LEVIN v. MCI, INC.
Filing
13
CLOSED/REMANDED - The decision of the United States Bankruptcy Court for the Southern District of Indiana granting MCI's Motion for Partial Summary Judgment on its new value defense is REVERSED and REMANDED for proceedings consistent with this opinion. Signed by Judge Richard L. Young on 5/2/2014.(TMD)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
EVANSVILLE DIVISION
)
)
)
)
)
)
VERIZON BUSINESS GLOBAL, LLC,
)
successor to MCI, INC.,
)
Appellee.
___________________________________ )
)
)
In re OneStar Long Distance, Inc.
)
Debtor.
___________________________________ )
)
)
Elliott D. Levin, as Chapter 7 Trustee for
)
OneStar Long Distance, Inc.,
)
Plaintiff,
)
vs.
)
)
MCI, Inc.
)
Defendant.
ELLIOTT D. LEVIN as Chapter 7 Trustee
for OneStar Long Distance, Inc.,
Appellant,
vs.
3:13-cv-00145-RLY-WGH
Bankruptcy Case No. 03-72697
Adversary Proceeding No. 05-07061
APPEAL FROM THE UNITED STATES BANKRUPTCY COURT
Appellant, Elliott D. Levin, in his capacity as Chapter 7 Trustee for the Debtor,
OneStar Long Distance, Inc., appeals the Bankruptcy Court’s Order on Summary
Judgment Motions, entered on March 22, 2013, and March 28, 2013, respectively,
concluding that all pre-petition transfers that OneStar made to MCI1 between October 8,
2003, and December 19, 2003, totaling $2,471,858.02, were subject to the “subsequent
Verizon Business Global, LLC, is the successor to MCI, Inc. For purposes of this
appeal, the court will refer to the appellee simply as MCI.
1
1
advance of new value” affirmative defense pursuant to 11 U.S.C. § 547(c)(4). For the
reasons set forth below, the court REVERSES the decision of the Bankruptcy Court and
REMANDS the case for proceedings consistent with this opinion.
I.
Statement of Facts
OneStar was a reseller of telecommunication services which it purchased
wholesale from suppliers such as MCI and other carriers, including Wiltel
Communications. (Deposition of Alan Powers (“Powers Dep.”) at 14, 19, 20; see also
IceNet Pre-Petition Bank Statements, attached as Ex. H to MCI’s Motion for Partial
Summary Judgment). OneStar had a longstanding relationship with MCI and in that
regard, entered into a number of Telecommunications Services Agreements with MCI.
(Id. at 89-90 & Dep. Ex. 20).
In 1999, the telecommunications industry “experienced a significant downturn in
investor confidence, business volumes, and financial performance.” (Deposition of
William Stapleton (“Stapleton Dep.”) at 72). OneStar was no exception. (Id.). By 2002,
OneStar could not pay its monthly bills from MCI (including other creditors) as they
came due. (Id. at 129). In June of 2002, OneStar executed a security agreement and a
promissory note payable to MCI totaling $5,907,396.48. (Deposition of Thomas Tracey
(“Tracey Dep.”) at 82 & Dep. Ex. 20). By late September of 2003, OneStar’s debt to
MCI rose to over $7.5 million, prompting MCI to issue notices of intent to disconnect
service on September 29, 2003, and November 25, 2003, respectively, if MCI was not
paid within seven (7) days of the date of the letter. (Id. Ex. 15; Powers Dep. Ex. 19).
2
On October 7, 2003, IceNet was formed by the principals of OneStar. (Deposition
of Martin Huebschman (“Huebschman Dep.”) at 106-07; Huebschman Dep. Ex. 29;
Powers Dep. at 181). On that same date, OneStar and IceNet entered into a Wholesale
Services Agreement (“WSA”), whereby OneStar began to purchase telecommunication
services from IceNet. (Powers Dep., Ex. 10; Huebschman Dep. at 106-07 (OneStar’s
Chief Financial Officer and General Counsel, Martin Huebschman, testified that although
the WSA was backdated to when IceNet was formed as an LLC, October 7, 2003, was
the “effective date” of when services began between the two entities).
On December 23, 2003, OneStar, IceNet, and MCI entered into a formal written
agreement entitled the Assignment and Assumption Agreement (“Assignment”). (Powers
Dep., Ex. 12). The Assignment assigned OneStar’s service agreements with MCI to
IceNet and IceNet assumed some, but not all, of OneStar’s obligations (note and usage
obligations) incurred for MCI service through that date. (Id., Ex. 12, §§ 1(a), 1(d), 3(b),
3(e), 4 (a), 4(b)). IceNet’s agreement to assume the note obligations was evidenced by a
promissory note payable to MCI. (Id., Ex. 12, § 4(a)). Pursuant to the Assignment, MCI
agreed to provide and deliver telecommunication services to IceNet, who in turn began
selling those services to OneStar. (Id.).
The parties dispute whether MCI’s transition from providing telecommunication
services to OneStar to providing such services to IceNet occurred overnight on December
22, 2003, the date the Assignment was actually executed. The Trustee contends MCI
actually began supplying telecommunication services to IceNet, instead of OneStar,
beginning in October 2003, and that the Assignment in December 2003 among OneStar,
3
MCI and IceNet simply formalized an already existing practice among these parties and
thereby officially assigned OneStar’s rights under various telecommunication services
agreements with MCI to IceNet. On the other hand, MCI contends that it continued to
supply telecommunication services to OneStar until the Assignment was formally
executed on December 22, 2003.
On December 31, 2003, an involuntary bankruptcy petition was filed against
OneStar under Chapter 7 of Title 11 in the Bankruptcy Court. IceNet thereafter filed a
proof of claim for the debts owed by OneStar to IceNet, asserting no charges for service
for the period prior to the Assignment. (Huebschman Dep. Ex. 32). Instead, the only
claim for usage expressly states that such charges “were incurred after the Bank
Assignment was executed.” (Id.).
In Count I of the present adversary proceeding between the Trustee and MCI, the
Trustee alleges that the payments made by OneStar to MCI 90 days prior to the
involuntary petition date, totaling $2,471,858.02, “constitute avoidable transfers pursuant
to the provisions of § 547(b) of the Bankruptcy Code.” (See Complaint ¶ 20). MCI
denied the allegations, and asserted the subsequent advance of new value defense under
11 U.S.C. § 547(c)(4). (See Answer, ¶ 20 & Fifth Affirmative Defense). In its ruling on
the parties’ cross-motions for summary judgment, the Bankruptcy Court granted MCI’s
Motion for Partial Summary Judgment on New Value to or for the Benefit of the Debtor,
thereby finding that MCI was entitled to the defense as a matter of law. In addition, the
Bankruptcy Court denied as moot the Trustee’s Motion for Summary Judgment and
MCI’s Motion for Summary Judgment.
4
All other facts necessary to this appeal will be addressed in the Discussion
Section.
II.
Standard of Review
Summary judgment is appropriate if the record “shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
FED. R. CIV. P. 56(a). The court reviews de novo a bankruptcy court’s grant of summary
judgment, viewing the facts and all reasonable inferences in the light most favorable to
the nonmoving party. Dick v. Conseco, Inc., 458 F.3d 573, 577 (7th Cir. 2006) (“In a
second appeal from a bankruptcy court’s decision, we apply the same standard of review
as did the district court, which in the case of the bankruptcy court’s grant of summary
judgment, is de novo.”) (internal quotation marks omitted).
III.
Discussion
The Trustee raises five (5) issues on appeal, all of which relate to whether the
Bankruptcy Court erred in finding that MCI gave new value to OneStar in the form of
telecommunication services throughout the preference period “to or for the benefit of”
OneStar under 11 U.S.C. § 547(c)(4).
A trustee may “avoid” and recover any payments made by the debtor to a creditor
for a pre-existing debt “on or within 90 days before the date of the filing of the
[bankruptcy] petition.” 11 U.S.C. § 547(b). Section 547 (c)(4) of Title 11 provides a
defense to a creditor in a preference action to the extent: (1) that, after payment, the
creditor gave new value to or for the benefit of the debtor; (2) which new value was not
secured; and (3) on account of which new value the debtor did not make an otherwise
5
unavoidable transfer to the creditor. 11 U.S.C. § 547(c)(4). “New value” means, inter
alia, money or money’s worth in goods, services, or new credit. 11 U.S.C. § 547(a)(2).
The purpose of the new value defense is to reward a creditor for replenishing the debtor’s
estate and not leaving it worse off as a result of the preferential transfer. Koch Bros. Dev.
Co. v. Cont’l Constr. Eng’rs, Inc., 930 F.2d 648, 652 (8th Cir. 1991) (“[T]he relevant
inquiry under section 547(c)(4) is whether the new value replenishes the estate. If the
new value advanced has been paid for by the debtor, the estate is not replenished and the
preference unfairly benefits a creditor.”); see also In re Globe Bldg. Materials, Inc., 484
F.3d 946, 950 (7th Cir. 2007) (“In assessing whether a creditor has provided ‘new value’
to a debtor, courts sometimes ask whether the preference payment being avoided has
been ‘repaid to the bankruptcy estate,’ that is ‘whether the new value replenishes the
[debtor’s] estate.’” (internal citations omitted)); In re Prescott, 805 F.2d 719, 731 (7th
Cir. 1986) (“[T]he theory behind the ‘subsequent advance’ exception to the trustee’s
avoiding power is that to the extent unsecured new value is given to the debtor after a
preferential transfer is made, the preference is repaid to the bankruptcy estate.”).
The parties agree that OneStar’s security agreement with MCI, dated June 30,
2002, does not secure repayment of the account debt which serves as the basis of the new
value relied upon by MCI. Thus, the debt at issue remains unsecured. The parties
dispute the remaining elements of the defense.
A.
The New Value Remained Unpaid
The Trustee cites the Seventh Circuit’s decision in In re Prescott, supra., for the
proposition that a creditor who raises the “new value” defense must establish that the debt
6
remained unpaid. See In re Prescott, 805 F.2d at 731 (“The creditor that raises a
‘subsequent advance’ defense has the burden of establishing that new value was
extended, which remains unsecured and unpaid after the preferential transfer.”). The
Trustee contends that, as a result of the Assignment of OneStar’s debt to IceNet, the debt
to MCI was “paid.” Accordingly, the Trustee argues, the Bankruptcy Court’s conclusion
that OneStar’s debt was “merely transferred to IceNet” and thus, remained unpaid as to
MCI, was erroneous.
As noted in the Background Section, the Assignment involved and was executed
by three parties: OneStar, IceNet, and MCI. In Section 1 of the Assignment, OneStar
assigned the Services Agreement with MCI to IceNet. OneStar acknowledged that, as of
the Assignment’s effective date, the amount outstanding to MCI, totaling $9,845,622.52,
“is fully due and owing.” (Powers Dep., Ex. 12, § 1). OneStar agreed that it “shall
remain liable for any Services Obligations [i.e., debt] incurred thereunder on or before the
Assignment Effective Date.” (Id., Ex. 12, § 6(b)). In Section 2, MCI assigned all right,
title, and interest in the debt owed by OneStar to IceNet. (Id., Ex. 12, § 2). The
Assignment contains no language evidencing a release of the debt. OneStar’s debt to
MCI thus remained “unpaid.”
Relatedly, the Trustee argues the Bankruptcy Court erred by finding that the
Assignment did not constitute a transfer of property to MCI. The Bankruptcy Code
defines “transfer,” in relevant part, as a disposition of the property of the debtor or an
interest of the debtor in property. 11 U.S.C. § 101(54). An assignment falls within the
definition of “transfer”; however, a Section 547 preferential transfer must be from the
7
debtor to the creditor. OneStar did not transfer any property or an interest in the property
of the estate to MCI as a result of the Assignment. As the Bankruptcy Court correctly
observed, OneStar’s debt was merely transferred to IceNet; consequently, the new value
relied upon by the Trustee was not the subject of an “otherwise unavoidable transfer.”
B.
The Preference Period
The Bankruptcy Court found, as a matter of law, that MCI provided new value in
the form of telecommunication services directly to OneStar, rather than IceNet,
throughout the preference period until the Assignment was formerly executed on
December 22, 2003. The Trustee contends this conclusion is expressly contrary to the
deposition of Alan Powers, the former Chief Executive Officer of OneStar, and the
circumstantial evidence relied upon by the Trustee in opposition to MCI’s motion for
summary judgment.
In the adversary proceeding between the Trustee and IceNet, Mr. Powers testified
by affidavit that MCI began selling telecommunication services to IceNet in October of
2003, and that IceNet, in turn, sold those same services to OneStar. (Powers Dep. at 5859; Powers Dep. Ex. 5, ¶ 47). In his deposition in this proceeding, he testified that he
believed that information was accurate. (Id. at 59). He later clarified that the information
contained in the affidavit was from “information [he] either knew [him]self” or
information he “dug up the answer to.” (Id. at 271). Although he could not recall exactly
when MCI services started, he explained that “in dealing with MCI or any of the large
telecom companies, it takes months and months and months of negotiation to get
anything accomplished,” and thus, his “best guess” would be that sales of
8
telecommunication services from MCI to IceNet began before the Assignment’s effective
date. (Id. at 58).
On cross-examination, Mr. Powers’ stated that his testimony regarding the
commencement of sales from MCI to IceNet was based on “something that [he]
believe[d] another person ha[d] told [him],” and on the history of OneStar’s business
relationship with MCI. (Id. at 172). “Normally, the documents, from MCI particularly,
took so long to negotiate that services were put in place way before the documentation
came, as a general rule.” (Id.). Upon further questioning regarding the invoices from
MCI to OneStar before January 1, 2014, Mr. Powers testified that he believed those bills
included service that was delivered to IceNet, but that his testimony in that regard was
based on speculation. (Id. at 173). Mr. Powers began to explain his answer, but the
record does not contain the following page. (Id. (“Well, it would have been kind of the
whole . . . .”)).
The court finds the Bankruptcy Court erred by failing to consider the totality of
Mr. Powers’ testimony. Mr. Powers asserted on more than one occasion that he had
personal knowledge of whether MCI was providing service to IceNet or to OneStar. (Id.
at 59, 271; Powers Dep. Ex. 5, ¶ 47). One would expect Mr. Powers, the CEO of
OneStar, to have such knowledge. Mr. Powers’ affidavit in the IceNet Adversary was
given four years before his deposition in this case, and thus, much closer in time to the
events material to OneStar’s 2003 bankruptcy. In addition, in this litigation, he testified
that his affidavit was “accurate.” (Id. at 59). Instead of ignoring that testimony, the
Bankruptcy Court should have given it some weight.
9
In addition to Mr. Powers’ testimony, the Trustee also presented the following
circumstantial evidence to the Bankruptcy Court: (1) the WSA between OneStar and
IceNet dated October 7, 2003, pursuant to which IceNet began selling telecommunication
services to OneStar; (2) invoices from IceNet reflecting $2.7 million in
telecommunication services that it provided to OneStar in October, November, and
December 2003 (Huebschman Dep. Ex. 8 at Ex. A); and (3) checks totaling $500,000
written in December 2003 by IceNet to MCI, written between December 19, 2003, and
December 29, 2003, signed by Mr. Powers as Secretary of IceNet (Plaintiff’s Ex. D;
Huebschman Dep. Ex. 8).
MCI presented evidence which poked holes into the Trustee’s case. For example,
MCI presented evidence that: (1) the checks issued by IceNet to MCI in December 2003
were returned to IceNet without negotiation (Deposition of Michael Treat (“Treat Dep.”)
at 74; Huebschman Dep. Ex. 9); (2) IceNet’s proof of claim in OneStar’s bankruptcy case
asserted no charges for sales to OneStar in the period prior to the Assignment; (3) MCI’s
November 25, 2003, disconnection notice was sent to OneStar, not IceNet (Powers Dep.
at 190; Powers Dep. Ex. 19); and (4) e-mail communications between the parties during
negotiation of the Assignment reflecting a prospective relationship between MCI and
IceNet. (Treat Dep. Exs. 19, 21). In light of this evidence, the Bankruptcy Court held
that none of the evidence relied upon by the Trustee – the WSA, invoices and checks –
had any probative value regarding the commencement of MCI sales to IceNet.
“[S]ummary judgment is not appropriate if the court must make a ‘choice of
inferences.’” Smith v. Severn, 129 F.3d 419, 426 (7th Cir. 1997). Instead, all reasonable
10
inferences that may be drawn from the evidence must be interpreted in the light most
favorable to the non-movant; here, the Trustee. Given the testimony of Mr. Powers and
the circumstantial evidence produced by the Trustee, the court finds a reasonable
inference could be drawn that the execution of the WSA coincided with when MCI began
providing telecommunication services to IceNet, and ceased providing such services to
OneStar. The court would be remiss not to mention the fact that IceNet was composed of
many of the same officers and directors as OneStar (including Mr. Powers, Mr.
Huebschman, and Mr. Stapleton), and that Mr. Powers signed checks on IceNet’s behalf
in December 2003 while still apparently employed as CEO of OneStar. Accordingly,
summary judgment in favor of MCI was inappropriate.
C.
Remaining Issues
The balance of the issues are: (1) whether MCI provided new value “for the
benefit of” OneStar during the period between the execution of the Assignment on
December 22, 2003, and the date the involuntary petition for bankruptcy was filed against
OneStar, December 31, 2003; (2) whether MCI gave new value to OneStar after its
receipt of checks totaling $300,000 from OneStar in December 2003; (3) whether MCI
established that non-usage charges, surcharges, and reimbursement for taxes billed by
MCI constitute “new value.” Each of these issues hinges on when MCI began providing
telecommunication services to IceNet, and thus, cannot be resolved in this appeal.
11
IV.
Conclusion
The decision of the United States Bankruptcy Court for the Southern District of
Indiana granting MCI’s Motion for Partial Summary Judgment on its new value defense
is REVERSED and REMANDED for proceedings consistent with this opinion.
SO ORDERED this 2nd day of May 2014.
__________________________________
s/ Richard L. Young________________
RICHARD L. YOUNG, CHIEF JUDGE
RICHARD L. YOUNG, CHIEF JUDGE
United States District Court
United States District Court
Southern District of Indiana
Southern District of Indiana
Distributed Electronically to Registered Counsel of Record.
12
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?