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In Re: Adelphia Recovery Trust v. Hsbc Bank Usa

February 8, 2011

IN RE: ADELPHIA RECOVERY TRUST ADELPHIA RECOVERY TRUST, SUCCESSOR TO THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF ADELPHIA COMMUNICATIONS CORPORATION, DEFENDANT-CROSS-CLAIMANT-APPELLANT,
v.
HSBC BANK USA, NATIONAL ASSOCIATION, FLEET NATIONAL BANK, KEY BANK NATIONAL ASSOCIATION, PLAINTIFFS-CROSS-CLAIMANTS-APPELLEES.



Appeal from a judgment of the United States District Court for the Western District of New York (Arcara, J.), affirming in part and reversing in part the judgment of the United States Bankruptcy Court for the Western District of New York (Kaplan, Bankr. J.).

The opinion of the court was delivered by: Hall, Circuit Judge:

09-0799-bk(L)

In re: Adelphia Recovery Trust

Argued: November 4, 2009;

Amended February 9, 2011

BEFORE: B.D. PARKER, HALL, and LYNCH, Circuit Judges.

The district court barred the Adelphia Recovery Trust from pursuing fraudulent conveyance claims against the appellee banks. AFFIRMED.

This case requires us to decide whether a debtor-in-possession is barred from bringing fraudulent conveyance claims against three banks because it actively participated in and facilitated a sale of the assets of a different debtor-in-possession, to which it was a creditor, while remaining silent about the possibility that it would bring fraudulent conveyance claims with respect to its prior take-outs of loans secured by those assets. The bankruptcy court (Kaplan, Bankr. J.) concluded that such a claim was barred as against only one of the banks, because only that bank actively participated in the hearing to confirm the sale. The district court (Arcara, J.) affirmed in part and reversed in part, and held that the fraudulent conveyance claims were barred as to all of the banks by four separate and independent doctrines: ratification, res judicata, judicial estoppel, and quasi-estoppel.

As we shall explain, we perceive difficulties with the district court's ratification analysis, but agree with it that res judicata bars the fraudulent conveyance actions with respect to the bank that actively participated in the sale hearing. We also agree with the district court that judicial estoppel bars those actions against the other two banks, and we therefore affirm that court's judgment.

BACKGROUND*fn1

I. The parties and other relevant entities

Because this case has many corporate players and has played out in numerous forums across the years, we set forth the following dramatis persone.

a. Adelphia Communications Corporation ("Adelphia Corp.")

Adelphia Corp. was once the fifth-largest cable television company in the United States. It was founded by John Rigas in the early 1950s, and became a public corporation in 1986. In June 2002, Adelphia Corp. filed for bankruptcy, all shareholder value was lost, and John Rigas and his son Timothy Rigas were subsequently convicted of bank fraud and securities fraud for looting the company. See United States v. Rigas, 490 F.3d 208, 211-14 (2d Cir. 2007). Adelphia Corp.'s bankruptcy proceedings took place in the Bankruptcy Court for the Southern District of New York (the "Adelphia bankruptcy"). In this opinion, the term "Adelphia Corp." shall be used exclusively to refer to the pre-bankruptcy corporation. When referring to actions taken by the company after it filed for bankruptcy but before its Chapter 11 Plan of Reorganization was confirmed, this opinion will refer to the "Adelphia Debtor-in-Possession" ("Adelphia D-I-P").

b. Adelphia Recovery Trust (the "ART")

The ART, the appellant here, is a Delaware statutory trust created pursuant to the Chapter 11 Plan of Reorganization that was confirmed by the Adelphia bankruptcy court in February 2007. It is the successor entity to the Official Committee of Unsecured Creditors of Adelphia Corp. (the "Committee"), and it is authorized by the Plan to pursue certain causes of action held by Adelphia Corp. and to administer the proceeds from those causes of action on behalf of holders of interests in the ART. Under the terms of the Plan, Adelphia Corp.'s creditors and its equity holders received various combinations of interests in the ART, cash, stock in Time Warner Cable (whose stock was used as part of the purchase price of Adelphia Corp. at the bankruptcy sale), and rights to excess reserves. See generally http://www.adelphiarestructuring.com/RecoveryTrust.aspx (last visited January 17, 2011). This case arises from one of the many causes of action the ART is authorized to pursue.

c. Niagara Frontier Hockey, L.P. ("NFHLP")

NFHLP was a Delaware partnership formed in March 1998, and its main assets were the Buffalo Sabres (a franchise of the National Hockey League) and an interest in the HSBC Arena, home to the Sabres. NFHLP ran the hockey team and the arena through wholly-owned subsidiary companies, including Crossroads Arena, LLC ("Crossroads") and Buffalo Sabres Concession, LLC ("BSC"). In July 2000, John Rigas and his sons, using Adelphia money, bought out the limited partners of NFHLP. In January 2003, NFHLP and it subsidiaries filed for bankruptcy in the Bankruptcy Court for the Western District of New York (the "NFHLP bankruptcy").

d. Patmos, Inc.

Patmos is a Delaware corporation incorporated in March 1998. John Rigas was the president of Patmos, and his sons were executive vice presidents. Patmos was wholly owned by John Rigas and members of his immediate family. In July 2000, Patmos became the General Partner of NFHLP.

e. Sabres, Inc.

Sabres, Inc., is a Delaware corporation incorporated in May 1995 and a wholly owned subsidiary of Adelphia Corp. As of 2000, John Rigas and his sons comprised all of the directors of Sabres, Inc. This opinion will always refer to this corporate entity as "Sabres, Inc.," and to the hockey team itself as "the Sabres" or "the hockey team." Sabres, Inc., was NFHLP's largest creditor at the time NFHLP filed for bankruptcy, for reasons that will become apparent. Sabres, Inc., filed for bankruptcy in June 2002, simultaneously with Adelphia, its parent.

f. The banks

The appellees here are three national banking associations: HSBC Bank USA, N.A. ("HSBC"), Fleet National Bank ("Fleet")*fn2 , and Key Bank, N.A. ("Key"). This opinion will refer to the three collectively as the "Banks."

II. The loans are made

In the 1990s, NFHLP and its wholly owned subsidiaries took out the following three loans with the Banks. Pursuant to these three loans, the Banks had security interests in substantially all of NFHLP's assets.

a. The Construction Loan

In May 1995, Crossroads borrowed $35 million pursuant to a "Building Loan Contract" agreed to by Crossroads, HSBC, Key, and Fleet. On this loan, HSBC was the agent, and HSBC, Key, and Fleet were all lenders. The purpose of this loan was to enable the construction of a new arena for the hockey team.

b. The Concession Loan

At the same time that Crossroads took out the Construction Loan, BSC borrowed $32.5 million pursuant to a "Concession Loan Agreement" agreed to by BSC, Fleet, and Key. On this loan, Fleet was the agent, and Fleet and Key were the lenders. The purpose of this loan was to finance food and concession equipment at the hockey team's new arena.

c. The Revolver Loan

In February 1997, NFHLP -- this time borrowing in its own name rather than through any subsidiary -- opened a revolving line of credit, up to a maximum of $12 million, with Fleet. The purpose of this loan ...


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