Our Litigators of the Week are Kirkland & Ellis partners Rush Howell, Ravi Shankar and Yates French for their work on behalf of telecom company Windstream in a complex and fast-moving fight with billions of dollars and their client’s future on the line.
Last year, Windstream filed for bankruptcy in the Southern District of New York. Soon after, the company’s lawyers from Kirkland sued Uniti Group—a real estate investment trust that had been spun out from Windstream in 2015—seeking to “recharacterize” a $650 million a year lease arrangement as a disguised financing.
On the eve of trial, the parties reached a settlement that calls for Uniti to provide over $2.1 billion to Windstream over the next 10 years. But after the deal was announced, some of Windstream’s creditors objected, setting off a new round of litigation.
On Friday, May 8, after hearing witness testimony and oral arguments (all over Skype), Judge Robert Drain overruled all objections and approved the settlement.
Howell, Shankar and French discussed the case with Lit Daily.
Lit Daily: Who is your client and what is at stake?
Rush Howell: Our client is Windstream, one the nation’s largest providers of telecommunications services. In 2015, Windstream spun off one of its subsidiaries, now known as Uniti, into a real estate investment trust. As part of that spin-off, Windstream sent billions of dollars worth of assets to Uniti and then Windstream entered into a “Master Lease” with Uniti to lease those assets at a rent of roughly $650 million a year.
In early 2019, Judge Jesse Furman in the Southern District of New York ruled that the 2015 spin-off transaction violated certain of Windstream’s bond indentures. This ruling led to Windstream filing for bankruptcy before Judge Robert Drain in the Southern District of New York. Once in bankruptcy, Windstream tasked us with investigating and evaluating potential litigation claims the bankruptcy estate held.
We conducted that investigation for several months before ultimately filing a complaint against Uniti. The centerpiece of the litigation was a “recharacterization” claim that Windstream sought to recharacterize the arrangement with Uniti as a disguised financing instead of a lease. What was at stake was several billions of dollars in rent payments along with the ability for Windstream to find a path out of Chapter 11.
Ravi Shankar: We knew that resolution of these issues with Uniti, either through litigation or settlement, would be critical for Windstream to be able to develop a plan of reorganization and emerge from bankruptcy. We set upon a fast-tracked litigation schedule and proceeded into multiple rounds of depositions and briefing throughout the fall and winter of 2019. And while we were litigating against Uniti, we also engaged in a seven-month mediation. Ultimately, we had to get all the way to the eve of trial before reaching a settlement on March 1, 2020.
Yates French: The settlement requires Uniti to make payments of over $2.1 billion to Windstream over the next 10 years. We believe that to be the largest recovery based primarily on a recharacterization claim in history.
Rush Howell: Once we reached an agreement in principle, new litigation began as Windstream’s unsecured creditors objected to the settlement. So we spent the past two months litigating in the time of COVID-19 to get that settlement approved. This included a telephonic discovery hearing, six video-depositions, and more team video meetings than I can count. Last Friday, Judge Drain, after a two-day, videoconference-based, evidentiary hearing and argument, approved the settlement finding it to be a favorable result for our client and well above the range necessary for approval.
What is a recharacterization claim and what are some of the challenges associated with lawsuits based around that?
Ravi Shankar: At the core, recharacterization is a claim where you seek to look past the form of an arrangement to its substance, and declare that the true arrangement is different than the labels put on it.
This case was focused on our claim that the arrangement between Windstream and Uniti was not truly a lease but rather a disguised financing. To develop that theory, we focused on the economic life of the assets transferred. To give a simple example, if I “lease” you a computer for 10 years, but that computer is only expected to be used for five years, then it’s not really a lease—it’s a financing arrangement where all of the value of the computer has been used up during the lease.
This becomes far more complex when you try to assess questions like “What is the useful life of hundreds of thousands of miles of copper wire, fiber optic cable, telephone poles, and land that are used to form a telecommunications network?” It was a fascinating topic to explore, especially in looking at how different experts in the case viewed that central question.
Yates French: Recharacterization claims are notoriously difficult because, after all, you are seeking to “re-characterize” something that has already been characterized differently. In this case, one of the principal challenges we faced was a long history of both Windstream and Uniti referring to the transaction as a “lease.” We felt good about the arguments we put together, but we recognized that would be a significant hurdle.
We also had to deal with several open questions of law that related to remedy. After all, we were asking for billions of dollars of assets to be deemed never to have left Windstream. In most cases, you know exactly what a win would look like, but here, a litigation win would have led to a lot more questions and several legal issues of first impression.
What was your overarching theme or argument in litigating this case?
Ravi Shankar: Our recharacterization boiled down to a couple of simple points. We argued that the useful life of the copper wire used in Windstream’s network was insufficient to last throughout the 15-year initial lease. Additionally, we argued that the true lease term was 35 years, rather than 15 because Windstream would be economically compelled to renew the lease.
Going back to the computer example, our position was basically that there was no situation in which Windstream would “return” these assets to Uniti with any material remaining value in them.
Who were the other entities—and their law firms—involved in the case?
Rush Howell: There were many parties involved. Uniti was well represented by Davis Polk. Then our creditors were represented by a host of top-tier firms including Paul Weiss; Ropes & Gray; White & Case; Morrison Foerster; and Milbank. If I listed all of the attorneys, I would quickly exceed the word count for this article, but suffice to say there was no shortage of legal talent.
Describe some of the challenges associated with bringing a large case to litigation in the bankruptcy context with so many parties with different goals involved.
Rush Howell: One of the biggest differences between restructuring and non-restructuring litigation is that almost nothing in bankruptcy is straightforward two-party litigation. Instead, you have multiple different players (debtors, creditors, and third parties), each with a unique interest and point of view. In this matter, we had multiple creditors on our side of the underlying litigation against Uniti.
Once we reached the settlement, however, some of those same creditors were the ones who objected to the settlement. Meanwhile, our previous adversaries were now on our side supporting the settlement! That’s par for the course in bankruptcy where allegiances are often quickly shifting.
Ravi Shankar: Sometimes in bankruptcy you only know that you’ve gotten to a fair resolution when nobody is happy. But here the settlement received significant support from many of Windstream’s creditors in addition to the company. It’s important that you keep a level head and a professional relationship with all the parties during a Chapter 11, especially since you never know whether you will be allies or adversaries at the next hearing.
Yates French: The best part about bankruptcy litigation is that it’s fast-paced and always changing. Ultimately, I believe this actually encourages good behavior and collegial conduct because you never know who will be seated next to you at the next hearing.
How did the litigation team work with Kirkland’s restructuring side on this matter?
Rush Howell: Extremely closely. I think one of the great things about working at Kirkland is the breadth of subject matter expertise we have at the firm combined with a culture of interdisciplinary cooperation. Nowhere is that more clear than in our restructuring cases where the restructuring team leads the matter but solicits constant input from our capital markets, debt finance, tax, IP, and (when they are so unlucky) litigation groups. That overall blend is critical to success.
Ravi Shankar: This case was certainly no exception. One of our senior restructuring partners, Marc Kieselstein, served as a liaison between restructuring and litigation as we developed our claims and case themes. And, most importantly, the entire litigation was done in parallel to an extremely in-depth mediation process overseen by the Honorable Judge Shelley Chapman. We had to constantly communicate between restructuring and litigation to make sure that we were delivering a consistent message.
Rush Howell: Restructuring partner Brad Weiland also deserves special mention as he was probably the only guy staying up later than Ravi as the trial date and end of mediation converged.
What was it like to do an evidentiary hearing over a video conference?
Rush Howell: It was a challenge, and not just because it required everyone to break their quarantine rituals and put on dress pants. We had four witnesses and over a dozen lawyers conducting exams or arguing, so our test run of the hearing (and thank goodness we had one) was a circus!
But overall everything worked out well thanks to the excellent work of both the court’s staff and the various video services we utilized. I would strongly recommend to anyone conducting a virtual evidentiary hearing to think hard about how to manage your documents during witness examinations. And attention capital is harder to come by over video, which actually is a great exercise in forcing attorneys to focus on organizing and streamlining their presentations (and also promotes the value of demonstratives).
Yates French: Doing a cross-examination over video was certainly an odd experience. It’s hard enough to effectively present your trial themes without also worrying about someone’s microphone cutting out. But I found that it wasn’t all that difficult to adjust to the “new normal.” And when you take or defend a seven-hour deposition, it’s not so bad to be able to relax at home afterwards rather than having to hop on a plane. Overall though, while I echo Rush’s view that the professionals that assisted us in this process were fantastic, I think it’s safe to say we’re not doing away with live courtroom presentations any time soon.
How does this decision impact the larger restructuring situation at hand?
Yates French: This settlement was critical for Windstream to be able to exit bankruptcy. While Windstream has done a great job operating since filing for Chapter 11, it is difficult to run a business of this size maximally while confronting the overhang of bankruptcy. Getting this settlement approved allows the company to move forward towards confirming a plan of reorganization that will dramatically improve its balance sheet while also obtaining the capital necessary to keep its network competitive. Absent a litigation resolution (either victory or a favorable settlement), the company would likely be forced to remain in bankruptcy many more months at significant cost to the estate.
How do you balance the desire to try the case with the fact that a settlement is the best path forward for the client?
Rush Howell: That is always the bittersweet moment for the litigators. You spend months and months building your evidence and case themes so that you can finally tell your story, only to settle on the courthouse steps. But there is nobody on earth less sympathetic than a dejected commercial litigator, and it’s ultimately quite easy to step back and see the big picture for your client. And, of course, we felt this was a good deal for the client.
I do want to take this opportunity though to give another thank you to my team because they worked their tails off for months and were ready to put on a great case. I was very fortunate to work with Cassandra Fenton, Greg Tsonis, Pratik Ghosh, Julia Harper, Carolyn Brown, Jenna Stupar, Dan Schwartz, and Allison McDonald and thankful for their creativity, dedication, and energy. And just as important was our terrific support staff who had us ready for trial. In the end, we’re pleased with what we helped accomplish, but the litigation was only a small part of this result. Our client and our bankruptcy partners worked tirelessly to negotiate a deal that should best position both Windstream and Uniti for success.
What makes the settlement a win for your client?
Yates French: The settlement provides a tremendous amount of value to Windstream and does it in a way that provides the best path forward not only for Windstream as a business, but for the partnership between Windstream and Uniti.
The settlement will allow for $285 million in up-front cash payments to Windstream, an additional $490 million in payments over the next 20 quarters, and then an additional $1.7 billion in reimbursements for capital expenditures that Windstream will make to improve its network over the next 10 years.
Ravi Shankar: That last point is extremely important for Windstream’s business. Windstream operates on a telecommunications network that contains copper wire, so getting the ability to invest nearly $2 billion to upgrade and enhance the network to fiber (a superior technology) will be critical for keeping their business up to speed (literally) with their primary competitors, cable companies.
And that provision also better aligns the interests of Uniti and Windstream going forward with what everyone hopes will be a very successful partnership for both companies. That’s what makes it such a win—it solves the shorter-term issue of paving the way out of bankruptcy while also addresses the long-term issue of improving a multi-billion dollar network.
What was the most memorable part of the case?
Rush Howell: This may sound a bit corny, but I think the coronavirus has really emphasized to me how lucky I am to get to work face-to-face with such talented people on a daily basis. So maybe it’s the quarantine talking, but what I remember most right now are the many, long, challenging in-person sessions where we debated the merits of our claims, developed our story, and strategized how to win the case.
At the beginning of cases, I like to do a long Friday afternoon session where junior team members will take on different roles and argue the case (from both sides), and I really miss being able to have those type of in-person meetings right now. This case was full of such moments.