In re Worldcom, Inc.

• Decision Date: 01 August 2003
• Docket Number: No. 02-13533 (AJG).,02-13533 (AJG).
• Citation: 296 B.R. 115
• Parties: In re WORLDCOM, INC., et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

296 B.R. 115

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

No. 02-13533 (AJG).

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

August 1, 2003.

COPYRIGHT MATERIAL OMITTED

Piper Rudnick LLP, Special Counsel for Debtors, New York City, Timothy W. Walsh, Eric B. Miller, of Counsel.

Daniel P. Taber, Attorney for Bracknell Corporation, by Arthur J. Petrie, Shareholder, Daniel P. Taber, of Counsel, Minneapolis, MN.

MEMORANDUM DECISION AND ORDER GRANTING DEBTORS' OBJECTION TO PROOF OF CLAIM FILED ON BEHALF OF BRACKNELL CORPORATION

ARTHUR J. GONZALEZ, Bankruptcy Judge.

I. Introduction

Before the Court is Debtors' Objection to Proof of Claim of Bracknell Corporation (Claim # 23461) (the "Objection"), filed by WorldCom, Inc. and certain of its direct and indirect subsidiaries (collectively, "WorldCom" or "Debtors") on April 22, 2003. The Objection seeks the disallowance of Bracknell Corporation's ("Bracknell" or the "Company") proof of claim (that is, Claim # 23461, in the amount of $500,000,000, hereinafter the "Claim" or the "Proof of Claim"), filed on its behalf by Arthur J. Petrie (the "Claimant"), a Bracknell shareholder, on January 23, 2003. The Objection asserts that: (i) the Claim is barred by a certain settlement agreement previously entered into by the Settlement Parties (as such term is defined below); and (ii) the Claim should be disallowed because Claimant failed to obtain proper authorization to assert a derivative claim on behalf of Bracknell.¹

Claimant responded by filing its Memorandum Opposing Debtors' Objection to Proof of Claim of Bracknell Corporation (Claim # 23461) (the "Opposing Memorandum"), entered on May 20, 2003. In the Opposing Memorandum, Claimant responds that: (i) the release does not constitute a bar to Claimant's recovery; and (ii) Claimant is authorized to file the Claim pursuant to principles governing shareholder derivative actions. A hearing on the matter was held before the Court on June 3, 2003 (the "June 3rd Hearing").

After due deliberation and for the reasons set forth below, the Objection is granted.

II. Background

Claimant is a shareholder of Bracknell, a Canadian corporation based in Minneapolis, Minnesota. Historically, Bracknell derived approximately 85% of its revenues from its United States operations. Since November 2001 the Company has not maintained active business operations. Claimant asserts that, as a result of accounting irregularities in WorldCom's 1999 and 2000 filings with the Securities and Exchange Commission (the "Fraudulent Statements"), Bracknell was fraudulently induced to complete a merger (the "Merger") with Able Telecom Holding Corp. ("Able"), then the sixth largest broadband infrastructure services provider in the United States, that ultimately drove the Company to insolvency and deprived shareholders of substantial value (the "Merger Inducement Claim").

From May through December 2000, Bracknell negotiated and completed a merger with Able, a Florida corporation. WorldCom, a global communications company, had long been a major shareholder and significant creditor of Able. Pursuant to the Merger, Bracknell capitalized on Able's relationship with WorldCom by negotiating a revised Master Services Agreement (the "MSA"), along with a Commitment Agreement, relating to services performed by Able for WorldCom. The M.S.A. § guaranteed Bracknell and its subsidiaries a minimum yearly revenue of $55 million and at least $390 million over the contract's six-year life. Also driving the Merger was Bracknell's desire to gain control of Adesta Communications ("Adesta"), an Able subsidiary that at the time was a leading developer of fiber optic network services. Bracknell's management believed that the Merger would allow the Company to penetrate new markets and gain access to untapped customers, enhance Bracknell's existing capabilities, and enable the Company to exploit potential synergies between Able and Bracknell. The terms of the Merger were heavily negotiated by senior management of Bracknell, Able and WorldCom over a period extending from May through August 2000. The Merger was publicly announced on August 24, 2000, and it received shareholder approval on December 22, 2000.

By mid-July 2001 Bracknell faced a liquidity crisis. Pursuant to its existing credit facilities (the "Credit Facilities"), Bracknell had a substantial principal payment due to its lenders (the "Banking Group") on July 31, 2001. Bracknell advised Banking Group in early July 2001 that it would be unable to make the principal payment and to continue meeting its basic operating expenses. Banking Group responded by providing Bracknell with a $20 million extension of credit and deferred a scheduled principal payment of $12.5 million until October 31, 2001.

In September 2001, WorldCom alleged default under the M.S.A. § on the part of Bracknell's subsidiaries and significantly reduced its business with them. WorldCom also claimed that Bracknell was in default of certain obligations under the Commitment Agreement and declared such agreement terminated. On October 12, 2001, Bracknell and WorldCom entered into an escrow agreement (the "Escrow Agreement") regarding payments owed to Bracknell pursuant to the M.S.A. § and the Commitment Agreement.

On October 31, 2001, Bracknell was unable to make a principal payment that had come due pursuant to the Credit Facilities. The Banking Group refused to extend further credit to the Company, instead disclosing its intention to declare Bracknell in default of the Credit Facilities and to enforce its security interests. Bracknell's officers and directors resigned on November 1, 2001, and the Company's stock was halted from trading on the Nasdaq National Market the following day. Banking Group proceeded to assume control of Bracknell through a power of attorney contained in the Credit Facilities, and to sell off its operating subsidiaries while they could still be liquidated as going concerns. Within three months Banking Group had sold all of Bracknell's subsidiaries and settled the Company's accounts receivable for cash. By February 2002, Bracknell's corporate headquarters in Minneapolis, Minnesota had been vacated, and Bracknell has not regained management or operational capabilities since that time.

On November 27, 2001, Banking Group, still acting on Bracknell's behalf, and WorldCom (the "Settlement Parties") executed a settlement agreement (the "Settlement Agreement"), pursuant to which the M.S.A. § was terminated and the Commitment Agreement was amended. Although each side alleged that the other had breached the terms of the MSA, the Settlement Agreement stipulated that the $3,524,756 held in escrow pursuant to the Escrow Agreement would be released to Bracknell in consideration of, among other things, a broadly worded mutual release. The release provision (the "Release") contained in the Settlement Agreement provides, in pertinent part, as follows:

In consideration hereof, [Bracknell]...hereby release[s] and forever discharge[s] [WorldCom]...from and against all actions, causes of action, claims, suits, debts, damages, judgments, liabilities, and demands whatsoever, whether matured or unmatured, whether at law or in equity, whether before a local, state or federal court or state or federal administrative agency or commission, and whether now known or unknown, liquidated or unliquidated, that [Bracknell] now [has] or may have had, or thereafter claim[s] to have, on behalf of themselves, or any other person or entity, at any time prior to and including the date of this Agreement, including, without limitation, those relating to or arising out of the MSA, the Merger Agreement, and all claims related to the performance of the Commitment Agreement prior to the date hereof.

On July 21, 2002 and November 8, 2002, WorldCom and certain of its direct and indirect domestic subsidiaries commenced cases under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). Such cases have been consolidated for procedural purposes only and are being jointly administered. Debtors continue to operate their businesses and manage their properties as debtors in possession pursuant to §§ 1107(a) and 1108 of the Bankruptcy Code.

Claimant contends that, prior to the announcement of the Merger, Bracknell had a capitalized net worth in excess of $100 million, and that following Banking Group's liquidation of the Company's assets Bracknell was left with over $250 million in debt. Claimant seeks compensatory and rescissionary damages to restore the value of the Company prior to the Merger.

III. Jurisdiction

The Court has jurisdiction over the Objection pursuant to § 1334(b) of title 28 of the United States Code. The Objection is a core proceeding pursuant to § 157(b) of title 28 of the United States Code. Venue is proper in the Southern District of New York pursuant to § 1408 of title 28 of the United States Code.

IV. Discussion

A. The Release Language Contained in the Settlement Agreement Bars the Claim

Debtors argue that the Settlement Agreement and the Release contained therein effectively bar the Claim, while Claimant asserts that they do not. Since, without contractual releases, the settlement of disputes would be rendered almost impossible, releases "should never be converted into a starting point for renewed litigation except under circumstances and under rules which would render any other result a grave injustice." Jerry's Gen. Contracting Serv., Inc. v. Republic of Philippines, No. 86 Civ. 3266, 1987 WL 16369, at *1 (S.D.N.Y.1987) (citing Mangini v. McClurg, 24 N.Y.2d 556, 301 N.Y.S.2d 508, 513, 249 N.E.2d 386 (1969)). The execution of a release represents a serious contractual undertaking, and policy dictates that the terms contained therein be accorded a strong presumption of validity by the Court. The language of the Settlement Agreement and the Release in the current proceeding is clear and unambiguous and, therefore, in executing the Settlement...