choice between them cannot be clearly erroneous.” Id. (cleaned up).
“On appellate review, this Court may set aside a bankruptcy court‘s order holding a party in contempt only for abuse of discretion, but such review is more exacting than under the ordinary abuse-of-discretion standard because a bankruptcy court‘s contempt power is narrowly circumscribed.” Blair Ventures, LLC v. Famous Restoration Inc. (In re Blair Ventures), 581 B.R. 728, 732 (S.D.N.Y. 2017) (cleaned up). A bankruptcy court‘s award of sanctions is also subject to an “abuse of discretion” standard. Solow v. Kalikow (In re Kalikow), 602 F.3d 82, 91 (2d Cir. 2010). A bankruptcy court “abuses its discretion if it (1) bases its decision on an error of law or uses the wrong legal standard; (2) bases its decision on a clearly erroneous factual finding; or (3) reaches a conclusion that, though not necessarily the product of a legal error or a clearly erroneous factual finding, cannot be located within the range of permissible decisions.” Klipsch Grp., Inc. v. ePRO E-Com. Ltd., 880 F.3d 620, 627 (2d Cir. 2018) (cleaned up).
III. DISCUSSION
The Court addresses in this opinion whether (1) Charter‘s advertisements violated the automatic stay and (2) the Bankruptcy Court properly held that there was no fair ground of doubt that the advertisements would violate the stay, such that civil contempt sanctions were appropriate. Because I find that Charter‘s advertisements did not violate the automatic stay, and in any case, there was a fair ground of doubt whether they did so, I do not address any other issue presented on this appeal.6
A. Whether the Bankruptcy Court Erred in Holding that Charter Violated the Automatic Stay
“The Bankruptcy Code‘s automatic stay provisions, set forth in Section 362, protect bankruptcy estates by restraining any formal or informal action or legal proceeding that might dissipate estate assets or interfere with the trustee‘s orderly administration of the estate.” Bayview Loan Servicing LLC v. Fogarty (In re Fogarty), 39 F.4th 62, 71 (2d Cir. 2022) (cleaned up). Upon the filing of a bankruptcy petition, “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” is automatically stayed.
Charter asserts it did not violate
1. Executory Contracts
Charter does not dispute that “Section 362(a)(3) clearly encompasses and protects a debtor‘s executory contracts, which are property of the debtor‘s estate under
Charter asserts that there is no evidence in the record of any contracts Windstream had with customers. The record before me is underdeveloped as to the specifics of the agreements Windstream had with its customers. At summary judgment, Windstream did not assert interference with contracts as a basis for its assertion that Charter violated the automatic stay. Rather, with regard to the advertisements in question, Windstream asserted only “that Charter intentionally disseminated advertisements regarding Windstream‘s Chapter 11 cases, which harmed Windstream‘s goodwill by falsely stating and implying that Windstream will not be able to provide services and/or that Windstream will be going out of business.” (Bankr. Dkt. 123 at 32 (emphasis added).)8
Nevertheless, at summary judgment the Bankruptcy Court found that Charter‘s advertising campaign was “an act to control property of the estate, namely, the debtors’ customers or contracts with those customers, which would also constitute a violation of the automatic stay.” (SJ Hr‘g at 152:7-14.) In the Order, the Bankruptcy Court cited as evidence of the contracts in question testimony from a Windstream employee that the “average tenure of a customer is let‘s just say ballpark 50 months.” (Order at 16 n.17, 19 n.24 (citing Bankr. Dkt. 328 at 39).) The witness did not, however, state that its customers remained with Windstream for an average of 50 months because of any contract.
Windstream argues on appeal that it has both “term contracts and month-to-month contracts,” but does not elaborate which contracts it claims to have lost due to Charter‘s advertisements. (ECF No. 24 (“Appellees’ Opp.“) at 22.) As evidence of the existence of these contracts, Windstream points to Charter‘s advertisement stating that “Windstream has a 2-year contract,” (id. at 25); a statement in Charter‘s Statement of Additional Facts in opposition to Windstream‘s summary judgment motion that it had “bought out 32 contracts from Windstream Customers in 2019” and
This evidence is quite thin. It suggests that some kind of contractual relationship may exist between Windstream and at least some of its subscribers, but does not reflect anything about the terms and conditions of those contracts, their duration, or what performance was required of either party to the contract. Windstream argues that, in addition to the limited evidence in the record, this Court can and should take judicial notice of the Terms and Conditions on its website, which it represents were in effect at the time of the stay violation, (Appellees’ Opp. at 26 n.5), and to which it points as evidence that “all Windstream subscribers are bound at least by month-to-month, automatically renewing contracts,” (id. at 27 (emphasis in original)). But this Court must “limit [its] review to the record on appeal” and accordingly cannot take judicial notice of evidence that was not presented to the trial court. Pullman v. Alpha Media Publ‘g, Inc., 624 F. App’x 774, 779 (2d Cir. 2015) (summary order); see Int‘l Bus. Machs. Corp. v. Edelstein, 526 F.2d 37, 45 (2d Cir. 1975) (per curiam) (“[A]bsent extraordinary circumstances, federal appellate courts will not consider rulings or evidence which are not part of the trial record.“).9 Thus, to the extent that Windstream relies on those terms and conditions for example, in arguing that all of its customers are at least covered by a month-to-month contract that is executory because the Terms and Conditions include “automatic renewal provisions that render the contracts continuous” – it fails to identify any evidence that this Court can properly consider to support that assertion.
The issue of whether Windstream had contracts with its customers is a question of fact reviewed for clear error. I find that despite the lack of evidence regarding the specifics of the contracts in question, the Bankruptcy Court did not clearly err in concluding that Windstream had some kind of contracts under which it provided services to at least some customers. This is supported by Charter‘s assertions that “Windstream has a two-year contract,” (Bankr. Dkt. 341-6 at 2), and that it “bought out 32 contracts from Windstream customers,” (see Bankr. Dkt. 158 ¶ 65). While the fact that customers typically stay with Windstream for 50 months does not necessarily mean that they do so pursuant to a contract, that fact, combined with Charter‘s concessions, could support an inference of the existence of either a term contract or some form of month-to-month contract that automatically renews.
On the legal question of whether such contracts are executory, Windstream points to case law to the effect that an automatically renewing contract does not end with the conclusion of the term, but
2. Goodwill
Charter also challenges the conclusion that goodwill constitutes property of the estate in this case. As a general matter, as the Bankruptcy Court held, “Section 362(a)(3) protects a debtor‘s goodwill” as “property of the estate under
3. Control
Even assuming that Windstream had executory contracts with its customers, and that its goodwill in the marketplace is protected by the automatic stay, Charter did not violate the automatic stay unless its advertisements were “an act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”
The Bankruptcy Court acknowledged that advertising alone does not violate the automatic stay, but nevertheless held that “[a]lthough every corporation expects legitimate advertising by competitors, and thus such advertising does not ‘exercise control’ over its property, 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.” (Order at 19-20.) But there is nothing in the “plain terms” of
As to the whether the case law permits such a broad interpretation of
Charter does not dispute that its advertisements were an attempt to influence customer behavior: they publicized Windstream‘s bankruptcy, suggested that Windstream‘s customers might lose service as a result of the bankruptcy, and proposed their own service as an alternative. But even if this conduct violated other, non-bankruptcy law (an issue I need not and do
The mere fact that the conduct may be wrongful or unlawful does not automatically convert it into a violation of the automatic stay. In re Golden Distributors, in which the debtor raised similar arguments, illustrates the point. There, the debtor sought a temporary restraining order and preliminary injunction under
By contrast, in Alert Holdings, Inc. v. Interstate Protective Services (In re Alert Holdings), 148 B.R. 194 (Bankr. S.D.N.Y. 1992), cited by Windstream and the Bankruptcy Court, the court held that a competitor of the debtors (who were in the business of monitoring and servicing alarm systems) violated the automatic stay when it told the debtors’ accountholders (who had term contracts) that the debtors were going out of business and that the competitor had been designated to take over their accounts, and sent representatives to the customers’ homes to switch their service. Id. at 197-98. When customers began receiving bills from both the debtors and the competitor, and the debtors attempted to correct the misconceptions caused by the competitor, the competitor sent another mailing telling the customers that their contracts with the debtors were unenforceable and offering legal assistance to anyone who had legal issues with the debtors over canceling their contract. Id. at 198. These acts, through which the competitor actively sought to convert or override exclusive term contracts between debtors and their customers, by using the debtors’ customer list and holding itself out as the proper and authorized servicer of those accounts, are properly characterized as attempts to exercise control. Such conduct is clearly distinguishable from Charter‘s mailing campaign here, which involved no proprietary information and in which Charter did not misrepresent its identity.
B. Whether the Bankruptcy Court Erred in Holding Charter in Contempt
Even if Charter‘s conduct violated the automatic stay, the Bankruptcy Court abused its discretion in concluding that there was no fair ground of doubt as to whether the advertisements were a violation of the automatic stay.
While the bankruptcy code provides that “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages,”
In 2019, the Supreme Court addressed bankruptcy courts’ civil contempt power under
“This standard reflects the fact that civil contempt is a severe remedy and that principles of basic fairness require that those enjoined receive explicit notice of what conduct is outlawed before being held in civil contempt.” Id. at 1802 (cleaned up). Both parties and the Bankruptcy Court agreed that Taggart is relevant to this case. (See Order at 6-8; Appellants’ Mem. at 23; Appellees’ Opp. at 50-53.)
The bankruptcy court in Taggart proposed, and the Supreme Court rejected, a substantially similar standard under
We doubt, however, that advance determinations would provide a workable solution to a creditor‘s potential dilemma. A standard resembling strict liability may lead risk-averse creditors to seek an advance determination in bankruptcy court even where there is only slight doubt as to whether a debt has been discharged. And because discharge orders are written in general terms and operate against a complex statutory backdrop, there will often be at least some doubt as to the scope of such orders. Taggart‘s proposal thus may lead to frequent use of the advance determination procedure.
Id. The strict liability proposal would “risk additional federal litigation, additional costs, and additional delays” that “would interfere with a chief purpose of the bankruptcy laws: to secure a prompt and effectual resolution of bankruptcy cases within a limited period.” Id. (cleaned up).
Some of the same concerns are present here: a standard that requires creditors to move to lift the stay, lest they be held strictly liable for an action determined to violate the stay, would generate more lift-stay motions. Further,
Despite these similarities, aspects of Taggart focus on concerns that are specific to discharges and inapplicable to the automatic stay. The Court explicitly acknowledged the differences between stay violations and discharge violations and acknowledged that the “aware of and intended to violate” standard was applied by lower courts in the context of
An automatic stay is entered at the outset of a bankruptcy proceeding. The statutory provision that addresses the remedies for violations of automatic stays says that “an individual injured by any willful violation” of an automatic stay “shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” This language, however, differs from the more general language in section 105(a). The purposes of automatic stays and discharge orders also differ: A stay aims to prevent damaging disruptions to the administration of a bankruptcy case in the short run, whereas a discharge is entered at the end of the case and seeks to bind creditors over a much longer period. These differences in language and purpose sufficiently undermine Taggart‘s proposal to warrant its rejection.
Id. at 1803-04 (quoting
The question here is whether – given controlling precedent in this circuit that
Notwithstanding the differences between the discharge injunction and the automatic stay, it is contrary to Taggart to read into
Further, the Bankruptcy Court‘s conclusion that there could have been objectively “no fair ground of doubt” on Charter‘s part that its advertisements would violate the automatic stay was outside the permissible range of decisions and thus an abuse of discretion. The Bankruptcy Court‘s conclusion that Charter‘s advertising campaign “exercises control” over estate property is at least highly debatable. The plain language of the automatic stay does not clearly proscribe the conduct here, as advertising (even misleading advertising) is not typically understood to exercise control over property. Even if I were to accept the theory of the stay violation here that because the advertisements were false, they were improperly influential – it is not an objectively obvious reading of the statute or the caselaw.
Particularly under the more searching standard that I must apply in assessing sanctions awarded under
IV. CONCLUSION
For the foregoing reasons, the portion of the Bankruptcy Court‘s Judgment holding Charter in contempt for violation of the automatic stay based on Charter‘s advertisements and sanctioning it in the amount of $19,179,329.45 for that violation is VACATED. The Clerk of Court is respectfully directed to close the case.
SO ORDERED.
Dated: October 6, 2022
White Plains, New York
CATHY SEIBEL, U.S.D.J.
Notes
(SJ Hr‘g at 152:7-19.)[T]he violation of the Lanham Act and its state law equivalents is an act to control property of the estate, namely, the debtors’ customers or contracts with those customers, which would also constitute a violation of the automatic stay, given that those rights are protected by the automatic stay. . . . [T]he automatic stay was violated by interference with the Windstream entities’ contracts with their customers by the mailing campaign.