The Billing Resource v. Chase et al

OCR transcription for search; preserved printed pages are authoritative

UNITED STATES BANKRUPTCY COURT

Entered on Docket
November 02, 2007

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

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8 NORTHERN DISTRICT OF CALIFORNIA.
9 In re: ] Case No. 07-52890-ASW
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10 | THE BILLING RESOURCE, dba ] Chapter i1
INTEGRETEL, a California ]
11 || corporation, ]
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5 13 || THE BILLING RESOURCE, dba ] Adversary No. 07-5156
5 INTEGRETEL, a California ]
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a FEDERAL TRADE COMMISSION, et al., ]
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MEMORANDUM DECISION RE ORDER TO SHOW CAUSE
20 REGARDING PRELIMINARY INJUNCTION
21 Before the Court is an Order to Show Cause (“OSC”) why a
22 | preliminary injunction should not issue enjoining the Federal Trade
23 | Commission (“FTC”) and David R. Chase (“Receiver”), not
24 || individually, but solely in his capacity as receiver for Access One
25 || Communications, Inc. (“Access One”) and Network One Services, Inc.
26 | (“Network One”)! from taking actions against The Billing Resource,
27
28 ' In addition to these two entities, Receiver is also the receiver for several other entities in

(continued...)

EMORANDUM DECISION RE
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INFORMATION

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dba Integretel (“Integretel” or “Debtor”)? in the action captioned

Federal Trade Commission v. Nationwide Connections, Inc,, et al.,

Case No. 06-80180-Civ-Ryskamp (“Florida Action”) pending in the
United States District Court for the Southern District of Florida
(“Florida Court”). Debtor seeks to enjoin the FTC from prosecuting
the enforcement aspect of the Florida Action (“Enforcement Action”)
against Debtor (and not against the other defendants in that
action) as well as enjoining the Receiver from implementing or
enforcing the Ommibus Order entered in the Florida Action on
September 14, 2007 (“Omnibus Order”) (as it relates solely to
Debtor, and not to any other defendants). Debtor also seeks to
unblock $1,762,762.56 currently held by Debtor in a blocked account
(“Blocked Account”). These funds were taken from Debtor’s general
commingled funds and placed temporarily in the Blocked Account
pursuant to a stipulation between Debtor and Receiver -- at the
suggestion of the Court -- entered into at the Seotember 26, 2007
hearing on Debtor’s interim motion for use of casn collateral.

A hearing on the OSC was held on October 17, 2007 and the
matter has been submitted for decision. Debtor is represented by
Michael H. Ahrens, Esq. and Steven B. Sacks, Esq. of Sheppard,
Mullin, Richter & Hampton, LLP. FTC is represented by Michael P.
Mora, Esq. and Collot Guerard, Esq. Receiver is :epresented by
Walter K. Oetzell, Esq. of Danning, Gill, Diamond & Kollitz, LLP

and Jeffrey C. Schneider, Esq. of Tew Cardenas LLP. The Official

'(...continued)
the litigation brought by FTC in which Receiver was appointed. The only two receivership entities
that are relevant to these proceedings are Access One and Network One.

> This Court will use Integretel to differentiate actions taken by or events related to Debtor
that occurred pre-petition.

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Committee of Unsecured Creditors (“Committee”) is represented by
John D. Fiero, Esq. of Pachulski Stang Ziehl & Jones LLP. Creditor
POL, Inc. is represented by Kathryn S. Diemer, Esq. of Diemer,
Whitman & Cardosi, LLP. Creditor PaymentOne Corporation
(“PaymentOne”) is represented by Stephen H. Warren, Esq. of
O'Melveny & Myers LLP. Creditor United Online, Inc. is represented
by Jeffrey K. Garfinkle, Esq. of Buchalter Nemer. BSG Billing
Solutions is represented by James A. Pardo, Jr., Esq. and Felton E.
Parrish, Esq. of King & Spalding 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.

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>
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FACTS
A. Debtor’s Business?

Debtor provides billing-related and other services for smaller
private telecommunications companies that compete with large local
exchange carriers (“LECs”) in niche areas such as public pay
phones, hotels and prisons (“Alternative Operator Services”).
Private telecommunications companies that provide Alternative
Operator Services have difficulty billing for “collect” and other
types of calls, since most individuals do not pay invoices from
these unknown companies and those companies cannot. bill the

individuals through the individual’s normal telephone bill. Debtor

> While “Debtor” refers to the post-petition business entity and “Integretel” refers to the pre-
petition business entity, the Court uses Debtor in the following section rather than Integretel because
the section describes Debtor’s business both pre- and post-petition.

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was created in 1988 to address this void in the rarketplace.

Debtor has billing and collection agreements with an estimated
1,400 LECs -- both major local exchange companies and numerous
independents. Debtor’s infrastructure permits private
telecommunications providers to incorporate such providers’ charges
into the phone bills of more than 90% of business and residential
consumers throughout the United States and Canada.

The typical service contract between Debtor and its service
provider customers provides that the customer subnits to Debtor the
customer’s billing transaction in a data format acceptable to
Debtor. In the typical service contract, the customers acknowledge
that these billing transactions are structured as a purchase of
accounts receivable. Debtor contends that its customers have no
ownership interest in the proceeds of the billing transaction after
the billing transactions are submitted to Debtor and its customers
hold only an unsecured claim against the distributions payable by
Debtor to the customer under the service contracts -- usually in 90
or so days. The service contracts provide detailed formulas for
computing the amounts Debtor owes to its customers. Debtor
maintains certain reserves for disputes, fees and other adjustments
as bookkeeping entries only.

The service contracts provide that each week Debtor transfer
by wire to its customers’ bank accounts the net proceeds identified
in the prior week as defined by the service contracts. This amount
is forwarded approximately 90 days after the submission of the
billing transaction. Once Debtor receives a billing transaction,
Debtor submits the billing information to the LECs and the LECs in

turn bill the end user. At varying intervals, the LECs make

MEMORANDUM DECISION

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payments into Debtor's “wire in” account based on the billing
transactions previously submitted to the LEC. Funds are
transferred into this account every day throughout the day.

Once a week -- typically on a Thursday -- Debtor settles its
accounts with its customers. To settle accounts, Debtor disburses
funds from the “wire in” account to the “wire out” account. The
“wire out” account is a zero balance account meaning that all funds
transferred into that account are generally transferred out to
several other accounts on the same day. It is from these other
accounts that Debtor: (1) pays its vendors, employees and other
operating expenses; (2) collects taxes that Debtor is required to
collect in connection with Debtor’s business; (3) makes payments to
LEC end users that are entitled to a cash voucher for a refund;?
and (4) holds excess funds, if any, from weekly settlements to
cover subsequent operating shortfalls including settlement
obligations that exceed available funds in the “wire in” account.

Debtor has approximately thirty-seven employees. In 2000,
Debtor formed PaymentOne as a subsidiary to address the specialized
billing and support requirements of the internet. Debtor owns 97%
of PaymentOne. In 2002, Debtor formed another majority-owned
subsidiary known as Inmate Calling Solutions, LLC to target the
correctional industry and in 2004, Debtor formed yet another
majority-owned subsidiary known as Information Services 900 LLC to

target 900 call traffic.

* Certain individual or business consumers are occasionally entitled to a refund or a credit.
This results, inter alia, from an error in billing. Debtor asserts that 95% of these cases are corrected
electronically through an automated credit transaction. In the 5% of errors handled through the
issuance of a voucher to the consumer, the voucher -- redeemable for cash -- is drawn from the
voucher account.

MEMORANDUM DECISION RE

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B. Florida Action

On February 27, 2006, the FTC commenced the Florida Action in
the Florida Court against three Alternative Operator Services
providers as well as their principals (not Integretel or its
principals) for alleged deceptive and unfair practices for
unauthorized billing of charges on phone bills in violation of the
Federal Trade Commission Act. The FTC alleged that these
defendants had defrauded consumers throughout the United States of
more than $30 million by placing unauthorized collect call charges
onto consumers’ telephone bills. At the request of the FTC, the
Florida Court entered an ex parte temporary restraining order
(“TRO”) that shut down the defendants’ alleged unlawful operation,
froze the defendants’ personal and corporate assezs and appointed
Receiver as temporary receiver for the corporate defendants. Two
of the corporate defendants -- Access One and Network One ~- were
prior customers of Integretel (collectively, “Prior Customers”).
On March 8, 2006, a preliminary injunction was entered
(“Preliminary Injunction”) and Receiver was permanently appointed.

Both the TRO and the Preliminary Injunction provided, inter
alia, that any business entity served with a copy of the TRO or
Preliminary Injunction

that holds, controls, or maintains custody of any account

or asset of any Defendant, or has held, controlled or

maintained custody of any such account or asset at any

time since the date of entry of this Order, shall:

A. Hold and retain within its control and prohibit

the withdrawal, removal, assignment, transfer,
pledge, encumbrance, disbursement, dissipation,

conversion, sale, or other disposal of any such
asset except by further order of the Court;

MEMORANDUM DECISION RE

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TRO at page 8; Preliminary Injunction at page 9. The FTC asserts
that the FTC served Integretel with the TRO within days of the
entry of the TRO.

On March 6, 2006, Integretel’s president, Ken Dawson,
submitted a letter to the FTC stating in relevant part that:

(a) Integretel had service contracts with the Prior Customers;

(b) pursuant to the service contract with the respective Prior
Customer, each Prior Customer was entitled to cerzain proceeds from
billing transactions; however (c) each Prior Customer was in
default under the service contract and no amounts were currently
due and owing. Mr. Dawson noted that Integretel had not processed
any billing for Access One since May 2005 nor for Network One since
June 2003. With respect to each Prior Customer, Mr. Dawson stated:
“[t]lo the extent proceeds become due to [Prior Customer] in the
future, we will establish a separate bank account into which such
funds will be deposited and notify your office accordingly.”° Pre-
petition Integretel did not establish any such separate bank
account.

On September 21, 2006, the FTC filed an amenced complaint
asserting claims against Integretel for Integretel’s collection of
alleged fraudulent charges. Specifically, the complaint asserts
that Integretel deceptively billed consumers for collect calls that
were never made, received or authorized. In its complaint, the FTC
seeks a monetary judgment as well as multiple forms of non-monetary

relief such as a permanent injunction against pertinent law

> Letter dated March 6, 2006 from Ken Dawson to Roberto Menjivar, Attachment B to
Declaration of Laura Kim in Opposition to Plaintiff’s Motion for a Temporary Restraining Order and
Preliminary Injunction filed on October 1, 2007.

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violations, “fencing-in” injunctive relief, rescission of contracts
and a claims procedure for consumer redress. Integretel filed an
answer denying the FTC’s allegations. Integretel’s principals were
not named in the amended complaint.

On October 16, 2006, Receiver filed a motion in the Florida
Court seeking to hold Integretel in contempt of court for
Integretel’s alleged failure to turn over to the Receiver on behalf
of the Prior Customers certain “reserves” under tne service
contracts with the Prior Customers in an alleged amount in excess
of $1.4 million. Integretel opposed the motion on various grounds,
including: (a) Integretel did not hold any such reserves in a
separate account; (b) the service contracts in place with the Prior
Customers permitted Integretel to withhold certain monies owed to
the Prior Customers as “reserves”; and (c) Integretel was not
obligated to turn over those funds under the respective service
contracts. Integretel also filed its own motions to modify the
Florida Court’s injunctive orders and to stay the contract claims
pending arbitration. A hearing on these motions was held on
April 12, 2007.

On September 14, 2007, the Florida Court entered the Omnibus
Order. In the Omnibus Order, the Florida Court found that
Integretel held reserves in the amount of $1,762,762.56 on behalf
of the Prior Customers as of June 30, 2007 (“Commingled Funds”).
The Florida Court stated that Integretel’s assertion that the
“reserves” were not held as segregated funds but rather were kept
in a pooled account and tracked via an internal accounting entry
was “a distinction without a difference, since the TRO captures

funds ‘held on behalf of, or for the benefit of, &6 Defendant.’”

MEMORANDUM DECISION RE

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Omnibus Order at 3. The Florida Court noted that “[a]n entity need
not be an agent, partner, joint venturer, trustee, fiduciary, or
legal representative to possess funds that one is holding ‘on
behalf of’ another person or entity...” Id. The Florida Court
also rejected Integretel’s arguments that Integretel could retain
the “Commingled Funds” to fund Integretel’s assertion of an
indemnity claim or liquidated damages for breach of contract
against the Prior Customers. Id. at 4.

Regarding Integretel’s motions, the Florida Court denied
Integretel’s request to stay the contract claims ‘ending
arbitration of those claims pursuant to the service contract
arbitration clause, since the Florida Court concluded that Receiver
was not bound by the those clauses. The Florida Court stated in
particular:

The Receiver’s claim is not a claim at law governed by

pre-receivership contracts, however, but one governed by

this Court’s jurisdiction over receivership property

based on the TRO and Amended Preliminary Injunction. The

Receiver does not claim that the funds must be turned

over according to, or by adopting, a contract signed

between Integretel and Access One/Network One. The

Receiver is seeking to recover the reserve funds pursuant

to the Court’s in rem jurisdiction over receivership

property, as memorialized in the TRO and the Amended

Preliminary Injunction.
Omnibus Order at 4. In response to Integretel’s argument that the
TRO and Preliminary Injunction would be invalid if those orders
permitted the Florida Court to determine Integretel’s ownership
interest -- or lack thereof -- in the Commingled Funds without a
new, separate legal proceeding, the Florida Court stated: “[i]lssues
concerning entitlement to disputed receivership property, in fact,

are the types of issues typically determined via summary

proceedings in the federal court equity receivership context.”

MEMORANDUM DECISION RE

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Id. at 5. The Florida Court rejected Integretel’s arguments that
Integretel was deprived of due process when the Florida Court
issued the TRO and Preliminary Injunction and also rejected
Integretel’s various arguments that those orders are invalid. The
Florida Court also denied Integretel’s request to modify those
orders. Finally the Florida Court:
ORDERED AND ADJUDGED that the Receiver’s Revised
Motion for Order to Show Cause Why Integretel Should Not
Be Held in Contempt of Court, filed October 16, 2006 [DE
246], is GRANTED. Integretel shall show cause in writing
within 10 days of the date of this Order why it should
not be held in contempt for failure to turn over the
reserves. In addition, Integretel shall provide a sworn
Statement identifying the amount of reserves as of the
issuance of the TRO. The Court further orders that these
funds shall be placed in a segregated Receivership
account. It is further
ORDERED AND ADJUDGED that Integretel’s Motion to
Modify Prior Injunctive Orders, filed Octobe: 30, 2006
[DE 294], is DENIED. It is further
ORDERED AND ADJUDGED that Integretel’s Motion to

Stay Contract Claims, filed December 29, 2006 [DE 363],
is DENIED.

Omnibus Order at 10. On September 16, 2007, promptly after
receiving the Omnibus Order, Integretel filed its bankruptcy
petition.

Debtor is one of seventeen defendants in the Florida Action.
Other than two pending motions regarding depositions, discovery is
complete in the Enforcement Action.*® Dispositive motions are
scheduled to be filed very soon -- by November 6, 2007, with
opposition to those motions to be filed by December 4, 2007, and

replies due by December 18, 2007. Debtor asserts that Debtor will

° Integretel filed a motion to continue one deposition and another billing aggregator
defendant filed a motion requesting ten additional depositions. The FTC opposed both motions and
the Florida Court had not ruled on those motions as of October 15, 2007.

MEMORANDUM DECISION RE

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not be filing any dispositive motions, but anticipates having to
respond to dispositive motions filed by other parties. The FTC has

stated that the FTC will seek summary judgment against Debtor.

Debtor asserts that a two- to four-week trial is set to commence in
the Florida Action on February 25, 2008. The FTC predicts that the
FTC will prevail on the liability aspect in summary judgment and if
not, the FTC estimates that the trial will be no more than nine
days, and other defendants contend that the trial will take ten to
fifteen days at most. The FTC does not contend tnat a preliminary
injunction against Debtor interferes with the FTC from proceeding
with the Enforcement Action against any of the other sixteen
defendants.

Debtor anticipates having to spend $821,600 in litigation
costs over the next six months related to depositions, discovery
motions, dispositive motions, other motions, pre-trial submissions
and trial.’ Debtor does not break out the estimated fees into the
various subcategories. Debtor estimates that in addition to those
fees there will be an estimated $10,000 in fees for local counsel
and an estimated $50,000 to $75,000 in costs.% In addition to
these estimated fees and costs, Debtor estimates that Debtor will
incur an additional $50,000 to $150,000 in fees related to

Receiver’s request for turnover of the Commingled Funds.’

” Declaration of Neal Goldfarb in Support of Emergency Motion for Temporary Restraining
Order and Preliminary Injunction filed on September 24, 2007 (“‘Goldfarb Dec.”) at [ff 5-6.

® Goldfarb Dec. at J 7.

° Goldfarb Dec. at { 8.

MEMORANDUM DECISION RE

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C. Events since Debtor Filed Its Bankruptcy Petition

As noted above, Debtor filed this chapter 11 bankruptcy case
on September 16, 2007. On September 17, 2007, Debtor fileda
Notice of Bankruptcy in the Florida Action. On September 18, 2007,
this Court generated a Notice of Chapter 11 Bankruptcy Case,

Meeting of Creditors, & Deadlines setting, inter alia, a meeting of

creditors for October 17, 2007 and a deadline for filing a proof of
claim for non-governmental units of January 15, 2008 and for
governmental units of March 14, 2008. On September 20, 2007, the
Florida Court issued an order stating that the Florida Action was
stayed by the automatic stay.

On September 21, 2007, the FTC filed an emergency motion for
clarification that the automatic stay did not apply to the
Enforcement Action and the contempt proceedings. On the same day,
without granting Debtor an opportunity to respond to the FTC’s
emergency motion either in writing or orally, the Florida Court
issued its Order Granting Motion for Clarification as to Scope of
Stay (“Clarification Order”). In the Clarification Order, the
Florida Court stated that in the Omnibus Order the Florida Court
had “ruled that the reserve funds are the property of the
receivership estate and ordered Integretel to pay the current
reserve funds, amounting to $1,762,762.56, immediately to the
Receiver.” Clarification Order at 1.

Furthermore, the Florida Court held that Bankruptcy Code

section 362(b) (4)*° did not stay the Enforcement Action. The

° Unless otherwise noted, all statutory references are to Title 11, United States Code, as
amended in 2005 (“Bankruptcy Code”).

MEMORANDUM DECISION RE

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Florida Court also stated with respect to the contempt proceedings
brought by the Receiver:

Nor is the contempt proceeding stayed. First, the
automatic stay applies only to protect property of the
bankruptcy estate or property of the debtor. See
11 U.S.C. § 362(a) (2). The Court has already ruled that
the reserve funds are neither the property of the
“bankruptcy estate” nor Integretel. Second, the
11 U.S.C. § 362(b) (4) exception also applies to civil
contempt proceedings brought by a governmental unit in
the exercise of its police or regulatory powers. See SEC
v. Bilzerian, 131 F. Supp. 2d 10, 14 (D.D.c. 2001) (civil
contempt proceeding falls within the exception;
incarceration of debtor subsequent to failure to provide
financial information as required by purgation provision

in prior disgorgement order). Finally, the vcankruptcy
filing does not deprive this Court of its innerent power
to enforce the integrity of its orders. *[C]ontempt

orders to uphold the dignity of the court are excepted
from the automatic stay.” NRLB v. Sawulski, 158 B.R.
971, 975 (E.D. Mich. 1993).

Clarification Order at 4. Thus, even though the newly extant
bankruptcy estate had no opportunity to respond to the FTC's
emergency motion, the Florida Court granted the FIC’s emergency
motion. The Florida Court stated that the commencement of Debtor’s
bankruptcy case did not stay the contempt proceedings against
Debtor or FTC’s prosecution of the Enforcement Action and the
Florida Court vacated the September 20, 2007 order staying
proceedings against Debtor.

Also on September 21, 2007, this Court held a hearing on
Debtor’s emergency motion for interim use of cash collateral and
Debtor’s request for authority to maintain Debtor's pre-petition
bank accounts. In its motion for interim use of cash collateral,
Debtor requested court authority to use cash collateral pursuant to
a stipulation with its secured creditor PaymentOne. Debtor
asserted that PaymentOne was a secured creditor based on more than

$6.4 million PaymentOne had loaned to Debtor between October 18,

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2006 and the petition date (the “new value” provided by PaymentOne,
in bankruptcy parlance). The motion for authority to maintain
Debtor’s pre-petition bank accounts was granted and the motion on
the interim use of cash collateral was continued to September 26,
2007.

Prior to the September 26, 2007 hearing, seven objections were
filed in opposition to Debtor’s motion for interin use of cash
collateral. Some of the oppositions raised questions regarding
Debtor’s viability and ability to operate successfully as a going
concern. Prior to and at the hearing, Debtor obtained the consent
of all parties to Debtor’s use of cash collateral. In particular,
Debtor and Receiver agreed to set up the Blocked Account whereby
Debtor agreed to deposit $1,762,762.56 of its commingled funds into
a blocked account and Debtor and Receiver agreed that the
establishment of the Blocked Account did not in any way affect the
merits of either parties’ rights, claims or defenses with respect
to the funds in the Blocked Account. Based in part on the consent
of all parties, this Court granted Debtor interim use of cash
collateral through October 15, 2007 and set a further hearing on
the use of cash collateral for that day.

In papers relating to the September 26, 2007 hearing and at
that hearing, Debtor informed this Court that negotiations were
underway for a possible sale of PaymentOne to a third party.

Debtor also requested the expedited appointment of the unsecured
creditors’ committee so that Debtor would have an entity with which
Debtor could talk on a confidential basis with, and obtain the
opinions regarding, possible reorganization scenarios, including

the possible sale of PaymentOne. On October 1, 2C07, the United

MEMORANDUM DECISION RE

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States Trustee filed a notice that a committee of seven unsecured
creditors of Debtor had been appointed. Two days later the
Committee selected the law firm of Pachulski Stang Ziehl & Jones
LLP as its counsel, subject to approval of this Court. Within a
week, Debtor and the Committee executed a confidentiality
agreement; Debtor provided the Committee with various documents and
information requested by the Committee; and the Committee began the
process of analyzing that information.

On October 10, 2007, the Committee and Debtor participated in
a five hour face-to-face meeting. Discussions at that meeting
included Debtor’s financial information -- including projections,
claims against Debtor, Debtor’s plan for post-petition pre-payment
to Debtor's pre-petition customers, Debtor’s relationship with the
LECs, the status of the Florida Action, as well as plan of
reorganization issues. At that meeting, the Committee agreed to
consent to Debtor’s continued use of cash collateral through
November 2. Debtor committed to negotiate with the Committee a
term sheet for a plan of reorganization contemplating a
continuation of Debtor’s business operations with the goal of
allowing Debtor to exit bankruptcy as quickly as possible, while
maximizing the value to unsecured creditors. The Committee stated
its intention to use the time between October 10 and November 2 to
conduct further due diligence on Debtor’s assets, liabilities and
financial affairs in an effort to be in a better position to
evaluate an exit strategy for Debtor from bankrupt:cy.

On October 15, 2007, this Court held a second hearing on
Debtor’s interim use of cash collateral. In support of Debtor’s

continued use of such cash collateral, Debtor submitted budgets

MEMORANDUM DECISION RE

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showing Debtor’s actual and projected post-petition finances.
Debtor submitted one budget assuming that Debtor could use the
funds in the Blocked Account as well as the assumption that the
Enforcement Action and related proceedings were stayed. Debtor
also submitted another budget without those assumptions. Regarding
the projected $1 million in litigation expenses related to the
Florida Action, Debtor projected incurring $333,333 for the weeks
ending November 2, 2007, December 7, 2007, and January 4, 2008.
Debtor asserted at that hearing, and continues to assert, that
Debtor needs the funds in the Blocked Account and that without the
ability to use the funds in the Blocked Account, Debtor will not
have sufficient cash flow as of mid-December 2007.

Debtor’s continued use of cash collateral again drew seven
objections, but the primary concern of the objecting creditors was
with respect to the alleged secured nature of their respective
claims, and not on Debtor’s ability to stay in business. [In
addition, as noted above, Debtor’s continued use of cash collateral
had the support of the Committee. On October 16, 2007, this Court
granted Debtor’s continued interim use of cash collateral. A
hearing for final authority for Debtor to use cash collateral is
set for November 2, 2007.

Meanwhile, on October 1, 2007, Debtor requested additional

time -- until November 15, 2007 -- to file its schedules of assets
and liabilities (“Schedules”) and statement of financial affairs
(“Statement”). In its application, Debtor noted the size and

complexity of Debtor’s business operations, coupled with the
limited number of employees, who, in addition to their regular

duties, were capable of preparing the Statement arid Schedules. On

MEMORANDUM DECISION RE

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October 23, 2007, this Court granted Debtor’s request. Debtor’s
Schedules and Statement are currently due on November 15, 2007.

On October 2, 2007, Debtor sought a temporary restraining
order from this Court enjoining the Enforcement Action and seeking
an order to show cause for the issuance of a preliminary
injunction. At that hearing, this Court denied Debtor’s request
for a temporary restraining order of the Enforcement Action on the
basis that for the period from October 2, 2007 through October 17,
2007, Debtor had not demonstrated that the threatened injury to
Debtor outweighed the harms of a temporary restraining order
against the FTC.'* However, the Court found that there was cause to
issue the OSC and the OSC was issued as to why a preliminary
injunction should not issue.

On October 11, 2007, Debtor filed in the Eleventh Circuit a
motion for an immediate interim stay of the Clarification Order in
as far as that order held that the Florida Action -- other than the
Enforcement Action -- was not automatically stayed. On October 17,
2007, the Eleventh Circuit temporarily granted Debtor’s motion

pending further order of the court (“Stay Order”),

Il.
APPLICABLE LAW

In the non-bankruptcy context, [the Ninth Circuit
has] consistently required trial courts deciding
preliminary injunction motions to balance the moving
party’s likelihood of success on the merits and the

'' While Debtor originally sought a temporary restraining order against Receiver’s continued
enforcement of the Omnibus Order, the stipulation at the September 26 cash collateral hearing that
resulted in the temporary establishment of the Blocked Account resolved that need to both parties’
satisfaction.

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relative hardship of the parties. The moving party must
show:

(1) a strong likelihood of success on the
merits, (2) the possibility of irreparable
injury to plaintiff if preliminary relief is
not granted, (3) a balance of hardships
favoring the plaintiff, and (4) advancenent of
the public interest (in certain cases).
Alternatively, a court may grant the injunction
if the plaintiff demonstrates either a
combination of probable success on the nerits
and the possibility of irreparable injury or
that serious questions are raised and the
balance of hardships tips sharply in his favor.

As we have said many times regarding the two
alternative formulations of the preliminary
injunction test: These two formulations
represent two points on a sliding scale in
which the required degree of irreparable harm
increases as the probability of success
decreases. They are not separate tests but
rather outer reaches of a single continuum.

save Our Sonoran, Inc. v. Flowers, 408 F.3d 1113, 1120
(9th Cir. 2005) (citations and internal quotation marks
omitted).

Solidus Networks, Inc. v. Excel Innovations, Inc., (In re Excel

Innovations, Inc.), --- F.3d ---, 2007 WL 2555941 at *5 (9th Cir.

Sept. 7, 2007) (emphasis in original). The usual preliminary
injunction standard applies to stays of proceedings under 11 U.S.C.
§ 105(a) (“Section 105”). Excel, 2007 WL 2555941 at *7. In Excel,
a reorganization case, the Ninth Circuit stated that in granting or
denying an injunction under Section 105, “a bankruptcy court must
consider whether the debtor has a reasonable likelihood of a
successful reorganization, the relative hardship of the parties,

and any public interest concerns if relevant.” Excel, 2007 WL

2555941 at *7.

MEMORANDUM DECISION RE

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Tit.
ANALYSIS
A. Reasonable Likelihood of a Successful Reorganization

In a reorganization context, a debtor seeking a stay against a
non-debtor must show a reasonable likelihood of a successful
reorganization. Excel, 2007 WL 2555941 at *7. This is not a high
burden, id. at *8, and a strong showing on the likelihood of a
successful reorganization lowers the burden to show irreparable
harm. Id. at *11.

The FTC argues that the Committee’s unwillingness to consent
to a final cash collateral order speaks volumes about Debtor’s
prospects -- or lack thereof -- of successfully reorganizing and
that it remains to be seen whether this will be a “real”
reorganization case. Citing general statistics, the FTC asserts it
is more likely that Debtor’s case will fall into the 90% or more of
chapter 11 cases that are converted to liquidations or dismissed.
The FTC argues that overall the record at this point demonstrates
that Debtor’s fate hangs precariously in the balance and a
liquidation scenario is more, or at least as likely as, a
successful reorganization and Debtor has not shown by a
preponderance of the evidence a likelihood of success on the
merits.??

Receiver asserts that Debtor has not shown a likelihood of
success on the merits on the basis that Debtor’s support by the

Committee fails to address the numerous objections by creditors

? A bankruptcy case may have an excellent result for creditors, even in a liquidation context.
For example, a successful sale of a debtor’s business and subsequent liquidation of that debtor’s
assets in a chapter 11 or a chapter 7 may result in a substantial distribution to creditors.

MEMORANDUM DECISION RE

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claiming a security interest in Debtor’s assets to Debtor’s
continued use of cash collateral. In addition, Dsbtor’s strategy
over the near-term presupposes Debtor will be able to use the
Commingled Funds to fund Debtor’s business operations, so Debtor
cannot show a likelihood of success on the merits.

The Court disagrees with the FTC and Receiver. The Court
finds that, at this juncture, Debtor has made a szrong showing that
Debtor has a reasonable likelihood of a successful reorganization.
It is very early in Debtor’s bankruptcy case -- Debtor’s bankruptcy
case is only six weeks old. In that short period of time, Debtor
has obtained the confidence of its creditors that Debtor is a
viable business and has a reasonable likelihood o2 reorganizing
successfully. This is demonstrated in several ways. First,
following strenuous initial objections, Debtor’s creditors
consented to Debtor’s first interim use of cash collateral as soon
as Debtor demonstrated its viability to the objecting creditors.
Second, the LECs have for the most part continued to forward funds
to Debtor. Third, in an effort to retain customers, Debtor is
negotiating with its customers to provide a 50% pre-payment of the
transferred accounts receivables at the time of transfer rather
than having the customers wait 90 days, as those customers did pre-
petition. Debtor has obtained the Committee's support of that
plan. Fourth, the Committee is confident enough in Debtor’s
prospects of reorganization that the Committee supported Debtor’s
continued use of cash collateral for an additional three weeks to
enable the Committee and Debtor to work together on the terms of a

plan of reorganization.

MEMORANDUM DECISION RE

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cf

In addition, Debtor and Debtor’s 97%-owned subsidiary
PaymentOne are diligently exploring both a reorganization with
Debtor and a sale of PaymentOne’s business to prospective
purchasers. The proceeds of such a sale could help Debtor fund a
plan of reorganization. Alternatively, Debtor is exploring the
possibility of a pot plan providing a pro-rata distribution to
unsecured creditors or a plan that would have Debtor continue its
operations and issue new stock in exchange for Debtor’s unsecured
debt .

At this early stage of Debtor’s bankruptcy case, Debtor's
reasonable likelihood of a successful reorganization is evident
from the support of Debtor’s creditors and the Committee, Debtor's
clear pursuit of several viable avenues of possible reorganization,
Debtor’s projections of positive cash flow for the next six months,
Debtor’s retention of its customers and the continued success of
Debtor’s business. Thus, Debtor has met its burden of showing a
reasonable likelihood of a successful reorganizat:on.?3
B. The FTC’s Enforcement Action

The parties do not dispute for the purposes of the current
dispute that, under Bankruptcy Code section 362(b) (4), the

automatic stay does not stay the Enforcement Action." However, the

'? Although the issue is not presented here, a court mi ght appropriately enjoin an
enforcement action, like the FTC’s, against a chapter 7 estate. The chapter 7 trustee might well
convince the court not to allow the enforcement action to proceed until the trustee and the court
knew what assets and liabilities there were in the estate. There would be no point, for example, in
allowing an enforcement action seeking a monetary judgment to proceed if the estate did not have
any money in it above the amount needed to pay administrative claims. There also mi ght be no
purpose in enjoining a chapter 7 debtor from engaging in certain business practices, if that debtor
was out of business.

“* While the Clarification Order in which the District Court held that Bankruptcy Code
(continued...)

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FTC argues that this Court does not have authority to stay that
litigation against Debtor under Section 105. This Court disagrees.

Under In re First Alliance Mortg. Co., 264 B.R. 634 (C.D. Cal.

2001) (*“FAMCO”) and the myriad of authorities cited therein, this
Court has the legal authority to enjoin prosecution of governmental
actions against a debtor that falls within the regulatory and
police powers exception of Bankruptcy Code section 362(b) (4).
FAMCO, 264 B.R. at 652 n.18.

This Court may enjoin the prosecution of the Enforcement
Action under Section 105 if the Enforcement Action “threatens” the
assets of the bankruptcy estate. FAMCO, 264 B.R. at 652. Under
FAMCO, a Section 105 injunction could be appropriate against a
regulatory action in two types of situations.

First, a governmental action that seeks actual
physical control over the assets of the debtor’s estate
threatens the bankruptcy court’s exclusive jurisdiction
over the res of the debtor’s estate and therefore can be
enjoined.

Second, a § 105 injunction of a regulatory or police
powers action could be appropriate in other circumstances
that severely threaten the integrity of the bankruptcy
process. A few courts have enjoined regulatory or police
powers actions on the grounds that the costs of defending
the actions at issue, both in terms of money spent on
lawyers’ fees and time taken away from focusing on
reorganization, were so high in comparison to the assets
of the estate that allowing the actions to continue
constituted a “threat” to the estate. E.g., NLRB v.
Superior Forwarding, Inc., 762 F.2d 695, 698-99 (8th Cir.
1985). Because the bankruptcy court has the obligation
to protect and marshal the estate’s assets, a severe
enough threat to the assets of the estate constitutes a
threat to the bankruptcy process.

'4(..continued)
section 362(b)(4) did not apply to the Florida Action is on appeal, in that appeal, Debtor has not

challenged that Order insofar as the Clarification Order holds that the Enforcement Action is not
automatically stayed.

MEMORANDUM DECISION RE

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Id. at 655. In balancing the hardships between the parties, “[a]
bankruptcy court must ‘identify the harms which a preliminary
injunction might cause to defendants and ... weigh these against

plaintiff's threatened injury.’ Caribbean Marine Servs. Co. v.

Baldridge, 844 F.2d 668, 676 (9th Cir. 1988) (citation omitted) .”

Excel, 2007 WL 2555941 at *9,

1. Harms to FTC

The FTC articulates that the FTC would be harmed by the
granting of a preliminary injunction because the FTC only seeks
what the FTC terms as “equitable” relief in the Enforcement Action
and this Court cannot grant all of the relief requested by the
FTC.'° But there is no doubt that the FTC seeks to collect monies
from Debtor. Specifically, the FTC seeks monetary injunctive
relief in the form of disgorgement of monies received from
consumers and restitution to the consumers. In addition, the FTC
seeks a permanent injunction halting Debtor’s allegedly unlawful
practices, rescission of contracts and a claims p:rocedure to
provide restitution to the consumers who allegediy paid for
unauthorized charges on their phone bills.

The FTC also asserts that being enjoined from proceeding in
its chosen forum -- the Florida Court -- would harm the FTC in
other critical ways. The FTC quotes extensively from FAMCO which
states in this regard:

[T]he hardship to the governmental units of not being

allowed to proceed with their actions in the:r chosen
forums includes harms different in character from the

'S While this Court does not necessarily agree with the FTC that this Court could not grant
all equitable relief requested by the FTC in the Enforcement Action, due to the limited nature of the

preliminary injunction being granted at this time, there is no reason for this Court to address the
FTC’s assertion.

MEMORANDUM_ DE

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harms normally considered on motions for injunctions
under § 105. Being able to have a claim determined by
the bankruptcy court is qualitatively different from
proceeding with a lawsuit in home forums. As Congress
recognized when it created the regulatory and police
powers exception, the goals of public policy, punishment,
and deterrence may sometimes conflict with the goals of
maximizing an individual estate’s assets and efficiently
processing claims. It is the former goals, which are
difficult if not impossible to measure in dollars and
cents, that are impaired when a governmental unit loses
the ability to enforce its laws in its own forum.

Considering deterrence in particular, the harm to
the governmental units must be measured with a broader
perspective in mind than these parties alone. The
bankruptcy court and First Alliance are undoubtedly
correct that there will be more money to distribute to
borrowers in this case if the separate actions are not
allowed to proceed. However, the governmental units are
entitled to make the choice that, over time, similarly
Situated borrowers and consumers benefit more when
companies do not violate the law in part because they
know that bankruptcy will not provide a way out when
their wrongs are discovered. In any given case,
reasonable minds could disagree about the marginal costs
and the marginal benefits of different approaches and
which will maximize the wealth and happiness of the
greatest number of people. The point is that it is the
governmental units charged with enforcing consumer
protection laws, governmental units that are responsive
to the political will of the people, that should be the
ones to make the choice, not the bankruptcy court.

FAMCO, 264 B.R. at 659.

The FTC asserts that the FTC’s need for permanent injunctive
relief is particularly acute here because the FTC needs permanent
injunctive relief from the Florida Court barring Debtor’s allegedly
unlawful business practices. The FTC asserts that the FTC's
pursuit of phone billing aggregators such as Debtor is a vital
enforcement strategy that the FTC has pursued to curb the allegedly
insidious and unlawful practice of placing unauthorized charges on
consumers’ phone bills. During the past nine years, the FTC has
filed numerous actions against telephone billing aggregators and

has obtained injunctive and monetary equitable relief. The FTC

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notes that this is not the first time that the FTC has sued Debtor
(the previous suit was settled) and some of Debtor’s current
customers were recently prosecuted by state attorneys general for
placing unauthorized charges on consumers’ phone bills and other
alleged deceptive trade practices.

2. Harms to Debtor

Debtor has filed a chapter 11 bankruptcy petition. “The
purpose of title 11 protection is to allow an entity to
‘restructure ... finances’ and enter a plan of reorganization so
that it is able to ‘continue to operate, provide its employees with
jobs, pay its creditors, and produce a fair retura for its

stockholders.’” CFTC v. NRG Energy, Inc., 457 F.3d 776, 779 (8th

Cir. 2006) (internal citation omitted). Said a different way,
“[t]he purpose of Chapter 11 reorganization is to assist
financially distressed business enterprises by providing them with

breathing space in which to return to a viable state.” In re

Little Creek Dev. Co., 779 F.2d 1068, 1073 (5th Cir. 1986) (quoting

In re Winshall Settlor’s Trust, 785 F.2d 1136, 1137 (6th Cir.

1985)). Here “Debtor ‘is a real company with real debt, real
creditors and a compelling need to reorganize in order to meet
these obligations’ and is therefore, exactly the type of debtor for

which chapter 11 was enacted.” In re Dow Corning Corp., 244 B.R.

673, 677 (Bankr. E.D. Mich. 1999), aff’d, 255 B.R. 445 (E.D. Mich.
2000) (internal citation omitted). In determining irreparable
injury to Debtor, this Court must consider the impact of permitting
the Enforcement Action to proceed against Debtor at this point in

Debtor’s bankruptcy case.

MEMORANDUM, D

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Debtor raises two main harms that would cause irreparable
injury should this Court not preliminarily enjoin the Enforcement
Action. First, Debtor anticipates having to spend over $900,000 in
fees and costs over the next six months in the Enforcement Action.
Debtor estimates it will incur $821,600 in litigation fees related
to depositions, discovery motions, dispositive motions, other
motions, pre-trial submissions and trial. In addition, Debtor
estimates that there will be an estimated $10,000 in fees for local
counsel and an estimated $50,000 to $70,000 in costs. Debtor’s
budgets show that Debtor will not be able to operate on an
administratively solvent’ basis if Debtor is forced to incur these
substantial fees over the next six months.

The FTC argues that Debtor overestimates its costs to defend
against the Enforcement Action. The FTC asserts ~hat the
declaration of Neal Goldfarb submitted by Debtor in support of its
request lacks sufficient detail to Support Debtor’s proposed
estimate. Moreover, the FTC argues that the estimate overstates
the amount of estimated trial time and fails to consider that some
of the issues in the Enforcement Action will be narrowed, if not
eliminated, by summary judgment since the FIC’s position is that
the uncontested facts establish Debtor’s liability.

The FTC further contends that the relevant comparison under

FAMCO is not between Debtor’s costs of defending itself against the

‘° In achapter 11 bankruptcy case, all post-petition obligations have administrative priority
status. This means that those claims are paid prior to most other claims in a bankruptcy estate,
namely other priority claims and pre-petition unsecured claims. In addition, those claims must be
paid in full on the effective date of a confirmed plan of reorganization. The effective date is usually
30 days after an order confirming a plan of reorganization is entered, but can be in as few as eleven
days. To stay administratively solvent, a debtor would insure that debtor retains sufficient cash
reserves on hand to pay all administrative claims in full on the effective date of a plan.

MEMORANDUM DECISION RE

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FTC in the Florida Court or not defending itself at all, but rather
between Debtor defending itself in the Florida Court and defending
itself in this Court. According to the FTC, unless the Enforcement
Action is concluded as to Debtor, the same facts will have to be
litigated in this Court to establish a bankruptcy claim against
Debtor.'’ Moreover, under the recently enacted changes to the
Bankruptcy Code, the FTC can pursue a non-dischargeability action
against Debtor for the FTC’s monetary claim. Finally, the FTC

alleges that it would pursue the non-monetary aspects of the

Enforcement Action after confirmation of Debtor’s plan. NRG
Energy, 457 F.3d at 780-81 (holding that a bankruptcy court has no
authority to enjoin a government agency from bringing a post-
confirmation enforcement action against a reorganized debtor for
injunctive relief against future law violations) .*?

The FTC does not address the second harm raised by Debtor: the
impact of the continuation of the Enforcement Action on Debtor's
reorganization efforts. Debtor has relatively few employees and
Debtor’s president, Mr. Dawson -- one of the founders of Debtor --
is and will continue to be very closely involved in Debtor's
defense in the Enforcement Action. Mr. Dawson is also the main

contact for all of Debtor’s reorganization efforts in addition to

'7 This argument is incorrect, or at least premature, because the Court is only enjoining the
Enforcement Action for a few months and has not determined whether the Enforcement Action will
be adjudicated in the Florida Court or in this Court, if it ultimately needs to be adjudicated at all. It
might well settle in the bankruptcy context in connection with a plan of reorganization or otherwise.
In this connection, the desire of the post-petition Debtor and the FTC to resolve their disputes may
be significantly greater than the situation before Debtor filed for bankruptcy.

Furthermore, even if the matter were tried in the bankruptcy court, this Court would
determine when the trial should take place.

"8 However, as noted, Debtor and the FTC may well settle those disputes in the context of
Debtor’s plan of reorganization or otherwise.

MEMORANDUM DECISION RE

fall

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his duties overseeing normal operational issues. The bankruptcy
filing unsettled Debtor’s customers and Debtor is working on a
proposed pre-payment plan whereby Debtor would pay 50% of the
receivables represented by post-petition billing submissions.
Because this is a new program, the program will be time-consuming
to implement and monitor. In addition, Mr. Dawson needs to be
available to work with Debtor’s reorganization counsel, the various
secured and unsecured creditors, the Committee and the United
States Trustee.

Further, the Committee supports Debtor’s use of cash
collateral through November 2, 2007. In exchange, Debtor has
committed to negotiate with the Committee a term sheet for a pian
of reorganization contemplating a continuation of Debtor’s business
operations with the goal of allowing Debtor to exit bankruptcy as
quickly as possible. Debtor is also monitoring te possible sale
of PaymentOne to a third party.

Finally, upon Debtor filing its chapter 11 bankruptcy
petition, Debtor became a “debtor-in-possession.” As a debtor-in-
possession, Debtor acts as a fiduciary to the bankruptcy estate and
owes a duty of care and loyalty to the bankruptcy estate’s

creditors. In re McConville, 110 F.3d 47, 50 (9th Cir. 1997).

Thus, Debtor thus is a new entity with different and additional
responsibilities, concerns and pressures than it had when Debtor
operated solely as Integretel. Debtor, the Committee and Debtor’s
other creditors need time to evaluate the merits and strengths of
the FTC’s positions and decide whether the bankruptcy estate should
try to settle the Enforcement Action with the FTC. Giving Debtor

and Debtor’s creditors a few months to do that 1s critical at this

MEMORANDUM DECISION RE

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juncture -- particularly in the context of negotiating a plan of
reorganization.

3. Balancing of the Harms and the Public Interest

Based on the unique facts of this case and in consideration
of the relative hardship of the parties and the public interest
concerns, the Court finds that continued prosecution of the
Enforcement Action severely threatens the integrity of the
bankruptcy process and Debtor’s prospects for reorganization and a
preliminary injunction of the Enforcement Action against Debtor
through March 14, 2008 is warranted. On March 7, 2008 at
1:00 p.m., the Court will hold a further hearing on whether the
preliminary injunction of the Enforcement Action should be
continued beyond March 14, 2008. Either the FTC or Debtor may
request that the preliminary injunction be lifted before March 7,
2008 for good cause based on facts that are not currently before
this Court.

The FTC is concerned that this Court’s granting of a
preliminary injunction against the Enforcement Action will set a
precedent that a defendant can escape prosecution for committing
deceptive and unfair trade practices by simply filing for
bankruptcy. The Court is keenly aware of the FTC’s concern and
that is not what this Court intends. Rather, it is the unusual
convergence ~- almost a perfect storm -- of the trial schedule in
the Enforcement Action and the critical first few months of a
viable chapter 11 bankruptcy case that warrant a ~imited
preliminary injunction at this time.

First, the next several months are a critical time for Debtor

in its effort to reorganize, and the immediate continuation of the

MEMORANDUM DECISION RE

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Enforcement Action seriously threatens Debtor’s ability to
reorganize. Debtor has only 37 employees to service its 58 pre-
petition customers and manage Debtor’s relations with over 1400
LECs. Moreover, Debtor’s president, Mr. Dawson, is and will
continue to be closely involved in Debtor’s defense in the
Enforcement Action. If the Enforcement Action is not temporarily
stayed, Mr. Dawson would be required to divert his time and
attention from Debtor’s reorganization between November 6 and
December 4, 2007 to assist Debtor’s counsel in the Enforcement
Action in preparing an opposition to a motion for summary judgment
that the FTC has stated it will file against Debtor. There may
also be eleven or more additional depositions in which Debtor will
need to participate if the Florida Court grants the pending motions
requesting additional discovery. In addition, Mr. Dawson will be
required to fly to Florida during February 2008 to prepare for and
participate in the trial in the Enforcement Action scheduled to
commence on February 25, 2008.1! The diversion of Debtor’s
management -- and Mr. Dawson in particular -- in defending the
Enforcement Action during the next few months seriously threatens
Debtor’s reorganization.

Mr. Dawson is the main contact for all of Debtor’s
reorganization efforts in addition to his duties overseeing normal
operational issues. Debtor’s reorganization efforts -- especially
at this early stage of Debtor’s bankruptcy case --- are time-

consuming. First, under the Bankruptcy Code, Debtor is required to

The trial situation could possibly change if FTC does file a summary judgment motion and
it is granted in part or in full. However, Debtor will still need to prepare for trial because Debtor
cannot know in advance what the result will be of any as yet to be filed FIC motions.

MEMORANDUM DECISION RE

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obtain court approval for the use of its cash collateral post-
petition. This is a marked difference from how Debtor operated
pre-petition. Pre-petition Debtor could use any cash that came
into Debtor’s accounts subject only to claims of various creditors.
Post-petition, however, Debtor must obtain the consent of all
creditors who have an interest in that cash collateral or court
approval for the use of that cash collateral. In this instance,
the Court has approved Debtor’s use of cash collateral on an
interim basis at three-week intervals. Debtor has scheduled a
final hearing for use of cash collateral for November 2, which
depending on the status of its negotiations with its creditors,
Debtor may or may not change to another interim request for use of
cash collateral.

It is not unusual in a chapter 11 bankruptcy case for a debtor
to seek multiple interim requests for use of cash collateral while
a debtor negotiates with secured and unsecured creditors for final
consent to a debtor’s use of cash collateral. In the early stages
of a bankruptcy case, creditors are getting up to speed regarding a
debtor's business operations and the relative likelihood of
recoveries for creditors pursuant to various reorganization
proposals. During this time, creditors, debtors and the bankruptcy
court strike a balance among the parties’ interests and grant
limited permission for a debtor to use post-petit:on cash
collateral until the parties are comfortable with a debtor’s plans
to operate and can resolve a debtor’s use of cash collateral on a
final basis. The early, limited permission to use cash collateral
is in part why a chapter 11 bankruptcy case is so time-intensive

for a debtor, and indeed all parties in the early stages.

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Second, the bankruptcy filing unsettled Debtor’s customers and
Debtor is actively working on a proposed pre-payment plan whereby
Debtor would pay 50% of the receivables represented by post-
petition billing submissions. This is a marked change from
Debtor’s pre-petition operations where Debtor paid its customers
approximately 90 days after the billing transactions were submitted
to Debtor. Because the pre-payment program is new, Mr. Dawson and
Debtor’s other employees will have to spend a great deal of time
implementing and monitoring the new program.

Further, the Committee was appointed on October 1, 2007 and on
October 10, 2007, the Committee had a five hour face-to-face
meeting with Debtor. At that meeting the Committse supported
Debtor’s use of cash collateral through November 2, 2007 and in
exchange Debtor has committed to negotiate with tie Committee a
term sheet for a plan of reorganization contemplazing a
continuation of Debtor’s business operations with the goal of
allowing Debtor to exit bankruptcy as quickly as possible. Debtor
is also monitoring the possible sale of PaymentOne to a third
party. Mr. Dawson is a, and probably the, critical participant in
those discussions and negotiations.

Finally, Debtor has complex business operations and over 1,200
creditors on its creditor matrix. Due to the size and complexity
of Debtor’s business operations, Debtor requires -- and has been
granted -- additional time to complete its Schedu.es and Statement
of Financial Affairs. Those documents are currently due on
November 15, 2007. The Schedules consist of seven separate
schedules that require Debtor to: (a) list in detail all real and

personal property, the value of each piece or category of property,

cq

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and the security interest held against that property; (b) provide
separate lists of Debtor’s creditors -- secured creditors, priority
unsecured creditors and unsecured creditors that includes an
address for each creditor, information regarding when the claim was
incurred and consideration for the claim, whether the claim is
contingent, unliquidated or disputed, and the amount of the claim;
(c) provide a detailed list of all executory contracts and
unexpired leases; and (d) provide a list of all entities that are
co-debtors with Debtor. The Statement requires Debtor to answer
twenty-five questions in detail regarding Debtor’s financial
affairs. The questions require Debtor to detail, inter alia, all
payments or transfers Debtor made in the 90 days immediately
preceding the commencement of the case that aggregate more than
$5,475 to any creditor, and all payments or transfers Debtor made
within one year immediately preceding the commencement of the case
to any creditor that is an insider (all of the majority-owned
subsidiaries of Debtor are considered to be insiders).

Based on these projected activities, Debtor’s management --
and Mr. Dawson in particular -- will spend the next few months
dealing with Debtor’s customers and creditors, completing Debtor’s
Schedules and Statement, negotiating with the Committee over the
terms for a plan of reorganization and, if successful, most of
November and early December will be spent negotiating a draft plan
of reorganization and overseeing the preparation of a proposed
disclosure statement. Both of these documents will require
substantial amounts of time on the part of Mr. Dawson and Debtor’s
other personnel. The plan of reorganization is Debtor’s contract

with its creditors as to how Debtor intends to restructure itself

MEMORANDUM DECISION RE

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using the Bankruptcy Code. In addition, the proposed disclosure

statement is similar to a prospectus and will require, inter alia,

a description of Debtor’s background, the events that caused Debtor
to file its bankruptcy case, what has changed such that Debtor will
be able to complete its proposed plan of reorganization, a
description of the proposed plan, and financial projections in
support of the plan if Debtor proposes to present a plan that
permits Debtor to operate as a going concern. Debtor must submit
its proposed disclosure statement to this Court for approval. 11
U.S.C. § 1125(b). Such activities will consume a huge portion of
the available time of Debtor’s management over the next few months.
However, should Debtor be required to proceed to trial in the
Enforcement Action at the end of February 2008, Mr. Dawson and
other of Debtor’s personnel will be required to t:ravel to Florida
and spend many days -- if not weeks in the case of Mr. Dawson --
preparing for and participating in the trial in the Enforcement
Action. This activity will take place at a critical juncture of
Debtor’s bankruptcy case where Debtor should instead be seeking
confirmation of a plan of reorganization. Debtor is committed to
proposing a plan of reorganization on an expeditious basis. Under
the notice requirements of the Bankruptcy Code and Rules, it is
highly likely that Debtor will seek approval of a disclosure
statement during January 2008, and could set a confirmation hearing
on a proposed plan of reorganization during February or March 2008.
Confirmation of a chapter 11 plan requires ar enormous amount
of work for both a debtor and its counsel. In addition to
resolving and addressing any objections by any parties to approval

of a disclosure statement and confirmation of a plan, this Court

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has an independent duty to ensure that a disclosure statement

contains adequate information, In re Main Street AC, Inc., 234 B.R.

771, 774 (Bankr. N.D. Cal. 1999), and an affirmative duty to ensure
that a plan satisfies all sixteen requirements of Bankruptcy Code

section 1129 for confirmation. In re Ambanc La Mesa Ltd. P’ship.,

115 F.3d 650, 653 (9th Cir. 1997). Just one of the requirements is
that this Court must determine that confirmation of Debtor’s plan
will not likely be followed by the liquidation or further financial
reorganization. 11. U.S.C. § 1129(a)(11). Mr. Dawson will almost
certainly be required to testify before this Court as to Debtor’s
plan and the financial projections on which it is based, as well as
other evidence this Court requires to confirm any proposed plan
submitted for confirmation by Debtor.

In addition to the impact of the Enfrocement Action on
Debtor’s president and other personnel, it would be highly
injurious to Debtor and Debtor's prospects for reorganization if
Debtor had to spend the bulk of the estimated $1 million in legal
fees and costs associated with the Enforcement Action during this
Same critical period. Such an outlay of funds at a critical time
of confirmation would seriously impair, if not strike a death
knell, to Debtor’s prospects for a reorganization. Debtor is
required under the Bankruptcy Code to pay all administrative claims
as of the effective date of a confirmed plan. 11 U.S.c.

§ 1129(a) (9) (A). Debtor may well not have sufficient funds to both
pay the litigation costs of defending the Enforcement Action and
pay administrative claims on the effective date of a confirmed

plan.

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The FTC likely holds only a pre-petition unsecured claim
against Debtor in the Enforcement Action. Any monetary claims FTC
asserts against Debtor arise only from Debtor’s alleged pre-
petition placing of unauthorized collect call charges onto
consumers’ telephone bills. There is no showing that at this point
there is any reason for Debtor to spend $1 million litigating an
unsecured claim in the next five months. First, at this juncture
it is unclear what unsecured creditors will receive in Debtor’s
reorganization and it is unknown if spending $1 million to defend
against the FTC’s claims makes sense, especially in this case where
secured and other unsecured creditors desperately need for all
resources to be devoted to Debtor’s reorganization efforts.

Second, over the next five months Debtor may negotiate a resolution
of the FTC’s claims without the need for litigation. This Court is
not determining at this juncture where the FTC’s claims will be
liquidated. Rather, this Court is merely delaying briefly the
Enforcement Action against Debtor only.*° It is this Court’s
experience that in chapter 11 cases such as Debtor's, a debtor
typically negotiates with the various creditors to reach a
consensus as to the structure of a plan of reorganization. It is
generally less expensive and easier if a debtor can negotiate a
plan of reorganization than if a debtor has to confirm a plan of
reorganization over the objections of numerous creditors. At the
early stages of Debtor’s case and under the facts of this case, a

preliminary injunction of limited duration is warranted.

This Court’s decision stays the Enforcement Action against Debtor for a few months. This
decision does not determine whether (1) the FTC may recommence the Enforcement Action in the
Florida Court after those few months, or (2) whether the FTC should be required to pursue Debtor by
filing a claim with, and litigating that claim in, the bankruptcy court.

MEMORANDUM DECISION RE

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By limiting the duration of the preliminary injunction and
requiring Debtor to provide further updated evidence in mid-
February 2008 to support the continued injunction of the
Enforcement Action, this Court eliminates or at least reduces
substantially the alleged harms of the FTC. The FTC cites three
harms from a possible injunction of the Enforcement Action: (1) the
inability of the FTC to obtain the non-monetary equitable relief it
seeks against Debtor; (2) the inability of the FT2 to pursue the
claims in the Enforcement Action against Debtor in the Florida
Court; and (3) the public interest in permitting the FTC to pursue
a vital enforcement strategy to curb the unlawful practice of
placing unauthorized charges on consumers’ phone d.ills. However,
this Court has not eliminated, and is not eliminating, the
possibility that at a later date this Court would permit the FTC to
prosecute the Enforcement Action in the Florida Court, including
the ability of the FTC to obtain the non-monetary equitable relief
it seeks against Debtor. The FTC itself notes that it will seek
such relief against Debtor post-confirmation. This Court is merely
delaying for a few months the FTC’s prosecution o7 the Enforcement
Action against Debtor. No decision has yet been made as to where
the FTC’s claims will be litigated if indeed those claims need to
be litigated at all.

Granting a preliminary injunction of limited duration also
renders premature the FTC’s argument that this Court must consider
Debtor’s costs of Debtor defending itself in the Florida Court and
defending itself in this Court rather than Debtor’s costs of
defending itself against the FTC in the Florida Court or not

defending itself at all. First, Debtor will not likely be

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prosecuting an objection to the FTC’s claim in the next few months.
Indeed, March 14, 2008 is the claims bar date for governmental
units in Debtor’s bankruptcy case. Thus, for this limited duration
preliminary injunction, Debtor almost certainly will not incur any
costs defending itself in this Court against the FTC’s claims.?!
C. Contempt Proceedings and Turnover Action

1. Debtor’s Ability to Sue the Receiver

Receiver argues that this Court lacks subject matter
jurisdiction over this adversary proceeding as to Receiver because
Debtor has not obtained permission from the Florida Court to bring
this action -- or any action -- against Receiver. Receiver asserts
that for over 100 years, legal authority holds that a litigant must
obtain permission from the court appointing a receiver before

bringing an action against that receiver. Carter v. Rodgers, 220

F.3d 1249, 1252 (11th Cir. 2000) (holding that under Barton v.
Barbour, 104 U.S. 126 (1881), a debtor must obtain leave from the
bankruptcy court before the debtor can initiate an action in
district court against a bankruptcy-court appointed trustee for

breach of fiduciary duties); In re Crown Vantaqae, Inc., 421 F.3d

963, 970 (9th Cir. 2005) (a bankruptcy-court appointed trustee of a
liquidating trust cannot be sued in a foreign jurisdiction for
violating a settlement agreement without the permission of the
court appointing the trustee).

Debtor asserts that the Barton doctrine applies only if Debtor
were suing Receiver for dereliction of duties, which Debtor is not
doing in this adversary proceeding. Moreover, Debtor argues that

Crown Vantage stands for the proposition that Debtor does not need

7! See footnote 17, supra.

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leave from the Florida Court to sue Receiver in this instance
because this Court has exclusive in rem jurisdiction to determine
the property of Debtor’s bankruptcy estate and the injunctive
relief requested by Debtor is a stay specifically designed to
protect the assets of the bankruptcy estate, so the Barton doctrine
is not invoked.

This Court agrees with Debtor that once Debtor filed its
bankruptcy petition on September 16, 2007, this Court obtained
exclusive in rem jurisdiction over the property in Debtor’s
bankruptcy estate, and particularly over any legal and equitable
interest Debtor held in the Commingled Funds as of the commencement
of the case. While none of the parties or this Court have found

any cases directly on point, the Court finds Gilchrist v. General

Elec. Capital Corp., 262 F.3d 295 (4th Cir. 2001). particularly
instructive.

In Gilchrist, Spartan International, Incorporated and its
subsidiaries (collectively, “Spartan”) closed the:r doors for
business. Spartan’s major creditor (“GE”) commenced a state law
debt-collection action invoking the diversity jurisdiction of the
district court of South Carolina (“South Carolina Court”). To
facilitate the foreclosure of the creditor’s lien, the South
Carolina Court appointed a federal receiver for all of Spartan’s
assets (“Receiver Order”). The Receiver Order en-joined all persons
from commencing or prosecuting any action, suit or proceeding that
affected the receivership estate or Spartan. Gilchrist, 262 F.3d
at 297-98.

One week later and with actual notice of the Receiver Order,

50 creditors (“Georgia Creditors”) filed an involuntary bankruptcy

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petition in the bankruptcy court in the Southern District of
Georgia (“Georgia Court”) and a request for the appointment of an
interim bankruptcy trustee. GE objected to the appointment of an
interim bankruptcy trustee and filed a motion to dismiss the
involuntary bankruptcy petition or transfer venue to the district
of South Carolina. The receiver filed a similar ‘notion. Following
a hearing, the Georgia Court overruled the objections, denied the
motions and appointed an interim bankruptcy trustee. Gilchrist,
262 F.3d at 298.

While that hearing was in progress, the receiver obtained a
temporary restraining order from the South Carolina Court enjoining
38 of the Georgia Creditors from undertaking any action in
furtherance of the involuntary bankruptcy petition. Four days
later the South Carolina Court found the Georgia Creditors in
contempt of the Receiver Order and allowed the Georgia Creditors to
purge their contempt by withdrawing the bankruptcy petition. The
interim bankruptcy trustee argued that the automatic stay precluded
the South Carolina Court’s actions, but the South Carolina Court
refused to recognize the automatic stay of its proceedings. The
South Carolina Court asserted that it had jurisdiction to determine
the scope of the automatic stay, and it had the authority to issue
an injunction to prevent the collateral attack of that court’s
Receiver Order appointing the receiver. In an effort to purge
their contempt, the Georgia Creditors subsequently filed a petition
in the Georgia Court to withdraw the involuntary petition, which
the Georgia Court denied. The Georgia Court stayed further
proceedings pending a review of the South Carolina Court’s orders

by the Fourth Circuit. Gilchrist, 262 F.3d at 298-99.

MEMORANDUM DECISION RE

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