ISP dumps 500 user contracts

Imagine receiving a notice from your ISP that says it is rejecting your contract, and service will cease in two weeks.

About 500 Genuity customers don't have to imagine; they lived through it earlier this year after the ISP declared bankruptcy.

Barclays Global Investors, BTM Capital, Metropolitan Transit Authority of New York, PricewaterhouseCoopers and Sun were among the 10% of Genuity's 5,000 customers that received letters saying their service contracts were being ditched. Some renegotiated, some did not, and some were not even given the opportunity.

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Imagine receiving a notice from your ISP that says it is rejecting your contract, and service will cease in two weeks.

About 500 Genuity customers don't have to imagine; they lived through it earlier this year after the ISP declared bankruptcy.

Barclays Global Investors, BTM Capital, Metropolitan Transit Authority of New York, PricewaterhouseCoopers and Sun were among the 10% of Genuity's 5,000 customers that received letters saying their service contracts were being ditched. Some renegotiated, some did not, and some were not even given the opportunity.

"It's pretty scary when you first get that letter," says Jim Wilder, head of IT at Nabi Biopharmaceuticals in Boca Raton, Fla. Wilder was surprised that his contract was among those rejected, although his company eventually renegotiated its deal for managed firewall services with Genuity's new parent company.

Genuity filed for Chapter 11 bankruptcy protection last December just before Level 3 Communications acquired it. Any company in Chapter 11 must accept or reject each of its existing contracts, including real estate, utility and customer contracts. This falls under Section 365 of the Federal Bankruptcy Code.

And this provision of bankruptcy law is not a two-way street. Customers that did not want to work with the bankrupt company or Level 3 were not allowed to abandon their contracts before they expired.

Genuity officials make no apologies for how they handled the contracts.

"A large number of contracts were not assumed by Level 3 either because they included services that Level 3 could not support or because the contracts were uneconomical, or contained terms and conditions that were difficult for Level 3 to honor," says Kevin O'Hara, president and COO of Level 3.

While it is expected that any company in Chapter 11 would avail itself of relief that the bankruptcy code offered, it is unusual that such a large number of revenue-generating contracts would be rejected, experts say.

"You usually see companies hold on to customer contracts because that is what's keeping them alive," says Denise Dell, a bankruptcy attorney at Akerman Senterfitt, a law firm in Florida. "In my experience, with telecom bankruptcies, you are seeing more customer contracts rejected. But it is still not common."

WorldCom, which recently changed its name to MCI, says it rejected only one customer contract when it reviewed its contracts last year after it filed for Chapter 11 bankruptcy protection. The service provider took a different approach by trying to retain as many customers as possible. The carrier's bankruptcy is still the largest on record.