In re South Canaan Cellular Investments, Inc., 09-10473bf

Citation427 B.R. 44
Decision Date25 March 2010
Docket Number09-10474bf.,No. 09-10473bf,09-10473bf
PartiesIn re SOUTH CANAAN CELLULAR INVESTMENTS, INC. & South Canaan Cellular Equity, LLC, Debtors.
CourtUnited States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

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Gretchen M. Santamour, Julie M. Murphy, Stradley Ronon Stevens & Young, LLP, Michael L. Temin, Fox Rothschild LLP, Philadelphia, PA, for Debtors.

Kevin P. Callahan, United States Trustee, Dept. of Justice, Philadelphia, PA, for U.S. Trustee.

MEMORANDUM OPINION

BRUCE FOX, Bankruptcy Judge.

The above-captioned chapter 11 debtors seek confirmation under 11 U.S.C. § 1129(b) of their jointly filed second amended chapter 11 plan dated September 28, 2009. Confirmation is opposed by secured creditor Lackawaxen Telecom, Inc. ("LTI"). Although LTI raises numerous confirmation objections, its opposition to the debtors' jointly proposed plan may be summarized thusly: that the only viable chapter 11 plan for these debtors requires the prompt sale of a limited partnership, in which these debtors are two of the four limited partners. LTI contends that the jointly proposed plan does not assure a prompt sale of the limited partnership sufficient to pay LTI's secured claim in full, with interest. The debtors counter that LTI has misconstrued the terms of their proposed plan and that a prompt sale that will repay LTI in full is indeed the main component of their plan, and that such a sale shall occur within one year.

Upon review of the evidence presented at the confirmation hearing that took place over three days, I make the following factual findings.

I.
A.

South Canaan Cellular Communications Co., LP, d/b/a Cellular One of Northeast Pennsylvania ("SCCCC, LP") is a limited partnership that provides wireless communications services in Pennsylvania Rural Service Area 5 located in Pike and Wayne Counties, Pennsylvania. It holds a cellular B-side FCC license. 1 N.T., at 51. SCCCC, LP has four limited partners: South Canaan Telephone Co. ("SCTC") holds a 10.2% limited partnership interest; South Canaan Cellular Telephone Co., DE ("SCCTC"), a wholly-owned subsidiary of U.S. Cellular, 1 N.T., at 16, which is in turn a subsidiary of TDS Telecommunications Corp., 1 N.T., at 6, holds a 49% limited partnership interest1; debtor South Canaan Cellular Equity, LLC ("SCCE") holds a 39.8% limited partnership interest; and finally debtor South Canaan Cellular Investments, LLC ("SCCI") is the general partner of SCCCC, LP and holds a 1% limited partnership interest. See exs. D-5; D-10, at 8-9; 1 N.T., at 50-51.

The limited partnership was reconstituted in October 2000, via a restated and amended partnership agreement that is governed by the Delaware Revised Uniform Limited Partnership Act. Exs. D-2; LTI-1 (tab 3A, 3B). Among the provisions of the partnership agreement relevant to this confirmation dispute are: Article 6 (limited partnership distributions); Article 7 (rights and powers of the partners, including the general partner); and Article 8 (transfers of partnership interests). Of particular relevance is § 8.5:

At any time after October 1, 2005, SCCTC, its successors and assigns, shall have the right to purchase, and the General Partner and the other Limited Partners shall have the right to sell to SCCTC, its successors and assigns, all of the Partnership Interests in the Partnership of the General Partner and the other Limited Partners....

The balance of § 8.5 concerns the mechanism of determining the purchase price to be paid by SCCTC for this "put and call" provision.

The two debtors are limited liability companies formed in 2000 under the Delaware Limited Liability Company Act. Ex. LTI-1 (tabs 1, 2). The debtors have identical members, 1 N.T. at 49, which the debtors have placed into four groups: Edwards Group (43.3%); Coughlin Group (30.8%); Cook Group (25.5%); and Miller Group (0.4%). Ex. D-4. Ms. Carolyn Copp, listed as an interest holder in the Cook Group, is the president of both debtors and serves on their management committees. 1 N.T. at 48. She is also the president of SCCCC, LP, 1 N.T., at 51, and chairman and chief executive officer of SCTC. Ex. LTI-1 (tab 5C). Mr. Frank Coughlin, an interest holder in the Coughlin Group, is the president of LTI. 3 N.T., at 87.

The debtors' schedules list about $19,000 in assets for each debtor, aside from the value of their partnership interests in SCCCC, LP. Exs. LTI-1 (tabs 8A-9A). Most of the value of the debtors' non-partnership assets stems from their interests in "CoBank participation certificates." Id. SCCTC has no assets besides its limited partnership interest. 1 N.T., at 47.

The seeds of the present dispute were planted in October 2000, when SCCI and SCCE entered into a loan agreement with CoBank, ACB, eventually borrowing around $7.5 million to purchase their partnership interests in SCCCC, LP, as well as working capital. Exs. LTI-1 (tabs 4A-4C); D-10, at 9-10. In addition to obtaining a security interest in both debtors' assets, ex. LTI-1 (tabs 4D-4H), CoBank also received partnership-interest pledge agreements from each of the debtors. Ex. LTI-1 (tabs 5A-5B). Moreover, it obtained a similar pledge agreement from non-debtor SCTC. Ex. LTI-1 (tab 5C). These pledge agreements stated, in part:

Upon the occurrence and during the continuance of an Event of Default and subject to the provisions of Section 13 of this Pledge Agreement, all rights of the Pledgor to exercise its voting, consensual and other powers of ownership pertaining to the Collateral with Collateral having been previously defined to include partnership interests shall become vested in the Secured Party upon two day's prior written notice from Secured Party to Pledgor and the Pledged Partnership, and thereupon Secured Party shall have the sole exclusive authority to exercise such voting, consensual and other powers of ownership which Pledgor shall otherwise be entitled to exercise....

Ex. LTI-1 (tabs 5A § 4; 5B § 4; and 5C § 4). An event of default under the pledge agreements included non-payment of the CoBank promissory note.

In April 2001, a loan agreement was signed wherein SCTC consented to use all partnership distributions it thereafter obtained from SCCCC, LP toward the repayment of the CoBank loan obligation, since assigned to LTI. See ex. LTI-2 (tab 19) (letter agreement dated April 10, 2001 between SCTC and the two debtors); see also 1 N.T., at 58.2

The debtors have also scheduled undisputed, unsecured loan obligations owed to SCTC in the amounts of $8,785.04 for SCCI (ex. LTI-1 tab 8D) and $349,644.47 for SCCE. Ex. LTI-1 (tab 9D); see also ex. LTI-2 (tab 19) (loan in the amount of $254,986.22 on Dec. 31, 2007 accruing interest at 6%). In addition, they scheduled undisputed, unsecured obligations owed to SCCCC, LP in the amounts of $2,814.11 for SCCI and $112,001.71 for SCCE. Ex. LTI-1 (tabs 8D and 9D); see also ex. LTI-2 (tab 19).3

On May 1, 2003, CoBank gave written notice that the debtors were in default in their loan payments. Ex. LTI-1 (tab 6). CoBank, however, did not give written notice that it was exercising its rights under the pledge agreements; nor did it undertake any other collection efforts. Ex. D-10, at 12. In October 2007, CoBank assigned its secured loan interests to LTI. Id. On January 23, 2009, LTI provided written notice to the debtors, SCTC and SCCCC, LP that the May 2003 loan default remained outstanding and that LTI was exercising its rights under section 4 of the three pledge agreements.4 The January 23rd notice further stated that LTI intended to commence state court litigation (in Colorado, as permitted by loan documents) to "confirm" its rights under the pledge agreements. Ex. LTI-1 (tab 7).

On January 23, 2009, LTI commenced litigation in Colorado state court against the two debtors (SCCI and SCCE) as well as against SCTC. Ex. D-24. In its complaint, LTI sought monetary damages for breach of the loan agreements, as well as a declaration of its rights under section 4 of the pledge agreements. Id. After that litigation was filed, but before the expiration of the two-day period provided in section 4 of the pledge agreements, on January 25, 2009, SCCI and SCCE filed voluntary petitions in bankruptcy under chapter 11. See 1 N.T., at 54. These bankruptcy filings stayed the Colorado litigation as to the debtors, but not as to SCTC. The debtors and LTI agree that the Colorado litigation against SCTC is still pending.

LTI timely filed a secured proof of claim in both bankruptcy cases. (Docketed as proofs of claim # 3.) LTI therein asserts that $13,534,231.78 is owed jointly by SCCI and SCCE. The debtors have commenced an adversary proceeding against Mr. Coughlin and LTI. As to the latter, they have also filed an objection to the secured proofs of claim. For purposes of this confirmation dispute, the proposed joint plan provides in ¶ 2.22 that LTI, as a creditor, will be treated as though it holds secured claims in the amounts it has asserted in its proofs of claim "for the limited purposes of determining feasibility of the Plan and for allowing LTI to vote on the Plan...." Exs. D-1, LTI-1 (tab 11). For plan distribution purposes, however, LTI will also receive payment on its secured claims after the debtors' objection has been determined and its claim is allowed.

B.

As mentioned earlier, SCCCC, LP is a telecommunications company providing wireless services to customers in a rural portion of northeastern Pennsylvania. It has 26 cell sites, of which five are owned and the balance are leased. Ex. D-25, at 45. As of September 2009, it had 7,066 subscribers. Id., at 46. As of October 2009, SCCCC, LP valued its tangible and intangible assets at about $30 million, of which more than $8,700,000 was in cash, and its liabilities at only about $2 million. Ex. D-18. Its gross revenues have increased from roughly $10 million in 2007 to more than $16.5 million anticipated...

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