INDEFEASIBLE RIGHTS OF USE IN A REVIVED TELECOMMUNICATIONS INDUSTRY

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333 INDEFEASIBLE RIGHTS OF USE IN A REVIVED TELECOMMUNICATIONS INDUSTRY: REVISITING THE TREATMENT OF IRUS IN BANKRUPTCY PROCEEDINGS By Charles A. Rohe and Richard H. Agins Charles A.

Rohe is o: counsel and Richard H. Agins is an associate at the rm o: Bingham McCutchen LLP. Mr.

Rohe and Mr. Agins grate:ully acknowledge the contribution o: Jonathan B. Alter, a partner in the rm o: Bingham McCutchen LLP, without whose assistance this article could not have been completed.

This article updates the observations of Michael J. Lichtenstein & Charles A. Rohe in The Treatment of IRUs in Bankruptcy Proceedings, J.

Bankr. L. & Prac., (Nov./Dec.

2001). I. INTRODUCTION The Telecommunications Act o: 1996 released a burst o: entrepreneurial activity in the U.S.

Whereas once the telecommunications industry had been dominated by con- servative monopolies, the 1996 Act ushered in an era o: grand new telecom ventures. Between 1996 and 1999, annual capital spending by telecommunications companies in the U.S. increased :rom $42 billion to $82 billion.

1 Internationally, telecommunica- tions market revenue more than doubled between 1990 and 2000, increasing to $1.16 trillion. 2 However, by the end o: 1999, reality was setting in. Some o: the telecom- munications providers that had been rst to enter the ... more. less.

competitive marketplace were beginning to run out o: money, never having turned a pro t. 3 In May 2000, Time Warner Telecom acquired bankrupt GST Telecommunications :or $450 million, just 70% o: the book value o: the company 9s plant, property, and equipment. 4 This raised an ominous sign that the industry might be weaker than previously believed, a :act that was borne out in July 2002, when WorldCom, Inc., the nation 9s second-largest long- distance company, led :or Chapter 11 bankruptcy protection. 5 In the years immediately :ollowing 2000, the telecommunications industry was beset by a signi cant number o: bankruptcies. Many bankruptcy proceedings involved the telecom service providers who owned the ber optic networks that increasingly carried the nation 9s essential communications. Telecommunications carriers, some that were household names and others that were relatively unknown, had constructed ber optic networks across continents and under oceans and then traded capacity on those networks with each other. 6 A major portion o: the capacity was, and continues to be, conveyed by a legal vehicle unique to the telecommunications industry, called N ortoN A NNuAl S urvey of B ANkruptcy l Aw 334 an inde:easible right o: use agreement, or IRU. An IRU involves the contractual grant o: usage rights in a telecommunication :acility. As many o: the grantors o: IRUs led :or bankruptcy in the early part o: this decade, courts were :aced with determining whether IRUs were executory contracts under section 365 o: the U.S. Bankruptcy Code 7 or should be treated as some :orm o: ownership. The consequences o: a determination by an bankruptcy court that an IRU is or is not an executory contract may have a signi cant impact on the parties to the contract. The importance o: this determination arises :rom the :act that executory contracts are not only subject to being assumed by a debtor or trustee in bankruptcy but also may be rejected by the trustee o: the debtor 9s estate under section 365 o: the Bankruptcy Code. For example, a bankrupt grantor o: an IRU may claim ownership o: the network :acility underlying the IRU but seek to reject the IRU as an executory contract. I: suc- cess:ul in that attempt, the grantor would be treated by the bankruptcy court as having breached the contract, and the bankruptcy estate would be liable to the grantee on the basis o: a claim that would share in distributions on a parity with all prepetition un- secured claims against the debtor. 8 However, the grantee o: the IRU could be dispos- sessed o: the IRU 9s capacity, with severe adverse consequences to the grantee and its customers. On the other hand, contracts that are not deemed to be executory would not be subject to rejection, and the owner o: such an IRU might enjoy rights o: an owner. Even as telecommunications bankruptcy cases began to move through the courts, by 2001, no court had ever addressed the executory character o: IRUs in a reported case. 9 Even now, case law is limited, although one decision, WorldCom, Inc. v. PPL- Prism, LLC , 10 :rom the U.S. Bankruptcy Court :or the Southern District o: New York, has begun to answer the questions o: practitioners. This article presents an analysis o: the WorldCom v. PPLPrism case, as well as legal commentary that has discussed IRUs in recent years. 11 In 2008, the telecommunications industry is substantially more stable than it was in the rst hal: o: this decade. Many companies are now contemplating ber optic network expansions, and investors are considering new business plans. With the ex- plosion o: communications tra: c on the Internet and the continuing globalization o: society, undersea cables are reaching capacity, and major expansions o: these :acilities will be needed in the near :uture. There:ore, as growth resumes in the telecommunica- tions industry, new IRUs will be dra:ted and signed. To avoid the uncertainties o: the past, this article re-examines IRUs and the risks related to a bankruptcy, suggests how the purchasers o: IRUs may be able to minimize bankruptcy risks, and tries to antici- pate how IRUs will be treated by bankruptcy courts in the :uture. II. DEFINING INDEFEASIBLE RIGHTS OF USE Gene a b cha a 3te 9st 9 3s An inde:easible right o: use is one o: the most common methods o: conveying as- sets in the telecommunications industry, and it combines :eatures o: a sale, a lease, and a service contract. IRUs o:ten involve the conveying o: conduit or dark ber but may also convey high-bandwidth circuits. IRUs have also been used to convey capital I NdefeASIBle r IghtS of u Se IN A r evIved t elecommuNIcAtIoNS I NduStry 335 interests in multipurpose satellite earth stations. 12 An IRU interest is a :orm o: ac- quired capital in which the grantee possesses an exclusive and irrevocable right to use the :acility :or all, or almost all, o: the :acility 9s use:ul li:e. 13 Every IRU agreement is unique, but the typical IRU agreement con:ers usage rights on the purchaser, and actual title to and control o: the :acility remains with the grantor. Terms o: IRU agree- ments di::er substantially beyond those two :actors. While many IRUs are structured such that the grantor retains ownership, others provide that the grantee receives an un- divided interest in the :acility. IRUs that provide :or the grantee to have an ownership interest sometimes postpone the conveyance until the agreement nears its expiration. Many IRUs provide that the grantee has an option to purchase the underlying asset at the end o: the IRU 9s term, usually :or a nominal amount, but that :eature is :ar :rom universal. It is also common :or IRU agreements to recite that the grantor receives cbene cial title and interest d or even cequitable title. d 14 Whichever party holds actual title, the IRU purchaser obtains a right to use the :acility, in conjunction with others, and is allowed to treat its investment in the :acility as a capital cost, rather than as an expense. 15 Most o:ten, an IRU grants most o: the cindicia o: ownership d while not conveying actual control o: the :acility. 16 In many cases, all o: the consideration :or the grant o: an IRU is paid upon de- livery o: the asset. Separate provisions in the IRU agreement, or perhaps a separate document, o:ten require the grantee to pay periodically :or operations and mainte- nance (O&M) services. Perhaps refecting recent concerns over grantors 9 long-term solvency, many buyers are now insisting that payment :or the IRU be incremental, in addition to the O&M payments. In such agreements, the minimum up-:ront payment must usually be at least 25% o: the amount due under the contract. I: the grantor conveys an IRU and receives only partial payment o: the consideration, the grantor ordinarily les a lien on the asset, requiring the grantee to sign a security agreement in connection with the IRU. 17 The popularity o: IRUs stems :rom various motives o: the grantors and grantees. A telecommunications company that constructs its own :acility is o:ten called the cdeveloper. d The developer has the advantage o: being able to design a network that is closely tailored to its own needs, while at the same time earning a pro t by convey- ing excess capacity to other carriers. O:ten the developer identi es the purchasers o: capacity be:ore the :acility is even built, in which case the prospective users o: the :acility enter into IRU agreements in which they agree to make incremental payments as the :acility is completed, helping the developer nance the project. In the case o: undersea cables, it is common :or the developer to organize a consortium o: :ellow de- velopers, sometimes re:erred to as c:ounders. d 18 The developer and :ounders enter into a construction and management agreement (C&MA) that allocates to each o: them a share o: the cables 9 total capacity. I: a :ounder cannot utilize its entire share, then that :ounder typically becomes a grantor o: IRUs to subordinate users. One o: the rst re:erences to an IRU was in the Federal Communications Commis- sion 9s cTAT-4 d decision, authorizing a transatlantic telephone cable. 19 Prior to TAT-4, competitive providers o: overseas data communications were required to lease cir- cuits :rom the owners o: transatlantic cables, usually AT&T or a :oreign telephone N ortoN A NNuAl S urvey of B ANkruptcy l Aw 336 monopoly. However, in 1964, the FCC concluded that IRUs would :acilitate market entry by new competitors, thereby serving the public interest. 20 Unlike the lease ar- rangements that had previously subjected competitive carriers to substantial rental expense, IRUs trans:ormed these carriers into owners. 21 IRUs assured their owners o: long-term availability o: :acilities at predictable costs. The concept was so popular that be:ore long IRUs were no longer con ned to the world o: undersea cables, and the FCC noted in 1993 that the IRU concept had been expanded to include the conveyance o: circuitry :rom one domestic U.S. carrier to another. 22 An IRU allows the holder to negotiate long-term availability o: a xed amount o: capacity at a set price, and investments in IRUs are typically capitalized. 23 Most dark ber IRUs have a duration o: at least 20 years, and undersea cable IRUs are o:ten 10 years in length or longer. Traditionally, a long-term IRU has been thought o: as ad- vantageous to the buyer because it relieves the pressure o: price uncertainty. However, some analysts have pointed to constant fuctuations in demand and suggested that shorter-term leases may be pre:erable to IRUs in some cases. 24 In :act, it is reported that some private cable systems have abandoned the IRU concept entirely and sell only short leases, o:ten lasting just two to three years. 25 For the purchaser who :avors an IRU because it can be recognized as a capital asset but does not desire a 10 to 20- year term, there are several bases upon which to consider shortening the length. For tax purposes, the critical :actor is that an IRU extend throughout the estimated li:e o: the asset at the time o: the IRU purchase. 26 In the case o: capacity IRUs, the economic li:e o: the IRU is dependent not only on the ber optic cable but also the equipment that transmits the electronic impulses. The economic li:e o: that equipment is almost certainly much less than 20 years. Even in the case o: a dark ber IRU, it is impossible to know :or certain how long a cable can be used economically. 27 As ber optic cable becomes increasingly e: cient, purchasing capacity on a new cable could become more economical than paying the operations and maintenance :ees on an older :acil- ity. 28 There:ore, subject to advice :rom tax and accounting pro:essionals, it may be possible to argue that the :air market value o: an IRU is zero a:ter much less than 20 years, and the term o: some IRUs need not be as long as previously believed. Unless insulation :rom price fuctuations is the buyer or seller 9s highest priority, either should be willing to consider setting a term :or the IRU that is less than 20 years. capa 3 9ty irUs o da k F 9be As originally conceived, IRUs in undersea cables had the appearance o: service agreements, although they :requently conveyed to the grantee an undivided interest in the cable itsel:. I: the cable was laid in any private or public land, submarine cable IRUs :requently were conveyed with an undivided interest in the right-o:-way, al- though such land was usually a very small part o: a submarine cable :acility. The purchaser o: an IRU received an allocation o: a cable 9s total capacity over which voice and data communications could be transmitted, expressed in Hertz (cycles per second in an analog transmission) or bits per second (in a digital network). As the concept o: IRUs spread, some IRU agreements began to look more like sales o: equipment or xtures. For example, IRUs have become one o: the primary I NdefeASIBle r IghtS of u Se IN A r evIved t elecommuNIcAtIoNS I NduStry 337 devices :or conveying dark ber, the individual optical strands over which communi- cations can be transmitted by laser technology. In dark ber IRU arrangements, the developer o: a cable project o:ten installs up to 864 strands o: ber and then conveys those strands in pairs to telecommunications carriers and other high-volume users. The typical dark ber IRU conveys a number o: ber strands between two points along a speci c route, with the grantee usually having the right to drop and add bers at intermediate points along the route. Similarly, an IRU may be used to convey use o: conduits in which a service provider installs its own cabling. Recent years have seen a renewed interest in domestic IRUs that again resemble service agreements, owing to substantial advancements in technology. With the im- provements in e: ciency o: modern optical transmission equipment, most users do not require a :ull pair o: ber optic strands be dedicated to their exclusive use. Dense Wavelength Division Multiplexing (DWDM) enables just two strands o: ber optic cable to be divided into approximately 30 wavelength channels (also called lambdas), each o: which is capable o: carrying hundreds o: voice and data circuits. Whereas dark ber and conduit IRUs convey tangible things, the IRU that conveys clit d circuitry, such as lambdas, are more cmetaphysical. d 29 A dark ber or conduit IRU is measured in terms o: lineal :eet, multiplied by the number o: dark ber strands or ducts in the conduit system, but lit ber is measured by distance and its capacity to carry voice and data circuits. In digital communications, this carrying capacity is called bandwidth, and it is typically measured in bits per second. 30 In today 9s market, IRUs conveying lit capacity are usually called ccapacity IRUs, d clit ber IRUs, d or (in the case o: DWDM) cwave IRUs. d A capacity IRU is similar to the original concept o: a subma- rine cable IRU. However, an additional di::erence has evolved in that many IRUs are no longer con ned to a speci c route. A wave IRU may not guarantee the speci c route or in:rastructure over which the bandwidth will be transmitted, but it still identi- es the originating and terminating points. Some IRUs provide that title in the bers pass to the IRU grantee at the end o: the term. More common is a provision that the grantee has an option to acquire title to the asset :or a nominal sum. In the case o: options to acquire title, it is seldom the expec- tation o: either party that this conveyance at the end o: the term will actually occur, and the grantor is usually very care:ul to provide in the agreement that, whether or not the grantee exercises the option, the grantor has no :urther obligation with respect to the :acility. That is because the :acility is ordinarily subject to underlying right-o:-way agreements that may not be renewable and, i: renewed, would probably incur signi - cant cost. The intent underlying any IRU is :or the asset to be at or near the end o: its use:ul li:e at the end o: the term, so discussion o: trans:ers a:ter the term are ordinarily technical, :or accounting and tax purposes. III. THE BANKRUPTCY PROBLEM Bank upt 3y co 4e § 365 Section 365(a) o: the Bankruptcy Code provides that cthe trustee, subject to the court 9s approval, may assume or reject any executory contract or unexpired lease o: N ortoN A NNuAl S urvey of B ANkruptcy l Aw 338 the debtor. d 31 Under bankruptcy law, a contract is deemed executory i: per:ormance is due to some extent on both sides. 32 An executory contract has also been de ned as cone in which a party binds himsel: to do or not do a particular thing, whereas an executed contract is one in which the object o: the agreement is already per:ormed. d 33 In :act, the Bankruptcy Code does not de ne executory contract because Congress decided, when it revised the Code in 1978, that the meaning was already well under- stood. 34 It appears that in the courts where the issue has been decided, i: the contract is so :ar unper:ormed that the :ailure o: either party to complete per:ormance would constitute a material breach excusing the per:ormance o: the other, then the contract is executory. The Sixth Circuit, :or example, has stated that c[e]xecutory contracts involve obligations which continue into the :uture& Generally, they are agreements which include an obligation :or the debtor to do something in the :uture. d 35 I: an executory contract or unexpired lease is rejected under section 365 o: the Bankruptcy Code, the creditor who loses the bene t o: the agreement is entitled to le an unsecured claim :or damages caused by the rejection as a breach o: contract, which may be paid in whole or part depending on the amounts available :or distribution to unsecured creditors. However, most importantly, the creditor o: a rejected contract or lease has no way to compel the debtor to per:orm. Accordingly, a party that entered into an IRU with the expectation o: receiving long-term capacity could su::er dire business consequences. I: a contract is not deemed executory on the other hand, a trustee (or debtor-in-possession) does not have the option to reject the contract. 36 lega b commenta y Until recently, no U.S. bankruptcy court has squarely addressed the executory char- acter o: an IRU in a reported case, and commentators 9 articles were the only source o: guidance. 37 In :act, in spite o: the intense interest in the issue today, case law is still limited. To ll this void, secondary legal sources have attempted to determine the legal standing o: IRUs in bankruptcy proceedings, and one published decision :rom the U.S. Bankruptcy Court :or the Southern District o: New York is now available. In 2001, Michael J. Lichtenstein and Charles A. Rohe, a co-author o: the present article, addressed the issue o: whether IRUs are executory contracts subject to rejection under section 365 o: the U.S. Bankruptcy Code. 38 Their article, published in the Journal o: Bankruptcy Law and Practice, argued that a court decision should rest on a case-by- case assessment o: the speci c terms and conditions o: the IRU in question. 39 Like most commentators, Lichtenstein and Rohe noted that there is little consistency in how IRUs are dra:ted and that substantial di::erences exist in the length o: IRUs, the degree to which the grantor has ongoing obligations a:ter the initial conveyance, and whether the consideration is paid up :ront or incrementally throughout the IRU 9s term. Lichtenstein and Rohe noted in their article that while IRUs originated as a means to convey capacity on undersea cables, the concept o: IRUs had expanded over the years to include terrestrial :acilities, including lit ber IRUs, dark ber, and conduits. 40 Li- chtenstein and Rohe suggested that most conduit and dark ber IRUs, which involve conveyances o: tangible property, are c:airly easy to conceptualize as sales. d 41 However, I NdefeASIBle r IghtS of u Se IN A r evIved t elecommuNIcAtIoNS I NduStry 339 while they were con dent that care:ully cra:ted dark ber and conduit IRUs should be characterized as sales, Lichtenstein and Rohe were less certain about lit ber. In the context o: tax issues, acquisitions o: lit ber IRUs (also re:erred to as capac- ity IRUs) have been treated as purchases. Moreover, a dra:t Revenue Ruling, prepared in 1975 by the General Counsel 9s O: ce o: the Internal Revenue Service, equated an IRU to ownership o: electronic transmission channels. 42 Relying in part on those tax precedents, Lichtenstein and Rohe thought it likely that capacity IRUs were within the de nition o: property. They went on to consider, however, that capacity IRUs were also similar to leases and cited case law and commentators that had used the terms IRU and lease almost interchangeably. 43 However, Lichtenstein and Rohe argued that characterization o: an IRU as a lease need not result in its being characterized as an ex- ecutory contract, subject to rejection by a bankruptcy trustee. Rather, Lichtenstein and Rohe drew analogies to the numerous bankruptcy cases in which leases were :ound to be cdisguised d sales and security agreements, not subject to assumption or rejec- tion under section 365. 44 As Rohe and Lichtenstein advocated in the case o: IRUs, the leases :ound not to be executory contracts had been examined on a case-by-case ba- sis, taking into consideration the ceconomic reality o: the transaction d rather than its nominal :orm. 45 The :acts relevant to the court 9s decision should include: (1) whether the lessee 9s payment obligations are not subject to termination by the lessee during the term o: the obligation; (2) whether the lessee is bound to renew the lease :or the remaining economic li:e o: the goods or is bound to become the owner o: the goods; and (3) whether the purchase option price at the end o: the lease term is nominal. 46 Arun S. Subramanian 9s 2003 Columbia Law Review Note, Assessing the Rights of IRU Holders in Uncertain Times 47 was cited in WorldCom, Inc. v. PPL Prism, LLC :or its analysis o: the treatment o: IRUs in the wake o: the bursting o: the telecom bubble. 48 Subramanian 9s Note argues that bankruptcy courts should adopt the cspe- ci c assets test d to determine when an IRU should be treated as a trans:er o: property outside the ambit o: Bankruptcy Code § 365, as opposed to an executory contract, which may be assumed and assigned or, alternatively, rejected, by a debtor in bank- ruptcy. Subramanian explained that c[w]hen :aced with an IRU that identi es speci c assets to be devoted to the IRU holder :or a de nite term, bankruptcy courts should nd that a property interest in those assets has been conveyed. d 49 He noted that adop- tion o: this test would both reduce uncertainty about treatment o: IRUs in bankruptcy and would minimize the potentially devastating impact o: rejection on the telecom sector and its customers. 50 Subramanian observed that an IRU is an economically expedient device by which the grantor agrees to provide the grantee with the right to use speci c network bers, bandwidth, or a combination o: the two. He :urther explained the distinctions among cdark ber IRUs d (those in which just the raw ber pairs are conveyed and which it is the responsibility o: the grantee to energize subject to an ongoing maintenance agree- ment with the grantor or other third-party), clit ber IRUs d (in which a :ully :unctional number o: ber pairs is conveyed to the grantee), and capacity or cwave IRUs d (in which no speci c ber real estate is conveyed but rather the use o: a percentage o: ber bandwidth is granted), in terms o: how each o: these con:orms to established N ortoN A NNuAl S urvey of B ANkruptcy l Aw 340 norms o: property law. 51 Common to each o: these is a long-term conveyance o: the given property interest :or a term equal to substantially all o: the use:ul li:e o: the as- set, but because IRUs o:ten have the attributes o: both property trans:ers and leases or service contracts, either classi cation may be viable. 52 Subramanian observed that there generally are :our important :actors to consider regarding the conveyance o: a property interest: (1) use, (2) physical occupation, (3) control, and (4) economic possession. 53 He explained that, despite these attributes, much uncertainty clouds the legal treatment o: IRUs as property conveyances, as leases, or as service contracts. Clearly, :rom the vantage point o: the contracting party, classi cation o: an IRU will have substantial impact. For the grantor-debtor, the ability to reject the IRU as an executory contract may be desirable because it permits treatment as a general unsecured claim arising :rom breach o: contract, payable in bankruptcy dollars. 54 For the creditor-grantee, rejection o: the contract may signal the demise o: its business and the stranding o: its customers without telecom access. Accordingly, clarity in the treatment o: IRUs at the time o: contract execution is highly desirable. Subramanian 9s Note proposed that, in adopting a legal justi cation :or the cspeci c assets test, d courts should consider upon which party the burdens o: nancial risk rest and how, and to what extent, the rights o: use are apportioned. 55 Seen in this light, Sub- ramanian argued that dark ber and lit ber IRUs con:orm most closely to the grant o: speci c assets, while pure wave IRUs may more easily be analogized as a grant o: use decoupled :rom the trans:er o: speci c assets. 56 Further, speci c asset IRUs o:ten obligate the grantee :or taxes and other :ees assessed on the underlying assets, thus supporting the view that the IRU holder has an economic interest in such assets. 57 The Note considered how the payment terms o: the IRU may impact the property analysis and how retaining the obligation to pay :or service, operation, and maintenance costs o: the bers separately :rom the IRU may be construed as an incident o: ownership. 58 Next, the Note examined policy-based considerations militating :or 4or against 4 the treatment o: IRUs as property conveyances. The cdistributional d argument :ollows the classic view that the economic burden o: an enterprise 9s collapse should rest upon the party most able to bear it. By contrast, the cproceduralist d or ceconomic d view- point espouses that :ailing businesses may avail themselves o: either state or :ederal insolvency law, so that a debtor in distress can choose the legal regime that will most readily achieve its goals without regard to the e::ect o: such choice upon its creditors, in short, c:orum shopping. d 59 Subramanian noted that these opposing views probably cannot be resolved, but that the goal o: the Note was not necessarily to do so but rather to shed light on what a judge should do when there is a dilemma regarding classi ca- tion o: IRUs under nonbankruptcy law. 60 Finally, Subramanian analyzed the e::ects o: the allocation o: IRU rights upon the grantee, the grantor, and both providers and consumers within the telecom sector at large. He noted that classi cation o: IRUs as service contracts may chill technologi- cal development and the deployment o: innovative communications technologies and may, in :act, shrink bandwidth availability. 61 I NdefeASIBle r IghtS of u Se IN A r evIved t elecommuNIcAtIoNS I NduStry 341 wo b 4com, in 3. v. PPlP 9sm, llc The case WorldCom Inc. and MCI WorldCom Network Services, Inc. v. PPLPrism, LLC 62 o::ers an insight into the legal di: culties surrounding the characterization o: IRUs as property interests. MCI WorldCom Network Services, Inc. (WorldCom) en- tered into both an inde:easible right o: use agreement (IRU) and a maintenance agree- ment (the Maintenance Agreement) with Cambrian Communications, LLC covering six bers (the IRU Fibers) in the Baltimore area. WorldCom paid a one-time :ee o: $575,000 :or the IRU Fibers and a one-time :ee o: $216,000 :or call routine, preven- tive and reactive maintenance d and also agreed to :uture payments o: a cproportion- ate share d o: actual costs :or cunscheduled and emergency maintenance. d Cambrian subsequently led :or bankruptcy and, pursuant to an asset-purchase agreement, sold these bers, among other things, to PPLPrism, LLC (PPL). The asset-purchase agree- ment contained an exhibit providing that Cambrian would attempt to reject the IRU as an executory contract under Bankruptcy Code § 365 and would also alternatively seek additional compensation :rom WorldCom in exchange :or assuming the IRU and assigning it to PPL. 63 WorldCom claimed that PPL should allow WorldCom to access and use the IRU Fibers without additional charge, and PPL asserted that it had no ob- ligation to do so. Both parties led motions :or summary judgment. The Bankruptcy Court :or the Southern District o: New York granted WorldCom 9s motion and denied PPL 9s motion. 64 WorldCom moved the New York bankruptcy court :or a determination that the motion to reject the IRU and Maintenance Agreement violated the automatic stay in WorldCom 9s Chapter 11 cases. 65 The New York court held that Cambrian could not proceed with its rejection o: that portion o: the IRU under which Cambrian agreed to trans:er to WorldCom an exclusive bene cial ownership interest in and an inde:easible right o: use o: the IRU Fibers but rather only that portion o: the IRU and Maintenance Agreement under which WorldCom did not claim to hold an ownership interest in the IRU Fibers. Interestingly, the New York court did not at that time nally adjudicate the question o: whether WorldCom or Cambrian held the bene cial ownership interest in the IRU Fibers or whether the IRU agreement was an executory contract subject to Code § 365. 66 Consistent with this ruling, WorldCom and Cambrian entered into an understanding with respect to Cambrian 9s bankruptcy proceeding in the Virginia court preserving WorldCom 9s right to assert that the IRU was not executory and that the IRU Fibers could not be sold :ree o: WorldCom 9s interest. When the Virginia court approved the Asset-Purchase Agreement between Cambrian and PPL, it speci cally protected this understanding and preserved the issue :or :uture determination. 67 WorldCom subsequently sought declaratory judgment in both the Virginia court and the New York court that it had an exclusive, bene cial interest in the IRU Fi- bers. The Virginia court held, among other things, that Cambrian was deemed to have abandoned any right, title, interest, or claim to the IRU agreement and the related IRU Fibers. The New York court held that WorldCom had an IRU en:orceable against PPL, including a right to access the IRU Fibers :or the limited purpose o: enjoyment o: the IRU. 68 Central to the New York court 9s decision was its analysis o: WorldCom 9s contention that WorldCom had a property interest in 4not merely a contractual right N ortoN A NNuAl S urvey of B ANkruptcy l Aw 342 o: access to 4the IRU Fibers. WorldCom contended that both the language and the operation o: the IRU indicated a property interest. The IRU speci ed that WorldCom would be the legal owner o: the IRU Fibers in every practical way, right down to pay- ing taxes on them and accounting :or them on WorldCom 9s balance sheet. Further, WorldCom cited its right to purchase the IRU Fibers at the end o: their use:ul li:e :or the nominal sum o: $10. Interestingly, although WorldCom requested a declaration that the grant o: the IRU was not an executory contract, the court did not entertain that motion on the grounds that the issue was not be:ore the court. At the same time, the court declined to rule generally on the legal nature o: all IRUs. 69 Instead, the court engaged in an analysis o: the IRU in question, applied state law to determine the kind o: interest in the bers that WorldCom held, and ascertained that the interest had been preserved in the various transactions between WorldCom, Cambrian, and PPL. 70 The Bankruptcy Court :or the Southern District o: New York noted the IRU 9s con- veyance o: equitable title to WorldCom and observed that a c 8bene cial owner 9 may generally be recognized in equity as the owner o: something because use and title belong to that person, even though legal title may rest with someone else. d 71 The New York court noted :urther that while no court had yet determined the precise legal nature o: an IRU, some decisions and secondary sources provided guidance. 72 Ulti- mately, the court seemed persuaded by :act that the IRU at issue in the WorldCom case identi ed a cspeci c asset, d noting the c[t]he IRU Agreement precisely identi es the bers subject to the IRU. d 73 In the court 9s opinion, state law would hold an IRU such as WorldCom 9s to be closer to an easement or a lease than a mere license because o: spe- ci c premises that were occupied. 74 The court held that WorldCom 9s IRU represented an exclusive right to use speci c bers :or a determinate price and de nite duration or, more aptly, a sale :or a term o: years because cbut :or the ten-dollar payment neces- sary to acquire [legal] title at the end o: the agreement term, [WorldCom] prepaid :or the IRU& The relevant contractual provisions and property law principles converge to enable the Court to conclude that [WorldCom 9s] IRU is a property interest, not a mere contractual interest. d 75 The nal holding o: the court was crucial to WorldCom 9s practical ability to bene t :rom the decision in the case. There was no dispute that the Maintenance Agreement between Cambrian and WorldCom had been rejected. 76 Because the ability to provide maintenance on dark ber requires access to the cable, and because maintenance is essential, the mere recognition o: WorldCom 9s ownership without the right o: access would be meaningless. 77 In its arguments to the court, PPL contended that because PPL is a party neither to the IRU Agreement nor the Maintenance Agreement, World- Com 9s only claims were against Cambrian, not only :or rejection o: the Maintenance Agreement but also WorldCom 9s inability to have the bers maintained by someone other than PPL. In any event, PPL argued that WorldCom could not have the right to demand maintenance o: bers by PPL. 78 In what probably was a crucial :actor :avor- ing WorldCom 9s argument on this question, the original IRU between Cambrian and WorldCom speci cally gave WorldCom the right to per:orm maintenance at Cam- brian 9s sole expense i: Cambrian ever :ailed to timely respond to a service demand. I NdefeASIBle r IghtS of u Se IN A r evIved t elecommuNIcAtIoNS I NduStry 343 There:ore, WorldCom argued success:ully that PPL could not have acquired :rom Cambrian a right to exclude WorldCom entirely :rom access to its bers because Cam- brian never held that right. 79 In its nal decision, the court held that WorldCom 9s IRU represented a property interest in the dark bers, en:orceable against PPL even i: PPL was not a party to the IRU or the Maintenance Agreement. When Cambrian rejected the Maintenance Agreement, WorldCom had not only the right to an unsecured claim :or breach o: con- tract in Cambrian 9s bankruptcy case but also (and much more importantly) the right to access the IRU Fibers to per:orm maintenance on its own behal:, in connection with the enjoyment o: its property interest. 80 IV. DISCUSSION Contributing to the di: culty o: classi:ying the property interests conveyed by IRUs is the :act that they combine :eatures o: sales, leases, and service agreements. IRUs involve the conveyance o: conduit, dark ber, or carrying capacity (whether a lit ber IRU, capacity IRU, or wave IRU). Whatever its type, the telecommunications industry views an IRU interest as a :orm o: acquired capital in which the holder possesses an exclusive and irrevocable right to use the :acility :or essentially all o: the :acility 9s use:ul li:e. 81 Still, the resemblance o: all IRUs to executory contracts and unexpired leases can hardly be denied, thereby providing cause :or any reasonable purchaser o: an IRU to be wary. WorldCom v. PPLPrism was decided on the basis o: the court 9s determination that the particular dark ber IRU in question had created a property interest in the grantee, WorldCom. This decision rein:orces the belie:s expressed by commentators that con- duit and dark ber IRUs are the most likely to survive an attempt at rejection by the trustee o: the grantor in a bankruptcy proceeding. 82 Even armed with the WorldCom v. PPLPrism decision, purchasers o: dark ber IRUs should be cautious in dra:ting an IRU document because at the core o: the problem with IRUs is that no two o: them look alike. The :actors that were :ound to be characteristic o: a property interest in WorldCom v. PPLPrism may not exist in the next case to come be:ore a bankruptcy court. Complicating the analysis, questions o: property rights in bankruptcy courts are determined by state law. 83 WorldCom v. PPLPrism was decided on the basis o: New York law, but a court applying the laws o: a di::erent state might nd di::erent precedent to :ollow and reach a di::erent result. In general, Bankruptcy Code § 365 covers any executory contract or unexpired lease. 84 Several cases and commentators, particularly those concerned with accounting principles, have used the term clease d to describe an IRU. 85 For example, in dictum, the U.S. District Court :or the District o: Maryland has re:erred to IRUs as cleases o: parts o: the [carrier 9s] ber optic network. d 86 On close examination, even the World- Com court, when comparing WorldCom 9s ownership interest in the IRU Fibers to a license, :ound it ccloser to an easement or a lease. d 87 Having gotten so close to calling WorldCom 9s dark ber IRU a lease, the court might easily have gone on to examine it under Code § 365, but it :ound that question not to be at issue in the case. 88 N ortoN A NNuAl S urvey of B ANkruptcy l Aw 344 Under the assumption that any IRU, whether dark ber or a capacity IRU, may be examined under section 365 as a lease, it should be recognized that IRUs may be similar in nature to leases that are sometimes characterized (or recharacterized) by courts as secured transactions or capitalized leases. In numerous cases, courts have concluded that a clease d was actually a disguised security agreement and declined to apply section 365 to security agreements, even where those agreements have taken on the sur:ace :ormalities o: contracts or unexpired leases that might otherwise come within the apparent reach o: that section. d 89 There:ore, section 365 o: the Bankruptcy Code was held not to govern. 90 Consistent with the recommendation o: commenta- tors in regard to IRUs, courts have held that whether a lease is intended as a security agreement is to be determined based upon the :acts o: each case. 91 Capitalized leases are governed by the respective state commercial codes and the Uni:orm Commercial Code (UCC), which has been adopted by all 50 states. 92 Section 1-201(37) o: the UCC provides in pertinent part: Whether a transaction creates a lease or security interest is determined by the :acts o: each case; however, a transaction creates a security interest i: the con- sideration the lessee is to pay the lessor :or the right to possession and use o: the goods is an obligation :or the term o: the lease not subject to termination by the lessee, and (a) the original term o: the lease is equal to or greater than the remaining economic li:e o: the goods, (b) the lessee is bound to renew the lease :or the remaining economic li:e o: the goods or is bound to become the owner o: the goods, (c) the lessee has an option to renew the lease :or the remaining economic li:e o: the goods :or no additional consideration or nominal consider- ation upon compliance with the lease agreement, or (d) the lessee has an option to become the owner o: the goods :or no additional consideration or nominal additional consideration upon compliance with the lease agreement. 93 In determining whether an agreement that purports to be a lease is, instead, a dis- guised security agreement, the majority o: courts have :ocused on certain o: the UCC :actors, including: (1) whether the lessee 9s payment obligation is not subject to termi- nation by the lessee during the term o: the obligation; (2) whether the lessee is bound to renew the lease :or the remaining economic li:e o: the goods or is bound to become the owner o: the goods; and (3) whether the purchase option price at the end o: the lease term is nominal. 94 The :oregoing analysis o: leases to determine whether they bear the characteristics o: secured transactions (and should be treated as such) should be equally applicable to dark ber IRUs with one added :actor. 95 In a typical dark ber IRU transaction, the grantor provides conduit and ber, but the grantee provides its own circuitry. There- :ore, once the transaction has been completed, the grantor has no continuing obliga- tions. The grantee has typically made a signi cant up-:ront payment and has executed a contract that contains other indicia o: a true sale, including a nominal purchase price at the end o: the term o: the IRU. From this :actual situation, a bankruptcy court should conclude that this type o: transaction is not an executory contract or unexpired lease subject to Bankruptcy Code § 365. As a consequence, the grantee o: a care:ully I NdefeASIBle r IghtS of u Se IN A r evIved t elecommuNIcAtIoNS I NduStry 345 dra:ted dark ber IRU should be able to rely on the continued use o: the :acility :or provision o: service to its customers. Some realities o: dark ber IRUs are not easily avoided, even with skill:ul dra:ting. For example, the grantor o: the IRU typically provides maintenance service, which is a continuing obligation throughout the IRU 9s term. That :act was addressed satis- :actorily in WorldCom v. PPLPrism because the structure o: the documents allowed the IRU grant and the maintenance to be severed. 96 More troublesome, and a problem not discussed in the WorldCom v. PPLPrism case, is the obligation o: the IRU grantor to continue paying :or rights-o:-way, including easements, licenses, municipal :ran- chises, and pole attachments, necessary to accommodate the cable in which the dark bers exist. It is unclear how a bankruptcy court could require a reorganized debtor to continue providing those rights o: way. The practical answer is probably that i: the debtor or successor did not intend to maintain the cable a:ter reorganization, an out- come such as the one in WorldCom v. PPLPrism would be impossible. However, in the majority o: cases, the reorganized debtor or a successor (such as PPL in the World- Com v. PPLPrism case) intends to continue operating the cable, and so preservation o: existing dark ber IRUs in the same :acility did not increase its postreorganization costs. I: a reorganized debtor or successor in that circumstance were to reject an IRU, it could result in the IRU 9s purchaser having to abandon a viable :acility while being paid negligible damages :or the rejected contract, and at the same time, the debtor would enjoy the practical ability to sell new IRUs in the same cable a:ter reorganiza- tion. As a court o: equity, a bankruptcy court should avoid that result. However, i: the debtor or successor intended to abandon the :acility, a bankruptcy court would simply not have the authority to order continued per:ormance a:ter reorganization. 97 A lit ber IRU exhibits many characteristics o: an executory contract or unexpired lease. This type o: IRU involves the grantor providing the conduit, ber, electronics, and (signi cantly) the services that convert those pieces o: hardware into a :unction- ing telecommunications network. Accordingly, the grantor has ongoing per:ormance obligations which, i: not per:ormed, would cause the ber to cgo dark d and render the IRU useless. This :act has caused commentators to speculate that a court would con- clude that such an IRU :or lit ber :alls within the ambit o: Bankruptcy Code § 365, possibly subject to rejection by the grantor/debtor to avoid continued per:ormance. 98 Indeed, the grantee that holds a lit ber IRU has limited arguments and very little precedent to draw on :rom the WorldCom v. PPLPrism case. However, one possibility would be :or the IRU grantee to argue that, under bankruptcy law, a contract is deemed executory only i: per:ormance remains due on both sides. 99 I: the grantee has :ully per:ormed all obligations under the agreement, then the IRU does not t that de ni- tion, and it should not be considered executory. The weakness in this argument is that, in all the cases reviewed, it is obvious that the :ocus o: the bankruptcy court will be on the uncompleted per:ormance o: the debtor. 100 However, as with the analysis o: dark ber IRUs, it may also be possible :or the grantee to argue that continued per:ormance by the reorganized debtor is inconsequential because it will be at no cost. This is o:ten the case i: the reorganized debtor or a successor intends to continue operating the elec- tronic equipment that generates the lit ber IRU. As discussed above in regard to many dark ber IRUs, preservation o: the grantee 9s IRU in such cases would not increase the N ortoN A NNuAl S urvey of B ANkruptcy l Aw 346 postreorganization costs. In :act, allowing the IRU to be rejected in that case would result in :reeing up the equipment :or other purposes and a corresponding wind:all to the reorganized debtor. The bankruptcy court should not countenance such an out- come. Finally, i: the lit ber IRU is con ned in a single speci c ber :acility, the IRU holder should consider making the arguments advocated by Subramanian that a lit ber IRU has attributes similar to a property interest i: it involves cspeci c assets. d Whether or not it involves a cspeci c asset, d a typical capacity IRU or wave IRU has many o: the characteristics o: a lease or service agreement. It may be di: cult :or a bankruptcy court to see how the bene ts, risks, and burdens under these types o: IRUs are similar to a sale and purchase. However, whether it involves dark ber, lit ber, conduit, or a lambda, i: the grantee has paid :or the :ull term in advance, it would work a substantial un:airness on the grantee and the grantee 9s customers :or the bankruptcy court to allow that IRU to be rejected under Bankruptcy Code § 365. d aft 9ng re 3ommen 4at 9ons Purchasers o: IRUs should recognize and consider bankruptcy law risks when dra:t- ing IRUs. An important :act to remember is that, generally speaking, a bankruptcy court cannot order speci c per:ormance o: a contract by a trustee in bankruptcy or a reor- ganized debtor. The rst step in preventing an undesirable outcome is through care:ul dra:ting o: IRUs, which should be structured to resemble sales or capitalized leases. The legal commentators discussed in this article, as well as the court in WorldCom v. PPL- Prism, have addressed a number o: :actors that legal dra:ters should consider. Any grant o: IRU 4whether :or dark ber, conduit or capacity 4should have the maximum possible isolation :rom the grantor 9s maintenance and operational obliga- tions. It is inevitable that the maintenance and operations obligations are executory in nature, with one or both parties having per:ormance and payment duties that continue into the :uture. The outcome o: the WorldCom v. PPLPrism case, which :avored the grantee o: a dark ber IRU, appears to have been heavily dependent on the :act that the IRU was viewed as an executed grant, separate and apart :rom the maintenance. 101 Anticipating this result, many IRU :orms are now comprised o: two documents: the grant o: the IRU and the maintenance terms and conditions, which is the structure best suited to preserve the value o: the IRU in the :ace o: a bankruptcy ling. Maintenance and operations :ees should not be paid in advance. Even i: the grantee achieves the desired result o: retaining the IRU as a property right, the maintenance agreement will probably be rejected under section 365. In that case, all prepaid :ees :or executory services will become unsecured claims against the debtor 9s estate and likely will not be paid at :ace value. Also, prepaid maintenance :ees are an invita- tion :or the debtor or a successor to reject the maintenance agreement, as occurred in the WorldCom v. PPLPrism case. Whereas maintenance contracts with ongoing maintenance :ees are a revenue opportunity :or a party acquiring the debtor 9s assets, contracts :or which the :ees were paid in advance represent nothing but a liability. When negotiating an IRU agreement, the grantee should ask :or a right to access the :acility :or purposes o: per:orming maintenance or operational tasks on its own behal: i: the grantor :ails to do so. Such clauses are di: cult to negotiate, and grantors I NdefeASIBle r IghtS of u Se IN A r evIved t elecommuNIcAtIoNS I NduStry 347 o:ten respond truth:ully that such access cannot be given because o: restrictions con- tained in underlying easements and other right-o:-way documents. Even so, it should be recognized that an access clause in cases o: the grantor 9s bankruptcy ling may make retention o: the grantee 9s IRU a practical alternative. 102 To strengthen the argument that an IRU is analogous to a secured transaction or capital lease, the IRU agreement should recite that the grantee has an option to acquire an interest in the cable :or a nominal sum upon expiration o: the term. 103 Such clauses need to be looked at as cmagic words, d important to the characterization o: an IRU as being a property right but generally o: no practical signi cance to either party. Similarly, it is desirable to recite that the grantee is a cbene cial owner d o: the IRU or (in the case o: dark ber) possesses cequitable title d to the underlying asset. Language such as this should change nothing in the understanding o: the parties, but it adds similarity to the document deemed to create a property interest in WorldCom v. PPLPrism . The dra:ter o: an IRU should examine the technology being utilized. I: it is pos- sible to characterize the IRU as being tied to speci c physical assets, that :act should be recited in the agreement. This :act opens a line o: argument that the IRU meets a cspeci c assets test, d advanced by legal commentators and endorsed by the New York court in WorldCom v. PPLPrism . 104 I: the grantor appears to present a bankruptcy risk, a smaller up-:ront payment :or the IRU is obviously desirable. One means to accomplish the smaller payment is to re- quest a shorter term. 105 However, i: the risk o: price fuctuations recommends against a term o: less than 20 years, the buyer should consider paying only part o: the consid- eration at inception, with incremental payments over the term. While that alternative is o:ten available, the price o: such an IRU will not usually be as :avorable, and the grantor will likely insist upon a security interest to ensure the :uture payments. As is o:ten said, an IRU grants most o: the cindicia o: ownership d while not con- veying actual control o: the :acility. 106 In recognition o: that :act, the rights and obliga- tions o: the grantee should resemble those o: a purchaser o: an equivalent asset, and the document should not look like service contracts or leases. The rights and obliga- tions o: the grantee should resemble those o: a purchaser o: an equivalent property asset. To that end, it is usually appropriate that property taxes on the ber be appor- tioned among the IRU holders. Moreover, while it is appropriate :or the purchaser o: an IRU to demand per:ormance testing standards at the time o: the conveyance, and the grantee may negotiate re:unds o: O&M :ees :or :ailures to promptly repair dam- aged cable, some purchasers o: IRUs have attempted to negotiate re:unds o: prepaid IRU :ees i: the :acility experiences an coutage. d Such credits :or outages tend to make the IRU look like a service contract, which is to say, executory. Accordingly, any such credits negotiated by the grantee should be applied against the O&M :ees and not against any :ee related to the grant o: the IRU. The grantee 9s right to assign its rights under an IRU should resemble any other property. While it is appropriate that the provider o: maintenance have a right o: con- sent prior to releasing the assignor :rom payment obligations, the grantor o: an IRU should not be able to block a trans:er or assignment. N ortoN A NNuAl S urvey of B ANkruptcy l Aw 348 Most importantly, while a grantor may withhold per:ormance o: maintenance ser- vices :or the grantee 9s :ailure to pay maintenance :ees, a de:ault by the grantee in pay- ment o: maintenance :ees should not result in the grantee ever being in de:ault o: the IRU. It is proper :or an IRU agreement to contain a clause stating that, in the case o: any breach by the grantee, the grantor shall have no right to revoke the IRU or restrict the grantee 9s use o: the IRU in any way. Naturally, sellers o: IRUs resist such clauses, but a reasonable response o: the potential buyer is that any breach is compensable only in damages awarded by a court o: law. While :actors intended to give an IRU the cindicia o: ownership d are reasonable items :or negotiation, the grantee that pays :or an IRU with cash in advance should be recognized as having assumed a risk o: loss i: the grantor declares bankruptcy. Under the analysis o: the court in WorldCom v. PPLPrism , that risk can be minimized i: the IRU is deemed to be property; a :act supporting the belie: that documents conveying the IRU should resemble a property conveyance. No single recommendation is determinative that an IRU is, or is not, an executory contract, or i: it will survive a bankruptcy o: the grantor. However, as stated by the court in WorldCom v. PPLPrism , property law principles may cconverge to enable the Court to conclude that [the grantee 9s] IRU is a property interest, and not a mere contract interest. d 107 V. CONCLUSION To a telecommunications provider, the most important bene t o: an IRU is that it :acilitates the industry 9s remarkable capacity :or innovation and rapid growth. Entre- preneurs with new ideas need IRUs to acquire access to worldwide networks, through which they will build their businesses on the :oundation o: cost stability. In a capital- intensive industry such as telecommunications, IRUs bring the bene ts o: in:rastruc- ture ownership to small businesses and thereby encourage competition. The industry 9s need :or IRUs has been refected in the :act that IRUs continue to be popular as a device :or conveying assets, in spite o: uncertainty as to how they would be treated in bankruptcy proceedings. A variety o: :actors contribute to the determination o: whether an IRU is property o: the acquiring entity, or whether it is an executory contract subject to rejection by a trustee in bankruptcy. From analysis o: legal commentary and the ndings o: the court in WorldCom v. PPLPrism , the :ollowing are critical indicia o: ownership: " The grantee must receive an exclusive, irrevocable right to use speci ec facili - ties :or a determinate price and de nite duration. " The term of the IRU should be for the useful life of the facility. " The full purchase price of the IRU should be paid in advance or the initial payment should at least be su: cient to deter the grantee :rom de:aulting in making :uture payments. " The grant of an IRU should convey cbene ecial ownership d to the grantee, even i: legal title may rest with someone else. I NdefeASIBle r IghtS of u Se IN A r evIved t elecommuNIcAtIoNS I NduStry 349 " The bene ets and burdens of IRU ownership should fall on the grantee in a manner that resembles any other :orm o: property ownership. The bene ts should include the right to use the property :or any legal purpose, unrestrict- ed trans:er rights, and the right not to be dispossessed o: the property except by process o: law. Burdens include the obligation to pay taxes and the risks o: obsolescence and loss due to casualty. A more precise test :or whether an IRU is property or an executory contract is not yet possible. However, in WorldCom v. PPLPrism , the U.S. Bankruptcy Court :or the Southern District o: New York has given practitioners a help:ul guide, having been the rst court to address the question head-on. Its ndings were a positive development :or the telecommunications industry. At least with respect to dark ber and conduit IRUs, :ears regarding Bankruptcy Code § 365 are now somewhat lessened. The use o: IRUs will continue because o: the importance o: the device to the tele- communications industry. To minimize risk in the case o: the grantor 9s bankruptcy, it is imperative that IRUs be care:ully dra:ted, but they remain a viable tool :or convey- ing network resources on a global basis. Research References: Bankr. Serv., L Ed §§ 21;169, 21:176, 21:204, 21:211, 21:212; Norton Bankr. L. & Prac. 3d § 46:59; Norton Bankr. L. & Prac. 3d 11 U.S.C. § 365 West 9s Key Number Digest, Bankruptcy d 3106, 3107, 3112 NOTES 1. Peter Elstrom, Telecom 9s Wake-Up Call, Business Week, Sept. 25, 2000 at 148. 2. Johan Deprez, The Telecommunications Industry in the In:ormation Age: A Case Study in Globalization, Deregulation and Tax Competition, 23 Loy. L.A. Int 9l & Comp. L. Rev. 537, 545 (2001). 3. See, e.g., In re E.Spire Communications, Inc. Securities Litigation, 127 F. Supp. 2d 734-40 (D. Md. 2001) (reciting :acts leading up to a ber optic provider 9s reduction in 1999 o: estimated revenues). 4. Gretchen Morgenson, Bond Believers See Prelude to a Fall, N.Y. Times, Nov. 19, 2000, § 3, at 1. 5. In re WorldCom, Inc., Chap. 11, Case No. 02-13533 (Bankr., S.D.N.Y. led July 21, 2002); see also Luisa Beltran, WorldCom Files Largest Bankruptcy Ever, CNN/Money available online at http://money.cnn.com/2002/07/19/news/worldcom_bankruptcy. 6. See, e.g., S.E.C. v. Nacchio, 438 F. Supp. 2d 1266, 1274-75, Fed. Sec. L. Rep. (CCH) P 93854 (D. Colo. 2006) (reciting :acts o: dark ber bought, sold, and cswapped d by Qwest Communications International Inc.). 7. 11 U.S.C.A. § 365. 8. 11 U.S.C.A. § 365(g); see N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513, 530, 104 S. Ct. 1188, 79 L. Ed. 2d 482, 11 Bankr. Ct. Dec. (CRR) 564, 9 Collier Bankr. Cas. 2d (MB) 1219, 5 Employee Bene ts Cas. (BNA) 1015, 115 L.R.R.M. (BNA) 2805, Bankr. L. Rep. (CCH) P 69580, 100 Lab. Cas. (CCH) P 10771 (1984). 9. Michael J. Lichtenstein & Charles A. Rohe, The Treatment o: IRUs in Bankruptcy Proceedings, J. Bankr. L. & Prac. (Nov./Dec. 2001) at 89. N ortoN A NNuAl S urvey of B ANkruptcy l Aw 350 10. In re Worldcom, Inc., 343 B.R. 430, 46 Bankr. Ct. Dec. (CRR) 160 (Bankr. S.D. N.Y. 2006). 11. See, e.g., Arun S. Subramanian, Assessing the Rights o: IRU Holders in Uncertain Times, 103 Colum. L. Rev. 2094 (2003). 12. In re Reevaluation o: the Depreciated-Original-Cost Standard in Setting Prices :or Conveyances o: Capital Interests in Overseas Communications Facilities Between or Among U.S. Carriers, CC Docket No. 87-45, Report and Order, 7 F.C.C.R. cd 15 (rel. July 22, 1992) at n.1. 13. Virgin Islands Telephone Corp. v. F.C.C., 198 F.3d 921, 922, n. 2 (D.C. Cir. 1999) (quoting In the Matter o: Reevaluation o: the Depreciated-Original-Cost Standard in Setting Prices :or Conveyances o: Capital Interests in Overseas Communications Facilities Between or Among U.S. Carriers, 8 F.C.C.R. 4173 ¶ 2 n. 6, 1993 WL 756863 (F.C.C. 1993)). 14. WorldCom v. PPLPrism, 343 B.R. at 439. 15. In the Matter o: Interconnection Arrangements Between and Among the Domestic and International Record Carriers, 89 F.C.C.2d 194, 211 n. 27, 1982 WL 190444 (F.C.C. 1982). 16. Robert C. Fisher, Telecommunications in Transition: Private Transatlantic Cable Facilities, 19 Geo. Wash. J. Int 9l L. & Econ. 493, 506, n. 103 (1985). See also Western Union Intern., Inc. v. F. C. C., 568 F.2d 1012, 1015 n. 3 (2d Cir. 1977) (re:erring to an IRU as an ownership interest). 17. Phillip L. Spector and Jesse A. Nicol, Creditors and IRUs: Assessing Rights in Fibre Optic Cable, Telecom Finance, Aug. 22, 2001 at 62. 18. See Aileen A. Pisciotta, Randall W. Si:ers, and Heather Wilson, Regulatory Considerations A::ecting Investments in Global Satellite and Undersea Cable Systems, in Telecom Deals: M&A, Regulatory & Financing Issues 2000 at 651 (PLI Corp. L. & Prac. Course, Handbook Series, July 2000). 19. In re American Tel. & Tel. Co., 37 F.C.C. 1151, 1161 (1964). 20. American Tel. & Tel., 37 F.C.C. at 1161. 21. In the Matter o: OVERSEAS COMMUNICATIONS SERVICES, 84 F.C.C.2d 622, 627, 1980 WL 121398 (F.C.C. 1980). It is noteworthy that, although periodic lease payments might, in :act, be equal to periodic amortization o: a capital investment, in the latter case, the grantee is able to present an enhanced balance sheet by refecting its equity in the IRU as a long- term asset. 22. In the Matter o: Reevaluation o: the Depreciated-Original-Cost Standard in Setting Prices :or Conveyances o: Capital Interests in Overseas Communications Facilities Between or Among U.S. Carriers, 8 F.C.C.R. 4173 ¶ 2 n. 6, 1993 WL 756863 (F.C.C. 1993). 23. 89 F.C.C. 2d 194, 211 n. 27; see Pisciotta, Si:ers, and Wilson, M&A, Regulatory & Financing Issues 2000 at 651. 24. Pisciotta, Si:ers, and Wilson, M&A, Regulatory & Financing Issues 2000 at 651. 25. Pisciotta, Si:ers, and Wilson, M&A, Regulatory & Financing Issues 2000 at 651. 26. Frederick W. Quattlebaum, Ventures on the High Seas: U.S. Federal Tax Treatment o: a Sale o: IRU Capacity, in Telecom Deals: M&A, Regulatory & Financing Issues 2000 at 589 (PLI Corp. L. & Prac. Course, Handbook Series, July 2000). 27. Quattlebaum, M&A, Regulatory & Financing Issues 2000 at 589. 28. Quattlebaum, M&A, Regulatory & Financing Issues 2000 at 589. Operations and maintenance :ees o:ten escalate according to a :ormula tied to a cost-o:-living index and become costly over time. 29. Tax Management Port:olios (BNA), Foreign Income Series: Provisions Applicable to U.S. & Foreign Persons, U.S. International Taxation o: Telecoms, TMFEDPORT No. 946 § XIV. Tax Treatment o: Inde:easible Rights o: Use (2007) at 3. 30. Newton 9s Telecom Dictionary 144 (22d ed. 2006) (de ning cbandwidth d). I NdefeASIBle r IghtS of u Se IN A r evIved t elecommuNIcAtIoNS I NduStry 351 31. 11 U.S.C.A.§ 365(a). Conversely, a trustee may not assume or reject a contract that is not executory. In re Giesing, 96 B.R. 229, 230 (Bankr. W.D. Mo. 1989). 32. See N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513, 522 n. 6, 104 S. Ct. 1188, 79 L. Ed. 2d 482, 11 Bankr. Ct. Dec. (CRR) 564, 9 Collier Bankr. Cas. 2d (MB) 1219, 5 Employee Bene ts Cas. (BNA) 1015, 115 L.R.R.M. (BNA) 2805, Bankr. L. Rep. (CCH) P 69580, 100 Lab. Cas. (CCH) P 10771 (1984). See also Giesing, 96 B.R. at 231 (contract is executory i: obligations o: both parties are so unper:ormed that the :ailure o: either to complete per:ormance would be a material breach) (citation omitted); In re Waldron, 36 B.R. 633, 637 (Bankr. S.D. Fla. 1984) (legislative history o: section 365 suggests that contract where some per:ormance remains due by all contracting parties is executory); H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 347 (1977), U.S. Code Cong. and Ad. News 5787, 6303. 33. In re Rovine Corp., 5 B.R. 402, 404, 2 Collier Bankr. Cas. 2d (MB) 944 (Bankr. W.D. Tenn. 1980) (re:erring to Farrington v. State o: Tennessee, 95 U.S. 679, 683, 24 L. Ed. 558, 1877 WL 18633 (1877)). See also

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