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United States District Court, S.D. New York

September 27, 2005.


The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge


M47 (SAS)

  The Ad Hoc Committee of Arahova Noteholders ("Arahova Committee") requests leave to file an expedited appeal from four orders of the Bankruptcy Court of the Southern District of New York in the jointly administered chapter 11 cases of Adelphia Communications Corp. ("ACC") and more than 200 of its direct and indirect subsidiaries.*fn1 The Orders relate to a process established by the Bankruptcy Court to resolve certain disputes as an adjunct to confirmation of the debtors' joint plan of reorganization. The Arahova Committee also moves for a stay of the Orders pending resolution of the appeal. The debtors, the Ad Hoc Committee of ACC Senior Noteholders, and the Official Committee of Equity Security Holders*fn2 oppose the motions on the grounds that the Orders are interlocutory and that the circumstances do not merit the exercise of this Court's discretionary jurisdiction. For the following reasons, the Arahova Committee's motions for leave to appeal and for a stay pending appeal are denied.


  The dollar figures in this dispute are high, the issues are complex, and the deadlines are short. The debtors, formerly the fifth largest cable company in the United States, filed for chapter 11 protection in June 2002.*fn3 More than three billion dollars in claims have since been asserted against their estates.*fn4 In April 2005, the debtors agreed to a sale of assets to Time Warner NY Cable LLC and Comcast Corporation for approximately $17.6 billion.*fn5 If the Time Warner/Comcast sale does not close by July 31, 2006, the debtors stand to lose the purchase price, and may be required to pay a "break-up" fee of $440 million.*fn6 A condition of the closing is timely confirmation of the debtors' plan of reorganization by the Bankruptcy Court.*fn7

  The debtors' plan of reorganization proposes that the proceeds from the sale be distributed to creditors of nine groups of substantively consolidated debtors.*fn8 Claims against debtors in all but two of these groups will be paid in full.*fn9 The percentage of recovery on claims against the groups including debtors ACC and Arahova Communications, Inc. ("Arahova") are uncertain.*fn10 Members of the Ad Hoc Committee of Arahova Noteholders hold, or advise holders of, $550 million in senior notes issued by Arahova.*fn11 Member of the Ad Hoc Committee of ACC Senior Noteholders hold, or advise holders, of, $1.7 billion in Senior Notes issued by ACC.*fn12 The resolution of issues regarding inter-debtor claims, allocation of value from the sale transactions among debtors, allocation of liabilities to the debtors, and substantive consolidation of debtors, will affect the ultimate recoveries of these noteholders.*fn13

  To correct accounting irregularities, the debtors have restated approximately seven million lines of inter-debtor transactions on their financial statements.*fn14 These restatements are reflected on the debtors' schedules of intercompany liabilities, amended in May, 2005.*fn15 On June 16, 2005, the Arahova Committee filed its Motion to Strike, which sought an order striking the intercompany schedules.*fn16 The Arahova Committee argued that the intercompany balances listed on the schedules were disputed claims, and that the schedules did not comply with the formal requirements for claims under the Bankruptcy Rules.*fn17

  On June 24, 2005, the debtors filed their Motion in Aid, which proposed a set of procedures to resolve inter-debtor issues as an adjunct to the plan confirmation process, including discovery obligations, deadlines, dates for briefing, and hearings to adjudicate inter-debtor issues.*fn18 In the Motion in Aid, the debtors took no position on any particular inter-debtor issue, but rather, turned resolution of disputes over to affected creditor bodies.*fn19

  On July 2, 2005, the Arahova Committee filed its Standing Motion, seeking authority to prosecute certain avoidance actions of inter-debtor transactions on behalf of the debtor Arahova.*fn20 The Arahova Committee estimates that these claims are worth between $1.5 and $2 billion to the Arahova estate.*fn21 The Arahova Committee argues that participation as a debtor has advantages over participation as a creditor, including access to privileged information, the ability to hire professionals paid by the estate, and entitlement to an appeal without posting a bond.*fn22

  On July 12, 2005, the Bankruptcy Court held a hearing at which counsel to the Arahova Committee argued that the Motion in Aid was inadequate because "somebody performing fiduciary duties for the benefit of each estate is elemental and fundamental to the success of the chapter 11 process."*fn23 Judge Gerber requested that the parties address the question of "whether the estate needs more fiduciaries" at a hearing to be held on July 26, 2005.*fn24

  On July 21, 2005, the Arahova Committee objected to the Motion in Aid and proposed an alternative order which required that each debtor identify and assert claims and defenses in the inter-debtor disputes, that each of the over 200 debtor estates appoint at least one independent fiduciary, and that each conflicted debtor be represented by separate counsel.*fn25

  On July 22, 2005, the Arahova Committee filed its Motion to Compel, which sought to compel responses to requests for discovery in connection with the Motion in Aid and the Motion to Strike.*fn26 The debtors objected that these discovery requests required production of the very documents that the discovery plan contained in the Motion in Aid was intended to address.*fn27 On July 25, 2005, the Bankruptcy Court denied the Motion to Compel.

  On July 26, 2005, the Bankruptcy Court held a hearing on In re Adelphia which commenced at 9:45 a.m. and did not conclude until approximately 8:30 p.m.*fn28 The Bankruptcy Court heard argument on the Motion in Aid from numerous parties in interest.*fn29 At the close of the hearing, the Bankruptcy Court granted the Motion in Aid, with certain modifications, and denied the Arahova Committee's Motion to Strike and Standing Motion.*fn30 The Bankruptcy Court reasoned that the process established by the Order in Aid would provide a full opportunity for the Arahova Committee to address the matters raised in the Standing Motion and the Motion to Strike.*fn31

  The Arahova Committee now seeks leave to appeal, arguing that the procedures established by the Bankruptcy Court to resolve the inter-debtor issues contravene the provisions of the Bankruptcy Code by failing to require that each debtor-in-possession be charged with fiduciary duties to maximize value for its respective creditors.*fn32 Oral argument on this motion was held on September 20 and 21, 2005. At oral argument, the Arahova Committee also argued that certain of the Orders were final orders, which may be appealed as of right.*fn33


  A. Final Orders

  The district courts are vested with appellate jurisdiction over bankruptcy court rulings.*fn34 Final orders of the bankruptcy court may be appealed to the district court as of right.*fn35 In In re Palm Coast, Matanza Shores Limited, the Court of Appeals held that an order is final if "nothing in the order . . . indicates any anticipation that the decision will be reconsidered."*fn36 "A bankruptcy court's order is `final' if it `completely resolve[s] all of the issues pertaining to a discrete claim, including issues as to the proper relief.'"*fn37

  Courts have held that a bankruptcy court order is final if it confirms a plan, denies relief from an automatic stay, authorizes a sale of property, allows an extension of credit, or approves the assumption or assignment of an executory contract or an unexpired lease.*fn38 An order approving a disclosure statement is not final because "the alleged inadequacies of the disclosure may change or be rendered moot" depending on how the bankruptcy court resolves the issues at the "heart" of the objecting party's concerns.*fn39 Orders determining the appointment of professionals in a bankruptcy case are final. The Second Circuit has held that bankruptcy court orders granting or denying motions to disqualify counsel are final.*fn40 Similarly, orders granting or denying appointment of a trustee in a bankruptcy case are final.*fn41 By contrast, an order denying a motion for the appointment of an official committee to represent creditors is not final, because it "does not exclude [creditors] from participation in the proceeding; it merely denies them the advantages of official committee status."*fn42

  B. Interlocutory Orders

  Appeals from non-final bankruptcy court orders may be taken either under the collateral order doctrine,*fn43 or pursuant to section 158(a)(3) of title 28 of the United States Code.*fn44

  1. Collateral Order Doctrine

  "An interlocutory order may be appealed pursuant to the collateral order doctrine . . . where the decision would (1) conclusively determine the disputed question, (2) resolve an important issue completely separate from the merits of the action?, and (3) be effectively unreviewable on appeal from a final judgment."*fn45 A decision is not reviewable as a collateral order unless it satisfies all three requirements.*fn46 This is a "narrow exception" to the general "final judgment" rule, limited to review of orders "affecting rights that will be irretrievably lost in the absence of an immediate appeal."*fn47 The "possibility that a ruling may be erroneous and may impose additional litigation expense is not sufficient to set aside the finality requirement."*fn48

  2. Section 158(a)(3)

  In deciding whether to grant leave to appeal under section 158(a)(3), reviewing courts have applied the standards set forth in 28 U.S.C. § 1292(b), which governs the appealability of interlocutory district court orders.*fn49 Under section 1292(b), for an interlocutory appeal to be granted, the order being appealed must "(1) involve a controlling question of law (2) over which there is substantial ground for difference of opinion," and the movant must also show that "(3) an immediate appeal would materially advance the ultimate termination of the litigation."*fn50 In addition, leave to appeal is warranted only when the movant demonstrates the existence of "exceptional circumstances."*fn51 The decision whether to grant an interlocutory appeal from a bankruptcy court order is within the district court's discretion.*fn52

  "In regard to the first prong, the `question of law' must refer to a `pure' question of law that the reviewing court could decide quickly and cleanly without having to study the record."*fn53 The question must also be "controlling" in the sense that reversal of the bankruptcy court would terminate the action, or at a minimum that determination of the issue on appeal would materially affect the litigation's outcome.*fn54

  Regarding the second prong, the "substantial ground for a difference of opinion" must arise out of a genuine doubt as to the correct applicable legal standard relied on in the order.*fn55 Substantial ground would exist if the issue is "difficult and of first impression."*fn56 However, it is not sufficient that the relevant case law is "less than clear" or allegedly "not in accord."*fn57

  C. Stay Pending Appeal

  A party seeking a stay pending appeal carries a heavy burden. Rule 8005 of the Federal Rules of Bankruptcy Procedure sets forth the procedure by which a party may seek a stay pending an appeal to the district court of a bankruptcy court's order. "The Rule does not articulate, however, the standard that governs such motions."*fn58 The Second Circuit has not spoken directly on this issue, and courts in this district have formulated various tests, drawing on the standard for preliminary injunction motions*fn59 or, alternatively, on the standard governing stays of district court orders pending appeals to the circuit courts.*fn60 The latter is the most logical because the district court stands in the same relation to the bankruptcy court as does the circuit court to the district court when a party seeks a stay of a district court order under Appellate Rule 8. By contrast, the preliminary injunction standard does not assume a prior judicial ruling.*fn61

  "Accordingly, in deciding whether to grant a stay of bankruptcy proceedings pending appeal, a district court considers the following factors: (1) whether there is a substantial possibility of success on appeal, (2) the risk of irreparable injury to the movant absent a stay, (3) the lack of substantial harm to another party if a stay is granted, and (4) the public interests that may be affected."*fn62 All four criteria must be satisfied to some extent before a stay is granted.*fn63


  A. The Bankruptcy Court Orders Were Not Final

  1. The Order in Aid

  The Arahova Committee asks that this Court review the Bankruptcy Court's expedited procedures for determining inter-debtor issues, including the abbreviation of avoidance action formalities, the refusal to set a bar date for inter-debtor claims, and the requirement that parties with interests in inter-debtor disputes file an "Issues List" with the court.*fn64 But the Bankruptcy Court's determinations on these issues are not final, because they direct the parties to engage in or participate in further proceedings and do not resolve any substantive issue.*fn65

  The Bankruptcy Court's failure to find a waiver of the attorney-client privilege based on Willkie Farr & Gallagher's dual representations of debtors on both sides of inter-debtor claims is also not a final order.*fn66 The Bankruptcy Court held that it would "leave requests for finding such a waiver for another day, if and when a suitable record for ruling on such an issue has been developed, and after the Debtors, the Creditors' Committee and other interested parties have a chance to be heard."*fn67

  The Arahova Committee also requests review of the Bankruptcy Court's Order in Aid on the grounds that certain professionals involved are conflicted and new professionals should be appointed.*fn68 However, the Arahova Committee did not clarify how many independent fiduciaries and/or counsel it was requesting, or which debtors required the appointment of more professionals.*fn69 Additionally, the Arahova Committee did not clarify the meaning of the term "fiduciary", which is not defined by the Bankruptcy Code. Because the Arahova Committee never made a "discrete claim" for relief in this regard, the Bankruptcy Court's order overruling all objections to the Motion in Aid was not final as to new professionals.*fn70

  Had the Bankruptcy Court squarely addressed a request for appointment of new professionals and disqualification of conflicted professionals, the order would have been final. In In re AroChem, the Second Circuit held that an order under section 327 of the Bankruptcy Code authorizing the trustee to retain a law firm, and denying a motion to disqualify that firm due to conflicts of interest, was final.*fn71 But the Arahova Committee cannot make a motion under section 327 because that section only allows a trustee or a debtor-in-possession to appoint professionals. Therefore, the Arahova Committee has argued that it should be appointed to "stand in the shoes" of the debtor-in-possession and make formal application to retain non-conflicted professionals under section 327.*fn72 Alternatively, the Arahova Committee has argued that it can move to compel certain debtors to appoint non-conflicted professionals under section 327.*fn73 In terms of finality, there is no meaningful distinction between an order denying these requests and the order at issue in In re AroChem.*fn74

  Therefore, should the Arahova Committee raise the issue of retention or disqualification of specific professionals and counsel for certain named debtors, and should the Bankruptcy Court deny that motion, the Arahova Committee would be entitled to an appeal as a matter of right.*fn75 This Court retains jurisdiction to rule on the issue in the event that the Bankruptcy Court enters a final order.

  2. The Standing Motion

  The Arahova Committee appeals the Bankruptcy Court's denial of the Standing Motion because the Bankruptcy Court "err[ed] in failing to grant the Arahova ? Committee standing to pursue legal actions on behalf of Arahova when Arahova has no disinterested fiduciary or counsel to initiate or prosecute such actions on behalf of Arahova."*fn76 However, the Order in Aid allows the Arahova Committee to participate in the resolution of the inter-debtor issues through alternative procedures. The denial of the Standing Motion is not final because it merely denies the Arahova Committee "the advantages of official ? status," as opposed to excluding it from participation.*fn77 3. The Motion to Compel

  The Bankruptcy Court's order denying the Motion to Compel is not a final order because the Arahova Committee may have the opportunity to procure the documents it requires through the procedures established by the Order in Aid.*fn78

  4. The Motion to Strike

  The Arahova Committee concedes that the schedules of liabilities at issue in the Motion to Strike merely "present? the possibility" that the intercompany transactions "will be given the benefit of presumptive validity."*fn79 The Bankruptcy Court noted that under the Order in Aid, the Arahova Committee "will still be able to litigate, among other things, the validity, characterization and amount of the intercompany transactions."*fn80 Therefore, the Bankruptcy Court's denial of the Motion to Strike was not a final order.

  B. Interlocutory Orders of the Bankruptcy Court

  1. Collateral Order Doctrine The Arahova Committee contends that the Orders should be reviewed under the collateral order doctrine because they conclusively determine procedural issues which improperly collapse the legal boundaries among affiliated debtors.*fn81 As previously discussed, the Bankruptcy Court's Orders only establish a process to resolve inter-debtor issues as an adjunct to confirmation, they do not conclusively resolve any issue.

  Moreover, the Arahova Committee and any other aggrieved creditors will have the opportunity to appeal any adverse substantive determination after the Bankruptcy Court enters an order confirming the plan. The appellate court can reverse the determinations of the Bankruptcy Court, including the order granting the Motion in Aid, and require that those issues be relitigated pursuant to different procedures. The Arahova Committee argues that this Court should grant leave to appeal because reversal now is preferable to reversal after the plan confirmation process, when an appeal could jeopardize the closing of the Time Warner/Comcast sale.*fn82 This argument is speculative. It presupposes that the Arahova Committee would prevail on its appeal, a question yet to be decided. Also, it is uncertain whether the procedure established by the Order in Aid will result in any adverse substantive determinations against the Arahova Committee. Even if this Court were to order the Bankruptcy Court to employ the procedures suggested by the Arahova Committee, those procedures might result in substantive determinations adverse to Arahova, and require appeal after confirmation. And as the Debtors correctly note, "[a]ny appeal from a confirmation order in this case — whether taken by the [Arahova Committee or any other party] may have an adverse impact on the Debtors' ability to close the Time Warner/Comcast sale in a timely manner. A grant of leave to appeal now will not obviate that concern."*fn83

  2. Section 158(a)(3) The many issues for appeal raised by the Arahova Committee certainly fail at least one prong of the section 1292(b) test because granting interlocutory appeal will not materially advance the litigation. By its own admission, the Committee's procedures are designed to proceed in roughly the same time frame as those in the Order in Aid.*fn84 In In re Enron Corp., the court denied leave to appeal an order staying arbitration because affirmance would not have expedited the litigation and reversal was "likely to complicate it" by creating duplicative proceedings in bankruptcy court and in arbitration.*fn85 Here, affirmance of the Orders would not advance the proceedings. Reversal could vastly complicate the proceedings by requiring the Bankruptcy Court to appoint hundreds of new professionals to resolve each interdebtor dispute through an adversary proceeding.*fn86 Similarly, the Arahova Committee is incorrect when it argues that granting an appeal now will reduce the likelihood that appellate practice after a final confirmation order is entered will jeopardize the Time Warner/Comcast sale.*fn87 It is uncertain that an appellate court would ever need to address these issues, in which case an interlocutory appeal now would be a waste of judicial resources.*fn88

  Additionally, I find that no exceptional circumstances are present that would justify an interlocutory appeal. The Arahova Committee is correct that this is an important case with a great deal of money at stake, but this alone does not justify a departure from the final judgment rule. If anything, this argument militates strongly in favor of deferring to the Bankruptcy Court, which has handled the case for three years and is infinitely more familiar with the record.

  The Arahova Committee also argues that if leave to appeal is not granted now, it will be precluded from seeking review of these issues after confirmation by the doctrine of equitable mootness.*fn89 This doctrine applies when "even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable."*fn90 Such a dismissal is appropriate when the "appellant has made no effort to obtain a stay and has permitted such a comprehensive change of circumstances to occur as to render it inequitable for the appellate court to reach the merits of the appeal."*fn91 "Completed acts in accordance with an unstayed order of the bankruptcy court must not thereafter be routinely vulnerable to nullification if a plan of reorganization is to succeed."*fn92

  Equitable mootness does not become a factor unless a party fails to obtain a stay of a bankruptcy court order that results in a change in circumstances.*fn93 If an appellant does seek a stay pending appeal, a court "will provide relief if it is at all feasible, that is, unless relief would knock the props out from under the authorization for every transaction that has taken place and create an unmanageable, uncontrollable situation for the Bankruptcy Court."*fn94

  In this case, the Bankruptcy Court has not yet entered a confirmation order. There are still "rules in place that [the Arahova Committee] may use to prevent equitable mootness" and to "enable appeal and review" of any and all issues in this bankruptcy.*fn95 The possibility of equitable mootness will only become an issue if the Arahova Committee fails to protect its rights after confirmation.*fn96 Therefore, equitable mootness concerns do not militate in favor of granting interlocutory review.

  The other two prongs of the test ("controlling question of law" as to which "there is substantial ground for difference of opinion") present a closer issue. The Arahova Committee does not point out which issues for appeal, out of the plethora it puts forward, are even amenable to interlocutory review. Some sifting is required to determine whether there are any "abstract issues of law" that this Court "could decide quickly and cleanly without having to study the record."*fn97

  As an initial matter, all nine separate issues presented on appeal of the denial of the Arahova Commitee's Motion to Strike,*fn98 as well as the issue presented on appeal from the denial of the Motion to Compel,*fn99 appear to be within the Bankruptcy Court's broad discretion under section 105 of the Bankruptcy Code to "prescrib[e] such limitations and conditions as the court deems appropriate to ensure that the case is handled expeditiously and economically."*fn100 These issues do not present pure questions of law or "arise out of a genuine doubt as to the correct applicable legal standard that was relied on in the order."*fn101 In fact, the only colorable "pure issues of law" that emerge from the Arahova Committee's appeal can be fairly stated as follows:

  1) Should the bankruptcy court have appointed an independent fiduciary for each debtor?*fn102

  2) Should the bankruptcy court have appointed independent counsel for each conflicted debtor?

  The issues of which professionals are conflicted and which should be appointed are "fact-based" determinations.*fn103 In any case, even assuming that the Court could distill the Arahova Committee's request for relief to a narrow legal question regarding proper representation for individual debtor entities, interlocutory appeal would still be inappropriate for the reasons discussed earlier.

  C. Motion to Stay

  The Arahova Committee's Motion to Stay Pending Appeal is denied. The Arahova Committee has not demonstrated a substantial possibility of success on appeal. The Bankruptcy Court has broad authority under section 105 of the Bankruptcy Code.*fn104 The Arahova Committee put forward sixteen separate "Issues for Appeal" as part of its application to this Court; most, if not all, directly implicate the Bankruptcy Court's discretionary authority.

  Even assuming that Arahova could demonstrate a substantial possibility of success on appeal, it cannot satisfy any of the other necessary factors. First, the Arahova Committee has fallen far short of demonstrating irreparable injury to it absent a stay. The Arahova Committee offers that "[i]f on appeal, however, the [Order in Aid] is vacated, the entire `Resolution Process' and the decisions resulting therefrom will be rendered invalid."*fn105 However, as the ACC Senior Noteholders point out, "[t]hat is true of any ruling that is overturned on appeal."*fn106 The parties are required to undertake much of the same preparation to participate in the procedures under the Order in Aid as under the Arahova Committee's proposed procedures. Therefore, a stay of the proceedings now would not necessarily save any effort. The Arahova Committee is also concerned that the Bankruptcy Court's rulings will be effectively unreviewable at the end of the case. But, the Arahova Committee can seek a stay of the confirmation order pending appeal at the end of the case.*fn107 As the debtors explained at oral argument, after the closing of the Time Warner/Comcast sale, the parties can still appeal Bankruptcy Court decisions determining distributions under the plan.*fn108

  Second, many parties will suffer substantial harm if a stay is granted. There are several complicated inter-creditor disputes that must be resolved by next Spring if the Time Warner/Comcast sale is to close. The requested stay would not completely halt the proceedings below, but it would substantially impair progress towards confirmation.*fn109 The parties require as much time as possible to resolve disputes, and halting that process now can only harm all parties.*fn110

  Third, for similar reasons, a stay would not be in the public interest, as it would jeopardize completion of a pending transaction that provides the best, and perhaps only; prospect of fulfilling the function of the Bankruptcy Code, which is to "achieve the maximum distribution [to creditors] in the minimum time."*fn111


  For the foregoing reasons, the Arahova Committee's motion is denied. The Clerk of the Court is directed to close the motion. SO ORDERED.


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