In re Dbsd North America, Inc., 09-13061 (REG).

• Citation: 421 B.R. 133
• Decision Date: 21 December 2009
• Docket Number: No. 09-13061 (REG).,09-13061 (REG).
• Parties: In re DBSD NORTH AMERICA, INC., et al., Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

421 B.R. 133

In re DBSD NORTH AMERICA, INC., et al., Debtors.

No. 09-13061 (REG).

United States Bankruptcy Court, S.D. New York.

December 21, 2009.

Kirkland & Ellis LLP, by James H.M. Sprayregen, P.C., Esq., Christopher J. Marcus, Esq., Yosef J. Riemer, Esq., Lee Ann Stevenson, Esq., Matthew F. Dexter, Esq., Christopher V. Coulston, Esq., New York, NY, and by Marc J. Carmel, Esq., (argued), Sienna R. Singer, Esq., Lauren M. Hawkins, Esq., Chicago, IL, Attorneys for the Debtors and Debtors in Possession.

Curtis, Mallet-Prevost, Colt & Mosle LLP by Steven J. Reisman, Esq., Maryann Gallagher, Esq., Timothy A. Barnes, Esq., New York, NY, for Official Committee of Unsecured Creditors.

Milbank, Tweed, Hadley & McCloy LLP, by Dennis F. Dunne, Esq., Risa M. Rosenberg, Esq., Michael E. Comerford, Esq., Jeremy S. Sussman, Esq., New York, NY, and by Andrew M. Leblanc, Esq. (argued), Washington, D.C., for Ad Hoc Committee of Senior Noteholders.

Linklaters LLP by Martin N. Flics, Esq. (argued), Paul S. Hessler, Esq., New York, NY, for DISH Network Corporation.

K & L Gates LLP, by John H. Culver III, Esq., Felton E. Parrish, Esq., Charlotte, NC, for Sprint Nextel Corporation.

DECISION ON DEBTORS' MOTION TO DESIGNATE DISH NETWORK'S VOTE TO REJECT DEBTORS' REORGANIZATION PLAN¹

ROBERT E. GERBER, Bankruptcy Judge.

Introduction

In this contested matter in the chapter 11 cases of DBSD North America, Inc. and its subsidiaries (the "Debtors"), the Debtors move, pursuant to section 1126(e) of the Bankruptcy Code, to designate the votes of DISH Network Corporation ("DISH"), now the sole holder of debt in the First Lien Debt (as defined below) class, rejecting the reorganization plan before the Court for confirmation. As described more fully below, DISH became involved in these cases when, after the Debtors proposed a plan of reorganization, DISH bought up all of the Debtors' First Lien Debt from its prior holders, at par, seeking by its acquisition of the Debtors' debt, "to acquire control of this strategic asset." Thereafter, literally on the eve of the plan confirmation hearing, DISH sought to terminate exclusivity and obtain permission to file its own plan, further to achieve its strategic objective.

The motion is granted.² This is the paradigmatic case for the application of the Allegheny doctrine,³ described more fully below. The Court's Findings of Fact and Conclusions of Law in connection with its determination follow.

Findings of Fact

The Debtors are a development-stage enterprise formed in 2004 to develop an integrated mobile satellite and terrestrial services network (the "Satellite System") to deliver wireless satellite communications services to mass-market consumers. To date, the Debtors have made significant progress in developing the Satellite System, including launching a satellite and obtaining frequency bands and related regulatory approval from the FCC for the Satellite System.

But the Debtors are still a development-stage enterprise and, as such, do not yet have significant operations from which to generate revenues or cash flow. However, the Satellite System, as developed to date, has substantial value.

In 1992, EchoStar Satellite LLC ("EchoStar"), a satellite television equipment distributor, acquired a Direct Broadcast Satellite license from the FCC. In early 1996, EchoStar established DISH as a provider of satellite television. Since then, EchoStar and DISH have launched a number of satellites to accommodate the enterprises' growth, and they now own and lease a total of 14 satellites. In addition to developing its proprietary satellite system, DISH has made significant investments in TerreStar Corporation ("TerreStar"), a development-stage telecommunications enterprise like the Debtors', which is likewise engaged in designing and developing a mobile satellite and terrestrial services network to deliver wireless satellite communications services.

DISH's total investment in TerreStar, at various levels of TerreStar's capital structure, all of which is public in the filings related to DISH's investment,⁴ is in excess of $250 million. DISH has 30 million shares of common equity in TerreStar, has an investment in a committed $50 million in vendor financing (approximately $15 to $20 million of which has been drawn down), and holds approximately $250 million (of TerreStar's $500 million) of first lien debt. TerreStar is a direct competitor of the Debtors.

On May 15, 2009, the Debtors filed for chapter 11 relief, and, on June 26, 2009, filed an amended plan (as amended to that point and thereafter, the "Plan") and associated disclosure statement. Under the Plan, the Debtors proposed to satisfy their first lien secured prepetition debt of approximately $40 million (the "First Lien Debt") through issuance of a modified promissory note, under an amended first lien facility (the "Amended Facility").

On July 9, 2009, about two weeks after the Debtors filed the Plan and disclosure statement (each of which disclosed the proposed treatment for the First Lien Debt), DISH purchased all of the First Lien Debt, in a principal amount of approximately $40 million, at par. Additionally, also after the Debtors' chapter 11 filing, DISH through an affiliate purchased approximately $111 million in principal amount of the Debtors' "7.5% Convertible Senior Subordinated Notes," representing second lien debt (the "Second Lien Debt")—a fulcrum security that the Plan proposed to convert to equity. DISH purchased Second Lien Debt only from sellers who were not bound by a support agreement (the "Plan Support Agreement"), which would obligate its parties to vote their claims in favor of the Plan.

DISH's actions and intent may be observed and inferred from the circumstances and its own documents. DISH purchased its debt at par—paying the price for which most other creditors could only hope.⁵ DISH thought it was overpaying for debt it acquired in this case, but was willing to make that investment.⁶ It was willing to overpay for this investment Because we have an interest generally in spectrum assets, and we were interested in having a relationship with ICO[⁷] that might allow us to, you know, reach some sort of transaction in the future if that spectrum could be useful in our business.⁸

DISH's acquisition of First Lien Debt was not a purchase to make a profit on increased recoveries under a reorganization plan. Rather, the Court finds that DISH made its investments in the Debtors' First Lien and Second Lien Debts as a strategic investor. One of its documents stated, in a number of bullet points that were part of an "Executive Summary":

DISH has invested [$32.9M] for [$111.6M] of Face Value 2nd Priority Convertible Notes at an average dollar price of [29.5].

The Company is attempting to negotiate a proposal to equitize Bondholders in return for 95% of the restructured ICO N.A. (subject to certain earnouts based on valuation).

We believe there is a strategic opportunity to obtain a blocking position in the 2nd Priority Convertible Notes and control the bankruptcy process for this potentially strategic asset.

We are seeking Board approval to invest up to an incremental [$100M] to purchase securities necessary to gain control of the Unsecured (impaired) Class.⁹

And another document, similar to but different from the one just quoted, said things similarly but in some respects even more explicitly:

DISH has invested [$32.9M] for [$111.6M] of Face Value 2nd Priority Convertible Notes at an average dollar price of [29.5].

The Company is attempting to negotiate a proposal to equitize Bondholders in return for 95% of a restructured ICO N.A. (subject to certain earnouts based on valuation).

We believe there is a strategic opportunity to obtain the remaining convertible bonds outstanding in an attempt to convert to equity and acquire control of ICO North America.

We are seeking board approval for up to [$200M] to acquire the remaining convertible bonds outstanding and establish control of this strategic asset.¹⁰

On July 24, 2009, the Debtors filed a further amended Plan and related disclosure statement, providing additional disclosure, addressing others' objections, and providing an updated term sheet for the Amended Facility. On July 27, 2009, the Court approved the Disclosure Statement, over DISH's objection, and thereafter the Debtors began soliciting votes on the Plan.

DISH voted all of its claims, including all of its First Lien Debt and Second Lien Debt claims, to reject the Plan. With a single exception,¹¹ all other impaired classes in which votes were cast voted to accept the Plan.

In response to DISH's rejection of the Plan, the Debtors filed a motion seeking to designate DISH's vote of its First Lien Debt to reject the Plan.¹² In its objection to such motion DISH noted, among other things, that its conduct was that of a "model bankruptcy citizen" and that it "has not moved to terminate exclusivity, and it has not proposed a competing plan."¹³ But on the morning before the scheduled confirmation hearing, September 21, 2009, DISH filed a motion seeking an order terminating the Debtors' 180 day exclusivity period for obtaining approval of the Plan and for authority to propose a competing plan.

DISH has made a proposal to enter into a major transaction with the Debtors, the specifics of which are inappropriate for disclosure in this public document. It is sufficient, for the purposes of this discussion, to say, and the Court finds, that DISH's proposal went far beyond the treatment of the First Lien Debt that DISH had recently acquired. DISH's proposal further evidences its strategic objective.

Based on the totality of the evidence, the Court finds DISH's efforts to understate its intent, as in some of its deposition testimony and counsel's argument, unpersuasive. The Court finds that DISH made its investment in this chapter 11 case, and has continued to act, not as a traditional creditor seeking to maximize its return...