LightSquared Wins Key Debt Ruling on Exit Path

Philip Falcone’s LightSquared Inc. won a judge’s approval to marginalize a $1 billion debt claim by Dish Network Corp. Chairman Charles Ergen, a key to the wireless broadband company’s ability to leave bankruptcy under a proposed reorganization plan.

Ergen’s claim will be put behind other creditors by an amount to be determined after further proceedings, U.S. Bankruptcy Judge Shelley Chapman said at a hearing today in Manhattan as she prepared to rule on LightSquared’s plan to reorganize with $2.5 billion in financing backed by Fortress Investment Group LLC, JPMorgan Chase & Co. and Melody Capital Advisors LLC.

LightSquared accused Ergen, 61, of secretly snapping up debt in the company to hijack its reorganization and get its airwaves at a discount. The company said that, as a rival, Ergen was barred from owning the debt in the first place and his claim could be singled out for worse treatment than that of other creditors.

Ergen “found a loophole and exploited it,” Chapman said, concluding that he acted improperly by concealing his identity and leaving some of his debt purchases in limbo in a bid to derail LightSquared’s bankruptcy.

‘No Doubt’

Chapman found that while it was unclear whether Ergen was acting for himself or Dish when he started making the purchases in 2012, there was “no doubt” he was acting on Dish’s behalf by April 2013, when he bought $320 million in face value of the debt and hired Willkie Farr & Gallagher LLP as bankruptcy counsel.

The fund Ergen used to buy the debt, SP Special Opportunities LLC, wasn’t technically prohibited from making the purchases because it was owned by him and not Dish, Chapman said. However, Ergen violated a covenant of good faith and fair dealing in LightSquared’s credit agreement by using the fund to conceal his identity and make an “end run” around the rule that competitors couldn’t buy LightSquared’s debt, she said.

“Ergen’s multiple hats -- LBAC, SPSO, Dish -- can’t be selectively deployed to insulate Dish,” Chapman said.

Chapman also cited intentional delays in the completion of some debt purchases.

LightSquared’s Inaction

Still, Ergen won’t face damages in the case because of the “inaction and delay” in confronting him by LightSquared and Falcone’s investment fund Harbinger Capital Partners LLC, which both knew or had strong suspicions for almost a year about who was buying, Chapman said.

“Falcone conveniently used his suspicions to drum up interest in LightSquared from strategic investors” while failing to use tools available under bankruptcy law to find out who was behind SPSO, Chapman said.

Falcone was less inclined to complain as the price of LightSquared’s debt more than doubled to 90 cents on the dollar, she said, citing e-mails he exchanged with Andrew McKnight at Fortress about it being potentially beneficial that Ergen was said to be a buyer.

Falcone, 51, who made billions betting against subprime mortgages before the housing collapse, accused Ergen of trying to game the reorganization process to get LightSquared’s airwaves at below-market prices. Ergen last year sought to acquire the wireless spectrum for $2.22 billion, only to drop his offer at the last minute.

Ergen said he made no “false representations” about his intentions and only dropped his bid after getting information about a technical issue on the day of a planned auction. The technical issue has been kept confidential.

LightSquared listed assets of $4.48 billion and debt of $2.29 billion in its 2012 Chapter 11 filing. The proposed plan values reorganized LightSquared at $7.7 billion and projects gaining regulatory approval to use some of the company’s airwaves starting in 2015.

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

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