In re Lan Tamers, Inc., Bankruptcy No. 02-43147.

• Citation: 281 B.R. 782
• Decision Date: 16 August 2002
• Docket Number: Adversary No. 02-4194.,Bankruptcy No. 02-43147.
• Parties: In re LAN TAMERS, INC., Debtor. City of Springfield, Plaintiff, v. Lan Tamers, Inc., The Bank of Western Massachusetts, Educational Technology, Inc., and Universal Service Administrative Company, Defendants.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

281 B.R. 782

In re LAN TAMERS, INC., Debtor.

City of Springfield, Plaintiff, v. Lan Tamers, Inc., The Bank of Western Massachusetts, Educational Technology, Inc., and Universal Service Administrative Company, Defendants.

Bankruptcy No. 02-43147.

Adversary No. 02-4194.

United States Bankruptcy Court, D. Massachusetts.

August 16, 2002.

Joseph B. Collins, Hendel & Collins, P.C., Springfield, MA, for The City of Springfield.

Martin O'Connell, Morisi & O'Connell, Springfield, MA, for Lan Tamers, Inc.

Jerry B. Plumb, O'Connell & Plumb, P.C., Springfield, MA, for The Bank of Western Massachusetts.

Mark H. Bluver, Shatz, Schwartz & Fentin, P.C., Springfield, MA, for Educational Technology, Inc.

Amanda C. Ellis, Mirrick O'Connell, DeMallie & Lougee, LLP, Worcester, MA, for Universal Service Administrative Company.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court is a complaint filed by the City of Springfield (the "City") against Lan Tamers, Inc. (the "Debtor"), the Bank of Western Massachusetts (the "Bank"), Educational Technology, Inc. ("ETI") (collectively "the Creditors") and the Universal Service Administrative Company ("USAC"). The Complaint seeks, inter alia, a declaration that certain reimbursement funds to be paid to the Debtor by USAC for work performed on the City's behalf are not property of the estate, but rather the property of the City.

A trial on this matter was held on June 13, 2002. No material facts are really in dispute.¹ The question is not how much is owed, but instead who owns the proceeds of the federal grant administered by USAC — the Debtor (and the estate) or the City. For the reasons set forth below, the Court rules that the Debtor holds the promised federal reimbursement in resulting trust for the benefit of the City. Alternatively, the Court rules that the Debtor holds the grant under a constructive trust for the City. Accordingly, those funds, when received, shall not constitute property of the Debtor's bankruptcy estate.

I. FACTS

The Universal Service Fund (the "Fund") is a funding mechanism mandated and expanded under the federal Telecommunications Act of 1996, 47 U.S.C. § 254 (2002), (the "Act"). The fund is generated through mandatory contributions from "all telecommunications companies in the United States, including all local and long distance telephone companies, wireless and paging companies and payphone providers." Stipulation at ¶ 19; 47 U.S.C. § 254(d). The Act's central purpose is to "ensure that health care providers for rural areas, elementary and secondary school classrooms, and libraries have affordable access to modern telecommunications services...." Texas Office of Pub. Util. Counsel v. F.C.C., 183 F.3d 393, 441 (5th Cir.1999) (quoting H.R.Rep. 104-458, at 132 (1996), reprinted in 1996 U.S.C.A.A.N. at 124, 144).

Among the Act's various goals is the support of telecommunications services, networking and internet access for schools and libraries. This support, denominated the E-rate discount, is offered either by requiring that service providers who are mandatory contributors to the Fund confer discounts to applicants or by providing applicants with reimbursement from the Fund when other qualified service providers are used. 47 U.S.C. § 254(h)(B);² 47 C.F.R. § 54.501 (2002). The level of E-rate discounts or reimbursements is largely dependent on the economic condition of the target area. In areas of lower income, the discount or reimbursement is higher; in areas of higher income, the discount or reimbursement is lower. 47 C.F.R. § 54.505 (2002).

A. Universal Service Fund Reimbursement Mechanism

The Fund is administered by USAC, a non-profit corporation, under the auspices of the Federal Communications Commission ("FCC"). 47 C.F.R. § 54.702 (2002). The procedures for applying for reimbursement are set forth in the FCC's regulations and the USAC manual. See 47 C.F.R. § 54.504 (2002); USAC application procedure guide, available at http:// www.sl.universalservice.org/apply/.

A qualifying entity seeking discounted service for improvements in the telecommunications capability of a school or library begins by obtaining approval by USAC's Schools and Libraries Division (the "SLD"). After a competitive bidding process, the applicant must submit an application detailing the nature and scope of the project. 47 C.F.R. § 54.504(a), (b). Upon obtaining initial approval, a contract is signed with the chosen service provider and a final application submitted, specifying the method of payment. 47 C.F.R. § 54.504(c). USAC's SLD then conducts a further review, and determines whether a funding commitment letter will be issued.

If the project is accepted, and reimbursement from the Fund is required and available, two alternative methods of payment for the project are permitted under the regulations. Under the most commonly used method, the Service Provider ("SPI") method, the applicant pays only its discounted share to the service provider; the balance of the invoice is paid or credited to the service provider by USAC. However, situations occasionally arise where the SPI method of payment is impractical. For example, if the project is accepted by USAC but not yet funded, the applicant may wish to go forward without delay and await the funding by way of reimbursement. The SPI payment method may also be impractical if project approval is actually denied by USAC and the applicant wishes to appeal to the FCC, but go forward with the project in the interim and undertake the risk that its position is not upheld. In such cases, applicants may choose the Billed Entity Reimbursement ("BEAR") method of payment.

Under the BEAR method, the applicant pays all of the vendor's invoice in advance. See Form 472 (BEAR) Filing Guidance, available at http:// www.sl.universalservice.org/reference/8bear.asp. When and if a USAC funding commitment letter is later obtained, the service provider may then bill USAC for the reimbursement. Upon receipt of the funds, the service provider must promptly remit that sum to the applicant. Id.

Regardless of the method of payment chosen, reimbursement checks are made payable to the order of the service provider. USAC/SLD Service Provider Manual, Chapter 9 at 2-3, available at http:// www.sl.universalservice.org/vendor/manual/chapter9.doc.³ Where the service provider enters into E-rate contracts with several applicants, a single reimbursement check is issued for the total amount owed under all of its contracts. Id. From this total amount, the service provider must then calculate the corresponding amount to be passed through to applicants who have chosen the BEAR payment method. Id.

USAC's reimbursement procedures unequivocally state that where the BEAR payment method applies, the service provider acquires no rights of ownership in the proceeds of the reimbursement. Indeed, in order to obtain the reimbursement, the applicant must submit FCC (BEAR) Form 472, which contains the following required acknowledgment by the service provider's authorized representative:

I am authorized to submit this Service Provider Acknowledgment for this Billed Entity Applicant Reimbursement Form, and acknowledge to the best of my knowledge, information and belief as follows:

I. The service provider must remit the discount amount authorized by the fund administrator to the Billed Entity Applicant who prepared and submitted this Billed Entity Applicant Reimbursement Form as soon as possible after the fund administrator's notification to the service provider of the amount of the approved discounts on this Billed Entity Applicant Reimbursement Form, but in no event later than 10 calendar days after receipt of the reimbursement payment from the fund administrator, subject to the restriction set forth in B. below.

II. The service provider must remit payment of the approved discount amount to the Billed Entity Applicant prior to the tendering or making use of the payment issued by the Universal Service Administrative Company to the service provider of the approved discounts for the Billed Entity Applicant Reimbursement Form.

FCC (BEAR) Form 472, Block 4, available at http:// www.sl.universalservice.org/ form/# vendor.

Furthermore, in the USAC Service Provider Manual, the following language appears as specific guidance to service providers:

Although the BEAR form is essentially an Applicant Form, it does require a signature from the Service Provider in Block 4. The purpose of this signature is to ensure that the Service provider is aware of the requirement that the Service Provider turn over the BEAR reimbursement amount (to the applicant) within 10 days of receipt of the check. The Service provider functions merely as a vehicle to deliver the reimbursement back to the applicant. Failure to provide the reimbursement in a timely fashion may result in the Service Provider facing enforcement action.

USAC/SLD Serv.Prov. Manual, Ch. 9 at 1, (emphasis supplied).

B. The City's Application Process

On April 1, 1999, the Debtor entered into a contract with the City to furnish and install certain network wiring in the City's Central High School (the "Central High School Project"), for the total price of $1,096,180.28. The work was performed and the Debtor was paid in full by the City. The City also entered into a separate contract with the Debtor in early 2001 to deliver certain network maintenance services for a one (1) year period to four other of the City's schools (the "Network Maintenance Project"), for a total price of $134,000.00. The Debtor completed the work, and was paid in full by the City.

Prior to the commencement of the Central High School Project, application was made to USAC for project approval from the Universal Service Fund. USAC declined for reasons not relevant here. The City appealed USAC's adverse determination to the FCC, but proceeded with the project in the interim. Ultimately, the City prevailed by order of the FCC, dated March 5,...