In re Psinet, Inc.

• Decision Date: 18 December 2001
• Docket Number: Bankruptcy No. 01-13213 (REG).,Adversary No. 01-2841(REG).
• Citation: 271 B.R. 1
• Parties: PSINET, INC. et al., Debtors PSINet, Inc. et al., Plaintiffs, v. Cisco Systems Capital Corporation, Defendant,
• Court: U.S. Bankruptcy Court — Southern District of New York

Page 1

271 B.R. 1

PSINET, INC. et al., Debtors PSINet, Inc. et al., Plaintiffs, v. Cisco Systems Capital Corporation, Defendant,

Bankruptcy No. 01-13213 (REG).

Adversary No. 01-2841(REG).

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

December 18, 2001.

COPYRIGHT MATERIAL OMITTED

Wilmer, Cutler & Pickering, Washington, D.C., Wilmer, Cutler & Pickering, New York City, By Andrew N. Goldman, and David R. Lurie, Nixon Peabody LLP, New York City, By Robert N. Christmas and Daniel Sklar, for PSINet, Inc. et al.

Murphy, Sheneman, Julian & Rogers, Los Angeles, CA, By David J. Richardson, Otterbourg, Steindler, Houston & Rosen, P.C., New York City, By Remy J. Ferrario, for Cisco Systems Capital Corporation.

DECISION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

ROBERT E. GERBER, Bankruptcy Judge.

Introduction

In this adversary proceeding — one of numerous "recharacterization" adversary proceedings brought by plaintiff, PSINet, Inc., one of the debtors in the above-captioned chapter 11 case ("PSINet," or the "Debtor"), against its equipment lessors — PSINet seeks a declaratory judgment that a "Master Agreement" and related "Lease Schedules," under which defendant Cisco Systems Capital Corporation ("Cisco") provided networking equipment which is held and used by PSINet, are financing agreements that create a security interest and are not "true leases."

PSINet moves for summary judgment granting it the declaratory judgment it seeks — arguing, as discussed more fully below, that this determination, under applicable state law, must be made solely on the economics of the transaction, and that there are no material disputed issues of fact as to the transactions' economics. Cisco says very little on the merits of PSINet's motion, but cross-moves for summary judgment, arguing that PSINet's claims are barred by the statute of limitations — and in particular, the 3-year statute of limitations applicable to "replevin" actions, i.e., an "action to recover a chattel," N.Y. C.P.L.R. ("CPLR") § 214(3), which Cisco contends started to run from the execution of the Master Agreement. Also, and thereby raising a threshold issue, Cisco asks this Court to determine that PSINet's claims are non-core, within the meaning of 28 U.S.C. § 157(b), and that this Court's power, as an Article I court, is limited to drafting proposed findings of fact and conclusions of law, for consideration, de novo, by an Article III district judge.

For reasons discussed below, PSINet is plainly entitled to summary judgment granting it the declaratory relief it seeks, unless (a) this Court cannot grant any judgment, because the matters before it in this adversary proceeding are non-core, or (b) PSINet's claims are barred by the statute of limitations. Upon consideration of the issues, however, the Court concludes that:

(a) this "recharacterization" action — involving the nature and extent of the parties' rights vis-à-vis property in the lawful possession of the debtor, laying the predicate for determining issues arising under title 11 — is a core matter; and

(b) the Debtor's claims are not barred by the applicable statute of limitations — which, this Court holds, is not CPLR § 214(3) ("an action to recover a chattel"), but rather CPLR § 213(1) ("an action for which no limitation is specifically prescribed by law").

Accordingly, Cisco's motion for summary judgment is denied. Cisco having failed to identify any material disputed issues of fact with respect to any other defense, and PSINet having made a textbook showing of an entitlement to recharacterization as a matter of law, summary judgment in favor of PSINet is granted.

Facts

The cross motions arise in one of 22 similar adversary proceedings commenced by PSINet as plaintiff, against various equipment lessors as defendants, under the umbrella of PSINet's chapter 11 case. By way of background (and as relevant to the Court's decision as to whether PSINet's claims are core), brief discussion of the underlying case and the purpose and substance of the adversary proceedings is appropriate. Then the Court addresses the undisputed facts upon which each litigant relies in its summary judgment motion.

A.

PSINet is engaged in the business of providing Internet access and web hosting to business customers, governmental entities and educational institutions, delivering its access products over a global fiber network. In part through subsidiaries, PSINet has been engaged in that business in both the United States and a number of other countries around the world. As of December 31, 2000, the total indebtedness of PSINet and its affiliates was said by the Debtor to be approximately $3.7 billion, of which approximately $3.5 billion consisted of senior notes, capital lease obligations and notes payable.

With many of its subsidiaries and affiliates, PSINet filed a petition for relief under chapter 11 of the Bankruptcy Code on May 31, 2001. A creditors' committee was appointed, and PSINet has continued to operate its businesses as a debtor-in-possession.

As in many chapter 11 cases, the Debtor has sought this Court's approval for the sale of whole lines of its business — as, for example, PSINet did with motions seeking approval of the sale of its Panamanian, Canadian, Chilean, and Hong Kong businesses.¹ In the course of PSINet's chapter 11 case and the various requests that the Court consider and approve those sales of PSINet's businesses, the Court has been repeatedly asked to consider and protect the rights of equipment lessors asserting rights in equipment used in those businesses that PSINet sought to convey.² Cisco has filed a number of pleadings with respect to the sale approval motions, seeking to protect Cisco's interests in equipment that might be transferred as a part of those sales.³

On July 3, 2001, the Debtor PSINet filed the first 11 of the 22 recharacterization adversary proceedings that are, or were, before this Court. On July 20, 2001, the Debtors moved for a stay of any payments that would be due to lessors under Bankruptcy Code section 365(d)(10) — a provision, applicable in chapter 11 cases, that generally requires post-petition payments to lessors under personal property leases after the 60-day point in a chapter 11 case. The Debtors said in that motion:

By this Motion, the Debtors seek a stay of any payments, pursuant to section 365(d)(10) of the Bankruptcy Code, that would otherwise be due and owing to the counter-parties to the Agreements [the agreements that nominally were leases] (some of which are already subject to the Adversary Proceedings), if the Agreements were true leases pending resolution of the Adversary Proceedings. If this Court determines that the Agreements are indeed secured financings, no payments would be due to the counter-parties to the Agreements pursuant to section 365 of the Bankruptcy Code because section 365 would no longer be applicable; the Debtors would own the equipment and IRUs⁴, subject to the potential lien (if perfected) of the respective financier. If this Court rules otherwise, the Debtors will promptly remit all leases payments properly due and owing under the Agreements from July 31, 2001 onward to the counter-parties thereto in accordance with section 365(d)(10) of the Bankruptcy Code.

(Docket # 230 at ¶ 17). They later stated:

The Debtors have acted, and will proceed to act, in a good faith and timely manner to obtain a judicial determination of the character of the Agreements, and intend to promptly commence similar adversary proceedings against the remaining counter-parties to the Agreements. The Debtors commenced the Adversary Proceedings within 33 days of the Petition Date and will seek resolution of the Adversary Proceedings on as expeditious a timetable as due process and the Court's calendar will allow.

(Id. at ¶ 21).

Following the filing of that motion, Cisco separately moved for an order requiring PSINet to make the payments to which Cisco would be entitled under section 365(d)(10) (if the PSINet-Cisco equipment leases were found to be true leases), or, alternatively, for adequate protection payments, under sections 361 and 363 of the Bankruptcy Code (if the leases were found to be financing agreements). (Docket # 384).

For the foregoing reasons, and others, the determination in this adversary proceeding will provide the underpinnings for the determination of numerous contested matters, all arising (and not just related to a case) under title 11:

(a) The Debtor's ability to effect section 363 sales of lines of business (most, or all of which have, in their possession, equipment covered under agreements denominated as leases) has been and will be affected — as evidenced by the Debtor's recent controversy with NTFC in connection with the sale of the Canadian business, and the pleadings with respect to the sale motions filed by Cisco and other equipment lessors in connection with the Chilean, Panamanian, Hong Kong and Canadian businesses sales — by the issue of whether the equipment belongs to the Debtor, on the one hand, or the equipment lessors, on the other;

(b) Two upcoming matters (which the Court now has on its calendar for January 17) with respect to Cisco's property interests in the equipment:

(1) As to Cisco's right, under Bankruptcy Code section 365(d)(10), to receive monthly payments required under its equipment leases (if they are true leases), and, conversely,

(2) As to Cisco's right, under Bankruptcy Code sections 361 and 363, to "adequate protection" with respect to PSINet's use of equipment which is or may be Cisco's collateral (if the "leases" are in fact secured financing agreements);

(c) The outcome of this proceeding will determine, at least in substantial part, whether or not these nominal equipment leases are executory contracts to be assumed, under section 365(a), and whose defaults must be cured incident to assumption, under section 365(b); and

(d) The outcome will also determine at least some of the issues...