Petition for Writ of Certiorari — Advanced Cellular Cellular Systems Systems v. Puerto Rico Rico Telephone Telephone Co Co. (No. 07-269)

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in’) Supreme Court, U.S.

7 (T) Surge Cos

sie 07-269 AUG 27 2007

OFFICE OF THE CLERK

In The

Supreme Court of the Anited States

ADVANCED CELLULAR SYSTEMS

and ADVANCED CELLULAR PAGING,

Petitioners,

PUERTO RICO TELEPHONE COMPANY

and CELULARES TELEFONICA,

Respondents.

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The First Circuit

PETITION FORA WRIT OF CERTIORARI

CARMEN CONDE AND ASSOCIATES

CARMEN CONDE TORRES

ROBERT FREEDMAN*

254 San Jose Street, 5th Floor

Old San Juan, PR 00901

(787) 729-2900

Counsel for Petitioners

“Counsel of Record

COORKLE LAW BRIEF PRINTING © 0) seat 225-69R4

OR CALL COLLECT te2.392 2s4)

QUESTION PRESENTED

Whether, in an action that is based on contract rights

asserted under Puerto Rico law, the First Circuit’s decision

to rely on general law derived from jurisdictions other

than Puerto Rico and from the Restatements instead of

applying Puerto Rico contract law granted a windfall to

Respondents merely because the instant case is under the

Federal Court’s Bankruptcy jurisdiction.

PARTIES TO THE PROCEEDINGS

Petitioners, who were debtors and appellees below, are

Advanced Cellular Systems, Inc. and Advanced Cellular

Paging Systems.

Respondents, who were creditors and appellants

below, are Puerto Rico Telephone Company and Celulares

Telefonica.

lll

RULE 29.6 CORPORATE

DISCLOSURE STATEMENT

Advanced Cellular Systems and Advanced Cellular

Paging Systems do not have any parent corporations and

no publicly held company owns 10% or more of the corpo-

rations’ stock.

TABLE OF CONTENTS

Page

GFE PET FUREY LID cccencervecenrsccssressevcssrenevensvncsssesorers i

PARTIES TO THE PROCEEDING.............scccssesscsresseserens ii

RULE 29.6 CORPORATE DISCLOSURE STATEMENT... ii

ER AE Fs SEE BUD iis teres roevsacssacnitnnssersébsavsivees conti vi

Se ED SUUEIEIAI ON viiefocsiiorinie tin stunitecneipinentehichestoudaatinibonieiiian 1

a kc iieissisnadceticustienaincisaesincenbiinccuuadbtaeiaiaanae 1

CONSTITUTIONAL AND STATUTORY PROVISIONS

ST ITE saiuicitsectudcsceandinitundedinvehelacsnepensiapoaiatagnedbueadaata 1

a ET sei iiiasisiaianniassaiisanshsavan Didstnibeniannstdcnsibicladianiaprabinas 1

Pia I DINE isi cid einriteeccaictericeemin 1

Bs: I I oi ca sinitsistninsieintrsaundecnapsbianinngce 5

REASONS FOR GRANTING THE PETITION............. 7

I. THE FIRST CIRCUITS DECISION RE-

PLACES PUERTO RICO LAW WITH GEN-

ERAL LAW DERIVED FROM A HAPHAZARD

ASSORTMENT OF COMMON LAW JURIS-

DICTIONS AND GENERAL COMMON LAW

PRINCIPLES IN VIOLATION OF FEDERAL-

IST PRINCIPLES AND THE ERIE DOC-

i ikcvirseiscadnndasiavtavicasasunieasmaaadeoaiieiuaiaddanaid 7

A. Long Standing Precedent Mandates that

the First Circuit Apply Substantive State

Law to Determine the Outcome of Claims

Pile: TIS isi cid suitestibaanstaivainicbatiaki 8

B. The First Circuit’s Opinion Effectively Di-

vests Puerto Rico of Its Authority to Estab-

lish Contract Law Principles Governing

the Relationships Between Parties............. 10

TABLE OF CONTENTS - Continued

Page

C. The First Circuit's Failure To Apply Puerto

Rico Law Unfairly Discriminates Against

Puerto Rico Litigants And Will Only En-

courage Forum Shopping ...............:000eeeeeeees 21

i asicccceceivecevciectensbicicresbosnatieon sockesopepisecormen 24

TABLE OF AUTHORITIES

Page

CASES

In Re Advanced Cellular, 483 F.3d 7 (1st Cir. 2007) ....passim

Arthur Young & Co. v. Virgilio Vega, 135 D.P.R. 157

CRUE ii sdecsthikesutcesiionrsscuciieddapiaaituuaiilinptibsinddaiaintiaineaepeiiale 19

Bank v. IBM Corp., 145 F.3d 420 (1st Cir. 1998)......... 12, 13

Borschow Hosp. & Med. Supplies Inc. v. Cesar Casti-

Ho Inc., 9B FAG 10 (iat COs. LGD) a sccccccesescescersecsesorsssienes 11

Butner v. United States, 440 U.S. 48 (1979).................. eee 9

Carillo Norat v. Camejo, 107 D.P.R. 132 (1978)............... 12

DIRECTV v. Budden, 420 F.3d 521 (5th Cir. 2005).......... 15

Erie R. Co. v. Tompkins, 304 U.S. 64 (1938).............. passim

Gasperini v. Center for the Humanities, 518 U.S.

CE hi biceihescstciciattiscaibininsianisticastiasaiiatininsaiede 22

Guevara v. Dorsey Labs, Div. of Sandoz, Inc., 845

Fe Ce i Fe cecdiacasitinractchestndsietaitensncnininsatoncacs 11

Hanna v. Plumer, 380 U.S. 460 (1965)............... ee 21, 22

La Sagrada Familia v. Castillo, 107 D.P.R. 405

ER OP HN tis sciasoivediuansnbpedeenacctarsdepuphackcdssencianiaadepeniiaaniadiaat 19

Martin v. The Vector Company, Inc., 498 F.2d 16

I Fa hibits omisitigenaenectvdaiianieestiasieaduanbubienided 20, 21

MBIA Insurance Corp. v. Royal Indem. Co., 426

Pea Ie Se Oe ION Sirincnsicdnsicdinennsearcdebsdeseettiacassanies 13, 14

Metlife Capital Corp. v. Westchester Fire Ins. Co.,

224 F.Supp.2d 374 (D.P.R. 2002).........cs-scseceseresevevees 15, 16

O'Melveny & Myers v. FDIC, 512 U.S. 79 (1994)... 9

TABLE © AUTHORITIES — Continued

Page

Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15

SEO asinrceventincierinvnensensevsapininneduaiebtaainaidindiadiis 8,9

Ulpiano Casal Inc., v. Totty Mfg. Corp., 90 P.R.R.

Fae 1 BOO sviscssciesivesocresensstecieneimaitepaleiedaauiaaanmaininan 12

Zapata Hermanos Sucesores v. Hearthside Baking

Company, 313 F.3d 385 (7th Cir. 2002) ............. ee 9, 10

U.S. CODES, STATUTES AND RULES

BE TG 6 Pe eiiitttnictcbinninonamnimadinanaan 1,10

STATE CODES, STATUTES AND RULES

Be BiB eteies WF WF ccsnesessuntdetiepidnidce benabieatantidoeesmialabeaalea 20

Ba Rick cede OE Ds rentsccpescnrincsdatptahetulaescsdsachpnibans 1, 11, 16,137

OE i oi: OO Oe ccpeckcotds cclinccnkach tabssninussassapeaiobesiean 11, 14,15

Ee Sad RTO OS RED s cccrerevcssiviintapeissinaetpirridedagreneoas 11,14

SE. Ein FRG Pee FOG OU ivinsscsnisvtiniond dutecdeancacieameniodeubitaeaaian 19

OPINIONS BELOW

The decision of the Court of Appeals is reported at 483

F.3d 7 (1st Cir. 2007), and is reprinted in the Appendix

to the Petition (“Pet. App.”) at 1-11. The District Court’s

opinion is unreported and is reprinted at Pet. App. 12-23.

The Bankruptcy Court’s opinion is unreported and is

reprinted at Pet. App. 24-49.

JURISDICTION

The Court of Appeals entered its judgment on March

28, 2007 and denied Rehearing on May 30, 2007. This

Court has jurisdiction pursuant to 28 USC § 1254(1).

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

28 USC § 1652 and 31 L.P.R.A. § 3471 et seq.

STATEMENT

A. Factual Background

In September 1986 Advanced Cellular Systems and

Advanced Cellular Paging Systems’ (hereinafter Advanced

' Advanced Cellular Systems and Advanced Cellular Paging

Svstems share common ownership, a common board of directors, and

corporate officers. The two corporate entities have been treated as a

single entity throughout this litigation and therefore will be referred to,

collectively, as Advanced Cellular. Similarly, Puerto Rico Telephone

(Continued on following page)

Cellular) entered into a contract with Puerto Rico Tele-

phone Company and its affiliate Celulares Telefonica

(hereinafter PRTC) enabling Advanced Cellular to “re-sell”

cellular service provided by PRTC’s network to individual

customers. The contract, entitled “Wholesale Service

Agreement,” was concluded under Puerto Rico law. Ad-

vanced Cellular and PRTC maintained their relationship

under the Wholesale Service Agreement (hereinafter

Wholesale Agreement) and subsequent tariffs issued by

PRTC until April 1, 1998 when PRTC terminated its

relationship with Advanced Cellular due to what PRTC

maintains was an unpaid debt. Shortly thereafter, on May

29, 1998 Advanced Cellular filed for bankruptcy under

Chapter 11 of the Bankruptcy Code.

During the years between when the Wholesale

Agreement was entered in 1986, and the conclusion of the

business relationship between PRTC and Advanced

Cellular in 1998, the telecommunications industry wit-

nessed the growth of a phenomenon called cloning. “Clon-

ing” in this context occurs when people who do not have

permission to enter a cellular network re-program a non-

authorized handset in a manner to impersonate, or

“clone,” the signal of an authorized phone.’ By using a re-

programmed handset, or cloned handset, an unauthorized

user is then able to enter a cellular network without

paying for access to the network.

Company and Celulares Telefonica have been considered a single entity

throughout this litigation.

~ A cloned phone copies both the electronic seria) number (HEX™

number! of an authorized phone and its cellular number.

In 1986 when Advanced Cellular and PRTC entered

the Wholesale Agreement, cloning was not a problem and

was completely unforeseen as a potential danger. (Pet.

App. at 18). Beginning in the early 1990s and reaching its

peak in 1996, cloning became a problem costing the

telecommunications industry tens of millions of dollars per

year. Due to the billing practices common in the telecom-

munications industry, networks that were duped by

cloning charged authorized users with the expenses

incurred by the people who used cloned handsets and later

refunded this amount when the authorized user notified

the network of the cloning-related charge.

In the instant case, Advanced Cellular documented

over $7.1 million in charges sent to it by PRTC that were

the result of third-party cloning during the period from

1992-1996. PRTC acknowledged that the charges were the

result of cloning but only granted credits to Advanced

Cellular totaling approximately $5.8 million. (Pet. App. at

36). The difference between the amount credited to Ad-

vanced Cellular by PRTC to compensate it for cloning costs

and the amount charged to Advanced Cellular as the

result of third-party cloning is $1.33 million. This sum

represents the monetary element to the dispute between

Advanced Cellular and PRTC.

Prior to the commencement of the instant litigation,

PRTC issued a series of tariffs to Advanced Cellular

governing the price of access to its cellular network. These

tariffs issued subsequent to the conclusion of the Whole-

sale Agreement also carried provisions noting terms and

conditions of services between PRTC and its resellers.

These tariff agreements were not the product of negotia-

tion betwéen the parties but were written solely by PRTC

and delivered to its resellers, of which Advanced Cellular

was one.

The 1986 Wholesale Agreement references the unitary

nature of the tariffs that PRTC would issue subsequent to

the Agreement. The Wholesale Agreement stated that:

“{vjariances from this agreement in any Reseller order will

be of no effect, except that the prices specified ... may be

changed at the sole discretion of PRTC within the guide-

lines of the appropriate tariff.” Wholesale Agreement

Provision XXIII (Pet. App. at 65). Despite the unitary

nature of the tariffs, the parties agreed in the Wholesale

Agreement that PRTC would bear the cost of “failing to

maintain proper standards of maintenance and operation”

of its network. Wholesale Service Agreement, Provision V,

paragraph F (Pet. App. at 56).

In its 1994 tariff, PRTC included provisions that differ

from the original Wholesale Agreement. Specifically, PRTC

included a provision that affirmed its property rights in

the access numbers it issued to Advanced Cellular, Febru-

ary 1994 Tariff, Section III (c), and it included the follow-

ing provision:

The reseller shall be solely responsible for all

risk and expenses incurred in connection with its

actions in the sale and service of the Cellular

Service or any other acts of the reseller pursuant

to this tariff. The reseller shall act in all respect

on its own account and shall be solely responsible

for any credit verification, deposits, billing, con-

solidation, rebilling, reseller or authorized user

billing complaints, toll calls, bad debts and

fraudulent use, by any person of any number or

numbers assigned to the reseller.

February 1994 Tariff, Section IV, subsection (B)(5)(c) (Pet.

App. at 70).

The parties stipulate that no agreement between

them explicitly references cloning. The substance of the

dispute between the parties is how Puerto Rico law evalu-

ates the original Wholesale Agreement, the pattern of

performance between the two parties, and the 1994 tariff

issued by PRTC in determining which party was responsi-

ble for bearing the cost of cloning.

B. Proceedings Below

In September 1998, PRTC filed a Proof of Claim

totaling $1,655,391 in the United States Bankruptcy Court

for the District of Puerto Rico against Advanced Cellular.

Of this amount, $1,334,204 represented charges that were

the result of third-party cloning. Advanced Cellular

argued, however, that of the $1.6 million asserted in the

Proof of Claim, the $1.33 million that related to cloning

charges should be disallowed as that expense was the

responsibility of PRTC.”

The Bankruptcy Court convened an _ evidentiary

hearing and held that cloning was an attack on PRTC’s

network. The court also held that PRTC had a duty under

the contract to ensure that its network met industry

standards of security and should bear the costs when it

' Advanced Cellular also maintained that due to PRTC’s billing

irregularities, its improper rounding of air time, and failures to account

properly for payments it made, that PRTC owed Advanced Cellular in

excess of $700,000 separate from any issue pertaining to cloning fraud.

The Bankruptcy Court ruled in favor of Advanced Cellular’s claims

regarding these issues. The Bankruptcy Court's findings with respect to

these issues was not a subject before the First Circuit.

failed in this obligation.’ (Pet. App. at 38). Further, the

Bankruptcy Court held that in light of PRTC’s practice of

crediting over $5 million to Advanced Cellular to compen-

sate it for cloning costs, it “defied common sense” for PRTC

to argue that it was not, and did not perceive itself, re-

sponsible for cloning costs. In Re Advanced Cellular, 483

F.3d 7, 10 (1st Cir. 2007). The Bankruptcy Court further

held that the practice of the parties revealed that both

parties considered cloning to be an attack on the network

and that PRTC was therefore responsible for the costs.

Therefore, the Bankruptcy Court disallowed the portion of

PRTC’s proof of claim representing the costs of the cloning

charges. PRTC appealed to the District Court and it

affirmed. PRTC then appealed to the First Circuit.

The First Circuit reversed the District Court and

Bankruptcy Court because it held that the 1994 Tariff

Provision put the burden of the costs associated with

cloning on Advanced Cellular regardless of whether the

fraud was targeted against the network or perpetrated

by its individual customers. The Court held that cloning

was fraud, that Advanced Cellular was responsible for

fraud under its reading of the 1994 tariff, that no other

provision of the contract between the parties was relevant

* PRTC argued before the Bankruptcy Court that it disallowed

Advanced Cellular’s claims for cloning because Advanced Cellular took

longer than 90 days to notify PRTC about the cloning. The Bankruptcy

Court reiected PRTC’s argument and held, in the context of the

relationship between the two parties, that 90 days was an unreasonably

short period for Advance Cellular to notify PRTC about cloning claims.

As will be discussed, the First Circuit disposed of the case without

affirming whether the Bankruptcy Court’s holding that PRTC’s time

demands were unreasonable and therefore this argument is not a

subject of this Petition.

in allocating responsibility for preventing fraud against

the network, that the conduct of the parties during the

course of their 12 year business history was irrelevant,

that the fact that cloning was not foreseen at the time the

parties entered their agreement did not hold importance,

and that Advanced Cellular was therefore responsible for

the $1.33 million in costs due to cloning. The First Circuit

issued its opinion on March 28, 2007 and denied Petition-

ers’ Motion for Rehearing on May 30, 2007.

REASONS FOR GRANTING THE PETITION

I. THE FIRST CIRCUIT’S DECISION REPLACES

PUERTO RICO LAW WITH GENERAL LAW

DERIVED FROM A HAPHAZARD ASSORT-

MENT OF COMMON LAW JURISDICTIONS

AND GENERAL COMMON LAW PRINCIPLES

IN VIOLATION OF FEDERALIST PRINCIPLES

AND THE ERIE DOCTRINE.

On multiple dispositive points in its decision, the First

Circuit relied on law that is materially different from

Puerto Rico law. It removed a clause from the context of a

larger agreement pursuant to Massachusetts partnership

law. In Re Advanced Cellular, 483 F.3d 7, 11 (1st Cir. 2007)

(Pet. App. at 9). It assigned a broad meaning to the terms

in the severed clause pursuant to Delaware contract law.

(Pet. App. at 7). It based its interpretation of words in the

severed clause on the interpretive tools necessary for the

statutory construction of a federal statute. (Pet. App. at 6).

It excluded potentially conflicting contractual provisions

between the parties based on the Restatements. (Pet. App.

at 8). Each one of these discrete decisions was key to

the court’s holding. Yet, none of these decisions relied on

Puerto Rico law as is required by Erie and by numerous

supporting decisions from this Court. Indeed, the First

Circuit preferred to rely on a general principle derived

from the Restatements rather than consult Puerto Rico

law. At other points in its opinion, such as declaring that

cloning was “fraud” and of the type of fraud covered in the

agreement, it offered no other support for its declaration

than the declaration itself. Advanced, 483 F.3d at 11.

If any single one of these discrete elements of the

opinion were decided differently or if the law used to

support the court’s decision were different, the basis for

the holding could not have been the same. That in so many

fundamental components of its opinion the First Circuit

did not consult or cite or even provide some cursory con-

nection to Puerto Rico law demonstrates that the First

Circuit’s decision and mode of analysis is materially

different from that of a Puerto Rico court.

A. Long Standing Precedent Mandates that

the First Circuit Apply Substantive State

Law to Determine the Outcome of State-

based Claims Against Debtors

Although the instant action began in federal bank-

ruptcy court, federal courts are bound to apply state law in

assessing claims. This Court in Raleigh v. Illinois Dept. of

Revenue, 530 U.S. 15 (2000), held that:

Creditors’ entitlements in bankruptcy arise in

the first instance from the underlying substan-

tive law creating the debtor’s obligation, subject

to any qualifying or contrary provisions of the

Bankruptcy Code. The ‘basic federal rule’ in bank-

ruptcy is that state law governs the substance of

the claims, Congress having generally left the

determination of property rights in the assets of

a bankrupt’s estate to state law.

Raleigh v. Illinois Dept. of Revenue, 440 U.S. 15, 54 (2000)

(quotations omitted).

This Court, in Butner v. United States, 440 U.S. 48

(1979), established the rule and rationale governing the

application of state law to claims raised in bankruptcy

court.

Property interests are created and defined by

state law. Unless some federal interest requires a

different result, there is no reason why such in-

terests should be analyzed differently simply

because an interested party is involved in a

bankruptcy proceeding. Uniform treatment of

property interests by both state and federal courts

within a State serves to reduce uncertainty, to

discourage forum shopping, and to prevent a

party from receiving a windfall merely by reason

of the happenstance of bankruptcy.

Butner v. United States, 140 U.S. 48, 54 (1979) (emphasis

added).

The legal heritage of the rule in Butner traces back to

this Court’s decision in Erie R. Co. v. Tompkins, 304 U.S.

64 (1938). Although the instant case is not a “diversity

case,” as was true in Erie, “the Erie doctrine applies to any

case in which state law supplies the rule of decision.”

Zapata Hermanos Sucesores v. Hearthside Baking Com-

pany, 313 F.3d 385, 390 (7th Cir. 2002) (citing O’Melveny &

Mvers v. FDIC, 512 U.S. 79, 83-85, 87-88 (1994)). In

holding that the Erie doctrine applies to claims arising

from state law, the Zapata court confirms the plain lan-

guage of the governing statute which requires that “the

laws of the several states ... be regarded as rules of

decision in civil actions in the courts of the United States,

in cases where they apply.” 28 USC § 1652. As in the

instant case, the court in Zapata had to apply civil law

principles to the substantive matters in the dispute. The

court likened its obligation to apply civil law principles to

its obligation to apply state law and held that:

[U]nder the Erie doctrine a federal court is not

authorized to apply a different substantive law of

contracts in a diversity case from the law that a

state court would apply were the case being liti-

gated in a state court instead.

Zapato, 313 F.3d at 390.

B. The First Circuit’s Opinion Effectively Di-

vests Puerto Rico of Its Authority to Estab-

lish Contract Law Principles Governing the

Relationships Between Parties

Erie’s mandate is clear: “there is no federal general

common law.” Erie R. Co. v. Tompkins, 304 U.S. 64, 78

(1938). Despite this mandate, the First Circuit relied on

general common law principles to dispose of the instant

case.

Puerto Rico being a civil law jurisdiction relies first on

its Civil Code to help it interpret contracts. Petitioners

understand that the interpretation of a properly stated

rule of Puerto Rico contract law is not a prime concern

before this Court. Rather, the concern before this Court is

whether the First Circuit applied Puerto Rico law. There-

fore, Petitioners here briefly summarize Puerto Rico

contract law to demonstrate the chasm between what

Puerto Rico Jaw is and what the First Circuit applied.

The key statutes governing contract construction

under Puerto Rico law are 31 L.P.R.A. § 3471 et seg. The

first statute in this series, 31 L.P.R.A. § 3471, commands

that when the terms of a contract “are clear and leave no

doubt as to intentions” the literal meaning of the terms

shall be observed unless “the words should appear con-

trary to the evident intention of the contracting parties.”

This provision requires a two-step process defining

whether terms are clear and then whether the terms

contradict the intentions of the parties. To determine the

intentions of the parties, 31 L.P.R.A. § 3472 requires

courts must be attentive to the parties’ “acts, contempora-

neous and subsequent to the contract” (emphasis added). If

a contract uses general terms, 31 L.P.R.A. § 3473 requires

that “there should not be understood as included [in the

contract] things and cases different from those with regard

to which the persons . . . intended to contract.”

The First Circuit has in the past recognized the

uniqueness of Puerto Rico’s status as a civil law jurisdic-

tion. In Borschow Hosp. & Med. Supplies Inc. v. Cesar

Castillo Inc., 96 F.3d 10 (1st Cir. 1996), the court held that

“as a civil law jurisdiction, Puerto Rico eschews common

law principles of contract interpretation in favor of its own

civil code derived from Spanish law.” Emphasizing this

point, prior to the instant case, the First Circuit correctly

noted that “the Supreme Court of Puerto Rico has made

clear that the common law of the United States is not

controlling, when filling gaps in the civil law system.”

Guevara v. Dorsey Labs, Div. of Sandoz, Inc., 845 F.2d 364,

366 (lst Cir. 1988). Yet, in the instant case the First

Circuit did use common law to fill gaps.

The First Circuit placed its primary emphasis on

examining one portion of a clause in the February 1994

tariff between the parties. The portion of the clause reads

“reseller shall be solely responsible for any ... fraudulent

use, by any person, of any numbers assigned to reseller.”

The First Circuit’s only cited authority for taking this

clause out of context and making it determinative of the

proceedings is a common law case — Bank v. IBM Corp..,

145 F.3d 420 (1st Cir. 1998). In the instant case the First

Circuit held that “the provision that speaks directly to the

issue governs” and cited Bank for its authority. Advanced,

483 F.3d at 11 (Pet. App. at 9).

Although a First Circuit case, Bank, does not concern

Puerto Rico law. Rather, it is an analysis of Massachusetts

partnership law. The case involves complicated issues of

partnership law under Massachusetts law. Bank, 145 F.3d

at 422. The case does not, however, include an analysis of

Puerto Rico contract law — the law that is controlling in

the instant case. Moreover, Bank does not offer any justifi-

cation for taking one clause out of an agreement and

making it determinative of an issue under Puerto Rico law.

Indeed, Puerto Rico law mandates that “the various terms

of a contract should be read together and harmonized so as

to determine the true intent of the parties.” Ulpiano Casal

Inc., v. Totty Mfg. Corp., 90 P.R.R. 739 (1964). See also

Carillo Norat v. Camejo, 107 D.P.R. 132 (1978).

In the Wholesale Agreement and the various tariffs

there is only one provision that has “Fraud” in its title -

the “Abuse and Fraudulent Use of CRS” provision of the

Wholesale Agreement. Wholesale Service Agreement

Provision XIII (B). According to this section, Advanced

* CRS refers here to “Cellular Radio Service.”

Cellular was responsible for and obliged to prevent its

users from making

[Floul or profane expressions, [from] imper-

sonatling] another person with fraudulent or ma-

licious intent, to call another person so frequently

or at such times of day in any other manner so as

to annoy, abuse, threaten, or harass.

Wholesale Service Agreement Provision XIII(B) (Pet. App.

at 60). The parties here defined “fraud” in their agreement

in a manner that confined the term to certain acts perpe-

trated by the authorized users themselves. The First

Circuit, under its “Bank” doctrine did not explain why this

contract clause was not relevant in defining the scope of

fraud in the case or why Puerto Rico law requiring the

harmonization of various contract provisions should not

have been considered. Instead, once the First Circuit court

removed the clause from the context of the contract, it

sought the broadest possible meaning of the terms regard-

less of how it affected other provisions of the contractual

relationship.

The First Circuit held that Advanced Celluiar

“broadly assumeld]” responsibility for fraud due to the

wording of the 1994 tariff clause. Advanced, 483 F.3d at 11

(Pet. App. at 7). The First Circuit held that where parties

use broad terms they are responsible for the consequences.

The First Circuit cited not Puerto Rico law for this propo-

sition but rather MBIA Insurance Corp. v. Royal Indem.

Co., 426 F.3d 204 (3d Cir. 2005).

Unlike Bank, MBIA is a case analyzing contract law —

but it analyzes Delaware contract law. Rather than rely on

a properly stated rule of Puerto Rican law, the First

Circuit relied on the Third Circuit’s interpretation of

Delaware contract law. In MBIA, the court analyzed

Delaware’s “objective theory of contract.” MBIA, 426 F.3d

at 210. The court noted that Delaware’s law differs from

general principles of contract Jaw in many other jurisdic-

tions. “Although the law of contract generally strives to

enforce agreements in accord with their makers’ intent,

the objective theory considers ‘objective acts’ the best

evidence of that intent.” MBIA, 426 F.3d at 210 (quotations

omitted).

Petitioners cannot determine whether this is a proper

statement of Delaware law, but petitioners can argue with

confidence that Delaware law is not Puerto Rico law.

Indeed, according to the court in MBIJA, Delaware law

differs from other common law jurisdictions because it

uses different evidentiary standards to discern the intent

of the parties. Therefore, any general principle that can be

distilled from MBIA is best left to the construction and

application of contracts exclusively under Delaware law.

Binding parties who made a contract under Puerto Rico

law to the terms and rules of construction of Delaware law

is, without any other explanation, contrary to both the

Erie doctrine and to rational decision-making.

The First Circuit did not cite any Puerto Rico law

providing guidance to courts in construing broadly written

terms. Yet, Puerto Rico has a statutory provision on point.

31 L.P.R.A. § 3473 reads: “However general the terms of a

contract may be, there should not be understood as in-

cluded therein things and cases different from those with

regard to which the persons interested intended to con-

tract.” To take full effect, this provision requires courts to

analyze the intent of the parties involved in a contract — as

demonstrated by their acts contemporaneous with the

contract and subsequent to the contract. See 31 L.P.R.A.

§ 3472. The First Circuit refused to analyze the intent of

the parties under its interpretive scheme.

The First Circuit relied on a case interpreting Massa-

chusetts partnership law to justify its decision to analyze a

clause from the 1994 tariff independent of its context. The

First Circuit then relied on a case concerning Delaware

contract law to ascribe a broad meaning to the words used

in the clause. The First Circuit then sought support for

defining the term “any person” within the context of this

severed clause. The First Circuit relied on a Fifth Circuit

case, DIRECTV v. Budden, 420 F.3d 521 (5th Cir. 2005), to

help it interpret the phrase. Advanced, 483 F.3d at 11 (Pet.

App. at 6).

DIRECTV, however, was not a case that concerned the

civil law nor was it a case that concerned contract law.

Rather, the court in DIRECTV sought to define the term

“any person aggrieved” in the context of a federal criminal

statute. DIRECTV, 483 F.3d at 527. The DIRECTV court

noted that the statute at issue exhaustively listed a series

of people who could properly be categorized as “any person

aggrieved” in order to be covered by the federal statute. Jd.

The DIRECTY court, analyzing the examples enumerated

in the statute along with the statute’s use of the word

“include,” held that the term “any aggrieved person”

covers a broad category of people. Jd. at 528. DIRECTV did

not involve general rules of contract interpretation and

most especially did not deal in any way with how civil

systems generally interpret contract law. The First Circuit

did not note why it found this particular case from a

different jurisdiction about a different issue dispositive of

a matter of contract construction in a civil law jurisdiction.

Later in its opinion, the First Circuit bolstered its

broad reading of the clause by citing Metlife Capital Corp.

v. Westchester Fire Ins. Co., 224 F.Supp.2d 374 (D.P.R.

2002). The First Circuit summarized the holding in Metlife

by writing “under Puerto Rico law, contractual terms

should generally be assigned their common meanings.”

Advanced, 483 F.3d at 11 (Pet. App. at 8). The Metlife

court, however, summarized the rule in Puerto Rico in a

far more nuanced fashion:

When engaging in contract interpretation, con-

tract clauses and provisions should be read in re-

lation to one another, giving to those that are

unclear the meaning which arises from consider-

ing all the clauses together. Terms should be as-

signed their common meanings, and any term

having multiple meanings should be read in the

sense that is most suitable to give it effect.

Metlife Capital Corp. v. Westchester Fire Insurance Co.,

224 F.Supp.2d 374, 382 (D.P.R. 2002) (quotations omitted;

emphasis added). The Metlife’s court summary of Puerto

Rico law supports Advanced Cellular’s position raised

before the First Circuit rather than militates against it.

Congruent with the demands of the Puerto Rico Civil

Code, the Metlife summary of Puerto Rico law places an

emphasis on harmonization of all contract terms and on

the intent of the parties. The First Circuit, however, avoids

these statutory commands and avoids the implications of

Metlife’s summary of the edicts of Puerto Rico law by

narrowly rewording Metlife’s summary.

In addition to relying on a blunt summary of Metlife’s

understanding of Puerto Rico law, the First Circuit relies

on a Puerto Rico statute that it quotes incompletely. The

First Circuit cited 31 L.P.R.A. § 3471 as reading “If the

terms of a contract are clear and leave no doubt as to the

intentions of the parties, the literal sense of the stipula-

tions shall be observed.” Advanced, 483 F.3d at 12 (Pet.

App. at 9). There is a second clause to 31 L.P.R.A. § 3471,

however, that reads “[i]f the words lof the contract] should

appear contrary to the evident intention of the contracting

parties, the intention shall prevail.” The First Circuit

neither cites nor references the second clause of 31

L.P.R.A. § 3471. Petitioners concede that interpreting the

interplay between the two clauses of § 3471 can be diffi-

cult. Nevertheless, the First Circuit’s obligation to apply

Puerto Rico law required it to cite relevant provisions

correctly, apply them and to consider other relevant

provisions, including provisions such as statutory man-

dates to harmonize all provisions of a contract, statutory

commands to evaluate intent by considering the acts of the

parties centemporaneous with and subsequent to the

contract, and provisions to interpret ambiguous clauses

against the drafter. The First. Circuit’s omission of the full

citation of § 3471, its failure to apply it, and its failure to

consider and apply other provisions amid its preference for

the law of other jurisdictions over Puerto Rico law raise

grave questions about its willingness to apply Puerto Rico

law as required by this Court.

Although the First Circuit was willing to impose

definitions on terms used in the severed 1994 tariff clause

based on rules supplied from other jurisdictions, curiously,

the Court did not seek definitions of the terms used in the

clause when the same terms were defined in the Whole-

sale Agreement. The 1994 clause places responsibility on

Advanced Cellular for numbers “assigned to” it. These

“assigned numbers” are indeed the “access numbers” given

to Advanced Cellular by PRTC. The term “access numbers”

is defined in the Wholesale Agreement. In Section I of the

1986 Wholesale Service Agreement between the parties,

“access number” is defined as “a telephone number pro-

vided to Reseller by PRTC and associated with Reseller’s

or its authorized user’s mobile radio unit, enabling use of

the cellular system.” (Pet. App. at 51). This definition

cc:nbined with the provision limiting Advanced Cellular’s

hability for fraud to acts by its “authorized users” go

against the First Circuit’s broad reading of the severed

1994 tariff term. Further, Puerto Rico law would seem to

require a harmonization of all contract terms in accor-

dance with the intent of the parties as evinced by their

conduct contemporaneous with and subsequent to the

contract. The First Circuit, however, avoided the need to

state Puerto Rico law properly by relying on the Restate-

ment of Contracts instead. Advanced, 483 F.3d at 12 (Pet.

App. at 8).

The First Circuit held that “it is well established that

courts should avoid interpretations that render a provision

of an agreement surplusage. See Restatement (First) of

Contracts § 236 (1932).” Advanced, 483 F.3d at 12 (Pet.

App. at 8). This well-established rule, however, is a com-

mon law rule. Indeed, the Restatements primarily serve as

a source of general legal principles for common law juris-

dictions. Again, the First Circuit decided an important

issue in the instant case based on a source of law that is

irrelevant to the state law that should govern the case.

The First Circuit cites no Puerto Rico authority that

justifies its decision to read one clause broadly, the clause

taken from the 1994 tariff, and others narrowly, the

clauses from the 1986 Wholesale agreement. Indeed, after

citing the Restatements, the First Circuit reads the

clauses from the 1986 Wholesale Agreement so narrowly

that they are effectively excluded from consideration.

Compounding the First Circuit’s errors in relying on

general common law was the First Circuit’s proclivity to

omit key civil law inquiries. As noted above, the tariffs

issued by PRTC subsequent to the Wholesale Agreement

were drafted by PRTC and delivered to its resellers with-

out edit. Therefore, were the tariffs valid statements of the

parties’ intent? The Court did not answer this question

and instead declared, without citing a source, that both

parties considered the clause binding.” Advanced, 483 F.3d

at 11 (Pet. App. at 6). Moreover, the Court did not analyze

the 1994 tariff clause in a manner that acknowledged

that it was drafted by one side. 31 L.P.R.A. § 3478 re-

quires courts to interpret “obscure stipulations of a

contract” in a manner that does not favor the party

“occasioning the obscurity.” Puerto Rico courts have read

this provision of the civil code to interpret clauses against

the drafter “even if the clause [itself] is clear.” See Arthur

Young & Co. v. Virgilio Vega, 135 D.P.R. 157 (1994). See

also La Sagrada Familia v. Castillo, 107 D.P.R. 405

(1978) (holding that “courts should construe terms of a

lcontract] ... against party able to include larger amount

of onerous clauses in contract.”) Even if the clause

frum: the 1994 tariff agreement is “clear,” Puerto Rico

law required the First Circuit to have interpreted the

clause in a manner that reflected that PRTC drafted

it and acknowledge that PRTC was in a position to inflict

“onerous” conditions on Advanced Cellular. In this

“ Whether the clause severed from the 1994 tariff is binding and

how it should be interpreted are matters of law. Advanced Cellular,

however, rejects any notion that the tariff clauses were the product of

negotiations between it and PRTC. The tariffs use generic language, do

not specify particular parties beyond common labels such as “reseller,”

and were delivered by PRTC to its multiple resellers.

instance the First Circuit did not misapply Puerto Rico

law, it chose to ignore Puerto Rico law.

On a more practical level, the First Circuit did not

examine how its construction of the 1994 tariff clause

affected other civil code provisions governing the relation-

ship between parties. The First Circuit’s holding places all

the burden of fraud directed against PRTC’s network from

cloning on Advanced Cellular. Yet, PRTC is the party

responsible for maintaining its own network in accordance

with industry standards. During the evidentiary hearing

in Bankruptcy Court, PRTC’s own expert stated that

PRTC is the party responsible for controlling access to its

network. (Pet. App. at 19). The First Circuit’s holding

therefore places the costs of attacks on the network on one

party, Advanced Cellular, while the capability and respon-

sibility for protecting the network is on another party,

PRTC.

This situation may implicate Puerto Rico civil law

principles. Puerto Rico Civil Code 31 L.PR.A. § 3047

states a condition of performance “shall be considered as

fulfilled when the obligated party should voluntarily

prevent fulfillment.” In interpreting this provision of

Puerto Rico law in an earlier case, the First Circuit held

that “under the civil law a condition is deemed ‘performed’

when nonperformance is utterly within the control of one

of the parties.” Martin v. The Vector Company, Inc., 498

F.2d 16, 22 (1st Cir. 1974). During the evidentiary hearing,

the Bankruptcy Court found that PRTC was not meeting

its duty to keep its network up to the standards of the

industry. The ability to prevent or protect against cloning

was solely within the ability of PRTC and NOT Advanced

Cellular. Indeed the First Circuit’s interpretation of the

1994 tariff “so minimizes the duty of performance of one of

the parties [here PRTC’s duty to maintain its network] as

to be illusory” and therefore makes the clause void under

Puerto Rico law. Martin, 498 F.2d at 24.

Prior to the instant litigation, the parties had placed

responsibility for bearing the cost of fraud perpetrated by

authorized users on Advanced Cellular as Advanced

Cellular controlled decisions regarding to whom it would

sell its services while PRTC accepted responsibility for

maintaining its network. Given the facts of the case, it is

plausible that the most harmonious reading of the contrac-

tual relationship under Puerto Rico law was that the

parties allocated the responsibility for fraud to the party

best positioned to prevent fraud. Regardless of whether

this is so, this Petition maintains that it was the First

Circuit’s responsibility to properly state Puerto Rico and

apply it. The First Circuit omitted several crucial legal

inquiries without justification.

C. The First Circuit’s Failure To Apply Puerto

Rico Law Unfairly Discriminates Against

Puerto Rico Litigants And Will Only En-

courage Forum Shopping

The reluctance to apply Puerto Rico law in the instant

case compounded by the First Circuit’s preference for

general common law principles directly implicates the Erie

doctrine this Court refined in Hanna v. Plumer, 380 U.S.

460 (1965). In instructing federal courts on when and how

to apply State law, Hanna commanded that courts ask:

[W|hether application of the [State’s] rule would

make so important a difference to the character

or result of the litigation that failure to enforce it

[the State’s law] would unfairly discriminate

against citizens of the forum State, or whether

application of the rule would have so important

an effect upon the fortunes of one or both of the

litigants that failure to enforce it would be likely

to cause a plaintiff to choose federal court.

Hanna v. Plumer, 380 U.S. 460, 468 (1965) (emphasis

added). If a federal court answered these questions posed

in Hanna in the affirmative, the court was obliged to apply

the state law. Id. See also Gasperini v. Center for the

Humanities, 518 U.S. 415, 428 (1996) (affirming Hanna

and holding that a New York law limiting damage awards

be applied by a federal court because it was different from

the federal standard).

In the instant case, the First Circuit’s fondness for

common law and its reliance on common law cases and

principles certainly altered the character of this litigation

from what a Puerto Rico court would have done. The First

Circuit’s opinion more than altered the character of the

litigation, however. Not only did the First Circuit omit

several questions that Puerto Rico law requires to be

considered, it relied on Massachusetts Partnership law to

justify its severance of a clause from a larger contractual

scheme, it relied on Delaware contract law to assign a

broad meaning to the terms in the severed clause, it relied

on interpretive tools derived from rules to construct

federal statutes not civil law contracts, and preferred to

consult the Restatements on Contract rather than Puerto

Rico law to justify its exclusion of competing contractual

provisions. Cumulatively, these individual decisions

comprising the First Circuit’s holding evince contempt for

Puerto Rico law and very likely produce a result that is

materially different from what a Puerto Rico court would

have decided.

The First Circuit’s holding represents a disregard for

jurisdictions such as Puerto Rico that have a unique legal

heritage compared to other jurisdictions where the appli-

cation of general common law principles is less offensive.

Regardless of how apt a general legal principle may be or

how relevant a principle derived from another jurisdiction

may be, Erie requires the law of the forum state to be

applied.

The First Circuit did not have to “divine” Puerto Rico

law in the instant case by consulting other authorities as

Puerto Rico law presents a clear method of analysis for

interpreting contract provisions. The First Circuit chose to

disregard this methodology. It chose instead to rely on

cases from other jurisdictions that, in some instances, did

not even concern contract law. If allowed to stand, the

First Circuit’s opinion creates an incentive for parties to

seek federal jurisdiction if they believe Puerto Rico law is

unfavorable to them. Further, the opinion will have

serious business consequences as parties will be unsure

whether Puerto Rico law will govern their transactions or

if general principles of common law will. Regardless, the

First Circuit's decision is a serious affront to the doctrine

established by Erie. This Court in Erie summarized its

rationale with the following:

|L]aw in the sense in which courts speak of it to-

day does not exist without some authority behind

it. The common law in so far as it is enforced in a

State, whether called common law or not, is not

the common law generally but the law of that

State existing by the authority of that State

without regard to what it may have been in

England or anywhere else. ... The authority and

only authority is the State, and if that be so, the

voice adopted by the State as its own (whether it

be of the legislature or of its Supreme Court)

should utter the last word.

Erie v. Tompkins, 304 U.S. 64, 79 (1938) (emphasis added;

quotations omitted). In the instant case, Puerto Rico’s

voice was not heard.

CONCLUSION

For the foregoing reasons, Petitioners respectfully

request this honorable Court to grant the Petition.

Respectfully submitted,

CARMEN CONDE AND ASSOCIATES

CARMEN CONDE TORRES

ROBERT FREEDMAN*

254 San Jose Street, 5th Floor

Old San Juan, PR 00901

(787) 729-2900

Counsel for Petitioners

*Counsel of Record

App. 1

United States Court of Appeals

For the First Circuit

No. 06-1332

IN RE: ADVANCED CELLULAR SYSTEMS, INC.;

ADVANCED PAGING SYSTEMS CORP.,

DEBTORS.

PUERTO RICO TELEPHONE COMPANY, d/b/a VERI-

ZON WIRELESS, f/k/a CELULARES TELEFONICA,

INC., f/k/a VERIZON WIRELESS PUERTO RICO, INC.

Creditor, Appellant,

ADVANCED CELLULAR SYSTEMS, INC.;

ADVANCED CELLULAR PAGING SYSTEMS CORP.,

Debtors, Appellees.

APPEAL FROM THE

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

{Hon. Salvador E. Casellas, Senior U.S. District Judge]

App. 2

Before

Lynch, Circuit Judge,

John R. Gibson,* Senior Circuit Judge,

and Howard, Circuit Judge.

Ricardo F. Casellas, with whom Ricardo L. Ortiz Colon

and Fiddler Gonzalez & Rodriguez, P.S.C. were on brief,

for appellant.

Carmen D. Conde Torres with whom C. Conde &

Associates was on brief for appellee.

March 28, 2007

HOWARD, Circuit Judge. This appeal concerns a

contract dispute that arose during the course of a bank-

ruptcy proceeding. The debtor is Advanced Cellular Sys-

tems, Inc., a reseller of cellular telephone numbers and

services in Puerto Rico. Through an arrangement with the

Puerto Rico Telephone Company, Advanced Cellular

purchased cellular services and te'vphone number? from

Puerto Rico Telephone at wholesale prices and reso’. them

to consumers at retail prices. The relationship between

Advanced Cellular and Puerto Rico Telephone was gov-

erned by a contract entered into in 1986 and by subse-

quent tariffs filed by Puerto Rico Telephone with the

Puerto Rico Telephone Authority. In April 1998, Puerto

* Of the United States Court of Appeals for the Eighth Circuit,

sitting by designation.

App. 3

Rico Telephone ended its relationship with Advanced

Cellular because of Advanced Cellular’s allegedly delin-

quent debts.

Thereafter Advanced Cellular filed for bankruptcy

protection under Chapter 11 of the Bankruptcy Code, and

Puerto Rico Telephone filed a proof of claim for the dis-

puted debt in the amount of $1,655,391.96. Advanced

Cellular objected to this claim, asserting that, in fact,

Puerto Rico Telephone owed Advanced Cellular money.’ It

based this objection on several grounds, including that

Puerto Rico Telephone owed Advanced Cellular reim-

bursements in the sum of $1,334,204.62 for the fraudulent

use of telephone numbers that it had purchased from

Puerto Rico Telephone.

The type of fraud at issue is commonly referred to as

cloning. Cloning occurs when a third party uses a device to

steal the identifying information of an authorized cellular

telephone number through the air waves and then uses

the stolen information to make calls that appear to have

originated from the authorized number. Cloning surfaced

in the cellular telephone industry in the early 1990s. In

response to this problem, which placed significant finan-

cial strain on Advanced Cellular and Puerto Rico Tele-

phone’s other resellers, Puerto Rico Telephone began to

reimburse resellers for losses suffered from cloning. To

receive reimbursements, Puerto Rico Telephone required

resellers to submit claims within 90 days of billing.

‘ The bankruptcy court limited its consideration of Advanced

Cellular’s objection to whether it owed funds to Puerto Rico Telephone.

The court dismissed without prejudice Advanced Cellular’s claim that

Puerto Rico Telephone owed it money.

App. 4

During the course of their relationship, Advanced

Cellular received over $5,750,000 in reimbursements for

cloning from Puerto Rico Telephone. The dispute in this

case centers on $1,334,204.62 in claims made by Advanced

Cellular that Puerto Rico Telephone had denied because

they were filed outside of the 90-day window. Before the

bankruptcy court, Puerto Rico Telephone claimed that it

had no contractual obligation to reimburse Advanced

Cellular for cloning claims at all, and therefore had the

discretion to deny claims that were untimely. Advanced

Cellular countered that Puerto Rico Telephone was con-

tractually responsible for losses incurred due to cloning

and that the 90-day claim window was arbitrary and

unreasonable.

The bankruptcy court agreed with Advanced Cellular.

It concluded that the parties’ agreement did not have a

specific provision regarding cloning but that Puerto Rico

Telephone had a contractual duty to maintain and operate

the cellular network. The court determined that this duty

included an obligation to take responsibility for cloning. It

also concluded that it “defied common sense” to believe

that Puerto Rico Telephone would have reimbursed over

$5 million of cloning claims made by Advanced Cellular if

there were no obligation to do so. Finally, the court ruled

that the 90-day window for reimbursement claims was

unreasonable and that Puerto Rico Telephone “had a duty

... to allow Advanced Cellular a reasonable time, such as

120 days, to submit their [sic] fraud claims.” The court

App. 5

accordingly disallowed Puerto Rico Telephone’s proof of

claim.”

Puerto Rico Telephone appealed to the district court,

which affirmed. The district court addressed a provision of

the tariff not explicitly mentioned by the bankruptcy court

that provided that Advanced Cellular “shall be solely

responsible for any ... fraudulent use, by any person, of

any number or numbers assigned” to it. The court inter-

preted this provision to apply only to fraud committed by

“authorized users” of numbers assigned to Advanced

Cellular. Because cloning is fraud conducted by unauthor-

ized third parties, the court concluded that this provision

did not govern. The court also concluded that this provi-

sion could not apply to cloning because Advanced Cellu-

lar’s relationship with Puerto Rico Telephone had

commenced in 1986, which was at least five years before

cloning emerged as a problem in the cellular telephone

industry.

Having concluded that the fraudulent use provision

did not apply, the district court adopted the bankruptcy

court’s rationale that Puerto Rico Telephone was responsi-

ble for cloning because of its contractual obligation to

operate and maintain the celiular network and because of

its actions in reimbursing sellers for cloning losses. The

court also upheld the bankruptcy court’s ruling that the

* While the cloning fraud issue accounted only for $1,334,204 62 of

the $1,655,391.96 that Puerto Rico Telephone claimed, the bankruptcy

court concluded that Advanced Cellular was entitled to other credits in

the sum of $709,277.04. It therefore held that Advanced Cellular was

entitled to a total credit of $2,043.480.27, which exceeded Puerto Rico

Telephone’s entire claim. The rulings that resulted in the $709,277.04

credit in favor of Advanced Cellular have not been appealed.

App. 6

90-day filing window was unreasonable because Puerto

Rico Telephone could not “unilaterally condition its own

preexisting obligation” to assume responsibility for clon-

ing. Puerto Rico Telephone timely appealed.

We review the bankruptcy court’s findings of fact for

clear error and its rulings of law de novo. Palmacci v.

Umpierrez, 121 F.3d 781, 785 (1st Cir. 1997). In so doing,

we provide “no particular deference” to the district court’s

conclusions. Jn re Healthco Int'l, Inc., 132 F.3d 104, 107

(1st Cir. 1997).

The validity of Puerto Rico Telephone’s proof of claim

rests primarily on the plain meaning of the relevant tariff,

and so we look to Puerto Rico law to guide our analysis.

See Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 20 (2000)

(“The ‘basic federal rule’ in bankruptcy is that state law

governs the substance of claims.”) (citing Butner v. United

States, 440 U.S. 48, 57 (1979)). Puerto Rico Telephone

argues, as it has throughout this litigation, that the

tariff’s fraudulent use provision unambiguously placed

the risk of loss from cloning on Advanced Cellular. As the

parties agree that the tariff binds them, we turn to con-

sider this provision.

The tariff provides that Advanced Cellular, as a

reseller, “shall be solely responsible for any .. . fraudulent

use, by any person, of any number or numbers assigned to”

it. Cloning is a form of “fraudulent use” as it involves a

misstatement by a third party that the party is an author-

ized user of a cellular telephone number; cloning is con-

ducted by “any person,” cf. DIRECTV, Inc. v. Budden, 420

F.3d 521, 528 (5th Cir. 2005) (describing the phrase “any

person” as broad); and cloning involves the making of

telephone calls by third parties impersonating authorized

App. 7

users of “numbers assigned to” Advanced Cellular. Under

this plain reading of the fraudulent use provision, Advanced

Cellular assumed responsibility for losses from cloning.

Advanced Cellular offers several unavailing argu-

ments in an attempt to undermine this straightforward

reading of the fraudulent use provision.’ First, it points

out that its relationship with Puerto Rico Telephone began

in 1986, before cloning had surfaced as a problem. Based

on this fact, it argues that the fraudulent use provision

cannot be interpreted to reflect an intent to assign respon-

sibility for losses from cloning. While it is true that the

parties’ initial agreement was signed in 1986, the tariff

was not filed until 1994, after cloning had emerged.

Moreover, even if the risk of cloning was unanticipated

when the tariff was adopted, Advanced Cellular agreed to

broadly assume the risk of all fraudulent use. If Advanced

Cellular meant to agree to assume a narrower risk, it was

incumbent upon it, especially as a sophisticated party, to

make the limitation clear. See MBIA Ins. Corp. v. Royal

Indem. Co., 426 F.3d 204, 218 (3d Cir. 2005) (where sophis-

ticated parties include broadly worded clauses in con-

tracts, courts will likely assume that they “said what they

meant and meant what they said”).

Second, Advanced Cellular contends that the fraudu-

lent use provision was intended to apply only to fraud

perpetrated by “authorized users” of the cellular numbers

assigned to it and therefore does not cover cloning perpe-

trated by unauthorized third parties. The fraudulent use

> We reject Advanced Cellular’s contention that Puerto Rico Tele-

phone waived reliance on the fraudulent use provision. The argument

was squarely raised in the bankruptcy and district courts.

App. 8

provision does not, however, refer to “authorized users”

but rather to “any person,” a term with a common mean-

ing broad enough to encompass fraud committed by third

parties. See Metlife Capital Corp. v. Westchester Fire Ins.

Co., 224 F. Supp. 2d 374, 382 (D.P.R. 2002) (stating that

under Puerto Rico law contractual terms should generally

be assigned their common meanings). Indeed, the phrase

“authorized user” appears in other provisions of the tariff,

which strongly suggests that this was not the intended

meaning of “any person” in the fraudulent use provision.

Third, according to Advanced Cellular, the fraudulent

use provision was meant to apply only to losses from

stolen cellular telephones. This argument fails because the

tariff contains a specific provision directly related to stolen

telephones.’ It is well-established that courts should avoid

interpretations that render a provision of an agreement

surplusage. See Restatement (First) of Contracts § 236

(1932). To interpret the fraudulent use provision to apply

only to losses from stolen cellular telephones would violate

this principle because it would render the provision

directly related to the issue meaningless.

Fourth, Advanced Cellular asserts that a provision in

the 1986 agreement concerning Puerto Rico Telephone’s

responsibility for maintaining the cellular network makes

it liable for cloning. The provision states, in relevant part,

that Puerto Rico Telephone is responsible for “mistakes,

omissions, interruptions, delays, errors or defects in

transmission” that result from its failure “to maintain

* Under this provision, Advanced Cellular was responsible for

losses from stolen telephones until it informed Puerto Rico Telephone of

the loss

App. 9

proper standards of maintenance and operation” of the

cellular network. Through this provision, Puerto Rico

Telephone appears to have taken responsibility for techni-

cal problems in service. Cloning by third parties is differ-

ent in kind from these sorts of difficulties, as it is the

product of wrongful human conduct, not a system mal-

function. In any event, the network maintenance provision

does not specifically cover losses from fraudulent use, and

therefore, the provision that speaks directly to this issue

governs. See Bank v. IBM Corp., 145 F.3d 420, 427-28 (1st

Cir. 1998).

Finally, Advanced Cellular relies on Puerto Rico

Telephone’s policy of reimbursing timely cloning fraud

claims from resellers to argue that Puerto Rico Telephone

was contractually obligated to provide such reimburse-

ments. It contends that this evidence shows the parties’

intent because Puerto Rico Telephone would never have

reimbursed such claims unless required to do so by con-

tract.

Under Puerto Rico law, “{i]f the terms of a contract are

clear and eave uv deubi as to the intentions of the con-

tracting parties, the literal sense of its stipulations shall

be observed.” P.R. Laws Ann. tit 31, § 3471. Consequently,

a court may not consider extrinsic evidence at all, if it

finds that the terms of an agreement are clear. Borschow

Hosp. & Med. Supplies, Inc. v. Cesar Castillo, Inc., 96 F.3d

10, 15 (1st Cir. 1996); Vulcan Tools of P.R. v. Makita

U.S.A., Inc., 23 F.3d 564, 567 (1st Cir. 1994). An agreement

is clear when it can “be understood in one sense alone,

without leaving any room for doubt, controversies or

difference of interpretation.” See Catullo v. Metzner, 834

F.2d 1075, 1079 (1st Cir. 1987) (internal citation omitted).

App. 10

As discussed above, Advanced Cellular unambiguously

assumed the risk of losses from cloning through the

tariff’s fraudulent use provision. Therefore, extrinsic

evidence is not admissible to assist in the interpretation of

the provision.’ See Mercado-Garcia v. Ponce Fed. Bank,

979 F.2d 890, 894 (1st Cir. 1992). In a similar circum-

stance, we affirmed the exclusion of extrinsic evidence of a

party’s attempt to accommodate the other by not enforcing

clear contractual terms. See Executive Leasing Corp. v.

Banco Popular de P.R., 48 F.3d 66, 69 n.5 (1st Cir. 1995).

We determined that, because the meaning of the contract

at issue was clear on its face, the party's subsequent

conduct was not admissible to alter the contract’s unambi-

guous terms. /d. So too here.*

In sum, the tariff’s fraudulent use provision unambi-

guously placed the risk of loss from cloning on Advanced

Cellular, and it was error to credit Advanced Cellular for the

cloning claims not reimbursed by Puerto Rico Telephone. We

* Advanced Cellular argues only that Puerto Rico Telephone’s

conduct in reimbursing cloning claims is relevant to interpreting the

contract. It does not argue that this conduct demonstrated a modifica-

tion or other alteration of the parties’ agreement.

* Even were we to consider extrinsic evidence concerning Puerto

Rico Telephone’s conduct in reimbursing cloning claims, we do not think

that it bears the weight placed upon it by the bankruptcy court. There

was evidence that cloning fraud was causing Puerto Rico Telephone’s

resellers substantial financial difficulties. Even though not contractu-

ally obligated to do so, it would not “defiy] common sense” for Puerto

Rico Telephone to assume losses stemming from cloning in the hope of

forestalling its resellers from suffering crippling losses that could force

them out of business.

App. 11

therefore vacate the judgment and remand for further

proceedings consistent with this opinion.’

So ordered.

* Puerto Rico Telephone argued in its brief that we should decide

the legal significance of an alleged admission by Advanced Cellular that

it owed Puerto Rico Telephone in excess of $700,000. At oral argument,

Puerto Rico Telephone conceded that this claim had not been resolved

by the bankruptcy court and therefore should not be decided as part of

this appeal. Puerto Rico Telephone may pursue this argument on

remand.

App. 12

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

PUERTO RICO TELEPHONE

COMPANY, CELULARES

TELEFONICA, INC.

Appellants Civil No. 02-1908(SEC)

Vv.

ADVANCE CELLULAR

SYSTEMS, INC.,

ADVANCE CELLULAR

PAGING SYSTEMS, CORP.

Appellees

*”

x ke KKK KK KK KK kK Ke OK

OPINION AND ORDER

Pending before the Court is Puerto Rico Telephone

Company and Celulares Telefonica, Inc.’s (herein “Appel-

lants” or “*PRTC”) appeal of the Bankruptcy Court’s Opinion

and Order of March 12, 2002 in Case No. 98-07437(ESL)

consolidated with Case No. 98-07438(ESL) (Docket # 13,

Ex. 5). PRTC has filed its brief on appeal (Docket # 13) and

Advance Cellular Systems, Inc./Advance Cellular Paging

Systems, Corp. (herein “Appellees” or “ACS”) has filed its

brief in opposition (Docket # 18). PRTC replied (Docket #

20) and ACS sur-replied (Docket # 24). After carefully

considering the parties’ filings and the applicable law, for

the reasons set forth below, we AFFIRM.

Procedural Background

On September of 1986 PRTC and ACS entered into

a Wholesale Service Agreement (herein “the Agreement”)

App. 13

under which ACS became a reseller of PRTC’s cellular

telephone numbers and services through the PRTC cellu-

lar network (Docket # 13, JAPP 0158-0172). However, on

April 1, 1998, due to an alleged debt, PRTC disconnected

the services of ACS (Docket # 18 at p. 4). Then, on May 29,

1998, ACS filed for bankruptcy under Chapter 11 of the

Bankruptcy Code (Docket # 18 at p. 4). On September 16,

1998, PRTC timely filed a Proof of Claim, Proof of Claim

No. 18, for the amount of $1,655,391.96 (Docket # 13,

JAPP 0020-0021). On December 23, 1998, ACS filed an

objection to said Proof of Claim (Docket # 13, JAPP 0022-

0023). After an evidentiary hearing, the Bankruptcy Court

issued an Opinion and Order deducting certain amounts

from PRTC’s Proof of Claim and further disallowing the

claim in its entirety (Docket # 13, JAPP 0783-0792).

Specifically, the Bankruptcy Court held that: (1) inasmuch

as PRTC had control over its cellular network and a duty

to maintain the same, PRTC had a duty to make adjust-

ments for fraud claims and “to allow ACS a reasonable

time, such as 120 days, to submit their fraud claims;” (2)

ACS made payments in excess of the amounts credited by

PRTC during the period from 1993 to 1998; (3) PRTC

overcharged ACS by improperly rounding the air time of

calls to six seconds; and (4) PRTC improperly retained the

billing tapes for periods over which ACS provided services

to its customers, preventing ACS from billing its custom-

ers (Docket # 13, JAPP 0792). Accordingly, the Bankruptcy

Court found that since the amount to be credited to ACS

(i.e. $2,043,480.27) exceeded the amount of PRTC’s claim

(i.e. $1,655,391.96), the Proof of Claim would be disallowed

in its entirety.

PRTC appeals from said Opinion and Order alleging

that the Bankruptcy Court erred by: (1) finding that PRTC

App. 14

had a duty or contractual obligation to deduct all claims

for cellular fraud from the amounts due by ACS; (2)

determining that ACS’s fraud claims were unfairly or

unreasonably denied by PRTC; (3) making a set-off of the

alleged credits and the proof of claim; (4) failing to give

weight to ACS’s admission of liability of certain sums owed

to PRTC in the proof of claim; (5) finding that ACS had

made payments which were not credited by PRTC; (6)

determining that PRTC illegally retained, or had an

obligation to return to ACS, the billing tapes after the

termination of the agreement; and (7) deciding that PRTC

failed to maintain adequate control to prevent fraudulent

usage of its network (Docket # 13).' We will address each

of these arguments to the extent that it becomes necessary

in the same order followed by the Opinion and Order

subject of this appeal.

Standard of Review

When reviewing the decision of a bankruptcy court,

a district court reviews the bankruptcy court’s factual

findings, whether based on oral or documentary evidence,

under the clear error standard, and its conclusions of law

de novo. Rule 8013 Fed.R.Bankr.P.; See In re G.S.F. Corp.,

938 F.2.i 1462, 1474 (1st Cir. 1991); Matter of Torres Lopez,

138 B.R. 348, 349 (D.P.R. 1992). A factual finding is

“clearly erroneous” only when the appellate court is left

' The Court notes that PRTC has failed to present any arguments

contesting the Bankruptcy Court’s finding that PRTC overcharged ACS

by incorrectly rounding the air time usage of calls. Per said finding, the

Bankruptcy Court credited ACS in the amount of $300,062.95. Having

failed to present any arguments on that respect, we hold that PRTC has

waived their right to appeal said matter. See Docket # 18 at p. 11.

App. 15

“with the definite and clear conviction that a mistake has

been committed.” Jn re the Bible Speaks, 869 F.2d 628,

630 (1st Cir. 1989) (quoting Anderson v. Bessermer City,

470 U.S. 564 (1985)). “However, two or more permissible

views of the evidence preclude|s] a finding of clear error.”

In re Advance Cellular Systems, Inc., 262 B.R. 10, 13

(D.P.R. 2001) (citations omitted). As such, the district

court shall give due weight to the opportunity of the

bankruptcy court to judge the credibility of the witness.

Rule 8013 Fed.R.Bankr.P. The district court may then

affirm, modify, or reverse a bankruptcy court’s judgment or

order, or may remand the case for further proceedings.

Applicable Law and Analysis

1. Fraud Claims

During the course of the business relationship be-

tween PRTC and ACS the existence of fraud in the cellular

service market surfaced, affecting said relationship. This

fraud consisted mainly of the theft of the cellular signal

and the use of this signal to make unauthorized calls

thiivugl aclive phone numbers, evading payment for the

same. When ACS’s clients requested a credit for these

fraudulent calls, ACS would credit them and would pro-

ceed to request from PRTC a credit for the same. While

PRTC granted over $5,000,000 in fraud credits to ACS, it

denied ACS’s fraud claims amounting to $1,334,204.62.

ACS has therefore objected to PRTC’s proof of claim

alieging that out of the $1,655,391.96 claimed by PRTC,

$1,334,204.62 corresponded to unfairly denied fraud

claims.

After analyzing the provisions of the Agreement and

applicable tariffs, the Bankruptcy Court found that the

App. 16

fraud claims in question were a result of the unauthorized

access to the PRTC network and that said type of fraudu-

lent conduct was not taken into account by PRTC or ACS

in the Agreement (Docket # 13, JAPP 0787). As such, the

Bankruptcy Court concluded that since PRTC had control

of its network, which :mplies the imposition of proper

standards of maintenance and operation of the same, it

was responsible for the costs of fraud claims (Docket # 13,

JAPP 0789). The Bankruptcy Court reasoned that al-

though no specific provision of the Agreement held PRTC

accountable for cellular fraud claims, the fact that PRTC

had provided credit adjustments in excess of five (5)

million dollars evidenced PRTC’s duty to make adjust-

ments for said claims. This conclusion was accompanied by

the Bankruptcy Court’s finding that the ninety (90) day

limitation period imposed by PRTC for its resellers to

submit their fraud claims to PRTC was unreasonable and

that, as such, ACS’s fraud claims submitted past the 90-

day deadline, were unfairly denied by PRTC (Docket # 13,

JAPP 0789).

To this end, PRTC avers that the Bankruptcy Court

erred by finding that: (1) PRTC had a duty to credit

resellers for fraud claims; (2) PRTC was negligent in the

maintenance of their network; and (3) PRTC’s 90-day

limitation period for resellers to file their fraud claim was

unreasonable. In essence, PRTC alleges that the applica-

tion of Puerto Rico law reveals that PRTC did not have a

duty to credit fraud claims and that PRTC only granted

fraud credits to ACS as a “good-faith gesture” in their

contractual dealings. PRTC further argues that the

Bankruptcy Court erred in disregarding the terms of the

Agreement and by assuming that said good-faith gesture

was simply not credible (Docket # 13 at pp. 17-18). Per the

App. 17

standard delineated above, we review de novo the Bank-

ruptcy Court’s interpretation of the contractual relation-

ship between PRTC and ACS and for clear error any

findings of fact that follow. We agree with the Bankruptcy

Court’s holding and affirm its application of the fraud

credits.

In its Opinion and Order, the Bankruptcy Court

stressed that the two (2) documents governing the rela-

tionship between PRTC and ACS are the Agreement and

the tariffs emitted thereunder (Docket # 13, JAPP 0787).

This much remains uncontested. Thus, we take a close

look at these documents. Section V(F) of the Agreement

provides that PRTC will be held liable to ACS for any

damages suffered, but only in an amount which shal] not

exceed an amount equivalent to the proportionate charge

to ACS, as a result of:

errors or defects in transmission, or failures or

defects in facilities furnished by P.R.T.C., occur-

ring in the course of furnishing CRS and not

caused by the negligence of RESELLER or its au-

thorized users, or of P.R.T.C. in failing to main-

tain proper standards of maintenance and

operation and to exercise reasonable supervision.

(Docket # 13, JAPP 0164). On the other hand, the applica-

ble tariff, in the pertinent part, states that “(t]he reseller

[ACS] shall be solely responsible for all risks and expenses

incurred in connection with its actions in the sale and

service of the Cellular Service ... [t]he reseller shall act be

solely responsible for any ... fraudulent use, by any

person of any number or numbers assigned to the reseller.”

(Docket # 13, JAPP 1374). Per the foregoing language, it

appears that while PRTC assumed liability for any defects in

its network and for damages on account of any negligence in

App. 18

the maintenance and operation of the same, ACS assumed

all risks of the fraudulent use “by any person of any

number(s)” assigned to it. That is, fraudulent use by

authorized users. Therefore, a finding that the fraud in

question occurred in the network or as a result of the

improper maintenance and operation of the same was

sufficient to impose liability on PRTC at least for “an

amount equivalent to the proportionate charge to [ACS]

for the period of service during which such mistake,

omission, interruption, delay, error or defect in transmis-

sion, or failure or defect in facility occurs.” (Docket # 13,

JAPP 0164). Holding ACS accountable for the costs of

fraud as a result of “defects in [the] facilities furnished by

PRTC” would be unwarranted.

Both parties agree that the fraud in question was not

contemplated by either party at the time of entering into

the Agreement. In fact, this type of fraud surfaced some-

time in 1992-1993, five to six (5-6) years from the date of

the Agreement (Docket # 13, JAPP 0984). The fact that

when the parties entered into the Agreement this type of

fraud was inexistent belies any possibility that the con-

tractual clause that governs ACS’s assumption of risk for

fraudulent use includes the type of fraud that is at issue

here.

Per the evidence in the record, the fraud consisted on

the theft of the electronic serial numbers of cellular

numbers assigned to authorized users and the subsequent

phone calls made using said authorized users’ numbers

without authorization (Docket # 13, JAPP 0983, 1315).

This theft occurred through the airwaves or air signals

(Docket # 13, JAPP 1320). It follows, that although

through authorized users’ numbers, the fraud in question

was committed by unauthorized users, that is, people who

App. 19

hacked the network to steal the signal and make unau-

thorized calls. Therefore, the conclusion that the theft

occurred in the network is not only reasonable but logical.

It was the network, whether it be for the lack of adequate

maintenance or operation or not, that allowed the unau-

thorized users to steal the signal from the airwaves and

make the unauthorized calls.

Inasmuch as the fraud at issue here occurred in the

PRTC network and that it was PRTC the one in control of

the access to its network, logically, ACS cannot be held

liable for said fraud. Naturally, ACS could not have con-

trolled or prevented the fraud. It could only help, as it did,

in the expedient investigation and reporting of the fraud

claims to PRTC. As such, regardless of whether PRTC

failed to timely and adequately prevent the fraud, failed to

implant the necessary technology to battle the fraud more

effectively, or negligently failed to maintain and operate

the network, the fact of the matter is that the network

belonged to PRTC and that it was PRTC who could have

prevented said fraud.° As testified by Mr. Millan, PRTC

controls the access to its network (Docket # 13, JAPP

1334-1335). It follows then that absent a provision in the

Agreement whereas ACS assumed the risk of fraud by

unauthorized users, ACS was entitled to receive credits for

‘ As to this issue, the Bankruptcy Court was faced with contradict-

ing evidence: on the one hand, the Comptroller's Audit Report indicat-

ing negligence by PRTC in the maintenance and operation of the

network and on the other hand, PRTC’s witness, Mr. Millan, who

testified that PRTC had invested millions of dollars in the purchase and

installation of fraud prevention technology. The Bankruptcy Court,

which evaluated the evidence first hand, gave credibility to the Audit

Report and not to Mr. Millan's testimony. This is an issue of credibility

which we will not disturb. See Docket # 13, JAPP 0175-0207 & JAPP

1321-1326.

App. 20

fraud in the network. Furthermore, the fact that, by its

own accord, PRTC granted more than $5,000,000 in fraud

credits to ACS is credible evidence that PRTC recognized

said obligation and that the fraud could not be attributed

to ACS or its clients, ACS’s authorized users. See Docket

13, JAPP 0900.

PRTC argues, however, that if in fact it was obliged to

grant the fraud credits, ACS’s failure to present said

claims during the 90-day period forever foreclosed ACS

from receiving credit for the reported fraud. The Bank-

ruptcy Court found this term unenforceable, stating

instead that “PRTC had a duty to make the adjustments

for the fraud claims and to allow ACS a reasonable time,

such as 120 days, to submit their fraud claims.” The

Bankruptcy Court’s finding is not clearly erroneous,

especially in light of the fact that ACS had to investigate

the fraud claims prior to submitting the same for reim-

bursement to PRTC. Furthermore, normally it took PRTC

more than 90 days to process the claims and give credit to

ACS. Thus, ACS was granting its own clients credits for

fraud claims even before receiving credit for the claims

itself.

We add, moreover, that PRTC was obliged to provide

the fraud credits as the fraud was a result of the fraudu-

lent and unauthorized use of its own network, which it

operated and maintained. As evidenced at the hearings

held by the Bankruptcy Court, the 90-day term was a

“policy statement” imposed by PRTC, which ACS did not

negotiate with PRTC. PRTC could not then unilaterally

App. 21

condition its own preexisting obligation.’ Accordingly, the

Bankruptcy Court’s decision to disallow PRTC’s proof of

claim in the amount of $1,334,204.62 is AFFIRMED.

2. Crediting Payments

ACS also objected to PRTC’s proof of claim alleging

that PRTC failed to apply certain payments made by ACS

to its account. These payments amount $353,674.82. PRTC

alleges that the Bankruptcy Court erred in disallowing its

proof of claim in this amount. To this end, the Bankruptcy

Court found that ACS could account for all its payments,

including those not credited to its account, and that PRTC

was not able to do the same. This is a determination of fact

made by the Bankruptcy Court which we review for clear

error.

An examination of the trial transcript and evidence in

the record reveals that ACS presented specific evidence of

all the payments made by ACS and the payments credited

to the ACS account by PRTC. In fact, even though PRTC

heavily objected to the evidence presented by ACS in

support of this claim it presented no rebuttal testimony to

Mr. Negrette’s testimony pertaining to the difference

between the payments made by ACS and those which were

credited to the ACS account by PRTC. The Bankruptcy

Court then logically relied on Joint Exhibit # 4 and ACS’s

Exhibits G & H which showed that approximately

* Moreover, there is no evidence that ACS agreed, or in any way

obliged itself, to the 90-day term. Instead, Mr. Negrette’s testimony was

that ACS merely complied to the best of its capacity with the term in

order to receive the credits and that ACS, on occasion, expressed its

difficulty to comply with said term and requested an enlargement. See

Docket # 13, JAPP 1067.

App. 22

$353,000 were paid by ACS and were not applied to the

ACS account. Specifically, ACS’s exhibits compared all

payments made by ACS and all payments credited to the

ACS account. The difference, per Mr. Negrette’s testimony,

represents the payments not credited to ACS. Inasmuch as

the Bankruptcy Court found Mr. Negrette’s testimony

credible and most of the information included in the

payment charts prepared by Mr. Negrette and admitted

into evidence, especially the information pertaining to the

payments credited, was provided by PRTC during discov-

ery, no clear error was committed. See Docket # 13, JAPP

1101-1103, 1140. As such, we will not disturb the Bank-

ruptcy Court’s finding. There was sufficient evidence on

the record to conclude that ACS made payments in an

amount of $353,674.82 which were not credited to their

account. Accordingly, we AFFIRM.

3. Obligation to Submit Billing Tapes after Dis-

connection & ACS’s Admission of Liability

Finally, PRTC submits that the Bankruptcy Court

erred in crediting ACS $55,537.00 due to PRTC’s decision

to retain the billing tapes of calls made from April to July

1998 and failed to recognize PRTC’s right to the recovery

of an amount of $800,000 due to ACS’s alleged admission

of liability. The Court sees no need to address these two

arguments.

PRTC submitted a proof of claim of $1,655,391.96. The

Bankruptcy Court determined, and we affirm, that ACS was

entitled to credit for fraud claims totaling $1,334,204.62,

credit for payments made and not credited to the ACS

account of $353,674.82 and credit for incorrect rounding of

air time usage of $300,062.95. These credits alone amount

App. 23

to $1,987,942.39. Since the credited amount already

exceeds PRTC’s proof of claim there is no need for the

Court to address PRTC’s last two arguments. The fact that

upon a breach PRTC could potentially prove that it was

entitled to retain the billing tapes or that ACS admitted to

liability in an amount of $800,000 has no bearing on the

credits adjudicated above.

Conclusion

For the reasons set herein, the Bankruptcy Court’s

Opinion and Order of March 8, 2002 is AFFIRMED.

Judgment shall be entered accordingly.

SO ORDERED.

In San Juan, Puerto Rico, this 9th day of January,

2006

S/ Salvador E. Casellas

SALVADOR E. CASELLAS

U.S. Senior District Judge

App. 24

UNITED STATES BANKRUPTCY COURT

District of Puerto Rico

IN RE:

ADVANCED CELLULAR °

SYSTEMS, INC. : CASE NO. 98-07437 ESL

Chapter 11

Debtor

IN RE:

ADVANCED PAGING : CASE NO. 98-07438 ESL

SYSTEMS, CORP. Chapter 11

Debtor

OPINION AND ORDER

(Entered Mar. 12, 2002)

The above captioned cases came before the court for

an evidentiary hearing to consider debtors’ objection to the

allowance of the proof of claim filed by the Puerto Rico

Telephone Company and Celulares Telefénica, Inc.(PRTC).

PRTC filed proof of claim number 18 in the amount of

$1,655,391.96 as an unsecured non priority claim. PRTC

claims that debtors owe the amounts specified in the proof

of claim for services rendered in accordance with the

written agreement between the parties. PRTC contends

that it applied the taritfs that were valid and correct for

each period in question and that it was under no contrac-

tual obligation to deduct claims for the fraudulent use of

lines. The debtors contend that the xmounts are not owed

and that, to the contrary, PRTC owes them $2,646,319.56.

The court limited the contested matter to the objection to

the proof of claim and denied without prejudice presenting

App. 25

evidence on debtors’ claim against PRTC. Debtors’ objec-

tion to the proof of claim rests on the following grounds: 1.

PRTC’s failure to provide adequate maintenance of its

system and failure to establish adequate controls led to

fraudulent use of cellular lines which resulted in failure to

credit the amount of $1,334,204.00 in fraud claims; 2.

PRTC did not credit $333,674.00 paid by the debtors; 3.

PRTC overbilled debtors for air time usage during 1993

and 1996 to 1998 by improper air-time rounding in the

amount of $300,062.95; and, 4. PRTC retained the billing

tapes from April to July 1998, for an amount of $55,537.00,

preventing debtors from billing their clients. Advanced

Cellular System (ACS) alleges that since the sum total of

the above credits exceeds the claim by PRTC, no amounts

are owed.

Uncontested Facts

The parties agreed to the following uncontested facts

in the pretrial report:

1. The parties limited the contested matter to

invoices and payments during the period from 1993 to

1998.

2. Advanced Cellular System (ACS) is a corporation

duly organized in the Commonwealth of Puerto Rico since

1986. Advanced Cellular engages in the services from

licensed carriers and resells numbers and services to

corporate customers.

3. PRTC/Celulares Telefonica is a corporation duly

organized in the State of Delaware and is authorized to do

business in Fuerto Rico. PRTC/Celulares Telefonica is duly

licensed by the Federal Communications Commission as a

App. 26

local exchange carrier in Puerto Rico for local and conti-

nental United States [cellular services]. PRTC/Celulares

Telefonica also provides commercial mobile radio services.

4. During the period of time relevant to this action,

1993 to 1998, Celulares Telefénica de Puerto Rico has been

an affiliated and/or unincorporated division of the Puerto

Rico Telephone Company, with PRTC/Celulares Telefénica

having integrated ownership. Celulares Telefénica is a

commercial mobile radio service provider for cellular

services for wholesale and corporate customers.

5. In 1986 Advanced Cellular and PRTC/Celulares

Telefonica subscribed a Wholesale Service Agreement.

6. During the period of 1993 to 1997 ACS had nine

(9) operating accounts with PRTC.

7. PRTC had two billing cycles.

8. ACS’ accounts with PRTC/Celulares Telefénica are

identified as follows:

Operating Accounts Miscellaneous Accounts

080-6000 080-9960

080-0600 080-9961

080-0660 080-9962

080-6001 080-9963

080-6060 080-9964

070-6060 070-9960

070-6161 070-9961

070-6262 070-9962

070--2020 070-9920

9. PRTC disconnected services to ACS on April 1,

1998.

App. 27

The Agreement

On September 22, 1986 Advanced Cellular System

Corp. entered into a “Wholesale Service Agreement Cellu-

lar-Radio Service” with the Puerto Rico Telephone Com-

pany. The “Agreement” granted ACS the right to resell

cellular telephone numbers and services for PRTC’s

cellular network, and is made a part hereof as Appendix I.

The agreement was supplemented at various times to

include the applicable tariffs, Joint Exhibit 2.

The Evidence-PRTC

Celia Lopez Zayas

Ms. Celia Lépez Zayas, Customer Services Coordina-

tor for the PRTC, was in charge of the ACS account since

1994. She participated in the preparation of the proof of

claim submitted by the PRTC, Joint Exhibit No. 5. Ac-

cording to her testimony all payments made by ACS were

credited, and the proof of claim reflects the balance owed.

Exhibit #1 for PRTC is the evidence of payments made by

ACS, organized by year, and comprising the period from

1993 io 1998. Joint Exhibit #4 includes the invoices from

1993 to 1998, the payments credited, and a compilation

of the same. Joint Exhibit #4 shows a total debt of

$1,628,790.34, excluding the balances in the miscellaneous

accounts. The amounts owed, including the miscellaneous

accounts, is $1,655,391.96. She explained that Joint

Exhibit #4 shows a total debt of $1,628,790.34, and clari-

fied that the debt as of today, and as specified in the proof

of claim is $1,655,391.66, because the chart is up to July

1998 and the proof of claim is as of the filing date, Sep-

tember 1998.

App. 28

Ms. Lépez testified upon cross examination that (1)

the compilations in Joint Exhibit #4 were not supported by

a separate log of claims; (2) ACS was not notified how the

payments were applied; (3) the invoices showing the

payments made do not include the check number nor the

particular amount applied; and (4) the total payments

credited on the invoice were the totals for the particular

billing cycle. She admitted that the checks through which

ACS made payments were numbered and included a detail

of the accounts to which particular amounts were to be

applied.

Ms. Lopez stated that the compilations submitted by

the PRTC in support of the proof of claim were prepared

by the Finance Department upon information provided by

the Customer Services Department. The posting of pay-

ments received from ACS were summarized in a payment

report but she knows of no separate log for posting indi-

vidual payments. In fact, she acknowledged that the

invoices only show the total amount credited to a reseller

for a particular billing cycle, but did not include the

number of check or the individual amount. She then

acknowledged, when shown PRTC Exhibit #1, that the

cheeks from ACS were sent with a cover letter detailing

their application, and that they were posted to a cash

receipt journal, but that the invoices stated total amounts

credited, and the detail was not included.

Ms. Lépez explained the procedure followed by PRTC

to process fraud claims. Fraud claims submitted within

ninety days from the invoice date were referred to the

Systems Control Area. The claims would be transferred to

a miscellaneous account that would not reflect the

amounts transferred as either a late claim or arrears in

payment. The fraud claims would be investigated and

App. 29

when the investigation was concluded the miscellaneous

account would be credited. Amounts not credited would be

re-transferred to the operating account to be charged to

the reseller, that is, ACS.

Ms. Lépez knew of complaints by ACS for fraud claims

but was not aware of the continuous complaints by ACS

for over billing, disconnected lines, duplicate charges,

billing of calls to Santo Domingo due to same area code as

Puerto Rico (809) and damaged invoice tapes. These

complaints were not referred to her and she was not made

aware of them upon her arrival to the department. She

failed to remember the complaints even after being shown

letters addressed to her. (Joint Exhibits 32, 39, 40- 48,66,

and 67). She identified Joint Exhibit #12 as a compilation

of claims processed but clarified that she did not partici-

pate directly in its preparation, that the same was pre-

pared by clerks in the Customer Services Department, and

that her role as coordinator was only to channel the

claims. The exhibit includes claims for deactivated lines

that continue to generate consumption. She knows that

the compilations reflect the invoices as they appear in the

several boxes for claims by ACS. She stated that the

compilations show the amount of $5,481,411,.05 credited

to ACS for fraud claims, of a total of $6,165,385.53 submit-

ted, leaving a balance of $628,789.77 denied.

Ms. Lépez was not aware of Joint Exhibit #6, which

includes requests for credit on account of charges for

disconnected lines. She does not know if a charge of

$29,560.96 included in the proof of claim as part of a

miscellaneous account was credited, adjudicated, or not

investigated.

App. 30

Ms. Lopez clarified, upon cross-examination, that the

processing of fraud claims was computed based on average

consumption due to the high volume, and that, after the

credit was given and shown in an invoice, the detail was

not provided to ACS. She also clarified that the period of

90 days from the date of invoice to process claims started

at the end of 1994. She processed the fraud claims that

were within 90 days of the date of the invoice, not from the

date they were received or the date that the invoice tape

was provided.

Raul Rios Gonzalez

Mr. Gonzalez is currently the Finance manager for

PRTC, was manager for invoice and credits during 1996-

1998, and was an internal auditor for approximately seven

years. He was responsible for the ACS account. One of his

primary concerns was collecting a debt which ACS had in

1996 for approximately $1,600,000.00, as well as the

processing of pending ACS fraud claims.

The billing process for PRTC was handled by the

Cincinnati Bell Information System (CBS). CBS would

process the billing cycles and submit them to PRT< for

approval, who, in turn, would send them to their clients,

together with supporting tapes that the resellers would

use to bill their own clients.

Mr. Gonzalez coordinated a series of payment plans

for ACS in order to reduced the aging of accounts over 90

days owed by ACS. The invoicing of services according to

the 1986 agreement was for air-time service and monthly

rental for active lines. The payment was due 90 days after

invoicing. He met personally with Mr. Cesar Negrette,

president of ACS, to establish a payment plan adjusted to

App. 31

the billing cycle of ACS. ACS continuously failed to comply

with the payment plans, payments were late and some-

times for an amount less than the invoiced amount. The

average balance, excluding fraud claims pending adjudica-

tion, averaged $1,500,000.00. This amount is in agreement

with the collection efforts shown in the following joint

exhibits: 22, 23, 24, 26, 27, 28, 29 and 30.

Regarding fraud claims, a letter dated November 25,

1996 (Joint Exhibit #23) shows that the amount credited

for fraud claims was based on an interim discount of 30%.

The percentage was reduced to 25% on January 30, 1997

(Joint Exhibit #24) as new technology was in place. Fi-

nally, on October 9, 1997, the period of 90 days to process

fraud claims was established by PRTC. PRTC believed the

period was reasonable as two new technologies, Phone

Print and Authentication, had been implemented.

Management of PRTC made the decision to terminate

the 1986 agreement and disconnect the lines at the end of

March 1998. Mr. Rios informed Mr. Negrette of the deci-

sion. At a meeting Mr. Negrette informed him that of the

$1,500,000.00 balance, approximately $700,000.00 was

contested. Mr. Negrette proposed to pay the balance, less

the $700,000.00, through a contract with PRTC for collec-

tion of debts from other clients.

Upon cross-examination Mr. Rios acknowledged that

Mr. Negrette brought the issue of the fraud claims on each

occasion they met or discussed the pending balances owed

by ACS to PRTC. However, his primary concern was in

collecting the amounts owed as the fraud claims were

under investigation and were not reflected as arrears until

they were denied. He also admitted that the billing tapes

App. 32

were not submitted to ACS after the contract was termi-

nated on April 1, 1998 and the lines were disconnected.

Mr. José C. Millan River

PRTC brought as a rebuttal witness Mr. José C.

Millan Rivera, an electrical engineer who worked for

PRTC during the years in question. He was presented to

rebut allegations of lack of adequate control of the PRTC

cellular network. Mr. Millan testified that cellular fraud

appeared since 1989, and PRTC installed equipment to

control it. Amongst the measures adopted was the installa-

tion of PIN, which added a third element to get access to

the system. The PIN was unique to the telephone unit.

This measure minimized cellular fraud. He does not

remember when the PIN system was actually installed,

but remembers it was acquired in either 1992 or 1993. The

cellular fraud increased from 1992 to 1995 in spite of the

PIN system. Subsequently they invested approximately

$1.7 million dollars to acquire a clone detector, which was

installed in 1995. Thereafter they acquired “Phone Print,”

at an approximate cost of four million dollars, and which

was the system that really prevented fraud because it was

around 95% effective. This was at the end of 1996. In 1997

they acquired “Authentication,” which was 100% effective.

The Evidence-ACS

ACS relied on the testimony of its president, Mr.

Cesar Negrette and the documentary evidence in support

thereof.

App. 33

Mr. Cesar Negrette

Mr. Negrette is the president and founder of ACS. He

holds a BA degree from George Washington University

and an MBA from Harvard University.

ACS has been a reseller of cellular telephones for

PRTC since 1986. ACS buys at wholesale prices from

PRTC and resells the service to customers at a retail price.

The relation between the parties is governed by a contract,

titled “Wholesale Service Agreement” signed in September

1985, Joint Exhibit #1. ACS purchases wholesale, or at a

large volume, from the PRTC network. In order to under-

stand the nature of the business, he relates to the follow-

ing definitions in the “Wholesale Service Agreement”:

¢ Access number — A telephone number provided to

RESELLER by P.R.T.C. and associated with RE-

SELLER’s or its authorized user’s mobile radio

unit, enabling use of the cellular system.

e Air time Usage — The time measured in minutes

during which RESELLER or its authorized user

utilizes the cellular system.

¢ Authorized User — A person, corporation or other

entity that is authorized by RESELLER to use

the CRS (Cellular Radio Service) purchased by

RESELLER from P.R.T.C.

Pursuant to the agreement the “UNDERTAKINGS OF

P.R.T.C.” are as follows:

P.R.T.C. undertakes to provide the services

outlined in this Agreement under the terms and

conditions specified herein and in all applicable

tariff filings. Any additional or varying terms,

conditions or rates offered by P.R.T.C. or its au-

thorized agents are null and void and are not

App. 34

part of the undertaking of P.R.T.C. unless other-

wise specified in this agreement or the approved

tariff.

P.R.T.C.’s undertaking is dependent upon its

availability to obtain, retain and maintain, with-

out unreasonable expense, suitable facilities, li-

censes and rights for the construction and

maintenance of the necessary circuits and

equipment.

Joint Exhibit #2 is a composite exhibit which shows

the tariffs set by the Autoridad de Teléfono for the years

from 1993 to 1998. The tariffs from March 1, 1992 to June

26, 1994 are the same. These are the tariffs referred to in

paragraph VII of the agreement, and which are the obliga-

tion of the RESELLER to pay PRTC for its air time usage.

The current tariff for 1993, up to July 24, 1993 is 24¢ a

minute, and from July 25, 1993 on, 22¢ a minute.

The agreement and the tariffs are the two basic

documents governing the relation between ACS and

PRTC. The relations between the parties were good until

1993 when ACS began experiencing problems, particularly

due to cellular fraud. Mr. Negrette testified as to the

problems encountered by ACS with PRTC’s billing, includ-

ing the following: duplicated calls, fraud claims, incorrect

roaming charges (JE #33); billing tapes not readable (JE

#34,35,42); errors in the tapes (JE#36); errors in billing by

CBS (JE# 37); tax for 911 service to disconnected lines

(JE#38); duplicate invoicing of calis (JE# 39,47); change in

area code billing errors \ J/E# 40,41,43,44,46); and fraud

claims (JE# 55,56,57).

The PRTC provide: continuous cellular network

services until March 31, 1998. There is no question that

ACS is liable to PRTC for legitimate services provided.

App. 35

The evidence shows that ACS was continuously in arrears

since 1992 and that several payment plans were made by

PRTC to cure the arrears. ACS consistently failed to

comply with the plans. However, during the same period,

ACS continuously made claims to PRTC for adjustments.

These claims were never finally settled.

Joint Exhibit number 6 compiles the claims presented

by ACS to PRTC from 1993 to 1998 for fraud claims and

billing errors.

The main problem in the arrears incurred by ACS was

the fraud claims. These concerned unauthorized access to

PRTC network by unauthorized users. The agreement

refers to authorized users, and fraudulent users are not

authorized users. The fraudulent conduct by users was not

authorized by either ACS or PRTC. PRTC, as the carrier,

had control of access to its network. Fraud started in 1993

and continued to grow until 1996, when it reached 35% of

total billings, a percentage deemed to be extremely high.

Fraud started to decline in 1997 due to new technology

installed by PRTC. At the same time, from 1996 to 1997, a

new kind of fraud emerged, the use of deactivated lines.

Fraud claims caused significant losses to ACS’ opera-

tion. ACS credited the customer for the fraud claim but

could not recoup the same because it was not provided by

PRTC with a detail of rejected claims. ACS would give the

credit to its client before the PRTC gave ACS credit for the

fraud claim. The fraudulent use of the network was the

main problem with PRTC (Joint Exhibits# 4,6).

App. 36

F ! Claims Not Credited

Mr. Negrette prepared a chart, Exhibit #A, showing in

summarized form the charges made by PRTC for fraudu-

lent use of disconnected lines. The information was ob-

tained from Joint Exhibit #12, provided by PRTC, which

compiles the documents in box number 31 of the docu-

ments submitted by PRTC as part of discovery. The total

amounts for these claims is $145,907.28. Mr. Negrette also

prepared a chart of fraud claims submitted to PRTC,

Exhibit #B. The chart was prepared from the information

in Joint Exhibit #6, which compiles the fraud claims by

account number and year. The total amount in Exhibit #B

is $ 7,222,229.45. He prepared a compilation of ACS

credits on fraud claims, Exhibit #C, based on Joint Exhibit

#4, which summarizes the application of credits for fraud

claims. This compilation (Exhibit #C) and Joint Exhibit #4

show that there is no basis for alleging that fraud claims

were actually in excess of ninety days, there is no indica-

tion in PRTC’s records when the billing was sent nor when

it was received by ACS, nor was a detail of the application

provided to ACS. Exhibit #F shows claims made in the

amount of $7,108,883.41; Exhibit #C shows fraud claims

credited in the amount of $5,774,678.38; for a balance of

fraud claims made and not credited of $1,334,204.62.

Exhibit #C also shows the amount of $29,560.95, included

in the proof of claim (Joint Exhibit #5) as not processed or

under investigation. Joint Exhibit #12 and Exhibit #D

show the amount of $193,559.32 as fraud claims not

processed. These claims were deemed not credited as the

same do not include a date or specific reason for rejection.

The assumption made by Mr. Negrette is that if no date is

indicated, then the claims were not processed. The only

claims that were included in the compilation were those in

Joint Exhibit #12, and in which the total claim was denied

App. 37

and the comments column indicated not applicable or not

processed. The two criteria were considered. That is,

Exhibit #D only contains credits that were denied and

which appear in Joint Exhibit #12.

Based on Joint Exhibits #4 and #6, Mr, Negrette

testified that of the total fraud claims rejected, the amount

of $1,111,084.35 corresponds to claims rejected because

they were submitted after 90 days from billing.

ACS established a fraud claims department to handle

the increased number of fraud claims reported by its

clients. ACS corroborated the claims by calling the suspect

numbers and inquiring whether they knew the owner of

the number. Mr. Negrette testified that ACS exercised

utmost due diligence in verifying the fraud claims before

submitting them to PRTC. According to Mr. Negrette, it

was unreasonable to require from a wholesaler like ACS to

comply with the same time period of 30 days to verify and

corroborate fraud claims as was required from individual

clients. ACS billing included thousands of clients as

compared to an individual client. ACS would receive the

billing tapes, on the average, within ten days. The time

period that PRTC imposed on its wholesaler clients con-

trasts with its own processing experience in handling

fraud claims. Exhibit #E, prepared using as basis Joint

Exhibit #12, shows the time it took PRTC to process the

fraud claims submitted by ACS. In fact, PRTC recognized

this by increasing the time period from the 30 days in

1993, to 60 days in 1994, and to 90 days towards the end of

1994. That it took PRTC well in excess of 90 days is a good

indi-ation that 90 days for a wholesaler was not reason-

able.

App. 38

The testimony by Mr. Negrette, upon cross examina-

tion, showed that ACS granted its own clients the same

period of thirty days that PRTC required from ACS to

verify claims. This procedure may seem, on its face, to

equitably bar ACS from alleging that thirty days was not

reasonable. The difference, however, lies in that ACS

clients were individual clients, and the time needed to

responsibly corroborate possible fraud claims is necessar-

ily less than it takes a wholesaler to verify thousands of

accounts.

ACS requested from PRTC that it be allowed a period

of 120 days to process the fraud claims due to its volume.

This period was based on the fact that it was taking PRTC

more than 120 days to process them. Joint Exhibit #59 is

an internal PRTC memo requesting approval of ACS fraud

claims because existing technology did not allow proper

control for cloned calls, calls not completed, calls made by

units activated by unauthorized users after the HEX

number was stolen, and which were billed to the legiti-

mate customer. The same can be concluded from Joint

Exhibits #60, #62, #64 and #65.

There is no contest in the fact that PRTC has control

over its own cellular network. The agreement between the

parties (Joint Exhibit #1, Section V.F) implies the obliga-

tion of PRTC to maintain proper standards of maintenance

and operation and to exercise reasonable supervision.

Likewise, it frees PRTC from liability due to negligence of

the RESELLER or its authorized users. The evidence

before the court is that ACS exercised due diligence in the

processing of fraud claims and that any misuse was by

unauthorized users. On the other hand, PRTC was unable

to properly maintain its network by not controlling the

App. 39

unauthorized use of stolen HEX numbers, either because

the technology was not available or not timely procured.

On June 30, 1996 the Office of the Comptroller of the

Commonwealth of Puerto Rico issued an audit of the

PRTC, Exhibit #F. Annex I to the audit report makes

findings on losses due to fraud in the cellular service.

Some of the findings in said report mirror the complaints

made by ACS to the PRTC and evidenced at this hearing.

Some of these are: that cellular fraud manifested itself in

1992, and that PRTC did not take timely action to procure

computerized. equipment and programs to combat cellular

fraud. The report also states the obvious, “[iJt is the

responsibility of management [PRTC] to take effective

control measures to detect and reduce on a timely manner

the incidence of cellular fraud.” The control measures

taken by the PRTC were clearly not effective.

ACS contends, and the court agrees, that the fraud

claims were unfairly denied by imposing time limitations

less than 120 days, which were unreasonable under the

circumstances, and because PRTC did not exercise ade-

quate cuulrol over iis network to control and detect unau-

thorized or fraudulent use of its network.

The total for fraud claims not credited, as shown in

Exhibit #C, is $1,334,204.62.

Payments not Credited

The manner in which PRTC credited payments on the

invoices made it difficult to reconcile the payments made,

particularly since neither the check number nor the

amount were indicated. Joint Exhibit #4 shows that

approximately $353,000.00 were not applied due to failure

App. 40

to track all payments. In preparing for this hearing Mr.

Negrette made a compilation of all payments made by

ACS, including ACS checks, PRTC payment binder, and

credits posted by PRTC as per Joint Exhibit #4. The

compilation of payments made by ACS during the period

in question, 1993 to 1998, are in Exhibit # G. The pay-

ments made are as follows:

Year Amount

1993 8,777 ,325.34

1994 9,048,874.91

1995 6,618,958.63

1996 5,102,701.89

1997 2,270,210.00

1998 292,920.82

Total 32,110,991.59

All the above payments were received by PRTC but

ACS cannot ascertain if all were credited or applied as

PRTC did not provide ACS with a detail of amounts

applied by check number, amount and account to which

applied. Mr. Negrette prepared a schedule of payments

made by ACS based on Joint Exhibit #4, and divided by

billing cycle. The schedule is Exhibit #H for ACS, and

shows payments during the period from 1993 to 1998 as

follows:

Cycle Amount

3 18,874,598.20

7 12,882,718.57

Total 31,757,316.77

PRTC counsel showed Exhibit ID. #B to Mr. Negrette.

This exhibit for identification purported to show that pay-

ments were made by ACS and not credited. The cancelled

App. 41

checks were available but the credit could not be traced.

Mr. Negrette testified that the same was not used because

he subsequently found copies evidencing payment in the

check binder of PRTC, which showed that they had been

credited. This shows his honest intent to prove amounts

through credible and accurate evidence. Another example

of candidness on the part of Mr. Negrette was when he

was asked if the supporting documents to Exhibit #G

included original checks by ACS. His straightforward

answer was that the evidence was the non negotiable stub

of the original check, that is, the duplicate copy that

remains in ACS books and records. However, Mr. Negrette

did verify personally the original checks to corroborate the

compilations. So there is no real controversy as to the fact

that the payments were made. The court notes that this

frank statement contrasts with the wavering testimony by

Ms. Celia Lépez when posed similar questions.

The difference between the amounts paid according to

Exhibit #G and those credited in Exhibit #H is $353,674.82.

Incorrect Rounding of Air-tinie

The testimony of Mr. Negrette is that PRTC incurred

in a form of over billing by rounding up to six seconds the

duration of calls. The agreement [Joint Exhibit #1, Para-

graph XI] prescribes that PRTC will invoice air time usage

according to the applicable tariffs which are in Joint

Exhibit #2. Joint Exhibit #2 states that the “timing of

calls” for chargeable time begins when the call is answered

and ends when disconnected, rounding to the next second.

Engaging in rounding chargeable time in increments of six

seconds violates the tariff agreement.

App. 42

Upon cross examination Mr. Negrette admitted that

ACS billed its own clients based on the billing submitted

by PRTC and charged a gross margin of twenty five

percent. PRTC charges that to allow ACS to recover the

amounts from PRTC after passing the cost to its clients

would be inequitable. Again, in a straight forward and

business like manner, Mr. Negrette indicated that this is a

matter for ACS customers and that PRTC cannot benefit

from whatever gross profit ACS charged its customers.

In order to quantify the over billing due to incorrect

rounding, Mr. Negrette prepared a compilation using Joint

Exhibits #15, #16, #17, and #18. The compilation is in

Exhibit #1. He determined the over billing due to rounding

based on the air usage charge. PRTC invoices include the

total number of minutes charged, the total number of

calls, and the amount invoiced to ACS. If you divide the

amount billed by the number of minutes, you get the

amount billed per minute. J2int Exhibit # 20 supports the

allegations made by ACS in that PRTC admits in writing

that rounding is incorrect. Mr. Negrette used as an exam-

ple Joint Exhibit #19, an invoice for $148,136.57. The

invoice shows that all calls were rounded in multiples of

six seconds. This occurrence is highly unlikely. The unlike-

liness of all calls being rounded in multiples of six seconds

was shown using the Bell Curve Principle, a basic princi-

ple of statistics and probabilities. The calculation yields an

estimate of three cents per call. This analysis, in the

court’s opinion, is a valid challenge to PRTC’s rounding

procedures in the billing process. An average of three

cents, and not six cents should have been charged. It was

PRTC’s burden of establishing that the actual time was

charged, rounded to the next second. PRTC did not meet

App. 43

the burden. The over billing totals as per Exhibit #I are

$300,062.95.

Billing Tapes Withheld

Exhibit #J, in conjunction with Joint Exhibit #31,

show the amounts in the billing tapes that were not

forwarded by PRTC after service was disconnected and

which ACS would have used to bill its own clients. The

request by ACS for these tapes was declined by PRTC. See

Joint Exhibit #31. The total amount for the tapes that

were not delivered after service was disconnected is

$55,537.88.

Burden of Proof-Objection to Claim

An objection to the allowance of a proof of claim is a

contested matter. Fed. R. Bankr. P. 3007, 9014. The con-

tested matter is a core proceeding over which the bank-

ruptcy court has jurisdiction to enter a final order. 28

U.S.C. §§ 157(b)(2)(B), 1334. The filing of a proof of claim

is prima facie evidence of its validity. Fed. R. Baukr. P.

3001(f). Thus, the objecting party has the initial burden of

controverting the claim. However, the ultimate burden is

on the claimant to establish the validity and extent of the

claim. Lawrence P. King, et al., 9 Collier on Bankruptcy,

{ 3007.01[2], pp. 3007-2 to 3, 15th ed. rev’d 2002. Jn re

Hemingway Transport, Inc., 993 F.2d 915 (1st Cir. 1993).

The claim must be established by a preponderance of the

evidence.

App. 44

Discussion

The events leading to the actual hearing on debtors’

objection to the proof of claim filed by the PRTC have been

marked by the bitter dispute between the parties relating

to discovery issues. Since the onset of the contested matter

it was clear that the evidence in support of the claim was

voluminous and difficult to reproduce. At the hearing it

became apparent, in spite of the efforts by able counsel,

that PRTC’s system of invoicing and accounting of pay-

ments made and credited was not accurate and reliable.

The witnesses presented by PRTC were the officers re-

sponsible for the recording of payments by ACS. Yet, their

inability to properly account for the amounts claimed as

owed by ACS in light of the challenges posed by ACS

debilitated the reliability that their own books and records

may have carried. On the other hand, the thorough knowl-

edge of the operation and the relevant issues to the objec-

tion to PRTC’s claim displayed by Mr. Negrette, debtor’s

president, and the explanations made through the compi-

lations he prepared based on the joint exhibits submitted

by the parties and produced by PRTC during discovery,

carried the weight of the arguments presented by ACS in

the objection to claim.

Duty to Credit Fraud Claims

To allege that PRTC had no contractual obligation to

make adjustments for fraud claims and at the same time

to have actually credited in excess of five million dollars

during the period from 1993 to 1998 is a contradiction by

itself. There is no specific provision in the agreement

prescribing the period within which to submit claims for

erroneous or improper charges, including fraud claims.

Likewise, there is no specific provision in the agreement

App. 45

regarding cellular fraud. In 1986, when the parties en-

tered into the agreement, cellular fraud was not a prob-

lem.

PRTC had control over its cellular network and had

the duty to maintain and operate the same in servicing the

agreement with resellers such as ACS. To think that

adjustments in excess of five million dollars were made out

of mere liberality or concession is not credible. That PRTC

continuously reviewed and enlarged the period to submit

fraud claims is also an indication of an obligation to

provide a reasonable time to present claims. Therefore as

a matter of law and common sense, PRTC had a duty to

make the adjustments for the fraud claims and to allow

ACS a reasonable time, such as 120 days, to submit their

fraud claims. PRTC’s duty and responsibility to control

and maintain its network is directly related to the services

it provides ACS as a reseller. Failing to maintain adequate

controls to prevent fraudulent usage of its own network

should not result in ACS bearing the cost of the breach. To

credit claims presented within a reasonable time is not a

set off of mutual debts, it is an obligation arising from the

duty to maintain and operate the network.

Crediting of Payments

A preponderance of the evidence, as stated above,

shows that ACS made payments in excess of the amounts

that appear credited by PRTC during the period from 1993

to 1998. Any deficit should be credited in favor of ACS and

deducted from the proof of claim.

App. 46

Incorrect Rounding

The invoices and the explanation given by Mr. Ne-

grette clearly established that rounding air time to six

seconds was against the tariff agreement which required

actual time rounded to the next second. Statistically it was

unreasonable to round calls to any number in excess of

three seconds. Moreover, the PRTC failed to rebut the

challenge of improper rounding and establish that the

amounts charged were for actual time rounded to the next

second. Therefore, the amounts claimed as a result of

improper rounding should be deducted from the proof of

claim.

Obligation to Submit Tapes after Disconnection

Irrespective of whether PRTC had the legal right to

disconnect service to ACS, it had no right under the

agreement to retain the billing tapes for periods over

which ACS provided the service to its own customers. By

doing so, PRTC engaged in an automatic set off of amounts

allegedly owed by ACS, without presenting then, or to this

date, the legal basis for doing so. Any amounts for the

retained tapes that ACS could have used to bill its custom-

ers should be deducted from the proof of claim as being

illegally retained.

Conclusion

In view of the foregoing, the court hereby concludes

that the following amounts should be deducted from the

proof of claim filed by the PRTC:

App. 47

1. Fraud claims in the amount of $ 1,334,204.62

2. Payments not credited in the amount of

$ 353,674.82

3. Incorrect rounding of air time usage in the

amount of $ 300,062.95

4. Billing tapes withheld after disconnection of ser-

vice in the amount of $ 55,537.27

Since the amounts to be credited total $ 2,043,480.27,

and exceed the amount of the proof of claim, that is,

$ 1,655,391.96, the court finds and concludes that the

proof of claim filed by the PRTC should be disallowed in

its entirety.

The clerk shall enter judgement accordingly.

SO ORDERED.

San Juan, Puerto Rico, this 8th day of March, 2002.

/s/ Enrique S. Lamoutte

ENRIQUE S. LAMOUTTE

U.S. Bankruptcy Judge

App. 48

United States Court of Appeals

For the First Circuit

No. 06-1332

IN RE: ADVANCED CELLULAR SYSTEMS, INC.;

ADVANCED PAGING SYSTEMS, CORP.

Debtors

PUERTO RICO TELEPHONE COMPANY, d/b/a

Verizon Wireless, f/k/a Celulares Telefonica, Inc.,

f/k/a Verizon Wireless Puerto Rico, Inc.

Creditor-Appellant

ADVANCED CELLULAR SYSTEMS, INC.;

ADVANCED CELLULAR PAGING SYSTEMS, CORP.

Debtors-Appellees

Before

Boudin, Chief Judge,

Torruella’, Lynch and Lipez, Circuit Judges,

Gibson’, Senior Circuit Judge,

and Howard, Circuit Judge.

' Judge Torruella is recused and did not participate in the consid-

eration of this matter.

* Of the United States Court of Appeals for the Eighth Circuit,

sitting by designation.

App. 49

ORDER OF COURT

Entered: May 30, 2007

The petition for rehearing having been denied by the

panel of judges who decided the case, and the petition for

rehearing en banc having been submitted to the active

judges of this court and a majority of the judges not having

voted that the case be heard en banc, it is ordered that the

petition for rehearing and the petition for rehearing en

banc be denied.

By the Court:

Richard Cushing Donovan, Clerk

By MARGARET CARTER

Chief Deputy Clerk

App. 50

PUERTO RICO TELEPHON MP

WHOLESALE SERVICE MEN

TABLE OF CONTENTS

Definitions

. Undertaking of P.R.T.C.

Availability of C.R.S.

Term

Liability

Service Activation/Deactivation

. Tariff, Rates and Charges

. Basic Obligation of Reseller

Timing of Calls

Deposits and Advance Payments

. Billing

. Rates for Fractional Periods

. Use

Use of Marks

Provision of the Mobile Radio Unit

. Telephone Numbers

. Other Carrier Charges

. Payment of Charges

Disconnection of Service for Cause

Non Discrimination

. Termination/Default

. Assignment

. General

App. 51

WHOLESALE SERVICE AGREEMENT

PUERTO RICO TELEPHONE COMPANY, a corpora-

tion organized under the laws of the State of Delaware and

authorized to do business in the commonwealth of Puerto

Rico (hereinafter P.R.T.C.) and (hereinafter “RESELLER”)

agree as follows: the terms and conditions hereunder will

apply to any RESELLER order per this Agreement for the

provision of Cellular Radio Service (CRS) by P.R.T.C.

I. DEFINITIONS

Access Number — A telephone number provided to

RESELLER by P.R.T.C. and associated with

RESELLER’s or its authorized user’s mobile radio

unit, enabling use of the cellular system.

Airtime Usage - The time measured in minutes

during which RESELLER or its authorized user

utilizes the cellular system.

Authorized User — A person, corporation or other

entity that is authorized by RESELLER to use the

CRS purchased by RESELLER from P.R.T.C.

Cellular Custom Calling Features:

a) Call Forwarding

Allows a customer to re-direct calls

intended for their Cellular Telephone

to another telephone number.

b) Call Waiting

Allows an_ individual customer

currently engaged in a call to be

alerted that another incoming call as

been received.

App. 52

c) Three-Way Calling

Allows a customer to add a third

party to an existing call.

Cellular Geographic Service area (CGSA) — The

geographic areas defined by the Company as its

service objective in FCC filings.

Cellular Radio Service (CRS) or Domestic Public

Cellular Telephone Service — A common carrier

service licensed by the FCC, which uses cellular

radio technology in the provision of radio tele-

communication service between mobile _ sub-

scribers, and between mobile subscribers and the

public switched telephone network. (Abbreviated

“DPCRTS” and also sometimes referred to as

“Cellular Service”).

Cellular System — A mobile telecommunications

system which provides CRS.

Mobile Subscriber Unit — A radiotelecommunications

transceiver, designed and FCC type accepted for

DPCRTS subscriber use, which may be either

vehicle mounted or hand held.

Mobile Service Area — The FCC authorized area

served by a cellular system. It may include one or

more cellular Geographic Serving Areas.

Off-Peak Usage Period —

(1) 7 PM to 7 AM Monday through Friday

and all day on Saturday and Sunday.

(2) The off-peak period rates apply to the

peak period for the holidays specified

below:

New Year’s Day (January 1)

Three Kings Day (January 6)

Il.

Hl.

App. 53

Good Friday

Independence Day (July 4)

Constitution Day (July 25)

Labor Day

Christmas (December 25)

Peak Usage Period -

(1) 7AM to 7PM Monday through Friday

UNDERTAKING OF P.R.T.C.

P.R.T.C. undertakes to provide the _ services

outlined in this Agreement under the terms and

conditions specified herein and in all applicable

tariff filings. Any additional or varying terms,

conditions or rates offered by P.R.T.C. or its

authorized agents are null and void and are not

part of the undertaking of P.R.T.C. unless

otherwise specified on this Agreement or the

approved tariff.

P.R.T.C.’s undertaking is dependent upon its

ability to obtain, retain and maintain, without

unreasonable expense, suitable facilities, licenses

and rights for the construction and maintenance of

the necessary circuits and equipment.

AVAILABILITY OF CRS

A. CRS is available to cellular mobile radio units

equipped for this service while they are within

the range of cell sites located in the Mobile

Service Area.

B. Subject to the terms and conditions specified

in this Agreement, CRS will be provided to any

person, firm or corporation or other entities

App. 54

wishing to become a Reseller and meet

P.R.T.C.’s credit criteria.

C. CRS may be temporarily refused or limited

due to system capacity limitations.

D. CRS is subject to transmission limitations

caused by atmospheric and other conditions.

E. Service to any or all customers may be

temporarily interrupted or curtailed due to

cellular system modifications, upgrades,

relocations, repairs and similar activities

necessary for the proper or improved operation

of CRS.

IV. TERM

A. Service is offered on a monthly basis subject to

an initial minimum service period of six

months beginning on the date service is

provided to RESELLER.

B. This Agreement will become effective when

signed by RESELLER and _ subsequently

accepted in writing by P.R.T.C. and the

Agreement will continue to be in effect until

terminated as provided in Clause XXI herein.

Any additional service order request under

this Agreement will have the same effective

and termination dates as the original contract.

V. LIABILITY

A. Because P.R.T.C. has no control over the

communications via its CRS and because of

the unavoidability of errors incident to the use

of CRS, the CRS furnished by P.R.T.C. is

subject to the terms, conditions and limitations

herein specified.

App. 55

P.R.T.C. GIVES NO WARRANTY, EITHER

EXPRESSED OR IMPLIED CONCERNING

THE FACILITIES OR THE SERVICES,

INCLUDING WITHOUT LIMITATION,

WARRANTIES OR MERCHANTABILITY, OR

FITNESS FOR A PARTICULAR PURPOSE

OR USE. THIS DISCLAIMER APPLIES

ONLY TO COMMERCIAL PURCHASES OF

THE SERVICE SOLD BY RESELLER, AND

DOES NOT APPLY TO END USERS.

No credit or adjustment will be issued for

interruptions of CRS, unless the interruption

continues for a period of 24 hours, as measured

from the time the interruption is reported to

P.R.T.C.

In the event of an interruption of CRS that

exceeds the minimum requirements in ‘B’ above,

a credit allowance will be made, at the

RESELLER’s request, for a prorata adjustment

of all monthly access charges billed by P.R.T.C.

for services rendered inoperative due to the

interruption.

The credit allowance will be computed by

dividing the duration of the service interruption

(measured in 24-hour days) from the time the

interruption is reported to P.R.T.C. by a

standard 30-day months, and then multiplying

the result by P.R.T.C.’s fixed monthly charges

_ for each interrupted access number. A period of

time less than 24 hours shall not be credited

and an additional period of 12 hours or more

shall be considered an additional day. In no

case shall the credit exceed the monthly access

charges. No other liability shall be attached to

P.R.T.C. in consideration of such interruption

to service.

App. 56

D. A credit allowance will not be given for

interruptions caused by the negligence or willful

acts of RESELLER or of its authorized users or

by interruptions caused by failure of equipment

or service not provided by P.R.T.C.

E. P.R.T.C. is not liable for any act or omission of

the facilities used in the provision of CRS not

provided by P.R.T.C.

F. The services furnished by P.R.T.C. in addition

to the limitations set forth preceding, also are

subject to the following limitation: The liability

of P.R.T.C. for damages arising out of

mistakes, omissions, interruptions, delays,

errors or defects in transmission, or failures or

defects in facilities furnished by P.R.T.C.,

occurring in the course of furnishing CRS and

not caused by the negligence of RESELLER or

its authorized users, or of P.R.T.C. in failing to

maintain proper standards of maintenance

and operation and to exercise reasonable

supervision, shall in no event exceed an

amount equivalent to the proportionate charge

to RESELLER for the period of service during

which such mistake, omission, interruption,

delay, error or defect in transmission, or

failure or defect in facilities occurs.

RESELLER or its authorized users shall have

no rights to consequential damages for reason

of such mistakes, omissions, interruption,

delay, or errors or defect in transmissions or

failure, or defect in facilities.

G. P.R.T.C. shall in no event be liable for

interruption or delays in transmission, or

errors or defects in transmission, or failure to

transmit when caused by acts of GOD, fire,

VI.

App. 57

war, riots, act of Government or other causes

beyond its control.

H. RESELLER or its authorized users indemnifies

and saves P.R.T.C. harmless or libel, slander, or

infringement of copyright from the material

transmitted over its facilities; against claims for

infringement of patents arising from, combining

with, or used in connection with facilities of

P.R.T.C., apparatus and systems of RESELLER

or authorized user; and against all other claims

arising out of any act or omission of RESELLER

in connection with facilities provided by P.R.T.C.

I. P.R.T.C. is not liable for damages for any

accident or injury resulting from the use of the

mobile radio unit when such accident or injury

is not due to the negligence of P.R.T.C.

J. P.R.T.C. is not liable for any defacement or

damage to RESELLER’S or its authorized

user’s vehicle resulting from the existence of

the mobile radio unit.

SERVICE ACTIVATION/DEACTIVATION

Access numbers provided to RESELLER will not be

activated until notification is received from

RESELLER. Notification shall be deemed to have

been received on the date given when hand

delivered, sent by facsimile or similar means of

communication acceptable to P.R.T.C.

P.R.T.C. will activate service for RESELLER

within twenty-four (24) hours of P.R.T.C.’s

acceptance of the service order request. Activation

will only be performed by P.R.T.C. during regular

working hours, Monday through Friday, except

legal holidays.

VII.

Vill.

IX.

App. 58

TARIFF, RATES AND CHARGES

Tariff, rates and charges may be changed at the

sole discretion of P.R.T.C., subject to such approval

as required by Law.

BASIC OBLIGATION OF RESELLER

The RESELLER will be responsible to pay P.R.T.C.

the applicable tariff rates and charges for the

services provided.

TIMING OF CALLS

RESELLER is charged for airtime usage when

calls are originated and when calls are

received as provided for in the applicable

P.R.T.C.’s tariff.

DEPOSITS & ADVANCE PAYMENT

P.R.T.C. may, in order to safeguard its

interests, require an applicant or RESELLER

to make a suitable deposit to be held as

guarantee of payment, and/or request an

advance payment and/or a Financial Guarantee

Bond for the sum of $25,000.00 for the first

block of numbers, and may also require the

same type of bond for the amount of

$10,000.00 per each additional block.

In the case that the Surety could cancel the

aforementioned bond or bonds by giving

written notice, P.R.T.C. should receive such

notice under the same terms as_ the

RESELLER.

bal

XI.

XII.

App. 59

The fact that a deposit has been made neither

relieves RESELLER from complying with

P.R.T.C.’s regulations on the prompt payment

of bills on presentation nor constitutes a

waiver or modification of the regulations of

P.R.T.C. providing for the discontinuance of

service for non-payment of any sums due

P.R.T.C. for service rendered, subject to

procedures required by Law.

BILLING

P.R.T.C. will bill RESELLER for basic and

access charges one month in advance for each

access number.

Magnetic tapes will be provided monthly to

RESELLER. The tapes will identify detail

airtime usage, toll calls, message units and

operator information charge, for each access

number. P.R.T.C. shall charge $175.00 per

month for these tapes. (magnetic tapes in 9

track 1600 BPI mode).

RATES FOR FRACTIONAL PERIODS

The charges for a fractional part of a month will be

a proportionate part of the monthly recurring

charge based on the actual number of days the

service is provided. For the purpose of administering

this regulation, every month is considered to have 30

days.

XIII.

XIV.

App. 60

USE

A. ‘Use of Service by RESELLER.

(1) Service is furnished for use _ by

RESELLER or authorized users.

(2) An access number may not appear in

more than one mobile radio unit.

(3) Orders, including those which involve the

activation, change, or the discontinuance

of service, will be accepted by P.R.T.C.

only from RESELLER.

(4) Services provided herein may be resold

subject to applicable state and/or federal

regulation.

B. Abuse and Fraudulent Use of CRS

Service to RESELLER or its authorized users

shall be governed by the following:

(1) Service shall not be used to make foul or

profane expressions, to impersonate another

person with fraudulent or malicious intent,

to call another person so frequently or at

such times of day or in any other manner so

as to annoy, abuse, threaten, or harass such

other person, or fot any unlawful purpose.

(2) Service shall not be used in such a manner

as to interfere unreasonably with the use of

the service by any authorized user.

USE OF MARKS

RESELLER shall not directly or indirectly hold

itself out as or otherwise create the impression

that they are sponsored, authorized, endorsed by,

XV.

XVI.

App. 61

affiliated with, or an agent of P.R.T.C., or any

affiliate or successor thereof, including but not

limited to using the name PUERTO RICO

TELEPHONE COMPANY, any mark used by

P.R.T.C. or any affiliate, or any colorable imitation

thereof in or as part of any company name or trade

name or in any other confusing or misleading

manner without the written consent of P.R.T.C.

PROVISION OF THE MOBILE RADIO UNIT

A. P.R.T.C. shall not be responsible for the

installation, operation, quality of transmission

or maintenance of any RESELLER’s or

authorized user’s mobile radio unit.

B. RESELLER or its authorized user must

provide any maintain all mobile radio unit

equipment and ensure that it is technically

and operationally compatible with the cellular

system and in compliance with applicable

Federal Communications Commission rules

and regulations.

C. The operating chasacterislics of such equipment

shall be such as not to interfere with the

service offered by P.R.T.C.

TELEPHONE NUMBERS

RESELLER andor its authorized user has no

property right over the telephone number (access

number) associated with the mobile radio unit.

P.R.T.C. reserves the right to assign, designate or

change such numbers when reasonably necessary

in the conduct of its business.

App. 62

XVII. OTHER CARRIER CHARGES

RESELLER is responsible to pay P.R.T.C. for all

measured services and toll charges resulting from

the origination of mobile calls. These charges are in

addition to the charge for usage.

XVIII. PAYMENT OF CHARGES

RESELLER is responsible for payment of

charges for all services furnished including,

but not limited to , all calls originated by or

completed to RESELLER’s mobile radio unit,

as well as any other charges billed to

RESELLER’s access numbers. Charges are

based on prices in effect at the time service is

furnished.

In the event a mobile unit is_ stolen,

RESELLER is liable for all usage and toll

charges originating from such unit until such

time that P.R.T.C. is notified.

Payment must be made on the 30th day

following the invoice date.

XIX. DISCONNECTION OF SERVICE FOR CAUSE

Upon nonpayment of any sum due P.R.T.C., or

upon a violation of any of the conditions

governing the furnishing of service as provided

in this agreement, P.R.T.C. may without

incurring in any liability, either temporarily

discontinue the furnishing of service to

RESELLER or terminate the contract subject

to procedures as required by Law.

Where RESELLER’s or its authorized user’s

equipment is used with facilities provided by

. wy

App. 63

P.R.T.C. in violation of any of the provisions of

this agreement, P.R.T.C. will take such action

as necessary for the protection of its facilities

or the service of its customers. RESELLER

shall discontinue such use of the equipment or

correct the violation immediately and shall

confirm in writing to P.R.T.C. within 5 days

that such use has ceased or that the violation

has been corrected. Failure of RESELLER to

discontinue such use or correct the violation

and to give the required written confirmation

to P.R.T.C. within the period stated above

shal] result, in interruption of that part of

the RESELLER’s service causing trouble.

Disconnected service will be restored when

RESELLER complies with the provisions of

this agreement.

C. Service may be refused or discontinued

without notice in the event the service is used

in such a manner that will adversely affect

P.R.T.C.’s service to others.

XX. NON-DISCRIMINATION

RESELLER shall not unreasonably discriminate

among its retail customers in allocating service

capacity purchased from P.R.T.C.

XXI. TERMINATION/DEFAULT

A. This Agreement may be terminated by

RESELLER upon thirty (30) days’ written

notice to P.R.T.C. or by P.R.T.C. if RESELLER

is in default as outlined in paragraph B or is

disconnected for cause as specified in Section

XIX. If termination precedes expiration of the

One Oe ee OEE

App. 64

contract period, RESELLER will be liable for

charges through the end of the contract period.

RESELLER will be in default under this

Agreement if (i) RESELLER fails to pay any

charge when due or fails to perform or observe

any term or condition of this Agreement, if

such failure shall continue unremedied after

thirty (30) days as of CUSTOMER’s receipt of

notice thereof from P.R.T.C.; or (ii) a

proceeding in bankruptcy, reorganization,

insolvency, receivership or assignment for the

benefit of creditors is instituted by or against

RESELLER.

In the event of default by RESELLER,

P.R.T.C. may terminate this Agreement or

any service orders or unfilled purchase

orders accepted hereunder. Also, P.R.T.C.

may, without incurring in any liability before

RESELLER or its authorized users, either

temporarily discontinue furnishing service

to RESELLER or terminate the contract.

RESELLER shall indemnify and_ hold

harmless P.R.T.C. from any such liability to

RESELLER’s authorized users.

Upon such termination by P.R.T.C., termination

charges will apply as set forth in this Agreement.

At the time this Agreement is terminated for

any reason, RESELLER and P.R.T.C. agree to

facilitate the provision of CRS to authorized

users. In such event, RESELLER will either

arrange for another retailer or dealer to provide

CRS or shall provide P.R.T.C. with sufficient

information on RESELLER’s authorized users so

that P.R.T.C. can continue to provide service to

these parties.

App. 65

E. RESELLER may terminate this Agreement,

subject to payment of accrued charges but

without liability for termination charges, if

P.R.T.C. fails to perform or observe any term

or condition of this Agreement and such failure

shall continue unremedied for thirty (30) days

after P.R.T.C.’s receipt of notice thereof from

RESELLER.

XXII. ASSIGNMENT

This Agreement is not assignable or transferable

by either party without the written consent of

the other, except that P.R.T.C. may, without

RESELLER’s consent, assign this Agreement to an

affiliate or subsidiary or assign its right to receive

payment hereunder; and its assignee shall have the

rights, powers and remedies of P.R.T.C. RESELLER

will not assert against P.R.T.C. unless expressly

permitted by law. P.R.T.C. shall impose a service

ordering charge for the process of an order for each

block of numbers as provided in the applicable

P.R.T.C.’s local tariff, if it consents to RESELLER’s

assignment of this contract to another.

XXIII. GENERAL

A. Any modification or waiver of any provision of

this Agreement must be in writing and signed

by authorized representatives of both parties.

Variances from this Agreement in any

RESELLER order will be of no effect, except

that the prices specified in Attachment A may

be changed at the sole discretion of P.R.T.C.

within the guidelines of the appropriate tariff.

B. If any term or provision of this Agreement

shall be held invalid or unforcible, the

App. 66

remainder of this Agreement shall not be

affected thereby and each term shall be valid

and enforced to the fullest extent permitted by

Law.

C. THIS IS THE ENTIRE AGREEMENT BET-

WEEN THE PARTIES WITH RESPECT TO

THE PROVISION OF CRS AND ASSOCIATED

SERVICES PROVIDED HEREUNDER AND

SUPERSEDES ALL PRIOR AGREEMENTS,

PROPOSALS OR UNDERSTANDINGS

WHETHER WRITTEN OR VERBAL.

PUERTO RICO

TELEPHONE COMPANY

/s/ César Negrette Muniz /s/ Pedro A. Galarza

(Authorized Signature) (Authorized Signature)

/s/ César Negrette Muniz /s/ Pedro A. Galarza

(Name) (Name)

Presidente Presidente

(Title) (Title

Date 5 de septiembre de 1986 Date 22 septiembre de 1986

WITNESSED

/s/ (Illegible]

Vice President Legal

Affairs

App. 67

WHOLESALE SERVICE AGREEMENT PRICING

Service Ordering Charges

To process an order for block of numbers,

each block

To activate each number

To restore or change a number to add

or modify call restriction features; per

number affected

Access and Usage Charges

Basic Monthly Charge

First group of 200 numbers

Each additional group of 100 numbers

Monthly access charge per activated

number

Usage Charges

Each minute; peak period

Each minute; off-peak period

Enhanced Services

Enhanced Services are offered as an

optional package. An end user may select

all or any combination of the following

services, per number, per month

Call Forwarding

Allows an end user to re-direct calls

intended for their Cellular Telephone

to another telephone number

Call Waiting

Allows an end user currently engaged

in a call to be alerted that another

incoming call has been received.

$ 50.00

15.00

10.00

850.00

425.00

23.75

0.28

0.14

1.45

App. 68

c. Three-Way Calling

Allows an end user to add a third party

to an existing call. 1.45

. Service offering (Cont.)

App. 69

UNITED STATES BANKRUPTCY COURT

DISTRICT OF PUERTO RICO

PUERTO RICO TELEPHONE AUTHORITY

(Filed by Puerto Rico Telephone Company

on FEB 24 1994)

(Authorized by P. R. Telephone Authority

on FEB 24 1994, Effective on MAR 27 1994)

- . *

DOMESTIC PUBLIC CELLULAR RADIO

TELECOMMUNICATIONS SERVICE

B. Wholesale Cellular Service (Cont.)

4. Terms of Payment (Cont.)

c. In the event an authorized user’s

mobile unit is lost, stolen or otherwise

absent from the authorized user’s

possesion or control, the reseller shall

nevertheless be liable for all charges

attributable to the access number

assigned to such Mobil Custome: Umit

the loss, theft or disappeareance is

reported to the Company.

5. Reseller obligations

a. The identity of the calling party shall

be established in the course of

communication as often as necessary

and the calling party shall be solely

responsible for establishing the identity

of the person or persons with whom

connection is made.

App. 70

b. The use of the Cellular Service shall at

all times be subject to the control of the

operator at the control point of the

Cellular Telecommunications.

c. The reseller shall be solely responsible

for all risk and expenses incurred in

connection with its actions in the sale

and service of the Cellular Service or

any other acts required of the reseller

... pursuant to this tariff. The reseller

shall act in all respect on its own

account and shall be solely responsible

for any credit verification, deposits,

billing, consolidation, rebilling, reseller

or authorized user billing complaints,

toll calls, bad debts and fraudulent use,

by any person of any number or

numbers assigned to the reseller.

d. The reseller and/or authorized user

indemnifies and holds the Company

harmless against claims for libel, slander

or infringement of copyright from the

material transmitted over the Company’s

facilities; against claims from

infringement of patents arising from

combining with, or using in connection

with facilities ‘of the Company,

apparatus, and systems of the reseller or

its authorized users; and against all

other claims arising out of any act or

omission of the reseller in connection

with facilities provided by the Company.

The reseller and the Company shall enter

into an agreement having additional terms

and conditions to those included in this

tariff.

App. 71

V. Rate Period and Timing of Calls

A. Rate Periods for Usage

Applicable rates of Cellular Service are applied

twenty four (24) hours daily, all days of the week.

B. Timing of Calls

1. Chargeable time for calls originated or

received by a Mobile Customer Unit begins

when the call is answered and ends when it

disconnects.

2. The accumulated monthly usage for calls is

rounded to the next minute for billing

purposes.

Vi. Rates and charges

Charges

A. Retail Service

1. Service Deposit See Section

E-12

2. Service Ordering Charge

a. To process an order

for each number $30.00*

b. To restore or change a

number, to add or modify

call restriction features or

change the identification

number of the Mobile

Customers Unit;

per number $ 7.50

* At the Company's option, this tamff will not apply during special

dates and/or during promotional periods from time to time.

App. 72

3. Itemized Monthly Charges*

For each monthly itemized

bill statement to the customer. 99

4. Access and Usage Rates**

The following monthly access and per minute

usage rates shall apply at customer’s option.

OPTIONS*

Minutes Charges per

Access Admitted Additional Minute

Numbers’ Rent Airtime Airtime

A 1-4 $ 35.00 ~ $0.35

B 1-4 59.00 75 0.33

C 1-4 79.00 150 0.30

D 1-4 119.00 300 0.27

E 5-10 31.95* sad 0.25

F 11-24 30.95* ” 0.25

G 25-+ 29.95* ‘ine 0.25

* . *

* For customers with Tariff Options E, F and G, the charge of

ninety nine ($0.99) cents will not apply (See this page, Section VI.A.4.)

** For Station to Station Operator Calls, under the single access

number plan, to one of the public network, will apply the charge of

$1.15, in addition to the air time charge; according to the subscribed per

additional minute charges option.

* Apply for one (1) bill, under one address, for all numbers under

that account.

** Eight (8) minutes per access number.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.