As reported in my prior post last January, Judge Shira A. Scheindlin of the United States District Court for the Southern District of New York issued a ruling on January 24, 2007 that she called "one of the most difficult tasks this Court has yet confronted." In it, by entering a stay of confirmation conditioned upon the posting of a $1.3 billion bond, she nearly derailed plan confirmation in the Adelphia bankruptcy, which Judge Robert Gerber, the presiding bankruptcy judge, called "among the most challenging — and contentious — in bankruptcy history."
By way of comparison, Judge Scheindlin’s ruling last week that pulled the plug on the dissident bondholders’ appeal seemed "a piece of cake." Why the change of heart? Judge Scheindlin realized, as she put it, that the bondholders "used the Court to obtain bargaining leverage to extract a better deal for their client with no intention of ever posting a reasonable bond." "[Their] inconsistent positions," she found, "have had an impact on judicial integrity and have prejudiced Appellees." "Such behavior," she observed, "is cynical at best and unprincipled at worst." ACC Bondholder Group v. Adelphia Comm. Corp. (In re Adelphia Comm. Corp.), 07-1172 (S.D.N.Y. 4/2/2007) (Opinion at p.14 n.33).
By way of background as to how the case proceeded from my last post, Judge Scheindlin recounted that soon after the bondholders appealed Judge Scheindlin’s initial decision, the 2d Circuit on 2/9/07 dismissed the appeal for lack of jurisdiction on the basis that bondholders were unwilling, rather than unable, to post the requisite bond. (Op. at 4.) The 2d Circuit, however, noted in remanding the case to Judge Scheindlin that the dissident bondholder group could
seek modification of the bond amount (a) if it can show that it is in fact unable (rather than unwilling) to post the required amount or (b) to present alternative arrangements for the District Court’s consideration that might lessen the amount of harm likely to be suffered by the Appellees in the event of an unsuccessful appeal, thereby perhaps justifying a reduction in the amount of the bond. (Op. at 4.)
Because the bondholders would not budge from the $10 million bond amount originally proposed, however, Judge Scheindlin vacated the stay on 2/12/07, finding that "such a small bond was unacceptable to the Court in light of the magnitude of threatened harm to the Appellees." (Op. at 5.)
Once the stay was lifted, Adelphia wasted no time in consummating the plan, distributing $6.49 billion in cash to 8,000 claimants, 118 million shares of free trading Time Warner Cable stock to 13,500 claimants, and 9.56 billion freely tradable interests in the "Contingent Value Vehicle" (a post-confirmation litigation trust) to 8,000 claimants and 23,000 equity interest holders. (Op. at 5-6.)
In the end, the bondholders’ lost in part because they were so persuasive in the first round before Judge Scheindlin where they argued that if Adelphia were permitted to consummate the plan, then the appeal would be "equitably mooted." This earlier argument, the Court held, precluded them under the principles of judicial estoppel from arguing the opposite view — in this second bite at the apple — that consummation of the plan would not equitably moot their appeal. (Op. at 11-14.)
Regardless, Judge Scheindlin held, the appeal in fact was equitably mooted by the plan’s substantial consummation because the bondholders "fail[ed] to meet their burden on four of the five Chateaugay factors" that would support hearing the merits of their appeal. (Op. at 14-15) (citing Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944, 952 (2d Cir. 1993) (these four factors being (i) whether effective relief can be granted (Op. at 15-20); (ii) whether such relief will unravel intricate transactions (Op. at 21-22); (iii) whether parties adversely affected have had notice and opportunity to participate in the appeal (Op. at 22-25); and (iv) whether appellants pursued a stay with diligence (Op. at 25-26)).
Judge Scheindlin closed the opinion by yet again expressing her displeasure with the bondholders for "pursuing a stay that they never intended to bond," once more demonstrating that a party attempting to "stop the confirmation train from leaving the station" better be prepared to "put up or shut up," as the old saying goes.
© Steve Jakubowski 2007