LightSquared Bankruptcy Plan Rejected, Ergen’s Debt To Be Subordinated

May 9 2014 | 1:50pm ET

A federal bankruptcy judge dealt a blow to Harbinger Capital Partners’ effort to hold on to its wireless Internet venture, ordering it to the negotiating table with a bitter rival.

U.S. Bankruptcy Judge Shelley Chapman rejected LightSquared’s reorganization plan, a $2.65 billion proposal, backed by Fortress Investment Group, that would have allowed the company to exit bankruptcy after two years. Chapman found that the plan violated bankruptcy law by treating LightSquared’s biggest creditor, Dish Network Chairman Charles Ergen, unfairly.

But Chapman also rapped Ergen, blasting him for making an “end run” around debt covenants barring competitors from buying LightSquared debt. The judge ruled that part of Ergen’s $1 billion in LightSquared bonds would be subordinated.

Chapman ordered the two sides to negotiate a new bankruptcy plan, giving them two weeks and warning that she would impose the mediation of U.S. Bankruptcy Judge Robert Drain if the talks failed.

“If you come up with a deal, both with respect to amount of equitable subordination and a plan, no Judge Drain,” she said. “If you don’t, Judge Drain.”

Chapman ruled that Ergen had purposefully obstructed LightSquared’s bankruptcy process and violated the spirit of the company’s credit agreement using hedge fund Sound Point Capital, which she called “essentially a front used by Mr. Ergen.” She added that Ergen and other Dish witnesses were “not credible” when they claimed that Ergen was buying the debt as a personal investment and not on Dish’s behalf.

“Mr. Ergen found a loophole in the express terms of the credit agreement and exploited it,” she said.

But she also refused to cancel the debt, which she said was barred by the bankruptcy code. Chapman said a future trial will determine exactly how much of Ergen’s debt should be subordinated.

The judge also refused to award damages to LightSquared or to Harbinger founder Philip Falcone, saying they failed to contest Ergen’s purchases quickly enough.

She also agreed with Ergen that the seven-year third-lien note LightSquared proposed to give him was too risky. Chapman said that Ergen could be treated differently than other holders of LightSquared’s bank debt, but not worse.


In Depth

GSAM's Papagiannis: Liquid Alternatives For The Long Run

Apr 21 2017 | 8:44pm ET

Interest in liquid alternatives cooled a bit last year amid a broad shift in investor...

Lifestyle

Aston Martin Returns To Debt Market As DB11 Drives Turnaround

Mar 31 2017 | 5:21pm ET

James Bond’s preferred carmaker is returning to the public debt markets for the...

Guest Contributor

Debunking Conventional Investment Wisdom (Part II)

Apr 17 2017 | 5:56pm ET

The alternative investment industry is currently replete with buzzwords around data...