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The proceeds of an insurance policy covering legal expenses of the Rigas family and Adelphia Communications Corp. officers is not an asset of the bankrupt company, a Southern District judge has ruled in a case of first impression in the 2nd U.S. Circuit Court of Appeals. 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), but that the bankruptcy judge could extend a stay if he hears more from the parties and decides such a course is warranted. The ruling comes after Gerber allowed John, Timothy, James and Michael Rigas, 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. But 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 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 They sought the proceeds regardless of the insurance companies’ claims that the policies should be rescinded on the grounds that the Rigases made fraudulent representations.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 elsewhere in the country, Baer said, and has yet to be addressed in the 2nd Circuit. “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 In re Adelphia Communications Corp., 03 Civ. 609. “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, or a living person having a death benefit policy, and claiming his beneficiaries have a property interest in the proceeds even though he remains alive,” he added. Judge Baer said he simply could not conclude that a “proper foundation” had been laid to back up the extension of a stay because Judge 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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