Adelphia Creditors Imperil Reorg

According to a bankruptcy judge, a group of debtholders seems to be threatening the sale of the company's assets to Time Warner and Comcast to gain...
Stephen TaubJanuary 26, 2006

Is the $17.6 billion reorganization of Adelphia Communications Corp. in jeopardy?

According to the New York Law Journal, the presiding judge said that the attempt by one group of creditors to appoint a trustee to oversee disputes between different groups of bondholders, and the disqualification of chief Adelphia bankruptcy counsel Willkie Farr & Gallagher, constituted a “nuclear war button” threatening the deal.

That bankruptcy judge, Robert Gerber of the Southern District of New York, earlier this week denied the appointment of a trustee. Gerber did disqualify Willkie lawyers from participating in the disputes, according to the Law Journal, which noted that Willkie is still Adelphia’s bankruptcy counsel.

As is typical, observed the Law Journal, each group of debtholders wants to extract the largest possible distribution from Adelphia’s assets, most of which are to be sold to Time Warner and Comcast for $17.6 billion. Gerber reportedly stated that to gain leverage in the debtholder negotiations, one group seemingly made the disqualification and trustee motions to “purposefully” imperil the sale. “If the sale transaction is not consummated,” he added, “there will be severe, negative economic impact on all of the debtors.”

One consequence, if the transaction failed to close, would be that Adelphia might owe the media giants a $443 million breakup fee, the judge reportedly stated. Gerber also observed that the appointment of a trustee would have constituted a default event under the agreement that provided Adelphia with $1.3 billion in debtor-in-possession financing, the Law Journal reported.

“Where interdebtor issues exist and are material, they cannot, of course, be swept under the rug….But the means established to resolve them should be the least destructive available,” Gerber reportedly wrote. “And neither the interests of a debtor’s creditor body, nor the integrity of the bankruptcy system, can tolerate the use of motions like these as a tactic to assist creditor groups wishing to augment their personal recoveries.”