## Facts

- Adelphia Communications Corporation (Adelphia) was a large U.S. cable company that later filed for chapter 11 bankruptcy.
- Adelphia’s post-confirmation successor, the Adelphia Recovery Trust (the Trust), obtained Adelphia’s causes of action and sued FPL Group, Inc. (FPL) and West Boca Security, Inc. (West Boca).
- In January 1999, Adelphia paid about $150 million to FPL and West Boca to repurchase Adelphia stock.
- The Trust sought to avoid and recover the payment as a constructive fraudulent transfer under the Pennsylvania Uniform Fraudulent Transfer Act (PUFTA), pursued through Bankruptcy Code avoidance powers.
- The Trust alleged Adelphia received less than reasonably equivalent value and, relevant here, that after the repurchase Adelphia had “unreasonably small” remaining assets/capital for its business.
- Evidence cited by the Trust included Adelphia’s negative cash flow, claimed violations of borrowing limits in its debt documents, claimed defaults under bond indentures, and the fact that Adelphia was experiencing internal fraud around that period.
- The record also reflected that, at the time of the repurchase, Adelphia anticipated roughly $600 million in capital needs over the next three years and still had an estimated equity cushion of about $2.5 billion.
- After a bench trial, the bankruptcy court ruled for FPL and West Boca, finding the Trust did not carry its burden to prove that Adelphia was insolvent, left with unreasonably small capital, or unable to pay debts as they came due at the time of the repurchase.
- The district court affirmed, and the Trust appealed to the Second Circuit.

## Issues

1. Whether the bankruptcy court clearly erred in finding the Trust failed to prove that, at the time of the January 1999 stock repurchase, Adelphia was left with “unreasonably small” assets/capital (and related financial-condition elements required for constructive fraudulent transfer).
2. Whether the district court improperly treated the “unreasonably small capital” inquiry as the same as balance-sheet solvency.
3. Whether the bankruptcy court committed reversible error in weighing competing valuation evidence, including rejecting the Trust’s discounted-cash-flow analysis tied to internal projections and crediting defendants’ market-based valuation evidence.

## Decision

- The Second Circuit affirmed the district court’s judgment, leaving in place the bankruptcy court’s judgment for FPL and West Boca.
- The court held the bankruptcy court’s findings on Adelphia’s financial condition at the time of the transaction were factual and were not clearly erroneous.
- The court rejected the Trust’s argument that the courts below collapsed “unreasonably small capital” into solvency; it found no reversible legal error in the framework used.
- The court upheld the trial court’s evaluation of valuation testimony, including skepticism toward cash-flow projections affected by internal fraud and acceptance of more market-oriented valuation indicators.
- Because the Trust did not prove the required financial-condition element (including “unreasonably small capital”), the constructive fraudulent transfer challenge to the $150 million repurchase failed.

## Legal Principles

- For a constructive fraudulent transfer claim under PUFTA (as pursued by a bankruptcy estate or successor), showing less than reasonably equivalent value is not enough; the plaintiff must also prove a qualifying financial condition at the time of the transfer, such as insolvency, unreasonably small capital, or inability to pay debts as they mature.
- “Unreasonably small capital” addresses whether the debtor had adequate capital for its business and reasonably foreseeable risks at the time of the transfer; it is a separate inquiry from balance-sheet solvency, though the evidence may overlap.
- Adequacy of capital and insolvency are fact-intensive determinations; on appeal, they are reviewed for clear error, and an appellate court will not reweigh the evidence where the trial court’s view is supported by the record.
- Trial courts may discount discounted-cash-flow models when the underlying projections are unreliable, including where management data is affected by fraud, and may instead rely on market-based valuation measures.

## Conclusion

The Second Circuit affirmed the rejection of the Adelphia Recovery Trust’s constructive fraudulent-transfer challenge to Adelphia’s January 1999 $150 million stock repurchase from FPL and West Boca, holding that the bankruptcy court did not clearly err in finding the Trust failed to prove Adelphia was left with unreasonably small capital (or other required financial distress) at the time of the transaction.


Adelphia Recovery Trust v. FPL Group, Inc. (In re Adelphia Communications Corp.), 652 F. App’x 19 (2016)