================================================================= ADELPHIA BANKRUPTCY NEWS Issue Number 5 ----------------------------------------------------------------- Copyright 2002 (ISSN XXXX-XXXX) May 17, 2002 ----------------------------------------------------------------- Bankruptcy Creditors' Service, Inc. 609-392-0900 FAX 609-392-0040 ----------------------------------------------------------------- ADELPHIA BANKRUPTCY NEWS is published by Bankruptcy Creditors' Service, Inc., 24 Perdicaris Place, Trenton, New Jersey 08618, on an ad hoc basis (generally every 10 to 20 days) as significant activity occurs in the Debtors' cases. New issues are prepared by Danilo R. Munoz, Jr., Vince Brant and Peter A. Chapman, Editors. Subscription rate is US$45 per issue. Any re-mailing of ADELPHIA BANKRUPTCY NEWS is prohibited. ================================================================= IN THIS ISSUE ------------- [00035] U.S. TRUSTEE APPOINTS UNSECURED CREDITORS' COMMITTEE [00036] DEBTORS' MOTION TO REJECT 58 UNEXPIRED LEASES [00037] DEBTORS' MOTION TO HONOR AND CONTINUE E-RATE PROGRAM [00038] DEBTORS' MOTION TO PAY PREPETITION REGULATORY FEES [00039] LUCENT'S MOTION TO COMPEL DEBTORS' DECISION ON CONTRACT [00040] COMMITTEE'S APPLICATION TO RETAIN KRAMER LEVIN AS COUNSEL [00041] DEBTORS' MOTION TO DETERMINE UTILITIES ADEQUATELY ASSURED KEY DATE CALENDAR ----------------- 03/27/02 Voluntary Petition Date 04/16/02 Deadline to provide Utilities with adequate assurance 05/26/02 Deadline to make decisions about lease dispositions 06/10/02 Deadline for filing Schedules of Assets and Liabilities 06/10/02 Deadline for filing Statement of Financial Affairs 06/10/02 Deadline for filing Lists of Leases and Contracts 06/25/02 Deadline to remove actions pursuant to F.R.B.P. 9027 07/25/02 Expiration of Debtor's Exclusive Plan Proposal Period 09/23/02 Expiration of Debtor's Exclusive Solicitation Period 03/26/04 Deadline for Debtor's Commencement of Avoidance Actions 03/26/04 Expiration of ACC-Backed DIP Financing Facility Bar Date for filing Proofs of Claim First Meeting of Creditors pursuant to 11 USC Sec. 341 ----------------------------------------------------------------- [00035] U.S. TRUSTEE APPOINTS UNSECURED CREDITORS' COMMITTEE ----------------------------------------------------------------- See prior entries at [00029] and [00024]. The United States Trustee for Region II amends the appointment of the Official Committee of Unsecured Creditors for the second time by removing Fidelity Management & Research Co. from the Committee. The Committee will now have these members: A. Bell South Corporation 1155 Peachtree St., Suite 1929, Atlanta, GA 30309-3610 Attn: Bradley O. Greene, Exec. Dir. - Corp. Development Phone: (404) 249-4506 Fax: {404} 249-4740 B. The Bank of New York 5 Penn Plaza, 13th Floor, New York, NY 10001 Attn: Loretta Lundborg, Vice President Phone: (212) 896-7273 Fax: (212) 328-7302 C. Bank of America 901 Main St., Dallas, Texas 75202 Attn: Robin Phelan Phone: (214) 209-0966 Fax: (214) 290-9490 D. Fujitsu Network Communications Inc. 2801 Telecom Parkway, Richardson, TX 75082 Attn: Charles R. Owen, Assistant General Counsel Phone: (972) 479-3713 Fax: (972) 479-2992 E. Wilmington Trust Co. Rodny Square North, 1100 Malat St., Wilmington, DE 19801 Attn: Michael Diaz Phone: (302) 656-8326 Fax: (302) 636-4140 ----------------------------------------------------------------- [00036] DEBTORS' MOTION TO REJECT 58 UNEXPIRED LEASES ----------------------------------------------------------------- According to Judy G.Z. Liu, Esq., at Weil Gotshal & Manges LLP in New York, New York, following the commencement of the Chapter 11 cases on March 27, 2002, the Debtors immediately began the process of evaluating their un-expired leases of nonresidential real property to determine whether it would be appropriate to assume or reject them. Although this process is far from complete, given the magnitude of the number of leases that require review, the Debtors have made an initial determination that the 58 Leases no longer serve any useful purpose for the Debtors' reorganization efforts. By this motion, the Debtors request authority to reject these un- expired lease of nonresidential property: Fresno Industrial Park, LLC Fresno, CA SkillSource, Inc. Reno, NV Great Western Realty Lease Tucson, AZ E-L Allison Pointe I, LLP Indianapolis, IN Manekin, Inc. Baltimore, MD Ck Three Tower Center, LLC Charlotte, NC CPX - River Center LP Cincinnati, OH Cox Investment Kingsport, TN Corporate Income Realty Fund I, LP San Antonio, TX Westpark Corp Center, LLC McLean, VA HP/AG Esplanade Downers Grove, IL AMB Property II LP Memphis, TN Highwoods/Tennessee Holdings, LP Memphis, TN Amherst Center Offices Austin, TX Multiple Trusts Amarillo, TX 114 Millenium Center Irving, TX Ft. Worth Plaza Limited Partnership Ft. Worth, TX Ione Sides Lubbock, TX Wichita Falls Offices Associates Wichita Falls, TX Eight Mile/Haggerty Office, LLC Southfield, MI Gary H. Emerson Jackson, MI Gus Sevastakis Toledo, OH Governor Printz Investments Wilmington, DE PNC Bank, Delaware Wilmington, DE Beaumont Medical Plaza LLC Lexington, KY Neil M. Bradshaw Milford, UT Duke-Weeks Nashville, TN 1600 Stewart Avenue, LLC Westbury, NY Clock Tower Partners, LLC Long Island City, NY Green 469 Seventh Ave New York, NY W.P. Mall LLC White Plains, NY Beametfed Inc./Equity Office Properties Boston, MA Concourse VI Assoc. Atlanta, GA ML Building, LLC Ft. Wayne, IN Union Station Properties, L.P. South Bend, IN Mercantile National Bank of Indiana Gary, IN SEAFO, Inc. Seattle, WA Shorenstein Realty Investors, LP Phoenix, AZ Saxton Incorporated Las Vegas, NV C & E Properties Portland, OR THA Investments, Ltd. Salt Lake City, UT Prowswood Office Center, LP Salt Lake City, UT California Equity Management Group Modesto, CA SN Properties Partnership Sacramento, CA Property Asset Management, Inc. Riverside, CA Emeryville Business Center Emeryville, CA 466 Townsend Street, LLC San Francisco, CA Cambay Tele.Com, LLC San Jose, CA Donald Hornung Madison, WI Beck Carton Corporation Milwaukee, WI Nicholas Abnos Kansas City, MO East Gate, LLC Springfield, MO Gary L. Nelson Springfield, MO AP-Prescott One Ten, L.P. Oklahoma City, OK AP-Prescott One Ten, L.P. Tulsa, OK Griffin Trust B Boise, ID Warburg-Storagemart Partners LP Columbia, MO Morgan Group St. Louis, MO Consistent with the generally anticipated growth of the telecommunications industry, Ms. Liu states that certain of the Leases were entered into by the Debtors with a view towards an expansion of their operations. The significant downturn in the market, however, particularly in the telecommunications sector, has curtailed growth, resulting in a corresponding reduction in the Debtors' need for facilities to administer additional telecommunications and data traffic. Given the economic downturn in this industry, and pursuant to the Debtors' revised business plan, the Debtors have determined to consolidate or downsize some of the markets in which they currently provide telecommunications services, and have closed, or will be closing, certain other markets. As such, Ms. Liu submits that certain of the Leases related to the housing of telecommunications huts and other service equipment are no longer needed in areas where the Debtors are downsizing or exiting markets. There will be attendant effects resulting from these changes, manifested in significant work force reductions and, consequently, diminished need for office space. If the Court approves the rejection of the Leases, the Debtors will retain sufficient office and telecommunications equipment storage space to continue their downsized operations. Ms. Liu contends that it is not in the Debtors' best interests to market the Leases for sale or sublease the underlying properties because the rents due under the Leases are significantly greater than their current market value. The Leases provide no benefit to the estate and are a cash drain on the Debtors' businesses. In consideration of the foregoing, the Debtors have determined, in the exercise of their sound business judgment, that it is in their best interests to reject the Leases. The Debtors submit that the rejection of the Leases should be effective as of the date an order is entered granting this Motion. ----------------------------------------------------------------- [00037] DEBTORS' MOTION TO HONOR AND CONTINUE E-RATE PROGRAM ----------------------------------------------------------------- See prior entry at [00030]. Motion granted. ----------------------------------------------------------------- [00038] DEBTORS' MOTION TO PAY PREPETITION REGULATORY FEES ----------------------------------------------------------------- See prior entry at [00031]. Motion granted. ----------------------------------------------------------------- [00039] LUCENT'S MOTION TO COMPEL DEBTORS' DECISION ON CONTRACT ----------------------------------------------------------------- See prior entry at [00034]. Committee Objects In its Motion, Mitchell A. Seider, Esq., at Kramer Levin Naftalis & Frankel LLP in New York, New York, relates that Lucent seeks to have the Court to compel the Debtors to decide within 45 days of the hearing date of the Motion whether to assume or reject a certain Contract between Lucent and the Debtors. Lucent alleges that the Debtors are over six months delinquent on a number of invoices in the aggregate amount of approximately $96,000,000, including late payment charges. The Debtors dispute a portion of this amount and believes that this amount is for pre-petition claims. However, Lucent has not provided any specific amount it alleges is due post-petition. In support of its Motion, Lucent argues that these estates would not be harmed by the requested relief as the Debtors must assume the Contract to reorganize. Lucent also claims that it is being harmed by the Debtors' lack of a decision in this regard because it has "absolutely no assurance of being compensated for its [post-petition] services". Further, Lucent proposes to establish an escrow account to fund the payment of Lucent's services performed from the date of the Court's Order until ABS assumes or rejects the Contract. Mr. Seider points out that the Bankruptcy Code allows the Debtors until the confirmation to decide whether to assume or reject the Contract. While Lucent correctly notes that Section 365(d)(2) affords this Court the discretion to shorten that period, case law establishes that the Debtors must, at least, be given a reasonable amount of time to make that decision. This is because a debtor is in "limbo" prior to confirmation and therefore, it is "understandably difficult to commit itself to assuming or rejecting a contract. . . ." In large and complex cases like these, courts have held that the non-debtor party to a contract must show a compelling reason why it is being prejudiced by the delay in the debtor's decision. This should be performed before a court should consider shortening the period. Mr. Seider contends that Lucent cannot meet its burden in these cases as it would be unreasonable for the Debtors to be compelled at the preliminary stage of these cases to decide whether to assume or reject the Contract. Though Lucent claims that the Debtors must assume the Contract in order to reorganize, that assertion is, at best, premature given that -- from the Committee's point of view -- the course of this reorganization remains uncertain. As such, the Debtors should not be compelled to make an accelerated decision to assume or reject the Contract in the absence of a business and legal restructuring supported by the various creditor constituencies herein. Lucent also argues that the Motion should be granted because otherwise they would be "in the unseemly position of having to provide services with absolutely no assurance of being compensated for these services." The Committee submits that the Debtors must keep current on the payment of post-petition expenses. However, Lucent has made no allegation that any post- petition payables are past due. Debtors Object Judy G.Z. Liu, Esq., at Weil Gotshal & Manges LLP in New York, New York, tells the Court that although Lucent has requested relief in the guise of a motion to compel assumption or rejection, its actual agenda is to coerce a reformation of the economic terms of its agreement with ABIZ. Using the performance of post-petition services as the linchpin for its request for a cash escrow and for immediate post-petition payments, Lucent inexplicably maintains that it "should not be required to perform services without compensation while [ABIZ] considers its options with regard to the [Agreement]." This is in the face of its own concession that it does not invoice ABIZ for the Services it renders to it "because of the overall consideration to be received by Lucent under the [Agreement]." Notwithstanding the plain terms of its Agreement with ABIZ and its own admissions, Ms. Liu relates that Lucent has nonetheless drummed up such an argument to seize what it thinks is an opportunity to rid itself of what it now believes to be an uneconomical bargain it made with ABIZ. Lucent wants to achieve a remedy which is unavailable under either the Agreement or applicable law. The contract between ABIZ and Lucent was specifically priced and structured to include the provision of services at no extra charge. But now Lucent wants to be paid additional amounts for these services, which at the time of entering into the Agreement, Lucent was perfectly willing to render to ABIZ at no extra charge. Notably, Lucent wants to price its contract with ABIZ and adjust the services it performs based upon agreements it has made with some of its other customers. To implement its objective, Ms. Liu notes that Lucent demands a cash escrow of 150% of what it charges these other customers because its Agreement with ABIZ does not require ABIZ to pay Lucent any fixed monthly charges. The Agreement does not obligate ABIZ to purchase additional merchandise from Lucent. Thus, Lucent's bald assertions - - that the Services were provided in exchange for ABIZ's failed promise to meet certain purchase commitments and pay its invoices - - are wholly unsupported by the Agreement. This demonstrates that Lucent is utterly unbothered by the facts that govern its relationship with ABIZ. Ms. Liu contends that Lucent's desire to rewrite its Agreement with ABIZ is an improper motivation for seeking to force ABIZ to determine whether to assume or reject the Lucent Agreement. Moreover, even if ABIZ desired to assume the Agreement, the parties would have to resolve their $96 million dispute to rule out any possibility of ABIZ having to provide Lucent with a cure payment of such magnitude. Given that the Debtors' road to reorganization is barely paved, it is simply too early in this 45-day old case for ABIZ, or any of the other Debtors, to assume contracts that may create administrative obligations to the potential detriment of general unsecured creditors. Ms. Liu points out that this case is in its infancy. The Debtors commenced this proceeding barely a month before Lucent filed this Motion. The Debtors have yet to obtain final post-petition DIP financing (although the process is currently underway) or to formulate a post-petition business plan. These are the foundational blocks upon which the Debtors' reorganization will be built. As these key components are not yet established, the Debtors are not presently in a position to decide whether to assume or reject the Agreement. Ms. Liu fears that the effects of prematurely forcing the Debtors to assume or reject an executory contract can be devastating. If the Debtors hastily and without proper analysis reject a contract that, in hindsight, they discover would have been beneficial to their estates, the Debtors may lose contractual benefits that may prove essential to the Debtors' reorganization efforts. Likewise, a premature decision to assume a contract may hamper or thwart such reorganization efforts by burdening the estate with substantial and unnecessary obligations. In such a case, even if the Debtors were to later reject the assumed contract, any damages suffered by the non-debtor party to the agreement would become administrative expenses and could greatly harm general unsecured creditors. According to Ms. Liu, Lucent and ABIZ have a long-standing and complex relationship. There have recently been numerous protracted disputes between the parties regarding invoices, shipments, and overall billing practices. In late 2000, throughout 2001 and into early 2002, the Debtors and Lucent endeavored to resolve many of their disputes and were successful in doing so with respect to the majority of the issues between the parties, although the agreements made have not always been carried through correctly in the billing documentation. The one significant disputed amount that the parties were not able to resolve relates to certain DWDM system products. Ms. Liu explains that the dispute involves what the Debtors estimate is over $90 million dollars of DWDM Equipment. It is the Debtors' understanding that this equipment is currently being stored in Lucent-controlled warehouses in Georgia and other Lucent facilities throughout the country. While the Debtors may have placed purchase orders for some of the DWDM Equipment, which was never delivered to the Debtors, much of the DWDM Equipment was transferred to the warehouses without orders from the Debtors or despite cancelled orders. Nevertheless, Lucent proceeded to invoice the Debtors for the value of all of the DWDM Equipment without specific purchase orders. Interestingly, Lucent does not assert that the Debtors' actually owe the $96 million and, in fact, concedes that a portion of it is disputed. Ms. Liu believes that nearly all of the $96 million cited in Lucent's Motion is attributable to the dispute over the DWDM Equipment. Given that the DWDM Equipment remains warehoused in Lucent's complete control, it is free to dispose of it as it chooses. As such, the equipment dispute, which involves alleged pre-petition debt, cannot possibly be the cause of any post- petition harm to Lucent in the event the Debtors do not immediately assume or reject the Agreement. Lucent also claims that it is being harmed by the fact that it is currently providing, at no additional cost, certain services and technical support for the equipment previously purchased by the Debtors. Significantly, however, Ms. Liu submits that the Services were included in the purchase price of the equipment. In fact, Lucent concedes as much in describing "[t]hose services, which are not invoiced to [ABIZ] because of the overall consideration to be received by Lucent under the [Agreement]." Lucent has gotten exactly what it bargained for and seeks to deny the Debtors the same benefit of their bargain. Lucent is not being harmed by its continued performance of the Services required by the Contract because ABIZ bought and paid for those Services. Indeed, even if the Debtors were to assume the Agreement, Lucent would continue to be obligated under the Agreement to provide the same Services at no additional cost to the Debtors. Ms. Liu asserts that the Agreement is important to the Debtors. The Debtors have, since 1996, purchased approximately $300 million of equipment necessary for their businesses from Lucent. In order to maintain this equipment and keep it updated, the Debtors rely on the Services and product upgrades provided by Lucent under the terms of the Agreement, among many other support services provided by Lucent. Without these Services and Upgrades, the equipment may deteriorate and lose its usefulness and value, thereby causing harm to the Debtors' networks and businesses. While the decision to assume or reject the Agreement has not been made, Ms. Liu states that such decision will ultimately have a major impact on the Debtors' reorganization efforts, and, accordingly, should not be made hastily. In this 45-day old case, it is clear that the Debtors have not had sufficient time to appraise their financial situation, and are still developing a business plan that will ultimately form the basis for a plan of reorganization. The 120-day exclusivity period granted under Section 1121(b) of the Bankruptcy Code will not expire for almost another 75 days. It is patent that the Debtors have not had sufficient time to determine whether greater benefit to the estate lies in assuming or rejecting the Agreement. Ms. Liu informs the Court that the Debtors have not yet obtained a final order with respect to their debtor in possession financing. While the Debtors are in the process of evaluating their businesses, they have not yet finalized a business plan. As such, the Debtors cannot determine at this time -- nor in the 45 additional days proposed by Lucent -- whether or not the Agreement is necessary to their estates or will be beneficial to their potential reorganization. Ms. Liu avers that the Debtors' evaluation of whether to assume or reject the Agreement is further impacted by the fact that a considerable dispute exists as to the amounts owed to Lucent. Notably, neither the debtor in possession financing nor the business plan presently contemplate a $96 million "cure" payment to Lucent. While Lucent contends that up to $96 million in pre- petition debt is outstanding, the Debtors believe they owe less than $400,000, if anything. In order to adequately assess the benefits and burdens of the Agreement, the Debtors need to be able to determine what cure amount, if any, would be due to Lucent if the Debtors were to assume the Agreement. Until the dispute of the DWDM Equipment is resolved, the Debtors cannot determine whether to assume or reject the Agreement. In its Motion, Lucent also requests that the Court order the Debtors to pay a reasonable amount for the Services rendered by Lucent after the Commencement Date based on the fees normally charged by Lucent to its other customers. By this request, Ms. Liu argues that Lucent is essentially asking the Debtors to pay twice for services already paid for under the Agreement. The Services that have been provided by Lucent to the Debtors since the Commencement Date are, under the Agreement, as conceded in Lucent's own Motion, Services that Lucent provides to the Debtor at no additional cost. So, while Lucent contends that it has continued to provide technical services to the Debtors without compensation, it concedes that such arrangement complies with the terms of the Agreement. Notably, Lucent's request for a reasonable amount of compensation from the Debtors for the post- petition Services rendered was based on the fees normally charged to its other customers, not on the fees normally charged to the Debtors for these services. This odd request can only be explained by the fact that were the Debtors to pay the fees charged by Lucent pursuant to its Agreement with the Debtors, the amount owed for such Services would be zero. In its Motion, Lucent requests that the Court order the Debtors to establish an escrow account to fund the payment of Lucent's Services from the date the requested order is granted to the time that the Debtors decide to assume or reject the Agreement. Again, Lucent points to the amounts it charges its other customers to determine the amount of the escrow. Lucent requests an escrow in an amount equal to 150% of the monthly fees of an annual service contract that Lucent would charge its other customers for services rendered on products similar to those in the Debtors' possession. In addition, Lucent's proposal contemplates a process where it is able to submit invoices directly to the escrow agent. These are for payment to Lucent within days of submission and unilaterally direct the replenishment of the Escrow in amounts Lucent alone deems sufficient. Aside from the obvious, and previously discussed improprieties involved with charging the Debtors twice for the cost of services based upon fees charged under someone else's contract, Ms. Liu claims that the escrow proposal also leaves no room for the Debtors to dispute any invoiced amounts. Whatever Lucent determines is adequate will govern. The proposed escrow would result in a major windfall to Lucent, as it will provide it with a ready fund of cash that must be replenished at Lucent's whim, to pay itself for services for which, under the Agreement, it has already been paid. Finally, Lucent argues that it should be entitled to an administrative expense priority because of the Services it performs post-petition for the Debtors. However, Ms. Liu maintains that Lucent is already contractually obligated to perform these Services at no additional expense. To permit Lucent to alter the terms of the Agreement and to receive an administrative priority for rendering the Services would put it in a better position than it would be in if the Debtors assumed the Agreement. This would be manifestly unfair to the Debtors' other unsecured creditors. Lucent Responds Joseph Lubertazzi, Esq., at McCarter & English LLP in Newark, New Jersey, tells the Court that the Debtors and the Committee correctly cite a series of cases for the proposition that generally a Debtor is entitled to wait until it files its plan of reorganization before electing to assume or reject its executory contracts. Lucent submits that this is not the typical case. ABS's Chapter 11 filing is another in a lengthy series of Chapter 11 cases in the telecommunications industry. Although Lucent trusts that ABS will seek to successfully reorganize, and will work in good faith with ABS to that end, it is mindful, as this Court undoubtedly is, of the fact that telecommunications companies are especially difficult to reorganize in the current economic climate. Even if, for the sake of argument, ABS requires more time than suggested by Lucent to assume or reject the Contract, Mr. Lubertazzi states that the Court should ensure that both parties are adequately protected in the interim. The Court can protect the interests of all parties by adopting Lucent's proposal that ABS pay for services rendered by Lucent post-petition, and that a replenishing escrow account be established to ensure payment of those services. Because ABS is presently delinquent on millions of dollars worth of receivables, the absence of such a mechanism, or similar equitable device, would force Lucent to provide services for ABS at no charge, while receiving no reciprocal benefit under the Contract. Although ABS concedes that it is indebted to Lucent, Mr. Lubertazzi contends that its estimate of the amount owing is wrong. Presently, ABS's telecommunications system is running on millions of dollars worth of equipment delivered and installed by Lucent, for much of which ABS has not paid. Lucent's records reflect that it has invoiced ABS $19,343,249.99 for equipment installed at ABS. Lucent's position is that ABS is responsible for an additional $69 million worth of invoices for uninstalled equipment. Moreover, Mr. Lubertazzi notes that Lucent's records reflect that $7,761,456.28 in late-payment charges, expressly provided for under the Contract, have accrued through March 27, 2002. Lucent did not promise ABS services at no charge in exchange for this "bargain." Although ABS argues that Lucent agreed to provide services at no charge under the Contract, Mr. Lubertazzi submits that ABS simply fails to acknowledge its side of the bargain. Lucent agreed to provide certain services at no charge to ABS in return for ABS's promise to meet specified purchase commitments and to timely pay its invoices. Because ABS has failed to meet its contractual obligations and thereby render Lucent the benefit of its bargain, Lucent should not be forced to continue to provide ABS services at no charge. ABS should be required to choose between not having the services and paying a reasonable price for them. Ultimately, Mr. Lubertazzi relates that ABS has two choices with respect to the Contract. ABS can either assume or reject it. If ABS ultimately chooses to accept the Contract and cure all defaults, as required by applicable law, Lucent would credit ABS for the amount ABS pays Lucent for post-petition services. This credit could either be applied to reduce the allowed amount of Lucent's claim under the Contract, or in the unlikely event that ABS's payments for Lucent's post-petition services were more than Lucent's allowed claim, the balance could be used as a credit against future products and services provided by Lucent. If ABS chooses to reject the Contract, the Contract would be deemed rejected as of the petition date, and Lucent would be left with no more than an administrative claim for its post-petition services, for which payment would be at best uncertain. By adopting Lucent's proposal for the establishment of an escrow account for payment of services, the Court would be protecting the parties' bargained for exchange, rather than requiring Lucent to perform services at no charge with no reciprocal benefit. ----------------------------------------------------------------- [00040] COMMITTEE'S APPLICATION TO RETAIN KRAMER LEVIN AS COUNSEL ----------------------------------------------------------------- The Official Committee of Unsecured Creditors of the Debtors hereby applies to the Court to authorize it to retain Kramer Levin Naftalis & Frankel LLP as counsel for the Committee in the Chapter 11 cases, effective as of April 5, 2002. Charles R. Owen, Chairman of the Committee, tells the Court that they have selected Kramer Levin to serve as counsel to the Committee. This firm would perform all of the services necessary and desirable to the conduct of the Chapter 11 Cases on behalf of the Committee. The Committee selected Kramer Levin primarily because Kramer Levin's Bankruptcy Department has extensive experience in the fields of bankruptcy and creditors' rights. In particular, this firm has represented creditors' committees in some of the largest and most complex Chapter 11 reorganization cases of recent years. These include Chapter 11 cases for Dow Corning Corporation, Bethlehem Steel Corp., SGL Carbon Corporation, Borden Chemicals and Plastics, American Architectural Products, Big V Holdings, VF Brands Inc., London Fog Industries, Inc., MMH Holdings, Inc., Edison Brothers, Olympia & York, SLM International, Inc., Integrated Resources, Inc., Financial News Network, Inc., INTERCO Incorporated and Public Service Company of New Hampshire. Furthermore, Kramer Levin's broad-based practice, which includes expertise in the areas of corporate and commercial law, litigation, tax, intellectual property, employee benefits and real estate, will permit it to represent fully the interests of the Committee in an efficient and effective manner. Mr. Owen expects Kramer Levin to render any legal services as the Committee may consider desirable to discharge the Committee's responsibilities and further the interests of the Committee's constituents in these cases. In addition to acting as primary spokesman for the Committee, it is expected that Kramer Levin's services will include, without limitation, assisting, advising and representing the Committee with respect to the following matters: A. The administration of these cases and the exercise of oversight with respect to the Debtors' affairs including all issues arising from the Debtors, the Committee or these Chapter 11 cases; B. The preparation on behalf of the Committee of necessary applications, motions, memoranda, orders, reports and other legal papers; C. Appearances in Court and at statutory meetings of creditors to represent the interest of the Committee; D. The negotiation, formulation, drafting and confirmation of a plan or plans of reorganization and matters related thereto; E. Such investigation, if any, as the Committee may desire concerning, among other things, the assets, liabilities, financial condition and operating issues concerning the Debtors that may be relevant to these chapter 11 cases; F. Such communication with the Committee's constituents and others as the Committee may consider desirable in furtherance of its responsibilities; and G. The performance of all of the Committee's duties and powers under the Bankruptcy Code and the Bankruptcy Rules and the performance of such other services as are in the interests of those represented by the Committee. Mitchell A. Seider, a member of the law firm of Kramer Levin Naftalis & Frankel LLP, relates that the principal attorneys expected to represent the Committee in this matter and their current hourly rates are: Mitchell A. Seider $500 per hour Robert T. Schmidt $450 per hour In addition, other attorneys and paraprofessionals may from time to time provide services to the Committee in connection with these bankruptcy proceedings. The range of Kramer Levin's hourly rates for Kramer Levin's attorneys and legal assistants is as follows: Partners $440-$625 Counsel $435-$440 Associates $210-$435 Legal Assistants $150-$175 Kramer Levin's hourly billing rates are subject to periodic adjustments to reflect economic and other conditions. Mr. Seider assures the Court that Kramer Levin is a "disinterested person" within the meaning of section 101(14) of the Bankruptcy Code. Neither Kramer Levin nor its professionals have any connection with the Debtors, the creditors or any other party-in-interest. Kramer Levin does not hold or represent any interest adverse to the Committee in the matters for which it is to be retained. Kramer Levin, however, currently represents or in the past has represented these parties-in-interests in matters unrelated to these cases: A. Shareholder: Alliance Capital Management LP, and JP Morgan Fleming Asset Management; B. Bondholder: American Express Financial Advisors Inc., Bear Stearns Asset Management, Blackrock Inc., Carpenters Pension Fund Massachusetts State, Connecticut General Life Insurance, Credit Suisse First Boston, Deutsche Asset Management, JP Morgan Fleming Asset Management, Los Angeles County Employees Retirement System, Metropolitan Life Insurance Co., Morgan Stanley Diversified Income Trust, Morgan Stanley High Income Advantage Trust II, Morgan Stanley High Yield Securities, Morgan Stanley Institutional Fund Tr. High Yield Port., Morgan Stanley Select Dimension Diversified Income, Morgan Stanley Universal High Yield Portfolio, Morgan Stanley Variable High Yield, MSDW High-Yield Fund, MSIF Trust Multi Asset Class Portfolio, Morgan Stanley Investment Management Inc., Northwestern Mutual Life Insurance Co., OFFIT Bank, Oppenheimer Funds Inc., Pacific Investment Management Co., Pilgrim High Yield Fund, Putnam Investments Inc., RBC Dominion Securities Corp., Redwood Capital Management, Salomon Smith Barney, Smith Barney Asset Management, Smith Barney Inc. Seg. Comm., Teachers Insurance and Annuity Association, UBS Warburg LLC, Unibank (Nordea), and UNUM Life Insurance Company of America/First UNIM Life Insurance Co.; C. Vendor: AT&T, COMPUSA, LeBoeuf Lamb Green & MacRae LLP, MCI Worldcom, Metromedia Fiber Net, Pirelli Cable Corp., SNET, Sprint, Telergy Network Serv, and WorldCom; D. Underwriter: Bank of America Securities, Bear Stearns & Co. Securities, Chase Securities Inc., CIBC World Markets, Donaldson Lufkin & Jenrette, First Union Capital Markets, First Union Securities Inc., Goldman Sachs & Co., and NationsBanc Montgomery Securities LLC; E. Committee Member: Bank of New York, Fidelity Investments, Fujitsu Network Communications, and Wilmington Trust Company; F. Lessor: Bellevue Associates, Chase Company, Crescent Real Estate, Cushman & Wakefield, First Union National Bank/Wachovia Bank, Guardian Life Insurance Company, KB Fund/CB Richard Ellis, Mack-Cali Realty LP, Mid America, PNC Bank N.A., and Prudential Insurance Co. of America; G. Professionals: Deloitte & Touche LLP. ----------------------------------------------------------------- [00041] DEBTORS' MOTION TO DETERMINE UTILITIES ADEQUATELY ASSURED ----------------------------------------------------------------- See prior entries at [00033] and [00022]. BellSouth Objects Paul M. Rosenblatt, Esq., at Kilpatrick Stockton LLP in Atlanta, Georgia, tells the Court that the Debtors' adequate assurance proposal raises questions as to whether these cases are exceptional cases. He asks if these cases are cases where adequate assurance can be satisfied by providing nothing more than what the Bankruptcy Code already provides to BellSouth. This is an administrative expense claim for post-petition services with promises of the Debtors to timely pay for those post-petition services. The Debtors argue that these are in fact such cases. BellSouth disagrees, and argues that something more than what is already required under the Bankruptcy Code is required to provide BellSouth with adequate assurance pursuant to Section 366. The Debtors propose to provide adequate assurance to BellSouth in the form of the Debtors' agreement to pay for services rendered post-petition, and that such services will be administrative expenses. Mr. Rosenblatt submits that this proposal is nothing more than what is provided for in the Bankruptcy Code, and is less than what was provided in Caldor. Although the Debtors propose to allow BellSouth to seek additional adequate assurance, such a proposal does not provide any adequate assurance to BellSouth, and rewrites the provisions of Section 366. Mr. Rosenblatt notes that the Caldor court did not unequivocally hold that an administrative expense priority claim is equal to adequate assurance. It did not hold that a timely pre-petition payment history was sufficient as the only factor to warrant adequate assurance in the form of an administrative expense claim. Rather, the Caldor court arrived at its conclusion after analyzing the specific facts in the case. Only after conducting an evidentiary hearing and finding that the Caldor debtors exhibited various qualities, did the Caldor court arrive at its conclusion. In the case at bar, the Debtors make no representation either in the Motion or in the Affidavit of Edward E. Babcock Pursuant to Local Bankruptcy Rule 1007-2 about having significant cash on hand. The Debtors are currently seeking approval of a proposed debtor-in-possession loan in the amount of $125 million. However, Mr. Rosenblatt believes that the Proposed DIP Loan should not be counted as a supporting factor in determining adequate assurance for BellSouth, particularly considering the multitude of potential defaults thereunder. The Debtors are absolutely dependent upon the Proposed DIP Loan to fund their operations and restructuring costs. In fact, "An immediate and critical need exists for the Debtors to obtain funds in order to continue the operation of their businesses. Without such funds the Debtors will not be able to pay their employees and other critical operating expenses, resulting in an immediate cessation of the Debtor's businesses and causing irreparable harm to the Debtors' estates. The ability of the Debtors to finance their operations and the availability to them of sufficient working capital and liquidity through the incurrence of new indebtedness for borrowed money, and other financial accommodations, are essential to the confidence of the Debtors' vendors and suppliers and their customers and to the preservation and maintenance of the going concern value of the Debtors' estates." In addition, the Adelphia Debtors were unable to obtain a credit facility on an unsecured basis. Mr. Rosenblatt observes that the Adelphia Debtors are relying exclusively upon their Proposed DIP Loan to pay BellSouth for post-petition services. The Proposed DIP Loan has over 13 categories of conditions, 10 categories of representation and warranties, eight reporting covenants, 11 affirmative covenants and seven negative covenants. In fact, there are 17 categories of defaults, making the Proposed DIP Loan a potential mine field. Should the Adelphia Debtors default under the Proposed DIP Loan, based upon findings already made by this Court, BellSouth can be assured that its post-petition invoices will not be paid. Such a precarious situation cannot be the basis of an adequate assurance representation to BellSouth. The Caldor debtors presented "significantly less risk than other customers of the Utilities." However, this is not the case with the Adelphia Debtors. In fact, Mr. Rosenblatt believes that the Debtors present significantly more risk to BellSouth than other customers of BellSouth. This is vividly illustrated in that the Debtors were past due on pre-petition invoices at the time of the Chapter 11 filings. The Debtors, however, are certainly not BellSouth's best risk customer. Even before the Debtors filed their Chapter 11 petitions, BellSouth identified risk in payment of the Debtors' outstanding obligations owed to BellSouth as the Debtors failed to maintain an established credit rating with BellSouth. Another factor in determining that the utility companies had adequate assurance in Caldor was the utilities' greater ability to monitor the financial strength of the Caldor debtors. The Adelphia Debtors do not contend in their Motion that BellSouth or any other utility has any greater ability than other creditors to monitor the Adelphia Debtors' financial strength. The Adelphia Debtors fail to propose any type of enhanced financial reporting to BellSouth for adequate assurance purposes. In Caldor, the bankruptcy court specifically determined that the Caldor debtors were solvent and were "operating out of the proceeds of their operations." On the other hand, Mr. Rosenblatt points out that the Adelphia Debtors appear to be insolvent, based upon the representations in the Babcock Affidavit that "[a]s of December 31, 2001, the Debtors' unaudited combined financial statements reflected assets of approximately $944.75 million and liabilities of approximately $1.44 billion." The Babcock Affidavit also discloses that the Adelphia Debtors anticipate significant negative cash flow during the 30-day period following the Chapter 11 filings, estimating cash disbursements of $31.8 million and cash receipts of $14.1 million during that period. Furthermore, the Adelphia Debtors are wholly dependent upon their Proposed DIP Loan. Thus, the Adelphia Debtors will not be "operating out of the proceeds of their operations." The Caldor debtors had a "solid pre-petition payment history." In their Motion, the Adelphia Debtors contend that they "timely paid their utility bills prior to the commencement of their chapter 11 cases" and that they have an "excellent pre-petition payment history with the Utility Companies." Mr. Rosenblatt asserts that these contentions are incorrect with respect to BellSouth. The Debtors were consistently delinquent in paying their bills to BellSouth at the time of the Chapter 11 filings. On average, the Debtors were 30 or more days past due on paying BellSouth's pre- petition invoices. That explains why BellSouth has a pre-petition claim in the amount of $8 million, representing approximately $2.5 million in monthly charges. These charges are for (i) the month of invoices for which the Debtors were past due (January 2002), (ii) the month of invoices for which the Debtors were not past due (February 2002), and (iii) the month of invoices which had not yet been billed (March 2002). In Caldor, the bankruptcy court found that the utilities generally had not required deposits from the Caldor debtors in the past. Unlike the Caldor debtors, Mr. Rosenblatt avers that BellSouth had specifically requested on multiple occasions prior to the Chapter 11 filings, dating back to early 2001, that the Debtors and non-debtor affiliates post a pre-petition deposit. The Debtors and non-debtor affiliates consistently and vigorously contested that they should post a pre-petition deposit. The pre- petition deposit dispute resulted in the filing by BellSouth of a specific public service commission proceeding to resolve the issue. The Debtors and non-debtors affiliates never paid the requested pre-petition deposit. Despite the Debtors' contentions that BellSouth did not need a deposit to protect its interests with respect to the Debtors, time has now shown that BellSouth was in fact correct is seeking a pre-petition deposit. The Adelphia Debtors support their adequate assurance proposal with four factors. However, none of these four factors support their proposal of providing adequate assurance to BellSouth. Each of the four factors are addressed below: A. Adelphia Factor One - The Debtors state that they have "an excellent pre-petition payment history with [BellSouth]." BellSouth disputes this contention and addresses this issue. In sum, the Adelphia Debtors were on average 30 or more days past due on paying pre-petition invoices. B. Adelphia Factor Two - The Adelphia Debtors state that there are no significant defaults or arrearages with respect to BellSouth, other than payment interruptions caused by the Chapter 11 filings. BellSouth disputes this contention. In sum, because of the Adelphia Debtors' pre-petition payment history, BellSouth is owed approximately $8,000,000 as of the petition date, including approximately $2,500,000 in past due amounts. C. Adelphia Factor Three - The Adelphia Debtors will pay all undisputed post-petition obligations as billed and when due. Because of the Adelphia Debtors' lack of unencumbered resources, the fact that they are balance sheet insolvent, that they are cash flow negative, and that they are wholly dependent on a precarious post-petition financing arrangement to satisfy monthly cash flow requirements, the Debtors' promise to pay does not amount to adequate assurance. Under this scenario, BellSouth could be exposed to at a minimum several months of unpaid post-petition invoices, in addition to the several month of unpaid pre-petition invoices. Even if the Debtors changed their pre-petition payment practice and timely paid post-petition invoices on 30 days terms, BellSouth will be exposed to two month of service, or $5 million at any one time. Couple that with the time it would take to notice a default and terminate service, BellSouth has exposure for over four months of post-petition service, or an additional $10 million. D. Adelphia Factor Four - The Debtors "have obtained interim Post-petition financing in the aggregate amount of $125 million, which should constitute adequate assurance for [BellSouth and the other utilities] . . . ." BellSouth disputes this contention and addresses this issue under Caldor Factor One above. The Debtors' adequate assurance proposal includes a provision by which BellSouth and other utilities can request "additional assurance" in the form of deposits or other security. In the case of BellSouth, Mr. Rosenblatt argues that the Debtors' adequate assurance proposal fails to provide any adequate assurance, so the use of the phrase "additional assurance" is misleading. The proposed procedure is also unfair and is at odds with Section 366(b). The proposal would require utilities to request adequate assurance from the Debtors within 25 days of entry of a utilities order, or presumably such request would be denied. The proposal fails to take into consideration that circumstances governing adequate assurance may change in the future. The proposal could be read to prohibit utilities from seeking to modify their adequate assurance at a later date should circumstances change, a procedure which is directly contrary to the language of Section 366(b) which says (". . . after notice and a hearing, the court may order reasonable modification . . . [of the] adequate assurance . . ."). Mr. Rosenblatt adds that the procedure is also unfair in that it would place control of adequate assurance issues not with the utility, or even with the Court, but with the Debtors, contrary to the explicit language of Section 366(b). Not only would the Debtors be the only party authorized to file an adequate assurance motion, but the Debtors would not have to do so until after a presumably lengthy negotiation process, which would likely take months from the time the utility requested "additional assurance" under the proposed procedures. This provision is inappropriate, and fails to take into consideration the exigencies that occur in bankruptcy cases. Section 366 adequate assurance issues need to be addressed now in these cases, not several months from now. Under the proposed procedures, Mr. Rosenblatt fears that it could be several months or more into the Debtors' bankruptcy cases before a final order is entered by the Court granting BellSouth "additional assurance." At that point, BellSouth will have provided $10 million or more of post-petition services to the Debtors while BellSouth will be prohibited from discontinuing service on account of adequate assurance issues. Prohibiting utilities from altering or disconnecting service based on adequate assurance issues where the Debtors and not the utility has selected the terms of adequate assurance is contrary to the specific language in Section 366(b), and fails to provide an incentive to the Debtors to expeditiously resolve adequate assurance issues. Mr. Rosenblatt asserts that adequate assurance is not satisfied in these cases through the Debtors' mere promise to pay coupled with an administrative expense claim. The only form of "adequate assurance" the Debtors are providing to BellSouth is the Debtors' promise to pay for post-petition services. Since BellSouth is being treated no differently than any other potential administrative claimant, and the Debtors are proposing nothing to differentiate any other administrative claimant from BellSouth, the Debtors are arguing that there is essentially no risk of non- payment for any administrative claimant in these cases. The Debtors specifically reference various bankruptcy cases in which the adequate assurance proposals sought in these cases were granted in other cases. Most Chapter 11 cases are commenced with the best of intentions, Mr. Rosenblatt explains. However, he continues, it is too early in these cases to know whether they will be administratively solvent, or a situation where the Debtors have a successful Chapter 11 outcome. Mr. Rosenblatt cites another major telecommunications Chapter 11 case pending in the Southern District of New York. In this case an administrative expense priority claim was on the first day deemed sufficient for adequate assurance to utilities. However, this case may now be administratively insolvent. As a result, BellSouth and other utility and non-utility vendors have not yet received, and may not receive, payment for services provided post-petition to the debtor. Critical in these cases is the time it will take BellSouth to effect a termination of services to the Debtors. Because of the complexity of the services provided by BellSouth to the Adelphia Debtors, and governance by public service commissions, Mr. Rosenblatt informs the Court that it will take BellSouth over two months to complete a termination of the services provided to the Debtors under standard termination procedures. The FCC and state public service commissions often vigorously oppose any type of accelerated termination proceedings. Even with a two-month deposit, BellSouth could still suffer an additional two months of post-petition exposure upon a termination of services. BellSouth is at risk for over $10,000,000 on a post-petition basis alone, and when combined with the existing pre-petition balances, BellSouth is at risk for close to $18,000,000. Based on the specific facts of these cases, BellSouth does not believe that adequate assurance provisions short of a 2-month deposit will provide BellSouth with adequate assurance. Mr. Rosenblatt contends that BellSouth's deposit request is supported by the facts of these cases, case law, Section 366 of the Bankruptcy Code and tariffs governing the provision of services by BellSouth to the Adelphia Debtors. BellSouth requests that the Court order and direct the Debtors to provide to them with a cash or equivalent deposit for $5 million. This deposit will be held and applied to unpaid post-petition services, which amount represents approximately two months of BellSouth services to the Debtors. Should the Court deny BellSouth's deposit request, in the alternative to a two-month deposit, adequate assurance may be achievable in these cases through a combination of setoff or "netoff" rights. These would be combined with bi-weekly or monthly pre-payments further coupled with an expedited termination proceeding that would allow for the termination of services to be accomplished on an expedited basis. Based upon experience in other cases, BellSouth believes that the expedited termination of services could occur no earlier than upon 31 days notice. *** End of Issue No. 5 *** ------------------------------------------------------------------------- Peter A. Chapman peter@bankrupt.com http://bankrupt.com ------------------------------------------------------------------------- Recommended Reading: Professor Stuart Gilson's newest title, "Creating Value Through Corporate Restructuring: Case Studies in Bankruptcies, Buyouts, and Breakups." List Price: $79.95 -- Discounted to $55.96 at http://amazon.com/exec/obidos/ASIN/0471405590/internetbankrupt -------------------------------------------------------------------------