IN RE ALPHA TEL-COM INC

ELIZABETH PERRIS, Bankruptcy Judge

The purpose of this Memorandum is to rule on the pending Debtors' Motion to Dismiss the bankruptcy chapter 11 cases of Alpha Tel-Com, Inc. ("Alpha"), Florida Pay Phone Systems, Inc., Pacific Telecom, Inc. and New York Pay Phone Systems, Inc. (collectively "Alpha entities" or "debtors") and Earnest Bustos's Motion to Convert the cases of the same entities to chapter 7. For reasons explained below, the Motion to Dismiss will be granted and the Motion to Convert will be denied. Factual Background

Much of the factual information is derived from the Declaration of Receiver Thomas F. Lennon in Support of Debtors' Motion to Dismiss Bankruptcy Case Pursuant to Section 1112(b) of the Bankruptcy Code ("Receiver's Declaration") (document #788).

The Alpha entities and three other related entities that are not in bankruptcy, American Telecommunications Company, Inc. ("ATC"), SPA Marketing LLC ("SPA"), and Strategic Partnership Alliance LLC (collectively "ATC entities"), ran a Ponzi scheme that raised millions from investors/purchasers of payphones. Claims totaling approximately $418 million have been filed in these bankruptcy cases. The Alpha and ATC entities are the subject of a Securities and Exchange Commission ("SEC") initiated receivership pending in the United States District Court for the District of Oregon ("District Court"). Granting the pending Motion to Dismiss will result in the liquidation and distribution of the assets of the Alpha entities being completed through the receivership in the District Court. The District Court receiver has been in control of the Alpha entities during these bankruptcy cases.

There is a dispute regarding whether the people and entities that entered into payphone agreements purchased securities rather than the specific asset.

The parties agree that continuation of the chapter 11 cases is not appropriate, because reorganization is not possible. There also is no dispute among the parties regarding what is left to do to complete administration of the estates of the Alpha entities. There needs to be a judicial determination of what rights, if any, the approximately 8,000 individuals and entities who entered into payphone purchase contracts with Alpha have to the approximately $400,000 in proceeds from the sale of the payphones during these bankruptcy cases. The receiver has claims against the brokers who sold the payphones for approximately $39 million in commissions paid as compensation for the payphone sales. Finally, a court needs to determine the allowed amount of the professional compensation to be paid in connection with the administration of the Alpha entities and ATC entities cases, and there needs to be a court determination regarding proper final distribution.

The Receiver's Declaration uses two amounts for the commission payments: $30 million, Receiver's Declaration at 3:21, and $39 million,id. at 5:25. Because Debtors' Motion to Dismiss Bankruptcy Case and Memorandum of Points and Authorities in Support (document #787) uses the $39 million figure, Motion to Dismiss at 12:2, I will use that figure in this Memorandum. It makes no difference to the analysis whether the amount is $30 million or $39 million.

Concurrently with issuance of this memorandum, the undersigned has entered an order allowing professional compensation in the Alpha entities bankruptcy cases. The District Court will determine professional compensation allowable in the Alpha and ATC entities receivership.

The Parties' Arguments

Debtors (through the receiver) argue that dismissal rather than conversion is in the best interests of creditors and the estate, because the more flexible summary procedures available in the receivership will allow more efficient and cost-effective determination of who is entitled to the payphone proceeds and whether the receiver is entitled to recover the $39 million in commissions, or some part thereof. In addition, debtors argue that, if these bankruptcy cases are converted rather than dismissed, there will be two parallel liquidation proceedings, which will increase administrative expenses. Simply put, debtors argue that there is no further benefit to any bankruptcy administration. Everything that could be accomplished in bankruptcy can be accomplished more efficiently and at less expense in the receivership.

Bustos disagrees that the receivership will be more litigation-efficient than chapter 7 bankruptcies. He asserts that the payphone purchasers are entitled to more than summary adjudication of their rights to the payphone proceeds. They are entitled to the type of notice and process that will be provided in bankruptcy adversary proceedings. In addition, he argues that the District Court does not have personal jurisdiction over the brokers who received the $39 million in commissions, because the District Court has federal receivership jurisdiction only in judicial districts where property of the receivership is located and the receiver timely filed a copy of the receivership complaint and order appointing the receiver. According to Bustos, all of the receivership property is located in Oregon. The brokers who received the commissions were located in 40 states. Receiver's Declaration at 5:26. Bustos asserts that, in the District Court receivership, the receiver will have to either sue the brokers where they reside or establish that they have minimum contacts with Oregon under the standard established in International Shoe Co. v. State of Washington, 326 U.S. 310 (1945). Bustos contends that this problem is eliminated if the brokers are sued through the bankruptcy process, because there is nationwide personal jurisdiction in bankruptcy cases and proceedings.

Issue

Whether dismissal or conversion of the Alpha cases is in the best interests of creditors and the estate.

Analysis

The bankruptcy court may convert a case under . . . chapter [11] to a case under chapter 7 . . . or may dismiss a case under . . . chapter [11], whichever is in the best interest of creditors and the estate, for cause. . . .

11 U.S.C. § 1112(b).

As the parties recognize, the interests of creditors and payphone investors/purchasers are best served by the course that will cost the least to administer and will take the least amount of time to accomplish. Every dollar spent on administrative expense is a dollar that is not available for the creditors and investors. I agree with debtors that dismissal rather than conversion will be most cost-effective, because one court, rather than two, will oversee the process, and because the procedures available in district court receiverships may be less costly (and, in any event, are no more burdensome) than those available in bankruptcy.

Having a single court oversee the remaining administration will avoid having two separate parallel proceedings for the Alpha entities and the ATC entities, with two sets of professionals both billing the estates. If the Alpha entities continue in bankruptcy, the cases will have to be converted to chapter 7, because reorganization in chapter 11 is not possible. A chapter 7 trustee will be appointed and the trustee will need professionals, particularly lawyers and accountants, to assist in accomplishing the trustee's duties. These are complex cases and the professional fees are likely to be substantial. The cost of educating the trustee and new professionals, coupled with the delay that is likely to occur while the trustee and professionals get educated, weighs against conversion and in favor of dismissal.

A single trustee will be appointed if the Alpha entities cases are converted, because the cases were substantively consolidated by order entered on February 28, 2002.

"Receivership courts have the general power to use summary procedure in allowing, disallowing, and subordinating the claims of creditors." United States v. Arizona Fuels Corp., 739 F.2d 455, 458 (9th Cir. 1984). The receiver takes the position that summary procedure can be used to determine the rights, if any, of the payphone investors/purchasers to the $400,000 in payphone proceeds. This court has indicated that such an action in the bankruptcy court is one to determine the extent and validity of ownership claims, which will require an adversary proceeding. See F.R.Bankr.P. 7001.

The procedural differences between a summary proceeding and an adversary proceeding that may impact cost and speed include the type of notice required and the type of proof that may be admissible. In an adversary proceeding in bankruptcy, the plaintiff will have to either sue the 8,000 payphone investors/purchasers or, possibly, use the class action process of F.R.Bankr.P. 7023. If the 8,000 investors/purchasers are sued, service must comply with F.R.Bankr.P. 7004, which may be difficult and complicated because of the large number of defendants.

A summary proceeding is more flexible. While notice to the parties affected must satisfy due process, it may be possible to use the existing mailing list rather than figuring out if the addresses on that list for each of the 8,000 investors/purchasers meets the limited service options of F.R.Bankr.P. 7004. Evidence at the trial of a bankruptcy adversary proceeding must comply with Fed.R.Civ.P. 43(a). A receivership summary proceeding is similar to a bankruptcy contested matter, in which evidence in the form of affidavits and deposition transcripts may be more readily utilized. See F.R.Bankr.P. 9017 and Fed.R.Civ.P. 43(e).

Although the District Court will ultimately have to determine the merits of the receiver's position on the use of summary procedure, the potential to use that procedure rather than a formal adversary proceeding in resolving the rights to the $400,000 weighs in favor of dismissal. If the District Court ultimately decides that the summary procedure is not available, the required plenary process will be similar to a bankruptcy adversary proceeding and the factor will at most be a neutral factor in the conversion/dismissal decision.

Bustos argues that there is another legal issue that tips the scale in favor of conversion rather dismissal. He argues that the District Court will not have personal jurisdiction over the recipients of the $39 million in commission payments, while the Bankruptcy Court would have personal jurisdiction. This argument simply is not a significant factor in deciding whether to dismiss or convert. The other factors discussed above have greater weight. Furthermore, it is not clear what part of the commission recovery claims are even property of the Alpha entities' bankruptcy estates. ATC, SPA and Alpha paid the brokers' commissions. Receiver's Declaration at 5:25-26. No accounting has been provided for how the $39 million is allocated among the three entities. ATC and SPA are not debtors in bankruptcy; they are subject to the receivership.

The parties disagree regarding whether the claims for recovery of the commissions can be pursued in a summary action. Debtors argue that a summary proceeding can be used; Bustos disputes that assertion. If debtors are correct, that potentially weighs in favor of dismissal. If a plenary proceeding is necessary, it is at most a neutral factor, because a bankruptcy action to avoid a transfer requires an adversary proceeding. F.R.Bankr.P. 7001(1).

To the extent the District Court's ability to obtain personal jurisdiction over the brokers is a factor, I am not persuaded by Bustos's argument that the District Court will not be able to obtain personal jurisdiction.

Debtors argue that, assuming compliance with 28 U.S.C. § 754, the receivership court has jurisdiction over all the receivership entity's assets of all types in the United States, including real, personal, tangible and intangible assets, and has nationwide personal jurisdiction. Bustos argues that § 754 only establishes jurisdiction over tangible assets and does not apply to the commission recovery claims, which are chosen in action. Bustos asserts that choses in action are located in the court where the receiver-plaintiff is appointed, i.e. Oregon, and that the District Court only has personal jurisdiction over defendants with minimum contacts with Oregon.

28 U.S.C. § 754 provides:

Receivers of property in different districts. A receiver appointed in any civil action or proceeding involving property, real, personal or mixed, situated in different districts shall, upon giving bond as required by the court, be vested with complete jurisdiction and control of all such property with the right to take possession thereof.

Such receiver shall, within ten days after the entry of his order of appointment, file copies of the complaint and such order of appointment in the district court for each district in which property is located. Failure to file such copies in any district shall divest the receiver of jurisdiction and control over all such property in that district.

Section 754 is augmented by 28 U.S.C. § 1692, which allows service of process beyond the territorial limits of the district court appointing the receiver. It provides:

In proceedings in a district court where a receiver is appointed for property, real, personal, or mixed, situated in different districts, process may issue and be executed in any such district as if the property lay wholly within one district, but orders affecting the property shall be entered of record in each of such districts.

This statute is supplemented by the provisions of Fed.R.Civ.P. 4, which provide for service of process in any judicial district.

I find debtors' argument more persuasive. As explained fully inHaile v. Henderson Nat'l Bank, 657 F.2d 816 (6th Cir. 1981), the action creating the receivership is the primary action, and suits brought thereafter by the receiver to recover assets are ancillary to the primary action. Id. at 822. As does the bankruptcy court, the receivership court has nationwide jurisdiction in actions seeking to recover receivership property. Once a receiver is appointed and complies with the filing requirements of § 754, "state or federal courts located in other districts may not exercise any control over defendant's property within their territorial jurisdiction. . . ." 12 Charles Alan Wright, Arthur R. Miller, and Richard L. Marcus, Federal Practice and Procedure § 2985, p. 45 (1997). Thus, contrary to Bustos's argument, receivership property must include intangible as well as tangible property. Otherwise, a receivership could never administer intangible property, which would seriously undermine the effectiveness of the receivership remedy. The state minimum contacts prerequisite to personal jurisdiction required byInternational Shoe and its progeny is simply not applicable when dealing with a federal court not exercising diversity jurisdiction. Haile, 657 F.2d at 822-823.

This court expresses no opinion as to whether the claims for recovery of commissions paid are choses in action or money, and depending on the answer to that question, where the claims are located for purposes of jurisdiction.

Conclusion

For the foregoing reasons, debtors' Motion to Dismiss is granted and Bostos's Motion to Convert is denied. The court clerk will prepare the dismissal order.