================================================================= ADELPHIA BANKRUPTCY NEWS Issue Number 4 ----------------------------------------------------------------- Copyright 2002 (ISSN XXXX-XXXX) April 29, 2002 ----------------------------------------------------------------- Bankruptcy Creditors' Service, Inc. 609-392-0900 FAX 609-392-0040 ----------------------------------------------------------------- ADELPHIA BANKRUPTCY NEWS is published by Bankruptcy Creditors' Service, Inc., 24 Perdicaris Place, Trenton, New Jersey 08618, on an ad hoc basis (generally every 10 to 20 days) as significant activity occurs in the Debtors' cases. Each issue is prepared by Peter A. Chapman, Editor. Subscription rate is US$45 per issue. Any re-mailing of ADELPHIA BANKRUPTCY NEWS is prohibited. ================================================================= IN THIS ISSUE ------------- [00029] U.S. TRUSTEE APPOINTS UNSECURED CREDITORS' COMMITTEE [00030] DEBTORS' MOTION TO HONOR AND CONTINUE E-RATE PROGRAM [00031] DEBTORS' MOTION TO PAY PREPETITION REGULATORY FEES [00032] DEBTORS' MOTION TO OBTAIN $135,000,000 OF DIP FINANCING [00033] DEBTORS' MOTION TO DETERMINE UTILITIES ADEQUATELY ASSURED [00034] LUCENT'S MOTION TO COMPEL DEBTORS' DECISION ON CONTRACT KEY DATE CALENDAR ----------------- 03/27/02 Voluntary Petition Date 04/16/02 Deadline to provide Utilities with adequate assurance 05/26/02 Deadline to make decisions about lease dispositions 06/10/02 Deadline for filing Schedules of Assets and Liabilities 06/10/02 Deadline for filing Statement of Financial Affairs 06/10/02 Deadline for filing Lists of Leases and Contracts 06/25/02 Deadline to remove actions pursuant to F.R.B.P. 9027 07/25/02 Expiration of Debtor's Exclusive Plan Proposal Period 09/23/02 Expiration of Debtor's Exclusive Solicitation Period 03/26/04 Deadline for Debtor's Commencement of Avoidance Actions 03/26/04 Expiration of ACC-Backed DIP Financing Facility Bar Date for filing Proofs of Claim First Meeting of Creditors pursuant to 11 USC Sec. 341 ----------------------------------------------------------------- [00029] U.S. TRUSTEE APPOINTS UNSECURED CREDITORS' COMMITTEE ----------------------------------------------------------------- See prior entry at [00024]. The United States Trustee for Region II amends the appointment of the Official Committee of Unsecured Creditors by replacing Morgan Stanley Investment Management with Fujitsu Network Communications Inc. The Committee is now comprized of: A. Bell South Corporation 1155 Peachtree St., Suite 1929, Atlanta, GA 30309-3610 Attn: Bradley O. Greene, Exec. Dir. - Corp. Development Phone: (404) 249-4506 Fax: {404} 249-4740 B. Fidelity Management & Research Co. 82 Devonshire St., E20E, Boston, MA 02109 Attn: Nate VanDuzer Phone: (617) 392-8129 Fax: (617) 476-5174 C. Fujitsu Network Communications Inc. 2801 Telecom Parkway, Richardson, TX 75082 Attn: Charles R. Owen, Assistant General Counsel Phone: (972) 479-3713 Fax: (972) 479-2992 D. Wilmington Trust Co. Rodny Square North, 1100 Malat St., Wilmington, DE 19801 Attn: Michael Diaz Phone: (302) 656-8326 Fax: (302) 636-4140 E. The Bank of New York 5 Penn Plaza, 13th Floor, New York, NY 10001 Attn: Loretta Lundborg, Vice President Phone: (212) 896-7273 Fax: (212) 328-7302 F. Bank of America 901 Main St., Dallas, Texas 75202 Attn: Robin Phelan Phone: (214) 209-0966 Fax: (214) 290-9490 ----------------------------------------------------------------- [00030] DEBTORS' MOTION TO HONOR AND CONTINUE E-RATE PROGRAM ----------------------------------------------------------------- The Debtors request authority to continue the E-Rate Program and to remit all amounts due and owing to the Schools and Libraries in the ordinary course of the Debtors' businesses. The Debtors further request that all applicable banks and other financial institutions be authorized and directed to receive, process, honor, and pay, to the extent of funds on deposit, any and all checks or wire transfer requests drawn on the Debtors' accounts in connection with E-Rate Program. Judy G.Z. Liu, Esq., at Weil Gotshal & Manges LLP in New York, New York, relates that on May 7, 1997, the FCC adopted the Universal Service Order. This Order implemented the Telecommunications Act of 1996 and was designed to ensure that all eligible schools and libraries have affordable access to advanced telecommunications services. Pursuant to the Order, eligible schools and libraries are entitled to receive rebates during a funding year ranging from 20% to 90% on telecommunications services and Internet access. The rebates are funded from the Universal Service Fund and are administered by the Schools and Libraries Division (SLD) of the Universal Service Administration Company. Each funding year commences on July 1 and terminates on June 30 of the following year. The current funding year will terminate on June 30, 2002. In furtherance of the E-Rate Program, and in the ordinary course of their businesses, Ms. Liu submits that the Debtors provide certain schools and libraries with telecommunications and Internet services. The Debtors bill the Schools and Libraries at the full rate for the Services and the Schools and Libraries then submit to the Debtors (on a monthly, quarterly, semi-annual, or annual basis) certain Billed Entity Reimbursement Forms indicating which Services were provided and the amount paid for such Services. The Debtors certify that the Schools and Libraries actually received the Services as indicated and return the certified Reimbursement Forms to the Schools and Libraries. The Schools and Libraries then submit the Reimbursement Forms to the SLD. Ms. Liu explains that the SLD processes each Reimbursement Form received from a School or Library and mails to the Debtor entity that provided the Services a corresponding check in an amount determined by the SLD. Pursuant to the E-Rate Program, the Debtors are required to deposit the Rebate Checks into their own bank accounts and issue new checks drawn upon the Debtors' bank accounts to the appropriate Schools and Libraries within 10 calendar days from the date on which the Debtors receive the Rebate Checks. According to Ms. Liu, as of April 24, 2002, the Debtors have received Rebate Checks in the aggregate amount of $3,378.54 related to rebates due and owing to Schools and Libraries for Services provided by the Debtors prior to March 27, 2002. However, due to the commencement of the Debtors' Chapter 11 cases, and given that the rebates relate to the pre-Commencement Date period, the Debtors are unable to remit such amounts to the appropriate Schools and Libraries. In addition, the Debtors anticipate that they will continue to receive Rebate Checks from the SLD for rebates due and owing to Schools and Libraries for Services provided in funding year 3 (July 1, 2000 - June 30, 2001) and the pre-Commencement Date portion of funding year 4 (July 1, 2001 - March 26, 2002) in an aggregate amount of approximately $4 million. Ms. Liu informs the Court that the Rebate Checks are collected by the Debtors on behalf of and held in trust for the Schools and Libraries. To the extent Rebate Checks are received by the Debtors, the Debtors have only legal title and not an equitable interest in the funds they represent. The Debtors act merely as a conduit for the rebate funds specifically earmarked by the SLD for the Schools and Libraries. Ms. Liu assures the Court that the Debtors maintain an accurate record of all Rebate Checks received from the SLD and deposited in the Debtors' bank accounts. Given that, pursuant to Section 541(d) of the Bankruptcy Code, the funds are not property of the Debtors' estates, the Debtors should be permitted to remit these funds to the Schools and Libraries as they are received from the SLD pursuant to the E- Rate Program. Given that the Debtors have been paid in full for the Services, Ms. Liu fears that the retention of the Rebate Checks would provide the Debtors with a windfall to which they are not entitled. Moreover, if the Debtors do not remit the funds earmarked for the Schools and Libraries, the Debtors could face substantial liability and litigation costs resulting from FCC enforcement actions and private enforcement actions brought by the Schools and Libraries. Ms. Liu contends that the success of the Debtors' businesses is largely dependent upon the loyalty and confidence of their customers. As a result, continued customer loyalty throughout the Chapter 11 process is essential to the viability of the Debtors' businesses and the Debtors' ability to reorganize. Collectively, the Schools and Libraries represent a significant portion of the Debtors' customer base. Any delay in honoring or inability to honor the E-Rate Program will severely and irreparably impair the Debtors' customer relations with the Schools and Libraries at a time when maintenance and expansion of customer loyalty and patronage are extremely critical. ----------------------------------------------------------------- [00031] DEBTORS' MOTION TO PAY PREPETITION REGULATORY FEES ----------------------------------------------------------------- By this motion, the Debtors seek authority to pay any pre- petition Regulatory Fees owed to the Regulatory Authorities in the ordinary course of their businesses on an un-accelerated basis, as such payments become due and payable. According to Harvey R. Miller, Esq., at Weil Gotshal & Manges LLP in New York, New York, in the ordinary course of conducting their business operations, the Debtors collect from their customers and pay to various federal, state, and local regulatory authorities, various maintenance fees, telecommunications taxes, universal service fund fees, education access fund fees, telecommunications relay services fees, right-of-way fees, franchise fees, business license fees, gross receipts taxes, 911 fees, FCC fees, and other similar regulatory fees. The Regulatory Fees are used to fund various federal, state and city agencies, and to subsidize the cost of local telecommunications services. The process by which the Debtors remit the Regulatory Fees varies depending on the nature of the Regulatory Fee at issue and the Regulatory Authority to which they are to be paid. The Debtors generally pay Regulatory Fees within 45 days following the end of the quarter in which the fees accrue. Depending on the particular jurisdiction, Mr. Miller explains that the Regulatory Fees are assessed by the Regulatory Authorities based on: A. a percentage of the Debtors' gross revenues derived from the provision of telecommunication services within the jurisdiction of the relevant Regulatory Authority, B. the number of telecommunication lines serviced by the Debtor in the jurisdiction, or C. assessed as a flat fee. Mr. Miller submits that these fees are imposed by the Regulatory Authorities in exchange for granting the Debtors authorization to build their network or offer their telecommunications services in the particular Regulatory Authority's jurisdiction. The Debtors estimate that, as of the date on which the Debtors commenced their Chapter 11 cases, they owe approximately $531,000 in Regulatory Fees. To the extent that checks sent to the Regulatory Authorities prior to the Commencement Date have not cleared as of the Commencement Date, the Debtors further seek authorization for their banks to honor the Checks. The Debtors seek authorization to issue checks, or provide for other means of payment to the Regulatory Authorities, to the extent necessary to pay all outstanding pre-petition Regulatory Fees assessed as of the Commencement Date. These amounts may not be due and owing until after the Commencement Date. The Debtors submit that the majority of the Regulatory Fees are in the nature of "trust fund" taxes, which are collected from third parties and held in trust for payment to the Regulatory Authorities. Mr. Miller informs the Court that the Regulatory Fees are collected from the Debtors' customers and are held in trust until remitted to the Regulatory Authorities. To the extent these "trust fund" taxes are collected, they are not property of the Debtors' estates under Section 541(d) of the Bankruptcy Code. The Debtors, therefore, do not have any equitable interest in these Regulatory Fees and should be permitted to pay the fees to the Regulatory Authorities, as they become due. Mr. Miller believes that certain of the Regulatory Fees are also entitled to priority status under Section 507(a)(8)(A) of the Bankruptcy Code as "tax[es] . . . measured by income or gross receipts." Despite being labeled "fees," these expenditures actually constitute a kind of tax. The Regulatory Fees are an involuntary pecuniary burden, generally imposed by the authority of a federal, state, or local legislature under its police or taxing power and used for the public purposes of funding various federal and state agencies and subsidizing the high cost of local telecommunications services and other governmental support services. As a tax assessed as a percentage of the Debtors' revenue derived from the provision of telecommunication services within the jurisdiction of the relevant regulatory body, certain of the Regulatory Fees qualify for a priority under 507(a)(8). Pursuant to Section 507(a)(8), Mr. Miller states that these Regulatory Fees must be paid in full before any general unsecured obligations of a Debtor may be satisfied. The proposed relief, therefore, will only affect the timing of the payment of the pre- petition Regulatory Fees and will not prejudice the rights of general unsecured creditors or other parties in interest. In addition, Mr. Miller tells the Court that certain Regulatory Authorities may challenge the applicability of the automatic stay under Section 362(b)(4) of the Bankruptcy Code with concomitant expense to the Debtors' estate. Thus, some Regulatory Authorities may conclude (perhaps erroneously) that they may shut off the Debtors' networks or otherwise preclude them from continuing to provide services to their customers. Such action would force the Debtors to expend time and money to seek the restoration of their networks after the damage was already incurred and would not guarantee that the Debtors would ultimately recapture the customers that were lost due to an interruption in service. Accordingly, the Debtors submit that payment of such amounts is necessary and appropriate and is authorized under Section 105(a) of the Bankruptcy Code pursuant to the "necessity of payment" doctrine, which "recognizes the existence of the judicial power to authorize a debtor in a reorganization case to pay pre- petition claims where such payment is essential to the continued operation of the debtor." ----------------------------------------------------------------- [00032] DEBTORS' MOTION TO OBTAIN $135,000,000 OF DIP FINANCING ----------------------------------------------------------------- See prior entry at [00012]. Verizon Communications Inc., objects to the entry of the proposed Final Order authorizing the post-petition financing because it provides, effectively, for a waiver of all claims under 11 U.S.C. Section 506(c). According to the list of 20 largest unsecured creditors filed by the Debtors, Verizon is owed in excess of $6,000,000 by the Debtors (although they claim this amount is disputed). Darryl S. Laddin, Esq., at Arnall Golden Gregory LLP in Atlanta, Georgia, contends that the services provided by Verizon are essential to the Debtors' ability to stay in business and reorganize. Accordingly, the services that Verizon is providing will be instrumental in Debtors' attempt to maximize the value of their assets and repay the post-petition lenders. In light of the critical and valuable services provided by Verizon, Mr. Laddin believes that it would be highly inequitable to allow the post-petition lenders to receive a windfall through the enhanced value of the Debtors' assets, while at the same time being immune from claims on behalf of those creditors whose services created the enhanced value. This is particularly true in this case when considered in light of the liens and super- priority administrative expense claims granted to the post- petition lenders. It is also true when considered in light of the Debtors' proposal in their utilities motion to afford Verizon and other utilities no assurance of payment for their post- petition services other than an administrative expense claim subordinate to the claim of the post-petition lenders and any diminution claim of their senior note-holders. ----------------------------------------------------------------- [00033] DEBTORS' MOTION TO DETERMINE UTILITIES ADEQUATELY ASSURED ----------------------------------------------------------------- See prior entry at [00022]. Verizon Communication Objects The Debtors propose to afford Verizon and other utilities no deposit at all and no pre-payments or other security. Instead, they propose to afford Verizon nothing more than what it already had pre-petition, without the benefit of Section 366. This is simply a mere unsecured promise by the Debtors to pay. The Debtors argue that no deposit is required because of the Debtors' supposed excellent pre-petition payment history, because they are seeking $135 million in post-petition debtor-in-possession financing, and because utility companies will receive an administrative expense priority for unpaid utility obligations. Darryl S. Laddin, Esq., at Arnall Golden Gregory LLP in Atlanta, Georgia, contends that none of these so-called protections provides "adequate assurance of payment." Mr. Laddin tells the Court that it is far from clear that the Debtors, in fact, have an excellent history of payment. The Debtors presumably have not paid (and cannot pay) all of their pre-petition obligations as they come due, or they would not have filed for bankruptcy protection. As for their debts to their utilities, the Debtors' list of 20 largest unsecured creditors discloses unpaid pre-petition utility obligations in excess of $22,500,000. Mr. Laddin states that the financing that the Debtors anticipate receiving may (unless and until there is a default) provide the Debtors with liquidity. However, it also will ensure that there is as much as $135 million in super-priority administrative expense claims and liens on all of their assets ahead of Verizon and other utilities. These will be left with a mere administrative claim under Section 503(b) of the Bankruptcy Code. Indeed, the Debtors propose to further subordinate the administrative claims of Verizon and other utilities by granting the holders of their $250 million in 121/4% Senior Secured Notes a super-priority administrative claim. Moreover, the Debtors' debtor-in-possession lenders are apparently seeking, as part of the final order on the proposed DIP financing, a waiver of any claim by the estate under Section 506(c) of the Bankruptcy Code, thereby further eroding any protection to Verizon and other utilities. Mr. Laddin adds that Verizon has not been provided with a budget showing that the post-petition financing is sufficient to fund ongoing operations and utility bills. Further, a default by the Debtors under their post-petition financing arrangements could result in the termination of their right to use any post-petition financing to pay Verizon. As for the administrative claim that the Debtors propose to afford Verizon, Mr. Laddin points out that the Debtors are offering nothing more than Verizon, or any other post-petition administrative creditor, would be entitled to under Section 503(b) in any event, even if Section 366 were not part of the Code. Finally, the Debtors' request a procedure for the resolution of any disputes regarding whether they have provided adequate assurance that is contrary to the express terms of Section 366. The Debtors propose that each utility have 25 days from entry of this Court's Order on the Utilities Motion to serve the Debtors with a request for assurance of payment in the form of a deposit or other security. If the Debtors (in their sole discretion) deem the request "unreasonable," the Debtors will (on an unspecified schedule) file a motion. In the interim until the Court has entered a final order, the utility will be required to maintain service and will be deemed to have been provided adequate assurance of payment by reason of the mere administrative claim it is receiving. Mr. Laddin argues that Section 366, however, explicitly allows any "party in interest," including a utility, to request "reasonable modification of the amount of the deposit or other security necessary to provide adequate assurance of payment." It explicitly allows a utility to "alter, refuse or discontinue service" if the debtor does not furnish adequate assurance "within 20 days after the date of the order for relief." In effect, by not requiring the Debtors to post any form of deposit as adequate assurance, the Motion seeks an Order that extends the period provided in Section 366(b) for the Debtors to provide adequate assurance. It extends the period from 20 days until such time as the Debtors get around to filing a motion to determine what additional assurance of future payment is needed. Nowhere in the Motion do the Debtors provide any citation of authority that would allow the Debtors to circumvent the express terms of Section 366. SBC Affiliates Object Lisa M. Golden, Esq., at Jaspan Schlesinger Hoffman LLP in Garden City, New York, tells the Court that the Debtors' Motion attempts to establish that the Utilities are adequately assured of future performance. This assurance is based upon nothing more than the Debtors' "promise" to pay all post-petition utility charges as they become due and give "entitlement" of each Utility to an administrative expense claim for the value of the services that a Utility provides to the Debtors. There is no showing in the Motion that the Utilities are not subject to an unreasonable risk of nonpayment. There is only the bald assertion that there is no such risk to the Utilities. There is no discussion of the Debtors cash position or their cash needs in the post-petition period that would give even minimal substance to the Debtors' promise to pay for services. Ms. Golden notes that there is not a requirement in the Bankruptcy Code or case law that vendors must provide post-petition goods and services to a debtor under such uncertain circumstances. In fact, recent case law has held that requiring a Utility to provide services under such circumstances is not permissible. Post-petition, the Debtors seek to continue to receive telecommunications services from the SBC Affiliates, which are valued post-petition at approximately $4 million per month. There is no question that the services to be provided by the SBC Affiliates to the Debtors will constitute actual and necessary expenses of preserving the Debtor's estates as the Debtors cannot fully operate without the SBC Affiliates services. The Motion fails to offer the SBC Affiliates with anything more than the SBC Affiliates are already entitled to receive in these bankruptcy cases. Without further adequate assurances the SBC Affiliates should not be compelled to continue to provide services to the Debtors in these cases. In the Motion the Debtors asserted that their demonstrated ability to pay future utility bills, and the administrative expense priority afforded under Sections 503(b) and 507(a)(1) of the Bankruptcy Code to the Utilities, together constitute adequate assurance to each of the Utilities of payment for all future services. The Debtors go on to assert that their promise to pay constitutes appropriate adequate assurance of future performance based upon their pre-petition prompt payment history. However, Ms. Golden submits that the Debtors do not have a timely payment history with the SBC Affiliates. Thus, the foundation for the assurances provided in the Motion are both faulty and inadequate. Accordingly, the Motion should be denied unless and until the Debtors provide actual assurance of future performance. AT&T Objects Kenneth A. Rosen, Esq., at Lowenstein Sandler PC in New York, New York, tells the Court that the Utilities Motion fails to provide adequate assurance of payment for post-petition services. Section 366 of the Bankruptcy Code requires a "deposit or other security" as adequate assurance. In this case, AT&T should receive a deposit in an amount equal to three months' services (approximately $2.1 million), 30 days pre-payment of all post- petition services ($711,000), and payment of all post-petition services as an administrative priority claim. Without such adequate assurance, AT&T should be permitted to exercise its right to terminate post-petition services upon expiration of the 20-day period as authorized by Section 366(b) of the Bankruptcy Code. According to Mr. Rosen, AT&T is one of the Utility Companies that provides Utility Services to certain of the Debtors. AT&T is still in the process of calculating the post-petition run rates. Prior to the Petition Date, AT&T provided approximately $711,000 of telecommunications services per month to the Debtors. As of the Petition Date, the Debtors owed AT&T approximately $1.3 million but is still in the process of reconciling these figures. The Debtors seek to provide adequate assurance to AT&T in the form of the Debtors' "promise" to pay for future Utility Services rendered to the Debtors as an administrative expense of their Chapter 11 estates pursuant to Sections 503(b) and 507(a)(1) of the Bankruptcy Code. Although the Utility Motion states that an administrative expense claim is sufficient to provide AT&T with adequate assurance, Mr. Rosen claims that the Motion fails to provide AT&T with anything more than what it is already entitled. Mr. Rosen contends that a vendor that provides post-petition goods or services to a debtor on a continuous basis is entitled to payment for those goods and services on a timely basis if the debtor wants the vendor to continue supplying the goods or services. Neither the Bankruptcy Code nor the applicable case law require vendors to provide post-petition goods and services to a debtor on a continuous basis without payment. The Debtors' "promise" to pay on a timely basis only confirms the Debtors' pre-existing obligation. Mr. Rosen states that there is no question that the services provided by AT&T to the Debtors constitute actual and necessary expenses of preserving the Debtors' estates. The Debtors are in the business of obtaining Utility Services from Utility Companies and selling those services to its customers. AT&T asserts that the Debtors cannot fully operate absent AT&T's services. Thus, regardless of the Utility Motion, AT&T is entitled to apply for an administrative claim for its post-petition services. Accordingly, the Motion fails to provide AT&T with anything more than what AT&T is already entitled to receive in these bankruptcy cases. Mr. Rosen relates that Section 366(b) of the Bankruptcy Code provides that a "utility may alter, refuse, or discontinue service if neither the trustee not the debtor, within 20 days after the date of the order for relief, furnishes adequate assurance of payment, in the form of a deposit or other security, for service after such date." The Bankruptcy Code's mandate to provide adequate assurance of payment for post-petition services in the form of a deposit or other security is clear. The Debtors' promise to pay coupled with an administrative expense claim does not satisfy the standard as adequate assurance in the form of an administrative expense priority claim is nothing more than another form of the Debtors' promise to pay. The Debtors are promising pay AT&T in a timely manner. If they fail to do so, then Debtors promise to pay AT&T in the future with an administrative claim. If the Debtors are unable to pay AT&T on a timely basis, the Debtors will likely lack the resources to pay AT&T's administrative claim. Accordingly, AT&T asserts that the Utility Motion fails to provide adequate assurance of future payment. Mr. Rosen submits that critical in this case is the time it will take AT&T to effect a termination of services to the Debtors. Because of the complexity of the services provided by AT&T to the Debtors, and governance by public service commissions, it will take AT&T between 30 and 60 days to complete a termination of the services provided to the Debtors. Thus, a three-month deposit and a monthly pre-payment, is necessary to provide AT&T with adequate assurance. Absent this relief, AT&T is at risk for over $2 million on a post-petition basis alone, and when combined with the existing pre-petition balances, AT&T is at risk for close to $2.5 million. Sprint Objects According to Gary I. Selinger, Esq., at Salomon Green & Ostrow P.C. in New York, New York, the Debtors use long distance telecommunications services, purchase other telecommunications services, and receive local telephone exchange services from Sprint LP and Sprint LTD, pursuant to various contracts between the parties. Under the Agreements, such Debtors were required to pay the Sprint Entities for the Services on a timely basis. Due to the normal billing practices of the parties, payment is due by Debtors in approximately 45 days for Sprint LTD and 60 days for Sprint LP. Historically, however, Debtors have made payment to Sprint LP more than 60 days past due, resulting in a credit exposure period up to approximately 120 days after rendering the Services. During the three months preceding the Petition Date, Mr. Selinger submits that the Debtors' average monthly usage of the services provided by Sprint LP was approximately $2,200,000. During the same period, Debtors' average monthly usage of the services provided by Sprint LTD was approximately $935,000. These figures translate to monthly credit for usage by Debtors of the Services of $3,135,000 and weekly credit for usage of $729,070. As of the Petition Date, Mr. Selinger relates that the Debtors were past due in payment to Sprint LP in the amount of $3,551,878.49 for long distance service. Portions of this sum were past due pursuant to the terms of the invoices by approximately 60 days. As of the Petition Date, Debtors were past due in payment to Sprint LTD in excess of $200,000. Since the Petition Date, Mr. Selinger informs the Court that the Sprint Entities have continued to provide such Debtors with the Services pursuant to the terms of the Agreements in compliance with Section 366 of the Bankruptcy Code. Debtors have failed to make any payments to the Sprint Entities for the Services. They have instead filed the Motion in which they seek an order prohibiting the Sprint Entities from discontinuing the Services simply upon the Debtors' promise of future payment. In the two weeks since the Petition Date, the weekly usage predicted above indicates a likely post-petition debt to the Sprint Entities of approximately $1,500,000. Paragraph 17 of the Motion erroneously alleges that Debtors "have an excellent pre-petition payment history with the Utility Companies." In fact, Mr. Selinger claims that the Debtors are past due in excess of $3,700,000 for pre-petition Services. In sum, Debtors' payment status with the Sprint Entities strongly indicates that a mere promise to pay future invoices is not "adequate assurance" of timely, future performance of Debtors' obligations under the Agreements. In addition, it is not clear that Debtors have sufficient post-petition administrative solvency to comply with such promises to the Sprint Entities and other entities defined by Debtors as "Utilities" in the Motion. This treatment violates the requirements of Section 366(b) of the Bankruptcy Code. Mr. Selinger states that the credit exposure of the Sprint Entities can exceed 60 days from the time of service. This period of time represents credit exposure to these Debtors of approximately $3,135,000 per month for a total of approximately $6,270,000 at any given time. Debtors have presented no evidence in the Motion that either their payment history to the Sprint Entities or their post-petition administrative solvency are sufficient to meet the "adequate assurance" promise of future payment made to the multitude of "Utilities," including the Sprint Entities. Pursuant to Section 366, Mr. Selinger contends that the Debtors are required to provide adequate assurance of payment to the Sprint Entities. In the alternative, if Debtors fail to immediately provide adequate assurance of payment as set forth herein, the Sprint Entities submit that cause exists, pursuant to Section 362(d)(1) of the Bankruptcy Code, to modify the automatic stay to permit the Sprint Entities to cease provision of the Services and terminate the Agreements immediately. For these reasons, the Sprint Entities seek the following additional adequate assurance of future performance: A. an immediate cash deposit in the amount of $6,270,000 and payments thereafter pursuant to the terms of the Agreements, or, in the alternative, weekly pre-payments by wire transfer to the Sprint Entities of $729,070 on Wednesday of each week for the following week of Services. Both alternatives are subject to modification in light of post-petition actual usage and without reduction in payments due to disputes asserted by Debtors prior to written agreement by the Sprint Entities or a final order of the Court sustaining such disputes; B. immediate payment by wire transfer to the Sprint Entities of the greater of all post-petition amounts charged by the Sprint Entities, if any, which have not yet been paid; or an amount equal to the weekly prepayment for the period from the Petition Date to the commencement of the weekly prepayments. C. the entry of an order directing that if Debtors fail to timely make any payments due under the order entered by this Court or perform any of the other terms and conditions set forth in the Agreements, the Sprint Entities have the right to terminate service to the Debtors immediately and without further order of the Court, and to the extent necessary, modifying the automatic stay of Section 362 of the Bankruptcy Code to permit the Sprint Entities to exercise such rights and remedies under the Agreements, including termination; and D. the entry of an order lifting the automatic stay to permit the Sprint Entities to offset all pre-petition amounts owing to Debtors by the Sprint Entities, if any, against all pre- petition amounts owing by Debtors to the Sprint Entities. ----------------------------------------------------------------- [00034] LUCENT'S MOTION TO COMPEL DEBTORS' DECISION ON CONTRACT ----------------------------------------------------------------- Lucent Technologies Inc., seeks an Order Pursuant to Sections 105 and 365(d)(2) of the Bankruptcy Code, compelling the Debtors to: A. elect to assume or reject its executory contract with Lucent within a reasonable time - in this case 45 days from the date of the Court's Order; B. immediately pay Lucent for the reasonable value of services rendered by Lucent post-petition until the date of the Court's Order; and C. establish an escrow account to fund the payment of Lucent's services performed from the date of the Court's Order until ABS assumes or rejects the Contract. According to Joseph Lubertazzi, Jr., Esq., at McCarter & English LLP in Newark, New Jersey, the Debtors currently owe Lucent millions of dollars in accounts receivable, stemming from the parties' General Agreement executed pre-petition and various addenda thereto, as modified by the parties' June 28, 2001 Settlement Agreement. Pursuant to the Contract, Lucent agreed to provide the Debtors telecommunications products, licensed materials and services in return for the Debtors' agreement to satisfy certain specified purchase commitments - set forth annually from 1999 through 2003 - and to timely pay its invoices. Mr. Lubertazzi submits that the Debtors has failed to meet its purchase commitments and to pay many of its invoices of Lucent's accounts receivable from the Debtors, the majority of which are over six months delinquent. Lucent's records reflect unpaid receivables approximating $96 million, including late-payment charges. It is acknowledged that the Debtors disputes a portion of this amount. Notwithstanding the Debtors failure to comply with the material terms of the Contract, Mr. Lubertazzi states that Lucent has continued to provide to the Debtors certain post-petition technical support services for both its hardware and software products. Those services, which are not invoiced to ABS because of the overall consideration to be received by Lucent under the Contract, were offered in exchange for the Debtors' promise to perform in accordance with the terms of the Contract. It costs money for Lucent to render these valuable services to the Debtors. Mr. Lubertazzi tells the Court that Lucent has continued to provide post-petition services for the Debtors pursuant to the Contract despite the fact that the Debtors is in default with respect thereto. Lucent is currently providing those services without compensation. It would be patently unjust to require Lucent to perform any further services unless the Debtor elects to assume the Contract and provide Lucent with the benefit of its bargain and payment for performance. This Court should therefore order ABS to assume or reject its Contract with Lucent within a reasonable period of time - in this case 45 calendar days. In the meantime, the Court should require that ABS promptly pay for such services. Mr. Lubertazzi believes that the Court should Order the Debtors to elect to assume or reject its Contract with Lucent within 45 days. Presently, Lucent is in the position of providing services to the Debtors without compensation. Lucent should not have to perform services while the Debtors weighs its options. Like WCFL, Lucent should not be required to in effect fund the Debtor's operations. Lucent agreed to perform services for the Debtors in exchange for their promise to meet certain purchase commitments and timely pay its invoices - the Debtors has failed to meet those obligations. Lucent proposes the following mechanism for ensuring that it is paid for the services it renders to ABS post-petition: A. The Debtors must pay Lucent, no later than May 31, 2002, a reasonable amount for the services rendered by Lucent to the Debtors from March 27, 2002 until the date of this Order. This payment will be based upon the fees normally charged by Lucent to its customers for similar service. B. ABS must also establish an interest-bearing escrow account, no later than May 26, 2002, to ensure that Lucent is paid for its services from the date of this Order until the Debtors elect to assume or reject the Contract. The account must be established in an initial amount equal to 150% of the monthly fees of an annual service contract which Lucent would charge its other customers to service the type of products in the Debtors' possession, heretofore sold by Lucent to the Debtors. C. Lucent will serve the Debtors and the escrow agent a monthly invoice for the reasonable value of the services it performs for the Debtors for which Lucent has not been compensated. Invoices will be served no later than 3 days after the start of each month, commencing June 3, 2002. D. The escrow agent will be required and have the authority to pay Lucent for the amount reflected on Lucent's invoices from the escrow account no later than the 7th day of each month, commencing June 7, 2002. E. The Debtors will be required to replenish the escrow account on the 1st day of each month, commencing July 1, 2002, so as to maintain the initial amount of the escrow account. In addition, Lucent and the Debtors will also confer monthly to discuss whether the amount of the escrow account is sufficient to fund ABS's service requests. Moreover, Lucent will not be required to perform any services for the Debtors if Lucent reasonably believes there are insufficient funds in the escrow account to satisfy payment for such service. Mr. Lubertazzi contends that the existence of the escrow account is necessary to protect Lucent's interests. For example, merely granting Lucent an administrative expense priority for the value of its services rendered post-petition would not protect Lucent in the event this case were converted to a Chapter 7 bankruptcy. Under 11 U.S.C. Section 726(b), administrative claims allowed under the Chapter 7 proceedings would be paid in full before any unpaid Chapter 11 administrative claims were paid. In the event the Debtors are delinquent on any payment, Mr. Lubertazzi submits that Lucent should have the right to terminate its services. Moreover, the Debtors should be required to pay Lucent immediately upon the shipment of any products or licensed materials shipped to the Debtors. Lucent should be granted an administrative priority for all amounts the Debtors fail to remit. Mr. Lubertazzi points out that any services rendered by Lucent to the Debtors post-petition would benefit not only the Debtors, but also the other creditors. Those services would also be performed pursuant to the parties' executory contract prior to rejection or assumption. Therefore, Lucent should be granted administrative priority for the value of the services it performs post-petition. *** End of Issue No. 4 *** ------------------------------------------------------------------------- Peter A. Chapman peter@bankrupt.com http://bankrupt.com ------------------------------------------------------------------------- Recommended Reading: Professor Stuart Gilson's newest title, "Creating Value Through Corporate Restructuring: Case Studies in Bankruptcies, Buyouts, and Breakups." List Price: $79.95 -- Discounted to $55.96 at http://amazon.com/exec/obidos/ASIN/0471405590/internetbankrupt -------------------------------------------------------------------------