• United States
by Janice Aune

Does bankruptcy give companies an unfair advantage? Yes.

Mar 03, 20033 mins
Telecommunications IndustryWi-Fi

Two industry insiders debate whether filing Chapter 11 gives firms a leg up on competitors.

There is absolutely no doubt that bankruptcy gives some companies an unfair advantage. But perhaps the focus should be less on the companies and more on the public policy that enables this inequity. Let me explain from the perspective of a regional service provider that operates a 3,500-mile network in Minnesota, and provides wholesale services to global and regional carriers.

The opposing view: No, Chapter 11 is not an unfair advantage

Your view: The Chapter 11 forum

The telecom industry is unlike many other businesses. It’s more like an ecosystem than a flowchart – we buy services from providers, sell services to those same providers and, in some cases, compete with those providers. There’s an ebb and flow of data, network capacities and fiber, and it works as long as everyone pays for their share. When one company fails, it has wide-reaching effects.

There are two primary examples of how the current bankruptcy system hampers the ability of solvent companies to compete. First, bankruptcy law enables something that I call the Chapter 11 Bankruptcy Car Wash. In the car wash, the bankrupt company washes off its debt, leaving many of its vendors in the dust. The bankrupt company, armed with an artificially low-cost structure, can then lower prices to below-market rates, forcing solvent companies to lose customers or drop prices to artificially low rates to compete. This creates a dangerous marketplace. We must ask, ‘What drove the behavior of these companies before bankruptcy? Do our public policies compel these companies to change their behavior?’ I don’t think so, which leads to my second example.

Chapter 11 bankruptcy protection laws disrupts the telecom arena, which directly affects my company. In a Chapter 11 proceeding, a judge will approve a list of critical vendors to the filing company. These vendors will immediately get paid for their prepetition debt. Our experience has shown that when one of our customers files for Chapter 11, we are designated as an administrative vendor and, therefore, it is unlikely we would be paid.

As a telecom provider, we accept the public responsibility that comes along with providing essential services. In other industries, a business can cut off services if a customer isn’t paying its bills. By law, however, we are restricted from cutting off services to a nonpaying customer. If we stopped providing service for nonpayment by a carrier customer, we would severely affect the nation’s telecom infrastructure – potentially isolating large communities or critical services. I am not advocating any policy that would endorse putting end users at risk of being cut off from vital services such as 911.

I am asking that lawmakers look at policies that place essential service providers in inequitable positions. If we – as a society – agree that our national telecom infrastructure consists of essential service providers, then we would agree we should maintain a status that reflects that position throughout the Chapter 11 bankruptcy process.