LightSquared Judge Says She Can’t Reject Reorganization

Philip Falcone’s LightSquared Inc. persuaded a judge to let it go forward with a bankruptcy plan that will punish Dish Network Corp. Chairman Charles Ergen, a creditor and onetime bidder for the wireless company, if he doesn’t go along.

U.S. Bankruptcy Judge Shelley Chapman in Manhattan said today she has “no choice” but to approve LightSquared’s disclosure statement laying out terms of the reorganization plan, on which creditors can then vote. The plan values LightSquared at $7.7 billion and doesn’t hinge on regulatory approval for using the airwaves that are its main asset.

Ergen’s investment fund, SP Special Opportunities LLP, gets different treatment for its debt depending on whether it votes for or against the plan. Singling out SPSO renders the entire plan improper under the bankruptcy code, the fund said in an objection. SPSO also said that whatever it votes on plan, the fund’s options are “worthless.”

“We have no choice,” Chapman said. “I’m not going to say today, ‘lights out on this company.’”

The judge was responding to claims that LightSquared may not be able to reorganize unless it has the option of putting Ergen’s holding of about $1 billion in debt at the back of the line or disallowing it altogether.

Final Approval

The plan still requires final court approval. LightSquared will argue at a hearing set to begin March 17 that the treatment of Ergen’s debt is justified because his companies compete with LightSquared.

Ergen, who once courted the company with a $2.22 billion offer for its wireless spectrum, was sued by LightSquared and Falcone’s investment fund Harbinger Capital Partners LLC last year. Since then, Ergen has withdrawn his offer, and a trial over whether Ergen sought to manipulate the case by buying up a large stake in LightSquared’s debt has yet to reach conclusion.

“LightSquared has premised its entire plan on SPSO’s being guilty until proven innocent,” SPSO said in court papers objecting to the plan.

SPSO lawyer Rachel Strickland said in court today that the plan is also unfair because it repays other creditors in cash while forcing Ergen and his fund to take a note in the company that has a seven-year maturity.

The plan seeks to “bind us in duct tape, throw us in the trunk of a car and take us along for a seven-year ride,” Strickland said.

LightSquared Suit

In the lawsuit, LightSquared said Ergen bought debt through SPSO while obscuring his involvement. The purchases were improper because Ergen was acting on behalf of Englewood, Colorado-based Dish, and competitors were prohibited from owning LightSquared’s debt, according to the complaint.

LightSquared further argued that Ergen sought to manipulate the outcome of the case through the “blocking position” he built up, trying to use it to buy LightSquared’s assets on the cheap and keep away other bidders.

Ergen has said that he was acting personally, not for Dish, in buying the debt, and that he made no “false representations” about his investment.

Under the disclosure statement, if Ergen’s SPSO votes for the plan, its $1.06 billion claim will be considered secured, following first-and second-lien claims on the company’s assets. If SPSO votes no, the claim would be deemed unsecured, placing it even further back in line to be repaid.

‘Slam Dunk’

SPSO said it won’t be repaid under either scenario because at best its claim would still come in behind $2.2 billion or even $3.2 billion in other debt. Being repaid through a seven-year note would link SPSO’s treatment to the long-term viability of LightSquared’s business plan, which is no “slam dunk,” Strickland told Chapman.

LightSquared filed for bankruptcy in May 2012 after the Federal Communications Commission blocked its service, saying it might interfere with global-positioning-system navigation equipment. The current plan anticipates LightSquared gaining first approvals by the end of 2015.

Matthew Barr, a lawyer for LightSquared, told Chapman today that the plan is supported by parties putting $1.65 billion in financing and equity into the company. Those backers, which include Fortress Investment Group LLC, also would provide $1 billion in exit financing.

“We do have broad consensus from all the other stakeholders in the Chapter 11 case,” Barr said.

Ergen’s Status

LightSquared can single Ergen out for different treatment in the plan because as a competitor, he has a different status than other debt-holders, Barr said. That will be established at a final hearing to confirm the plan, and doesn’t require any finding of wrongdoing at trial, Barr said. He also said the company will show that Ergen’s claim will be repaid in full.

The plan would leave Reston, Virginia-based LightSquared a stand-alone company, with Falcone’s investment fund keeping an equity stake.

A purchase by Ergen of LightSquared’s wireless spectrum would complement his satellite-television businesses while allowing him to repay himself for the LightSquared debt he bought through SPSO.

The case is In re LightSquared Inc., 12-bk-12080, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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