The bankruptcy filing of

Adelphia Communications


is leading the cable TV industry into uncharted territory.

The latest oddity on the horizon -- about as rare as a handcuffed cable executive paraded in front of TV cameras -- is a dispute between Adelphia and a company that guarantees Adelphia's financial obligations in dozens of municipalities across the U.S.

In light of the billions of dollars in debt acknowledged by Adelphia in its bankruptcy filing last month, the amount of money at issue in this particular dust-up -- $60 million -- is relatively tiny.

But up until Monday afternoon, the issue loomed as a giant monkey wrench in Adelphia's continuing operations, one that in theory could have put Adelphia in default of agreements across the U.S. and threatened its right to operate in numerous cities and towns.

Adelphia's travails -- financial, operational and ultimately legal -- have exacerbated the pain felt throughout the cable sector this year. With investors worrying about high debt, heavy capital expenditures, and the uncertain return on system upgrades, the cable sector has fallen hard over the past few months, though stocks staged a rally Monday.


Adelphia's bankruptcy and resulting complications are an anomaly, says Adrian Herbst, an attorney at The Baller Herbst Law Group. "I've been representing cities across the country since the 1970s, and this is the first time that this has occurred in my experience," says Herbst, whose clients include municipalities involved with the Adelphia case. "The whole impact of bankruptcy is new for the municipalities."

The fire that Adelphia appeared to put out Monday involved what are known as surety bonds, issued to Adelphia by Hanover Insurance, a subsidiary of

Allmerica Financial

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Like other cable TV system operators, Adelphia needs these bonds issued as a condition to do business in the various towns and cities in which it offers cable service. The bonds -- variously known as performance bonds, franchise bonds and pole attachment bonds -- serve as guarantees to local communities that Adelphia will live up to the terms of its franchises and pay various local charges it may incur. For a cable operator to not have a performance bond, says Herbst, is often grounds for a municipality to declare a cable operator in default of its franchise, and to revoke it.

And that's how things were looking Monday afternoon for Adelphia. In early July, Hanover Insurance filed a motion in the U.S. Bankruptcy Court in the Southern District of New York, where Adelphia's bankruptcy is proceeding, asking to terminate 185 bonds which it had issued, worth more than $60 million in aggregate. That filing was to be the subject of a hearing this Wednesday -- that is, until an attorney for Hanover Insurance filed a letter with Robert Gerber, the bankruptcy judge hearing the Adelphia case, saying that Hanover was withdrawing its motion.

Making Sure

Presumably, Adelphia's current management and Hanover have reached an agreement not to terminate the bonds, or are approaching such an agreement. In practice, say attorneys, surety bond issuers working with companies who have filed for Chapter 11 want to be sure that the credit they extend to companies is protected.

A Hanover attorney declined to comment. An Adelphia spokesman, reached before Hanover's letter was filed, said, "We are in conversations with them, and we are hopeful they will continue to provide us the bonds."

Generally, surety bond issues that arise in bankruptcy reorganizations usually do get worked out, says Marilyn Klinger, a partner at the law firm Sedgwick Detert Moran & Arnold, because businesses that need those bonds know they can't operate without them. "If a Chapter 11 entity wants to continue in business," she says, "it figures out a way."