504 B.R. 321
Bankr. S.D.N.Y.2013Background
- LightSquared, controlled by Harbinger (majority equity holder), filed chapter 11 after FCC action disrupted its ATC network plans; LightSquared LP had outstanding secured Loan Debt governed by a Credit Agreement with transfer restrictions.
- Credit Agreement barred "Disqualified Companies" (competitors and their subsidiaries) from becoming "Eligible Assignees" of Loan Debt; Schedule listed EchoStar and later DISH as disqualified.
- SPSO, a special-purpose vehicle formed with involvement of Sound Point Capital and linked in the complaint to Charles Ergen (DISH/EchoStar founder), purchased large blocks of Loan Debt and became the largest single holder by mid-2013.
- Harbinger sued (amended complaint) alleging: equitable disallowance of SPSO’s claim; fraud, tortious interference, unfair competition, and civil conspiracy by Ergen/DISH/SPSO/Sound Point; and an objection to SPSO’s claim under §502.
- Defendants moved to dismiss under Fed. R. Civ. P. 12(b)(6) (and Rule 9(b) for fraud). Defenses: SPSO was an eligible purchaser; no fiduciary duty to Harbinger; group-pleading/failure under Rule 9(b); many claims belong to the debtors not Harbinger.
- The bankruptcy court (Judge Chapman) granted dismissal in part: Count One (equitable disallowance) dismissed with prejudice; most tort/fraud counts dismissed (without prejudice to debtors to replead); aiding/abetting and claims against Sound Point and DISH defendants dismissed for pleading defects; objection to SPSO’s claim (§502) dismissed without prejudice to parties-in-interest.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether bankruptcy courts may equitably disallow a claim (Count One) | Harbinger: Court has equitable power to disallow grossly inequitable claims (rare, but permitted) | Defendants: No textual basis in §502 or §510 for equitable disallowance; remedy is subordination not disallowance | Court: Equitable disallowance not permitted under the Bankruptcy Code; Count One dismissed with prejudice |
| Fraud against Ergen/DISH (Count Two) | SPSO misrepresented it was an Eligible Assignee; Ergen/DISH caused or controlled SPSO and concealed ties to obtain debt and block Harbinger | Defendants: SPSO’s statement was not false; Harbinger fails to plead control/agency, scienter, reliance; Harbinger lacked standing to rely | Court: Fraud plausibly not pleaded—no adequate allegations of false statement by defendants (only SPSO), agency/control, duty to disclose, scienter, or reasonable reliance; Count Two dismissed (without prejudice to debtors) |
| Tortious interference / Unfair competition / Civil conspiracy (Counts Four–Seven) | Harbinger: SPSO’s debt purchases, hung trades, and LBAC’s low bid interfered with Harbinger’s negotiations and economic relations | Defendants: Harbinger lacks independent protectable relationship or standing; conduct not wrongful as pleaded; facts insufficient to show intent or wrongful means | Court: Claims inadequately pleaded; Harbinger conflates its interests with debtor’s; tort claims dismissed (without prejudice to debtors) and conspiracy fails when underlying torts fail |
| Sufficiency of fraud/aiding-and-abetting and Rule 9(b) / group pleading (Sound Point & DISH) | Harbinger: Sound Point formed SPSO, brokered trades, and concealed affiliations; DISH/EchoStar acted via Ergen | Defendants: Complaint lumps defendants, fails to particularize who said/did what; aiding-and-abetting lacks substantial-assistance allegations | Held: Pleading fails Rule 9(b) particularity; group pleading and lack of substantial assistance are fatal; claims against Sound Point and DISH defendants dismissed (without prejudice) |
| Objection to SPSO’s claim under §502 (Count Eight) | SPSO was not an Eligible Assignee so transfers void and SPSO has no claim | Defendants: SPSO’s purchases complied with Credit Agreement; on merits, objections belong to debtor/parties-in-interest | Court: Dismissed Count Eight without prejudice to debtors or other parties-in-interest to object under §502(b) by appropriate procedure |
Key Cases Cited
- Pepper v. Litton, 308 U.S. 295 (Sup. Ct.) (equitable disallowance under pre-Code law; discussed as historical backdrop)
- Travelers Cas. & Sur. Co. v. Pac. Gas & Elec. Co., 549 U.S. 443 (Sup. Ct.) (§502(b) textual rule: claims allowed unless they fall within enumerated exceptions)
- Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692 (5th Cir.) (equitable subordination vs. disallowance; courts should not create nonstatutory disallowance)
- Smart World Techs., LLC v. Juno Online Servs., 423 F.3d 166 (2d Cir.) (§105(a) does not create substantive rights beyond the Code)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (Sup. Ct.) (standard for cogent inference of scienter in fraud pleading)
- Dish Network Corp. v. DBSD N. Am., Inc., 634 F.3d 79 (2d Cir.) (purchase of claims for blocking strategic purposes and good-faith vote designation context)