In re Allegiance Telecom, Inc.

• Citation: 356 B.R. 93
• Decision Date: 08 December 2006
• Docket Number: No. 03-13057(RDD).,03-13057(RDD).
• Parties: In re ALLEGIANCE TELECOM, INC., et al., Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

356 B.R. 93

In re ALLEGIANCE TELECOM, INC., et al., Debtors.

No. 03-13057(RDD).

United States Bankruptcy Court, S.D. New York.

December 8, 2006.

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Brown Rudnick Berlack Israels LLP, by Martin S. Siegel and Emilio A. Galvan, for XO Communications, Inc.

Akin Gump Strauss Hauer & Feld LLP, by Abid Qureshi and Vincenzo DeLeo, for the Allegiance Telecom Liquidating Trust.

CORRECTED MEMORANDUM OF DECISION ON XO'S MOTION FOR PAYMENT OF ADMINISTRATIVE EXPENSES OR XO'S CLAIMED CASH AND RELATED DISPUTES PERTAINING TO ASSET PURCHASE AGREEMENT

ROBERT D. DRAIN, Bankruptcy Judge.

Allegiance Telecom, Inc. ("Allegiance") and certain direct and indirect subsidiaries primarily operated a facilities-based national local exchange telecommunications business. They commenced chapter 11 cases in this Court on May 14, 2003, and in November and December of 2003 negotiated with third parties for the sale of substantially all of their business as a going concern. After an auction (the "Auction") that started on February 12, 2004 and continued into the morning of the next day,¹ Allegiance announced that XO Communications, Inc. ("XO"), itself a former chapter 11 debtor and, after its emergence from bankruptcy, under the ultimate control of Mr. Carl Icahn, was the winning bidder.

XO's bid was the highest and best at the Auction for two reasons: first, XO offered the highest price, a combination of approximately $311.2 million in cash and 45,380,000 shares of XO common stock; second, notwithstanding that as a regulatory matter XO could not acquire the business until receipt of certain FCC and state PUC approvals, which might take months,² XO agreed that, after the occurrence of other relatively easily satisfied conditions, (a) XO would deliver the purchase price into escrow, (b) XO would start to manage the business under an Operating Agreement³ with Allegiance, and, most importantly, (c) XO's obligation to close the sale would become unconditional. See XO's Auction Bid Proposal ¶ 8 (Trial Ex. 1). The other bidder, Qwest Communications, Inc. ("Qwest") was not prepared to fully adopt this two-step approach (referred to as the "soft/hard closing" or "Early Funding Date" concept), which materially improved XO's bid by significantly reducing Allegiance's closing risk.⁴ XO agreed to the concept not only because it enhanced its bid over Qwest's, but also because of XO's strong desire to integrate its business with Allegiance's as soon as possible to obtain what XO believed to be $100 million to $200 million of synergies.⁵

After the Auction, XO and Allegiance negotiated and executed an Asset Purchase Agreement, dated February 18, 2004 (the "APA"),⁶ under which Allegiance and an affiliate, Allegiance Telecom Company Worldwide ("ATCW"; with Allegiance, the "Sellers"), agreed to sell substantially all of their assets and the stock of the reorganized direct and indirect subsidiaries of ATCW to XO. On February 19, 2004 the Court approved the Sellers' entry into the APA.

On June 10, 2004, Allegiance obtained confirmation of its Third Amended Joint Plan of Reorganization (the "Plan"), which went effective on June 23, 2004. The Plan provided for the creation of the Allegiance Telecom Liquidating Trust (the "ATLT") and the transfer to the ATLT of various remaining assets of the Allegiance debtors, including the "Excluded Assets" as defined in section 2.2 of APA (that is, the Sellers' assets that XO did not buy). See Plan §§ 5.3(b), 1. 18, 1.64.

The two-step, soft/hard closing approach has led to the primary dispute before the Court. XO and the ATLT disagree about whether XO is entitled, as XO contends, to keep the proceeds of the Sellers' pre-soft closing accounts receivable that were paid between the soft closing, or Early Funding Date, and the hard, or final Closing Date, or whether, as the ATLT contends, this cash was not intended to be transferred to XO. The parties agree that between $40 million and $41 million was paid on these accounts receivable before the Closing Date.

Although the parties have primarily focused on this issue, they also have aired other disputes, pertaining to (a) the amount XO was required to reimburse Allegiance for expenses of the business paid by Allegiance during the period between the Early Funding Date and the Closing Date, (b) the calculation of a working capital adjustment to the purchase price under the APA, (c) the amount of the agreed adjustment, or "true-up" under a prior settlement between the parties relating to a different set of issues under the APA, (d) whether XO purchased certain other assets under the APA, and (e) whether certain liabilities should, under the transaction documents, be assumed by XO or, instead, should have been paid by the Sellers. The parties have acknowledged that some of these disputes, which have delayed full performance of the APA, are not disputes on the merits but were raised in an attempt to preserve setoff claims, in turn primarily dependent upon the outcome of the main issue between them, and that certain others are not yet ripe for determination. As discussed below, moreover, the APA contains an alternative dispute resolution ("ADR") procedure for the two most significant of these additional controversies, although not for the primary issue, discussed above.

This memorandum of decision first provides the Court's rationale for concluding that the ATLT's position on the main issue, XO's claim to the benefits of the pre-Closing Date proceeds of pre-Early Funding Date accounts receivable, is correct, and addresses the remaining issues, to the extent they are ripe, only insofar as they should not be left to the binding ADR procedures contained in the APA.

Discussion

A. Jurisdiction. The Court has jurisdiction over this proceeding under 28 U.S.C. § 1334(b), notwithstanding the Plan's consummation. Both the order approving Allegiance's entry into the APA and the order confirming the Plan⁷ reserved the Court's jurisdiction to decide the disputes addressed herein, and the disputes involve the interpretation and implementation of the APA and the Plan and directly affect distributions to creditors. See Luan Inv. S.E. v. Franklin 145 Corp. (In re Petrie Retail, Inc.), 304 F.3d 223, 229-30 (2d Cir.2002); Penthouse Media Group v. Guccione (In re Gen. Media, Inc.), 335 B.R. 66, 73-74 (Bankr.S.D.N.Y. 2005). The exception, as discussed below, is the Court's lack of power to decide the parties' disputes, even though this is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (0), to the extent that they are subject to mandatory ADR that will not necessarily jeopardize or inherently conflict with the objectives or provisions of the Bankruptcy Code. MBNA Am. Bank, N.A. v. Hill (In re Hill), 436 F.3d 104, 108, 111 (2d Cir.2006).

B. Contract Interpretation. "Under New York law,⁸ a written contract is to be interpreted so as to give effect to the intention of the parties as expressed in the unequivocal language they have employed." Craden v. Bank of New York, 957 F.2d 961, 976 (2d Cir.1992). "Under New York law, ... if a contract is unambiguous on its face, its proper construction is a question of law." Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 906 F.2d 884, 889 (2d Cir.1990). A court should not look beyond the confines of the contract to extrinsic evidence if its relevant provisions are plain and unambiguous. W.W.W. Assoc., Inc. v. Giancontieri, 77 N.Y.2d 157, 162, 565 N.Y.S.2d 440, 566 N.E.2d 639 (1990); Nicholas Laboratories, Ltd. v. Almay, Inc., 900 F.2d 19, 21 (2d Cir.1990). "When parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms." Vermont Teddy Bear Co., Inc. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475, 775 N.Y.S.2d 765, 807 N.E.2d 876 (2004).

This is particularly appropriate if the contract "was negotiated between sophisticated, counseled business people negotiating at arm's length." Id. In such circumstances, "courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include. Hence, courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing." Id. (internal quotations and citations omitted). See also W.W.W. Assoc., Inc. v. Giancontieri, 77 N.Y.2d at 163, 565 N.Y.S.2d 440, 566 N.E.2d 639; Wallace v. 600 Partners Co., 86 N.Y.2d 543, 548, 634 N.Y.S.2d 669, 658 N.E.2d 715 (1995).

Giving the terms of a contract their plain meaning, a court should find contractual provisions ambiguous only if they are reasonably susceptible to more than one interpretation by reference to the contract alone. Krumme v. WestPoint Stevens Inc., 238 F.3d 133, 139 (2d Cir. 2000); Burger King Corp. v. Horn & Hardart Co., 893 F.2d 525, 527 (2d Cir.1990). "Contract language is unambiguous if it has a definite and precise meaning, unattended by danger of misconception in the purport of the contract itself, and concerning which there is no reasonable basis for a difference of opinion." Metropolitan Life Ins. v. RJR Nabisco, 906 F.2d at 889 (internal quotations and citation omitted). "Language whose meaning is otherwise plain is not ambiguous merely because the parties urge different interpretations in the litigation." Id. See also Lee v. BSB Greenwich Mortg. L.P., 267 F.3d 172, 179 (2d Cir.2001) ("any ambiguity in a contract must emanate from the language used in the contract rather than from one party's subjective perception of the terms").

1. The APA. In light of the foregoing principles it is clear that the parties did not provide in the APA for XO's purchase of the proceeds of the Sellers' pre-soft closing date accounts receivable that were paid between the soft closing (referred to in the APA as the Early Funding Date⁹) and the hard closing (referred to in the APA as...