In re Adelphia Communications Corp.

• Decision Date: 17 May 2007
• Docket Number: No. 02-41729.,No. 07 Civ. 1018(SAS).,02-41729.,07 Civ. 1018(SAS).
• Citation: 371 B.R. 660
• Parties: In re ADELPHIA COMMUNICATIONS CORPORATION, et al., Debtors. Official Committee of Equity Security Holders of Adelphia Communications Corporation, Appellant, v. Adelphia Communications Corporation, et al., Appellees.
• Court: U.S. District Court — Southern District of New York

371 B.R. 660

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

Official Committee of Equity Security Holders of Adelphia Communications Corporation, Appellant, v. Adelphia Communications Corporation, et al., Appellees.

No. 02-41729.

No. 07 Civ. 1018(SAS).

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

May 17, 2007.

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Peter D. Morgenstern, Gregory A. Blue, Eric B. Fisher, Morgenstern Jacobs & Blue LLC, New York, New York, for Appellant.

Myron Trepper, Brian E. O'Connor, Rachel C. Strickland, Brian P. Guiney, Wilkie Farr & Gallagher LLP, New York, New York, for Appellees Reorganized Debtors.

David M. Friedman, Adam L. Shiff, Michael C. Harwood, Kasowitz, Benson, Torres & Friedman LLP, New York, New York, for Appellee Official Committee of Unsecured Creditors.

OPINION AND ORDER

SCHEINDLIN, District Judge.

The present dispute arises out of the approximately 230 jointly administered chapter 11 cases of Adelphia Communications Corporation ("ACC") and its subsidiaries (collectively, the "Debtors"). The Official Committee of Equity Security Holders (the "Equity Committee") appeals from the Bankruptcy Court's confirmation order (the "Confirmation Order") approving the First Modified Fifth Amended Joint Chapter 11 Plan (the "Plan").¹ By Consent Order dated January 23, 2007, the Equity Committee withdrew its motion for an emergency stay of the Plan, agreeing that if the Plan went effective it would be without prejudice to the appeal the Equity Committee now brings.²

The Equity Committee urges that the Confirmation Order be vacated, in relevant part, on the following five grounds: (1) the Bankruptcy Court lacked jurisdiction over the claims being asserted by the Equity Committee (the "Equity Committee Claims") because the District Court had withdrawn its reference of these claims to the Bankruptcy Court; (2) the Debtors lacked the authority to transfer those claims to the Plan's litigation trust, the Contingent Value Vehicle ("CVV"); (3) the Bankruptcy Court committed reversible error by allowing for the "de facto substantive consolidation" of litigation claims in the CVV,³ the proceeds of which will be distributed to creditors with "no legitimate right to those proceeds;"⁴ (4) the Plan impermissibly deprives the Equity Committee of its right to prosecute its own objection to the claims of the Debtors' pre-petition lenders; and (5) the Bankruptcy Court committed reversible error by ignoring conflicts of interest inherent in the CVV's governance provisions.

In some sense, these five issues boil down to one main — and novel — question: Did the Bankruptcy Court commit reversible error when it effectively withdrew the Equity Committee's derivative standing to pursue litigation against ACC's pre-petition lenders and investment banks on behalf of the estate? The Bankruptcy Court conferred this standing on the Equity Committee, upon its uncontested motion, in August 2005 ("Standing Decision").⁵ In that decision, the Bankruptcy Court concluded that although the "ultimate prognosis" for the claims proposed by the Equity Committee was not "particularly optimistic," allowing them to go forward would be in the estates' best interest at that time.⁶ For all intents and purposes, the Bankruptcy Court withdrew this standing in its January 3, 2007 Bench Decision, stating "[t]he Equity Committee served responsibly and well. But now its job is done."⁷ Although neither party attacks head on the question of whether such a withdrawal was an appropriate exercise of the Bankruptcy Court's equitable authority, it is necessary to do so here in order to decide the issues raised by this appeal.⁸

The Debtors and the Creditors Committee (together, "Proponents") filed a joint brief in opposition to the Equity Committee's appeal.⁹ For the reasons discussed below, the Bankruptcy Court's withdrawal of the Equity Committee's derivative standing was not an abuse of discretion.

I. LEGAL STANDARD

A. Appeals of Bankruptcy Court Orders

The district courts are vested with appellate jurisdiction over bankruptcy court rulings.¹⁰ Final orders of the bankruptcy court may be appealed to the district court as of right.¹¹ An order is final if "[n]othing in the order ... indicates any anticipation that the decision will be reconsidered."¹² Courts have held that an order confirming a plan of reorganization is final.¹³

B. Standard of Review

A district court functions as an appellate court in reviewing judgments rendered by bankruptcy courts.¹⁴ Findings of fact are reviewed for clear error.¹⁵ A finding of fact is clearly erroneous if the court is "`left with the definite and firm conviction that a mistake has been committed.'"¹⁶ If the bankruptcy court's factual findings are "plausible in light of the record viewed in its entirety," this court "may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently. Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous."¹⁷ A bankruptcy court's conclusions of law, by contrast, are reviewed de novo.¹⁸

Whether a party should be granted derivative standing is a mixed question of law and fact.¹⁹ Because "the ability to confer derivative standing upon ... committees is a straightforward application of bankruptcy courts' equitable powers,"²⁰ the decision to confer standing is reviewed for an abuse of discretion.²¹ By the same token, a bankruptcy court's decision to withdraw derivative standing is reviewed for an abuse of discretion.²² In reviewing the Bankruptcy Court's decision, the Court remains mindful that a bankruptcy court abuses its discretion by failing to make findings necessary to the proper exercise of its discretion, and that a bankruptcy court's reliance on erroneous conclusions of law is itself an abuse of discretion.²³

C. Derivative Standing Under the STN Trilogy

The Standing Decision offers a thorough and accurate recitation of this Circuit's derivative standing doctrine.²⁴ However, because that decision predated (by less than two weeks) the Second Circuit's ruling in In re Smart World Technologies, LLC ("Smart World"),²⁵ of which the parties offer conflicting interpretations, I briefly summarize relevant case law below.

Three seminal cases in this Circuit laid the foundation for committees to acquire derivative standing to press claims on behalf of debtors' estates. They are: (i) Unsecured Creditors Committee of Debtor STN Enterprises, Inc. v. Noyes ("STN");²⁶ (ii) In re Commodore International, Ltd. ("Commodore");²⁷ and (iii) In re Housecraft Industries USA, Inc. ("Housecraft")²⁸ (collectively, the "STN Trilogy"). The Second Circuit first recognized the doctrine of derivative standing in STN. There, the court held that although "no explicit authority for creditors' committees to initiate [suit]" exists in the Code, an "implied, but qualified" right exists under 11 U.S.C. §§ 1103(c)(5) and 1109(b) in cases where the debtor-in-possession has "unjustifiably" failed to bring suit and a committee seeking standing obtains the approval of the court.²⁹ In Commodore, the court extended the doctrine of derivative standing to apply in cases where the debtor-in-possession consents to a committee's maintenance of the claim.³⁰ Finally, in Housecraft, the court held that bankruptcy courts may grant standing to a committee to sue as a co-plaintiff with the debtor-in-possession on behalf of the estate.³¹

A court entertaining a derivative standing motion governed by the STN Trilogy must inquire, "in the first instance," into the committee's "probabilities of legal success and financial recovery in event of success."³² The "court need [not] undertake a mini-trial," but "should assure itself that there is a sufficient likelihood of success to justify the anticipated delay and expense to the bankruptcy estate that the initiation and continuation of litigation will likely produce."³³ Additionally, where the debtor-in-possession's failure to bring suit has not been found to be "unjustifiable" under STN, a court granting derivative standing to a committee must "find[] that suit by the committee is (a) in the best interests of the bankruptcy estate, and (b) is `necessary and beneficial' to the fair and efficient resolution of the bankruptcy proceedings."³⁴ This "approach permit[s] a reasoned and practicable division of labor between the creditors committee and the debtor in possession or trustee, while also providing bankruptcy courts with significant authority to both manage the litigation and to check any potential for abuse by the parties."³⁵

It follows from the reasoning of the STN Trilogy that a bankruptcy court may exercise its equitable power to withdraw derivative standing if the court concludes that maintenance of the litigation being pursued by a committee no longer meets the test outlined above (i.e., that allowing the litigation to continue would be detrimental to either the estate's best interest, or to the fair and efficient resolution of the bankruptcy proceeding). This result is also supported by the Second Circuit's characterization of derivative standing in Commodore as the right to "sue on behalf of the debtors, with the approval and supervision of a bankruptcy court."³⁶

II. DISCUSSION

A. Withdrawal of the District Court's Reference

As a threshold issue, the Equity Committee contends, as it did below, that the Bankruptcy Court lacked jurisdiction to transfer the Equity Committee Claims to the CVV, or to substitute the CVV's trustees as nominal plaintiffs with respect to those claims, because the District Court's reference of the Bank Litigation to the Bankruptcy Court had been withdrawn.³⁷ In response to this argument, the Bankruptcy Court observed that the District Court's withdrawal of the reference ("Withdrawal Decision"),³⁸ "gave the district court the responsibility for adjudicating [the merits of...