In re Worldcom, Inc.

Decision Date27 April 2004
Docket NumberNo. 02-13533(AJG).,02-13533(AJG).
Citation308 B.R. 157
PartiesIn re WORLDCOM, INC. et al., Debtors.
CourtU.S. Bankruptcy Court — Southern District of New York

Engelman Berger, P.C., Phoenix, AZ, David Wm. Engelman, Steven N. Berger, Richard Koral, Kevin M. Judiscak, of counsel, Richard L. Koral, New York City, for HSG/ATN.

Weil, Gotshal & Manges LLP, New York City, Marcia Goldstein, Lori Fife, Alfredo R. Perez, Christopher Marcus, Kristin King, of counsel, for Debtors and Debtors-In Possession.

MEMORANDUM DECISION AND ORDER REGARDING MOTION FOR ALLOWANCE AND PAYMENT OF ADMINISTRATIVE CLAIM BY HSG/ATN, INC.

ARTHUR J. GONZALEZ, Bankruptcy Judge.

I. Introduction

On February 19, 2003, HSG/ATN, Inc. ("HSG") filed a Notice of Motion For Allowance And Payment Of Administrative Claim By HSG/ATN, Inc. ("Motion"), pursuant to which HSG seeks: earned commissions for the post-petition period of October 1, 2002 through December 16, 2002 in the approximate amount of $600,000; and ongoing commissions that come due in the future. WorldCom, Inc. and certain of its direct and indirect subsidiaries, as the debtors and the debtors-in-possession (collectively, "WorldCom" or the "Debtors") filed an objection to the Motion on March 14, 2003 ("Objection"). The Debtors respond that HSG is not entitled to an administrative claim because the subject residual commissions did not arise out of a transaction with the debtors-in-possession and HSG did not provide any benefit to the Debtors' estates.

The Objection also demands that HSG turnover the residual commissions inadvertently paid by the Debtors to HSG for the period July 21-31, 2002 and the months of August and September 2002 (the "Inadvertent Payments"). In the alternate, to the extent the Court is not prepared to order HSG to immediately turnover the Inadvertent Payments, the Debtors request that the Court establish the scheduling for further proceedings in respect of the Debtors' demand for turnover of the Inadvertent Payments. HSG did not file a response to the Debtors' turnover demand.

The Official Committee of Unsecured Creditors filed a Joinder to the Objection on March 17, 2003. Hearings were held with regard to the Motion on June 17, 20031 and July 1, 20032 (the "Hearing").

Based on the testimony and exhibits admitted into evidence, as well as the agreed facts in the parties' Agreed Statement Of Facts, dated June 16, 2003, the Court finds that HSG is not entitled to an administrative claim. Regarding the post-petition period during which HSG complied with its non-solicitation obligation under the Representation Agreement, HSG has failed to establish that such compliance was "rendering services" under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"), section 503(b)(1)(A), so as to qualify for an administrative claim under section 507(a)(1) of the Bankruptcy Code. Further, regarding the "call center service," HSG has failed to establish that (1) the service was required under the Representation Agreement, and (2) the performance of the service was induced by the debtors-in-possession. With respect to the Debtors' demand for the return of the inadvertent post-petition payments, pursuant to section 549 of the Bankruptcy Code, the Debtors are directed to initiate an adversary proceeding pursuant to the Federal Rules of Bankruptcy Procedure.

II. Factual Background

On August 4, 1998, HSG and MCI WorldCom Communications, Inc. ("MCI WorldCom") one of the Debtors herein, entered into a Representation Agreement that appointed HSG as an authorized sales representative of MCI WorldCom to procure orders for services provided by WorldCom. This original Representation Agreement was subsequently amended on numerous occasions, with the last amendment being entitled the "Sixth Amendment to Representation Agreement" dated November 1, 2001 (the original Representation Agreement and subsequent amendments thereto are hereinafter referred to collectively as the "Representation Agreement"). Pursuant to the Representation Agreement, MCI WorldCom would pay HSG commissions (the "Residual Commissions") based upon a percentage of the amount that MCI WorldCom billed to the customers (the "Customers" or "Customer") procured by HSG. The Residual Commissions were due and payable, pursuant to the terms of the Representation Agreement, forty-five (45) days from the end of the month in which the Customers received their bills for the services from MCI WorldCom. Pursuant to the Representation Agreement, "Services" is defined as the services identified in Exhibit A to the Representation Agreement that MCI WorldCom offers and provides to the Customers.

HSG had an exclusive agreement with MCI WorldCom. (Tr. 1 at 49.) Pursuant to the Representation Agreement, HSG was not permitted to offer the services of any other vendor except for WorldCom. (Tr. 1 at 50.) As permitted under the Representation Agreement, HSG sent a letter to MCI WorldCom on June 28, 2002, seeking to terminate the Representation Agreement. HSG terminated the Representation Agreement because of its desire to become a nonexclusive agent. (Tr. 1 at 52.) On July 21, 2002 (the "Filing Date") and November 8, 2002, WorldCom commenced cases under the Bankruptcy Code. WorldCom continues to operate its businesses and manage its properties as the debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.

By letter, dated August 6, 2002, MCI WorldCom accepted HSG's termination of the Representation Agreement effective July 28, 2002.3 MCI WorldCom contends that its decision to accept HSG's termination of the Representation Agreement was triggered by HSG's solicitation of Customers in July 2002. (Tr. 2 at 38-40, 74.) However, Ray Ahern, MCI WorldCom's director of business operations in the art channel department, testified at the hearing that he never saw any written documentation or electronic communication to substantiate the allegations (of MCI WorldCom Los Angeles sales director) that HSG was soliciting the Customers. (Tr. 2 at 73-75.) MCI WorldCom's August 6, 2002 letter also provided, inter alia, that HSG was required to comply with the provisions of section 8.1 of the Representation Agreement. Exhibit 10.4

Section 8.1 of the Representation Agreement states as follows:

For as long as WorldCom pays Representative commissions in accordance with Exhibit B, Representative agrees that Representative will not contact any Customers or WorldCom Group customers procured pursuant to this Agreement or any other Agreement with the WorldCom Group for the purpose of inducing them to switch to another provider of any service which competes with the Services. Representative warrants that Representative's agreements with Representative's agents and distributors presently include, and shall continue to include, the non-solicitation and non-competition covenants contained in this Section 8.1 and shall be enforceable against such agents and distributors to the same extent that this Section 8.1 is enforceable against Representative.

According to MCI WorldCom, the August 6, 2002 letter referenced Section 8.1 because it was MCI WorldCom's understanding that this section was violated by HSG. (Tr. 2 at 40.)

On August 2, 2002, WorldCom mass mailed a memorandum ("Memorandum") to agents who had recently received commissions. (Tr. 2 at 42-44; Exhibit 11.) The Memorandum provided that monies earned by the agent under their respective agreements with WorldCom after July 22, 2002 would be paid according to the terms and conditions in the respective Representation/Partner Agreements. The Memorandum also indicated that WorldCom was prohibited from paying any amounts due for pre-petition commissions. On August 5, 2002, WorldCom posted a letter ("Letter") on a website that was accessible by active representative agents. (Tr. 2 at 44-45; Exhibit 12.) The Letter also served as a reminder to the agents that they were "required by federal law to abide by all terms and conditions of your existing Representation Agreement."

As of the Filing Date, MCI WorldCom provided services to approximately 169,000 Customers. As of the Filing Date, HSG's monthly Residual Commissions totaled approximately $200,000.00 and were entirely based upon orders procured pre-petition. HSG did not obtain any new Customers after the Filing Date. The Customers had access to and were made aware of MCI WorldCom's 24 hour customer service center by (a) the 800 number which was listed on several parts of the initial welcome letter, (b) the customer service number listed on the back of the calling card, and (c) a public web site which explained how to contact MCI WorldCom's customer service. HSG's number was also placed on the calling card in the event customers needed to request additional cards or wanted to purchase additional services. But if customers needed customer service, they were directed to the back of the calling card which listed WorldCom's customer service number.

At the time HSG sent the above-mentioned termination letter, dated June 28, 2002, HSG and representatives of MCI WorldCom were negotiating a seventh amendment to the Representation Agreement. The seventh amendment to the Representation Agreement had been drafted and signed by HSG, but was never signed by MCI WorldCom. The seventh amendment sought to make HSG a nonexclusive agent. (Tr. 1 at 52.)

WorldCom paid HSG, subsequent to the Filing Date, for Residual Commissions for the periods of July 21, 2002 through July 31, 2002, and for the full months of August and September 2002. WorldCom has made no further payments for Residual Commissions to HSG.

Aside from the alleged July 2002 solicitation, the evidence reveals that HSG solicited Customers on two other separate occasions for the purpose of enticing the Customers to a different service provider for their telecom services. (Tr. 1 at 57.) HSG's initial solicitation was by a letter, dated September 25, 2002 (th...

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