In re Am., Docket Nos. 10–1175

Citation634 F.3d 79
Decision Date07 February 2011
Docket NumberDocket Nos. 10–1175,10–1352.,10–1201
PartiesIn re DBSD NORTH AMERICA, Incorporated, Debtor.DISH Network Corporation, Creditor–Appellant,v.DBSD North America, Incorporated, Debtor–Appellee,Ad Hoc Committee of Senior Noteholders, Official Committee of Unsecured Creditors, Creditors–Appellees.Sprint Nextel Corporation, Appellant,v.DBSD North America, Inc., Ad Hoc Committee of Senior Noteholders, Official Committee of Unsecured Creditors, Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

OPINION TEXT STARTS HERE

Lawrence Byrne (Martin N. Flics, Paul S. Hessler, on the brief), Linklaters LLP, New York, NY, for CreditorAppellant DISH Network Corporation.John H. Culver III (Felton E. Parrish, on the brief), K & L Gates LLP, Charlotte, North Carolina, Eric T. Moser, on the brief, K & L Gates LLP, New York, NY, for CreditorAppellant Sprint Nextel Corporation.Yosef J. Riemer (James H.M. Sprayregen, Lee Ann Stevenson, on the brief), Kirkland & Ellis LLP, New York, NY, Marc J. Carmel, Lauren M. Hawkins, on the brief, Kirkland & Ellis LLP, Chicago, IL, for DebtorAppellee DBSD North America, Incorporated.Theresa A. Foudy (Steven J. Reisman, Maryann Gallagher, on the brief), Curtis, Mallet–Prevost, Colt & Mosle LLP, for CreditorAppellee, Official Committee of Unsecured Creditors.Dennis F. Dunne (Risa M. Rosenberg, on the brief), Milbank, Tweed, Hadley & McCloy LLP, New York, NY, Andrew M. LeBlanc, on the brief, Milbank, Tweed, Hadley & McCloy LLP, Washington, DC, for CreditorAppellee Ad Hoc Committee of Senior Noteholders.Evan M. Jones, O'Melveny & Myers LLP, Los Angeles, CA, Jennifer M. Taylor, on the brief, O'Melveny & Myers LLP, San Francisco, CA, Elliot Ganz, on the brief, Loan Syndications and Trading Association, New York, NY, for Amicus Curiae Loan Syndications and Trading Association.Before: POOLER, RAGGI, and LYNCH, Circuit Judges.Judge POOLER concurs in part and dissents in part in a separate opinion.GERARD E. LYNCH, Circuit Judge:

These consolidated appeals arise out of the bankruptcy of DBSD North America, Incorporated and its various subsidiaries (together, DBSD). The bankruptcy court confirmed a plan of reorganization for DBSD over the objections of the two appellants here, Sprint Nextel Corporation (Sprint) and DISH Network Corporation (DISH).

Before us, Sprint argues that the plan improperly gave shares and warrants to DBSD's owner—whose interest lies below Sprint's in priority—in violation of the absolute priority rule of 11 U.S.C. § 1129(b)(2)(B). DISH, meanwhile, argues that the bankruptcy court erred when it found DISH did not vote “in good faith” under 11 U.S.C. § 1126(e) and when, because of the § 1126(e) ruling, it disregarded DISH's class for the purposes of counting votes under 11 U.S.C. § 1129(a)(8). DISH also argues that the bankruptcy court should not have confirmed the plan because the plan was not feasible. See 11 U.S.C. § 1129(a)(11).

On Sprint's appeal, we conclude (1) that Sprint has standing to appeal and (2) that the plan violated the absolute priority rule. On DISH's appeal we find no error, and conclude (1) that the bankruptcy court did not err in designating DISH's vote, (2) that, after designating DISH's vote, the bankruptcy court properly disregarded DISH's class for voting purposes, and (3) that the bankruptcy court did not err in finding the reorganization feasible. We therefore affirm in part, reverse in part, and remand for further proceedings.

BACKGROUND

The reader may find the full facts of this case in the decisions of both the bankruptcy court, In re DBSD North America, Inc. (“ DBSD I ”), 419 B.R. 179 (Bankr.S.D.N.Y.2009); In re DBSD North America, Inc. (“ DBSD II ”) 421 B.R. 133 (Bankr.S.D.N.Y.2009), and the district court, In re DBSD North America, Inc. ( “DBSD III ”), Nos. 09–cv–10156 (LAK), 09–cv–10372 (LAK), 09–cv–10373 (LAK), 2010 WL 1223109 (S.D.N.Y. Mar. 24, 2010); see also In re DBSD North America, Inc. ( “DBSD IV ”), 427 B.R. 245 (S.D.N.Y.2010) (affirming bankruptcy court's treatment of Sprint's claim). We therefore focus only on the facts most pertinent to these appeals.

ICO Global Communications founded DBSD in 2004 to develop a mobile communications network that would use both satellites and land-based transmission towers. In its first five years, DBSD made progress toward this goal, successfully launching a satellite and obtaining certain spectrum licenses from the FCC, but it also accumulated a large amount of debt. Because its network remained in the developmental stage and had not become operational, DBSD had little if any revenue to offset its mounting obligations.

On May 15, 2009, DBSD (but not its parent ICO Global), filed a voluntary petition in the United States Bankruptcy Court for the Southern District of New York, listing liabilities of $813 million against assets with a book value of $627 million. Of the various claims against DBSD, three have particular relevance here:

1. The First Lien Debt: a $40 million revolving credit facility that DBSD obtained in early 2008 to support its operations, with a first-priority security interest in substantially all of DBSD's assets. It bore an initial interest rate of 12.5%.

2. The Second Lien Debt: $650 million in 7.5% convertible senior secured notes that DISH issued in August 2005, due August 2009. These notes hold a second-priority security interest in substantially all of DBSD's assets. At the time of filing, the Second Lien Debt had grown to approximately $740 million. It constitutes the bulk of DBSD's indebtedness.

3. Sprint's Claim: an unliquidated, unsecured claim based on a lawsuit against a DBSD subsidiary. Sprint had sued seeking reimbursement for DBSD's share of certain spectrum relocation expenses under an FCC order. At the time of DBSD's filing, that litigation was pending in the United States District Court for the Eastern District of Virginia and before the FCC. In the bankruptcy case, Sprint filed a claim against each of the DBSD entities jointly and severally, seeking $211 million. The bankruptcy court temporarily allowed Sprint's claim in the amount of $2 million for voting purposes.1

After negotiations with various parties, DBSD proposed a plan of reorganization which, as amended, provided for “substantial de-leveraging,” a renewed focus on “core operations,” and a “continued path as a development-stage enterprise.” The plan provided that the holders of the First Lien Debt would receive new obligations with a four-year maturity date and the same 12.5% interest rate, but with interest to be paid in kind (“PIK”), meaning that for the first four years the owners of the new obligations would receive as interest more debt from DBSD rather than cash. The holders of the Second Lien Debt would receive the bulk of the shares of the reorganized entity, which the bankruptcy court estimated would be worth between 51% and 73% of their original claims. The holders of unsecured claims, such as Sprint, would receive shares estimated as worth between 4% and 46% of their original claims. Finally, the existing shareholder (effectively just ICO Global, which owned 99.8% of DBSD) would receive shares and warrants in the reorganized entity.

Sprint objected to the plan, arguing among other things that the plan violates the absolute priority rule of 11 U.S.C. § 1129(b)(2)(B). That rule requires that, if a class of senior claim-holders will not receive the full value of their claims under the plan and the class does not accept the plan, no junior claim- or interest-holder may receive “any property” “under the plan on account of such junior claim or interest.” Id. In making its objection, Sprint noted that the plan provided for the existing shareholder, whose interest is junior to Sprint's class of general unsecured claims, to receive substantial quantities of shares and warrants under the plan—in fact, much more than all the unsecured creditors received together. Sprint argued that [b]ecause the Plan fails to satisfy” the absolute priority rule, “it cannot be confirmed.”

The bankruptcy court disagreed. It characterized the existing shareholder's receipt of shares and warrants as a “gift” from the holders of the Second Lien Debt, who are senior to Sprint in priority yet who were themselves not receiving the full value of their claims, and who may therefore “voluntarily offer a portion of their recovered property to junior stakeholders” without violating the absolute priority rule. DBSD I, 419 B.R. at 210. It held that it would permit such gifting “at least where, as here, the gift comes from secured creditors, there is no doubt as to their secured creditor status, where there are understandable reasons for the gift, where there are no ulterior, improper ends ... and where the complaining creditor would get no more if the gift had not been made.” Id. at 212 (footnotes and quotation marks omitted).

Meanwhile, DISH, although not a creditor of DBSD before its filing, had purchased the claims of various creditors with an eye toward DBSD's spectrum rights. As a provider of satellite television, DISH has launched a number of its own satellites, and it also has a significant investment in TerreStar Corporation, a direct competitor of DBSD's in the developing field of hybrid satellite/terrestrial mobile communications. DISH desired to “reach some sort of transaction with [DBSD] in the future if [DBSD's] spectrum could be useful in our business.”

Shortly after DBSD filed its plan disclosure, DISH purchased all of the First Lien Debt at its full face value of $40 million, with an agreement that the sellers would make objections to the plan that DISH could adopt after the sale. As DISH admitted, it bought the First Lien Debt not just to acquire a “market piece of paper” but also to “be in a position to take advantage of [its claim] if things didn't go well in a restructuring.” Internal DISH communications...

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