United States District Court, S.D. New York
In re LIGHTSQUARED, INC., et al., Debtors.
LIGHTSQUARED INC., et al., Appellees SANJIV AHUJA, Appellant,
For LightSquared Inc., In Re, Debtor: Alan Joseph Stone, Milbank, Tweed, Hadley & McCloy LLP, New York, NY.
For Sanjiv Ahuja, Appellant: Avery Daniel Samet, Bijan Amini, Jaime Burton Leggett, LEAD ATTORNEYS, Storch Amini & Munves, P.C., New York, NY.
For LightSquared Inc., Appellee: Matthew Scott Barr, LEAD ATTORNEY, Milbank, Tweed, Hadley & McCloy LLP, Los Angeles, CA.
For Harbinger Capital Partners LLC, Appellee: Adam L.. Shiff, David M. Friedman, LEAD ATTORNEYS, Kasowitz, Benson, Torres & Freidman L.L.P., New York, NY.
For Non-party Centerbridge Partners L.P., Appellee: Aaron Stephen Rothman, Brad Eric Scheler, Peter Brian Siroka, LEAD ATTORNEYS, Fried, Frank, Harris, Shriver & Jacobson LLP, New York, NY.
For JPM Investment Parties, Appellee: Elisha David Graff, LEAD ATTORNEY, Simpson Thacher & Bartlett LLP (NY), New York, NY.
OPINION & ORDER
KATHERINE B. FORREST, United States District Judge.
This is an appeal from the Bankruptcy Court's (Chapman, J.) order dated March 27, 2015, confirming the debtors' Modified Second Amended Joint Plan Pursuant to Chapter 11 of the Bankruptcy Code (the " Plan" ). (Bankr. Dkt. 2276, Attached as Appendix to Brief for Debtor-Appellees (" App." ), ECF No. 23.) The Plan was proposed by a group including Fortress Credit Opportunities Advisors LLC (" Fortress" ), Centerbridge Partners, L.P. (" Centerbridge" ), Harbinger Capital Partners LLC (" Harbinger" ) and LightSquared (collectively, the " Plan Proponents" ). The Plan has the additional support of SIG Holdings, Inc. and/or one of its designated affiliates (" SIG", and collectively with Fortress, Centerbridge and Harbinger, the " New Investors" ), MAST Capital Management, LLC (" MAST" ) and Prepetition Inc. Agent. (See Transcript of March 26, 2015 Confirmation Hearing (" Tr." ) at 102, Bankr. Dkt. 2285, App. 1009-1178.)
Appellant Sanjiv Ahuja is a former Chief Executive Officer (" CEO" ) and holder of approximately 8% of the existing common equity interests (" Existing Inc. Common Equity Interests" ) of debtor LightSquared, Inc. (" Old LightSquared" ). Under the Plan confirmed by the March 27, 2015 Order, Ahuja receives no equity in the reorganized LightSquared (also referred to as the " Reorganized Debtor" or " New LightSquared" ). On appeal, Ahuja argues that (1) the Plan violates the " fair and equitable" requirements of 11 U.S.C. § 1129, (2) the Plan violates the equality of treatment rule of § 1123(a)(4), and (3) the Plan was not proposed in good faith. Ahuja's arguments are premised on his positions -- articulated in various ways -- regarding the enterprise value of the New LightSquared, that it is unfair that Harbinger receives equity in the New LightSquared while Ahuja does not, that senior classes received more value than that which they have contributed, and that eliminating Ahuja's equity position demonstrates that hthe Plan was not proposed in good faith as it is contrary to a settlement agreement into which he had entered.
For the reasons set forth below, this Court finds that Ahuja's arguments lack merit. The Bankruptcy Court's order of March 27, 2015, is AFFIRMED.
I. STANDARD OF REVIEW
The district court acts as the first level appellate review for orders from a bankruptcy court. See Fed. R. Bankr. P. 8013. On appeal, the district court may " affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." Id. A bankruptcy court's conclusions of law are reviewed de novo and findings of fact are reviewed for clear error. In re Ames Dep't Stores, Inc., 582 F.3d 422, 426 (2d Cir. 2009) (" We will determine that a finding is 'clearly erroneous' when we are left with the definite and firm conviction that a mistake has been made." ) Mixed questions of law and fact are subject to de novo review. AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202, 209 (2d Cir. 2000).
II. FACTS RELEVANT TO THIS APPEAL
The debtors are providers of wholesale mobile satellite communications and broadband services in North America. " Through its ownership of several satellites and licenses to use mobile satellite spectrum issued by the Federal Communications Commission (" FCC" ), LightSquared delivers voice and data services to mobile devices used by individuals, the military, first responders and other safety professionals." 513 B.R. at 62. The FCC licenses LightSquared's use of electromagnetic spectrum for its mobile satellite system (" MSS" ) operations. An MSS license holder is permitted to effect wireless telecommunications by linking callers through a satellite orbiting earth. LightSquared has been seeking to transition away from pure MSS operations. LightSquared's primary electromagnetic spectrum, which is held by L2LP (a separate debtor), lies in what is referred to as the " L-Band." The L-Band consists of two 10 MHz downlinks, paired with two uplinks. For terrestrial operations, the uplinks carry signals from the handset to a cell tower and the downlinks carry signals in the opposite direction, from the cell tower to a customer's handset. The L-Band downlinks and uplinks bracket a spectrum band reserved for use by the GPS industry and other geo-positioning systems. Although LightSquared's MSS operations have not caused interference with GPS systems, the GPS industry has expressed concerns that harmful interference could arise from the increased number of transmissions that would occur in the L-Band if LightSquared were permitted to conduct terrestrial operations similar to those conducted by major network wireless carriers.
In 2010, the FCC authorized LightSquared to conduct nationwide terrestrial operations in the L-Band as an adjunct to its existing MSS operations. (App. 498.) LightSquared then entered into a number of contracts and incurred substantial debt to construct the infrastructure for a terrestrial cellular network. Based on what LightSquared has referred to as reaction by the GPS industry which claimed that its terrestrial operations would be harmed from terrestrial operations in the L-Band, in 2012 the FCC proposed a suspension of the permission it had previously granted LightSquared. (App. 26-30.) The proposed suspension was the functional equivalent of an actual suspension. On May 14, 2012, LightSquared filed for bankruptcy under Chapter 11 of the Bankruptcy Code. LightSquared continues to operate its businesses and manage its properties as debtor in possession pursuant to sections 1107(a) and 1108 of the Code.
There are $4.29 billion in claims and interests asserted against LightSquared that are senior to the common equity. The senior claims and interests include general unsecured claims and preferred equity. Harbinger has secured claims as well as 90% of the common equity of LightSquared Inc. and certain litigation claims (" Harbinger Litigations" ). Pursuant to a settlement of certain employment-related claims (described below), Ahuja owns approximately 8% of LightSquared's common equity.
Following the FCC's proposed suspension, LightSquared filed interrelated requests (collectively, the " License Modification" ) with the FCC that would allow it to conduct terrestrial operations on a somewhat reduced and modified basis. (App. 496-97.) A significant aspect of the License Modification is that it proposes to use the spectrum referred to as the " Crown Castle Spectrum." The lease for this spectrum is an asset of a wholly owned subsidiary of L2Inc, in an integrated spectrum pairing with L-Band spectrum owned by L2LP. LightSquared asserts that the Crown Castle Spectrum does not have the interference issues which led to the suspension and may replace at least a portion of the capacity lost due to the suspension. Notably, L2Inc and L2LP are separate debtors in the Chapter 11 cases -- they have separate and different assets, capital structures, owners and creditors. L2Inc's assets are pledged as collateral for L2Inc's secured indebtedness but those same assets are not collateral for L2LP's secured indebtedness, and vice versa. In light of the difficulties caused by the proposed suspension of L-Band terrestrial license and the continuing scrutiny of the L-Band, LightSquared's Special Committee, management and advisors concluded that the greatest value (and greater than could be achieved on a standalone basis) would be achieved by combining L2Inc's and L2LP's spectrum assets into a single network; the Plan therefore contemplates such combination. Such combination is not a formal substantive consolidation of assets; it is a functional combination.
In a January 2014 filing with the Bankruptcy Court the FCC stated that it could not represent when or if it would approve the License Modification requested by LightSquared. (App. 140-143.) In February 2014, LightSquared filed the Third Amended Plan. (App. 146-245.) While exit financing was not conditioned on FCC approval of the License Modification, FCC approval was nonetheless critical for ensuring that LightSquared had sufficient value to support its proposed reorganization under that plan. (App. 337.) The Third Amended Plan provided for a distribution to common equity holders of 30% of a class of common shares. This point is worth pausing on: pursuant to this prior plan -- in contrast to the later filed Plan here at issue -- Ahuja stood to receive an equity distribution.
The Bankruptcy Court held a multi-day confirmation hearing on the Third Amended Plan commencing on March 19, 2014 and concluding with closing statements on May 6, 2014. It issued extensive findings of fact and conclusions of law on July 11, 2014. 513 B.R. 56 (2014). The Bankruptcy Court included a substantial set of findings regarding valuation. Id. at 77-81. It found, for instance, that, " While effectiveness of the Plan is not conditioned on FCC approval of LightSquared's pending License Modification Application, LightSquared's Plan relies on opinions offered at the Confirmation Hearing that the FCC will approve the pending License Modification Application and the later use of its Lower Downlink within the timeframes upon which the valuation is based." Id. at 69.
As part of these 2014 findings, the Bankruptcy Court also found that various valuations, including that by Dr. Mark Hootnick, a Managing Director of Moelis & Company, relied on unsupported speculation as to the likely outcome and timing of the FCC's approval of the License Modification. Id. at 76 (" Mr. Hootnick's valuation rises or falls with Mr. McDowell's opinions on the timing of FCC approvals." ) The Bankruptcy Court noted that for his part, McDowell " pointed to no evidence indicating that the FCC will proceed along the timeline suggested, offered no evidence that he had any knowledge of how or when the National Telecommunications and Information Administration or any coordinate agency intends to act with respect to LightSquared's application and could not credibly estimate or state when any required rulemaking proceeding may be commenced or how long it would take. His opinion is simply educated guess and cannot be afforded significant weight." Id. at 71. The Bankruptcy Court refused to confirm the Third Amended Plan, in large part because of this uncertainty as to FCC approval of the License Modification. (App. 339, 342-43.)
From November 13, 2014 until January 25, 2015, the FCC auctioned certain broadband wireless spectrum in what was known as " Auction 97" (involving spectrum arguably comparable to LightSquared's). As a result of unexpectedly robust prices bid during Auction 97, potential lenders, investors and third parties became willing to lend and invest additional funds into LightSquared. (App. 629-30.)
On December 10, 2014, a group including Fortress, Centerbridge, SIG, and Harbinger (the " New Investors" ) pledged to support what ultimately became the Plan. The New Investors also committed to a combined investment in the Reorganized Debtor with a quantity of new money.
In a hearing on January 20, 2015, the Bankruptcy Court indicated that it would not reverse its position on the regulatory uncertainty regarding the License Modification and suggested that the parties take a " moment to pause and reflect" on the viability of another valuation premised on a hypothetical grant of regulatory approvals." (App. 371, 376-77.)
LightSquared subsequently filed what became the Plan. The Plan made a valuation assumption of $9.6 billion based on FCC approval (which is assumed only to occur after confirmation of the Plan), of the less controversial aspects of the License Modification. (App. 485-87.) The Plan's valuation is also based on prices set at Auction 97. (App. 615-23.) Following filing of the Plan, the FCC again filed a statement with the Bankruptcy Court disavowing regulatory approval for terrestrial use of LightSquared's spectrum by a certain date or at all. (App. 712.)
A confirmation hearing on the Plan commenced on March 9, 2015 and concluded on March 26, 2015. (App. 467-748.) Following closing arguments, the Bankruptcy Court confirmed the Plan with a decision read into the record -- but, as discussed more fully below, did not find that the enterprise value of LightSquared was $9.6 billion. (App. 1009-1178.) The Bankruptcy Court entered the Order confirming the Plan the next day (the " Confirmation Order" ). (App. 789-890.)
Sanjiv Ahuja filed a notice of appeal of the Confirmation Order to this Court that same day. (ECF No. 1.) Oral argument on that appeal occurred on June 4, 2015.
III. THE BANKRUPTCY COURT'S DECISION
In its thoughtful and reasoned decision, the Bankruptcy Court carefully recited findings from the seven day confirmation hearing and ultimately concluded " that the Debtors have carried their burden of proof with respect to the structure and valuation premise of the Plan and have otherwise demonstrated that Plan complies with all provisions of the Bankruptcy Code." (Tr. 99-100.) This decision followed the extensive findings of fact previously made by the Bankruptcy Court with regard to the Third Amended Plan. 513 B.R. 56 (2014). The Bankruptcy Court again heard from a number of witnesses live and reviewed numerous documents received into evidence. (Tr. 115.) The Bankruptcy Court noted that " [t]estimony was particularly focused on the issue of the value of LightSquared's spectrum and Moelis & ...