On Wednesday, it appeared that Adelphia Communications’s tortured four-and-a-half year journey through the bankruptcy process was finally near its end, as U.S. Bankruptcy Court Judge Robert Gerber handed down a massive 267-page opinion confirming court approval of Adelphia’s Chapter 11 plan. Adelphia, which had ranked as the fifth largest cable operator in the U.S., was forced into bankruptcy in 2002 after it was discovered that Adelphia’s founder, John Rigas, and members of his family had siphoned millions of dollars from the company for personal use.

A business consultant who contracted to receive a percentage of a company’s shares in exchange for helping the company go public—but never actually received those shares and obtained a money judgment against the company instead—was not a holder of equity for purposes of subordination under the Bankruptcy Code, the U.S. Court of Appeals for the Ninth Circuit has determined.

In a case of first impression, the U.S. Court of Appeals for the Second Circuit has held that a claim for damages based on a chapter 11 debtor’s failure to issue shares of its common stock in exchange for a claimant’s stock in another company pursuant to a termination agreement is subject to mandatory subordination.

In Rombro v. Dufrayne (In re Med Diversified, Inc.), 461 F.3d 251 (2d Cir. 2006), the court held that the claim “arose from” the purchase of the debtor’s stock within the meaning and purpose of the Bankruptcy Code’s subordination provision.

On Monday, U.S. District Court Judge Shira Scheindlin lifted a hold on a bankruptcy court order approving Adelphia Communications’ Chapter 11 reorganization plan, thereby enabling Time Warner Cable (TWC) to proceed Tuesday with plans to transform itself into a publicly-traded company. Although U.S. Bankruptcy Court Judge Robert Gerber signed off on Adelphia’s reorganization plan on January 3, Scheindlin—at the behest of bondholders who objected to the plan—had blocked implementation pending review of the bondholders’ claims.

Recently, in In re Northwest Airlines Corp.,1 Bankruptcy Judge Allan Gropper issued an opinion requiring a group of hedge funds that had formed an ad hoc committee of equity security holders (the “Ad Hoc Equity Committee”) to disclose “the amounts of claims or interests owned by the members of the committee, the times when acquired, the amounts paid therefor, and any sales or other disposition thereof” in order to comply with Rule 2019 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”).

Background

“Give ups” by senior classes of creditors to achieve confirmation of a plan have become an increasingly common feature of the chapter 11 process, as stakeholders strive to avoid disputes that can prolong the bankruptcy case and drain estate assets by driving up administrative costs.

Though the shareholders of a corporation did not sign a corporate sale agreement, they were considered to be the sellers of the corporation, and therefore were entitled to avail themselves of the indemnification provisions under the agreement, ruled the Bankruptcy Court for the Eastern District of Pennsylvania. See In re NuNet, Inc., 348 B.R. 300 (Bankr. E.D. Pa. 2006).

In previous Alerts, we have addressed the complexities of claims in bankruptcy. Likewise, trading in claims and securities can present challenges. Difficulties have arisen in large Chapter 11 reorganizations as constituencies engaged in the Chapter 11 process, who are major players in the case, seek to trade in securities relating to that case. This Alert explores the impact that some trading activities may have on potential recoveries in the bankruptcy and the help (and impact) of the Internal Revenue Code.

In May of 2006, the U.S. Bankruptcy Court in Chicago, Illinois, issued an 89-page opinion finding that a common stock valuation performed by KPMG (n/k/a BearingPoint) was reasonable and appropriate. The valuation had been performed in September 2000 of high-tech start-up Nanovation Technologies, Inc. After Nanovation filed for bankruptcy in 2001, the bankruptcy trustee sued BearingPoint, alleging that the valuation had been negligently performed and had grossly overvalued the stock.

The rapid growth in derivatives as hedging instruments, particularly through equity swaps, credit default swaps ("CDS") and loan credit default swaps ("LCDS"), has challenged fundamental assumptions underlying corporate governance law, federal shareholder disclosure requirements and bankruptcy law. Corporate law has long relied on a "one share one vote" model, which presumes that a shareholder's economic interests in a corporation are inextricably linked to their voting power.