A $1.25 million reimbursement under the federal eRate program is the property of the school system that applied for the funding and not the creditors for the now-bankrupt company that performed the wiring service, the U.S. Supreme Court has decided.

The High Court’s Dec. 1 ruling ends a two-year legal fight over who should retain eRate funds in the event that a service provider declares bankruptcy before receiving any money through the program, which provides discounts on telecommunications services to eligible schools and libraries.

The Springfield, Mass., public school system–one of the state’s poorest districts–had contracted with LAN Tamers of Palmer, Mass., to install a high-speed computer network at Central High School and do maintenance work on computer networks at four other schools.

The district paid the company in full for its work and then applied for a reimbursement on the eRate-eligible portion of the cost using the program’s Billed Entity Applicant Reimbursement (BEAR) form. Before any funding could be issued, however, LAN Tamers filed for bankruptcy.

Under eRate rules, schools and libraries apply for funding through the Universal Service Administrative Co. (USAC), which disburses funds directly to an applicant’s service providers. These companies, in turn, pass on the funding in the form of discounts or “if services have been paid for in full through reimbursements.”

The bankruptcy trustee for LAN Tamers sought to keep Springfield’s reimbursement check to help pay off the company’s creditors. Springfield filed a complaint in U.S. Bankruptcy Court arguing that the funds were for work performed on behalf of the school district and should be the city’s property, not that of the bankruptcy estate.

The bankruptcy court agreed in August 2002, finding that the “ownership rights in the reimbursements are held by the city, not the debtor.” The court further specified that “the funds are available neither as collateral for the bank nor as a source of funds for a distribution to unsecured creditors.”

The bankruptcy trustee appealed to the First U.S. Circuit Court of Appeals and again to the U.S. Supreme Court. The Dec. 1 Supreme Court ruling upholds the lower court rulings. “I’m thrilled,” said Harry P. Carroll, deputy solicitor for the city of Springfield. “It has been a long, hard-fought battle.”


U.S. Supreme Court

Universal Service Administrative Co.: Schools and Libraries Division