In re Incomnet, Inc.

• Decision Date: 20 September 2006
• Docket Number: No. 03-56736.,03-56736.
• Citation: 463 F.3d 1064
• Court: U.S. Court of Appeals — Ninth Circuit
• Parties: In re INCOMNET, INC., a California corporation; In re Incomnet Communications Corporation, f/k/a National Telephone & Communications, Inc., Debtors, Universal Service Administrative Company, Appellant, v. Post-Confirmation Committee of Unsecured Creditors of Incomnet Communications Corporation, Appellee.

463 F.3d 1064

In re INCOMNET, INC., a California corporation; In re Incomnet Communications Corporation, f/k/a National Telephone & Communications, Inc., Debtors Universal Service Administrative Company, Appellant, v. Post-Confirmation Committee of Unsecured Creditors of Incomnet Communications Corporation, Appellee.

No. 03-56736.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 4, 2005.

Filed September 20, 2006.

COPYRIGHT MATERIAL OMITTED

Jonathan T. Cain, Mintz Levin Cohn Ferris Glovsky & Popeo, P.C., Reston, VA, for the appellant.

Michael R. Adele, Evan D. Smiley, Kyra E. Andrassy, and Michael J. Heyman, Albert, Weiland & Golden, LLP, Costa Mesa, CA, for the appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel, Montali, Klein, and Lee, Bankruptcy Judges, Presiding. BAP No. CC-03-01064-LKMo.

Before: BROWNING, RAYMOND C. FISHER, and JAY S. BYBEE, Circuit Judges.

BYBEE, Circuit Judge:

In this case we are asked to review the decision of the bankruptcy appellate panel ("BAP"), which held that the Universal Service Administrative Company ("USAC") was a transferee under 11 U.S.C. §§ 547 and 550. We hold that USAC is a transferee under the "dominion" test and affirm the judgment of the BAP.

I. FACTS AND PROCEEDINGS

Congress passed the "1996 Telecommunications Act . . . to encourage universal telecommunications service." City of Springfield v. Ostrander (In re LAN Tamers, Inc.), 329 F.3d 204, 206 (1st Cir. 2003). "Universal service includes `advanced telecommunications and information services,' particularly high-speed internet access, for schools (as well as for libraries and rural health care providers)." Id. (quoting 47 U.S.C. § 254(b)(6), (h)(1) (2000)). To this end, the Telecommunications Act of 1996 ("Telecommunications Act") requires telecommunications carriers providing interstate telecommunications services to financially support the cost of providing telecommunications services to schools, libraries, health-care providers, low-income consumers, and subscribers in high-cost areas. See 47 U.S.C. § 254(b) (2000); see also id. § 254(d) ("Every telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to preserve and advance universal service."). The telecommunications companies pass this cost through to their subscribers; the charge generally appears on phone bills as the "Universal Service Fund Fee."

Each telecommunications carrier is required by law to contribute to the Universal Support Fund ("USF") based on its interstate and international telecommunications revenue. See 47 C.F.R. § 54.709(a) (2005). The Federal Communications Commission ("FCC") devises a formula that each carrier must adhere to in calculating its contribution. The USF contributions are not defined as federal funds; however, they exist because of a federal mandate. In re LAN Tamers, Inc., 329 F.3d at 206; see also Tex. Office of Pub. Util. Counsel v. FCC, 183 F.3d 393, 405-09 (5th Cir.1999) (describing the history and universal service goal of the Telecommunications Act and subsequent implementing regulations); In re LAN Tamers, Inc., 329 F.3d at 206-07 (describing certain portions of the USAC structure in conjunction with the E-Rate program implementing USF financial support for schools and libraries); Robert M. Frieden, Universal Service: When Technologies Converge and Regulatory Models Diverge, 13 HARV. J.L. & TECH. 395, 397-422 (2000) (describing the Telecommunications Act's "universal service mission" and its impact). The universal service fund is then disbursed to subsidize the costs of telecommunications services for the beneficiaries of the Act (e.g., schools, libraries, and rural health care providers).¹ All disbursements from the USF are made to carriers.²

Congress gave the FCC the authority to implement the universal service support provisions of the Telecommunications Act and mandated that it do so. Pursuant to this authority, the FCC designated USAC, a non-profit corporation incorporated in Delaware, to collect, pool, and disburse the universal service support funds contributed by carriers pursuant to 47 U.S.C. § 254(d). 47 C.F.R. § 54.701(a) (2005) ("The Universal Service Administrative Company is appointed the permanent Administrator of the federal universal service support mechanisms. . . ."); see also id. § 54.5 ("The term `Administrator' shall refer to the Universal Service Administrative Company that . . . has been appointed the permanent Administrator of the federal universal service support mechanisms."). All of USAC's operations are carried out pursuant to regulations promulgated by the FCC. See id. §§ 54.701, 54.702.

Incomnet Communications Corporation ("Incomnet") was a telecommunications carrier subject to universal service support contribution requirements under FCC regulations. Pursuant to FCC rules, USAC billed and collected USF contributions from Incomnet during the months of June, July, and August 1999. The contributions for those three months totaled $470,161.52, and USAC deposited Incomnet's contributions in the USF along with contributions from other carriers.

Incomnet filed for Chapter 11 bankruptcy on September 2, 1999.³ The Post-Confirmation Committee of Unsecured Creditors of Incomnet Communications Corporation ("Committee") was appointed trustee of Incomnet's estate on May 9, 2000. The Committee filed a complaint against USAC in federal bankruptcy court, alleging that the $470,161.52 paid by Incomnet to USAC in June, July, and August of 1999 constituted a preferential transfer made within the ninety days preceding Incomnet's bankruptcy petition. Arguing that USAC was a transferee under 11 U.S.C. §§ 547 and 550(a), the Committee sought to recover these universal service support contributions and requested that USAC reimburse these payments to Incomnet. The Committee also sought to prevent USAC from making any further claims on Incomnet's estate.

USAC admitted that it had received a total of $470,161.52 in universal service support contributions from Incomnet through three payments in June, July, and August of 1999, respectively. However, it contended that it was not a transferee under 11 U.S.C. § 550(a), but was instead a mere conduit for the funds, and moved for summary judgment on that ground.

The Committee filed objections to USAC's motion for summary judgment and subsequently moved for summary judgment on its first cause of action, the preferential transfer. It argued that uncontroverted evidence established that USAC's receipt of the funds from Incomnet met all of the requirements of 11 U.S.C. § 547(b).

Purporting to apply the test we announced in Danning v. Miller (In re Bullion Reserve of North America), 922 F.2d 544, 549 (9th Cir.1991), which the bankruptcy court labeled the "dominion or control" test, the bankruptcy court found that USAC did not have dominion or control over the USF. The bankruptcy court held that "USAC [did] not have the requisite degree of unfettered control over the [USF] to qualify as a transferee" under 11 U.S.C. §§ 547 and 550 and granted USAC's motion for summary judgment. [E.R. 22.]

The Committee appealed to the Ninth Circuit Bankruptcy Appellate Panel ("BAP"). The BAP reversed the bankruptcy court's grant of summary judgment in favor of USAC, holding that USAC was a transferee under 11 U.S.C. § 550(a) because it was the actual recipient of the transfer. See Post-Confirmation Comm. v. Universal Serv. Admin. Co. (In re Incomnet Commc'ns Corp.), 299 B.R. 574, 581 (B.A.P. 9th Cir.2003). The BAP held that the "dominion or control" test did not apply because it was adopted to distinguish financial intermediaries from true recipients, and that the USAC transaction could not be a "conduit" transfer because it did not involve a two-step transaction. See id. at 578, 580. USAC filed this appeal.

II. STANDARD OF REVIEW

We review the BAP's conclusion of law de novo. Cool Fuel, Inc. v. Bd. of Equalization of Cal. (In re Cool Fuel, Inc.), 210 F.3d 999, 1001 (9th Cir.2000). "Because we are in as good a position as the BAP to review bankruptcy court rulings, we independently examine the bankruptcy court's decision, reviewing the bankruptcy court's interpretation of the Bankruptcy Code de novo and its factual findings for clear error." United States v. Hatton (In re Hatton), 220 F.3d 1057, 1059 (9th Cir.2000); see also Ehrenberg v. Cal. State Univ., Fullerton Found. (In re Beachport Entm't), 396 F.3d 1083, 1086 (9th Cir.2005); Tex. Comptroller of Pub. Accounts v. Megafoods Stores, Inc. (In re Megafoods Stores, Inc.), 163 F.3d 1063, 1067 (9th Cir.1998). A bankruptcy court's summary judgment order is reviewed de novo. Paulman v. Gateway Venture Partners III, L.P. (In re Filtercorp, Inc.), 163 F.3d 570, 578 (9th Cir.1998); see also In re Bullion Reserve, 922 F.2d at 546.

III. ANALYSIS

A. Statutory Framework and the "Dominion" Test

The trustee of a bankrupt debtor's estate can seek to avoid and recover preferential transfers pursuant to 11 U.S.C. §§ 547 and 550. Section 547 reads, in relevant part:

(b) Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property —

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made — (A) on or within 90 days before the date of the filing of the petition [and]. . . .

(5) that enables such creditor to receive more than such creditor would receive if —

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

11 U.S.C. § 547(b) (2000 & Supp.2005). The trustee, in this...