Lightsquared LP v. SP Special Opportunities LLC (In re Lightsquared Inc.)

• Decision Date: 10 June 2014
• Docket Number: Case No. 12–12080 (SCC) Jointly Administered,Adv. Pro. No. 13–01390 (SCC)
• Citation: 511 B.R. 253
• Parties: In re: LightSquared Inc., et al., Debtors. LightSquared LP, LightSquared Inc., LightSquared Investors Holdings Inc., TMI Communications Delaware, Limited Partnership, LightSquared GP Inc., ATC Technologies, LLC, LightSquared Corp., LightSquared Inc. of Virginia, LightSquared Subsidiary LLC, SkyTerra Holdings (Canada) Inc., and SkyTerra (Canada) Inc., Plaintiff–Intervenors, v. SP Special Opportunities LLC, DISH Network Corporation, EchoStar Corporation, and Charles W. Ergen, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

511 B.R. 253

In re: LightSquared Inc., et al., Debtors.LightSquared LP, LightSquared Inc., LightSquared Investors Holdings Inc., TMI Communications Delaware, Limited Partnership, LightSquared GP Inc., ATC Technologies, LLC, LightSquared Corp., LightSquared Inc. of Virginia, LightSquared Subsidiary LLC, SkyTerra Holdings (Canada) Inc., and SkyTerra (Canada) Inc., Plaintiff–Intervenors,

v.SP Special Opportunities LLC, DISH Network Corporation, EchoStar Corporation, and Charles W. Ergen, Defendants.

Case No. 12–12080 (SCC) Jointly Administered

Adv. Pro. No. 13–01390 (SCC)

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

Signed June 10, 2014

Milbank, Tweed, Hadley & McCloy LLP, 1 Chase Manhattan Plaza, New York, NY 10005, By: Matthew S. Barr, Esq., Alan J. Stone, Esq., Michael L. Hirschfeld, Esq., Andrew M. Leblanc, Esq., Attorneys for Plaintiff–Intervenors and Debtors and Debtors in Possession.

Kasowitz, Benson, Torres & Friedman LLP, 1633 Broadway, New York, NY 10019, By: David M. Friedman, Esq., Jed I. Bergman, Esq., Christine A. Montenegro, Esq., Attorneys for Plaintiffs Harbinger Capital Partners LLC, HGW US Holding Company LP, Blue Line DZM Corp., and Harbinger Capital Partners SP, Inc.

Willkie Farr & Gallagher LLP, 787 Seventh Avenue, New York, NY 10019, By: Rachel C. Strickland, Esq., Tariq Mundiya, Esq., James C. Dugan, Esq., Matthew Freimuth, Esq., Attorneys for Defendants Charles W. Ergen, SP Special Opportunities, LLC, and Special Opportunities Holdings LLC.

Sullivan & Cromwell LLP, 125 Broad Street, New York, NY 10004, By: Robert J. Giuffra, Jr., Esq., Brian T. Frawley, Esq., Brian D. Glueckstein, Esq., Attorneys for Defendants DISH Network Corporation, EchoStar Corporation, and L–Band Acquisition, LLC.

Kirkland & Ellis LLP, 601 Lexington Avenue, New York, NY 10022, By: Paul M. Basta, Esq., Joshua A. Sussberg, Esq., Attorneys for Special Committee of Boards of Directors of LightSquared Inc. and LightSquared GP Inc.

Akin, Gump, Strauss, Hauer & Feld LLP, One Bryant Park, New York, NY 10036, By: Philip C. Dublin, Esq., Michael S. Stamer, Esq., Attorneys for Intervenors U.S. Bank National Association and MAST Capital Management, LLC.

White & Case LLP, 1155 Avenue of the Americas, New York, NY 10036, By: Thomas E. Lauria, Esq., Glenn M. Kurtz, Esq., Andrew C. Ambruoso, Esq., Julia M. Winters, Esq., Attorneys for Intervenor Ad Hoc Secured Group of LightSquared LP Lenders.

Chapter 11

POST–TRIAL FINDINGS OF FACT AND CONCLUSIONS OF LAW

SHELLEY C. CHAPMAN, UNITED STATES BANKRUPTCY JUDGE

TABLE OF CONTENTS

THE PARTIES...261

PROCEDURAL HISTORY...262

FINDINGS OF FACT...265

I. The Parties and Certain Relevant Third Parties...265

II. The LightSquared LP Credit Agreement and the Restrictions on the Transfer of LP Debt...267

III. Background Regarding SPSO's Purchases of LP Debt...271

A. Messrs. Ergen and Kiser Investigate Whether DISH and EchoStar Can Purchase LP Debt...271

B. Messrs. Ergen and Kiser Create the Bal Harbour Entities, and Then SPSO, to Purchase LP Debt...272

C. SPSO and Mr. Ketchum Did Not Reveal that Mr. Ergen Was Behind the LP Debt Purchases...275

IV. SPSO is Solely a Front for Mr. Ergen...275

A. SPSO Was Undercapitalized and Funded Solely at Mr. Ergen's Discretion...276

B. SPSO Votes Against Extension of LightSquared's Negotiations with Lenders... 277

C. SPSO's LP Debt Purchases...278

D. Mr. Ergen's Desire to Obtain a Blocking Position in LP Debt...280

V. Mr. Ergen Acted, at Least in Part, for the Benefit of DISH in Acquiring LP Debt Through SPSO...280

A. Mr. Kiser's Role in SPSO's LP Debt Purchases...281

B. Mr. Ergen Uses DISH Employees, Resources, and Legal Counsel to Facilitate the LP Debt Purchases...282

C. DISH Board Members and Management Take No Action Upon Learning of Mr. Ergen's LP Debt Acquisition...283

D. Mr. Ergen Controls the Boards of DISH and EchoStar...285

E. Soon After Acquiring a Blocking Position, Mr. Ergen Makes a Presentation to the DISH Board that Contemplates a DISH Bid...286

VI. DISH Contemplates and Makes a Bid for LightSquared at Mr. Ergen's Behest...288

A. DISH Forms a Special Committee to Evaluate a DISH Bid and the Propriety of Mr. Ergen's LP Debt Purchases...288

B. Mr. Ergen Makes a “Personal” Bid That Sets the Floor and Ensures He Will Be Repaid in Full...288

C. The DISH Special Committee...289

VII. LightSquared as a Strategic Investment for DISH...293

A. DISH and EchoStar's Prior Acquisitions of Spectrum Assets...293

B. Mr. Ergen's Consideration of LightSquared's Spectrum Assets...294

C. DISH's Pursuit of Sprint and Clearwire...296

VIII. Mr. Ergen's Assertion That He Was Making a Personal Investment is Belied by the Evidence...296

A. SPSO's Purchases of LP Debt Were Inconsistent with Mr. Ergen's Personal Past Investment Strategy...296

B. The Price at Which Mr. Ergen Attempted to Purchase the LP Debt and Offered for the LP Preferred Interests is Inconsistent with the “Great Investment” Premise...298

IX. LightSquared and Harbinger Were Aware or at Least Had a Strong Suspicion That Mr. Ergen was Acquiring LightSquared Debt...298

A. Although Public Information Provided No Certainty as to Who Was Behind Sound Point's Purchases, There Was Ample Reason to Believe It Was Mr. Ergen... 298

B. Harbinger and LightSquared Add DISH to the List of Disqualified Companies Because They Believe Mr. Ergen Is Buying LP Debt...302

C. Neither Harbinger Nor LightSquared Attempted to Use a Rule 2004 Subpoena to Determine Who Was Buying LightSquared Debt Through Sound Point...302

D. LightSquared and Moelis Representatives Also Suspect Mr. Ergen Is Buying Debt Through Sound Point...303

E. LightSquared and Harbinger Make Inquiries to Determine Who Is Behind Sound Point's Purchases but Fail to Take Action Based Upon Their Suspicions...303

F. On May 21, 2013, LightSquared and Harbinger Definitively Learn that Mr. Ergen is Behind SPSO...305

X. SPSO Delays Closing Hundreds of Millions of Dollars in LP Debt Trades For Several Months During a Critical Time in LightSquared's Bankruptcy Case...305

A. Mr. Kiser, with Sound Point's Assistance, Delays the Closing of LP Debt Trades...305

B. There Was No True Economic Benefit for Messrs. Ergen and Kiser to Keep the LP Debt Trades Open...308

C. LP Debt Trades Were Not Left Open Due to Liquidity Constraints...310

XI. LightSquared and its Creditors Were Injured by SPSO's Conduct...311

A. Negotiations with the Ad Hoc Secured Group Are Affected by SPSO's Pending LP Debt Trades...311

B. Once SPSO Discloses its Blocking Position and Joins the Ad Hoc Secured Group, Plan Negotiations Cease...311

C. Within Weeks of SPSO's Joining the Ad Hoc Secured Group, The LBAC Bid is Adopted...312

D. LightSquared's Negotiations with Creditors Come to an End after the Filing of the Ad Hoc Secured Group Plan...313

E. LBAC and DISH Seek to Obtain Broad Releases for Themselves and Their Affiliates in the Ad Hoc Secured Group Plan...314

DISCUSSION...314

I. Introduction...314

II. SPSO Cannot Be Held Liable for Breach of the Express Terms of the Credit Agreement...315

A. SPSO Was Not Technically Prohibited from Purchasing LP Debt...315

III. SPSO's Acquisition of the LP Debt Violated the Spirit of the Credit Agreement and is a Breach of the Implied Covenant of Good Faith and Fair Dealing...317

A. SPSO's LP Debt Purchases...318

B. Mr. Ergen's Conduct in the Spring of 2013 Establishes that He Was Acting for DISH...323

C. Breach of the Implied Covenant of Good Faith and Fair Dealing...333

IV. The SPSO Claim Shall Not Be Disallowed...339

A. The SPSO Claim is Not Void or Voidable Even Though the Court Finds an Implied Breach and Even if the Court Were to Have Found an Express Breach...339

B. The Inaction and Delay of LightSquared and Harbinger Preclude the Award of Affirmative Damages...341

V. SPSO's Claim Shall be Equitably Subordinated to the Extent of Injury Caused to Innocent Creditors...345

A. Applicable Law...346

B. Mobile Steel Prong I: SPSO's Inequitable Conduct...352

1. Breach of the Implied Covenant of Good Faith and Fair Dealing...352

2. SPSO, Through the Conduct of Messrs. Kiser and Ketchum, Purposefully Delayed the Closing of LP Debt Trades...353

C. Mobile Steel Prong II: SPSO's Conduct Harmed LightSquared's Creditors... 360

CONCLUSION...361

Between April 13, 2012 and April 26, 2013, Charles Ergen, through an entity named SPSO, purchased approximately $844 million of the senior secured debt of LightSquared LP, a debtor in these chapter 11 cases. Mr. Ergen—the founder, chairman of the board of directors, and controlling shareholder of DISH Network—bought the debt, he says, without any strategic intent to benefit DISH. Rather, he was interested in acquiring LightSquared debt personally because he “liked the investment” and because he had been advised that DISH itself was not eligible to purchase the debt due to restrictions in the LightSquared LP Credit Agreement. The “diligence” on the purchaser eligibility issue, such as it was, was conducted by Mr. Ergen's longtime friend Jason Kiser, the Treasurer of DISH, who from time to time worked on personal matters for Mr. Ergen. Mr. Kiser also arranged the trades on behalf of Mr. Ergen, on “his own time” while at work at DISH. Promptly after Mr. Ergen's initial debt purchase in the face amount of $5 million on April 13, 2012, and particularly after his significant debt purchase in the face amount of $247 million on May 4, 2012, the press began to speculate about the identity of the SPSO purchaser, publishing stories with headlines such as “LightSquared [Term Loan] Trades North of 70 as Ergen Enters the Picture” and “Ergen Builds Cash Pile Amidst LightSquared Restructuring Talks.” The trades and the press reports did not go unnoticed by LightSquared, especially after the news that it was Carl Icahn who had sold his nearly quarter billion dollar position in the debt to SPSO. Philip Falcone, the founder and principal owner of Harbinger Capital Partners, which is the principal shareholder of LightSquared, reacted to the news...