In re World Access, Inc.
| Decision Date | 22 April 2005 |
| Docket Number | Bankruptcy No. 01 B 14633.,Adversary No. 02 A 01739. |
| Citation | 324 B.R. 662 |
| Parties | In the Matter of WORLD ACCESS, INC., Debtor. Morton Levine, as Trustee of the World Access Realization Liquidation Trust, Plaintiff. v. Telco Systems, Inc., Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
J. Michael Lamberth, Atlanta, GA, for Debtor.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This Adversary proceeding relates to the Chapter 11 bankruptcy case of World Access Inc. ("World Access" or "Debtor"). The Plaintiff Trustee for the World Access Liquidation Trust seeks to recover state tax refunds received by its former affiliate, Telco Systems Inc. ("Telco" or "Defendant"), contending that they are property of the estate. Telco claims ownership of the refunds, but did not argue that claim or show a legal or contractual basis for it. In the alternative, it asserts a right of setoff and recoupment based on contractual provisions and claims.
Following trial, the Court now makes and enters the following Findings of Fact and Conclusions of Law. For reasons discussed below, judgment will separately be entered for the Plaintiff. In essence, World Access filed returns and paid state taxes on behalf of Telco as it contracted to do so, overpaid such taxes, and wants the refunds that were sent by the state taxing authorities to Telco. Telco has no nor any right to offset or recoup its own claims against those funds or right to those refunds, and must disgorge them.
On September 21, 2004 an Order was entered in World Access' jointly administered bankruptcy case (jointly administered with cases of related companies) confirming a Plan of liquidation. The Plan, effective October 12, 2004, established a Liquidation Realization Trust to liquidate the assets and property of World Access. The Plan designated Morton Levine of Levine & Block in Atlanta, Georgia to serve as the initial Realization Trustee. (Def.'s Ex. 7, § 7.1.) This Adversary was filed preconfirmation by Debtor, but an order was entered herein substituting Morton Levine, as Trustee of the World Access Realization Liquidation Trust, as plaintiff in place of World Access, Inc. (Realization Trustee's Substitution Order, Oct. 19, 2004.) Pursuant to the confirmed Plan, the present Plaintiff is authorized to prosecute this litigation.
The Adversary went to trial on the Amended Complaint, which recites three theories, actually separate counts although not so named. Count I alleges that the tax refunds were property of the estate and requests judgment ordering turnover under 11 U.S.C. § 542. Count II pleads that Telco's receipt of the refunds constituted postpetition transfers due to be returned under 11 U.S.C. §§ 549, 550. Count III alleges that Telco's receipt and use of the tax refunds constituted a conversion of its property.
Telco answered, raising affirmative defenses claiming its ownership rights in the tax refunds; a right of setoff and recoupment; a contractual right of indemnification based on a Stock Purchase Agreement; failure to state a claim; and its right to recover a tax refund received from the State of Massachusetts by it but then paid over by "mistake" to World Access. (Answ. ¶¶ 28-32.)
Telco also asserted a counterclaim seeking the imposition of a constructive trust (Answ. ¶¶ 33-44), but voluntarily dismissed that counterclaim with prejudice. (Order Dismissing Telco's Counterclaim, September 24, 2004.)
The Adversary proceeding was tried, evidence taken, the parties rested. The Court now makes and enters the following Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
Most materials facts were not disputed, and indeed were stipulated to or admitted in proposed Findings of Fact and Conclusions of Law filed by the parties or by Debtor in its Disclosure Statement.
1. World Access, Inc. ("World Access" or "Debtor") is a Delaware corporation with its principal place of business in Atlanta, Georgia.
2. World Access and several related entities filed a Chapter 11 bankruptcy proceeding in this Court. The World Access bankruptcy case and those of the related entities are being jointly administered under Case No. 01 B 14633. (Stip. ¶ 1.)1
3. Prior to filing its petition for relief, World Access manufactured and resold telecommunications equipment. In December of 1998, it reorganized into two separate groups: a Telecommunications Group that provided, among other things, wholesale international long distance service via a combination of its own international network facilities and resale relationships with other long distance service providers; and an Equipment Group that provided, among other things, digital switches, billing and telemanagement systems, and other telecommunications products.
4. Telco Systems, Inc. ("Telco" or "Defendant") was the largest entity in the Equipment Group. (Am. Compl. ¶ 7; Answ. ¶ 7.)
5. Telco is a Delaware corporation with its principal place of business in Foxboro, Massachusetts. It provides telecommunications equipment to telephone service providers and end users. (Garrity Tr. at 99.)2
6. In 1999, World Access adopted a plan to divest itself of the Equipment Group, including Telco. (Pl.'s Post-Trial Findings of Fact ¶ 1; Def.'s Post-Trial Findings of Fact ¶ 1.) World Access entered into discussions with an Israeli technology company, BATM Advanced Communications Limited ("BATM"), regarding a potential sale of Telco.
7. On January 19, 2000, Mr. Robert W. Cleveland, an attorney for BATM, sent a facsimile transmission to Mr. G. Scott Rafshoon, an attorney for World Access (the "Cleveland 1/19/00 Facsimile"). (Stip. ¶ 121; Pl.'s Ex. 24.) The Cleveland 1/19/00 Facsimile provided comments from BATM's counsel to World Access's counsel on a draft stock purchase agreement whereby BATM would purchase all the outstanding stock of Telco. (Stip. ¶ 122.)
8. Section 8.9, entitled "Tax Indemnification" and included in the Cleveland January 19, 2000 Facsimile as Rider 21 A, was drafted by counsel for BATM. (Stip. ¶ 123.)
9. Most of the substance of Section 8.9, entitled "Tax Indemnification" and included in the Cleveland 1/19/00 Facsimile as Rider 21A, after certain modifications resulting from further negotiations between BATM and World Access, became Section 9.8 of the Stock Purchase Agreement when executed. (Stip. ¶ 124.)
10. On or about February 2, 2000, World Access and BATM executed the Stock Purchase Agreement ("SPA"). World Access agreed to sell Telco for $260.8 million in cash and 960,000 shares of BATM stock, which had a value as of closing of $85.482 million. BATM also agreed to purchase all of the issued and outstanding capital stock of Telco and assume approximately $25.692 million in debts. (Stip. ¶ 2; Am. Compl.¶ 9; Answ. ¶ 9; Pl.'s Ex. 1.)
11. World Access and BATM closed the sale of Telco on April 7, 2000 ("Closing Date"). (Stip. ¶ 3.)
12. The SPA refers to World Access as the "Seller," to BATM as the "Buyer," and to Telco as the "Company." (Stip. ¶ 127; Pl.'s Ex. 1.)
13. Telco was not a signatory to the SPA. (Stip.¶ 127.)
14. Under terms of the SPA, World Access and BATM agreed to make a joint Internal Revenue Code Election under § 338(h)(10) of the Internal Revenue Code to treat the stock sale as a deeded asset sale for tax purposes. (Compl. ¶ 11; Anws. ¶ 11; Stip. ¶ 4; Pl's Ex. 1, § 9.38(i).)
15. The SPA required that income taxes for the period up to and including the Closing would be determined on the basis of an interim closing of the books as of the end of the Closing Date, and it specified a formula for any taxes not based on income. (Pl.'s Ex. 1, § 9.8(c)(ii); Stip. ¶ 7.)
16. World Access and BATM agreed to allocate responsibility for the payment of such tax liability of Telco. (Pl's Ex. 1, § 9.8(c)(i).)
17. World Access was to be responsible for the filing of tax returns, extension payments and payment of tax liability for Telco's taxes attributable to periods ending on or before the Closing Date. (Stip. ¶¶ 6, 9; Pl's Findings of Fact ¶ 3; Def.'s Findings of Fact ¶ 3; Pl.'s Ex. 1, § 9.8(d)(i).) This period was from January 1, 2000 through April 7, 2000 ("Stub Period"). (Stip. ¶¶ 14, 22, 45, 53, 72, 80.)
18. BATM was responsible for the filing of tax returns, extension payments, and payment of tax liability for Telco's taxes attributable to periods beginning after the Closing Date. (Stip. ¶ 6; Pl.'s Ex. 1, § 9.8(d)(i).)
19. World Access also agreed to indemnify, defend, and hold harmless BATM and Telco from specified tax claims, deficiencies, demands, or assessments, including defense or settlement costs, and attorneys fees arising before the Closing Date. (Pl.'s Ex. 1, § 9.8(a).)
20. Under the SPA, World Access was to file tax forms on Telco's behalf requesting an extension of the deadlines for filing Telco's tax returns for the Stub Period. World Access filed such extension requests with taxing authorities in the states of Georgia, Pennsylvania, Massachusetts, and New Jersey. (Stip. ¶¶ 17, 43, 70, 103.)
21. World Access also submitted a series of extension payments to satisfy Telco's pre-closing tax liability to taxing authorities of the states of Georgia, Pennsylvania, Massachusetts, and New Jersey. (Stip. ¶¶ 14, 22, 45, 53, 72, 80, and 105.)
22. World Access submitted the extension requests and extension payments after the Closing date. (Stip. ¶¶ 15,16, 73, 74, 106, and 107.)
23. On or about June 22, 2000, World Access submitted Georgia Form IT-560-C (requesting an extension of the time for filing Telco's tax return for the income tax year ending April 10, 2000) to the Georgia Income Tax Division of the Georgia...
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