R2 Invs, LDC v. Charter Commc'ns, Inc. (In re Charter Commc'ns, Inc.)

• Decision Date: 31 August 2012
• Docket Number: Docket Nos. 11–1710–bk, 11–1726–bk.
• Citation: 691 F.3d 476,56 Bankr.Ct.Dec. 254
• Parties: In re CHARTER COMMUNICATIONS, INC. R<SUP>2</SUP> Investments, LDC, Appellant, v. Charter Communications, Inc., CCH I, LLC, CCH I Capital Corporation, CCH II, LLC, CCH II Capital Corporation, Debtors–Appellees, Paul G. Allen, Official Committee of Unsecured Creditors, Appellees. Law Debenture Trust Company of New York, Appellant, v. Charter Communications, Inc., CCH I, LLC, CCH I Capital Corporation, CCH II, LLC, CCH II Capital Corporation, Debtors–Appellees, Paul G. Allen, Official Committee of Unsecured Creditors, Appellees.
• Court: U.S. Court of Appeals — Second Circuit

691 F.3d 476

56 Bankr.Ct.Dec. 254

In re CHARTER COMMUNICATIONS, INC.

R² Investments, LDC, Appellant,

v.Charter Communications, Inc., CCH I, LLC, CCH I Capital Corporation, CCH II, LLC, CCH II Capital Corporation, Debtors–Appellees,Paul G. Allen, Official Committee of Unsecured Creditors, Appellees.

Law Debenture Trust Company of New York, Appellant,

v.Charter Communications, Inc., CCH I, LLC, CCH I Capital Corporation, CCH II, LLC, CCH II Capital Corporation, Debtors–Appellees,Paul G. Allen, Official Committee of Unsecured Creditors, Appellees.^*

Docket Nos. 11–1710–bk, 11–1726–bk.

United States Court of Appeals, Second Circuit.

Argued: March 26, 2012.

Decided: Aug. 31, 2012.

Lawrence S. Robbins (Mark T. Stancil, Matthew M. Madden, on the brief), Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, D.C., for Appellant R² Investments, LDC.

Andrew W. Hammond, White & Case LLP, New York, NY, for Appellant Law Debenture Trust Company of New York.

John C. O'Quinn, Kirkland & Ellis LLP, Washington, D.C. (Richard M. Cieri, Paul M. Basta, Kirkland & Ellis LLP, New York, NY, Jeffrey S. Powell, Daniel T. Donovan, Kirkland & Ellis LLP, Washington, D.C., on the brief), for Debtors–Appellees Charter Communications, Inc., CCH I, LLC, CCH I Capital Corporation, CCH II, LLC, CCH II Capital Corporation.

Jeremy A. Berman (Robert E. Zimet, Jay M. Goffman, Sean J. Young, on the brief), Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Appellee Paul G. Allen.

David S. Elkind (Mark R. Somerstein, Keith H. Wofford, Darren Azman, on the brief), Ropes & Gray LLP, New York, NY, for Appellee Official Committee of Unsecured Creditors.

Before: JOHN M. WALKER, JR., LYNCH and LOHIER, Circuit Judges.

JOHN M. WALKER, JR., Circuit Judge:

On March 27, 2009, Charter Communications, Inc. (“CCI” and, together with its affiliated debtors, “Charter”) filed what the Bankruptcy Court for the Southern District of New York (James M. Peck, Bankruptcy Judge ) described as “perhaps the largest and most complex prearranged bankruptcies ever attempted, and in all likelihood ... among the most ambitious and contentious as well.” JPMorgan Chase Bank, N.A. v. Charter Commc'ns Operating, LLC (In re Charter Commc'ns), 419 B.R. 221, 230 (Bankr.S.D.N.Y.2009). Following the bankruptcy court's confirmation of Charter's proposed plan of reorganization (the “Plan”), the Law Debenture Trust Company of New York (“LDT”), as indenture trustee for certain notes issued by CCI, and R² Investments, LDC (“R²”), a CCI shareholder, appealed the confirmation order to the District Court for the Southern District of New York. The district court (George B. Daniels, Judge ) dismissed those appeals under the doctrine of equitable mootness. R² Invs., LDC v. Charter Commc'ns, Inc. (In re Charter Commc'ns), 449 B.R. 14 (S.D.N.Y.2011). LDT and R ² now appeal that dismissal. We agree with the district court that the appeals are equitably moot and affirm.

BACKGROUND

We recite only those facts necessary to this appeal. A full recitation of the facts may be found in the district court and bankruptcy court opinions. See In re Charter Commc'ns, 449 B.R. 14;In re Charter Commc'ns, 419 B.R. 221.

In 2008, Charter, the nation's fourth-largest cable television company and a leading provider of cable and a broadband service, was operationally sound but carried almost $22 billion in debt at various levels of its corporate structure.¹In re Charter Commc'ns, 419 B.R. at 230–31. After the September 2008 collapse of Lehman Brothers and the financial crisis that ensued, Charter could no longer service its debt due to the tightening credit markets, Charter's excessive leverage, and lower valuations of companies in the cable sector. Id. at 232–33. Charter began negotiating with Paul G. Allen, a major investor whose ownership stake gave him control of the company, and a group of junior bondholders (referred to as the “Crossover Committee”). Id. The negotiations culminated in a settlement (the “Allen Settlement”) that contemplated Charter's prenegotiated reorganization in bankruptcy. Id. Charter then filed for Chapter 11 bankruptcy, using the Allen Settlement as the cornerstone of its prenegotiated Plan. Id.;449 B.R. at 17. Left out of the negotiations, however, were LDT, the trustee for $479 million in aggregate principal of convertible notes issued by CCI; R², a CCI shareholder; and J.P. Morgan Chase N.A. (“JPMorgan”), the holder of Charter's senior debt. These entities had no input into the Allen Settlement or the prepackaged Plan. Id. at 17;419 B.R. at 233.

To fully appreciate the key role Paul Allen played in Charter's reorganization requires delving a bit into the weeds of the negotiations underlying the Allen Settlement. Charter's reorganization strategy was driven by the goal of reinstating its senior credit facility with JPMorgan—that is, curing any breaches in its contracts with JPMorgan so that JPMorgan would be classified as an unimpaired creditor. See11 U.S.C. § 1124(2). Charter wanted to avoid renegotiating its senior debt during the financial turmoil of late 2008 and early 2009 because it believed such renegotiation would at best lead to a higher interest rate and at worst result in Charter being closed off to new financing altogether. In re Charter Commc'ns, 419 B.R. at 233. Charter thus needed to structure its reorganization in a way that would avoid triggering a default under the credit agreement with JPMorgan. One condition Charter had consented to in the credit agreement was that Allen would retain thirty-five percent of the ordinary voting power of Charter Communications Operating, LLC (“CCO”), the obligor under the senior credit agreements. Id. at 230, 237–38. For the reorganization plan to succeed, Charter thus needed to induce Allen to retain these voting rights, even though most of his investment in Charter would be wiped out. Id. at 230–31. In addition, for Charter to preserve roughly $2.85 billion of net operating losses, a valuable tax attribute, it needed Allen to forgo exercising contractual exchange rights and to maintain a one percent ownership interest in Charter Communications Holding Company, LLC (“Holdco”). Id. at 253. Because Charter's main goals in restructuring, namely reinstating its senior debt and obtaining tax savings though preserving net operating losses, required Allen's cooperation, Allen alone was in a position to provide “uniquely personal” benefits to Charter. Id. at 259.

Following “a spirited negotiation in which sophisticated adversaries and their expert advisors bargained with each other aggressively and in good faith,” id. at 241, Charter, the Crossover Committee, and Allen agreed to the Allen Settlement. As part of the Settlement, Allen agreed to retain a thirty-five percent voting interest in CCO and a one percent ownership interest in Holdco, and to refrain from exercising his contractual exchange rights. Id. at 253–54. In return for these concessions, Allen would receive $375 million, of which $180 million was classified as pure settlement consideration. Id. at 241. The Allen Settlement further provided for a “$1.6 billion rights offering, a stepped-up tax basis in a significant portion of [Charter's] assets, and the purchase of [Allen's]” preferred shares in CC VIII, LLC, a Charter subsidiary. Id. at 253. Allen also successfully negotiated for a liability release (other third parties, including the management of Charter, were released as well). Id. at 257–58 & n. 26. Under the reorganization Plan that resulted from the Allen Settlement, the CCI noteholders, represented by LDT, would receive approximately 32.7 percent of their claims, id. at 242, and R² and other equity holders of CCI would receive nothing, see Debtor's Disclosure Statement at 33.

On November 17, 2009, after a nineteen-day hearing, the bankruptcy court overruled all objections and confirmed the Plan as submitted by Charter. 419 B.R. at 271. The following week, the bankruptcy court denied R² and LDT's motions for an emergency stay of the confirmation order. The district court (Sidney H. Stein, Judge, sitting in Part I) denied a stay pending appeal to that court, and the confirmation order and the Plan took effect on November 30, 2009. See In re Charter Commc'ns, 449 B.R. at 21. Charter immediately took actions under the Plan, including cancelling the equity issued by the prepetition Charter, issuing shares in the reorganized Charter, converting notes issued by the prepetition Charter entities into new notes, and issuing warrants to Charter's prepetition noteholders. Id. at 24 nn. 19–20.

R² and LDT have objected to the Plan at every stage of these proceedings. Before the district court, they raised several overlapping challenges to the Plan's confirmation. Their objections, viewed broadly, related to the Allen Settlement, the bankruptcy court's valuation of Charter, and compliance with the Bankruptcy Code's cramdown provisions for approving a plan over the objections of creditors. See id. at 21. Charter, Allen, and the Committee of Unsecured Creditors argued that, whatever the merit of R²'s and LDT's legal claims, the relief they sought could not be granted without upsetting the already-consummated Plan and that the doctrine of equitable mootness barred the appeals. Id. at 17. The district court agreed and dismissed the appeals as equitably moot. R² and LDT filed separate appeals from that dismissal, which were argued in tandem.

DISCUSSION

I. Legal Standard for Equitable Mootness

This appeal concerns equitable mootness, a prudential doctrine under which the district court may dismiss a bankruptcy appeal “when, even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable.” Official Comm. of Unsecured Creditors of LTV Aerospace & Def. Co. v. Official Comm. of Unsecured Creditors of LTV Steel Co. (In re Chateaugay Corp.), 988 F.2d 322, 325 (2d Cir.1993) (“Chateaugay I ”). Unlike constitutional mootness,...