IN RE ADELPHIA COMMUNICATIONS CORP. (Bankr.S.D.N.Y. 2005)

330 B.R. 364

Bankruptcy No. 02-41729 (REG), Adversary No. 03-04942 (REG).United States Bankruptcy Court, S.D. New York.
August 30, 2005.

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Kasowitz, Benson, Torres Friedman LLP, by David M. Friedman, Esq. (argued), Andrew K. Glenn, Esq., Adam L. Shiff, Esq., Jonathan E. Minsker, Esq., Sean C. Shea, Esq., New York, NY, Klee, Tuchin, Bogdanoff Stern LLP, by Edward T. Attanasio, Esq. (argued), David M. Stern, Esq., Martin R. Barash, Esq., Los Angeles, CA, for Plaintiff Official Committee of Unsecured Creditors.

Willkie Farr Gallagher LLP, by Marc Abrams, Esq., Brian E. O’Connor, Esq., Paul Shaloub, Esq., Morris J. Massel, Esq., New York, NY, Boies, Schiller Flexner LLP, by Philip C. Korologos, Esq. (argued), Eric Brenner, Esq., Armonk, NY, by George F. Carpinello, Esq., Albany, NY, for Plaintiff Debtors and Debtors in Possession.

Bragar Wexler Eagel Morgenstern, P.C., by Peter D. Morgenstern, Esq., Gregory A. Blue, Esq. (argued), Debra Kramer, Esq., Kate Webber, Esq., New York, NY, for Plaintiff Official Committee of Equity Security Holders.

Simpson Thacher Bartlett LLP, by Peter V. Pantaleo, Esq. (argued), John J. Kerr, Jr., Esq., William T. Russell, Jr., Esq. (argued), Sean Thomas Keely, Esq., Elisha D. Graff, Esq., New York, NY, for Defendants Wachovia Bank, N.A. and Wachovia Capital Markets, LLC.

Haynes and Boone, LLP, by Robin E. Phelan, Esq. (argued), Richard D. Anigian, Esq. (argued), Thomas E. Kurth, Esq., Dallas, TX, by Judith Elkin, Esq., New

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York, NY, for Defendant Bank of America, N.A.

White Case LLP, by Howard S. Beltzer, Esq., Glenn M. Kurtz, Esq. (argued), Karen M. Asner, Esq., New York, NY, for Bank of America, N.A.

Milbank, Tweed, Hadley McCloy LLP, by Luc A. Despins, Esq. (argued), Scott A. Edelman, Esq., Brian D. Hail, Esq. (argued), New York, NY, for Citibank, N.A. and Citicorp USA, Inc., as Administrative Agent for the Century TCI Facility.

Milbank, Tweed, Hadley McCloy LLP, by James C. Tecce, Esq. (argued), Dennis F. Dunne, Esq., David R. Gelfand, Esq., Thomas A. Arena, Esq., Jeffrey L. Nagel, Esq., New York, NY, for Defendant JPMorgan Chase Bank, as Administrative Agent for the FrontierVision Lenders.

Mayer, Brown, Rowe Maw LLP, by J. Robert Stoll, Esq., Robert J. Ward, Esq., Jean-Marie L. Atamian, Esq., Kenneth E. Noble, Esq. (argued), Scott E. Mortman, Esq., New York, NY, by Robert F. Finke, Esq., Chicago, IL, for Defendants Bank of Montreal and Harris Nesbitt Corp.

Luskin, Stern Eisler LLP, by Michael Luskin, Esq. (argued), Trevor Hoffmann, Esq., New York, NY, for The Bank of Nova Scotia.

Chadbourne Parke LLP, by Andrew P. Brozman, Esq. (argued), Janice A. Payne, Esq., Jennifer C. DeMarco, Esq., New York, NY, for Defendants Credit Lyonnais New York Branch, Credit Lyonnais Securities (USA) Inc., and LCM I Limited Partnership.

Clifford Chance, by Margot Schonholtz, Esq., Scott T. Talmadge, Esq. (argued), New York, NY, for Defendants CIBC, Inc. and CIBC World Markets.

Gibson, Dunn Crutcher LLP, by Mar-shall R. King, Esq. (argued), Jonathan M. Landers, Esq., Robert F. Serio, Esq., Michael J. Passante, Esq., Michael J. Riela, Esq., New York, NY, for Merrill Lynch Co., Inc.

Duane, Morris Heckscher LLP, by Lawrence J. Kotler, Esq., Philadelphia, PA, for Defendant SG Cowen Company, LLC (f/k/a SG Cowen Securities Corp.).

Wilmer Cutler Pickering Hale Dorr, LLP, by John A. Valentine, Esq. (argued), Theresa Titolo, Esq., Washington, D.C., by Phillip D. Anker, Esq., New York, NY, for Defendants Credit Suisse First Boston (USA), Inc. and The Royal Bank of Scotland PLC.

Cleary Gottlieb Steen Hamilton LLP, by Lindsee P. Granfield, Esq. (argued), Jennifer L. Kroman, Esq. (argued), Mitchell A. Lowenthal, Esq., Thomas J. Moloney, Esq., David Bober, Esq., Jane Kim, Esq., New York, NY, for Defendants Thirteen Investment Banks.

Winston Strawn LLP, by James A. Beha II, Esq., Steven M. Schwartz, Esq. (argued), New York, NY, for Defendant J.P. Morgan Securities, Inc.

Stroock Stroock Lavan LLP, by Brian Cogan, Esq., Lewis Kruger, Esq., New York, NY, for Defendants D.E. Shaw
Co., LLC and D.E. Shaw Laminar Portfolios, LLC.

Bingham McCutchen LLP, by Alexis Freeman, Esq., New York, NY, for Defendant GECC.

Greenberg Traurig, LLP, by Douglas A. Amedeo, Esq., Richard Miller, Esq., for Defendant Barclays Bank.

DECISION ON MOTIONS BY CREDITORS’ COMMITTEE AND EQUITY COMMITTEE TO PROSECUTE CLAIMS ON BEHALF OF THE DEBTORS’ ESTATES
ROBERT E. GERBER, Bankruptcy Judge.

By motion brought in this adversary proceeding under the umbrella of the

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jointly administered cases of Adelphia Communications Corporation and its subsidiaries (collectively, the “Debtors” or “Adelphia”) under chapter 11 of the Bankruptcy Code, Adelphia’s Official Committee of Unsecured Creditors (the “Creditors’ Committee”) seeks leave of this Court — what is colloquially referred to in this Circuit as “Housecraft“

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authority[1] — to prosecute claims, as a co-plaintiff with Adelphia, on behalf of the Debtors’ estates. The Creditors’ Committee’s motion is opposed by the defendants in the action to be prosecuted — numerous commercial banks and their investment bank affiliates (the “Defendants”) — who are charged with wrongdoing in their dealings with Adelphia’s former management, John, Timothy, Michael and James Rigas (the “Rigases”), against whom Adelphia brought suit for the looting of the company. The Creditors’ Committee’s claims against the Defendants, which are numerous, include, inter alia, fraudulent conveyance claims and claims for aiding and abetting the Rigases’ breaches of fiduciary duty in connection with “co-borrowing” facilities under which Adelphia became liable to repay the banks for billions of dollars that went to or for the benefit of the Rigases.

Adelphia’s Official Committee of Equity Security Holders (the “Equity Committee,” and together with the Creditors’ Committee, the “Committees”), which has intervened in this action, has joined in the bulk of the claims made by the Creditors’ Committee — all but those premised on insolvency — and, by a supplemental intervenor complaint, wishes to assert additional claims as well. By a separate, similar motion, the Equity Committee moves fo STN authority[2] to assert those additional claims on behalf of the Debtors’ estates. The Defendants likewise oppose the Equity Committee’s motion.

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Perhaps significantly, neither of the Committees’ motions is opposed by anyone other than the Defendants in the litigation to be prosecuted. Those with an interest in maximizing the value of the estate — as contrasted to those with an interest in defeating the claims to be asserted here — do not seem to be troubled by the Committees’ proposed use of estate resources for the litigation the Committees wish to prosecute.[3]

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Though the words used by the Second Circuit in each of the cases in the STN Trilogy differ slightly, they share a common underpinning requiring the bankruptcy court to satisfy itself that the prosecution of the proposed litigation by the Committee concerned would be in the best interests of the estate. With the Court having concluded that the Creditors’ Committee easily meets those requirements, and that the Equity Committee, though the matter is closer, does so as well, both motions are granted. The following are the Court’s Findings of Fact, Conclusions of Law, and bases for the exercise of its discretion in this regard.

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Facts
The Court considers the Creditors’ Committee motion in the context of a complaint that the Creditors’ Committee has already filed and served — to meet a deadline that had been imposed upon it under Adelphia’s DIP financing order — with a stipulation that the Defendants’ threshold opposition to standing, and substantive 12(b)(6) motions addressed to the Creditors’ Committee complaint, would be considered together.[4] The Court likewise considers the Equity Committee’s motion in the context of the supplemental complaint in intervention that the Equity Committee also has already filed and served, with similar understandings. The factual terrain includes the 12(b)(6) motions that the Defendants have filed, and the foreseeable outcomes on those motions.

The Court also has the benefit of evidentiary matter, submitted by the Committees and the Defendants, principally in the form of documents and deposition testimony taken under Fed.R.Bankr.P. 2004. But for reasons discussed more fully below, it was inappropriate for the Court to conduct a “mini-trial” or evidentiary hearing on the Housecraft or STN issues, and it has not made factual findings on disputed issues of fact. While the Court has engaged in some review of disputed facts, it has done so (perhaps in an excess of caution, as language in STN
suggests that factual review is not required)[5] only to satisfy itself that there is some factual support for the Committees’ allegations — without determining whether those allegations are true — and to satisfy itself that the proposed litigation would be a sensible application of estate resources.

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The two Committees’ complaints are lengthy and detailed — in each case about 250 pages. Without getting into all of the

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detail that characterizes the allegations of the complaints and the factual record on this motion, the Court notes the most important allegations, and matters the Committees may be able to show, below.

A.
The Rigases are the largest shareholders of Adelphia, which was founded by John Rigas, but they are not its only ones. Much of Adelphia’s equity securities are held by the investing public. Adelphia also has billions of dollars in public unsecured debt. Until May 2002, John Rigas, and his sons Timothy, Michael and James Rigas, held Adelphia’s most senior management positions. John, Timothy, Michael and James Rigas, along with Peter Venetis, the husband of Ellen Rigas Venetis (John Rigas’s daughter), were also Adelphia directors.

In May 2002, after disclosure (or, as some Defendants contend, increased disclosure)[6] in March 2002 and in the weeks thereafter of matters underlying this adversary proceeding — most significantly, the Rigases’ use of over $3 billion borrowed from the Defendant commercial banks under the co-borrowing facilities that Adelphia was obligated to repay — the Rigases resigned as officers and directors of Adelphia.

But even before the Rigases’ resignations, Adelphia had independent directors. The Committees allege that Adelphia’s independent directors were not beholden to the Rigases, and were in a position to prevent the fraudulent conduct alleged in the

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complaints if the Rigases and their confederates had not concealed their fraudulent activities.[7]

The Committees’ charges are fleshed out in considerably greater detail in their complaints and briefs, and will not be set out at comparable length here. The principal theme of the Committees’ claims is that the Defendants knew of the Rigases’ wrongful activity, and knowingly and materially assisted in it, because it was profitable for them to do so. The Committees allege that there were years of “concerted action” among the Rigases and the Defendants, which permitted both to enrich themselves at the expense of the Debtors and the Debtors’ other creditors and public investors.[8]
This “concert of action,” the Committees charge, had four main components. First, they charge, the Rigases misused the Debtors’ “credit support” to obtain financing for themselves from the banks that were agents for their syndicates (the “Agent Banks”) and other lenders to finance the Rigases’ lavish lifestyle and personal investments. Second, they charge, the Agent Banks made financial

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accommodations to the Rigases through co-borrowing facilities structured by the Agent Banks — and, the Committees emphasize, by their affiliated investment banks (the “Investment Banks”) — that violated fundamental lending practices (including, it is argued, their own), in order to obtain lucrative fees for their affiliated Investment Banks and thereby obtain a return on capital that was materially in excess of the return that would be associated with commercial banking alone, and which

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was “essential to ensure the profitability of their relationship with Adelphia.”[9] Third, the Committees charge, the affiliated Investment Banks underwrote securities offerings for Adelphia and certain of its subsidiaries — without disclosing “the fraud they knew suffused Adelphia’s financial statements”[10] — to raise from public investors the money that the Debtors could have used to pay back the amounts that the Rigases borrowed from the Agent Banks. And fourth, the Committees charge, the Investment Banks used their purportedly independent analysts to issue materially misleading research reports in order to artificially inflate both the value of the Adelphia securities underwritten by the Investment Banks and the value of the “tainted bank debt” being sold by the Agent Banks in the secondary market.[11]

A major aspect of the Rigases’ breaches of fiduciary duty and fraud, as charged by the Committees, was the Rigases’ ostensible efforts to reduce Adelphia’s higher than average leverage by equity infusions, paid for with borrowings upon which Adelphia was liable — as allegedly masked by heavy use of “off-balance sheet” debt. The Committees have adduced evidence of knowledge on the part of some Agent Banks or Investment Bank affiliates of the off-balance sheet liabilities,[12] in documents that could fairly be said to show that they had greater knowledge than the public did with respect to Adelphia’s off-balance sheet liabilities, and, arguably, the uses to which their credit support had been put.

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The Defendants dispute these allegations (along with many of the Committees’ more specific allegations with respect to the foregoing) and also raise numerous issues of law. The Defendants’ many defenses include, most significantly, as a factual matter, the denial that they knew of any fraud (and that they knew of anything that, if public disclosures had been read more carefully, creditors and investors also would know), and that the facts and transactions underlying the Rigases’ fraud were known to Adelphia’s independent directors. The Defendants’ defenses include, as a legal matter, inter alia, assertions that they are not responsible for the uses to which funds borrowed from the defendant commercial banks or raised by the defendant investment banks were put; that the claims asserted by the Committees belong instead to individual investors; and that the wrongful actions of the Rigases should be imputed to the estate’s innocent creditors and non-insider equity holders, under the doctrine of in pari delicto. The Defendants also dispute, as a matter of law, assertions by the Committees that commercial and investment banks dealing with Adelphia in the manner in which they are alleged to have done so should be deemed to have entered into fiduciary relationships with Adelphia.

As noted above, the Defendants filed numerous 12(b)(6) motions with respect to

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the Committees’ claims. Though the Court’s decision on those motions, which necessarily will be lengthy, will have to come at a later date, it is plain to the Court, based on its consideration of the legal issues underlying those motions to date, that while some of the Creditors’ Committee’s claims will be dismissed, the bulk of them will survive dismissal under Rule 12(b)(6). The Court further believes that while a materially greater percentage of the Equity Committee’s claims will not survive the 12(b)(6) motions, some of the Equity Committee’s claims will now survive, either because those claims have

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apparent support or because the Equity Committee has said what needs to be said to satisfy the pleading requirements for such — even though such claims, after factual development, might not withstand summary judgment motions.

It also is plain to the Court, based on apparently undisputed facts and matters as to which the Committees have made evidentiary showings (by e-mails, other documents, and deposition testimony), that there is, at the least, reasonable basis to conclude that the Committees would succeed in proving material portions of the factual matters they allege.

B.
By stipulation dated July 24, 2003, Debtor Adelphia and the Creditors’ Committee agreed that they would join as co-plaintiffs to bring this action. They agreed that the Creditors’ Committee would take the lead in prosecuting the action, subject to certain Debtor rights, one of which was the Debtors’ right to settle the action, pursuant to a plan or otherwise.[13]

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The Equity Committee intervened in this action, joined in the claims already asserted by Adelphia and the Creditors’ Committee (except for those premised on insolvency), and sought STN
authority to assert additional ones. Adelphia did not join in the additional Equity Committee claims as a co-plaintiff, as it had with respect to the claims brought by the Creditors’ Committee, but did not object to their prosecution.

Discussion A.
The Bankruptcy Code does not, in express terms, authorize committees or individual creditors — as contrasted to trustees and debtors in possession — to sue on behalf of the estate. Nevertheless, the Second Circuit has held that provisions of the

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Bankruptcy Code imply a qualified right for creditors’ committees to sue on behalf of an estate with bankruptcy court approval.[14] The practice of authorizing the prosecution of actions on behalf of an estate by committees, and even by individual creditors,[15] upon a

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showing that such is in the interests of the estate, is one of long standing, and nearly universally recognized.[16]

The practice, which has been established in the Second Circuit under the STN Trilogy and countless lower court cases, is a salutary (and many might say essential) element of the chapter 11 process. Debtors sometimes lack the inclination, or the means, to bring actions that should be prosecuted. They sometimes have higher priorities, or are distracted by other things. They sometimes have a practical need to avoid confrontation with entities like their secured lenders, because they need those entities’ continuing cooperation — as, for example, in connection with exit financing. And they sometimes are limited by DIP financing orders that foreclose or impair their ability to bring claims against certain entities (such as prepetition secured lenders), so that such claims must be brought by creditors or not at all. The caselaw authorizing the prosecution of suits on behalf of estates by committees and creditors, as reflected in the STN Trilogy and the many other cases holding likewise, provides creditors and other stakeholders with the comfort that potentially valuable (and sometimes critical) claims on behalf of the estate will be prosecuted — without requiring bankruptcy judges to throw out the baby with the bath water, resorting to much more draconian or ineffective mechanisms to ensure the

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prosecution of those claims,[17] with the destruction to going concern value and creditor recoveries that would frequently be the result.

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In STN, the first of the STN Trilogy, the Second Circuit confirmed the authority of bankruptcy courts to deputize committees to prosecute litigation on behalf of the estate with the approval of the bankruptcy court.[18] Approval would be appropriate where the committee presented a colorable claim or claims for relief that on appropriate proof would support a recovery, and where the trustee or debtor in possession unjustifiably failed to bring suit or abused its discretion in not suing.[19] In considering the failure to bring suit, the lower courts were directed by the Circuit to consider whether an action asserting the proposed claims would be likely to benefit the reorganization estate,[20] and as part of any such analysis, each lower court was directed to “assure itself that there is a sufficient likelihood of success to justify the anticipated delay and expense to the bankruptcy estate that the initiation and continuation of litigation will likely produce.”[21]
Commodore extended the STN principles to encompass situations where the debtor in possession, while not prosecuting the litigation itself, consented to its prosecution by a committee. In Commodore, the Second Circuit ruled that a committee

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could appropriately act on behalf of the estate under such circumstances, with the approval of the bankruptcy court:

if (1) the committee has the consent of the debtor in possession or trustee, and (2) the court finds that suit by the committee is (a) in the best interest of the bankruptcy estate, and (b) is `necessary and beneficial’ to the fair and efficient resolution of the bankruptcy proceedings.[22]

The Circuit observed that this approach permitted a reasoned and practicable division of labor between the creditors’ committee and the debtor in possession or trustee, while also providing bankruptcy courts with significant authority both to manage the litigation and to check any potential for abuse by the parties.[23]

Then Housecraft, the third of the cases in the STN Trilogy, extended these principles further. As noted above, Housecraft
permits the bankruptcy court to confer standing upon a committee to sue as a co-plaintiff with the debtor on behalf of the estate, with the approval of the bankruptcy court. The bankruptcy court can provide that approval when the requirements o Commodore are satisfied — when the litigation is “both in the best interest of the bankruptcy estate and necessary and beneficial to the fair and efficient resolution of the bankruptcy proceedings.”[24]

B.
The Creditors’ Committee notes at the outset of its presentation that the Debtors have joined in its claims. It properly observes,

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accordingly, that the Court need only satisfy itself as to the remainder of the Housecraft tests — that the litigation the Creditors’ Committee proposes to bring be (a) in the best interest of the bankruptcy estate and

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(b) necessary and beneficial to the fair and efficient resolution of the bankruptcy proceedings.

Though the Second Circuit, in Housecraft and Commodore,
applied those standards to the relatively clear factual situations then before it, the Circuit did not dictate more particularized criteria for evaluating those considerations. But it is plain — by the express words used by the Circuit; by examination of the factors the Circuit itself considered; and by other common sense factors that necessarily would have to be considered in determining whether any litigation is in the interest of the bankruptcy estate and necessary and beneficial to the bankruptcy case — that the inquiry must evaluate, at the least,[25] whether the prosecution of the claims is consistent with the maximization of the value of the estate. Additionally, the Ninth Circuit BAP has identified particular factors to be considering in implementing the Ninth Circuit’s similar doctrine authorizing the deputization of committees to act on behalf on an estate.[26] To the extent the Ninth Circuit BAP’s factors do not overlap with considerations in this Circuit (which, not surprisingly, they do in material respects), the Court considers them as well. The Ninth Circuit BAP’s additional factors include whether the deputization of the committee would permit the debtor to concentrate its resources on rehabilitating its business; whether the committee’s interests do not conflict with those of the estate; and whether the assignment would prejudice the equality of distribution amongst the debtors’ creditors.

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As part of their differences on the components of th Housecraft analysis, the two sides differ sharply on the means and standards by which the Court considers the litigation’s prospects. In that connection, the Court is not in a position to fully endorse the position of either side. Several of the Defendants contend that the Court must conduct a de facto mini-trial on the merits to determine whether the Creditors’ Committee has a probability of success before granting the Creditors’ Committee standing.[27] But the Court cannot agree. I STN — which, of the three cases in the STN
Trilogy, most explicitly requires consideration of the merits of the proposed litigation[28] — the Second Circuit

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explicitly stated that a mini-trial is not
required,[29] and there is no reason why it would be any more necessary in Commodore or Housecraft
scenarios, especially since they do not even involve differences of views between the committee and debtor in possession as to whether the litigation should be brought.

By the same token, the Creditors’ Committee argues that Adelphia’s consent to its standing vitiates any need to review the merits of the Committees’ claims.[30] The Court is not of a mind to go that far. The Creditors’ Committee is correct in its observation[31] that the standards enunciated i Commodore and Housecraft, unlike those in STN, do not by

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their terms call for consideration of the merits, and that the context in which the Circuit called for a merits inquiry in STN
involved whether or not the debtor or trustee had unjustifiably failed to bring suit. But in Commodore and Housecraft
situations as well, a requirement for some kind of merits inquiry necessarily must be implied, as it is impossible to determine whether a litigation is in the best interests of an estate without at least some consideration of the possibilities of success. The standard, as discussed below, is not a difficult one to meet, but the Court must nevertheless be comfortable that the committee is not embarking on a senseless enterprise.

Neither Commodore nor Housecraft speaks to the likelihood of success that would be required to pass muster. STN required the claims to be “colorable,”[32] and that expression has repeatedly been used in articulating the appropriate standard on both STN[33] and Commodore/Housecraft[34]
motions. This Court likewise utilizes that standard here.

Caselaw construing requirements for “colorable” claims has made it clear that the required showing is a relatively easy one to make. In STN, the Second Circuit eschewed extensive merits review, requiring instead “a colorable claim — for relief tha on appropriate proof would support a recovery.”[35] In this district, on STN motions, Chief Judge Brozman has observed that authorization should be denied only if the claims are

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“facially defective,”[36] and Judge Gonzalez has noted that in determining whether there is a colorable claim, the court must engage in an inquiry that is “much the same as that undertaken when a defendant moves to dismiss a complaint for failure to state a claim.[37]

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Outside this district, on Commodore motions, the Colfor
court observed, consistent with the common meaning of “colorable,”[38] that the claims to be asserted should be “plausible” or “not without some merit,”[39] and the iPCS
court, consistent with KDI, noted that the requisite inquiry would be “much the same as that undertaken when a defendant moves to dismiss a complaint for failure to state a claim.”[40]

C.
Applying the factors in the caselaw described above, the Court determines that the Creditors’ Committee has easily satisfied the requisite standards.

1. Colorable Claims?

The Creditors’ Committee has put forth an extraordinarily detailed complaint, painting a picture that — if proven — could establish that the Defendants were the recipients of fraudulent conveyances costing the Debtors’ estates billions of dollars, and that the Agent Banks and Investment Banks were guilty of a classic aiding and abetting of the Rigases’ wrongful activities. It is plain to this Court that the Creditors’ Committee has much more than satisfactorily alleged a complicity with the Rigases that went

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considerably beyond ordinary business transactions and routine business dealings — and that the Creditors’ Committee, if its proof could substantiate its allegations, could show, inter alia, knowing substantial assistance to the Rigases in connection with the co-borrowing facilities, motivated by the Agent Banks’ and Investment Banks’ economic self-interest in their Adelphia relationship — which, at the time, was in material respects a relationship with the Rigases individually.

Of course, the Defendants have already asserted numerous defenses, and undoubtedly will have those and more things to say as the litigation goes on. The Creditors’ Committee’s allegations have not yet been proven, if they ever will be, and some of its claims (such as those premised on insolvency) may turn out to rest on predicates that may not be established, or that may be established for some entities in the Adelphia capital structure but not others. But the great bulk of the matters that underlie the Creditors’ Committee’s claims will involve issues of fact and context, all requiring further factual development and inquiry, and, quite possibly, trial.

In opposing the motion, the Defendants, or a subset of them, challenged or sought to advance their explanations as to aspects of the Creditors’ Committee’s allegations or proof, or to argue additional facts — such as those underlying contentions that appropriate disclosure had, in fact, been made; that the public should not have been fooled; and even that there had been no fraud at Adelphia at all. The Defendants also moved against the great bulk of the Creditors’ Committee’s claims for relief, challenging the legal theories on which the Creditors’ Committee would proceed. But the Defendants’ arguments in the former category, relating to factual challenges, factual explanations, and factual supplements, are, as the Court has just

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noted, simply one side’s position on disputed

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issues of fact.[41] And the Defendants’ legal contentions, while they will likely result in 12(b)(6) dismissal of some of the claims, fall far short of being “show-stopper” issues that could presage defeat for the Creditors’ Committee in the litigation as a whole, especially before factual inquiry.

One of those legal contentions, important because so many of the Defendants devote so much time and energy to it, warrants express mention here. Relying upon the Second Circuit’s decision in Shearson Lehman Hutton, Inc. v. Wagoner,[42] and its progeny[43] (decided under New York and Connecticut law), and the Third Circuit’s

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decision in Official Committee of Unsecured Creditors. v. R.F. Lafferty Co., Inc.[44] (decided under Pennsylvania law), the Defendants ask this Court now to conclude that by reason of the “Wagoner
Rule,”[45] the Creditors’ Committee’s litigation

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would be pointless. The Defendants contend that the second prong of the Wagoner Rule — which immunizes defendants from liability for otherwise actionable wrongful conduct on “in pari delicto” grounds, by imputation to a bankruptcy trustee or deputized creditors’ committee of the predecessor management’s wrongful conduct — absolves the Defendants from any liability they might otherwise have here, as a matter of law.

In its response, the Creditors’ Committee properly assumes that to the extent that the state law underlying the federal court decisions[46] in Wagoner and its progeny is applicable and remains good law, Wagoner and its Second Circuit progeny are binding

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authority on this Court. But the Creditors’ Committee argues that there are nevertheless several reasons why the in pari delicto
doctrine and the Wagoner rule would not bar recovery on behalf of the Adelphia Debtors here, even under the Second Circuit decisions. First the Creditors’ Committee notes that the “adverse interest” exception to the in pari delicto and Wagoner Rule defenses precludes imputation where the agents were acting to advance their own interests, and not those of the debtor[47] — as the Rigases are alleged to have done here. Then the Creditors’ Committee notes another exception to the application of in pari delicto: that an in pari delicto
defense does not bar recovery by the estate upon a showing of one or more decision makers that could have stopped the fraud or breaches of fiduciary duty[48] — as Adelphia’s independent directors, shortly before Adelphia’s bankruptcy, at least assertedly (and possibly without dispute) could do here, and did do here.

The Creditors’ Committee further argues that since the determination as to what is or is not property of the estate (such as a cause of action for injury to the

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estate) is measured, under section 541 of the Bankruptcy Code as of the time of filing, where (as here) the wrongdoing insiders were ousted prior to the filing, an in pari delicto defense would not apply. And the Creditors’ Committee finally argues — reasoning, with some force, that Pennsylvania law would apply to the tort claims in this case — that the Pennsylvania Supreme Court has rejected the application of in pari delicto when its effect would be to penalize a victim debtor (and hence its innocent creditors), and that the better reasoned federal analyses under Pennsylvania law have done likewise.

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The Creditors’ Committee’s final two points — that under traditional Bankruptcy Code section 541 analysis, the prepetition ouster of the insider wrongdoers would make in pari delicto
inapplicable,[49] and that Pennsylvania would not respec in pari delicto defenses under the facts presented here[50] — have considerable merit, and could make the first two points academic. But it will be unnecessary for this Court to decide them on this motion. That is so because the Committees’ first two points — as to the “adverse interest” and “innocent decision-maker” exceptions — will be incapable of resolution under Rule 12(b)(6), and will require factual inquiry. Even assuming, without now deciding, that Pennsylvania law were to regard in pari delicto as having any application to claims by innocents on behalf of a bankruptcy estate,[51] it is at least arguable, given the facts of

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which this Court has already become aware while supervising Adelphia’s action against the Rigases, and observing

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the Government’s criminal prosecution of John, Timothy, and Michael Rigas, that the Creditors’ Committee will be able to make the necessary factual showing to make out the “adverse interest” exception.[52] In any event, the Creditors’ Committee has satisfactorily pleaded the facts necessary to trigger the exception, and that will present an issue of fact, plainly inappropriate for determination under Rule 12(b)(6).

Likewise, the Creditors’ Committee has satisfactorily pleaded the facts necessary to trigger the “innocent decision-maker” exception. Determining whether that exception applies, in light of the totality of the circumstances concerning the knowledge and actions of Adelphia’s outside directors (and their actions, in particular, in the period March through May 2002, when they made supplemental disclosures and ousted the Rigases), will present an issue of fact.[53]

Some of the matters alleged by the Creditors’ Committee —e.g., that the Defendants themselves owed fiduciary duties to Adelphia (as contrasted to aiding and abetting breaches of fiduciary duty by the Rigases), and that Defendants are liable here for losses suffered by investors in Adelphia debt offerings (as contrasted to losses

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suffered by Adelphia itself, whose stakeholders will share in the Debtors’ value in accordance with priorities under law, under a chapter 11 plan) — may not withstand the Defendants’ pending 12(b)(6) motions. But the bulk of the Creditors’ Committee’s claims would, if proven, provide valid bases for relief. Those claims should be evaluated on their respective merits.

Additionally, the Creditors’ Committee has put forward some of its proof. Though it is not clear that the Court needs to,[54] the Court has reviewed that evidence, some of which was referred to above. Though the Court does not need to find (and does not now find) that the Creditors’ Committee has established a likelihood of success, it can and does find that that the Creditors’ Committee’s claims have at least some factual support.

It should be remembered, of course, that a determination on a STN or Housecraft motion that claims are colorable simply satisfies a condition for permitting the issues to be decided where they should be decided — in the plenary litigation itself, where the need to prove allegations will remain, and where factual and legal claims and defenses can and will be considered on their individual merits.

2. Permitting Debtor to Concentrate Its Resources on Rehabilitating Business

The first of the other factors identified by the Ninth Circuit BAP in Spaulding

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Composites is whether the prosecution of the estate’s claims by a committee would permit the debtor to concentrate is resources on rehabilitating its business. That factor plainly supports granting the Creditors’ Committee standing.

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The Adelphia chapter 11 cases have been complex, and it is fair to say, though an understatement, that the Debtors have had their hands full. Among many other things, the Debtors have been busy, at various times during these cases (and particularly when these claims, if they were to be made, had to be brought):

?? Stabilizing the Debtors’ business, particularly in light of accounting uncertainties that resulted from the Debtors’ management in the Rigas era;
?? Prosecuting claims against the Rigases, which the Debtors needed to do intensively if they were to have any hope of prevailing over billions of dollars in competing claims;
?? Trying to avoid an indictment by the Justice Department of the corporate enterprise, and to defeat a very large claim by the SEC;
?? Addressing the competing desires of stakeholders, with both negotiating and litigation discovery demands, initially with respect to controversies between creditors and equity holders, and later (and currently) in connection with intercreditor disputes; and, perhaps most significantly,
?? Devoting extraordinary time and effort to the marketing of the Debtors’ business, which ultimately led to the prospective sale to Comcast and Time Warner.

Suit by the Creditors’ Committee has freed up the Debtors to address these important concerns.

3. Do Committee Interests Conflict With Those of the Estate?

Considering the second factor in Spaulding Composites, there is no conflict whatever. To the contrary, the effort by the Creditors’ Committee, if successful, would

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augment the Debtors’ estates (or reduce their liabilities), with no adverse consequences whatever. The reservation by the Debtors of the ability to settle these cases protects the estates from the non-existent conflict even more.

4. Would Assignment Prejudice the Equality of Distribution Amongst Creditors?

Considering the fourth[55] factor in Spaulding Composites, this factor is essentially inapplicable here. The circumstances where it would really be relevant — if those bringing the litigation would get a disproportionate share of any recovery — are wholly absent here, where those with rights to distributions in the Debtors’ estates will share in the value of those estates (as augmented by any recoveries the Committees can garner) in accordance with the usual statutory priorities. No member of either Committee will receive any additional consideration because of such Committee’s representation of the estates. This factor is relevant, in the Court’s view, principally where the proponents of the litigation wish to sidestep the normal equality of distribution amongst creditors, or to circumvent statutory priorities. While, under such circumstances, that would be a matter of concern for this

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and many other bankruptcy courts tipping against granting authority, it has no application here.

5. Is Litigation Consistent With Maximization of Value of Estate?

While, as noted, extensive merits inquiry on a motion of this character is not required, this Court believes that any “best interests of the estate” analysis requires consideration of whether the proposed litigation is consistent with the maximization of

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the estate.[56] This factor, in the Court’s view, gets to the nub of the issue, and strongly favors granting leave here. While the Defendants plainly have defenses that will require serious consideration, and likely will have more to say when the facts are explored, the substantial sums to be recovered — which are, of course, a function of the damage done to Adelphia and its stakeholders — more than justify the substantial sums that prosecuting the litigation would cost. The Creditors’ Committee is correct in its assertion[57] that if it is successful, the recovery will augment the estates by billions of dollars, at a relatively modest cost. And it is equally correct in its assertion that denying it standing could result in the waste of one of the estate’s most valuable assets.[58] Even recognizing that some of the Committees’ claims will not withstand motion and that others will be subject to proof, the Committees have satisfied the Court that the litigation has enough of a chance to be successful, to be much more than a reasonable economic bet.

6. Other Factors

Sometimes other factors, though not specifically or extensively identified in earlier caselaw, nevertheless should appropriately be considered. One such factor is whether prosecution of the litigation would impede the Debtors’ reorganization or assist it. Here the prosecution of the litigation would, at the least, not impede the Debtors’ reorganization. Under all plan proposals advanced to date, the claims to be litigated would not need to be resolved prior to confirmation. To the contrary, those Defendants

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who are entitled to plan distributions will receive them, subject only to the duty to pay the distributions back, or otherwise to make payment, to the extent any liability is established. Reorganization would not be a hostage to the determination of this litigation, and no delay to emergence from chapter 11 will result from the pendency of the proposed litigation. And while the Debtors plainly have many responsibilities that they will necessarily have to meet to achieve a successful reorganization, the incremental burdens on the Debtors as a consequence of the prosecution of the litigation, as discussed above, would be modest in comparison to the prospective gains.

Another factor is that, early in these cases, when the Debtors sought and obtained their DIP financing, the Debtors’ prepetition secured lenders, who were “primed” by the postpetition financing, required

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provisions in the DIP financing order cutting off issues on which the Debtors could litigate against those lenders (all or most of which are Defendants here), and setting a time limit by which any claims against the lenders by committees or individual creditors had to be brought.[59] It was necessary (and typical) for the Debtors to accede to such a provision, and for the Court to approve it. Provisions of that character are common in DIP financing orders in chapter 11 cases (at least where prepetition lenders are asked to make concessions to permit the postpetition financing), but bankruptcy courts normally approve them only where some
entity — typically a creditors’ committee — has the ability to assert those claims.[60] If the Court were then to

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deprive the Creditors’ Committee of standing, that would undercut one of the critical premises upon which those limitations were approved in these chapter 11 cases. It would deprive the estates of the opportunity to pursue claims that, whether or not they ultimately will be meritorious, plainly deserve to be pursued.

7. “Best Interests of the Estate” and “Necessary and Beneficial” Overview

Upon the foregoing analysis, it is obvious to the Court — and not just true on balance — that the prosecution of the litigation by the Creditors’ Committee here would be in the best interests of the estate. That determination is, to be blunt about it, an easy one. The potential recoveries would be enormous; the cost of prosecution will be relatively modest (by the standards of the amount at stake); and the bulk of the Creditors’ Committee claims will easily withstand 12(b)(6) motions, and (to the extent the Court needs to consider this) have factual support.

D.
The analysis with respect to the additional claims to be brought by the Equity Committee is similar, though considerably closer — principally because the Equity Committee’s additional claims, in material respects, push the envelope vis-à-vis their underlying legal and factual predicates.

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In its intervenor complaint, the Equity Committee asserts claims against the Agent Banks on the co-borrowing facilities under RICO; against Salomon Smith Barney and certain other underwriters of Adelphia securities for breach of contract, negligence, and related claims; against the

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Agent Banks for fraudulent concealment; and against the Agent Banks for fraud.[61]

The Equity Committee’s RICO claims, which are plainly the most dramatic, in many respects push the envelope the most. The Equity Committee alleges that Adelphia itself was one of the two RICO enterprises that are alleged, and that the Agent Banks, by their lending facilities, thereby met the requisite requirements for acquiring or maintaining their interests in, and control of, the enterprise. Even assuming (as the Court believes it should for the purposes of these motions) that the Creditors’ Committee can prove what it has alleged on these motions, it is not clear that the Equity Committee will be able to do likewise on the incremental claims the Equity Committee wishes to assert. In particular, it is not clear whether, after the facts are developed, the Equity Committee will be able to show that the co-borrowing facilities led to the requisite degree of acquisition and/or control, and for the Equity Committee to meet RICO’s continuity requirement. Yet the Equity Committee’s intervenor complaint has made the necessary allegations to state a prima facie case. And since STN states explicitly, in connection with its colorable claim requirement, that a colorable claim is one “that on appropriate proof would support recovery,” addressing any shortcomings in proof likely would be appropriate, at the earliest, on summary judgment and not motions under 12(b)(6).

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The Equity Committee’s claims against Salomon Smith Barney, for breach of contract and negligence in connection with a fairness opinion Salomon Smith Barney provided with respect to the amounts paid by the Rigases for their Adelphia stock, plainly raise, at the least, colorable issues. And the Equity Committee’s breach of contract claims against the other Defendant Investment Banks, while weaker, are again more appropriately determined at the time of summary judgment, or thereafter, and not on motions to dismiss.

However, while the Equity Committee’s claims for conspiracy to commit fraud are colorable at this stage in the litigation, the claims against the Agent Banks for common law fraud and fraudulent concealment (as contrasted to aiding and abetting breaches of fiduciary duty and fraud) likely will not withstand motion, for lack of representations and omissions when under the duty to speak, and as the essence of the claims is a failure to tell others at Adelphia things that the Rigases already knew.

Thus, while some of the Equity Committee’s claims will likely not survive 12(b)(6) motions, and while others — especially the RICO claims — will be at some substantial risk at the time of motions for summary judgment, some of the Equity Committee’s claims have potential promise. Those in the latter two categories are at least colorable.

But while the ultimate prognosis may not be particularly optimistic for all but a few of the Equity Committee’s claims, the “ultimate prognosis” is not the test, as the discussion above makes clear. And the Court necessarily must consider the fact that the Equity Committee does not propose asserting its supplemental claims in isolation, but rather as an adjunct to the

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claims the Creditors’ Committee will assert. As the Equity

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Committee fairly observes, its motion does not present the Court with the more common cost-benefit analysis where the cost of an independent full-blown litigation must be analyzed. Here the Court must consider the incremental cost of permitting the Equity Committee to pursue the additional claims it wishes to assert. And here the incremental cost of prosecuting the Equity Committee’s claims will be quite small — at least in the context of the claims already to be asserted by the Creditors’ Committee, and the potential rewards of success on even one of the Equity Committee’s claims.

Factors unrelated to the strengths of the prospective claims themselves, discussed above in connection with the claims to be asserted by the Creditors’ Committee, are in all material respects identical when applied to the incremental claims to be asserted by the Equity Committee. And the Court once more observes that no non-Defendant stakeholder opposes the assertion by the Equity Committee of its claims.

Thus, as the bulk of the Equity Committee’s claims are colorable, and given the relatively modest incremental expense to the estate that would result from the Equity Committee’s prosecution of its claims, the Court finds that the prosecution of these claims too would be in the best interests of the estate.

Conclusion
It is plain that on Housecraft and STN motions the Committees do not have to show a likelihood of success on the merits. Rather, those proposing to pursue litigation on behalf of an estate must give the Court comfort that their litigation will be a sensible expenditure of estate resources. That means, as a practical matter, providing the Court with a predicate for concluding that the claims will, if proven, provide a basis for recovery, and that the proposed litigation will not be a hopeless fling. It also means, as a practical matter, that the prospective rewards can reasonably be expected to be

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commensurate with the litigation’s foreseeable cost. But no more than that is required, and the Court must be mindful of the purposes for its inquiry. It is not for the protection of defendants sued or to be sued by a committee on behalf of an estate, whose defenses can be fully and fairly considered in the plenary litigation to be prosecuted — just as they would if the defendants had been sued by a debtor (or a nondebtor) directly. Rather, the purpose of the bankruptcy court’s gatekeeper role is to protect the estate, to ensure that the litigation reasonably can be expected to be a sensible expenditure of estate resources, and will not impair reorganization.

The Committees have provided this Court with more than sufficient comfort that their litigation is a sensible endeavor. Indeed, they have satisfied the Court not only that this litigation is consistent with maximizing the value of the estate, but that it is necessary to achieve that goal. Accordingly, both Committees are granted leave to assert their respective claims on behalf of the Debtors’ estates. This determination is, of course, without prejudice to any of the Defendants’ rights on any issues in the litigation so brought.

SO ORDERED.

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