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Two broadband companies under bankruptcy court protection are fighting over who gets the proceeds from the sale of one company’s assets. Atlanta-headquartered NetRail wants the court to allow it to sell off its assets while it litigates claims against one-time merger partner 360networks (USA), the American subsidiary of a Vancouver, Canada, company. The two companies had planned to merge as recently as last spring, and 360 even loaned NetRail money to keep it afloat financially. In turn, NetRail agreed not to negotiate with other potential partners. But then 360networks backed out, breaking its agreement, according to NetRail. 360networks, which had liabilities of $3.6 billion in March 2001, and is in bankruptcy protection in Canada and New York, proposes to shave several hundred thousand dollars off its $4 million claim against NetRail, sell off NetRail’s remaining investments, and disburse the proceeds to creditors. The fight pits two new economy companies — as well as Atlanta’s two largest law firms — against each other. Alston & Bird’s Dennis J. Connolly represents 360networks. NetRail’s lawyer J. Robert Williamson Jr., of Scroggins & Williamson, brought King & Spalding’s Paul K. Ferdinand to the case to help with NetRail’s liquidation plan. U.S. Bankruptcy Court Judge Joyce Bihary recused herself from consideration of the competing plans because she is married to Alston & Bird partner Jonathan W. Lowe. (Lowe does not handle bankruptcy cases). NetRail was a “first tier” broadband provider that was founded in Virginia in 1994, incorporated in Delaware and headquartered in Atlanta. Companies offering Internet access to individual computer users would buy bandwidth from NetRail, which had a nationwide “backbone” communicating with other large broadband systems. It also sold bandwidth to other Internet service wholesalers. When NetRail filed for Chapter 11 protection in July 2001, it had about 50 employees. In fiscal 2000, the revenue was about $9.5 million, and for the first seven months of fiscal 2001, the company had revenue of about $8 million. Williamson says the troubles that led NetRail to bankruptcy court occurred in February and March 2001, when NetRail and 360 were finalizing a merger agreement. To tide NetRail over until the deal closed, Williamson says, 360 extended interim financing to help it meet expenses. Both sides dispute the amount of secured financing NetRail actually received. “They [360] did loan out a good part of it, but they didn’t loan out all of it,” Williamson says. But the deal didn’t close as quickly as anticipated. “It got bogged down,” Williamson says. “It was going to take longer than anyone had thought originally.” Then 360 pulled out of the merger agreement, Williamson says. “We didn’t have the money and we didn’t have the merger agreement,” Williamson says. “We’re out there drifting in space without an air hose or a rope.” NetRail filed for Chapter 11 protection July 25, 2001, as part of an original plan to sell its assets to Aleron U.S. Inc. However, the plan drew competing bids from Cogent Communications Inc. and Tier One Acquisition Company. On Sept. 6, the court allowed Cogent to acquire most of NetRail’s assets. “We actually had a highly successful auction,” Williamson says. “[Cogent] came in with a big sack of cash, essentially.” From the auction in which NetRail was expecting to reap about $4 million, the company actually collected about $12 million. “Even if 360 wins completely, we’ll still have the money for a nice return to the unsecured creditors,” he says. What 360 stands to win are the proceeds from the sale of one million shares of WebUseNet, an Atlanta Usenet access provider. Usenet is a combination library, bulletin board and archive for digital messages on a multitude of topics. Those shares, Williamson says, might be worth between $500,000 and $1 million. NetRail maintains those shares are unencumbered by 360′s claims. 360 claims the proceeds from those shares should go to it first. In the amended disclosure statement company lawyers filed Jan. 28, 360 proposes what it calls “a complete compromise and settlement of all claims between NetRail and 360.” 360 asserts a claim of $4,292,918 as of March 2002, including interest, but will accept $3,750,000 to settle the claim entirely. Any claims NetRail’s lawyers might seek to pursue against 360, Connolly wrote, “have no substantive merit.” “360 was not a party to the Merger Agreement,” he wrote. “Rather, the Merger Agreement was entered into by NetRail and 360′s parent corporation, 360networks inc (which is several tiers removed from 360 in the overall corporate structure and incorporated in a separate country.)” Further, Connolly wrote, the claims will be very expensive to litigate-diminishing the total money available to creditors. “The effect of the 360 plan, as a result, would be to save unsecured creditors approximately $45,000 per month in interest “carry” on the 360 secured claim � as well as 360′s attorneys’ fees, to avoid hundreds of thousands of dollars of legal and administrative costs for litigation and to obtain a $300,000 concession from 360,” they wrote. “These claims could aggregate well over $1,000,000.” Since June, 360 has been also under Chapter 11 protection in U.S. Bankruptcy Court in New York. Its parent company is also under bankruptcy protection in Canada. “[A]t best, the debtor would have a general unsecured claim, which in the context of the 360 bankruptcy cases would have de minimis value,” Connolly wrote. Connolly did not return phone calls seeking comment. But Williamson says 360 stands to collect in full, whether its plan succeeds or not. The question of the expense of possible litigation, he says, is not terribly important. “We know another way to eliminate all that expense,” he says. “They can walk away or they can come to us with a legitimate offer.” Williamson says NetRail will file a response and objection to 360′s proposal sometime in the next week or so. The court has not set a date for a confirmation hearing on the competing plans.

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