May 9 (Bloomberg) -- LightSquared Inc.’s plan to exit bankruptcy, designed by controlling shareholder Philip Falcone, was thrown out by a judge who called it a “shell game” that was unfair to the wireless-broadband company’s one-time suitor, Dish Network Corp. Chairman and co-founder Charles Ergen.
LightSquared had sought to put Ergen’s $1 billion debt claim behind those of other creditors as it reorganized with $2.5 billion in financing backed by Fortress Investment Group LLC, JPMorgan Chase & Co. and Melody Capital Advisors LLC, leaving Falcone with an equity stake in a new company.
U.S. Bankruptcy Judge Shelley Chapman in Manhattan, while faulting how Ergen acquired his claim, yesterday called the proposal “a sophisticated shell game that moves debt and cash up and down the capital structure.” She gave the parties until May 27 to develop a new plan before she imposes a mediator.
The decision is a setback to Falcone’s goal of getting Reston, Virginia-based LightSquared back on its feet. The company sought bankruptcy protection in 2012 after the Federal Communications Commission blocked its service, saying it might interfere with global positioning system navigation equipment. It still doesn’t have U.S. approval to use its airwaves.
The company accused billionaire Ergen, 61, of secretly snapping up its debt to hijack the reorganization and get its wireless spectrum at a discount.
U.S. pay-TV growth has peaked as people spend more time watching online video, leaving Englewood, Colorado-based Dish searching for new revenue sources. LightSquared, whose airwaves could be used to support growing mobile-phone use, is like “unbuilt beachfront property that has yet to be put to its highest and best use,” Chapman said yesterday.
Ergen had offered to pay $2.22 billion for the airwaves, only to withdraw the bid just before an auction, citing a technical issue. Falcone, 51, accused Ergen of trying to game the bankruptcy process to get a lower price and of secretly buying debt that LightSquared rivals weren’t permitted to own.
Dish is probably no longer interested in the company, said Tim Farrar, founder of Telecom, Media & Finance Associates Inc., a Menlo Park, California-based research firm. “Dish has got much bigger things on its plate, and it’s highly unlikely it’s going to step back into the fray,” he said.
Ergen last year also offered to buy wireless provider Sprint Corp., only to be outbid by SoftBank Corp. If regulators decide to block a merger of Sprint and T-Mobile US Inc., “then T-Mobile would have strategic interest to us,” Ergen said yesterday on a conference call to discuss first-quarter earnings.
While the judge faulted Falcone’s treatment of Ergen, she also said the Dish chairman’s behavior warranted marginalizing his $1 billion claim.
Chapman said Ergen concealed his identity in buying LightSquared debt and wasn’t credible when he blamed the technical issue for the dropped airwave offer. Ergen’s claim will be put behind those of other creditors on terms to be determined later, she said.
Still, Ergen won’t face damages because of “inaction and delay” in confronting him on the part of LightSquared and Falcone’s investment fund Harbinger Capital Partners LLC, according to Chapman.
“Ergen and Falcone did some fancy footwork but didn’t fool the judge,” Erik Gordon, a professor at the University of Michigan’s business and law schools, said in an e-mail. “Two bad eggs and a crummy recipe don’t make an omelet.”
LightSquared had proposed repaying Ergen’s debt with a seven-year note or disallowing it entirely. At best, he said, his claim would come behind $2.2 billion or even $3.2 billion in other debt, and neither option complied with bankruptcy law.
“We are pleased that the court agreed that a plan premised on unfair discrimination could not go forward,” Rachel Strickland, a lawyer for Ergen, said in a statement. “As the largest creditor, Mr. Ergen remains optimistic that a constructive path can be achieved to bring LightSquared out of bankruptcy and enable it to continue as a going concern.”
Matthew Barr, an attorney for LightSquared, and David Friedman, Harbinger’s lawyer, didn’t immediately respond to calls seeking comment on yesterday’s ruling.
The proposal, designed to “bootstrap” other lenders ahead of Ergen under Falcone’s guidance, also included valuations of the company that weren’t supportable, the judge said.
LightSquared listed assets of $4.48 billion and debt of $2.29 billion in its Chapter 11 filing. The proposed plan valued the company at $7.7 billion.
“The question now is, if you use lower valuation, whether there’s anything left over for Harbinger,” Farrar said. “I strongly suspect that in two weeks’ time, they’ll be going to mediation, I’d be very surprised if there’s any room for agreement.”
The case is In re LightSquared Inc., 12-bk-12080, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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