In re Best Payphones, Inc.

• Decision Date: 24 June 2002
• Docket Number: No. 01-15472 (SMB).,01-15472 (SMB).
• Parties: In re BEST PAYPHONES, INC., Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

Page 92

279 B.R. 92

In re BEST PAYPHONES, INC., Debtor.

No. 01-15472 (SMB).

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

June 24, 2002.

Michael A. Cardozo, Corporation Counsel of the City of New York, Counsel for the Department of Information Technology and Telecommunications, New York City, M. Diane Jasinski, Assistant Corporation Counsel Of Counsel.

Mayne Miller, New York City, for Debtor.

MEMORANDUM DECISION DENYING MOTION FOR RELIEF FROM STAY AS MOOT

STUART M. BERNSTEIN, Chief Judge.

Prior to the filing of the debtor's chapter 11 petition, the New York City Department of Information Technology and Telecommunications ("DoITT") commenced administrative proceedings to fine the debtor for operating payphones without the proper permit. After the petition was filed, the administrative law judge ("ALJ") dismissed the violations, ruling that the City had failed to terminate the debtor's right to operate the payphones. DoITT now seeks relief from the automatic stay to appeal from the adverse administrative determination.

The ALJ's decision violated the automatic stay, and was void ab initio. Since there is no valid order or decision to appeal from, DoITT's motion is denied as moot.

BACKGROUND

A. Introduction

Except as otherwise noted, the facts are uncontested. The debtor is engaged in the business of operating public payphones in New York City. Over the years, the City has established various regulatory schemes, administered by DoITT, to control such services. Prior to the enactment of Local Law 68 by the City Council in 1995, which established the current regulatory scheme and became effective on March 2, 1996, a number of providers, including the debtor, were operating payphones. To accommodate these providers and ensure ample time to phase in the new regulatory program, DoITT established an interim operating protocol for the existing telephones.

The interim regulations essentially "grandfathered" the payphones installed and activated before March 1, 1996. These "interim eligible public pay telephones" could continue to operate provided that they appeared on a list (the "Interim Registry") submitted to DoITT, paid the interim occupancy fees, and no objection was lodged to the continued operation by the Commissioner of DoITT. It is undisputed that the debtor was authorized to operate under the interim regulations.

The new regulations, effective on March 2, 1996, were designed to replace the pre-existing system and the interim regulations with a franchise system. The City Council legislation and DoITT's implementing rules continued the right to operate under the Interim Registry until one of three terminating events occurred:

(i) the owner has declined to respond to the request for proposals or other solicitation of proposals issued by the Commissioner¹ for the purpose of entering into franchise agreements for the installation, operation and maintenance of public pay telephones within the time period specified in such request for proposals or other solicitation of proposals and sixty days have elapsed following such failure to respond; (ii) the Commissioner has determined not to propose the award of a franchise to such owner to the Franchise and Concession Review Committee² and sixty days have elapsed following notification to such owner of the Commissioner's determination; or (iii) the Franchise and Concession Review Committee has determined not to approve a proposed franchise agreement for such owner and sixty days have elapsed following notification to such owner of the Committee's determination.

N.Y. R. & Regs., tit. 67, § 6-23; accord N.Y. City Local Law 68/1995 § 6(a)(limiting notification period to 30 days).

B. The Franchise Award to the Debtor

As noted, the debtor had installed and activated approximately 830 public pay telephones on City property prior to March 1, 1996, and operated its payphones under the Interim Registry. On June 9, 1997, DoITT issued a revised request for proposals, looking toward the creation of the franchise system envisioned by the new guidelines. The debtor responded, and by resolution dated August 11, 1999, the Franchise and Concession Review Committee ("Franchise Committee") approved the grant of a franchise to the debtor, as well as others. The approval required the debtor to execute and deliver the franchise agreement as a condition to the award. DoITT subsequently sent the closing package, which included the franchise agreement, to the debtor for its execution. DoITT asked the debtor to return the completed materials by October 15, 1999, but later extended the due date to November 15, 1999.

C. The Attempted Termination of the Debtor's Franchise

The Debtor failed to return the completed materials for reasons immaterial to this decision, except to note that the debtor objected to many of the provisions in the proposed franchise agreement. In any event, on January 13, 2000, an Assistant Corporation Counsel wrote to the debtor (the "January 13, 2000 Letter"), stating that the Franchise Committee's approval of the franchise had been conditioned on the execution and delivery of the franchise agreement and other required closing documents, and the debtor had failed to meet the condition. As a result, the Franchise Committee "can therefore be deemed to have determined not to approve a franchise for [the debtor]."

The January 13, 2000 Letter nevertheless granted the debtor a final, sixty day period to submit the franchise documentation. If it did not, "[the debtor's] opportunity to become a franchise holder during the current phase of franchise grants will end." The January 13 Letter reiterated this warning in its conclusion:

If [the debtor] fails within sixty days to (1) enter into an agreement to sell its public pay telephones as described above, or (2) to remove all its public pay telephones from City property, or (3) submit executed copies of the Franchise Agreement and all associated closing documents (complete, accurate and in acceptable form) as described above, then any and all of [the Debtor's] phones located on City property shall be subject to removal by the City, pursuant to Section 6-26(c) of Title 67 of the Rules, and [the Debtor] shall be considered for all purposes a non-holder of a City franchise.

D. The Decision of the Environmental Control Board (the "ECB")

The debtor did not comply with any of the conditions in the January 13, 2000 Letter. As a result, DoITT removed twenty three of the debtor's public payphones from City property between May 8 and May 10, 2000, and issued 23 Notices of Violation. Each violation charged the debtor with operating and maintaining a telephone without a permit, and initiated an administrative proceeding before the ECB to collect a $900.00 fine for each violation. The Notices of Violation stated when and where to appear for the hearing.

The ALJ conducted four days of hearings during the summer and fall of 2000, (City of New York v. Best Payphones, Inc., Violation no. 091-456-568, at ¶ 5 (N.Y. City Envtl. Control Bd. Nov., 7, 2001) ("ECB Decision")), but the matter had not been decided prior to October 23, 2001, chapter 11 petition date. On October 31, 2001, the debtor's president, Michael Chaite, attended a scheduled pre-hearing conference, without counsel. It does not appear that he advised the ALJ that the debtor had filed a bankruptcy petition, or requested a stay based on the filing. (Id. ¶¶ 7-8). Instead, he requested an adjournment, apparently to obtain substitute counsel. (See id. ¶ 8.) The ALJ denied the request, and since he had a fully developed record,³ he reserved decision. (See id. ¶ 9.)

The ALJ rendered the ECB Decision dismissing the violations one week later. He observed that the debtor was a member in good standing on the Interim Registry, and its right to operate continued until the occurrence of one of three terminating events set forth in Local Law 68/1995 and the corresponding DoITT regulations, quoted above. (ECB Decision ¶¶ 23-32). Further, the January 13, 2000 Letter did not revoke the Franchise Committee's August 1999 approval of a franchise, thereby satisfying the third terminating event. Rather, the Franchise Committee had to make a "subsequent determination" in accordance with the procedures set out in the relevant laws and regulations. (Id. ¶ 39.) The Corporation Counsel, the author of the January 13, 2000 Letter, was not authorized to make that determination, and accordingly, the debtor's right to operate under the Interim Registry remained intact. (Id. ¶¶ 44-45.) As a result, the ALJ dismissed the Notices of Violation.

E. The Adversary Proceeding and the TRO

In response to the ECB Decision, DoITT announced a meeting of the Franchise Committee for December 27, 2001. The meeting was designed to sidestep the administrative process and the ECB Decision. Its avowed purpose was to disapprove the debtor's franchise, although the proposed resolution expressed the sentiment that the franchise approval had already terminated by virtue of the debtor's failure to meet the submission deadlines.

The announcement prompted the debtor to commence an adversary proceeding in the Bankruptcy Court on December 21, 2001, against DoITT and the Franchise Committee. The debtor sought preliminary and permanent injunctive relief restraining the defendants from taking any action to interfere with the debtor's ability to operate its pay telephone business under the Interim Registry. The first of the two claims alleged that the meeting scheduled for December 27, 2001 violated the automatic stay, and the second sought equitable relief on the ground of unjust enrichment. The debtor also moved by order to show cause for a temporary stay against the proposed action.

On December 26, 2001, and over the defendants' objection, I issued a temporary restraining order (the "TRO") pending the hearing and determination of the debtor's motion for a preliminary injunction. As set forth in the TRO, it appeared that the...