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Adelphia Recovery Trust v. Bank of America

December 22, 2009

ADELPHIA RECOVERY TRUST, PLAINTIFF,
v.
BANK OF AMERICA, N.A. ET AL., DEFENDANTS.



The opinion of the court was delivered by: McKENNA, D.J.,

MEMORANDUM AND ORDER

1.

The Bank Defendants move, pursuant to Fed. R. Civ. P. 16 and 56 for an order determining that plaintiff Adelphia Recovery Trust ("ART") lacks standing to pursue claims 32, 36, 37, 38, 40, 53 and 55 of the Second Amended Complaint ("SAC") on behalf of Adelphia Communications Corporation ("ACC").*fn1 The Bank Defendants argue that the harms for which ART seeks redress in the claims at issue are harms to what are known as the Obligor Debtors, direct or indirect subsidiaries of ACC; it was the Obligor Debtors that entered into the Co-Borrowing Facilities and became liable to repay the moneys loaned under those facilities, much of which was used for no corporate business purpose but for the personal benefit of members of the Rigas family. ACC was not a party to the Co- Borrowing Facilities and was not liable under them. The Bank Defendants rely on a rule restated in numerous cases to the effect that "[a] shareholder -- even the sole shareholder -- does not have standing to assert claims alleging wrongs to the corporation." Jones v. Niagara Frontier Transp. Auth., 836 F.2d 731, 736 (2d Cir. 1987).

ART cross-moves for summary judgment pursuant to Fed. R. Civ. P. 56, and the Bank Defendants move to strike ART's Local Rule 56.1 Statement.

2.

On the issue whether a shareholder has standing to assert a direct claim on behalf of the corporation of which it is a shareholder, the rule in the Second Circuit is that the law of the state of incorporation of the corporation governs. Bartfield v. Murphy, 578 F.Supp.2d 638, 645 (S.D.N.Y 2008) (citing Struogo v. Bassini, 282 F.3d 162, 168-69 (2d Cir. 2002)).

ACC, and all but two of the Obligor Debtors, are incorporated in Delaware. (The two non-Delaware Obligor Debtors are incorporated in Connecticut and Virginia, whose law, defendants have shown, is substantially the same as that of Delaware in relevant respects; see Def. Mem. at 9 n.10.) The Court thus follows Delaware law on the issue of standing.

3.

Delaware law on the issue in question is found in two recent decisions of the Delaware Supreme Court, Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), and In re J.P. Morgan Chase & Co. S'holder Litig., 906 A.2d 766 (Del. 2006).

Tooley says that the standard for determining whether a claim is direct, i.e., one that a shareholder can bring in its own right, or derivative, turns solely on "(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)." 845 A.2d 1033. Tooley further states that: "The stockholder's claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation." Id. at 1039.

ART argues that there are applicable exceptions to this rule. Three of the decisions it cites, however -- General Rubber Co. v. Benedict, 215 N.Y. 18 (N.Y. 1915) (Cardozo, J.), Quantel Corp. v. Niemuller, 771 F.Supp. 1361 (S.D.N.Y. 1991), and In re First Cent. Fin. Corp., 269 B.R. 502 (Bankr. 2001) -- apply New York law, not Delaware law, which governs.

One of ART's cases -- Case Fin., Inc. v. Alden, Civ. No. 1184 VCP, 2009 WL 2581873 (Del. Ch. Aug. 21, 2009) -- does apply Delaware law. There, the Vice Chancellor noted Tooley, but departs from it to the extent that he concluded that the defendant that was sued by the plaintiff corporation with respect to conduct by the defendant while an officer of the plaintiff corporation's subsidiary, was also an officer and director of the plaintiff parent corporation, to which he owed (and was alleged by his conduct to have breached) fiduciary obligations. That pattern is not present in this case, however, where the defendants are only alleged aiders and abettors of persons (the Rigases) who had fiduciary obligations to ACC. ART has not shown any authority or persuasive rationale to extend the exception to Tooley found in Case Financial to include aiders and abettors.

4.

ART suggests that the Court may have passed on the present issue in its January 17, 2008 Memorandum and Order, 390 B.R. 64, deciding appeals from ...


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