A competitor’s attempt to take over a debtor through its debt may be subject to judicial scrutiny, as discussed in the bench, and subsequent written, decision issued by Bankruptcy Judge Shelley C. Chapman in the LightSquared case.1 Such scrutiny extends to the classification of debt purchased by a competitor, treatment accorded that debt under a plan of reorganization and the competitor’s ability to vote its claim because these are plan-related activities that effect a change of control through Chapter 11. In prosecuting its third amended plan, LightSquared argued that separate classification of a competitor’s claims is appropriate, the rejection vote of the competitor’s class should be designated and, in the event the rejection vote was recognized, that the Plan should still be confirmed under the “cram-down” provisions of the Bankruptcy Code. Chapman concluded that separate competitor classification was appropriate, but denied designation and confirmation. The court reaffirmed that the competitor’s conduct merited equitable subordination appropriate to redress injury to innocent creditors, but again deferred ruling on the extent of subordination.
Background
A few months ago, Charles Ergen, the founder, chairman of the board of directors and controlling shareholder of DISH Network, was the focus of bankruptcy court scrutiny due to his conduct in acquiring senior secured claims against LightSquared (the Ergen claims). His heavily litigated takeover attempt, in which he amassed what appeared to be a control position of having close to $1 billion of the outstanding $1.5 billion in senior secured debt, resulted in the determination to equitably subordinate his claims to an extent to be determined at a later date.2 Critically, the Ergen claims were all acquired before a plan was filed. An auction for the assets of LightSquared, premised upon a stalking horse proposal from DISH-related entities, followed. There were no competing bids, but the purchase agreement was terminated by DISH for failure to meet various agreed milestones.
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