In re Adelphia Communications Corp.

• Decision Date: 11 December 2006
• Docket Number: No. 02-41729 (REG).,02-41729 (REG).
• Citation: 359 B.R. 54
• Parties: In re ADELPHIA COMMUNICATIONS CORP., et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

Page 54

359 B.R. 54

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

No. 02-41729 (REG).

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

December 11, 2006.

Weil, Gotshal & Manges LLP by Martin J. Bienenstock; Esq., Brian S. Rosen, Esq., Melanie Gray, Esq., Sylvia Ann Mayer, Esq., New York, NY, for the ACC Bondholders Group.

Stutman, Treister & Glatt by Isaac M. Pachulski, Esq., Stephan M. Ray, Esq., Los Angeles, CA, Special Conflicts Counsel for the ACC Bondholders Group.

Fried, Frank, Harris, Shrivel & Jacobson LLP by Bonnie Steingart, Esq., Gary Kaplan, Esq., New York, NY, for W.R. Huff Asset Management Co., L.L.C.

Pachulski, Stang, Ziehl, Young, Jones & Weintraub P.C. LLP by Dean A. Ziehl, Esq., New York, NY, by Richard Pachulski, Esq., Dean A. Ziehl, Esq., Jeremy V. Richards, Esq., Los Angeles, CA, for the ACC II Committee.

White & Case LLP by J. Christopher Shore, Esq., Gerard Uzzi, Esq., New York, NY, by Thomas E. Lauria, Esq., Richard S. Kebrdle, Esq., Miami, FL, for the Ad Hoc Committee of Arahova Noteholders.

Kasowitz, Benson, Torres & Friedman LLP by David M. Friedman, Esq., Adam L. Shiff, Esq., New York, NY, for the Official Committee of Unsecured Creditors.

BENCH DECISION¹ ON MOTION TO DESIGNATE VOTES OF CERTAIN CREDITORS IN THE CLASS OF ACC SENIOR NOTES

ROBERT E. GERBER, Bankruptcy Judge.

In this contested matter in the chapter 11 cases of Adelphia Communications Corporation and its subsidiaries (the "Debtors"), I have before me the motion of a group of holders of ACC Senior Notes (the "ACC Bondholders Group") to designate² the votes in the class of ACC Senior Notes of three creditor groups that voted to support the Plan now before me for confirmation:³

(1) the members of a "crossover committee" of holders of both ACC Senior Notes and notes of. Arahova Communications Corp., an indirect ACC subsidiary (the "ACC II Committee");

(2) accounts maintained or managed by W.R. Huff Asset Management Co., some or all of which are likewise holders of notes of each of ACC and Arahova (referred to, for simplicity, simply as "Huff'); and

(3) those members of the Arahova Noteholders Committee who also hold ACC Senior Notes.

The three of them (the "Targeted Creditors"), joined by the Creditors Committee, oppose the motion, arguing, among other things, that even if the underlying factual contentions are true, there is no basis for disqualifying their votes.

The antagonists on both sides of the issue are predominantly or exclusively investors in distressed debt. And in this and now-withdrawn litigation going in the other direction — where similar efforts to designate were aimed at members of the ACC Bondholders Group — many expressed concerns as to the confidentiality of distressed debt trader investments, trading positions, and trading practices. At various times in these cases, I ruled that as a general matter, there is no absolute rule prohibiting discovery of distressed debt investors' debt trading activities, but that I'd limit discovery of these activities to situations where such was sufficiently relevant.⁴ Accordingly, I said I'd initiate consideration of the issues presented under this motion' by demurrer — i.e., by 12(b)(6) motions — with discovery (and, if necessary, an evidentiary hearing) to follow if such should be necessary.⁵

As described more fully below, motions to designate are within the discretion of the court. Here I conclude that even if all of the factual allegations asserted by the ACC Bondholders Committee were true, I would not disqualify the Targeted Creditors' votes. The ability to vote on a reorganization plan is one of the most sacred entitlements that a creditor has in a chapter 11 case. And, in my, view, it should not be denied except for highly egregious conduct — principally, seeking to advance interests apart from recovery under the Plan, or seeking to extract plan treatment that is not available for others in the same class.

While creditor tactics, activities or requests (or plan provisions that result from them) may be objectionable, the Code provides for other ways to address concerns that arise from such (such as upholding objections to confirmation), without the draconian measure of denying one's franchise to vote.⁶ And while I assume it to be true that creditors of different debtors in a multi-debtor chapter 11 case have interests contrary to each other (and that the different debtors themselves do as well), that is a fact of life in most, if not all, large chapter 11 cases.⁷ If, under section 1126(e) (which now is silent on the matter) or otherwise, creditors who hold claims of multiple debtors are to be denied the right to vote all of their claims, in all of the debtors in which they hold debt — even assuming, once again, that the individual debtors have interests contrary to each other, and that the recoveries of one debtor come at the expense of another — that is a matter for Congress to decide.

Thus the motion is denied, Findings of Fact, Conclusions of Law and, bases for the exercise of my discretion in, this regard follow.

Facts

For the purposes of this demurrer, the relevant facts are undisputed.⁸

The Plan

On October 17, 2006, I approved a supplement to the disclosure statement and authorized solicitation of votes on what is now the present Plan. A central feature of the Plan is the settlement of disputes relating to the intercompany relationships among the Debtors. Settling parties include Huff, the ACC II Committee, the Creditors' Committee, the ACC Settling Parties, the Arahova Noteholders Committee and certain other ad hoc committees of unsecured creditors. The Plan includes provisions for releases, exculpation and fee reimbursements for members of ad hoc committees and for individual creditors who signed onto the settlement and agreed to support the Plan, and for the same releases to go to any and all ACC Senior Noteholder creditors that support the Plan.⁹ The Targeted Creditors voted all of their claims, including any ACC claims, in support of the Plan. The ACC Bondholders vehemently oppose the Plan and the underlying settlement and, thus, voted against the Plan.

Inter-Creditor Dispute

The principal inter-creditor dispute, and the one most relevant to the motion at hand, is a dispute between holders of ACC Senior Notes and the holders of Arahova Notes. Creditors of ACC Parent arid of the Arahova Debtors, have asserted positions that in nearly all respects would cause one group to benefit at the expense of the other — though under the settlement, ACC recoveries were augmented from debtors other than the Arahova debtors, to the end that ACC benefited without a corresponding detriment to Arahova. In nearly all respects, an increase in any recovery on the Arahova Notes results in a decrease in recovery on the ACC senior notes, and vice versa.

Earlier in this case, the Arahova Noteholders filed numerous motions and engaged in related acts (together, the "Arahova Motions") seeking to thwart the judicial determination of interdebtor issues that the Debtors proposed and that I had approved; seeking relief which, if granted, would have been devastating to creditor recoveries in these cases (including, most significantly, a motion seeking the appointment of a chapter 11 trustee for the Arahova debtors, which would have been a breach of the Debtors' DIP financing facility and an event excusing Time-Warner and Comcast from closing on their purchase); and entering into an agreement to put their motions on hold pending the outcome of settlement negotiations. The. ACC Bondholder Group asserts, and 1 take it as true for the purposes of this motion, that these were tactics on the. Arahova Bondholders Group's part to improve its, recovery. As the ACC Bondholders group appropriately notes,¹⁰ I "sharply criticized" the Arahova Bondholders' tactics, and was "understandably dismayed" by them. In a lengthy decision in January 2006 addressing Arahova Debtors' motions, I stated:

[T]he 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.¹¹

I stated at the conclusion:

The bringing of motions like these is not unethical, or sanctionable, but neither should it be encouraged, or rewarded. Motions that would bring on intolerable consequences for an estate should not be used as a tactic to augment a particular constituency's recovery.¹²

Huff's Rule 2004 Discovery

Huff sought and obtained Rule 2004 discovery to investigate the creation and dissemination of a letter sent by certain members of the ACC Noteholders Committee to the Board of Directors of ACC and to the Wall Street Journal on April 17, 2006. Huff sought discovery based on the premise that dissemination of the letter was an attempt to manipulate the market and an improper solicitation under section 1125(b) of the Code. The, ACC Bondholders contend (and I must accept as true for the purposes of a demurrer) that this was not, in fact, Huff's true intent, and instead was an effort to improperly pressure ACC Noteholders.¹³

Plan Agreement

The ACC Bondholders then contend that only two days after I expressed an adverse reaction to alleged activities on the part of certain ACC Bondholders which were the subject of the now-withdrawn motion directed at them, and "in the midst of Huff's coercive tactics," two other holders of ACC Senior Notes agreed to a term sheet embodying a plan...