LightSquared Judge to Charles Ergen, Philip Falcone: A Plague on Bot...

For the past two years, Charles Ergen, chairman and co-founder of Dish Network, and Philip Falcone, manager of Harbinger Capital Partners, have been doing battle in the Chapter 11 case of mobile communications company LightSquared Inc.  LightSquared, primarily owned by Harbinger and controlled by Falcone, holds spectrum rights potentially worth billions of dollars, but was forced to seek bankruptcy protection in 2012 following its failure to obtain crucial FCC approvals. 

 Ergen began surreptitiously buying up LightSquared’s first lien bank debt, utilizing a personally-owned investment vehicle to skirt prohibitions in the loan documents that would have prevented Dish, as a competitor of LightSquared, from holding the debt itself.  Ergen and Dish made a $2.2 billion offer last year to acquire LightSquared, but later withdrew the offer, a move that Falcone and LightSquared’s other creditors have argued was intended to damage LightSquared so that Ergen could later acquire it more cheaply.  Falcone and Harbinger sued Ergen, seeking to subordinate his $1 billion in claims on account of his alleged inequitable conduct.  Harbinger also proposed a plan of reorganization that would provide full and immediate payment in cash to other holders of the first bank debt while providing Ergen with a non-cash interest seven year note, but under which Falcone and Harbinger would maintain a significant minority ownership stake in LightSquared.  In addition, Harbinger sought to “designate” (effectively disqualify) Ergen’s vote against the plan, thus forcing him to accept the disparate treatment of his claims. 

 Last week, following months of litigation, Judge Shelley Chapman had her say. 

 She ruled first that Ergen’s claims could be subordinated based on his conduct.  Ergen argued that he acquired LightSquared’s first lien bank debt as a personal investment, and not on behalf of Dish.  Judge Chapman found this contention to be “not credible,” noting that it was entirely inconsistent with his investment history.  She determined that Ergen intended to make an “end run” around the prohibitions in the loan documents, and that he had “purposely obstructed” the bankruptcy process.    

 She did not rule on the extent to which Ergen’s claims could be subordinated, however, leaving that issue instead for a further hearing.  She also noted that LightSquared and Falcone had sought to use the initial rumors of Ergen’s purchases of the first lien bank debt to their advantage, in an effort to create interest among other potential investors.     

 More importantly, she refused LightSquared’s request to designate Ergen’s vote on the plan (a sanction imposed on Dish back in 2010 in another Chapter 11 case in which Ergen had sought to use the strategy of buying up senior bank debt as a means of acquiring a competitor).  Ergen’s efforts as a creditor, she determined, while “aggressive” and “selfish,” were not undertaken with the requisite degree of bad faith necessary under Section 1126 of the Bankruptcy Code to warrant vote disqualification. 

 Since Ergen’s vote against the plan was upheld, LightSquared was required to show that the different treatment of his claims from the other holders of first lien bank debt did not constitute “unfair discrimination,” and that the note that he would receive under the plan would satisfy the “cramdown” provisions under Section 1129(b) of the Bankruptcy Code by providing him with the “indubitable equivalent” of the first lien bank debt he had purchased. 

 Judge Chapman bluntly denied confirmation of the plan, calling it a “gerrymandered end around” Ergen’s claims and a “sophisticated shell game.”  Whatever the extent to which Ergen’s claim can be afforded treatment different from the full and immediate cash payment being given to other holders of first lien bank debt, the provision of a non-cash interest seven year note (subordinated to new financing and at a lower rate of interest than the existing first lien bank debt) would not suffice. 

 Nor was Judge Chapman sparing in her assessment of Ergen’s and Falcone’s behavior.  She directed all parties to “tone down their animosity” and “to adjust their expectations.”  She concluded by stating that she was prepared to appoint Judge Robert Drain as mediator and direct both sides to meet with him.  However, having provided “a lot of guidance on what’s going to fly,” she said that she would give Ergen and Falcone two weeks to try to reach a deal on their own.