May 2014 – Lesson from LightSquared Rulings: Even Equitably Subordinated Claims Must be Treated Fairly and Equitably under 11 U.S.C. § 1129(b)
On May 8, 2014, U.S. Bankruptcy Judge Shelley C. Chapman denied confirmation of LightSquared Inc.’s plan to reorganize nearly $4 billion of debt in a ruling announced in open court over four hours. Although the text of the oral ruling is currently restricted, news outlets have reported Judge Chapman ruled, on the one hand, that LightSquared could equitably subordinate part of Dish Network Corp. Chairman Charlie Ergen’s $844 million secured claim to the claims of other secured creditors, but, on the other hand, that the plan could not be confirmed as written because it treated Mr. Ergen’s subordinated claim unfairly compared to similarly situated secured debt holders, whom the plan proposed to pay in full. The plan proposed to pay Mr. Ergen’s equitably subordinated claim via a payment-in-kind promissory note over seven years, secured by a third-priority lien.
At first blush, these rulings appear somewhat at odds. Why should an equitably subordinated claim be required to receive treatment similar to claims that are not equitably subordinated? The reason is found in 11. U.S.C. § 1129(b), the cramdown provisions of the Bankruptcy Code. Because Ergen presumably objected to confirmation, LightSquared had to confirm the plan over his objection. But § 1129(b) states the court may only confirm a plan over an impaired creditor’s objection if “the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.” Section 1129(b)(2)(A) requires that for the treatment of a class of secured claims to be considered “fair and equitable” the plan must provide that the claim holder retain its lien to the extent of the allowed amount of its secured claim (i.e., the value of the collateral), and receive deferred cash payments totaling at least the allowed amount of the holder’s debt, with the present value of such payments on the effective date being at least the value of the creditor’s allowed secured claim. Therefore, Lightsquared could have run afoul of these requirements–even though Judge Chapman found the plan could subordinate part of Ergen’s claim—if Judge Chapman found either that the plan discriminated against Ergen unfairly (whatever that means) or that the 7-year note was so speculative that it’s present value fell short of Ergen’s allowed secured claim.
The takeaway from these rulings is that even equitably subordinated claims, which by their nature are allowed to be discriminated against, must still be provided fair and equitable treatment when a debtor is attempting to confirm a plan under § 1129(b).
The case is In re: LightSquared, Inc., case number 1:12-bk-12080, pending before the U.S. Bankruptcy Court for the Southern District of New York. The written opinion allowing equitable subordination and denying confirmation is anticipated to be issued this summer.
Christopher R. Thompson, Esquire
Associate, Bankruptcy Department