The opinion of the court was delivered by: David G. Larimer United States District Judge
Plaintiff, Global Crossing Bandwidth, Inc. ("Global"), brings this diversity action against Locus Telecommunications, Inc. ("Locus"), seeking damages occasioned by Locus's alleged breach of a contract for telecommunications services between Global and Locus. Locus in turn has asserted several counterclaims against Global.
Both Global and Locus have moved for summary judgment. See Dkt. #40, #47. For the reasons that follow, Global's motion is granted in part and denied in part, and Locus's motion is granted in part and denied in part.
Global is a California corporation with its principal place of business in New York.
Locus is a Delaware corporation with its principal place of business in New Jersey.
On May 26, 2000, Global and Locus entered into a carrier service agreement ("Agreement"), by which Global agreed to provide, and Locus agreed to purchase, network transport and other telecommunications services for one year. Complaint Ex. A. The Agreement was amended and extended several times, and was eventually continued on a month-to-month basis. Id.
At various times during the parties' contractual relationship, disputes arose about certain matters, the particulars of which will be addressed later in this decision. At least in part because of those disputes, on October 6, 2005, Nelson Gomez, Locus's Senior Director of Risk Management, sent Global a letter informing Global of Locus's intention to terminate the Agreement effective January 5, 2006. Gomez added that "Locus will continue to abide by its obligations under the Agreement until the Termination Date." Dkt. #48-3 ¶ 29 and at 26.
On November 29, 2005, Global sent Locus a letter which stated, in part, "This letter serves as a notice of default for Locus Telecommunications, Inc." Id. ¶ 20 and at 19. The letter stated that there was a past-due balance on Locus's account of over $1.6 million, which Global sa8i dh o"murus.s"t b Teh pea liedt tweri tahlisno 4stated that if Locus did not "cure this breach" by paying that amount in full by 5:00 p.m. on Thursday, December 1, 2005, Global "may pursue its remedies" under the Agreement. Global added that those remedies "may include service termination" and that "[s]hould termination result, Global Crossing will immediately terminate services as of 5:00 PM EDT Thursday, December 1 ... ." Id.
In a second letter dated the next day, November 30, 2005, however, Global informed Locus that "Global Crossing hereby revokes the Notice of Default served upon Locus Telecommunications, Inc. on November 29, 2005 and serves this notice in its place." Id. ¶ 22 and at 21.*fn1 That letter stated that "[a]though [Locus's] account ... has a total past due balance greater than $915,140.14, this is the amount that must be paid by 5:00 PM EST Monday, December 5, 2005." Except for the change of date from December 1 to December 5, the letter contained language identical to that in the November 29 letter concerning the possibility that Global might pursue its available remedies, including immediate termination of its services.
It appears that the parties may have made some attempt to resolve their disputes, but those efforts were not successful, and the Agreement, and Global's services under the Agreement, were terminated.*fn2
Global commenced this action on February 6, 2006. The complaint asserts four causes of action, the first three of which seek $1.9 million in damages. The first cause of action asserts a claim for breach of contract, alleging that Locus failed to pay for services rendered by Global under the Agreement. The second cause of action is premised on theories of quantum meruit, unjust enrichment, and constructive trust, and alleges that Locus has received benefits under the contract for which it has not compensated Global. The third cause of action asserts an account-stated claim based upon Global's invoices to Locus.
The fourth cause of action, captioned "Enforcement of Security Interest," alleges that on August 20, 2001, Global and Locus entered into a security agreement by which Locus gave Global a security interest in Locus's existing and future accounts receivable, contract rights, and other assets, as security for Locus's obligations under the Agreement. See Complaint Ex. C (Dkt. #1-4). Global alleges that because Locus has breached the Agreement, Global is entitled to enforce the security agreement and take possession of the collateral.
In its answer, Locus has asserted a three-count counterclaim, alleging that Global has improperly or erroneously imposed and sought to collect various charges against Locus. Locus asserts claims for breach of contract, violation of the Federal Communications Act ("FCA" or "Act"), and for attorney's fees under the Act. Locus seeks damages in an amount to be determined at trial.
Global contends, first, that Locus's counterclaims are barred by certain events that occurred in the course of Global's bankruptcy proceedings. The relevant facts are described in more detail below, but in short, Global filed for Chapter 11 protection in January 2002, and its bankruptcy plan became effective in December 2003. Global now asserts that the bankruptcy court's confirmation of Global's plan, as well as a certain "cure order" issued by the bankruptcy court during the bankruptcy proceedings, bar all of Locus's counterclaims in this action.
Second, Global asserts that Locus failed to dispute Global's invoices in accordance with the procedures prescribed by the Agreement. Under the terms of the Agreement, Global argues, Locus has thereby waived its right to contest those invoices, and the invoices are binding on Locus.
Global also raises several arguments pertaining to the individual charges in dispute. For instance, Global seeks summary judgment dismissing one of Locus's counterclaims, which is sometimes referred to as the "inbound minutes" claim, in which Locus alleges that Global improperly billed Locus for calls delivered to Locus's switch, even if the calls were never completed to the party being called. Global contends that this counterclaim is flatly refuted by the terms of the Agreement, which, according to Global, provided that Global was entitled to bill Locus for such calls.
Similarly, Global seeks summary judgment on a claim concerning outbound calls to the United Kingdom ("UK"), in which Locus alleges that Global improperly billed it at wireless rates, which were higher than the rates applicable to landline calls. Global contends that this claim is defeated by the undisputed evidence showing that the calls in question did terminate at wireless phones in England. Global also advances other arguments relating to particular components of the claims at issue, which will be addressed below.
In its cross-motion, Locus contends that its counterclaims are not barred by Global's bankruptcy proceedings, because the counterclaims are based on a theory of recoupment. Locus contends that both relevant case law and Global's bankruptcy plan itself permit the survival of claims sounding in recoupment against a party in bankruptcy.
In addition, Locus argues that Global, through its course of dealing with Locus, effectively modified the Agreement, by never seeking to enforce the dispute procedures that Global now claims Locus failed to follow. Locus contends that Global has, therefore, implicitly waived any claims or defenses it might have had based upon Locus's alleged failure to comply with the dispute procedures called for by the Agreement.
Locus further contends that: Global's own breaches of the Agreement preclude it from recovering on its breach of contract claim; none of the charges for which Global seeks recovery are valid; Global's claim for unjust enrichment is precluded by Global's claim for breach of contract; Global has failed to establish the elements of an account-stated claim; all of Global's claims for charges due on or before February 5, 2004 are time-barred under the FCA; Global's calculations of its alleged damages are erroneous; and the minimum monthly usage charges imposed by Global are unenforceable.
I. Effect of Global's Bankruptcy Proceedings
On January 28, 2002, Global's parent corporation, Global Crossing Ltd., and fifty-four of its subsidiaries, including Global, filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the Southern District of New York. An automatic stay of all claims against Global and the other debtors in that action took effect on that date pursuant to 11 U.S.C. § 362.
The debtors' Plan of Reorganization ("Plan") became effective on December 9, 2003. The Plan provided, in part, that upon its effective date, all entities holding claims against the debtors as of that date would be permanently enjoined from commencing or continuing any action or proceeding to collect any property from the debtors on account of such claims. Dkt. #41-14 ¶ 9.5(a). The Plan further stated that "[i]n no event shall the [debtors, following their reorganization pursuant to the Plan] have any liability or obligation for any Claim against ... the Debtors arising prior to the Effective Date, other than the Assumed Liabilities." Id.
In addition, on December 13, 2002, the bankruptcy court issued an order ("cure order") authorizing the debtors to assume certain executory contracts, and fixing the "cure cost" with respect to each of those contracts, i.e., the amount that had to be paid in order to cure any defaults under the contracts. The order provided that the cure costs listed in the order "are final and binding for all purposes and constitute a final determination of total cure required to be paid in connection with assumption of each such executory contract," and that they "shall not be subject to further dispute or audit ... ." Dkt. #41-11 ¶¶ 5, 6. Global's Agreement with Locus was among the contracts listed in the cure order, and the stated cure "cost" of that contract was zero dollars. Id. at 8.*fn3
Prior to the entry of the cure order, notice of the proposed cure costs was sent to all interested parties, including Locus. The notice stated, inter alia, that "if you have a contract ... with the debtors, your contract ... may be subject to assumption and any cure costs associated with assumption fixed without further notice in accordance with the procedures described herein." Dkt. #41 Ex. 10 ¶ 3 (emphasis omitted). The notice also stated that any objections to the proposed cure costs had to be filed no later than December 6, 2002, and that if no timely objections were received, "the Cure Costs shall be fixed in the amount listed ... ." Id. ¶ 6. Locus did not file any objections to the proposed zero-dollar cure cost with respect to its contract with Global.
Global contends that the cure order, the Plan, and Locus's failure to object to the Plan or cure order, or to seek some relief in Global's bankruptcy proceedings, render the issues before the Court in the case at bar simple and straightforward. According to Global, the cure order and the Plan bar both Locus's counterclaims and its defenses to Global's claims in this action. Global also asserts that the terms of the Agreement make clear that Global is entitled to collect the amounts that it seeks in this action. In response, Locus argues that its counterclaims are not barred by Global's bankruptcy proceedings because they are based on a theory of recoupment or setoff.
"While the Bankruptcy Code does not mention recoupment explicitly, bankruptcy law does recognize the recoupment doctrine." In re McMahon, 129 F.3d 93, 95-96 (2d Cir. 1997). As the Supreme Court has explained:
It is well settled ... that a bankruptcy defendant can meet a plaintiff-debtor's claim with a counterclaim arising out of the same transaction, at least to the extent that the defendant merely seeks recoupment. Recoupment permits a determination of the just and proper liability on the main issue and involves no element of preference.
Reiter v. Cooper, 507 U.S. 258, 265 n. 2 (1993) (internal citations and quotation marks omitted). See also In re De Laurentiis Entertainment Group Inc., 963 F.2d 1269, 1276-77 (9th Cir.) (right of setoff survives even if claimant fails to file an objection prior to plan confirmation), cert. denied, 506 U.S. 918 (1992); In re Davidovich, 901 F.2d 1533, 1539 (10th Cir. 1990) ("the right to assert a setoff against a mutual, prepetition debt owed the bankrupt estate survives even the Bankruptcy Court's discharge of the bankrupt's debts"); In re A and C Elec. Co., 211 B.R. 268, 273 (Bankr. N.D.Ill. 1997) ("The right of recoupment is unaffected by a discharge in bankruptcy") (citing In re Flagstaff Realty Associates, Inc., 60 F.3d 1031, 1035-36 (3d Cir. 1995)).
Though recognizing the recoupment doctrine, the Second Circuit has also characterized it as "a limited one [that] should be narrowly construed." McMahon, 129 F.3d at 97. In particular, the court has stated that for the recoupment doctrine to apply, "the claim and counterclaim must arise out of the same transaction or set of transactions." In re Malinowski, 156 F.3d 131, 133 (2d Cir. 1998). That principle is in keeping with the rationale for the doctrine, which is that where a claim and counterclaim concern the same transaction, the court should strive "to do justice viewing [that] transaction as a whole." Id.
In Westinghouse Credit Corp. v. D'Urso, 278 F.3d 138 (2d Cir. 2002), for example, the Court of Appeals held that "it would be inequitable ... to apply recoupment" to the facts before it, even though the case "concern[ed] a single integrated transaction, because the obligations to which [the respondent] wishes to apply recoupment arise from discrete and independent units within that transaction ... ." Id. at 146. The court made clear that it is not enough that a counterclaim arise out of the same transaction for the doctrine to apply; the circumstances must also be such that "it would be inequitable for the debtor to enjoy the benefits of that transaction without also meeting its obligations." Id. at 147 (quoting Malinowski, 156 F.3d at 133).
Applying these principles to the case at bar, I conclude that Counts II and III of Locus's counterclaim are barred by the Plan, but that Count I sounds in recoupment, and accordingly is not barred. Count II alleges that "Global Crossing's course of dealing with Locus ... constitute[s] unjust and unreasonable practices that are unlawful in violation of [the FCA]." Dkt. #4 ¶ 73. That claim is not so directly related to the Agreement, and to the alleged breach of the Agreement as set forth in Global's complaint, for the recoupment doctrine to apply. The counterclaim may relate to the same contractual relationship as Global's claims against Locus, but the basis for liability asserted in these two counts of the counterclaim is separate from and independent of the parties' obligations under, or any breach of, the Agreement. Although the counterclaim alleges that Global's "failure to abide by the Agreement" in certain respects also constitutes a violation of the Act, Dkt. #4 ¶ 73, the liability asserted in Count II arises not from the Agreement itself, but from a federal statute.
Count II may be related to the Agreement, then, but--particularly in light of the Second Circuit's admonition that the recoupment doctrine is to be narrowly construed--I do not believe that the doctrine can properly be stretched to cover this claim. See United States v. Hollis, No. SA-08-CV-0362, 2008 WL 4179474, at *1 (W.D.Tex. Sept. 7, 2008) ("Assuming such [counter]claims arise out of the same transaction as the one sued upon, Hollis's [counter]claims do not sound in recoupment or offset," but were instead based upon alleged violations of federal and state statutes and regulations). As stated, the recoupment doctrine is based upon the idea that when faced with obligations arising out of a single integrated transaction, the court should seek to give effect to the mutual obligations arising out of that transaction. D'Urso, 278 F.3d at 147. Penalties or obligations arising out of a statute, independent of the transaction itself, are therefore outside the scope of that doctrine. See Malinowksi, 156 F.3d at 133 ("since recoupment is an equitable, non-statutory exception to the automatic stay, it should be limited in bankruptcy to cases in which 'both debts ... arise out of a single integrated transaction so that it would be inequitable for the debtor to enjoy the benefits of that transaction without also meeting its obligations'") (quoting In re University Med. Ctr., 973 F.2d 1065, 1081 (3d Cir. 1992)). Count II is therefore barred.
Count III of Locus's counterclaim asserts a claim for attorney's fees under the FCA. Section 206 of the Act provides that a common carrier who violates the Act is liable "for the full amount of damages sustained in consequence of any such violation ... together with a reasonable counsel or attorney's fee." 47 U.S.C. § 206. Since Locus's substantive FCA claim is not cognizable in this action, however, its claim for attorney's fees under the Act is barred as well.
I reach a different result as to Count I of Locus's counterclaim, however. In Count I, Locus alleges that Global breached the Agreement in several ways, generally involving Global's imposition of certain charges that Locus contends were not justified, either factually or under the terms of the Agreement. For example, Locus alleges that it was improperly billed for certain calls to the UK, based on Global's use of the wrong numerical code for those calls. Locus also alleges that certain charges, or at least the amount of certain charges or the manner in which Global sought to collect them, contravened the express terms of the Agreement.
That claim arises directly out of the transactions that form the basis for Global's claims against Locus, and therefore the recoupment doctrine applies to this counterclaim. Resolution of Global's claims and of Count I of Locus's counterclaim would both require the factfinder to determine which, if any, charges at issue here were properly billed, and it would be difficult if not impossible to separate Global's claims from Locus's counterclaim.
Global contends that Count I should be dismissed in any event because it could only be used as a defense, in the form of a setoff, to Global's claims, rather than as a counterclaim asserting an independent claim for "recoupment" against Global. There is authority, however, "that 'both set-offs and recoupments are to be pleaded as counterclaims rather than affirmative defenses.'" Canadian St. Regis Band of Mohawk Indians ex rel. Francis v. New York, 278 F.Supp.2d 313, 353 (N.D.N.Y. 2003) (quoting Middletown Plaza Associates v. Dora Dale of Middletown, Inc., 621 F.Supp. 1163, 1165 (D.Conn. 1985)). See also 3 James W. Moore et al., Moore's Federal Practice §§ 13.11, 13.31 (3d ed. 2008) (stating that "[r]ecoupment claims--the setting off against asserted liability of a counterclaim arising out of the same transaction as the initial claim--are by definition compulsory counterclaims," and that "[c]laims for setoff arise from a transaction separate from the subject matter of the opposing party's claim," and "are permissive counterclaims").*fn4 Furthermore, even if Locus had misdesignated its claim in this regard, that would have little impact here as a practical matter. See Reiter, 507 U.S. at 263 ("it makes no difference that petitioners may have mistakenly designated their counterclaims as defenses, since Federal Rule of Civil Procedure 8(c) provides that 'the court on terms, if justice so requires, shall treat the pleading as if there had been a proper designation'").
For the same reason, I also reject Global's argument that the counterclaim asserted in Count I is barred by the doctrine of res judicata. In general, "the confirmation of a Chapter 11 plan operates to discharge the debtor of debts incurred prior to confirmation." In re Layo, 460 F.3d 289, 294 (2d Cir. 2006) (internal quotation marks omitted). See also In re Flushing Hosp. and Med. Center, 395 B.R. 229, 244 (Bankr. E.D.N.Y. 2008) ("Confirmation orders are given res judicata effect, and may not be subject to collateral attack"); In re Cross Media Marketing Corp., 367 B.R. 435, 447 (Bankr. S.D.N.Y. 2007) ("It is well settled that a bankruptcy court's order confirming a chapter 11 plan is treated as a final judgment on the merits with full res judicata effect").
That rule only applies, however, to claims that were not preserved by the plan itself. See In re I. Appel Corp., 300 B.R. 564, 567 (S.D.N.Y. 2003) ("the confirmation of a plan of reorganization prevents the subsequent assertion of any claim not preserved in the plan"), aff'd, 104 Fed.Appx. 199 (2d Cir. 2004); In re Bousa Inc., No. 89-B-13380, 2006 WL 2864964, at *5 (Bankr. S.D.N.Y. Sept. 29, 2006) ("The Second Circuit typically affords confirmation of a plan res judicata effect, preventing the assertion of claims not preserved in the plan") (citing Silverman v. Tracar, S.A., 255 F.3d 87, 92 (2d Cir. 2001).
The Plan here does expressly provide for some recoupment rights: it enjoins entities with claims against the debtors from asserting any right of setoff, "except for recoupment" against any obligation due to the debtors. Dkt. #41 Ex. 12 ¶ 9.5(a). Count I of the counterclaim is therefore not barred by res judicata.
II. Locus's Alleged Failure to Comply with the Dispute Procedures
Global contends that under the Agreement, Locus was permitted to withhold payment of an invoice only if the invoice was disputed within thirty days of its receipt from Global. With respect to the invoices at issue in this case, Global further contends that Locus withheld payment notwithstanding its failure to file a dispute within the thirty-day period. Having failed to file a timely dispute, Global contends, Locus lost any right it may have had to withhold payment, and Global's invoices are therefore binding on Locus. In response, Locus contends that Global unilaterally modified the Agreement with respect to the dispute procedures, by not insisting upon compliance with, or in any way attempting to enforce, the provisions setting forth those procedures.
In support of its position, Global cites Frontier Communications of the West, Inc. v. North American Long Distance Corp., No. 99-CV-0868, 2001 WL 1397856 (W.D.N.Y. Oct. 24, 2001). That case involved a dispute between a telecommunications provider ("Frontier") and another telecommunications company ("NALD Canada"), who had entered into a contract similar to that between Global and Locus.*fn5
The court in Frontier granted summary judgment for Frontier on its contract claim against NALD Canada, in part based on NALD Canada's breach of the dispute provisions in the parties' agreement. In so ruling, the court stated: even assuming that NALD Canada had properly disputed each and every unpaid invoice, according to the terms of the Agreement plaintiff is still entitled to summary judgment. Pursuant to the clear and explicit terms of the Agreement, NALD Canada was required to pay the invoices--including the disputed portions--in full and then dispute them in writing, with supporting documentation, within sixty days. It is undisputed that NALD Canada did not pay the disputed invoices--as it was required to do and as it had agreed to do pursuant to paragraph 4 of the Agreement--; accordingly NALD Canada breached the Agreement. Furthermore, because the Agreement required NALD Canada to pay the invoices timely and in full and then dispute any contested charges in writing, with supporting documentation, within 60 days of the invoice date and because this time frame has long since expired, NALD Canada has lost its right to avail itself of the dispute resolution mechanism provided for in the Agreement. Accordingly, summary judgment will be entered in favor of Frontier against NALD Canada. 2001 WL 1397856, at *4. Global argues that the same reasoning applies to the case at bar.
The contractual provisions concerning the dispute procedure in the case at bar are similar, but not identical, to those in Frontier. In Frontier, the parties' agreement provided in part that NALD Canada "ha[d] the affirmative obligation of providing written notice and supporting documentation for any good-faith dispute with an invoice ('Dispute') within 60 Business Days after [its] receipt" of the invoice, and that if NALD Canada "d[id] not report a Dispute within the 60 Business Day period, [NALD Canada would be deemed to] have irrevocably waived its dispute rights for that invoice." The agreement further provided that NALD Canada would "pay disputed amounts, subject to resolution of the Dispute." Id. at *1 n.4.
In the case at bar, § 4 of the Agreement provides that Locus "shall have the affirmative obligation of providing written notice of any dispute with an invoice within 90 days after receipt of the invoice by Locus," and that "Locus may withhold payment only on amounts so disputed within 30 Business Days after Locus's receipt of the Invoice. Locus may not withhold payment of amounts disputed after such 30 Business Day period." Dkt. #41-3 at 8. The Agreement also states that "[i]f Locus does not report a dispute with respect to an invoice ...