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Adelphia Recovery Trust v. Key Bank National Association

May 18, 2012

ADELPHIA RECOVERY TRUST, PLAINTIFF,
v.
KEY BANK NATIONAL ASSOCIATION, HSBC BANK USA, NATIONAL ASSOCIATION AND FLEET NATIONAL BANK, DEFENDANTS.



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

DECISION AND ORDER

Introduction

This case requires the Court to determine whether the silence of a Chapter 11 debtor-in-possession in response to an inquiry by a bankruptcy judge while presiding over an asset-sale hearing in a closely-related debtor's bankruptcy about others' interests in the assets gave rise to judicial estoppel. For the reasons described herein, this Court concludes that because Plaintiff, Adelphia Recovery Trust, actively participated in, facilitated and benefitted from the release of loans and sale of assets during the hearing, without disclosing potential claims, judicial estoppel bars Plaintiff from now asserting those claims.

Background

The Court assumes the parties' familiarity with the relevant facts and prior proceedings in this case, which are summarized by the Second Circuit in Adelphia Recovery Trust v. HSBC Bank, USA, N.A., 634 F.3d 678, 682-89 (2d Cir. 2011) ("Adelphia Recovery Trust") and in this Court's prior determination in HSBC Bank USA, N.A. v. Adelphia Communication Corp., No. 07-cv-553A, 2009 WL 385474 at *1-6 (WDNY February 12, 2009). As the Second Circuit acknowledged in Adelphia Recovery Trust, "the facts of this case are, to put it mildly, enormously complex." 634 F.3d at 682. Therefore, this Court has endeavored to simplify the facts by including only the relevant facts and prior proceedings necessary for determining the issues presented here.

The Buffalo Sabres Loans

During the 1990s, Key Bank National Association ("Key Bank"), HSBC Bank USA, National Association ("HSBC") and Fleet National Bank ("Fleet Bank") (collectively referred to as the "Banks") were lenders to Niagara Frontier Hockey, LP ("NFHLP"). NFHLP owned the Buffalo Sabres, a professional hockey team.

On May 10, 1995, the Banks entered into two loans with NFHLP. The loans had a combined face value of $67.5 million. These loans were provided to NFHLP for the building of the HSBC arena. HSBC arena is the Buffalo Sabres home hockey rink, located in Buffalo, New York. One loan, totaling $35 million, was made to finance the construction of the HSBC arena (the "Construction Loan"). The second loan, totaling $32.5 million, was made to finance food and concession equipment at the new arena (the "Concession Loan"). On February 28, 1997, NFHLP and Fleet Bank entered into a third loan which established a revolving line of credit in favor of NFHLP in the principal amount of $12 million (the "Revolver Loan"). Throughout this opinion, the Construction, Concession and Revolver Loans are collectively referred to as the "Buffalo Sabres Loans" or the "Loans".

In 2000, the Banks decided to sell all of their interests in the Buffalo Sabres Loans to Adelphia Communications Corporation ("Adelphia"), through its subsidiary, Sabres, Inc. Adelphia was a publicly traded cable company founded by John Rigas ("Rigas"). At its peak, Adelphia was the fifth-largest cable company in the United States. Sabres, Inc. was a Delaware corporation and a wholly owned subsidiary of Adelphia. The sole members of the Sabres, Inc. board of directors were members of the Rigas family.

Adelphia (through Sabres Inc.) paid approximately $34.1 million to acquire the Construction and Revolver Loans from the Banks. The sale of the Concession Loan was never finalized because consent of a third party could not be obtained. Instead, in 2002 and 2003, Adelphia made close to $14 million in principal and interest payments to the Banks on the Concession Loan on NFHLP's behalf.

At or around the same time that the Banks sold the Construction and Revolver Loans to Adelphia, the Rigas family acquired NFHLP. This acquisition was carried out through Patmos, Inc., a Delaware corporation whose shareholders consisted only of John Rigas and other members of the Rigas family. Plaintiff maintains that because NFHLP was in default on the Buffalo Sabres Loans and at risk of bankruptcy, Rigas and the Banks agreed that if Adelphia (through Sabres, Inc.) purchased the Loans, the Banks would give the necessary consent for the Rigas' (through Patmos) to purchase NFHLP and become the sole owners of the hockey team. In order to facilitate the acquisition and recapitalization of NFHLP, Rigas caused Adelphia to transfer approximately $10 million to buy out the limited partners of NFHLP. Plaintiff claims that the Banks were "intimately involved" in the discussions that resulted in the Rigas' acquisition and recapitalization of NFHLP.

The sale of the Buffalo Sabres Loans to Adelphia and the acquisition and recapitalization of NFHLP by Rigas enabled the Banks to prevent default or losses on the Loans. At this time, Adelphia was a publically traded company controlled by the Rigas family as majority shareholders, and the Rigas' were the equitable owners of NFHLP. Thus, these transactions left the Rigas family with a continued majority interest in Adelphia, ownership of NFHLP and control over the Buffalo Sabres hockey team. Further, these transactions created a situation where Adelphia was creditor and NFHLP was debtor. It is alleged that after the Loans were sold and Adelphia became NFHLP's largest secured creditor, Rigas caused Adelphia to invest over $200 million in NFHLP, despite inadequate benefit to Adelphia and detrimental effects on Adelphia's shareholders and creditors.

It was the Banks' role in the sale of the Buffalo Sabres Loans to Adelphia and the acquisition and recapitalization of NFHLP by Rigas that would ultimately lead the Plaintiff in this action to bring fraudulent conveyance and aiding and abetting a breach of fiduciary duty claims against the Banks.

The Bankruptcies and Sale of NFHLP

In March of 2002, Adelphia disclosed publically that Rigas family members and affiliates had used Adelphia funds for personal purposes. In fact, it was disclosed that through massive financial fraud, the Rigas family and affiliates had borrowed approximately $2.3 billion that had not been listed on Adelphia's balance sheets. The company was potentially liable for billions of dollars in Rigas family debts. Soon thereafter, the NASDAQ exchange announced that it would delist Adelphia stock. In sum, Adelphia was facing complete financial collapse.

In June 2002 Adelphia filed for bankruptcy protection in the Bankruptcy Court for the Southern District of New York ("Adelphia Bankruptcy"). A month later, Rigas was arrested for bank, wire and securities fraud. He was ultimately sentenced to fifteen years in federal prison for looting the company and concealing approximately $2.3 billion in liabilities from Adelphia investors and creditors. See United States v. Rigas, 490 F.3d 208, 211-214 (2d Cir. 2007).

In January 2003 NFHLP filed for bankruptcy protection in the Bankruptcy Court for the Western District of New York ("NFHLP Bankruptcy"). Shortly thereafter, Hockey Western LLC ("Hockey Western") agreed to purchase NFHLP's assets. Because Adelphia owned the Construction and Revolver Loans and made significant payments on NFHLP's behalf with respect to the Concession Loan, Adelphia was NFHLP's largest secured and unsecured creditor. Therefore, Adelphia was given permission to appear as creditor in the NFHLP Bankruptcy at the asset-sale hearing. Since Adelphia was, by far, the largest creditor of NFHLP, its claims had the potential to swamp those of all other creditors.

Counsel for Adelphia appeared at the NFHLP asset-sale hearing by telephone. By law, Adelphia, which was by the time of the hearing operating under new management, had the rights, powers and responsibilities of a trustee in bankruptcy and debtor-in-possession. See 11 U.S.C. §1107(a). As debtor-in-possession, it was the official representative of the Adelphia bankruptcy estate. See 11 U.S.C. §323(a).

At the asset-sale hearing, Adelphia entered into a Stipulation and Order agreeing to fully release the liens, security interests and guarantees that it held as collateral for the Construction and Revolver Loans. Adelphia further agreed that the proceeds of the sale could be used to pay off the Concession Loan. Specifically, Adelphia represented to the bankruptcy court that it was releasing its rights to the collateral supporting the Buffalo Sabres Loans so that NFHLP could be sold "free and clear" to Hockey Western, the hockey team could stay in Buffalo, and the claims against NFHLP would not be overwhelmed by Adelphia's claims. 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 since the Rigas' had acquired NFHLP in March of 2000. Adelphia consented to a "cash out" amount of $21.4 million for the Concession Loan.

Also during the asset-sale hearing, counsel for Adelphia stated that as consideration for releasing its rights to the Construction and Revolver Loans, Adelphia would receive: (1) the release of two letters of credit totaling $27.6 million; and (2) assumption of an agreement for broadcast rights to the Buffalo Sabres for five years. Further, Adelphia would be relieved of its obligation to continue making cash advancements--which between March 2000 and January 2003 were between $26 and $35 million--to the Buffalo Sabres franchise in order to protect its collateral.

At the time of the asset-sale hearing, the Banks were also creditors of NFHLP. Fleet Bank appeared at the sale hearing, but HSBC and Key Bank did not. During the hearing, in an effort to ensure a proper asset sale and a complete resolution of all potential claims, the bankruptcy judge asked repeatedly whether everyone who had a legal, equitable or beneficial interest in the assets of any of the debtors had either appeared or signed a stipulation. The bankruptcy judge also specifically asked whether any party wished to be heard (regarding anything having to do with the asset sale) or make an objection to the sale. No one, including Adelphia, said a word. In concluding that all necessary parties to the asset-sale were present, 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 anyone 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 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.

See Adelphia Recovery Trust v. HSBC Bank, USA, N.A., 634 F.3d 678, 686 (2d Cir. 2011) (quoting Tr. of Bankruptcy Sale Hearing at 42); HSBC Bank USA, N.A. v. Adelphia Communication Corp., No. 07-cv-553A, 2009 WL 385474 at *11 (WDNY February 12, 2009) (quoting same)

Despite the bankruptcy judge's questioning, Adelphia's counsel never mentioned that it might file fraudulent conveyance claims or aiding and abetting a breach of fiduciary duty claim against the Banks based upon the Banks' sale of the Buffalo Sabres Loans to Adelphia, payments made by Adelphia on the Loans, or the acquisition and recapitalization of NFHLP. As a result of the representations made by Adelphia and the other parties in attendance, including Adelphia's silence about potential causes of action against the Banks, the bankruptcy court issued an order approving Adelphia's release of its interests in the Buffalo Sabres Loans as well as the "free and clear" sale of NFHLP's assets to Hockey Western.

The Southern District Adversary Proceeding

In July 2003, less than three months after Adelphia appeared at the sale hearing and agreed to fully release its interests in NFHLP's assets, Adelphia and the Official Committee of Unsecured Creditors of Adelphia Communications Corporation (now "Adelphia Recovery Trust") (the "Trust")*fn1 filed a complaint in the Southern District of New York against hundreds of defendants, including the Banks ("Southern District Adversary Proceeding"). In the multi-party, multi-count complaint, the Trust claimed that the named defendants, including the Banks, helped perpetrate frauds committed by the Rigas family. Claims 17-24 of the Complaint alleged fraudulent conveyances on the part of the Banks for receiving millions of dollars from Adelphia as part of the Buffalo Sabres Loan transactions (the "fraudulent conveyance claims").

The Trust specifically alleged that the March 2000 transfer of $34.1 million by Adelphia (through Sabres, Inc.) to the Banks in exchange for the Banks' interests in the Construction and Revolver Loans was an intentional or constructive fraudulent conveyance. The Trust also alleged that the transfer of approximately $14 million by Adelphia to the Banks for payment of principal and interest on the Buffalo Sabres Loans were further fraudulent conveyances. In sum, the Trust claimed the Banks knew that the Loan sales and the principal and interest payments made by Adelphia were accomplished only to ...

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