April 23 (Bloomberg) -- Motorola Inc., the world's third- biggest mobile-phone maker, settled claims by creditors of its bankrupt former satellite unit Iridium LLC, eliminating the last obstacle to winding up a nine-year bankruptcy.

Motorola rose 4.4 percent. The agreement ends litigation between the company and its failed unit, Iridium said in court documents filed yesterday in U.S. Bankruptcy Court in Manhattan. Iridium will distribute $16 million to unsecured creditors on claims of $1.6 billion, giving a one percent recovery.

The settlement ``represents the best opportunity for Iridium creditors to finally receive some recovery from these estates, without risk of further protracted litigation,'' Iridium said in court documents.

The provider of commercial satellite communications filed for bankruptcy in 1999 after its spinoff by Schaumburg, Illinois- based Motorola. Iridium previously benefited from a bankruptcy court ruling that creditor claims should be limited because it wasn't proven that Motorola misled investors about its satellite phone technology. Creditors had attempted to claim $4.3 billion against the former parent company.

According to yesterday's filing, lawyers for the creditors agreed to ``voluntarily'' reduce their expense claims so creditors may get a recovery. The company said their claim will be about $29 million.

Weil Gotshal

Greg Danilow, a lawyer with New York-based Weil Gotshal & Manges, which represents the unsecured creditors, didn't immediately return a call seeking comment.

Matthew Dundon, an analyst at Miller Tabak Roberts Securities, a research firm specializing in high-yield debt, said Iridium's bonds had been trading in a range that showed holders anticipated the one percent recovery.

``Bondholders were weighing a small chance of a larger recovery against a large chance of no recovery,'' Dundon said. He noted that if bondholders want to contest the settlement, they would have to fund the case themselves, as the litigation fund set up in the bankruptcy ran out of money.

Iridium's bankruptcy estate will have $53.6 million to distribute, including $20 million in cash and a $33.6 million payment to secured lenders. Motorola agreed to drop a $675 million administrative claim and withdraw objections to the bankruptcy.

Keep Claim

Motorola will keep its claim against Iridium's secured lenders, according to court papers.

In order to keep expenses low, the case will convert to a Chapter 7 liquidation once disputed claims have been resolved, Iridium said.

The company requested a hearing May 20 before U.S. Bankruptcy Judge James Peck to approve the settlement.

Nokia Oyj is the world's largest mobile phone-maker, while Samsung Electronics Co. is second.

Motorola rose 40 cents to $9.55 in New York Stock Exchange composite trading.

Iridium LLC's 14 percent notes due 2005 most recently traded at 1 cent on the dollar on April 16, down from 1.5 cents March 19. Its 10.88 percent notes due 2005 traded at 1.97 cents on the dollar on April 17, up from 1.09 on April 14.

The adversary case is Statutory Committee of Unsecured Creditors v. Motorola Inc., 01-02952, and Iridium Operating LLC's bankruptcy case is 99-45005, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Tiffany Kary in New York bankruptcy court at tkary@bloomberg.net.

Last Updated: April 23, 2008 17:15 EDT