In Re: Windstream Holdings, Inc.

Background

Windstream Holdings, Inc. and its debtor affiliates filed for Chapter 11 bankruptcy on February 25, 2019. The filing triggered an automatic stay under 11 U.S.C. § 362, which generally pauses actions to obtain or control property of the bankruptcy estate. Charter sent an advertising campaign to about 800,000 residences in areas likely to include Windstream customers. The advertisements said Windstream’s bankruptcy created uncertainty about its future services and urged customers to switch to Charter’s Spectrum service.

Windstream alleged that the advertisements were knowingly false and caused customer confusion and losses. It brought seven claims in the Bankruptcy Court, including claims under the Lanham Act and similar state laws, breach of contract, violation of the automatic stay, and equitable subordination. The Bankruptcy Court granted Windstream summary judgment on liability for several claims, including the automatic-stay claim. After a trial on the automatic-stay and equitable-subordination claims, it held Charter in contempt for violating the stay through the advertising campaign and imposed $19,179,329.45 in sanctions.

Charter appealed only the contempt ruling and sanctions related to the advertising campaign. It did not challenge the Bankruptcy Court’s rulings that Charter’s termination of certain service violated the parties’ Value Added Reseller Agreement or that Charter’s unsecured claims should be equitably subordinated.

Automatic-stay ruling

The District Court reviewed the Bankruptcy Court’s legal conclusion about the automatic stay independently and reviewed factual findings for clear error. Section 362(a)(3) bars acts to obtain possession of, or exercise control over, property of the bankruptcy estate. The District Court recognized that executory contracts—contracts in which important obligations remain unperformed—can be estate property. It also stated that goodwill can be estate property in some circumstances.

The District Court found the record insufficient to establish the specific terms, duration, or performance obligations of Windstream’s customer agreements. It nevertheless held that the Bankruptcy Court did not clearly err in finding that Windstream had some kind of contracts with at least some customers. The District Court did not definitively decide whether those contracts were executory because it concluded that the advertisements did not obtain or control the contracts.

The court also rejected applying the automatic stay to the advertisements based on marketplace goodwill. The court explained that the cases protecting goodwill generally involved wrongful impersonation, trademarks, customer lists, trade secrets, or other proprietary information. Charter’s mailings identified Charter as a competitor and did not use proprietary information or hold itself out as connected to Windstream.

Most importantly, the District Court held that advertising intended to influence customers’ choices was not an act to obtain or exercise control over estate property under Section 362(a)(3). The advertisements may have harmed Windstream’s business or violated other laws, but wrongful or unlawful conduct does not automatically violate the automatic stay. The court distinguished conduct that actively converted or overrode customers’ exclusive contracts or misused the debtor’s proprietary information from Charter’s mailings, which sought to persuade customers to choose a competitor.

Contempt and sanctions

The court separately held that the Bankruptcy Court abused its discretion in finding contempt. For a corporate debtor, the court explained, contempt proceedings under 11 U.S.C. § 105(a) are the proper means of compensation and punishment for a willful automatic-stay violation. Under the Supreme Court’s standard in Taggart v. Lorenzen, civil contempt sanctions are available when there is no objectively reasonable basis—or “fair ground of doubt”—for believing that the conduct was lawful under the relevant bankruptcy order.

The District Court rejected the Bankruptcy Court’s view that a party uncertain about whether the automatic stay applies must first ask the Bankruptcy Court to clarify the issue or face sanctions. The court held that this requirement was inconsistent with the Taggart standard. It also held that the Bankruptcy Court’s conclusion that Charter had no fair ground to doubt whether its advertisements violated the stay fell outside the permissible range of decisions. The statutory text and case law did not clearly establish that advertising, even misleading advertising, exercises control over estate property.

Disposition

The court held that Charter’s advertisements did not violate the automatic stay. It further held that, even if they had, the contempt finding was improper because there was a fair ground of doubt about whether the conduct violated the stay. The court therefore vacated the portion of the Bankruptcy Court’s Judgment holding Charter in contempt for the advertising campaign and sanctioning it $19,179,329.45. It did not address whether the advertisements violated the Lanham Act or equivalent state laws, the appropriate amount of damages, or other issues not necessary to the appeal. The Clerk was directed to close the case.