Adelphia Recovery Trust v. HSBC Bank USA (In re Adelphia Recovery Trust)

Summarized by Kevin Baum , Windels Marx Lane & Mittendorf, LLP
15 years 3 weeks ago

Citation:

Nos. 09-0799-bk(L), 09-0808-bk(Con), 09-0810-bk(Con) (2d Cir. Feb. 9, 2011)

Tag(s):

2nd Circuit

Ruling:

Rejecting the district court’s ratification analysis, the Second Circuit held that, as a successor in interest of the Adelphia DIP the Adelphia Recovery Trust’s (“ART”) fraudulent conveyance actions against three banks seeking to recover the purchase price of non-performing loans were barred by the doctrines of res judicata and judicial estoppel. Before ART initiated the fraudulent conveyance actions, Adelphia DIP released its liens from those loans being sold in a 363 sale another related bankruptcy case. ART is a creditor’s trust formed pursuant to Adelphia’s confirmed plan of reorganization, and is charged with pursing the chapter 5 avoidance actions. First, the doctrine of res judicata barred ART’s claim against Fleet Bank because Fleet Bank and the Adelphia DIP agreed to have proceeds from a 363 sale in Niagara Frontier Hockey, L.P.’s (“NFHLP”) bankruptcy case satisfy part of the Fleet Bank’s claim in the Adelphia DIP’s bankruptcy case. NFHLP was also owned by Adelphia’s former majority shareholder. Adelphia, the prebankruptcy entity, had previously purchased certain loans made by HSBC, Key Bank, and Fleet Bank (collectively, the “Banks”) to NFHLP. Both the Adelphia DIP and Fleet Bank conditioned their consent to the NFHLP 363 sale on this settlement, which the NFHLP bankruptcy court approved. Therefore, the settlement between Fleet Bank and the Adelphia DIP fully dealt with the DIP’s rights in the loans purchased from Fleet Bank, and thus, precluded relitigating the issue of whether Adelphia, the prebankruptcy entity, received adequate value when it purchased the loans from Fleet Bank prior to Adelphia’s bankruptcy. Second, the doctrine of judicial estoppel barred ART’s claims against HSBC and Key Bank seeking to recover money used to purchase prepetition loans made to NFHLP. “Typically, judicial estoppel will apply if: 1) a party’s later position is ‘clearly inconsistent’ with its earlier position; 2) the party’s former position has been adopted in some way by the court in the earlier proceeding; and 3) the party asserting the two positions would derive an unfair advantage against the party seeking estoppel.” The first element of judicial estoppel was satisfied because the Adelphia DIP’s representation at the NFHLP 363 sale hearing that it owned the sole interests in two loans made to NFHLP was inconsistent with ART’s assertion that “even back at the time of the sale confirmation proceedings, the prices that had been paid for the loans resulted in fraudulent conveyances subject to rescission.” The second element of judicial estoppel was satisfied because the NFHLP bankruptcy court indicated that it was only authorizing the 363 sale because all parties with interests, including the Adelphia DIP, consented to the sale. Finally, the Court held that the Adelphia DIP gained an unfair advantage against the Banks in seeking to obtain the immediate sale of the NFHLP’s assets while also preserving its ability to bring avoidance actions against the Banks. The Banks, meanwhile, had lost the ability to reclaim their collateral in the NFHLP’s bankruptcy case in the event that any fraudulent conveyance action proved successful.

Procedural context:

ART appealed from a judgment of the United States District Court for the Western District of New York, affirming in part and reversing in part the judgment of the United States Bankruptcy Court for the Western District of New York. The district court barred the ART from pursuing fraudulent conveyance claims against the Banks. AFFIRMED.

Facts:

John Rigas, the founder of Adelphia Communications, used Adelphia money to acquire NFHLP—the owner of the Buffalo Sabres, an NHL hockey team, and its arena. In the 1990s, NFHLP entered into three loans. First, in May 1995, Crossroads, a wholly-owned subsidiary of NFHLP, borrowed $35 million (the “Construction Loan”) from the Banks. This loan enabled the construction of a new hockey arena. Second, also in May 1995, Crossroads borrowed $32.5 million (the “Concession Loan”) from Fleet Bank and Key Bank to finance food and concession equipment for the arena. Third, in February 1997, NFHLP opened a $12 million revolving line of credit (the “Revolver Loan”) with Fleet Bank. As a result of these three loans, the Banks’ liens encumbered substantially all of NFHLP’s assets. In March 2000, Sabres, Inc., a wholly-owned subsidiary of Adelphia, purchased the Construction Loan and the Revolver Loan from the Banks for $34.1 million. Although the Fleet Bank and Key Bank also intended to sell the Concession Loan to Sabres, Inc., they were unable to obtain the necessary third-party consent from the arena’s concession stand operator. ART asserts that these transactions occurred because the hockey team was losing money and John Rigas was seeking to prop up NFHLP in order to avoid bankruptcy. Specifically, between 1995 and 2002, when Adelphia filed for bankruptcy, John Rigas allegedly invested more than $200 million of Adelphia’s money into NFHLP. In 2003, NFHLP filed for bankruptcy in the Western District of New York. In April 2003, NFHLP sold the hockey team’s assets “free and clear of all liens, claims, interests and encumbrances” in a 363 sale. The Adelphia DIP and Fleet Bank consented to the 363 sale. The proceeds of the 363 sale would be used to satisfy the Concession Loan, and in exchange for the Adelphia DIP forgoing its lien against NFHLP, Fleet Bank gave the Adelphia DIP an off-set for $11 million in payments Adelphia Corp. had made earlier in debt-support of NFHLP. HSBC and Key Bank did not participate in the NFHLP 363 sale hearing. Shortly after the 363 sale, ART instituted fraudulent conveyance actions against the Banks in Adelphia’s bankruptcy case. ART asserted the loans were under-performing and worth substantially less than the purchase price that Adelphia paid to the Banks.

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