# In Re Adelphia Communications Corp.

> United States Bankruptcy Court, S.D. New York · January 23, 2006 · 336 B.R. 610

URL: https://www.frixlaw.com/law-library/cases/1950950

## Case

- **Full name:** In Re ADELPHIA COMMUNICATIONS CORP., Et Al., Debtors
- **Court:** United States Bankruptcy Court, S.D. New York
- **Decided:** January 23, 2006
- **Citations:** 336 B.R. 610; 45 Bankr. Ct. Dec. (CRR) 260; 2006 Bankr. LEXIS 75; 2006 WL 177159
- **Precedential status:** Published
- **Opinion:** Opinion by Gerber
- **Judges:** Robert E. Gerber
- **Cited by:** 42 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/1950950

## How later opinions describe it (automated extraction)

- discussing how prevalent inter-debtor issues are, and how they had been addressed in other cases

## Opinion text

DECISION ON MOTIONS BY AD HOC COMMITTEE OF ARAHOVA NOTEHOLDERS TO APPOINT TRUSTEE OR NONSTATUTORY FIDUCIARY; TO DISQUALIFY COUNSEL; AND TO TERMINATE EXCLUSIVITY
ROBERT E. GERBER, Bankruptcy Judge.
In this contested matter under the umbrella of the jointly administered chapter 11 cases of Adelphia Communications Corporation (“Adelphia Parent”) and its subsidiaries, the Ad Hoc Committee of Araho-va Noteholders (the “Arahova Noteholders Committee”)—holders of bond debt issued by Arahova Communications Inc. (“Araho-va”), an intermediate subsidiary of Adelp-hia Parent, one of the 231 debtors (the “Debtors”) whose chapter 11 cases are being jointly administered in this Court— moves for orders:
(1)appointing a chapter 11 trustee for Arahova (which is a holding company) and its operating company subsidiaries (together, the “Arahova Debtors”), or, alternatively, (a) directing the recusal of the Arahova Debtors’ officers and directors with respect to interdebtor disputes (the “Interdebtor Disputes”), and (b) ordering the appointment of nonstat-utory fiduciaries—“independent” officers and directors—and “unconflicted counsel” to represent the Arahova Debtors in intercreditor disputes (the “Intercreditor Disputes”) now pending in this Court, described more fully below (the “Trustee Motion”);
(2) disqualifying Willkie Farr & Gallagher (“WF & G”), the counsel that has represented all of the debtors since these chapter 11 cases were filed 3-1/2 years ago, from representing (a) the Ar-ahova Debtors, and (b) any of the other debtors, in the Interdebtor Disputes (the “Disqualification Motion”);
1
and
(3) terminating the Arahova Debtors’ exclusive right (now held, in common with all of the other debtors in the Adelphia corporate family) to file a reorganization plan—referred to, in bankruptcy parlance, as “exclusivity” (the “Exclusivity Motion”).
2
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The motions rest on a factual predicate that is common in multi-debtor chapter 11 cases (especially large ones), in this district and elsewhere. In multi-debtor cases, individual debtors frequently, if not always, have actual or arguable obligations to each other—by reason of money lent, or funds or other assets having been transferred, from one debtor to another; by reason of one debtor having provided or obtained services for other debtors; by reason of allocations of overhead or charges for shared facilities or other property; or by reason of other interdebtor dealings. As corporate families grow in size to achieve economies of scale, and to avoid duplication of services as between individual family members, the number and complexity of such dealings and relations increase. In many instances (typically varying from ease to case), the amount one debtor owes to another as a result of such dealings is undisputed or ultimately is not material. But in many other instances, it is not.
As creditor recoveries from particular debtors rise or fall as a function of the assets and liabilities of the particular debtors with whom those creditors dealt, and particular debtors in a corporate family frequently also dealt with each other or used property or services provided by each other, intercreditor disputes frequently arise with respect to the appropriate treatment of such individual debtors’ transactions with each other; with respect to the allocation of value, after an asset sale, for assets that had been contributed by many individual debtors; with respect to liability for expenses incurred on behalf of multiple debtors; or for a host of other reasons, limited only by the creativity of creditor counsel in finding bases to increase their clients’ shares of the collective pie.
3
*618
The motions, especially the first two of them, raise the issue whether, as a matter of law or an exercise of the Court’s discretion, chapter 11 trustees, or some kind of nonstatutory fiduciaries (assuming that appointment of the latter is permissible under the Code) must be appointed for individual debtors in a multi-debtor chapter 11 case with such interdebtor disputes, and what actions debtors and their counsel, and/or bankruptcy courts, must take when such intercreditor or interdebtor disputes arise. But in this case, the Court does not need to decide those issues in their broadest form, and instead decides them under the particular facts that the Court finds to be present here. In this case, the Debtors and their counsel:
—focused their efforts on maximizing value for every debtor;
—never acted adversely to the interests of any individual debtor;
—proposed a mechanism (thereafter approved, with some fine-tuning, by this Court) for the Intercreditor Disputes to be litigated in a fashion that would give the creditors whose ox might be gored in the controversy a fair and full opportunity to press their respective positions (and where the creditors affected by the outcome would have the incentive, and the resources, to press their respective interests);
4
and
—stayed neutral in the Intercreditor Disputes, and have confirmed their intention to remain so, proposing a reorganization plan that would effectively escrow the disputed value pending further determinations of the Court on the in-tercreditor issues.
The Court further decides these motions in the context of the fact that—using the words of the Arahova Noteholders Committee’s own counsel—the motions represent the “nuclear war button,”
5
with devastatingly adverse consequences that would result if the Arahova Noteholders Committee’s Trustee Motion were granted, too numerous to list in this summary here.
And the Court further decides these motions in light of the compelling inference that the motions were filed as part of a scorched earth litigation strategy that would provide the Arahova Debtors with little benefit that they do not already have (trumped, dramatically, by a resulting prejudice to the Arahova Debtors themselves, along with all of the other Debtors), and which would have the effect (and, the Court believes, the purpose) of imperiling the pending Time Warner/Comcast trans
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action and the Debtors’ DIP financing in an effort to extract a greater distribution, sidestepping the Court-approved process for determining the Intercreditor Dispute issues on their respective merits.
Finally, the Court is troubled, to say the least, by the 11th hour time at which the conflict issues were raised, when the supposedly disabling conflicts were apparent 3-1/2 years ago. If the concerns were material and genuine; if the appointment of trustees or nonstatutory fiduciaries was truly necessary; and/or if the more traditional means of letting creditors negotiate out, or litigate, intercreditor issues were unsatisfactory, creditors in this case, and/or the committees acting for them, would have sought this relief long ago. The Court does not need to address whether the delay gives rise to a waiver, estoppel, or even laches; the circumstances instead go to the motions’ bona fides. The Court’s concerns as to the motions’ bona fides are amplified by the Ara-hova Noteholders Committee’s entry into a standstill agreement under which these supposedly critical motions would not be pressed while negotiations as to its recovery under the reorganization plan progressed.
Facts like these would make granting these motions a dreadful exercise of the Court’s discretion, and the relief the Ara-hova Noteholders seek here thus would appropriately be granted only if such relief were required as matter of law. But except in one respect (where WF & G has already acted, and largely made the motions moot), it is not. To the contrary, it is quite clear, in this Court’s view, under the Bankruptcy Code and the case law, that there is no requirement of law, nor should there be one, that says that any time interdebtor disputes exist in a multi-debtor chapter 11 case, and a creditor constituency is upset that it may not be paid in full, independent fiduciaries (of any kind) must be appointed for any or all of the individual debtors so affected. The imposition of any such requirement would represent a sea change in the law and in chapter 11 practice, with a highly destructive effect on the manner in which multi-debtor chapter 11 cases are run. As importantly or more so, any such rule would in nearly all, if not all, such cases have a material adverse effect on creditor recoveries.
Under the Code and the relevant case-law, in this Court’s view, the existence of interdebtor disputes, even material ones, is not by itself cause for the appointment of a trustee or (assuming one might be permissible) a nonstatutory fiduciary. The existence of such disputes must instead be considered as one of many factors—including, most significantly, the advantages and disadvantages to affected creditors that would result from the desired appointment; the existence of less damaging alternatives; and the extent to which the alternatives would address legitimate needs and concerns with fairness, due process and appropriate advocacy.
The record here does not come close to satisfying the requirements of section 1104(a)(1) of the Code, requiring the appointment of a trustee for debtor wrongful conduct or mismanagement. And while section 1104(a)(2) of the Code authorizes discretionary appointment of a trustee where such is in the interests of creditors, the record here does not support that either. Indeed, the appointment of a trustee for Arahova and/or its subsidiaries under these facts would be
antithetical
to creditor interests, subjecting them to actual and potential prejudice in many ways, with no corresponding benefit.
Then, the Court does not need to decide broad issues as to the extent to which nonstatutory fiduciaries can be appointed under the Code (or whether a debtor’s
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continued possession in a chapter 11 case can be conditioned, under section 1107 of the Code or otherwise, on the appointment of nonstatutory fiduciaries). The Court has considerable doubt that section 1107(a) can be used to appoint a trustee equivalent. But even assuming,
arguendo,
that nonstatutory fiduciaries
could
be appointed, the Court could not appropriately
require
their appointment without at least a showing akin to that which the Second Circuit requires in other instances where it has authorized the deputization of nonstat-utory fiduciaries on behalf of an estate— that the deputization be in the best interests of the estate, and that it be necessary and beneficial to the fair and efficient resolution of the bankruptcy proceedings. No such finding could appropriately be made here.
The Court pauses, at the risk of stating the obvious, to make its thinking clear. Where interdebtor issues exist and are material, they cannot, of course, be swept under the rug. Even though consensual resolution is the normal (and preferred) practice, some means, consistent with fairness, due process, and appropriate advocacy, must be formulated to resolve them if those issues cannot be settled. But the means established to resolve them should be the least destructive available. And neither the interests of a debtor’s creditor body, nor the integrity of the bankruptcy system, can tolerate the use of motions like these as a tactic to assist creditor groups wishing to augment their personal recoveries.
The motions to appoint a trustee for the Arahova Debtors, or, alternatively, to require the appointment of nonstatutory fiduciaries, are denied. The motions for an order directing the Arahova Debtors’ officers and directors to recuse themselves on interdebtor issues, and to disqualify WF & G from representing the Arahova Debtors and any of the other debtors in the Inter-debtor
Disputes—i.e.,
to ensure the continuing neutrality of each—are granted; without finding that present management or WF
&
G have in any way acted inappropriately to date, the Court believes that their voluntary neutrality in such disputes, as a prophylactic measure, should be mandatory. The motion to terminate the Ara-hova Debtors’ exclusivity is denied.
The following are the Court’s Findings of Fact, Conclusions of Law, and bases for the exercise of its discretion in connection with the motions.
Findings of Fact
The motions raised material disputed issues of fact, requiring an evidentiary hearing over three days, and development of an extensive factual record. The motions also required this Court to bring to the table the knowledge of these cases—most significantly their history, and the matters that had to be, and will have to be, decided— that it acquired over the 3-1/2 years that these cases have progressed under this Court’s watch. The factual record underlying these motions thus came to be extraordinarily detailed, and it would be manifestly impractical, in the Court’s view (particularly for a decision that must be issued in “real time”) for the Court to discuss in detail every factual finding it could or did make.
6
As the most sensible alternative, the Court regards it as best first to address the critical background; the most important of the underlying facts (most of which are historical or otherwise not subject to serious dispute); and its factual findings with respect to the disput
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ed issues.
7
A. Relevant History and Events
1. Background
Adelphia, one of the largest cable companies in the United States, was founded by John J. Rigas, who later brought his sons and other members of his family into the business. Over the years, Adelphia grew substantially, principally as a result of acquisitions, many of which were financed by borrowings. With the acquisitions, Adelphia became much larger, and its operations became much more complex. Additionally, the Rigases themselves owned a number of cable companies and other, non-cable, assets through a variety of corporations, partnerships, and LLCs (together, “Rigas Family Entities”). The day-to-day affairs of the Rigas Family Entities that were cable companies were managed by Adelphia. Those cable companies have been referred to, in this Court and elsewhere, as “Managed Entities.”
By 2002, John Rigas and members of his family occupied the top officer positions at Adelphia, and many (but not all) of the seats on its Board of Directors (the “Board”). In March 2002, Adelphia disclosed that it was jointly and severally liable for more than $2 billion of borrowings attributed to certain of the Managed Entities under credit facilities (the “Co-Borrowing Facilities”) that were not reflected as debt on Adelphia’s consolidated financial statements. It also appeared that a portion of the borrowings for which Adelphia entities were jointly and severally liable had been advanced to various Rigas Family Entities to finance purchases of Adelphia securities.
In the aftermath of this disclosure, the stock of Adelphia Parent was delisted from the NASDAQ National Market; De-loitte & Touche LLP (“Deloitte”), the Debtors’ independent auditor at that time, suspended its auditing work on Adelphia’s consolidated financial statements for the year that ended December 31, 2001, and withdrew its opinion for prior consolidated financial statements. Adelphia and its subsidiaries ultimately defaulted under various credit facilities, notes and preferred stock.
In addition, a special committee of the Board, composed of three members of the Board who were not members of the Rigas Family, commenced a formal investigation into related party transactions between
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Adelphia entities and Rigas Family Entities and Rigas Family members. This investigation led to the public disclosure of previously undisclosed information about the Rigas Family’s co-borrowing activities, related party transactions, and involvement in accounting irregularities. In May 2002, the Rigases resigned their positions as officers and directors of Adelphia.
With no access to traditional sources of liquidity in the capital markets, pending governmental agency investigations, mounting litigation, default notifications under various credit instruments, and the resulting risk of collection and foreclosure actions by creditors, the Debtors filed for chapter 11 protection in June 2002.
At this point, the chapter 11 cases of 231 individual Debtors are being jointly administered in the Adelphia chapter 11 cases, on this Court’s watch. The Debtors’ presently proposed reorganization plan (the “Present Plan”)—which, more precisely, consists of 18 separate plans—calls for a partial (but not total) substantive consolidation.
8
But at least up to this time, none of the individual Debtors’ estates have been substantively consolidated.
2. Early Case Proceedings
As is customary in chapter 11 cases, the Court considered, very shortly after the filing of the bulk of the Adelphia cases,
9
“first day” orders, which included, as relevant here, orders approving the Debtors’ continuation of their centralized cash management system and the Debtors’ retention of professionals, including counsel. The Court approved the retention of WF & G by all of the Debtors to provide them with, among other things, “general restructuring advice.” Additionally, the Court approved postpetition financing—referred to in bankruptcy parlance as “DIP Financing”-—in the original maximum amount of $1.5 billion (now $1.3 billion), to be used for operations and capital expenditures.
Shortly thereafter, the U.S. Trustee formed the Creditors’ Committee. As originally appointed by the U.S. Trustee, the Creditors’ Committee was well balanced, and included trade creditors (Home Box Office, Viacom, and Seientific-Atlan-ta); bondholder creditors of Adelphia Parent; Law Debenture Trust Co. (the indenture trustee for the Adelphia Parent bonds); bondholder creditors of subsidiaries like Arahova;
10
and U.S. Bank, the indenture trustee for the Arahova (and also FrontierVision) bonds.
11
However, as described more fully below, distressed debt traders and other investors
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in claims have been a major presence in these cases, and since the filing of these cases in 2002, there was a substantial turnover in the membership of the Creditors’ Committee. By March 2004, the Creditors’ Committee had lost most of its Adelp-hia Parent bondholder membership (though it continued to include a major bondholder who, to the Court’s understanding, had positions at both the Adelp-hia Parent and subsidiary levels), and by July 2004, the Creditors’ Committee lost each of the original three trade debt members, though an acquirer of trade claims had joined the Creditors’ Committee in December 2003. The lack of a meaningful presence on the Creditors’ Committee of Adelphia Parent bondholders became a matter of concern to the Court, and it was remedied in May 2005, with the appointment of two additional members to the Creditors’ Committee that the Court understands to be holders of Adelphia Parent debt.
The members of the Creditors’ Committee, all of whom were parties to confidentiality agreements, had access to a great deal of information with respect to the Debtors—including, without limitation, financial information generally, and information as to interdebtor issues in particular. But even in 2002, those reviewing public information (such as operating reports) could see interdebtor issues, and perceptive creditors (such as Appaloosa) could see interdebtor issues even from the pre-petition SEC filings issued during the Ri-gas era.
Also in the opening weeks of these cases, the U.S. Trustee appointed the Equity Committee, as the ultimate value of the Debtors was uncertain, and it was possible that there might be residual value for equity.
S. Early Case Stabilization Matters
During the first year of these cases, the Rigases were gone, but getting senior replacement management to take their place was a major undertaking. During that time, the Debtors were led by interim management that lacked significant cable experience, operating under a Board consisting of the former independent directors (the “Carry-Over Directors”). By necessity, interim management focused on stabilizing operations, identifying and hiring an experienced successor management team, creating state-of-the-art corporate governance structures, and conducting an investigation of the Rigases’ activities. Early on, the Board also commenced work on establishing better corporate governance procedures, which would give the Debtors’ creditors (and, significantly, the United States Department of Justice (“DoJ”) and the SEC) comfort that transgressions of the type perpetrated during the Rigas era would not recur.
From August 2002 through July 2003, the Carry-Over Directors began to reconstitute the Board with new independent directors. In addition, because prior to May 2002 virtually all of the directors of Adelphia Parent’s subsidiaries were members of the Rigas Family, the Debtors appointed a new slate of directors to each of the subsidiary boards. When interim management was replaced in the Spring of 2003, the subsidiary management and boards were reconstituted yet again.
In early 2003, the Debtors (with extensive input from the Creditors’ Committee) replaced interim management with permanent executives who have substantial cable experience. After an evidentiary hearing (at which the Court considered objections on the part of the Equity Committee and a few other constituencies, principally with respect to the executives’ compensation), the Court approved the Debtors’ motion,
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widely supported by the Debtors’ creditors, for approval of the employment contracts of William Schleyer and Ronald Cooper, their present CEO and COO, respectively.
12
The Debtors thereafter hired Vanessa Wittman, their CFO.
13
Then and only then, in the second year of these cases, once new management was in place and all of the Debtors’ boards were reconstituted, the Debtors were able to turn their attention to the Debtors’ restructuring.
U. Debtors’ Efforts With Respect to Their Accounting Records
In light of the fiscal mismanagement and fraud on the part of the Rigases, the Debtors initiated investigations and engaged forensic accountants. After the filing of their chapter 11 cases, the Debtors’ accounting personnel initiated an analysis, review, and in certain cases, reconstruction of Adelphia’s historical books and records (the “Restatement”). It included:
(a) an attempt to re-audit and restate financial statements for 1999 and 2000;
(b) the preparation of financial statements for 2001, 2002 and 2003; and
(c) the review of over 7 million lines of intercompany transactions (the “In-tercompany Transactions”).
The Restatement was a massive undertaking that was critical to the reorganization effort that was about to begin. By ensuring that the Debtors’ financial records and statements would be presented in accordance with generally accepted accounting principles (“GAAP”), the Debtors could obtain an audit opinion from Price-waterhouseCoopers LLP (“PwC”), the Debtors’ new independent accountants. The Debtors believed that audited finan-cials would be required by either a buyer if their business was sold, or by the SEC if they were to emerge as standalone companies.
Although the Debtors initially intended to prepare separate audited financials for each subsidiary Debtor that was a reporting company under the '34 Act and similar securities laws (each, a “Subsidiary Reporting Company”), they ultimately determined that they would be unable to complete financial statements for the Subsidiary Reporting Companies that would be compliant with GAAP. Early on, the Debtors’ management learned of possible fraudulent conveyances associated with the prior movement of subsidiaries among various Debtors during the Rigas era. Thereafter, in early 2004, the Debtors learned of other issues that could increase or decrease assets or liabilities of one or another of the individual Debtors vis-á-vis each other. By early in the Fall of 2004, it was determined that without a resolution of each of these issues, separate financial statements for the Subsidiary Reporting Companies could not be completed.
Throughout the Restatement process, the Debtors kept constituents abreast of their progress. Over the course of the project, the Debtors’ senior executives had ongoing discussions with representatives and members of both official committees, including representatives of Appaloosa, U.S. Bank and other parties in interest.
The Restatement culminated with the filing of 10-Ks for Adelphia, on a consolidated basis, for the years 2003 and 2004, in
*625
December 2004 and October 2005, respectively.
In order to complete the Restatement, generate consolidated financial statements, and obtain an audit opinion, the Debtors had to reconcile their balance sheet accounts, including intercompany general ledger accounts. These accounted for, among other things: (a) Intercompany Transactions among consolidated entities, including consolidated joint venture partners, and (b) affiliate balances with non-consolidated entities, such as the Managed Entities and Century/ML Cable Venture— a joint venture between Century Communications Corporation (an Arahova subsidiary), and ML Media Partners L.P. (an investment vehicle managed on behalf of unrelated investors by Merrill Lynch), which, until a recent sale, operated two cable systems in Puerto Rico.
In conjunction with this review, unless a transaction was evidenced by documentation between two Debtors, Intercompany Transactions
(e.g.,
cash receipts, disbursements, acquisition accounting and cost allocations) were deemed to have been made by or to a single entity, Adelphia Cablevision, LLC (“Adelphia Cablevision”). This methodology, often referred to as the “Bank of Adelphia paradigm,” aggregated Intercompany Transaction balances (the “Intercompany Balances”) consistent with the actual flow of funds within the Debtors’ cash management system. In addition to ensuring the consistent application of the Bank of Adelphia paradigm, the Debtors: (a) corrected erroneous and inconsistent Intercompany Transactions reflected in the income statement; (b) applied a consistent allocation methodology for, among other things, corporate and high speed data overhead, high speed data and video call center costs and interest on In-tercompany Balances; and (c) otherwise reviewed and adjusted, when they regarded it as necessary, the Intercompany Transactions.
14
The Bank of Adelphia Paradigm is one way to ascertain intercompany obligations that arose during the Rigas era, but it is not the only way. Whether it is the appropriate way or not is one of the issues to be tried as part of the Intercreditor Disputes.
The extent to which the Debtors appropriately drew conclusions as to the appropriate accounting for Intercompany Transactions is a matter of sharp dispute between some of the creditor groups, particularly the Arahova Noteholders Committee and the Adelphia Parent Notehold-ers Committee. In this respect, the Court cannot agree fully with either of them, and makes certain alternative findings instead. The Court’s first bottom line finding (rejecting a contention of the Arahova Noteholders Committee) is that the Debtors approached the task with neutrality, without intending to aid or prejudice any individual debtor. The Court’s second bottom line finding (rejecting a contention of the Adelphia Parent Noteholders Committee) is that notwithstanding the effort and care that the Debtors put into the task, the Debtors’ conclusions will not necessarily be considered to be binding on individual Debtors or creditors, particularly as to judgmental matters and legal determinations. The Court will take evidence and briefing on these matters in the future proceedings in this case.
Underlying the Court’s first finding is its threshold finding that an important aspect of the accounting review was simply to determine what happened before the filing—what assets, or cash, went where— and what the accounting consequences for
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that should be. The fact that some of the transactions were between Debtors did not make the effort of getting one’s arms around the facts, and reporting on them to one’s creditors and other parties in interest, wrongful on the part of the Debtors. That is particularly so since while the facts would seem to be whatever they are, the Debtors made the raw data available, to give any constituency the opportunity, if it wished, to suggest that facts were otherwise.
A more controversial aspect of the accounting process was the judgmental part, and an even more controversial aspect of it was legal conclusions that should attach to the historic facts. But as to each of these, the Debtors took pains to make clear that their accounting judgments were not binding, and that they were not purporting to decide legal issues that only this or another Court could decide. And where the Debtors made corrective entries, they left “footprints,” so one disagreeing with the corrections could argue that the corrections were inappropriate.
The application of accounting principles necessarily involves a certain amount of judgment. The Court finds that while Adelphia’s accounting team was aware that the restatement of the Intercompany Transactions could affect creditor recoveries, the process was guided solely by the desire to achieve accuracy in the accounting treatment—not by the impact that correct methods of accounting might have on any particular creditor group.
15
Until the Restatement and subsequent reconciliation of Intercompany Transactions was complete and the substantive consolidation structure and other elements of a plan were finalized, no party, including the accountants, could predict accurately the impact that any given decision would have on recoveries.
16
After Adelphia completed and issued the 2003 10-K, in January 2005, the Debtors filed an amended Schedule of Liabilities with the Court (the “January 2005 In-tercompany Schedule”). This schedule listed each Debtor’s net intercompany payable to, or receivable from, Adelphia Cablevision, and contained significant qualifications and reservations of rights. Thereafter, the Debtors’ accounting team identified additional accounting issues, prompting the Debtors to file an amended Schedule of Liabilities on May 11, 2005 that listed each Debtor’s net intercompany payable to, or receivable from, Adelphia Cablevision (the “May 2005 Intercompany Schedule”).
After the Debtors did so, the Arahova Noteholders Committee, which was formed in or before May 2005,
17
moved to strike the May 2005 Intercompany Schedule. This Court denied the motion, though it noted the limits as to the extent that any conclusions in the May 2005 Intercompany Schedule would be binding on creditors.
By the time of the hearing on the Ara-hova Noteholders Committee’s motion to strike, on July 26, 2005, the Debtors were intentionally refraining from publicly advocating a particular position or preferred outcome as to the intercreditor issues.
18
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In that connection, this Court then observed:
There’s been a lot of talk about the Debtors’ neutrality in connection with such issues, but while, as I noted in the status conference, a debtor may take sides in such disputes and debtors not infrequently do, no statutory or case law has been brought to my attention suggesting that Debtors must choose sides in intercreditor disputes and I’m aware of none, at least in a situation where the creditors with an interest in the outcome have both a large enough amount in controversy to suggest vigorous negotiation and/or litigation, have skilled counsel to present their positions, and have the will to press their respective positions.
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5. Early Efforts to Resolve the Inter-creditor Disputes
Beginning in August 2003, the Debtors convened a series of meetings with key restricted parties (the bank groups’ agents to the prepetition credit facilities, the Creditors’ Committee and the Equity Committee) to review and discuss the four primary factors in determining potential recoveries: the “Waterfall” analysis (ie., the analysis of how distributable value would flow through the corporate structure), the Debtors’ long range business plan, the Intercompany Transactions, and valuation/allocation. This was the first set of highly detailed presentations that confirmed that the treatment of the Intercom-pany Transactions was an important issue that needed to be resolved in order to bring the
Adelphia
cases to a successful conclusion.
20
While the underlying facts were not a major subject of controversy, the accounting judgment calls and application of the law to the facts were a matter of considerable debate. The Debtors brought the issues, and the uncertainties concerning their resolution, to the attention of the creditor groups involved, with the hope that they would consensually resolve them.
21
Appaloosa and U.S. Bank, members of the Arahova Noteholders Committee, received all of these presentations.
22
The presentations distributed by the Debtors in the Fall and Winter of 2003 informed parties of the potential for significant disputes between creditors of Araho-va and Adelphia Parent. At that time, the precursors to the Arahova Noteholders Committee and the Adelphia Parent Note-holders Committee—Appaloosa and The Blackstone Group (“Blackstone,” which at the time was a major holder of Adelphia Parent bonds), respectively—were restricted and actively representing their interests. In an effort to bridge the gap between these creditor groups, in December 2003, the Debtors hosted several meetings and conference calls with Appaloosa, Blackstone and their respective counsel.
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But those efforts proved to be unsuccessful in bridging the gap.
6. The First Plan
Adelphia filed a first proposed plan of reorganization (the “First Plan”) in February 2004. The First Plan did not purport to have meaningful creditor support, and instead was intended to provide a basis for the start of negotiations with and between creditors. Significantly, Adelphia’s first proposed plan was a “standalone” plan—
ie.,
one that contemplated that reorganized Adelphia Parent and its subsidiaries would remain ongoing entities continuing in their business operations, to be owned largely (if not wholly) by their creditors, whose claims would be satisfied by the issuance of reorganized Adelphia stock.
23
The First Plan proposed to treat all Inter-company Transactions as either reinstated (all or in part) or discharged (all or in part) and to pay holders of the Arahova notes in full. The Debtors made no effort to solicit acceptances of the First Plan, and parties in interest were informed that it was designed to focus attention on important issues that remained unresolved, including the Intercreditor Disputes and claims asserted by the SEC and the DoJ.
24
However, the enterprise value of reorganized Adelphia under the First Plan— $17.39 billion—was a matter of sharp dispute, particularly with equity holders and creditors with the more junior claims to the Debtors’ assets. They had a fear that the standalone enterprise was undervalued, causing them to be unjustifiably “out of the money,” depriving them of any recovery from the bankruptcy—which would be particularly unfortunate if the reorganized company were then sold at a higher value, providing a windfall to the more senior classes.
25
7.
Sale of the Company
The Debtors were sensitive to these concerns. So was the Court, and it told the
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parties so, though the Court recalls its belief at the time that the Debtors had already focused on the issue and were considering means to address it. In April 2004, the Debtors advised the Court in a chambers conference that with the support of both the Creditors’ Committee and Equity Committee, they would explore parallel alternatives. The Debtors would market the company, to see what it would fetch in a sale. But to keep bidders honest, and to protect against the risk of giving away the company at too low a price, they would reserve the option, as an alternative, to proceed with a standalone plan.
After a thorough search process, the Debtors retained Allen & Company (“Allen”) and UBS Securities (“UBSS”) as financial advisors, and Sullivan & Cromwell (S
&
C), as legal advisor, in the effort to sell the company. During the Summer of 2004, the Debtors and their advisors engaged in extensive analysis and effort to achieve a robust sale process. Ultimately, the Debtors and their advisors determined to market the Debtors’ assets in clusters, and to allow potential purchasers to bid on multiple clusters and the entire enterprise. The process of forming clusters was motivated by a desire to maximize the value of all of the Debtors’ assets in a sale, and, the Court also finds, by that desire alone. By breaking the company into clusters, the Debtors sought to maximize the number of possible bidders, thereby ensuring a higher value for their assets. The number and composition of the clusters was established, with the assistance of the advisors, to realize the highest possible value.
26
Not only did the Debtors need to determine how to package the assets; they also needed a process to market and sell the assets. The Debtors created a two-phase process. During Phase I, from September 2004 through October 2004, the Debtors solicited preliminary indications of interest in the assets from potential buyers. Subsequently, during Phase II, from October 2004 through January 2005, the Debtors provided extensive due diligence, sought binding bids and provided bidders an opportunity to refine their offers. In Phase II, the Debtors provided the bidders with extensive access to management and a virtual data room consisting of operational, financial, technical, legal, tax, and other information.
On September 15, 2004, the Debtors gave various creditors that were subject to appropriate confidentiality agreements, including Appaloosa and U.S. Bank, a general update on the sale process. At that meeting, the Debtors also disclosed the composition of the seven clusters of assets (the “Clusters”).
27
No one in attendance criticized or raised any objection to the Debtors’ strategy or the composition of the Clusters.
It is the common practice for bankruptcy courts, in connection with sales of businesses or lines of business, to enter orders approving bidding procedures and bidding-related obligations, especially no-shop re
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quirements and breakup fees,
28
before being asked to approve the resulting sale itself. In September 2004, the Debtors sought the first of two orders of that character. The requested order, among other things, would:
(a) establish the timing and method for the submission of bids for all or a portion of the Debtors’ assets in a one-step auction;
(b) outline the parameters for entry into a purchase agreement, including provisions that would limit the Debtors’ ability to actively pursue bids after an agreement had been reached with a bidder (the “No-Shop Requirement”); and
(c) authorize payment of a breakup fee in certain limited circumstances (the “Breakup Fee”).
No party in interest objected to the relief sought by the Debtors, and the Court granted the requested relief.
At the conclusion of Phase I in October 2004, the Debtors had received non-binding indications of preliminary interest from a large number of potential bidders, expressing an even larger number of indications of such interest.
In January 2005, the Debtors received what the Court considers to be an impressive number of bids. After considering the bids, the Board concluded that the bid submitted by Time Warner and Comcast for substantially all of the Debtors’ assets was the bid most likely to maximize the value of all estates and each estate. While the Court will not recite the more detailed evidence that was introduced with respect to the bids, it notes its finding that the Debtors did not receive any bids for Ara-hova assets alone that could be regarded as more favorable than Arahova’s share of the Time Warner/Comcast bid would be.
Prior to the execution of definitive documents with Time Warner and Comcast, the Debtors sought and obtained a second bidding procedures order from this Court (the “Supplemental Order”), supplementing the earlier Bid Protections Order described above. As relevant here, the Supplemental Order expanded the events that would trigger payment of the Breakup Fee. And notably, the Supplemental Order ordered that the Breakup Fee would be a joint and several liability of each Debtor; and that neither the definitive purchase agreement nor the relief granted by the Supplemental Order would prejudice or affect the rights of any creditor with respect to the distribution or allocation of any consideration received by the Debtors in connection with the sale (the “Sale Proceeds”) among creditors and other stakeholders.
29
Only three parties formally responded to the request for approval of the Supplemental Order and two of those responses, filed by U.S. Bank, constituted reservations of rights already reserved. Neither U.S. Bank, Appaloosa nor any other member of the Arahova Noteholders Committee objected to the entry of the Supplemental Order.
The Debtors kept the estates’ fiduciaries and parties to confidentiality agreements updated through detailed presentations. Constituents were even present at meetings with Time Warner and Comcast, and, at times, negotiated directly with Time Warner and Comcast on key points.
Ultimately, in April 2005, Adelphia executed the asset purchase agreements (col
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lectively, the “Purchase Agreements”) with Time Warner and Comcast. The transaction contemplated by such agreements provides for aggregate consideration of nearly $17.6 billion. This amount reflects a substantial control premium over the standalone valuation of the Debtors at that same April 2005
time—ie.,
a substantial premium over the estimated post-emergence trading value of the Debtors.
30
But if the closing of the sale does not take place by July 31, 2006, Time Warner and Comcast will have termination rights. The Court finds that the closing of the Time Warner/Comcast transaction is highly beneficial to the Debtors, both collectively and individually, and that the loss of that transaction would be extraordinarily damaging to all of the Debtors, including the Arahova Debtors.
There is no basis to find, and the Court does not find, that the Debtors sacrificed an opportunity to get more value for the Arahova Debtors in order to gain a better deal for any of the remaining Debtors, or for all of the Debtors’ estates generally. The Arahova Noteholders Committee introduced no evidence of any alternative sale transaction that is (or was) available to Arahova or any of its subsidiaries, nor did it introduce evidence from which the Court could see how it would provide for the Arahova Debtors to continue as standalone entities in the absence of facilities and services provided by other Adelphia Debtors. There is nothing in the record to suggest that the Arahova Debtors would have any opportunity to monetize their assets that would be superior to getting their share of the Time Warner/Comcast proceeds, nor to show that “going it alone” would be a superior business strategy. The Court finds that the Time Warner/Comcast sale is as beneficial to the Arahova Debtors as its is to all of the other Debtors, and that it is in the interests of the Arahova Debtors, just as it is in the interests of all of the other Debtors.
31
8. The Escalation of the Intercreditor Disputes
Once the sale process began in April 2004, the Intercreditor Disputes took a “back seat” to the sale process, at least in terms of the Debtors’ activity. The Debtors were cognizant of the fact that sale consideration in excess of the Debtors’ February 2004 valuation could effectively moot the Intercreditor Disputes.
However, other parties in interest were simultaneously addressing the Intercreditor Disputes. On November 9, 2004, the Creditors’ Committee announced that its six members, which included Appaloosa and U.S. Bank, unanimously approved a settlement term sheet that resolved all “inter-creditor” disputes and “enjoy[ed] the support of other holders of Adelphia’s unsecured debt.”
32
But unfortunately, creditors of Adelphia Parent had not been included, at least in any meaningful way, in the intercreditor negotiations that had led to the announced settlement, and many, if not all, of the Adelphia Parent creditors had not agreed to it. The Court well recalls the chambers conference at which it first heard from counsel for the Adelphia Parent bondholders, and learned,
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to the Court’s considerable surprise, that holders of over a billion dollars of funded debt claims had not agreed to the purported settlement.
33
Prior to this time, the In-tercreditor Disputes and all of their sub-aspects—fact finding, accounting analysis, legal analysis and negotiation—had been behind the scenes, invisible to the Court. Now they were painfully obvious. But the Court was of the hope, perhaps naive in retrospect, that with further effort, the feuding creditor groups would reach agreement, as such groups normally do.
The Debtors tried to facilitate such an agreement.
34
In June 2005, William Schleyer, certain of the Debtors’ professionals, and Adelphia CFO Vanessa Witt-man met with representatives and professionals of the Arahova Noteholders Committee, Adelphia Parent Noteholders Committee, W.R. Huff Asset Management Co., LLC (“Huff’), and McKay Shields LLC (“McKay”), who, at that time, were major creditors and were affected by the Intercreditor Disputes. The Debtor representatives presented each group with detailed information about potential outcomes of the Intercreditor Disputes.
At the June 2005 meeting with the Ara-hova Noteholders Committee, attended by two of the top people at Appaloosa and their counsel, the Debtor representatives discussed potential treatments of Inter-company Transactions, potential consolidation structure approaches, the allocation of value, issues related to possible fraudulent conveyance claims by one Debtor against another, and estimated recoveries of each constituency under different scenarios. The Arahova Noteholders Committee requested additional financial data, which Ms. Wittman’s team and advisors provided in the following weeks. The Debtors had similar conversations and meetings with the other constituencies affected by the Intercreditor Disputes, each with the purpose to facilitate a settlement and mediate a resolution.
In September 2005, Mr. Schleyer, Ms. Wittman and Adelphia’s advisors convened a second set of meetings with the Adelphia Parent Noteholders Committee, the Ara-hova Noteholders Committee, McKay and Huff. At these meetings, they again discussed the Intercreditor Disputes, and the fact that, to prevent the loss of value in the Time Warner/Comcast sale, it was in all creditors’ interests to close the sale trans
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action expeditiously. Although the Debtor representatives had preliminary views of the relative strengths and weaknesses of the parties’ positions in the Intercreditor Disputes, they shared only some of their views, and were deliberate in informing the Arahova Noteholders Committee and Huff that ultimately, absent a settlement, the Bankruptcy Court would have to make its own determinations.
35
Thereafter, in October 2005, Mr. Schleyer and Ms. Wittman facilitated a meeting between the Arahova Noteholders Committee and the Adelphia Parent Notehold-ers Committee to discuss a possible settlement. In advance of the meeting, Ms. Wittman and her colleagues supplied the Arahova Noteholders Committee with information it requested to assist it in its negotiations. But at the parties’ request, representatives of the Debtors did not attend the meeting.
After hearing all of the evidence, much of it set forth in detail above, the Court finds that the Debtors intended to and did maintain their neutrality with respect to the Interdebtor Disputes,
36
and limited their activities, exactly as they should have, to providing relevant information and support, and assuming roles as facilitator and mediator.
37
Without question, the Debtors expressed views as to potential litigation outcomes to the feuding creditor groups—as this Court expressly authorized them to do, and as mediators often do. But the Debtors did not advocate publicly particular outcomes with respect to the Intercreditor Disputes.
38
9. The Motion in Aid
In that same 2005 time period (both before and after the intercreditor meetings described just above), the Debtors saw the clock ticking, with no agreement between the creditor groups yet in sight. In the Spring of 2005, after over a year and a half of trying to mediate the gap between the creditor constituencies, the Debtors believed that the Intercreditor Disputes would jeopardize the value of the sale to Time Warner and Comcast. To avoid that disastrous result, and to facilitate the resolution of the Intercreditor Disputes, the Debtors filed a “Motion for Order in Aid of Confirmation Establishing Pre-Confirmation Process to Resolve Certain Inter-Creditor Issues.”
39
It was colloquially referred to by the parties, and this Court, as the “Motion in Aid,” or sometimes “MIA.”
The purpose of the Motion in Aid was to put the Intercreditor Disputes into a judicially-approved and supervised framework to resolve outstanding issues that were not
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settled (the “Resolution Process”) within a time frame consistent with the Purchase Agreements’ deadlines.
40
This process was designed to provide creditors with prompt access to information and discovery, a reasonable but expeditious discovery and litigation schedule, and notice and an opportunity to be heard. In short, it was designed to give the creditors who would be affected by the disputes a full opportunity to litigate their needs and concerns.
After a chambers conference and extensive hearing on the Motion in Aid, the Court approved the motion, with some fine-tuning to provide further procedural protections. In the Resolution Process Order, the Court scheduled six separate hearings to be held on the Intercreditor Disputes commencing January 31, 2006 and concluding March 6, 2006. The Debtors established a data room with a huge body of relevant information, and made witnesses available for discovery.
The Resolution Process, which is embodied in the approved Disclosure Statement (the “Disclosure Statement”) and plan that is currently being balloted, provides the Arahova Noteholders with a full opportunity to litigate the Intercreditor Disputes. If the Arahova Noteholders Committee
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prevails in the litigation, the plan provides that the Arahova Noteholders will receive payment in full, with postpetition interest—the proverbial “par plus accrued”— and with a full reserve of all plan consideration should the Resolution Process extend beyond the closing of the Sale.
10. The Present Plan
On November 21, 2005, the Debtors filed a Fourth Amended Plan (the “Present Plan”) and Disclosure Statement. After four days of hearings that addressed over 40 separately filed objections, on November 23, 2005, this Court approved the Disclosure Statement. The Debtors commenced solicitation of the Present Plan on December 5, 2005. Among many other things, the Present Plan provides for:
—the Debtors to sell substantially all of their assets to Time Warner and Comcast for aggregate consideration of approximately $17.6 billion, subject to adjustments, consisting of approximately $12.7 billion in cash and shares of Time Warner Cable’s Class A Common Stock (“Common Stock”) with a deemed value of approximately $4.96 billion;
—payment in full, including postpetition interest, through cash and/or Common Stock on the Present Plan’s Effective Date, to the creditors of the 14 Debtor Groups that the Debtors believe are solvent; and
—no immediate distribution to, among others, creditors of the Arahova Debtors (unless a minimum initial distribution is authorized by this Court in conjunction with the Confirmation Hearing), with the maximum potential distribution (ie., payment in full plus postpetition interest) to such creditors being escrowed until the resolution of the Intercreditor Disputes and a determination of such group’s solvency.
41
11. The Present Motions
Following this Court’s approval of the Motion in Aid, the Arahova Noteholders Committee sought leave, in the District Court, to file an expedited appeal, and for a stay pending appeal. Judge Scheindlin of the District Court, to whom the requests were referred, denied both.
42
Then, still not content with a mechanism that will pay them in full—“par plus accrued”—if, but only if, the underlying facts and law support their position, and which will escrow the value to pay them in full, the Arahova Noteholders Committee filed the present motions.
The Arahova Noteholders Committee attempted to bring these motions on, by Order to Show Cause, on shortened notice. But as this Court did when the Equity Committee (then represented by different counsel) had sought to bring on another motion with potentially highly prejudicial consequences on shortened notice,
43
this Court had concerns that motions of this character could not be heard that way, consistent with the complexity of the factual and legal issues, their potential impact on the Debtors’ reorganization, and fairness. So as it had done with the Equity Committee’s motion, the Court set a conference on the motion on shortened notice instead. The issues before the Court raise questions of extraordinary importance not only in this case, where there are billions
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of dollars at stake (and at risk), but in dozens of other multi-debtor chapter 11 cases, in this district and elsewhere.
44
Having some understanding of the needs and concerns of the creditors holding billions of dollars worth of claims in this case, the potential consequences of granting a motion of this character, and of the applicable law, the Court was unwilling to let the future of Adelphia and its creditors be decided that way. It put the motions on a fast track, but with appropriate opportunity to consider the motions and their implications, and to provide enough time for the many opposing parties in interest to make a record on their objections.
12. The Standstill Agreement
Finally, the Court notes a matter of concern to it. On October 13, 2005, about two weeks after Judge Scheindlin issued her decision, the Arahova Noteholders Committee and the Debtors entered into an agreement. It was captioned “Standstill Agreement Between the Ad Hoc Committee of Arahova Noteholders and the Debtors” (the “Standstill Agreement”), and as its name implies, there were no other parties to it—omitting, most significantly, the Adelphia Parent Noteholders Committee, which was the Arahova Note-holders Committee’s principal antagonist; the FrontierVision Noteholders Committee, which was also becoming increasingly involved in the Intercreditor Disputes; and a fair number of other creditor groups who, while affected to a much lesser degree, had filed “issue statements” setting forth their positions on aspects of the In-tercreditor Disputes. It was filed with the
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Court, on the Court’s ECF system, with a “Notice of Filing of Standstill Agreement,” with the Standstill Agreement itself as an attachment.
45
But while it looked very much like a stipulation (having a caption, and being signed by counsel, and not parties), it had no place for a Court approval signature, and Court approval was neither sought nor obtained.
In substance, the Standstill Agreement provided that for a two-week period (terminable on two days’ notice), the Arahova Noteholders Committee would not file any papers “relating to issues raised” in Judge Scheindlin’s opinion. The Debtors would adjourn the consideration of issues raised in an Arahova Noteholders Committee objection to the adequacy of the Debtors’ proposed plan disclosure statement, which was then up before the Court for approval; agreed not to hold the passage of time against the Arahova Noteholders Committee; and agreed to oppose the efforts of any nonsignatory to do so. The parties also agreed that if, following the standstill period, the Arahova Noteholders Committee proceeded to seek relief, the Debtors consented to having that relief considered on an expedited basis, provided that the Debtors were provided “a reasonable opportunity under the circumstances” to respond.
46
The deal points of the agreement were preceded by two paragraphs of recitals. They read, in material part:
WHEREAS [the Arahova Notehold-ers Committee] and [the Debtors] ... are engaged in settlement discussions (the “Settlement Negotiations”) in an attempt to resolve certain disputes; and WHEREAS the Debtors believe that, in the interests of facilitating the Settlement Negotiations, the Arahova Note-holders should refrain from filing certain pleadings, motions, and other papers in the [Bankruptcy Court] during the pen-dency of the Settlement Negotiations
An agreement of this character would have been entirely understandable if the subject of the negotiations were refinements as to the procedures to be used in the Motion in Aid, or procedural arrangements to set up briefing or discovery schedules on any motion that might be filed. But evidence at the hearings on these motions established that the negotiations related not to matters of that character, but rather to possible revisions in the then-pending reorganization plan, which revisions had been proposed by the Araho-va Noteholders Committee two days earlier, at an October 11, 2005 meeting between representatives of the Arahova Noteholders Committee and the Debtors.
47
At the recent hearing, the Court directed the parties not to tell it the specifics of the plan proposal. It is possible that the plan revisions might have been immaterial, or have involved nothing more than revisions in the arrangement to escrow plan consideration pending the resolution of the Intercreditor Disputes. But the Court draws the more likely inference that the discussions involved plan treatment of the Arahova Debtors in a material and sub
*638
stantive way.
48
Such plan treatment, because of the limited size of the Adelphia pie and the “zero sum game” character of the Intercreditor Disputes, would necessarily have had an effect on other creditors who were not parties to the negotiations— an adverse one, if, as one would assume, it helped the Arahova Noteholders.
The Court has insufficient basis to find, and does not find, that entering into the Standstill Agreement was unethical or otherwise improper, or that the Debtors’ willingness to enter into the Standstill Agreement was a breach of the fiduciary duties they had to the much broader universe of stakeholders, or a violation of any order or direction of the Court that had been stated in other than precatory words. But the Court can and does make certain narrower findings.
First, it plainly appears, and the Court finds, that the filing of the motions now before the Court was a tactical measure, subject to deferral or a decision not to file them at all if plan desires of the Arahova Noteholders were satisfied. The Court does not accept the Arahova Noteholders Committee’s contentions to the contrary.
49
If, as the Arahova Noteholders claimed, there were interdebtor conflicts that creditors could not waive, what was the purpose, or effect, of the standstill? By all appearances, better plan treatment for the Arahova creditors threatening trustee or disqualification motions could make the motions go away. Since any plan treatment change in favor of the Arahova Note-holders would come at the expense of creditors of Adelphia Parent (and, perhaps, other creditor groups as well), the Court cannot accept the sincerity of the institutional concerns that the Arahova Notehold-ers Committee professes to advance.
50
Neutrality could be abandoned if the Debtors sided with the Arahova Noteholders Committee.
Second, the Court finds that while the Debtors ultimately did nothing that the Court could find wrongful or a violation of their fiduciary duties, they came close to stepping over the line. If the negotiations referred to in the recitals had led to the next step—an agreement that would have bought off the creditors of the Arahova Debtors—that agreement almost certainly would have come at the expense of one or
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more of the other Debtors, and their creditor groups. Faced with threats of litigation that would cost the estate hundreds of thousands of dollars (or more), and, more importantly, that risked dooming the reorganization, it may have made sense to enter into the standstill, in the hope of making the problems go away. But the Court hopes and expects that before going to the next step, the Debtors thought, or would have thought, about whether acceding to the threats of the creditors of one of the debtors would have been damaging to the interests of the other debtors. The same fiduciary duties were owed to them.
51
B. Business Considerations Relevant to the Motions
The Court took considerable evidence on the business implications of the motions, and on the effects granting them might have on Arahova and its creditors. The Court’s findings in these respects follow.
1. Failure to Consummate the Transaction with Time Warner and Com-cast
The relief sought by the Arahova Note-holders Committee could (and in certain instances, will) give Time Warner and Comcast the right to terminate the Purchase Agreements. If the sale transaction is not consummated, there will be a severe, negative economic impact on all of the Debtors, including the subsidiaries of Ara-hova. Ironically, should the Time Warner/Comcast deal not close, among the estates that would be adversely affected would be those of the Arahova Debtors. The breakup fee of approximately $443 million in the aggregate that must be paid to Time Warner and/or Comcast under certain termination scenarios is a joint and several obligation of all of the Debtors, including the Arahova Debtors.
52
2. The DIP Facility
Appointment of a trustee will constitute an event of default under the $1.3 billion DIP Facility, which could trigger termination of the loans and acceleration of all indebtedness. Such an event would materially impair all of the Adelphia Debtors’ ability to operate their businesses on a day-to-day basis. The Century and Century-TCI Debtor Groups, which are included in the Arahova Debtors, currently borrow under the DIP Facility. Other Arahova Debtors have borrowed under the DIP Facility in the past. Without the ability to borrow under the DIP Facility (or incur other substantial indebtedness), these Debtors would face considerable obstacles to emergence from chapter 11.
S. Agreements with LFAs
Additionally, though the Arahova Debtors currently have agreements with vari
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ous local franchising authorities (“LFAs”) to provide service, the continuance of such agreements is by no means assured. Mr. Schleyer testified that were the Arahova Debtors to divorce themselves from the rest of the enterprise, he understood that certain LFAs might assert that a change of control of the franchisee had occurred, and that they could exercise rights that would directly affect the Arahova Debtors’ operations. He stated that he disagreed with that assertion, but thought some LFAs might be inclined to litigate the matter. Approximately 245 of the 438 franchises held by the Arahova Debtors contain “change of control” provisions.
Mr. Schleyer further testified that, although arguably not required, in the event the sale transaction were modified or terminated, over 1,500 LFAs could assert that the Debtors would be required to submit new Form 394s (ie., forms to obtain consent for the transfer of a franchise) under the federal Cable Act which would afford each such LFA an additional 120-day period to review the newly proposed transfer and determine whether or not to consent.
Once more, Mr. Schleyer was not cross-examined on those views, and no contrary evidence as to that was introduced. The Court does not make a finding that those risks would necessarily materialize, or that any parties’ contentions as to this matter would or would not have merit, but it can and does find that avoiding risks of that character is a relevant consideration.
h. Government Settlement
As noted above, the Debtors’ settlement with the government (the “Government Settlement”) requires the Debtors to contribute $715 million in value to a victims restitution fund. Under the Government Settlement, such payments must be made no later than certain prescribed times. Although those deadlines could be extended by the SEC and the DoJ, there is no assurance that the Debtors would be granted those extensions to comply with the Government Settlement and the Settlement Order, or that the SEC and DoJ would not use the resulting delays as a basis for trying to extract consideration for the extension, or otherwise trying to renegotiate the deal. Thus, even if Time Warner and Comcast were willing to proceed with the sale without the inclusion of Ara-hova’s assets as part of the purchase, the delay that would result from the relief requested by the Arahova Noteholders Committee could force the Debtors into non-compliance with the Government Settlement, and re-expose the Debtors to the same risks that motivated the settlement in the first place.
5. Issues of Efficiency, Cost, and Delay
These are complex cases. They are operationally complex, factually complex, and legally complex, and matters in these cases that involve several debtors or silos are exceedingly common. The Balkanization of the decision making in this case would be highly damaging to all of the debtors, and their creditors, and the Arahova Debtors and their creditors would be no exception. The need for fiduciaries for individual estates to confer with each other, and often to act jointly, vis-á-vis individual estates on their watch, would be extraordinarily difficult. It would add a layer of delay, potential confusion, and error to corporate decision making that would be a daily element of these chapter 11 cases.
Additionally, any trustee appointed would need to be educated on a wide range of Adelphia business, operational and legal issues, along with the remaining plan issues that need to be resolved. The time necessary for such trustee’s education
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would delay and interfere with that trustee’s ability to confirm a plan in a timely way, and would present a significant obstacle to the consummation of the Time Warner/Comcast sale in the timeline contemplated by the Purchase Agreements.
Assuming that such could be done, appointing trustees or fiduciaries limited in authority to litigating interdebtor matters—without a charge to get involved in operational issues—would not be a practical solution. The factual and legal issues that underlie the Intercreditor Disputes are extraordinarily complex and difficult to get one’s arms around. And while the Arahova Noteholders Committee, the Adelphia Parent Noteholders Committee and, to an arguably lesser extent, the FrontierVision Noteholders Committee have a great deal of knowledge in this area (and will be prepared to try the issues on the Intercreditor Disputes by the time the hearings on those issues will begin at the end of this month), no newcomers could come close in acquiring their knowledge, much less being prepared for hearings or trials, in that time frame. It would take many months, and perhaps even longer.
Three days after the last hearing day on these motions, the Court considered the desirability of appointing a mediator to assist the creditors in reaching agreement. As much as this Court welcomed a settlement, many of the same considerations caused this Court to conclude that the appointment of a mediator would not be helpful, and to reluctantly abandon that as an option. If any mediator were to be taken seriously by the parties, he or she would have to spend considerable time catching up to the parties as to the factual and legal issues underlying the disputes. These are not the kinds of issues as to which executive summaries, position papers, or briefing books would be useful. No trustee or fiduciary could become competent to negotiate, or litigate, the issues in a reasonable time frame, and would take many months to acquire a knowledge level that the creditors already have.
6. Limits on WF & G Activities
The Court has also considered facts relevant to the extent to which any of the above factors, or any others, should bear on disqualification of WF & G.
The Court has noted that the Arahova Noteholders Committee no longer seeks to disqualify WF & G generally. That is understandable. WF & G has acquired an extraordinary expertise in Adelphia affairs, and has performed its responsibilities with distinction. The loss of either of those, especially at this late date, would be terrible for creditors, and would materially delay, if not torpedo, the Debtors’ timely reorganization.
Different considerations apply, however, with respect to the narrower motion now before the Court, disqualifying WF
&
G from participation in the Intercreditor Disputes, or, as the Arahova Noteholders Committee calls them, the Interdebtor Disputes. The Court finds no prejudice to creditors or other stakeholders there. The affected creditors already have the knowledge, means and inclination to litigate those issues, and do not need WF & G to do so. WF & G can use its knowledge of the underlying issues to try to facilitate agreement, while at the same time refraining from taking any public role that would cause one or another creditor group to feel that WF & G is acting contrary to individual debtors’ interests. WF & G has done nothing wrong. But the prophylactic imposition of mandatory neutrality on WF & G on interdebtor issues would not cause WF & G, or the Debtors, any material prejudice either.
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C. Facts Relevant to Exclusivity
The Court makes certain other factual findings, which are particularly relevant to exclusivity.
1. Jointly Shared Services and Assets
Cable operators often consolidate their operations in order to achieve economies of scale. The Debtors have managed their assets and operations in a manner similar to that employed by their industry counterparts. Given the significant economies to the enterprise achieved by such consolidation, it is unlikely that the Arahova Debtors, were they to be somehow extricated from the rest of Adelphia, could manage their businesses as cost-effectively as management currently does.
The Debtors’ engineering assets are shared regionally and across the enterprise. Such assets include, but are not limited to: (a) head-ends; (b) redundant fiber rings; (c) a single technology laboratory that serves all of the Debtors; (d) a single national Network Operations Center that serves all of the Debtors; and (e) assets and liabilities relating to “VOIP” (or Voice-over-Internefc-Protocol). It would be incredibly expensive and time-consuming to physically separate the Arahova Debtors’ engineering processes from those of the other Debtors.
The Debtors’ high-speed internet businesses are also operated at a national level. For instance, there is one “backbone,” a single national provisional center, and shared physical facilities, circuits and contracts for such businesses. In addition, while there are multiple call centers within the enterprise, such centers share one interactive voice recognition system, and calls are routed nationwide to various centers.
Additionally, many corporate functions of the Debtors’ enterprise, among others, are consolidated on a regional or national level: (a) treasury, including cash management; (b) accounting; (c) media services, including certain ad insert and marketing research contracts; (d) legal; and (e) human resources. Similarly, many other essential corporate matters are addressed solely at a consolidated level: (i) employee benefit structures
(e.g.,
payroll, workman’s compensation, health benefits); (ii) insurance policies; (iii) taxing issues (ie., filing of sales, property and income tax returns, and audits); (iv) rate filing issues; and (v) intellectual property matters. Moreover, billing for all of the Debtors is performed at a national level by two outside vendors.
If the Arahova Debtors attempted to emerge as a standalone entity, they would face several challenges. The procurement of additional physical equipment and facilities for a standalone entity comprised of the Arahova Debtors alone would require a considerable expenditure by such Debtors. The Arahova Debtors would need to obtain separate engineering assets and parcels of real property to develop headquarters, regional offices and call centers, among other things. The Arahova Debtors would also have to invest significant capital to obtain information technology systems that assist in treasury, accounting, and other similar functions. Essentially, the Arahova Debtors would be obligated to duplicate every service shared across the present Adelphia family in order to emerge from chapter 11 as a separate organization.
2. Agreements with Programmers
Agreements with programmers represent the operational backbone of a cable operator. As the Debtors’ access to con
tent—i.e.t
the programs consumers watch, which are transmitted by broadcast or cable networks—is governed by agreements executed by Adelphia Parent, the Arahova Debtors would either have to negotiate
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separate contracts with over 150 programmers or opt into agreements of programming cooperatives. Regardless of their approach, however, the Arahova Debtors would no longer enjoy the large-volume discount afforded to the enterprise.
3. Managerial Services
It is possible that the Arahova Debtors would request certain managerial services from the Debtors or their successors in order to effectively remain operationally integrated with the rest of the company. The Court assumes, notwithstanding caveats expressed by Mr. Schleyer in that regard, that the remaining Debtors would, if necessary, come to agreements with respect to providing joint managerial services and jointly shared assets. But doing so would be complex and time consuming. And determining the obligations and liabilities as between the Debtor groups would be as complex, or more so, than doing so would be in the present environment. The Court faced similar issues in dealing with the services and assets shared between the Debtors and Adelphia Business Solutions (“ABIZ”), a business once owned by Adelphia that had been spun off and which had its own, separately administered, chapter 11 cases before this Court.
53
This Court well remembers the many hearings and chambers conferences that it had to devote to untangling the affairs of the two estates, and determining their respective rights and obligations vis-a-vis each other. The process was time-consuming and painful, even though most of it was ultimately eonsensually resolved.
Then, the Arahova Debtors would have to attract employees to their operations. And in order to present themselves as a business enterprise distinct from the rest of the Debtors, the Arahova Debtors would have to embark upon an extensive and expensive marketing and re-branding campaign. It costs approximately $30 million to re-brand a cable company with five million subscribers. The Arahova Debtors have over 1.75 million subscribers.
Mr. Schleyer testified that while it would not be impossible, it would take at least a year, and likely much longer, to sever the Arahova Debtors from the company as a whole. He also testified that it was not an endeavor that any multi-system cable operator would find cost-effective, practicable or reasonable. Mr. Schleyer was not cross-examined on those views, and no contrary evidence as to that was introduced. The Court finds those views to be true.
A
Marketing the Arahova Debtors
Mr. Schleyer testified that since Araho-va’s assets had already been marketed extensively, any attempt to repackage and remarket such assets was likely to be viewed as a “clearance sale” or liquidation, which would be perceived as an involuntary or distressed sale by the market. In that environment, he concluded, it was unlikely that any party would submit a fair market bid. Once more Mr. Schleyer was not cross-examined on those views, and no contrary evidence as to that was introduced. The Court finds those views to be true.
5. Plan Process
This is not a case in which the Debtors have failed to formulate or file a proposed
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reorganization plan. Nor is it a case where the Debtors have abused exclusivity, as, for example, by trying to prefer incumbent equity or management; by spurning a testing of the value of the company in the marketplace; or by trying to circumvent the absolute priority rule. Rather, the Debtors have in essence maximized the estate’s value and handed over the estate to their creditors, with the principal remaining issue being the creditors’ respective shares of the pie that the Debtors have put on the table.
The Debtors now have an approved Disclosure Statement, and are in the process of soliciting acceptances of their Present Plan. The Court does not yet know whether it will be accepted, and has no means, short of awaiting the creditors’ votes, of determining whether it will be accepted. A hearing on confirmation of the plan is scheduled to begin in March.
Without question, many creditors have threatened to vote “no” on the Present Plan. Many of those are creditors who will be paid in full under the Present Plan, but are threatening to vote “no” because of differences in perceptions over what being paid in full means (such as differences as to the postpetition interest rate that would be applicable to their claims, or issues as to when they might be entitled to indemnification for legal expenses, after already being paid in full on account of principal, interest and fees), and because of their reluctance to have their incremental entitlements determined by this Court or higher courts.
Whether such creditors will ultimately vote against the Present Plan, and risk the loss of the $17.6 billion now being offered by Time Warner and Comcast, is yet to be determined. What is clear, however, is that whatever dissatisfaction there may be with the Present Plan would not be obviated by terminating exclusivity for the Ara-hova Debtors. The stated dissatisfaction is not limited to the distributions that would come from the Arahova Debtors. And any plan treatment with respect to Arahova Debtors’ creditors would still have to take into account the same inter-debtor issues that are present under the Debtors’ Present Plan—including, most obviously, any Arahova Debtors liabilities to other individual Debtors as to whom exclusivity would not be terminated.
D. Practices in Other Cases
Multi-debtor chapter 11 cases with disputes or apparent conflicts between or amongst debtors are quite common. The Court finds the following with respect to how interdebtor disputes have been addressed in other multi-debtor cases.
54
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1.
WorldCom
55
In this mega-case, filed in July 2002 by WorldCom, Inc. and approximately 200 of its subsidiaries, in which WorldCom had tens of billions of dollars in liabilities on a consolidated basis,
56
serious interdebtor issues arose by April 2003. One of WorldCom’s many subsidiaries was MCI Communications Corp. (“MCI”), which WorldCom had acquired prior to its chapter 11 filing. An Ad Hoc MCI Trade Claims Committee (the “Ad Hoc Committee”) moved for “the immediate appointment of a chapter 11 trustee,” under each of Bankruptcy Code sections 1104(a)(1) and (a)(2), or alternatively for the appointment of an examiner for MCI.
57
As the bases for its motion, the Ad Hoc Committee asserted that WorldCom had alleged the existence “of billions of dollars in in-tercompany claims against MCI” but had not provided any support for that view, and that the debtors had not performed any investigation of the validity of such claims. The Ad Hoc Committee further asserted that the appointment of a trustee was required, in the interests of creditors, in light of “the failure of any MCI fiduciary to investigate intercompany claims and to oppose substantive consolidation of the Debtors’ estates.”
58
Judge Gonzalez denied the motion to appoint a chapter 11 trustee for MCI. In a lengthy opinion (that appears on the Court’s ECF system, but not in the Bankruptcy Reporter or the electronic research services), he rejected the arguments under each of Bankruptcy Code sections 1104(a)(1) and 1104(a)(2). He found that the necessary “cause” for appointment of a trustee under subsection (a)(1) was lacking, and that appointment of a trustee was likewise not appropriate, in the interest of creditors, under subsection (a)(2).
In his discussion of subsection (a)(1), Judge Gonzalez stated:
The Court recognizes that significant obstacles exist in accurately recreating a map of these complex intercompany claims. However, the Court believes that, given the circumstances, Movants had access to the most comprehensive information available. The Court does not believe that the appointment of a chapter 11 trustee is needed to ensure that Movants continue to receive accurate information from the Debtors, or
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that the Debtors’ disclosure to date is insufficient, rendering necessary the appointment of a trustee.
59
In his discussion of subsection (a)(2), he observed:
The appointment of a trustee would be very costly to the Debtors and their estates, with no apparent benefit. Given the size and complexity of the Debtors and their operations, the delay and expense that would be caused by the trustee’s (and new professionals’) need to learn about the Debtors’ assets, liabilities, businesses, and chapter 11 cases would be substantial and would likely seriously and adversely affect the prospects of rehabilitation. The appointment of a trustee would severely impede the Debtors’ ability to confirm a consensual chapter 11 plan of reorganization within the next few months. As has been stated previously in this decision, the issues raised by the Movants throughout are most appropriately addressed in the context of the Plan confirmation process.
60
Judge Gonzalez likewise denied the alternative request for the appointment of an examiner,
61
“to investigate the propriety of the questionable intercompany claims,”
62
for substantially the same reasons. The underlying interdebtor issues were thereafter resolved consensually, in a manner satisfactory to MCI creditors.
2.
Enron
63
In this mega-case, initially filed in December 2001 by Enron Corporation (“Enron”) and, ultimately, about 180 of its subsidiaries, in which Enron’s petition reflected approximately $13 billion in liabilities on a consolidated basis (not counting off-balance sheet obligations, which were substantial), major interdebtor disputes existed, but no trustee was appointed.
However, an examiner was appointed, for one of Enron’s subsidiaries, Enron North America Corp. (“ENA”). ENA was engaged in an energy trading business that allegedly was more profitable than many of the other entities in the Enron family. The ENA creditors thought that they were entitled to greater recoveries than the creditors of other Enron debtors, but the extent of the ENA creditors’ recoveries could be affected materially by the extent to which cash was taken out of ENA for the benefit of other debtors, intercompany obligations existed, or substantive consolidation might be warranted—which would effectively cause the assets of ENA to be subject to greater claims. Issues particularly existed with respect to intercompany receivables, the treatment of transactions effected through Enron’s centralized cash management system, and Enron’s and ENA’s respective equity interests in various entities.
64
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Between January and February 2002, 10 different creditors moved for appointment of a trustee or examiner for ENA, appointment of a separate creditors’ committee for ENA, or appointment of separate counsel for ENA. The motion of various trade creditors argued that a fiduciary should be appointed because additional books and records were in danger of being destroyed, and the cash and other assets of ENA might be used to pay the creditors of the debtors other than ENA.
Judge Gonzalez appointed an examiner for ENA, who examined the matters in dispute (such as the use of the cash management system, outward payments of cash to other debtors, and the other debtors’ ability to pay the cash back), as well as other matters. Significantly, the examiner was instrumental as a plan facilitator in aiding the parties to reach a largely consensual settlement of the issues. However, the ENA examiner did not have the power to sue or appear as a party on litigated matters for ENA.
A trustee was not appointed. But the appointment of a trustee was not actually denied. Those creditors who had previously sought a trustee deferred their motions to await the efforts of the examiner. They never sought to put their motions back on the calendar.
Between January and March 2002, early in the
Enron
case, certain class action plaintiffs filed motions for appointment of a trustee, appointment of either a trustee or examiner, or appointment of an examiner for Enron. The debtors agreed to the appointment of an examiner for Enron, to inquire into special purpose vehicles and off-balance sheet transactions that prepetition Enron had utilized. This inquiry did not involve interdebtor disputes in any significant way.
A trustee was not appointed for Enron either, but once again Judge Gonzalez did not deny any motion requesting the appointment of a trustee. The movants, having the benefit of a new chief executive officer and reconstituted board of directors, who had been installed with the efforts and support of the Enron creditors’ committee, to replace the prepetition management, put their motions on hold and never sought to restore their motions to the calendar.
3. Global
Crossing
65
In this mega-case, filed in January 2002, by Global Crossing Ltd. (“Global Crossing”) and 53 of its subsidiaries, in which Global Crossing’s petition reflected approximately $12 billion in liabilities on a consolidated basis, no trustee was appointed. An examiner was appointed, at the very outset of the case and on a consensual basis, but for reasons unrelated to inter-debtor disputes, principally with respect to issuing an audit opinion on the Debtors’ consolidated financial statements for the 2001 year which had just ended, and for the 2002 year in which the case was filed.
66
A motion by an equity holder (who was badly out of the money) to appoint a chapter 11 trustee early in the case (for reasons unrelated to interdebtor disputes) was denied. Motions by that equity holder and another equity holder for appointment, in the alternative, of an examiner led to the consensual appointment of the examiner, as described above (once more, for reasons unrelated to inter debtor disputes).
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There
was
a significant intercreditor/in-terdebtor dispute in Global Crossing, late in the case, at the time of confirmation, which neither the Arahova Noteholders Committee nor the objectors noted but which this Court recalls. It again did not result in the appointment of a trustee or examiner, and presumably was not noted by the opposing parties on the motions here because there were no motions for appointment of a trustee or examiner at that time.
Instead, an Ad Hoc Committee of Bondholders of Global Crossing North America (which was a subsidiary of Global Crossing Ltd.) (the “Global Crossing Ad Hoc Committee”) objected to the disclosure statement and then confirmation.
67
Global Crossing North America was the successor to Frontier Communications (which in turn had once been known as Rochester Telephone Corporation) (“Frontier”), which Global Crossing Ltd. had acquired; Frontier had been an issuer of its own bonds before the acquisition. The Global Crossing Ad Hoc Committee complained about the debtors’ efforts to reconcile intercom-pany claims, and argued, among other things, that the plan improperly released intercompany claims between the Global Crossing debtors.
The Global Crossing Ad Hoc Committee was particularly concerned with respect to the debtors’ argued failure to enforce or even preserve “billion dollar causes of action”
68
that Frontier assertedly would have had as a result of the alleged diversion of the proceeds of the sale of Frontier assets to or for the benefit of other Global Crossing debtors.
69
The Ad Hoc Committee also objected to substantive consolidation, which would dilute their higher recoveries while giving up those assertedly valuable claims.
70
The objection to confirmation was litigated on the merits, with the Ad Hoc Committee putting on its case. The objection was opposed by the debtors and the creditors’ committee, who were joint proponents of the Global Crossing plan, and who considered the proposed plan treatment fair. After a few of days of hearings (and before the Court ruled on the Ad Hoc Committee’s contentions), the dispute was consensually resolved.
k.
ABIZ
71
In this mega-case, which was filed by a former subsidiary of Adelphia Parent (that had been spun off from the main Adelphia family) and six of its subsidiaries, the petition reflected liabilities of approximately $882 million. No trustee or examiner was appointed. Major disputes existed between ABIZ entities and various debtors in the Adelphia cases, with respect to the untangling of the various debtors’ operations and the obligations each might owe to the other, which were settled. While there were intercreditor disputes in the
ABIZ
case, which were settled, interdebtor disputes amongst the various ABIZ entities, if any, never were brought to the Court, or otherwise came to its attention.
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5. PSINet and PSINet Consulting Solutions
Holdings
72
In this mega-case, filed in June 2001, in which
PSINet’s
petition reflected approximately $4 billion in liabilities, PSINet had a number of direct and indirect subsidiaries, one of which was PSINet Consulting Solutions Holdings (“Holdings”). PSINet caused Holdings, which in turn had another subsidiary, PSINet Consulting Solutions, formerly known as Metamor Worldwide (“Metamor”), which had its own public bond debt, to file its own chapter 11 petition in September 2001, about 3 months after the original filing. The chapter 11 cases of PSINet and Holdings were separately administered (and each of PSINet and Holdings had its own creditors’ committee), but when Holdings filed, PSINet and Holdings continued to have joint management, and the same counsel.
Within a few months after the Holdings filing, it became apparent that interdebtor disputes were serious, and that PSINet’s management and counsel were conflicted. The dispute principally involved differences over whether about $98 million that PSINet had transferred to or spent on behalf of Metamor (and that had been largely booked as intercompany debt) should be characterized as debt or equity, and as to whether PSINet had mismanaged Metamor. PSINet’s creditors regarded the $98 million PSINet had laid out as a receivable from Holdings (a characterization with which Holdings’ creditors disagreed), and disputed Holdings’ creditors’ contentions that PSINet had mismanaged Metamor.
In November 2001, Holdings’ creditors’ committee moved before this Court for
STN
authority to proceed against PSINet to litigate those issues. But shortly before that motion was heard, the PSINet directors and officers that had led Holdings resigned, leaving Holdings without any management; PSINet’s counsel indicated that it would represent only PSINet; and PSINet cross-moved to convert Holdings’ case to chapter 7, or alternatively to appoint a chapter 11 trustee or other responsible person to oversee Holdings—observing that “in light of the resignations” of Holdings’ directors and officers, “some corporate governance figure (be it a Chapter 7 trustee, Chapter 11 trustee or other responsible person) would be required to oversee the wind-down and distribution process.”
73
This Court appointed a chapter 11 trustee, in the interests of creditors, under Code section 1104(a)(2). By reason of the cross-motion, that relief had been consented to. The officer and director resignations created a vacuum that needed to be filled, and creditor advocacy, even with
STN
authority, would be insufficient. Holdings and its subsidiaries then had little if anything in the way of continuing operations. Holdings’ principal activity by then was recovering on its receivables and any valid causes of action it could assert, and defeating the PSINet claims. No business considerations (such as the loss of an impending sale, or of DIP financing) militated against the appointment of a trustee. After the resignations and appointment of the chapter 11 trustee for Holdings, PSINet’s management and coun
*650
sel did not stay neutral, and instead sided with PSINet.
The Holdings creditors’ committee’s
STN
motion was denied without prejudice as moot. When considering its alternatives in dealing with the interdebtor dispute and the management vacuum, this Court considered, but rejected, the idea of appointing a “responsible person.” This Court ruled at the time:
As I said, I am concerned about the corporate governance vacuum that I am faced with here, and concerned that I have a ship without ... a board of directors, and I need to have somebody who could be subject to fiduciary duties.
There was some suggestion of the appointment of a responsible person. The U.S. Trustee objects for reasons that I fully understand and which I lean in favor of agreeing with, but expressly do not rule on now because it is unnecessary to do so because the appointment of a [cjhapter 11 [tjrustee would skin the cat just as effectively, in my view.
I need not reach the issue of whether ... a responsible person might ever [be] appropriate in some future case. It is unnecessary and inappropriate with the facts of this case.
74
The Holdings chapter 11 trustee thereafter retained his own counsel, who litigated the Holdings side of those issues in this Court against a team of counsel for PSI-Net and the PSINet creditors’ committee. The controversy was settled before the Court’s decision issued.
6. Casual
Male
75
In this mega-case, in which the parent’s petition reflected $244 million in debt, the debtors consisted of a parent and 15 subsidiaries, whose businesses were sold in section 363 sales in the course of the chapter 11 cases. A single joint plan of liquidation (jointly proposed by the debtors and the creditors’ committee) was confirmed, which did not substantively consolidate the estates (and which strictly speaking consisted of separate plans for each of the debtors),
76
but which allocated value received in the sales amongst creditors of different debtors, and at different levels, to the end that they received varying percentages of recovery of the total proceeds obtained in the sales.
The distributions to the creditors were premised upon the allocation of asset sale proceeds of the various estates pursuant to a settlement, described in greater detail in the plan’s disclosure statement,
77
which was the result of the debtors’ and the creditors’ committee’s joint efforts to establish valuations for the debtors’ various estates, and to allocate the debtors’ sale proceeds based upon the values of each of the 16 estates. While the confirmation of the case was delayed somewhat, after the last of the section 363 sales, to permit the settlement to be agreed on and approved, the valuation and related interdebtor allocation issues were never litigated. No trustee or independent fiduciary was appointed. None was requested.
7. Williams
Communications
78
In this mega-case, filed by Williams Communications Group and a subsidiary,
*651
and where the petition reflected debt of approximately $8 billion on a consolidated basis, neither a trustee nor an examiner were sought or appointed. A special counsel for the Williams Board was appointed, but for reasons unrelated to interdebtor issues. The Court can see no indication from the parties’ submission indicating that interdebtor issues were a prominent feature in the case.
8. NTL
79
In this mega-case, filed by NTL, Inc. and five of its subsidiaries, and where the petition reflected debt of approximately $23 billion on a consolidated basis, no trustee or examiner was appointed. It does not appear that interdebtor disputes were a prominent feature of that case.
9.
NRG
80
In this mega-case, filed by NRG Energy, Inc. and 25 of its subsidiaries, and where the petition reflected approximately $9 billion in liabilities, no trustee or examiner was appointed. There is no indication that interdebtor disputes were a prominent feature of that case.
10.
Conseco
81
Intercompany claims were an issue in the
Conseco
cases, but no party raised the need for a trustee or examiner for any of the debtors. No trustee or examiner was appointed, and the same counsel represented all 24 debtors.
11.
Kmart
82
No trustee or examiner was appointed. Two committees of creditors were appointed (one of which contained trade vendors and other general unsecured creditors, and the other of which contained financial institutions), but there is no indication that the separate committees were appointed to represent the opposite sides of interdebtor disputes. The debtors’ counsel, together with the board of directors and the statutory committees, investigated various allegations of malfeasance by former management.
12.FINOVA
83
No trustee, or examiner, was appointed. A single law firm (from out of town) acted as debtors’ counsel for all debtors, while a second law firm (in Delaware) served as Delaware counsel for all debtors.
18. IT
Group
84
No trustee was appointed. However, an examiner was appointed about two months after the case was filed. A few days before, the creditors’ committee (represented by the same counsel that represents the Arahova Noteholders Committee) moved for the appointment of a trustee and examiner with expanded powers to investigate cost-cutting and revenue enhancement measures for the debtors. It was alleged that the debtors had no reorganizational purpose (being “wedded to ... a liquidation of their assets”) and that they had preordained a sale of substantially all of their assets prior to contemplating a chapter 11 filing. The creditors’ committee argued that “there [was] no one left acting on behalf of the estate to pursue the reorganization scheme identified in December
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by the debtors but scuttled in January under pressure by the debtors’ prepetition lenders.”
85
The motion did not express any concern regarding the investigation or analysis of intercompany claims.
86
IT Group was the parent of 92 direct and indirect subsidiaries, and had direct and indirect ownership interests in 43 LLCs and JVs.
87
Nevertheless, only one examiner was appointed, to serve case-wide. It appears that in one place in a 26-page report, the examiner mentioned in-tercompany payables, but they do not appear to be a very significant aspect of that report.
88
Ik-
Mirant
89
The
Mirant
cases, which were filed in July 2003, involved 83 debtors that had been operated as a single enterprise and held many interdebtor contracts and shared assets. All of the debtors were operated by the same management and used the same professionals. No trustee was appointed, for any debtor. There were, however, two official creditors’ committees, one of which represented creditors at the structurally senior level, and one of which represented creditors at the structurally junior level.
90
The debtors stayed neutral in the interdebtor disputes, and the committees acted as the advocates for their creditor groups.
On April 13, 2004, the
Mirant
court issued an order directing the appointment of an examiner to perform certain investigatory duties, one of which was to ensure that transactions among debtors or their affiliates were fair and not prejudicial to the estates or creditors of any debtor. The court thereafter determined that closer supervision by the examiner was necessary. On April 29, 2004, approximately two weeks after having appointed the examiner, the
Mirant
court issued an order defining the examiner’s role to, among other things, review prospective transactions and courses of dealing between debtors to provide an opportunity for the court to determine whether such transaction or course of dealing was fair and consistent with the best interests of each debtor affected by it.
Thereafter, the
Mirant
court expanded the role of the examiner to include, among other things, the identification of any issue of fact or law the resolution of which might be necessary or useful to the advancement of the debtors’ reorganization, to take steps to resolve those issues consistent with the examiner’s duty to remain neutral; and, if an issue could not be resolved, to consult with the committees and the parties affected by the issue over how and when that issue should be resolved through litigation. In the event no party commenced litigation to resolve the issue, the examiner could seek court authority to commence that litigation, unless to do so would compromise his neutrality as to each of the debtor’s estates. As described by the Arahova Noteholders Committee’s counsel, the examiner served as a “lubricant” with respect to the resolution of the interdebtor issues and disputes.
91
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Thus the examiner’s powers with respect to the resolution of intercompany claims were expressly limited by reason of the
Mirant
court’s concern for preserving the examiner’s neutrality. Although inter-debtor issues existed, as described above, no trustee was appointed. And while the examiner was given a fact finding and facilitator role, the appointment was subject to the need to get a further court order to gain litigation authority. Corm mittees acted as the advocates for their creditors’ interests.
15. Federal Mogul
Global
92
A combination of a single out-of-town firm and a single Delaware firm represented all debtors, and there is no indication of additional bankruptcy counsel on a debtor by debtor basis. No trustee or examiner was appointed.
16. U.S.
Airways
93
A combination of a single out-of-town firm and a single Virginia firm represented all debtors, and there is no indication of additional bankruptcy counsel on a debtor by debtor basis. No trustee or examiner was appointed.
As is apparent from the foregoing, inter-debtor disputes are common in multi-debt- or chapter 11 cases. But the appointment of chapter 11 trustees to deal with them is not. In none of the 14 cases that the Arahova Noteholders Committee brought to the Court’s attention (and only one of the additional eases of which this Court has knowledge) was a trustee appointed. And there the debtors themselves had moved for that relief, and the driving factor was not the presence of the interdebtor disputes (which the respective estates’ committees could have litigated), but rather the management vacuum at the affected debtor, by reason of the resignations of all of its officers and directors.
Similarly, in none of these cases was any kind of nonstatutory fiduciary appointed, such as a responsible officer or designated corporate employee.
In a few cases, examiners were appointed, to be fact finders, facilitators of settlements, or both. But none was granted authority to litigate on behalf of one debt- or against another.
E. Ultimate Findings of Fact
Based on all of the evidence, the Court makes the following ultimate Findings of Fact:
Neither the Debtors nor their counsel have engaged in fraud, dishonesty, incompetence or gross managements of the Debtors’ affairs. To the contrary^ both have performed their duties in an exemplary manner.
The appointment of a trustee for the Arahova Debtors, especially at this late time, would be highly prejudicial to the Arahova Debtors. The appointment of one or more non-trustee “fiduciaries,” especially at this late time, would be highly prejudicial to the Arahova Debtors.
The Debtors marketed the company conscientiously and effectively. By obtaining the sale to Time Warner and Comcast, they obtained the maximum value for it. There is no evidence to suggest that by carving out the Arahova Debtors from a sale of the rest of the Debtors, the Debtors or their advisors could have secured more consideration for the Arahova Debtors. There is no evidence to suggest that there is any alternative prospective buyer for the
*654
Arahova Debtors, much less one offering more attractive consideration.
The Debtors likewise engaged in their accounting analysis conscientiously and effectively, recognizing (as does the Court) that their judgments in this regard (including as to methodology) would not be binding on the Court, and that the ultimate interdebtor/interereditor issues in this case—including, without limitation, judgmental matters, legal determinations, determinations as to the voidability of past transactions, and factual determinations as to disputed facts (to the extent factual disputes exit)—are the Court’s province, and not the Debtors’, to decide.
Interdebtor Disputes do now exist, which must be resolved in some fashion. But the only fact that could tilt toward appointment of a trustee or nonstatutory fiduciary (to the extent one is permissible and otherwise appropriate under the law) is the mere existence of such Interdebtor Disputes.
Interdebtor disputes are very common in large multi-debtor chapter 11 cases. In most cases, they are resolved by negotiations between or among the creditors whose recoveries are determined by the outcome of those disputes—with a subcur-rent underlying those negotiations that creditors have the right to litigate them if agreement cannot be reached. The appointment of a trustee to litigate such disputes is not unprecedented, but is nearly so. The appointment of a nonstatutory fiduciary to litigate those disputes would be unprecedented. The appointment of an examiner to litigate those disputes (though not requested here) would be unprecedented.
At all relevant times, the Debtors and their counsel maintained neutrality in the Interdebtor Disputes. The Debtors’ decision to maintain neutrality, and to refrain from taking sides as an advocate for or against either the Arahova Noteholders or any of the Debtors (including, most significantly, Adelphia Parent) was sensible and taken in good faith.
The Court agrees with the Adelphia Parent Noteholders Committee
94
that the motions are “not reflective of any genuinely held concern over conflicts of interest. If that were the case, the Motions would have been filed months, if not years, ago.” Rather, they are a tactical measure, to secure greater recoveries.
95
The record is devoid of any evidence from which the Court could find, and it does not find, that the Arahova Debtors in any way acted in violation of their duty of loyalty. Nor does the Court find postpetition self-dealing.
Discussion
I.
Trustee/Nonstatutory Fiduciary
A. Appointment of Trustee
In the first of its motions, the Arahova Noteholders Committee seeks an order of this Court, pursuant to section 1104(a) of the Code, appointing a trustee for Arahova and its subsidiaries.
96
This motion is denied in all respects.
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In the form applicable to the Adelphia chapter 11 cases,
97
section 1104(a) provides:
(a) At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of a trustee—
(1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor; or
(2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.
As the Second Circuit has noted, “the standard for § 1104 appointment is very high.”
98
“Chapter 11 of the Code is designed to allow the debtor-in-possession to retain management and control of the debtor’s business operations unless a party in interest can prove that the appointment of a trustee is warranted,”
99
and there is a strong presumption that the debtor should be permitted to remain in possession absent a showing of need for the appointment of a trustee.
100
It has been repeatedly held that the appointment of a chapter 11 trustee is an “extraordinary remedy.”
101
As the Third Circuit has held:
It is settled that appointment of a trustee should be the exception, rather than the rule.... The movant ... must prove
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the need for a trustee by clear and convincing evidence.
102
A party seeking appointment of a trustee has the burden of showing, by clear and convincing evidence, cause under section 1104(a)(1) or the need for a trustee under section 1104(a)(2).
103
The decision to appoint a trustee in a chapter 11 case is a factual determination left to the discretion of the bankruptcy judge.
104
The standards for the application of the two subsections of section 1104(a) “are quite flexible and give the judge wide discretion in deciding whether there is cause to appoint a trustee.”
105
1. Appointment of Trustee for
Cause&emdash;
Section 1104(a)(1)
While the Arahova Noteholders Committee moves under both sections, its reliance on section 1104(a)(1) is nearly frivolous. Subsection (a)(1) authorizes the appointment of a trustee for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debt- or by current management. With the Rigases out, and on the factual record here, the Arahova Noteholders Committee does not come close to making the necessary showing.
While the words following “including” do not, by definition, represent the only bases for a finding of cause,
106
words are nevertheless known by the company they keep, and here there is no basis for any finding of misconduct or lack of managerial skill. The Arahova Noteholders Committee acknowledged the extraordinary job the Debtors had done,
107
but went on to say “that’s not what these motions are about.”
108
But when the Court examines the narrower alleged Debtor offenses that do supposedly evidence misconduct or mismanagement, the Court finds neither. The Court has rejected as a fact the Ara-hova Noteholders Committee’s contention that in conducting the sale process, the Debtors’ focus on maximizing the value of the Adelphia enterprise somehow came at the expense of particular estates and their stakeholders, and has noted, to the contrary, that the Court cannot find that the Debtors sacrificed an opportunity to get more value for the Arahova Debtors to gain a better deal for the remaining Debtors, or for all of the Debtors’ estates generally. It likewise has rejected, as a fact, the Arahova Noteholders Committee’s contention that the Debtors engaged in their accounting to aid or hurt any particular debtor or constituency.
As discussed in its Findings of Fact above, the Court has also found that the Debtors have maintained neutrality in the
*657
Interdebtor and Intercreditor Disputes, They have not acted adversely to any debt- or estate.
109
Thus the Court is left with the mere
presence
of interdebtor conflicts, which, as the Court has noted above, are present in many, if not most, large multidebtor cases. Interdebtor disputes do not by themselves evidence (much less establish) fraud or mismanagement, or misconduct of the type that constitutes cause under section 1104(a)(1).
Most of the eases cited by the Arahova Noteholders Committee in the portion of its Trustee Motion seeking relief under subsection (a)(1)
110
had characteristics of either management self-dealing or misconduct, or instances in which management ignored potential causes of action.
111
In the exception,
In re L.S. Good & Co.,
112
the trustee was appointed under subsection (a)(2), and not, as the Arahova Notehold-ers Committee implied,
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subsection (a)(1). In fact, the
L.S. Good
court said:
[T] motion should not be granted under the provisions of 11 U.S.C. § 1104 (a)(1) for the record before me is devoid of clear and convincing proof that the current management of Knapp is guilty of fraud, dishonesty, incompetence or gross mismanagement.
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Though it might be regarded as faint praise for the Debtors in this case, that is no less true here.
2. Appointment in the Interests of Creditors, et al.
Section 1104(a)(2) authorizes the appointment of a trustee on a separate ground, where such is “in the interests of creditors, equity security holders, and other interests of the estate.” In exercising the considerable discretion this Court has in deciding the motion insofar as it rests on this subsection, the Court engages in a fact-driven analysis, principally balancing the advantages and disadvantages of taking such a step, and mindful of the many cases, noted above, that have held that appointment of a trustee is an extraordinary remedy,
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and should be the exception, rather than the rule.
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Subsection (a)(2) envisions a flexible standard.
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It has been repeatedly held that “ ‘[i]n determining whether the appointment of a trustee is in the best interests of creditors, a bankruptcy court must necessarily resort to its broad equity powers.’ ”
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In considering requests under subsection (a)(2), courts “ ‘eschew rigid absolutes and look [ ] to the practical realities and necessities.’ ”
119
Thus there is no basis for a conclusion that the mere presence of interdebtor disputes alone mandates the appointment of a trustee.
Among the factors that are considered are: (i) the trustworthiness of the debtor; (ii) the debtor in possession’s past and present performance and prospects for the debtor’s rehabilitation; (iii) the confidence—or lack thereof—of the business community and of creditors in present management; and (iv) the benefits derived by the appointment of a trustee, balanced against the cost of the appointment.
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Plainly, any need to find a mechanism to address interdebtor issues should be considered as part of that balancing, but it is not by itself determinative.
Here, after the ouster of the Rigases, the Debtors’ trustworthiness is not an issue. Similarly, the Arahova Debtors, like the other Debtors, have had more than satisfactory performance, and their rehabilitation (at least if not disrupted by the present motions) is strongly likely. And
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those lacking axes to grind (such as the Creditors’ Committee) have voiced no dissatisfaction or lack of confidence with the Arahova Debtors’ management. Thus the Court turns to the final factor—which, in this case and so many other cases—is the most important.
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The relevant facts tilt overwhelmingly against the appointment of a trustee, especially from the perspective of the Arahova Debtors’ unsecured creditors.
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Among many other things, as noted above, such an appointment would constitute an act of default under the pending $17.6 billion Time Warner/Comcast sale, the loss of which would cost the Arahova Debtors their share of that amount—an amount that, as Mr. Schleyer testified, could not be fetched by a sale of the Arahova Debtors alone. It also would constitute an act of default under the Debtors’ DIP financing facility, resulting in the loss of funding essential to all of the Debtors’ operations and capital expenditures—including, the Court notes, certain of the Arahova Debtors as well. Each of these would be disastrous for the Arahova Debtors, just as they would be disastrous for all of the others.
Appointment of a trustee also almost certainly would result in a slowdown, if not halt, in the progress of the Arahova Debtors in their emergence from bankruptcy. And if the closing of the Time Warner/Comcast sale were delayed past July 31, 2006, that would give the buyers termination rights.
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Such a scenario would put the receipt of the $17.6 billion sale price at risk, and additionally subject the Debtors, including the Arahova Debtors, to risk of the loss of $443 million in breakup fees. Even if Time Warner and Comcast were still willing to do the deal, the Debtors’ estates, including the Arahova Debtors’ estates, would still be subject to the risk that Time Warner and Comcast would use that as a basis to lower the price. Even with the appointment of a trustee for the Arahova Debtors, the interdebtor issues will still need to be addressed. But it is difficult, if not impossible, to see how the hearings on them could then commence at the end of this month, as the Court now has directed.
The Court cannot speculate as to exactly how long it would take a new trustee and his/her advisors to acquire the knowledge that it took Appaloosa and the other members of the Arahova Noteholders Commit
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tee (and their adversaries) years to acquire, but that time necessarily would be lengthy. And there is grave uncertainty as to how much time it would take the new trustee to get up to speed on Arahova
operational
issues that presumably would also have to be addressed, particularly if the Arahova Debtors are to be run, in whole or in part, independently.
Delay in exiting bankruptcy will materially prejudice the unsecured creditors of the Arahova Debtors, just as it will materially prejudice substantially all of the other unsecured creditors in the Adelphia cases. The Arahova Debtors, like most of the others, have secured debt, which is at least seemingly oversecured and entitled to postpetition interest. The Arahova Debtors’ unsecured creditors are junior in priority, and as the interest on secured claims continues to accrue, unsecured creditor recoveries will decrease. To a certain extent, delay in this case was unavoidable, as these were cases of extraordinary complexity, with the need to address changes in the Board and in senior management; to stabilize and grow the business; to deal with the legacy of the Rigases; to settle disputes with the SEC and DoJ; and, of course, to market the company. And to the extent that delay was unavoidable, everyone must accept it. But it is the responsibility of the Court to ensure that there be no further delay that can be avoided. And, of course, delay in the effectiveness of the Present Plan and the closing of the Time Warner/Comcast sale will risk the loss of the sale proceeds and, at the same time, the loss of the breakup fee, presaging even greater risks to the Arahova Debtors’ unsecured creditors.
Whether on operational issues, the sale to Time Warner and Comcast, or on reorganization plans, the appointment of a trustee (and, one can presume, newly hired counsel) for the Arahova Debtors would indeed, as the Debtors argue, result in the Balkanization of decision making in the case, impeding prompt decision making, and adding one or more extra layers of delay. No party could seriously suggest that any of this is in the interests of creditors. It will be quite the opposite. That is especially true since, as the Adelphia Parent Noteholders Committee and Fron-tierVision Noteholders Committee have noted (while opposing appointment of a trustee for the above reasons, among others), if a trustee were to be appointed for the Arahova Debtors, then trustees would have to be appointed for their borrower Debtors as well.
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Against this, there would be few, if any, benefits of appointing a trustee for the Arahova Debtors here. The Arahova Noteholders Committee is quite able to litigate and protect its economic interests without the assistance of a trustee, as its many filings on these moti

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/1950950. Public record. Not legal advice.