Don't Touch that Dial! Adelphia's Reorganization Plan Temporarily Put on Hold to Give Dissenting Bondholders Their Day in Court
Bankruptcy lawyers often analogize the plan confirmation process to the running of trains, whereby once the so-called "confirmation train leaves the station," it's very hard -- if not impossible -- to stop the plan from being confirmed. When does the confirmation train "leave the station"? Typically, when a consensus is reached among the debtor and its major creditor constituents (or classes) over the terms of a reorganization plan. It's commonly assumed that once that consensus is reached, not even Superman can stop that locomotive from reaching its destination. As the famed late Bankruptcy Judge James E. Yacos of New Hampshire noted when he terminated plan exclusivity in New Hampshire's largest bankruptcy case ever (In re Public Service of New Hampshire, 99 B.R. 155, 176 (Bankr. D.N.H. 1989)):
Opening up the process to alternative plans in my judgment will serve to quantify and make concrete various ways of resolving those circular questions. I believe it will force the parties to use all of their considerable skills to negotiate resolutions on a fact basis (rather than and ideological basis dealing with unanswered and unanswerable interesting legal questions) under the gun of having the "reorganization train leave the station" before they are aboard.
Adelphia Communications Corporation's reorganization case has been proceeding for over 4-1/2 years. It was called by Bankruptcy Judge Robert E. Gerber, the presiding judge in the case, "among the most challenging -- and contentious -- in bankruptcy history." The case involved 230 separate jointly administered entities, generated over 13,000 docket entries in the main bankruptcy case and spawned about 130 separate adversary proceedings (not to mention scores of additional complex and high-profile related securities and criminal proceedings).
As widely reported, on January 3, 2007, Judge Gerber rang in the new year with a 267 page "Bench Decision on Confirmation" that laid the groundwork for entry of an order confirming Adelphia's "First Modified Fifth Amended Joint Chapter 11 Plan." The opinion, with its comprehensive explanation of key events in Adelphia's reorganization (including the background to the filing, the restatements of Adelphia's financials and bankruptcy schedules, the proposed sale of Adelphia's cable operations to Time Warner/Comcast and the genesis of that deal, the various iterations of the reorganization plans previously proposed, the increasingly complex and hostile negotiations leading to the current plan, asset valuations, and the key points of contention at the confirmation hearing), is a veritable masterpiece (not to mention the lengthiest opinion of record confirming a plan of reorganization). The supporting Confirmation Order, entered two days later, is itself 47 another pages, and incorporates the Bench Decision (and the "Rigas Pay-over Bench Decision") by reference as containing the Court's findings of fact and conclusions of law.
The primary objector to plan confirmation was the so-called "ACC Bondholder Group," comprised mainly of activist hedge funds, which on the day before Thanksgiving, filed this opening 34 page objection summarizing the group's primary confirmation objections. The focus of the Bankruptcy Court's Bench Decision, at its core, is on explaining why the ACC Bondholder Group's objections should not stop confirmation.
The ACC Bondholder Group appealed the order of confirmation (submitting this "Statement of Issues and Designation of Record on Appeal"), and the case was assigned to Judge Shira A. Scheindlin, whose previous involvement in various prior unrelated appeals gave her significant familiarity with the procedural preconfirmation dynamics of the case. From the ACC Bondholder Group's perspective, the selection of Judge Scheindlin to hear the appeal must have been welcome news given her history of supporting the underdog, even at the risk of being reversed by the Second Circuit (as happened in her February 2004 ruling that Maurice Clarett could participate in the 2004 NFL Draft and her April 2002 ruling dismissing perjury charges against an acquaintance of two of the 9/11 hijackers, who she then ordered released from prison after finding his detention legally unjustifiable--and who later, by the way, was acquitted by a unanimous jury, thereby silencing Judge Scheindlin's fierce critics).
On January 24, 2007, Judge Scheindlin stepped in front of Adelphia's speeding confirmation train and, in this opinion, single-handedly derailed it by granting the ACC Bondholder Group's motion to stay the effectiveness of the confirmation order (though the victory must have seemed a pyrrhic one to the victors given the $1.3 billion bond that Judge Scheindlin ordered be posted as a condition to maintenance of the stay).
In granting the stay, Judge Scheindlin said that deciding what to do was "one of the most difficult tasks this Court has yet confronted." What swayed Judge Scheindlin? At root, three things:
- First, fundamental due process. Absent a stay, she wrote, "it is extremely unlikely that Appellants will ever be able to have meaningful appellate review of the rulings of the Bankruptcy Court, a non-Article III court, and in any event, a lower court." Such review, she stressed, "is the guarantee of accountability in our judicial system [and] no single judge or court can violate the Constitution and laws of the United States, or the rules that govern court proceedings, with impunity, because nearly all decisions are subject to appellate review.... [W]e, as a nation, are governed by the rule of law [and] [t]hus, the ability to appeal a lower court ruling is a substantial and important right." (Op. at 2-3.)
- Second, Judge Scheindlin found the approved settlement to be fundamentally flawed both procedurally and substantively.
(a) First, she noted, the ACC Bondholder Group never approved the settlement, and because the procedural ground rules established in the negotiations leading to the Plan forbade the Debtor or the Creditors' Committee from attempting to cram a settlement down the Group's throats, it was impossible to say that a settlement had been reached absent the Group's consent. Moreover, since--by definition--no settlement existed, there was technically nothing for the Bankruptcy Court to approve under Bankruptcy Rule 9019 (which establishes the standards governing approval of settlements) as being in the "best interests of the estate." (Op. at 24-31.)
(b) Judge Scheindlin also found serious flaws in the Plan provisions that provided for the substantive consolidation of various debtor entities, especially since the Bankruptcy Court found (and all parties acknowledged) "that substantive consolidation would be a highly unlikely result" under the Second Circuit's rigorous standards for permitting substantive consolidation of affiliated debtors. (Op. at 31-37.)
(c) Judge Scheindlin also questioned whether the plan unfairly discriminated against the non-accepting ACC Bondholder Group in that "some claimants will receive a more valuable settlement than others ... in exchange for the claimant's affirmative vote on the Plan -- an added benefit that is tied directly to the Plan itself and given to some claimants in a class, but not all." In this regard, Judge Scheindlin noted the intense debate over whether the "unfair discrimination" test focuses on the fairness in treatment of claims or on the fairness in treatment of the holders of such claims. Ultimately, Judge Scheindlin favored the view that it is fairness in the treatment of claimants that ultimately matters (hence providing another basis for finding a increased likelihood of success on the merits of the bondholder group's appeal). (Op. at 37-40.)
(d) Finally, Judge Scheindlin challenged the chapter 7 liquidation analysis of the Debtor's expert (Daniel Aronon of Lazard Freres), suggesting that it was "flawed in that it assumes that the Settlement would exist in chapter 7 despite the fact that this is the very proposition to be evaluated." She also questioned Judge Gerber's exclusion on a motion in limine of the testimony and reports of the ACC Bondholders' experts (Harrison Goldin and David Prager from Goldin Associates ) as to why a chapter 7 trustee would not adopt the settlement reflected in the Plan. (Op. at 40-46.)
- Third, in order for the stay to remain in effect, the ACC Bondholders Group (with $4.9 billion in aggregate claims at stake) would be required to post a whopping $1.3 billion bond to cover the "threatened loss to the non-moving parties" in the event the appeal were not successful. The Court ordered ten percent of the bond to be posted within 24 hours and the remainder to be posted within 48 hours thereafter (which presumably would have meant today given that the 48th hour fell on Saturday). Judge Scheindlin obviously felt that if the appeal meant enough to the ACC Bondholders to block the Time Warner / Comcast $17 billion acquisition and otherwise prevent the distribution of approximately $15 billion in value among various estate constituents that had endured over 4-1/2 years of delay (described at length in the Bench Decision and the fourth amended disclosure statement and first and second supplements thereto), then the ACC Bondholder Group needed to put their money -- and a lot of it -- where their mouth is. (Op. at 48-49.) Or, put another way, "the L-rd gave, and the L-rd hath taken away." (Job 1:21.)
What happened next? On January 25, 2007, before the expiration of the first 24 hour period within which a $130 million bond had to be posted, Judge Robert A. Katzmann of the Second Circuit Court of Appeals -- apparently concurring with the ACC Bondholder Group that "[t]he bond requirement imposed by the District Court effectively denies the request for a stay by imposing a cost-prohibitive bond on the creditors wrongly injured by the appealed orders of the Bankruptcy Court" -- temporarily suspended Judge Scheindlin's requirement that a bond be posted in order to stay the confirmation order. Bloomberg news reports that the Second Circuit may hear arguments as early as today on whether the ACC Bondholder Group has to post the bond. Meanwhile, as reported here, Time Warner / Comcast's acquisition is stalled pending the outcome of the appellate proceedings.
Those trying to find pleadings online can forget searching PACER for them. These proceedings have moved so quickly, that none of the pleadings or decisions are being filed through PACER, but instead are being handled the old-fashioned way -- via hand delivery to chambers. The district court appeal has been assigned Case No. M-47 (SAS).
Thanks for reading.
© Steve Jakubowski 2007
In an opinion authored on April 2, Judge Scheindlin dismissed the ACC Bondholder Group's appeal as equitably moot.