Old T.B.R. Incorporated v. The Billing Resource, LLC,

OCR transcription for search; preserved printed pages are authoritative

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For The Northern District Of California
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UNITED STATES BANKRUPTCY COURT
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AUTHENTICAT,
US. GOVERNMENT,
INFORMATION

GPO

Entered on Docket
November 02, 2011

GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

NORTHERN DISTRICT OF CALIFORNIA

In re: Case No. 07-52890-ASW
OLD T.B.R., INCORPORATED, f/k/a/
THE BILLING RESOURCE, dba
INTEGRETEL, a California
corporation,

Chapter 11

Debtor..

OLD T.B.R., INCORPORATED, f£/k/a/
THE BILLING RESOURCE dba
INTEGRETEL,

Adversary No. 09-5074

Plaintiff,
vs.

THE BILLING RESOURCE, LLC, a
Delaware limited liability company,

Defendants.

THE BILLING RESOURCE, LLC, a
Delaware limited liability company,

Counterclaimant,
vs.
OLD T.B.R., INCORPORATED, £/k/a/
THE BILLING RESOURCE dba
INTEGRETEL,

Counterdefendant.

PO OU OS OO et oe

MEMORANDUM DECISION RE
THREE MOTIONS FOR SUMMARY ADJUDICATION

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MEMORANDUM DECISION RE TH

MOTIONS FOR SUMMARY ADJUDICATIORS

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Before the Court are three motions for summary adjudication --
two filed by plaintiff Kerry Krisher, Liquidating Trustee as
successor to Debtor (“Liquidating Trustee”) and one filed by
defendant The Billing Resource, LLC (“New TBR”). The three motions
seek summary adjudication as follows:

First, Liquidating Trustee and New TBR both seek partial
summary adjudication as to the ability of New TBR to charge Debtor
for accelerated dilutions -~ the so-called “910 Account” -- related
to billing transactions submitted prior to the sale of Debtor’s
operating assets to New TBR and which were still in “the pipeline”
at of the time of the sale. The parties essentially have filed
cross-motions for summary adjudication relating to the
approximately $1.3 million charged by New TBR to Liquidating
Trustee relating to the “910 Account.”

Second, Liquidating Trustee seeks partial summary adjudication
relating to New TBR’s assertion that Debtor failed to turn over
control of certain 800 numbers in breach of the Asset Purchase
Agreement between New TBR and Debtor.

Third, New TBR seeks partial summary adjudication that the
amount which Liquidating Trustee does not contest is owed to New
TBR -~- approximately $868,000 -- should be paid to New TBR now.

Fourth, New TBR asserts Debtor is required to reimburse New
TBR approximately $65,500 for a shortfall in the minimum amount
paid to Qwest Corporation (“Qwest”) under two agreements with Qwest
which New TBR assumed as part of the sale of Debtor’s operating
assets to New TBR.

Fifth, New TBR asserts Debtor is liable for “trailing

dilution” and “true-up charges” related to PaymentOne Corporation

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(“PaymentOne”) in the approximate amount of $96,500 because
PaymentOne is a non-Nelson Gross entity.

Sixth, New TBR requests interest on the amounts awarded to New
TBR as well as a determination that New TBR is the prevailing party
and is entitled to reimbursement of attorney fees and costs.

A lengthy hearing was held on June 28, 2011. The motions were
submitted for decision after supplemental papers were filed with
the Court. lLiquidating Trustee is represented by Gail S.
Greenwood, Esq. of Pachuiski Stang Ziehl & Jones LLP. New TBR is
represented by Kathryn S. Diemer, Esq. of Diemer, Whitman &
Cardosi, LLP and John Greene, Esq. of Klein Zelman Rothermel LLP.

This Memorandum Decision constitutes the Court’s findings of
fact and conclusions of law, pursuant to Rule 7052 of the Federal

Rules of Bankruptcy Procedure.

I.

FACTUAL BACKGROUND

Debtor filed a chapter 11 bankruptcy petition on September 16,
2007 as a result of litigation filed by the Federal Trade
Commission against Debtor, two prior corporate customers of Debtor,
and other defendants in the United States District Court for the
Southern District of Florida. As part of Debtor’s chapter 11 case,
Debtor sold Debtor’s assets and confirmed a liquidating chapter 11
plan. Liquidating Trustee succeeded to Debtor’s rights in this
litigation under Debtor’s confirmed plan.
A. Debtor’s Business Structure

Debtor was a billing aggregator and provided billing-related

and other services for smaller private telecommunications companies

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1 |} that compete with local exchange carriers (“LECs”) in niche areas
2} such as public pay phones, hotels and prisons (“Alternative
3] Operator Services”). Private telecommunications companies that
4} provide Alternative Operator Services have difficulty billing for
5i| “collect” and other types of calls, since most individuals do not
6] pay invoices from these unknown.companies and those companies
7 cannot bill the individuals through the individual’s normal
8} telephone bill. Debtor was created in 1988 to address this void in
9} the marketplace. Debtor had billing and collection agreements with
10 || an estimated 1,400 LECs -- both major local exchange companies and
11 | numerous independents. Debtor’s infrastructure permitted private
12 || telecommunications providers to incorporate such providers’ charges
13 |} into the phone bills of more than 90% of business and residential
14} consumers throughout the United States and Canada.
15 An individual or entity who used the telecommunications
16 || services of an Alternative Operator Service (“End-User”) provided
17 |] information that would permit the Alternative Operator Service to
18 | charge the End-User’s telephone bill for those telecommunication
19 || services. The Alternative Operator Service -- a customer of Debtor
20 || -- provided the End-User billing transaction information to Debtor
21 ]/in a data format acceptable to Debtor, as required by the typical
22 |} service contract between Debtor and Debtor’s customers.
23 Debtor bundled the End-User billing transaction information
24} from Debtor’s various customers by LEC as a Purchase of Accounts
25 |} Receivable (“PAR”). Debtor submitted the various PARs to different
26 || LECs for processing. The LEC then included the Alternative
27 |) Operator Service’s charge on the End-User’s bill. The End-User
28 || either paid or disputed the Alternative Operator Service charge.

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If the End-User paid the charge, the LEC would pay Debtor as part
of the PAR in which the End-User’s billing transaction information
was included. On a daily basis and throughout each day, the LECs
made payments into Debtor’s “wire in” account based on the PARs
Debtor previously submitted to the LECs.

The service contracts with Debtor’s customers provided that
each week Debtor transfer by wire to Debtor’s customers’ bank
accounts the net proceeds identified in the prior week as defined
by the service contracts. The service contracts provided detailed
formulas for computing the amounts Debtor owed to Debtor’s
customers. Both the LECs and Debtor withheld certain funds,
including fees, unbillables (receivables that the LECs could not
bill), uncollectibles, dilutions, adjustments and taxes, from the
full amount of the customer’s billing transaction.

Debtor’s individual customers were identified by unique client
numbers. Debtor captured the weekly customer settlement data in
Settlement Statement History Reports (“Settlement Reports”), which
were created for Debtor’s individual customers and provided to the
respective customer. Liquidating Trustee contends for the first
time in Liquidating Trustee’s Response to the Court’s written
comments (“Trustee’s Response”) filed on June 15, 2011 that under
the service contracts, Debtor paid Debtor’s customers for submitted
call traffic approximately 90 days after the submission of the
billing transaction, and generally before the LECs paid Debtor.
Although there is no evidence in the record on the motions that
such is the case, this contention is consistent with the service

contracts between Debtor and Debtor’s customers as well as the

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Court’s understanding of Debtor’s business operations. It is
unclear whether New TBR contests this contention.

Final reconciliation of the PARs submitted to the LECs could
take as long as 20 months to complete. Debtor maintained certain
reserves for disputes, fees and other adjustments which Debtor
recorded as bookkeeping entries only. One of the general ledger
accounts was the 910 Account.

1. The 910 Account

Pre-petition, Debtor “accelerated” dilution by charging
dilution to Debtor’s customers as soon as a LEC advised Debtor that
a dilution could be expected. A LEC would inform Debtor that the
LEC would dilute a certain batch of submitted PARs by a certain
amount of money. Because the PARS related to several customers and
Debtor did not know to which customer(s) the dilution related,
Debtor used a formula to dilute the weekly settlement amounts to be
paid to Debtor’s customers whose accounts receivable were part of
the PAR which the LEC was going to dilute. In order to keep track
of the dilutions which Debtor had already charged to Debtor’s
customers, Debtor made an offsetting entry in the 910 Account.
Thus, the 910 Account was essentially a general ledger account that
reflects Debtor’s financial position vis-a-vis the overall LEC
transactions. In other words, the 910 Account captures the
variance between (a) dilution that Debtor has billed to customers
and (b). dilution that Debtor has been charged by LECs.

As a result of accelerated dilution, Debtor often withheld
amounts from settlements with Debtor’s customers on account of the
accelerated dilution even though the corresponding charge from the

LECs had not yet passed through to Debtor. The practical effect of

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taking the accelerated dilution for Debtor was that Debtor
essentially had a one-time cash flow benefit at the inception of
acceleration by paying customers less than the customers were
otherwise due on a given settlement. Once the LEC actually charged
the dilution, Debtor attempted to true-up the prior projected
customer dilution with the actual dilution using the information
provided by the LECs’ reconciliation of the PARs. Debtor would
perform the client settlement true-up according to the service
contract and would “zero out” the “910 Account” journal entry.

2. The 800 Numbers

LECsS require that billing aggregators -- such as Debtor --
provide toll-free numbers with live customer service to End-Users
to facilitate billing and other inguires from End-Users. ~LECs
typically charge fees to billing aggregators in order to change the
toll-free numbers that are printed on the End-Users’ bills.

Debtor formed PaymentOne in 2000 as a wholly-owned subsidiary
to address the specialized billing and support requirements of the
internet. Debtor owned 97% of PaymentOne at the time Debtor filed
Debtor’s chapter 11 bankruptcy petition. In March 2006, Debtor
contracted with PaymentOne for data processing and support services
(“Data Processing Agreement”). The Data Processing Agreement
included Debtor’s use of certain 800 Numbers (“800 Numbers”) for
customer services and inquiry support. The 800 Numbers were
provided to the LECs and printed on the telephone bills sent out by
the LECs to the End-Users. There is no dispute that Debtor had
been using the 800 Numbers for many years before March 2006.

Liquidating Trustee asserts that in January 2006, Debtor

transferred all rights and interest in the 800 numbers to

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PaymentOne, shortly before Debtor entered into the Data Processing
Agreement with PaymentOne. New TBR disputes this contention and
asserts that, as of the petition date, Debtor had control over the
800 Numbers, not PaymentOne.
B. The Sale of the Operating Assets to New TBR

Post-petition, New TBR acquired the assets that made up
Debtor’s billing services business (“Operating Assets”) on a going
concern basis as part of a sale under Bankruptcy Code section 363
(“Sale”). The Sale was approved by the Court pursuant to an order
entered on October 16, 2008 (“Order”). As part of the Sale, Debtor
and New TBR entered into an Asset Purchase Agreement (“APA”) anda
Master Services Agreement (“MSA”). These documents govern the
obligations between the parties with respect to, inter alia,
customer accounts, reserves and the billing pipeline.

1. Post-Sale Relationships

Debtor’s business structure essentially had two separate, but
interrelated, accounting processes. First, there was the
settlement process between Debtor and Debtor’s customers. To the
extent Debtor paid Debtor’s customers before the LECs paid Debtor
on a respective PAR, Debtor “advanced” funds to Debtor’s customers
which Debtor then reconciled when Debtor received the funds from
the LECs. The “Debtor-customer” accounting also included
reconciliation of any “accelerated” dilutions from the 910 Account.
The second accounting process was between Debtor and the LECs.
Since each PAR typically involved billing transactions for more
than one customer, Debtor accounted for funds paid by the LECs on
account of the PARs, and then included that information in the

settlement process with Debtor’s customers. As noted above, the

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“Debtor-LEC” accounting could take up to 20 months to reconcile in
full.

The Sale interrupted both of these processes. Under Section
7.3 of the APA, Debtor was to receive all proceeds from billing
transactions submitted to the LECs prior to the close of the Sale
(“Retained Billing Transactions”). New TBR was to receive all
proceeds from billing transactions submitted to LECs after the
close of the Sale. Because the LECs had established procedures to
transfer funds through Debtor’s “wire-in” account, Debtor’s “wire-
in” account was transferred to New TBR upon the close of the Sale
and Debtor no longer had access to the proceeds from the billing
transactions. New TBR and Debtor entered into the MSA whereby New
TBR agreed to service the Retained Billing Transactions for Debtor.
Under the MSA, all amounts in the “wire-in” account were to be
transferred to Debtor without deduction or offset for the first 32
days after the Effective Date of the Sale. Thereafter, New TBR was
to forward to Debtor on a weekly basis all monies received by New
TBR on account of the Retained Billing Transactions, less certain
charges.

Also as part of the Sale, PaymentOne and New TBR entered into
a Shared Support and Services Agreement as of October 31, 2008
(“SSSA”). PaymentOne and New TBR also entered into an amended Data
Processing Agreement, as the Data Processing Agreement was assigned
to New TBR under the APA.

2. Post-Sale Litigation

Disputes between New TBR and Debtor as well as between New TBR
and PaymentOne arose post-Sale. Both New TBR and PaymentOne

initiated lawsuits relating to both New TBR’s assertion that the

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800 Numbers belonged to New TBR as well as disputes regarding the
amounts due under the SSSA and the amended Data Processing
Agreement. New TBR and PaymentOne settled all of their disputes as
of January 27, 2011.

Prior to New TBR and PaymentOne filing the litigation
referenced above, Debtor filed this lawsuit on March 18, 2009,
asserting that New TBR’s failure to make payments to PaymentOne as
required under the MSA was impacting a proposed sale of Debtor’s
interest in PaymentOne. On August 31, 2009, Debtor filed an
amended complaint seeking a determination that Debtor did not need
to turn the 800 Numbers over to New TBR under the APA as well as
disputing the amounts New TBR charged Debtor under the MSA. Debtor
also asserted claims for breach of contract and breach of the
implied covenant of good faith and fair dealing. Liquidating
Trustee substituted in as plaintiff on September 18, 2009. New TBR
filed an answer and counterclaim on September 30, 2009.

Liquidating Trustee filed an answer to New TBR’s counterclaim on
October 20, 2009. The parties subsequently filed the motions for
summary adjudication described above, which are currently pending

before this Court.

Il.

APPLICABLE LAW

A motion for summary adjudication should be granted if there
is no genuine issue of material fact and the moving party is
entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a);

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The

moving party bears the initial burden of informing the court of the

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2)

basis for the motion, and identifying portions of the pleadings,
depositions, answers to interrogatories, admissions, or affidavits
which demonstrate the absence of a triable issue of material fact.

Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

If the moving party meets its initial burden, the burden
shifts to the non-moving party to present specific facts showing
that there is a genuine issue of material fact for trial. Celotex,
477 U.S. at 324. The evidence and all reasonable inferences
therefrom must be viewed in. the light most favorable to the

non-moving party. T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors

Ass'n, 809 F.2d 626, 630-31 (9th Cir. 1987). The nonmoving party
has a duty.to present affirmative evidence in order to defeat a
properly supported motion for summary adjudication. Anderson,
477 U.S. at 257. Summary adjudication is not appropriate if the
non-moving party presents evidence from which a reasonable Jury
could resolve the disputed issue of material fact in his or her

favor. Anderson, 477 U.S. at'248; Barlow v. Ground, 943 F.2d 1132,

1136 (9th Cir. 1991).

IIl.
ANALYSIS

A. 910 Account

Regarding the cross-motions for summary adjudication relating
to the 910 Account, New TBR and Liquidating Trustee have different
interpretations of the APA and MSA. The Court can resolve this
dispute based on the language of these documents for three reasons.
First, the parties do not believe that either the APA or MSA is

ambiguous. Second, Section 8.5 of the APA contains an express

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integration clause which provides in relevant part that the terms
of the APA “supersede and cancel all prior agreements,
negotiations, correspondence, undertakings, understandings and
communications of the parties, oral and written, with respect to
the subject matter hereof or thereof.” APA, Section 8.5. Third,
the parties have uniformly testified that there were no discussions
regarding the 910 Account, or the concept of “balancing out” the
ledger account prior to the Sale.

In analyzing the parties’ papers, the Court has discovered a
factual premise on which the parties disagree, and for which the
Court finds no evidentiary support in the papers filed with these
motions. Specifically, Liquidating Trustee asserts in Trustee’ s
Response that:

Generally speaking, TBR [Debtor] paid its clients for the

submitted call traffic before the LECs had paid TBR.
When the LECs did pay, they did so based on a PAR

(“Purchase of Accounts Receivable”). TBR would then
reconcile the PAR with what they expected to receive from
the LEC.

Trustee’s Response at 5:9-12. This assertion is consistent with
the service contracts between Debtor and Debtor’s customers as well
as the Court’s understanding of how Debtor conducted Debtor’s
business. However, there is no evidentiary support in the record
in these motion papers for Liquidating Trustee’s statement.

New TBR’s argument assumes that any accelerated dilution is a
windfall for Debtor and that Debtor would be unable to charge
Debtor’s customer subsequently for the alleged one-time cash flow
benefit Debtor received at the inception of the acceleration.
However, that may not be the case. If Debtor generally paid

Debtor’s customers before the LECs paid Debtor, then an accelerated

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dilution is not necessarily the windfall for Debtor that New TBR
asserts. Rather, the accelerated dilution would be a credit to
Debtor for the monies Debtor already advanced to Debtor’s customer,
and for which the customer would subsequently be liable when Debtor
subsequently reconciled the PAR payment. To the extent that
Debtor’s customer is ultimately liable for an accelerated dilution
rather than Debtor, under this Court’s interpretation of the APA
and the MSA, New TBR should not charge Debtor. In an effort to
further this litigation, the Court will explain how the Court
construes the APA and MSA and let the parties analyze further
whether New TBR’s charges for the 910 Account comport with the
Court’s interpretation.

Ligquidating Trustee asserts that under Section 1.7 of the APA,
New TBR acknowledged that the Sale was “as is” and without any
representations. Section 1.7 provides: |

PURCHASER ACKNOWLEDGES AND AGREES THAT, EXCEPT AS
OTHERWISE MAY BE EXPRESSLY PROVIDED HEREIN, SELLER MAKES
NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR
IMPLIED, WITH RESPECT TO THE OPERATING ASSETS OR ANY
OTHER MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION,
INCOME TO BE DERIVED OR EXPENSES TO BE INCURRED IN
CONNECTION WITH THE OPERATING ASSETS, THE PHYSICAL
CONDITION OF THE OPERATING ASSETS, THE VALUE OF THE
OPERATING ASSETS, THE TERMS, AMOUNT, VALIDITY OR
ENFORCEABILITY OF ANY ASSUMED LIABILITIES, THE
MERCHANTABILITY OR FITNESS OF THE OPERATING ASSETS FOR
ANY PARTICULAR PURPOSE, OR ANY OTHER MATTER OR THING
RELATING TO THE OPERATING ASSETS. WITHOUT IN ANY WAY
LIMITING THE FOREGOING, SELLER HEREBY DISCLAIMS ANY
WARRANTY, EXPRESS OR IMPLIED, OF MERCHANTABILITY OR
FITNESS OF THE OPERATING ASSETS FOR ANY PARTICULAR
PURPOSE. PURCHASER FURTHER ACKNOWLEDGES THAT PURCHASER
HAS CONDUCTED AN INDEPENDENT INSPECTION AND INVESTIGATION
OF THE OPERATING ASSETS AND ALL SUCH OTHER MATTERS
RELATING TO OR AFFECTING THE OPERATING ASSETS AS
PURCHASER DEEMED NECESSARY OR APPROPRIATE AND THAT IN
PROCEEDING WITH ITS ACQUISITION OF THE OPERATING ASSETS,
EXCEPT FOR ANY REPRESENTATIONS AND WARRANTIES EXPRESSLY
SET FORTH HEREIN, PURCHASER IS DOING SO BASED SOLELY UPON
SUCH INDEPENDENT INSPECTIONS AND INVESTIGATIONS.
ACCORDINGLY, EXCEPT AS EXPRESSLY SET FORTH ELSEWHERE

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HEREIN, PURCHASER WILL ACCEPT THE OPERATING ASSETS AT THE

CLOSING “AS IS,” “WHERE IS,” AND “WITH ALL FAULTS.”
APA, Section 1.7. New TBR counters that Section 1.7 of the APA is
not applicable because the “AS IS” clause is qualified by the
phrase “EXCEPT AS OTHERWISE MAY BE EXPRESSLY PROVIDED HEREIN” in
two respects. First, Section 1.2 of the APA provides that Debtor
shall be responsible to New TBR for liabilities and obligations
under the LEC Agreements prior to the Effective Time. Section 1.2
of the APA provides in relevant part:

Seller [Debtor] shall be responsible to Purchaser [New

TBR] as provided in the LEC Servicing Agreement [the MSA]

entered into by the parties and attached hereto as

Exhibit BE for liabilities and obligations arising under

the LEC Agreements prior to the Effective Time.
APA, Section 1.2. Second, Section 7.3 of the APA provides that
Debtor’s rights to the funds received on account of the Retained
Billing Transactions are subject to New TBR’s rights under the MSA.
Section 7.3 of the APA provides in relevant part:

The parties agree that all funds received on account

of Billing Transactions submitted to Telcos [LECs], as

those terms are defined in the LEC Servicing Agreement

[the MSA], prior to the Effective Time (“Seller’s

Pipeline Funds”) belong to Seller [Debtor], subject to

Purchaser’s [New TBR’s] rights set forth in the LEC
Servicing Agreement.

APA, Section 7.3. The Court agrees with New TBR that the “AS IS”

clause of Section 1.7 of the APA is qualified by Sections 1.2

and 7.3 of the APA. Thus, the issue to be analyzed is what are New

TBR’s rights under the MSA in the Retained Billing Transactions.
According to New TBR, under Section 2 of the MSA, Debtor or

Debtor’s customers remain responsible for all costs and expenses

directly or indirectly related to the Retained Billing

Transactions. Section 2 of the MSA provides in full:

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2. NEWCO SERVICES. NEWCO [New TBR] shall provide
the following services (each a “Service Order”) as more
fully described on the referenced Schedules, attached
hereto and made a part hereof.

Sched # Service Order Options Included
II PhoneBill Services (Telco [LEC] Billing) (X)
VI End-User Inquiry (X)

(required with Service Order II or III)
Client [Debtor] and/or Integretel [Debtor] Clients
shall remain responsible for any and all costs and
expenses directly or indirectly related to Billing
Transactions submitted to the LECs prior to the Effective
Date of this Agreement, including, but not limited to
Unbillables, Adjustments, Uncollectibles and Other
Deductions.
MSA, Section 2. New TBR asserts that the “accelerated” dilutions
referenced in the 910 Account are indirect costs related to the
Retained Billing Transactions and are the responsibility of Debtor
or Debtor’s customers. Liquidating Trustee asserts that any
accelerated dilutions referenced in the 910 Account are already
accounted for in the client settlement system and the 910 Account
is simply a reminder of how much unreconciled dilution has already
been passed down to Debtor’s customers.
New TBR asserts that Sections 5 and 6 of Schedule II of the
MSA allow New TBR to recover amounts attributable to the
deceleration of dilution based on Debtor’s prior “accelerated”

dilution. Sections 5 and 6 provide in full:

5. OTHER DEDUCTIONS.

a) Telco [LEC] Fees. NEWCO [New TBR] shall be
entitled to recover all Telco-imposed processing and
other charges associated with Integretel [Debtor]
Clients’ Billing Transactions (“Telco Fees”).

b) Client Reserve. Client [Debtor] may withhold and
Maintain, from amounts otherwise due to Integretel
Clients, reasonable reserves to protect Client from
credit losses with respect to such Integretel Clients
provided that, if NEWCO and Client mutually agree in

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MOTIONS FOR SUMMARY ADJUDICATION 15

UNITED STATES BANKRUPTCY COURT
For The Northern District Of California

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2)

writing, Client shall reduce such reserve amounts for
those Integretel Clients with which NEWCO has entered
into a new services contract effective on or after the
Effective Date hereof, and Client may withdraw the amount
of the reduction from the Disbursement Reserve.

6. SETTLEMENT OF AMOUNTS DUE. (a) Client shall be
entitled to all amounts collected from the TELCOs on
Integretel Clients’ Billing Transactions submitted to the
TELCOs prior to the Effective Date (“Settled Amounts”),
less any amounts due and owing to NEWCO, or which NEWCO
is entitled to withhold, hereunder including, without
limitation, Unbillables, Adjustments, Telco Holdbacks,
excess Uncollectibles (pursuant to any True-Up), Taxes,
Fees and Telco Fees (such difference being the “Net
Proceeds”). For the first 32 days after the Effective
Date, all Settled Amounts shall be transferred without
deduction or offset to Client’s designated account, as
provided in the APA. Thereafter, all Settled Amounts
shall be paid to NEWCO and NEWCO shall transfer each
week, by wire to Client’s, or at Client’s written
request, to Integretel’s Client’s bank accounts, the Net
Proceeds identified the prior week.

(bo) In the event that the calculation of Net
Proceeds yields a negative amount for an Integretel
Client, NEWCO shall invoice Client for such negative
amount and Client shall, within five (5) business. days,
reimburse such negative amount to NEWCO out of the funds
held in the Disbursement Reserve or other Client funds.
However, in the event that no funds remain in the.
Disbursement Reserve attributable to a particular -
Integretel Client and either (i) NEWCO has notified
Client not to withhold reserve amounts with respect to
such Integretel Client or (ii) the Integretel Client is
an Affiliate (as defined in the APA) of NEWCO, then NEWCO
shall offset such negative amounts from amounts otherwise
due directly from NEWCO to such Integretel Client or
collect such negative amount from such Integretel Client
and not from Client.

(c) The parties shall work in good faith to inform
each other and reconcile the amounts due to/from each
Integretel Client. Client may reduce the amount held in
the Disbursement Reserve by any amounts withheld from
Settled Amounts by NEWCO for Telco True-ups and by any
amounts paid to NEWCO under this Section 6 from the
Disbursement Reserve.

MSA, Schedule II, Sections 5 and 6. Liquidating Trustee asserts

that the amount New TBR can charge the bankruptcy estate is limited

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to those charges allowed under MSA, Schedule II, Section 6(b)
(quoted above) only.

Under Section 7.3 of the APA, Debtor is to receive all
proceeds from the billing transactions submitted to the LECs prior
to the close of the Sale and New TBR is to receive all proceeds
from billing transactions submitted to the LECs after the close of
the Sale. If prior to the Sale, Debtor had withheld settlement
funds from a customer based on an indication from a LEC that there
would be a future dilution to a Retained Billing Transaction,
Debtor would have allocated the future dilution to the weekly
settlement for that customer and reduced the settlement proceeds
accordingly. To the extent that Debtor had previously “advanced”
settlement funds to that customer, the accelerated dilution merely
“repaid” Debtor for those advances, for which the customer would
have been responsible in any event. Debtor would have accounted
for the accelerated dilution in the 910 Account.

Assume for a moment that the Sale had not taken place. If
there had been no Sale, when the LEC eventually paid the PAR,
Debtor would have reconciled the accelerated dilution with the
actual dilution, made an appropriate adjustment to the customer’s
weekly Settlement Report, and made an appropriate adjustment to the
910 Account. Now assume that the PAR had not yet been paid on the
date of the Sale. As of the Sale, there would have been an entry
for the accelerated dilution in the 910 Account and an accelerated
dilution withheld from the customer. When the LEC paid the PAR
post-Sale, the LEC would have withheld monies on account of the
dilution from the monies paid to New TBR. According to New TBR,

because the withheld funds relate to a Retained Billing

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MOTIONS FOR SUMMARY ADJUDICATIONS 17

UNITED STATES BANKRUPTCY COURT
For The Northern District Of California

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Transaction, either Debtor or Debtor’s customer is responsible for
the monies withheld by the LEC, not New TBR. This is consistent
with the language of Section 7.3 of the APA. New TBR then asserts
that under Section 2 of the MSA, and because Debtor had previously
withheld monies on account of the accelerated dilution, Debtor --
not Debtor’s customer ~~ should be responsible for paying the
monies previously withheld on account of the accelerated dilution.
According to New TBR, New TBR has withheld the amounts diluted by
the LEC from monies to be paid .to Debtor as a reduction from the
“910 Account” on New TBR’s invoice.

However, New TBR’s analysis does not account for Debtor’s
alleged general practice of advancing payments on billing
transactions to Debtor’s customers before Debtor received funds
from the LECs. For example, assume Debtor advanced funds on a
Retained Billing Transaction submitted by one of Debtor’s customers
and the PAR, which included that Retained Billing Transaction,
remained unpaid as of the Sale. When the PAR is paid post-Sale by
the LEC, and if the LEC payment includes a dilution on which Debtor
had taken a pre-Sale accelerated dilution, it should be the
customer -- not Debtor -- who is responsible for any and all costs
and expenses related to that Retained Billing Transaction up to the
point of any unpaid advance. This is because when Debtor advanced
funds to the customer pre-Sale and then subsequently applied a
dilution, the dilution offset the amount the customer owed Debtor
for the advanced funds. New TBR’s analysis assumes that all
accelerated dilutions were gains to Debtor and that there were no

amounts which a customer owed to Debtor at the time of an

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MOTIONS FOR SUMMARY ADJUDICATTO

For The Northern District Of California

UNITED STATES BANKRUPTCY COURT

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accelerated dilution to which Debtor could apply an offset. This
assumption is likely not correct.

It is not readily apparent that New TBR’s invoicing for the
910 Account takes into account Debtor’s alleged general practice of
advancing funds to Debtor’s customers. Accordingly, at this time,
the Court will not determine whether the bankruptcy estate is
liable for the 910 Account charges and, if so, in what amount.
B. 800 Numbers

Liquidating Trustee seeks a determination that Liquidating
Trustee had no obligation to transfer the 800 Numbers to New TBR as
part of the Sale and, therefore, Liquidating Trustee is not liable
for any alleged damages based on Debtor’s alleged failure to
transfer the 800 Numbers to New TBR. Through the briefing on this
matter, both parties now agree that 800 numbers are tariffed
numbers which cannot be owned by an entity under rulings of the
Federal Communications Commission. As explained by New TBR, 800
numbers are managed by responsible organizations (“resporgs”) . If
an entity seeks to re-provision an 800 number -- i.e., transfer the
800 number from one billing organization to another under the
portability doctrine -- the resporg is the entity to which such a
request is made. Qwest, with which Debtor had an existing
relationship, was the resporg for the 800 Numbers published on the
LEC bill pages with whom Debtor had the right to place charges.

This 800 Number dispute arose when Nelson Gross -- on behalf
of New TBR -- sent a provisioning request to Qwest to transfer the
800 Numbers to Global Crossing -- a different resporg -- and that
request was blocked because PaymentOne claimed to control the 800

Numbers. Ultimately, PaymentOne permitted the transfer of the 800

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‘MEMORANDUM DECISION RE THR 0
MOTIONS FOR SUMMARY ADJUDICATION 19

UNITED STATES BANKRUPTCY COURT

For The Northern District Of California

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Numbers under the settlement agreement between New TBR and
PaymentOne, and the 800 Numbers have been transferred to New TBR.
The central issue is what -- if any -- rights to the 800
Numbers Debtor had at the time that Debtor sold the Operating
Assets to New TBR. According to Liquidating Trustee, in January
2006 -- prior to filing for bankruptcy, Debtor transferred all of
Debtor’s rights and interest in the 800 Numbers to PaymentOne,
shortly before Debtor entered into the Data Processing Agreement
with PaymentOne in March 2006. lLiquidating Trustee relies on the
following evidence to support Liquidating Trustee’s interpretation
that the 800 Numbers were controlled by PaymentOne. First, the
Data Processing Agreement which provides that “800 toll free
numbers shall be supplied by PAYONE [PaymentOne] at it’s (sic) own
expense.” Data Processing Agreement, Schedule 2.1, Section B-1,
Paragraph 8. |

Second, Ken Dawson, one of the co-founders of Debtor and
former president as well as a member of the board of directors for
nearly 20 years, testified in deposition that at some point pre-
petition, Debtor outsourced Debtor’s customer inquiry
responsibilities to PaymentOne. At the time of the outsourcing,
PaymentOne was Debtor’s wholly-owned subsidiary. Debtor
transferred control and/or responsibility of the 800 Numbers to
PaymentOne because the underlying vender who provided the inquiry
services to PaymentOne needed control over the 800 Numbers.
According to Mr. Dawson’s deposition testimony, when Debtor
transferred control, Debtor transferred to PaymentOne the
management, billing, payment, service ordering, and ability to

change carriers -- essentially, whatever was needed to keep the 800

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MEMORANDUM DECISION RE THREE
MOTIONS FOR SUMMARY ADJUDICATION 20