In re Worldcom, Inc.

• Decision Date: 26 February 2009
• Docket Number: No. 02-13533 (AJG).,02-13533 (AJG).
• Citation: 401 B.R. 637
• Parties: In re WORLDCOM, INC., et al., Reorganized Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

Page 637

401 B.R. 637

In re WORLDCOM, INC., et al., Reorganized Debtors.

No. 02-13533 (AJG).

United States Bankruptcy Court, S.D. New York.

February 26, 2009.

COPYRIGHT MATERIAL OMITTED

Stinson Morrison Hecker LLP, Mark A. Shaiken, Esq. of Counsel, Kansas City, MO, Special Counsel for Reorganized Debtors.

Kilpatrick Stockton LLP, Todd C. Meyers, Esq., Colin M. Bernardino, Esq. of Counsel, Atlanta, GA, Attorneys for Elliott D. Levin, Chapter 7 Trustee of OneStar Long Distance, Inc.

OPINION REGARDING MOTION OF REORGANIZED DEBTORS TO ENFORCE PLAN AND CONFIRMATION ORDER AGAINST CHAPTER 7 TRUSTEE OF ONESTAR LONG DISTANCE, INC.

ARTHUR J. GONZALEZ, Bankruptcy Judge.

I. INTRODUCTION

Before the Court is the motion of reorganized debtors, WorldCom, Inc. and its subsidiaries (collectively, "WorldCom" or the "Reorganized Debtor"), to enforce the Debtors' Modified Second Amended Joint Plan of Reorganization (the "WorldCom Plan") and WorldCom confirmation order (the "WorldCom Confirmation Order") against Elliot D. Levin, the Chapter 7 Trustee (the "OneStar Trustee") for OneStar Long Distance, Inc. ("OneStar").¹

II. JURISDICTION

The Court has subject matter jurisdiction over this proceeding pursuant to §§ 1334 and 157(b) of title 28 of the United States Code, the July 10, 1984 "Standing Order of Referral of Cases to Bankruptcy Judges" of the United States District Court for the Southern District of New York (Ward, Acting C.J.), and paragraph 32 of the WorldCom Confirmation Order confirming the WorldCom Plan under chapter 11 of title 11 of the United States Code.² This matter is a core proceeding pursuant to § 157(b)(2)(B) of title 28 of the United States Code. Venue is proper before the Court pursuant to §§ 1408 and 1409 of title 28 of the United States Code.

It is not contested that OneStar received notice of the WorldCom bankruptcy case and proceedings and was served with all relevant materials relating to the WorldCom Plan and corresponding disclosure statement. Further, OneStar filed five timely proofs of claim in the WorldCom bankruptcy case.

III. BACKGROUND

On July 21, 2002, and continuing thereafter, WorldCom, Inc. and certain of its subsidiaries filed for bankruptcy under chapter 11 of the Code in the United States Bankruptcy Court for the Southern District of New York. By orders dated July 22, 2002 and November 12, 2002, the chapter 11 cases were consolidated and jointly administered for procedural purposes. Thereafter, the Debtor continued to operate its businesses and manage its properties as a debtor in possession pursuant to §§ 1107(a) and 1108 of the Code. On October 31, 2003, the Court signed the WorldCom Confirmation Order (the "WorldCom Confirmation Order Date"). The WorldCom Plan became effective on April 20, 2004 (the "WorldCom Effective Date").³ Upon the WorldCom Effective Date, WorldCom changed its name to MCI, Inc. On January 6, 2006, MCI, Inc. merged with Verizon Communications, Inc. ("Verizon") and under the merger agreement, Verizon, among other things, assumed the liabilities of MCI, Inc. MCI, Inc. is now doing business as Verizon Business Global, LLC.

Between the WorldCom Confirmation Order Date and WorldCom Effective Date, on December 31, 2003 (the "OneStar Petition Date"), certain creditors of OneStar filed an involuntary chapter 7 bankruptcy petition against OneStar in the United States Bankruptcy Court for the Southern District of Indiana (the "Indiana Bankruptcy Court"). An order for relief was entered on February 3, 2004 converting OneStar's involuntary chapter 7 case to a voluntary case under chapter 11 of the Code. After substantially all of its assets were sold, OneStar's chapter 11 case was converted back to a case under chapter 7 of the Code on January 13, 2005. An interim trustee was appointed on January 13, 2005. On February 10, 2005, the OneStar Trustee was elected.

Before and after the OneStar Petition Date, a WorldCom subsidiary, MCI, provided OneStar with telecommunications services pursuant to various telecommunications services agreements, for which OneStar paid WorldCom, and which OneStar resold to its customers. All payments for such services were received by WorldCom after WorldCom filed its petition.⁴ On August 16, 2005, the OneStar Trustee commenced an adversary proceeding (the "Adversary Proceeding") against WorldCom in the Indiana Bankruptcy Court seeking the avoidance and recovery of certain transfers under §§ 547, 549, and 550 of the Code that OneStar made to WorldCom during the 90-day period prior to the OneStar Petition Date. Upon motion by WorldCom, the Adversary Proceeding was stayed by the Indiana Bankruptcy Court pending resolution of its motion to enforce the WorldCom Plan before the Court. The Adversary Proceeding asserts that payments received by WorldCom are avoidable by the OneStar Trustee as preferential and unauthorized postpetition transfers under §§ 547 and 549, respectively, of the Code, and seeks to recover those transfers for the benefit of the OneStar estate. Of these transfers, the OneStar Trustee asserts that WorldCom received $981,242.95 after the commencement of WorldCom's case, during the OneStar preference period and before the WorldCom Confirmation Order Date, and $1,490,615.07 was received during the OneStar preference period and between the WorldCom Confirmation Order Date and WorldCom Effective Date. Further, the OneStar Trustee seeks to avoid $100,000.00 that was received by WorldCom between the OneStar Petition Date and the WorldCom Effective Date.⁵

At a hearing held on May 20, 2008, the Court directed the parties to file supplemental briefs addressing the issue of whether the OneStar Trustee is bound by the terms of the WorldCom Plan under the principles of res judicata. (Tr. 3:3-11, May 20, 2008, Case No. 02-13533, Docket No. 19330.) Specifically, the parties were to address whether a bankruptcy trustee seeking to pursue an avoidance action is bound by the notice of the confirmation order that the debtor received in another bankruptcy case, when the debtor received the notice before it became a debtor by its filing of a bankruptcy case while it was a creditor in that other bankruptcy case.⁶ Id. The parties submitted their respective briefs, with the final brief being filed on July 28, 2008. No further hearing was held.

IV. THE PARTIES' CONTENTIONS

a. WorldCom's Arguments

WorldCom argues the OneStar Trustee violated the Court's discharge injunction by knowingly commencing the Adversary Proceeding seeking to avoid transfers made prior to the effective date of the WorldCom Plan. WorldCom asserts that these claims, which arose prior to the WorldCom Effective Date, were discharged by the WorldCom Plan, the WorldCom Confirmation Order and under the Code. Therefore, it argues that any assertion of such claims had to be brought as an administrative expense claim request in this Court within the applicable statute of limitations, in OneStar's bankruptcy case, under § 546(a).⁷

WorldCom also argues that the OneStar Trustee had notice of WorldCom's bankruptcy proceeding but refused to dismiss the Adversary Proceeding and file an request for an administrative expense claim in WorldCom's chapter 11 case, or seek relief from the discharge injunction to proceed with the Adversary Proceeding. WorldCom asserts that since litigating the Adversary Proceeding violated the discharge injunction, it is void. WorldCom seeks an entry of an order directing the OneStar Trustee to dismiss the Adversary Proceeding. Further, WorldCom argues that since the filing of the Adversary Proceeding was void, any subsequent filing of the avoidance action, although not barred by an administrative bar date — since none was set, nevertheless would be subject to dismissal because of the statute of limitations in the OneStar case for filing avoidance actions under § 546(a) has expired.

b. The OneStar Trustee's Arguments

The OneStar Trustee argues that since the OneStar estate's causes of action arose postpetition in WorldCom's case, they do not fit the definition of a "claim" as provided by the WorldCom Plan and were not discharged by the WorldCom Plan. The OneStar Trustee contends that since the claims in the Adversary Proceeding do not fit the WorldCom Plan's definition of a claim, he is not enjoined under the WorldCom Plan or the WorldCom Confirmation Order from prosecuting the Adversary Proceeding. Further, he contends that even if the avoidance actions fall within the definition provided for by the WorldCom Plan, § 1141(d) does not permit a plan to discharge post-confirmation/pre-effective date claims. Therefore, such a provision providing for the discharge of post-confirmation/pre-effective date claims would violate § 1129(a)(1)⁸ and be unenforceable.

V. DISCUSSION

a. Post-Confirmation/Pre-Effective Date Claims

Article I, § 1.25 of the WorldCom Plan defines claim as having "the meaning set forth in section 101 of the ... Code." Citing LTV Steel Co. v. Shalala (In re Chateaugay Corp.), 53 F.3d 478 (2d Cir. 1995), the OneStar Trustee asserts that only a prepetition claim is a claim under the Code because "[h]owever broadly `claim' is understood, it is clear that the existence of a valid bankruptcy claim depends on (1) whether the claimant possessed a right to payment, and (2) whether that right arose before the filing of the petition." Id. at 497. The Court finds that the OneStar Trustee interprets the term "claim" too narrowly.

Contrary to the OneStar Trustee's argument, LTV does not stand for the proposition that only a prepetition claim is a claim under the Code. The Second Circuit did not hold that a right to payment arising postpetition is not a claim under the Code.⁹ Rather, the Second Circuit discussed that a valid claim arises prepetition in the context of requiring creditors with prepetition claims to file a "proof of claim." See id. at 496. In that context, the claim for which a "proof of claim" is filed is a prepetition one. Comparatively, a...