Judge Shelley Chapman agreed with Charlie Ergen's satellite TV group that the company was able to withdraw from an agreement with a group of secured debt holders, after transaction milestones were not fulfilled by a Jan. 7 deadline. Chapman described the ruling as a "tentative view," and suggested that the secured creditors could appeal.
The creditors had argued that an order governing bidding procedures locked up Dish's offer until Feb. 15. The group hoped to use proceeds from the sale to Dish to fund a reorganization plan for the LightSquared unit, which owns the debtor's most valuable assets.
A bankruptcy exit is growing more complex for LightSquared, which has backing from Philip Falcone's Harbinger Capital Partners and sought Chapter 11 protection in May 20123.
LightSquared has proposed a stand-alone reorganization plan with support from Fortress Investment Group and others. However, the Federal Communications Commission filed a letter on Friday stating that it could not it be sure it could approve a reorganization by the plan's December 2014 deadline.
Much of Wednesday's argument centered on semantic differences about what qualified a "successful bid" in an October order establishing auction rules.
Chapman suggested Wednesday that "a bunch of tired lawyers wrote down words that didn't precisely reflect what the deal was" when they drafted revisions to auction rules.
Dish was the stalking horse bidder. The company negotiated for bidding protections including a $51 million termination fee.
In exchange, Dish agreed that if it were the runner-up, it would remain committed to the deal until mid-February. The intent was to protect LightSquared in case an auction winner were not able to obtain regulatory approval. Dish would be available as a fall-back.
The auction rules noted that LightSquared would identify the successful bid after an auction.
LightSquared itself called off the auction in December, after a special committee of its board decided to pursue other options. The debtor said it was "not deeming any bid received for the assets, or any grouping or subset thereof, the successful bid" in a notice filed with the bankruptcy court on Dec. 11.
Rachel Strickland of Willkie Farr & Gallagher noted that since LightSquared cancelled the auction and did not actually designate a successful bid, Dish should not be on the hook.
The lock up only applied if Dish were the runner-up.
A prior agreement with the secured creditors obligated Dish to maintain its bid if milestones were passed. By Jan. 7, for example, the creditors would need approval for their reorganization plan and would need to reach a funding milestone.
Strickland argued that Dish could terminate because the secured creditors did not satisfy the requirements.
White & Case lawyer Thomas Lauria said it was "incomprehensible" that a stalking horse bidder would be able to walk away from a deal if it won the auction, and would only be locked up if it finished second.
"That is as upside down as it gets," said Lauria, who represents the secured creditors.
Chapman described the secured creditors' arguments as "a creative recreation of history" and sided with Dish. "We had no auction," Chapman observed. "We had no successful bid. We blew through the milestones."
Even if Chapman found that Dish could not revoke its offer, the secured creditors would have challenges. The largest holder of the secured debt is Dish Chairman Ergen, who purchased the loans as a personal investment.
Chapman observed Wednesday that Dish had provided formal evidence that it withdrew an agreement to support the secured group's plan, but had not filed an official notice that it had terminated the bid.
Strickland told Chapman that the company had given oral notice and was not required to give the creditors a more formal notice. "We could do that by handing them a Post-It note," Strickland quipped.
Meanwhile, LightSquared is nearing the end of its cash reserves. Some of the secured creditors have agreed to provide debtor in possession financing.
Chapman will consider the DIP loan on Jan. 31.
--Written by Chris Nolter in New York