In re Smart World Technologies, LLC
| Decision Date | 12 September 2005 |
| Docket Number | Docket No. 04-3497-BK. |
| Parties | In Re SMART WORLD TECHNOLOGIES, LLC, Freewwweb, LLC, and Smart World Communications, Inc., Debtors. Smart World Technologies, LLC, Freewwweb, LLC, and Smart World Communications, Inc., Debtors-Appellants, v. Juno Online Services, Inc., Official Committee of Unsecured Creditors, Worldcom Technologies, Inc., and UUNET Technologies, Inc., Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
J. Alex Kress (Dennis J. O'Grady and Glenn D. Curving, of counsel; Stephen J. Amoriello III and Ryan G. Foley, on the brief), Riker, Danzig, Scherer, Hyland & Perretti LLP, Morristown, NJ, for Debtors-Appellants.
Lawrence P. Gottesman, Bryan Cave LLP, New York, NY, (Rebecca Tapie and Karine Louis, of counsel, Brown Raysman Millstein Felder & Steiner LLP, New York, NY), for Appellee Juno Online Services, Inc.
Laurence May (Rochelle R. Weisburg, of counsel, and Leonard H. Gerson, on the brief), Angel & Frankel, P.C., New York, NY, for Appellee Official Committee of Unsecured Creditors.
Thomas R. Califano (Eric B. Miller, of counsel), Piper Rudnick LLP, Baltimore, MD, for Appellees WorldCom Technologies, Inc. and UUNET Technologies, Inc.
G. Eric Brunstad, Jr., Bingham McCutchen LLP, Hartford, CT, Amicus Curiae urging reversal.
Before: WALKER, Chief Judge, NEWMAN and JACOBS, Circuit Judges.
Debtors-appellants Smart World Technologies, LLC, Freewwweb, LLC, and Smart World Communications, Inc. (collectively, "Smart World") appeal from an unreported decision and order of the United States District Court for the Southern District of New York (Denise L. Cote, Judge), Smart World Techs., LLC v. Juno Online Servs., Inc. (In re Smart World Techs., LLC), No. 03 Civ. 9467, 2004 WL 1118328 ("Smart World"), which affirmed the judgment of the bankruptcy court (Cornelius Blackshear, Bankruptcy Judge). The bankruptcy court granted Smart World's creditors standing to pursue settlement, under Federal Rule of Bankruptcy Procedure 9019, of an adversary proceeding between Smart World and appellee Juno Online Services, Inc. ("Juno"), despite Smart World's strenuous objections.1 Following a hearing, the bankruptcy court approved the settlement.
On appeal, Smart World argues that as debtor-in-possession, it alone was entitled to bring a Rule 9019 motion. Smart World also raises a number of specific challenges to the bankruptcy court's approval of the settlement.2 Because we find that the bankruptcy court erred in granting WorldCom and the Committee standing, we vacate the judgment of the district court affirming the bankruptcy court's approval of the settlement and remand for further proceedings consistent with this opinion.
Smart World began providing free internet service in 1996. As of June 2000, it had approximately 1.7 million registered subscribers, 750,000 of whom actively used its internet services. Smart World, however, was unable to run its business profitably and sought a purchaser for its most valuable asset, its list of subscribers. On June 29, 2000, it entered into an agreement with Juno, a competing internet service provider who was the sole bidder. Under the agreement, terms of which were set forth in a "Term Sheet," Smart World agreed to sell its subscriber list to Juno and to continue referring subscribers to Juno through its distribution network. As part of the transaction, Juno required Smart World to file for bankruptcy and to conduct the sale under § 363 of the Bankruptcy Code.3 At Juno's request, Smart World filed for bankruptcy on the very day that the Term Sheet was signed.
Under the Term Sheet, Juno was not required to pay Smart World for subscribers unless the subscribers were deemed "qualified."4 Compensation for qualified subscribers was to be paid partly in cash and partly in Juno stock, with the percentage to be paid in stock increasing with the number of qualified subscribers referred.5
The bankruptcy court approved the sale on July 19, 2000.
Soon after the sale was approved, relations between the parties soured. According to Smart World, Juno circumvented the process established in the agreement for tracking subscribers referred to Juno by causing a "database dump" on the very day the sale was approved. The database dump allegedly prevented Smart World from identifying how many of its subscribers became qualified subscribers, and thus, how much Juno owed Smart World. When Smart World raised these allegations before the bankruptcy court, the court scheduled a hearing for September 6, 2000 on the issue of Juno's good faith in the § 363 sale.
Juno's response to the scheduling of the good-faith hearing was twofold. First, Juno refused to respond to Smart World's discovery requests, complaining that they were overly broad and burdensome. When the bankruptcy court ordered Juno to expedite discovery, Juno dumped tens of thousands of documents on Smart World's counsel just days before the hearing.6 Second, Juno commenced a declaratory action in an adversary proceeding, which subsumed the good-faith allegations raised by Smart World.
Specifically, Juno's complaint, filed just days after the bankruptcy court decided to hold the good-faith hearing, addressed the precise issues regarding implementation of the Term Sheet raised by Smart World. Juno denied that it had engaged in a database dump and instead asserted that Smart World had "concoct[ed] false claims relating to the implementation of the Term Sheet . . . in an effort to extract additional and unearned consideration from Juno." According to Juno, it was Smart World, and not Juno, who had impeded implementation of the agreement. In fact, Juno argued, Smart World had not only "failed to fully implement critical elements [of the Term Sheet]," but in addition Smart World's three most senior officers had in effect extorted Juno, "threaten[ing] to immediately resign . . . unless Juno immediately paid [them] salaries in excess of the amounts previously authorized by the Court," a demand to which Juno allegedly felt that it had to yield. In short, Juno maintained, Smart World's accusations of wrongdoing were part of a wholesale "effort to extract additional consideration from Juno . . . and to obtain other modifications to the Term Sheet."
Between August 2000, when Juno commenced the declaratory action, and September 2003, when the bankruptcy court approved settlement, the adversary proceeding stalled, essentially because Juno repeatedly represented to the bankruptcy court that settlement was imminent and because the court openly supported settlement rather than litigation. From the beginning, Smart World's efforts to prosecute its own claims and to engage in discovery were frustrated.
In October 2000, Smart World applied to the bankruptcy court for retention of special litigation counsel on a contingency basis. Juno opposed the application and instead asked the court for a "standstill agreement," which would allow settlement negotiations to proceed. The court granted Juno's request, giving the parties until November 8, 2000 to come to an agreement. With the acquiescence of Smart World's creditors, Juno deliberately excluded Smart World from the ensuing negotiations.
When the parties failed to settle by November 2000, litigation resumed, and the bankruptcy court approved Smart World's request to retain litigation counsel on a contingency basis. Soon after, Smart World filed its answer and counterclaims7 and commenced discovery. In the meantime, Juno continued to negotiate settlement with Smart World's creditors, without Smart World's participation. Smart World's lawyers had just begun reviewing documents produced by Juno in January 2001 when, according to Smart World, Juno's lawyers told Smart World that a settlement had been reached and immediately terminated all further discovery.
On February 7, 2001, the bankruptcy court held a hearing on the purported settlement at which Smart World's principal creditor, WorldCom, characterized the settlement as a "confidential" agreement between Juno and WorldCom:
I think we need to be fair here. World Com [and Juno] started settlement discussions just with themselves in early December. [Counsel for Juno] had previously uniformly taken the position that [Smart World] has no economic stake and he didn't want to include [Smart World] in any settlement negotiations.
WorldCom's lawyer further asserted:
We don't have a fiduciary duty to anyone else and we don't want to have that handle put upon us. . . . [W]e were not motivated by the merits of the claims. We were motivated by what we see as a deteriorating situation both in this case and at Juno, and we felt a settlement that we could get paid upon quickly was better than nothing. That was our motivating factor. We didn't need discovery because of the way we approached it. Other people may need confirmatory discovery, but that was not our approach to this matter.
Juno's earlier claim that a settlement had been reached proved to be inaccurate; however, promising the bankruptcy court that settlement was imminent, Juno requested another "standstill of the [adversary] litigation," to allow negotiations to continue and to avoid further discovery by Smart World. When the court indicated its intention to grant a thirty-day stay, Smart World argued that the case could not "settle . . . without discovery," to which the court responded that it would allow "discovery as to the settlement proposal only," but "not [as it pertains to] the adversary [proceeding]." The court also expressed its strong preference for settlement and its deep reluctance to allow the adversary suit to continue.
The thirty-day standstill stretched into months. In October 2001, nearly eight months later, with no...
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