Case Information
*3 B e f o r e: WINTER, WALKER, and CABRANES, Circuit Judges.
Aрpeal from a judgment of the United States District Court for the Southern District of New York (Lawrence M. McKenna, Judge) granting summary judgment to defendant-appellee Goldman, Sachs & Co. and dismissing Adelphia Recovery Trust’s fraudulent conveyance claim brought pursuant to 11 U.S.C. § 548(a)(1)(A). We affirm on grounds of judicial estoppel.
DAVID M. FRIEDMAN (Michael C. Harwood & Howard W. Schub, on the brief), Kasowitz, Benson, Torres & Friedman, 29 30 31 LLP, New York, NY, for Plaintiff- Counter-Defendant-Appellant. 32 MELVIN A. BROSTERMAN (Claude G. Szyfer 33 and Francis C. Healy, on the brief), 34 Stroock & Stroock & Lavan LLP, New York, 35 NY, for Defendant-Appellee. 36 37
WINTER, Circuit Judge: 38
39 The Adelphia Recovery Trust, an entity created to represent 40 the non-whole creditors of a debtor corporation that is party to 41 a bankruptcy proceeding described below, appeals from Judge 42 McKenna’s grant of summary judgment dismissing its fraudulent conveyance claim against Goldman, Sachs & Co. In such a
fraudulent conveyance claim, the Trust may recover only property owned by the parent-company debtor. The various schedules and Chapter 11 plan, which were consummated with the agreement of appellant and its predecessors in interest in the bankruptcy proceeding, all treated the property transferred as owned by a separate subsidiary. We, therefore, affirm on grounds of judicial estoppel.
BACKGROUND
Adelphia Communications Corp. (“ACC”) was the parent company
of some 200 holding and operating subsidiaries (collectively,
“Adelphia”). At its peak, Adelphia formed the fifth-largest
cable company in the United States. ACC, at all relevant times a
publicly traded company, was founded by John Rigas in 1986, and
members of the Rigas family held several top positions at ACC.
After ACC disclosed that it had several billion dollars in
fraudulently concealed, off-balance-sheet debt, Rigas family
members were forced to resign from their positions and faced
various civil and criminal actions. See, e.g., United States v.
Rigas,
On June 25, 2002, ACC and its subsidiaries entered bankruptcy under Chapter 11. Pursuant to an ensuing plan of reorganization, substantially all assets of ACC and its subsidiaries were liquidated, and all secured creditors of ACC and its subsidiaries were paid in full. In addition, all unsecured debt of the subsidiaries was also paid in full with interest, and a portion of ACC’s unseсured debt was paid. Those creditors of ACC who were not paid in full received an interest in any remaining assets that appellant can recover.
In July 2003, appellant’s predecessor in interest filed suit against over 400 lenders, investment banks, and other financial institutions, seeking damages for their alleged participation in the Rigas family fraud. This action included the present action against Goldman, Sachs & Co. (“Goldman”). [1]
Appellant’s action against Goldman alleges a fraudulent conveyance under 11 U.S.C. §§ 548(a)(1)(A) and 550(a). It arose out of а 1999 multi-million margin loan that Goldman had extended to Highland Holdings II LLP (“Highland”), an entity owned by the Rigas family (a Rigas family entity, or “RFE”) unconnected to Adelphia. The loan, which was secured by ACC stock owned by Highland, was allegedly used by the Rigases to purchase additional ACC stock and thereby to maintain their control over Adelphia. As ACC’s stock price decreased following the disclosure of the fraudulent concealment of debt in 2002, Goldman issued several margin calls to Highland. The complaint alleged that the Rigases caused ACC to make cash payments of $63 million to cover these margin calls.
Appellant’s allegations against Goldman were amended several
times at the suggestion of the district court. The court was
concerned that “[t]he Amended Complaint does not identify which
fraudulent conveyances came from ACC and which came from the
[subsidiaries]. This omission is significant because [appellant]
lacks standing to pursue claims to recover for fraudulent
conveyance on behalf of the [subsidiaries].” Adelphia Recovery
Trust v. Bank of Am., N.A., No. 05-civ-9050,
Pursuant to this order, appellant submitted a revised version of the complaint that alleged, in relevant part:
[T]he Rigases caused ACC to commingle funds in the concentration account that it controlled, in the name of [a subsidiary] Adelphia Cablevision LLC, from such sources as customer receipts, liquidation of overnight investment accounts, and transfers from various subsidiary entities . . . in order to satisfy these margin calls. On each date identified in the following charts, the Rigases caused ACC to direct that the funds it had gathered in the concentration account be distributed by Adelphia Cablevision LLC directly to the Margin Lenders or to the RFE for immediate payment over to the Margin Lenders.
Rev. Second Am. Compl. ¶ 1359.
It appears from this allegation and the record that the pertinent payments were made either: (i) directly to Goldman from a particular account (the “Concentratiоn Account”), which contained most of the funds in the cash management system through which the collective cash of ACC and its subsidiaries was managed; or (ii) indirectly from the Concentration Account through an RFE and then to Goldman. Appellant seeks in this action to recover $63 million.
In the district court, and here, appellant faced the problem
that the payments to Goldman were made in the name of the
subsidiary, Adelphia Cablevision LLC, that held the Concentration
Account and that has paid all its scheduled creditors, which did
not include ACC, in full. Accordingly, appellant lacked standing
to sue the subsidiary. It therefore argued, based on the amended
allegation quoted above, that ACC was the real owner of, and
payor from, the Concentration Account. Adelphia Recovery Trust
v. Bank of Am., N.A., No. 05-cv-9050,
This appeal followed.
DISCUSSION
We review de novo whether Goldman was entitled to summary
judgment as a matter of law. See, e.g., Miller v. Wolpoff &
Abramson, L.L.P.,
The sole issue is whether the amended complaint states a valid claim of a fraudulent conveyance under 11 U.S.C.
§§ 548(a)(1)(A) and 550(a). Section 548(a)(1)(A) provides, in relevant part:
The trustee may avoid any transfer . . . of an interest of the debtor in property . . . that was made or incurred on or within 2 years before the date of the filing of the [bankruptcy] petition, if the debtor voluntarily or involuntarily . . . made such transfer . . . with аctual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made[,] . . .
indebted. 11 U.S.C. § 548(a)(1)(A). The avoidance power thus applies only to “transfers of property of the debtor,” Begier v. IRS, 496 U.S. 53, 58 (1990), which includes “all legal or equitable interests of the debtor in property as of the commencement of the case,” 11 U.S.C. § 541(a)(1). Whether the margin loan payments to Goldman were transfers of the property of ACC, or should be deemed to be so, is the issue on appeal.
Appellant argues that we should follow decisions of the
Fifth and Tenth Circuits, Matter of Southmark Corp.,
However, neither decision was rendered in a legal context similar to the one before us or involved application of the judicial estoppel doctrine. Throughout the reorganization proceedings here, the Concentration Account was listed as an asset only of two successive ACC subsidiaries, not the property of ACC. The theory that the Concentration Account was actually the property of ACC appeared for the first time late in the present litigatiоn, as described above, and well after consummation of the plan of reorganization.
Appellant’s (or its predecessors’ in interest) position in the bankruptcy proceedings regarding ownership of the account is inconsistent with the claim it makes on appeal. [2] Given the importance to bankruptcy proceedings of determining with finality a debtor’s ownership of particular assets, we hold that appellants are estopped from pursuing a claim that would reattribute asset ownership based on a determination of asset ownership among the various entities agreed to by the pertinent parties, after a plan of reorganization has been confirmed and substantially consummated.
a) Principles of Judicial Estoppel
In New Hampshire v. Maine , the Supreme Court made clear that
the exact criteria for invoking judicial estoppel will vary based
on “specific factual contexts,” and that “courts have uniformly
recognized that its purpose is to protect the integrity of the
judicial process by prohibiting parties from deliberately
chаnging positions according to the exigencies of the moment.”
Courts have observed that the circumstances under which judicial estoppel may appropriately be invoked are probably not reducible to any general formulation of principle. Nevertheless, several factors typically inform the decision whether to apply the doctrine in a particular case: First, a party’s later position must be clearly inconsistent with its earlier position. Second, courts regularly inquire whether the party has succeeded in persuading a court to accept that party’s earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or the second court was misled. . . . A third consideration is whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the оpposing party if not estopped. In enumerating these factors, we do not establish inflexible prerequisites or an exhaustive formula for determining the applicability of judicial estoppel.
Id. at 750-51. (internal citations and quotation marks omitted).
Although we have recognized that “[t]ypically” the application of
judicial estoppel requires showing unfair advantage against the
party seeking estoppel, DeRosa v. Nat’l Envelope Corp., 595 F.3d
99, 103 (2d Cir. 2010) (requiring a party to show a clearly
inconsistent position, adoption of that position by a court in an
earlier proceeding, and unfair advantage against the party
seeking estoppel in the ADA context), we have not required this
element in all circumstances. See Maharaj v. BankAmerica Corp.,
Our holding in this regard is shaped by the context of a complicated bankruptcy proceeding involving 250 related, insolvent entities, and the risk to judicial integrity if we were to allow a party, after the consummation of a bankruptcy, to take a positiоn that unravels key decisions in the proceedings. We first turn to a description of the legal mechanics of such a proceeding.
b) The Bankruptcy Context
Following a filing for Chapter 11 bankruptcy reorganization,
the debtor must file “a list of creditors[,] a schedule of assets
and liabilities[,] a schedule of current income and current
expenditures[, and] a statement of the debtor’s financial
affairs.” 11 U.S.C. § 521(a)(1). The debtor is given a 120-day
exclusive period in which to submit a plan of reorganization, 11
U.S.C. § 1121(b), and a disclosure statement containing “adequate
informаtion” to allow interested parties to evaluate that plan.
11. U.S.C. § 1125(a)-(b). This plan includes items like complete
asset schedules. See Sure-Snap Corp. v. State St. Bank & Trust
Co.,
The debtor is given 180 days, extendаble up to 20 months by the court, from filing for Chapter 11 relief in which to obtain the approval of “each class of claims or interests that is impaired under the plan.” 11 U.S.C. § 1121(c)-(d). If the debtor fails to file a plan or the debtor’s exclusive filing period expires without acceptance of a proposed plan by the parties in interest, any party in interest can file a competing plan and seek approval by the parties in interest. 11 U.S.C. § 1121(c). Both the debtor’s plan and any competing plan must meet various mandatоry provisions and may meet various discretionary provisions. 11 U.S.C. §§ 1122, 1123(a), (b). Foremost among the mandatory requirements is that the plan designate classes of claims and classes of interests and specify how these classes will be treated under the plan. 11 U.S.C. §§ 1122, 1123(a).
Once a conforming plan has been proposed, parties in interest can vote to approve it. Following approval by at least one class of impaired non-insider claims -- claims that will not be paid completely or will have some other right altеred under the plan -- the court can confirm the plan and bind all creditors if the plan is feasible, was proposed in good faith, and is in compliance with the Bankruptcy Code. 11 U.S.C. § 1129(a)(10), (b); Fed. R. Bankr. P. 3020(b)(2). Once the plan is confirmed, the debtor is discharged from any prepetition debts, subject to specific exceptions not relevant here, as long as the confirmed bankruptcy plan is followed. 11 U.S.C. §§ 1141(d)(1), 523. c) Application of Judicial Estoppel
As the recitation of bankruptcy procedures and time frames makes clear, debtors and creditors have ample periods of time within which to finalize asset ownership schedules and fashion a plan dependent upon those schedules.
In the present case, ACC filed for bankruptcy on June 25,
2002; the ultimately-confirmed plan was proposed on October 16,
2006; and the plan was confirmed on January 5, 2007, leaving over
four and a half years to sort out whether ACC or a subsidiary
owned the Concentration Account assets. At no time during these
proceedings did ACC or any party attribute ownership of the
Concentration Account assets to ACC. At the time of bankruptcy
filing and again in February 2004, the ACC subsidiary ACC
Operations, Inc. identified the Concentration Account as its
property; ACC did not. Amendments to the schedules of
liabilities in January and May 2005 listed the ACC subsidiary
Adelphia Cablevision as the owner of the Account in concluding
that “intercompany transfers between a Debtor on the one hand,
and Adelphia Cablevision [as owner of the Concentration Account]
on the other hand, have been netted in the Intercompany Schedule,
creating either a net payable or receivable intercompany balance
between each such Debtor and Adelphia Cablevision.” ACC never
claimed the Account as one of its assets until such a claim of
ownership was asserted in the present proceeding in 2009. Nor
did any other party assert such a claim or seek a substantive
consolidation of ACC and Adelphia Cablevision’s bankruptcies, as
permitted in bankruptcy proceedings to remedy circumstances where
formally separate entities comminglе and subject their collective
assets to single control. See In re Augie/Restivo Baking Co.,
Further, the bankruptcy plan undeniably was substantially consummated as early as 2007. In re Adelphia Comm’cns Corp. , 367 B.R. 84, 94 (S.D.N.Y. 2007). Substantial consummation, as defined in 11 U.S.C. § 1101(2), requires the “transfer of all or substantially all of the property” in the plan, “assumption by the debtor . . . of all or substantially all of the property dealt with by the plan,” and “commencement of distribution under the plan.” Over $6 billion in cash, $117 million in tradeable Time Warner shares, and $9.5 billion in tradeable Adelphia Contingеnt Value Vehicle shares (shares set up as an interest in Adelphia recoveries against third party lenders and accountants) were distributed to claimholders as of early March 2007, just after confirmation of the plan. Since then, substantially all Adelphia’s assets have been liquidated, returning approximately $18 billion to claimholders.
In the bankruptcy context, whether a party’s position with
regard to the ownership of assets is inconsistent with its later
claims is largely informed by the bankruptcy court’s treatment of
those claims. See Galin v. United States, No. 08-cv-2508, 2008
WL 5378387, at *10 (E.D.N.Y. Dec. 23, 2008) (“adoption” in
judicial estoppel “is usually fulfilled . . . when the bankruptcy
court confirms a plan pursuant to which creditors release their
claims against the debtor” (quoting Negron v. Weiss, No. 06-cv-
1288,
It is therefore crucial, both for the sake of finality and
the needs of debtors and creditors, that claims to ownership of
various assets be determined in the bankruptcy proceedings.
Particularly when, as here, the assets in question were claimed
by other parties during the bankruptcy prоceeding without
objection, a debtor’s subsequent claim to those assets in a
different proceeding must be seen as inconsistent with its prior
silence.
[3]
Cf. Chartschlaa,
The bankruptcy court’s treatment of the asset schedules in
the present matter underlies their importance and the need for
finality. In order for the reorganization to proceed, the
Adelphia entities underwent a massive restatement of their
accounting records, which sought to provide separate, audited
financials for each insolvent entity. In re Adelphia,
The asset schedules thus played a key role in both the
bankruptcy court’s supervision of the process and in the parties’
understanding of the plan. As the district court noted in its
discussion of substantive consolidation, such relief was “highly
unlikely” because “the Debtors have issued restated financial
statements and filed the May 2005 Schedules, thus evidencing an
ability to generally determine the assets and liabilities of each
Debtor.” Id. at 219 (discussing In re Augie/Restivo,
A different ruling would threaten the integrity of the
bankruptcy process by encouraging parties to alter their
positions as to ownership of assets as they deem their litigation
needs to change, leaving courts to unravel previously closed
proceedings. Doing so would allow parties an opportunity to
“play[] fast and loose” with the requirements of the bankruptcy
process and inject an unacceptable level of uncertainty into its
results -- exactly the result that the doctrine of judicial
estoppel is intended to avoid. Wight v. BankAmerica Corp., 219
F.3d 79, 89 (2d Cir. 2000); accord In re Adelphia Recovery Trust,
In relying upon the prospective harm to the integrity of bankruptcy proceedings that would result from a different ruling, we do not exclude the possibility of specific harm, or unfair disadvantage to, Goldman beyond the possible loss of $63 million. We simply decline to require Goldman and the courts having to unravel all previous proceedings to determine what would have happened had appellant or its predecessors in interest claimed ownership of the Cоncentration Account in a timely fashion.
We also do not exclude the possibility that, in an unusual
case, the allocation of specific assets may be largely irrelevant
to the bankruptcy court’s actions. However, given the centrality
of asset allocation to the integrity of the bankruptcy process,
see Chartschlaa,
CONCLUSION The requirements of judicial estoppel are, therefore, met. The asset schedules showing that the Concentration Account was held by a subsidiary of ACC were approved by appellant’s predecessors in interest. The bankruptcy court adopted the asset schedules and approved a plan of reorganization that treated ACC separately from its subsidiaries based on those schedules. Revisiting the accuracy оf those schedules to permit the present action to proceed would clearly threaten the integrity of bankruptcy proceedings. We, therefore, hold that appellant’s complaint is barred by the doctrine of judicial estoppel. The judgment of the district court is affirmed.
Notes
[1] On June 17, 2008, the claims asserted on behalf of ACC subsidiary
debtors, who had already been paid in full, were dismissed for lack of
standing. Adelphia Recovery Trust v. Bank of Am., N.A.,
[2] Attribution of the Concentration Account to ACC required an explicit claim of ownership by ACC in the bankruptcy proceeding. First, bank statements listed the account holder’s Taxpayer ID Number as that corresponding to the ACC subsidiary National Cable Acquisition Associates. Second, within Adelphia the Concentration Account was referred to as the Adelphia Cablevision (an ACC subsidiary) account, and Adelphia Cablevision was the entity that made and received payments involved with the Account. Finally, any of ACC, its subsidiaries, or RFEs could direct that money be paid from the Account on their behalf by wire or check regardless of how much they had contributed to the account, and if at any time the payments on behalf of these entities exceeded the entity’s contribution to the Account, an intercompany payable to Adelphia Cablеvision by those entities was created.
[3] A party may be bound by the position taken by its predecessors in
interest in prior proceedings. See, e.g., Secured Equities Invs., Inc. v.
McFarland,
[4] “[I]ntercompany transactions (e.g., cash receipts, disbursements, acquisition accounting and cost allocations) were deemed to have been made by or to a single entity, Adelphia Cablevision, LLC (the ‘Bank of Adelphia’). This methodology, often referred to as the ‘Bank of Adelphia Paradigm,’ aggregated intercompany transaction balances consistent with the actual flow of funds within the Debtor’s cash management system.” In re Adelphia, 368 B.R. at 151.