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September 29, 2004.

JOHN J. RIGAS, et al., Defendants-Appellees.

The opinion of the court was delivered by: GERARD E. LYNCH, District Judge


This is an appeal by chapter 11 debtor Adelphia Communications Corporation ("Adelphia") and a cross-appeal by defendants John Rigas, Timothy Rigas, Michael Rigas and James Rigas (collectively, the "Rigases") from a March 9, 2004, Order by the Honorable Robert E. Gerber, United States Bankruptcy Judge, which was a further modification to a November 2002 Temporary Restraining Order that had earlier been modified on August 7, 2003. The original TRO placed a freeze on all of the assets of the Rigases and any entities owned or controlled by them (the "Rigas Family Entities"), with the proviso that reasonable living expenses and legal expenses were to be carved out as necessary. The March 9 Order allowed the Rigases access to an additional $12.8 million to pay the lawyers and consultants that were assisting in the criminal defense of the Rigases, and directed Adelphia, as manager, to pay the granted amount out of a set of entities that both sides refer to as the Managed Entities. Adelphia sought a stay pending appeal, which was denied by this Court in a ruling from the bench on March 22, 2004. Adelphia's appeal on the merits will be granted in part and denied in part, and the March 9 Order vacated and remanded for further proceedings not inconsistent with this opinion. The Rigases' cross-appeal will be denied.


  I. History of Adelphia

  Adelphia was founded by John Rigas in 1952 and grew into the fifth largest cable company in the United States. Until May 2002, John Rigas and members of his family held a majority of the voting shares of Adelphia and formed a majority of Adelphia's Board of Directors. The Rigases also held nearly all of the senior executive positions in the company. The Rigases also owned or controlled a number of other entities (the "Rigas Family Entities") that were not directly part of Adelphia, including a set of private cable companies known in this litigation as the Managed Entities. The Managed Entities are a subset of the whole group of Rigas Family Entities.

  Adelphia's cash management system ("CMS") operated as a centralized depository for Adelphia receipts and as primary payor of Adelphia obligations. The CMS was used for receipts and payments not only for Adelphia and its subsidiaries, but also for the Rigases and Rigas Family Entities, thus creating one centralized pool of cash for all Rigas-controlled businesses. Following Adelphia's bankruptcy filing in June 2002, the estate retained Price Waterhouse Coopers ("PWC") to conduct an examination of Adelphia's book and records, including the CMS. PWC concluded that, between January 1, 1999, through May 10, 2002, the Rigases used the CMS to transfer in excess of $55 million from Adelphia to Rigas Family Entities for further transfer to the Rigases personally. (R. 486-87.)

  PWC also concluded that the Rigases used Adelphia funds for the purchase of Adelphia stock in their own names through the use of "co-borrowing" facilities that had been entered into by certain Adelphia subsidiaries and the Managed Entities. (R. 488-89.) Under these facilities, any borrower could draw on the facility up to the lending limit, and all borrowers would be jointly and severally liable on the full amount outstanding under the facility. (R. 488.) According to the PWC report, the Rigases, through various creative uses of these co-borrowing facilities, used over $1.3 billion in borrowed funds, on which Adelphia or a subsidiary was jointly and severally liable, to purchase Adelphia stock, which they registered in their own names. (R. 489-90.) PWC also concluded that the Rigases had drawn on over $200 million in cash belonging to Adelphia to meet margin calls on their personal stock holdings beginning in early 2000, as the market value of Adelphia's stock began a precipitous decline. (R. 490.) PWC calculated that the approximate loss to Adelphia from either direct cash transfers to the Rigases or Rigas Family Entities, or withdrawals under co-borrowing facilities for which Adelphia or its subsidiaries are fully liable, amounted to over $3 billion between January 1, 1999, and May 31, 2002. (R. 491.) On April 3, 2002, Adelphia announced that the Securities and Exchange Commission was conducting an inquiry into Adelphia's co-borrowing facilities, and on April 17, 2002, Adelphia announced that the SEC had issued a formal order of investigation. Following these developments, John Rigas resigned as Chairman and CEO of Adelphia on May 15, 2002, and the following day Adelphia announced that a special committee of the Board, consisting of three independent non-Rigas directors, would conduct an internal investigation of transactions between Adelphia, the Rigases, and the Rigas Family Entities. All of the Rigases resigned their seats on Adelphia's Board, as well as their officer positions at Adelphia, shortly after this investigation commenced. On June 25, 2002, Adelphia and its subsidiaries filed a voluntary chapter 11 bankruptcy petition in the bankruptcy court for this district.

  On July 24, 2002, the Rigases, as well as James Brown and Michael Mulcahey, former officers of Adelphia, were arrested by federal agents and charged with fraud, self-dealing and conspiracy to commit fraud in connection with their management of Adelphia. The SEC filed an action against the same defendants on the same day. On September 23, 2002, the Rigases, Brown and Mulcahey were indicted for conspiracy to commit securities fraud, wire fraud and bank fraud. See S.D.N.Y. Case No. 02 Cr. 1236 (LBS). Brown pled guilty to certain of these charges on November 4, 2002, admitting as part of a plea agreement that he had participated in a scheme to defraud Adelphia's creditors and investors by falsifying Adelphia's public financial disclosures, filing false statements with the SEC concerning Adelphia's business and finances, falsifying Adelphia's books and records, providing false and misleading information to Adelphia's auditors, and concealing the conversion and misappropriation of Adelphia's assets by various Adelphia officers. (R. 352-58.) On January 10, 2003, Timothy Werth, Adelphia's former director of accounting, also pled guilty to similar charges, admitting that he had falsified Adelphia's books and records, in concert with others.

  The criminal trial of the Rigases and Mulcahey commenced before Judge Leonard Sand in this district in March 2004. On July 8, 2004, the jury found John Rigas and Timothy Rigas not guilty on the wire fraud counts and guilty on all other counts, and found Mulcahey not guilty on all counts. The jury found Michael Rigas not guilty on the wire fraud and conspiracy counts, and could not reach a unanimous verdict on the remaining counts against him.

  II. Procedural History and the Record Below

  A. The November 2002 TRO

  In August 2002, Adelphia sought injunctive relief from the Bankruptcy Court to protect what it contended were estate assets. On September 10, 2002, following a hearing on August 26, 2002, Judge Gerber entered an order preliminarily enjoining the Rigases and any Rigas Family Entities from selling, transferring or encumbering any real property assets, based on a showing by Adelphia that such property may be part of the Adelphia bankruptcy estate. (R. 165-229; R. 230-32.) On November 25, 2002, after learning that the Rigases were exercising certain timber rights on some of the property covered by the September 10 Order, Adelphia moved the Bankruptcy Court for an emergency order restraining all assets of the Rigases and Rigas Family Entities, on the grounds that it appeared that some or all of such assets may properly be property of the Adelphia estate, and that the Rigases' non-compliance with discovery requests for information regarding those assets made a further accounting impossible. (R. 233-45.) Judge Gerber granted the requested relief ex parte for 24 hours, and a hearing was held on November 26, 2002, with all affected parties present. At the November 26 Hearing, Adelphia argued that, because the Rigases refused to provide an accounting of their assets based on an assertion of their Fifth Amendment privileges, an appropriate balancing of the interests of the estate with the interests of the Rigases would require an order freezing all Rigas and Rigas Family Entity assets, with appropriate carveouts on request for reasonable living expenses and attorneys' fees for their criminal and civil defense. (R. 527-45.)

  In his oral ruling at the November 26 Hearing, Judge Gerber found that the affidavits submitted with Adelphia's November 25 Motion established a prima facie case that the Rigases used the Adelphia CMS to transfer hundreds of millions of dollars from Adelphia to themselves or to Rigas Family Entities and that the Rigases used co-borrowing facilities to make Adelphia jointly and severally liable for loans that primarily benefitted the Rigases personally. (R. 587-88.1.) Judge Gerber noted, however, that these factual findings were not "definitive" and were "certainly not of the type that could ever be used for any purpose other than the TRO application" before him, but that they were sufficient to support the entry of preliminary injunctive relief. (R. 588.1.) Finding that Adelphia had demonstrated a likelihood of success on the merits, a likelihood of irreparable injury absent the requested relief, and the balance of hardships tipping in favor of the debtors, at least if the requested relief were appropriately narrowed, Judge Gerber concluded that a TRO freezing all assets of the Rigases and Rigas Family Entities would be appropriate to protect the Adelphia bankruptcy estate, except that any "working property" such as office buildings or agricultural property would be permitted to use proceeds of the properties to pay ordinary course expenses, and the Rigases would be entitled to use whatever funds were necessary for reasonable living expenses and for their criminal and civil defense costs. (R. 588.3-88.6.) Judge Gerber directed counsel for Adelphia and for the Rigases to agree on a proposal for the use of authorized funds, and provided that, if agreement could not be reached, the Rigases were entitled to seek relief on "three hours notice" — in particular for any expenses related to their criminal defense. (R. 588.6.)

  B. The August 2003 Modification

  On July 16, 2003, in response to a letter from the Rigases' counsel (R. 589-97), Judge Gerber held a hearing to determine whether the Rigases were entitled to a modification of the TRO to permit the use of $15 million for their criminal and civil defense costs. At that hearing, counsel to the Rigases represented, without presenting evidence, that the Rigases had no cash assets to fund defense costs, that any real estate assets were insufficiently liquid to fund the immediate needs of the Rigases, and that they were seeking the $15 million from the cash flow of the Managed Entities — cable companies that the Rigases owned, but which were managed by Adelphia and which Adelphia claims are actually estate property. (R. 622-24, R. 650.) The Rigases argued that, first, the Managed Entities are owned by the Rigases and thus are assets covered by the TRO entered in November 2002; and, second, that because Adelphia manages the Managed Entities and controls their cash flow, Judge Gerber had the power to order Adelphia to release funds authorized by the Board of Directors of the Managed Entities. (R. 670-73.) The Rigases further argued that the emergency nature of the financial need obviated any requirement for briefing or evidentiary hearings on the obligations of Adelphia as manager of the Managed Entities, or the propriety of Adelphia's refusal, as manager, to carry out the directions of the record owners of the Managed Entities, as the management agreements allegedly provided. (R. 676.) Finally, the Rigases argued that, since the TRO covered all Rigas and Rigas Family Entity assets, if (as Adelphia claimed) other assets existed and ultimately all Rigas assets would be found to be property of the estate, no harm accrued to Adelphia from paying defense costs out of one pool rather than another. (R. 679-70.) In opposition, Adelphia argued that the Managed Entities were not cash-flow positive, after debt service payments and operating expenses, and that, since the Managed Entities participated in the Adelphia CMS, any money ordered to be paid from the Managed Entities to the Rigases would actually come out of the cash flow of Adelphia entities that also were part of the CMS. (R. 681-82.) Judge Gerber identified two legal issues presented by the Rigases' request for the $15 million: first, did he have the power to modify the TRO to allow the Rigases to pay defense costs from the cashflow of the Managed Entities; and, second, did he have the power to order Adelphia, as manager, to honor the Rigases' directions as owners. (R. 690.2-90.3.)

  In briefing submitted after the hearing, the Rigases essentially repeated the arguments made at the July 16 Hearing (R. 691-704), and Adelphia supported its arguments by providing evidence that the Managed Entities did not have positive cashflow, and that, because of the interlocking nature of the CMS and the co-borrowing agreements, Adelphia would be essentially funding any withdrawal made by the Rigases, because any cash used for the Rigases would not be available for debt service payments, which would have to be made up by Adelphia. (R. 798-816.) Adelphia also argued that the Rigases should be required to make a greater showing of "need" for the requested funds — with "need" defined not as "need for funding," but as "inability to fund from other sources." (Id.) Numerous lending institutions and the Adelphia Creditors' Committee either joined in Adelphia's opposition to the Rigases' motion or filed their own briefs arguing that the motion should be denied. On August 1, 2003, Judge Gerber held a further hearing and asked the parties to address five issues: (i) the split, if any, between funds of the Adelphia estate and funds of the Managed Entities in providing the requested $15 million; (ii) the extent to which he could or should address any corporate or partnership governance issues of the Managed Entities; (iii) whether ...

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