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In re Adelphia Communications Corp.

August 21, 2008

IN RE ADELPHIA COMMUNICATIONS CORP., ET AL., DEBTORS.
THE BANK OF NOVA SCOTIA AND CITIBANK, N.A., APPELLANTS,
v.
ADELPHIA COMMUNICATIONS CORPORATION AND THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS, APPELLEES.



The opinion of the court was delivered by: John G. Koeltl, District Judge

MEMORANDUM OPINION AND ORDER

This is an appeal from the Decision and Order of the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") dated May 15, 2006 (the "Decision"). (Bankr. Docket No. 10853.) That decision disallowed claims for additional "grid interest" made by the administrative agents under six separate credit facilities (the "Initial Appellants"). The Initial Appellants filed a joint Notice of Appeal on May 24, 2006. On June 29, 2006, the Bankruptcy Court confirmed the Third Modified Fourth Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code for the Century-TCI Debtors and the Parnassos Debtors (as confirmed, the "JV Plan").*fn1 On January 5, 2007, the Bankruptcy Court confirmed the First Modified Fifth Amended Joint Chapter 11 Plan for Adelphia Communications Corporation ("Adelphia") and Certain of its Affiliated Debtors (as confirmed, the "Affiliates Plan"). Following the confirmation of the Affiliates Plan, four of the six Initial Appellants have withdrawn their appeal. The Appellants are the two remaining administrative agents, Bank of Nova Scotia ("BNS") as administrative agent for the lenders under the Parnassos Credit Agreement, and Citibank N.A. ("Citibank") as administrative agent for the lenders under the Century-TCI Credit Agreement. There is jurisdiction to hear the appeal pursuant to 28 U.S.C. § 158(a)(1).*fn2

The central issue on this appeal is whether the Bankruptcy Court erred in finding that the Appellants were not entitled to additional "grid interest" and therefore that the Debtors did not have to create a reserve for claims for such interest. The Bankruptcy Court found that the claims for additional grid interest were without merit because the credit agreements did not provide for the recalculation of grid interest in the event of the delivery of false compliance certificates to the Administrative Agents and default interest was the Appellants' exclusive remedy under the credit agreements. The Bankruptcy Court also found that that claims for additional grid interest were not secured claims under 11 U.S.C. § 506(b), and that the Appellants were limited to restitutionary damages with respect to any tort remedies they might have, which would not include additional grid interst.

The Court has reviewed the Decision and the arguments of the parties to this appeal. The Decision is vacated and remanded for further proceedings consistent with this opinion.

I.

The following facts are undisputed unless otherwise noted. Prior to filing for bankruptcy on June 25, 2002 (the "Petition Date"), the Debtors entered into credit agreements with various bank lenders that established seven lending facilities. The Appellants are the Administrative Agents under two of these facilities, the Century-TCI Credit Agreement and the Parnassos Credit Agreement (collectively, the "Agreements"). As explained in the Decision of the Bankruptcy Court, the Agreements calculate the non-default rate of interest based on the sum of a floating "Base Rate" and an "Applicable Margin." (Parnassos Credit Agreement § III.2.1; Century-TCI Credit Agreement § 2.06.) The "Applicable Margin" is in turn determined by reference to a grid, where the "Applicable Margin" increases as a function of the borrower's "Leverage Ratio." (Parnassos Credit Agreement § I.1; Century-TCI Credit Agreement § 1.01.) Under the Agreements, the borrower is required to deliver to the Administrative Agent periodic compliance certificates reporting the borrower's "Leverage Ratio" along with related financial information. (Parnassos Credit Agreement § VII.1.1; Century-TCI Credit Agreement § 5.01.) The financial statements are to be prepared in compliance with GAAP and "present fairly in all material respects" the financial condition and results of operations of the borrower. (Parnassos Credit Agreement § 6.5; Century-TCI Credit Agreement § 5.01.) The provision of inaccurate financial information in a Compliance Certificate constitutes an Event of Default under the Agreements. (Parnassos Credit Agreement § VIII.1.2; Century-TCI Credit Agreement § 7.01(a).)

Shortly after the Petition Date, and following extensive negotiation between the Debtors and the bank lenders, the Debtors obtained approval of Debtor In Possession ("DIP") financing from the Bankruptcy Court. The Final DIP Order provides the Appellants with a right to, among other things: (i) immediate payment of pre-petition accrued and unpaid interest; and (ii) current interest payments during the pendency of the bankruptcy at the non-default grid interest rates in effect as of the day immediately prior to the Petition Date. In exchange, the Appellants waived any right to receive default interest under the Agreements. (See Final DIP Order, Joint Exhibit ("JE") 111 at 20-21.)

The Administrative Agents timely filed proofs of claim, including claims for unpaid interest, and asserted claims for breach of contract, fraud, fraudulent inducement, fraudulent misrepresentation and negligent misrepresentation in connection with the Agreements. (JE-7 at 6; JE-13 at 4.) On July 8, 2004, John Rigas and Timothy Rigas, officers of Adelphia, were convicted of, among other crimes, bank fraud. The Appellants subsequently filed amended proofs of claim more fully describing claims for additional interest payments to which they would have been entitled had they received true, complete and accurate information concerning the Debtors' financial performance (the "Additional Grid Interest claims"). (JE-6 at 10; JE-12 at 4.) The Debtors' objected to these claims. (Bankr. Docket No. 10667.) After additional briefing and oral argument, Judge Gerber issued an oral ruling on May 10, 2006 disallowing the Additional Grid Interest claims. On May 15, 2006, Judge Gerber issued the Decision that is the subject of this appeal.

II.

The Court reviews the Bankruptcy Court's conclusions of law de novo and its findings of fact for clear error. Citibank, N.A. v. Vebeliunas, 332 F.3d 85, 90 (2d Cir. 2003); In re Johns-Manville Corp., 340 B.R. 49, 58 (S.D.N.Y. 2006); see also Fed. R. Bankr. P. 8013. The parties have agreed that the language of the relevant agreements is unambiguous, and therefore the Bankruptcy Court's interpretation of the Agreements is subject to de novo review. Network Publishing Corp. v. Shapiro, 895 F.2d 97, 99 (2d Cir. 1990); see In re Calpine Corp., No. 07 Civ. 8493(JGK), 2007 WL 4326738, at *3 (S.D.N.Y. Nov. 21, 2007).

III.

The Appellants argue that they are not limited to default interest as a remedy upon an event of default and that the Bankruptcy Court erred in interpreting the Agreements to preclude the recovery of additional grid interest based on the fact that the Agreements did not contain a mechanism for a recomputation of Applicable Margin. The main issues presented on appeal, therefore, are (1) whether the Appellants were entitled to grid interest based on the borrowers' actual financial condition, as opposed to the financial condition reported on false compliance certificates, and (2) whether under the terms of the Agreements the parties agreed that the Appellants would be limited to the remedy of default interest in the event that false compliance certificates were presented to the Administrative Agents.

Under the Parnassos Credit Agreement: Following the sixth-month anniversary of the Effective Date, the Leverage Ratio used to compute the Applicable Margin shall be the Leverage Ratio set forth in the Compliance Certificate most recently delivered by the Borrower to the Administrative Agent . . . . (Parnassos Credit Agreement § I.1.) "Compliance Certificate" under the Parnassos Credit Agreement is defined as "a certificate duly completed and executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit E hereto . . . ." (Parnassos Credit Agreement § I.1; see also Parnassos Credit Agreement § V.1.14.) The Parnassos Credit Agreement also contains a provision that the financial information of the borrower "furnished to the Administrative Agent and each Lender pursuant to Section 5.1.13 have been prepared in accordance with GAAP consistently applied, and present fairly the consolidated financial information of the Persons covered thereby," and a further representation that "no . . . factual information . . . furnished in connection with this Agreement or any other Loan Document by the Borrower or any other Obligor to any Credit Party will contain any untrue statement of a material fact . . . ." (Parnassos Credit Agreement §§ VI.5 and VI.18.)

Similarly, under the Century-TCI Credit Agreement: [a]t all times after the date six months following the Closing Date, if the Leverage Ratio as at the last day of any fiscal quarter of the Borrower shall fall within any of the ranges specified in the schedule below, then, subject to the delivery to the Administrative Agent of a certificate demonstrating such fact (which certificate shall accompany the financial statements for such fiscal quarter delivered under Section 5.01 on which the calculation of such Leverage Ratio is based) . . . the "Applicable Margin" shall be adjusted upwards or downwards, as the case may be . . . . (Century-TCI Credit Agreement § 1.01). There is an affirmative covenant that the financial statements provided under Section 5.01 will be accompanied by appropriate opinions that they are prepared in accordance with GAAP and "fairly present the financial condition and results of operations" of the borrower. (Century-TCI Credit Agreement § 5.01; see also § 5.07.) There is an additional covenant that "[a]ll written information furnished . . ...


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