The Reorganization of Bankrupt Internet Companies

The emergence of the dot-com company has appropriately been referred to as an “Internet gold rush,” characterized at its inception by an energized stock market and ready investors. However, over the past several years, the stock values of several Internet companies have plummeted, raising issues about the bankruptcy process as it is related to debt and reorganization in cyberspace.

Chapter 11 Bankruptcy Protection for the Dot-Com
Chapter 11 bankruptcy, also known as “business reorganization,” is designed to help a failing business restructure its assets and debts to become profitable again. Because so many consumers have come to depend on daily Internet and e-mail access, Chapter 11 bankruptcy protection for dot-com companies can have unique and far-reaching implications.

Generally, filing for Chapter 11 bankruptcy allows a company to continue operations by relieving the company of some of its burdens. One of the most important benefits of a Chapter 11 plan is the company’s ability to cancel a disadvantageous contract, with court approval. A recent bankruptcy case involving a major Internet service provider illustrates the extent of the relief afforded by a Chapter 11 bankruptcy plan, to the detriment of consumers.

In that case, the Internet provider filed for Chapter 11 bankruptcy protection, claiming that it was being underpaid by its subscribers in relation to the services it provided. Accordingly, a federal bankruptcy judge ruled that the Internet provider was permitted to effectively turn off Internet service for thousands of consumers. The judge held the service contracts to be “clearly burdensome” to the company, costing the company up to $6 million per week.

Sale of “Cyberassets” During Reorganization
Another issue that has arisen with regard to dot-com bankruptcy is whether a particular “cyberasset” will count as property for purposes of sale under a Chapter 11 plan.

The ability to sell assets “free and clear of creditors’ liens” is one of the most important benefits of Chapter 11 reorganization. Asset sales free of liens allow a Chapter 11 company to use the proceeds from the sale of its “hard assets” to facilitate reorganization (rather than to satisfy the debt owed to its creditors). Hard assets include tangible property, such as equipment, inventory and real estate. Although Internet companies generally lack hard assets, they have other valuable assets, including:
Intellectual property
Patent rights
Software and content licenses
Partner relationships
Internet Domain Names
An example of the type of intellectual property that an Internet company possesses is an Internet domain name. The domain name identifies a specific area on the Internet and allows an Internet user to access a particular website directly. However, recent cases on the topic have uniformly suggested that Internet domain names are not proper subjects for sale. Instead, the courts indicate that they should be considered services rather than property. This trend against the classification of intangible assets as property suggests that the Chapter 11 reorganization process might present more difficulty for Internet companies than other businesses.