Source: https://www.abi.org/member-resources/blog/judicial-estoppel-essentially-locking-a-litigation-trust-into-representations
Timestamp: 2019-04-19 20:18:51+00:00

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Recently, in Adelphia Recovery Trust v. Goldman Sachs & Co., the Second Circuit held that a fraudulent conveyance claim brought by a litigation trust, created to recover assets for the benefit of unsecured creditors of Adelphia Communications Corp. (“ACC”), was barred by the doctrine of judicial estoppel because the funds at issue were transferred from an account that the plaintiff’s predecessor-in-interest scheduled as an asset of one of the predecessor’s subsidiaries, not the predecessor itself. The litigation trust commenced a fraudulent conveyance claim against Goldman, Sachs & Co. under sections 548(a)(1)(A) and 550(a) of the Bankruptcy Code to recover certain payments made to Goldman from a concentration account held in the name of Adelphia Cablevision Corp. (“Adelphia Cablevision”), a subsidiary of ACC. Goldman later moved for summary judgment on the grounds that (1) the plaintiff lacked standing to assert the fraudulent conveyance claim because the payments were not transfers of ACC's property; and (2) the plaintiff failed to raise a material issue of fact as to whether the payments were made with an actual intent to hinder, delay or defraud ACC's creditors. In response, the litigation trust argued that “ACC was the real owner of, and payor from, the Concentration Account” because ACC exercised complete control over the collective cash of ACC and its subsidiaries in the concentration account. While the district court recognized that the money in the concentration account may have been attributed to ACC prior to the bankruptcy proceedings, the district court ruled that “the easy attribution of money to whatever entity may at the moment be convenient stopped with the bankruptcies.” Therefore, the district court granted Goldman’s motion for summary judgment, stating that “it [wa]s admitted by [the litigation trust’s] own revised pleading that the margin loan payments were not made by ACC but by Adelphia Cablevision LLC, an ACC subsidiary on whose behalf [the litigation trust] does not have standing to sue.” The Second Circuit affirmed, holding that the litigation trust did not have standing to sue because it was judicially estopped from arguing now that ACC owned the account.
The Adelphia Recovery Trust decision has significant implications for debtors, recovery and litigation trusts, creditors and counterparties to prepetition transactions with debtors. For debtors’ attorneys, this decision demonstrates the importance of accurately determining the ownership of the various assets in cases where there are multiple debtors because the parties will be bound by the asset schedules and the plan of reorganization. In particular, when drafting a plan, attorneys should consider whether each particular debtor has potential avoidance claims and determine how the plan’s allocation of assets amongst the debtors’ various estates affects such claims. Importantly, the attorneys should be cognizant of the fact that they may be judicially estopped from later arguing that the plan misallocated the assets in connection with an avoidance action. Further, these attorneys should consider the benefits of creating multiple trusts to pursue avoidance claims on behalf of the various estates because by doing so, each estate will be able to pursue its own avoidance claims. Indeed, nothing in Adelphia Recovery Trust would have likely stopped a litigation trust created for the benefit of Adelphia Cablevision’s creditors from asserting the exact same fraudulent conveyance claim against Goldman. Next, for recovery and litigation trusts, Adelphia Recovery Trust illustrates that these trusts will be bound by the assertions (or lack of assertions) by their predecessors in their schedules, plans and other filings. This can prove problematic if the various debtors that were focused on confirming a plan misallocate an asset in such a way that forecloses the trusts’ ability to avoid certain prepetition transfers at the expense of trusts’ constituents (i.e., the trust’s predecessor’s creditors). Finally, counterparties to prepetition transactions with a debtor should take solace in the fact that a court will not permit a litigation trust to reargue issues that were previously settled simply because doing so advances the trust’s current position. As such, the doctrine of judicial estoppel provides a potentially powerful defense to avoidance actions brought by recovery and litigation trusts against those counterparties. Therefore, when faced with an avoidance action, those counterparties should review the previous filings in the case to determine whether the trust’s current position is inconsistent with a position put forth by the trust’s predecessor.
 Adelphia Recovery Trust v. Goldman, Sachs & Co., 748 F.3d 110 (2d Cir. 2014).
 Brief for Defendant-Appellee Goldman, Sachs & Co. at 12, Adelphia Recovery Trust v. Goldman, Sachs & Co., 748 F.3d 110 (No. 11-1858-cv), 2011 WL 5031309, at *12.
 Adelphia Recovery Trust, 748 F.3d at 114.
 Adelphia Recovery Trust v. Bank of Am., N.A., No. 05–cv–9050, 2011 WL 1419617, at *2 (S.D.N.Y. Apr. 7, 2011).
 Adelphia Recovery Trust, 748 F.3d at 114 (citing Adelphia Recovery Trust, 2011 WL 1419617, at *2).
 Id. at 116 (citing New Hampshire, 532 U.S. at 749–51).
 Id. (citing New Hampshire, 532 U.S. at 749–51).
 Id. (quoting New Hampshire, 532 U.S. at 750–51).
 Id. at 116–17 (quoting Republic of Ecuador v. Chevron Corp., 638 F.3d 384, 397 (2d Cir. 2011)).
 Adelphia Recovery Trust, 748 F.3d at 118 (citations omitted).
 Id. (quoting Galin v. United States, No. 08–cv–2508, 2008 WL 5378387, at *10 (E.D.N.Y. Dec. 23, 2008)).
 Adelphia Recovery Trust, 748 F.3d at 118.
 Id. at 118 (“Determination of the ownership of assets [wa]s at the core of the bankruptcy process, and particularly the creation of a bankruptcy reorganization plan, which involves ‘a schedule of all [the debtors’] liquid assets and liabilities,’ and thereafter operates, with full preclusive effect, to ‘bind its debtors and creditors as to all the plan’s provisions, and all related, property or non-property based claims which could have been litigated in the same cause of action.’”).

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