Judge Says LightSquared Restructuring Plan Unfair to Ergen -- 2nd Update

By Dow Jones Business News, 

By Joseph Checkler

A judge on Thursday said some of Dish Network Corp. Chairman Charlie Ergen's nearly $1 billion in claims in the wireless venture's bankruptcy case will be subordinated below those of other creditors. However, in a separate ruling, she refused to approve LightSquared's restructuring, saying it is unfair to Mr. Ergen.

Judge Shelley Chapman of U.S. Bankruptcy Court in Manhattan said the amount of his debt to be subordinated is "to be determined" at a trial later. In refusing to approve LightSquared's restructuring proposal, the judge said Mr. Ergen is treated worse than other holders of the company's bank debt, which would violate the bankruptcy code.

Judge Chapman said it would be too risky to conclude that LightSquared is worth enough to pay Mr. Ergen back over seven years, as it has proposed to do.

The separate rulings, one on whether to approve LightSquared's $2.65 billion restructuring plan and the other in a trial over Mr. Ergen's debt purchases, were read aloud for hours in court Thursday. LightSquared must now scramble to come up with a new restructuring proposal that treats Mr. Ergen differently, although the subordination of his debt now looms as a fact, rather than a possibility.

Mr. Ergen, the judge said, intentionally delayed trades in order to slow LightSquared's bankruptcy case last year, calling it a "purposeful obstruction of the process." She said some of the testimony from Mr. Ergen and other witnesses called by his lawyers was "not credible," particularly regarding the delays of the trades.

The wireless venture had said Mr. Ergen improperly bought his claims on behalf of Dish as part of a plan to ease LightSquared into Dish's hands, and the judge essentially agreed. Mr. Ergen has denied that allegation, saying he made the purchases for himself via his SP Special Opportunities, or SPSO, investment vehicle.

The judge said that while Mr. Ergen's investment vehicle was "not technically prohibited" from buying LightSquared's bank debt, he made "an end run" around a credit agreement.

"Mr. Ergen found a loophole in the express terms of the credit agreement and exploited it," Judge Chapman said. " SPSO was essentially a front used by Mr. Ergen."

A spokesman for Dish declined to comment for the company and Mr. Ergen. LightSquared didn't immediately have comment.

While concluding that at least some of the purchases were "carried out for the benefit of Dish," Judge Chapman refused to cancel the debt entirely, citing the Bankruptcy Code. She also refused to award damages to LightSquared and its main equity holder, Philip Falcone, because they failed to go after Mr. Ergen for the purchases until it was "too late in the game."

Dish had bid $2.2 billion for a large swath of LightSquared's wireless spectrum, but dropped that bid earlier this year, citing an undisclosed technical issue regarding LightSquared's network.

LightSquared's restructuring plan, led by Fortress Investment Group LLC, would have allowed Mr. Falcone and his Harbinger Capital Partners hedge-fund firm to keep at least a 35% equity stake in the company. The two rulings made Thursday were related because Mr. Ergen has fought his treatment under that plan.

The plan called for his nearly $1 billion in bank debt to be paid back over seven years, via a note. Mr. Ergen wanted to be treated like other holders of the same debt, who would get paid in cash in full. In rejecting the restructuring plan, Judge Chapman said it was OK for Mr. Ergen's debt to be treated differently, but not worse. Her separate ruling to subordinate his debt, though, may make it easier for LightSquared to formulate a new plan.

LightSquared 's main asset is spectrum, the limited pockets of airwaves that mobile-phone and Internet companies use.

LightSquared filed for Chapter 11 in May 2012 after federal regulators refused to clear its plans to launch a wireless network, which they said could interfere with global-positioning systems. Its previous restructuring proposals all were contingent on the Federal Communications Commission approving modifications to LightSquared's network, which the agency has said isn't imminent. LightSquared has touted the fact that the newest Fortress proposal isn't contingent on such stringent regulatory conditions.

Write to Joseph Checkler at joseph.checkler@wsj.com

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This article appears in: Technology

Referenced Stocks: DISH , FIG

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