In re Iridium Operating LLC, Bankruptcy No. 99-45005 (JMP).

CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York
Citation373 B.R. 283
Docket NumberAdversary No. 01-02952(JMP).,Bankruptcy No. 99-45005 (JMP).
PartiesIn re IRIDIUM OPERATING LLC, Iridium Capital Corp., Iridium IP LLC, Iridium Roaming LLC, Iridium (Potomac) LLC, and Iridium Promotions, Inc. Statutory Committee of Unsecured Creditors on behalf of Iridium Operating LLC, Iridium Capital Corp., Iridium IP LLC, Iridium LLC, Iridium Roaming LLC, Iridium (Potomac) LLC, Plaintiff, v. Motorola, Inc., Defendant.
Decision Date31 August 2007
373 B.R. 283
In re IRIDIUM OPERATING LLC, Iridium Capital Corp., Iridium IP LLC, Iridium Roaming LLC, Iridium (Potomac) LLC, and Iridium Promotions, Inc.
Statutory Committee of Unsecured Creditors on behalf of Iridium Operating LLC, Iridium Capital Corp., Iridium IP LLC, Iridium LLC, Iridium Roaming LLC, Iridium (Potomac) LLC, Plaintiff,
v.
Motorola, Inc., Defendant.
Bankruptcy No. 99-45005 (JMP).
Adversary No. 01-02952(JMP).
United States Bankruptcy Court, S.D. New York.
August 31, 2007.

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Greg A. Danilow, Esq., Michael F. Walsh, Esq., Scott J. Atlas, Esq., Diane Harvey, Esq. and Ashish D. Gandhi, Esq., Weil, Gotshal & Manges LLP, New York, NY, for Statutory Committee of Unsecured Creditors,

Garrett B. Johnson, Esq., Anne McClain Sidrys, Esq. and Maria P. Rivera, Esq., Kirkland & Ellis LLP, Chicago, IL, for Motorola, Inc.

OPINION REGARDING INSOLVENCY AND UNREASONABLY SMALL CAPITAL

JAMES M. PECK, Bankruptcy Judge.

	

TABLE OF CONTENTS INTRODUCTORY STATEMENT AND OVERVIEW .........................................291 PROCEDURAL HISTORY ..........................................................304 JURISDICTION AND VENUE ......................................................304 FINDINGS OF FACT ............................................................305 I. IRIDIUM CORPORATE HISTORY ...................................................305 II. THE IRIDIUM SYSTEM ..........................................................306 A. Iridium System Performance ..............................................308 B. Expectations About Handset Size .........................................310 III. RELEVANT INFORMATION REGARDING EXPECTED SYSTEM PERFORMANCE WAS DISCLOSED TO IRIDIUM AND ITS INVESTORS .................................................................311 A. Iridium And Its Board Were Informed About The System's Voice Quality And Expected Performance In Various Environments ..............311 B. Iridium Publicly Disclosed System Limitations to Investors ..............313 IV. IRIDIUM'S BUSINESS PLANS AND MARKET RESEARCH ................................314 A. Early Iridium Business Planning And Market Research .....................314 B. The 1996-1998 Market Research ...........................................316 C. Translating Market Research Into Projections ............................317 1. KPMG Financial Models ...............................................318 2. Business Plan 2. 0 ..................................................318 3. Business Plans-2. x, 2. x Update and 3. 0 ...........................319 D. Marketing Expert Opinions ...............................................319

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 V. IRIDIUM'S BANK LOANS ........................................................320
                 A. Global Arrangers' Due Diligence .........................................320
                 B. The C & L/ADL "Banking Case" ............................................322
                 1. ADL technical due diligence .........................................325
                 2. ADL risk assessment .................................................326
                 3. ADL understanding of system performance .............................326
                 VI. IRIDIUM PUBLIC AND PRIVATE EQUITY AND DEBT
                 TRANSACTIONS ..............................................................326
                 A. Private Equity Investments ..............................................326
                 1. Due diligence associated with private investments ...................328
                 a. Goldman Sachs ...................................................328
                 b. Early investors .................................................328
                 B. 1995 Contemplated Debt Offering .........................................329
                 C. Public Equity Offerings .................................................329
                 1. Public Equity Due Diligence And Understanding Of System
                 Limitations .......................................................330
                 a. Merrill Lynch ...................................................330
                 b. Salomon Smith Barney ............................................331
                 2. Equity underwriter valuations of Iridium ............................331
                 D. Iridium's Public Debt Offerings .........................................332
                 E. Bondholder due diligence and understanding of system limitations ........333
                 VI. IRIDIUM'S STOCK PRICE AND ANALYST ASSESSMENTS ...............................333
                 A. Iridium Stock Price .....................................................333
                 B. Analysts ................................................................334
                VIII. EVIDENCE REGARDING IRIDIUM'S CAPITAL ADEQUACY ...............................335
                 A. Iridium's Financial Advisors ............................................335
                 B. Iridium CFO/CEO .........................................................336
                 C. KPMG ....................................................................336
                 IX. MOTOROLA SOLVENCY EXPERTS ...................................................337
                 A. Paul Pfleiderer .........................................................337
                 B. Bruce Den Uyl ...........................................................337
                 1. Den Uyl DCF Analysis ................................................337
                 a. 1995 DCF analysis ...............................................338
                 b. 1997 DCF analysis ...............................................338
                 c. 1998 DCF analysis ...............................................338
                 C. Other Evidence Regarding Iridium's Solvency .............................338
                 X. COMMITTEE'S SOLVENCY EXPERT .................................................339
                 A. The Committee's Adjusted Iridium Projections ............................340
                 1. Spragg's 1995 Projections ...........................................340
                 2. Spragg's 1997 Projections ...........................................341
                 CONCLUSIONS OF LAW ..........................................................342
                 XI. BURDEN OF PROOF .............................................................342
                 XII. LEGAL STANDARDS FOR PROVING INSOLVENCY/INADEQUACY
                 OF CAPITAL ................................................................344
                 A. Insolvency ..............................................................344
                 B. Capital Adequacy ........................................................345
                XIII. RELEVANCE OF IRIDIUM'S. SUBSEQUENT FAILURE IN
                 DETERMINING INSOLVENCY AND/OR INADEQUACY OF
                 ITS CAPITAL ...............................................................345
                

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 XIV. ROLE OF CONTEMPORANEOUS EVIDENCE IN DETERMINING
                 IRIDIUM'S INSOLVENCYAND/OR INADEQUACY OF
                 ITS CAPITAL ...............................................................346
                 A. Iridium's Market Capitalization. ........................................346
                 B. Iridium Projections of Future Cash Flows ................................347
                 C. Analysts, Investors and Lenders .........................................348
                 XV. EXPERT TESTIMONY ON INSOLVENCY AND INADEQUATE
                 CAPITAL ...................................................................349
                 A. Legal Standards Regarding The Reliability And Credibility Of Expert
                 Testimony .............................................................349
                 B. The Expert Opinion Testimony Regarding Insolvency Offered By The
                 Committee Is Not Persuasive ...........................................350
                 CONCLUSION ..................................................................352
                

The Statutory Committee of Unsecured Creditors (the "Committee") on behalf of Iridium Operating LLC, Iridium Capital Corp., Iridium IP LLC, Iridium LLC, Iridium Roaming LLC and Iridium (Potomac) LLC (collectively "Iridium") seeks to recover billions of dollars from Motorola, Inc. ("Motorola") in this litigation on behalf of the Iridium estate. The Committee's claims arise out of Motorola's development and deployment for Iridium of a global telecommunications constellation of sixty-six low earth orbit satellites and related gateways pursuant to what is known as the Space System Contract. Under that contract and related contracts, Motorola received approximately $3.7 billion in transfers from Iridium in accordance with the contract's milestone payment schedule. Iridium activated its service with much fanfare in November 1998 and ended up in bankruptcy about nine-months later. The litigation explored, but did not fully explain, the reasons for this huge and embarrassing failure.

Following years of fact and expert discovery, pretrial motions and the submission of a final pretrial order, the parties, in consultation with the Court, consented to bifurcate the trial in order to streamline what otherwise would have been an unwieldy and prolonged proceeding. The first phase of the trial, by agreement, was limited to the questions of whether Iridium was insolvent or had unreasonably small capital during the four-year period prior to commencement of the bankruptcy case. Even with this agreement to limit the issues, this phase of the trial was unusually long — fifty trial days. Opening arguments took place on October 23, 2006; closing arguments were presented on June 5, 2007. Between the opening argument and the closing, 52 witnesses testified, including 7 experts, and 866 exhibits were admitted into evidence. The parties submitted detailed post-trial proposed findings of fact and conclusions of law and post-trial briefs. The issues regarding insolvency are unusually complex and present a challenging valuation problem.

After consideration of the evidence presented during this bench trial and review of extensive post-trial submissions, the Court in this opinion now decides whether Iridium was insolvent or had unreasonably small capital during the four-year period from August 13, 1995 through August 13, 1999 for purposes of fraudulent conveyance and preference claims seeking to avoid transfers from Iridium to Motorola that total approximately...

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