Adelphia Commc'ns Corp. v. U.S. Specialty Ins. Co. (In re Adelphia Commc'ns Corp.)

• Citation: 638 B.R. 506
• Decision Date: 17 March 2022
• Docket Number: Case No. 02-41729 (SHL) (Jointly Administered),Adv. Pro. No. 19-01027 (SHL)
• Parties: IN RE: ADELPHIA COMMUNICATIONS CORP., et al. Debtors. Adelphia Communications Corp. and Quest Turnaround Advisors, LLC, Plaintiffs, v. U.S. Specialty Insurance Company, Defendant.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

638 B.R. 506

IN RE: ADELPHIA COMMUNICATIONS CORP., et al. Debtors.

Adelphia Communications Corp. and Quest Turnaround Advisors, LLC, Plaintiffs,

v.U.S. Specialty Insurance Company, Defendant.

Case No. 02-41729 (SHL) (Jointly Administered)

Adv. Pro. No. 19-01027 (SHL)

United States Bankruptcy Court, S.D. New York.

Signed March 17, 2022

MASINI, VICKERS, RUKSAKIATI & HADSELL, P.C., Counsel for Adelphia Communications Corp. and Quest Turnaround Advisors, LLC, By: Thomas A. Vickers, Esq., 150 S. Wacker Drive, 24th Floor, Chicago, Illinois 60606

WOLLMUTH MAHER & DEUTSCH LLP, Counsel for Adelphia Communications Corp. and Quest Turnaround Advisors, LLC, By: Paul R. DeFilippo, Esq., Lyndon M. Tretter, Esq., 500 Fifth Avenue, New York, New York 10010

CLYDE & CO US LLP, Counsel for U.S. Specialty Insurance Company, By: Scott Schwartz, Esq., 405 Lexington Avenue, 16th Floor, New York, New York 10174, -and-, By: Douglas M. Mangel, Esq., 1775 Pennsylvania Avenue, N.W., Suite 400, Washington, D.C. 20006

MEMORANDUM OF DECISION

SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE

Before the Court are cross-motions for summary judgment filed in the above-captioned adversary proceeding by Adelphia Communications Corp. ("Adelphia") and Quest Turnaround Advisors, LLC ("Quest," and together with Adelphia, the "Plaintiffs") on the one hand, and by U.S. Specialty Insurance Company ("U.S. Specialty" or the "Defendant") on the other. See Plaintiffs’ Combined Mot. and Supp. Mem. Pursuant to Local Bankruptcy Rule 7056-1, for Entry of an Order (A) Granting Plaintiffs Summ. J. on Count I of their Compl. (Declaratory J.) (Adv. Proc. No. 19-01027, Doc. 1, Filed 02/20/19); and (B) Granting Plaintiffs Summ. J. as to Liability on Count II of their Compl. (Breach of Contract) (Adv. Proc. No. 19-01027, Doc. 1, Filed 02/20/19) [ECF No. 25]¹ (the "Plaintiffs’ SJM"); Mem. Of Law in Supp. of Defendant U.S. Specialty Insurance Company's Cross Mot. for Summ. J. [ECF No. 26] ("U.S. Specialty SJM"). Adelphia and Quest seek coverage under an insurance policy issued by U.S. Specialty for certain defense fees, costs and expenses incurred in Adelphia's bankruptcy proceeding. U.S. Specialty argues that coverage is precluded by a fee exclusion contained in that policy.² For the reasons set forth below, the Court grants the Plaintiffs’ SJM and denies the U.S. Specialty SJM.

BACKGROUND

The material facts set forth in this Decision are not in dispute. See generally Joint Statement of Undisputed and Material Facts [ECF No. 24] (the "SUF"). In June 2002, Adelphia and its affiliated debtors filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. See Case No. 02-41729 [ECF No. 1]. Some 15 years ago, the Court confirmed the Fifth Amended Joint Chapter 11 Plan for Adelphia Communications Corporation and Certain of its Affiliated Debtors (the "Plan"). See SUF ¶ 1. The Plan became effective shortly thereafter. See SUF ¶ 2.

The Plan dissolved Adelphia's Board of Directors and vested the rights, powers and executive authority of the Board in a new fiduciary known as the "Plan Administrator." See SUF ¶ 2. After confirmation, Quest and Adelphia executed a Plan Administrator Agreement (the "Plan Administrator Agreement") that retained Quest as the Plan Administrator. See SUF ¶ 3; see also Plan Administrator Agreement, attached as Exhibit A to the SUF.³ The Plan Administrator Agreement obligates Adelphia to indemnify Quest for any expenses that Quest incurs in a proceeding relating to the Plan Administrator Agreement, including issues dealing with Quest's role as the Plan Administrator. See SUF ¶ 6 (citing Plan Administrator Agreement, Section 4.7(b)).⁴

In early 2007, U.S. Specialty began insuring Quest in its capacity as Plan Administrator under a series of insurance policies. See SUF ¶¶ 7-8. The policy currently at issue is the Directors, Officers and Organization Liability Insurance Policy No. 14-MGU-10-A20695 (the "Policy"),⁵ which was initially issued for the period from January 5, 2010 to January 5, 2012 and was subsequently extended to "TBD plus 6 (six) years." SUF ¶¶ 7-9 (citing Policy at Declarations and quoting Policy at Endorsement No. 42).⁶ Under the Policy, Quest qualifies as an Original Insured Organization⁷ and Adelphia is listed as an Additional Insured Organization . See SUF ¶¶ 13-14; Policy, Endorsement No. 15, Section 1. The Policy defines an Insured Organization as "the Original Insured Organizations , but solely in their capacity as Plan Administrator for [Adelphia]. Insured Organization will also include the Additional Insured Organizations ...." Policy at Endorsement No. 15, Section 2. The Policy also provides for coverage if Adelphia is obliged to indemnify Quest under the Plan Administrator Agreement. See Policy at Endorsement No. 15, Section (4); see also SUF ¶ 11.⁸

The basic coverage grant of the Policy provides that U.S. Specialty "will pay to or on behalf of the Insured Organization [any] Loss arising from Claims first made against it during the Policy Period ... for Wrongful Acts ." Policy at Insuring Agreement (B); see also SUF ¶ 10. Under the Policy, a Loss includes Defense Costs , which are the "reasonable legal fees, costs and expenses, consented to by the Insurer ... resulting from the investigation, adjustment, defense or appeal of a Claim against an Insured ." Policy at Definitions (C) and (J). A Wrongful Act includes a Professional Services Wrongful Act , which means "any actual or alleged act, error, misstatement, misleading statement, omission or breach of duty committed or allegedly committed in rendering or failing to render Professional Services ." Policy at Endorsement No. 15; see also SUF ¶ 18. Professional Services are, in turn, defined as "those services that the Plan Administrator is obligated to perform pursuant to the [Plan Administrator Agreement]." Policy at Endorsement No. 15, Section 1; see also SUF ¶ 19. A Claim includes, among other things, "(1) any oral or written demand, including any demand for non-monetary relief, [and] (2) any civil proceeding commenced by service of a complaint or similar pleading." Policy at Definition (B); see also SUF ¶ 16. As applied to the current dispute then, the Policy provides coverage to Quest for legal fees and costs for a claim made against it for an alleged breach of duty in its providing of services as Plan Administrator.

Endorsement No. 15 excludes from coverage "any payment of Loss in connection with a Claim arising out of, based upon or attributable to any fee or other compensation due or allegedly due in return for any service provided pursuant to the [Plan Administrator Agreement]."⁹ Policy at Endorsement No. 15, Section 5 (the "Fee Exclusion"); see also SUF ¶ 12.

In February 2018, creditor Solus Alternative Asset Management, L.P. ("Solus") filed a motion in Adelphia's bankruptcy proceeding seeking, among other things, removal of Quest as Plan Administrator for cause (the "Original Motion"). See SUF ¶ 22. The Original Motion was subsequently amended in June 2018 (the "Amended Motion" and together with the Original Motion, the "Solus Motions")¹⁰ by Solus and ACC Claims Holdings, LLC (together, the "Movants"). See SUF ¶ 26. Adelphia and Quest opposed the relief requested by the Movants and the Court held an evidentiary hearing on the Amended Motion in October 2018. See SUF ¶¶ 23, 27, 30-31. Adelphia, Quest and the Movants ultimately settled the disputes raised in the Solus Motions and in June 2019, the Court entered the Order Approving and "So-Ordering" Stipulation and Overruling Objection . See SUF ¶ 32. Pursuant to this settlement, the Solus Motions were resolved, the Plan Administration Agreement was terminated and a new party was appointed as Plan Administrator. See Stipulation and Consent Order With Respect to (A) Motion of Solus Alternative Asset Management LP and ACC Claims Holdings LLC, (B) Second Amendment to Plan Administrator Agreement, and (C) Appointment of Successor Administrator , attached as Exhibit P to the SUF [ECF No. 24-16].

Plaintiffs Adelphia and Quest now seek coverage under the Policy for the fees, costs and expenses they incurred in defending the Solus Motions. Defendant U.S. Specialty acknowledges that fees incurred in defense of the Solus Motions meet the coverage grant under the Policy,¹¹ but argues that the Fee Exclusion precludes coverage because—it claims—the Solus Motions related to the fees owed to Quest. See SUF ¶ 36. The Plaintiffs counter that the Fee Exclusion is inapplicable because it applies to a "fee or other compensation due or allegedly due ," whereas the Solus Motions sought termination of Quest as Plan Administrator and related to fees that were already paid to Quest. Policy at Endorsement No. 15, Section 5 (emphasis added); see SUF ¶ 37.

DISCUSSION

A. Legal Standards

1. Summary Judgment

Federal Rule of Civil Procedure 56, made applicable by Rule 7056 of the Federal Rules of Bankruptcy Procedure, governs the granting of summary judgment. "[S]ummary judgment is proper ‘if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the [movant] is entitled to a judgment as a matter of law.’ " Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting Fed. R. Civ. P. 56 ). If the "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no ‘genuine issue for trial.’ " Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (quoting First Nat'l Bank of Ariz. v. Cities Serv. Co. , 391 U.S. 253, 288, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968) ).

"A fact is material when it might affect the outcome of the suit under governing law." McCarthy v. Dun & Bradstreet Corp ., 482 F.3d 184, 202 (2d Cir. 2007). But "the mere existence of some alleged factual dispute between the parties...