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New York-The proceeds of an insurance policy covering legal expenses of the founding Rigas family and Adelphia Communications Corp. officers are not an asset of the bankrupt company, a New York federal judge has ruled. Judge Harold Baer found that Bankruptcy Judge Robert E. Gerber incorrectly stated that litigation over the proceeds was subject to an automatic stay under 11 U.S.C. 362(a)(3). The bankruptcy judge may extend a stay if he hears more from the parties and decides such a course is warranted, Baer ruled. The ruling came after Gerber allowed company founder and chairman John Rigas and his sons Timothy, James and Michael, who are charged with multiple counts of corporate fraud in managing the communications company, to apply for $300,000 each in legal defense costs under the directors’ and officers’ policy, which covers wrongful acts. Gerber also found that those proceeds were an asset of Adelphia, and that litigation over them was subject to an automatic stay until after the completion of criminal proceedings against the Rigases, which will begin next year. The Rigases appealed, arguing that the stay on litigation was incorrect. They sought the proceeds regardless of the insurance companies’ claims that the policies should be rescinded on the grounds that the Rigases made fraudulent representations. The issue has divided circuits, Baer said, and has yet to be addressed in the 2d U.S. Circuit Court of Appeals. No property interest yet “Here, as far as I can tell, Adelphia does not have a property interest in the proceeds of the insurance policies yet,” he wrote. In re Adelphia Communications Corp., No. 03 Civ. 609 (S.D.N.Y., Aug. 19, 2003). “Such argument would be akin to a car owner with collision coverage claiming he has a right to proceeds from his policy simply because there is a prospective possibility that his car will collide with another tomorrow,” he added. Baer said he simply could not conclude that a “proper foundation” had been laid to back up the extension of a stay because Gerber did not provide supporting findings. In remanding the case to Gerber for further proceedings, Baer noted that courts have construed liberally a bankruptcy court’s power to extend stays- under � 105 of the Bankruptcy Code-to prevent adverse effect on the debtor. “The proof required to extend the stay is not as rigorous as that normally required for injunctions,” Baer wrote.

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