Orius Corp. v. Qwest Corp.
| Citation | 373 B.R. 555 |
| Decision Date | 09 August 2007 |
| Docket Number | No. 06 C 6306.,No. 06 C 6304.,No. 06 C 6305.,06 C 6304.,06 C 6305.,06 C 6306. |
| Parties | ORIUS CORP., Debtor-Appellant, and Deutsche Bank Trust Company Americas, Lender-Appellant, v. QWEST CORPORATION, Appellee. |
| Court | U.S. District Court — Northern District of Illinois |
Aaron C. Smith, Folarin Sherif Dosunmu, Katherine Heid Harris, Timothy S. McFadden, Travis Rojakovick, Lord Bissell & Brook, Chicago, IL, for Debtor-Appellant.
Matthew J. Botica, Mindy D. Cohn, Thomas F. Blakemore, Winston & Strawn LLP, Chicago, IL, for Lender-Appellant.
Edwin L. Durham, Kevin Buckley Duff, Rachlis Durham Duff & Adler, Chicago, IL, for Appellee.
Qwest Corporation ("Qwest") is an incumbent local exchange carrier that provides telecommunications services in fourteen western states. Prior to December 12, 2005, Appellants, Orius Corporation and other joint debtors (collectively, the "Debtors"), contracted with Qwest to perform construction and maintenance work on Qwest's network. On December 12, 2005, the Debtors filed for bankruptcy and subsequently breached their contracts with Qwest by ceasing portions of their construction and maintenance work. During the course of the Debtors' bankruptcy proceedings, the Debtors and Qwest reached an agreement in order to streamline the process by which Qwest would pay the Debtors for the work the Debtors had performed under the contracts while also asserting claims for the money Qwest believed it was owed as a result of the Debtors' breach. The bankruptcy court's rulings relating to this agreement form the basis of this appeal.
First, the Debtors appeal the bankruptcy court's October 26, 2006 order directing the Debtors to pay Qwest money that Qwest claimed it was owed as a result of the Debtors' breach and the bankruptcy court's order denying the Debtors' motion for reconsideration of that ruling. Second, the Debtors appeal the bankruptcy court's November 7, 2006 order overruling their objections to certain portions of Qwest's claims. In this opinion, the court also addresses the appeal of Deutsche Bank Trust Company Americas, a lender to the Debtors and agent for certain other lenders ("the Lenders"). The Lenders challenge the bankruptcy court's November 7, 2006 order striking the Lenders' objections to Qwest's claims on the grounds that the Lenders lacked standing. For the reasons set forth below, the court remands the case to the bankruptcy court for further consideration.
Qwest provides various telecommunications services in fourteen western states of the United States as an incumbent local exchange carrier. (Qwest Resp. on Order Overruling Debtors' Objections at 3.) At some point prior to December 2005, Qwest entered into various construction contracts with Orius Corporation and its affiliated debtors; under these contracts, the Debtors agreed to perform certain construction and maintenance work on Qwest's telephone network and to serve as general contractors on projects Qwest had undertaken in Minnesota, Idaho, Oregon, and Washington. (Stipulation Between Debtors and Qwest Corporation Authorizing and Directing Payment of Monies to the Debtors, Establishment of Trust Accounts to Resolve Lien Rights, and the Establishment of Qwest Setoff Trust Account (the "Stipulation") ¶ A; Qwest Resp. on Order to Pay at 2.) The Debtors hired subcontractors to perform some of the work required under their contracts with Qwest. (Stipulation ¶ D.) The Debtors do not dispute that it was their responsibility to supervise their subcontractors and ensure that the subcontractor's work was completed to Qwest's specifications and that the subcontractors were paid in a timely manner. (Qwest Resp. on Order to Pay at 2.)
On December 12, 2005, Orius Corporation and each of its affiliated debtors filed petitions for voluntary relief under Chapter 11 of Title 11 of the United States Code. (Debtors' Brief on Order to Pay at 4.) Pursuant to a pre-petition credit agreement between the Debtors and Lenders, the Debtors owed the Lenders approximately $109,939,000 at the time they filed for bankruptcy. (Lenders' Brief at 3.) The Debtors' obligations to the Lenders were "secured by liens on substantially all of the Debtors' assets including the Debtors' accounts receivable." (Id.) The Lenders assert that, because they are undersecured (a fact that Qwest does not contest), they have "significant secured claims and unsecured deficiency claims against the Debtors' estate." (Id.)
It is undisputed that the Debtors breached at least some of their contracts with Qwest after December 12, 2005. Indeed, after filing for bankruptcy, the Debtors informed Qwest that they would not be able to complete some of their work under the contracts and would instead be liquidating their assets. (Debtors' Brief of Order to Pay at 4; Qwest Resp. on Order to Pay at 3.) Qwest asserts that, when they breached their contracts, the Debtors "walked off their jobs in Minnesota; ceased supervising and paying subcontractors; failed to ensure that Qwest's deadlines and specifications were met; and failed to turn over necessary construction and maintenance materials, records, and contracts in connection with the jobs they abandoned." (Qwest Resp. on Order Overruling Debtors' Objections at 4.) As a result of the Debtors' breach, subcontractors also walked off jobs and asserted mechanic's liens and pre-lien notices against Qwest's property and its customers. (Qwest Resp. on Order to Pay at 3.) Despite their breach, the Debtors claim that they worked with Qwest to effect an orderly transition for some of the work that they were unable to complete by, for example, maintaining employees in certain regions to wind-down projects. (Debtors' Brief on Order to Pay at 4-5.)
Qwest describes the fallout from the Debtors' breach as extensive. According to Qwest, the Debtors' breach created a risk that Qwest would face state and regulatory penalties for failing to meet certain construction and service deadlines. (Qwest Resp. on Order to Pay at 3.) Qwest claims, further, that the Debtors' breach forced Qwest to use "significant internal and external resources, including attorneys and its own employees, to perform management, supervision, inspection, construction, and maintenance services in the voids left by the Debtors." (Id. at 4.) For example, Qwest asserts that the Debtors' breach left it without a general contractor in Milwaukee, forcing Qwest to use internal resources that would not otherwise have been dedicated to that job. (Id.) Qwest also asserts that as a result of the Debtors' breach of their contract obligations, Qwest was required to negotiate and resolve "third-party and outside plant damages" that were the Debtors' obligations and pay to recover material and equipment that was improperly sold by the Debtors. (Id.) Qwest also claims that it incurred substantial costs when it hired outside counsel to negotiate with the Debtors to satisfy the claims of unpaid subcontractors and to negotiate a resolution process with the Debtors, which, according to Qwest, protected the Debtors from liability for massive penalties and other damages flowing from their breach. (Id. at 5.) In Qwest's view, the Debtors are contractually obligated to indemnify Qwest for costs and damages resulting from any breach, including Qwest's attorneys' fees and the cost to Qwest using its own employees to fill voids left by the Debtors. (Id. at 2.)
As of December 12, 2005, Qwest owed the Debtors millions of dollars in unpaid invoices for work the Debtors had performed under the contracts up to that point. (Debtors' Brief on Order to Pay at 5.) Qwest took the position that it was also owed monies from the Debtors as a result of the Debtors' breach and other damage claims and that it had the right to set off these amounts against the money it owed to the Debtors. (Id.; Stipulation ¶ E.) Qwest further claimed that it was entitled to recoup or set off the unpaid amounts owed by Debtors to their subcontractors or suppliers because these unpaid subcontractors had asserted, or could assert, lien rights against Qwest's property or customers as a result of the Debtors' failure to pay the subcontractors for their services. (Debtors' Brief on Order to Pay at 5; Stipulation ¶ D.) Qwest refused to pay the Debtors for the work they had performed until a mechanism to resolve such claims was in place. (Debtors' Brief on Order to Pay at 5.) The Lenders assert that all money owed by Qwest to the Debtors for work performed by the Debtors and their subcontractors — the Debtors' accounts receivable — constitutes property of the Debtors' estate that is subject to the Lenders' senior liens. (Lenders' Brief at 4.)
Qwest and the Debtors engaged in extensive negotiations to reach an agreement to facilitate payment to the Debtors for work they had completed, while ensuring that Qwest would recover on its claims resulting from the Debtors' breach. On March 7, 2006, the bankruptcy court approved the Stipulation, which was proposed to the court by the Debtors and Qwest. The Stipulation aimed to "preserve Qwest's secured status, resolve all claims of unpaid subcontractors and suppliers, and assure that Qwest was paid for its allowable claims, while permitting the Debtors to collect from Qwest on their unpaid invoices." (Debtors' Brief on Order to Pay at 5; Qwest Resp. on Order to Pay at 6.) Prior to the bankruptcy court's approval of the Stipulation, the Debtors served the Lenders' counsel with a "Notice of Stipulation" and a motion for court approval of the Stipulation. (Qwest Resp. to Lenders' Brief at 5.) The Lenders did not object to the Stipulation when it was entered. (Id.)
Pursuant to the Stipulation, Qwest paid the Debtors the sum of $3,973,077.16, most of which was divided into funds to pay subcontractor...
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