Year in, bankruptcy of fiber network operator drags on

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WORCESTER — As an elevator lifted him toward a wood-paneled courtroom this week in Federal Square, an attorney for the Massachusetts Technology Collaborative knew that arguments on his legal pad might not win the day.

But after years of battles with the operator of the state's $90 million broadband network, John J. Monaghan is paid to try.

"I expect this feels a bit like 'Groundhog Day' to all of us," Monaghan told Judge Elizabeth D. Katz, after stepping to the podium in Courtroom 4 of U.S. Bankruptcy Court.

Indeed, they had been here before, in November and January, as attorneys for MassTech tried to persuade Katz to compel the company that runs the state's prized network to fulfill its contract — or set it free.

If Monaghan's movie reference meant the next day might find his client in the same place, he was right. Further arguments on a motion the state filed in September were pushed to July, after a lawyer for the network operator, KCST USA Inc., argued that a bigger legal question must be settled first.

KCST filed for bankruptcy protection 13 months ago, alleging that MassTech did not turn over the network it promised, leaving it unable to avoid millions of dollars in losses and driving it to seek protection from its creditors.

Most people in Western Massachusetts likely have no idea the fate of something they take for granted — a 1,200-mile network that laces through rural Massachusetts like veins in a leaf, providing high-speed internet to hundreds of cities, towns and civic groups — is playing out in a scene like this.

And not just here in the four-story Harold D. Donohue Federal Building. Skirmishes in the grudge match between MassTech and KCST and its financial parent, Axia Net Media Corp., of Calgary, Canada, have been heard in Suffolk Superior Court, U.S. District Court and the U.S. Court of Appeals.

To that list, add yet another legal avenue: arbitration that will consume an estimated 600 hours of work, cost upward of $50,000 for the arbitrator alone and determine, without any right to appeal, two competing claims:

The state says Axia Net Media owes it $30 million for failing to live up to its contract.

Axia believes the state owes it $18 million.

This week, Katz stuck to her position that the debtor in her court, KCST, needs to know the outcome of the arbitration, because the network operator agreement is its most valuable asset. The contract runs to 2023.

"I have not changed my mind on this," she said. Katz set a noon hearing July 17.

The judge then offered about as much clarity as this high-stakes case seems able to produce. "The arbitrator's going to figure out whatever the arbitrator's going to figure out," Katz said.

Living in limbo

When he rose to address the bankruptcy court Tuesday, Monaghan tried a few approaches to getting Katz to order KCST to "assume or reject" its contract with MassTech, most of them retreads.

Think of the creditors, he said. Bankruptcy cases aren't supposed to be two-party disputes, as they have been in this case, Monaghan said. "There are other creditors vitally concerned about what happens here."

Those creditors include cities and towns, among them Pittsfield, Great Barrington, Lee, Hinsdale and Savoy (and even its fire department, the Hilltown Hose Co.).

The creditor list includes big state agencies, like the Department of Transportation and Attorney General's Office; federal entities like the IRS and Securities and Exchange Commission; and schools like the University of Massachusetts and the Massachusetts College of Liberal Arts.

"They have a vital interest in what the debtor plans to do with this case," Monaghan said. "There hasn't been so much as a hint about that."

And think of the customers, Monaghan pleaded, the hundreds of "community anchor institutions," including public safety departments, that face the loss of internet if KCST and Axia suddenly halt operations.

Axia was ordered last year in U.S. District Court, in this same building, to live up to a $4 million guarantee to protect the network's operations. Its appeal of that order has been heard and is on advisement in the U.S. Court of Appeals.

If Axia wins that case, it would not have to keep providing a lifeline of financial support to KCST, the entity it spun off a month before filing for bankruptcy.

Axia provides about $200,000 a month of funding to KCST. Though KCST is legally the network operator, actual work is provided from Axia's Canadian headquarters.

The possibility of what Monaghan has called a "crash landing" of the network got another mention this week. KCST loses $3 million a year, he noted, and the money needed to protect the network's operation could run out abruptly.

But after hearing from the debtor's attorney, Katz was not moved.

Harold Murphy, representing KCST, said that worries about the continued operation of the middle mile are unfounded.

"We continue to do what we're supposed to do," he told Katz. "As far as I'm aware, there haven't been any complaints."

Financing to run the network is in place through June, Murphy said.

Arbitration next

With action in bankruptcy court put off for 90 days, attention turns to the $30 million, or $18 million, question.

Both sides accuse the other of failing to live up to terms of the contract to run MassBroadband 123, as the network is known.

To decide who's right, an outside arbitrator will convene nine days of proceedings starting May 14. Before that, depositions will be taken during the first week in May. Closing arguments are planned for May 30.

"This is a fairly substantial effort," Murphy told Katz.

Murphy said a decision is due by the end of June, ahead of the next hearing scheduled in bankruptcy court.

"We're not trying to hold a party hostage to this situation," Murphy said.

Once the arbitrator decides the contract dispute, he said, the network operator will move "promptly" to resolve questions that have hung over the middle mile since the bankruptcy filing in March 2017.

To sum things up, Murphy went for a "red zone" football reference, rather than one from a movie, saying the case sits on the 10-yard line.

"We're almost there," Murphy said. "It has taken a while."

Larry Parnass can be reached at lparnass@berkshireeagle.com, at @larryparnass on Twitter and 413-496-6214.


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