CCT COMMUNICATIONS, INC. v. ZONE TELECOM, INC., SC 19574

Judicial District of Waterbury

 Contracts; Bankruptcy; Whether Court Properly Found that Ride-Through Doctrine Rendered Contract’s Bankruptcy Termination Clause Enforceable Despite Plaintiff’s Bankruptcy Filing. The defendant contracted with the plaintiff for the provision of long distance telephone services.  The contract contains an ipso facto or bankruptcy termination clause permitting either party to terminate the contract in the event that the other files a bankruptcy petition.  In 2007, the plaintiff filed a Chapter 11 bankruptcy petition, and the defendant notified the plaintiff that it was terminating the contract pursuant to the bankruptcy termination clause.  After the Bankruptcy Court dismissed the bankruptcy case in September, 2009, the plaintiff brought this breach of contract action alleging that the bankruptcy termination clause was unenforceable and that the defendant owed it for charges incurred through December, 2009.  The defendant counterclaimed, seeking damages for breach of contract and a declaration that its termination of the contract was effective.  The trial court ruled for the defendant on both the complaint and the counterclaim.  The court found that, while the Bankruptcy Code generally invalidates bankruptcy termination clauses, the bankruptcy clause here remained valid and enforceable despite the bankruptcy filing by operation of the ride-through, or pass through, doctrine.  The ride-through doctrine provides that an executory contract that has not been affirmatively assumed or rejected by a debtor in bankruptcy is unaffected by the bankruptcy filing and “passes through” the bankruptcy unaffected.  The court found that, as there was no dispute that the plaintiff did not accept or reject the contract here, the plaintiff was not entitled to the Bankruptcy Code’s protection from enforcement of the bankruptcy termination clause.  The court ruled that the defendant had properly exercised its right to terminate the contract and that the plaintiff had breached the contract when it filed for bankruptcy such that the defendant was entitled to damages on its breach of contract counterclaim.  The plaintiff appeals and claims that the trial court wrongly concluded that the defendant’s termination of the contract was effective.  The plaintiff argues that its rights under the contract became property of the bankruptcy estate upon the filing of the bankruptcy petition and that the defendant’s termination notice was without legal effect because it violated 11 U.S.C. § 362 (a) (3), which provides that, on the filing of a Chapter 11 bankruptcy petition, any act to obtain possession of, or exercise control over, property of the estate is automatically stayed.  The plaintiff also claims that the trial court erred in finding that it breached the contract by filing the bankruptcy petition and in declining to award it any relief on its claims that it was owed for long distance telephone services it had provided the defendant.