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In re Best Payphones

June 15, 2010


The opinion of the court was delivered by: Paul G. Gardephe, U.S.D.J.


On May 17, 2007, the Bankruptcy Court issued a judgment against Appellant Best Payphones, Inc. ("Best") awarding Appellee Manhattan Telecommunications Corp. ("MetTel") $238,082.43 plus interest. ("5/17/07 Written Order") Pending before the Court is Best's appeal from the Bankruptcy Court's judgment. For the reasons stated below, the appeal is denied.


I. FACTS*fn1

Best installed and operated pay telephones in Manhattan, the Bronx, and Brooklyn, and contracted with other entities, known as competitive local exchange carriers ("CLECs"), to provide dial-tone service for its pay telephones. (5/8/07 Op. at 2) Best entered into a service contract with MetTel on September 24, 1999 (the "1999 MetTel Contract") under which MetTel was to provide dial-tone service for all of Best's pay telephones. On December 8, 2000, while the 1999 MetTel Contract was in effect, Best entered into a new agreement with Natelco (the "Natelco Agreement") and began using Natelco as its service provider. (Id. at 2-3) MetTel sued Best for unpaid fees under the 1999 MetTel Contract and obtained two judgments against Best totaling approximately $210,000.*fn2 (Id. at 3)

Natelco began providing service for Best's pay phones on January 31, 2001. (Id. at 3) Shortly thereafter, on February 23, 2001, Natelco filed a petition for relief under Chapter 11 of the Bankruptcy Code. (Id.) MetTel agreed to purchase Natelco's assets, including its service contracts and accounts receivable, on April 4, 2001. (Id. at 4)

Best received notice of the proposed sale to MetTel and filed an objection to the sale. (Id.) Best acknowledged that its service contract with Natelco was an executory contract within the meaning of Bankruptcy Code § 365, but objected to the sale on the ground that MetTel could not fully perform the contract. (Id.) The bankruptcy court overruled the objection and -- because of Natelco's dire financial condition and the need to avoid a break in service -- approved the sale from the bench on April 25, 2001. (Id.) Because Natelco could not continue to operate as of April 25, 2001, the bankruptcy court authorized MetTel to begin providing service to Natelco's customers immediately. (Id. at 5) The bankruptcy court entered a formal order assigning Natelco's service contracts to MetTel on May 16, 2001. (Id. at 5)

On May 8, 2001, MetTel sent Best the following "Notice of Disconnection":

This is a final disconnect notice. Payment of $267,328.61 is required by May 18, 2001 to avoid the suspension of your outgoing service on the following business day. Ten days later your service will be disconnected.

The following represents a breakdown of the amount due MetTel:

Judgment of Past Due Amounts $185,205.68 March 1, 2001 Invoice (Natelco) 41,703.01 April 1, 2001 Invoice (Natelco) 40,419.92 TOTAL $267,328.61

The above total does not include any legal fees or late fees that are associated with the judgment against Best Payphones. This will be determined at a later date.

If your service is suspended, you will have to pay $40.00 per line to have service restored, and a deposit of your last two (2) months invoices will be required. To restore your service promptly, payment must be made by certified check or wire transfer. Payment by personal check will delay the restoration of service until the date the check clears. Unless the full amount is paid prior to disconnection of your service, we will have no choice but to cancel your account. To re-establish service, you will have to pay your full account balance, a new connection charge, and possibly a deposit.

You can avoid these inconveniences by paying promptly.

If you have any questions about your bill please call me at (212) 607-2166. If you have already sent full payment, please confirm its receipt with METTEL to avoid any possible interruption in service.

METTEL (Pltf. Ex. 23)

Best responded by entering into a service agreement with yet another provider, BridgeCom, on May 15, 2001. (Id. at 8) Although Best later contended that MetTel's "Notice of Disconnection" constituted a breach of the Natelco Agreement, at the time Best did not give MetTel notice of breach or an opportunity to cure, despite the following notice and cure provision in the Natelco Agreement: "[Best] may terminate this Agreement for any material breach by [the provider] of its obligations under this Agreement, unless [the provider] cures such breach within ten (10) business days after the date written Notice is given to [the provider]." (Pltf. Ex.11 ¶ 7; Op. at 11)

MetTel filed a breach of contract suit against Best on August 15, 2001. (5/8/07 Op. at 8) That action was stayed when Best initiated Chapter 11 bankruptcy proceedings on October 23, 2001. (Id.) MetTel then filed a proof of claim in the bankruptcy proceedings. (Id. at 8-9)

II. The Bankruptcy Court's Decision

After a three-day bench trial, the bankruptcy court found that MetTel had proven that Best breached the Natelco Agreement and that MetTel was entitled to damages representing lost profits in the amount of $238,082.43 plus statutory interest. (Id. at 1-2) In so holding, the bankruptcy court found that MetTel had breached the Natelco Agreement by serving a notice of disconnection conditioned on payment of the judgment arising from the unrelated 1999 MetTel Contract. (Id. at 10-11) The court further found, however, that Best was obligated to notify MetTel of that breach and to provide MetTel with an opportunity to cure before it terminated the Natelco Agreement. It is undisputed that Best failed to give such notice to MetTel before entering into the agreement with BridgeCom on May 15, 2001. (Id. at 11-15) Accordingly, the court concluded that Best breached the Natelco Agreement when it terminated that agreement on May 15, 2001.

The court rejected Best's defenses to liability, finding that MetTel had not unequivocally repudiated the Natelco Agreement, and that accordingly Best was not excused from complying with the notice and opportunity to cure provisions set forth in the Natelco Agreement. (Id. at 11-13) The court also concluded that language differences between the Natelco Tariff and the MetTel Tariff were not material, and that accordingly Best had no right to terminate the Natelco Agreement on this ground. (Id. at 21) Best's anti-slamming arguments were likewise rejected. The court held that neither New York anti-slamming laws nor FCC waivers granted to Natelco invalidated Best's service agreement with MetTel. The court further held that even if these provisions could be read as requiring notice and consent to assignment, the Bankruptcy Code invalidated any provisions limiting assignment. (Id. at 25)

The court awarded lost profits to MetTel based on the difference between the gross income MetTel lost when Best terminated the Natelco Agreement and the costs MetTel saved as a result of the breach. (Id. at 32) The court relied on data of Best's usage levels in 2000 under the 1999 MetTel Contract. This usage data was applied to the rates specified in the Natelco Agreement and Verizon's wholesale tariff. (Id. at 32-33) The court included an FCC line charge for each line used by Best in these calculations, finding that this line charge was a surcharge commonly billed to CLECs. (Id. at 35)

III. Issues Presented on Appeal

On appeal, Best argues that:

(1) MetTel repudiated the Natelco Agreement, and that this repudiation excused Best's obligation to comply with the notice and cure provisions of the Natelco Agreement (Best Br. at 1);

(2) even if Best was required to comply with the notice and cure provisions, Best's obligation to provide 10 business days notice to MetTel of the breach was excused in light of MetTel's demand that Best make payment ...

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