Windstream Holdings, Inc. v. Charter Commc'ns Inc. (In re Windstream Holdings, Inc.)

• Decision Date: 08 April 2021
• Docket Number: Case No. 19-22312 (RDD) (Jointly Administered),Adv. Pro. No. 19-08246
• Citation: 627 B.R. 32
• Parties: IN RE: WINDSTREAM HOLDINGS, INC., et al., Debtors. Windstream Holdings, Inc., et al., Plaintiffs, v. Charter Communications Inc. and Charter Communications Operating, LLC, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

627 B.R. 32

IN RE: WINDSTREAM HOLDINGS, INC., et al., Debtors.Windstream Holdings, Inc., et al., Plaintiffs,

v.Charter Communications Inc. and Charter Communications Operating, LLC, Defendants.

Case No. 19-22312 (RDD) (Jointly Administered)

Adv. Pro. No. 19-08246

United States Bankruptcy Court, S.D. New York.

Signed April 8, 2021

Katten Muchin Rosenman LLP, by Terence P. Ross, Michael R. Justus, and Shaya Rochester, for Debtors/Plaintiffs.

Morrison & Foerster LLP, by Lorenzo Marinuzzi and Todd M. Goren, for the Official Committee of Unsecured Creditors.

Thompson Coburn LLP, by John Kingston, Michael Nepple, and Brian Hockett, for Defendants.

MEMORANDUM OF DECISION ON COUNT VI (CONTEMPT FOR VIOLATION OF THE AUTOMATIC STAY) AND COUNT VII (EQUITABLE SUBORDINATION)

Hon. Robert D. Drain, United States Bankruptcy Judge

After December 18, 2019 a bench ruling, the Court entered an order [Dkt. No. 274] granting in part and denying in part the motion of plaintiffs/debtors and debtors in possession ("Plaintiffs" or "Debtors") for partial summary judgment on all counts in this adversary proceeding. In an order dated March 30, 2020 following a memorandum of decision appearing at Windstream Hldgs., Inc. v. Charter Communs. Inc. (In re Windstream Hldgs., Inc. ), 2020 WL 1304147, 2020 Bankr. LEXIS 708 (Bankr. S.D.N.Y. Mar. 17, 2020), the Court decided to hear the remaining issues in this adversary proceeding only with respect to Count VI (breach of the automatic stay set forth in 11 U.S.C. § 362(a) ) and Count VII (equitable subordination under 11 U.S.C. § 510(c) ) of the claims filed in these chapter 11 cases by defendant Charter Communications Operating, LLC ("Operating;" the defendants together, "Defendants" or "Charter").¹

The Court's order on the Debtors' summary judgment motion held that the Defendants breached the automatic stay set forth in 11 U.S.C. § 362(a) by their termination of "last mile" connectivity service to certain of the Debtors' customers based on the Debtors' prepetition default under the parties' Spectrum Business Value Added Reseller Agreement, dated April 11, 2018 (the "VAR Agreement"),² as well as Defendants' literally false and intentionally misleading advertising campaign to induce the Debtors' customers to terminate their agreements with the Debtors.

The remaining issues on Count VI are whether the Defendants are liable in civil contempt for such breaches and, if so, the proper compensatory sanction.

As to Count VII, the remaining issues are the amount of harm caused by the foregoing conduct to the creditors of the Debtors against which Operations has filed claims (the "Applicable Debtors") and whether equitably subordinating Operations' claims to those creditors' claims conflicts with any other provision of the Bankruptcy Code, the Applicable Debtors' summary judgment motion having previously established the other elements of their equitable subordination claim under 11 U.S.C. § 510(c).

The Court conducted a four-day trial on these issues and has considered the witness' testimony, the parties' agreed deposition designations, the documents admitted into evidence, and the parties' post-trial submissions. This Memorandum of Decision explains why (a) the Defendants should be held in contempt for violating the automatic stay under (i) 11 U.C.C. § 362(a)(3) and (6) for their termination of service to the Debtors' customers on account of prepetition amounts owing under the VAR Agreement, and (ii) 11 U.S.C. § 362(a)(3) for their literally false and intentionally misleading advertising campaign that wrongfully interfered with the Debtors' customer contracts and goodwill; (b) the Defendants should be jointly and severally sanctioned in the amount of certain of the Debtors' actual damages arising from their termination of customer service under the VAR Agreement, in the aggregate sum of $5,278.85; (c) the Defendants should be jointly and severally sanctioned $19,179,329.45 for the losses caused by their violation of the automatic stay by intentionally and wrongfully interfering with the Debtors' customer contracts and good will; (d) (i) the harm to the Applicable Debtors' general unsecured creditors in Class 6A under the Debtors' confirmed Chapter 11 Plan caused by Operations' foregoing conduct is, as set forth in the Court-Approved Disclosure Statement therefor,³ far greater than Operations' projected recovery on its claims against the Applicable Debtors that are Class 6A Obligors, warranting the equitable subordination of Operations' unsecured claims in full under 11 U.S.C. § 510(c) to the other general unsecured claims against the those Debtors, and (ii) such subordination does not conflict with any other provision of the Bankruptcy Code; and (e) because the general unsecured creditors in Class 6B under the Debtor's Chapter 11 Plan would receive a full recovery regardless of the damages caused by Operations, Operations' claims against the Applicable Debtors that are Class 6B Obligors should not be equitably subordinated.

Jurisdiction

The Court has previously ruled that it has "arising under" jurisdiction under 28 U.S.C. §§ 157(a) - (b) and 1334(b) with respect to Counts VI and VII, which are core proceedings under 28 U.S.C. § 157(b) that the Court can decide by a final order under the United States Constitution. In re Windstream Hldgs., Inc., 2020 WL 1304147 at *2-3, *5-6, 2020 Bankr. LEXIS 708 at *6, *12-14 ; see also In re Residential Capital, LLC, 571 B.R. 581, 585 (Bankr. S.D.N.Y. 2017) ("If a civil contempt proceeding arises out of a core matter, the contempt proceeding is core."); Ames Dept. Stores, Inc. v. Lumbermens Mut. Cas. Co. (In re Ames Dep't. Stores, Inc. ), 542 B.R. 121, 141-43, 145 (Bankr. S.D.N.Y. 2015) (bankruptcy court has not only core but also exclusive jurisdiction over claims for breach of the automatic stay and equitable subordination). Confirmation of the Debtors' Chapter 11 Plan after the trial in this proceeding did not deprive the Court of jurisdiction over these pending claims. New York Skyline Inc. v. Empire State Bldg. Co. LLC (In re New York Skyline Inc. ), 2015 WL 5071948, at *14–15, 2019 Bankr. LEXIS 2837, at *35-39 (Bankr. S.D.N.Y. Aug. 26, 2015).

Discussion

Contempt for Violation of the Automatic Stay .

Acts taken in violation of the automatic stay set forth in 11 U.S.C. § 362(a) are void. In re 48th St. Steakhouse, 835 F.2d 427, 431 (2d Cir. 1987) ; 3 Collier on Bankruptcy ¶ 362.12[1] (16th ed. 2020), and courts routinely grant injunctive relief to ameliorate their effect. In re Adelphia Communs. Corp. v. The American Channel, LLC, 345 B.R. 69, 83-84, 86 (Bankr. S.D.N.Y. 2006). In addition, under certain circumstances monetary sanctions may be warranted for such violations. In the Second Circuit, if the debtor is not a natural person such sanctions derive from the Court's inherent contempt power, Maritime Asbestos Legal Clinic v. LTV Steel Co. (In re Chateaugay Corp. ), 920 F.2d 183, 187 (2d Cir. 1990) ; see also Fidelity Mortgage Investors v. Camelia Builders, Inc., 550 F.2d 47, 52-53 (2d Cir. 1976), cert. denied , 429 U.S. 1093, 97 S.Ct. 1107, 51 L.Ed.2d 540 (1977) ; 3 Collier on Bankruptcy ¶ 362.12[2], as well as under 11 U.S.C. § 105(a), which provides that "The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title," in this instance 11 U.S.C. § 362(a).⁴

Generally, "Federal Courts consider two factors in determining whether to hold a party in civil contempt: whether the alleged contemnor had notice of the court order, and whether that person complied with the order." In re Residential Capital, 571 B.R. at 585. As held by In re Chateaugay Corp., the automatic stay has the effect of a court order for purposes of the contempt power as further supported by 11 U.S.C. § 105(a). 920 F.2d at 187 ; see also Knupfer v. Lindblade (In re Dyer ), 322 F.3d 1178, 1191 (9th Cir. 2003) ("Because the metes and bounds of the automatic stay are provided by statute and systematically applied to all cases, there can be no doubt that the automatic stay qualifies as a specific and definite court order.") (internal quotation and citation omitted).

In addition, "To justify a civil contempt order, a movant must establish that (1) the order the contemnor failed to comply with is clear and unambiguous, (2) the proof of noncompliance is clear and convincing, and (3) the contemnor has not diligently attempted to comply in a reasonable manner." Weston Capital Advisors v. PT Bank Mutiara, Tbk, 738 Fed. App'x 19, 21 (2d Cir. 2018) ; see also In re Residential Capital, 571 B.R. at 585 ; In re Chief Exec. Officers Clubs, Inc., 359 B.R. 527, 535 (Bankr. S.D.N.Y. 2007) (noting, further, at 534, "it is well established that bankruptcy courts have power to enter civil contempt orders"). Lastly, an alleged contemnor's inability to comply with an order cannot be punished by contempt if the burden to prove such inability is carried "clearly, plainly, and unmistakably." Huber v. Marine Midland Bank, 51 F.3d 5, 10 (2d Cir. 1995).

The Supreme Court has clarified that when a court uses its inherent civil contempt power (including in the bankruptcy context when invoked in conjunction with 11 U.S.C. §§ 105(a) and 524 ), an additional finding of bad faith or willfulness is not required. Taggart v. Lorenzen, ––– U.S. ––––, 139 S. Ct. 1795, 1802, 204 L.Ed.2d 129 (2019). See also Dibattista v. Selene Fin. LP (In re Debattista ), 615 B.R. 31 (S.D.N.Y. 2020), which dismissed the argument that the willful violation of an order in the sense of an intent to violate, as opposed to an intentional act in violation of the order, is required to hold one in contempt: "This standard ... does not seem to survive Taggart, where the Court held that ‘the absence of willfulness does not relieve [a party] from civil contempt.’ 139 S. Ct. at 1802." Id. at 39.

Instead, "civil contempt should not be resorted to where there is a fair ground of doubt as to the wrongfulness...