PIPER RUDNICK LLP Hearing Date: May 4, 2004

Transcription

1 PIPER RUDNICK LLP Hearing Date: May 4, 2004 Eric B. Miller (admitted pro hac) Hearing Time: 10:00 a.m Smith Avenue Objection Deadline: April 29, 2004 Baltimore, Maryland Telephone: (410) Facsimile: (410) PIPER RUDNICK LLP Timothy W. Walsh (TW-7409) 1251 Avenue of the Americas New York, New York Telephone: (212) Facsimile: (212) SPECIAL COUNSEL FOR WORLDCOM, INC. AND ITS AFFILIATES UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK : In re: : Chapter 11 Case WORLDCOM, INC. et al., : No AJG : Debtors. : (jointly administered) : : MOTION OF WORLDCOM, INC. TO APPROVE SETTLEMENT AGREEMENT BY AND AMONG THE UNITED STATES OF AMERICA, ACTING THROUGH THE DEPARTMENT OF JUSTICE AND THE UNITED STATES ATTORNEY S OFFICE FOR THE CENTRAL DISTRICT OF CALIFORNIA, AND ON BEHALF OF THE GENERAL SERVICES ADMINISTRATION, WORLDCOM, INC., ALONG WITH ITS SUBSIDIARIES AND AFFILIATES INCLUDING MCI WORLDCOM COMMUNICATIONS AND JOHN RUSSO, AS RELATOR TO THE HONORABLE ARTHUR J. GONZALEZ,

2 UNITED STATES BANKRUPTCY JUDGE: WorldCom, Inc. and certain of its direct and indirect subsidiaries, including MCI WorldCom Communications as debtors and debtors in possession (collectively, WorldCom ), respectfully represent: Jurisdiction 1. This Court has jurisdiction to consider this motion pursuant to 28 U.S.C. 157 and 1334 and the Standing Order of Referral of Cases to Bankruptcy Judges, dated July 10, 1984, issued by District Court Judge Robert J. Ward. This matter is a core proceeding pursuant to 28 U.S.C. l57(b). Venue is proper before this Court pursuant to 28 U.S.C and The statutory predicates for the relief sought herein are section 363(b) of chapter 11 of title 11 of the United States Code (the Bankruptcy Code ) and Federal Bankruptcy Rule General Background 2. On July 21, 2002 and November 8, 2002 (the Petition Date ), WorldCom, Inc. and substantially all of its direct and indirect domestic subsidiaries commenced cases under chapter 11 of the Bankruptcy Code. 3. By Order dated July 22, 2002, the chapter 11 cases have been consolidated for procedural purposes only and are being jointly administered. On July 29, 2002, the Office of the United States Trustee appointed the Official Committee of Unsecured Creditors in these cases. 1 This motion is offered for purposes of settlement and the compromise of disputed matters. The motion and any statements or representations made in connection with this motion, are intended and shall be used for no other purposes, consistent with controlling law, including Rule 408 of the Federal Rules of Evidence. As to any contested matters, adversary proceedings, arbitration proceedings, or other pending or potential actions, this motion, and any statements or representations made in connection with this motion, shall not constitute or be construed as an admission of any fact or liability, stipulation, or waiver.

3 On and as of April 20, 2004 the Debtors Modified Second Amended Joint Plan of Reorganization became effective. 4. WorldCom is one of the world s preeminent global communications companies, providing a broad range of communication services in over 200 countries on six continents. Through its core communications services business, which includes voice, data, Internet, and international services, WorldCom carries more communications over its networks than any other entity. Relief Requested 5. By this Motion, WorldCom seeks entry of an Order pursuant to section 363(b) of the Bankruptcy Code and Bankruptcy Rule 9019 authorizing WorldCom to enter into a settlement agreement with the United States of America, acting through the Department of Justice (the DOJ ) and the United States Attorney s Office for the Central District of California, and on behalf of the General Services Administration ( GSA ), and John Russo (the Relator ), to compromise the alleged claims of the parties. Background Facts 6. Relator is an individual residing in San Diego, California. On February 3, 2003, Relator filed a qui tam action in the United States District Court for the Central District of California entitled United States ex rel. [Under Seal] v. WorldCom, Incorporated and MCI Group, Civil No SVW (MANx)(C.D. Cal.)(the Civil Action ), and filed a related and timely proof of claim number against the WorldCom estates that, along with three related timely filed proofs of claim numbered 37209, and filed by DOJ (hereinafter collectively referred to as the Bankruptcy Claims ), are pending in this Court.

4 7. In January 1999, GSA and WorldCom entered into Contract number GS00T99NRD2002 (the FTS2001 Contract ) under which WorldCom was to provide telecommunications services to the United States. 8. Pre-Subscribed Interexchange Carrier Charges ( PICCs ) are fees that long distance telephone companies pay to local telephone companies to help them recover the costs of providing outside telephone wires, underground conduits, and other facilities that link each telephone customer to the telephone network. 9. The FTS2001 Contract permits WorldCom to charge the United States for PICC fees pursuant to a clause known as Clause H Relator alleged in the Civil Action that WorldCom defrauded the United States by systematically charging inflated PICC fees as pass-through surcharges under the FTS2001 Contract when WorldCom had actually only been charged a fraction of those amounts by the local telephone service carriers. Relator also alleged that the PICC fees WorldCom charged the United States failed to reflect that many local telephone service carriers, such as Pacific Bell, had either reduced or eliminated their PICC charges to WorldCom for Centrex and Multi-line business lines. 11. In its defense, WorldCom asserted that the FTS2001 Contract has at all times contained two different versions of Clause H.29. WorldCom claimed that one version of this Clause appearing in Contract Section A restricts WorldCom to a "pass through" to GSA of WorldCom's actually incurred PICC costs and a second version of the Clause appearing in Contract Section H.29 permits WorldCom to charge GSA for PICC in excess of PICC costs actually incurred by WorldCom. WorldCom further asserted that pursuant to its interpretation of

5 the FTS2001 Contract Clause H.29, WorldCom was permitted to charge GSA for PICC in excess of PICC costs actually incurred by WorldCom. 12. The United States and the Relator have contended that pursuant to their interpretation of Section A of the FTS2001 Contract, WorldCom was not permitted to charge more than the costs it actually incurred. Further, the United States and the Relator contend that both versions required WorldCom to maintain documentation that its PICC fees did not exceed the actual PICC charges that it paid to local telephone service carriers. 13. The United States and Relator claimed that WorldCom knowingly passed through to the United States costs and fees for PICC in excess of the costs and fees that WorldCom was allowed to assess under the FTS2001 Contract. The allegations in the Civil Action and the Bankruptcy Claims pertain to the period of time from January 10, 1999 through March 31, 2004, and are hereinafter referred to as the "Covered Conduct." 14. The United States further argued that it has certain civil claims against WorldCom under the False Claims Act, 31 U.S.C , and/or common law doctrines for engaging in the Covered Conduct. 15. WorldCom did not dispute that it charged the United States in excess of the PICC costs it actually incurred. However, WorldCom denied the contentions of the United States and the Relator, and contended, among other things, that it properly billed the United States for PICC charges pursuant to WorldCom's interpretation of the terms of the FTS2001 Contract Clause H.29. The Settlement Agreement 16. WorldCom, the DOJ, the GSA and the Relator (collectively, the Parties ) have entered into a settlement agreement (the Settlement Agreement ), which by its terms is subject

6 to the entry of an Order approving the Settlement Agreement in this proceeding. The Settlement Agreement is intended to resolve all alleged claims related to the Covered Conduct and avoid the delay, uncertainty, inconvenience and expense of protracted litigation of such claims The Settlement Agreement provides that WorldCom will pay the United States the sum of $27,000,000 (twenty seven million dollars) (the "Payment") and will reduce the bills it submits to GSA in the future by an amount equal to the amount GSA has paid to WorldCom for PICC from July 1, 2003 through the date the Settlement Agreement is executed (the "Credit Amount", which is estimated at $670,000 in actual credits, exclusive of taxes and other charges, and collectively with the Payment, the "Settlement Amount"). In addition, the United States agrees to pay the Relator the sum of $4,261,500 from the Payment as Relator's Share of the proceeds pursuant to 31 U.S.C. 3730(d). In connection with the settlement, WorldCom does not admit to any wrongdoing. 18. The Settlement Agreement is subject to the entry of an order authorizing and approving the Settlement Agreement in this proceeding (the "Approval Order"). 19. Upon the entry of the Approval Order and the full payment of the Settlement Amount, including the reduction of WorldCom's future bills to GSA in an amount equal to the Credit Amount, and subject to the exceptions set forth in the Settlement Agreement, the United States (on behalf of itself, its officers, agents, agencies and departments) will release WorldCom, its parent, its current and former subsidiaries, divisions, affiliates, predecessors-in-interest, 2 A copy of the Settlement Agreement is not attached but a copy will be made available to the Court upon its request.

7 successors and assigns, current and former directors, officers, employers, and agents (collectively, "Releasees") from any civil or administrative monetary claim the United States has or may have under the False Claims Act, 31 U.S.C , the Program Fraud Civil Remedies Act, 31 U.S.C , the Contract Disputes Act, 41 U.S.C , or common law, or any other statute creating a cause of action for civil damages or civil penalties for submitting or causing to be submitted claims to the United States for Covered Conduct. Upon the satisfaction of all conditions set forth in the Paragraphs III.A and B of the Settlement Agreement, Relator and Relator's counsel, for themselves, their heirs, successors and assigns, will release and will be deemed to have released and forever discharged (i) any claims which the Relator has asserted, could have asserted, or may assert in the future against the Releasees relating to the Covered Conduct or arising from the filing of the qui tam allegations, including without limitation the Civil Action and the Bankruptcy Claims; and (ii) the United States, its agencies, employees, servants, and agents from any claims which the Relator has asserted, could have asserted, or may assert in the future against the United States, its agencies, employees, servants, and agents, relating to the Covered Conduct or arising from the filing of the Civil Action and the Bankruptcy Claims. The Court Should Authorize WorldCom to Enter Into the Settlement Agreement 20. Approval of the Settlement Agreement is beneficial to the WorldCom bankruptcy estate. As such, authority should be granted for WorldCom to enter into and perform in accordance with the Settlement Agreement. Under the terms of the Settlement Agreement, WorldCom is making the Payment and issuing the Credit Amount to resolve allegations concerning the Covered Conduct. WorldCom reviewed its potential liability exposure and negotiated with the United States to settle all claims as a civil matter, resulting in a substantial

8 compromise of claims and saving litigation costs. Overall, WorldCom decided that the Settlement Amount represented a reasonable compromise. 21. Bankruptcy Rule 9019(a) states: (a) Compromise. On motion by the trustee 3 and after notice and a hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity as the court may direct. See Federal Bankruptcy Rule In determining whether to approve a settlement under Rule 9019, a court must assess and balance the value of the claim that is being compromised against the value to the estate of the acceptance of the compromise proposal. In re Martin, 91 F.3d 389, 393 (3d Cir. 1996) (citing Protective Committee Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, (1968)). Courts have utilized four factors in considering a proposed settlement: (i) the probability of success in litigation; (ii) the likely difficulties in collection; (iii) the complexity of the litigation involved and the expense, inconvenience, and delay necessarily attending it; and (iv) the paramount interest of the creditors. See, e.g., In re Gordon, 1995 U.S. Dist. Lexis (D. D.C. 1995); Martin, 91 F.3d at 393; In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 292 (2d Cir. 1992); In re Marvel Entertainment Group, Inc., 222 B.R. 243, 249 (D. Del. 1998); In re Louise s, Inc., 211 B.R. 798, 801 (D. Del. 1997); In re McLean Indus., Inc., 84 B.R. 340, 344 (Bankr. S.D.N.Y. 1988). 3 Based upon Section 1107(a) of the Bankruptcy Code, WorldCom possesses the same rights as a trustee with respect to the compromise or settlement of controversies. See, e.g., In re Grant Broadcasting of Philadelphia, Inc., 71 B.R. 390, 396 n.4 (Bankr. E.D. Pa. 1987).

9 23. The decision whether to approve a compromise under Rule 9019 is committed to the sound discretion of the bankruptcy court, which must determine if the compromise is fair, reasonable, and in the interest of the estate. Gordon, 1995 U.S. Dist. Lexis at *7-8. See also Nellis v. Shugrue, 165 B.R. 115, 121 (S.D.N.Y. 1994); In re Drexel Burnham Lambert Group, Inc., 134 B.R. 499, 505 (Bankr. S.D.N.Y. 1991). A compromise is deemed reasonable provided it does not fall[] below the lowest point in the range of reasonableness. In re Pennsylvania Truck Lines, Inc., 150 B.R. 595, 598 (E.D. Pa. 1992), aff d without op., 8 F.3d 812 (3d Cir. 1993); In re W.T. Grant Co., 699 F.2d 599, 608 (2d Cir. 1983). Generally, a proposed settlement will be approved as long as it clears this low threshold of reasonableness. See In re Geller, 74 B.R. 685, 688 (Bankr. E.D. Pa. 1987). 24. An analysis of these four factors clearly demonstrates that the Settlement Agreement is fair, reasonable, and in the interest of the estate, and therefore should be approved. 25. The standards applicable to the approval of the Settlement Agreement are clearly satisfied for the reasons stated herein. WorldCom has determined in the exercise of its sound business judgment that consummation of the Settlement Agreement under the terms set forth therein is in the best interest of its estate and creditors. Waiver of Memorandum of Law 26. Pursuant to Rule (b) of the Local Bankruptcy Rules for the Southern District of New York, because the relevant authorities have been cited herein and there are no novel issues of law presented herein, WorldCom requests the court waive the requirement that WorldCom file a separate memorandum of law in support of this motion.

10 Notice 27. WorldCom has provided notice of this motion to: (i) all parties on the Service List maintained by the Debtors pursuant to the Case Management Order entered in this case, as amended, in the manner prescribed therein; and (ii) the DOJ, the GSA and the Relator. WorldCom submits that, pursuant to the terms of the Case Management Order, and given the circumstances and the nature of the relief requested herein, no other or further notice is required. court. 28. No previous motion for the relief sought herein has been made to this or any other

11 Conclusion WHEREFORE, WorldCom, Inc. respectfully requests that the Court enter an order, substantially in the form annexed hereto as Exhibit 1, granting the relief requested herein and such other and further relief as the Court deems just. Dated: April 20, 2004 Of Counsel: Robert J. Mathias PIPER RUDNICK LLP Special Counsel to WorldCom, Inc Smith Avenue Baltimore, Maryland Telephone: (410) Facsimile: (410) /s/eric B. Miller Eric B. Miller (admitted pro hac) PIPER RUDNICK LLP 6225 Smith Avenue Baltimore, Maryland Telephone: (410) Facsimile: (410) Timothy W. Walsh (TW-7409) PIPER RUDNICK LLP 1251 Avenue of the Americas New York, New York Telephone: (212) Facsimile: (212) Special Counsel to WorldCom