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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

**(MarkOne)**

** **

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2009**

 

**or**

** **

o          **TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                  to            **

 

**Commission File Number: 000-53209**

 

**Adelphia Recovery Trust**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **11-6615508**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**919 North Market Street, 17****th**** Floor, PO Box 8705**

**Wilmington, Delaware**

(Address of principal executive offices) (Zip Code)

 

**302-652-4100 Attn: Dean Ziehl**

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.    x Yes No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate website, if any, every interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).    o Yes No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-accelerated  filer x                       |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                         |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).    o Yes No x

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Sections 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court.    o Yes No o

 

 

 

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ADELPHIA RECOVERY TRUST

FORM 10-Q

INDEX

 
| PART I — FINANCIAL INFORMATION |
|------------------------------------------|
|                                     |   |
|                                     | ITEM 1. FINANCIAL STATEMENTS  (unaudited) |
|                                     |   |
|                                     |   | Condensed Balance Sheets as of  September 30, 2009 and December 31, 2008 |
|                                     |   |   |
|                                     |   | Condensed Statements of  Operations for the three months ended September 30, 2009 and 2008 and  the nine months ended September 30, 2009 and 2008 |
|                                     |   |   |
|                                     |   | Condensed Statements of Cash  Flows for the nine months ended September 30, 2009 and 2008 |
|                                     |   |   |
|                                     |   | Notes to Condensed Financial  Statements |
|                                     |   |   |
|                                     | ITEM 2. MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|                                     |   |
|                                     | ITEM 4. CONTROLS  AND PROCEDURES |
|                                     |   |
| PART II                             |
|                                     |   |
|                                     | ITEM 1. LEGAL  PROCEEDINGS |
|                                     |   |
|                                     | ITEM 1A. RISK FACTORS |
|                                     |   |
|                                     | ITEM 6. EXHIBITS |
|                                     |   |
| SIGNATURES                               |
|                                     |   |
| CERTIFICATIONS                           |

 

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**PART 1 - FINANCIALINFORMATION**

 

Item1   Financial Statements

 

**AdelphiaRecovery Trust**

**Unaudited Condensed Balance Sheets**

** **
| ** **                            | ** ** | **As of  September 30, 2009** | ** **        | **As of  December 31, 2008** | ** ** |
|---------------------------------------|------------|------------------------------------|-------------------|-----------------------------------|------------|
|                                  |       |                               |              |                              |       |
| **Assets**                            |       |                               |              |                              |       |
| Cash  and cash equivalents            |       | $                                  |  137,370,378 |                              | $          |  161,057,351 |   |
| Prepaid  assets                       |       | 761,142                            |              | 374,356                           |       |
| Note  and accrued interest receivable |       | 5,681,299                          |              | 5,388,781                         |       |
| Total  assets                         |       | $                                  |  143,812,819 |                              | $          |  166,820,488 |   |
|                                  |       |                               |              |                              |       |
| **Liabilities and net assets**        |       |                               |              |                              |       |
| Accrued  expenses                     |       | $                                  |  5,007,807   |                              | $          |  550,871 |   |
| Total  liabilities                    |       | 5,007,807                          |              | 550,871                           |       |
|                                  |       |                               |              |                              |       |
| Net  assets                           |       | 138,805,012                        |              | 166,269,617                       |       |
|                                  |       |                               |              |                              |       |
| **Total liabilities and net assets**  |       | $                                  |  143,812,819 |                              | $          |  166,820,488 |   |

 

See accompanying notes tothe condensed financial statements.

 

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**AdelphiaRecovery Trust**

**Unaudited Condensed Statements ofOperations**

 
| ** **                               | ** ** | **For the  quarter ended  September 30, 2009** | ** **        | **For the  quarter ended  September 30, 2008** | ** ** | **For the nine  months ended  September 30, 2009** | ** ** | **For the nine  months ended  September 30, 2008** | ** **        |
|------------------------------------------|------------|-----------------------------------------------------|-------------------|-----------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|-------------------|
|                                     |       |                                                |              |                                                |       |                                                    |       |                                                    |              |
| **Revenues**                             |       |                                                |              |                                                |       |                                                    |       |                                                    |              |
| Litigation  - court approved settlements |       | $                                                   |  —      |                                                | $          |  —                                            |       | $                                                       |  —      |   | $ |  200,206 |   |
| Litigation  - other settlements          |       | —                                              |              | —                                              |       | —                                                  |       | 910,194                                                 |              |
| Interest  income                         |       | 153,123                                             |              | 1,034,219                                           |       | 681,289                                                 |       | 3,825,198                                               |              |
| Total  revenues                          |       | 153,123                                             |              | 1,034,219                                           |       | 681,289                                                 |       | 4,935,598                                               |              |
|                                     |       |                                                |              |                                                |       |                                                    |       |                                                    |              |
| **Operating expenses**                   |       |                                                |              |                                                |       |                                                    |       |                                                    |              |
| General  and administrative expenses     |       | 465,213                                             |              | 481,901                                             |       | 1,675,010                                               |       | 1,930,382                                               |              |
| Professional  expenses - litigation      |       | 11,338,780                                          |              | 5,589,722                                           |       | 26,262,289                                              |       | 17,577,987                                              |              |
| Professional  expenses - administrative  |       | 37,927                                              |              | 199,329                                             |       | 208,595                                                 |       | 1,864,096                                               |              |
| Total  operating expenses                |       | 11,841,920                                          |              | 6,270,952                                           |       | 28,145,894                                              |       | 21,372,465                                              |              |
|                                     |       |                                                |              |                                                |       |                                                    |       |                                                    |              |
| **Net loss**                             |       | $                                                   |  (11,688,797 | )                                                   | $          |  (5,236,733                                        | )          | $                                                       |  (27,464,605 | ) | $ |  (16,436,867 | ) |

 

See accompanyingnotes to the condensed financial statements.

 

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**AdelphiaRecovery Trust**

**Unaudited Condensed Statements ofCash Flows**

 
| ** **                                         | ** ** | **For the nine  months ended  September 30,  2009** | ** **        | **For the nine  months ended  September 30,  2008** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|-------------------|----------------------------------------------------------|------------|
|                                               |       |                                                     |              |                                                     |       |
| **Operating activities**                           |       |                                                     |              |                                                     |       |
| Net  loss                                          |       | $                                                        |  (27,464,605 | )                                                        | $          |  (16,436,867 | ) |
| Changes  in operating assets and liabilities:      |       |                                                     |              |                                                     |       |
| Prepaid  assets                                    |       | (386,786                                                 | )                 | (402,756                                                 | )          |
| Note  and accrued interest receivable              |       | (292,518                                                 | )                 | (292,518                                                 | )          |
| Accrued  expenses                                  |       | 4,456,936                                                |              | (5,953,035                                               | )          |
| Net  cash used by operating activities             |       | (23,686,973                                              | )                 | (23,085,176                                              | )          |
|                                               |       |                                                     |              |                                                     |       |
| **Net change in cash and cash equivalents**        |       | (23,686,973                                              | )                 | (23,085,176                                              | )          |
| **Cash and cash equivalents, beginning of period** |       | 161,057,351                                              |              | 189,684,573                                              |       |
| **Cash and cash equivalents, end of period**       |       | $                                                        |  137,370,378 |                                                     | $          |  166,599,397 |   |

 

See accompanying notes tothe condensed financial statements.

 

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ADELPHIA RECOVERY TRUST

 

Notes to the CondensedFinancial Statements — September 30, 2009 (Unaudited)

 

1                                          Background

 

TheAdelphia Recovery Trust (the “ART”) was formed as a Delaware statutorytrust pursuant to that certain First Modified Fifth Amended Joint Chapter 11Plan of Reorganization (the “Plan”) of Adelphia CommunicationsCorporation (“Adelphia”) and certain of its subsidiaries (collectivelythe “Debtor” ). The purpose of the ART is to prosecute the variouscauses of action transferred to the ART pursuant to the Plan (the “Causes ofAction”) and distribute to the owners (the “Holders”) of theinterests in the ART (“Interests”) the net proceeds of such Causes ofAction (“Distributions”), according to the relative prioritiesestablished pursuant to the Plan, subject to the retention of various amountsto fund the prosecution of those Causes of Action and operations of the ART.Pursuant to the Plan, in addition to the Causes of Action, Adelphia transferred$25 million in cash to the ART, in connection with its formation, in order tofund the initial expenses of operation.

 

Asset forth in the Plan, the ART is administered by five trustees (the “Trustees”)who are responsible for carrying out the purposes of the ART. Quest TurnaroundAdvisors, L.L.C. (“Quest”) is the plan administrator (in such capacity,the “Plan Administrator”) of Adelphia. Quest and Adelphia together haveagreed to provide certain administrative services to the ART. In order tofacilitate the provision of such administrative services, the ART has appointedQuest as the trust administrator of the ART (in such capacity, the “TrustAdministrator”).

 

2                                          Basis ofPresentation

 

The accompanying interim unaudited condensedfinancial statements of the ART have been prepared in accordance with generallyaccepted accounting principles in the United States of America for interimperiods (“US GAAP”) and with the instructions to Form 10-Q.  As such, they do not include all of theinformation and disclosures required by US GAAP for complete financialstatements.  In the opinion of theTrustees, all adjustments (consisting of normal recurring accruals) considerednecessary for a fair presentation of the interim unaudited condensed financialstatements have been included.  Thesecondensed financial statements should be read in conjunction with the ART’saudited financial statements for the year ended December 31, 2008 includedin its Form 10-K filed with the Securities and Exchange Commission (“SEC”)on March 10, 2009. Interim results are not necessarily indicative of theresults for the complete fiscal year. The unaudited condensed balance sheet asof December 31, 2008 was derived from the audited financial statements forthe year then ended.

 

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3                                          Related PartyTransactions

 

The Trust Administrator and Adelphia continue toprovide administrative support to the ART including maintaining electronic dataand paper documents used in prosecuting the Causes of Action, financialreporting and support for Distributions when they might occur (includingmaintenance of data related to the implementation of Plan provisions). Theseservices have and will continue to be provided at no cost to the ART under theterms of various agreements between the Trust Administrator and Adelphia. TheART financial statements do not reflect any amounts for these services.

 

4                                          Causes ofAction and Contingencies

 

Except as set forth below, there have been nomaterial developments in the legal proceedings described in the ART’s Form 10-Kas filed on March 10, 2009.

 

BankLitigation

 

On June 18, 2008, the District Court dismissedcertain fraudulent transfer claims, avoidable preference claims, and equitablesubordination and disallowance claims.  Afinal judgment was entered on those claims as well as certain claims dismissedin 2007 by the Bankruptcy Court. The ART filed a timely notice of appeal andthe appeal is being briefed by the parties in the Second Circuit Court ofAppeals.

 

Withrespect to the remaining pending claims, fact discovery has closed and the partiesare engaged in expert discovery and pretrial briefing. Under the currentscheduling order, the trial on the remaining claims will commence on April 8,2010.

 

Atthis time, the ART cannot predict the outcome of these proceedings or estimatethe possible financial effect of these proceedings on the ART’s financialstatements.

 

MotorolaLitigation

 

OnAugust 22, 2007, plaintiffs moved for summary judgment to disallow aportion  of the defendants’ claimsagainst certain Adelphia debtors. Plaintiffs’ motion is pending. Trial on theclaims for equitable subordination and equitable disallowance was held on October 26-30,2009. The court has those claims under submission and has scheduled post trialbriefing. The parties currently are engaged in mediation but there is noassurance that any agreement will be reached.

 

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Sabres Litigation

 

OnFebruary 17, 2009, the District Court for the Western District of New Yorkissued a final judgment granting a permanent injunction against the prosecutionof fraudulent conveyance claims against Key Bank N.A., Fleet National Bank, andHSBC Bank USA, N.A. (collectively, the “Sabres Banks”) by the ART in the BankLitigation. The fraudulent conveyance claims against the Sabres Banks involveAdelphia’s purchase of and payments on certain loans made by the Sabres Banksto the Buffalo Sabres hockey team. The ART filed a timely notice of appeal, andthe appeal has been briefed by the parties in the Second Circuit Court ofAppeals. Oral argument was held on November 4, 2009.

 

Atthis time, the ART cannot predict the outcome of these proceedings or estimatethe possible financial effect of these proceedings on the ART’s financialstatements.

 

Prestige Litigation

 

Factdiscovery concluded on September 18, 2009.   On October 22, 2009, the ART filed amotion seeking leave to amend the complaint to conform the pleadings to theevidence developed during fact discovery. The proposed amendments do not seek to add any new claims or parties.That motion is pending.

 

OnOctober 27, 2009, Defendants moved for summary judgment on all of ART’sclaims.  The summary judgment motion isto be fully briefed and submitted to the Court by February 1, 2010.  Expert discovery is stayed pending a decisionon the summary judgment motion.

 

Notrial date has been set in the case.

 

Atthis time, the ART cannot predict the outcome of these proceedings or estimatethe possible financial effect of these proceedings on the ART’s financialstatements.

 

FPL Litigation

 

Trialhas been scheduled for June 6, 2011.

 

Atthis time, the ART cannot predict the outcome of these proceedings or estimatethe possible financial effect of these proceedings on the ART’s financialstatements.

 

LitigationIndemnification Fund Litigation

 

Discoveryrelated to the JV LIF Claims is pending and an evidentiary hearing on themotion has not been set.

 

Atthis time, the ART cannot predict the outcome of these proceedings or estimatethe possible financial effect of these proceedings on the ART’s financialstatements.

 

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5                                          Fair Value ofFinancial Instruments

 

As of September 30, 2009, the fair value ofcash and cash equivalents and accrued expenses approximates their carryingvalues using active market data (i.e. Level 1, as defined). Further, the fairvalue of the note receivable and accrued interest has been determined usingunobservable inputs (i.e. Level 3, as defined) and approximates $4.3 million asof September 30, 2009 and $4.2 million as of December 31, 2008. Thecarrying values were $5.7 million as of September 30, 2009 and $5.4million as of December 31, 2008. The note bears 8% simple interest and isrecourse only to the proceeds of a $28 million life insurance policy on Mr. LeonardTow and his wife.

 

6                                          SubsequentEvents

 

Subsequentevents have been evaluated through November 6, 2009, the date theaccompanying financial statements were issued. There have been no subsequentevents that would be material to the financial statements of the ART, includingCause of Action settlements or judgments or Distributions or decisionsconcerning future Distributions.

 

Item 2                                       ManagementDiscussion and Analysis

 

Overview

 

TheAdelphia Recovery Trust was formed as a Delaware statutory trust pursuant tothat certain First Modified Fifth Amended Joint Chapter 11 Plan of Reorganizationof Adelphia and certain of its subsidiaries. The purpose of the ART is toprosecute the various Causes of Action transferred to the ART pursuant to thePlan and distribute to the owners of the Interests in the ART the net proceedsof such Causes of Action, according to the relative priorities establishedpursuant to the Plan, subject to the retention of various amounts to fund theprosecution of those Causes of Action and operations of the ART. Pursuant tothe Plan, in addition to the Causes of Action, Adelphia transferred $25 millionin cash to the ART in connection with its formation in order to fund theinitial expenses of operation.

 

Adelphiaand certain of its subsidiaries filed for Chapter 11 bankruptcy protection in June 2002.During the bankruptcy, on July 31, 2006 the assets of Adelphia were soldfor a combination of cash and stock in Time Warner Cable, Inc. (“TWC”).In late 2006, representatives of various groups of creditors reached agreementon the allocation and distribution of the cash, TWC stock, other proceeds fromthe sale of estate assets and relative priorities to any Distributions arisingfrom the Causes of Action contributed to the ART. This agreement was embodiedin the Plan, which was confirmed in January 2007 and became effective on February 13,2007 (the “Effective Date”). Under the Plan, the creditors and equityholders of Adelphia and certain of its subsidiaries received one or more of thefollowing: cash, TWC stock, rights to future Distributions up to payment infull and the Interests.

 

TheART will dissolve upon the earlier of the resolution of all Causes of Actionand the distribution of all of its assets to the Holders or the fifthanniversary of its creation. However, the Bankruptcy Court may approve anextension of the term if deemed necessary

 

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for the purposes ofresolving the Causes of Action and distributing the net proceeds to Holders.

 

Asset forth in the Plan and the Declaration of Trust for the ART, as amended (the“Declaration”), the ART is administered by five Trustees. These Trusteesare authorized to carry out the purposes of the ART. In particular, theTrustees are responsible for protecting, maintaining, liquidating to cash andmaximizing the value of the Causes of Action contributed to the ART, whether bylitigation, settlement or otherwise.

 

Distributions

 

Pursuantto the Plan and the Declaration, Distributions to Holders are net of any costsand expenses incurred by the ART in connection with administering, litigatingor otherwise resolving the various Causes of Action. Such costs and expensesmay also include fees and expenses of the Trustees, premiums for directors andofficers insurance, and other insurance and fees and expenses of attorneys andconsultants. Distributions will be made only from assets of the ART and only tothe extent that the ART has sufficient assets (over amounts retained forcontingent liabilities and future costs and expenses, among other things) tomake such payments in accordance with the Plan and the Declaration. NoDistribution is required to be made to any Holder unless such Holder is toreceive in such Distribution at least $25.00 or unless such Distribution is thefinal Distribution to such Holder pursuant to the Plan and the Declaration.

 

Distributionswill be made at the sole discretion of the Trustees in accordance with theprovisions of the Plan and the Declaration. As of the date hereof, the Trusteeshave determined the present best course of action is to retain the existingcash in reserve to administer the ART and fund the prosecution of the Causes ofAction. Consequently, there have been no Distributions through the filing dateof this Form 10-Q and none have been planned.

 

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Asof September 30, 2009, the number of Interests outstanding in each serieseligible to receive a Distribution is as follows:

 
| **Series of Interests:** | ** ** | **As of September 30, 2009** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| Series RF                     |       | 115,000,000                                      |       |
| Series Arahova                |       | 722,639,681                                      |       |
| Series FrontierVision         |       | 86,600,001                                       |       |
| Series FPL                    |       | 25,575,129                                       |       |
| Series Olympus                |       | 17,000,001                                       |       |
| Series ACC-1                  |       | 4,839,988,165                                    |       |
| Series ACC-2                  |       | 281,933,289                                      |       |
| Series ACC-3                  |       | 119,430,302                                      |       |
| Series ESL  (1)               |       | 17                                               |       |
| Series ACC-4                  |       | 1,790,968,272                                    |       |
| Series ACC-5  (1)             |       | 458                                              |       |
| Series ACC-6B                 |       | 150,000,000                                      |       |
| Series ACC-6B1  (1)           |       | 3                                                |       |
| Series ACC-6D                 |       | 575,000,000                                      |       |
| Series ACC-6D1  (1)           |       | 229,004                                          |       |
| Series ACC-6E/F               |       | 935,812,456                                      |       |
| Series ACC-6E/F1  (1)         |       | 277,210                                          |       |
| Series ACC-7                  |       | 217,022,640                                      |       |
| Series ACC-7A  (1)            |       | 1,537,766,752                                    |       |

 

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(1) For each of these categories of Interests(which include disputed claims), each holder of a disputed claim was awardedone Interest. The number of Interests is expected to change based on theresolution of disputed claims.

** **

**Results of Operations**

 

TheART operates pursuant to the Plan and the Declaration. The ART was formed as aDelaware statutory trust to prosecute various claims originally owned byAdelphia and, if any of the prosecutions are successful or are settled in amanner which provides economic benefit to the ART, to distribute excessproceeds over amounts retained to fund the prosecution of the Causes of Actionand operations of the ART, to the Holders. It is not possible to determine atthis time if there will be any excess proceeds available for a Distribution.

* *

*Third Quarter 2009 vs Third Quarter 2008*

 

Totalrevenues decreased to approximately $0.2 million in the third quarter of 2009.The decrease of $0.9 million was caused by decreased interest income in thethird quarter of 2009 compared to the third quarter of 2008. The decreasedinterest income was caused most significantly by a reduction in investmentyields and to a lesser extent from lower average invested cash balances fromthe third quarter of 2008 to the third quarter of 2009. There were nosignificant differences in the investment vehicles utilized by the ART betweenthe third quarter of 2008 and the third quarter of 2009. There were nosettlements or related revenues for the third quarter of 2009 or for the thirdquarter of 2008.

 

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Totaloperating expenses for the ART increased to $11.8 million in the third quarterof 2009 from $6.3 million in the third quarter of 2008.  The increase of $5.5 million was caused byincreased professional litigation costs of $5.7 million in the third quarter of2009 versus the third quarter of 2008. This increase was slightly offset bydecreases in professional administrative costs of $0.2 million. General andadministrative costs showed a slight decrease when comparing the third quarterof 2009 to the third quarter of 2008.

 

Professionallitigation costs increased in the third quarter of 2009 compared to the thirdquarter of 2008 by $5.7 million due to increased professional activity relatedto the Bank Litigation and other Causes of Action.

 

Professionaladministrative costs decreased $0.2 million in the third quarter of 2009compared to the third quarter of 2008. The decreased costs in the third quarterof 2009 from the third quarter of 2008 relate primarily to reduced costs forART regulatory compliance and professional administration costs.

 

Generaland administrative costs were slightly decreased in the third quarter of 2009when compared to the third quarter of 2008. The ART experienced reduced costsin the third quarter of 2009 compared to the third quarter of 2008 for bankservices, insurance, and regulatory compliance but had offsetting increasedcosts for audit and valuation services over the same timeframe.

 

Asa result of the decrease in total revenues of $0.9 million and the increase intotal operating expenses of $5.5 million in the third quarter of 2009 comparedto the third quarter of 2008, the net loss of $11.7 million for the quarterended September 30, 2009 was approximately $6.4 million higher than thenet loss for the quarter ended September 30, 2008.

* *

*Nine months ended September 30,2009 versus the Nine months ended September 30, 2008*

 

Totalrevenues decreased to $0.7 million for the nine months ended September 30,2009 compared to $4.9 million for the nine months ended September 30,2008. The decrease of $4.2 million was caused by decreased settlement revenuesof $1.1 million and decreased interest income of $3.1 million for the ninemonths ended September 30, 2009 compared to the nine months ended September 30,2008.

 

Therewere no settlements or related revenues for the nine months ended September 30,2009 while the nine months ended September 30, 2008 included courtapproved Tow settlement proceeds of $0.2 million and other settlement revenueof $0.9 million, including settlement revenue from a previous Adelphia vendor.Both nine month periods ended September 30, 2009 and September 30,2008 reflect interest income from the invested cash balances of the ART.Interest income decreased due to lower investment yields and to a lesser extentdecreased cash balances.

 

Totaloperating expenses for the ART increased to $28.1 million for the nine monthsended September 30, 2009. The increase of $6.8 million was caused byincreased professional litigation costs of $8.7 million for the nine monthsended September 30, 2009

 

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compared to the nine monthsended September 30, 2008. This increase was offset by decreases inprofessional administrative costs of $1.7 million and general andadministrative costs of $0.2 million for the nine months ended September 30,2009 versus the nine months ended September 30, 2008.

 

Professionallitigation costs have increased for the nine months ended September 30,2009 by $8.7 million primarily due to increased activity related to the BankCause of Action. The increased activity caused higher professional fees of $8.3million for the nine months ended September 30, 2009 compared to the ninemonths ended September 30, 2008. Also, professional litigation costsincreased $0.4 million for the nine months ended September 30, 2009compared to the nine months ended September 30, 2008 due to areclassification of certain professional fees. The reclassification did not change total operating expenses or netincome in either period.

 

Professionaladministrative costs decreased $1.7 million for the nine months ended September 30,2009 compared to the nine months ended September 30, 2008. The decreasedcosts for the nine months ended September 30, 2009 from the nine monthsended September 30, 2008 relate primarily to decreased costs for ARTregulatory compliance matters and professional administration costs of $1.3million and decreased costs of $0.4 million related to the reclassificationdiscussed in the preceding paragraph.

 

Generaland administrative costs decreased by $0.2 million for the nine months ended September 30,2009 compared to the nine months ended September 30, 2008 due to decreasesin total compensation and expenses paid to the ART Trustees as well as ARTcosts for bank services, insurance and audit fees.

 

Asa result of the decrease in total revenues of $4.2 million and the increase intotal operating expenses of $6.8 million for the nine months ended September 30,2009 compared to the nine months ended September 30, 2008, the net loss of$27.5 million for the nine months ended September 30, 2009 was $11.0million higher than the net loss for the nine months ended September 30,2008.

** **

**FinancialCondition and Cash Flows**

 

TheART’s sources of liquidity are from (a) the $25 million transferred to theART by Adelphia pursuant to the Plan on the Effective Date, (b) thesuccessful resolution of Causes of Action and (c) earnings on investedcash balances. Receipts from these sources are used to pay professional andoperating expenses of the ART and to fund Distributions to the Holders afterreserving cash required to pay future professional and operating expenses ofthe ART. The Trustees regularly evaluate the future financial needs of the ART.After careful evaluation of future financial needs, the Trustees have notdeclared any Distributions.

 

Basedupon cash and cash equivalent balances as of September 30, 2009 totaling$137.4 million and expected expenses and other potential disbursements, the ARTexpects to meet its obligations as they come due in the next twelve months. Dueto the uncertain nature of future revenues and expenses beyond twelve months,it is not possible to be certain that cash will be available to cover all thefuture financial needs of the ART. Incurring debt,

 

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creating contingentobligation agreements and seeking methods to reduce legal professional andadministrative costs are all strategies that could be undertaken to addressliquidity issues should they arise. These strategies could impact the ART’sability to maximize recoveries from settlements.

 

Thenature of the ART’s operation does not give rise to capital expenditures andthere are no current or expected commitments for capital expenditures in thenext twelve months. Should a need for capital expenditures arise, the ART wouldfund the requirement from existing assets. Additionally, the ART currently hasno long-term contracts or other long-term obligations.

 

Cashand cash equivalent balances at September 30, 2009 of $137.4 million are $23.7 million lower than as of December 31, 2008. This is due to operatingactivity including a net loss for the nine months ended September 30, 2009of $27.5 million, and an increase in prepaid assets of $0.4 million from theextension of ART insurance coverage offset by an increase of $4.5 million inaccrued expenses. The increase in accrued expenses is due to the timing ofvendor payments and due to a general increase in operating expenses. Non-cashoperating activities include the accrual of interest on a note receivableduring the nine months ended September 30, 2009 of $0.3 million. Availablecash is invested in either FDIC insured deposit accounts or a money market fundinvested in short-term U.S. Treasury and government agency securities.

** **

**Debt and Other Long-termObligations**

 

TheART has no debt, capital or operating lease or other long-term obligations andhas no current plans to incur such obligations.

** **

**Cautionary Statement Regarding Risks and UncertaintiesThat May Affect Future Results**

 

Thisreport on Form 10-Q contains forward-looking statements about thebusiness, financial condition and prospects of the ART. The actual results ofthe ART could differ materially from those indicated by the forward-lookingstatements because of various risks and uncertainties, including, withoutlimitation, the number of and proceeds from litigations and/or settlementswhich are successful, delays in obtaining proceeds, the amount of fundingrequired for the litigations and other operating expenses, economic conditions,changes in tax and other governmental rules and regulations applicable tothe ART, and other risks identified and described in the Form 10-K filedwith the SEC on March 10, 2009. These risks and uncertainties are beyondthe ability of the ART to control, and in many cases, the ART cannot predictthe risks and uncertainties that could cause its actual results to differmaterially from those indicated by the forward-looking statements. When used inthis report the words “believes,” “estimates,” “plans,” “expects,” and “anticipates”and similar expressions as they relate to the ART or its management areintended to identify forward-looking statements.

 

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Item 4                                                                Controls andProcedures

* *

*Evaluationof Disclosure Controls and Procedures*

 

TheART maintains disclosure controls and procedures that are designed to ensurethat information required to be disclosed in its reports filed under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms. Disclosure controls andprocedures include controls and procedures designed to ensure that suchinformation is accumulated and communicated to ART Trustees and the TrustAdministrator as appropriate, to allow timely decisions regarding requiredfinancial disclosure.

 

TheTrustees and the Trust Administrator have completed an evaluation of theeffectiveness of the design and operation of disclosure controls and proceduresas of the quarter ended September 30, 2009. Based on their evaluation ofthe effectiveness of the design and operation of the ART’s disclosure controlsand procedures, the Trustees and the Trust Administrator concluded that as of September 30,2009, the ART’s disclosure controls and procedures were effective.

 

*Limitations on theEffectiveness of Controls*

 

The Trustees and the Trust Administrator do not expect that the ART’sdisclosure controls will prevent or detect all errors and all fraud. A controlsystem, no matter how well designed and operated, can provide only reasonable,not absolute, assurance that the control system’s objectives will be met.Further, the design of a control system must reflect the fact that there areresource constraints, and the benefits of controls must be considered relativeto their costs. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the ART have been detected. These inherentlimitations include the realities that judgments in decision-making can befaulty, and that breakdowns can occur because of simple error or mistake.Controls can also be circumvented by the individual acts of some persons, bycollusion of two or more people, or by management override of the controls. Thedesign of any system of controls is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions. Over time, controls may become inadequate because of changes inconditions or deterioration in the degree of compliance with associatedpolicies or procedures. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected.

 

*Changes in Internal Control over Financial Reporting*

 

Duringthe quarter ended September 30, 2009, there were no changes in the ART’sinternal control over financial reporting that have materially affected, or arereasonably likely to materially affect, internal control over financialreporting.

 

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**PART II**

 

Item 1                                                                LegalProceedings

 

Except as set forth below, there have been nomaterial developments in the legal proceedings described in the ART’s Form 10-Kas filed on March 10, 2009 or as updated in the ART’s Form 10-Q filedon August 8, 2009.

 

BankLitigation

 

On June 18, 2008, the District Court dismissedcertain fraudulent transfer claims, avoidable preference claims, and equitablesubordination and disallowance claims.  Afinal judgment was entered on those claims as well as certain claims dismissedin 2007 by the Bankruptcy Court. The ART filed a timely notice of appeal andthe appeal is being briefed by the parties in the Second Circuit Court ofAppeals.

 

Withrespect to the remaining pending claims, fact discovery has closed and the partiesare engaged in expert discovery and pretrial briefing. Under the currentscheduling order, the trial on the remaining claims will commence on April 8,2010.

 

Atthis time, the ART cannot predict the outcome of these proceedings or estimatethe possible financial effect of these proceedings on the ART’s financialstatements.

 

MotorolaLitigation

 

OnAugust 22, 2007, plaintiffs moved for summary judgment to disallow aportion  of the defendants’ claimsagainst certain Adelphia debtors. Plaintiffs’ motion is pending. Trial on theclaims for equitable subordination and equitable disallowance was held on October 26-30,2009. The court has those claims under submission and has scheduled post trialbriefing. The parties currently are engaged in mediation but there is noassurance that any agreement will be reached.

 

Sabres Litigation

 

OnFebruary 17, 2009, the District Court for the Western District of New Yorkissued a final judgment granting a permanent injunction against the prosecutionof fraudulent conveyance claims against Key Bank N.A., Fleet National Bank, andHSBC Bank USA, N.A. (collectively, the “Sabres Banks”) by the ART in the BankLitigation. The fraudulent conveyance claims against the Sabres Banks involveAdelphia’s purchase of and payments on certain loans made by the Sabres Banksto the Buffalo Sabres hockey team. The ART filed a timely notice of appeal, andthe appeal has been briefed by the parties in the Second Circuit Court ofAppeals. Oral argument was held on November 4, 2009.

 

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Atthis time, the ART cannot predict the outcome of these proceedings or estimatethe possible financial effect of these proceedings on the ART’s financialstatements.

 

Prestige Litigation

 

Factdiscovery concluded on September 18, 2009.   On October 22, 2009, the ART filed amotion seeking leave to amend the complaint to conform the pleadings to theevidence developed during fact discovery. The proposed amendments do not seek to add any new claims or parties.That motion is pending.

 

OnOctober 27, 2009, Defendants moved for summary judgment on all of ART’sclaims.  The summary judgment motion isto be fully briefed and submitted to the Court by February 1, 2010.  Expert discovery is stayed pending a decisionon the summary judgment motion.

 

No trial date has been set in the case.

 

Atthis time, the ART cannot predict the outcome of these proceedings or estimatethe possible financial effect of these proceedings on the ART’s financialstatements.

 

FPL Litigation

 

Trial has been scheduled for June 6, 2011.

 

Atthis time, the ART cannot predict the outcome of these proceedings or estimatethe possible financial effect of these proceedings on the ART’s financialstatements.

 

LitigationIndemnification Fund Litigation

 

Discoveryrelated to the JV LIF Claims is pending and an evidentiary hearing on themotion has not been set.

 

At this time, the ART cannot predict the outcome of theseproceedings or estimate the possible financial effect of these proceedings onthe ART’s financial statements.

 

Item1A.                 Risk Factors

 

As of the date of this filing there have been nomaterial changes from the risk factors previously disclosed in our “RiskFactors” in the ART’s Form 10-K for the year ended December 31, 2008as filed with the SEC March 10, 2009.

 

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| Item 6 | Exhibits |
|--------|----------|
|   |     |
|   | 2.1*     | First  Modified Fifth Amended Joint Chapter 11 Plan of Reorganization of Adelphia  Communications Corporation and Certain of its Affiliated Debtors, effective  February 13, 2007 |
|   |     |   |
|   | 3.1*     | Restated  Certificate of Trust, dated February 13, 2007 |
|   |     |   |
|   | 3.2*     | Amendment  to Restated Certificate of Trust, dated March 15, 2007 |
|   |     |   |
|   | 3.3*     | [Second]  Amended and Restated Declaration of Trust, dated February 13, 2007 |
|   |     |   |
|   | 3.4*     | Rules and  Procedures of Adelphia Recovery Trust |
|   |     |   |
|   | 4.1*     | Form of  Certificate Evidencing Undivided Beneficial Interests in the Assets of the  Adelphia Recovery Trust (Global Certificate) |
|   |     |   |
|   | 4.2*     | Form of  Certificate Evidencing Undivided Beneficial Interests in the Assets of the  Adelphia Recovery Trust (Book Entry Certificate) |
|   |     |   |
|   | 10.1*    | Plan  Administrator Agreement, dated February 12, 2007 |
|   |     |   |
|   | 10.2*    | Trustee Compensation  Agreement |

 

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*Incorporatedby reference to the Form 10 of Adelphia Recovery Trust (File No. 000-53209)filed April 30, 2008 and the amended Form 10 filed July 2, 2008.

 
| 31.1 | Section 302  Certification of Trustee                                                                                                                  |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 | Section 302  Certification of Trust Administrator                                                                                                      |
| 32.1 | Certification  of Trustee pursuant to 18 U.S.C. 1350 Section 1350, as adopted pursuant  to Section 906 of the Sarbanes Oxley Act of 2002          |
| 32.2 | Certification  Trust Administrator pursuant to 18 U.S.C. 1350 Section 1350, as adopted  pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this Report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

 
| Date: November 6,  2009                           |
|--------------------------------------------------------|
|                                                   |
| By: Quest Turnaround  Advisors, LLC                    |
| as Trust Administrator of  the Adelphia Recovery Trust |
| /s/ Jeffrey A. Brodsky                                 |   |
| Jeffrey A. Brodsky                                     |
| Member                                                 |

 

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