Opinion
Case Nos. 01-12264-SSM, 01-12265-SSM, (Jointly Administered)
July 22, 2002
Alexander M. Laughlin, Esquire, Wiley Rein Fielding, LLP, McLean, VA, Local counsel for the debtor.
Michael O'Reilly, Rees, Broome Diaz, P.C., Vienna, VA, Local Counsel for Qwest Corporation.
Malcolm Mitchell, Esquire, Vorys, Sater, Seymour Pease, L.L.P., Alexandria, VA, Local counsel for the Official Committee of Unsecured Creditors.
MEMORANDUM OPINION
Before the court is a motion filed by Qwest Corporation ("Qwest") on April 3, 2002, for payment of an administrative expense claim in the amount of $83,624.49. A hearing was held on June 7, 2002, at which the debtor in possession, Qwest, the Official Committee of Unsecured Creditors, and the United States Trustee were present by counsel. At that hearing, the parties submitted a stipulation of facts and presented oral argument, and the court took the matter under advisement. Having reviewed the facts and the applicable law, the court concludes that the request for payment of an administrative expense must be disallowed in its entirety.
Background
On November 30, 1999, Pathnet, Inc. ("PNI") entered into an Amended and Restated Indefeasible Right of Use Agreement ("IRU Agreement") with U.S. West Communications, Inc. Under the IRU Agreement, U.S. West and its successors obtained rights of use in a dark fiber telecommunications network being constructed by PNI, Tri-State Generation and Transmission Association, Inc. ("Tri-State"), Empire Electric Association, Inc., La Plata Electric Association, Delta Montrose Electric Association, Inc., and San Miguel Power Association, Inc. Essentially, the IRU Agreement provided for compensation to PNI in a pre-determined amount in exchange for U.S. West's, and later Qwest's, access to the dark fiber network. Further, the IRU Agreement, which was to last for a minimum of twenty years, required PNI to maintain the dark fiber network, and imposed liability upon PNI for any "Service Affecting Conditions" caused primarily by the gross negligence or willful misconduct of PNI, its employees or agents. Finally, the IRU Agreement, which is governed by Colorado law, provides that "Pathnet may assign or transfer this Agreement including its rights and obligations hereunder without Customer's consent, provided that such assignment or transfer shall not release or discharge Pathnet from its duties, obligations or liabilities hereunder." Mem. in Supp. of Mot. of Qwest Corp. for Allowance and Payment of Admin. Claim, at Ex. 1, § 21B (emphasis added).
U.S. West was subsequently acquired by Qwest Corporation ("Qwest"), which succeeded to U.S. West's rights under the Agreement.
The dark fiber network runs from Albuquerque, New Mexico, to Grand Junction, Colorado. See Stipulation Regarding June 7, 2002, Hr'g on Administrative Claim of Qwest Corp., at Ex. E.
The Agreement states that a "`Service Affecting Condition' shall mean a condition on a Segment that materially adversely affects Customer's ability to utilize the Customer Fibers." Mem. in Supp. of Mot. of Qwest Corp. for Allowance and Payment of Administrative Claim, at Ex. 1, § 1.21.
On August 9, 2000, PNI assigned its rights under the IRU Agreement to an affiliate, Pathnet Operating, Inc. ("POI"). No notice of the assignment was given to U.S. West. Indeed, in many ways the distinction between PNI and POI was invisible to the outside world. POI had no employees of its own, with all management, accounting, and other functions being provided by PNI's employees under the terms of an Intercompany Services Agreement dated August 2000. Additionally, invoices and other general correspondence simply bore the name "Pathnet" without distinguishing among the various companies that were part of the Pathnet group.
On April 2, 2001, approximately seven months later, PNI, POI, and four affiliated companies filed voluntary chapter 11 petitions in the District of Delaware. All six cases were thereafter transferred to this district, where four of the six cases, including that of POI, were converted to chapter 7 on July 19, 2001, at the insistence of POI's secured creditors.
PNI, however, remained in chapter 11 together with its parent holding company, Pathnet Telecommunications, Inc. ("PTI"). Following POI's conversion to chapter 7, PNI, with court approval, rejected the Intercompany Services Agreement. By November 2, 2001, PNI had liquidated most of its saleable assets, had terminated most of its employees, and had retained a staff of approximately eight individuals. James Craig, PNI's responsible officer and designated representative at the time, determined that it was in PNI's best interests to terminate utility services for which PNI no longer had any use. Among the utility services terminated were those provided by Empire Electric Association ("Empire") and the Public Service Company of New Mexico ("PSCNM").
On the evening of November 6, 2001, Empire in turn disconnected electrical service to regeneration sites located along the dark fiber network in Colorado. See Stipulation Regarding June 7, 2002, Hr'g on Administrative Claim of Qwest Corp., at Ex. B. This outage led to the activation of various emergency back-up generation sites, which because they had not been maintained properly, led to the temporary disconnection of telephone service for approximately 21,000 Qwest customers in Colorado.
Similarly, on November 11, 2001, electrical service to regeneration sites located along the dark fiber network in New Mexico was disconnected. As before, this outage led to the activation of various emergency back-up generation sites, which because they had not been maintained, resulted in the temporary disconnection of telephone service for an undetermined number of Qwest customers in New Mexico.
Finally, on December 6, 2001, PSCNM disconnected electrical service to regeneration sites located along the dark fiber network in New Mexico. Once again, this outage led to the activation of various emergency back-up generation sites, which, because they had not been maintained, led to the temporary disconnection of telephone service for an undetermined number of Qwest customers in New Mexico.
Qwest submits that the following costs it incurred as a result of the three outages should be allowed as an administrative expense in this case:
In house labor costs associated with the restoration of power after the November 7, 2001, disconnection. $1,528.08
Overtime labor costs associated with the restoration of power after the November 7, 2001, disconnection. $936.63
In house labor costs associated with the restoration of power after the December 6, 2001, disconnection. $1,014.45
Repair of electrical system after the December 6, 2001, disconnection. $54,186.00
Legal fees associated with putting procedures in place to avoid further outages. $25,962.33
Total $83,624.49
Subsequent to the termination of electric service, PNI and PTI proposed and obtained confirmation of a joint plan of liquidation. Payment on general unsecured claims is not expected to exceed 2 to 3 cents on the dollar. POI's chapter 7 trustee has assumed the IRU Agreement and has assigned it to Tri-State.
Discussion I.
A bankruptcy court, upon request, and after notice and a hearing, may allow as administrative expenses "the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case." § 503(b)(1)(A), Bankruptcy Code. Allowed administrative expenses are paid ahead of general unsecured claims. § 507(a)(1), Bankruptcy Code. As the Fourth Circuit has observed, "because `[o]ne of the goals of chapter 11 is to keep administrative costs to a minimum in order to preserve scarce resources,'" the provision for allowance of administrative claims should not be read "to `saddle debtors with special post-petition obligations lightly or give preferential treatment to certain select creditors.'" Ford Motor Credit Co. v. Dobbins, 35 F.3d 860, 866 (4th Cir. 1994). Rather, in order for a claim to qualify for administrative expense priority, there must be "actual use of the creditor's property by the debtor, thereby conferring a concrete benefit on the estate." Id. (emphasis in original).
A.
Here, there is no dispute that the threshold requirement for administrative expense priority set forth in Dobbins — concrete benefit to the estate — has not been met. Rather, Qwest relies on the line of cases following Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968) (decided under former Bankruptcy Act of 1898), and In re Charlesbank Laundry, Inc., 755 F.2d 200 (1st Cir. 1985), which establish an exception to the concrete benefit requirement of § 503(b)(1)(A). See e.g. In re Mammoth Mart, Inc., 536 F.2d 950 (1st Cir. 1976); In re N.P. Mining Co., 963 F.2d 1449 (11th Cir. 1992); In re Al Copeland Enterprises, Inc., 991 F.2d 233 (5th Cir. 1993); In re MegaFoods Stores, Inc., 163 F.3d 1063 (9th Cir. 1998); In re Met-L-Wood Corp., 115 B.R. 133 (N.D.Ill. 1990); In re B.
Cohen and Sons Caterers, Inc., 143 B.R. 27 (E.D.Pa. 1992); In re Continental Airlines, Inc., 148 B.R. 207 (D.Del. 1992); In re CIS Corp., 142 B.R. 640 (S.D.N.Y. 1992). In Reading, the Supreme Court held that damage caused to adjacent premises when the bankrupt's building caught fire as a result of negligence by a workman hired by the chapter XI receiver was entitled to administrative expense treatment. Similarly, in Charlesbank Laundry, the First Circuit held that a civil compensatory fine for commission of a nuisance should be treated as an administrative expense. Here, Qwest alleges that because PNI negligently terminated the electricity service to certain portions of the dark fiber network, and negligently failed to maintain various emergency back-up generation sites along the network, Qwest has been damaged in the amount of $83,624.49 for which it is entitled to be compensated as an administrative expense. PNI, needless to say, opposes the relief and argues that the Reading-Charlesbank Laundry rationale is inapplicable.
B.
Plainly, the Reading-Charlesbank Laundry line of cases require post-petition conduct that is either tortious or in violation of Federal, state, or local law. Mere contractual liability arising out of a post-petition breach of a prepetition contract that is not assumed by the debtor is not sufficient to elevate the resulting damages to administrative expense status. Such breaches, rather, simply give rise to prepetition unsecured claims and are paid pro-rata with all other such claims. In the present case, no violation of Federal, state, or local law is alleged.
Although the IRU Agreement was assumed by POI's chapter 7 trustee in connection with the sale of the route to Tri-State, it was never assumed by PNI.
Accordingly, the question is whether a common-law tort occurred which would justify application of the Reading-Charlesbank Laundry exception.
II.
The answer to this question requires this court to divide Qwest's requested administrative claim into two distinct portions: (a) that portion dealing with PNI's termination of electrical service to certain portions of the dark fiber network; and (b) that portion dealing with PNI's failure to maintain various emergency back-up generation sites along the network.
A.
With respect to the former, it is argued that PNI acted negligently when its responsible officer and designated representative at the time, Jim Craig, directed the termination of electrical service powering the dark fiber network. It is undisputed that the electrical service was terminated, not out of malice, but simply because PNI no longer owned the routes (having assigned the IRU Agreements to POI). As an insolvent company in bankruptcy, and as a fiduciary for its creditor body, PNI could hardly justify expending funds for which it received no benefit. PNI, to be sure, did have a contractual obligation to Qwest under the IRU Agreement to ensure the continued operation of the network. However, that contract was entered into prior to the filing of the chapter 11 petition and was never assumed by PNI in its chapter 11 case. The breach of that contract therefore simply gives rise to a prepetition claim, not an administrative expense. Nor can a breach of contract be elevated to a tort merely by characterizing the breach as "negligent," since "no cause of action lies in tort when purely economic damage is caused by negligent breach of [a] contractual duty." Jardel Enterprises, Inc. v. Triconsultants, Inc., 770 P.2d 1301, 1303 (Colo.Ct.App. 1988). See also Richmond Metro. Auth. v. McDevitt Street Bovis, Inc., 256 Va. 553, 559, 507 S.E.2d 344, 347 (1998).
Although the mere breach of the IRU Agreement resulting from the termination of electric service cannot be characterized as tortious and is not sufficient to elevate the resulting damages to administrative claim status, an argument could perhaps be made that failure to warn or notify Qwest of the termination, when it was within PNI's power to do so in time to enable Qwest to minimize or avert loss, would independently constitute a tort. Qwest, however, has not pointed to any authority recognizing a tort of negligent failure to warn of an impending breach of contract. Additionally, even if such a tort were to be recognized, it would only be applicable with respect to the November 7, 2001, outage. Within two days of that outage, Qwest's attorneys were fully aware that the electric service had been terminated and were communicating with POI's chapter 7 trustee on arrangements to ensure that further outages did not occur. Any damages arising from the subsequent outages on November 11 and December 6 could not be the proximate result of PNI's failure to warn, because by then Qwest was fully aware of the danger.
Additionally, even assuming that a negligent failure to warn of an impending breach of contract could be deemed an independent tort, the evidence before the court would not support a finding that PNI acted negligently. The IRU Agreement had long before been assigned to POI. PNI was neither operating the dark fiber network nor deriving revenues from it. POI's chapter 7 trustee had been in place for approximately three months at the time service was terminated, and PNI, with court approval, had already rejected the Intercompany Services Agreement under which it had been paying POI's bills. As early as October 26, 2001, PNI had advised POI's chapter 7 trustee, as well as POI secured creditor Nortel (which has worked closely with the trustee throughout), that electrical service would be cut off, and that POI would be required to set up its own electrical service for the affected portions of the network. See Mem. in Supp. of Mot. of Qwest Corp. for Allowance and Payment of Administrative Claim, at Ex. 8, pp 70-72 (testimony of Sean O'Donnell), 76-80 (testimony of Michael St. Patrick Baxter, Esq.); Stipulation Regarding June 7, 2002, Hr'g on Administrative Claim of Qwest Corp., at Ex. E. The chapter 7 trustee, to be sure, had a lot on his plate at the time, and a detailed written notice from PNI, specifying the names of the utility providers, the account numbers, the routes to which they related, and the date service would be terminated, would have been at least courteous, would have facilitated a smooth transition of the utility accounts to POI's name, and might have prevented the outages. Be that as it may, it was not unreasonable for Mr. Craig to assume that POI's trustee had taken the necessary steps to maintain electric power to those portions of the dark fiber network that the trustee was trying to sell. Accordingly, the court cannot find that PNI was negligent in terminating its accounts with Empire and NMPSC.
B.
With respect to the damages resulting from the failure to maintain the back-up generation sites, Qwest's claim for administrative expense is even less compelling. PNI's only obligation to maintain the sites arose under the IRU Agreement and the Intercompany Services Agreement. The Intercompany Services Agreement had been rejected, with court approval, some three months earlier, and PNI never assumed the IRU Agreement. That agreement had been assigned to POI prior to the filing of the chapter 11 petition, and any revenues would enure to the benefit of POI, not PNI. Here, there is not even an unexpected pulling of the plug — as arguably occurred when PNI directed that its accounts with Empire and NMPSC be terminated — but simply a contractual liability for the failure of its assignee, POI, to perform the duties which PNI had originally undertaken to perform under a prepetition contract. Such liability may well give rise to a claim, but not to an administrative expense.
III.
A separate order will be entered disallowing Qwest's claim for an administrative expense.