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HSBC Bank USA, National Association v. Adelphia Communications Corp.

February 12, 2009

HSBC BANK USA, NATIONAL ASSOCIATION, APPELLANT,
v.
ADELPHIA COMMUNICATIONS CORPORATION, ET AL., APPELLEES.
KEY BANK NATIONAL ASSOCIATION, APPELLANT,
v.
ADELPHIA COMMUNICATIONS CORPORATION, ET AL., APPELLEES.
THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF ADELPHIA COMMUNICATIONS CORPORATION, APPELLANT,
v.
FLEET NATIONAL BANK ET AL., APPELLEES.



The opinion of the court was delivered by: Honorable Richard J. Arcara Chief Judge United States District Court

(Administratively Consolidated under 07-CV-553A)

DECISION AND ORDER

INTRODUCTION

This is a consolidated appeal from an order of the Bankruptcy Court. Fleet National Bank ("Fleet"), HSBC Bank USA , National Association ("HSBC") and Key Bank National Association ("Key Bank") (collectively, the "Banks"), were lenders to Niagara Frontier Hockey, LP ("NFHLP"). NFHLP owned the Buffalo Sabres, a National Hockey League ("NHL") team, and had interests in the HSBC Arena, the Sabres' home rink. The Banks funded the construction of the Arena and the operations of NFHLP during the 1990s with three separate loans.

In 2000, Adelphia Communications Corporation ("Adelphia") purchased two of the three Bank loans for a total of $34.1 million. Adelphia filed for bankruptcy protection in June 2002 in the Bankruptcy Court for the Southern District of New York.

In January 2003, NFHLP filed for bankruptcy protection in the Bankruptcy Court for the Western District of New York. The sale of NFHLP's assets was authorized in April 2003, after a hearing in the Bankruptcy Court. Adelphia, NFHLP's single largest secured and non secured creditor, released its liens on the NFHLP assets (which it acquired pursuant to the two purchased loans) "free and clear" in favor of the purchaser. Adelphia also agreed that proceeds of the sale could be used to pay off the third loan.

In July 2003, Adelphia and the Official Committee of Unsecured Creditors of Adelphia Communications Corporation (now Adelphia Recovery Trust) ("the Committee") sued the Banks in the Southern District of New York as an adversary proceeding in the Adelphia bankruptcy. Adelphia and the Committee alleged that the Adelphia funds used to purchase the two loans and pay the principal and interest on the third loan were fraudulent conveyances.

The Banks filed proofs of claim in the NFHLP bankruptcy in the Western District, stating that, to the extent the Committee obtained a judgment on its fraudulent conveyance claims in the Southern District, the Banks had a claim against the NFHLP estates. The NFHLP debtors brought a declaratory judgment action seeking to disallow the Banks' proofs of claim. The Banks filed cross-claims against Adelphia and the Committee asserting various affirmative defenses barring Adelphia's and the Committee's continued prosecution of the fraudulent conveyance claims asserted against the Banks in the Southern District adversary proceeding. All parties cross-moved for summary judgment.

The Bankruptcy Court granted Fleet's motion for summary judgment, but denied all the other motions for summary judgment, without prejudice to such motions being raised again in the Southern District adversary proceeding. These appeals followed.

STATEMENT OF THE FACTS*fn1

A. The Parties and Other Significant Persons

1. John Rigas and Adelphia Communications Corporation

John Rigas was one of the founders of Adelphia, which at its peak was the fifth largest cable company in the United States. Rigas and his sons (through a corporation, Patmos, Inc.) became the owners of the Buffalo Sabres and the sole partners of NFHLP in July 2000. In 2004, John Rigas was convicted of bank, wire and securities fraud based on allegations that he concealed $2.3 billion in liabilities from Adelphia investors and used Adelphia funds as his personal funds. He was sentenced to 15 years in federal prison.

2. Adelphia Recovery Trust

The Adelphia Recovery Trust is the successor to the Official Committee of Unsecured Creditors of Adelphia (hereinafter the "Committee"). For the purposes of the issues presented here, the Committee stands in the shoes of Adelphia and has the same rights, claims and defenses as Adelphia.

3. Niagara Frontier Hockey, L.P.

NFHLP is a Delaware partnership which was formed on March 14, 1988. NFHLP's main assets were the Buffalo Sabres and its interests in the HSBC Arena.

NFHLP ran the team and the HSBC Arena through its subsidiaries, including Crossroads Arena LLC ("CALLC") and Buffalo Sabres Concession LLC ("Sabres Concession"). In July 2000, John Rigas and his sons (using Adelphia money), bought out the limited partners of NFHLP.

NFHLP and its subsidiaries filed for bankruptcy protection in the Bankruptcy Court for the Western District of New York in January 2003 (the "NFHLP Bankruptcy"), and the case was assigned to Bankruptcy Judge Michael J. Kaplan.

4. Patmos, Inc.

Patmos, Inc. ("Patmos") is a Delaware corporation which was incorporated on March 4, 1998. John Rigas was President of Patmos and his sons Michael, Timothy and James Rigas were Executive Vice-Presidents. Patmos became the General Partner of NFHLP in July 2000. The shareholders of Patmos consisted only of John Rigas and members of the Rigas family.

5. Sabres, Inc.

Sabres, Inc. (a wholly-owned subsidiary of Adelphia), is a Delaware corporation which was incorporated on May 26, 1995. The sole members of the Board of Directors of Sabres, Inc., in 2000, were John, Michael, Timothy and James Rigas. Between the years 1995 and 2000, Sabres, Inc. was the holder of significant economic interests in NFHLP and was NFHLP's largest creditor. Sabres, Inc. filed for bankruptcy protection in June 2002.

6. The Banks

The Banks are national banking associations. They were NFHLP's major lenders from approximately 1995 to 2000, particularly in connection with the construction of the HSBC Arena in downtown Buffalo.

7. The Buffalo Sabres Loans

On May 10, 1995, the Banks entered into two loans with a combined face value of $67.5 million in connection with NFHLP's construction of the HSBC Arena: a "Building Loan Contract" with CALLC (the "Construction Loan") and an "Interim and Term Concession Loan Agreement" with Sabres Concession (the "Concession Loan"). On February 28, 1997, NFHLP and Fleet entered into an "Amended and Restated Credit Agreement" which established a revolving line of credit in favor of NFHLP in the principal amount of $12 million for working capital and general partnership purposes (the "Revolver Loan"). The Construction, Concession and Revolver Loans are referred to herein collectively as the "Buffalo Sabres Loans."

Pursuant to the Buffalo Sabres Loans, the Banks had liens on substantially all of the assets of NFHLP.

8. Sale of the Construction and Revolver Loans to Sabres, Inc., and the Sale of NFHLP to the Rigas Family

In 2000, the Banks decided to sell all their interests in all the Buffalo Sabres Loans to Sabres, Inc. On March 17, 2000, the Banks sold their interests in the Construction and Revolver Loans to Sabres, Inc., pursuant to a "Junior Participation Agreement," whereby the Banks sold to Sabres, Inc. "95% undivided junior participation interests" in the advances, loans and obligations owed by CALLC and NFHLP to the Banks, respectively. The Junior Participation Agreement contained a transitional mechanism whereby the 95% interest converted into a 100% interest upon the NHL's consent to the transfer. It is uncontested that the Junior Participation Agreement eventually ripened into 100% ownership by Sabres, Inc.

On March 22, 2000, pursuant to the terms of the Junior Participation Agreements, Sabres, Inc. transferred approximately $34.1 million to the Banks ($18,583,542 to Fleet; $11,595,398 to HSBC; and $3,902,444 to Key Bank) in exchange for the Construction and Revolver Loans.

The sale of the Concession loan to Sabres, Inc. never came to fruition because the consent from a necessary third party could not be obtained.

Simultaneous to the sale of the Construction and Revolver Loans to Sabres, Inc., John Rigas and Patmos acquired NFHLP.

9. Adelphia Bankruptcy

On June 25, 2002, Adelphia filed for bankruptcy protection in the Bankruptcy Court for the Southern District of New York following disclosures of fraud and off-balance-sheet liabilities (the "Adelphia Bankruptcy").

10. NFHLP Bankruptcy and Sale of NFHLP Assets to Hockey Western

On January 13, 2003, NFHLP filed for bankruptcy protection in the Bankruptcy Court for the Western District of New York (the "NFHLP Bankruptcy"). Shortly after the filing, Hockey Western LLC ("Hockey Western") agreed to purchase NFHLP's assets. A hearing to approve the sale, wherein substantially all of the assets of NFHLP were sold to Hockey Western "free and clear" of liens claims and encumbrances, was held in the Bankruptcy Court on April 10, 2003. At the sale hearing, NFHLP made a presentation and proffered witnesses who were prepared to testify that the offer from Hockey Western was the best (indeed, the only) offer for the team and that if the sale did not happen quickly, the team would not be able to stay in Buffalo.

Adelphia sought and was given permission in the Adelphia Bankruptcy to appear as a creditor in the NFHLP Bankruptcy. The February 5, 2003 Order (the "Adelphia Approval Order") allowing Adelphia to appear provided that Adelphia was "authorized in the exercise of [its] business judgment to consent to the sale of certain assets of [NFHLP] in connection with any sale process [under the Bankruptcy Code]" and that any "conveyance of [Adelphia's] interest in [NFHLP] in connection with any sale process . . . shall be free and clear of any liens, interests or encumbrances of any of [Adelphia's] creditors or lenders, with such Liens, if any, to attach to the net proceeds, subject to the rights and defenses of [Adelphia] with respect thereto . . . ."

At the April 10, 2003 sale hearing, Adelphia entered into a Stipulation and Order (the "Adelphia Stipulation and Order"), agreeing to release the liens, security interests and guarantees that it held as collateral for the Construction and Revolver Loans. Adelphia also agreed that proceeds of the sale could be used to pay off the Concession Loan. In calculating the amount due on the Concession Loan, full credit was given to the $11.3 million in principal and interest payments Adelphia had already paid on the Loan. Adelphia consented to the "cash out" amount of $21.4 million for the Concession Loan.

Counsel for Adelphia appeared at the sale hearing by telephone. He told the Bankruptcy Court that Adelphia had agreed to release its rights to the collateral supporting the Construction and Revolver Loans so that, among other things, the sale could go through, the team could stay in Buffalo, and the claims of unsecured creditors would not be swamped by Adelphia's $200 million proof of claim. He also stated that as consideration for releasing its rights, Adelphia would receive (1) the release of two letters of credit totaling $27.6 million, and (2) assumption of a broadcast agreement for broadcast rights to the Buffalo Sabres for five years beginning September 2002. In addition, Adelphia would receive the benefit of being relieved of its obligation to continue making cash advances--which between March 2000 and January 2003 amounted to between $26-35 million--to the struggling Buffalo Sabres franchise to protect the Construction Loan and Adelphia's collateral.

At one point during the sale hearing, the Bankruptcy Judge stated:

[W]hen I was reading the draft order and saw that all the parties who had liens and so forth would have consented and so forth, and I was wondering how we were going to get those and who they needed to be from, I was wondering how that was going to be handled and I guess what we have, having read the stipulations, is that everybody who anybody thinks actually has legal or equitable or beneficial interest in some kind of ownership or lien on the assets of these debtors have all signed the same stipulation; essentially identical stipulations, so that we needn't worry about that unless there's some entity that slipped through the cracks, but I doubt that would have happened with the quality of representation that we have here. So those who haven't seen them should rest assured that in fact the pertinent public officials and officers have, in fact, executed what is necessary to permit this sale.

Committee's Record on Appeal at 10094-96.

Adelphia's counsel did not respond to the Judge's statement and never mentioned at the sale hearing any possible fraudulent ...


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