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LightSquared's latest turn: Plan "jammed Charlie" as compromise, Phil Falcone says

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Philip Falcone never wanted Dish Networks founder Charlie Ergen in LightSquared’s capital structure, but opted to support a plan that “jammed Charlie” in order to get the company out of bankruptcy as soon as possible, the Harbinger Capital Partners founder testified today in Manhattan bankruptcy court

Falcone took the stand on the final day of a two-week reorganization-plan-confirmation hearing in LightSquared’s long-running Chapter 11 proceedings. Judge Shelley Chapman scheduled closing arguments for May 5 and 6, but did not indicate when she expects to finally approve or deny the plan.

Judge Chapman, meanwhile, has yet to rule on litigation between LightSquared and Ergen’s investment vehicle, SP Special Opportunities, in a dispute at the heart of LightSquared’s reorganization plan. In January, she held a week-long trial to determine whether Ergen improperly acquired about $1 billion in LightSquared senior claims via SPSO. Closing arguments in the dispute ended just two days before the confirmation hearing began, even though Chapman’s final decision in that dispute directly impacts her ability to confirm LightSquared’s plan. (see “LightSquared v. Ergen trial wraps, judge’s ruling yet to come,” LCD News, March 17, 2014).

SPSO is the sole LightSquared creditor opposed to the company’s current plan – based on new financing from Melody Capital Partners, J.P. Morgan, Fortress Investment Group, and Harbinger – but the size of its claims gives Ergen a blocking position, allowing SPSO to veto any plan proposal. The current plan proposes to repay SPSO’s claims in full, but it would do so via a third-lien, seven-year payment-in-kind note, instead of the cash that creditors in the same class will receive.

LightSquared has asked Judge Chapman to dismiss SPSO’s claims altogether, a move Chapman has already said she would not consider, or to subordinate SPSO’s claims and designate its vote. Doing so would effectively guarantee confirmation of LightSquared’s plan.

SPSO has maintained that its debt purchases were all “perfectly legal,” and that it is being unfairly discriminated by the plan. SPSO lawyer James Dugan repeatedly questioned Falcone today about his decision to support subordination of SPSO’s claims. Citing e-mails Falcone wrote last December, Dugan focused on his animosity toward Ergen, evidence that could support SPSO’s argument that subordination of its claims was a punitive tactic, which would render the plan unconfirmable.

“You specifically thought it was a good idea to subordinate SPSO’s debt, right?” Dugan asked Falcone.

“I think it goes above and beyond that,” Falcone replied.

“What you say in your e-mail is, I like [the] subordination plan,” Dugan said.

“It would help the company exit bankruptcy,” Falcone said. “It wouldn’t necessarily do much for me.”

Among other things, Falcone also said in another e-mail Dugan cited that if LightSquared does not eventually receive FCC approval for the company’s proposed spectrum use – a crucial factor in the company’s business plan – he would file lawsuits that would tie up the FCC and the Department of Defense in litigation for the next decade.

Harbinger agreed to various plan provisions that are detrimental to its interests in order to push through a viable plan for LightSquared, Falcone said under questioning from his own lawyer, Kasowitz, Benson, Torres & Friedman partner David Friedman. Among other things, under the current proposed plan Harbinger agreed to give up its right to sue Ergen, the GPS industry, or the FCC on behalf of LightSquared.

After an earlier plan proposal fell apart in December, Falcone testified that he agreed to a new proposal from Melody Capital Partners that would subordinate Ergen/SPSO claims in order to repay the rest of the company’s creditors in cash.

Under the current plan, Harbinger will receive about 36% of the equity in reorganized LightSquared in exchange for its current 80% equity stake and an additional $150 million investment. A call-option gives Harbinger the chance to take up to 45% of the equity for an additional “couple hundred million,” Falcone testified.

LightSquared will run out of operating cash around April 15, when it is expected to exhaust a $33 million debtor-in-possession credit facility the court approved in February. The company is currently working on a new financing agreement with lenders to support the company through the remainder of its case, Milbank partner Matthew Barr told the court this afternoon. Barr said he would file a notice with the court tomorrow regarding a deal on financing by May 31. – John Bringardner