Telecom bankruptcies could create opportunities for municipalities

Kenneth A. Brunetti
Attorney
Miller & Van Eaton, LLP
San Francisco, California

The past two years has seen a virtual deluge of bankruptcy filings by telecommunications providers nationwide, and the trend is nowhere near complete. Notable bankruptcies include WorldCom, Metromedia Fiber Networks, e.spire, Yipes Communications, the parent company of Williams Communications, the parent company of XO Communications, Global Crossing, Northpoint Communications, 360 Networks USA, Covad Communications, PSINet, WinStar Communications and Metricom Inc. The cycle appears to be nowhere close to being complete. Rumors continue to swirl about Qwest Communications. Even the cable companies are joining the party as major cable operator Adelphia Communications filed for bankruptcy protection this past summer.

While these bankruptcies certainly raise concerns for municipalities—the threat of unpaid franchise or license fees, the elimination of in-kind services, such as the use of fiber or conduit, or to build connections between public buildings, or even the possibility that a bankrupt franchisee or licensee may try to assign the franchise, license or right-of-way agreement to a third party without the municipality's consent—bankruptcy might also afford municipalities the opportunity to take over telecommunications facilities that the debtor disposes of in bankruptcy.

The Metricom example
The Metricom bankruptcy case provides a good example of just such an opportunity. In that case, Metricom—a company that had provided a mobile, wireless, high-speed Internet access service known as Ricochet—initially attempted to sell its entire business as a going concern through an auction held in bankruptcy. When no buyer was interested in purchasing the entire company, Metricom attempted to sell off the company in pieces. During this process, it became apparent that no one was interested in buying any of the company's wireless communications equipment-transmitters, wired access points and other equipment located on utility, streetlight, and traffic light poles and on the roofs of public and private buildings.

Metricom therefore decided to abandon all of its wireless communications equipment, which it is authorized to do under bankruptcy law, provided that the abandonment does not result in a substantial risk to the public safety. The authority that permits a debtor such as Metricom to abandon property is found in Section 554 of the Bankruptcy Code, which permits a debtor to abandon property that is burdensome or of inconsequential value to the bankrupt's estate. Metricom argued that the cost of removing each piece of equipment from a pole or building was greater than the salvage value the company could get from selling the equipment in the open market, i.e., the equipment had a negative salvage value. The bankruptcy court accepted Metricom's arguments. The court agreed that the decision to abandon reflected the reasonable business judgment of the trustee or debtor-in-possession.

Opportunity for cities
At first glance, Metricom's actions appeared to leave municipalities in a bind, stuck with worthless equipment sitting on light poles and buildings. As it turns out, however, facilities abandoned by a telecommunications provider in bankruptcy are not necessarily a burden to a municipality merely because the debtor has determined that they are a burden to the bankruptcy estate. To the contrary, abandoned telecommunications facilities may afford a municipality an excellent opportunity to put the facilities to its own use, whether through a municipal system or through a different commercial provider. In fact, numerous municipalities where Metricom abandoned its equipment explored the possibility of taking control of the abandoned Metricom equipment and either incorporating the facilities into the municipality's own internal mobile data network or making the facilities available to another provider to offer a similar service.

The Metricom case had another twist, which made municipal use of the abandoned assets a little more complicated. Metricom did succeed in selling some of its assets in bankruptcy, including certain software and other intellectual property, to a company called Aerie Networks out of Colorado. Among other things, Aerie purchased certain patent rights, including the exclusive rights to the technology that is used in Metricom's wireless data network. As a result, any municipality upon whose rights-of-way or property Metricom abandoned its equipment would have had to negotiate a license with Aerie before it could operate the abandoned telecom equipment.

Several cities did engage in discussions with Aerie. To date, the only municipality that reached an agreement with Aerie is Denver. In that city, Aerie has re-launched its Ricochet commercial service. Because most of its equipment had been abandoned on Denver city property, Aerie agreed to provide the City with 1,000 wireless modems and to allow city workers to use the service for free for a term of at least 25 years. We understand that Aerie continues to work with other cities in which it hopes to enter into similar arrangements. Of course, Metricom is just one example. In fact, abandoned fiber optic lines in the rights-of-way would present an easier business model for a municipality to use, as it most likely will not involve the intellectual property issues that exist in the Metricom case.

Who owns abandoned property?
One issue that may arise when a debtor abandons property is who has legal title to the property after it is abandoned. Property that is deemed by the bankruptcy court to be abandoned ceases to be property of the bankruptcy estate and whatever interest the debtor's estate had reverts to the debtor as if no bankruptcy case had ever arisen. "Abandoned" property is removed from the jurisdiction of the bankruptcy court, and the issue of title becomes a question of state law, not bankruptcy law. To be clear, the bankruptcy court order approving abandonment of property does not and cannot legally transfer the property to a third party. Title to such property is determined as though the bankruptcy petition had never been filed. Therefore, a municipality may need to take specific steps under state law to legally take possession and title to the abandoned property.

Basically, it comes down to the terms of the franchise, license or right-of-way agreement and, if transfer of title in the event of bankruptcy, abandonment of the franchise or cessation of service is not covered therein, then to other principles of state law. As a practical matter, the franchising authority's forfeiture or seizure of the facilities will usually be uncontested. A lender with a lien is unlikely to want to take possession of the equipment unless it has a potential operator interested in buying the facilities. If such an operator existed, the debtor probably would not have abandoned the facilities but instead would have sold them through the bankruptcy proceeding.

Conclusion
To be sure, municipalities should not be distracted by the abandonment issue when they are confronted with a bankruptcy case. The other issues of unpaid fees, preserving future promised benefits, and transfers to new operators are more likely to arise. For example, a franchise authority may lose all rights it has to be paid out of a bankruptcy estate if it does not timely file a proof of claim with the bankruptcy court prior to a court-prescribed "governmental claims bar date." But local governments should at least be aware of the concept of abandonment, as it may present an excellent opportunity for a municipality to take over abandoned telecommunications facilities and put them back into use, either to the benefit of the government or the public.

Kenneth A. Brunetti was a co-presenter of an educational session at Kansas City's Congress entitled, "Managing Utility/Telecommunications Firms: The Fallout from Bankruptcy and Non-Compliance." He also co-facilitated a Roundtable Discussion entitled, "State Legislation on Right-of-Way Management and Compensation from Telecommunications and Cable Television Providers." He can be reached at 415-477-3654 or at kbrunetti@millervaneaton.com.