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In re South Canaan Cellular Investments

November 3, 2009

IN RE: SOUTH CANAAN CELLULAR INVESTMENTS, LLC AND SOUTH CANAAN CELLULAR EQUITY, LLC (JOINTLY ADMINISTERED)
LACKAWAXEN TELECOM, INC.
v.
SOUTH CANAAN CELLULAR INVESTMENTS, LLC AND SOUTH CANAAN CELLULAR EQUITY, LLC



The opinion of the court was delivered by: Joyner, J.

Bankruptcy Nos. 09-10473, 09-10474

MEMORANDUM AND ORDER

By this appeal, Appellant Lackawaxen Telecom, Inc. ("LTI") seeks reversal of the May 19, 2009 Memorandum Decisions issued by U.S. Bankruptcy Judge Bruce Fox denying its Motions to Dismiss these two jointly administered Chapter 11 Bankruptcy matters. For the reasons which follow, we shall affirm the decisions*fn1 of the Bankruptcy Court.

Statement of Relevant Facts

The debtors in this action are South Canaan Cellular Equity, LLC and South Canaan Cellular Investments, LLC (hereafter "SCCE" or "Equity" and "SCCI" or "Investments," respectively), both of which were formed for the purpose of holding partnership interests in South Canaan Cellular Communications Company, LP, a Limited Partnership ("SCCCC") in the business of providing wireless communications services in Northeastern Pennsylvania's Pike and Wayne Counties. Specifically, Equity holds a 39.8% limited partnership interest, whereas Investments holds a 1% interest in SCCCC and acts as its general partner. SCCCC has two other limited partners, neither of which are debtors here. South Canaan Cellular Telephone ("SCTC") holds a 10.2% limited partnership interest and SCCTC, a Delaware Corporation is the final limited partner with a 49% interest.

The two debtor entities are owned by four families. The Edwards family holds interests in SCCI and SCCE of approximately 42-43%, Frank Coughlin (who is the President of LTI) holds an interest of 30.8%, the Copp family owns 24% and the Miller family holds a less than 1% interest. Carolyn Copp is the Chairman, sole member of the Board of Managers and President of SCCI and the Chairman of the Board of Managers and President of SCCE. Both entities have Ms. Copp's personal residence in West Chester, PA as their principal places of business. Neither of the debtor LLCs have any employees or operating income; their sole source of income comes from potential partnership distributions, although no such distributions have been made since 2002.

In 2008, SCCCC had approximately 7,900 subscribers which accounted for some 16.8% of the company's revenue for that year.

The vast majority of SCCCC's revenue, however, was attributable to the payment of "roaming" fees charged by SCCCC to Verizon Wireless pursuant to a three-year agreement, for providing wireless services to Verizon's customers who are traveling through SCCCC's service territory. While that agreement was due to expire in June 2009, it has successive one-year renewal terms with 90 days' notice such that unless SCCCC receives notice from Verizon that it intends to terminate the agreement, it will automatically renew for a one-year term. Although the possibility certainly exists that Verizon could negotiate a rate reduction, it is highly unlikely that Verizon would terminate its relationship with SCCCC because Verizon would be required to build its own infrastructure*fn2 or risk not being able to provide service to a large number of customers adjacent to its headquarters and where many of its executives have vacation homes.

On or about October 26, 2000, SCCE and SCCI entered into a master loan agreement (and supplement) with and executed a promissory note in favor of Co Bank ACB in the amount of $7.5 million. These funds were utilized by SCCE and SCCI to acquire their interests in SCCCC and to upgrade SCCCC's wireless system from analog to digital and to make other network improvements. Together with the master loan documents, SCCE and SCCI also entered into a security agreement whereby they granted security interests in all of their property, as well as their interests in the SCCCC limited partnership, to Co Bank. The non-debtor SCTC likewise provided Co Bank with a pledge of its partnership interest. The outstanding principal balance of the loan was to be repaid in 26 consecutive quarterly payments due on the 20th day of January, April, July and October of each year beginning in October 2002 through January, 2009.*fn3 The loan documents provided that, except to the extent governed by applicable federal law, the agreements would be governed by and construed in accordance with the laws of Colorado and that the debtor entities agreed and consented to submit to the jurisdiction of the Colorado state and/or federal courts in the event that the Secured Party should elect to file any legal action or proceeding as the result of a dispute arising out of the parties' agreements.*fn4 In addition, under Section 4 of the Agreements,

"[s]o long as no Event of Default hereunder shall have occurred and be continuing, Pledgor shall have the right to receive any Distributions and exercise all of its voting, consensual and other powers of ownership pertaining to the Collateral for all purposes not inconsistent with the terms of this Pledge Agreement or any of the other Loan Documents. Upon the occurrence and during the continuance of an Event of Default and subject to the provisions of Section 13 of this Pledge Agreement, all rights of Pledgor to exercise its voting, consensual and other powers of ownership pertaining to the Collateral shall become vested in Secured Party upon two days' prior written notice from Secured Party to Pledgor and the Pledged Partnership, and thereupon Secured Party shall have the sole and exclusive authority to exercise such voting, consensual and other powers of ownership which Pledgor shall otherwise be entitled to exercise; provided, however, that this shall not be construed as prohibiting Pledgor from contesting the existence of an Event of Default."

Although the debtors made the first two quarterly payments on the loan, no further payments were made and the loan went into default in May, 2003. Shortly after the default occurred, however, the debtors commenced negotiations with Co Bank to resolve the debt; those negotiations continued until September 2007, when LTI purchased and took assignment of the loan from Co Bank. Although discussions apparently continued between SCCI, SCCE and LTI toward repayment of the loan subsequent to LTI's purchase, they proved unsuccessful in large part, according to Ms. Copp, because Mr. Coughlin was seeking to gain control of the debtor entities and refused to discuss settlement until such time as he had replaced Ms. Copp as president.*fn5

On January 23, 2009, Mr. Coughlin writing in his capacity as President of and on behalf of LTI, sent written notice to Ms. Copp and to SCCI, SCCE, SCTC and SCCCC that:

"[p]ursuant to Section 4 of the Partnership Interests Pledge Agreements with the LLC's and South Canaan Telephone Company ... all rights of the LLC's and SCTC to exercise their respective voting, consensual and other powers of ownership pertaining to the 1% general partnership interest of SCCI and 50% limited partnership interests of the SCCE and SCTC in ... SCCCC shall become vested in LTI two days after the date of this notice, and thereupon that LTI shall have the sole and exclusive authority to exercise such voting, consensual and other powers of ownership in SCCCC, ..." and that:

LTI was "commencing litigation in Colorado to confirm our right to take this action in the event it may be opposed."

Apparently, on or about January 23, 2009, LTI did file a Verified Complaint and Request for Declaratory Relief in the Colorado District Court for the City and County of Denver, Colorado against SCCE, SCCI and SCTC which suit sought, inter alia , money damages for breach of the loan documents in the amount of the unpaid principal of $7,120,413 together with accrued interest, attorney's fees and costs as well as a ...


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