Adelphia Recovery Trust v. Key Bank National Association et al
Filing
1010
DECISION AND ORDER granting 991 HSBC's Motion for Judgment on the Pleadings; granting 992 Keybank's Motion to Dismiss; and ismissing 997 HSBC's counterclaims. Clerk of Court shall close case. Signed by Hon. Richard J. Arcara on 5/18/2012. (JMB)
UNITED STATES DISTRICT COURT
W ESTERN DISTRICT OF NEW YORK
ADELPHIA RECOVERY TRUST,
Plaintiff,
v.
DECISION AND ORDER
09-CV–00215
KEY BANK NATIONAL ASSOCIATION, HSBC
BANK USA, NATIONAL ASSOCIATION AND
FLEET NATIONAL BANK,
Defendants.
Introduction
This case requires the Court to determine whether the silence of a Chapter
11 debtor-in-possession in response to an inquiry by a bankruptcy judge while
presiding over an asset-sale hearing in a closely-related debtor’s bankruptcy
about others’ interests in the assets gave rise to judicial estoppel. For the
reasons described herein, this Court concludes that because Plaintiff, Adelphia
Recovery Trust, actively participated in, facilitated and benefitted from the release
of loans and sale of assets during the hearing, without disclosing potential claims,
judicial estoppel bars Plaintiff from now asserting those claims.
Background
The Court assumes the parties’ familiarity with the relevant facts and prior
proceedings in this case, which are summarized by the Second Circuit in
Adelphia Recovery Trust v. HSBC Bank, USA, N.A., 634 F.3d 678, 682-89 (2d
Cir. 2011) (“Adelphia Recovery Trust”) and in this Court’s prior determination in
HSBC Bank USA, N.A. v. Adelphia Communication Corp., No. 07-cv-553A, 2009
W L 385474 at *1-6 (W DNY February 12, 2009). As the Second Circuit
acknowledged in Adelphia Recovery Trust, “the facts of this case are, to put it
mildly, enormously complex.” 634 F.3d at 682. Therefore, this Court has
endeavored to simplify the facts by including only the relevant facts and prior
proceedings necessary for determining the issues presented here.
The Buffalo Sabres Loans
During the 1990s, Key Bank National Association (“Key Bank”), HSBC
Bank USA, National Association (“HSBC”) and Fleet National Bank (“Fleet Bank”)
(collectively referred to as the “Banks”) were lenders to Niagara Frontier Hockey,
LP (“NFHLP”). NFHLP owned the Buffalo Sabres, a professional hockey team.
On May 10, 1995, the Banks entered into two loans with NFHLP. The
loans had a combined face value of $67.5 million. These loans were provided to
NFHLP for the building of the HSBC arena. HSBC arena is the Buffalo Sabres
home hockey rink, located in Buffalo, New York. One loan, totaling $35 million,
was made to finance the construction of the HSBC arena (the “Construction
Loan”). The second loan, totaling $32.5 million, was made to finance food and
concession equipment at the new arena (the “Concession Loan”). On February
28, 1997, NFHLP and Fleet Bank entered into a third loan which established a
2
revolving line of credit in favor of NFHLP in the principal amount of $12 million
(the “Revolver Loan”). Throughout this opinion, the Construction, Concession
and Revolver Loans are collectively referred to as the “Buffalo Sabres Loans” or
the “Loans”.
In 2000, the Banks decided to sell all of their interests in the Buffalo Sabres
Loans to Adelphia Communications Corporation (“Adelphia”), through its
subsidiary, Sabres, Inc. Adelphia was a publicly traded cable company founded
by John Rigas (“Rigas”). At its peak, Adelphia was the fifth-largest cable
company in the United States. Sabres, Inc. was a Delaware corporation and a
wholly owned subsidiary of Adelphia. The sole members of the Sabres, Inc.
board of directors were members of the Rigas family.
Adelphia (through Sabres Inc.) paid approximately $34.1 million to acquire
the Construction and Revolver Loans from the Banks. The sale of the
Concession Loan was never finalized because consent of a third party could not
be obtained. Instead, in 2002 and 2003, Adelphia made close to $14 million in
principal and interest payments to the Banks on the Concession Loan on
NFHLP’s behalf.
At or around the same time that the Banks sold the Construction and
Revolver Loans to Adelphia, the Rigas family acquired NFHLP. This acquisition
was carried out through Patmos, Inc., a Delaware corporation whose
shareholders consisted only of John Rigas and other members of the Rigas
3
family. Plaintiff maintains that because NFHLP was in default on the Buffalo
Sabres Loans and at risk of bankruptcy, Rigas and the Banks agreed that if
Adelphia (through Sabres, Inc.) purchased the Loans, the Banks would give the
necessary consent for the Rigas’ (through Patmos) to purchase NFHLP and
become the sole owners of the hockey team. In order to facilitate the acquisition
and recapitalization of NFHLP, Rigas caused Adelphia to transfer approximately
$10 million to buy out the limited partners of NFHLP. Plaintiff claims that the
Banks were “intimately involved” in the discussions that resulted in the Rigas’
acquisition and recapitalization of NFHLP.
The sale of the Buffalo Sabres Loans to Adelphia and the acquisition and
recapitalization of NFHLP by Rigas enabled the Banks to prevent default or
losses on the Loans. At this time, Adelphia was a publically traded company
controlled by the Rigas family as majority shareholders, and the Rigas’ were the
equitable owners of NFHLP. Thus, these transactions left the Rigas family with a
continued majority interest in Adelphia, ownership of NFHLP and control over the
Buffalo Sabres hockey team. Further, these transactions created a situation
where Adelphia was creditor and NFHLP was debtor. It is alleged that after the
Loans were sold and Adelphia became NFHLP’s largest secured creditor, Rigas
caused Adelphia to invest over $200 million in NFHLP, despite inadequate benefit
to Adelphia and detrimental effects on Adelphia’s shareholders and creditors.
It was the Banks’ role in the sale of the Buffalo Sabres Loans to Adelphia
4
and the acquisition and recapitalization of NFHLP by Rigas that would ultimately
lead the Plaintiff in this action to bring fraudulent conveyance and aiding and
abetting a breach of fiduciary duty claims against the Banks.
The Bankruptcies and Sale of NFHLP
In March of 2002, Adelphia disclosed publically that Rigas family members
and affiliates had used Adelphia funds for personal purposes. In fact, it was
disclosed that through massive financial fraud, the Rigas family and affiliates had
borrowed approximately $2.3 billion that had not been listed on Adelphia’s
balance sheets. The company was potentially liable for billions of dollars in Rigas
family debts. Soon thereafter, the NASDAQ exchange announced that it would
delist Adelphia stock. In sum, Adelphia was facing complete financial collapse.
In June 2002 Adelphia filed for bankruptcy protection in the Bankruptcy
Court for the Southern District of New York (“Adelphia Bankruptcy”). A month
later, Rigas was arrested for bank, wire and securities fraud. He was ultimately
sentenced to fifteen years in federal prison for looting the company and
concealing approximately $2.3 billion in liabilities from Adelphia investors and
creditors. See United States v. Rigas, 490 F.3d 208, 211-214 (2d Cir. 2007).
In January 2003 NFHLP filed for bankruptcy protection in the Bankruptcy
Court for the W estern District of New York (“NFHLP Bankruptcy”). Shortly
thereafter, Hockey W estern LLC (“Hockey W estern”) agreed to purchase
NFHLP’s assets. Because Adelphia owned the Construction and Revolver Loans
5
and made significant payments on NFHLP’s behalf with respect to the
Concession Loan, Adelphia was NFHLP’s largest secured and unsecured
creditor. Therefore, Adelphia was given permission to appear as creditor in the
NFHLP Bankruptcy at the asset-sale hearing. Since Adelphia was, by far, the
largest creditor of NFHLP, its claims had the potential to swamp those of all other
creditors.
Counsel for Adelphia appeared at the NFHLP asset-sale hearing by
telephone. By law, Adelphia, which was by the time of the hearing operating
under new management, had the rights, powers and responsibilities of a trustee
in bankruptcy and debtor-in-possession. See 11 U.S.C. §1107(a). As debtor-inpossession, it was the official representative of the Adelphia bankruptcy estate.
See 11 U.S.C. §323(a).
At the asset-sale hearing, Adelphia entered into a Stipulation and Order
agreeing to fully release the liens, security interests and guarantees that it held as
collateral for the Construction and Revolver Loans. Adelphia further agreed that
the proceeds of the sale could be used to pay off the Concession Loan.
Specifically, Adelphia represented to the bankruptcy court that it was releasing its
rights to the collateral supporting the Buffalo Sabres Loans so that NFHLP could
be sold “free and clear” to Hockey W estern, the hockey team could stay in
Buffalo, and the claims against NFHLP would not be overwhelmed by Adelphia’s
claims. In calculating the amount due on the Concession Loan, full credit was
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given to the $11.3 million in principal and interest payments Adelphia had already
paid since the Rigas’ had acquired NFHLP in March of 2000. Adelphia
consented to a “cash out” amount of $21.4 million for the Concession Loan.
Also during the asset-sale hearing, counsel for Adelphia stated that as
consideration for releasing its rights to the Construction and Revolver Loans,
Adelphia would receive: (1) the release of two letters of credit totaling $27.6
million; and (2) assumption of an agreement for broadcast rights to the Buffalo
Sabres for five years. Further, Adelphia would be relieved of its obligation to
continue making cash advancements–which between March 2000 and January
2003 were between $26 and $35 million–to the Buffalo Sabres franchise in order
to protect its collateral.
At the time of the asset-sale hearing, the Banks were also creditors of
NFHLP. Fleet Bank appeared at the sale hearing, but HSBC and Key Bank did
not. During the hearing, in an effort to ensure a proper asset sale and a complete
resolution of all potential claims, the bankruptcy judge asked repeatedly whether
everyone who had a legal, equitable or beneficial interest in the assets of any of
the debtors had either appeared or signed a stipulation. The bankruptcy judge
also specifically asked whether any party wished to be heard (regarding anything
having to do with the asset sale) or make an objection to the sale. No one,
including Adelphia, said a word. In concluding that all necessary parties to the
asset-sale were present, the bankruptcy judge stated:
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[W ]hen I was reading the draft order and saw that all the parties who had
liens and so forth would have consented and so forth, and I was wondering
how we were going to get those and who they needed to be from, I was
wondering how that was going to be handled and I guess what we have,
having read the stipulations, is that everybody who anyone thinks actually
has legal or equitable or beneficial interest in some kind of ownership or
lien on the assets of these debtors have all signed the same stipulation;
essentially identical stipulations, so we needn’t worry about that unless
there’s some entity that slipped through the cracks, but I doubt that would
have happened with the quality of representation that we have here. So
those who haven’t seen them should rest assured that in fact the pertinent
public officials and officers have, in fact, executed what is necessary to
permit this sale.
See Adelphia Recovery Trust v. HSBC Bank, USA, N.A., 634 F.3d 678, 686 (2d
Cir. 2011) (quoting Tr. of Bankruptcy Sale Hearing at 42); HSBC Bank USA, N.A.
v. Adelphia Communication Corp., No. 07-cv-553A, 2009 W L 385474 at *11
(W DNY February 12, 2009) (quoting same)
Despite the bankruptcy judge’s questioning, Adelphia’s counsel never
mentioned that it might file fraudulent conveyance claims or aiding and abetting a
breach of fiduciary duty claim against the Banks based upon the Banks’ sale of
the Buffalo Sabres Loans to Adelphia, payments made by Adelphia on the Loans,
or the acquisition and recapitalization of NFHLP. As a result of the
representations made by Adelphia and the other parties in attendance, including
Adelphia’s silence about potential causes of action against the Banks, the
bankruptcy court issued an order approving Adelphia’s release of its interests in
the Buffalo Sabres Loans as well as the “free and clear” sale of NFHLP’s assets
to Hockey W estern.
8
The Southern District Adversary Proceeding
In July 2003, less than three months after Adelphia appeared at the sale
hearing and agreed to fully release its interests in NFHLP’s assets, Adelphia and
the Official Committee of Unsecured Creditors of Adelphia Communications
Corporation (now “Adelphia Recovery Trust”) (the “Trust”)1 filed a complaint in the
Southern District of New York against hundreds of defendants, including the
Banks (“Southern District Adversary Proceeding”). In the multi-party, multi-count
complaint, the Trust claimed that the named defendants, including the Banks,
helped perpetrate frauds committed by the Rigas family. Claims 17-24 of the
Complaint alleged fraudulent conveyances on the part of the Banks for receiving
millions of dollars from Adelphia as part of the Buffalo Sabres Loan transactions
(the “fraudulent conveyance claims”).
The Trust specifically alleged that the March 2000 transfer of $34.1 million
by Adelphia (through Sabres, Inc.) to the Banks in exchange for the Banks’
interests in the Construction and Revolver Loans was an intentional or
constructive fraudulent conveyance. The Trust also alleged that the transfer of
approximately $14 million by Adelphia to the Banks for payment of principal and
1
The Trust is a Delaware statutory trust created pursuant to the Chapter 11 Plan
of Reorganization following Adelphia’s bankruptcy. The Trust is the successor to the
Official Committee of Unsecured Creditors of Adelphia and stands in the shoes of
Adelphia. As plaintiff in this action, the Trust is authorized to pursue certain causes of
action held by Adelphia and to administer proceeds from those causes of action on
behalf of the holders of interests in the Trust.
9
interest on the Buffalo Sabres Loans were further fraudulent conveyances. In
sum, the Trust claimed the Banks knew that the Loan sales and the principal and
interest payments made by Adelphia were accomplished only to enrich the Rigas
family entities and facilitate the Rigas’ ownership of the Buffalo Sabres, and
provided no benefit to Adelphia and its shareholders.
In response to the commencement of the Southern District Adversary
Proceeding, the Banks filed proofs of claim in the NFHLP Bankruptcy. The Banks
asserted that since Adelphia appeared at the asset-sale hearing and failed to
disclose the fraudulent conveyance claims to the bankruptcy court at that time,
the Banks would have a claim against the NFHLP estate if the Trust were to
obtain a favorable judgment on the fraudulent conveyance claim. The NFHLP
debtors then brought a declaratory judgment action seeking a declaration that the
Banks’ claims should be subordinated to other claims in the NFHLP Bankruptcy.
Subsequently, the Banks filed cross-claims in the NFHLP Bankruptcy,
which was proceeding in the W estern District, seeking to bar the fraudulent
conveyance claims in the Adelphia Bankruptcy, which was proceeding in the
Southern District. In its cross-claims, the Banks argued that, among other things,
the Trust should be judicially estopped from asserting its fraudulent conveyance
claims because, as a result of Adelphia’s silence at the sale hearing, neither the
Banks nor the bankruptcy court were given notice of those claims. The Banks
maintained that estoppel arose when, during the asset-sale hearing, Adelphia
10
represented that it was the sole owner of the Buffalo Sabres Loans and agreed to
the payoff of the Concession Loan, received other benefits, and put neither the
bankruptcy court nor the Banks on notice of any possible claims. The Banks
alleged that if they had known at the time of the asset-sale hearing that the
Adelphia debtor-in-possession was about to sue them for fraudulent
conveyances, they would have objected to the sale of NFHLP free and clear of
their liens on its assets.
The Banks later filed administrative claims in the Adelphia Bankruptcy and
the NFHLP Bankruptcy (the “Administrative Claims”). The Administrative Claims
asserted that if the Banks had to pay a judgment with respect to the fraudulent
conveyance claims, the Banks would have an equal and offsetting claim against
Adelphia in such an amount.
Jurisdictional Order
On June 14, 2004, in an effort to avoid dueling litigations in both the
W estern and Southern Districts, the Southern District Bankruptcy Court entered
an order allowing the fraudulent conveyance claims to be litigated exclusively in
the W estern District Bankruptcy Court. Specifically, the Southern District
relinquished jurisdiction to the W estern District to decide whether Adelphia’s
participation in the sale of NFHLP’s assets estopped or released the Trust’s
fraudulent conveyance claims against the Banks in the Southern District
Adversary Proceeding (the “Jurisdictional Order”). The Jurisdictional Order
11
provided:
It is now ORDERED that leave is granted (and jurisdiction of this Court is
relinquished) to the extent necessary, and only to the extent necessary, to
permit defendants HSBC and Key Bank to obtain from the United States
Bankruptcy Court for the W estern District of New York a determination one
way or the other as to whether the Adelphia debtors participation in the
process of the sale of [NFHLP] debtors assets, and in the confirmation of
the [NFHLP] debtors joint plan, estopped or released the Adelphia estates
claim against HSBC and Key Bank in this Adversary Proceeding. The
same relief is extended to Fleet Bank[.]
See In re Adelphia Communications Corp., AP No. 03-04942; Chap 11 Cases,
Case No. 02-41729 (SDNY Bank. Ct. June 14, 2004).
The W estern District Bankruptcy Court entered a reciprocal order
accepting jurisdiction. By decision and order dated March 2, 2007 and amended
on March 22, 2007, the W estern District Bankruptcy Court granted Fleet Bank’s
motion for summary judgment dismissing the Trust’s fraudulent conveyance
claims, but denied HSBC and Key Bank’s respective summary judgment motions.
An appeal to this Court followed.
The Tort Claims
In October of 2007, after the entry of the W estern District Bankruptcy
Court’s decision on the fraudulent conveyance claims but before this Court’s
determination on appeal, the Trust filed an Amended Complaint. The Amended
Complaint asserted additional claims against the Banks for aiding and abetting a
breach of fiduciary duty (Count 56) and equitable subordination (Count 57)
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(collectively referred to as the “tort claims”).2
Count 56 alleges that the Banks aided and abetted Rigas’ breach of
fiduciary duty to Adelphia. Like the fraudulent conveyance claims, the Trust’s
aiding and abetting a breach of fiduciary duty claim revolves, in significant part,
around the Banks’ sale of the Buffalo Sabres Loans to Adelphia, and the principal
and interest payments made by Adelphia with respect to the Loans. In sum, the
Trust claims that the Banks aided and abetted Rigas’ breach of fiduciary duty to
Adelphia by: (1) selling the Buffalo Sabres Loans to Adelphia; (2) allowing
Adelphia to make payments on the Loans; and (3) helping Rigas to acquire and
recapitalize NFHLP.
Count 57 seeks equitable disallowance of the Banks’ administrative claims
or, alternatively, equitable subordination of those claims. The equitable
subordination claims involve the administrative claims filed by the Banks in the
Adelphia Bankruptcy. There, the Trust argues that because of the Banks’ alleged
misconduct, the Banks administrative claims should be equitably disallowed or
subordinated in favor of Adelphia’s other creditors.3
2
On February 29, 2008 the Trust filed a Second Amended Complaint. However,
no additional substantive relief is sought against the Banks in the Second Amended
Complaint.
3
In response to the Trust’s Amended Complaint, HSBC asserted the following
counterclaims: (1) post-petition tort or negligent representation; (2) indemnification; and
(3) contribution. The post-petition tort claim is based upon alleged misrepresentations
made by Adelphia to the bankruptcy court during the asset-sale hearing when Adelphia
failed to disclose the tort claims.
13
Present Proceeding
On February 12, 2009, this Court dismissed the Trust’s fraudulent
conveyance claims against all of the Banks. See HSBC Bank USA, N.A. v.
Adelphia Communication Corp., No. 07-cv-553A, 2009 W L 385474 (W DNY
February 12, 2009). This Court held, inter alia, that Adelphia’s conduct at the
NFHLP asset-sale hearing, namely its failure to disclose potential fraudulent
conveyance actions against the Banks at the time it released its interests in the
Buffalo Sabres Loans, estopped it from subsequently asserting fraudulent
conveyance claims against any of the Banks.4
This Court’s dismissal of the fraudulent conveyance claims was later
affirmed by the Second Circuit Court of Appeals. Adelphia Recovery Trust,
supra, 634 F.3d at 678. The Second Circuit concluded that judicial estoppel
barred the Trust from pursuing fraudulent conveyance claims against the Banks
because Adelphia facilitated the sale of NFHLP by asserting to the bankruptcy
court that it was the only party with an interest in the Buffalo Sabres Loans, while
remaining silent that it would later bring fraudulent conveyance claims against the
Banks with respect to those Loans. Id.
4
On March 5, 2009, while the Trust’s appeal of this Court’s dismissal of the
fraudulent conveyance claims was pending before the Second Circuit, the Southern
District of New York issued an order severing both the fraudulent conveyance claims
and the tort claims from the Trust’s Amended Complaint and permanently transferring
them to the Western District of New York. See Adelphia Recovery Trust v. Bank of
America, N.A., No. 05-cv-9050, 2009 WL 636719 at *1 (SDNY March 5, 2009).
14
Since the Second Circuit has dismissed the fraudulent conveyance claims
against the Banks on the basis of judicial estoppel, all that remains at issue
before this Court are the Trust’s tort claims against HSBC and Key Bank.5 As
explained in detail below, this Court finds that judicial estoppel bars the Trust’s
tort claims. Specifically, this Court holds that Adelphia’s silence about potential
claims against the Banks during the NFHLP asset-sale hearing not only estops
the Trust from pursuing fraudulent conveyance claims against the Banks, but also
estops the Trust from pursuing the aiding and abetting a breach of fiduciary duty
claim. Further, because the equitable subordination claim is premised upon a
finding of liability on the part of Defendants with respect to the aiding and abetting
claim, the equitable subordination claim is dismissed as well.
Discussion
Defendants’ Motions
HSBC has filed a motion for judgment on the pleadings, pursuant to
Federal Rule of Civil Procedure 12(c), dismissing the Trust’s claims. Key Bank
has filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6),
also seeking dismissal of the claims. Rule 12(c) allows for either party to move
for judgment on the pleadings, “after the pleadings are closed but within such
time as not to delay the trial.” See Fed. R. Civ. P. 12(c). This is similar to a Rule
5
The Trust and Fleet Bank have entered into a settlement agreement and the
Trust’s claims with respect to Fleet Bank have been dismissed. Fleet Bank is no longer
a party to this action.
15
12(b)(6) motion to dismiss for failure to state a claim, except that a Rule 12(b)(6)
motion comes before the close of the pleadings. See Fed. R. Civ. P. 12(b)(6);
Pifko v. CCB Credit Services, Inc., No. 09-cv-0357, 2010 U.S. Dist. Lexis 69872,
*5 (EDNY July 7, 2010). In either case, the court should apply the same
standard. Id.; see also Irish Lesbian & Gay Org. v. Giuliani, 143 F.3d 638, 644
(2d Cir. 1998).
Specifically, for both 12(b)(6) and 12(c) motions, a district court must
accept the factual allegations contained in the complaint as true and draw all
reasonable inferences in favor of the non-moving party. Lesbian & Gay Org.,
supra, 143 F.3d at 638. The factual allegations contained in the complaint must
satisfy a flexible plausibility standard, which obliges a pleader to amplify a claim
with enough factual allegations to render the claim plausible. Iqbal v. Hasty, 490
F.3d 143, 157-58 (2d Cir. 2007). Generally, the complaint must raise a right to
relief above the speculative level. Bell Atl. Corp. v. Twombly, 550 US 544, 555
(2007).
Both Key Bank and HSBC set forth a number of arguments in favor of their
respective motions to dismiss, including judicial estoppel. As indicated previously
and will be explained in detail below, this Court determines that Plaintiff’s tort
claims are barred in their entirety based upon the doctrine of judicial estoppel.
Therefore, even though Defendants have moved to dismiss Plaintiff’s claims
under Rule 12(c) and Rule 12(b)(6), this Court does not need to evaluate
16
Plaintiff’s pleadings pursuant to the standards set forth in the Federal Rules of
Civil Procedure. Instead, the Court’s decision focuses primarily on why Plaintiff’s
prior behavior at the asset-sale hearing estops them from now bringing the claims
at issue here, notwithstanding the content and adequacy of Plaintiff’s pleadings.
The Doctrine of Judicial Estoppel Bars the Trust’s Aiding and Abetting a Breach
of Fiduciary Duty Claim Against Key Bank and HSBC.
The doctrine of judicial estoppel prevents a litigant from asserting a position
or claim in a legal proceeding that is inconsistent with a position or claim taken by
that litigant in a previous proceeding. See Moore’s Federal Practice §134.30, pp.
134-62 (3d ed. 2000); Pegram v. Herdrich, 530 U.S. 211, 227 (a party cannot
prevail in one phase of a case on an argument and then rely on a contradictory
argument to prevail in another phase). It is consistently recognized that “where a
party assumes a certain position in a legal proceeding, and succeeds in
maintaining that position, he may not thereafter, simply because his interests
have changed, assume a contrary position, especially if it be to the prejudice of
the party who has acquiesced in the position taken by him.” New Hampshire v.
Maine, 532 U.S. 742, 749 (2001).
In Adelphia Recovery Trust, supra 634 F.3d at 695-96, the Second Circuit
recognized that judicial estoppel will bar a claim if: (1) a party’s former 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
17
party asserting the two positions would derive an unfair advantage against the
party seeking estoppel. See also DeRosa v. Nat’l Envelope Corp., 595 F.3d 99,
103 (2d Cir. 2010). As explained below, each of the three enumerated
requirements of judicial estoppel are met with respect to the aiding and abetting a
breach of fiduciary duty claim.
To begin, the Trust took an inconsistent position at a prior proceeding. At
the sale hearing, Adelphia represented that it alone had an interest in the
Construction and Revolver Loans and, as such, its liens on those loans could be
released “free and clear” in favor of the purchaser, Hockey W estern. Adelphia
also took the position that the proceeds of the sale could be used to pay off the
Concession Loan. Most significantly, Adelphia wholly failed to disclose that it was
considering bringing an aiding and abetting a breach of fiduciary duty claim
against the Banks. Adelphia’s position at the hearing, as well as its silence
regarding the potential claims against the Banks, led the bankruptcy court to
conclude that there were no issues or concerns with respect to the release of the
Buffalo Sabres Loans and the “free and clear” sale of NFHLP. Moreover,
Adelphia’s representations led the bankruptcy court to determine that no
additional parties needed to be notified of or included in the sale of NFHLP’s
assets.
Now, in contrast, the Trust vigorously maintains that the Banks’ sale of the
Loans to Adelphia aided and abetted Rigas’ breach of fiduciary duty to Adelphia.
18
Specifically, the Trust claims that the Banks would not consent to the ownership
transfer of NFHLP to Rigas until the parties agreed that Adelphia (via its
subsidiary Sabres, Inc.) would purchase the Buffalo Sabres Loans, even though
the purchase was not beneficial to Adelphia. The Trust also asserts that the
Banks were aware that Rigas was causing Adelphia to make payments on the
Buffalo Sabres Loans, even though Adelphia was not the debtor and received no
benefit from those payments. The Trust seeks the same relief from the aiding
and abetting a breach of fiduciary duty claim as it did from the fraudulent
conveyance claims, namely, the return of the $48 million that Adelphia paid to the
Banks to purchase the Loans and made in principal and interest payments. In
addition, the Trust seeks recovery of the $10 million that Adelphia paid to the
limited partners of NFHLP to facilitate Rigas’ acquisition of NFHLP and the
hockey team.
The Trust’s current aiding and abetting claim is clearly inconsistent with
Adelphia’s prior position at the sale hearing, during which Adelphia remained
silent about the claim and represented that no other party had an interest in either
the release of the Buffalo Sabres Loans or the sale of NFHLP’s assets. Had
Adelphia revealed, at the sale hearing, that it planned to file a multi-million dollar
lawsuit against the Banks based, in significant part, on the Loan sale transactions
and payments made with respect to the Loans, the release of the Loans and the
sale of NFHLP would not have proceeded without, at a minimum, providing the
19
Banks with notice and opportunity to be heard regarding those potential claims.
Indeed, such notification would have been essential to ensure a fair and complete
sale proceeding.
In Adelphia Recovery Trust, supra, 634 F.3d at 697, the Second Circuit
opined that judicial estoppel “is not concerned with the repose of individual claims
but with the ability of courts to render their decisions based on faithful
representations by counsel.” Here, by asking the parties present at the assetsale, including Adelphia, whether all parties with potential interests or claims had
been accounted for, the bankruptcy judge made a careful attempt to ensure that
everyone with an interest in the outcome of the sale proceeding was present
before the sale of NFHLP was completed. It is evident that had Adelphia
disclosed at the sale hearing that it might later pursue an aiding and abetting a
breach of fiduciary duty claim against the Banks based in large part on the Loan
transactions and payments, the sale hearing would not have proceeded in the
same speedy and uncontested manner.
In applying judicial estoppel to bar the Trust’s fraudulent conveyance
claims, the Second Circuit found it most significant that Adelphia’s failure to
disclose those claims at the sale hearing deprived the bankruptcy court of the
opportunity to fairly and efficiently resolve all of the potential claims with respect
to the Loan transactions. Adelphia Recovery Trust, supra, 634 F.3d at 699. The
Second Circuit surmised that:
20
[B]y failing adequately to ensure that all of its lawyers were mindful of these
potential causes of action, [Adelphia] allowed the mechanism for fair and
efficient resolution of its fraudulent conveyance actions to slip away,
foregoing the speedy resolution of their claims at the sale hearing for a
lengthy and costly proceeding in the NFHLP bankruptcy court on this
appeal.
Id. (emphasis added). The Second Circuit’s reasoning in Adelphia Recovery
Trust applies equally to the aiding and abetting a breach of fiduciary duty claim
presently before this Court. Indeed, like the fraudulent conveyance claims, the
aiding and abetting claims were among the potential causes of action which
Adelphia should have disclosed at the time of the sale hearing. By failing to
disclose them, just as it failed to disclose the fraudulent conveyance claims,
Adelphia deprived the bankruptcy court of reaching a “fair and efficient resolution”
of those claims. Because Adelphia remained silent regarding the aiding and
abetting a breach of fiduciary duty claim, the Trust is now estopped from
asserting it.
The Trust contends that the Second Circuit’s decision in Adelphia
Recovery Trust is distinguishable because by failing to disclose the fraudulent
conveyance claims at the sale hearing, the Banks were deprived of the
opportunity to object to the asset sale and rescind the original loan transfers. The
Trust maintains that rescission is not available in an action for aiding and abetting
a breach of fiduciary duty claim. Thus, the Trust concludes that since it is
monetary damages rather than rescission which is at stake here, their position at
21
the sale hearing is not inconsistent with their current position. In other words, the
Trust argues that their position at the sale hearing that the Loans could be
released free and clear is not inconsistent with their position now that they are
owed monetary damages because the Banks aided and abetted Rigas’ breach of
fiduciary duty. In response, Defendants contend, inter alia, that rescission is a
potential remedy for an aiding and abetting a breach of fiduciary duty claim and
therefore the positions remain inconsistent.
The Court finds that regardless of the potential remedy for the Trust with
respect to the aiding and abetting a breach of fiduciary duty claim, what is most
significant is that if Adelphia had disclosed the possibility of any claim against the
Banks arising from the same operative facts as the fraudulent conveyance
claims, both the bankruptcy court and the Banks would have approached the
asset sale very differently. This represents a key reason as to why the Trust’s
positions are deemed inconsistent.
This reasoning is consistent with the Second Circuit’s application of judicial
estoppel in Adelphia Recovery Trust. Indeed, in assessing the Trust’s fraudulent
conveyance claims, the Second Circuit acknowledged that “Adelphia could have
pursued a money judgment notwithstanding the possibility of rescission even
after the asset sale, and thus it might be argued that [the Trust’s] current position
is not clearly inconsistent with its silence at the asset sale.” Adelphia Recovery
Trust, supra, 634 F.3d at 697. The Second Circuit proceeded to determine that
22
even though monetary damages were still available with respect to the fraudulent
conveyance claim, the Trust’s respective positions remained inconsistent. The
Second Circuit opined, “[w]e think it enough that both the bankruptcy court and
the banks undoubtedly would have approached the sale differently had Adelphia
disclosed the possibility of fraudulent conveyance actions at the sale hearing.” Id.
This Court draws the same conclusion with respect to the aiding and
abetting a breach of fiduciary duty claim. W hile the parties may disagree as to
whether rescission of the Loan transactions would have been an available
remedy in an aiding and abetting a breach of fiduciary duty claim, it cannot be
disputed that both the Banks and the bankruptcy court would have proceeded
differently at the sale hearing had this claim been disclosed. The Trust’s aiding
and abetting a breach of fiduciary duty claim arises, in significant part, from the
$48 million which Adelphia paid to the Banks for the Buffalo Sabres Loans as well
as in principal and interest. Had the bankruptcy court been provided with this
information, it likely would have suspended the proceeding, provided notice to the
Banks, and allowed the parties an opportunity to settle these disputes before the
Loans were released and an asset sale finalized. The fact that rescission of the
Loans may not have been an available remedy is not determinative.
Judicial estoppel is properly applied because Adelphia’s silence interfered
with the integrity of the judicial system by depriving the bankruptcy court of the
ability to address potential claims at the time of the sale hearing. In fact, the
23
bankruptcy judge specifically stated that if the bankruptcy court had been
informed that Adelphia was reserving its right to bring fraudulent conveyance
actions in its own bankruptcy proceeding, it “would not have approached the sale
without the consent of the banks or a full-blown resolution as to who owned the
lean rights.” Adelphia Recovery Trust, supra, 634 F.3d at 688. It cannot be the
case that the bankruptcy court would have taken any different view if the tort
claims, as well as the fraudulent conveyance claims, had been disclosed. W hile
it is not the typical case that a party’s silence with respect to claims will result in
the estoppel of those claims, it is the appropriate result here, where the silence of
a party with respect to potential claims caused a court to proceed much differently
than it would have, had it been made aware of the claims. Indeed, in Adelphia
Recovery Trust, supra, 634 F.3d at 697, the Second Circuit noted that “it will be
the rare case in which the silence of a party (or its counsel) is not adequate to
cause ratification but exposes the party to judicial estoppel, but this is that rare
case.”
The Trust also claims that the Second Circuit’s application of judicial
estoppel to the fraudulent conveyance claims is distinguishable from the instant
matter because the damages stemming from the fraudulent conveyance claims
are not identical to the damages that would result from the aiding and abetting a
breach of fiduciary duty claim. Specifically, the Trust claims that if it were to
prevail on its aiding and abetting claim it would be entitled not only to the $48
24
million which Adelphia paid the Banks for the Loans as well as in principal and
interest (damages which also would have been available in the fraudulent
conveyance actions), but also to the $10 million that Adelphia paid for the
recapitalization of NFHLP (Adelphia claims that this amount would not have been
paid absent the Banks’ aiding and abetting).
Just as the potential rescission of the Loans is not a critical factor in
determining whether judicial estoppel applies here, it is not determinative that
additional damages may be available to the Trust if it were permitted to pursue
the aiding and abetting a breach of fiduciary duty claim against the Banks. The
purpose of judicial estoppel is to prevent parties from using inconsistent positions
in different proceeding to their advantage. Galin v. Goldfishcer, No 03 Civ. 9019,
2008 US Dist. LEXIS 106603 (SDNY December 31, 2008). As explained above,
the fact that monetary damages may still be available with respect to either the
fraudulent conveyance or aiding and abetting claim does not counsel against the
application of judicial estoppel. Here, the Court finds that Adelphia should not be
permitted to proceed on the aiding and abetting a breach of fiduciary duty claim
because its silence about those claims prevented the bankruptcy court from
reaching an efficient and fair resolution of the matter at the time of the sale
hearing.
The second element of judicial estoppel requires that the party’s earlier
position be adopted by the court or administrative body in the prior proceeding.
25
Here, Adelphia represented that it was the only party with an interest in the
Loans, and failed to disclose its potential causes of action against the Banks
arising, in significant part, from the sale and payments of those Loans.
Adelphia’s representations were indispensable to the bankruptcy court’s
willingness to enter into the NFHLP sale order.
The final element of judicial estoppel requires a showing that the party
received an unfair advantage based upon its inconsistent positions. Here, the
Trust gained the same unfair advantage in failing to disclose the aiding and
abetting a breach of fiduciary duty claim that it did in failing to disclose the
fraudulent conveyance claims. Indeed, the Loans were released and NFHLP was
sold without delay or objection. As consideration for releasing its interests in the
Construction and Revolver Loans, Adelphia received two letters of credit totaling
$27.6 million, assumption of a five-year agreement to broadcast rights for the
Buffalo Sabres, and relief of its obligation to continue making cash advancements
to the Buffalo Sabres franchise in order to protect its collateral. Adelphia received
these benefits by remaining silent regarding the potential fraud and tort claims,
therefore allowing the asset sale to proceed uncontested and uninterrupted. At
the same time, the Trust’s ability to bring an aiding and abetting a breach of
fiduciary duty claim against the Banks, based in large part on the Loan
transactions and the Banks relationship with NFHLP, was preserved. The Trust’s
silence was fundamentally unfair because while Adelphia received the benefit of
26
the immediate release of the Loans and sale of NFHLP and the Trust preserved
its ability to bring fraud and tort claims against the Banks, the bankruptcy court
was deprived of the opportunity to attempt to resolve the claims prior to the sale
of the assets.
This Court finds the Trust’s remaining arguments against the application of
judicial estoppel also unpersuasive. The Trust maintains that while there was a
short time between the sale hearing and assertion of the fraudulent conveyance
claims, a number of years have passed between the sale hearing and the
assertion of the aiding and abetting a breach of fiduciary duty claim. The Trust
emphasizes that in Adelphia Recovery Trust the Second Circuit was particularly
concerned with the fact that the fraudulent conveyance claims were brought only
a few months after the sale hearing, indicating that the Trust was actually aware
of the existence of those claims at the time of the sale hearing. The Trust
attempts to distinguish the present claims by asserting that it was not until years
after the sale hearing that it discovered the factual elements necessary to
establish the aiding and abetting a breach of fiduciary duty claim.
However, the application of judicial estoppel is not dependent upon the
amount of time that has passed between a party’s assertion of inconsistent
positions, but instead focuses on the inconsistency itself and its effect on the
Courts and other litigants. See New Hampshire v. Maine, 532 U.S. 742 (2001)
(In a dispute over a state border in 2001, the Supreme Court found that New
27
Hampshire was prohibited from asserting a position contrary to the position it
asserted in a 1977 consent decree). Further, while judicial estoppel does not
apply when a party’s position is based upon mistake or inadvertence, it does not
require purposeful deceit. New Hampshire, supra, 532 U.S. at 749-50 (the
purpose of judicial estoppel is not to look for, or punish, outright lies, but “to
protect the integrity of the judicial process by prohibiting parties from deliberately
changing positions according to the exigencies of the moment.”) Here, it is
enough that the Trust was aware that it had some claims against the Banks
arising in whole or part from the Loan transactions, yet failed to disclose any of
them.
Because all three elements of judicial estoppel have been met, the Trust’s
aiding and abetting a breach of fiduciary duty claim against HSBC and Key Bank
is dismissed.
Equitable Subordination
The Trust’s claim for equitable subordination or equitable disallowance
relates to Defendants’ administrative claims in the Adelphia Bankruptcy.
Specifically, HSBC and Key Bank claim that if they are found liable in the present
action, they have a claim against the Adelphia estate in the bankruptcy
proceeding since the Trust remained silent at the asset sale regarding the instant
tort claims. Conversely, the Trust argues that because of HSBC and Key Bank’s
alleged misconduct, namely the alleged aiding and abetting a breach of fiduciary
28
duty, HSBC and Key Bank’s administrative claims should be either subordinated
or disallowed in favor of Adelphia’s other creditors.
“The purpose of equitable subordination is to undo wrongdoing by an
individual creditor in the interests of the other creditors.” In re Applied Theory
Corp., 345 B.R. 56, 59 (SDNY 2006). A creditor’s claim may be equitably
subordinated if the party seeking subordination establishes the following: (1) the
claimant engaged in inequitable conduct; (2) the inequitable conduct resulted in
injury to other creditors or conferred an unfair advantage on the claimant; and (3)
equitable subordination of the claim is not inconsistent with bankruptcy laws. In
re Blumenberg, 263 B.R. 704, 720 (Bankr. Ct. EDNY 2001). The party seeking
equitable subordination or disallowance of the claims bears the burden of proof.
Fraud, illegality, breach of fiduciary duty, undercapitalization, or control or use of
the debtor as an alter ego is generally the type of misconduct that warrants the
equitable subordination of a claim. 80 Nassau Assoc. v. Crossland Fed. Sav.
Bank (In re 80 Nassau Assoc.), 169 B.R. 832, 838 (Bankr. Ct. SDNY 1994).
Further, the Second Circuit has generally held that where a litigant seeks to
subordinate the claim of a party who is neither an insider of the debtor, nor a
fiduciary to the debtor or other creditors, a higher level of proof is needed. ABF
Capital Mgmt. v. Kidder Peabody & Co., Inc., 210 B.R. 508, 515 (Bankr. Ct.
SDNY 1997). In short, when a non-insider or non-fiduciary is involved, egregious
or “severely unfair” conduct must be shown before the claim is subordinated. In
29
re 604 Columbus Ave. Realty Trust, 968 F.2d 1332, 1360 (1st Cir. 1992). The
conduct required has been described as “substantial misconduct tantamount to
fraud, misrepresentation, overreaching or spoilation.” Nassau Assocs., supra,
169 BR at 838-39.
This Court acknowledges that the Trust has alleged conduct on the part of
the Banks which may state a claim for equitable subordination. However, the
Court does not have to render a determination with respect to the adequacy of
the Trust’s pleading. The administrative claims are based upon a finding of
liability on the part of HSBC and Key Bank with respect to the Trust’s claim for
aiding and abetting a breach of fiduciary duty. Since, as detailed above, the
aiding and abetting claim is estopped and will be dismissed, HSBC and Key
Bank’s administrative claims will be rendered moot. Thus, the Trust’s claim for
equitable subordination of those administrative claims is also rendered moot and
likewise is dismissed.
HSBC and Key Bank’s Additional Defenses
The Banks’ cross-claims against the Trust requested an order “bar[ring] the
Adelphia Debtors from pursuing any existing claims or causes of action against
[the Banks] concerning the Adelphia allegations.” The Banks sought to define the
term “Adelphia Allegations” as all of the factual allegations asserted with respect
to the fraudulent conveyance claims. The Banks requested relief pursuant to the
doctrines of res judicata, judicial estoppel and equitable estoppel.
30
In the present proceeding, HSBC argues that the Jurisdictional Order,
considered together with this Court’s order dismissing the fraudulent conveyance
claims and granting HSBC’s cross-claims, bars the Trust’s tort claims. In sum,
HSBC maintains that even though the tort claims had not been asserted at the
time the cross-claims were made, the tort claims are “within the broad class of
claims and causes of actions which HSBC’s prior motion sought to bar in its
cross-claims.” HSBC therefore concludes that this Court’s decision with respect
to the cross-claims also operated as a bar to Trust’s tort claims. Conversely, the
Trust argues that the Jurisdictional Order contained a limited grant of jurisdiction,
allowing this Court to consider issues related to the fraudulent conveyance claims
only.
This Court does not conclude that its prior decision on HSBC’s crossclaims operates to bar the tort claims as well. The June 2004 Jurisdictional Order
applied only to the claims then pending against HSBC and Key Bank in the
Southern District Adversary proceeding, namely the fraudulent conveyance
claims. This Court does not find that the language of HSBC’s cross claims, which
sought to bar all claims and causes of action arising from the “Adelphia
Allegations” operated to preclude tort claims which had not yet been asserted.
Therefore, this Court’s prior determination on the cross-claims dismissed the
fraudulent conveyance claims only.
In March 2009, after the Complaint had been amended to include the tort
31
claims, the Southern District of New York entered an order severing both the
fraudulent conveyance claims and the tort claims from the Trust’s amended
complaint and permanently transferring those claims to this Court. As explained
above, this Court has concluded that the tort claims, like the fraudulent
conveyance claims, are barred by the doctrine of judicial estoppel and will be
dismissed.
Also in support of their motion to dismiss, HSBC and Key Bank assert that
the tort claims are untimely and fail to state a viable claim for aiding and abetting
a breach of fiduciary duty. Because this Court has determined that the Trust’s
tort claims are barred based upon the doctrine of judicial estoppel, it will not
examine the merits of these additional defenses.
HSBC’s Counterclaims
As noted above, in March of 2008 HSBC filed its answer to the Trust’s
Amended Complaint. At that time, HSBC asserted a counter-claim against the
Trust for post-petition tort or negligent misrepresentation. HSBC’s post-petition
tort claim is based upon the alleged misrepresentations made by Adelphia to the
bankruptcy court, at the NFHLP asset-sale hearing, that it was the only party with
an interest in the Buffalo Sabres Loans. In order to state a claim for negligent
misrepresentation under New York State law, a party must demonstrate: (1) the
existence of a special or a privity-like relationship imposing a duty on the
defendant to impart correct information to the plaintiff; (2) that the information was
32
incorrect; and (3) reasonable reliance on that information. J.A.O. Acquisition
Corp. V. Stavitsky, 8 N.Y.3d 144, 148 (2007). HSBC argues that its damages will
consist of: (1) any liability found for aiding and abetting Rigas’ breach of fiduciary
duty; and (2) the attorney’s fees it has incurred in this action.
For the reasons set forth above, the Trust’s aiding and abetting a breach of
fiduciary duty claim is dismissed as a result of judicial estoppel. Therefore, HSBC
will have no damages emanating from this claim. Further, the Second Circuit
does not recognize attorney’s fees as damages flowing from a common law tort
such as negligent misrepresentation. Goldberg v. Mallinckrodt, Inc., 792 F.2d
305, 309 (2d Cir. 1986). Counsel fees and the legal expenses necessarily
incurred in carrying on a lawsuit are not generally considered items of expense
recoverable as general or special damages, unless a specific statute or
contractual provision so provides. Coopers & Lybrand v. Levitt, 52 A.D.2d 493
(1st Dept. 1976). Here, HSBC is asserting a common law tort for negligent
misrepresentation. There is no statute or contractual provision which provides for
attorney’s fees with respect to such a claim. Since there are no damages
available to HSBC, its counterclaim for negligent misrepresentation or postpetition tort is dismissed.
HSBC also asserts counterclaims for contribution and indemnification.
HSBC’s claim for contribution provides that “in the event it is determined that
HSBC has any liability for the Adelphia Debtors and Adelphia Trust, HSBC is
33
entitled to contribution and indemnification for a percentage of any damages.”
HSBC’s claim for indemnification is based upon a letter, executed by Adelphia in
favor of the Banks, which provides that “Adelphia indemnifies and holds each
Sabres Bank harmless from any claim relating to the Assignment and Transfer [of
the Loans].” Since the Trust’s claim for aiding and abetting a breach of fiduciary
duty is dismissed, HSBC’s contribution and indemnification claims are rendered
moot and are also dismissed.6
Conclusion
For the reasons stated above, the Court: (1) grants HSBC’s motion for
judgment on the pleadings; (2) grants Key Bank’s motion to dismiss; and (3)
dismisses HSBC’s counterclaims.
SO ORDERED.
s/ Richard J. Arcara
HONORABLE RICHARD J. ARCARA
UNITED STATES DISTRICT JUDGE
DATED: May 18, 2012
6
During oral argument on Defendants’ Motions to Dismiss, counsel for HSBC
stated that should this Court dismiss the Trust’s tort claims, HSBC would accept
dismissal of its counterclaims. For this reason, as well as the reasons stated herein,
HSBC’s counterclaims are dismissed in their entirety.
34
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