## Facts

- Adelphia Communications Corporation and affiliates filed Chapter 11 and proposed a plan of reorganization for confirmation.
- Within the class of Adelphia senior notes, a bondholder group voted to reject the plan and sought to disqualify the acceptances of certain “crossover” creditors who held both parent-level and subsidiary-level debt.
- The challenged voters included investors associated with committees and managed accounts that held Adelphia senior notes and notes of Arahova Communications Corp., an Adelphia subsidiary.
- The bondholder group alleged the crossover creditors supported the plan to advance recoveries on subsidiary claims and to obtain plan-related benefits such as releases, exculpation, and fee-related provisions.
- The bondholder group also alleged improper solicitation and “overreaching” in efforts to secure plan support.
- The court handled the motion on a Rule 12(b)(6)-type approach, assuming the movants’ factual allegations were true and determining whether they stated a legally sufficient basis for designation before permitting discovery or an evidentiary hearing.

## Issues

1. Whether the challenged creditors’ acceptances of the plan should be designated under 11 U.S.C. § 1126(e) as not cast, solicited, or procured in good faith.
2. Whether voting driven by cross-capital-structure positions, including interests in subsidiary debt, constitutes bad faith for purposes of § 1126(e).
3. Whether negotiating for plan benefits (e.g., releases, exculpation, fee-related provisions) or engaging in aggressive solicitation, without allegations of fraud or illegality, warrants designation.

## Decision

- The court denied the motion to designate the challenged creditors’ votes in the Adelphia senior note class.
- Even taking the movants’ allegations as true, the court held they did not plead conduct meeting § 1126(e)’s standard for vote designation.
- The court declined to allow discovery or an evidentiary hearing because the allegations, as pleaded, were legally insufficient.

## Legal Principles

- Under 11 U.S.C. § 1126(e), a court may designate (disqualify) a plan acceptance or rejection that was not cast in good faith, or was not solicited or procured in good faith or in accordance with the Bankruptcy Code.
- Designation is an extraordinary remedy, applied narrowly and generally reserved for egregious conduct seeking an improper advantage to which the creditor is not entitled.
- A creditor does not act in bad faith merely by voting in accordance with economic self-interest, including where it holds positions at different levels of a corporate group’s capital structure.
- The existence of overlapping holdings and strategic portfolio-based voting, without more, is insufficient to show bad faith under § 1126(e).
- Plan negotiations that include releases, exculpation, or other constituency-specific consideration are not, without additional improper conduct, grounds to infer bad-faith voting; such terms are assessed through the confirmation process and required disclosures.
- Allegations of hard bargaining or aggressive solicitation do not justify designation absent indicia of coercion, fraud, illegality, or similar misconduct tied to the voting or solicitation process.

## Conclusion

The court refused to disqualify crossover creditors’ plan acceptances, holding that self-interested voting and negotiated plan consideration—without allegations of fraud, illegality, or similarly egregious misconduct—do not constitute bad faith under § 1126(e), and thus did not warrant vote designation.


In re Adelphia Commc’ns Corp., 359 B.R. 54 (Bankr. S.D.N.Y. 2006)