Magic Words to Preserve an Interest in an IRU?

by Davis Wright Tremaine LLP

Previously on this Law Advisor, I questioned whether an IRU is really an IRU. In particular, after peeling back the layer of the IRU onion, what really is it? I suggested that an IRU is a capital lease with the right to quiet enjoyment. I went on to state that in only one instance of which I am aware, a judge in a bankruptcy case found that the grantee of the IRU had an ownership interest in the IRU, which had the effect of disallowing the rejection of the IRU by the bankrupt grantor and, arguably imbuing it with property rights. I believe it worthwhile to take a somewhat closer look at what the court in that instance found persuasive; in particular, whether the parties in that case used any “magic words” that could be used in IRU agreements to help preserve the interest of the grantee by moving the needle towards giving the grantee of an IRU an ownership interest and finding an IRU to be a property right.

The case to which I am referring involved the grant of an IRU to MCI Worldcom by Cambrian Communications, who had filed for bankruptcy. The court was clear to state that it was not deciding whether the IRU agreement was executory and therefore could be rejected by Cambrian. The court also stated that it was not ruling on “the legal nature of all IRUs.” Instead, declared the court, it was determining the “kind of interest MCI has in the fibers.” Nevertheless, the court concluded that “the IRU is a property interest that runs with the fibers and is enforceable.” The court also found that the right to access accompanies the IRU” and “also runs with the fibers and is enforceable” so that MCI could enjoy the IRUs. In other words, the court’s holding preserved MCI’s interest in and use of the IRUs even though Cambrian had declared bankruptcy. So, what led the court to such a conclusion?

Scouring the IRU agreement, the court noted that the parties stated they were transferring “beneficial title and interest” to the IRUs and that MCI was the “beneficial owner possessing equitable title.” The court also noted the recitals of the agreement, which provided that Cambrian desired to “sell” and that MCI desired to “purchase” the “exclusive right to use certain fibers.” The court cited that portion of the agreement which provided that upon acceptance of the fibers, Cambrian “shall sell, convey, transfer, assign and deliver” and MCI “shall accept and acquire” all of Cambrian’s “beneficial title and interest” in the fibers. The court pointed to the language claiming that MCI was the “absolute owner” of the “ownership interest” in the fiber; that the agreement repeatedly proclaimed that the IRU is “exclusive”; that MCI is the owner for tax and accounting purposes; that MCI was required to provide the equipment necessary to use the fiber; that MCI had “exclusive possession and control” of the fiber; and that the fibers were identified. The court also found that the right to access the fibers survived bankruptcy or breach of the agreement because, otherwise, the IRUs would be rendered nugatory.

Are these words the magic potion by which to find that an IRU is property and preserve an ownership interest in an IRU? No, not necessarily, but they can’t help. Moreover, although the court’s holding is not the only or last say on the matter, the court was the Bankruptcy Court for the Southern District of New York, which, at least in bankruptcy circles, is an influential court.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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