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Orius Corp. v. Qwest Corp.

August 9, 2007

ORIUS CORP., DEBTOR-APPELLANT, AND DEUTSCHE BANK TRUST COMPANY AMERICAS, LENDER-APPELLANT,
v.
QWEST CORPORATION, APPELLEE.



The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

Qwest Corporation ("Qwest") is an incumbent local exchange carrier that provides telecommunications services in fourteen western states. Prior to December 12, 2005, Appellants, Orius Corporation and other joint debtors (collectively, the "Debtors"), contracted with Qwest to perform construction and maintenance work on Qwest's network. On December 12, 2005, the Debtors filed for bankruptcy and subsequently breached their contracts with Qwest by ceasing portions of their construction and maintenance work. During the course of the Debtors' bankruptcy proceedings, the Debtors and Qwest reached an agreement in order to streamline the process by which Qwest would pay the Debtors for the work the Debtors had performed under the contracts while also asserting claims for the money Qwest believed it was owed as a result of the Debtors' breach. The bankruptcy court's rulings relating to this agreement form the basis of this appeal.

First, the Debtors appeal the bankruptcy court's October 26, 2006 order directing the Debtors to pay Qwest money that Qwest claimed it was owed as a result of the Debtors' breach and the bankruptcy court's order denying the Debtors' motion for reconsideration of that ruling. Second, the Debtors appeal the bankruptcy court's November 7, 2006 order overruling their objections to certain portions of Qwest's claims. In this opinion, the court also addresses the appeal of Deutsche Bank Trust Company Americas, a lender to the Debtors and agent for certain other lenders ("the Lenders"). The Lenders challenge the bankruptcy court's November 7, 2006 order striking the Lenders' objections to Qwest's claims on the grounds that the Lenders lacked standing. For the reasons set forth below, the court remands the case to the bankruptcy court for further consideration.

BACKGROUND*fn1

A. The Parties

Qwest provides various telecommunications services in fourteen western states of the United States as an incumbent local exchange carrier. (Qwest Resp. on Order Overruling Debtors' Objections at 3.) At some point prior to December 2005, Qwest entered into various construction contracts with Orius Corporation and its affiliated debtors; under these contracts, the Debtors agreed to perform certain construction and maintenance work on Qwest's telephone network and to serve as general contractors on projects Qwest had undertaken in Minnesota, Idaho, Oregon, and Washington. (Stipulation Between Debtors and Qwest Corporation Authorizing and Directing Payment of Monies to the Debtors, Establishment of Trust Accounts to Resolve Lien Rights, and the Establishment of Qwest Setoff Trust Account (the "Stipulation") ¶ A; Qwest Resp. on Order to Pay at 2.) The Debtors hired subcontractors to perform some of the work required under their contracts with Qwest. (Stipulation ¶ D.) The Debtors do not dispute that it was their responsibility to supervise their subcontractors and ensure that the subcontractor's work was completed to Qwest's specifications and that the subcontractors were paid in a timely manner. (Qwest Resp. on Order to Pay at 2.)

B. Debtors' Bankruptcy Filing

On December 12, 2005, Orius Corporation and each of its affiliated debtors filed petitions for voluntary relief under Chapter 11 of Title 11 of the United States Code. (Debtors' Brief on Order to Pay at 4.) Pursuant to a pre-petition credit agreement between the Debtors and Lenders, the Debtors owed the Lenders approximately $109,939,000 at the time they filed for bankruptcy. (Lenders' Brief at 3.) The Debtors' obligations to the Lenders were "secured by liens on substantially all of the Debtors' assets including the Debtors' accounts receivable." (Id.) The Lenders assert that, because they are undersecured (a fact that Qwest does not contest), they have "significant secured claims and unsecured deficiency claims against the Debtors' estate." (Id.)

It is undisputed that the Debtors breached at least some of their contracts with Qwest after December 12, 2005. Indeed, after filing for bankruptcy, the Debtors informed Qwest that they would not be able to complete some of their work under the contracts and would instead be liquidating their assets. (Debtors' Brief of Order to Pay at 4; Qwest Resp. on Order to Pay at 3.) Qwest asserts that, when they breached their contracts, the Debtors "walked off their jobs in Minnesota; ceased supervising and paying subcontractors; failed to ensure that Qwest's deadlines and specifications were met; and failed to turn over necessary construction and maintenance materials, records, and contracts in connection with the jobs they abandoned." (Qwest Resp. on Order Overruling Debtors' Objections at 4.) As a result of the Debtors' breach, subcontractors also walked off jobs and asserted mechanic's liens and pre-lien notices against Qwest's property and its customers. (Qwest Resp. on Order to Pay at 3.) Despite their breach, the Debtors claim that they worked with Qwest to effect an orderly transition for some of the work that they were unable to complete by, for example, maintaining employees in certain regions to wind-down projects. (Debtors' Brief on Order to Pay at 4-5.)

Qwest describes the fallout from the Debtors' breach as extensive. According to Qwest, the Debtors' breach created a risk that Qwest would face state and regulatory penalties for failing to meet certain construction and service deadlines. (Qwest Resp. on Order to Pay at 3.) Qwest claims, further, that the Debtors' breach forced Qwest to use "significant internal and external resources, including attorneys and its own employees, to perform management, supervision, inspection, construction, and maintenance services in the voids left by the Debtors." (Id. at 4.) For example, Qwest asserts that the Debtors' breach left it without a general contractor in Milwaukee, forcing Qwest to use internal resources that would not otherwise have been dedicated to that job. (Id.) Qwest also asserts that as a result of the Debtors' breach of their contract obligations, Qwest was required to negotiate and resolve "third-party and outside plant damages" that were the Debtors' obligations and pay to recover material and equipment that was improperly sold by the Debtors. (Id.) Qwest also claims that it incurred substantial costs when it hired outside counsel to negotiate with the Debtors to satisfy the claims of unpaid subcontractors and to negotiate a resolution process with the Debtors, which, according to Qwest, protected the Debtors from liability for massive penalties and other damages flowing from their breach. (Id. at 5.) In Qwest's view, the Debtors are contractually obligated to indemnify Qwest for costs and damages resulting from any breach, including Qwest's attorneys' fees and the cost to Qwest using its own employees to fill voids left by the Debtors. (Id. at 2.)

As of December 12, 2005, Qwest owed the Debtors millions of dollars in unpaid invoices for work the Debtors had performed under the contracts up to that point. (Debtors' Brief on Order to Pay at 5.) Qwest took the position that it was also owed monies from the Debtors as a result of the Debtors' breach and other damage claims and that it had the right to set off these amounts against the money it owed to the Debtors. (Id.; Stipulation ¶ E.) Qwest further claimed that it was entitled to recoup or set off the unpaid amounts owed by Debtors to their subcontractors or suppliers because these unpaid subcontractors had asserted, or could assert, lien rights against Qwest's property or customers as a result of the Debtors' failure to pay the subcontractors for their services. (Debtors' Brief on Order to Pay at 5; Stipulation ¶ D.) Qwest refused to pay the Debtors for the work they had performed until a mechanism to resolve such claims was in place. (Debtors' Brief on Order to Pay at 5.) The Lenders assert that all money owed by Qwest to the Debtors for work performed by the Debtors and their subcontractors-the Debtors' accounts receivable-constitutes property of the Debtors' estate that is subject to the Lenders' senior liens. (Lenders' Brief at 4.)

C. The March 3, 2006 Stipulation

Qwest and the Debtors engaged in extensive negotiations to reach an agreement to facilitate payment to the Debtors for work they had completed, while ensuring that Qwest would recover on its claims resulting from the Debtors' breach. On March 7, 2006, the bankruptcy court approved the Stipulation, which was proposed to the court by the Debtors and Qwest. The Stipulation aimed to "preserve Qwest's secured status, resolve all claims of unpaid subcontractors and suppliers, and assure that Qwest was paid for its allowable claims, while permitting the Debtors to collect from Qwest on their unpaid invoices." (Debtors' Brief on Order to Pay at 5; Qwest Resp. on Order to Pay at 6.) Prior to the bankruptcy court's approval of the Stipulation, the Debtors served the Lenders' counsel with a "Notice of Stipulation" and a motion for court approval of the Stipulation. (Qwest Resp. to Lenders' Brief at 5.) The Lenders did not object to the Stipulation when it was entered. (Id.)

Pursuant to the Stipulation, Qwest paid the Debtors the sum of $3,973,077.16, most of which was divided into funds to pay subcontractor claims. (Stipulation ¶ (a).)*fn2 Of that sum, the Stipulation required that $500,000 be set aside ("Qwest Setoff Reserve") to fund a trust account (the "Qwest Setoff Trust Account"). (Id. ¶ (c).) The Stipulation was clear that these funds and certain other funds earmarked for trust accounts were not part of the bankruptcy estate. The Stipulation barred any transfer of these funds to the Debtors' estate until Qwest's claims have been resolved. (Id. ¶¶ (g), (q) & (x).) The Stipulation further specified that none of its terms, "including Qwest's payment of monies" to the Debtors, would impair Qwest's right to recoupment against the Debtors. (Id. ¶ (t).)

The Stipulation defines "Qwest's Alleged Claims" as the money that Qwest has alleged it is owed from the Debtors "as a result of Debtors' breach of the Contracts or other damage claims, including (without limitation) claims arising from the Debtors' post-petition conduct." Id. ¶ E.) Under the Stipulation, if agreed upon by the Debtors or allowed by final order of the bankruptcy court, Qwest's Alleged Claims would be paid from the Qwest Setoff Trust Account. (Id. ¶¶ E, (g).) According to Qwest, the fund was necessary because all of its mitigation costs and breach damages were not known at the time the parties entered the Stipulation, and Qwest expected to incur additional costs from the past breach. (Qwest Resp. on Order to Pay at 7.) The parties specified that the Qwest Setoff Reserve was not intended to be a cap or limitation on Qwest's claims and that Qwest had until June 15, 2006 to file with the bankruptcy court a proof of claim or other pleading setting out its claims; that date could be extended by the consent of the parties or court order. (Stipulation ¶¶ (l)-(m).) Section (j) of the Stipulation, the interpretation of which is a focus of the Debtors' appeal, provides, in relevant part, that upon approval of the Stipulation, the Debtors waived and released the right to file any claims against Qwest. But, Section (j) also states that:

[T]he Debtor, the estate, and any successor thereto reserve the right to object to the allowance and payment of Qwest's Alleged Claims. The waiver and release provided for in this paragraph (j) shall not be applicable or effective in the context of an objection to the allowance of Qwest's Alleged Claims; provided, however, that the Debtor shall not have the right (i) to object to the allowance and payment of Qwest's Alleged Claims on the basis of any actions taken by Qwest to mitigate its damages following the Debtor's breach of any Contracts in any Region by completing jobs the Debtor did not complete in accordance with the specifications of any Contracts or on the basis of other costs incurred by Qwest as a result of the Debtor's breach of any Contracts or (ii) to seek any affirmative recovery against Qwest. (Id. ¶ (j).)

The Stipulation recognized that the wind-down of the Debtors' work in certain regions could result in a materially different damage claim against the Debtors. (Id. ¶ (g).) In that event, Qwest reserved its right to petition the bankruptcy court to increase the amount of money in the Qwest Setoff Reserve. (Id.) Any balance remaining in the Qwest Setoff Trust Account after the resolution of Qwest's claims would be transferred to the Debtors and constitute property of the Debtors' estate. (Id. ¶ (I).)

Finally, the Stipulation recognized the Lenders' interest in the money in the Qwest Setoff Reserve. It stated that the Debtors' right, title and interest in any money payable to the Debtors pursuant to the Stipulation was "subject to the prepetition and post-petition security interests and liens of [the Lenders] . . . ." (Id. ¶ (x).) The Stipulation also acknowledged the Lenders' interest in future payments from Qwest, and provided that future payments would belong to the Debtors subject to superior claims in the following order of priority: (1) to fund subcontractor trust accounts;

(2) to increase the amount of funds in the Qwest Setoff Reserve; and (3) to meet the Debtors' obligations with respect to the liens and security interests of the Debtors' lenders. (Id. ¶ (h).) Under Section (u) of the Stipulation, any disputes related to the Qwest Setoff Trust Account are subject to the jurisdiction of the bankruptcy court. (Id. ¶ (u).) The Stipulation is binding upon the Debtors, Qwest and "each of their successors and assigns, including any chapter 7 or chapter 11 trustee." (Id. ¶ (v).)

D. Qwest's Proof of Claims

On June 13, 2006, Qwest submitted a proof of claim against the Qwest Setoff Reserve in the amount of $378,032.57. (Qwest Resp. on Order to Pay at 8.) In Qwest's view, all of the amounts included in the claim "represent[ed] costs resulting from Qwest's mitigation or breach damages." (Id. at 9.) Qwest assets that the June 13, 2006 claim included attorneys' fees it incurred to address subcontractor lien issues and protect its rights in light of the Debtors' bankruptcy, including efforts to resolve regulatory fines and lien claims and Qwest's attorneys' efforts in negotiating the Stipulation. (Id.) Qwest also claimed the costs it incurred when it devoted personnel to manage the jobs the Debtors left, located replacement contractors, and resolved disputes concerning the Debtors' defective or incomplete work. (Id.) Of the $378,032.57 sum Qwest claimed on June 13, 2006, $138,013.76 was for attorneys' fees and $35,025.21 was for the cost of Qwest employees "stepping in to manage abandoned jobs" in Minnesota. (Id. at 10.) The Debtors object to Qwest's claim to these sums, though they do not dispute Qwest's right to be reimbursed money in the remaining categories listed in Qwest's June 13, 2006 proof of claim (e.g., "outside plant construction damages, settlement of third-party claims, recovery of wrongfully sold materials, relocation of materials to a new contractor, and Oregon and Southwest Washington Damages Claims"). (Id.) In this initial claim, Qwest stated that it "reserve[d] the right to amend [its] proof of claim and this rider as may be necessary to adjust the amount asserted herein or to supplement this claim in any way, including, but not limited to, liquidating, and claiming that all of its damages [were] a result of the Debtors' breaches of the Contracts." (June 13, 2006 Proof of Claim.)

Qwest subsequently filed four amendments to its proof of claim, each of which increased the total sum Qwest was asserting against the Qwest Setoff Reserve:

* August 14, 2006 - amendment increasing Qwest's total claim to $485,954.47

* September 13, 2006 - amendment increasing Qwest's total ...


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