Kravitz v. Summersett (In re Great Lakes Comnet, Inc.)

588 B.R. 1

IN RE: GREAT LAKES COMNET, INC., et al.,

Debtors.

Peter Kravitz, Liquidation Trustee, Plaintiff,

v.John Summersett, Paul Bowman, Ryan Thelen, Andre Cooks, Randy Fletcher, Janet Beilfuss, Sidney Shank, Todd Roesler, Duane Bronson, David Larocca, Les Jenkins, George Orphan, David Schroeder, John Lodden, Michigan Network Services, Local Exchange Carriers of Michigan Inc., IBDC Telecom Corporation, Nuleef Communications LLC, and John Does, Defendants.

Case No. GL 16–00290–jtg (Jointly Administered)

Adv. Proc. No. 17–80180–jtg

United States Bankruptcy Court, W.D. Michigan.

Signed: June 15, 2018

APPEARANCES: Stuart A. Gold, Esq., GOLD LANGE & MAJOROS PC, Southfield, Michigan, Roger P. Meyers, Esq., Jessica V. Currie, Esq., and Vincent C. Sallan, Esq., BUSH SEYFERTH & PAIGE PLLC, Troy, Michigan for Local Exchange Carriers of Michigan, Inc.; Michael C. Hammer, Esq. and Doron Yitzchaki, Esq., DICKINSON WRIGHT PLLC, Ann Arbor, Michigan, Jonathan Bach, Esq., David Bright, Esq., Max Schlan, Esq., Seth Van Aalten, Esq. and Cathy Hershcopf, Esq., COOLEY LLP, New York, New York for Peter Kravitz, Trustee of the GLC Liquidation Trust

OPINION REGARDING MOTION TO DISMISS PURSUANT TO FED. R. BANKR. P. 7012 FILED BY LOCAL EXCHANGE CARRIERS OF MICHIGAN, INC.

John T. Gregg, United States Bankruptcy Judge

This matter comes before the court on a motion to dismiss and brief in support thereof [Adv. Dkt. No. 36] (the "Motion") filed by Local Exchange Carriers of Michigan, Inc., one of the defendants in the above-captioned adversary proceeding ("LEC–MI").² LEC–MI argues that the Complaint fails to state claims upon which relief can be granted under Fed. R. Bankr. P. 7012 (incorporating Fed. R. Civ. P. 12(b)(6) ) for concert of action, conspiracy, unjust enrichment, aiding and abetting breach of fiduciary duty, and the avoidance and recovery of fraudulent transfers, both actual and constructive.³ Peter Kravitz, the Liquidation Trustee of the GLC Liquidation Trust and the plaintiff in the above-captioned adversary proceeding (the "Trustee"), filed a response [Adv. Dkt. No. 57] (the "Response") in which he disputes all but one of LEC–MI's arguments. For the following reasons, the Motion is granted in part, and denied in part.

JURISDICTION

The federal district courts have "original and exclusive jurisdiction" over all cases under the Bankruptcy Code, but may refer bankruptcy cases to the bankruptcy courts. 28 U.S.C. § 157(a) ; 28 U.S.C. § 1334(a).⁴ Upon referral, bankruptcy courts are authorized to hear, determine, and enter appropriate orders and judgments in core proceedings "arising under" the Bankruptcy Code, or "arising in" a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1).⁵ Proceedings "arising under" the Bankruptcy Code are proceedings that involve claims created or determined by a statutory provision of the Bankruptcy Code.

Mich. Emp't Sec. Comm'n v. Wolverine Radio Co., Inc. (In re Wolverine Radio Co.) , 930 F.2d 1132, 1144 (6th Cir. 1991) (citation omitted). Proceedings "arising in" a case under the Bankruptcy Code are proceedings that could only arise in a bankruptcy case and would have no existence outside of a bankruptcy case. Id. (citation omitted).

In this adversary proceeding, the Trustee's claims for the avoidance and recovery of fraudulent transfers arise under the Bankruptcy Code and are therefore core. 28 U.S.C. § 157(b)(2)(H). The Trustee's remaining claims against LEC–MI do not arise under the Bankruptcy Code or in a case under the Bankruptcy Code. Rather, the claims against LEC–MI for concert of action, conspiracy, unjust enrichment and aiding and abetting breach of fiduciary duty all arise under Michigan law. None of these claims comprise a proceeding that can arise solely in the context of a bankruptcy case, because they may be pursued without the prerequisite of a bankruptcy filing. As such, these claims are not part of a core proceeding.

Nonetheless, this court may exercise jurisdiction if the proceeding is "non-core, but related to" the bankruptcy. 28 U.S.C. § 157(c)(1) ; In re Wolverine Radio Co. , 930 F.2d at 1142 (quoting Pacor, Inc. v. Higgins (In re Pacor) , 743 F.2d 984, 994 (3d Cir. 1984) ). Because the claims against LEC–MI that arise under Michigan law could form the basis for increased payments to creditors under the confirmed plan of liquidation, this proceeding is non-core, but related to the bankruptcy. See , e.g. , Morris v. Zelch (In re Reg'l Diagnostics, LLC) , 372 B.R. 3, 22–25 (Bankr. N.D. Ohio 2007) (related to jurisdiction because potential recovery from state law claims would augment creditor recovery); see also Browning v. Levy , 283 F.3d 761, 773 (6th Cir. 2002) (related to jurisdiction because potential recovery from legal malpractice claim would represent asset available for distribution to creditors).⁶

BACKGROUND ⁷

Great Lakes Comnet, Inc. (the "Debtor", and together with Comlink, L.L.C., the "Debtors")⁸ was a Michigan corporation that owned and operated a 6,500-mile fiber-optic network that connected long-distance calls of national exchange carriers such as AT & T, Verizon, Sprint and Qwest with local exchange carriers. (Compl. ¶¶ 21–22) The Debtor's network provided telecommunications services to commercial and residential customers in Michigan, Ohio, Wisconsin, Illinois and Minnesota. (Compl. ¶ 21)

A. Officers' Schemes

Beginning in 2010, the Debtor's officers perpetrated four schemes designed to charge national exchange carriers with illegal tariffs, thereby artificially inflating the Debtor's profits. (Compl. ¶ 33) First, as part of their "traffic pumping scheme," the officers caused the Debtor to enter revenue sharing agreements with certain local exchange carriers and "traffic aggregators," including LEC–MI. (Compl. ¶¶ 34–37) The revenue sharing agreement between the Debtor and LEC–MI required LEC–MI to route call traffic onto the Debtor's network in violation of certain rules and regulations promulgated by the Federal Communications Commission (the "FCC"). (Compl. ¶¶ 37–39, 49–50) In order to facilitate the scheme, LEC–MI created a new transport facility known as "Trunk Group 331" that allowed it to deliver 1–800 number traffic onto the Debtor's network. (Compl. ¶ 39) In return, the Debtor paid approximately $2.4 million to LEC–MI between January 2012 and May 2016. (Compl. ¶ 40)

As part of the traffic pumping scheme, the Debtor also paid other third parties in exchange for their agreements to route traffic onto LEC–MI's switch in Southfield, Michigan. (Compl. ¶¶ 43–47) From there, LEC–MI routed traffic to Trunk Group 331 and subsequently delivered it onto the Debtor's network. (Compl. ¶¶ 44, 46) As a result of the traffic pumping scheme, the Debtor benefited from an extraordinary increase in call traffic between 2010 and 2014. (Compl. ¶ 48)

The traffic pumping scheme had another adverse consequence. The Debtor was required to file updated tariffs according to FCC rules and regulations. (Compl. ¶ 50) Despite this requirement, the Debtor's chief operating officer intentionally filed erroneous tariffs with the FCC so as not to reveal the scheme he and the other officers had implemented. (Compl. ¶ 50) By intentionally filing incorrect tariffs, the Debtor's chief operating officer further contributed to the traffic pumping scheme. (Compl. ¶ 50)

Second, as part of their "mileage pumping scheme," the officers caused the Debtor to use a circuitous, inefficient route for directing calls. (Compl. ¶ 54) Rather than route calls from its switch in Southfield, Michigan to AT & T's switch in Bloomfield Township, Michigan, a distance of only seven miles, LEC–MI routed calls to the Debtor's switch in Westphalia, Michigan. (Compl. ¶¶ 56–57) By adding seventy-six miles of transport in violation of FCC rules and regulations, the Debtor was able to charge its national exchange carriers for traffic routed over unnecessary distances. (Compl. ¶¶ 59–60)

Third, as part of the "inflated tariff rates scheme," the officers caused the Debtor to charge approximately 30 times that of the closest local exchange carrier in violation of FCC rules and regulations. (Compl. ¶ 62) Similarly, the Debtor's officers caused the Debtor to charge a tandem switching rate of nearly 50 times that of the closest local exchange carrier. (Compl. ¶ 64) In order to charge these rates, the officers caused the Debtor to represent in FCC filings that it was a rural carrier, when in reality it was not. (Compl. ¶ 65)

Finally, as part of the "fraudulent rates scheme," the officers caused the Debtor to charge fraudulent tariffs for services it never provided. (Compl. ¶ 68) Instead of billing national exchange carriers by applying LEC–MI's operating company code, the Debtor billed the carriers for 83 miles of transport by using the wrong code in violation of FCC rules and regulations.⁹ (Compl. ¶¶ 68–70)

B. Debtor's Disputes with Carriers and Officers' Misrepresentations

In 2012, AT & T and other national exchange carriers began to suspect that the Debtor was engaged in improper conduct and started to withhold payments. (Compl. ¶ 71) The Debtor's officers, however, concealed the reasons for the withheld payments by advising the Debtor's board of directors that the Debtor was experiencing billing disputes with the carriers. (Compl. ¶¶ 72–73) According to the officers, the billing disputes amounted to nothing more than matters of collection. (Compl. ¶ 73) Although communications detailing the schemes were sent by the national exchange carriers, the officers intentionally concealed the communications from the board. (Compl. ¶ 74)

In late February 2014 and with the schemes continuing, certain national exchange carriers filed an informal complaint with the FCC against the Debtor and LEC–MI. (Compl. ¶ 75) At a meeting of the Debtor's board a few weeks later, the officers did not apprise the board of the true facts surrounding the disputes. (Compl. ¶ 75) Instead, the officers advised the board that the billing disputes presented an...