Yankee Microwave Inc. v. Petricca Comm. Systems Inc., 98-P-559

• Citation: 53 Mass. App. Ct. 497
• Decision Date: 07 January 2002
• Docket Number: 98-P-559
• Parties: YANKEE MICROWAVE, INC. vs. PETRICCA COMMUNICATIONS SYSTEMS, INC., & others.(FN1) Docket No.: 98-
• Court: Appeals Court of Massachusetts

YANKEE MICROWAVE, INC. vs PETRICCA COMMUNICATIONS SYSTEMS, INC., & others.¹

Docket No.: 98-P-559

January 19, 2000.

January 7, 2002

County:Berkshire.

The case was heard by Daniel A. Ford, J.

A. Hugh Scott for the plaintiff.

Ronald E. Oliveira (William E. Martin with him) for the defendants.

Practice, Civil, Findings by judge. Res Judicata. Administrative Law, Agency, Preclusive effect of decision, Adjudicatory proceeding, Retroactive effect of regulation, Rate regulation, Judicial review. Federal Communication Commission. Massachusetts Uniform Fraudulent Conveyance Act. Fraudulent Conveyance. Loan. Contract, Service agreement. Corporation, Recapitalization, Corporate disregard.

Civil action commenced in the Superior Court Department on February 5, 1992.

Present: Jacobs, Gillerman, & Gelinas, JJ.

GELINAS, J.

We consider in this case whether Yankee Microwave, Inc. (Yankee), is precluded from recovery against Petricca Communications Systems, Inc. (PCS), Petricca Industries, Inc. (PII), Basil A. Petricca (Basil), and Robert W. Petricca (Robert), because, as the trial judge found, Yankee failed to file for tariff approval with the Federal Communications Commission (FCC) and the Massachusetts Department of Public Utilities (DPU), thus rendering its performance under the parties' contract for microwave transmission services (service agreement) illegal and void. We also consider (1) Yankee's contention that the trial judge erred in finding that certain transfers of money from PCS to PII, Basil, and Robert were not improper and did not constitute fraudulent conveyances, and were not in violation of G. L. c. 156B, 61; (2) PCS's contention that the trial judge erred in entering judgment in favor of Yankee on PCS's counterclaims alleging breach of contract, breach of a covenant of good faith, and violation of G. L. c. 93A; and (3) PCS's contention that Yankee is barred from recovering damages from PCS by Yankee's own breach of the service agreement when it refused to agree to the assignment of the service agreement to ACC Corporation (ACC). We reverse that part of the judgment declaring that Yankee's performance under the service agreement was illegal, and that the transfer of funds to Basil and Robert by PCS in repayment of certain loans was proper. We affirm that part of the judgment entered in favor of Yankee on PCS's counterclaims, as well as that part of the judgment requiring Robert to disgorge certain funds paid to him for his capital stock in PCS and ruling that certain payments to PII by PCS were proper. We remand the case to the Superior Court for further proceedings on the issue of damages.

Facts. We summarize the facts found by the trial judge, supplemented by additional uncontested evidence appearing on the record, reserving details for our discussion of the issues.

A. Background. During the relevant time period, Yankee provided radio microwave transmission services for voice and data communications. PCS was a new, long-distance telephone company, providing service to consumers in western Massachusetts. PCS was formed in 1982 by Basil and Robert, brothers involved in a number of businesses in the construction industry, including three corporations owned by PII, a holding company. In 1984, the PCS telephone network consisted of leased services provided by American Telephone & Telegraph Company (AT&T) and New England Telephone. PCS purchased service in bulk and resold discrete units to customers at retail. The bulk service purchased from AT&T was expensive, and in the first years of deregulation of the communications industry, the agreement with AT&T left PCS vulnerable to sudden rate increases. As technology improved, competition fostered price reductions, creating a volatile, downward pricing spiral. Rather than anticipate potential price reductions as a result of deregulation, PCS made the decision to seek out a carrier who would provide service at a fixed, stable rate, on a long-term basis. Competitive pressures, resulting in rate declines, determined that this business strategy was ultimately wrong.

B. The service agreement. In 1984, Yankee was planning a digital microwave system to serve the corridor from Boston to New York. PCS contacted Yankee in May of that year, seeking to contract for digital microwave transmission services. During the next few months Yankee developed a plan to carry PCS's long distance telephone traffic at fixed rates. On January 31, 1985, Yankee and PCS signed a six-year service agreement for digital microwave service. Yankee's charges under the service agreement were based on its anticipated total capital outlay for the PCS project of $1,629,300, plus other related costs, including debt service, and Yankee's desired profit. This total, divided by seventy-two, the number of months to be covered by the contract, produced a monthly fee to PCS of $44,284.40, a charge approximately $40,000 less than the $85,000 per month that PCS was then paying for service from AT&T. The six-year term offered PCS the stability of rates that it was seeking. PCS accepted Yankee's proposal in December, 1984, and the parties signed the service agreement² the next month.³ In April, 1985, the service agreement was expanded, at PCS's request, to add service to Boston, and the monthly fee was increased to $54,985. The service agreement required Yankee to file a tariff with the FCC.⁴

C. Guarantees, and sale of PCS. Based on PCS's financial condition, Yankee required that payments under the service agreement be guaranteed; after discussion, the parties agreed that Petricca Construction Corp. (PCC), a wholly-owned subsidiary of PII⁵ would guarantee the first eighteen payments. Yankee then began building the necessary long-distance microwave transmission system, completing construction in 1986. PCS requested that the start of service be delayed to February of 1987. Yankee agreed, and the service agreement was amended to that effect on December 4, 1986. Service began in February, 1987. Prior to the inception of service, with PCS experiencing serious financial difficulties, Basil and Robert sought a buyer for the company. In late 1986, PCS entered into discussions with ACC.⁶ The parties reached agreement, under which ACC would acquire the assets of PCS, paying PCS $1.8 million in cash together with a warrant to purchase 100,000 shares of ACC stock at a favorable price. A closing was scheduled for January 31, 1987. Prior to the closing, ACC sought to assume the service agreement between Yankee and PCS. Last minute efforts to secure Yankee's permission, required by the service agreement for such assignment, failed. The PCS-ACC sale went forward only after ACC agreed to pay for Yankee's services, on a pass-through basis, for a period of eighteen months. This period was consistent with PCC's guarantee, thus obviating the need for an assignment of the service agreement to ACC. After receiving service and paying monthly fees for eighteen months, ACC stopped the pass-through payment, and PCS defaulted on its obligations under the service agreement.

D. The litigation. Yankee first pursued PCS in Federal District Court.⁷ After dismissal of its claims in Federal court, Yankee filed suit in Superior Court in early 1992, alleging, among other things, breach of contract, fraudulent conveyance of PCS assets, and breach of directors' duties.⁸

In Superior Court, PCS, PII, Basil, and Robert (collectively the defendants) all claimed as an affirmative defense that Yankee had breached the service agreement because Yankee had not received Federal and State tariff approval of its rates, as required in the service agreement. Yankee's performance under the service agreement was thus illegal, since provision of service without obtaining tariff approval violated both the Federal Communications Act of 1934, 47 U.S.C. 151-609 (1976) (Act), and G. L. c. 159. As an additional defense, the defendants claimed that the rates were not just and reasonable under 201 and 203 of the Act. The defendants also counterclaimed against Yankee, alleging breach of contract, breach of the covenant of good faith and fair dealing, and violation of G. L. c. 93A.

In the spring of 1992, the defendants successfully moved for a stay of the Superior Court case, pending the outcome of proceedings before the FCC challenging the lawfulness of Yankee's rates. These proceedings were brought in April, 1992, by ACC. The Superior Court judge found and ruled that PCS was in privity with ACC with respect to the FCC proceedings, and that ACC acted as PCS's "virtual representative" before the FCC.⁹

E. The FCC proceedings. Among other allegations, ACC claimed in its complaint to the FCC that the rates charged in the service agreement were unlawful and discriminatory, in violation of 201(b) and 202(a) of the Act. In its initial complaint, ACC made no specific claim for relief based on Yankee's failure to file for tariff approval under 203 of the Act, although it did assert that the failure to file as required by the service agreement constituted a violation of 201 and 202. ACC asked the FCC to take "primary jurisdiction of the legality" of the service agreement. The FCC's Common Carrier Bureau (bureau) ruled in favor of Yankee on these issues. See ACC Long Distance Corp. v. Yankee Microwave, Inc., 8 F.C.C. Rcd. 85 (1993). ACC appealed the bureau's decision to the full commission. In its appeal, ACC raised Yankee's failure to file tariffs under 203, urging the commission to overturn the bureau's decision because the bureau had failed to order Yankee "to file tariffs pursuant to Section 203 of the Act." The full commission found and ruled that the bureau had determined that there was no basis upon which to order Yankee to file tariffs, and that the bureau was correct in that determination. ACC Long Distance Corp. v. Yankee Microwave, Inc., 10 F.C.C. Rcd. 654 (1995). Further, the commission ruled that, as ACC's initial complaint did not allege a violation...