In re Coin Phones, Inc.

Decision Date10 October 1996
Docket NumberBankruptcy No. 89 B 20451 (ASH),Adv. No. 92-5334A.
Citation203 BR 184
PartiesIn re COIN PHONES, INC., Debtor. Barbara BALABER-STRAUSS, Trustee of Coin Phones, Inc., Plaintiff, v. NEW YORK TELEPHONE and American Telephone & Telegraph Company, Defendants.
CourtU.S. Bankruptcy Court — Southern District of New York

203 B.R. 184 (1996)

In re COIN PHONES, INC., Debtor.
Barbara BALABER-STRAUSS, Trustee of Coin Phones, Inc., Plaintiff,
NEW YORK TELEPHONE and American Telephone & Telegraph Company, Defendants.

Bankruptcy No. 89 B 20451 (ASH), Adv. No. 92-5334A.

United States Bankruptcy Court, S.D. New York, White Plains Division.

July 26, 1996.

As Amended October 10, 1996.

203 BR 185
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Kazlow & Kazlow by James M. Lemonedes, New York City, for Trustee

Elizabeth A. Westcott, New York City, Davis Polk & Wardwell by Guy Miller Struve, New York City, for Defendant New York Telephone Co.


ADLAI S. HARDIN, Jr., Bankruptcy Judge.

Plaintiff Barbara Balaber-Strauss (the "Trustee") as Trustee of the debtor Coin Phones, Inc. ("CPI") commenced this adversary proceeding against defendants New York Telephone Company ("NYTel") and American Telephone & Telegraph Company ("AT & T") to recover damages for defendants' alleged wrongful conduct. The Trustee's claim against AT & T has been settled. Claims are asserted against NYTel based on negligent misrepresentation, tortious interference with economic opportunity and breach of the covenant of good faith and fair dealing.

CPI filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code on July 21, 1989. On July 6, 1990 the case was converted to a case under Chapter 7. This adversary proceeding was commenced in October 1992. This Court has jurisdiction over the subject matter of this case under 28 U.S.C. §§ 1334(a) and 157(a). Venue is proper under 28 U.S.C. §§ 1391 and 1409. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (C) and (O). The case was tried to the Court without a jury during the course of six days in September 1995. Summations were presented in October and final post-trial briefs were filed in December 1995. The following constitute the Court's findings of fact and conclusions of law under Rule 52 of the Federal Rules of Civil Procedure, made applicable herein under Bankruptcy Rule 7052.

The task of finding the facts in this unusual case was complicated by inconsistencies and conflicts in the testimony of the witnesses, absence of certain witnesses who could have been expected to provide relevant testimony and lack of documents which one would have expected to exist. Moreover, there is an Alice-in-Wonderland aura surrounding the pivotal events in dispute. The findings below are necessarily informed by the Court's perceptions as to the reliability and credibility of the testimony and by inferences to be drawn from the oral and documentary evidence and, in some cases, lack of evidence.

The Parties

CPI was a publicly-held corporation engaged in the pay telephone business. It installed and serviced customer-owned coin-operated telephones ("COCOTs") at approximately 1,650 locations in the New York metropolitan area between 1986 and 1989. NYTel was and is a state chartered and regulated monopoly providing local telephone service to commercial and private customers throughout the New York metropolitan area. Because of NYTel's monopoly position, COCOT vendors such as CPI were necessarily dependent on NYTel to provide local telephone service, interface with long distance carriers and screening and blocking

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services to protect individual COCOT lines from long-distance access and fraud

NYTel was itself engaged in the coin-operated telephone business in direct competition with CPI. Indeed, NYTel was the largest competitor in the business, owning and operating approximately 121,300 coin-operated telephones in the New York metropolitan area.

In addition to its roles as exclusive provider of local service and long-distance interface to independent COCOT vendors such as CPI, and the largest competitor of the independent COCOT vendors, NYTel acted as the billing and collection agent on behalf of AT & T under a billing and collections agreement between NYTel and AT & T. NYTel received compensation ("access fees") from AT & T based on the volume of calls connected to the AT & T network and billed to NYTel's customers. In accordance with the billing and collections agreement, NYTel would include in its monthly bill for each of CPI's COCOT lines charges for AT & T long-distance services. If CPI disputed all or any of the AT & T charges reflected on the NYTel statements, NYTel was required to notify AT & T of the dispute. If AT & T maintained that the charges were valid, and CPI persisted in disputing the charges, NYTel was required to "recourse" the disputed charges to AT & T for such further collection action as AT & T deemed appropriate. After disputed charges were "recoursed" to AT & T, NYTel was required to delete the disputed charges from all future billings to CPI.

Under the governing Public Service Commission tariffs, NYTel has the right to terminate service to a customer for non-payment of local charges. However, it is undisputed that the tariffs do not permit NYTel to terminate or interrupt service (i) for non-payment of disputed AT & T long-distance charges or (ii) for non-payment of local service charges which are disputed by NYTel's customer. Moreover, the tariffs do not permit termination unless NYTel has first notified its customer in writing of the amount required to be paid to avoid termination.

Chronology of Events

During the spring of 1989 CPI was engaged in negotiations with American Teltronics Inc. ("ATI"), another independent COCOT vendor, and GTE Communications Systems ("GTE"), a manufacturer of coin-operated telephones. These negotiations reached fruition in July 1989. A July 12, 1989 letter of intent from ATI to CPI stated, inter alia, that the two companies would merge and ATI would arrange a cash infusion of $1,600,000 into the new company. This would be used, in part, for payment in full of CPI's indebtedness to NYTel for local service charges which CPI believed, and had represented to ATI, aggregated approximately $600,000. A "Memorandum of Intent" dated July 20, 1989 was signed on the morning of that day by GTE, ATI and CPI at the GTE headquarters in Stamford, Connecticut. GTE was CPI's largest creditor and the manufacturer of a large number of the CPI COCOTs, which had been experiencing operational difficulties. In the Memorandum of Intent the three parties agreed "to mutually assist each party in the culmination of a business combination between ATI and CPI", and stated that GTE would "negotiate a satisfactory resolution of any disputes with Coin Phones, Inc." Richard Coghlin, President of ATI, testified that it was contemplated that the merged ATI/CPI entity "would become a GTE flagship for the Northeast Corridor and that we would be the authorized distributor of the GTE product line".

CPI and NYTel had a history of dispute and uncertainty regarding two aspects of NYTel's billings to CPI. One source of conflict was NYTel's billing of AT & T longdistance charges. Despite the blocking and screening services requested by CPI, NYTel routinely billed CPI for large volumes of AT & T long-distance charges aggregating more than $3 million during the period from December 1987 to July 1989 (the "pre-petition AT & T charges"). CPI took the position that it would refuse to acknowledge the validity of or pay for any AT & T long-distance charges, with de minimis exceptions long preceding the events in question. CPI routinely protested the AT & T charges and sent monthly or periodic "credit reports" detailing

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the disputed AT & T long-distance charges. The record establishes clearly that the responsible NYTel officials had full knowledge for months prior to July 20, 1989 that CPI disputed, rejected and refused to pay for all AT & T long-distance charges. Thus, all of the AT & T charges should have been "recoursed" to AT & T, eliminated from NYTel's billings to CPI and eliminated as a source of dispute between the parties. But the AT & T charges were not "recoursed" to AT & T, and NYTel continued to demand payment of these charges from CPI

The parties also disagreed with respect to the amount owed by CPI to NYTel. Startlingly, part of the problem was that CPI could not ascertain from NYTel how much NYTel claimed CPI owed for local service charges. The matter came to a head in July 1989. Eric Fiebert, the Chairman, Chief Financial Officer, Treasurer and one of the founding shareholders of CPI, and Lee Karson, CPI's general manager, met with NYTel representatives shortly before July 14 to discuss CPI's approximately $600,000 debt to NYTel, and to try to negotiate payments over time. The NYTel representatives rejected any deferred payment scheme but did not then take issue with the total amount owed. On July 14 NYTel's business office manager, Joanne Quattrone, wrote a notice of termination letter to CPI confirming a telephone conversation that day (the "July 14 Letter"). Because of the importance of this document, it is reproduced here in full:

This letter will confirm our conversation of July 14, 1989 regarding the outstanding charges in the amount of $581,106.06 for all your 859 COCOT accounts. This total represents the amount your corporation is stating is due New York Telephone. New York Telephone\'s figures are substianally sic higher. We will continue to review all your claims and process credits that are due on your accounts.
The following date is important to you. Payment of the full amount for telephone service is required by 5:00 P.M. on July 24, 1989 to avoid interruption of your service on the following business day. Ten days later your service will be disconnected. If your service is interrupted, a $76.50 charge to restore it will apply and a deposit or an additional deposit may be required.
Unless the full amount is paid prior to disconnection of your service we would have no choice but to cancel your account. This would result in a

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