In re Western Integrated Networks, LLC

• Decision Date: 24 March 2005
• Docket Number: Bankruptcy Case No. 02-13043 EEB. Adversary Proc. No. 04-1330 MER.
• Citation: 322 B.R. 156
• Parties: In re WESTERN INTEGRATED NETWORKS, LLC, et al., Debtors. Tom H. Connolly, as liquidation trustee of the Consolidated WIN Liquidating Trust, Plaintiff, v. The City of Houston, Texas, Defendant. City of Houston, Texas, Counter-Plaintiff, v. Tom H. Connolly, as liquidation trustee of the Consolidated WIN Liquidating Trust, Counter-Defendant.
• Court: U.S. Bankruptcy Court — District of Colorado

322 B.R. 156

In re WESTERN INTEGRATED NETWORKS, LLC, et al.,¹ Debtors.

Tom H. Connolly, as liquidation trustee of the Consolidated WIN Liquidating Trust, Plaintiff, v. The City of Houston, Texas, Defendant.

City of Houston, Texas, Counter-Plaintiff, v. Tom H. Connolly, as liquidation trustee of the Consolidated WIN Liquidating Trust, Counter-Defendant.

Bankruptcy Case No. 02-13043 EEB. Adversary Proc. No. 04-1330 MER.

United States Bankruptcy Court, D. Colorado.

March 24, 2005.

J. Brian Fletcher, Denver, CO, for Plaintiff/Counter-Defendant.

Amber Donner, Denver, CO, Bruce H. White, Greenberg Traurig, LLP, William L. Medford, Dallas, TX, for Defendant/Counter-Claimant.

ORDER

MICHAEL E. ROMERO, Bankruptcy Judge.

THIS MATTER comes before the Court on cross-motions to dismiss filed by the Defendant/Counter-Plaintiff, City of Houston, Texas ("Houston") and the Liquidating Trustee of the Consolidated WIN Liquidating Trust, Tom H. Connolly (the "Liquidating Trustee"). The motions were filed under Fed.R.Civ.P. 12(b)(6), made applicable to adversary proceedings by Fed. R.Bankr.P. 7012. The Court has jurisdiction over this matter under 28 U.S.C. § 1334(a) and (b) and 28 U.S.C. § 157(a) and (b)(1). This Adversary Proceeding constitutes a core action under 28 U.S.C. § 157(b)(2)(A), (E), (F) and (H). The Court has considered the pleadings and legal arguments presented by the parties and hereby makes the following findings of fact and conclusions of law.

I. BACKGROUND FACTS²

The joint Chapter 11 Debtors (collectively "WIN") were service providers of cable television, broadband internet, and local and long distance telephone to residential consumers and small businesses. On March 11, 2002, all but two of the Debtors filed Chapter 11 petitions. The remaining Debtors, WIN of Colorado Purchasing Company and WIN of Dallas Purchasing Company, filed Chapter 11 petitions on June 20, 2002. The Court approved joint administration of the cases on July 5, 2002. The Court confirmed the Debtors' Second Amended Joint Liquidating Chapter 11 Plan (the "Chapter 11 Plan"), on November 10, 2003. Pursuant to the confirmed plan, each of the Debtor entities was consolidated into the case of Western Integrated Networks, LLC ("WIN LLC"), and all property of each estate became the Estate of the consolidated WIN LLC. Complaint to Avoid and Recover Preferential and Fraudulent Transfer and to Recover Property of the Estate (the "Complaint"), at p. 1, n. 2; Order (A) Confirming Second Amended Joint Liquidating Chapter 11 Plan Proposed by Debtors and the Official Unsecured Creditors' Committee, Dated August 6, 2003 and (B) Establishing Administrative Claims Bar Date (the "Confirmation Order"), ¶ 4, p. 7. Simultaneously, title to all the assets and property of the consolidated WIN LLC was transferred to a newly created Consolidated WIN Liquidating Trust (the "Trust"). Confirmation Order, ¶ 5, p. 7. The Liquidating Trustee was appointed as the trustee of the Trust and given those powers specifically set forth in the Chapter 11 Plan and 11 U.S.C. ¶ 1142. Confirmation Order, ¶ 6, p. 7.

On August 16, 2000, Houston granted a franchise to Western Integrated Networks of Texas Operating, L.P. ("WIN-TX") for the development of a cable television system within that city (the "Franchise Agreement").³Complaint, ¶ 8. Under the Franchise Agreement, WIN-TX was required to pay Houston a quarterly fee equal to five percent of its annual gross revenues (the "Franchise Fees"). Complaint, ¶ 9. In addition, the Franchise Agreement required WIN-TX to pay a cash deposit of $1 million as a prepayment of the Franchise Fees. Complaint, ¶ 10. On or about August 23, 2000, WIN-TX satisfied the prepayment requirement. Complaint, ¶ 11. Thereafter, the parties agreed to amend the Franchise Agreement, as consideration for which Houston deducted $64,500 from the $1 million prepayment.⁴Complaint, ¶ 2.

The Liquidating Trustee filed his Complaint on March 10, 2004. The Complaint seeks recovery under four claims. First, it alleges the $64,500 constitutes a preferential transfer under 11 U.S.C. § 547(b). Second, it asserts the $64,500 was a fraudulent transfer pursuant to 11 U.S.C. § 548(a)(1)(B). Third, the Complaint maintains the $64,500 is a fraudulent transfer under 11 U.S.C. § 544(b)(1) and § 24.005 of the Tex. Bus. & Comm.Code. Finally, the Complaint requests turnover of the $1 million pursuant to 11 U.S.C. § 542(a).

In its answer and counter-complaint, Houston denies the Liquidating Trustee has standing to bring this action, and further denies it still holds $935,500 of the $1 million transfer, stating such funds were recouped against capital contributions owed to Houston under the parties' Franchise Agreement. Defendant, City of Houston's Original Answer to Complaint, Motion to Dismiss and Counter Complaint for Declaratory Relief (the "Houston Answer/Dismissal Motion") ¶ 43, 44 and 45(a) and (b). Alternatively, Houston states it is entitled to offset the $1 million pre-payment against funds due from WIN-TX under the Franchise Agreement, which transferred legal and equitable title and terminated any property interest of WIN-TX, Houston Answer/Dismissal Motion ¶ 45(d) and (e). In addition, Houston states the Trustee is no longer entitled to turnover of the property because the Court has confirmed the Chapter 11 Plan, and the Estate was only entitled to turnover during the pendency of the case, and then only to the extent the Debtors could use, sell or lease the subject property under 11 U.S.C. § 363. Houston Answer/Dismissal Motion ¶ 45(c).

Houston also filed a counter-complaint (the "Counterclaims"), seeking declaratory judgments that (1) all of the Debtors' legal and equitable title to the Franchise Agreement and the pre-payment were sold to a third party, SureWest Communications in July, 2002, and therefore the Trust has no legal or equitable interest in either the Franchise Agreement or the pre-payment; (2) to the extent the Trust retained any interest in the Franchise Agreement or pre-payment, Houston appropriately exercised its recoupment rights with a net amount due from the bankruptcy estates of $64,500; and (3) any interest the Debtors held in the pre-payment and Houston's interest in the first capital contribution are mutual, valid debts and Houston is entitled to offset the pre-payment against the first capital contribution.

II. DISCUSSION

A. The Cross-Motions to Dismiss shall be determined under Rule 12 rather than Rule 56.

On a motion to dismiss for failure to state a claim for relief under Rule 12(b)(6), the Court may consider only the facts stated on the face of the complaint, the documents attached to the complaint or incorporated therein, and matters of which the Court may take judicial notice. Automated Salvage Transport, Inc. v. Wheelabrator Environmental Systems, Inc., 155 F.3d 59, 67 (2nd Cir.1998). Pursuant to Rule 12(b), if a motion to dismiss for failure to state a claim presents matters outside the pleadings which are not excluded by the Court, "the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all materials made pertinent to such a motion by Rule 56." Rule 12(b)(6). Under Rule 12(b)(6), the Court has complete discretion to accept or not accept any materials beyond the pleadings. 5A Wright and Miller, Federal Practice and Procedure § 1366 (2d Ed.1990).

In their respective pleadings, the Liquidating Trustee and Houston have both made allegations and attached exhibits outside the four corners of the Complaint, i.e., the Liquidating Trustee's exhibits pertaining to the SureWest Communications sale and the franchise bond, and Houston's reference to the SureWest Asset Purchase Agreement. The Court believes these extraneous materials may eventually be relevant to the ultimate resolution of the issues in this Adversary Proceeding. However, the Court cannot currently accept the extraneous materials because they lack affidavits or other verifications of authenticity. Therefore the Court will not consider any materials beyond the pleadings and matters of which it may take judicial notice and will treat the cross-motions pursuant to Rule 12 rather than Rule 56.

B. The Merits of the Motions to Dismiss.

1. The Liquidating Trustee's First and Second Claims Pursuant to §§ 547 and 548.

Houston argues the Liquidating Trustee's claims must fail for lack of standing. Houston Answer/Dismissal Motion, § 45.a.⁵ The Liquidating Trustee rejects this argument citing to the provisions of the Chapter 11 Plan and Confirmation Order defining his duties and powers. Chapter 11 Plan, Article 8, ¶¶ B and C. He further argues the Debtor expressly reserved jurisdiction over the type of claims raised in this Adversary Proceeding when it confirmed the Chapter 11 Plan, citing Article 11 of that document. Trustee's Objection to City of Houston's Motion to Dismiss, ¶ 13.

Article 11 of the Chapter 11 Plan specifically provides that "the Liquidating Trustee shall have the right to commence adversary proceedings to enforce any claim or interest belonging to Consolidated WIN, including any claims or interests arising under Sections 547 through 551 of the Bankruptcy Code." The initial issue which must be addressed is whether this provision adequately reserves the Liquidating Trustee's right to assert the claims raised in his Complaint.

The ability of a party to enforce a claim once held by the bankruptcy estate is limited to that which is retained under the terms of a confirmed chapter 11 plan. See 11 U.S.C. § 1123(b)(3); In re Pen Holdings, Inc., 316 B.R. 495, 500-501 (Bankr.M.D.Tenn.2004). A chapter 11 plan is a contract between a debtor and the creditors of the bankruptcy estate. In re Lacy, 304 B.R. 439, 444 (D.Colo.2004) (citing In re Ernst, 45 B.R. 700, 702 (Bankr.D.Minn.1985)). As such, it must be interpreted according to the general rules for contractual...