UPDATE 4-U.S. judge rejects LightSquared plan, orders new talks

Thu May 8, 2014 8:12pm EDT

(Adds comment from Ergen lawyer, no-comment from LightSquared)

By Nick Brown

NEW YORK May 8 (Reuters) - A U.S. bankruptcy judge ordered LightSquared and its chief creditor, satellite owner Charles Ergen, to discuss a settlement after she refused to approve the wireless provider's plan to exit its two-year bankruptcy.

Chapman spent several hours on Thursday in her Manhattan courtroom reading a lengthy opinion that capped weeks of hearings aimed at resolving a bitter dispute between Ergen and LightSquared founder Phil Falcone over the company's restructuring.

LightSquared premised its plan to exit Chapter 11 bankruptcy on subordinating the $1 billion it owes to Ergen, the chairman of Dish Network Corp to the claims of other creditors.

Chapman found his debt should be subordinated to remedy Ergen's underhanded dealings, but she also found LightSquared was not treating him fairly. The ruling essentially hit both sides, and she ordered them to begin talking with lowered expectations or she would order mediation by her colleague, Judge Robert Drain.

"You have two weeks," Chapman said. "If you come up with a deal, both with respect to amount of equitable subordination and a plan, no Judge Drain. If you don't, Judge Drain."

A lawyer for LightSquared declined to comment.

Ergen's lawyer, Rachel Strickland, said she was "optimistic" about the potential for "constructive" talks.

"We are pleased that the court agreed that a plan premised on unfair discrimination could not go forward," Strickland said in an interview.

THE FIGHT CONTINUES

LightSquared's bankruptcy has devolved into a long and contentious fight between majority owner Falcone's Harbinger Capital Parnters, and Ergen. Chapman's ruling assures the case will go on at least a little longer.

LightSquared went bankrupt in 2012 when the Federal Communications Commission revoked its license to build a massive wireless network, citing fears of interference with GPS systems.

Ergen later bought up enough of the company's senior loan debt to own a controlling stake among the lenders, essentially giving him veto power over any restructuring he did not favor.

Harbinger and LightSquared accused him of concealing his identity while buying the debt with an eye toward a takeover. Ergen insisted the purchases were on his own behalf, and that Harbinger's real motive in the lawsuit was to preserve its ownership in LightSquared.

Chapman said she agreed that Ergen's actions were "no doubt" made on Dish's behalf, citing a "troubling pattern of non-credible testimony" by Ergen and those who helped him make his investments. Subordinating a piece of his debt was "necessary and appropriate."

But LightSquared's current plan, which would pay him in the form of a seven-year note while preserving equity for Harbinger, goes too far, Chapman ruled. Given regulatory uncertainty over LightSquared's future operations, there is no guarantee he would be paid back, she said.

The order puts Falcone and Harbinger in difficult positions. The company must come up with a way to pay Ergen more robustly than proposed, which could cost Harbinger control of LightSquared.

"You've now been given a lot of guidance about what's gonna fly with me and what's not," Chapman added. (Reporting by Nick Brown in New York; Editing by David Gregorio, Richard Chang and Andre Grenon)