In re Adelphia Communications Corp.

• Decision Date: 23 January 2006
• Docket Number: No. 02-41729 (REG).,02-41729 (REG).
• Citation: 336 B.R. 610
• Parties: In re ADELPHIA COMMUNICATIONS CORP., et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

336 B.R. 610

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

No. 02-41729 (REG).

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

January 23, 2006.^*

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White & Case, by Thomas E. Lauria, Miami, FL, by J. Christopher Shore, Gerard Uzzi, New York City, for Ad Hoc Committee of Arahova Noteholders.

Sheppard Mullin Richter & Hampton, by Daniel L. Brown, New York City, for U.S. Bank, N.A., as Indenture Trustee with Respect to the Arahova Notes.

Willkie Farr & Gallagher, by Marc Abrams, Roger Netzer, Brian E. O'Connor, Rachel C. Strickland, Morris J. Massel, New York City, for Debtors and Debtors in Possession.

Kasowitz, Benson, Torres & Friedman LLP, by David M. Friedman, Adam L. Shiff, Daniel N. Zinman, New York City, for Official Committee of Unsecured Creditors.

Morgenstern, Jacobs & Blue, by Gregory A. Blue, New York City, for Official Committee of Equity Security Holders.

Hennigan, Bennett & Dorman LLP, by Bruce Bennett, James O. Johnston, Los Angeles, CA, for Ad Hoc Committee of ACC Senior Noteholders.

Kramer Levin Naftalis & Frankel LLP, by Kenneth H. Eckstein, Jeffrey S. Trachtman, New York City, for Ad Hoc Committee of FrontierVision Noteholders.

Brown Rudnick Berlack Israels LLP, by Steven D. Pohl, Boston, MA, for Ad Hoc Adelphia Trade Claims Committee.

Stroock & Stroock & Lavan, by Gerald Bender, Erez Gilad, New York City, for Ad Hoc Convertible Notes Committee.

Kirkland & Ellis, by James H.M. Sprayregen, Los Angeles, CA, for Ad Hoc Committee of Non-Agent Lenders.

Fried, Frank, Harris, Shriver & Jacobson, by Gary L. Kaplan, New York City, for W.R. Huff.

Kelley, Drye & Warren, by Joseph A. Boyle, New York City, for Wilmington Trust Company.

Seward & Kissel, by Arlene R. Alves, New York City, for Law Debenture Trust Company of New York.

Simpson Thacher & Bartlett LLP, by Peter V. Pantaleo, New York City, for Wachovia Bank, N.A.

Haynes and Boone, LLP, by Robin E. Phelan, Dallas, TX, by Judith Elkin, New York City, for Bank of America, N.A Office of the United States Trustee, by Tracy Hope Davis, New York City.

DECISION ON MOTIONS BY AD HOC COMMITTEE OF ARAHOVA NOTEHOLDERS TO APPOINT TRUSTEE OR NONSTATUTORY FIDUCIARY; TO DISQUALIFY COUNSEL; AND TO TERMINATE EXCLUSIVITY

ROBERT E. GERBER, Bankruptcy Judge.

In this contested matter under the umbrella of the jointly administered chapter 11 cases of Adelphia Communications Corporation ("Adelphia Parent") and its subsidiaries, the Ad Hoc Committee of Arahova Noteholders (the "Arahova Noteholders Committee")—holders of bond debt issued by Arahova Communications Inc. ("Arahova"), an intermediate subsidiary of Adelphia Parent, one of the 231 debtors (the "Debtors") whose chapter 11 cases are being jointly administered in this Court—moves for orders:

(1) appointing a chapter 11 trustee for Arahova (which is a holding company) and its operating company subsidiaries (together, the "Arahova Debtors"), or, alternatively, (a) directing the recusal of the Arahova Debtors' officers and directors with respect to interdebtor disputes (the "Interdebtor Disputes"), and (b) ordering the appointment of nonstatutory fiduciaries — "independent" officers and directors—and "unconflicted counsel" to represent the Arahova Debtors in intercreditor disputes (the "Intercreditor Disputes") now pending in this Court, described more fully below (the "Trustee Motion");

(2) disqualifying Willkie Farr & Gallagher ("WF&G"), the counsel that has represented all of the debtors since these chapter 11 cases were filed 3-1/2 years ago, from representing (a) the Arahova Debtors, and (b) any of the other debtors, in the Interdebtor Disputes (the "Disqualification Motion");¹ and

(3) terminating the Arahova Debtors' exclusive right (now held, in common with all of the other debtors in the Adelphia corporate family) to file a reorganization plan-referred to, in bankruptcy parlance, as "exclusivity" (the "Exclusivity Motion").²

The motions rest on a factual predicate that is common in multi-debtor chapter 11 cases (especially large ones), in this district and elsewhere. In multi-debtor cases, individual debtors frequently, if not always, have actual or arguable obligations to each other—by reason of money lent, or funds or other assets having been transferred, from one debtor to another; by reason of one debtor having provided or obtained services for other debtors; by reason of allocations of overhead or charges for shared facilities or other property; or by reason of other interdebtor dealings. As corporate families grow in size to achieve economies of scale, and to avoid duplication of services as between individual family members, the number and complexity of such dealings and relations increase. In many instances (typically varying from case to case), the amount one debtor owes to another as a result of such dealings is undisputed or ultimately is not material. But in many other instances, it is not.

As creditor recoveries from particular debtors rise or fall as a function of the assets and liabilities of the particular debtors with whom those creditors dealt, and particular debtors in a corporate family frequently also dealt with each other or used property or services provided by each other, intercreditor disputes frequently arise with respect to the appropriate treatment of such individual debtors' transactions with each other; with respect to the allocation of value, after an asset sale, for assets that had been contributed by many individual debtors; with respect to liability for expenses incurred on behalf of multiple debtors; or for a host of other reasons, limited only by the creativity of creditor counsel in finding bases to increase their clients' shares of the collective pie.³

The motions, especially the first two of them, raise the issue whether, as a matter of law or an exercise of the Court's discretion, chapter 11 trustees, or some kind of nonstatutory fiduciaries (assuming that appointment of the latter is permissible under the Code) must be appointed for individual debtors in a multi-debtor chapter 11 case with such interdebtor disputes, and what actions debtors and their counsel, and/or bankruptcy courts, must take when such intercreditor or interdebtor disputes arise. But in this case, the Court does not need to decide those issues in their broadest form, and instead decides them under the particular facts that the Court finds to be present here. In this case, the Debtors and their counsel:

— focused their efforts on maximizing value for every debtor;

— never acted adversely to the interests of any individual debtor;

— proposed a mechanism (thereafter approved, with some fine-tuning, by this Court) for the Intercreditor Disputes to be litigated in a fashion that would give the creditors whose ox might be gored in the controversy a fair and full opportunity to press their respective positions (and where the creditors affected by the outcome would have the incentive, and the resources, to press their respective interests);⁴ and

— stayed neutral in the Intercreditor Disputes, and have confirmed their intention to remain so, proposing a reorganization plan that would effectively escrow the disputed value pending further determinations of the Court on the intercreditor issues.

The Court further decides these motions in the context of the fact that—using the words of the Arahova Noteholders Committee's own counsel—the motions represent the "nuclear war button,"⁵ with devastatingly adverse consequences that would result if the Arahova Noteholders Committee's Trustee Motion were granted, too numerous to list in this summary here.

And the Court further decides these motions in light of the compelling inference that the motions were filed as part of a scorched earth litigation strategy that would provide the Arahova Debtors with little benefit that they do not already have (trumped, dramatically, by a resulting prejudice to the Arahova Debtors themselves, along with all of the other Debtors), and which would have the effect (and, the Court believes, the purpose) of imperiling the pending Time Warner/Comcast transaction and the Debtors' DIP financing in an effort to extract a greater distribution, sidestepping the Court — approved process for determining the Intercreditor Dispute issues on their respective merits.

Finally, the Court is troubled, to say the least, by the 11th hour time at which the conflict issues were raised, when the supposedly disabling conflicts were apparent 3-1/2 years ago. If the concerns were material and genuine; if the appointment of trustees or nonstatutory fiduciaries was truly necessary; and/or if the more traditional means of letting creditors negotiate out, or litigate, intercreditor issues were unsatisfactory, creditors in this case, and/or the committees acting for them, would have sought this relief long ago. The Court does not need to address whether the delay gives rise to a waiver, estoppel, or even laches; the circumstances instead go to the motions' bona fides. The Court's concerns as to the motions' bona fides are amplified by the Arahova Noteholders Committee's entry into a standstill agreement under which these supposedly critical motions would not be pressed while negotiations as to its recovery under the reorganization plan progressed.

Facts like these would make granting these motions a dreadful exercise of the Court's discretion, and the relief the Arahova Noteholders seek here thus would appropriately be granted only if such relief were required as matter of law. But except in one respect (where WF&G has already acted, and largely made the motions moot), it is not. To the contrary, it is quite clear, in this Court's view, under the Bankruptcy Code and the case law, that there is no requirement of law, nor should there be one, that says that any time interdebtor disputes exist in a multi-debtor ...