In re Telesphere Communications, Inc.

• Decision Date: 01 April 1994
• Docket Number: Bankruptcy No. 91 B 17581,91 B 19188 and 91 B 19189. Adv. No. 91 A 1136.
• Citation: 167 BR 495
• Parties: In re TELESPHERE COMMUNICATIONS, INC., et al., Debtors. ALMAR COMMUNICATIONS, LTD., et al., Plaintiffs, v. TELESPHERE COMMUNICATIONS, INC., et al., Defendants. The CHASE MANHATTAN BANK, et al., Cross Plaintiffs, Counter Plaintiffs, and Third-Party Plaintiffs, v. ALMAR COMMUNICATIONS, LTD., et al., Third-Party Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

167 B.R. 495 (1994)

In re TELESPHERE COMMUNICATIONS, INC., et al., Debtors.

ALMAR COMMUNICATIONS, LTD., et al., Plaintiffs, v. TELESPHERE COMMUNICATIONS, INC., et al., Defendants.

The CHASE MANHATTAN BANK, et al., Cross Plaintiffs, Counter Plaintiffs, and Third-Party Plaintiffs, v. ALMAR COMMUNICATIONS, LTD., et al., Third-Party Defendants.

Bankruptcy Nos. 91 B 17581, 91 B 19188 and 91 B 19189. Adv. No. 91 A 1136.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

April 1, 1994.

Marcia L. Goldstein, Sean L. McKenna, Weil, Gotshal & Manges, New York City, John Collen, Douglas B. Rosner, Sonnenschein, Nath & Rosenthal, Chicago, IL, for Chase Manhattan Bank.

Andrew T. Fruend, Zukowski, Rogers, Flood & McArdle, Crystal Lake, IL, for Vocall Communications Corp.

Walter J. Cicack, Meyer, Orlando & Evans, Houston, TX, for Capital Savings Corp.

Kevin M. Brill, Kevin M. Brill & Assoc., Chtd., M. Marshall Seeder, Marc Kieselstein, Sachnoff & Weaver, Ltd., Chicago, IL, Jeffrey M. Steinberg, Livingston, NJ, Lawrence F. Flick, II, Blank, Rome, Comisky & McCauley, Philadelphia, PA, for Almar.

Robert Fishman, Patrick S. Munzer, Ross & Hardies, Chicago, IL, for debtors.

MEMORANDUM OF OPINION

EUGENE R. WEDOFF, Bankruptcy Judge.

This adversary proceeding arises in the context of three administratively consolidated Chapter 11 cases; it presents a question of the ownership of money. The debtors were, among other things, middlemen in the 900 number telephone business. They arranged for telephone programs created by "information providers" to be transmitted to local telephone companies, whose customers could then call 900 numbers in order to listen to the programs. The debtors also received payments for the 900 number calls from the local telephone companies, and made payments to the information providers. At the time that orders for relief were entered in these cases, the debtors had not paid the information providers all of the money to which they were entitled. Thereafter, certain information providers brought this adversary proceeding, claiming ownership of the money paid by the local telephone companies to the debtors in connection with 900 number programs. The adversary plaintiffs contend that the debtors held this money merely as agents of the information providers, with no ownership interest. The debtors, in turn, supported by their secured lenders, contend that they obtained both legal and equitable title to the money received from the local telephone companies, and that the information providers are simply unsecured creditors of the debtors' estates. The issue is before the court on cross motions for summary judgment. For the reasons set forth below, the court finds that both legal and equitable title to the 900 number proceeds are held by the estates of the debtors, and grants judgment accordingly.

Jurisdiction

This Court has jurisdiction to hear this adversary proceeding pursuant to 28 U.S.C. § 1334(a), (b), and (d); 28 U.S.C. § 157(a), (b)(1), and (b)(2); and General Rule 2.33 of the United States District Court for the Northern District of Illinois. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A).¹

Findings of Fact

The relevant facts are undisputed and are drawn from the exhibits and statements of undisputed facts submitted by the parties.² In August, 1991, an involuntary bankruptcy proceeding was commenced under Chapter 7 of the Bankruptcy Code (Title 11, U.S.C., "the Code") against Telesphere Communications, Inc. In September, 1991, Telesphere Communications, Inc. converted the involuntary Chapter 7 case to a voluntary case under Chapter 11 of the Code, and its two subsidiaries, Telesphere Network, Inc. and Telesphere Limited, Inc., each filed a voluntary petition for relief under Chapter 11 of the Code. Shortly thereafter, this court entered an order administratively consolidating the three Chapter 11 cases. In November, 1991, plaintiffs instituted this adversary proceeding against the three debtors (collectively referred to as "Telesphere").

General background. This case involves the 900 number telephone business. (Compare IPS ¶¶ 3-4 & 15-18 with TRS ¶¶ 3-4 & 15-18.) "900 number" refers to the dialing prefix used in making the telephone calls involved in this business. (Compare IPS ¶ 6 with TRS ¶ 6.) By placing telephone calls to 900 numbers, customers of local telephone companies can receive information and entertainment programs created by "information providers" — or "IPs" — and pay for these programs through a per call charge on their regular telephone bills. (IPRS ¶¶ 24-25, 29-30 & 33-34; compare IPS ¶¶ 6-11 & 16 with TRS ¶¶ 6-11 & 16.)

The plaintiffs in the pending proceeding are information providers. (Compare IPS ¶ 4 with TRS ¶ 4.) They developed, promoted, and set prices for telephone programs which they intended to distribute to the public through the use of 900 numbers. (IPRS ¶ 25; compare IPS ¶¶ 4 & 30 with TRS ¶¶ 4 & 30.) In order to make their programs available nationwide, the IPs needed access to telecommunication networks in addition to the one provided by the telephone company which supplied services for the region in which they were located. (IPRS ¶ 29; see also IPS May Exhibits, Group Exhibit B (Letter of Agency Affidavits), ¶¶ 2-3.) They could obtain such access through "interexchange carriers." (IPRS ¶ 29; see also IPS May Exhibits, Group Exhibit B (Letter of Agency Affidavits), ¶¶ 2-4.)

Telesphere was an interexchange carrier. (Compare IPS ¶¶ 3 & 7 with TRS ¶¶ 3 & 7.) It served as an intermediary between IPs and local telephone companies in two respects. First, it supplied the switching and transmission services — known as "access services" — which linked the IPs with the telecommunications networks of local telephone companies located throughout the United States. (See IPRS ¶ 29; see also IPS May Exhibits, Group Exhibit B (Letter of Agency Affidavits), ¶¶ 2-4; compare IPS ¶¶ 7 & 16 with TRS ¶¶ 7 & 16.) This link allowed the customers of local telephone companies throughout the country to receive the IPs' programs by dialing the appropriate 900 number. (IPRS ¶ 29; compare IPS ¶¶ 3, 7 & 16 with TRS ¶¶ 3, 7 & 16.) Second, it arranged for "billing and collection" services, receiving payment from local telephone companies — based on the 900 number calls made by their customers — and, in turn, making payments to the IPs based on these calls. (IPRS ¶ 30; compare IPS ¶¶ 6-11 & 16 with TRS ¶¶ 6-11 & 16.) In one promotional brochure directed to IPs, Telesphere described this aspect of its services by stating that it would "handle all the billing . . . from collecting fees to sending your revenues" (ellipsis in original). (See IPRS ¶ 30; see also T April Exhibits, Appendix A, Tab 36, Page ACH 35477.)

Documentation of the business relationship. There are only a few documents that defined the relationship between Telesphere and the IPs. In connection with providing access services, Telesphere regularly submitted to the IPs a "Letter of Agency." (See IPRS ¶¶ 102 & 106 sic: ¶¶ 103 & 106; see also IPS May Exhibits, Group Exhibit B (Letter of Agency Affidavits); compare IPS ¶ 20 with TRS ¶ 20.) That letter, which called for execution by the IP, read, in pertinent part, as follows:

Effective immediately, IP name has appointed Telesphere, with offices at Two Mid America Plaza, Suite 500, Oak Brook Terrace, IL 60181, as our authorized agent for matters pertaining to our telephone systems and services provided by your company.

The scope of this agency shall include, but not be limited to, the ordering or rearrangement of services, assignment of primary interexchange carrier, service requests, disconnection of service and requests as indicated below. This authorization is not exclusive and shall not supersede our own authority or that of any other authorized agents which have been named in the past and whose agency authorization have sic neither expired nor been rescinded.

(IPRS ¶ 102 sic: ¶ 103; see also IPS April Exhibits, Group Exhibit E (Letters of Agency).)

Telesphere's billing and collection practices were announced to the IPs in a series of "revenue policies" that were periodically issued, and unilaterally revised, by Telesphere. (Compare IPS ¶ 33 with TRS ¶ 33; see also IPS April Exhibits, Exhibits F-I (Revenue Policy).) The Revenue Policy revised July 1, 1990 is typical of the series. (Compare IPS April Exhibits, Exhibit I (Revenue Policy) with IPS April Exhibits, Exhibits F-H (Revenue Policy).) This policy provided in pertinent part:

(1) that Telesphere would remit the "net proceeds of 900 billings to the Information Provider on a calendar month basis sixty days after the close of the month";

(2) that Telesphere would provide two sets of reports to each IP: first, 30-day reports setting forth the amounts that Telesphere submitted for billing in the preceding month to the local telephone companies for calls made to the IP's numbers, together with the service charges assessed by Telesphere; and second, 60-day reports, accompanying payment to the IP, again setting forth total billing and service charges, but also reporting an "Uncollectible Account Summary";

(3) that Telesphere would initially estimate the percentage of customer billings that would not be collected by the telephone companies according to a sliding scale, based on the average revenue per call; and

(4) that Telesphere would adjust the uncollectible rate "to the actual rate of uncollectibles as information is received from the various telephone companies." (IPS April Exhibits, Exhibit I (Revenue Policy).)

The Revenue Policies also made certain additional disclosures to the IPs. Those disclosures included Telesphere's express reservation of the right to adjust the "Uncollectible Rate" (or "Uncollectible Factor") and its right to enter into contracts "with the various serving telephone companies, independent billing companies and outside collection agencies, when permitted, to...