In Re Worldcom, Inc.

322 B.R. 530, 2005 Bankr. LEXIS 450, 44 Bankr. Ct. Dec. (CRR) 138, 2005 WL 678844
United States Bankruptcy Court, S.D. New York·Decided March 25, 2005·No. 18-14095·Published·Cited by 1 cases

Opinion

MEMORANDUM DECISION REGARDING DEBTORS’ MOTION TO DISMISS TELNET COMMUNICATIONS, INC.’S PROOF OF CLAIM NO. 8297

ARTHUR J. GONZALEZ, Bankruptcy Judge.

WorldCom, Inc. and certain of its direct and indirect subsidiaries, as debtors and debtors in possession (collectively, referred to as the “Debtors” herein at all times pre- and post-petition) objected to the proof of claim filed by Telnet Communications, Inc. (“Telnet”), Claim No. 8297. Claim No. 8297 relates to Telnet’s purchase of billing software from the Debtors. 1

I. Jurisdiction and Venue

The Court has subject matter jurisdiction over this proceeding pursuant to sections 1334(b) and 157(a) of title 28 of the United States Code. This matter is a core proceeding within the meaning of section 157(b) of title 28 of the United States Code. Venue is properly before this Court, pursuant to sections 1408 and 1409 of title 28 of the United States Code.

II. Background

The Debtors provide a broad range of communication services in over 200 countries on six continents. Through its core communications service business, which includes voice, data, internet and international services, the Debtors carry more data over its networks than any other entity. The Debtors were the second largest carrier of consumer and small business long distance telecommunications services in the United States, and provided a wide range of retail and wholesale communications services.

On July 21, 2002 and November 8, 2002, the Debtors commenced cases under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). On October 29, 2002, this Court entered an order establishing January 23, 2003, as the bar date for filing proofs of claim (the “Bar Date”). By entry of the Confirmation Order on October 31, 2003, this Court confirmed a plan of reorganization (the “Plan”). The Plan became effective on April 20, 2004 (the “Effective Date”). Upon the Effective Date, the Debtors’ name was changed to MCI WorldCom Communications, Inc.

Telnet was a small start-up company that purchased telecommunications services from the Debtors for resale. On January 29, 1996, Telnet signed a Representation Agreement (the “Representation Agreement”) with the Debtors. Pursuant *534 to the Representation Agreement, Telnet would receive a commission from the Debtors based upon a percentage of the billed telephone service usage of each customer that Telnet generated. In late February 1996, the relationship between Telnet and the Debtors expanded to enable Telnet to act as a re-biller of the Debtors’ products and services.

To enable Telnet to re-bill its customers for long distance services provided by the Debtors, the Debtors required Telnet to sign “WorldCom’s Commercial Application for Services” whereby Telnet committed to purchase $50,000 a month in long distance service over a three-year period. The idea behind the re-billing arrangement was for the Debtors to bill Telnet one rate for all of Telnet’s customers’ long distance use and then send Telnet a separate bill for each of Telnet’s customers with Telnet’s rate marked-up by a specific percentage set by Telnet on a customer-by-customer basis. That would enable Telnet to then send a bill to each of its customers at the marked-up rate. The difference in the two rates was to be Telnet’s compensation, in lieu of receiving a commission under the Representation Agreement.

In February 1996, Telnet had signed up for a tariffed product known as “WorldOne Option G.” The one-year period that Telnet purchased long distance services from the Debtors was governed by WorldCom FCC Tariff No. 2 (the “Tariff’). The Tariff included a clause which stated:

[The Debtors] shall not be liable for any direct, indirect, consequential, special, actual or punitive damages, or for any lost profits of any kind or nature whatsoever arising out of any defects or any other cause. This warranty and these remedies are exclusive and in lieu of all other warranties or remedies, whether express, implied or statutory, including without limitation implied warranties of merchantability and fitness for a particular purpose.

The Tariff, Sec. B.5.6 (Aug. 16, 1995).

The Tariff provided for a software program package known as Call Manager PC, also referred to as PC Manager Rerate Software (“Call Manager Software”), which would enable Telnet to re-rate its customers’ bills so that Telnet could send bills to its customers with marked-up re-rates. The Debtors’ account executives gave Telnet brochures that explained that the Call Manager Software could facilitate the issuance of the re-rated bills necessary to enable Telnet to re-rate and re-bill its customers. The Call Manager Software was sold under the Tariff for $25. On March 29, 1996, the Debtors amended the Tariff to remove all mention of the Call Manager Software as one of its services. The relationship between the Debtors and Telnet ended in April 1997.

Telnet alleges that it was assured that its customers would receive accurate and detailed bills which would reflect calls made, time of day, originating source and an accurate rate or charge. Telnet maintains that, from the beginning, it and its customers complained that the monthly long distance telephone bills prepared by the Debtors were incorrect; that the rates charged were incorrect; and that customers were being billed for calls they did not place. Telnet claims that because of these problems it lost its clients, credibility, and reputation and as a result could not further market the Debtors’ service. The Debtors allege, and Telnet does not deny, that Telnet engaged in self-help and withheld payments of thousands of dollars in outstanding invoices.

In 1998, Telnet filed suit in Texas state court, which was later removed to federal court, alleging that the Debtors misrepresented the reliability and accuracy of its billing services, failed to accurately bill *535 Telnet and Telnet’s clients, and failed to provide bills with the “call detail” allegedly promised by the Debtors’ representative. Telnet asserted state law claims for breach of contract, fraud, misrepresentation, negligent misrepresentation, negligence, gross negligence, tortious interference, violations of the Texas Deceptive Trade Practices Act (the “DTPA”), and violations of the Federal Communications Act (the “FCA”). Telnet further alleged that the Debtors tortiously interfered with Telnet’s contractual relations with its customers in that the Debtors misrepresented to at least one customer (Inter Recycling) that the Debtors were representing Telnet in addition to themselves in offering services to that customer, however, Telnet was never compensated for such sale.

Telnet filed its individual proof of claim in this Court on January 2, 2008, attaching as support the Third Amended Complaint it filed in the Texas proceeding. The Debtors filed their objection on May 28, 2003. Thereafter, the Debtors filed the Motion to Dismiss Telnet’s Individual Proof of Claim (the “Motion to Dismiss”). A hearing was held on January 13, 2004. This Memorandum Decision arises from the Motion to Dismiss.

III. Discussion

The Debtors present three reasons why Telnet’s claim cannot be allowed.

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In Re Worldcom, Inc., 322 B.R. 530, 2005 Bankr. LEXIS 450, 44 Bankr. Ct. Dec. (CRR) 138, 2005 WL 678844 (N.Y. 2005).

322 B.R. 530 (In Re Worldcom, Inc.) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.

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