In re Lan Tamers, Inc.

• Decision Date: 19 May 2003
• Docket Number: No. 02-2309.,02-2309.
• Citation: 329 F.3d 204
• Parties: In re LAN TAMERS, INC., Debtor. City of Springfield, MAssachusetts, Plaintiff, Appellee, v. David W. Ostrander, Trustee in Bankruptcy, Defendant, Appellant, Lan Tamers, Inc.; Bank of Western Massachusetts; Educational Technology, Inc.; Universal Service Administrative Company; Official Unsecured Creditors' Committee of Lan Tamers, Inc., Defendants.
• Court: U.S. Court of Appeals — First Circuit

329 F.3d 204

In re LAN TAMERS, INC., Debtor.

City of Springfield, MAssachusetts, Plaintiff, Appellee, v. David W. Ostrander, Trustee in Bankruptcy, Defendant, Appellant Lan Tamers, Inc.; Bank of Western Massachusetts; Educational Technology, Inc.; Universal Service Administrative Company; Official Unsecured Creditors' Committee of Lan Tamers, Inc., Defendants.

No. 02-2309.

United States Court of Appeals, First Circuit.

Submitted March 20, 2003.

Decided May 19, 2003.

Eugene B. Berman, Kerry David Strayer, and Kamberg, Berman, P.C. on brief, for defendant-appellant.

Joseph B. Collins, George I. Roumeliotis, Hendel & Collins, Harry P. Carroll, Deputy City Solicitor, Melissa M. Shea, Associate City Solicitor, and Springfield Law Department on brief, for plaintiff-appellee.

Joseph H. Baldiga and Mirick, O'Connell, DeMallie & Lougee, LLP on brief, for Universal Service Administrative Company, amicus curiae.

Before BOUDIN, Chief Judge, LYNCH and HOWARD, Circuit Judges.

LYNCH, Circuit Judge.

This case involves competing claims of the Springfield, Massachusetts public schools and the creditors of LAN Tamers, Inc., a bankrupt company, to a million-plus dollars. The case arises from the intersection of the federal Bankruptcy Code and the federal "E-Rate" program, created by the Telecommunications Act of 1996 to encourage public schools to connect to the internet. The E-Rate program subsidizes these internet connections with funds extracted from the telecommunications industry and administered by a private not-for-profit corporation, the Universal Service Administrative Company (USAC). The schools contract with service providers to do the connection work. USAC, through the Universal Service Fund (USF), either pays the subsidy to the service provider directly (if the approved schools have not already paid in full) or reimburses the schools for part of the cost (if the projects have been approved and the schools have paid the service provider for the work). In the latter case, USAC actually makes its payment to the service provider, who in turn must pass the funds through to the school.

The issue here is whether reimbursement monies, presently held by USAC, are part of the estate of LAN Tamers, the bankrupt service provider. When LAN Tamers filed for bankruptcy, Springfield had already paid it in full for installation and maintenance of internet networks at various schools. USAC had already approved E-Rate funding for the projects. The bankruptcy court and district court both held that these funds belong to Springfield and are not the property of the estate. We affirm.

I.

The facts about the structure of the E-Rate program and the events are undisputed.

One of the goals of the 1996 Telecommunications Act was to encourage universal telecommunications service. 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). See 47 U.S.C. § 254(b)(6), (h)(1) (2000). The internet highway for these schools is paved with mandated contributions from the telecommunications industries; the USF's coffers are filled by interstate telecommunications providers who pay mandatory charges, which they typically pass on to consumers in their bills. See id. § 254(d); 47 C.F.R. § 54.706 (2002). Federal regulations give USAC the responsibility to administer the USF, collect the charges, and disburse its funds, all under the direction of the Federal Communications Commission (FCC). See 47 C.F.R. §§ 54.701, 54.702. The USF monies are not appropriated federal funds; nonetheless, they exist by reason of a federal mandate. The funds are not distributed by a federal agency but by USAC, a private nonprofit corporation, subject to regulation. See generally Tex. Office of Pub. Util. Counsel v. FCC, 183 F.3d 393, 405-09 (5th Cir.1999) (describing USF provisions of 1996 Telecom Act and subsequent regulations); R.F. Frieden, Universal Service, 13 Harv. J.L. & Tech. 395, 397-422 (2000) (same).

The E-Rate program implements the Telecom Act's mandate of USF support for schools. See 47 U.S.C. § 254(b)(6). In the past few years, USAC has disbursed between $1.4 billion and $1.7 billion annually in E-Rate funding for schools and libraries. To receive funds, a school enters directly into a contract with a service provider to supply eligible telecommunications services. See 47 C.F.R. § 54.504(c). The service provider must be registered with USAC. See USAC Service Provider Manual, ch. 4, available at http://www.sl.universalservice.org/vendor/manual/ (last visited May 15, 2003). A school must complete an application process with multiple steps to have E-Rate support approved. The amount of funding a school receives from the USF depends on the area's poverty level, and ranges from 20% to 90% of the total cost of eligible projects. See 47 C.F.R. § 54.505(b). Springfield, one of the state's most economically disadvantaged school districts, generally receives near the maximum percentage.

Most often, after approval, USAC and a school simply disburse their respective shares of the cost directly to the service provider. Sometimes, however, schools elect an alternative payment method, referred to as "Billed Entity Applicant Reimbursement" (BEAR), especially if they want a project completed quickly. Springfield chose the BEAR option for the two contracts at issue here. Under the BEAR method, a school (the "Billed Entity Applicant") pays the full cost to a service provider up front, receives from USAC a funding commitment letter for the E-Rate program's share of the cost, and then submits a form to USAC to receive reimbursement.

USAC makes its payments from the USF in the form of either a check or, if the service provider so chooses and owes charges to the USF, a credit against those charges. See 47 U.S.C. § 254(h)(1)(B)(i)-(ii); 47 C.F.R. § 54.515. USAC says that it lacks the authority to pay a school directly, because the Telecom Act and its regulations allow payments from the USF only to service providers. See 47 U.S.C. § 254(e) ("[O]nly an eligible telecommunications carrier ... shall be eligible to receive specific Federal universal service support"); id. § 254(h)(1)(B) (authorizing E-Rate payments for "telecommunications carriers"). Thus the service provider, who has already been paid, must receive the funds under the BEAR method and pass them through to the school. As part of the BEAR application, an authorized representative of the service provider is required to sign an "acknowledgment" that:

[T]he service provider must remit the discount amount authorized by [USAC] to the Billed Entity Applicant who prepared and submitted this [form] as soon as possible after [USAC]'s notification to the service provider of the amount of the approved discounts ... but in no event later than 10 calendar days after the receipt of the reimbursement payment....

The service provider must remit payment of the approved discount amount to the Billed Entity Applicant prior to tendering or making use of the payment issued by [USAC] to the service provider....

USAC's handbook for service providers is even more explicit: "The service provider functions merely as a vehicle to deliver the reimbursement back to the applicant. Failure to provide the reimbursement in a timely fashion may result in the Service Provider facing enforcement action." USAC Service Provider Manual, supra, ch. 9.¹ Springfield says it normally received reimbursements within a few days after USAC paid them to the service provider.

LAN Tamers completed a number of projects for Springfield, two of which are pertinent. In 1999, LAN Tamers and Springfield entered into a $1,096,180.28 contract for LAN Tamers to install a high-speed data network at Central High School. In 2001, they entered into a separate one-year contract for LAN Tamers to provide network maintenance services at four Springfield schools for $134,220. LAN Tamers completed both jobs satisfactorily. Springfield paid in full for the Central High School project by January 2000, and for the maintenance contract by January 2002.

USAC initially found the Central High School project ineligible for E-Rate funding, but Springfield appealed this decision to the FCC and prevailed in March 2001. By early 2002, the contracts were fully performed by both parties and Springfield had received funding commitment letters from USAC stating that the E-Rate program would reimburse 87% of each contract's cost. These two reimbursements total $1,070,056.74. Springfield submitted the required BEAR paperwork to USAC on April 17, 2002. On each form, LAN Tamers signed the acknowledgment quoted above.

A month later, on May 20, 2002, LAN Tamers filed a voluntary Chapter 11 bankruptcy petition. Upon learning of this filing, USAC withheld payment of the reimbursements, which were to have been made to LAN Tamers by check. At proceedings brought by creditors, LAN Tamers mentioned the reimbursements and said the monies were not its property and that it acted merely as a pass-through. The creditors claimed the proceeds. The City of Springfield appeared and asserted the reimbursements were its property. The bankruptcy court opined that Springfield's claim was really a claim to title and to recover an asset and so it should be asserted in an adversary proceeding. See Fed. R. Bankr.P. 7001(2).²

On June 4, 2002, Springfield filed an adversary proceeding laying claim to the reimbursements. The suit named as defendants LAN Tamers, its principal creditors, and USAC. One creditor, the Bank of Western Massachusetts, counterclaimed, arguing that its secured interest in all receivables of LAN Tamers extended to the reimbursements. The Official Unsecured Creditors' Committee also argued against Springfield's position and was deemed a party to the proceeding. LAN Tamers supported Springfield's claim. USAC also argued that the reimbursements belonged to...