In re Adelphia Communications Corp.

• Decision Date: 16 May 2007
• Docket Number: No. 02-41729.,02-41729.
• Citation: 368 B.R. 348
• Parties: In re ADELPHIA COMMUNICATIONS CORP., et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

368 B.R. 348

In re ADELPHIA COMMUNICATIONS CORP., et al., Debtors.

No. 02-41729.

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

May 16, 2007.

Miller & Van Eaton, by Kenneth Brunetti, Esq., Nicholas Miller, Esq., William Malone, Esq., Washington, D.C., Counsel for Charlotte-Mecklenburg Office of Cable & Franchise Management.

Hogan & Hartson L.L.P. by Gardner Gilles-pie, Esq., Paul Werner, Esq., Jake Shields, Esq., Washington, D.C., Counsel for Time Warner N.Y. Cable LLC.

DECISION ON DETERMINATION OF PURCHASE PRICE TO BE PAID BY THE MECKLENBURG-IRDELL CONSORTIUM FOR THE PORTION OF THE DEBTORS' CABLE SYSTEMS THAT SERVES THE CONSORTIUM COMMUNITIES

ROBERT E. GERBER, Bankruptcy Judge.

In this contested matter in the jointly administered cases of Adelphia Communications Corporation and its subsidiaries (the "Debtors"), the Court has before it the determination of the purchase price to be paid by the County of Mecklenburg, North Carolina and the towns of Cornelius, Davidson, Huntersville, Mooresville, and Troutman, all of which are governmental entities in the State of North Carolina (collectively, the "Consortium"), to exercise rights of first refusal to purchase the cable systems that serve the Consortium communities (the "Consortium Systems"). The Consortium Systems were included in a wide range of assets that Time Warner Cable and, Comcast Corporation offered to buy from the. Debtors. As described more fully below, the Court concludes that the Consortium must match Time Warner Cable's and Comcast's offer of $3,810 per subscriber.

The following are the Court's Findings of Fact and Conclusions of Law in connection with its determination.

Facts

Until recently, the county and towns comprising the Consortium operated as local franchising authorities ("LFAs") under state and federal law.¹ In North Carolina cable franchises were awarded by LFAs, not the state.² Pursuant to their authority under state law, the members of the Consortium have passed substantially identical ordinances to regulate cable communications in their jurisdictions (the "Cable Ordinances").³ The LFAs also have entered into substantially identical franchise agreements (the "Franchise Agreements") with Prestige Cable TV of North Carolina, Inc., an Adelphia subsidiary ("Prestige").⁴ The Franchise Agreements authorize Prestige to provide cable services within the geographic areas governed by the Consortium. The Franchise Agreements specifically reference the Cable Ordinances, and state that the franchises were granted under the "terms and conditions" contained in the ordinances.⁵

In particular, the sections within the Franchise Agreements concerning the transfer or renewal of franchises incorporate by reference the Cable Ordinances,⁶ including the provision within the Cable Ordinances that provide the LFAs a right of first refusal to purchase the cable system. That provision reserves for the LFAs "the right of first purchase in any sale, transfer, lease, assignment or disposal of the system at a cost at least equal to a bona fide offer otherwise acceptable to the Grantee."⁷

On April 25, 2005, the Debtors entered into asset purchase agreements (the "APAs") with Time Warner N.Y. Cable LLC ("Time Warner") and Comcast Corporation ("Comcast") for the sale of substantially all of the Debtors' assets. The APAs required the Debtors to transfer the Franchise Agreements to Time Warner or Comcast. The Consortium first filed an objection to the APAs before reaching a settlement agreement⁸ that gave the Consortium the right to exercise its right of first refusal with respect to the sale of those assets covered by the Franchise Agreements.

Pursuant to the terms of the settlement agreement, the parties agreed that this Court would determine the dollar amount to be paid by a Consortium member in order to exercise its right of first refusal for a Consortium System. That dollar amount will equal the price per subscriber set by this Court multiplied by the number of subscribers served by that Consortium System.⁹ Time Warner asserts that for the Consortium to exercise its right of first refusal, it must match the purchase price of $3,810 per subscriber that Time Warner claims was paid by Time Warner and Comcast to the Debtors in the APAs. The Consortium argues that the price per subscriber was not clear in the APAs, and that the fair market value would more accurately represent the price to be paid.¹⁰

First, this Court will discuss rights of first refusal generally. Then, this Court will address whether Time Warner and Comcast made a "bona fide" offer. Finally, this Court will determine whether the Court should substitute a "fair value" price for the per subscriber price that was used by the seller and buyers under their agreement.

Discussion

I. Nature of Rights of First Refusal

As stated above, the Consortium's Cable Ordinances contain provisions governing rights of first refusal that reserve "the right of first purchase in any sale, transfer, lease, assignment, or disposal of the system at a cost at least equal to a bona fide offer otherwise acceptable to the Grantee."¹¹ This Court recognized the enforceability of the Consortium's right of first refusal in its decision dated June 22, 2006.¹². By its terms, the Consortium's right of first refusal requires that the holder pay a purchase price "at least equal to a bona fide offer." The right of first refusal does not speak to paying market value; unless trumped by rules of law, the amount of "a bona fide offer" is controlling, and the holder is required to match the offer's price.

Caselaw supports a contractual interpretation of the Consortium's right of first refusal as a right to match and nothing more. The United States District Court for the Western District of Virginia recently issued a ruling regarding the attempt by the City of Martinsville and the County of Henry, Virginia to exercise rights of first refusal related to the Adelphia bankruptcy.¹³ The court held:

"The cable ordinances do not grant the City and the County the right to pay a fair value for the Adelphia cable television assets, much less a value they believe to be fair. The ordinances only provide Martinsville Cable with the limited right to match what Time Warner and Comcast have offered, which it utterly failed to do."¹⁴

Federal court decisions have supported the view of rights of first refusal as rights to match. In Miller v. LeSea Broadcasting, Inc., the Seventh Circuit, speaking through Judge Posner, observed, "All [that a right of first refusal] entitles the holder to do is match an offer from a third party should the grantor of the option be minded to accept that offer."¹⁵ The Third and Fifth Circuits, respectively, have expressed similar understandings of rights of first refusal, distinguishing them from "a right to first negotiation,"¹⁶ and recognizing that "the owner of a property subject to a right of first refusal remains master of the conditions under which he will relinquish his interest, as long as those conditions are commercially reasonable, imposed in good faith, and not specifically designed to defeat the preemptive rights."¹⁷

The matching requirement exists to ensure that the seller can alienate the encumbered property at the time and price of its choosing, either to a third party or to the rights holder.¹⁸ This requirement recognizes that rights of first refusal do not endow the rights holder with the authority "Rio require [the third party] to offer a price that [the rights holder] would consider low enough to exercise successfully its right[s]."¹⁹

Several state court opinions share the same understanding of rights of first refusal as rights to match, not rights to pay the fair market value of the property that is subject to the right of first refusal. The Massachusetts Supreme Court has observed that holders of rights of first refusal do not have the right to purchase the property at a fair market price because that would effectively "contradict[ ] the practical application of the right of first refusal."²⁰ A right of first refusal means "that a third party, not the holder of the right, will dictate the price, and the holder therefore runs the risk that the third party will agree to a price that is above market value, or that is above what the holder is willing and able to pay."²¹ Other state courts have refused to remand for determination of fair market value when the third party offeror allocated a reasonable price to the property subject to the right of first refusal.²²

A right of first refusal entitles the holder to match any subsequent offers for the property before the third party offeror can complete its transaction. The transaction with the third party offeror, not the market or the rights holder, dictates the terms and price of the right to match. Put plainly, the Consortium cannot second-guess Time Warner's offer, and as a general matter, any Consortium member wishing to acquire a franchise pursuant to its right of first refusal must match the price.

II. Bona Fide Offer

The Cable Ordinances require that the third party's offer be "bona fide."²³ The "bona fide" requirement ensures that there really is an offer to be matched, and, as relevant here, prevents a third party offeror selecting an amount solely to defeat the right of first refusal. This concern is especially a matter of attention in package deals, like the one here, where the property subject to the purchase right is included within a greater package. Courts recognize a risk in package deals that the purchase price may be unfairly allocated or padded to defeat rights of first refusal.²⁴

Here, the Consortium has made no allegation that Time Warner, Comcast and the Debtors manipulated the price allocation to frustrate the Consortium's rights of first refusal, or the price at which such rights might be exercised. Nor has the Consortium alleged or produced evidence of bad faith when Time Warner, Comcast and the Debtors entered into the...