In Re Adelphia Communications Corp.

BENCH DECISION ON CONFIRMATION

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ROBERT E. GERBER, Bankruptcy Judge.

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In this contested matter in the jointly administered chapter 11 cases of Adelphia Communications Corporation and its subsidiaries (the “Debtors”), I have before me, for confirmation, the First Modified Fifth Amended Joint Chapter 11 Plan (the “Plan”) — a much-revised plan of reorganization for all of the 230-odd Debtors in these cases — now jointly proposed by the Debtors and the Official Committee of Unsecured Creditors (the “Creditors Committee”), and bank lender agents Wacho-via, the Bank of Montreal, and the Bank of America (collectively, the “Plan Proponents”). The Plan would distribute the approximately $15 billion in value remaining after the^Debtors’ $17.6 billion sale of the Company this summer to Time Warner

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and Comcast, and after the distribution of the first $2.6 billion in value under an earlier confirmed plan for joint venture debtors in the Adelphia chapter 11 cases.

After 4-1/2 years in chapter 11 in a case that has been among the most challenging — and contentious — in bankruptcy history (and after seven predecessor plans that made one creditor constituency or another-and in some cases nearly everybody — extremely unhappy),

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the Plan now has overwhelming support. It has satisfied the Bankruptcy Code’s assent thresholds for all 30 of the 30 impaired classes that were entitled to, and did, vote on the Plan,

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holding approximately $10.7 billion of the Debtors’ $12.7 billion total in debt. But the Plan nevertheless has been faced with objections to confirmation — including not just the usual, relatively minor, confirmation objections that normally accompany any chapter 11 plan (and are easily resolved, either by negotiation or judicial determination), but also extremely bitter objections by creditors who were outvoted in the balloting on the plan.

Significantly — as this underlies much of the Plan’s support, and the vociferous objection to it — the Plan has as its cornerstone a settlement, described more fully below (the “Settlement”), of intercreditor disputes that have plagued the Adelphia cases for years (and that, if not settled, would continue to do so), and that came very close to torpedoing the Time Warner/Comcast sale.

Principally by reason of the settlement of the interdebtor disputes, the Plan has been vigorously opposed by a group of holders of Senior Notes of ACC (the “ACC Bondholder Group”) who vociferously oppose the Settlement. They argue that notwithstanding the overwhelming support for the Plan (including within their own class and the six other classes of ACC creditors and equity holders), the Plan is unconfirmable.

Some minor aspects of the ACC Bondholder Group’s objections have merit (or did until they were cured),

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but the great bulk of them do not. And those that lack merit include, most significantly, the objections to the Settlement, which I have reviewed with considerable care to ensure that it passes muster for reasonableness. Significantly, as relevant to the remaining objections that do have merit (which are minor, in the scheme of things, and which will not require resolicitation of the Plan), the Plan provides for automatic corrections, as the impermissible provisions apply only to the extent permissible under law, or are trumped by an order of the Court directing otherwise. As I am now telling the parties how I will address those

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matters (as discussed below), the Plan will be confirmed.

The following are my Findings of Fact and Conclusions of Law in connection with this determination.

Findings of Fact

Under my Case Management Order # 3, testimony is taken by affidavit or declaration, and cross-examination and any subsequent testimony is taken live. After a nine-day evidentiary hearing, at which the declarants were cross-examined, I find most, but not all, of the testimony worthy of reliance, and where I have not found testimony credible (or, in the case of expert testimony, persuasive), I will so note. Without getting into all of the detail that characterizes the record on this matter,

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I summarize my factual findings, and my conclusions based upon them, below.

A. Background,

Adelphia, until the sale of nearly all of its operations to Time Warner and Com-cast, was the fifth largest operator of cable systems in the United States. It provided residential customers with analog and digital video services, high-speed Internet access, and other advanced services over its broadband networks. It 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, Adelp-hia became much larger, and its operations became much more complex. The Rigases themselves owned a number of cable companies and other, non-cable assets, through a variety of corporations, partnerships, and LLCs (the “Rigas Family Entities”). The day-to-day affairs of the Rigas Family Entities that were cable companies (the “Managed Entities”) were managed by Adelphia.

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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 the board of directors of ACC (the “Board”).

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In March 2002, the Debtors disclosed that they were 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 the Debtors’ consolidated financial statements. It also appeared that a portion of the borrowings for which Adelp-hia 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 ACC was del-isted from the NASDAQ National Market; Deloitte & Touche LLP, the Debtors’ independent auditor at that time, suspended its auditing work on Adelphia’s consolidated

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financial statements for the year that ended December 31, 2001, and withdrew its opinion for prior consolidated financial statements; and, ultimately, the Debtors defaulted under all six credit facilities and all of the indentures to which they were a party.

In the Spring of 2002, a special committee of the Board, comprised of three members of the Board who were not members of the Rigas Family, commenced a formal investigation into related party transactions between Adelphia entities and members and the Rigas Family Entities. 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. After the Rigases’ resignation, only four directors, unaffiliated with the Rigases (the “Carry-Over Directors”) remained on the ACC Board, who managed Adelphia, to the extent anyone could, until new directors and officers came on board.

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, substantially all of the Debtors filed for chapter 11 protection in June 2002.

In July 2002, the United States Trustee for the Southern District of New York (the “UST”) appointed the Creditors Committee, as a fiduciary to represent the interests of the unsecured creditors of the Debtors. The membership of the Creditors Committee changed over the course of time, as creditors sold their claims, and others acquired claims as an investment. The current members of the Creditors Committee are: W.R. Huff Asset Management Co., LLC; Appaloosa Management; Law Debenture Trust Debtors of New York, as Indenture Trustee; Sierra Liquidity Fund, LLC; U.S. Bank National Association, as Indenture Trustee; Tudor Investment Corporation; Wilmington Trust, as Indenture Trustee; Highfields Capital Management; and Dune Capital Management LP.

When it looked like there might also be sufficient value in the estate to provide recoveries to equity holders, the UST also appointed an Equity Committee, as a fiduciary to protect equity holder interests.

B. New Leadership

During the first year of these cases, the Company was led by interim management that lacked significant cable experience. By necessity, interim management focused on stabilizing operations, identifying and hiring an experienced successor management team, commencing the process of creating state-of-the-art corporate governance structures, and conducting a thorough investigation of Rigas Family conduct and transactions.

From August 2002 through July 2003, the Carry-Over Directors began to reconstitute the Board with new independent directors. In addition, the Company appointed a new slate of directors to each subsidiary board. When interim management was replaced in the spring of 2003, the subsidiary management and boards were reconstituted yet again.

In early 2003, the Company (with extensive input from the Creditors Committee) replaced interim management with a slate of senior executives who had substantial cable experience. Thus, it was only in the second year of these cases, once new management was in place and the majority of the Debtors’ boards was reconstituted,

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that the Company and its advisors were able to turn their attention to the Company’s restructuring.

C. Restatement Of Debtor Books And Records

In light of the fiscal mismanagement and fraud on the part of the Rigases that had been discovered up to that point, the Debtors initiated investigations and engaged accountants with forensic accounting skills. 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”). This process 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. Audited financials were required by Time Warner and Comcast and would have been required by the SEC if the Debtors were to emerge as stand-alone companies.

Although the Debtors intended initially to prepare separate audited financials for each subsidiary Debtor that was a reporting Debtor under the ’34 Act and similar securities laws (each, a “Subsidiary Reporting Debtor”), after significant effort, it became apparent that the Debtors would be unable to complete financial statements for certain of 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 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.

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 general ledger accounts. These accounted for, among other things, intercompany transactions among consolidated entities, including consolidated joint venture partners.

These Restatement efforts identified accounting errors that generally arose in connection with the misinterpretation or misapplication of GAAP and the failure to maintain adequate internal controls and appropriate books and records. But as part of the Restatement, intercompany transactions were generally only adjusted when they were not compliant with GAAP or otherwise erroneous. Other issues, including the validity, treatment and priority of Intercompany Claims, and the eradication of fraud, were not determined and instead reserved for later determination.

This is a critically important fact, which was not understood or sufficiently taken into account by the ACC Bondholder Group’s expert. The focus of the Adelphia effort was to make its financial statements reliable so the

outside world

— in

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vestors and counter-parties to transactions — could rely on them. And this was what Adelphia’s auditor, PwC, opined upon. So far as I can tell (based on evidence I saw in the record of these cases going over 4-1/2 years, including the detailed examination of the Restatement effort that took place in the “MIA” Litigation, discussed below) Adelphia and its outside consultants (including, most notably, Scott MacDonald, Robert DiBella and Carol Savage), and its outside auditor PwC, which opined on consolidated (but not unconsolidated) financials, did a first-rate job. And Adelphia’s financials,

on a consolidated basis,

insofar as they address matters of importance to the outside world, appear indeed to be highly reliable. But the same cannot necessarily be said about Adelphia’s

unconsolidated

financials, which underlie interdebtor disputes. Insofar as Adelphia’s financials deal with internal matters, including, most significantly, interdebtor matters that ehminated each other in “eliminating transactions” that were undertaken as part of the process of preparing consolidated financials, they did not have the same level of reliability, because that was not the Restatement Team’s focus.

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The extent to which the unconsolidated finan-cials had reliability was (and still is) a matter of sharp debate.

As the global notes to the schedules filed by the Company in May 2005 disclosed, the Company “reserve[d] all rights with respect to the intercompany balances, including, without limitation, the appropriate characterization of the intercompany balances in the Plan.” The Debtors have not advocated any particular treatment of the Intercompany Claims or that such schedule entries even constituted claims.

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D. The “Bank of Adelphia Paradigm”

In conjunction with the review just described, 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 (the “Bank of Adelphia”). This methodology, often referred to as the “Bank of Adelphia Paradigm,” aggregated intercompany transaction 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) attempted to correct erroneous and inconsistent intercompany transactions reflected in the income statement;

(b) sought to apply 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 intercompa-ny balances; and

(c) otherwise reviewed and adjusted, when they regarded it as necessary, the intercompany transactions.

But this inevitably involved judgment calls, particularly with respect to non-cash transactions. Since the great bulk of cash transactions involved disbursements from, or deposits to, the Bank of Adelphia, it is understandable (though even then, not indisputable) that Adelphia’s accounts “ran them through” the Bank of Adelphia. But with respect to noncash transactions (especially including recapitalizations, acquisition accounting, and non-cash dividends), the propriety of the use of the Bank of Adelphia Paradigm was and is more debatable. Use of the Bank of Adelphia would

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in most material respects (if not all of them) not change results reported to the outside world in consolidated financial reporting, because, as noted, “eliminating transactions” as part of the consolidating process would make use of the Bank of Adelphia Paradigm academic. But it could have huge significance in its effect on in-terdebtor transactions. And its effect would be magnified, arguably astronomically, if the Bank of Adelphia was insolvent (as it now appears to be), and seemingly offsetting

transactions

— e.g., a reduction in assets on the part of one of the debtors “matched” with a corresponding receivable from the Bank of Adelphia — appeared on the books. Then the “offsetting” entry would arguably, if not plainly, be offsetting only in theory, and not in practice. A huge issue in the litigation I will describe below was how one fairly should deal with situations where seemingly “matched” transactions weren’t really matched, in practice, because assets (or the accounting equivalent) might be going out in 100% dollars, with offsetting receivables (or the accounting equivalent) in dollars upon which less than 100% distributions would be paid or payable.

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Beginning in August 2003, the Debtors convened a series of meetings with key restricted

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parties (bank lender agents, tile Creditors Committee and the Equity Committee) to review and discuss the four primary factors in determining potential recoveries: the “Waterfall” analysis (i.e., the analysis of how distributable value would flow through the corporate structure), the Debtors’ long range business plan, the intercompany transactions, and valuation/allocation. While the underlying facts were not a major subject of controversy, the accounting judgment calls and application of the law to the facts were matters 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.

The presentations distributed by the Debtors in the Fall of 2003 and Winter of 2004 informed parties of the potential for significant disputes between creditors, particularly (though not exclusively) Arahova and ACC.

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At that time, the precursors to the Arahova Noteholders Committee and the ACC Senior Noteholders Committee 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 affected parties and their respective counsel.

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But those efforts proved to be unsuccessful in bridging the gap.

E. The Sale of the Company

Adelphia filed a first proposed plan of reorganization (the “First Plan”) in February 2004.

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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 (especially) between creditors. Adelphia’s first proposed plan was a “standalone” plan—

i.e.,

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. 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 at the time by the SEC and the DoJ.

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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.

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The Debtors were sensitive to these concerns. In April 2004, the Debtors advised me, in a chambers conference, that with the support of both the Creditors Committee and Equity Committee, they would

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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 search process, the Debtors retained Allen & Company (“Allen”) and UBS Securities (“UBSS”) as financial ad-visors, and Sullivan

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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. In January 2005, the Debtors received an impressive number of bids. After considering the bids, the Board concluded that a 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.

On April 20, 2005, ACC entered into definitive sale agreements (the “Purchase Agreements”) with Time Warner and Comcast (together, the “Buyers”) pursuant to which the Buyers agreed to purchase substantially all of the Debtors’ U.S. assets, including their equity in the JV Debtors whose reorganization plans were confirmed in June 2006. Under that sale transaction (the “Sale Transaction”), substantially all of Adelphia would be sold for approximately $12.7 billion in cash and an approximately 16% interest in Time Warner Cable, Inc. (“TWC”). That amount reflected 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.

At that time, the Buyers desired (and the Purchase Agreements required) that the Sale Transaction be implemented pursuant to a chapter 11 plan, and that it be closed on or before July 31, 2006 (the “Outside Date”).

F. The May 2005 Schedules

In January 2005, the Debtors filed amended Schedules of Liabilities with the Court (the “January 2005 Intercompany Schedules”). They listed each Debtor’s net intercompany payable to, or receivable from, the Bank of Adelphia, 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, the Bank of Adelphia (the “May 2005 Schedules”).

This was a blockbuster event. Unlike the Debtors’

consolidated

financials, (addressing their financial condition in a way that would be of significance to the outside world), the May 2005 Schedules, if regarded as the basis for determining intercom-pany obligations, would have an enormous impact on the distribution of value as between Debtors in the complex Adelphia corporate structure — and, accordingly, on the recoveries of the creditors holding claims against those individual Debtors.

The various constituencies at the time reacted to the publication of the May 2005 Schedules in markedly different ways. An “Ad Hoc Committee of ACC Senior Note-holders” (the “ACC Senior Noteholders Committee”)

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had appeared in these

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cases to advocate the interests of Senior Noteholders of ACC. The ACC Senior Noteholders Committee applauded the figures in the May 2005 Schedules. An Ad Hoc Committee of Arahova Bondholders (the “Arahova Bondholders Committee”), which was formed in or before May 2005, strongly objected to them, and moved to strike the schedules. I denied the motion, though I noted the limits as to the extent to which any conclusions in the May 2005 Schedules would be binding on creditors.

The ad hoc committees’ respective reactions were such even though the May 2005 Schedules contained significant reservations of rights by the Debtors, including:

• “While the Debtors’ management has made every reasonable effort to ensure that the Bankruptcy Schedules are accurate and complete ... the subsequent receipt of information and/or further review and analysis ... may result in material changes to financial data and other information contained in the Bankruptcy Schedules.”

• “The intercompany balances can be characterized in many ways, including (i)

pan passu

with all third-party debt, including bank debt; (ii)

pan passu

with trade debt but subordinated to bank debt; (iii) subordinated to all third-party debt but senior to common equity; or (iv) equity____The Debtors reserve all of their rights with respect to the intercompany balances, including, but not limited to, the appropriate characterization of the intercompany balances.”

•“Any failure to designate a claim as ‘contingent’, ‘unliquidated’, or ‘disputed’ does not constitute an admission by the Debtors that such claim is not ‘contingent’, ‘unliquidated’, or ‘disputed’.”

On May 27, 2005, I approved an application by the Creditors Committee to authorize the retention of Weiser LLP as “Tax and Intercompany Transaction Consultants” for the Creditors Committee.

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But this application turned out to be very controversial, as it brought out into the open, at least for me, the gravity of the interdebtor and intercreditor disputes that would become such a huge aspect of these cases.

At the hearing to consider the Weiser Application, I said that the Creditors Committee’s role with respect to the Intercred-itor Dispute was not to take sides, but rather to “keep the lid on, in terms of intercreditor disputes and facilitating the settlement of intercreditor issues, if at all possible.”

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During that hearing and with the agreement (if not also urging) of counsel to the Creditors Committee, I strongly encouraged (though I did not order) that members of the ACC Senior Noteholders Committee be appointed to the Creditors Committee.

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As a result, Tudor and Highfields, holders of ACC Senior Notes and members of the ACC Senior Note-

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holders Committee, joined the Creditors Committee on or about May 20, 2005.

G. Origins of the MIA

In May 2005, Adelphia sought my approval for a major four-way settlement with the United States Department of Justice, the Securities and Exchange Commission, and members of the family of John Rigas. The settlement addressed, among other things, the DoJ’s ability to indict Adelphia itself, the SEC’s action and proof of claim against Adelphia, and litigation Adelphia had commenced against the Ri-gases. The settlement included, among other things, providing value (partly in cash and partly in other currency) to the Government of $715 million-though this cost would be offset, in part, by another aspect of the settlement, under which Ri-gas family assets, many or all of which likely would have been forfeited to the Government, would pass to Adelphia. Adelphia’s motion for approval of that settlement engendered a considerable number of objections, principally by unsecured creditors, who expressed the concern, “probably with some justification, that a victims restitution fund that the DoJ and SEC will establish with settlement proceeds will go in major part to equity holder victims of Adelphia fraud, whose recoveries in this Court would be subordinate to creditors under normal bankruptcy priorities.”

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I approved that motion, “with certain additional measures being included within my approval order to protect rights following the implementation of the settlement.”

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One of those involved interdebtor and intercreditor disputes, which were beginning to boil. I noted:

Several groups of unsecured creditors— the Ad Hoc Committee of ACC Senior Noteholders, the Ad Hoc Committee of Arahova Noteholders, and the Ad Hoc Trade Claims Committee (who hold claims against entities at different levels in Adelphia’s rather complex parent-subsidiary structure)- — -voice concerns — in many respects, mirror images of each other — as to whether they would inappropriately be prejudiced by any payment on behalf of the estate. In the view of each, the burden of the settlement should be borne, in whole or in material part, by creditors at other levels, or by creditors of different entities. The ACC Senior Noteholders go a step further, and argue that this settlement cannot be approved until the intercreditor disputes, which could also involve benefits of the settlement, along with burdens, are resolved.

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I disagreed that the pendency of the inter-creditor disputes made it impossible to approve the DoJ/SEC/Rigases settlement, but held:

While I recognize that the

magnitude

of the burdens, or benefits, from this settlement might appropriately vary from one to another of the 220 debtors, I have no doubt whatever that the settlement is advantageous for all, and I reject the notion that approval of the settlement should be denied or delayed for the resolution of these individual intercreditor disputes — especially given the importance to Adelphia of the prompt resolution of the issues underlying this settlement.

I went on to say:

However, I agree with those creditors when they say that the allocation of the

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burdens and benefits of the settlement—

e.g.,

the payment of the $715 million, and the allocation of the excess value deriving from the Managed Entities — should be done in a fashion that does not prejudice their rights in their respective in-tercreditor disputes. It is reasonable to expect that creditors at the different levels in the corporate chain will have different perceptions as to what is fair when it comes to the allocation of settlement burdens and benefits. Fairness requires that mechanisms be created to permit those issues to be resolved-consensually, if possible, but otherwise with due process.

I continued:

All would agree, I think, that the rights of various creditor constituencies on these interereditor disputes should not be prejudiced by the settlement approved today, and paragraph 9 of the proposed order does that quite capably. But the creditor groups have a legitimate need to get a determination on the allocation issues, if they cannot agree, and supplemental mechanisms need to be established to accomplish that. I am uncomfortable with the proposal made by the Debtors, in their reply papers, that this be left to the plan negotiation process. While I always welcome consensual agreement, I think the Debtors’ proposal lacks the necessary mechanism for giving creditors their day in court on the allocation issues if agreement cannot be achieved.

I then went on to say:

Accordingly, I believe that such an opportunity for judicial resolution, if necessary, must be provided. But it need not be done on a lightning fast basis, and indeed should not be, as the issues are complex and they likely will be interwoven with other complex issues involving intercompany obligations. Also, none of the Debtors will actually be writing out a check to the Government any time soon, and I thus think that concerns creditors articulated as to how any such payment would be accounted for prior to resolution of the allocation issues are illusory....

At this juncture, I will direct that stakeholders who wish to take a position on allocation issues caucus amongst themselves, together with professionals for the Debtors and the Creditors’ Committee (who likely will not be antagonists on these issues, but who are likely to be helpful in the process) to establish a game plan for the resolution of the allocation issues. That game plan should include the creation of an escape valve litigation mechanism (to be handled as a contested matter) to resolve any disputes if necessary. The game plan should provide sufficient time to get these issues resolved before confirmation, and, if possible, before the finalization of any reorganization plan. I will leave it to the parties, in the first instance, to decide on the best way to move the process forward, but I will make myself available, as usual, for conference calls, chambers conferences, or more formal hearings if desired.

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When it became increasingly a matter of concern that consensual efforts to resolve the intercreditor issues would be unavailing, the Debtors filed a “Motion in Aid of Confirmation,” which came to be referred in shorthand as the “Motion in Aid.” On July 26, 2005, I conducted lengthy hearings on the propriety of granting the Motion in Aid (and, if I were to grant it, what procedures I would establish) as well as several other motions brought by the Ara-hova Noteholders — one of which was a mo

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tion to strike the May 2005 Schedules, and another of which was to give the Arahova Noteholders Committee

STN

authority to bring a fraudulent conveyance action on behalf of Arahova (though not to deal with other aspects of the interdebtor disputes). I heard extensive argument from various parties in connection with each of the motions. After the conclusion of the hearing, I issued an oral ruling denying the Araho-va Noteholders’ motions and approving most of the requested procedures sought in the Motion in Aid, some of which I had modified in order to further the parties’ due process rights.

One of the provisions I approved was a reservation of rights on the part of the Debtors to propose a settlement of the MIA issues, subject to parties’ rights of Participants in the Motion in Aid litigation to object to the proposed compromise or to the Debtors’ authority to compromise disputes.

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That authority was never taken away, though the Debtors’ ability to take sides on the merits of the controversy, granted in an accompanying paragraph, was thereafter circumscribed by my increasingly specific rulings that the Debtors initially voluntary neutrality on the merits of interdebtor disputes would become mandatory.

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I approved the Motion in Aid on August 4, 2005, and thereby established a judicial framework for parties to resolve the inter-debtor disputes — which process, since it evolved from the Motion in Aid, came to be referred to in shorthand as the “MIA.” The Arahova Bondholders Committee tried to appeal my orders declining to strike the schedules and teeing up the MIA for determination, but leave to appeal (along with a request for a stay of the MIA litigation) was denied by the district court.

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In the fall of 2005, the Debtors established a data room and/or data base, and made Adelphia employees and consultants available for deposition. Testimony was not similarly available, however, from the Rigases and those of their confederates who had issued instructions resulting in the journal entries that became a focus of the MIA, as Fifth Amendment concerns made obtaining their testimony impractical.

H. The November 2005 Plan

On November 21, 2005, after several previous iterations of a plan of reorganization had been filed with the Bankruptcy Court,

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the Debtors filed the Fourth Amended Plan (referred to here, for simplicity, as the “November 2005 Plan”). Among other things, it provided for implementing the sale of the Company to Time Warner and Comcast. Shortly thereafter,

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I approved a disclosure statement for soliciting acceptances of the November 2005 Plan (the “November 2005 Disclosure Statement”). Solicitation of votes with respect to the November 2005 Plan commenced on or about December 5, 2005, and the hearing to consider confirmation of the November 2005 Plan was originally scheduled to begin on February 5, 2006.

The MIA created a mechanism for litigating the complex interdebtor issues, but could not (and ultimately did not) ensure that a plan of reorganization could be confirmed prior to the Outside Date so as to preserve the value associated with the Sale Transaction. Accordingly, the November 2005 Plan provided for, among other things, a holdback of funds in an amount sufficient to pay affected creditors their full legal entitlements, regardless of the outcome of the MIA.

Though everyone in the case who spoke to the matter expressed approval of the sale of the Company to Time Warner and Comcast, the November 2005 Plan was in all other material respects exceedingly unpopular with creditors. Over 50 objections to the confirmation of the November 2005 Plan were filed, including objections by all of the formal and ad hoc committees in these cases. And a multitude of stakeholders stated their intention to oppose vigorously any attempt by the Debtors to seek to confirm the November 2005 Plan over their rejecting vote. Further complicating matters, a number of the objections asserted diametrically opposed positions, demonstrating a lack of common ground among the Debtors’ stakeholders.

As a result, in many cases, the Debtors could not amend the November 2005 Plan to assuage the concerns of one creditor faction without further alienating another. Moreover, once the Debtors submitted the November 2005 Plan to their creditors for a vote, it became clear that the November 2005 Plan was at risk of being rejected by multiple classes of creditors. This effectively froze progress on the confirmation of a reorganization plan, with the deadlock increasingly threatening the Time Warner/Comcast sale, whose deadline for closing, after confirmation of a reorganization plan, was just a few months down the road, at the end of the upcoming July.

I. The Arahova Motions

On November 7, 2005, the Arahova Bondholders Group — dissatisfied with the prospect of litigating the MIA and facing a situation under which the May 2005 Schedules, if respected, could have quite an adverse effect on its members’ recoveries— made a number of motions seeking relief which, if granted, would have been devastating to creditor recoveries in these cases. One was for the appointment of a chapter 11 trustee for the Arahova debtors, which would have been a breach of the Debtors’ DIP financing facility and an event excusing Time Warner and Comcast from closing on their purchase. Another was to terminate plan exclusivity for the Arahova Debtors, and a third was to disqualify Willkie Farr (which as of that time had been counsel for the Debtors for 3-1/2 years) from acting in these cases, initially in all respects, and then, after a narrowing of the motion, only with respect to inter-debtor dispute matters.

Then, the Arahova Debtors entered into an agreement to put their motions on hold pending the outcome of settlement negotiations. As the ACC Bondholder Group accurately notes, I sharply criticized the Arahova Bondholders’ tactics, and was “understandably dismayed” by them. In a lengthy decision in January 2006 denying the Arahova Debtors’ motions insofar as they sought the appointment of a trustee and the termination of exclusivity, I stated:

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[T]he 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 transaction 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.

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I stated at the conclusion of the

Arahova Trustee Motion Decision:

The bringing of motions like these is not unethical, or sanctionable, but neither should it be encouraged, or rewarded. Motions that would bring on intolerable consequences for an estate should not be used as a tactic to augment a particular constituency’s recovery.

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I did not deny, however, a component of the Arahova Bondholder Group’s motions that sought Willkie Farr disqualification as to interdebtor disputes, and dealt with analogous matters with respect to the Debtors’ management. Each had already expressed its intention to stay neutral on the merits of the interdebtor disputes, and I granted the Arahova motion to the extent of making those voluntary commitments mandatory. In the portion dealing with management, I stated:

The Debtors’ decision to tee up the In-terdebtor Disputes for Court determination, and to step to the side while affected creditors fought the issues out, was sensible, and hardly a breach of fiduciary duty. But if the Debtors actually took sides in a way that injured one or another of the estates to whom they owed their duties of loyalty, that would result in at least the appearance of impropriety, and, the Court fears, the reality as well.

30

Similarly, in the portion dealing with Willkie Farr, I said:

Though at the outset of these cases, and for most their 3-1/2 year duration to date, no one suggested that interdebtor issues made WF

&

G conflicted in any way, it now appears that intercreditor issues have expanded to the point that they are now a prominent feature of these chapter 11 cases. Because the parties to the Intercreditor Disputes hold debt of different debtors in the Adelphia overall corporate structure, the Arahova Noteholders can accurately say, even if driven by a tactical agenda, that these cases also present interdebtor disputes. WF & G, which represented all of the Debtors without complaint before the intercreditor issues blew up, must, under the rules applicable to any law firm, now respond to that new circumstance.

31

I then noted:

The caselaw above, with its fact-driven approach, makes it clear that no relief beyond requiring neutrality on the In-terdebtor Disputes themselves is warranted — especially since the Court has no basis for a conclusion that WF & G

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has acted wrongfully in any way. But now that the Interdebtor Disputes are in litigation, WF

&

G cannot, under a variety of disciplinary pronouncements, act on both sides of the litigated controversy. It must withdraw from acting against, or for, the Arahova Debtors in those disputes.

32

In one significant footnote in the

Arahova Trustee Decision,

I stated:

The Court advised the Debtors and parties in interest in this case, in at least one chambers conference at the end of which it expressed its thoughts, that it saw no problems in the Debtors (and, by the same logic, the Creditors’ Committee) trying to facilitate a settlement between the Arahova Noteholders Committee and the Adelphia Parent Note-holders Committee — and, in that connection, sharing their views as to the likely litigation outcome, if the disputes ultimately came before the Court, based on their analysis of the facts and applicable law. But the Court expressed the view that the Debtors should act as a facilitator and not an advocate, and that if push came to shove, and they did not succeed in bringing the feuding creditor groups together, the Debtors should remain neutral in the controversy, and assist or oppose neither party. The evidence convinces the Court that the Debtors did exactly that, and the Court so finds.

33

And in another significant footnote, I stated:

The Court continues to believe, as it has stated previously, that WF & G can continue to act as a facilitator to privately try to assist the creditor groups whose money is at stake to reach a settlement. But now that the controversy has come to this point, WF & G will have to refrain from “going public”; from being an advocate for either side; and from taking any steps that might be regarded by any of the feuding parties as tilting the playing field.

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J. Litigation of the MIA

Since a sale of the Company depended on confirmation of a reorganization plan, and confirmation of a reorganization plan depended on determining intercreditor entitlements, the resolution of the MIA became increasingly critical. After an intensive discovery period, the MIA was scheduled to, and did begin on January 31, 2006.

The MIA was divided into six phases, initially anticipated to take about one week each:

(1) Avoidability of the intercompany claims, admissibility of May 2005 Schedules and burden of proof with respect to intercompany claims;

(2) Validity, priority characterization or allowance of the intercompany claims;

(3) Inter-Debtor Fraudulent Conveyance Claims;

(4) Allocation issues, including allocation of sale proceeds;

(5) Substantive consolidation; and

(6) Any remaining issues, possibly including allocation of post-petition overhead and reorganization expenses amongst the Debtors.

But except as to Phase I (which finished at the time that had been estimated), the MIA schedule turned out to be exceedingly

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unrealistic. Extensive submissions on the part of the litigants and extensive trial testimony of witnesses caused the MIA to proceed exceedingly slowly. It was originally contemplated that hearings with respect to the MIA would commence on January 31, 2006 and conclude on or about March 7, 2006. But after about six weeks, and about 20 trial days (with trial having been held, for the most part, four days per week), the MIA litigants were still in Phase II. Fact testimony was nearing the end, but expert testimony had not yet commenced, and post-trial supplemental briefing had become necessary on 14 issues I identified, principally with respect to accounting journal entries with seeming significant effects on intercompany balances, most of which involved transactions out of the ordinary course, and some of which at least seemingly resulted from Rigas-era fraud.

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The MIA also put a tremendous strain on the Debtors’ personnel and consultants, who were subjected to day after day of examination by the MIA creditor litigants — drawing them away from their other responsibilities for the Debtors. Recognizing this strain, and the potential deleterious effect on creditor recoveries, in a February 2006 Chambers conference, I ordered certain of the principal litigants in the MIA — the Arahova Bondholders Committee, the ACC Senior Notes Committee, and the FrontierVision Bondholders Committee — to attend weekly, mandatory, negotiation sessions: one day per week with lawyers and principals, and an additional one day per week with principals only.

36

I felt that it was appropriate and necessary for those with economic risk to be in the room negotiating. Despite a great deal of effort by all sides, no agreement was reached after weeks of negotiation.

K. The Phase I Decision

At the conclusion of Phase I, I issued a written decision, establishing the legal framework for going forward.

37

The

Phase I Decision,

issued after extensive briefing and argument by the litigants to the MIA, was and is, despite its relative brevity, of great importance to any analysis of possible MIA outcomes.

The

Phase I Decision

was issued in the context of two earlier decisions I had issued, neither of which had been published, but which instead had been dictated decisions from the bench. The first was my decision, some months earlier, to deny the Arahova Bondholder Group’s motion to strike the May 2005 Schedules, but to recognize that the May 2005 Schedules nevertheless would not be conclusive, especially given their own stated limitations. The

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second was my decision, based in substantial part on a decision by Judge Cote of the district court in WorldCom,

38

to overrule hearsay objections to the admissibility of restated financial statements prepared by new, honest accounting personnel in the aftermath of a financial fraud. The May 2005 Schedules were based on the accounting records, but were not financial records themselves.

I will deal with some of this in the legal discussion that follows, but there are several aspects of it that warrant discussion as facts, relevant to any discussion of the extent to which any MIA settlement would be fair. That is especially so, I think, since all parties to the MIA put on then-proof in the MIA to make the showings of fact and as to mixed questions of fact and law that the

Phase I Decision

would require, without challenging any of the legal rulings in the

Phase I Decision

itself.

In the

Phase I Decision,

I held that the Debtors’ schedules started “as prima facie evidence of the obligations stated therein,”

39

but that this would be so only if or to the extent that they were not challenged. But I continued that “just as proofs of claim can be challenged by a party in interest, schedules can be challenged too, and if challenged (as they have been here), the schedules no longer have a presumption of validity.”

40

And I went on to say:

Anyone who wishes to challenge schedule entries has the burden of coming forward to do so. But the burden of coming forward is not the same as the burden of proof. And once the schedules are challenged, the Court must then consider issues relating to the existence, amount and priority of the underlying intercompany liabilities on the merits.

41

I then held that the party asserting the existence of a claim had the burden of establishing, by a preponderance of the evidence, that the claim was valid. And I went on to hold, in an aspect of the ruling that is so important to an understanding of the MIA that I should quote it in full:

With the schedules having been challenged, the schedules themselves are no longer sufficient by themselves to establish the existence or amount of intercom-pany claims. But the financial statements, ledgers, journal entries and other accounting business records (together, the “Business Records”) underlying the schedules may be used to establish the intercompany receivables or payables that the schedules show. The Business Records, in turn, will be evidence of the “right to payment” by which “claim” is defined.

But to say that the Business Records may be used for that purpose is not to say that the Business Records conclusively establish such claims, or that they presumptively do. To the contrary, no presumptions that would alter usual burdens of proof would attach to the Business

Records.

42

I continued that the Business Records, once in evidence, could be used like any other evidence tending to prove or disprove the existence of a fact in question— including, as relevant in the MIA, the existence of intercompany obligations, and, hence, intercompany claims. The Business Records, once in evidence, would be “as persuasive in establishing the obli

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gations they reflect as the circumstances warrant.”

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I continued that under the facts of the MIA, those circumstances would include, “at the least”:

- the extent to which the Business Records are mathematically disputed [“Factor # 1”];

- the extent to which the Business Records record or fail to record transactions that seemingly should have been recorded [“Factor # 2”];

-the degree of effort, care, thought and integrity that went into the accounting entries in question, when first made and when corrected as part of the restatement process [“Factor # 3”];

-express or implied qualifications and caveats in the Business Records [“Factor # 4”];

-the extent to which obligations seemingly appearing from the Business Records conform to, or are contradicted by, other relevant evidence [“Factor #5”]; -the extent to which transactions reflected in the Business Records had economic substance [“Factor # 6”];

- why do various Debtors (including, inter alia, holding companies) show the liabilities they show [“Factor # 7”];

- the extent to which any alternate means of accounting would more accurately track where money actually went, on whose behalf money was paid, or for whose benefit money was spent [“Factor #8”];

-the extent to which any aspect of the Business Records is the result of purely historic facts, on the one hand, or judgmental matters, on the other (and, if the latter, the extent to which the judgmental calls should be respected) [“Factor # 9”]; and

- the extent to which the Business Records’ assumptions or conclusions should be trumped by determinations of law or of mixed questions of fact and law that are up to the courts to decide. [“Factor # 10”]

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Those matters, along with any other relevant matters not listed, would be considered in Phase II or in other proceedings to follow. And I was careful to note that:

The matter of the existence of intercom-pany obligations should not be confused with what I regard as separate issues: whether intercompany obligations should be avoided; whether they should be

pari passu

with other obligations, subordinated to other obligations, or some other possibility; or whether they should be recharacterized to be deemed to be contributions of equity and not debt.

45

L. The First Plan Settlement Proposal

In light of the difficulties occasioned by the litigation of the MIA, the Debtors attempted a different approach to provide the adverse parties with an alternative that would assure a resolution of these cases and a closing prior to the Outside Date to avoid triggering a termination right of each Buyer and other associated negative consequences. In April 2006, the Debtors sought an order from me authorizing the Debtors to propose amendments to the November 2005 Plan to provide certain creditors with a

choice

between:

(a) several potential settlements of the MIA, or

(b) a holdback of distributions pending completion of the MIA. By an order dated April 6, 2006 (the “April 6, 2006

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Order”), I granted the request. Expressly focusing on the issue, I determined that proposing a settlement of interdebtor disputes — so long as it was not

imposed, on creditors,

and creditors could decide whether or not they liked it — would not be a violation of the Debt- or and Willkie Farr neutrality that had been an important aspect of the

Arabo-va Trustee Decision.

In that connection, I provided, in the April 6, 2006 Order, in relevant part:

The Debtors are authorized, but not required, to propose amendments to the Fourth Amended Plan of Reorganization (the “Plan”) that provide for one or more optional proposed settlements of issues in these cases, including, but not limited to, issues relating to the [MIA], on the following conditions:

(a) the Amended Plan shall be structured to permit creditors to separately accept or reject

(i) the Plan including the proposed settlement (the “Settlement Plan”) and

(ii) the Plan excluding the proposed settlement, which Plan shall provide for reserves or escrows of distributions pending the determination of the [MIA] to enable any court determined resolution of such dispute to be implemented (the “Reserve Plan”);

(b) absent further order of the Court following notice and a hearing on motion of a party in interest,

the Debtors are not authorized to request confirmation of any Settlement Plan under section 1129(b) of the Bankruptcy Code if the Settlement Plan is rejected by a class of creditors made party to a settlement proposed in the Settlement Plan;

and

(c)if the Settlement Plan is rejected by a class of creditors made party to a settlement proposed in the Settlement Plan, the Debtors shall be authorized to request confirmation of the Reserve Plan, including confirmation under section 1129(b) of the Bankruptcy Code if appropriate.

46

The purpose and effect of this provision was to authorize the Debtors to propose a settlement plan to see if it would fly, and to give the Debtors the comfort that if they did so, the proposal would not be violative of the principle of neutrality. . This order did not take away their authority to propose a settlement (in fact, it confirmed it), but it made such a proposal subject to securing the assent of the affected creditors through the plan process.

Entry of the April 6, 2006 Order had followed a lengthy hearing on the subject, at which I had considered a host of somewhat inconsistent needs and eoncerns-in-cluding most significantly:

—the need to avoid destroying the sale to Time Warner and Comcast;

—the unpopularity (and probable rejection) of a holdback plan from the perspective of many creditor groups;

—the uncertainty as to the estate’s ability, given its liquidity situation, to fund the enormous reserves that would be required for a holdback plan; and, most obviously,

—the tension between maintaining Debtor neutrality on the merits, on the one hand, and allowing the Debtors to invoke creditor democracy, on the other, to see if the creditors themselves wanted a settlement.

If the Debtors reserved the right to invoke cramdown, to get a settlement — notwithstanding the lack of creditor support for a settlement, most obviously from creditors

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of ACC — that would likely (and, quite arguably, properly) be perceived as a violation of neutrality. But other creditors were concerned about the risks of creditor deadlock, and the loss of the Time Warner deal. Counsel for the Debtors, faced with two competing positions, proposed that neither the Debtors nor any party would have the right under the April 6, 2006 Order to seek cramdown, but that anyone would be free to ask for it in the future. He used as an example a situation where a settlement might be approved by 65% in amount, and 60% in number, of a creditor class to be affected by a settlement, that might fall slightly short of the consent thresholds under the Code.

Later in the hearing, Debtors’ counsel continued:

With respect to the cram-down issue, Your Honor, I come back to one basic proposition: That door remains shut, and only Your Honor could have the key to unlock it in the future; not the debt- or, not anyone else. The Court alone could unlock that door. But it remains firmly shut today, consistent with all of my statements in the past, including today and last week, in our adherence to the neutrality principle.

47

That, and my response to it, established the ground rules for going forward. In issuing a decision on the Debtor motion that led to the April 6, 2006 Order, I said:

[Debtors’ Counsel] said in very nearly these exact words: “The cram-down door remains shut.” That is properly so now, and perhaps also forever. If ever that were to change, I would, indeed, have serious concerns vis-a-vis neutrality, which was a premise under which both I and Judge Scheindlin ruled. And I’m very sympathetic to the observation that a settlement, by definition, is a two-way street and one can’t settle with oneself.

At this juncture, and perhaps more than at this juncture, I must say that it’s very hard for me to see how I would ever authorize a cram-down, vis-a-vis the in-tercreditor issues....

Once more, the point that [Creditors’ Committee Counsel] made, while he may only be being careful, is one that I’m sensitive to: I want to minimize the extent to which I restrict flexibility so I am not quite saying never. I do have to tell you I’m close to it, and that it would come — it’s only if you take really extraordinary examples, like if you have 64 or 65% acceptance in a class, or, you know, some bug because a whole class went fishing on election day and didn’t vote against the plan, but you didn’t get the necessary assenting votes, then most likely a justification could be made.... I think I have adequately articulated my concerns and reservations and presumption against approving any kind of cram-down plan.

48

Two noteworthy messages emerged from the April 6, 2006 hearing. The first was that so long as cram-down wasn’t authorized, the counsel for the ACC Senior Noteholders Committee voiced no objection to seeing if a Debtor-proposed settlement would be accepted by affected creditors in requisite numbers. He expressed considerable doubt as to whether any such effort would be successful.

49

But he said once in a brief and then again in court that:

If the debtors are able to craft a fair, reasonable settlement proposal that has the prospect of acceptance by the vari

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ous constituencies in this case, we will be the first to applaud. We mean it, and I wish them luck and hope they can come up with something.

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The second was a message on my part that necessary assent to a settlement had to be evidenced by the votes of affected creditors in favor of it, and that I would almost certainly

not

find necessary assent by cram-down.

The Debtors hoped that this approach would cause creditors to emerge from their previously entrenched positions, and thereby reach a consensus. Unfortunately, members of the ACC Senior Notes Committee, holding the bulk (though not all) of the Senior Notes represented by that committee, declared the settlement “dead on arrival,” and announced (both publicly and privately) their intent to reject any version of the April Plan embodying the settlement.

They conveyed these views in a letter dated April 17, 2006 to the Adelphia Board, and the letter found its way to the Wall Street Journal, substantially simultaneously with the time (or perhaps before) it was received by at least some of the Board members to whom the letter to the Board was directed. On April 19, 2006, the Wall Street Journal ran an article discussing the intercreditor tensions, quoting portions of that letter. Later that day, the Debtors sent me a letter expressing their concern as to the events, noting that they had taken place pending a hearing on the adequacy of a recently filed supplemental disclosure statement and re-balloting of the plan.

The Debtors stated in that letter:

While the ACC Ad Hoc Committee now urges the Debtors to abandon their settlement efforts, the Debtors note that the Court itself ordered mandatory settlement discussions and, when those sessions failed to produce a result, authorized the Debtors to propose a settlement. Against that background, the inflammatory invective directed at the Debtors’ good faith efforts to facilitate a settlement as authorized by the Court is highly inappropriate, and the airing of that invective in the media amounts to a deliberate attack on the orderly resolution of this matter in the manner contemplated by the Bankruptcy Code— through a supervised and structured process of balloting and judicial review, and based on judicially-approved disclosure materials rather than on untested, unilateral assertions by interested parties.

51

But except for the portion quoted above that - characterized (correctly) my earlier orders, this letter was, of course, merely one party’s contentions as to this matter. It provided no basis for either making judicial findings or taking any judicial action other than to consider what might be done next. I held a chambers conference to determine what, if anything, was appropriate under the circumstances. After opportunity for parties to be heard, I authorized discovery under Fed. R. Bankr.P.2004 to investigate the circumstances surrounding these events.

52

I ultimately had no occasion to make judicial findings as to whether anyone acted improperly with respect to these events, and I do not do so now. Certainly

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I do not make a finding that anyone acted wrongfully. But it is necessary for me now to make a finding that investigation of the events surrounding this episode was plainly appropriate, and that creditors who differed with those who had disseminated the letter had a legitimate right in seeking such investigation. It was not improper harassment. Ironically, evidence shown to me at the conference and thereafter suggested that to the extent any ACC Senior Bondholders did anything that could be criticized, others (though not necessarily those who sought the discovery) did or at least may have done so too. And I ruled later that if anyone wanted me to take judicial action beyond investigation of these events, I would permit discovery to let those attacked show that they were doing the same thing others had done. But ultimately these issues did not have to be addressed.

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M. Appointment of the Monitor

During the course of the intercreditor negotiations, those involved in the process made other accusations, apart from those described above. Creditors asserted, in varying directions, that their negotiating counterparties were not negotiating in good faith. To address those concerns, I considered alternatives to facilitate the negotiations.

After consultation with the litigants, I considered, and rejected, the appointment of a mediator for the process. As I told the parties, I had a fear that the issues were so complex, and the litigants would have such a head start on the facts and the law involved in the controversy, that a mediator would have difficulty timely catching up to the litigants’ and my understanding of the issues, and the mediator’s views as to the merits would not be taken seriously.

Instead, I asked the parties, in March 2006, if they would agree to my appointment of another judge of this Court to act as a “monitor” for the negotiations. As the term was used, “monitor” had a double meaning. The monitor would observe the proceedings, and, in addition, would serve as a “hall monitor,” in the high school sense, to ensure that litigants were not misbehaving.

The litigants said that they welcomed that. On April 25, 2006, a lawyer for the Debtors, who were trying to assist the MIA litigants in reaching an agreement, sent an email to my Chambers, with copies to the interested parties:

We have conferred with the participants in the settlement conference regarding the Court’s expressed inclination to appoint a monitor to attend settlement conferences and to facilitate discussions among the parties.

The settlement participants, which include the ad hoc committees for the ACC senior noteholders, FrontierVision and Arahova, Huff and the cross-holder group (Mr. Pachulski’s newly formed group), agree that such an appointment may be beneficial and will cooperate with the Court’s designee. All parties agree that it is important that the monitor be authorized to report to the Court on the status and progress of his or her efforts.

An additional problem that surfaced at that time was the Debtors’ need to focus on consummating the sale to Time Warner and Comcast, which placed great demands

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on the same accounting personnel who were required to be in court testifying for the MIA. The Debtors thus requested, and I granted, an adjournment of the MIA, in large part to permit the Debtors to focus on consummating the Sale Transaction.

Since then, for about eight months, there have been no further hearings on the MIA. At the time when the hearings were adjourned, the parties were in the middle of the second of the six sets of hearings and the twice weekly (or more) negotiating sessions, each of which typically lasted most of a business day, had been ongoing for two months with no agreement having been reached. With the sale to Time Warner and Comcast in increasing jeopardy, and with the deadline for confirming a reorganization plan and having such a plan go effective coming ever closer (at this point, it was about three weeks away), I used chambers conferences to address what I feared was an imminent disaster — a deadlock between creditors that would cause the Debtors to lose the deal with Time Warner and Comcast, or give them a basis to renegotiate the deal on terms disadvantageous to the Adelphia estate. At one such chambers conference, on May 23, 2006, I once more sought to confirm that all were comfortable with the Monitor sharing her observations with me. I asked the parties directly, further to the earlier e-mail, whether any objected to the Monitor communicating directly with me concerning the settlement negotiations. No party in attendance (including counsel for the ACC Noteholders Committee) offered any objection.

From March through May, the Monitor met at length with representatives of the negotiating parties in Poughkeepsie, New York, and Manhattan on numerous occasions, and participated in several telephonic meetings with the negotiating parties. The parties’ meetings with the Monitor continued until July.

N. The S6S Sale And Joint Venture Plan

By the end of May 2006, with twice weekly (or more) negotiations with and without the assistance of the Monitor ongoing for nearly four months, with no agreement that could lead to a plan having been reached, the Debtors determined that they had to do something to save the Time Warner/Comcast deal. With the agreement of Time Warner and Comcast, and the support of many of the Debtors’ creditor constituencies, the Debtors sought to get the deal closed with a section 363 sale, instead of a global plan which would be dependent on resolution of the intercreditor disputes. Getting Adelphia sold in this fashion would involve a reorganization plan for the Century-TCI and Parnassos Debtors and joint ventures in which they were members, but would not raise the same interdebtor and intercreditor dispute issues, as those debtors were sufficiently solvent that their creditors could be paid in full without interdebtor concerns.

In furtherance of this approach, on May 26, 2006, the Debtors filed a motion (the “363 Motion”) seeking authority to, among other things:

(a) consummate the Sale Transaction for all of the Debtors under a section 363 sale; and

(b) take the steps necessary to consummate the sale of the Debtors’ equity interests in the JV Debtors to Comcast by discharging the liabilities of the joint ventures and their subsidiaries under a simplified version of the April Plan, in accordance with the terms of the Com-cast Purchase Agreement.

But as part of that, the Debtors and the Buyers had to, and did, negotiate modifications to the Purchase Agreements, including requirements with respect to the issu-

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anee of the TWC stock. Specifically, the Purchase Agreements, as amended, compelled the Debtors to pursue one of two courses of action.

Under the first alternative (the “Plan Requirement”), the Debtors had to confirm a plan of reorganization prior to the IPO Deadline (defined below) and distribute at least 75% of the TWC stock, excluding stock held in escrow, to constituents as long as the stock was then listed on the NYSE or NASDAQ (if such a listing was not obtained, then the threshold would be 90%). (The Plan, if timely confirmed and if TWC is able to obtain the requisite listing, will satisfy the Plan Requirement.)

Alternatively, if the Plan Requirement were not met, the Debtors would be required, within three months of the relevant Time Warner registration statement being declared effective by the SEC (such date, subject to certain extensions, the “IPO Deadline”), to sell at least 33?% of TWC stock in an underwritten public offering. In such an offering, Time Warner would pay all “registration expenses,” but the Debtors would have to bear the applicable brokers’ commission and/or underwriting fees.

Time Warner is not obligated to wait to see if the Debtors will comply with the Plan Requirement. Indeed, Time Warner’s registration process is well underway, with Time Warner having already filed a registration statement with the SEC.

On June 6, 2006, the Debtors filed a modified plan of reorganization (as confirmed by the JV Confirmation Order, the “JV Plan”) for the Parnassos Debtors and the Century-TCI Debtors (as defined in the JV Plan, the “JV Debtors”). The JV Plan was a simplified version of the April Plan, with all debtor groups other than the Century-TCI Debtor Group and the Par-nassos Debtor Group (each as defined in the April Plan) excluded, and included certain changes to reflect, among other things, the revised Sale Transaction, a negotiated settlement with the Bank Lenders under the Century-TCI and Parnassos Prepetition Credit Agreements, and certain clarifications. In general, the JV Plan provided that all creditors of the JV Debtors would receive payment, in full and in cash, of their allowed claims.

Prior to the hearing to consider confirmation of the JV Plan (the “JV Confirmation Hearing”), I approved a stipulation that preserved the parties’ rights in connection with the MIA while also ensuring the ability of the Debtors to make all distributions required under the JV Plan.

O. The Beginnings of Agreement

Meanwhile, one week earlier, as an initial result of the settlement negotiations, on June 21, 2006, the Monitor filed a report (the “Monitor’s Report”) in this Court that included a term sheet (the “Original Term Sheet”) that embodied the Monitor’s observations of the state of the settlement negotiations. In the Monitor’s Report, the Monitor stated that:

[f]rom my observations and from my perspective, this proposed term sheet is beneficial to and in the best interests of all parties, and it is a better alternative to (i) the plans that have been filed by the Debtors with the Court, (ii) the process and procedures proposed by the Debtors under section 363 of the Bankruptcy Code, and (iii) continuing proceedings under the Motion in Aid Process.

The Original Term Sheet was executed by W.R. Huff Asset Management Co., L.L.C. (“Huff’), Huffs counsel, certain members of the Ad Hoc Committee of Arahova Noteholders (the “Arahova Note-holders Committee”), counsel to the Ara-

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hova Noteholders Committee, certain members of the “Ad Hoc Committee of Arahova Noteholders and ACC Senior Noteholders” (“Committee II”), counsel to Committee II, certain members of the Ad Hoc Committee of FrontierVision Note-holders (the “FV Noteholders Committee”), and counsel to the FV Noteholders Committee. But it was not executed by any member of or counsel for the

ad hoc

committees of (a) the “ACC Senior Note-holders Committee”; (b) Olympus Parent noteholders (the “Olympus Noteholders Committee”); (c) FPL noteholders (the “FPL Noteholders Committee”); or (d) representatives of holders of trade claims against the Subsidiary Debtors (the “Subsidiary Trade Committee”) or holding company Debtors (the “Parent Trade Committee”). In addition, none of the Administrative Agents, Bank Lenders, Debtors, or the Creditors Committee executed the Original Term Sheet.

The Original Term Sheet provided, in part, for the payment of $1.08 billion to ACC from the distributions as to which unsecured creditors of Subsidiary Debtors contended that they were otherwise entitled- — -some of which could be repaid from distributions from a Contingent Value Vehicle (“CW”), which would distribute proceeds, if any, derived from litigation by the Adelphia estate against Bank Lenders- and set the value of the TWC stock at $4.7 billion, subject to a “true up” of up to 15% based on a market test post-effective date.

P. The Agreement of Tudor And High-fields

The Original Term Sheet was a step forward, but it should be noted, and perhaps emphasized, that while the Original Term Sheet had the support of Committee II, whose members held both Arahova and ACC senior bonds, it had no support from any bondholders who had claims solely against ACC. Without that, it could go nowhere. As noted above,

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I had stated, at the hearing of April 6, 2006 that a party couldn’t settle with itself, and that if there were to be a settlement, it had to have ACC creditor assent. While I did not quite say “never,” I made it quite clear, I think, that I was not likely to cram down an assent on ACC creditors if they did not accept the settlement under a plan.

Thus, further negotiations ensued after the execution of the Original Term Sheet. On July 7, 2006, after additional negotiations amongst several parties, Tudor and Highfields (the “Initial ACC Settling Parties”), restricted members of the ACC Senior Noteholders Committee, came to an agreement with the parties to the Original Term Sheet. At this point, the Creditors Committee joined the settlement also.

After additional negotiations, effective July 21, 2006, ACC, on behalf of all Debtors,

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entered into the Plan Agreement

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with Tudor and Highfields, representatives of Committee II, representatives of the Arahova Noteholders Committee, representatives of the FrontierVision Committee, Huff, representatives of the Subsidiary Trade Committee and representatives of the Creditors Committee. Tudor and Highfields were the principal “pure”

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ACC bondholder participants in the settlement discussions, and participated in the settlement discussions with the knowledge of most (if not all) of the other members of the ACC Senior Notes Committee. But each of Tudor and Highfields executed the Plan Agreement in its individual capacity and not in a fiduciary capacity, and in particular not as an authorized representative of any other ACC senior bondholders — including those on the ACC Senior Noteholders Committee.

Tudor’s participation and perspective in the plan negotiations was described in trial testimony before me by Darryl Schall, who is primarily responsible for managing the high yield and distressed debt investments made or managed by Tudor. Mr. Schall also serves as a member of the Creditors Committee. The cross-examination of Mr. Schall was neither extensive nor destructive, and I found Mr. Schall’s testimony to be fully credible.

Mr. Schall testified that Tudor holds approximately $192 million (face amount) of ACC Senior Notes. Tudor also holds some shares of ACC preferred stock, but otherwise has no holdings or other investments in any other of the Debtors. Tudor has been restricted, and has not traded any of the Debtors’ securities since Mr. Schall became a member of the Creditors Committee in May 2005.

In November 2004, Tudor, along with other holders of ACC Senior Notes, joined what became the ACC Senior Notes Committee. By January 2005, members of the ACC Senior Notes Committee held approximately $1.25 billion in aggregate principal amount of such notes. The ACC Senior Notes Committee was formed to represent and advocate interests of holders of ACC Senior Notes and to maximize the recoveries of holders of ACC Senior Notes. Thus it became a principal litigant in the MIA. From November 2004, Tudor worked closely with the ACC Senior Notes Committee’s counsel, Hennigan Bennett & Dorman (“HBD”). As the MIA progressed, it became apparent that one or members of the ACC Senior Notes Committee would need to have access to confidential information that was evidence in the controversy, to properly discuss strategies and other litigation matters with HBD.

After I had directed the litigants in the MIA to attend the mandatory settlement sessions, in the period February through April 2006, Mr. Schall attended nearly all of them, flying to New York from Los Angeles nearly once per week for no less than three months. He likewise attended almost all of the meetings held with the Monitor; the few meetings that he was unable to attend were attended by Joseph Mazella of Highfields or Bruce Bennett, Esq., of HBD, the lead lawyer trying the MIA from the Parent Bondholders’ side. At the settlement sessions, parties listened to multiple presentations by the Debtors

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concerning potential negative consequences to the estates if the MIA couldn’t be resolved. They included adverse tax consequences, diminution of value to the estate and bondholder recoveries on account of interest and other costs attendant to delay, and risk to the closing of the sale of the Company to Time Warner.

In March 2006, Perry Capital (“Perry”), and in April 2006, Elliott Associates (“Elliott”), two entities that were other members of the ACC Senior Notes Committee and that are now members of the ACC Bondholder Group, decided to participate more actively in the MIA and settlement negotiations, and each signed a confidentiality agreement allowing it to gain access to the non-public information. They also began to attend some of the settlement meetings being held by the Monitor. At one meeting with the Monitor, Highfields, Tudor, Elliott and Perry (in the presence of counsel) were asked by the Monitor whether she could communicate the status of the negotiations with me. After consulting Mr. Bennett of HBD, each of the four agreed that the Monitor could communicate directly with me.

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On or about June 13, 2006, after several days of internal discussions amongst themselves, Tudor, Highfields, Perry and Elliott (the four restricted members of the ACC Senior Noteholders Committee) presented a proposed amended term sheet to the Monitor. That term sheet was rejected by other parties, but negotiations amongst the parties continued. Tudor, Highfields, Perry and Elliott had agreed that Original Term Sheet (which was attached to the Monitor’s Report) was not acceptable for several reasons, including an unacceptable valuation of the TWC stock that was to be distributed under the Plan, and an unacceptable governance structure for the Board of Directors that would be responsible for managing the litigation by the CW. But negotiations continued on June 29, and on that day Highfields and Tudor agreed in principle to the outline of terms of a revised term sheet and settlement.

It was then agreed, however, that public disclosure of such terms and agreement wouldn’t be made until Perry and Elliot had an opportunity to review the proposed terms. That same evening, June 29, Mr. Schall informed John Pike of Elliott of such terms, and of Tudor’s intent to sign a final term sheet with the revised terms, and Schall told Pike that he believed that the agreed upon settlement was a fair deal, encouraging Pike to review the settlement as soon as the revised term sheet was circulated. Tudor and Highfields thereafter signed on to the July 7 modified term sheet and subsequent documents relating to the settlement.

Mr. Schall explained why Tudor agreed to the Settlement, and I found his explanation credible and entirely understandable. Tudor, after consultation with counsel to the members of the ACC Senior Notes Committee and Highfields, decided to execute the Plan Agreement (in its individual capacity) for various reasons, including: certainty of more than $1 billion of initial distributions from concessions made by various parties to the Plan Agreement; an ability to select two members of the CW Board, thereby giving ACC Senior Note-holders greater control over the Bank Litigation Claims; a cessation of monthly interest accruals; avoidance of significant costs (including costs of a required Initial Public Offering) that would be borne if the stock of TWC stock were not distributed by early 2007; protection against the opportunity costs that would result from delayed distributions; a reduction of poten

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tial tax exposures that could arise if TWO stock was distributed in early 2007; and cessation of significant and mounting litigation costs with no certainty as to the timing or favorable outcome of such litigation.

Mr. Schall also believed that there were significant risks in litigating the MIA to its conclusion. The ACC Senior Notes Committee and its counsel began preparing for MIA litigation in November 2004. The trial did not begin until January 31, 2006. Of the estimated five-week trial (comprised of six hearings in total), only the first and part of the second of the hearings were complete, after 20 trial days, over 2-1/2 months. The MIA was a highly complex ease that largely relied on interpretation of actions of former management, many of whom were no longer with the Debtors (for good reason), and some of whom had been convicted of crimes as a result of their actions. Moreover, witnesses would have to testify as to journal and other accounting entries that occurred more than five years ago.

In Mr. Schall’s view, the MIA proceedings were so complex and subject to so many variables and permutations that he believed that it was impossible to predict the outcome using a financial model or spreadsheet. Given the impossibility of being able to predict with any certainty a settlement range, it came to be Mr. Schall’s view that ACC Creditors could receive as little as $600 million or as much as $1.5 billion from the par plus accrued recoveries from structurally senior creditors and other sources at the conclusion of the MIA. Finally, regardless of the ultimate conclusion of the MIA, creditors of ACC would bear the lion’s share of the costs of the Debtors’ estates and suffer the lion’s share of any diminution in value of the Debtors’ estates, for the time period in which the MIA was ongoing.

At the time Tudor agreed to settle, it was his view that the bid/ask spread between the June 13 Term Sheet and the terms under which Highfields and Tudor settled was fairly close. Ultimately, he decided that unanimity of the four restricted members of the Ad Hoc Committee was not required for Tudor to agree to a settlement.

Tudor did not receive any special consideration in exchange for entering into the Plan Agreement beyond that being made available to other bondholders, or receive any benefits not available to every other ACC Senior Noteholder. Mr. Schall testified, and I find, that Tudor did not enter the Plan Agreement because of threats, coercion, or other inducements. Tudor entered into the Plan Agreement because, as a holder of ACC Senior Notes, it determined that it was in Tudor’s best interest to pursue the course that it believed would result in the maximization of value of ACC Senior Notes.

Mr. Schall further testified, and I find, that certain aspects of the Plan Agreement — such as the cessation of the Rule 2004 discovery earlier that year that I described at page 38 above, and exculpation clauses that would be embodied in the Plan — were designed to be inclusive rather than exclusive. Because Tudor and Highfields joined in the settlement prior to any other members of the Ad Hoc Committee, it believed that, as part of the settlement, these benefits should be available to any holder of ACC Senior Notes that elected to join in the Settlement and not just available to Highfields and Tudor as the first holders of ACC Senior Notes to execute such agreement. In Mr. Schall’s experience, release and exculpation provisions were commonly included in bankruptcy reorganization plans and there was nothing unusual or unexpected about including releases and exculpations to set

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tling parties in this Plan.

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For the purposes of satisfying myself that Tudor, Highfields and the Plan Proponents acted in good faith, and that there was nothing improper in the settlement process, I find Mr. Schall’s testimony and views entirely credible.

Q. Closing of the Time Wamer/Comcast Sale

Effective July 31, 2006 (the “Sale Effective Date”), the Debtors consummated the Sale Transaction and JV Plan. Proceeds from the Sale Transaction consisted of cash in the approximate amount of $12.7 billion and 155,913,430 shares of TWO common stock, representing approximately 16% of the outstanding equity securities of TWO as of the Sale Effective Date. A portion of that was deposited in an escrow to secure ACC’s indemnification obligations and any post-closing purchase price adjustments due to the Buyers from ACC.

R. Further Agreement

Following execution of the Original Term Sheet, members and/or representatives of the Olympus Parent Noteholders, the FPL Noteholders, and the Subsidiary Trade Committees participated in discussions with the Monitor and the creditor parties to the Original Term Sheet in an effort to reach further consensus. At some point, Bank Lender agents were also brought into the process. Thereafter, on September 11, 2006, the Debtors, the Creditors Committee, and the Bank Proponents announced the terms of a settlement which, if implemented, will fully and finally resolve numerous issues relating to the treatment afforded Bank Claims under the Plan. This compromise, which was reached only after extensive and significant negotiations between and among the Debtors, the Creditors Committee and the Banks, including the Agent Banks, resulted in a different treatment of the Bank Claims under the Plan than originally contemplated in the Amended Term Sheet. On that date, agreements in principle with the FPL Noteholders Committee and the Olympus Noteholders Committee concerning the terms of consensual plan treatment were also announced.

S.Effort To Terminate Exclusivity

On August 17, 2006, the ACC Bondholder Group moved to terminate exclusivity, asking me to allow the ACC Bondholder Group to propose its own plan for all of the Debtors. In the Exclusivity Motion, the ACC Bondholder Group argued that the filing of a plan incorporating the Plan Agreement was “extremely inappropriate,”

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and a “blatant abuse of the privilege of exclusivity”

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— contending that the plan violated neutrality requirements and my earlier orders governing prior plans.

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At the hearing on the Exclusivity Motion, counsel to the ACC Bondholder Group continued this argument, stating that “[tjhere is no settlement,” because it was not “negotiated and agreed to by the parties authorized to control it.”

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On September 19, 2006,1 issued a bench decision in which I denied the relief sought by the Exclusivity Motion.

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I ruled,

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among other things, that: (a) the Plan containing the Settlement should be put up for a vote;

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(b) the Plan “was the result of weeks of effort to bring seemingly intractable disagreements to a consensual conclusion;”

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and (c) that I “disagreed with the contentions that the process that led up to the term sheet that underlies it was in any way unlawful or illegitimate.”

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A few days earlier, on September 12, when focusing on the disclosure statement, I addressed the reality that the exclusivity motion, which was then

sub judice,

could have a bearing on what would be in the disclosure statement. I then told the parties that exclusivity was a matter quite different from whether the proponents of the Plan would be allowed to put the plan forward.

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And in the latter connection, I said:

Specifically, Pm going to rule as follows: That the debtors putting a plan of this character up for a creditor vote and soliciting acceptances to a plan, which creditors and other stakeholders will be free to accept or reject, does not violate the undertakings of neutrality or the directions as to neutrality that I expressed and that the debtors undertook earlier in this case.

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On September 22, 2006, when the Plan now up for confirmation was close to being solicited, the ACC Bondholder Group moved for an order requiring the Debtors to pay down the bank debt, so as to stop the accrual of interest on that debt. That was in the context of a then-pending motion by the Creditors Committee to hold back distributions of bank claims by reason of receipt of fraudulent conveyance claims that had been asserted against bank lenders, which would be settled under this Plan. I tabled that motion (in accordance with a recommendation of two of the bank agents), in a decision dictated from the bench, on September 26, 2006. I said:

I think what Mr. Pantaleo and Mr. Noble [bank agent lawyers] said makes sense, and I’m agreeing with their recommendation. Assuming that the proposed motion were granted, it wouldn’t move this case forward in any material way, because we’d still have the issue of the holdback motion. So it wouldn’t get the banks paid anyway. The Debtors, Creditors Committee and some of the banks have put forward an alternative which would get the banks paid and make both the Parent Bondholder Group’s motion, and the Holdback motion, moot. Leaving this issue temporarily aside, pending such a possibility, is sensible case management. In addition to obviating the need to have even more litigation in this case, over issues that may never have to be decided, it avoids interference with a solicitation process that I’ve determined can and should go forward, and avoids confusion in the solicitation process.

I think the Parent Bondholder Group’s motion deserves to be heard if and when it makes a difference, but this isn’t that time.

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T. Still More Agreement

Thereafter, and after further negotiations and amendments to improve the settlement from an ACC creditor perspective, three additional major holders of ACC Senior Notes — OZ Management, L.L.C. (“Oz”), C.P. Management, LLC (“C.P.”) and Satellite Asset Management, L.P. (“Satellite”) (the “Additional ACC Settling Parties”) agreed to support the settlement. After additional rounds of discussions, on October 11, 2006, an agreement (the “Plan Support Agreement”) was reached on the terms of the Settlement that is now embodied in the Plan. The Plan Support Agreement was executed by the Plan Proponents, Committee II, Huff, the Arahova Noteholders Committee, Appaloosa Management LP, Deutsche Bank Securities, Inc., the Initial ACC Settling Parties and the Additional ACC Settling Parties. Among other terms, the Plan Support Agreement generally provides that at least approximately $1.08 billion in value will be transferred from certain unsecured creditors of various Subsidiary Debtors to certain unsecured senior, trade and other unsecured creditors of ACC and certain other holding company debtors, subject, in some cases, to repayment from contingent sources of value, including the proceeds of the CW. As the ACC Senior Notes Claims Class has voted to accept the Plan, the $1.08 billion in value has been increased by $50 million in accordance with the Plan to $1.13 billion.

On August 18, 2006, the Debtors and the Creditors Committee filed the Fifth Amended Plan — a first version of the current iteration of the Plan — which reflected the understanding reached in the Amended Term Sheet, and a related disclosure statement supplement (the “Second Disclosure Statement Supplement”). Thereafter, subsequent iterations of these documents, reflecting the additional agreements reached and the added disclosure requirements from the disclosure approval process, were filed. On October 17, 2006, I approved the Second Disclosure Statement Supplement, relating to the Fifth Amended Plan.

U. Designation Motions

On November 29, 2006, the Creditors Committee filed a motion, under seal, to designate (disqualify) the votes of certain members of the ACC Bondholder Group, which the Creditors Committee expected to be voted against the Plan, based on circumstances related to those I described on page 38 above. Shortly thereafter, the ACC Bondholders Group moved to designate votes in the ACC class by Huff, members of the Arahova Bondholders Committee and members of the ACC II Committee, expected to be voted in favor of the Plan, based upon alleged misconduct on the part of Huff and the Arahova Bondholders Committee, and, in the case of all three of them, by reason of their ownership of both Arahova and ACC Bonds. After the Plan Proponents secured the assenting ACC Senior Notes vote they wanted (even with the targets of the designation motion presumably voting in opposition to the Plan) the Creditors Committee’s designation motion was withdrawn. But the ACC Bondholder Group motion remained. In a written decision,

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I denied the ACC Bondholder Group’s motion, for reasons I set forth at length there. One of those reasons was my view as to the importance of creditor voting.

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V Valuation of TWC Stock

Adelphia offered an expert on the valuation of the TWC stock (the “Adelphia Valuation Expert”), who testified as to range for that stock from $5.5 billion to $6.5 billion, with a mid-point of $6.0 billion. He further testified that in his view, there was an equal probability that any number in that range would represent the appropriate valuation.

The ACC Bondholder Group did not have any expert testimony on valuation, and its only evidence on valuation was a prospectus prepared by TWC, valuing its stock in a manner that would result in a valuation of the Adelphia portion of the TWC at $5.5 billion on July 31, 2006. The ACC Bondholder Group’s Expert was not asked to form an opinion on the value of the TWC stock, and did not do so, although it is highly likely, if not certain, that he and his colleagues could have done so if requested. Thus there was a material imbalance in the weight of the proof, dramatically favoring the Plan Proponents, although I took into account points made in cross-examination and from the TWC prospectus in making value adjustments based on the Adelphia Valuation Expert’s testimony.

After hearing the evidence, I believe that a number of factors — including, most significantly, the movement in stock valuations since the time the Adelphia Valuation Expert formed his views — make it most probable that there no longer is a realistic likelihood that all values within the Adelp-hia Valuation Expert’s $5.5 billion to $6.5 billion range are equally likely. I think the stock should be valued at the high end of the range, and find as a fact that the stock is now worth $6.5 billion. While there is some evidence in the

record

— ie., the TWC prospectus — that could be (and was) argued to support a higher valuation, it is insufficiently probative for me to make a finding as to a higher amount.

On the whole, the Adelphia Valuation Expert testified very competently and credibly. But the very testimony that made him believable showed that by reason of price movements in the stocks of comparable companies in the time between his November 17, 2006 valuation of the TWC stock and the date of his testimony at the confirmation hearing,

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I should use the high end of the range of values he estimated.

I admitted into evidence a TWC valuation of its stock in its recent prospectus at a level of $5.5 billion on July 31, 2006 ($1 billion below the amount I find), and considered the argument that the valuation the TWC prospectus reflected should be boosted on the basis of comparables to reflect a greater value at this time. That might suggest, if one could do it simply as a matter of arithmetic, a valuation higher than $6.5 billion. But I found believable the Adelphia Valuation Expert’s uncontra-dicted testimony that one would not simply change the valuation by making such a simple arithmetic computation. And the value I find is not that far off from the arithmetic result in any event.

Finally, the Adelphia Valuation Expert’s decisions (a) not to include, as a relevant factor, discounted cash flow (even though it had been taken into account as a factor in earlier valuations), by reason of uncertainties as to future cash flow, and (b) to include part, but not all, of the adjustments that might seem to be appropriate by reason of tax attributes, struck me as conclusions that might not be wrong, but

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could be subject to fair debate. Those factors likewise cause me to conclude that the value of the TWC stock is best valued at the high end of the range the Adelphia Valuation Expert testified to, or $6.5 billion.

The failure of the ACC Bondholder Group to offer its own expert on the valuation of the TWC stock was striking. So was its failure to offer a witness from TWC to explain the methodology and assumptions underlying the TWC valuation at $5.5 billion in July 2006, or to explain how one appropriately could adjust for the July 2006 evaluation to get an evaluation for the present date. While I did take into account points the ACC Bondholder Group made in cross examination, I find there to be a failure of proof as to amounts higher than $6.5 billion, and in any event I find that amount fully supported and persuasive.

A factual finding on my part that the stock is not now worth $5.1 billion or $5.4 billion is not the same as a conclusion of law that it was or would be wrong to enter into a consensual deal under which stock is assumed to be worth $5.1 billion or $5.4 billion. But I am finding that the stock is now worth $6.5 billion.

W.

Costs of IPO

If the Plan is confirmed, Adelphia will be able to distribute the TWC stock that creditors will receive under the Plan under a section 1145 exemption.

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However, in a liquidation, the stock would not be freely tradable under federal securities laws, and Adelphia would have to register the stock, as part of an initial public offering (“IPO”) to permit the lawful sale of the TWC stock.

In this connection, evidence was introduced by Vanessa Wittman, Adelphia’s CFO, and Daniel Aaronson, a Managing Director at Lazard, as to what it would cost Adelphia (or a trustee acting in Adelp-hia’s place) to make the stock saleable through an IPO. Based on that testimony, I find that an initial public offering of the TWC stock in a chapter 7 liquidation would result in significant costs to the estates. In a hypothetical chapter 7 liquidation, the Debtors would not qualify for a section 1145 exemption, subjecting the Debtors to the costs associated with an IPO in order for the TWC stock to be distributed to creditors. These costs would entail, among others, primarily two components: (i) an IPO discount and (ii) underwriting fees.

The term IPO discount describes a market perception that an issuer undertaking an IPO must offer its shares at a discount to their intrinsic value. Stated in more simple terms, the IPO discount is the amount needed to clear the market from a stated price so that the shares can be sold.

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The amount of an IPO discount can range from about 5% to 10% of the value of the stock issued.

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I find it reasonable to estimate the IPO discount at 7%. The underwriting fees constitute the gross spread or what the underwriters are paid to conduct the offering as a percentage of the dollar amount of each security sold.

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Typical IPO underwriting fees range from 3-5%. I find it reasonable to

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estimate the underwriting discount at 4%. I further find it reasonable to assume that the value of the TWC stock to be distributed would be $6.5 billion. Therefore, I find that the total costs associated with the IPO of TWC stock would amount to about 11% of its value, or $715 million.

X. The Opponents’Expert

The ACC Bondholder Group retained an expert (the “Opponents’ Expert”) to opine on the fairness of the settlement, who was the principal of a well-known and respected financial restructuring firm. As is typical, the Opponents’ Expert relied on fact gathering and analysis by members of his staff, including a principal assistant, who testified. I sustained

Daubert

objections to the Opponents’ Expert’s effort to fix a particular dollar amount below which any settlement would not be reasonable. But I admitted the remainder of his and his assistant’s direct testimony and report (including more qualitative analysis of the settlement’s fairness), and admitted all of the testimony of each on cross-examination, redirect, and thereafter.

I found the Opponents’ Expert to be fully truthful.

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However, I have such serious concerns as to the care in reviewing the record of the MIA, and/or in understanding it, that I cannot put any material weight on the Opponents’ Expert’s conclusions.

At no time prior to preparing his report and coming to his conclusions did the Opponents’ Expert read the

Phase I Deci

sion..

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He had not read it as of the time of his deposition.

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His testimony and report, in several places, assumed as premises legal matters that were flatly contradictory to holdings in the

Phase I Decision.

And when questioned on this, the Opponents’ Expert asserted that what the

Phase I Decision

actually said would not change his conclusions in any way. Likewise, and surprisingly, his principal assistant twice expressed the view that it wasn’t necessary that a fiduciary or someone advising a fiduciary “should fully familiarize themselves with all of the facts and circumstances and the merits of the litigation before offering any opinion as to the merits.”

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These matters were not trivial. The Opponents’ Expert repeatedly discussed the company’s books and records as if they were entitled to deference, with “presumptive validity” or some kind of burden to show the contrary.

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That is exactly the

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opposite of what I had held.

In the

Phase I Decision

(which the Opponents Expert had not read before issuing his report or being deposed, but said he had read by the time of trial), I had held — quite clearly, I think — that:

But to say that the Business Records may be used for that purpose is not to say that the Business Records conclusively establish such claims, or that they presumptively do. To the contrary, no presumptions that would alter usual burdens of proof would attach to the Business Records.

The Opponents’ Expert tried to explain the inconsistency between his premise and the MIA law of the case by saying that he had used “presumption” in a layman’s sense, and not a legal one. This was wholly unpersuasive to me. It’s far more probable to me, and I so infer, that his incorrect assumptions resulted not from his failures of memory as to the law or the difference (if any) between a layman’s and lawyer’s understanding of a presumption,

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but rather from the more fundamental fact that he simply hadn’t read the

Phase I Decision.

In a related matter, the Opponents’ Expert was questioned, during cross-examination, as to whether or not he, as a fiduciary, would accept accounting entries even if they reflected out of the ordinary, multi-billion dollar transactions, even if they were back dated 14 months (like the CCHC Recap, discussed below), and even if they would dramatically affect creditor recoveries.

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The Opponents’ Expert said he would still accept them, saying “That’s life.”

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While the issue for consideration, as discussed below, is not so much what a fiduciary (who is an advocate for the entity for whom he or she is a fiduciary) would do as what a

court

would do, when deciding the issue, the premise upon which he expressed that view was flawed in light of the

Phase I Decision,

which had expressly identified, as matters to be considered:

—the degree of effort, care, thought and integrity that went into the accounting entries in question, when first made;

—the extent to which transactions reflected in the Business Records had economic substance;

—why do various Debtors (including, inter alia, holding companies) show the liabilities they show; and —the extent to which any alternate means of accounting would more accurately track where money actually went, on whose behalf money was paid, or for whose benefit money was spent.

Also, the Opponents’ Expert considered it to be sufficiently relevant to his conclusions that he included in his “Summary of Settlement Dynamics” a statement that “[b]ecause the Plan provides near par or higher recoveries for creditor groups other than ACC, the settlement understandably garnered their support.”

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This was plainly true, as far as it went, but the

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Opponents’ Expert gave no attention to support for the Plan by others who were themselves ACC creditors, such as Tudor, Highfields, Oz, C.P. and Satellite (all of whom became supporters of the Plan before the vote). And while he could not be expected to have predicted the ultimate vote by creditors of ACC, he declined to amend his views or acknowledge the relevance of approval of the plan by the ACC Senior Notes class, the ACC Trade Claims class, the ACC Other Unsecured Claims class, the ACC Sub Debt class, the ACC Preferred Stock class, or the ACC Common Stock class.

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Y. Canvassing of MIA Issues

As noted above, trial of the MIA was suspended part of the way through Phase II. When trial of the MIA was interrupted, it had not resolved:

(a) Validity, priority, characterization or allowance of the Intercompany Claims;

(b) Inter-Debtor Fraudulent Conveyance Claims;

(c) Allocation issues, including allocation of sale proceeds;

(d) Substantive consolidation; and

(e) Any remaining issues, possibly including allocation of post-petition overhead and reorganization expenses amongst the Debtors.

The parties appear to be in agreement that the last category, while once an issue, does not appear to have a significant effect on creditor recoveries. Thus the principal elements of the MIA remaining to be litigated would include the character, treatment, and priority of Intercompany Claims (Phase II); resolution of fraudulent transfer allegations (Phase III); allocation of consideration from the Sale Transaction (Phase IV); and substantive consolidation issues (Phase V).

Though they later will require some interrelated discussion, I think I should describe them separately, in the first instance.

1. Phase II Matters (Intercompany Obligations)

During the course of Phase II, there was one issue that was of extraordinary difficulty, and that in many respects dwarfed all others — the extent to which I should follow the Bank of Adelphia Paradigm with respect to noncash transactions. This was a difficult issue because the realities of this case made ordinary accounting assumptions questionable. Many of us were trained in our accounting courses in the principles of “T-Accounts,” under which debits and credits would be recorded in journal entries with the items on each side being equal. But what if the offsetting entries, while theoretically equal, were not equal in fact, because the account obligor whose payable was recorded on one side of the T-account was insolvent? Then transactions that theoretically would have offsetting receivables and payables would not have them in reality. If, for example, the Bank of Adelphia were only paying 30 cents on the dollar on its claims (a figure that was used by MIA litigants), assets deemed to leave Arahova, with a corresponding receivable from the Bank of Adelphia back to Arahova, would be “paid for” at the rate of only 30 cents on the dollar.

At the MIA trial, the parties disputed the propriety of applying the “Bank of Adelphia Paradigm” to intercompany balances. The ACC Senior Noteholders

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Committee argued that the Bank of Adelp-hia Paradigm reflected economic reality and should be respected. The Arahova Noteholders argued that the Bank of Adelphia Paradigm was a fiction and should be disregarded, at least when applied to noncash or non-ordinary course transactions. The parties vigorously disputed the basis for the Bank of Adelphia Paradigm, how and why it was applied, and the extent to which I should respect it. I will discuss the Bank of Adelphia Paradigm in greater depth when we come to the first issue where it is relevant, but it should be remembered that this is an issue of huge importance, that affects most, if not all, of the issues in Phase II.

Much of the evidence in Phase II concerned noncash transactions, the accounting for which was of considerable complexity. As it was not clear to me then (nor is it clear to me now) that I would be willing to reject the application of the Bank of Adelphia Paradigm with respect to all non-cash transactions, across the board, I asked the parties to hone in on the propriety of the accounting for specified transactions that then seemed to me to be of particular significance, for individualized attention. Without having been presented any recovery analyses illustrating the economic “value” of any particular issue, I requested post-trial briefs on 14 issues raised by the parties related to intercom-pany transactions, on which, as of that time, I had heard testimony:

(1) Intercompany Claims arising from entries in connection with the acquisition of Cablevision Systems Corp.

(2) Intercompany Claims arising from entries in connection with the acquisition of Prestige Communications of Georgia and Prestige Communications of North Carolina.

(3) Intercompany Claims arising in connection with Century Holding companies recapitalization entries posted May 2002, effective March 2001.

(4) Intercompany Claims arising from entries regarding payment of dividends by FrontierVision Partners LP to ACC.

(5) Intercompany Claims arising from entries regarding payment of dividends by Century Cable Holding Corp. to Ara-hova Communications Corp.

(6) Intercompany Claims arising from entries in connection with co-borrowing debt (including funds used for Highland Prestige, ABIZ, and, to the extent applicable, Rigas securities purchases).

(7) Claims arising from affiliate/inter-company interest entries.

(8) Intercompany Claims arising from entries in connection with loan placement fees and management fees.

(9) Intercompany Claims arising from booking of historic entries (including, without limitation, entries related to the “Century step up” and push-down accounting).

(10) Intercompany Claims in connection with XO center or XO transaction entries.

(11) Propriety of netting Intercompa-ny Claims.

(12) $16.8 billion receivable from Bank of Adelphia to ACC Investment Holdings, Inc., to the extent it was not included in other issues.

(13) Arahova Communications, Inc.’s $1.44 million receivable

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(including $865

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million in intercompany activity between Arahova and ACC Ops.), to the extent it is not included in other issues.

(14) Century Communications Corp.’s $717 million payable, to the extent it was not included in other issues.

The issues as to some of these were more one-sided than others, and some would be easier to follow after preliminary matters were addressed. Thus I shift them around in order, somewhat. Arguments that each side could make in this connection follow.

a) “CCHC Recap” (Recapitalization of Century Cable Holdings Corp) (Issue 3)

The parties introduced conflicting evidence in Phase II as to whether ledger balances resulting from accounting journal entries to “recapitalize” Century Cable Holdings Corp. (“CCHC”) should not be regarded as establishing claims. The issue was referred to in shorthand as the “CCHC Recap.”

The recapitalization entries were made in May 2002 (as one of prepetition management’s last acts, just about one month before these cases were filed), but were effective as of March 31, 2001. Putting it plainly, they were backdated by 14 months. The entries, made by a set of journal entries known as UG-510, related to a transaction in which CCHC ostensibly borrowed money from the Bank of Adelp-hia to make a “capital investment” (whether this was indeed a “capital investment” being a significant element of dispute), in Century Cable Holdings, LLC (“CCH, LLC”).

In their most important respects, the recapitalization entries resulted in:

(i) a $3,467 billion payable at CCHC ($2,286 billion of which was to the Bank of Adelphia) ;and

(ii) a $4.3 billion receivable at CCH, LLC ($3,121 of which was from the Bank of Adelphia).

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The Arahova Noteholders Committee argues that the CCHC Recapitalization entries do not reflect actual transactions creating a debt obligation or right of payment, and should not be characterized as debt claims. On the other hand, the ACC Bondholder Group seeks to have them preserved, and to have the debt treated as valid.

1. Arahova Noteholders Committee’s Contentions

The Arahova Noteholders Committee argues that the recapitalization entries should be disregarded because they did not involve an actual exchange of cash, or other value; that they resulted in a net intercompany balance at CCHC of almost $3.5 billion that did not actually serve to recapitalize CCH, LLC; and that they did not advance any economic purpose. The Arahova Noteholders Committee further argues that the purpose of these entries was to hide pre-existing covenant defaults, and to avoid personal liability for issuing false compliance certificates. Tim Werth, they argue, is the only person who can really explain why these entries were made, and he did not testify and, in any event, pled guilty to various charges.

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The Arahova Noteholders Committee contends that running these balances through the Bank of Adelphia would ignore the economic realities of the recapitalization entries, since (a) CCH, LLC, which was in a net $700 million receivable position with respect to the Bank of Adelphia, would never have assumed a $4 billion credit risk with the Bank of Adelphia, and (b) the Bank of Adelphia would never have assumed a $3.5 billion credit risk with CCHC, which had no ability to repay a loan.

Finally, but significantly, the Arahova Noteholders Committee also contends that the CCHC net payable balance of $3.467 billion and the CCH, LLC net receivable of $4.155 billion are fundamentally unfair because those balances, when run through the Bank of Adelphia, benefit ACC to the detriment of Arahova, since any value residing in CCH, LLC flows directly to the Bank of Adelphia — bypassing the natural flow of the capital structure through Ara-hova. As a result, they argue that Century Communications Corp. (“CCC”) and Ar-ahova, though effectively parents of CCHC and CCH, LLC, receive no value from their equity ownership of CCHC and CCH, LLC, respectively.

2.

ACC Bondholder Group’s Contentions

The ACC Bondholder Group contends

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that the recapitalization entries did not require modification in the Restatement process, and do not require modification now. Moreover, it contends that if I should determine that the recapitalization entries require modification, I should either permit them to stand as a whole or disregard them in their entirety.

In other words, the ACC Bondholder Group contends that the Arahova Note-holders Committee should not succeed in obtaining a reversal of only the CCHC payable that resulted from the purported recapitalization, without a simultaneous reversal of corresponding receivables, since there is no principled basis upon which to apply such a selective approach.

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In support of its argument, it offered or could offer the following testimony and evidence.

First, the ACC Bondholder Group established that none of the recapitalization entries related to ACC, but only to subsidiaries of Arahova and their balances with the Bank of Adelphia. Indeed, it elicited testimony from Ms. McMullen in which she acknowledged that the purpose of the recapitalization entries was to reduce the intercompany balances at CCH, LLC, which (in contrast to ACC) was a party to the Century co-borrowing facility.

Moreover, the ACC Bondholder Group asserts that leaving the recapitalization entries intact would be consistent with the Debtors’ own Restatement accounting. It elicited evidence that in determining

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whether or not to preserve or reverse a particular entry, the Debtors’ Restatement Team made no effort to evaluate the original purpose of a particular entry (e.g., whether it was made to manipulate financial results), but simply looked to see whether it had been double-booked.

3. My Observations

Factor # 3 in the

Phase I Decision

included the degree of “integrity” that went into the accounting entries in question. Factor # 6 in the

Phase I Decision

would require consideration of the extent to which any transaction had economic substance. The

Phase I Decision

gave the litigants the right to argue that I shouldn’t be faithful to accounting entries that were elements of the fraud of the Rigases and their confederates. And I didn’t rule that the fact that a transaction was an element of Rigas fraud would

necessarily

be conclusive' — as it was possible that a transaction that took place because of Rigas fraud might nevertheless have enough economic substance to require inclusion.in the finan-cials.

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But it would be exceedingly difficult for ACC to base a claim against other Debtors based on a noncash transaction whose sole apparent purpose was to manipulate covenants, and which had no economic substance.

The evidence showed that members of the Restatement Team did not reverse every transaction that was seemingly or plainly the result of Rigas fraud when doing the work they did. But there is considerable evidence to support the conclusion, if it is not also beyond doubt, that the Restatement Team’s focus was on producing financials that could be audited on a consolidated basis, and that Restatement Team’s members had no need or occasion to make determinations as to how to deal with Rigas-era fraud when the fraud eliminated itself in preparing consolidated fi-nancials, and affected only transactions within the Adelphia consolidated entity.

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Backdated transactions — especially when backdated by 14 months — tend to give rise to concerns on the part of a judge. Noncash transactions are much more suspect than those where cash actually moved. Transactions without apparent business purpose are likewise more suspect. Given the absence of any evidence that the recapitalization entries had a legitimate business purpose, and the testimony from Ms. McMullen (the person who made the entries) and Mr. Donovan (the person responsible for reviewing the entries) suggesting that these entries were illegitimate, I believe, and find, that the chances are remote that I would find an intercompany claim to have been established based upon the CCH Recap. The ACC Parent creditors would have a remote chance of success on this issue.

b) “The Arahova Receivable” (Arahova Communications $1.11 billion payable under the Bank of Adelphia Paradigm) (Issue 13)

The “Arahova Receivable” issue is the first of several that turn on the propriety of establishing claims based on the Bank of Adelphia Paradigm.

1. ACC Bondholder Group’s Arguments

The ACC Senior Noteholders Committee introduced evidence in Phase II estab

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lishing that the Bank of Adelphia Paradigm was based on the centralized cash management system (“CMS”) used by the Debtors, both pre- and postpetition, and that many large corporations use a similar centralized CMS. In fact, what used to be called Century Communications Corp. (which is now called Arahova, and which is different than the present Century Communications Corp.) used a similar centralized CMS before it was acquired by Adelphia. The Bank of Adelphia owned substantially all of the Debtors’ bank ac-. counts (other than certain lock box accounts and petty cash accounts), collected all receipts and made all disbursements. And the Arahova Noteholders Committee stated during the completed portion of the MIA that it would not object to the vast majority of intercompany balances.

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The ACC Senior Noteholders Committee introduced evidence that after a massive effort by the Debtors and PwC, the books were restated in an attempt to remove the effects of the fraud. And the ACC Senior Noteholders Committee elicited testimony from Scott Macdonald and Robert DiBella that the Bank of Adelphia Paradigm now accurately reflects prepetition transactions.

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2. Arahova Noteholders Committee’s Arguments

The Arahova Noteholders Committee countered this evidence with evidence that the CMS was a significant part of the mechanism used by the Rigases to further their fraud, and that the CMS was not an ordinary, centralized CMS similar to those used by other corporations. There were no controls in place; nor was there a cash management agreement; and there were no agreements or documents reflecting any Debtor’s payment obligations to the Bank of Adelphia or the Bank of Adelp-hia’s obligation to pay its balances with affiliates.

As significantly or more so, the Arahova Noteholders Committee elicited extensive testimony to support its contention that the Restatement did not remove all of the fraud and did not evaluate all intercompa-ny transactions for economic substance.

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If there was no documentation, in general, the Restatement Team left the transactions as booked. The prepetition ledgers contained many intercompany transactions directly between Debtors other than the Bank of Adelphia. The Debtors’ books and records show balances between such Debtors.

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The Arahova Noteholders Committee offered evidence to establish that the Bank of Adelphia Paradigm did not exist prepet-ition, and that there was no prepetition record of the Debtors that reflected that all intercompany transactions should run through the Bank of Adelphia. Such evidence indicated that in April 2002, certain accounting personnel merely “explored the possibility” of rolling all intercompany balances up to cost center 001 (the Bank of Adelphia). Thus, the Arahova Bondholders could and did argue that just two months before the Commencement Date, the Bank of Adelphia Paradigm was not standard operating procedure for inter-company balances within Adelphia, and it would not have been erroneous for any then existing intercompany balances to be directed between legal entities.

3. My Observations

That arguments could be made on each side of this issue was known to me even before the start of Phase I. In the

Araho-va Trustee Decision,

in January 2006, I had noted:

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 Inter-creditor Disputes.

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The fact that running transactions through the Bank of Adelphia would subject the Debtor counterparties to such transactions to a payment risk that was not reflected in the accounting that presupposed equal offsetting entries was a matter of concern to me when Phase II was ongoing, and would have to be a matter of concern to me if the MIA were resumed.

When I issued the

Phase I Decision,

I observed that whether or not I could rely on book balances would depend on whether they established

claims,

and whether the party seeking to establish such claims (in this context, ACC) could meet the burden of establishing their validity. In that connection at least four of the factors

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could be argued to suggest that the Bank of Adelphia Paradigm could not be used where an apparent premise in its application — that offsetting accounting entries

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were, in fact, equal — would not have a basis in reality.

Where there is an interdebtor transaction where no cash changes hands or is received or spent on behalf of a particular Debtor, quite a decent argument can be made that it is more appropriate to' book the transaction directly between the Debtors involved, instead of using an insolvent entity as an intermediary.

The concern would be magnified if use of the Bank of Adelphia Paradigm resulted in taking value “sidewise” out of Debtors in operating company groups and depriving their corporate parents of the value that otherwise would flow up to them — and at least seemingly channeling it instead to the corporate parents of the Bank of Adelphia, as a consequence of a failure to be returning equal value back to the operating company group Debtors.

This is such a major concern that I think that the Arahova Bondholders would have, at the least, an even money chance of success.

c) “The AIH Receivable” ($16.8 billion receivable from ACC Investment Holdings, Inc. (Issue 12))

As I noted above, the May 2005 Schedules contained significant reservations. One of them said:

The intercompany balances can be characterized in many ways, including (i)

pari passu

with all third-party debt, in-eluding bank debt; (ii)

pari passu

with trade debt but subordinated to bank debt; (iii) subordinated to all third-party debt but senior to common equity; or (iv) equity.... The Debtors reserve all of their rights with respect to the inter-company balances, including, but not limited to, the appropriate characterization of the intercompany balances.

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During Phase II, the Arahova Notehold-ers Committee advanced the argument that the $16.8 billion receivable (the “AIH Receivable”) owed to ACC Investment Holdings, Inc. (“AIH”), a wholly-owned subsidiary of ACC, by the Bank of Adelp-hia should be recharacterized as equity, equitably subordinated, or disallowed. The ACC Bondholder Group argued that there is no basis to recharacterize, subordinate, or disallow the AIH Receivable.

1. Recharacterization

Recharacterization disputes are not uncommon in bankruptcy cases, and I conducted a lengthy trial on this issue in a similar interdebtor dispute between PSI-Net and PSINet Consulting Solutions (its former subsidiary) in the

PSINet

and

PSI-Net Consulting Solutions

cases about two years ago, which ultimately resulted in a settlement. Coincidentally, and perhaps ironically, the trustee of PSINet Consulting Solutions, who was then arguing in favor of recharacterization, is the Opponents’ Expert in these cases,

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who takes the opposite position here.

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(a) ACC Bondholder Group’s Arguments

The ACC Bondholder Group argues that the intercompany claims arising from the operation of the cash management system are enforceable as debt and not equity. It asserts that the claims reflect liabilities from prepetition transactions of economic substance among the Adelphia entities where transfers, flowing through the CMS, were recorded as intercompany payables and receivables through the Bank of Adelphia. According to the ACC Bondholder Group, this argument is supported by one of the key cases in the area,

Hills-borough Holdings.

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There, intercompa-ny liabilities pursuant to a cash management system were held enforceable as debt and not equity.

The ACC Bondholder Group argues that Adelphia’s claims were identified as receivables and payables in Adelphia’s books and public financial statements, which was “sufficient formality for an intercompany loan.” It further argues that in a case that is an important part of the Second Circuit’s bankruptcy jurisprudence,

Augie

Restivo

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(a case that also held that substantive consolidation was improper, and which is discussed below), the Second Circuit established that the enforcement of claims among affiliated debtors would be the rule, and that intercompany claims often serve as an important component of creditors’ recovery.

The ACC Bondholder Group also contends that recharacterization would be inappropriate, citing case law for the proposition that the movement of cash and consideration among affiliated entities pursuant to a consolidated cash management system results in debt, not capital contributions or dividends. It asserts that an entry of an advance on the corporate books is sufficient formality for an intercompany loan since a cash management system would be unworkable if separate writing for each transaction were required. It argues that these transactions do not merit recharacterization because the AIH Receivable resulted from direct cash proceeds from ACC’s securities issuances, or from the consideration for acquisitions, not equity investments. This, the ACC Bondholder Group asserts, is made clear from the interest paid on the AIH Receivable by the Bank of Adelphia.

The ACC Bondholder Group further argues that the intent to treat intercompany transactions as debt is indicated in interest charge entries on the intercompany balances, which were disclosed in the Adelp-hia prepetition public financial statements.

(b) Arahova Noteholders Committee’s Arguments

The Arahova Noteholders Committee argues that the prepetition ledger entries are insufficient to prove billions of dollars of intercompany debt, and that the ACC Bondholder Group cannot use circumstantial evidence to satisfy ACC’s heightened burden of proof as an insider of the Debt- or. It argues that evidence of debt — such as loan agreements or promissory notes— is significantly absent. And it argues that

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when a parent raises money (particularly by issuance of equity), and sends it downward to its subsidiaries, it is entirely reasonable to regard that as an equity investment, especially where, as here, no promissory notes were executed or there was any other contemporaneous documentation to evidence a loan.

The Arahova Noteholders Committee argues that any inter-Debtor balances resulting from contributions of ACC should be characterized as equity because contributions of a parent to its subsidiaries without the creation of a note or other indicia of indebtedness, such as terms of interest or documentation as a “payable,” should be treated as equity.

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The Arahova Note-holders Committee argues that when the Debtors wanted to document a transaction as a debt transaction, the Debtors created promissory notes, which shows the recognition that a note was the proper way to document a debt transaction.

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The Arahova Noteholders Committee asserted in Phase II that prior to the filing of the May 2005 Schedules, creditors of Arahova had no expectation that intercom-pany claims would cause the holding company and the holders of convertible subordinated debt (which by their terms were subordinated to other creditors) to be senior to operating company creditors. In fact, it argues that Adelphia’s prepetition public filings made clear that all ACC debt was structurally subordinated to the debt of its subsidiaries, such that the assets of an indebted subsidiary would be used to satisfy the applicable subsidiary debt before being applied to the payment of parent debt.

In that connection, the Arahova Note-holders Committee argued that certain of ACC’s publicly filed documents said:

The operations of the Adelphia Parent Company are conducted through its subsidiaries. Therefore, the Adelphia Parent Company is dependent on the earnings, if any, and cash flow of and distributions from its subsidiaries to meet its debt obligations, including its obligations with respect to the Notes. Because the assets of its subsidiaries and other investments constitute substantially all of the assets of Adelphia Parent Company, and because those subsidiaries and other investments will not guarantee the payment of the principal of and interest on the Notes, the claims of holders of the Notes effectively will be subordinated to the claims of creditors of those entities.

And it is true that none of the operative debt instruments for Arahova provided that the notes issued thereunder would be subordinate to any intercompany claims, and that Adelphia’s prepetition Form 10-K, filed on April 2, 2001 for the period ended December 31, 2000, made clear that “[a]ll significant intercompany accounts and transactions have been eliminated in consolidation,” suggesting that there would be no intercompany obligations that could trump Arahova creditor rights to payment.

As a result, the Arahova Noteholders Committee argues that investors would have no way of knowing that intercompany claims among the various Debtor compa

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nies would somehow attain priority on par with the claims of investors in the subsidiary notes.

The Arahova Noteholders Committee also disputes ACC’s reliance on the accrual of interest on intercompany liabilities as evidence that liabilities arising from a cash management system are debt. It cites observations on the part of members of Adelphia’s Restatement Team and PwC Forensics personnel that regarded interest charges booked by the Rigases as inconsistent and possibly fraudulent.

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In essence, the Arahova Noteholders Committee asserts that parties dealing in transactions constituting billions of dollars would be expected to have some formal understanding as to basic issues, such as: “(1) what is the interest rate? (2) when is payment due? (3) what is the source of the repayment? (4) what security is there for the payment? and (5) does this party have an ability to satisfy the obligations.”

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(c) My Observations

The ACC Bondholder Group is right when it observes that the fact that money comes down from a parent to its subsidiary does not by itself make it an equity investment, and that intercompany accounts have been held to be sufficient documentation of debt. But the Arahova Notehold-ers Committee also has very respectable arguments in this regard, particularly when one considers the absence of any contemporaneous documentation (not just promissory notes), terms for repayment, means to satisfy the repayment obligation, and the fact that interest accruals were sporadic and at least seemingly fraudulent. Different results could also apply to the proceeds of debt offerings, on the one hand, and equity offerings, on the other.

There is authority to support and reject recharacterization and disallowance of the AIH Receivable. I am not in a position to conclude that either side has a material advantage on this issue over the other. It must be regarded as an issue that could go either way.

2. Equitable Subordination

Equitable subordination of debt is authorized under both pre- and post-Code caselaw, and section 510(c) of the Bankruptcy Code. The ACC Bondholder Group and the Arahova Noteholders Committee differ on whether it could appropriately be imposed here.

(a) ACC Bondholder Group’s Arguments

The ACC Bondholder Group argues that the AIH Receivable cannot be equitably subordinated because ACC has not engaged in any misconduct that caused harm to Arahova or its creditors. Contrary to the Arahova Noteholders Committee’s assertion, the ACC Bondholder Group argues that the fraud perpetrated by the Rigas family cannot be attributed to ACC, or, alternatively, must be attributed to every Debtor in the Adelphia enterprise.

(b) Arahova Noteholders Committee’s Arguments

The Arahova Noteholders Committee argues that the Rigases’ conduct, while serving as officers and directors of ACC (and using their positions as such to control the rest of the Adelphia enterprise) is the epitome of “inequitable conduct” justi

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fying equitable subordination. And the Arahova Noteholders Committee argues that it is inequitable for ACC creditors to benefit derivatively from the fraud orchestrated by Rigas management to the detriment of the recoveries of Arahova. For example, $1.776 billion of the AIH Receivable relates to securities of ACC purchased by the Rigases, which purchases were likely, if not plainly, fraudulent. Debtors other than ACC, including Debtors in the Arahova Group, were liable for co-borrowings that the Rigases used for their own purposes.

(c) My Observations

MIA Phase II was never completed. Thus, factual submissions were not completed, and there has been no expert testimony yet. That said, it is clear from the existing record that whether part or all of the AIH receivable should be equitably subordinated is a factually intense issue and presents difficult legal issues for adjudication.

I had initially' thought that since the Rigases and their confederates were doing improper things throughout Adelphia’s capital structure, and were acting, at various times, on behalf of one or another of nearly all of the Debtors, I would be disinclined to penalize creditors of one of the Debtors to benefit the creditors of another, and thus would not regard the Arahova Noteholders Committee’s equitable subordination arguments to be as strong as its arguments for recharacterization or (especially) for declining to follow the Bank of Adelphia Paradigm. But I have since come to respect the argument that the Rigases used their positions at ACC and control over Debtors other than ACC in a way that would cause injury to those Debtors to a greater degree than ACC itself — ■ such as by making them liable for bank debt that at least seemingly was used for the Rigases’ benefit at the ACC level, such as for purchases of ACC securities. A respectable argument could be made that I would need to take curative action to address the issue of equitable subordination, if the facts established that those premises were true.

Accordingly, it is difficult to predict at this juncture which party would prevail if litigation is not compromised under the Settlement. Very little testimony or evidence was introduced by the parties during MIA Phase II concerning the AIH Receivable, and the MIA was stayed before the evidence was closed on this issue. While I see that the Opponents’ Expert predicted victory for ACC on this issue, I cannot share his optimism. Neither side can assume victory in this regard. I think that equitable subordination is quite a difficult issue in the case, and one that could easily go either way.

d) “CCC Payable” (Century Communications Corp. $717 million payable under Bank of Adelphia Paradigm) (Issue W

The parties next dispute the propriety of the intercompany payable of Century Communications Corp. (“CCC”) of approximately $717 million to the Bank of Adelp-hia because (a) the payable is generated by the Bank of Adelphia Paradigm, and (b) the payable resulted from the Restatement Team’s reversal of certain entries made by prepetition management (the so-called “Century Step-Up”) in connection with the acquisition of Century Communications Corp. (the “Century Acquisition”).

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When Adelphia acquired Century in October 1999, the price paid by Adelphia was higher than the aggregate book value of the assets owned by Century. The “Century Step-Up” was a series of entries made by the Debtors’ prepetition management to step-up the book value of the Century assets to match the market value of the purchase price on the aggregate amount paid for Century stock. Prepetition management originally booked the Century Acquisition using the “equity method,” but subsequently changed the accounting to the “hybrid method,” whereby the parent recorded the investment with an offset to its equity account, and the purchase price was “pushed down” through intercompany accounts, resulting in intercompany balances to the extent intercompany accounts were used (including an intercompany receivable of approximately $1,777 billion at CCC).

Because the source of the cash for Adelphia’s purchase of Century was the Bank of Adelphia, the Restatement Team felt it did not make “sense” for there to be such a large intercompany receivable at Arahova (approximately $1.4 billion), and that it would have been more “appropriate” to: (i) record an intercompany receivable at the Bank of Adelphia, and an in-tercompany payable at Arahova and (ii) convert Arahova’s intercompany receivables into equity. The Restatement Team determined that certain historic entries had generated much of Arahova’s inter-company receivable, and determined that a restatement entry should be posted to reverse the associated impact to intereom-panies through equity.

During the Restatement process, the Century Acquisition was adjusted to the equity method, whereby the parent recorded the acquisition as an investment on its books and as equity on the books of the acquired entity, resulting in no intercom-pany balances. Of the many Restatement entries that together resulted in a decrease to the net intercompany balance between Arahova and the Bank of Adelp-hia from $1,375 billion down to $351 million, $1,385 billion in adjustments affected transactions in the acquisitions/swaps category. That $1,385 billion in adjustments, in turn, was comprised of two Restatement entries in the amounts of $1.36 billion and $24 million, respectively.

1. ACC Bondholder Group’s Contentions

To the extent CCC received no value for this transaction, the ACC Bondholder Group contends that the Bank of Adelphia Paradigm is needed to eliminate CCC from these entries. The ACC Bondholder Group’s argument is bolstered, it asserts, by the Debtors’ acknowledgment that the only reason prepetition accounting personnel recorded transactions with parties other than the Bank of Adelphia was that it was easier to do so.

Finally, the ACC Bondholder Group could argue that the underlying journal entry was driven in part by the requirements of push-down accounting, whereby the value of the purchase price is “pushed down” to the value of the assets and the legal entities.

2. Arahova Noteholders Committee’s Contentions

The Arahova Noteholders Committee argues that the Debtors’ Restatement Team acknowledged that no standards were applied with respect to whether the journal entries would be moved from inter-company to equity, and could not explain why this particular set of step-up entries appeared in the intercompany (as opposed to the equity) accounts, or even why only some of the Century Step-Up entries needed to be made. And the Arahova

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Noteholders Committee further argues that the Debtors’ Restatement Team acknowledged that there was no GAAP provision, and indeed no standard or principle whatsoever, behind its decision to reverse one aspect of the Century Step-Up, other than a feeling that it was inappropriate.

S. My Observations.

I haven’t yet concluded whether unwinding this transaction would achieve a just result. It appears that there may have been a legitimate basis for the Restatement Team to have made the entries it did. Whether or not those measures were required by GAAP, I find it understandable that the result of a transaction under which the Bank of Adelphia made expenditures for an acquisition would result in a net payable back to the Bank of Adelphia. However, it also appears that the entries may never have been made in the first place if the Restatement Team had a fuller understanding of the original accounting for the Century acquisition.

This issue too could go either way. But on balance, I think the ACC Noteholders Committee has somewhat the better of this argument.

e) Acquisition Accounting, In General (Intercompany Issues 1, 2)

Another point of contention among the parties is whether the acquisitions of Century Cablevision (the “Cablevision Acquisition”) and Prestige Communications North Carolina/Prestige Communications Georgia (the “Prestige Acquisition”), which together constitute two of the three prepetition acquisitions involving Arahova’s subsidiaries, should be restated.

The Arahova Noteholders Committee contends that the following intercompany balances arising from Adelphia’s accounting for these acquisitions do not represent actual transfers of value between Debtors creating a right to payment, and that the accounting for these acquisitions should be restated so as not to rely on intercompany accounts:

(i) Adelphia Cable Prestige’s net balance of $841 million to the Bank of Adelphia;

(ii) Adelphia Cleveland’s net balance of $827 million to the Bank of Adelphia; and

(iii) Adelphia of the Midwest’s $898 million payable to the Bank of Adelphia.

The ACC Bondholder Group maintains that the use of intercompany payables for these acquisitions appropriately reflected the debt obligations they were intended to be, was the preference of Adelphia’s pre-petition management, and was perfectly appropriate under GAAP — such that the only reason to restate the accounting for these acquisitions would be to benefit Ara-hova.

The Debtors’ prepetition management applied three different methodologies in accounting for acquisitions: (i) the “inter-company accounts” method, whereby the purchase price was “pushed down” to the applicable legal entity from the parent, resulting in an intercompany receivable at the parent level and an intercompany payable at the subsidiary where the assets are recorded; (ii) the “equity transaction” method, whereby the parent recorded the acquisition as an investment on the parent’s books and as equity on the acquired legal entity’s books, resulting in no inter-company balance; and (iii) the “hybrid” method, whereby the parent recorded the investment with an offset to its equity account and the purchase price is “pushed down” through intercompany accounts, resulting in intercompany balances to the extent intercompany accounts are used. According to the Arahova Noteholders Committee, each accounting method was

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applied by prepetition management inconsistently and, according to Arahova, incorrectly. The Debtors originally booked the Cablevision Acquisition using the hybrid method, and the Prestige Acquisition using the intercompany method.

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The ACC Bondholder Group and the Arahova Noteholders Committee advance both general arguments in favor of or against the Debtors’ acquisition accounting, and arguments that are specific to the challenged acquisitions. The arguments that are applicable to both transactions are addressed first, followed by the arguments that are specific to each of the challenged acquisitions.

1. Arahova Noteholders Committee’s Contentions

As a general matter, the Arahova Note-holders Committee argues that intercom-pany obligations resulting from the accounting relating to the acquisitions: (i) should have used the equity accounts; (ii) did not result in valid debt with a right to repayment; and (iii) bear no indicia of a validly created debt obligation.

In arguments very much like those previously addressed in connection with AIH Receivable Recharacterization, the Araho-va Bondholders Group argues that the purported intercompany obligations of Ar-ahova and its subsidiaries bear none of the hallmarks of debt, as: (i) there are no instruments evidencing indebtedness, maturity dates or schedule of payments, fixed rate of interest, or identified source of repayment; (ii) the capitalization of Araho-va and its subsidiaries was inadequate; (iii) Arahova and its subsidiaries and the Bank of Adelphia have a common parent; (iv) the obligations are unsecured; (v) outside financing would not have been available, absent ACC’s continued non-disclosure of the Rigas fraud; (vi) the absence of evidence of demands for payment indicates that the obligation was subordinated; (vii) there is no evidence concerning the use of the funds; and (viii) there was no sinking fund to provide repayment.

And the Arahova Noteholders Committee argues that these claims do not rise to a “right to repayment,” in particular where, as here: (i) the purported public disclosures of these obligations are rife with fraud; (ii) interest charges on these obligations were manipulated and bore no relationship to the capital provided; (iii) there is no evidence that cash actually changed hands in these purported borrowings; and (iv) the Debtors recognized the proper way to document a debt transaction, and created promissory notes when they wanted to reflect actual debt.

Significantly, the Arahova Noteholders Committee argues that prepetition management booked the transactions in the way it did not because it was the right thing to do, but simply because it was easier.

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And finally, the Arahova Noteholders Committee argues that the Restatement Team’s decisions as to what may have been appropriate from an accounting perspective should not dictate how value should be allocated in a bankruptcy case upon proven claims.

2. ACC Bondholder Group’s General Contentions

Similarly, the ACC Bondholder Group makes arguments much like those it makes in connection with AIH Receivable Re-characterization. As a general matter, the ACC Senior Noteholders Committee argued at the MIA hearings that the inter-company obligations running between Ara-hova Group entities and the Bank of Adelphia would bear the marks of debt, not equity, because: (i) they do not reflect obligations between a parent to its wholly-owned subsidiary, but rather between Ara-hova and its subsidiaries and an affiliate (the Bank of Adelphia) with whom they have no direct or indirect ownership interest; (ii) the Debtors knew the difference between equity and debt, as evidenced by the fact that transactions intended to be equity investments, capital contributions, or dividends were recorded as such; (in) the transactions were not merely rubber-stamped by the Restatement Team, but were reversed when the intent and substance of the transactions reflected equity instead of debt; and (iv) the intercompany claims, arising under the CMS, are similar to the types of liabilities that are incurred daily in the postpetition period and to which the Arahova Debtors have not objected.

The ACC Senior Noteholders Committee next argued that, rather than sweep aside entire categories of intercompany liabilities, the Arahova Noteholders Committee had to establish, on a case by case basis, that the transaction underlying the claim at issue was in substance indicative of an equity contribution rather than cash.

The ACC Senior Noteholders Committee further argued that even where the intercompany obligation was

not

accompanied by certain indicia typical of debt, such as a note or a repayment schedule, such an obligation could properly be treated as debt instead of equity where: (i) even if no separate writing existed, the obligations at issue were listed in the Debtors’ books and records as payables and receivables, not equity; (ii) the obligations were disclosed in the Debtors’ audited financial statements and public filings, affording third-party creditors notice of such obligations and their characterization as debt; (iii) even if no definitive interest rate was contained (an irregularity that was corrected in the Restatement Process), interest on the obligations was charged periodically; (iv) even if no repayment schedule was established, the relevant parties expected the obligations to be repaid; (v) repayment of the obligations was not tied to the profitability of the entities that incurred them, but rather through ongoing and regular settlement of intercompany debt; and (vi) the evidence suggested that the Arahova Debtors were adequately capitalized.

Finally, the ACC Senior Noteholders Committee argued that the debt obligations could not be recharacterized as equity where: (i) there was no identity of interest between the creditor and stockholder (i.e., the obligations did not reflect advances between a parent and its subsidiary or a stockholder and its corporation,

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but rather between the Arahova Debtors and their affiliate, the Bank of Adelphia); (ii) the recharacterization doctrine is not intended to protect a corporation (i.e., Ara-hova) from claims asserted against its subsidiaries and other entities in which it has an equity interest because such equity holders would be deemed to know of the existence of the obligations of their affiliates; and (iii) recharacterization of the myriad transactions with the Bank of Adelphia would make it impossible to allocate ownership between creditors whose interest was denominated in dollars and shareholders whose interest was denominated in shares.

S. My Observations

I would likely agree with the ACC creditors that transactions would have to be looked at on a case-by-case basis. But I would be mindful of the fact that the burden would go the other way, placing the burden on the entity that was trying to establish a claim.

Once looking at the transactions on a case-by-case basis, I would undoubtedly have to give substantial weight to the McMullen testimony that the debt method was used for accounting for the acquisitions not because it was required by GAAP or preferred, but simply because it was easier. This was not fraudulent, but it was not a satisfactory premise upon which I could find a claim. Though I will talk about the specifics momentarily, this is a matter of substantial concern, and would almost certainly result in an Arahova Noteholders Group win on each of the acquisition accounting issues.

The specific acquisitions that have been challenged, as well as the ACC Senior Noteholders Committee’s and the Arahova Noteholders Committee’s respective arguments with respect to those acquisitions, are addressed below.

j) Cleveland Cablevision Acquisition (Intercompany Issue 1)

The “Cablevision Acquisition” is shorthand for two transactions, both of which were finalized in November 2000. In the first transaction, which was a cash transaction, ACC acquired the assets of Cablevision of Cleveland, L.P. and Telerama, Inc. for $990 million pursuant to an Asset Purchase Agreement dated December 8, 1999 (the “Cablevision APA”). ACC subsequently assigned its rights under the Ca-blevision APA to Adelphia Cleveland, LLC (“Adelphia Cleveland”) pursuant to a letter dated November 1, 2000. In the second transaction, a stock transaction, ACC agreed to merge with Cablevision of the Midwest, Inc. under an agreement pursuant to which ACC issued 10,800,000 shares of its common stock, valued at approximately $503 million, to the shareholders of Cablevision of the Midwest, Inc. Thus, the total acquisition amount of the Cablevision Acquisition (including both its cash and equity components) was $1.493 billion.

The acquisition was accounted for using the hybrid accounting method. Journal entries associated with the acquisition were recorded in nine steps. With respect to the stock portion of the Cablevision Acquisition, Adelphia initially recorded the stock on the equity accounts (i.e., the transfer from ACC to Arahova), but then switched to intercompany accounts (i.e., the transfer from Arahova to CCC) before the equity reached its final resting home (i.e., Adelphia of the Midwest, Inc.). With respect to the cash portion, only intercom-pany accounts were used. Ultimately, an intercompany payable of $503 million was created at Adelphia of the Midwest, Inc. (an entity with no subscribers or employees that was created for the sole purpose of furthering Adelphia’s tax strategy) and

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an intercompany payable of $990 million was created at Adelphia Cleveland, LLC.

Neither the ACC Senior Noteholders Committee’s nor the Arahova Noteholders Committee’s expert could describe the source of the $990 million for the acquisition with certainty. The Arahova Note-holders Committee argued that the source was a draw on the Century co-borrowing facility of $1.05 billion on November 1, 2000, while the ACC Senior Noteholders claimed that there was no way to conclude that the source for the cash was the Century co-borrowing facility, in particular since $120 million of the draw was allocated to Adelphia Business Solutions,

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not CCH, LLC.

1. Arahova Noteholder Committee’s Arguments

The Arahova Noteholders Committee contends that the accounting for the Ca-blevision Acquisition was inappropriate for the following reasons:

(i) The choice of accounting methodologies for the acquisition was a reflection of the relative ease of recording the transactions through the intercompany, as opposed to the equity, methodology.

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(ii) The Restatement Team (to which the ACC Bondholder Group would have this Court defer) itself acknowledged that it would account for the acquisition through the equity, rather than the in-tercompany, method were the Restatement being performed today and not merely reviewed.

(iii) There was no legitimate business purpose for the accounting treatment of the Cablevision Acquisition.

(iv) The acquisition was accounted for through inappropriate intercompany “churning,” as is apparent from the number of legal entities through which the Cleveland Cablevision assets (both stock and cash) were transferred.

(v) The Bank of Adelphia lacked economic interest in the transaction.

(vi) Recording voluminous intercom-pany activity had an arbitrary and adverse impact on the recovery of the Ara-hova noteholders.

(vii) The intercompany obligations were not accompanied by any of the documentation that is ordinarily expected for a debt transaction.

2. ACC Bondholder Group’s Arguments

The ACC Bondholder Group defends the accounting of the Cablevision Acquisition on the following grounds:

(i) It was appropriate to treat the in-tercompany payables of Adelphia Cleveland and Adelphia Midwest as debt even without additional documents evidencing a debt obligation. The affiliate liabilities related to the acquisition were evidence enough of an obligation to pay for those assets, in particular given the lack of evidence suggesting that there was no

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intention to take on an obligation to pay for the assets received, and the absence of standards preventing the assumption of an intercompany obligation.

(ii) GAAP does not address the character and treatment for business, financial, and accounting purposes for inter-company transactions among wholly-owned subsidiaries. Instead, the manner in which such transactions are characterized and recorded is within the discretion of management.

(iii) Ade

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