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Bankruptcy Court Denies Motion to Dismiss Trustee’s Complaint Seeking Declaratory Judgment

By Charlene D. Davis

On October 26, 2015, Judge Kevin J. Carey of the United States Bankruptcy Court for the District of Delaware (the “Court”) issued a memorandum and order denying a motion by AT&T Corporation (“AT&T”) to dismiss an amended complaint (the “Complaint”) for declaratory relief filed the by the Plan Trustee (the “Trustee”) of Touch America Holdings and its subsidiaries (“Touch America”).  In the Complaint, the Trustee asked the Court to declare that Touch America’s confirmed Chapter 11 plan (the “Plan”) had transferred certain Stranded Conduits (as hereinafter defined) to the Trustee free and clear of any claims of AT&T and another defendant.  The Court found that the Trustee met the plausibility standard required for a cause of action by asserting sufficient facts for the Court to draw a reasonable inference that the parties did not consider the Stranded Conduits to be among the assets conveyed in the Debtors settlement with AT&T.

The dispute relates to certain conduits (the “Stranded Conduits”) that Touch America built in 2000 adjacent to a Next Gen Network of conduits it was building for AT&T pursuant to a 1999 Fiber Optic Agreement between AT&T and it.  In June 2003, Touch America filed for Chapter 11 relief before completing the work required by the Fiber Optic Agreement.  On October 6, 2004, the Court confirmed the Plan, which included a settlement agreement between AT&T and Touch America wherein Touch America conveyed all of its “Personal Property” to AT&T and the remaining assets to the Trustee of the Plan trust.  Nine years after confirmation of the Plan, the Trustee learned of the existence and value of the Stranded Conduits, which were not being used in any business operations, and filed the Complaint.

In denying AT&T’s motion to dismiss, the Court adhered closely to the standards articulated by the U.S. Supreme Court and the U.S. Court of Appeals for the Third Circuit in considering a motion to dismiss.  It assessed only the factual allegations made in the Complaint (not facts argued in the briefing) to determine that the Complaint stated a plausible cause of action that required denial of the motion to dismiss.

A copy of the memorandum and order is available here.

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