In re Coleman Enterprises, Inc.
| Decision Date | 05 September 2001 |
| Docket Number | 00-33477.,No. 00-33476,00-33476 |
| Citation | 266 BR 423 |
| Parties | In re COLEMAN ENTERPRISES, INC., and American Cyber Corporation, Inc., Debtors. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
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Robert T. Kugler, Robins, Kaplan Miller & Ciresi, Minneapolis, MN, Robert P. Goe, Goe & Forsythe, L.L.P., Newport Beach, CA, for QAI, Inc.
Kenneth Corey-Edstrom, Henningson & Snoxell, Ltd., Brooklyn Center, MN, for debtors.
Michael R. Fadlovich, Minneapolis, MN, for United States Trustee.
Margaret M. Newell, Washington, DC, Roylene A. Champeaux, Minneapolis, MN, for United States, through the Federal Communications Commission.
These jointly-administered Chapter 11 cases came on before the Court on July 17, 2001, for hearing on several motions: that of QAI, Inc. ("QAI"), a creditor, for an order abrogating the Debtors' election to be treated as small businesses under 11 U.S.C. § 1121(e); the Debtors' motion for dismissal of the cases; and the motion of the United States Trustee for conversion of the cases. QAI appeared by its attorneys, Robert T. Kugler and Robert P. Goe. The Debtors1 appeared by their attorney, Kenneth Corey-Edstrom. The United States Trustee appeared by her attorney, Michael R. Fadlovich. The United States of America, through the Federal Communications Commission ("FCC"), appeared by its attorneys, Margaret M. Newell and Roylene A. Champeaux. Upon the moving and responsive documents for all of the motions, the arguments of counsel, and all of the other files, records, and proceedings in these cases, the Court makes the following order.
These Chapter 11 cases arise out of the telecommunications industry in the post-deregulation years of the late 1990s; the Debtors, QAI, and Pathfinder Capital, Inc., ("Pathfinder"), the Debtors' other major unsecured creditor, all did business in that industry in various roles. Gleaned from the various documents in this case,2 the nature of the Debtors' pre-petition relationships with QAI and Pathfinder is as follows:
The Debtors are both artificial business entities, Coleman having been incorporated in Minnesota and American Cyber in Nevada. They are telecommunications companies, providing long-distance telephone service to residential and business customers under the trade name "Local Long Distance." Before their respective bankruptcy filings, the Debtors afforded service over wide geographic areas, Coleman in 28 states and American Cyber in 45.
As telecommunications companies, the Debtors are subject to various federal and state regulatory structures. Under the federal rules, only telecommunications companies can obtain new customers for long-distance telephone service. Under the current legal regime, however, telecommunications companies need not themselves provide the utility service directly or through subsidiaries; they may subcontract with independent entities, or even strings of them, to actually meet customers' needs. In order to provide service in a particular state, however, a telecommunications company must register itself with an agency of the state and must obtain a Certificate of Public Convenience and Necessity. After that, the telecommunications company must see that its own activities meet the state and federal regulatory requirements. As to the same requirements, it is responsible for the activities of certain of its contractors and subcontractors.
The Debtors split out various operational functions of their business to subcontractors — the solicitation of new customers to one or more marketers, and the provision of actual long-distance service on a wholesale basis to QAI, Pathfinder, and RSL Com USA, Inc. ("RSL"). The relationship between the Debtors and these wholesalers was set forth in documents entitled "Independent Marketing Agreements" ("IMAs"). The wholesalers, in turn, subcontracted with an actual provider of service — in the Debtors' case, usually Sprint Communications, L.P. Through their own employees, the wholesalers did customer billing and performed direct "customer service" — responding to inquiries and complaints — for the Debtors.
Once the Debtors obtained and placed customers with a wholesaler, they were to receive a lump-sum payment from the wholesaler as an advance against future revenues from the customer's account. When a customer's account started generating ongoing revenue, subcontractors were to be paid and the wholesalers were to receive a fee for their direct services and for coordinating all contractors' performance. The Debtors were then to receive the net revenues, in periodic payments from the wholesalers.
The Debtors commenced operation under these arrangements in 1997-98. In 1999, however, QAI and Pathfinder stopped accepting new customers from the Debtors and ceased payment to them out of ongoing customer accounts. They alleged that the initial advances to the Debtors had accumulated to an excessive amount and had to be reduced by offset. In April, 2000, RSL took the same action. These events deprived the Debtors of all ongoing revenue, and led to their Chapter 11 filings several months later.
Before the bankruptcy filings, the FCC and various state regulatory agencies had received complaints that the Debtors' marketing subcontractors had engaged in "slamming" (unauthorized transfer of customers from other long-distance service providers to the Debtors) and "cramming" (provision of particular billed services to customers that they had not sought or authorized). On the basis of the complaints, they commenced investigations or enforcement proceedings against the Debtors. Several of the state-agency matters are still pending. The proceeding by the FCC resulted in the levy of an administrative fine against the Debtors on December 7, 2000, in the amount of $750,000.00. The Debtors' right to seek further review of this fine has now lapsed.
1. On August 18, 2001, the Debtors filed separate voluntary petitions for relief under Chapter 11. On the first page of both petitions, the Debtors checked the boxes that attested "Debtor is a small business as defined in 11 U.S.C. § 101," and "Debtor is and elects to be considered a small business under 11 U.S.C. § 1121(e)."
2 Each Debtor included entries for QAI and Pathfinder on its respective Schedule F, that for unsecured claims. Both creditors' claims were assigned a value of "1.00," and were alleged to be contingent, unliquidated, and disputed. The consideration for QAI's claim was stated as "subcontractor of long-distance provider."
3. On August 30, 2000, the Debtors filed separate complaints in adversary proceedings against QAI and Pathfinder. In them, they alleged that QAI and Pathfinder had breached the IMAs by failing to provide accountings of their receipt of revenues and other performance under the IMAs, and by failing to make payment to the Debtors since October 1, 1999. Styling the complaints under the turnover provisions of 11 U.S.C. § 542, the Debtors sought judgments directing QAI and Pathfinder to comply with their duties of accounting and payment for all post-petition revenues. The Court granted the Debtors' motion for a preliminary injunction and denied a motion by QAI and Pathfinder for a stay pending appeal. On December 21, 2000, the United States District Court (Montgomery, J.) denied those defendants' motion for leave to appeal, and their renewed motion for a stay pending appeal.
4. On September 15, 2000, the Court heard the Debtors' motions for joint administration of these cases. As grounds for the relief, the Debtors alleged that the same person, Daniel G. Coleman, owned 100 percent of the shares of stock in both corporations; that the Debtors were engaged in similar businesses and had the same major creditors; and that they anticipated no major conflicts of interest between them in the administration of their respective estates. On September 18, 2000, the Court entered an order granting the motion.
5. Immediately before their Chapter 11 filings, the Debtors had commenced a lawsuit against QAI, Pathfinder, and one Dave Wiegand in the Minnesota State District Court for the Tenth Judicial District, Washington County. Their pleaded causes of action were for breach of contract and fraud. Pursuant to a stipulation among the parties, this Court granted relief from the automatic stay to the defendants in this suit, to allow them to interpose answers and to maintain all claims and defenses. The litigation has proceeded, though its present status is not entirely clear from the record here.3
6. On November 27, 2000, the Debtors filed a motion for court approval of their rejection of their IMAs with QAI and Pathfinder, as executory contracts within the scope of 11 U.S.C. § 365. In seeking this relief, the Debtors alleged that Sprint Communications had discontinued long distance service to some of their customers, and threatened to discontinue service to the rest, due to the way QAI and Pathfinder had structured and executed their provision of service on a wholesale basis under the IMAs. QAI and Pathfinder objected to the grant of such relief, at least without certain conditions on the rejection. The Court overruled the objection and granted the motion by an order entered on November 30, 2000.
7. The Debtors then moved for an order authorizing their entry into service contracts with NorthStar Communications, Inc., under which NorthStar would undertake to provide service to the Debtors' customers on a wholesale basis. The motion was noncontroversial. It was granted under an order entered on January 3, 2001.
8. On January 25, 2001, the Debtors filed a joint plan with accompanying joint disclosure...
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Landlord's Rejection-Damage Claims: Lawyering Using Graphic And Mathematical Expressions
...For instance, one court used "the simple set theory of middle-school mathematics" to aid decision-making. In re Coleman Enterprises Inc., 266 BR 423, 434 (Bankr. D. Minn. 18 See, e.g., Mark MacDonald, et al., "Chapter 11 as a Dynamic Evolutionary Learning Process in a Market with Fuzzy Valu......