Opinion
Case No. 02-13533 (AJG), (Jointly Administered).
December 20, 2005
ORDER REGARDING MOTION OF MISSISSIPPI POWER CO. AND SOUTHERN COMPANY SERVICES, INC. TO COMPEL CURE PAYMENT
Upon consideration of the Motion of Mississippi Power Co. and Southern Company Services, Inc. to Compel Cure Payment (the "Cure Motion") and the parties' briefs and argument on the Cure Motion, and for the reasons stated in the Court's December 6, 2005 decision, attached hereto as Exhibit A, on the Cure Motion, it is hereby
ORDERED that the uncontested portion of the Cure Motion is granted, in the amount of $303,315.13 for costs of Southern Company Services, Inc. and Georgia Power Co. associated with maintenance of the fiber optic cable, and $419,560.02 for costs associated with title research and acquisition of rights of way; and it is further
ORDERED that the Cure Motion is denied in all other respects.
EXHIBIT A
AS REVIEWED AND MODIFIED BY THE COURT ON 12/6/2005
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
In re Case No. WORLDCOM, INC., et al, 02-13533 Reorganized Debtors.
December 6, 2005 12:00 p.m.
United States Custom House One Bowling Green New York, New York 10004
DIGITALLY RECORDED PROCEEDINGS EXCERPT
12:00 WORLDCOM, INC., ET AL DECISION TO BE RENDERED
Motion filed by Mississippi Power Company and Southern Company Services, Inc. to Compel Cure Payments.
BEFORE:
THE HONORABLE ARTHUR J. GONZALEZ United States Bankruptcy Judge
DEBORAH HUNTSMAN, Court Reporter 198 Broadway, Suite 903 New York, New York 10038 (212) 608-9053 (917) 723-9898
APPEARANCES:
JENNER BLOCK LLP Special Counsel for Reorganized Debtors 601 Thirteenth Street, N.W. Suite 1200 South Washington, D.C. 20005
BY: J. ALEX WARD, ESQ. (via telephone)
VINSON ELKINS LLP Attorneys for Mississippi Power Company and Southern Company Services, Inc. 666 Fifth Avenue, 26 th Floor New York, New York 10103
BY: DAVID R. LURIE, ESQ. (via telephone)
BALCH BINGHAM LLP Attorneys for Mississippi Power Company and Southern Company Services, Inc. 1310 Twenty Fifth Avenue Gulfport, Mississippi 39501 BY: BEN H. STONE, ESQ. (via telephone)
Proceedings
(Whereupon, the following is an excerpt from 12/6/05 in re Enron Corp., et al, Case No. 01-16034.)
JUDGE GONZALEZ: Please be seated.
With respect to the 12:00 matter, this is a decision to be rendered in the Mississippi Power Company and Southern Company Services, Inc. Motion to Compel Cure Payment.
I will read the decision into the record. What I read from will be provided to the transcriber for purposes of corrections, as well as setting forth certain citations; and upon review by the Court, the Court may make modifications to the decision.
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Before this Court is a Motion to Compel Cure Payment pursuant to 11 U.S.C. Section 365 (b) brought by Mississippi Power Company ("MPC") and Southern Company Services, Inc. ("SCS"), agent for Mississippi Power Company and each of the other operating companies of the Southern Company (collectively "Southern"). This motion seeks an order compelling the Reorganized Debtors, MCI, Inc. ("MCI"), to satisfy its cure obligations under 365 (b) and Section 8.05 of the Debtors' Modified Second Amended Joint Plan of Reorganization ("Plan"). The Debtor responds that it has no obligation to cure MPC's indemnification demands and urges the Court to reject MPC's motion.
MPC's claim for cure payment arises out of the Agreement for the Provision of Fiber Optic Facilities and Services ("Agreement") between MCI's predecessor MCI WorldCom Telecommunications, Inc. ("WorldCom") and MPC. The Debtor agreed to assume the obligations of the Agreement pursuant to the terms of a Stipulation and Order Resolving Limited Objection of Mississippi Power Company to Debtors' Amended Plan, entered by this Court on September 19, 2003. Docket No. 89 96. MCI formally assumed the Agreement on April 20, 2004, the effective date ("Effective Date") of the Plan. The Agreement laid out the rights and responsibilities of MPC and WorldCom relating to the construction and maintenance of a fiber optic cable system along MPC's power easements. In return for funding and maintaining the fiber optic system for MPC, WorldCom received a 50-year lease on the system's spare capacity. Included within the provisions of the Agreement was an indemnity clause that under a certain set of conditions obligated WorldCom to compensate MPC for any costs, liabilities, penalties, and damages incurred as a result of lawsuits relating to the easements the fiber optic system was constructed on.
Under the terms of the Agreement, MPC now seeks cure payments that may be separated into four categories. The first category comprises the costs to MPC for title research and acquisition of rights-of-way in connection with the fiber optic system ("First Category"). The second category comprises costs SCS and Georgia Power Company incurred for the maintenance of the fiber optic system ("Second Category"). The third category relates to the indemnity clause in the Agreement and includes all pre-Effective Date legal fees, costs, penalties, and expenses related to a number of lawsuits recently filed against MPC alleging misuse of easement, trespass, and unjust enrichment ("Third Category"). The final category incorporates the attorneys' fees related to MPC's instant attempts to seek cure payments from MCI ("Fourth Category"). MCI disputes its liability as to both the Third Category and Fourth Category, denying its obligation to pay any costs incurred under the indemnification clause. As MCI has not disputed its liability for either the First Category or Second Category, this Court finds that MPC is entitled to cure payments totaling $722,875.15 as demanded in part. The primary issue before this Court then is the application of the indemnity clause contained within the Agreement.
The parties agree that the law of the State of Alabama is controlling here. The parties further acknowledge that this Court has subject matter jurisdiction pursuant to 28 U.S.C. Sections 157 and 1334, and that this is a core proceeding pursuant to Section 157(b).
In its relevant part, the Agreement provides
"Southern shall be responsible, at MCI's expense, and with MCI's prior approval if the cost is in excess of one thousand dollars ($1,000) per parcel, for the acquisition of any easements, rights-of-way or other rights that may be required in order to permit (1) the installation, operation, and maintenance of the Cable, (2) the use of the Southern Interest by Southern, or (3) the use of the MCI Interest by MCI. MCI shall be responsible for determining whether the acquisition of such easements, rights-of-way or other rights are required; provided, however, that if Southern notifies MCI that, in Southern's judgment, any such easements, rights-of-way or other rights should be acquired, and MCI elects not to acquire such right, MCI shall reimburse Southern for any and all damages, judgments, settlements, costs, expenses (including reasonable attorneys' fees) and liabilities incurred by Southern as the result of any claim, action or lawsuit of any kind a rising from the failure to acquire such easement or right-of-way right."
Agreement Art. 4.1 (d), Docket No. 1953.
MPC states that, per the terms of the Agreement, it notified MCI on October 26, 2000 ("conditional notice") that in its judgment, "additional telecommunications easements and rights should also be obtained across properties on which MCI is using fiber optic telecommunications lines. "Affidavit of Bernard Jacob, Exhibit A, Docket No. 14814. MPC further states that on June 20, 2001 ("indemnification notice"), it informed MCI of a lawsuit filed against it relating to easements and demand ed indemnification for legal costs pursuant to the Agreement. MPC argues, therefore, that it is entitled under the Agreement to cure payments from MCI indemnifying all its legal costs related to land owner suits prior to the Effective Date. MCI responds that it has no obligation to indemnify MPC under a number of alternative theories: first, that MPC did not satisfy the conditions of the indemnity clause; second, that enforcement of the indemnity clause is against public policy; third, that the indemnification action is barred by the statute of limitations; and finally, that indemnification is sought for damages that may not be indemnified.
This Court will first examine the issue of the contractual conditions. As an initial conclusion, this Court notes that the plain language of the indemnity clause sets out two conditions that must both be met before it can operate. MPC must first have notified MCI that it believed easements should be acquired. After such notification, the indemnity clause only becomes effective if MCI then fails to acquire such easements. In addition, although not required by the language of the Agreement, the law implies the additional requirement that MPC provide MCI with notice of any indemnification demand. The first step in this Court's inquiry then is to analyze the notice MPC provided to MCI.
Notice is frequently a precondition to indemnification in contractual arrangements. Moreover, it is regarded as so integral to the performance of an indemnification clause that it will be implied by law even where the contract does not expressly require it. Cochrane Roofing Metal Co. V. Callahan, 472 So.2d 1005 (Ala. 1985); 15 S. Williston, A Treatise on the Law of Contracts, Section 48:1 (4th ed.). The indemnification clause in the Agreement contains a notice requirement, but it is nonetheless slightly different in form from typical indemnification clauses. This clause contains the additional condition precedent that MPC must recommend that MCI purchase additional easements and MCI must not then purchase those easements before MCI will be liable to indemnify MPC for any legal costs related to those easements identified. The specific notice clause in the Agreement applies to this condition precedent ("conditional notice provision"), not to any request for indemnification under the terms of the Agreement. A notice requirement as to demands for indemnification ("indemnification notice provision") will therefore be implied, but the issue before the Court solely concerns the condition al notice provision. Neither party denies that this notice provision should be interpreted and applied according to the law requiring a more typical indemnification notice requirement, such as those generally found in insurance contracts. Accordingly, and because this Court finds that the condition precedent and its notice provision are inextricably linked and functionally similar to the indemnification clause, Alabama case law regarding notice provisions for indemnification demands will be applied to the conditional notice provision at issue here.
The first part of the analysis concerns the sufficiency of the notice. MCI argues that the notice was insufficient because it hedged MPC's recommendation that additional easements should be purchased with MPC's belief that the legal controversy that prompted such recommendation would eventually be resolved in MPC's favor. This Court finds, however, that this notice was legally sufficient under both the requirements of the Agreement and Alabama case law. The notice clearly stated MPC's judgment that MCI should purchase additional easements. This recommendation was neither hidden nor ambiguous in its plain language. Further, MPC did not breach its good faith obligation to MCI by sharing its beliefs concerning the eventual course the relevant litigation would take. Rather, by providing MCI all relevant information, MPC enabled MCI to make its own informed decision and enjoy the benefits of the contract. Hilley v. Allstate Ins. Co., 562 So.2d 184, 190 (Ala. 1990) (a breach of good faith is the improper interference with enjoyment of the benefits of the contract). The conditional notice then was sufficient.
The second part of the analysis concerns the timeliness of the notice. MCI argues that the notice was defective by reason of its untimeliness and contends that timely notice would have been given either (1) at the time the cable was installed, or (2) in the alternative, at some time before the Mississippi Supreme Court rendered its decision inMcDonald v. Mississippi Power Co., which decision prompted MPC to recommend that MCI purchase additional easements. 732 So.2d 893 (Miss. 1999). MPC responds that the conditional notice was offered after it learned that additional easements were likely necessary, was there fore timely, and more over, that any prior notification would have been premature and violate its good faith obligation to MCI.
Timely notice is required by law because the indemnitor must be able to "investigate the claim and prepare his defense."Cochrane Roofing, 472 So.2d at 1008; see also, Barry R. Ostrager Thomas R. Newman, Handbook on Insurance Coverage Disputes, Section 4.02 [a] (10th ed. 2000) ("The object of all these goals is to provide the insurer with an opportunity to protect its interests."). Untimely notice prevents the indemnitor from doing so. Timely notice, therefore, is that which does "not come so late that the indemnitor is prejudiced in preparing the defense. . . . "Stone Building Co. v. Star Electrical Contractors, Inc., 796 So.2d 1076, 1091 (Ala. 2000) (quoting Restatement (Second) of Judgments Section 57, cmt.e). "Conversely, tardiness without prejudice provides no defense. "Id. (emphasis in original) (following modern trend in requiring proof of prejudice to escape liability. 32 ALR 4th 141, 2 (2005)). This inquiry is necessarily contextual and fact-based, as "timely notice is a relative term, that is, it depends on the facts and circumstances of each case. "Burkes Mechanical, Inc. v. Ft. James-Pennington, Inc., 908 So.2d 905, 911 (Ala. 2004). The key inquiry under Alabama law then is whether the facts and circumstances of the case demonstrate that notice was so delayed as to prejudice the defense by the indemnitor.
In general indemnification actions, the "defense "referred to in the case law is simply any defense to the action for which the indemnitee claims indemnification. However, the indemnification clause at issue here cannot be read so simply. The function al role of the condition precedent in the indemnification clause is not simply to limit the conditions under which indemnification may be demanded. Rather, the condition precedent creates for MCI an additional ground of defense, namely the ability to preempt any action by purchasing those easements that would give rise to a claim. In this way, the condition precedent represents a bargain between MPC and MCI that grants MCI an additional defense to any action for which it might be required to indemnify MPC. In return for conditional indemnification, MPC agreed to provide MCI, through notice, with the information necessary to exercise this preemptive defense. It is simple to see how this bargain operates in terms of risk distribution. MPC, as a local entity that owns the easements at issue, has greater access to the information necessary to manage the risk of legal action on behalf of easement holders. MCI then bargained to assume MPC's risk in return for access to that information. In this way, MCI and MPC are then both better able to manage the risks related to the easements. The "defense "that is analyzed relative to the timeliness of the notice therefore includes this bargained — for defense of preempt ion. Simply, MPC's notice may not prejudice MCI's ability to preempt the claims for which MPC seeks indemnification.
Similarly, MPC may not prejudice MCI's defense in action for which indemnification is sought. The indemnitor may, if it chooses, intervene and assume the defense for the indemnitee in any such action. The indemnitee may, therefore, clearly not unreasonably prejudice this defense through un timely notice of a demand for indemnification. Stone Building, 796 So.2d at 1090-1091. Equally clearly, the conditional notice may not be so untimely as to prejudice the defense the indemnitor might offer to the matured claim. As the condition precedent brings into effect the indemnification clause, so too must the notice for the condition precedent not prejudice a defense offered as indemnitor.
This Court finds that the conditional notice was untimely as to both defenses. There are a number of key contextual factors that militate for this conclusion. First, at issue here is an indemnification clause that was contractually designed to operate only in limited circumstances. The indemnification clause is not general, but rather a bargained-for-risk-shifting device that operates only upon the completion of certain actions. Second, MPC has no rights or obligations under the indemnity clause, only the opportunity to be indemnified if it provided information to MCI that MCI did not act upon. If MPC failed to take advantage of that opportunity, this Court will not remedy that failure. Finally, and most importantly, the prejudice that arose from the delay is linked to MPC's own actions in the intervening period. MPC had already litigated and lost the primary issue bearing on both defenses, whether the easements used by MPC and MCI were sufficient, before it sought indemnification from MCI.
In McDonald, MPC litigated with a separate sublessee, Interstate Fiber net, Inc. ("IFN"), the scope of the easements it used with IFN. The Mississippi Supreme Court in McDonald held that as a matter of law MPC was not necessarily entitled to sublease the spare capacity of the system to IFN, that whether or not the easements were violated was a question of fact, and therefore remanded the case back to the trial court for a factual determination of the issue. MPC argues that as notice was offered shortly after this judgment, there was no prejudicial delay. This is, however, an un convincingly narrow characterization. As MPC notes, this fiber optic system was distinct from the one it had installed with MCI. However, the fiber optic system and easements at issue in McDonald were in all legally relevant ways identical to those shared by MPC and MCI. The language of the easements was the same. The broad facts of installation and sublease of spare capacity were the same. The only difference was the identity of the sublessee, a matter not relevant to the Supreme Court's determination of the issue. Therefore, the decision in McDonald that MPC was not as a matter of law entitled to sublease spare capacity is controlling precedent in any suit against MPC and MCI. Although theMcDonald decision is not fully dispositive of any actions against MPC and MCI, the prejudice to MCI that resulted from MPC's delay of notice until after the decision in McDonald is nonetheless clear.
As to the first defense, the option of precluding any claims by purchasing those easements, MPC's litigation prejudiced MCI's use of this defense by forcing MCI to offer significantly more for these easements than would have been the case beforeMcDonald was litigated and decide d. This is substantial and definite prejudice. The scope of the easements was no longer questionable, but now more definite than not to the detriment of MCI. The value of those easements, particularly their settlement value, was now significantly higher given the increased certainty as a result of the judgment in McDonald. MPC's delay in notifying MCI until after the litigation was concluded when it was in control of that litigation then is clearly prejudicial to MCI's ability to preempt actions on those easements and the notice untimely. MPC was aware during the course of the litigation that there was a real risk that the settlement value of the easements would increase as a result of the litigation, even if it believed the probability of an adverse judgment was low. MPC cannot therefore argue that the delay was not prejudicial when it was engaged in litigation to resolve the legal uncertainty regarding the easements during the delay to the detriment of MCI's ability to defend itself.
MPC argues that any such prejudice related to the value of the easements cannot be recognized. MPC argues that claims on the issue of easement violation were possible the moment the fiber optic system was installed and used, and that therefore, any delay after installation would have necessarily been prejudicial according to this reasoning. This argument, however, is inapposite. If it is assumed that MPC is correct, and that no delay can be recognized as prejudicial simply because any delay after installation was prejudicial, then this Court would have to recognize that the indemnification clause no longer operated after installation. Any other conclusion would be inequitable to MCI. This Court does not consider MPC's argument accurate, however, because this Court must strive to interpret the contract so as to give effect to its provisions. This Court concludes therefore, that the parties incorporated the post-construction costs of settlement into the contract and that the condition precedent related to any change in circumstances beyond the mere fact of construction. MPC's litigation of the issue in McDonald is just such a change in circumstances.
Similarly, MCI's ability to defend MPC in any litigation on the easement issue was clearly prejudiced by the delay in notice until after the McDonald decision. The key issue of the scope of the easement as a matter of law, which MCI would have raised in such litigation, had by then already been decided against MPC, harming MCI's capacity to defend its interests. While it is true that MPC's delay would not necessarily be prejudicial where any decision stripped MCI of a possible defense, it is equally true that the same cannot be said where the decision involved MPC as a litigant and the issue at stake bore equally on MCI as it did on the actual litigants. This situation is analogous to the typical indemnification dispute in which the indemnitee seeks indemnification after resolution of the litigation. See, e.g., Cochrane Roofing, 472 So.2d at 1005;West Bend Co. v. Chiaphua Industries, Inc., 112 F.Supp.2d 816 (E.D. Wis. 2000). In those, more typical disputes, prejudice is found when the evidence the indemnitor would have used in its defense is unavailable by reason of the delay in notice. Similarly here, the prejudice is found because MCI is unable to defend the MPC on a primary issue in any future litigation because of the prior litigation. Just as the indemnitor in the typical dispute has no access to crucial evidence, MCI here has no access to a primary issue. In both situations, the indemnitor is unable to present an effective defense. MPC cannot now claim that MCI should indemnify it for any legal costs a rising out of litigation that it participated in and lost when MPC denied MCI the opportunity to defend its interests in that litigation or pursue contemporaneous and parallel litigation.
These conclusions are supported by risk-sharing analysis of the indemnification provision. As previously stated, the indemnification provision was an implicit bargain in which MCI agreed to shoulder additional risk if MPC provided it information to which MPC had better access, and which would enable MCI to better manage that risk, as well as its own. By the time MPC provided that information to MCI, however, MCI had fewer options to manage that risk. From that simple perspective, MPC failed to perform the function it had bargained with MCI to fulfill. More crucially, MPC chose to pursue the litigation in McDonald without informing MCI or seeking MCI's assistance. MPC gave MCI no opportunity to manage the risk that this litigation would have an adverse effect on the interests they share d. MPC therefore alone shouldered that risk and cannot now claim that MCI should have to bear it. The indemnification clause at issue here was a clear mechanism through which the parties could effectively manage the risks they face d. MPC not only failed to enable MCI to manage those risks. It added to them without informing MCI of the possible consequences of its actions or allowing MCI to choose for itself how it wished to follow MPC's lead. MPC simply cannot now shift the risk to MCI.
MPC raises one final argument to avoid the judgment that its notice was untimely. MPC argues that it would have violated its obligation of good faith had it informed MCI prior to theMcDonald decision that MCI should purchase additional easements because MPC did not, in fact, believe this was necessary, as it did not believe that it would lose the McDonald action. This Court need not resolve the nature of MPC's good-faith obligations except to the extent necessary to note that MPC's primary good-faith obligation was to provide MCI with information from which MCI could draw its own independent conclusions.
This Court finds, therefore, that MCI has raised a valid defense to MPC's claim for indemnification. Accordingly, MCI is not obligated to cure any legal costs arising out of the pre-Effective Date litigation. Similarly, as MPC's claims for legal costs related to this cure payment motion are based upon the indemnification clause, MCI is not obligated to cure those costs.
Based upon the foregoing, the Plaintiff's Motion to Compel Cure Payment is grant ed as to the First Category and Second Category, and denied as to the Third Category and Fourth Category.
The Debtor is to settle an order consistent with the Court's opinion.
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I will take a five-minute recess and then return for the next matter.
CERTIFICATE
STATE OF NEW YORK ) : SS: COUNTY OF NEW YORK )
I, DEBORAH HUNTSMAN, a Shorthand Reporter and Notary Public within and for the State of New York, do hereby certify:
That the within is a true and accurate transcript of the Digitally Recorded Proceedings recorded on the 6th day of December, 2005.
I further certify that I am not related by blood or marriage to any of the parties and that I am not interested in the outcome of this matter.
IN WITNESS WHEREOF, I have hereunto set my hand this 8th day of December, 2005.