Minimizing Cash-Flow Risk arising from a Bankruptcy for Frontier Communications
It is widely reported in the business press that Frontier Communications plans to file for protection under the Bankruptcy Code sometime in the relatively near term. Reportedly, Frontier met with creditors and advisers to inform them Frontier hopes to negotiate a pre-packaged bankruptcy plan before $356 million of debt payments come due March 15, 2020.
How can Frontier’s vendors and other trade creditors minimize their risk related to the contemplated filing? Several strategies are described below.
- Minimize outstanding A/R as we move closer to an expected filing date.
- Don’t be afraid to accept whatever payments you can collect, but be aware of potential claw-back claims.
- Negotiate “critical vendor” status if possible.
- Consider providing credit on conservative terms after the petition date.
The largest risk associated with a contemplated bankruptcy filing is in connection with invoices or other outstanding receivables that are not collected on the petition date. Because the contemplated bankruptcy will almost certainly proceed as a reorganization under Chapter 11 of the Code, Frontier will be obligated to propose a plan of reorganization that will provide for the repayment of outstanding liabilities as of the date of its bankruptcy filing. However – despite its reported efforts to negotiate a pre-packaged plan - the proposal and confirmation of the plan could take months, and associated delays mean Frontier’s bankruptcy could present cash flow disasters for vendors and trade creditors.
To address those concerns, take steps to minimize any outstanding accounts receivable to Frontier as we move closer to the anticipated filing date. Monitor A/R carefully, and minimize pre-petition exposure by decreasing the value of any single future order. To the extent possible, negotiate cash-on-delivery terms for orders to be delivered before the bankruptcy is filed. COD plus – involving cash for current deliveries and reduction of outstanding A/R - is ideal.
Trade creditors should be aware that the Bankruptcy Code authorizes a debtor to “claw-back” into the bankruptcy court payments the debtor made against old debt in the months leading to the bankruptcy. Accordingly, there is a theoretical possibility that Frontier could attempt, after bankruptcy, to reclaim the payments it made to creditors shortly before the bankruptcy. However, as a practical matter, this risk should not deter creditors from collecting A/R. The exceptions to the claw-back are very broad, and exclude from the claw-back power almost any payment that occurred in the ordinary course of business. More fundamentally, in the Chapter 11 context, Frontier itself will determine whether to exercise the claw-back power, and many Chapter 11 debtors choose not to do so. These practical considerations suggest that it may be best for trade creditors to collect as much A/R as possible prior to any bankruptcy filing, recognizing that a claw-back claim is a possibility. MCCM’s lawyers are well-versed in the claw-back exceptions, and regularly defend those claims. We will be happy to help if that possibility comes to be.
If Frontier does indeed file for protection under the Bankruptcy Code, the law provides a priority for payment to those who do business with the debtor during its effort to reorganize. Frequently, in an effort to ensure a bankruptcy will not unduly interrupt its supply chain, a Chapter 11 debtor will ask the court to designate some suppliers as “critical vendors” who can be paid even with respect to their pre-petition obligation. It’s worthwhile to see if this is an option. Even if it is not, during the administration of a reorganization case, the debtor is authorized to pay its post-petition obligations, incurred in the “ordinary course,” on a current basis. Frontier’s financial ability to pay these ordinary course administrative priority claims can be confirmed by reviewing the monthly operating reports that it will have filed throughout the course of its case.
An interesting twist arises from a situation where a trade creditor’s obligation with Frontier is defined by a contract that still requires elements of performance by both Frontier and by the trade creditor. For example, if Frontier is obligated to make monthly payments on a pre-bankruptcy maintenance contract with a term that extends for months after the bankruptcy filing. These contracts are known as “executory contracts,” and Frontier will have the unilateral right, in bankruptcy, to determine whether to assume or reject these contracts. The other party to the executory contract cannot treat the bankruptcy filing as a breach – even if the contract says so – and, the other party’s remedy is to ask the court to compel the assumption or rejection as early as possible, and to insist that “adequate assurances” are provided with respect to Frontier’s ability to honor the contractual terms going forward.
The lawyers on MCCM’s Insolvency and Creditors’ Rights team have guided clients through the complicated issues surrounding bankruptcy reorganizations for a combined 80 years. If news surrounding Frontier’s potential reorganization raises questions, we are happy to assist you to understand how to navigate the best course.
 See e.g., https://www.bloomberg.com/news/articles/2020-01-16/frontier-said-to-tell-creditors-it-seeks-a-mid-march-bankruptcy; https://arstechnica.com/tech-policy/2020/01/frontier-an-isp-in-29-states-plans-to-file-for-bankruptcy/
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McConville Considine Cooman & Morin, P.C. is a full-service law firm based in Rochester, New York, providing high-quality legal services to businesses and individuals since 1979. With over a dozen attorneys and a full paralegal support staff, the firm is well-positioned to right-size services tailored to each client. We are large enough to provide expertise in a broad range of practice areas, yet small enough to devote prompt, personal attention to our clients.
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