In re Winstar Communications, Inc.

• Decision Date: 03 February 2009
• Docket Number: No. 07-2569.,07-2569.
• Citation: 554 F.3d 382
• Parties: In re WINSTAR COMMUNICATIONS, INC., Debtor. Christine C. Schubert, Chapter 7 Trustee v. Lucent Technologies Inc., Appellant.
• Court: U.S. Court of Appeals — Third Circuit

554 F.3d 382

In re WINSTAR COMMUNICATIONS, INC., Debtor Christine C. Schubert, Chapter 7 Trustee v. Lucent Technologies Inc., Appellant.

No. 07-2569.

United States Court of Appeals, Third Circuit.

Argued October 27, 2008.

Filed: February 3, 2009.

Craig Goldblatt, Esq. (Argued), Wilmer Hale, Washington, DC, for Appellant.

Andrew C. Gold, Esq., David R. King, Esq., Stephen M. Rathkopf, Esq. (Argued), Herrick Feinstein, New York, NY, for Appellee.

Robert K. Rasmussen, Esq., University of Southern California, Los Angeles, CA, for Amicus-Appellant.

G. Eric Brunstad, Jr., Esq., Bingham McCutchen, Hartford, CT, for Amicus-Appellee.

Before: SLOVITER, GREENBERG, Circuit Judges, and IRENAS,^* Senior District Judge.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

This appeal, arising out of the self-described "strategic partnership" between Winstar Communications, Inc. (the bankrupt corporation) and Lucent Technologies Inc. (one of Winstar's primary creditors and suppliers), presents us with an issue of first impression — when a creditor can be considered a non-statutory insider for purposes of extending the time for recovery of preferential payments. Ordinarily, a trustee may recover transfers made by the debtor within ninety days of the bankruptcy, but the Bankruptcy Code authorizes a trustee to recover any transfers made within a year of the bankruptcy if the creditor was an "insider."¹ We must determine whether Lucent may be deemed an "insider" of Winstar for purposes of the Bankruptcy Code and, if so, whether the Bankruptcy and District Courts properly held that the Trustee was entitled to recover approximately $188 million from Lucent as an avoidable preference payment. We also must determine whether those courts properly held that Lucent breached its contract with one of Winstar's subsidiaries and that Lucent's claims against Winstar's estate should be equitably subordinated to those of Winstar's other creditors and certain equity interest holders.

I. Procedural Background

Winstar Communications, Inc. ("Winstar") and its wholly-owned subsidiary Winstar Wireless, Inc. ("Wireless") filed voluntary petitions for reorganization pursuant to Chapter 11 of the Bankruptcy Code on April 18, 2001 (the "Petition Date"). "In January 2002 the cases were converted to Chapter 7 and shortly thereafter Christine C. Shubert (the `Trustee') was appointed as the Chapter 7 trustee." Shubert v. Lucent Techs., Inc. (In re Winstar Commc'ns, Inc.), 348 B.R. 234, 244 (Bankr.D.Del.2005).

Winstar initially commenced this adversary proceeding against Lucent Technologies Inc. ("Lucent") on the Petition Date, "alleging that [Lucent] breached several of the contracts between Winstar and Lucent, [thereby] allegedly forcing Winstar to file its bankruptcy petition." Shubert v. Lucent Techs., Inc., (In re Winstar Commc'ns, Inc.), No. 01-01430, 2004 WL 2713101, at *1 (D.Del. Nov.16, 2004). In turn, "Lucent filed several proofs of claim, asserting claims against Winstar that include secured and unsecured claims for sums alleged due under agreements between Lucent and Winstar" totaling nearly one billion dollars.² Id. Following conversion of the case into a Chapter Seven liquidation, the Trustee interceded into this adversary proceeding and filed the Second Amended Complaint (the controlling complaint in this appeal). Id. After the Trustee voluntarily dismissed certain claims and the Bankruptcy Court granted Lucent dismissal of another, the Trustee had three remaining claims: "Count VII for Breach of the Parties' Subcontracting Arrangement," "Count X for Return of Preferential Transfer," and "Count XI, a claim seeking to equitably subordinate Lucent's claims." Id.³

Lucent made a demand for a jury trial and asserted four counterclaims for fraud and negligent misrepresentation. Lucent subsequently requested the District Court to exercise its discretionary power to withdraw this case from the Bankruptcy Court under 28 U.S.C. § 157(d) because of its right to a jury trial on the contract and preference claims. The District Court denied Lucent's request, holding that by submitting a proof of claim against Winstar, Lucent "triggered the process of allowance and disallowance of those claims," thereby subjecting Lucent to the equity power of the Bankruptcy Court. 2004 WL 2713101 at *3. Finally, the Court declined to exercise its discretion to withdraw the reference, citing In re Pruitt, 910 F.2d 1160, 1168 (3d Cir.1990), and ruled that Lucent violated Local Bankruptcy Rule 5011-1, which provides that "the movant for withdrawal shall concurrently file with the Clerk a motion for a determination by the Bankruptcy Court with respect to whether the matter ... is core or non-core." Id. Thereafter, the Bankruptcy Court held a trial on the Trustee's claims and Lucent's counterclaims. The Bankruptcy Court found for the Trustee on all her claims. It rejected all of Lucent's counterclaims (which Lucent does not contest on appeal).

On the Trustee's preference claim, the Bankruptcy Court held that Winstar's payment to Lucent on December 7, 2000, of the proceeds of a loan Siemens made to Winstar was an avoidable preference and therefore ordered Lucent to return those funds to the Trustee. Because that transaction occurred more than ninety days before Winstar filed for bankruptcy, the transaction was avoidable only if Lucent was an "insider" of Winstar. The Bankruptcy Court, after discussing the statutory definition of an "insider" as including a "person in control of the debtor," 11 U.S.C. § 101(31), as well as case law regarding the non-statutory category of insiders, held that Lucent was an insider of Winstar. The Bankruptcy Court rejected Lucent's argument that Winstar lacked "an interest" (as required by § 547(b)'s prefatory language) in the Siemens loan and rejected Lucent's "new value defense" to the preference claim.

Next, the Bankruptcy Court equitably subordinated Lucent's claims against the Winstar estate to the claims of all of Winstar's other creditors and certain equity interest holders.

Finally, on the Trustee's breach of contract claim, Lucent challenged the Bankruptcy Court's authority to issue a final judgment with respect to that claim, which Lucent contended was "non-core." See 28 U.S.C. § 157(c)(2) (providing that bankruptcy courts can enter final judgments on non-core matters only with the consent of the parties). Ultimately, the Bankruptcy Court rejected Lucent's challenge to its ability to issue final orders on several grounds. First, the Bankruptcy Court found that Lucent "waived its objection to this Court's entry of final orders by its conduct," 348 B.R. at 250, because "[f]rom before the filing of the withdrawal motion, through the conclusion of the Trustee's case-in-chief in this Court when Lucent then unsuccessfully sought judgment on partial findings pursuant to Fed. R. Bankr.P. 7052, until after submission of all the evidence, and indeed, submission of each party's proposed findings of fact and conclusions of law[,] ... Lucent did not raise the issue that the Bankruptcy Court lacked jurisdiction to enter final judgment," id. at 244-45. Indeed, the Court noted that "Lucent sought a final order in its favor on several occasions from this Court." Id. at 245. Second, the Bankruptcy Court "interpret[ed] the district court's earlier findings [regarding Lucent's motion to withdraw the reference] that the claims and counterclaims fall within the claims allowance process to necessitate a finding that these actions are core pursuant to 28 U.S.C. § 157(b)(2)(B)." Id. at 246. See 28 U.S.C. § 157(b)(2)(B) ("Core proceedings include ... allowance or disallowance of claims against the estate....").

Third, the Bankruptcy Court made an "independent examination of its own jurisdiction" and concluded that the Trustee's Subcontract claim was a core claim under § 157(b)(2)(B). Id. Lucent filed a proof of claim that stated that "Lucent held a secured claim (and to the extent not secured, an unsecured claim) in [a]n amount not less than $138,957,218.90 for goods sold, money loaned, and other." Id. at 247. "Lucent described the documents which support its claim as the Supply Agreement ... and any and all related documents, agreements and statements of work." Id. (emphasis added in original) (internal quotations omitted). Thus, the Bankruptcy Court concluded that "[w]hether Lucent may have breached the Subcontract by refusing to pay [in March 2001] has a direct bearing upon whether Lucent may recover under its Proof of Claim and if so, in what amount. Therefore the breach of the Subcontract claim falls within the core jurisdiction of the Court." Id.

On the merits of the Subcontract claim, the Bankruptcy Court held that Lucent breached the Subcontract by its refusal to pay Wireless approximately $62 million for services rendered between January and March 2001.⁴

Lucent subsequently appealed the Bankruptcy Court's decision to the District Court, which affirmed. See Lucent Technologies, Inc. v. Shubert (In re Winstar Commc'ns, Inc.), No. 06-147-JJF, 2007 WL 1232185 (D.Del. August 26, 2007).

The parties do not disagree as to the relevant facts. They vigorously disagree as to the legal effect of these facts and the conclusions reached by both the Bankruptcy and District Courts.

II. Facts

Prior to its bankruptcy, Winstar was a publicly traded Delaware corporation that provided local and long distance telecommunications services. During the 1990s, Winstar was also engaged in the construction of a global broadband telecommunications network. Initially, its subsidiary Wireless was primarily responsible for the design and construction of this network. Lucent, which was spun off by AT & T, is a publicly traded Delaware corporation that "designs and delivers telecommunications systems, services, and products, including software." 348 B.R. at 252.

Before the arrangements at issue here, Winstar and Lucent had an arm's-length vendor-creditor relationship in...