PHILADELPHIA—A bankruptcy judge has declined to throw out a massive lawsuit brought by unsecured creditors and shareholders of Adelphia Communications Corp. against 380 lenders, including 24 investment banks, allegedly involved in the cable TV company’s collapse.
Judge Robert E. Gerber of the U.S. Bankruptcy Court in Manhattan dismissed on Monday some claims against banks accused of breaching fiduciary duties in their dealings with Adelphia’s former management, the founding Rigas family, which has been accused of looting the company.
But many claims survive in a case that threatens detailed examination of allegations that some of the biggest U.S. banks looked the other way while the Rigases stripped Adelphia of value, in order to hold on to lucrative investment-banking fees.
“There will undoubtedly be issues of fact as to whether the agent banks and investment banks were conditioning their delivery of commercial banking services on investment banking opportunities, on the one hand, or the Rigases were using the link as an enticement to the agent banks, on the other,” Gerber wrote in his ruling.
Those kind of questions, however, can only be determined at trial, the judge said.
“It’s too soon to celebrate, but we’re gratified by the opinion,” said David M. Friedman of New York firm Kasowitz, Benson, Torres & Friedman, who argued the case on behalf of Adelphia’s unsecured creditors.
Friedman said Adelphia’s dissolution in bankruptcy freed up the creditors to go after the lenders without worrying about spoiling their chances for getting additional financing.
Sale of Adelphia’s assets to Time Warner Inc. and Comcast Corp. Z(CMCSA) raised about $15 billion in cash that was used to pay some bills when Adelphia’s liquidating Chapter 11 plan took effect in February. That money has been distributed to secured creditors, including the banks and investment banks that are being sued.
The Chapter 11 plan set up a trust that will, among other things, collect and distribute any cash that comes out of the litigation against lenders accused of having had a hand in the massive accounting fraud carried out by Adelphia founder John Rigas and his son Timothy.
The pair were convicted of pocketing more than $2 billion in company funds for their own use and misleading investors about the company’s finances and performance.
The question of whether Adelphia shareholders will recover anything if the case against the banks ultimately succeeds remains up in the air.
Adelphia’s creditors are asking $5 billion in damages, but estimates in the liquidated company’s Chapter 11 plan say more than $6 billion in debt remains to be paid before shareholders can expect to get any money back.
During Adelphia’s bankruptcy, the official equity committee lost “standing,” or the right to bring the lawsuit against the banks on its own. However, it joined as an intervenor in the case being pushed by the creditors.
In a footnote to the opinion signed Monday, Gerber said he would issue a separate decision on a bid by the banks to knock out the claims that were added to the case by Adelphia’s official equity committee.
Shareholder lawyers accuse Adelphia’s banks of violations of racketeering law, and the judge hasn’t said yet whether those allegations will get to trial.
Among the counts dismissed in the wide-ranging lawsuit that was begun by the official committee of unsecured creditors and the official equity committee in the case are accusations of gross negligence against banks that did business with Adelphia while it was under the Rigases’ control.
But Gerber ruled Monday that many of the claims being carried by creditors lawyers survived a first bid by the banks to defeat them at the pretrial stage—a motion to dismiss.
Allegations that the banks aided and abetted fraud by the Rigases were among the claims knocked out Monday. However, the judge gave Adelphia’s creditors another chance to set out the aiding and abetting case against the lenders.
Among the claims that now could be headed to trial are charges aimed at Adelphia margin lenders, Salomon Smith Barney, Bank of America, Goldman Sachs and Deutsche Bank, for “fraudulent conveyance,” or moving Adephia assets out of the reach of creditors improperly.
The ruling also gives unsecured creditors and shareholders a shot at proving the banks that led the lending to Adelphia and the company’s investment banks violated banking laws.
Adelphia moved to Greenwood Village, Colo., after it filed for bankruptcy.
