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CCT Communications, Inc. v. Zone Telecom, Inc.

Supreme Court of Connecticut

November 21, 2017

CCT COMMUNICATIONS, INC.
v.
ZONE TELECOM, INC.[*]

          Argued November 7, 2016

          Joseph K. Scully, with whom was Jeffrey P. Mueller, for the appellant (plaintiff).

          William M. Murphy, for the appellee (defendant).

          Rogers, C. J., and Palmer, Eveleigh, McDonald, Espinosa, Robinson, and D'Auria, Js. [**]

         Syllabus

         The plaintiff, a telecommunications company, sought to recover damages for, inter alia, breach of contract in connection with the provision of certain equipment, software and services to the defendant for the operation of a telecommunications switch room. The parties had executed an agreement in 2006 pursuant to which the defendant purchased a digital signal circuit from the plaintiff and agreed to pay certain enumerated rates for long-distance telephone service, subject to a minimum monthly usage charge. In order to fulfill its duties under the agreement, the plaintiff purchased certain long-distance telephone service from G Co., which the plaintiff then resold to the defendant. Subsequently, a dispute developed between the plaintiff and G Co. over the plaintiff's failure to stay current with its payments and certain service problems. In January, 2007, G Co. notified the plaintiff that, if these problems were not resolved, it would terminate the plaintiff's service. Thereafter, the defendant requested the plaintiff's assistance in resolving certain service issues and, on January 26, 2007, G Co. terminated the plaintiff's service. The plaintiff then filed a voluntary bankruptcy petition and, following the issuance of certain automatic stays in connection with the bankruptcy proceeding, G Co. restored service to the plaintiff. On February 5, 2007, the defendant notified the plaintiff that it was terminating their agreement pursuant to an ipso facto clause in the agreement, which purported to allow termination in the event that either party filed a voluntary bankruptcy petition. The plaintiff claimed that, because the bankruptcy proceeding had stayed the termination of service by G Co., the defendant continued to be obligated under the agreement to either use the plaintiff's services or to pay the minimum monthly usage charge. Ultimately, the circuit used to route the defendant's long-distance calls under the agreement was rendered inoperable. The bankruptcy court subsequently dismissed the plaintiff's bankruptcy petition and, in doing so, declined to retain jurisdiction over the adversarial claims between the plaintiff and the defendant, noting, inter alia, that those claims primarily involved questions of state law. The plaintiff subsequently brought the present action, alleging breach of contract for the defendant's failure to pay certain amounts owed under the parties' agreement. The defendant filed a counterclaim alleging breach of contract based on the plaintiff's failure to provide certain services and seeking, inter alia, a judgment declaring that the defendant's termination of the agreement on February 5, 2007, was valid and effective. The trial court rendered judgment for the defendant on the plaintiff's complaint and on the defendant's breach of contract and declaratory judgment counterclaims. The trial court concluded that federal law did not preclude the defendant from exercising its right to terminate the agreement under the ipso facto clause and that the plaintiff had breached the agreement when it filed for bankruptcy. On appeal, the plaintiff claimed, inter alia, that the trial court incorrectly determined that the plaintiff had breached the agreement when it filed for bankruptcy and that the defendant had effectively exercised its right to terminate the agreement.

         Held:

         1. This court declined to affirm the trial court's judgment on the alternative ground that that the plaintiff had breached the parties' agreement by failing to provide adequate service prior to the receipt of the defendant's notice of termination; the trial court's memorandum of decision, without additional findings, was insufficient to support a finding of breach on the basis of the plaintiff's failure to provide adequate service, in light of the court's repeated finding of breach based on the bankruptcy filing, the court's avoidance of any express finding of breach on the basis of the failure to provide adequate service, certain provisions in the agreement requiring the defendant to provide notice and an opportunity to cure service issues, and certain testimony by the defendant's chief financial officer.

         2. The trial court incorrectly concluded that the plaintiff's act of filing for bankruptcy constituted a material breach that permitted the defendant to terminate the agreement: the plain language of the ipso facto clause in the parties' agreement provided only an option for the nondebtor party to terminate the agreement following a bankruptcy petition if it so desired; furthermore, the trial court incorrectly determined that the defendant's termination of the agreement under the ipso facto clause was valid on the ground that the common-law ride-through doctrine provided an exception to the federal statute (11 U.S.C. § 365 [e]) barring enforcement of ipso facto clauses, this court having concluded that the ride-through doctrine did not apply because the plaintiff's bankruptcy petition was dismissed before confirmation of a reorganization plan, a debtor that seeks reorganization under the federal bankruptcy statutes need not assume an executory contract in order to avail itself of the protections afforded by 11 U.S.C. § 365 (e), and the ride-through doctrine does not operate to retroactively validate a previous, ineffective termination that had been initiated during bankruptcy proceedings; moreover, the defendant could not prevail onits claim that the trial court's judgment should be affirmed on the alternative ground that the parties' agreement fell within a statutory (11 U.S.C. § 556) exception to 11 U.S.C. § 365 (e) for commodity forward contracts, the trial court having correctly determined that the agreement was not subject to that exception because the defendant had failed to demonstrate that telecommunication services are actively traded or resold like other commodities, there was no indication that the defendant had entered into the agreement primarily as a hedge against fluctuations in the price of long-distance telephone services, the agreement did not specify a particular quantity of goods to be delivered on a particular date, it was not clear that the services at issue were truly fungible, and the agreement involved, inter alia, the sale of noncommodities to the defendant, namely, equipment.

         Procedural History

         Action to recover damages for, inter alia, breach of contract, and for other relief, brought to the Superior Court in the judicial district of Danbury, where the defendant filed a counterclaim; thereafter, the case was transferred to the judicial district of Waterbury, Complex Litigation Docket, and tried to the court, Agati, J.; judgment for the defendant on the complaint and in part for the defendant on the counterclaim, from which the plaintiff appealed; subsequently, the court granted the defendant's application for attorney's fees and costs, and the plaintiff filed an amended appeal. Reversed; further proceedings.

          OPINION

          EVELEIGH, J.

         The plaintiff, CCT Communications, Inc., appeals from the judgment of the trial court rendered in favor of the defendant, Zone Telecom, Inc., [1]on the plaintiff's complaint and the defendant's counterclaim for damages and declaratory judgment. The case arises from a purchase agreement entered into by the parties in which the plaintiff was to provide various equipment, software, and services to the defendant for a telecommunications switch room located in Los Angeles, California. On appeal, the plaintiff claims that the trial court incorrectly rendered judgment in favor of the defendant on the plaintiff's complaint and the defendant's counterclaim. Specifically, the plaintiff asserts that the trial court incorrectly (1) concluded that it breached the purchase agreement by filing a petition for bankruptcy protection under chapter 11 of the United States Bankruptcy Code (bankruptcy code); see 11 U.S.C. § 1101 et seq. (2012); (2) determined that a letter from the defendant dated February 5, 2007, was an effective exercise of the defendant's right to terminate the purchase agreement, (3) failed to award the plaintiff certain damages on count one of its complaint, and (4) awarded the defendant damages, costs, and attorney's fees in excess of a limitation of liability clause in the purchase agreement. We agree that the trial court incorrectly concluded that the plaintiff's bankruptcy petition constituted a breach of the purchase agreement and permitted the defendant to terminate that agreement.[2" name="FN2" id="FN2">2] We therefore reverse the judgment of the trial court.

         The following facts and procedural history, as found by the trial court and supplemented by the undisputed facts contained within the record, are relevant to our resolution of this appeal. The defendant provides long-distance telephone and other telecommunications services to independent local exchange carriers, which in turn sell the services to commercial and residential end users. In 2005, the plaintiff began providing various equipment, software, and services for use in the defendant's switch room.

         By September, 2006, the relationship between the parties had begun to deteriorate. Following a heated meeting and further communications, the plaintiff, represented by its president, Dean Vlahos, and the defendant, represented by its senior vice president, Daniel Boynton, and its then vice president and chief legal counsel, Eamon Egan, ultimately agreed to continue to do business together on a restructured basis. The parties' new relationship was memorialized in the purchase agreement, which became effective on November 1, 2006. This is the operative legal document governing the present dispute.

         A third, nonparty entity, Global Crossing Telecommunication, Inc. (Global), also was involved in the activities that underlie this case. Global supplies long distance telephone service, including national and international long-distance calling as well as toll-free service, to commercial resellers. When a customer contracts for Global's services, calls made under that contract are run through a level three digital signal circuit (circuit), which is capable of carrying a large volume of telephone calls. The consumer normally purchases a circuit as part of an agreement to use Global's long-distance services and rates.

         Under the purchase agreement, the plaintiff essentially acted as a middle man, buying Global's long-distance services and reselling them to the defendant. Prior to the purchase agreement, the plaintiff owned a circuit that was located in the defendant's switch room. Under the purchase agreement, the plaintiff sold that circuit to the defendant.[3" name="FN3" id= "FN3">3] This circuit enabled clients of the defendant to place calls through Global's long-distance network. In return, the defendant agreed to purchase long-distance service from the plaintiff at rates enumerated in the purchase agreement for certain specified geographical areas. Ultimately, Global was to sell long-distance service to the plaintiff at a fixed rate per minute, and the plaintiff was to resell that service to the defendant at a marked up rate. The defendant, in turn, would provide long-distance service to its own customers at a further markup.

         The purchase agreement included a minimum usage guarantee, pursuant to which the defendant obtained long-distance services from the plaintiff on a ‘‘ ‘take or pay' '' basis. This meant that the defendant was required to pay a minimum amount each month for the plaintiff's services, even if it did not run any calls through the circuit. Any usage exceeding the minimum would be billed to the defendant at an agreed upon rate per minute. This clause of the purchase agreement was to have run through December, 2009.

         As we have indicated, the purchase agreement became effective on November 1, 2006. Long-distance service under the purchase agreement commenced on December 1, 2006, and the defendant ran enough long-distance service through the circuit in the month of December, 2006, to meet its minimum usage requirement. During that month, the plaintiff and Global also amended their retail customer agreement. After execution of this amendment, the plaintiff began to run a higher volume of long-distance service through Global.

         By mid-January, 2007, a dispute had arisen between Global and the plaintiff about the terms of their amended retail customer agreement and, specifically, about the amount and scope of the long-distance service that the plaintiff was sending through Global's network. See generally In re CCT Communications, Inc., United States Bankruptcy Court, Docket No. 07-10210 (SMB) (S.D.N.Y. July 2, 2008). Global was of the opinion that the plaintiff was violating the amended retail customer agreement and taking unfair advantage of Global by reselling certain services.[4] Id.

         In any event, the result of the plaintiff's routing so many long-distance calls through Global was that the defendant's clients and their customers encountered an increasing number of service problems. Calls would not complete, would continue to ring, or would result in a fast busy signal or dead air. These issues were brought to Global's attention by way of trouble tickets filed by the defendant. The purchase agreement authorized the defendant to open such trouble tickets directly with Global if the defendant had service problems. During January, 2007, the defendant filed a number of trouble tickets with Global because of service problems with calls being routed through the circuit.

         In addition to the service problems that arose after the plaintiff attempted to run an increasing number of calls through Global's network, Global grew concerned by January, 2007, because the plaintiff was not current with its payments. By that time, the plaintiff owed Global approximately $2 million and had exceeded its credit limits with Global. These issues were memorialized in a letter from Global to Vlahos on January 11, 2007. At that time, Global put the plaintiff on notice that, if a resolution of these problems was not achieved, Global would terminate all services to the plaintiff on January 25, 2007.

         Between January 11, 2007, and January 25, 2007, the plaintiff continued to increase international and domestic long-distance traffic through Global, which resulted in additional service problems. In response, Global began to throttle down the plaintiff's access to its service. By January 17, 2007, Global had blocked international long-distance calling service to the plaintiff. After that date, the plaintiff continued to push through domestic, long-distance calls at what the trial court characterized as ‘‘an excessive rate.'' But see footnote 4 of this opinion. This influx of domestic, long-distance calls caused major service issues for Global. For example, 192, 000 calls would not complete on January 19, 2007, and 142, 000 calls would not complete on January 20 and 21, 2007.

         On January 25, 2007, Egan, who had since become the defendant's chief financial officer, sent a letter to the plaintiff advising it of multiple service issues for long-distance calls being transmitted through the circuit. The defendant requested assistance from the plaintiff to resolve these issues. The defendant stated that if assistance was not forthcoming, the defendant would not be committed by the purchase agreement to pay the minimum usage charge for January, 2007, due to unacceptable service quality.

         The following day, on January 26, 2007, Global blocked all calls generated through the plaintiff. Global also sent a letter to the plaintiff on that date terminating their relationship and claiming that the plaintiff was in breach of contract because it was reselling the services in alleged contravention of the amended retail customer agreement. A copy of this termination notice was inadvertently faxed to the defendant's switch room by Global, making the defendant aware of the seriousness of the dispute between Global and the plaintiff.

         As a result of the termination of service by Global, which shut down all of the Global circuits operated by the plaintiff, on January 29, 2007, the plaintiff filed its bankruptcy petition in the United States Bankruptcy Court for the Southern District of New York. Because of the automatic stay provisions that come into effect upon filing of a bankruptcy petition; see 11 U.S.C. § 362 (a) (3) (2012); Global concluded that it was compelled to reconnect the circuits.

         Although service was restored to the Global circuit by January 31, 2007, on February 5, 2007, the defendant notified the plaintiff by letter that it was exercising its right to terminate their contractual relationship. The defendant purported to terminate pursuant to § 7 (b) of the purchase agreement, which provides, among other things, that either party may terminate upon thirty days written notice if the other party files a voluntary bankruptcy petition.[5" name="FN5" id= "FN5">5]

         Between February 5, 2007, and March 24, 2007, Vlahos and Egan exchanged a series of letters about their positions vis-a`-vis the bankruptcy and the continuation of the purchase agreement. The plaintiff's position was that the bankruptcy proceedings stayed the shut off of service by Global and, therefore, that the defendant remained obligated to use the circuit or to pay the minimum monthly usage charge. The defendant's position was that it had notified the plaintiff of service problems prior to the shut off of service by Global and that the shut off jeopardized service to the defendant's clients. Because of the instability of the relationship between the plaintiff and Global, the defendant took the position that it could not continue to use the circuit unless it was given adequate assurance from Global that it could rely on the service being operational and not subject to further shutdown. The plaintiff insisted that it was not obligated by law to provide any such adequate assurance and declined to do so.

         Meanwhile, on March 15, 2007, the circuit went into alarm, which precipitated an inquiry from Global. Upon confirmation by the defendant that it was not running any traffic through the circuit, Global removed the circuit from service. This meant that the circuit was not operational and could no longer provide long-distance service. The circuit was never restored to working order. The trial court found that to do so would have required a request to Global by the plaintiff, [6" name="FN6" id="FN6">6] which Global never received. Consequently, as of March 15, 2007, the circuit that would have run the defendant's long-distance calls under the purchase agreement was inoperable.

         Although the parties continued to correspond sporadically between March 24, 2007, and November 25, 2009, the dispute between the plaintiff and the defendant primarily played out in the proceedings before the United States Bankruptcy Court for the Southern District of New York. Specifically, on January 27, 2009, the plaintiff commenced an adversary proceeding against the defendant, alleging breach of the purchase agreement. See In re CCT Communications, Inc., 20 B.R. 160');">420 B.R. 160, 177-78 (Bankr. S.D.N.Y. 2009).

         The bankruptcy petition was dismissed on November 25, 2009. Id., 178. The Bankruptcy Court dismissed the petition because the plaintiff, having filed a plan of reorganization on November 26, 2007, failed to timely confirm the plan as required by 11 U.S.C. § 1129. Id., 166, 168, 178. The court retained jurisdiction over the ongoing dispute between the plaintiff and Global, but declined to retain jurisdiction over the adversary proceeding between the plaintiff and the defendant, noting that the latter dispute had not advanced beyond the pleading stage and primarily involved questions of state contract law.[7] Id., 178.

         The plaintiff then filed the present action in December, 2009, upon the dismissal of the bankruptcy petition. In its two count complaint, the plaintiff claimed (1) breach of contract for the defendant's failure to pay the monthly amounts owed under the purchase agreement, and (2) account stated. In response, the defendant filed an answer and counterclaim. In its three count counterclaim, the defendant (1) alleged breach of contract for the plaintiff's failure to provide services under the purchase agreement, (2) sought a declaratory judgment that the defendant's obligations to the plaintiff were terminated no later than thirty days after the defendant's letter to the plaintiff dated February 5, 2007, and (3) sought a judgment declaring that, among other things, the plaintiff had no right to continue its utilization of the defendant's switch room.

         The case was tried to the trial court, Agati, J., which rendered judgment for the defendant on the plaintiff's complaint and on count one of the defendant's counterclaim in the amount of $694, 000. In addition, the trial court awarded statutory costs in the amount of $655 and attorney's fees in the amount of $936, 441.18. The trial court also rendered declaratory judgment as requested in count two of the defendant's counterclaim.

         On appeal, [8] the parties disagreed as to the basis for the trial court's conclusion that the plaintiff, rather than the defendant, had breached the purchase agreement. The plaintiff took the position that the trial court had determined, as a matter of law, that (1) the plaintiff breached the purchase agreement by filing for bankruptcy, (2) under the circumstances of the present case, federal bankruptcy law does not invalidate § 7 (b) of the purchase agreement, which allows a party to terminate the contract when the other party files a bankruptcy petition and, therefore, (3) the defendant's letter of February 5, 2007, was a valid and effective termination of the purchase agreement and did not constitute a breach of contract by the defendant. The plaintiff took issue with all three of these conclusions. In the alternative, the plaintiff argued that, even if the trial court had correctly construed and applied federal bankruptcy law, the trial court had incorrectly (1) failed to hold the defendant liable for financial obligations it incurred both before and after the defendant's purported termination, and (2) awarded damages in excess of the limitation of liability clause of the purchase agreement.

         For its part, the defendant argued that, although the trial court correctly construed federal bankruptcy law, this court need not resolve the bankruptcy questions because the trial court also found, largely as a matter of fact, that the plaintiff had breached the purchase agreement by providing inadequate service. The defendant urged us to decide the appeal on the basis of that alternative ground for affirmance.

         Following oral argument, this court, sua sponte, ordered the trial court to issue an articulation pursuant to Practice Book § 60-5. After receiving the trial court's articulation, we affirmed the judgment of the trial court on the basis of the defendant's alternative ground for affirmance. See CCT Communications, Inc. v. Zone Telecom, Inc., 324 Conn. 654');">324 Conn. 654, 658 and n.2, 53 A.3d 1249');">153 A.3d 1249 (2017). Subsequently, we granted the plaintiff's timely motion for reconsideration en banc.[9] Additional facts and procedural history will be set forth as necessary.

         I

         Because we initially decided this case on the basis of the defendant's alternative ground for affirmance; see id., 658 n.2; we first address the plaintiff's argument in its motion for reconsideration en banc that the record is not sufficient to permit us to affirm the judgment of the trial court on that ground. On further review of the trial record, we now are persuaded that the plaintiff is correct in this regard and that the trial court did not find that the plaintiff breached the purchase agreement by providing inadequate service.

         A

         The following additional procedural history is relevant to our consideration of this issue. Count one of the defendant's counterclaim, which stated a breach of contract claim, alleged that the plaintiff, ‘‘by failing to provide the service it contracted to provide to [the defendant through the] circuit, breached its obligations . . . under the terms of the [purchase] [a]greement.'' Nowhere in the counterclaim did the defendant allege that the plaintiff had breached the purchase agreement by filing for bankruptcy protection. Rather, the defendant raised the issue of the bankruptcy petition as a defense to the plaintiff's breach of contract claim and with respect to count two of the counterclaim, which sought a declaratory judgment that the defendant's own obligations under the purchase agreement had terminated no later than thirty days after the defendant exercised its right to terminate under § 7 (b).

         In its memorandum of decision, however, the trial court appeared to misunderstand the nature of the defendant's breach of contract counterclaim, construing it as alleging that the plaintiff had breached the purchase agreement by filing for bankruptcy protection. In summarizing the action, the trial court characterized the counterclaim as follows: ‘‘[The defendant] counter-claimed . . . alleging that [the plaintiff] breached the [purchase] agreement by, inter alia, filing a voluntary bankruptcy petition on January 29, 2007. [The defendant] also seeks a declaratory judgment concerning the rights of the parties under the [purchase] agreement.'' Later in the decision, in its legal analysis of the competing breach of contract claims, the trial court never directly addressed the defendant's allegations that the plaintiff breached the purchase agreement by failing to provide the services that it had contracted to provide. Rather, the court began its analysis by stating that, ‘‘[a]lthough this is a breach of contract action, the key legal issue before the court is the impact of [the plaintiff's] voluntary bankruptcy petition.'' The court then spent seventeen pages parsing the bankruptcy code, ultimately concluding that the relevant provisions did not preclude the defendant from exercising its contractual right to terminate the purchase agreement.

         Immediately following its analysis of the bankruptcy issues, the court concluded as follows: ‘‘The court finds that [the defendant] has presented ample evidence to establish each of the elements in support of its claim that [the plaintiff] breached its obligations under the purchase agreement of November 1, 2006. The breach took place when [the plaintiff] filed its voluntary bankruptcy petition of January 29, 2007. Pursuant to [§] 7 (b), [the defendant] exercised its right to terminate the purchase agreement on February 5, 2007. The court finds for [the defendant] on count [one] of its counterclaim for breach of contract.'' In other words, the trial court appeared to treat the bankruptcy questions as dispositive not only of the defendant's defense to the plaintiff's breach of contract claim-the defendant had argued that the plaintiff's bankruptcy excused it from further performance-but also of the defendant's own breach of contract counterclaim.

         On appeal, the plaintiff interpreted the memorandum of decision to mean that the trial court resolved the competing breach of contract claims solely on the basis of the bankruptcy arguments and, accordingly, the plaintiff focused its appellate argument on those questions. The defendant, by contrast, was of the view that the trial court also made an independent finding that the plaintiff breached the purchase agreement by failing to provide adequate service. In support of this alternative ground for affirmance, the defendant directed our attention to three aspects of the record.

         First, the defendant noted that the trial court made a number of factual findings indicating that the defendant encountered serious service problems in January, 2007, culminating in the total cessation of service for several days, and implied that the plaintiff was responsible for those service problems. The trial court also expressly found that the defendant's principal witness testified credibly whereas the plaintiff's did not. The defendant emphasized that the trial court prefaced its factual findings and credibility determinations by stating that it was setting forth ‘‘the salient facts [that the court] finds relevant and pertinent to the final decision in this case.'' The defendant argued that there would have been no reason for the court to make such extensive factual findings, and that such findings would not have been legally relevant, had the court in fact found that the plaintiff's bankruptcy was the sole ground on which it breached the purchase agreement.[10]

         Second, the defendant noted that the trial court found that the defendant ‘‘presented ample evidence to establish each of the elements in support of its claim that [the plaintiff] breached its obligations under the purchase agreement of November 1, 2006.'' Because the counterclaim actually alleged a failure to provide service, the defendant argued, the trial court's finding that all of the elements of that claim were satisfied necessarily implied that the court found a breach of contract on that basis.[11]

         Third, the defendant argued that the trial court's judgment and the judgment file resolve any ambiguity as to whether the court found a breach of contract for failure to provide service. The defendant emphasized that the court rendered judgment on the counterclaim in its favor with respect to both count one, which alleged breach of contract, and count two, which sought a declaratory judgment, but had referenced the bankruptcy petition only in relation to the latter. From this fact, the defendant deduced that the court must have decided ...


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