Can a bank be a negligent lender? Major bondholders in Adelphia Communications think so and are suing the bankrupt MSO's banks for $5 billion.
The bondholders want a federal bankruptcy court judge to order the banks to pay damages to other, unsecured creditors and then stand in line behind them when it comes time to collect a piece of the company.
The suit is part an emerging strategy by bankrupt companies' unsecured bondholders, who stand behind banks in collecting. Banks generally recover 80 cents to 100 cents of each dollar they lent. Bondholders typically get 30 cents to 70 cents.
At the heart of the Adelphia suit is $3 billion in loans that banks made to private companies controlled by the family of company Chairman John Rigas. Those private companies weren't worthy of so much credit, but the banks allowed the MSO itself to co-sign the loans. Much of that money was used to buy Adelphia stock, so, when the share price fell, the co-signed loans dragged the whole cable operation down.
"Each of the [banks] actually knew or recklessly disregarded the fact that the Rigas family was using the co-borrowing facilities to defraud the debtors, their creditors and other stakeholders," the bondholders' suit said.
The banks named include Bank of America, Barclays Plc, Citigroup and Wachovia Corp. But the list of lenders being sued goes on for seven pages.
In this case, the bondholders contend that Adelphia's banks had significant conflicts of interest in receiving financing and other advisory fees from Adelphia that could be jeopardized if they didn't lend money to the family as well.