Best Payphones, Inc.

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK

: Chapter 11 (Confirmed)
BEST PAY PHONES, INC., : Case no. 01-15472(SMB)

POSI-TRIAL FINDINGS OF FACT
AND CONCLUSIONS OF LAW

APPEARANCES:
ARNALL GOLDEN GREGORY LLP
Attomeys for Verizon New Y ork, Inc.

171 17" Street - Suite 2100
Atlanta, Georgia 30363

Darryl S. Laddin, Esq.
Of Counsel

MAY NE MILLER, ESQ.
Attomey for Debtor

P.O. Box 8050 G.P.O.
New Y ork, New Y ork 10116

STUART M. BERNSTEIN
Chief United States Bankruptcy J udge:

This opinion relates to the August 22, 2007 trial of an issue remanded by the
District Court, and concems the construction of the setoff provisions contained in a
settlement agreement between the debtor, Best Payphones, Inc. (“Best”) and Verizon
New Y ork, Inc. (“Verizon”). For the reasons discussed below, the Court concludes that it
properly applied the setoff provisions in its earlier decision, and Verizon’ s withdrawal of

the balance of its claim moots Best’ s remaining setoff claims.

BACKGROUND1
A. 	The Initial Bankruptcy Court Litigation
The background leading up to the trial is set forth in this Court’s Opinion
Resolving Debtor’s Objection To Claim No. 12 Filed By Verizon New York Inc., dated
November 4, 2005 (“Bankruptcy Court Opinion”) (ECF Doc. # 456) and the District
Court’s decision on appeal, In re Best Payphones, Inc., No. 05 Civ. 6531(GEL), 2006
WL 647618 (S.D.N.Y. Mar. 14, 2006) (“District Court Opinion”). Familiarity with each
is assumed. In brief, Best was formerly engaged in the business of owning and operating
public pay telephones. It filed this chapter 11 case on October 23, 2001, and confirmed a
100% plan (the “Plan”) in December 2002. The Plan required Best to escrow the funds
needed to pay the disputed claims, pending the resolution of those disputes. Larry Glick,
Esq. acted as the escrow agent.2
One of the disputed claims belonged to Verizon. Verizon had filed a claim in the
sum of $75,962.14, reflecting unpaid prepetition phone charges, and Best had objected to
it. Best’s objection contended, inter alia, that Verizon had injured Best in a variety of
ways, and as a result, Verizon owed Best more than Best owed Verizon. Significantly,
Best did not seek any affirmative relief beyond expungement of the Verizon claim. Thus,
if Best prevailed, Verizon would not receive a distribution under the Plan, but Best would
not receive any further relief, such as a payment, from Verizon. Best escrowed the full
amount of Verizon’s disputed claim, nearly $76,000.
1 	In this opinion, “Tr.” refers to the Corrected Transcript of Hearing Held on 8/22/07 (ECF Doc. #
703), and “VX” refers to Verizon’s trial exhibits. Best offered one exhibit at trial, but it was not relevant to
the disposition of the dispute, and is not referred to in this opinion.
2 	Glick may have been misidentified in prior opinions as Best’s attorney. He represented Michael
Chaite, Best’s sole shareholder and a co-proponent of the plan. Mayne Miller, Esq. represented Best.
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The Court decided to liquidate the Verizon claim before addressing any of Best’s
setoffs, and conducted a trial on April 20, 2005. By then, Verizon had voluntarily
reduced its claim to $35,307.76. After hearing the witnesses and considering the
documentary evidence, the Court dictated a decision into the record allowing the Verizon
claim in the reduced amount. To understand what happened next, it is necessary to take a
step back.
At the same time that the bankruptcy case was going forward, Best and Verizon
were also involved in proceedings before the New York State Public Service Commission
(“PSC”). The dispute concerned municipal surcharge payments incorrectly billed to and
paid by Best. Best claimed it was entitled to a refund. (See Tr. at 11.) The PSC entered
an Order Granting Partial Refunds, which gave Best some but not all that it was seeking.
(See id. at 12.) As a result, it filed an Article 78 proceeding in state court to review the
PSC decision. (Id.)
In the course of that litigation, Verizon and Best entered into a Stipulation, dated
September 19, 2003 (the “Stipulation”). The Stipulation fixed Best’s refund claim at
$25,285.08, but did not require Verizon to pay it right away, if ever. Paragraph 2 of the
Stipulation provided:
By this Stipulation, Verizon agrees that Best Payphones’ escrow
agent in its bankruptcy case ... may release to Best Payphones $25,285.08
from amounts being held in escrow on Verizon’s behalf. If it is
determined at some later date by the Bankruptcy Court that the total
amount of Verizon’s prepetition charges owed by Best Payphones to
Verizon for any period prior to October 23, 2001 (the “Verizon Prepetition
Charges”) is less than $25,285.08, Verizon will pay directly to Best
Payphones the difference between (x) $25,285.08, less (y) the total
amount of the Verizon Prepetition Charges, plus 4% interest per annum
accruing from the date that is 10 days from the date of this Stipulation,
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within 10 days of the entry of a final, non-appealable Order determining
the amount of the Verizon Prepetition Charges.
(VX 17) (emphasis added.) In other words, payment would await the entry of a final,
non-appealable order by this Court determining the amount of “Verizon’s Prepetition
Charges,” a defined term. If the charges were less than $25,285.08, Verizon would pay
the difference to Best.
After its proof of claim was liquidated in this Court at the April 20, 2005 trial,
Verizon maintained that the $25,285.08 refund claim should be setoff against its
liquidated claim, leaving an unpaid balance of approximately $10,000. The Court agreed.
The order dated May 4, 2005 (the “May Order”)(ECF Doc. # 405), fixed Verizon’s claim
in the amount of $35,307.76 and setoff $25,285.08, leaving a “Remaining Claim
Amount” of $10,102.68, subject, however, “to setoff claims to the extent such setoff
claims are valid and were properly raised by the Debtor in the Objection.”
The parties continued to contest whether Best had any other valid setoffs, and in
the course of those proceedings, Best identified two: a claim relating to “dial around
compensation” and another claim concerning Verizon’s negligent handling of
“migration” orders when Best switched local phone carriers. Verizon decided that it was
not worth litigating the setoffs. Consequently, it withdrew the balance of its claim,
zeroing it out, and argued that the withdrawal of the balance of the claim mooted the
setoff litigation. Best disagreed, contending that it was entitled to liquidate its remaining
setoffs in the Bankruptcy Court. Agreeing with Verizon, the Court entered an order on
November 4, 2005, which terminated the litigation, and preserved Best’s right to payment
under the Stipulation if the order fixing Verizon’s claim was modified or reversed on
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appeal. (ECF Doc. # 457.) Best also filed a notice of appeal from the November 4, 2005
order.
B. 	The District Court Appeals
The two appeals were consolidated before District Judge Lynch. The District
Court affirmed the portion of the May Order that liquidated Verizon’s claim in the sum of
$35,307.76, but reversed and remanded on the question of how to apply the setoff
provisions in the Stipulation. As noted, the Stipulation required Verizon to pay Best the
difference between $25,285.08 and “total amount of Verizon’s prepetition charges owed
by Best Payphones to Verizon for any period prior to October 23, 2001 (the “Verizon
Prepetition Charges”) . . . within 10 days of the entry of a final, non-appealable Order
determining the amount of the Verizon Prepetition Charges.” Judge Lynch concluded
that the setoff provision was ambiguous. Specifically, “Verizon Prepetition Charges”
could have two meanings. First, it could simply refer to the unpaid usage and other
charges identified in Verizon’s proof of claim. Under this interpretation, the order of
proceedings would be the following: (1) liquidate the Verizon claim, (2) apply the
Stipulation setoff, and (3) liquidate the other setoff claims to the extent necessary. This is
what I did. After determining the allowed amount of the Verizon charges, I setoff the
$25,285.08. Once Verizon withdrew the balance of its claim, the remaining setoffs
became moot.
Second, “Verizon Prepetition Charges” could refer to the allowed amount of
Verizon’s claim, net of all other offsets. Under this interpretation, this Court would have
to (1) liquidate the Verizon claim, (2) liquidate the remaining offsets, and (3) then apply
the Stipulation setoff. If the other setoffs reduced the Verizon claim below $25,285.08,
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Best would be entitled to a payment under the Stipulation for the difference. The second
interpretation was the only one that held out the possibility of an affirmative recovery by
Best.
Judge Lynch remanded the issue to this Court for the purpose of conducting
additional proceedings to resolve the ambiguity.3 The District Court entered a single
judgment in both appeals on March 17, 2006. (ECF Doc. # 21, in In re Best Payphones,
Inc., No. 05 Civ. 6531 (S.D.N.Y.).) Best filed an appeal to the United States Court of
Appeals for the Second Circuit, (id., ECF Doc. # 22), but its appeal was dismissed on
June 1, 2007, based upon its default under the Court of Appeal’s scheduling order. (Id.,
ECF Doc. # 23.)
C. 	The Proceedings on Remand
The Court conducted a trial on August 22, 2007, at which it heard the testimony
of two witnesses, Michael Chaite and Thomas Farrelly, and received numerous
documents into evidence. The trial disclosed the following regarding the Stipulation:
Even after the PSC had issued its Order Granting Partial Refund, the parties
apparently disputed the actual amount of the refund. They resolved their dispute in
September 2003, and sought to memorialize the resolution in a written stipulation.
3 Best’s post-trial brief indicates that it has withdrawn the municipal surcharge refund from its
objection to Verizon’s claim, and apparently reasons that since the refund claim is no longer before this
Court, I must decide the other setoff claims. (See Proposed Findings of Fact and Conclusions of Law
Retrial of Effect of Stipulation With New York State Public Service Commission, dated Sept. 20, 2007, at
4) (“Any contention that since Best included the municipal surcharge in its Objection meant that the
amount of the Stipulation was a part of the total setoff claim in the Objection evaporated when Best
withdrew, without objection, that element of its Objection and proceeded to attempt to try its setoffs based
on DAC and faulty migration.”)(ECF Doc. # 700.)
This is utter nonsense, assuming it is even true. Best did not mention at the trial that it had
withdrawn the right to setoff the municipal overcharge refund claim. But even if Best withdraws the refund
claim from its objection, it is still bound by the Stipulation.
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Farrelly, Verizon’s in-house counsel, and Darryl Laddin, Esq., its outside counsel,
represented Verizon during those negotiations. Michael Chaite, Best’s president,
represented Best, and Diane T. Dean, Esq., a PSC assistant counsel, facilitated the
negotiations. Most of the negotiations were conducted through e-mail. (See Tr. at 23,
70.)
Initially, the proposed stipulation drafted by Ms. Dean simply liquidated the
overcharge claim at $25,285.08, and required Verizon to pay it. 4 (VX 1.) This was
unacceptable to Verizon. Its claim in the bankruptcy exceeded the refund, and Verizon
objected to paying Best anything while Best still owed Verizon money. (See Tr. at 66,
72, 74.) Verizon proposed instead to hold on to the refund until the Court decided the
dispute surrounding its proof of claim.
Verizon’s proposal triggered two concerns by Best. The first involved interest
rates, and is not germane. The second is. Best had escrowed the full amount of the
disputed claims with Glick. Verizon’s approximate $76,000 claim was, therefore,
already fully secured. On September 17, 2003, Chaite sent an e-mail,5 (VX 4), to Darryl
Laddin, Esq., Verizon’s outside counsel, complaining that it was unfair for Verizon to
have the security of both the bankruptcy escrow and the right to setoff the $25,285.08. In
essence, this amounted to double security for the same debt:
4 	The draft stipulation also included two paragraphs (paragraphs 3 and 4) that, in general, stated that
the stipulation did not constitute a waiver by either party of their other rights. (Tr. at 40.) These clauses
are not relevant to the pending dispute.
5 	The sender of the e-mail is identified by the address “Bpayphones101@aol.com,” Best’s e-mail
address. (Tr. at 50-51.) The e-mail was sent to Mr. Laddin, and copies were sent to Diane Dean, Thomas
Farrelly and to “Waywilman@aol.com,” the e-mail address of Mayne Miller, Esq., Best’s attorney. I
assume that the author was Michael Chaite, the president and sole shareholder of Best. See In re Best
Payphones, Inc., No. 01-15472 (SMB), 2007 WL 1388103, at *1 (Bankr. S.D.N.Y. May 08, 2007).
Chaite was the only Best employee directly involved in the negotiations with Verizon.
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[T]he issue of Verizon already having 100% of its stated claim, along with
an allowance for interest, in Mr. Glick’s account remains unaddressed.
Verizon has already commented or admitted that its actual claim is at least
somewhat less than the amount on its proof of claim. If the amount
relating to the Municipal Surcharge is also allowed to be put in escrow,
Verizon will have far greater than 100% of its stated claim, which I have
said is substantially, if not, completely overstated.
(VX 4.)
Ms. Dean attempted another redraft that, she thought, met each party’s concerns.
In substance, Verizon could hold on to the refund, the bankruptcy escrow agent would
release a like amount from his escrow to Best, and the payment of the refund claim would
await further proceedings between Verizon and Best in this or another court. The balance
of ¶ 2 now stated:
By this Stipulation, Verizon agrees that Best Payphones’ escrow
agent in Bankruptcy may release to Best Payphones $25,285.08 from the
amounts being held in escrow on Verizon’s behalf. If it is determined at
some later date, by the Bankruptcy Court or some other judicial forum,
that Best Payphones in fact does not owe Verizon the funds being held in
escrow on Verizon’s behalf, Verizon will pay directly to Best Payphones
the $25,285.08 within 10 days.
(VX 4.)
Farrelly categorically rejected the language. In his view, the Stipulation was
intended to deal with two amounts that were fairly straightforward and easily
determinable: Verizon’s unpaid prepetition charges, i.e., its unpaid bills, and the
municipal surcharge refund. (Tr. at 47-48.) He was concerned that the language could be
interpreted to cover more than just these two amounts, and wanted to nail down his
understanding. (See Tr. at 48.)
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Verizon redrafted ¶ 2, interjecting language that restricted the setoff to Verizon’s
unpaid prepetition charges:
If it is determined at some later date by the Bankruptcy Court that the total
amount of Verizon’s prepetition charges owed by Best Payphones to
Verizon for the period prior to October 23, 2001 (the “Verizon Prepetition
Charges”) is less than $25,285.08, Verizon will pay directly to Best the
difference between (x) $25,285.08, less (y) the total amount of the Verizon
Prepetition Charges, within 10 days of entry of a final, non-appealable
order determining the amount of the Verizon Prepetition Charges.
(VX 5.) Farrelly intended “Verizon Prepetition Charges” to refer to the charges that Best
had incurred but not paid for Verizon’s services. (See Tr. at 72-73.) If the refund
exceeded the allowed amount of Verizon’s prepetition charges, Verizon would pay the
difference to Best.
The parties exchanged several more drafts, (see VX 6-9, 12, 14), but the
substance of paragraph 2 did not change: if this Court determined that “the total amount
of Verizon’s prepetition charges” was less than $25,285.08, Verizon would pay Best the
difference within 10 days of a “final, non-appealable order.” The Stipulation was signed
on September 19, 2003, after a negotiation process that lasted not much more than three
days.
DISCUSSION
The Stipulation is a contract, and the rules governing the interpretation of a
contract are familiar. The primary objective is to give effect to the parties’ intent. Sayers
v. Rochester Tel. Corp. Supplemental Mgmt. Pension Plan, 7 F.3d 1091, 1094 (2d Cir.
1993); Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992).
Where the parties’ intent is not plain from the language they used, a court may look to the
objective manifestations of intent gathered from the parties’ words and deeds. Brown
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Bros. Elec. Contractors, Inc. v. Beam Construction Corp., 361 N.E.2d 999, 1001 (N.Y.
1977); Nycal Corp. v. Inoco PLC, 988 F. Supp. 296, 301 (S.D.N.Y. 1997). “The secret
or subjective intent of the parties is irrelevant.” Klos v. Polskie Linie Lotnicze, 133 F.3d
164, 168 (2d Cir. 1997).
The principal ambiguity in ¶ 2 concerns the phrase “Verizon Prepetition
Charges,” and whether, as Best argues, it referred to Verizon’s allowed bankruptcy claim,
net of all setoffs. A critical question, in the Court’s view, was whether anyone even
mentioned Best’s other setoffs during the negotiations. Chaite’s testimony was
inconsistent. He first testified that he did not recall any discussions about Best’s other
setoff claims during the negotiations. (Tr. at 23-24.) He subsequently reversed himself,
and testified that he discussed the other setoffs with Darryl Laddin, (Tr. at 24-27), and
understood that the $25,000 would be applied only after all of the setoffs were resolved.
(Tr. at 26-27.)
Farrelly’s recollection was much clearer. He testified that the only two amounts
ever discussed during the negotiations involved Verizon’s unpaid charges for the services
provided to Best and the municipal surcharge refund. (See Tr. at 47-48, 56, 60, 62, 69,
72-73.). No one ever suggested that the “Verizon Prepetition Charges” would be subject
to reduction for any other reason. (Tr. at 73.) Farrelly was aware that Best had setoff
claims against Verizon, but the Stipulation was not intended to address those other
claims. (Tr. at 69-70.)
Having had the opportunity to observe the witnesses and consider their demeanor,
I believe Farrelly. The parties were focusing on two amounts when they negotiated the
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Stipulation. The “Verizon Prepetition Charges” referred to the unpaid amounts that Best
owed for using Verizon’s services – Verizon’s unpaid bills. Indeed, this is the natural
reading of the reference to “charges.” The charges were subject to only one setoff under
the Stipulation – the $25,285.08 municipal surcharge refund. The parties never discussed
any other reductions.
I find, in this regard, that Chaite’s contrary (and equivocal) testimony was not
credible, and I discount it. This finding is not limited to the impression he made while
testifying during the trial. In contrast to Farrelly, Chaite did not give any reason, much
less any evidence, to explain why the parties would understand “unpaid charges” to
encompass a reduction for unrelated, unliquidated counterclaims, such as those arising
from Best’s “migration” claims.
Chaite’s September 17, 2003 e-mail, quoted above, also undercuts his testimony.
Chaite was concerned about the double security, and wanted to release $25,285.08 from
the escrowed sums held by Glick. Chaite argued that Verizon had filed a $76,000 claim
but “already commented or admitted that its actual claim is at least somewhat less than
the amount of its proof of claim.” He then went right to the double escrow issue, noting
that “if the [$25,285.08] is also allowed to be put in escrow, Verizon will have far greater
than 100% of its stated claim” which was overstated.
If the other setoffs were on Chaite’s mind, one would think that Chaite would
have mentioned them as an additional reason to release funds from the bankruptcy
escrow. Chaite never said to Verizon, in words or substance, “your claim is overstated
and will be reduced by the other offsets before we even get to the escrow.” Instead, Best
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focused solely on the overstated amount of the claim, and the availability of the
bankruptcy escrow to pay that claim.
Best also relies heavily on the phrase “final, non-appealable Order” that appears
in ¶ 2 of the Stipulation. According to ¶ 2, the setoff would be triggered by “a final, non-
appealable Order determining the amount of the Verizon Prepetition Charges.” Best
contends that none of the parties knew when they signed the Stipulation that I would
separately try the amount of Verizon’s disputed claim and Best’s setoffs. Hence, the
reference to a “final, non-appealable Order” fixing the “Verizon Prepetition Charges” had
to refer to an order that adjudicated all of the objections, including the setoffs. Until then,
the piecemeal determination of the issues would be interlocutory.
Best may be correct as a matter of federal procedure, but that is not the question.
Rather, the question is what the parties meant when they referred to a “final, non-
appealable Order.” Farrelly, an attorney, testified that he understood it to refer to what
they had been discussing, the liquidation of Verizon’s unpaid charges. (Tr. at 78.) It was
not intended to reflect any other setoffs. (Tr. at 79.) Chaite is a layman who negotiated
the Stipulation on Best’s behalf, and offered no evidence, other than self-serving
testimony, (see Tr. at 13), that he understood the phrase to have any particular meaning.
Moreover, they could not have intended “final, non-appealable Order” to refer to one
entered after the resolution of the other setoffs because the resolution of the other offsets
never entered into their negotiations.
In addition, Best’s own actions contravene the meaning it now ascribes to “final,
non-appealable Order.” Best filed and thereafter prosecuted an appeal from the May
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Order. The May Order liquidated the “Verizon Prepetition Charges,” without regard to
any setoffs other than the municipal surcharge refund. It did not “finally” adjudicate the
allowed amount of Verizon’s claim because it recognized the possibility of additional
setoffs. In short, it was precisely the type of order that Best now argues was non-final
and non-appealable. Yet Best apparently understood the May Order to be final and
appealable because it filed and prosecuted an appeal from it. 6
In conclusion, the parties never intended to setoff the $25,285.08 refund against
any amount other than Verizon’s claim for unpaid charges. They did not intend that
Verizon’s claim would be subject to reduction based on other setoffs before the refund
was applied. Once the refund was setoff against the $35,307.76 due on account of
Verizon’s Prepetition Charges, and Verizon withdrew the balance of its claim, the
balance of Best’s objection to that claim, including its setoffs, became moot.
The foregoing constitutes the Court’s findings of fact and conclusions of law.
FED. R. CIV. P. 52(a). Settle an order on notice.
Dated: New York, New York
October 17, 2007
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
Chief United States Bankruptcy Judge
6 	In light of the Second Circuit’s disposition of Best’s appeal, the May Order may be final and non-
appealable at this point.
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