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In re Asia Global Crossing

April 30, 2009


The opinion of the court was delivered by: Richard J. Holwell, District Judge


The principal question in this bankruptcy appeal is whether a party confronted with an anticipatory repudiation of a contract must prove it was ready, willing, and able to perform in order to recover a downpayment or prepayment under the contract. The Court holds that the answer to that question is "no."

Appellant-claimant 360Networks Corporation ("360") appeals from orders of the United States Bankruptcy Court for the Southern District of New York (Bernstein, C.J.) expunging its $100 million claim during the bankruptcy proceedings of Asia Global Crossing, Ltd. 360's claim originates in a transaction where 360 acquired an indefeasible right to use $150 million of bandwidth on Global Crossing's Asian networks, and Global Crossing acquired the right to use $200 million of bandwidth on 360's North American network. Commentators (and, apparently, the Bankruptcy Court) view such transactions with skepticism, because they have been used to artificially inflate revenues reported on businesses' financial statements.

The Bankruptcy Court held that although Global Crossing repudiated its contractual obligations when it obtained the court's approval to sell substantially all its assets, 360 could not recover on its claim because it failed to show it was ready, willing, and able to takedown (i.e., order) capacity. This Court holds that because 360 is merely seeking to recover its $100 million prepayment, the Bankruptcy Court erred in requiring 360 to show it was ready, willing, and able to takedown capacity. The Court, however, remands for further findings as to whether the Global Crossing-360 transaction is a "hollow swap," and therefore unenforceable on public policy grounds.


A. The Parties

The parties to this appeal operate, or operated, in the once-lucrative field of fiber optic data communications. 360, whose business focuses on the North American market, provides telecommunications capacity to other companies and businesses. Debtors, including Asia Global Crossing Ltd. and Asia Global Crossing Development Co. (collectively, "Asia Global Crossing"), were indirect majority owned subsidiaries of Global Crossing, Ltd. Global Crossing Bandwidth Inc. ("GC Bandwidth") was a selling agent for various Global Crossing entities. For convenience, the Court refers to the Global Crossing entities collectively as "Global Crossing" except where more detail is necessary.

B. The Master Agreement and Guaranty

In March 2001, Global Crossing and 360 entered into a swap transaction in which each party agreed to purchase bandwidth on the other's network. Global Crossing agreed to purchase $200 million of capacity on 360's North American network and transatlantic cable. 360, for its part, agreed to purchase $150 million of capacity on Global Crossings' Asian networks. (See In re Asia Global Crossing, Ltd., 379 B.R. 490, 491-92, 502 & n.3 (Bankr. S.D.N.Y. 2007) ("Asia Global Crossing III").) The parties netted their payment obligations, and Global Crossing paid $50 million to 360. (Id. at 502; Trial Tr. 41, July 26, 2007.)

Members of Congress, Global Crossing shareholders, and the financial press have expressed concern that such transactions are nothing more than an accounting trick-a "hollow swap"-designed to artificially inflate the parties' revenues. (See, e.g., In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319, 326 (S.D.N.Y. 2004) (Lynch, J.) (describing shareholder allegations against Global Crossing and Arthur Andersen LLP); In re Global Crossing Sec. & ERISA Litig., 225 F.R.D. 436 (S.D.N.Y. 2004) (Lynch, J.) (approving settlement of claims against Global Crossing); Dennis K. Berman, Julia Angwin & Chip Cummins, How Some Firms Booked Revenue that Was Bogus- Unraveling of Transactions in Highflying Industries Lowered the Boom on Era, The Asian Wall St. J. (Dec. 24, 2002), at A1; Katherine Reynolds Lewis, 360networks in Scheme with Global Crossing: Allegations Made at Congressional Hearing, Nat'l Post (Sept. 25, 2002), at FP12; Andrew Backover & Kevin Maney, Once-Popular Capacity Swaps Now Tangle Telecoms, USA Today (Feb. 28, 2002), at 1B.) On October 1, 2002, the Oversight and Investigations Subcommittee of the House Energy and Commerce Committee held hearings on whether various swaps Global Crossing entered into were "sham transactions designed to boost revenues." (Capacity Swaps by Global Crossing and Qwest: Sham Transactions Designed To Boost Revenues?: Hearings Before the Subcomm. on Oversight and Investigations of the H. Comm. on Energy and Commerce, 107th Cong. 1 (2002), available at Patrick Joggerst, Global Crossing's former President of Carrier Sales, testified that Global Crossing and 360 entered into the transaction at issue in this case for the sole purpose of meeting Global Crossing's quarterly revenue projections. (Id. at 24.) Jim Gorton, Global Crossing's former General Counsel, testified that the transaction "presented too much of a risk to the company," and that "the legal risks associated with a 360 bankruptcy to me outweighed any business purpose that [Global Crossing] had for the transaction." (Id. at 533.)

As part of the swap transaction, two 360 subsidiaries entered into a contract, labeled the "Master Agreement," with GC Bandwidth on March 31, 2001. (See Pl.'s App., Item 1, at 4 (the "Master Agreement").)Under the Master Agreement, 360 acquired an indefeasible right to use (an "IRU," in industry parlance) $100 million of bandwidth on Global Crossing's Asian networks. (Master Agreement § 2(a); see generally Arun S. Subramanian, Note, Assessing the Rights of IRU Holders in Uncertain Times, 103 Colum. L. Rev. 2094, 2094-95 (2003).) In exchange, 360 agreed to pay Global Crossing $100 million. (Master Agreement § 2(a).)

Standing on its own, the Master Agreement did not give 360 the right to use any particular network facilities. Instead, 360 acquired the right to order or "takedown" Global Crossing capacity in the future at a rate specified in § 2(l) of the agreement. Section 2(l) provided that the amount of capacity 360 was entitled to would be determined by market prices at the time of delivery. 360 was entitled to $100 million of capacity at the lower of (i) the price listed in Exhibit C to the agreement or (ii) the lowest price offered by Global Crossing or its affiliates to a non-affiliated third party. (See Master Agreement § 2(l).) To secure GC Bandwidth's performance, Asia Global Crossing delivered a guaranty to 360, which was dated March 30, 2001. (See Pl.'s App., Item 1, at 81 ("Guaranty").) In it, Asia Global Crossing guaranteed the full performance of GC Bandwidth's responsibility to provide bandwidth under the Master Agreement, as well as certain obligations related to the provision of collocation space. (Guaranty § 2.1.)

C. Subsequent Events

Less than three months after the parties signed the Master Agreement, 360 filed for protection under Canada's bankruptcy statute, the Companies' Creditors Arrangement Act. (Asia Global Crossing III, 379 B.R. at 494.) Shortly thereafter, 360 abandoned its plans to develop trans-Pacific capacity and began efforts to sell the rights it acquired under the Master Agreement. (Id.) No buyers emerged. (Id.) Although 360 could have ordered capacity and "warehoused" it-i.e., left the capacity unused for resale to a future buyer-the Bankruptcy ...

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