Adelphia Recovery Trust v. Bank of America, N.A.

624 F.Supp.2d 292

ADELPHIA RECOVERY TRUST, Plaintiff, v. BANK OF AMERICA, N.A., et al., Defendants.

No. 05 Civ. 9050(LMM).

United States District Court, S.D. New York.

May 6, 2009.

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McKENNA, District Judge.

MEMORANDUM AND ORDER

Table of Contents
1. Factual Background ......................................................... 298
   A. The Adelphia Fraud ...................................................... 298
   B. Overview of the Co-Borrowing Facilities ................................. 298
   C. The UCA/HHC Co-Borrowing Facility ....................................... 299
       i. The UCA/HHC Term Sheet Was Prepared by the Defendants ............... 300
      ii. The UCA/HHC Term Sheet Contained Omissions and
           Misstatements ...................................................... 300
     iii. The UCA/HHC Term Sheet Defects were known To the
           Defendants ......................................................... 301
   D. The CCH Co-Borrowing Facility ........................................... 301
       i. The CCH Term Sheet Was Prepared by the Defendants ................... 301
      ii. The CCH Term Sheet Contained Omissions and Misstatements ............ 302
     iii. The CCH Term Sheet Defects were known to the Defendants ............. 302
   E. The Olympus Credit Facility ............................................. 303
       i. The Olympus Term Sheet Was Prepared by the Defendants ............... 303
      ii. The Olympus Term Sheet Contained Omissions and
           Misstatements ...................................................... 304
     iii. The Olympus Term Sheet Defects were known to the Defendants ......... 304
2. Procedural Background ...................................................... 305
   A. Proceedings in the Bankruptcy Court ..................................... 305
   B. Proceedings before this Court ........................................... 306
3. Standard of Review ......................................................... 307
   A. Substantive Law is Pennsylvania State Law ............................... 307
   B. Procedural Law used is that of the Southern District of New York ........ 307
   C. Pleading Standard under Fed.R.Civ.P. 8(a) ............................... 308
   D. Pleading Standard for Fraud under Fed. R. Civ. P. 9(b) .................. 308
4. Discussion ................................................................. 308
   A. Claim 38—Aiding and Abetting Fraud against the Agent Banks and
        Their Affiliated Investment Banks is not Dismissed .................... 308
       i. Background of Claim ................................................. 309
      ii. Aiding and Abetting Fraud is a Valid Claim under Pennsylvania
           State Law .......................................................... 309
     iii. Aiding and Abetting Fraud is Plead with Particularity ............... 312
      iv. Group Pleading of the Agent Banks and Their Affiliated
           Investment Banks Is Permitted ...................................... 315
       v. Co-Borrowing Term Sheets Do Not Contradict the Amended
           Complaint .......................................................... 317

   B. Claim 37—Aiding and Abetting a Breach of Fiduciary Duty against the
        Agent Banks and Their Affiliated Investment Banks ..................... 318
       i. Background of Claim ................................................. 318
      ii. Aiding and Abetting a Breach of Fiduciary Duty is Pled with
            Enough Particularity .............................................. 319
     iii. Pleadings Related To the Three Facilities ........................... 320
   C. Claim 54—Fraudulent Concealment against the Investment Banks Is
        Dismissed ............................................................. 320
       i. Background of Claim ................................................. 320
      ii. Elements of Fraudulent Concealment .................................. 321
     iii. The Investment Banks Did Not Have an Affirmative Duty to
           Speak Based on a Fiduciary Duty or Unique Knowledge ................ 322
   D. Claim 55—Fraud against the Agent Banks and their Affiliated
        Investment Banks Is Dismissed In Part ................................. 324
       i. Background of Claim ................................................. 325
      ii. Elements of a Fraud Claim ........................................... 325
     iii. Claim 55 Sub-Claims which are not pled with the Necessary
            Particularity ..................................................... 326
      iv. The Following Sub-Claims Meet Pleading Requirements ................. 328
   E. Claim 31 Avoidance and Recover of Intentionally Fraudulent
        Obligations and Transfers Under 11 U.S.C. §§ 548 and 550 against the
        Margin Lenders ........................................................ 332
       i. Claim 31 Background ................................................. 332
      ii. SSB Moves For Dismissal of Claim 31 on the Basis it is Untimely ..... 333
     iii. Goldman Sachs Moves for Dismissal of Claim 31 on the Basis
           That It Had Not Been Plead With Particularity ...................... 334
5. Order ...................................................................... 336

This action arises from the bankruptcy of Adelphia Communications Corporation ("Adelphia") following the disclosure of $2.2 billion in liabilities that had not previously been reported on its balance sheet. The liabilities at Adelphia stemmed in part from Adelphia's participation in Co-Borrowing Loan Facilities ("Co-Borrowing Facilities"). Beginning in 1999 Adelphia participated in three such Co-Borrowing Facilities. The Rigas family which was the prior management of Adelphia¹ had Rigas family entities ("RFEs") enter into Co-Borrowing Facilities with public Adelphia subsidiaries. This arrangement allowed the RFEs controlled by the Rigas family to borrow billions of dollars guaranteed almost exclusively by Adelphia's assets. The Rigas family used the Co-Borrowing Facilities to draw down billions of dollars for their own purposes. Adelphia was left to pay the bill.

Adelphia's disclosure of billions of dollars in liabilities connected to the Co-Borrowing Facilities led to a precipitous chain of events concluding with Adelphia filing for bankruptcy. The Adelphia Recovery Trust ("ART") was formed to prosecute Adelphia's claims against numerous entities that allegedly assisted the Rigas family in perpetrating a massive financial fraud against Adelphia.²

This order addresses ART's claims against 26 Banks and 22 affiliated Investment Banks. ART alleges these Banks and their affiliated Investment Banks helped to structure the Co-Borrowing Facilities which played a role in the collapse of Adelphia. This Court previously addressed some of Defendants' motions to dismiss ART's claims pursuant to Rule 12(b)(6). This order addresses the various Agent Banks and Investment Banks motions' to dismiss the October 31st 2007 Amended Complaint Claims 37, 38, 54 and 55 (collectively, the "Tort Claims"). In addition, this order addresses the motions for dismissal of Claim 31 against Salomon Smith Barney ("SSB") and Goldman Sachs ("GS").

This Court DENIES the various Defendants' motions for dismissal of Claims 31, 37 and 38. This Court GRANTS Defendants' motions for dismissal of Claim 54 against the Investment Bank Defendants. This Court GRANTS in part and DENIES in part Defendants' motions to dismiss Claim 55.

1. Factual Background

It is useful to summarize the factual history of the Rigas family fraud owing to the complexity of this case. On a 12(b)(6) motion for dismissal a court will take factual allegations in the Amended Complaint as true. "For purposes of reviewing the dismissal of a complaint for failure to state a claim, we accept the complaint's factual allegations ... as true." Roth v. Jennings, 489 F.3d 499, 501 (2d Cir.2007); see also Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 164, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993).

A. The Adelphia Fraud

Adelphia was a cable company founded in 1952 by John Rigas. By the late 1990's Adelphia had grown to be the sixth largest cable-television provider in the United States. However, beginning in the late 1990's the Rigas family needed access to billions of dollars of capital to acquire cable businesses, purchase stock to maintain their majority stockholder status at Adelphia, and finance an extravagant lifestyle. (Am. Cmpl. ¶ 807.) The Rigas family did not have enough personal capital or available credit to finance these expenditures. Lacking in capital or credit, the Rigas family turned to the balance sheet of Adelphia to finance their acquisitions, stock purchases, and lifestyle. The Rigas family caused Adelphia to enter into a series of financial transactions whereby RFEs could borrow hundreds of billions of dollars against the balance sheet of Adelphia under Co-Borrowing Facilities. The Rigas family was not entitled to use Adelphia as a source of credit or capital for their own ends because Adelphia was a public company. (Am. Cmpl. ¶¶ 802-04.) The Rigas family worked with the Agent Banks and their affiliated Investment Banks to create the Co-Borrowing Facilities. (Am. Cmpl. ¶¶ 825-30.)

B. Overview of the Co-Borrowing Facilities

Co-Borrowing Facilities allowed the Rigas family to gain access to the credit and capital of Adelphia. According to the Amended Complaint, the Co-Borrowing Facilities were structured primarily with this purpose in mind. All Co-Borrowing Facilities were set up so both Adelphia and the RFEs could borrow up to the entire amount of the Co-Borrowing Facility. (Am. Cmpl. ¶ 826.) The impact of this arrangement was that Adelphia was liable for the entire amount borrowed by the...