NEW YORK - A federal bankruptcy judge blocked yesterday a plan to compensate the Rigas family in return for its surrendering control of a bankrupt former unit of Adelphia Communications Corp., saying the arrangement is unfair to creditors.
Creditors of Adelphia Business Solutions Inc. had argued that the Rigas family's ties to the telephone service provider jeopardize its reorganization. Two family members have resigned from Adelphia Communications, the former parent, amid a Securities and Exchange Commission investigation of alleged self- dealing.
The Adelphia Business creditors' committee said in court papers that the settlement was "a blatant attempt by the Rigas family to take advantage of the debtors' grave need to have the Rigas family resign." The family members should step down without payment, the creditors said.
U.S. Bankruptcy Judge Robert E. Gerber ruled for the creditors, saying the settlement "is disapproved because I can't find that it's fair and equitable, and even more strongly that it's in the best interests of creditors."
Adelphia Communications, the sixth-largest U.S. cable television company, is under investigation by the SEC and federal prosecutors in two states in connection with $3.1 billion in loans to former Chairman John Rigas and his son Timothy, who was chief financial officer. They resigned from the cable operator last month, accused of using bank loans guaranteed by Adelphia to purchase company securities.
Adelphia Communications spun off its 79 percent stake in Adelphia Business in January. Coudersport, Pa.-based Adelphia Business, which sells Internet, local and long-distance phone service to corporations, sought Chapter 11 bankruptcy protection in March.
Under a settlement reached with Adelphia Business this month, Chief Executive Officer James Rigas, Chief Financial Officer Timothy Rigas, Chairman John Rigas and Vice Chairman Michael Rigas agreed to resign their positions in the company and quit the board.
In exchange, Adelphia Business offered to pay the family members' future legal costs, provide them with liability insurance and pay James Rigas $350,000 in severance.
Adelphia Business said June 4 that the agreement would give the company a chance to reorganize without the distraction of the Rigas family's involvement with struggling Adelphia Communications.
Jeff Nodland, a spokesman for Adelphia Business, declined to comment on yesterday's ruling, as did Judy Liu, Adelphia Business' bankruptcy lawyer.
Adelphia Business needs a loan to finance its bankruptcy reorganization after Adelphia Communications and a partnership controlled by John Rigas backed out of a $135 million commitment last month. Potential lenders have said they wouldn't provide a loan unless the family stepped down, court papers show.
In light of the conditions on getting a new loan, the proposed settlement "amounts to nothing less than extortion," the creditors' committee said.
The creditors' committee said the bankruptcy court shouldn't let the Rigas family "manipulate the Chapter 11 process to procure personal benefits."
SBC Communications Inc., owed about $5 million by Adelphia Business, also filed court papers opposing the payment to James Rigas and legal indemnification for the family members, calling it "highly objectionable."