In re Metromedia Fiber Network, Inc.

• Decision Date: 01 August 2002
• Docket Number: Bankruptcy No. 02-22746(ASH).,Bankruptcy No. 02-22751(ASH).,Bankruptcy No. 02-22752(ASH).,Bankruptcy No. 02-22739 (ASH).,Bankruptcy No. 02-22737 (ASH).,Bankruptcy No. 02-22741 (ASH).,Bankruptcy No. 02-22736 (ASH).,Bankruptcy No. 02-22742 (ASH).,Adversary No. 02-5283(ASH).,Bankruptcy No. 02-22744(ASH).,Bankruptcy No. 02-22749(ASH).,Bankruptcy No. 02-22753(ASH).,Bankruptcy No. 02-22754(ASH).,Bankruptcy No. 02-22745(ASH).,Bankruptcy No. 02-22740 (ASH).,Bankruptcy No. 02-22738 (ASH).
• Parties: In re METROMEDIA FIBER NETWORK, INC., et al., Debtors. Metromedia Fiber Network Services, Inc., Plaintiff, v. Washington Metropolitan Area Transit Authority, Defendant.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

281 B.R. 524

In re METROMEDIA FIBER NETWORK, INC., et al., Debtors Metromedia Fiber Network Services, Inc., Plaintiff, v. Washington Metropolitan Area Transit Authority, Defendant.

Bankruptcy No. 02-22736 (ASH).

Bankruptcy No. 02-22737 (ASH).

Bankruptcy No. 02-22738 (ASH).

Bankruptcy No. 02-22739 (ASH).

Bankruptcy No. 02-22740 (ASH).

Bankruptcy No. 02-22741 (ASH).

Bankruptcy No. 02-22742 (ASH).

Bankruptcy No. 02-22744(ASH).

Bankruptcy No. 02-22745(ASH).

Bankruptcy No. 02-22746(ASH).

Bankruptcy No. 02-22749(ASH).

Bankruptcy No. 02-22751(ASH).

Bankruptcy No. 02-22752(ASH).

Bankruptcy No. 02-22753(ASH).

Bankruptcy No. 02-22754(ASH).

Adversary No. 02-5283(ASH).

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

August 1, 2002.

Kronish Lieb Weiner & Hellman, LLP, by Ronald R. Sussman, New York City,

for Metromedia Fiber Network Services, Inc.

Office of General Counsel, by Joseph J. Zimmerman, Washington, D.C., for Washington Metropolitan Area Transit Authority.

Chadbourne & Parke, LLP, by Seven Rivera, New York City, for the Official Committee of Unsecured Creditors.

DECISION ON DEFENDANT'S MOTION TO DISMISS COMPLAINT AND MOTION TO DISSOLVE TEMPORARY RESTRAINING ORDER

ADLAI S. HARDIN, Jr., Bankruptcy Judge.

Debtor-plaintiff Metromedia Fiber Network Services, Inc. ("MFNS") filed this adversary proceeding seeking injunctive relief on July 18, 2002. At a hearing late in the afternoon on the same day, July 18, this Court signed a scheduling order setting August 1, 2002 as the return date for a motion by MFNS for a preliminary injunction restraining defendant Washington Metropolitan Area Transit Authority ("WMATA") from (1) terminating its pre-petition executory license agreement with MFNS or otherwise interfering with the operation of the business of MFNS, (2) interfering with or disrupting MFNS's business and (3) seeking to recover the pre-petition debt allegedly owed by MFNS to WMATA. The July 18 scheduling order included a temporary restraining order ("TRO") pending the August 1 hearing. Although WMATA received actual notice of the July 18 hearing on the TRO, WMATA did not appear at that hearing or otherwise oppose the relief requested.

On July 25, 2002, WMATA moved to dismiss this adversary proceeding under Fed.R.Civ.P. 12(b) (made applicable to adversary proceedings under Bankruptcy Rule 7012) and to dissolve the TRO on the grounds that this Court is barred by the Eleventh Amendment to the United States Constitution from exercising jurisdiction over WMATA and that the TRO is unconstitutional. On WMATA's application, an accelerated hearing on the motion was held on July 31, 2002. For the reasons stated below, WMATA's motion to dismiss and to vacate the TRO is denied.

Background

MFNS, a Delaware Corporation, and other affiliated debtors (referred to collectively as the "Debtors") filed voluntary petitions under Chapter 11 on May 20, 2002 which are being jointly administered. The Debtors provide fiber optic infrastructure, high-bandwidth internet connectivity and managed internet infrastructure for customers in the United States and Europe, including communications carriers, corporations and government entities.

WMATA has its principal place of business in Washington, DC, and is an "interstate compact agency" which by federal law is an agency and instrumentality of the State of Maryland and the Commonwealth of Virginia. See Clarke v. Washington Metro. Area Transit Auth., 654 F.Supp. 712, 713 (D.D.C.1985); WMATA Compact, D.C.Code Ann. § 1-1107.01 (2001). The WMATA "Compact" is, in effect, its charter. WMATA operates a public mass transit rail system in the Washington, D.C., metropolitan area. As part of its public mass transit rail system, WMATA has constructed and maintains underground tunnels and surface transportation corridors, rights of way referred to as the "WMATA ROW."

Pursuant to a license agreement dated April 19, 1999 (the "License Agreement"), between MFNS and WMATA, MFNS placed fiber and related equipment in conduits in the WMATA ROW. The License Agreement is an executory contract and property of the MFNS bankruptcy estate. Each strand of fiber is utilized by a different MFNS customer for any of a variety of purposes, including Internet access, telephone communications and other methods of internal and external communications.

In March 2002 MFNS received an invoice from WMATA seeking payment of approximately $2,232,000 for use of the WMATA ROW during the period of April 2002 to April 2003 and past-due labor charges for August through November 2001. MFNS did not pay the invoice. WMATA sent a notice of delinquency and a notice of default on May 2, 2002, and June 13, 2002, respectively. The latter notice (the "Default Notice"), sent after the filing of the Chapter 11 petition, stated that failure by MFNS to pay all past-due balances (i.e., the pre-petition debt) within 30 days after the date of the notice "will result in the License Agreement being terminated as of the date thirty (30) calendar days after receipt of this letter — `Termination Date'," that "[a]ll services provided by WMATA to [Debtors] under the ... License Agreement will cease as of the Termination Date," that "[Debtors'] business activities on WMATA property must also cease as of the Termination Date" and that the Debtors would be "required to cease all communications traffic on or through WMATA property as of the Termination Date." Finally, the Default Notice advised that "third party users or customers affected thereby should be notified as soon as possible and told to make alternative arrangements."

Attempts to reach an agreement with WMATA were not successful, and on July 17, 2002, Debtors were advised by counsel for WMATA that "WMATA has not consented to the jurisdiction of the Bankruptcy Court. It has not, and will not, waive its immunity from the process of that Court." WMATA's July 17, 2002 letter concluded as follows:

we again advise [Debtors] to make alternative arrangements for carriage of customer communications after the date set for termination of the License Agreement, e.g., on July 19, 2002. WMATA reserves its full rights under law to proceed against [Debtors] in the event that [Debtors'] business operations on WMATA property do not cease at that time.

Faced with the potentially dire consequences of this threat, and precluded from complying with WMATA's demand for payment of its prepetition debt without order of this Court on notice to all parties in interest, MFNS filed the instant adversary proceeding seeking a preliminary and permanent injunction prohibiting WMATA from (1) terminating the License Agreement; (2) interfering with the business of MFNS; or (3) seeking to recover the pre-petition debt allegedly owed by MFNS to WMATA.

MFNS alleges that in threatening to terminate the License Agreement for failure to pay the pre-petition debt due WMATA violates the "automatic stay" provisions of the Bankruptcy Code found in 11 U.S.C. § 362(a), which prohibits, inter alia,"any act to obtain possession of property of the estate" and "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case."¹ MFNS further asserts that WMATA, in seeking to terminate the License Agreement, discriminates against MFNS in violation of 11 U.S.C. § 525(a).²

The TRO was granted based upon a prima facie showing by the Debtors that if WMATA were not enjoined from discontinuing service under the License Agreement, irreparable injury would be sustained not only by the Debtors but by the users of MFNS's fiber network in the Washington, D.C., area whose telecommunications services would be terminated. MFNS's attorney Richard S. Kanowitz, in his Affidavit in support of the TRO, states:

if WMATA is allowed to terminate the license agreement based upon the failure of [the Debtor] to pay the pre-petition debt, such conduct will cause irreparable injury to the Debtors and their bankruptcy estates because the fiber network of the Debtors in the Washington D.C. area will cease to function and otherwise operate properly. A termination of the license agreement would seriously disrupt telecommunications services provided to fiber customers of the Debtors in the Washington D.C. area. Without such telecommunications services, the business of such customers in the Washington D.C. area may come to a halt.

A partial list of the businesses which could be disrupted by termination of the License Agreement include AboveNet, Adelphia Communications, America Online, AT & T, BBC, Cox Communications, Deutsche Telecom, Gannett Company, Inc., Global Crossing, Sprint, Verizon, Williams, and XO Communications. MFNS alleges that an even more grievous consequence of termination of the License Agreement is the potential threat to public welfare and safety because some of the users of services provided by MFNS are hospitals and government entities that carry out essential operations by means of the telecommunications services provided by MFNS and supplied through the WMATA ROW.

At the request of the Court, WMATA explained the steps it would take immediately upon termination of the License Agreement, barring injunctive relief or a consensual resolution. First, WMATA would forbid access to the WMATA ROW by MFNS personnel, placing locks on the "fiber huts," the current means of accessing the switches and equipment. In the event of an emergency involving public health or safety, WMATA anticipates it would be able to have a critical line repaired, either by permitting an MFNS technician to enter the fiber huts, or by bringing in a third-party technician. Eventually WMATA would make a final demand that MFNS cease operations through the WMATA ROW. If WMATA's demands are not met, WMATA states that it would take no further steps until an order is obtained from a judge with competent jurisdiction, most likely in the District of Columbia.

In its instant motion, WMATA does not address MFNS's allegations of potential serious...