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Appeals Court Says Applicant “Owns” E-rate Reimbursement

A U.S. Court of Appeals has reaffirmed a lower court ruling that an E-rate reimbursement that had taken center stage in a bankruptcy proceeding was the property of the E-rate applicant, in this case the public school system in Springfield, MA. The ruling in Springfield v. Ostrander is the result of a legal tug-of-war between the city of Springfield, acting on behalf of the district, and creditors for LAN Tamers, an E-rate vendor that filed for bankruptcy before receiving any E-rate discounted reimbursement payments from the Universal Service Administrative Company (USAC).

Springfield, one of Massachusetts' most disadvantaged school districts, had contracted with LAN Tamers to install a broadband data network for slightly more than $1 million at one school, and to provide routine maintenance services for several other schools. Springfield duly paid the vendor for performing its contractual obligations, and applied to USAC for its E-rate discount reimbursement. Springfield had chosen the Billed Entity Applicant Reimbursement (BEAR) method of payment, and thus paid LAN Tamers the full amount up front. USAC originally ruled that Springfield's contracts were ineligible, but later reversed itself. However, during that delayed time frame, LAN Tamers went bankrupt.

In 2002, Springfield filed a complaint in U.S. Bankruptcy Court against USAC, as well as LAN Tamers and its bankruptcy bank and creditors, asking the court to declare that the reimbursed funds that USAC owed were for work performed on behalf of Springfield — and therefore the funds were the property of the city and not the bankruptcy estate. The bankruptcy court, in August 2002, agreed and found that the "ownership rights in the Reimbursements are held by the City, not by the Debtor" and accordingly, "the funds are available neither as collateral for the Bank nor as a source of funds for a distribution to unsecured creditors." A district court later affirmed this decision, as did the U.S. Court of Appeals in a decision handed down in May 2003.

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