Opinion
Case No. 02 B 13533 (AJG), Jointly Administered.
May 27, 2003.
On July 21, 2002 and November 8, 2002, WorldCom, Inc. and certain of its direct and indirect subsidiaries (collectively, the "Debtors") filed petitions under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). The Debtors chapter 11 cases have been consolidated for procedural purposes only and are being jointly administered pursuant to orders, dated July 22, 2002 and November 8, 2002. The Debtors continue to operate their businesses as debtors-in-possession pursuant to sections 1007(a) and 1108 of the Bankruptcy Code.
Pre-petition, the Debtors entered into certain agreements with SBC Communications, Inc. ("SBC"), and its subsidiaries or affiliates, as counterparties. The subsidiaries and affiliates, which include the Ameritech operating companies (collectively, "Ameritech"), the Pacific Bell operating companies (collectively, "Pacific Bell"), and the Southwestern Bell operating companies (collectively, "Southwestern Bell" and, together with Ameritech, and Pacific Bell, the "SBC Affiliates"), each operate within certain regions. Pursuant to service orders, the Debtors purchased certain services from the SBC Affiliates in accordance with certain tariffs or interconnection agreements, which set forth the term commitments and prices for the purchase of the services. In connection with the purchase of these services, the Debtors also entered into certain Managed Value Plan ("MVP") agreements for each of the regions covered by Ameritech, Pacific Bell and Southwestern Bell. The MVP agreement is a five-year discount program which entitles the Debtors to billing discount credits for services rendered in exchange for an agreement by the Debtors to meet or exceed a minimum annual revenue commitment (the "MARC"). A MARC is initially established for the Debtors under each MVP agreement and the Debtors are then obligated to maintain qualified access billed revenue equal to or greater than the MARC for each year of the five-year term. Pursuant to the terms of the MVP agreement, the Debtors must also, among other things, remit bill payment of amounts due.
In instances where the Debtors meet or exceed the monthly prorated MARC under each MVP agreement, calculated on an individual basis, the SBC Affiliate is required to apply such month's credits against the Debtors' next monthly bill. Even where the MARC is not met on a prorated basis in any particular month, the Debtors may qualify to receive that particular month's credit through an annual "true-up" process where the entitlement to the discount is calculated based upon the Debtor's purchase of service over the entire year.
At the end of any contract year, if the Debtors do not achieve the MARC for that year, the Debtors must pay the SBC Affiliate the difference between the annual MARC and the actual annual billing amount. Once the Debtors pay this deficiency, they are entitled to receive the credits for any months in that contract year where they were not afforded credits because they had not met the prorated MARC for that month. Alternatively, rather than paying the deficiency, the Debtors may elect to terminate the MVP agreement by providing written notice and paying a termination liability.
The Debtors' first contract year under the each of the three MVP agreements commenced on November 1, 2001 and ended on October 31, 2002. Since November 1, 2002, the Debtors have been operating in the second contract year under the MVP agreements. SBC sent a letter to the Debtors in early December 2002 informing them that for the first contract year, there was a deficiency in attaining the MARC in the Ameritech and Pacific region, and that the MARC had been exceeded in the Southwestern Bell region. In that letter, SBC further informed the Debtors that it would only apply a portion of the credit under the Ameritech and Southwestern Bell MVP agreements to the Debtors' post-petition bills. SBC further notified the Debtors that the balance of the credits would be used by SBC to setoff pre-petition amounts due under the agreements. The Debtors responded that they were in accord with the allocation of the credits to the pre and post-petition periods. The Debtors, however, also indicated that they would similarly proceed to allocate the deficiency due on the MARC related to Ameritech to a pre and post-petition period and currently only pay that portion attributable to the post-petition period. With respect to the amounts due for pre-petition services rendered, the Debtors view was that the Bankruptcy Code precluded them from paying those amounts at that time.
Subsequently, in February 2003, SBC modified its position and indicated that it would not apply any credits and would terminate the MVP agreements absent payment of all pre-petition amounts due. SBC informed the Debtors that to qualify for the billing discounts, the Debtors needed to: (i) meet the MARC in each of the regions; (ii) remit all unpaid access charges to qualify for the discount for those particular charges and (iii) either assume the MVP Agreements or provide the SBC Affiliates with the right to receive an administrative claim for credits posted in the second year of the MVP agreement in the event of its subsequent rejection.
The Debtors filed a motion, dated February 13, 2003 (the "Debtors' Motion"), seeking entry of an order directing SBC and the SBC Affiliates to perform certain obligations under the MVP Agreements. The SBC Affiliates filed opposition, dated March 24, 2003 (the "Objection"), to the Debtors' Motion. The Debtor's filed a response, dated March 28, 2003 (the "Debtors' Response"), to the Objection. The SBC Affiliates filed a reply, dated April 2, 2003 (the "SBC Reply") to the Debtors' Response. A hearing on this matter was conducted before the Court on March 25, 2003 (the "Hearing").
In the Motion, the SBC Affiliates argue that the criteria for entitlement to the discount credits are conditions that must be met in order to qualify to receive those credits. Thus, the SBC Affiliates argues that the Debtors must remit payment for the MARC deficiency, as well as payment for pre-petition amounts due for the services provided.
The Debtors assert that while they are now prepared to pay the MARC deficiency in full for the Ameritech region, they are precluded by from paying any amounts due for services rendered pre-petition by Ameritech and Southwestern Bell unless such payments are made in compliance with the Bankruptcy Code. The Debtors further have asserted their intention to reject the Pacific MVP agreement.
The Court finds that due and proper notice of the Motion was provided and no further notice need be provided. The Court has reviewed the Motion, the Objection, the Debtors' Response and the SBC Reply, and considered the arguments presented at the Hearing and has determined that the legal and factual bases set forth in the Motion and at the Hearing establish just cause for the relief granted in that the counter-party to a contract cannot condition its performance under, or terminate an executory contract, based on the non-payment of an amount due pre-petition. Pursuant to the Bankruptcy Code, the Debtors are currently precluded from paying amounts due pre-petition for services rendered. The obligation to pay the Ameritech MARC deficiency, however, arose post-petition, after the end of the first contract year. The Debtors are obligated to pay the MARC deficiency due for the Ameritech region if they seek to continue to enforce the Ameritech MVP agreement because it is the only way in which they may meet the Ameritech MARC, as they were unable to reach the revenue commitment through the ordinary purchase of services.
With respect to the nonpayment for pre-petition services rendered, the counter-party to an MVP agreement is not without remedy if it perceives it is severely prejudiced by the nonpayment of prepetition amounts due as it may bring a motion to compel the debtors to make a determination of whether to assume or reject the contract. The SBC Affiliates have filed such a motion and, after a hearing on that motion, it will be addressed by separate order. Based upon the foregoing and upon all of the proceedings had before the Court and after due deliberation and sufficient cause appearing therefor, it is hereby
Ordered that the Motion is granted; and it is further
Ordered that, pending assumption or rejection of the MVP Agreements, SBC and the SBC Affiliates are required to perform all of their obligations under such agreements; and it is further
Ordered, that pursuant to section 362 of the Bankruptcy Code, the MVP Agreements may not be terminated or deemed terminated without Court authorization.