In re Lightsquared Inc.

504 B.R. 321

In re LightSquared Inc., et al.¹, Debtors.

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

Harbinger Capital Partners LLC, HGW US Holding Company LP, Blue Line DZM Corp., and Harbinger Capital Partners SP, Inc., Plaintiffs,

v.Charles W. Ergen, Echostar Corporation, Dish Network Corporation, L–Band Acquisition LLC, SP Special Opportunities LLC, SP Special Opportunities Holdings LLC, Sound Point Capital Management LP, and Stephen Ketchum, Defendants.

The Ad Hoc Secured Group of LightSquared LP Lenders, LightSquared Inc., et al., Mast Capital Management, LLC, and U.S. Bank National Association, Intervenors.

Case No. 12–12080 (SCC) Jointly Administered

Adv. Pro. No. 13–1390 (SCC)

Filed November 21, 2013

Kasowitz, Benson, Torres & Friedman LLP, 1633 Broadway, New York, NY 10019, By: David M. Friedman, Esq., Jed I. Bergman, Esq., Attorneys for Plaintiffs Harbinger Capital Partners LLC, HGW U.S. 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., James C. Dugan, 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.

O'Melveny & Myers LLP, 7 Times Square, New York, NY 10036, By: Charles E. Bachman, Esq., Peter M. Friedman, Esq., Alexander Elliot Slater, Esq., Attorneys for Defendants Sound Point Capital Management, L.P. and Stephen Ketchum.

Milbank, Tweed, Hadley & McCloy LLP, 1 Chase Manhattan Plaza, New York, NY 10005, By: Matthew S. Barr, Esq., Alan J. Stone, Esq., Karen Gartenberg, Esq., Attorneys for Intervenor Debtors.

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., Attorneys for Intervenor Ad Hoc Secured Group of LightSquared LP Lenders.

Chapter 11

MEMORANDUM DECISION GRANTING MOTIONS TO DISMISS COMPLAINT

SHELLEY C. CHAPMAN, UNITED STATES BANKRUPTCY JUDGE

TABLE OF CONTENTS

BACKGROUND...330

I. The Debtors and the Commencement of the Bankruptcy Cases...330

II. The LightSquared LP Credit Agreement...330

III. The Defendants...331

IV. The Defendants' Alleged Scheme...332 PROCEDURAL HISTORY...333

STANDARD OF REVIEW...334

DISCUSSION...335

I. Harbinger's Equitable Disallowance Claim (Count One) is Dismissed with Prejudice...335

A. Applicable Statutory Provisions and Case Law...336

1. Section 502 of the Bankruptcy Code...336

2. Section 510 of the Bankruptcy Code...336

3. Applicable Case Law...336

B. The Bankruptcy Code Does Not Permit Equitable Disallowance...339

1. Statutory Interpretation...339

a. The Plain Language of Section 502 Does Not Permit Equitable Disallowance...339

b. The Court Cannot Equitably Disallow a Claim Under Section 105(a)...341

c. Section 510(c) Provides an Equitable Remedy of Subordination, Not Disallowance...342

2. Some Observations on the Use of Legislative History...343

II. Harbinger Has Failed to State a Claim for Fraud or in Tort Against the Ergen Defendants...344

A. Fraud (Count Two)...344

1. Defendants' Alleged Material False Representations and Omissions...345

a. Material False Representations...345

b. Material Omissions...345

2. Defendants' Intent...347

3. Harbinger's Reliance...349

B. Tortious Interference with (i) Prospective Economic Advantage with LightSquared Creditors and (ii) the Jefferies Relationship (Counts Four and Five)...351

1. Harbinger's Allegations of Tortious Interference with Creditor Relationship...352

2. Harbinger's Allegations of Tortious Interference with Jefferies Relationship...353

3. Harbinger Has Not Pled Facts Sufficient to Demonstrate Tortious Interference with Either the Creditor Relationship or the Jefferies Relationship...353

C. Unfair Competition (Count Six)...353

D. Civil Conspiracy (Count Seven)...355

III. Harbinger Has Failed to State a Claim for Fraud or in Tort Against the DISH Defendants...355

IV. Harbinger Has Failed to State a Claim for Fraud or in Tort Against the Sound Point Capital Defendants...356

V. Objection to the Claim of SPSO under Section 502 of the Bankruptcy Code (Count Eight)...357 CONCLUSION...358

Before the Court are the motions (the “Motions to Dismiss”) ² of defendants Charles W. Ergen (“Mr. Ergen”), SP Special Opportunities, LLC (“SPSO”), Special Opportunities Holdings LLC (“SO Holdings,” and, collectively with Mr. Ergen and SPSO, the “Ergen Defendants”), EchoStar Corporation (“EchoStar”), DISH Network Corporation (“DISH”), L–Band Acquisition, LLC (“LBAC,” and, collectively with EchoStar and DISH, the “DISH Defendants”), Sound Point Capital Management, L.P. (“Sound Point Capital”), and Stephen Ketchum (“Mr. Ketchum,” and, together with Sound Point Capital, the “Sound Point Capital Defendants”) ³ seeking to dismiss the amended complaint (the “Amended Complaint”) ⁴ of Harbinger Capital Partners LLC, HGW U.S. Holding Company LP, Blue Line DZM Corp., and Harbinger Capital Partners SP, Inc. (collectively, “Harbinger”).

As stated in the Amended Complaint, Harbinger “brings this action against Ergen and entities he controls, including DISH, EchoStar, LBAC, SPSO, and SO Holdings, to seek redress for Defendants' fraud and other tortious conduct aimed at misappropriating Harbinger's control over and investment in LightSquared, and destroying Harbinger's contractual rights and business opportunities relating to that investment.” Am. Compl. ¶ 1. More specifically, Harbinger alleges that DISH and EchoStar, acting through Mr. Ergen as their executive chairman, and with the assistance of Sound Point Capital and Mr. Ketchum in forming SPSO, engaged in subterfuge and fraudulently purchased certain secured debt obligations of LightSquared LP (the “Loan Debt”) issued under the Credit Agreement (as defined below), in order to gain control of LightSquared Inc. and its debtor subsidiaries (“LightSquared” or the “Debtors”) and derail Harbinger's (i) control over and equity interest in the Debtors and their assets, (ii) plans for the reorganization of the Debtors, and (iii) attempts to gain exit financing for such reorganization. In addition, Harbinger alleges that Mr. Ergen and DISH/EchoStar, through LBAC, made a low-ball, bad-faith offer to purchase the Debtors' wireless spectrum at a discount in order to confuse and deter other potential purchasers from making a reasonable bid for such assets. Harbinger asserts that the “Defendants' fraudulent scheme has materially harmed Harbinger's contractual rights and opportunities as LightSquared's controlling shareholder, and will improperly provide Ergen and his entities with an unfair advantage as a bidder for the spectrum assets....” Id.

By their three separate Motions to Dismiss, each group of Defendants asserts, among other things, that the Amended Complaint fails to state a claim upon which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure (the “Rules”), made applicable herein by Rule 7012 of the Federal Rules of Bankruptcy Procedure (the “BankruptcyRules”), and should be dismissed. More specifically, the Defendants argue that SPSO, the entity that purchased $1,013,082,326.30 in Loan Debt ⁵ and, as of July 26, 2013, held $824,323,097.83 in Loan Debt,⁶ was permitted to do so under the applicable provisions of the Credit Agreement because SPSO is not a “Disqualified Company” as defined in the Credit Agreement, nor is it a subsidiary of a Disqualified Company. The Ergen Defendants and the DISH Defendants (collectively, the “Ergen/DISH Defendants”) further assert that they owed no duty to Harbinger, which, they maintain, precludes the assertion of any fraud claim. In the absence of a claim for fraud, the Defendants argue that Harbinger has failed to state a claim in each of the other causes of action in the Amended Complaint. Defendants further argue that Harbinger lacks “standing” or the right to assert the claims alleged in the Amended Complaint, as Harbinger lacks a protectable right or interest that could serve as a basis for the claims. Finally, Defendants argue that any such claims belong exclusively to the Debtors. The DISH Defendants also argue that Harbinger has failed to meet the heightened pleading standard required by Rule 9(b) (made applicable herein by Bankruptcy Rule 7009) with respect to its fraud claim, and that the Amended Complaint is replete with impermissible “group pleading,” characterized by broad allegations against groups of Defendants without particularized assertions of the specific allegations being made against each of the Defendants.

For the reasons set forth below, the Motions to Dismiss are granted as follows: (i) with respect to Count One, the Motion of the Ergen Defendants to Dismiss the Amended Complaint is granted, and Count One is dismissed with prejudice; (ii) with respect to Counts Two, Four, Five, Six, and Seven, the Motion of the Ergen Defendants to Dismiss the Amended Complaint is granted; (iii) with respect to Counts Two, Four, Five, Six, and Seven, the Motion of the DISH Defendants to Dismiss the Amended Complaint is granted; (iv) with respect to Counts Three, Six, and Seven, the Motion of the Sound Point Capital Defendants to Dismiss the Amended Complaint is granted; and (v) with respect to Count Eight, the Motion of the Ergen Defendants to Dismiss the Amended Complaint is granted, and Count Eight is dismissed without prejudice to the rights of any party-in-interest, including Harbinger, to seek disallowance of SPSO's claim under section 502 of the Bankruptcy Code on grounds not...