Harbinger Complaint by Unsecured Creditors

8/6/2019 Harbinger Complaint by Unsecured Creditors

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Scott L. llazanDavid M. PosnerStanley L. Lane, Jr.OTTERBOURG, STEINDLER, JIOUSTON & ROSEN, P.C.230 Park AvenueNew York, New York 10169Telephone: (212) 661-9100Facsimile: (212) 682-6104Counsel to the Official CommitteeOfUnsecured CreditorsUNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORK--------------------------------------------------------- xIn re:TERRESTAR NETWORKS INC., et aI.,

Debtors.---------------..---.-----.----------------------.-----------xTHE OFFICIAL COMMITTEE OFUNSECURED CREDITORS OFTERRESTAR NETWORKS INC. et aI.,

PlaintifT,v.

U.S. BANK NATIONAL ASSOCIATION,in its capacity as Collateral Agent under thePurchase Money Credit Agreement.HARBINGER CAPITAL PARTNERS, LLC.HARBINGER eAPITAL MANAGEMENT,HARBINGER CAPITAL PARTNERSMASTER FUND 1, LTD., HARBINGERCAPITAL PARTNERS SPECIALSITUATIONS FUND, LP., CREDITDISTRESSED BLUE LINE MASTER FUND, :LTD . and their affiliatesMAs'r CREDIT OPPORTUNITIES IMASTER FUND UMITPD and its aftiliatcs,

Chapter 11Case No. 10-15446 (SHL)(Jointly Administered)

Adv. Pro. No. 11- -SHL

COMPLAINT FORRECIIARACTERIZA TIONAND/OREQUITABLE SUBORDINATIONAND RELATED RELIEF


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as successors to Harbinger,COHANZICK BIGIl YIELDINTERNATIONAL MASTER FUND, LTD.,COHANZICK CREDIT OPPORTUNITIESMASTER FUND LTD.,COHANZICK ABSOLUTE RETURNMASTER FUND LTD. and their affIliates,as successors to Harbinger,

ULYSSES PARTNERS L.P. and its affiliates,and,RIVER PARK SHORT TERM IIICiH YIELDFUND and its affiliates, as successors toHarbinger.

Defendants.--------------------------------------------------------- x

Plaintiff, the Official Committee of Unsecured Creditors (the "Committee") of TerreStarNetworks Inc., et al., (the "Debtors") by its undersigned counsel, brings this Complaint against U.S.Bank National Association ("U.S. Bank"), in its capacity as Collateral Agent under the PurchaseMoney Credit Agreement ("PMCA"); Harbinger Capital Partners, Harbinger Capital Management,Harbinger Capital Partners Master Fund I, LTD, Harbinger Capital Partners Special Situation Fund,L.P., Credit Distressed Blue Line Master Fund, Ltd. and their affiliates (collectively "Harbinger")and their successors in interest, Mast Credit Opportunities I Master Fund Limited and its affiliates,Cohanzick High Yield lntemational Master Fund, Ltd., Cohanzick Credit Opportunities Master FundLtd., Cohanzick Absolute Retum Master Fund Ltd. and its affiliates, Ulysses Partners L.P. and itsaffiliates and River Park Short Term 11igh Yield Fund and its affiliates (col1ectively, the "SuccessorDefendants" and together with U.S. Bank and Harbinger, the "Defendants" and individually, each a"Defendant") to re-characterize as equity and/or equitably subordinate $5 million of"principal" that

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the Debtors received allegedly under the PMCA and any paid in kind "interest" that accrued withrespect thereto, in connection with the Waiver and Forbearance Agreement (defined below). I Insupport thereof, the Committee respectfully alleges as follows:

PRELIMINARY STATEMENT

At a time when the Debtors were severely undercapitalized, the Defendants provided anadditional $5 million (the "August 2010 Advance") to the Debtors that they styled as a furthersecured "advance" under the February 5, 2008 Purchase Money Credit Agreement (the "PMCA)among TerreStar Networks Inc. ("TSN"), as the borrower, and Harbinger and EchoStar, as originallenders. The reality, however, is that the $5 million actually constituted a fUl1her equity investmentin TSN by Harbinger. Although it is highly unlikely that any arms length lender would havepermitted further borrowings under similar circumstances, I {arbinger used its close relationships andinsider status with the Debtors to arrange for the additional funds they sought to invest in TSN to bechanneled through the secured PMCA, rather than as a capital contribution, all to the Defendants'benefit and to the detriment ofTSN's general unsecured creditors.

Upon information and belief, this $5 million advanced by Harbinger (disingenuously styledas an additional loan) was funded at a time when I larbinger was one of the most significant holdersof the Debtors' stock and outstanding debt and Harbinger's investment was subject to substantialrisk due to the Debtors' liquidity constraints. Upon information and belief, at the time this additional

The facts and cuuses of action asserted herein arc also relevant to EchoStar Corporution ("EchoStar"), whichalso advanced $5 million or "principal" to the Debtors under the PMCA pursuant to the Waiver and ForbearanceAgreemen t. Accordingly. a total of'SI 0 mill ion of "principal" was advanced to the Debtors under the PMCA pursuant tothe Waiver and Forbearance Agreement in August 20 I 0 The Committee, however, is not asserting any causes ofactionagainst EchoStar or its affiliates und the rl'liefrequcsted herein is not Il1tended to affect the claims or r ights of EchoStar.References to EchoStur in this Compla int arc included to p r o v i d ~ the complete picture of the facts and circumstancesrelating to the $10 million advanced in August 20 I 0 under the PMCA thut support this Complain t as against Harbing erand thc Successor Defendants.

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$5 million was provided, llarbinger was a substantial holder ofboth common and preferred stock ofTSN, and Ilarbinger also held common stock and two different series ofpretcrred stock in TerreStarCorporation ("TSC") - the Debtors' ultimate parent corporation. Additionally, at all relevant times,Harbinger was also a substantial holder of the Debtors' secured and unsecured outstanding debtobligations.2 Accordingly, the $5 million advance was made at a time when Harbinger dominatedthe Debtors' capital structure and was well aware that the Debtors required additional capital tocontinue operations. llarbinger used its insider position, however, to provide TSN with its neededcapital under the guise of secured debt financing.

Upon information and belief, due to the absence of available funds from other sources andthe unwillingness of Harbinger to contribute additional funds to TSN as a capital contribution or topermit TSC to downstream cash to TSN, th0 Debtors' only option for liquidity was the additional"debt" tunding that Harbinger and EehoStar each agreed to make available through the PMCA. Infurtherance thereoC Harbinger and EchoStar each executed a Waiver and Forbearance Agreementthat waived certain provisions contained in the PMCA that required funds advanced under thePMCA to be used only for specified purposes. Harbinger and EehoStar each also agreed to forbearfrom exercising rights and remedies with respect to certain defaults or events of default that eitheralready existed or might arise under the PMCA, the 15!rh Scnior Secured Notes Indenture (definedbelow), and the 6.5% Exchangeable Notes Indenture (defined below). Upon information and belief,Harbinger advanced the $5 million under the PMCA even though Harbinger and the Debtors knew,or should have known, that the $5 milIi()l1 (together with the $5 million that was simultaneously

The Indenture fur the Debtors' 1 5 ( ~ ' o Senior Secured Notes and the Indenture tor the Debtors' 6.5% SeniorExchangeabl e Notes each contained several restrictive covenants. including, but not limited to the j(lllowing: limitationson incurrence ofadditlOrml indebtedness, limitations on liens, limitations on transactions with affiliates, and limitationson lines of business. The PMCA contained several restrictive covenants, including, but not limited to the following:limitations on incurrence of additional indebtedness, limitation on liens, limitation on asset sales of collateral andlimitation on transactions with affiliates.

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advanced by EchoStar) was wholly insufficient to meet the Debtors' capital needs (and which theDebtors intended with the full know ledge 0 f Harbinger to use for purposes entirely inconsistent withthe uses originally contemplated by the PMCA). In fact, as the Defendants were alreadycontemplating the likelihood that TSN might need to scek bankmptcy protection, their clearintention was to misLise the PMCA as a shield for providing the funds needed to "buy time" for theirChapter II plans to bc "sorted out". all while doing so in a way intended to minimize their additionalfinancial exposure at the expense of TSN's other existing creditors.

Accordingly, this last $5 million advanced by Harbinger to TSN under the PMCA should bere-characterized to accurately reflect what it was an equity investment in TSN by Harbinger. Inthe alternative, the $5 million obligation owed by TSN to Harbinger on account of this final"advance" should be cquitahly subordinatcd to all other indebtedness owed by the Debtors to theirunsccured cn.:ditors.

PROCEDURAL BACKGROUND

1. On October 19,2010 (the "Pctition Date"), the Debtors each filed a petition for reliefunder Chapter 11 of the Bankruptcy Code, thereby commencing their respective Chapter 11 cases.The Debtors arc managing their propel1ies and operating their businesses as debtors-in-possessionpursuant to Bankruptcy Code sections 1107 and 1108. Those Chapter II cases were being jointlyadministered for procedural purposes.

2. The following entities were the original debtors in the jointly administeredbankruptcy casc; TSN; TerreStar New York Inc.: Motient Communications Inc.; Motient HoldingsInc.; Moticnt License Inc.; Motient Services Inc.; Motient Ventures Holding Inc.; MVH HoldingsInc.; TerreStar License Inc. ("TSL"); TerrcStar National Services Inc. ("TSNS"); TerreStar

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Networks Holdings (Canada) Inc. ("TSN Holdings-Canada"); TerreStar Networks (Canada) Inc.("TSN-Canada"); and 0887729 B.C. Ltd. (collectively, the "Debtors"). By Order dated February 23,2011, the Court granted the original Debtors' Motion for Entry of an Order Amending OrderDirecting Joint Administration of Related Chapter 11 Cases [Docket No. 445]. As a result of theFebruary 23, 20 II order, certain of the original Debtors' chapter I I cases no longer arc jointlyadministcred with TSN, ef 01. Currently, the Debtors in these chapter II cases are: TSN; TSLI;TSNS; TSN Holdings Canada; TSN-Canada and 0887729 B.C. Ltd.

3. On October 29, 2010, the Office of the United States Trustee appointed theCommittee in the within chapter II cases [Docket No. 57]. The Committee is currently comprisedof six (6) members who arc among t.he Debtors' largest unsecured creditors.

4. On November 5, 2010, TSN, TSNS, 0887729 B.C. Ltd., TSL, TSN Holdings-Canada,and TSN-Canada (collectively, "the TSN Debtors") filed a Joint Chapter II Plan (the "Plan")[Docket No. 82] and an accompanying disclosure statement (the "Disclosure Statement") [Docket

No. 83]. Following a series of amendments to the Disclosure Statement and to the Plan (both asoriginally proposed), the Disclosure Statement (as amended) was approved by the Bankruptcy Courtat a hearing held on December 21, 20 I 0 IDocket No. 312].

5. A hearing to confirm the Plan was scheduled to be held on March 4, 20 II, but did notgo forward. On February 16, 20 11, the Debtors voluntarily withdrew the Plan [Docket No. 424].

6. Following withdrawal ofthe Plan, the Debtors embarked on a dual-track strategy thatcontemplated potentially alternate final outcomes: (a) an intended sale of substantially all of theDebtors' assets; and (b) a complex reorganization plan that would, among other things, resolvenumerous litigation and inter-creditor issues. In further pursuit of these two alternatives, on April

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15,2011, the Debtors filed a motion with the Court seeking approval of bid and auction proceduresfor a sale of substantially all ofthe Debtors' assets [Docket No. 533] (the "Sale Motion"). On June14,20 II, the Debtors filed a motion [Docket No. 617] (the "Sta lking I forse Motion") with the Courtseeking entry of an order (i ) authorizing the Debtors to entcr into a Stalking f forse Agreement withthe potential purchaser (the "Stalking Ilorse Bidder") and (ii) approving bid procedures and bidprotections in connection therewith (the "Amended Bid Procedures"). On June 22, 2011, theBankruptcy Court entered an order [Docket No. 645] (the "Stalking Horse Order"), among otherthings, approving the bid protections and the Amended Bid Procedures and setting a new date for theSale Hearing. Pursuant to the Amended Bid Procedures, any bids tor the Assets were required to besubmitted by June 27, 2011 (the "Bid Deadline"). The Debtors did not receive any additional bidsprior to the Bid Deadline and the Auction scheduled to be held on June 30, 2011 was cancelled. OnJune 28, 2011, the Debtors filed a notice announcing the Stalking Horse Bidder as the winningbidder. A hearing to approve the Sale to the Stalking Horse Bidder is currently scheduled to be heldon July 7,2011.

7. As required by the Stalking Ilorse Agreement, the Debtors have filed a motion (the"Secured Debt Pay-Down Motion") to use proceeds of the Sale to repay in full all of the Debtors'outstanding secured indebtedness (including, among other secured debt, the PM CA) in the near term,and prior to distributions to general unsecured creditors pursuant to a plan of liquidation. Thepurpose ofsuch motion is to stop the accrual ofin1crest that continues in these chapter 11 cases andwhich will ultimately reduce any recovery for the Debtors' general unsecured creditors (the PMCAaccrues interest at an estimated $3.4 to $3.5 million per quarter). However, since the Committee ischallenging a portion ofthe PMCA obligations in this Complaint, the relief requested in the Secured

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Debt Pay-Down Motion is inappropriate absent a resolution of this dispute. 3 The outcome of thislitigation will also likely have a materially significant impact on the distributions available to generalunsecured creditors pursuant to any proposed plan ofliquidation. Therefore, this dispute should bedecided either prior to, or contemporaneously with, issues related to confirmation of any proposedplan of liquidation. In all events, however, the resolution of these issues must be made prior to adistribution of any proceeds 1rom the collateral securing the PMCA.

THE PARTIES

8. The Committee appointcd by the Onlce of the United States Trustce is the Plaintiffherein.

9. Upon information and belief: Defendant U.S. Bank is a national banking associationchartered under thc laws ofthe United States ofAmerica and is an insured depository institution (asdefined in section 3 of the Federal Depository Insurance Act). U.S. Bank is named as a Defendantsolely in its capacity as Collateral Agent for the lenders under the PMCA.

10. Upon ini()rmation and belief: Defendant Harbinger Capital Partners LLC is a NewYork based private investment firm (hedge fund sponsor) specializing in event/distressed strategies.

11. Upon information and belief: Defendant I Iarbinger Capital Management is an affiliateofHarbinger Capital Partners, LLC.

The Secured Debt Pay-Down Motion seeks relief in the alternative that recognizes the outstanding litigationwith respect to the secured nature of the Debtors' 15% Senior Secured Paid-in-Kind Notes and proposes to pay suehnotes on an unsecured basis. Similarly, the Committee believes that the Court may consider granting the Secured DebtPay-Down Motion with respect to the undisputed portion ofthe PMCA and refrain from granting the Secured Debt PayDown Motion with respect to the $5 million August 20 I 0 Advance until the resolution of the dispute asserted in thisComplaint.

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12. Upon infonnation and belieC Defendants Harbinger Capital Partners Master Fund I,Ltd., Harbinger Capital Partners Special Situation Fund L.P., Credit Distressed Blue Line MasterFund, Ltd. and their aftiliates arc investment funds of Harbinger Capital Partners, LLC.

13. Upon infonnation and belief, Defendants Mast Credit Opportunities I Master FundLimited and its affiliate Master Fund Limited and their affiliates, are successors to Harbinger'sinterests under the PMCA, and are investment funds with offices located in Boston, MA.

14. Upon intonnation and belief, Defendants Cohanzick High Yield International MasterFund, Ltd., Cohanzick Credit Opportunities Master Fund Ltd., Cohanzick Absolute Return MasterFund Ltd. and its affiliates (collectively, the "Cohanzick Defendants") arc located in Pleasantville,New York; are privately owned investment funds; and arc successors to Harbinger'S interest underthe PMCA. The Cohanzick Defendants are named as Defendants solely as successors to Harbinger 'sinterests under the PMCA.

15. Upon information and b e l i e f ~ Defendant Ulysses Partners L.P. is a privately ownedinvestment fund sponsor located in New York, New York and its affiliates that arc also Defendantsarc investment funds. Together they arc successors to Harbinger's interest under the PMCA.Ulysses Partners L.P. and its affiliates are named as Defendants solely as successors to Harbinger'sinterests under the PMCA.

16. Upon information and belief, Defendants River Park Short Tenn High Yield Fundand its affiliates (collectively, the "River Park Defendants") arc investment advisors with officeslocated in New York, New York, and arc successors to Harbinger's interests under the PMCA. TheRiver Park Defendants arc named as Defendants solely as successors to Ilarbinger's interests underthe PM CA.

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JURISDICTION AND VENUE

17. This Court has subject matter jurisdiction pursuant to 28 U.S.C. 157 and 1334.Venue of this proceeding is proper under 28 U.S.C. 1409. This adversary proceeding relates to thechapter I I cases jointly administered under the style In re TcrreStar Networks Inc., et al., Case No.10-15446 (SIlL).

18. This is a core proceeding within the meaning of 28 U.S.C. IS7(b).

STANDING

19. In addition to being a "party in interest" with a right to be heard pursuant to 11 U.S.C.1109, the Committee was granted specific standing to challenge "the validity, enforceability,priority or extent of the Prepetition Obligations or the liens on the Prepetition Collateral securingsuch Prepetition Obligations" pursuant to the final order (the "Final Order") of this Court approvingthe Debtors' motion to obtain postpctition financing ('the "DIP Financing"). [Docket No. 181 atpara. 17J

20. Specifically, the Final Order provides that an adversary proceeding must be filedwithin the specified challenge period:

unless (i) the Committee '" has duly filed an adversary proceeding ... (X)challenging the validity, enforceability, priority or extent of the PrepetitionObligations or the liens on the Prepetition Collateral securing such PrepetitionObligations or (Y) otherwise asserting or prosecuting any A voidance Actions or anyother claims, counterclaims or causes of' action, objections, contests or defenses(collectively, the "Claims and Defenses") against the Prcpetition Agent or any oftheother Prepetition Secured Parties or their respective agents, atTIliates, subsidiaries,directors, officers, reprcsentatives, attorneys or advisors in connection with anymatter related to the Prepetition Obligations or the Prepetition Collateral, and (ii) anorder is entcred by a court of competent jurisdiction and becomes final and non-

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appealable in favor ofthe plaintif f sustaining any such challenge or claim in any suchduly filed adversary proceeding; provided that, as to the Debtors, all such Claims andDefenses arc hereby irrevocably waived and relinquished as ofthe Petition Date. Ifno such adversary proceeding is duly and timely filed in respect of the PrepetitionObligations, (x) the Prepctition Obligations shall constitute allowed claims, notsubject to counterclaim, setoff: subordination, recharacterization, defense oravoidance, for all purposes in the Cases and any subsequent chapter 7 case, (y) theliens on the Prepetition Collateral securing the Prepetition Obligations, as the casemay be, shall be deemed to have been, as of he Petition Date, and to be, legal, valid,binding, perfected and of the priority specified in paragraph 4(b), not subject todefense, counterclaim, recharacterization, subordination or avoidance and (z) thePrepetition Obligations, the Prepetition Agent and the Prepetition Secured Parties, asthe case may be, and the liens On the Prepetition Collateral granted to secure thePrepetition Obligations shall not be subject to any other or further challenge by theCommittee (if any) or any other party-in-interest, and such Committee or party-ininterest shall be enjoined th1l11 seeking to exercise the rights ofthe Debtors' estates,including without limitation, any successor thereto (including, without limitation, anyestate representativC' or a chapter 7 or II trustee appointed or elected for any oftheDebtors) .... Nothing in this Final Order vests or confers on any Person (as defined inthe Bankruptcy Code) (other than the Committee l i l l any)1 as provided above),standing or authority to pursue any cause of action belonging to the Debtors or theirestates, including without limitation, Claims and Defenses with respect to thePrepetition Loan Docul1].9Jlts or t h g J ~ r ~ p . C l t ! 1 i Q J l J 2 Q J i g ~ l i Q J l ~ i . Q L l : ! ! y l i . 9 J l ; i . ~ n m t e d by(Emphasis added.)

STATEMENT OF FACTSAt all Relevant Times, Harbinger was an Insider of the Debtors

21. Upon information and belief, at all relevant times, Harbinger was an insider of theDebtors. As disclosed in TSC's Form IO-K/A dated May 6, 2010 for the fiscal year endedDecember 31,2009 CTSC 2009 Form IO-KlA"), Harbinger held approximately 47.78% of thecommon stock of TSC as of April 28,2010. Similarly, as disclosed in the Declaration ofJeffreyEpstein Pursuant to Local Bankruptcy Rule 1007-2 In Support ojFirst Day Plemi;ngs (the "EpsteinDeclaration") [Docket No.3 J, I larbinger held approximately 47.78(% onhe common stock ofISe as

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of the Petition Date. 4 l11erefore, upon infonnation and b c l i c i ~ Harbinger held in excess of20% ofthe TSC's common stock at all relevant times and, specifically, at the time of the August 2010Advance.

22. As of the Petition Date and, upon information and belief, at all relevant times,Harbinger (through its affiliate Lightsquared, Inc.) held approximately 10.7% ofTSN's commonstock.

23. Upon information and belief: as part of the Debtors' February 2008 re-financings,Harbinger received, among other things, all ofTSN's Series B preferred stock (as represented by asingle share) pursuant to which it was given consent rights with respect to certain fundamentalcorporate transactions by TSN. Harbinger also received the right to nominate up to two members ofTSN's Board of Directors.5

24. Upon information and belief: at all relevant times, two members ofTSN's Board ofDirectors were Ilarbinger designees whose principal allegiance was owed to IIarbingcr and not toTSN.

4 The Debtors' public tilings arc inconsistent with respect to Harbinger's holdings ofTSC common stock. For example,the Disclosure Statement. dated December 23.20 10. discloses that Ilarbmger (based on the aggregate holdings of threespecified funds: Credit Distressed Blue [.inc Master Fund. Ltd.. Ilarbinger Capital Partners Master Fund I, Ltd. andHarbinger Capital Partners Special Situations Fund. tP.) bencfil;ially holds 25.9% ofthc common stock ofTSC. Uponinfonnation and belief, Harbinger has sold TSC common stock since the Petition Date. Notwithstanding any suchinconsistency, it is clear that Harbinger has beneficially held in excess of 20(Yo of the common stock of TSC at allrelevant times to the facts and causes of action herein.5 Upon infom1ation and belief, Harbinger also received all of the Series D preferred stock issued by TSC (alsorepresented by a single share) which provided Harbinger with consent rights with respect to certain fundamentalcorporate transactions by TSC. Harbinger also received the right to nominate up to two members of TSC's Board ofDirectors (which mirrored the composition ofTSN's Board of Directors),

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25. Upon information and belief, the Debtors would not have granted Harbinger theconsent rights it received and/or thc right to designate two ofTSN' s Board members had Harbingernot insisted on receiving same.

26. Upon information and belief, I larbinger was an original lender under the PMCA.

27. Upon infOlmation and belief, as of the Petition Date and (at all relevant times),Harbinger was a 50% lender under the PMCA.

28. Upon information and belief: as of the Petition Date (and at all relevant times),Harbinger was a substantial holder of the Debtors' 15;() Senior Secured Paid-in-Kind Notes (the"15% Senior Secured Notes") and held approximately one-third of the Debtors' 6.5% SeniorExchangeable Paid-in-Kind Notes (exchangeable for the common stock ofTSC at a conversion rateof$5.57 per share) (the " 6 S ~ o Exchangeable Notes"). Upon infonnation and b e l i c f ~ llarbingernowholds more than half of the 6.5!Yc) Exchangeable Notes.

29. Upon information and belief, Harbinger (a) has contractual lease rights to useTerreStar 1.4 Holdings LLC's 1.4 GHz spectrum; (b) has purchased prepaid satellite minutes fromTSN; and (c) has entered into a series of exclusivity agreements with respect to entering a poolingarrangement of the Debtors' and Harbingers' various spectrum licenses and satellite capacity.

30. Upon information and belief, through its myriad relationships with the Debtors andTSC as set forth above, induding its common stock holdings, preferred stock holdings, itsdesignation rights by which it directly controlled two of the scats on TSN's Board ofDirectors, itsrights to nominate up to two members ofTSC's Board of Directors, its consent rights, its variouslending relationships and its various contractual arrangements with both TSN and TSC, Harbinger at

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all relevant times had a close relationship with the Debtors and TSC. Through these holdings andclose relationships, Harbinger directly and indirectly held sufficient interests in TSN to render it an"insider" of the Debtors and TSC at all rdevant timcs.6

31. Upon information and belief, since the Petition Date, Harbinger has sold all of itsinterests under the PMCA.

32. Upon information and belief, as of December 1,2010, Harbinger's former interests inthe PMCA were held by the Successor Defendants (Mast Credit Opportunities I Master FundLimited and its affiliates, Cohanzick High Yield International Master Fund, Ltd., Cohanzick CreditOpportunities Master Fund Ltd., Cohanzick Absolute Return Master Fund Ltd. and its affiliates,Ulysses Partners L.P. and its afliliates, and River Park Short Term High Yield Fund and itsaffiliates).

Harbinger Participated in NearlyAll ofthe Debtors' Prepetition Financings, including the PMCAthat was Subsequently Used to Disguise a Capital Contribution as a Secured Loan

33. Upon information and belicf, in February 2008, the Debtors consummated a series oftransactions with, among others, Harbinger and EchoStar. The transactions included the following:(a) EchoStar's purchase 0/'$50 million in additional 15% Senior Secured Notes; (b) the issuance of$150 million aggregate principal amount of 6.5% Exchangeable Notcs due 2014; (c) the $100million PMCA by and among TSN (as borrower), U.S. Bank (as collateral agent), and Harbinger andEchoStar (as the original [enders); and Cd) the acquisition by TSC ofthe 1.4 GHz spectrum licensesfrom EchoStar and Ilarbingcr.--- - - - - - - - ~ - - -6 See II [J,S,C, 101(2) (stating that an "afliliali:" includes an entity that directly or indirectly owns, controls, or holdswith power to vote. 2 0 ' ~ ( ) or morc llfthe outstanding voting securities of the debtor): II U.S.c. 101 (31 )(E) (stating thatan "insider" includes an "affiliate, or insider of an affiliate as if slIch aftiliate were the debtor"),

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15% SeniQr Secured Paid-in-Kind Notes

34. Upon information and belief, on February 14, 2007, TSN issued $500 million

aggregate principal amount of 15% Senior Secured Notes due 2014. LJ .S. Bank is the trustee underthe indenture for the 15% Senior Secured Notes. As of the Petition Date, approximately $943.9Million was outstanding pursuant to the 15% Senior Secured Notes obligations. Upon infonnationand belief, at all relevant times, Harbinger held a substantial portion of the 15 0ft) Senior SecuredNotes.

6.5% Exchangeable Notes

35. Upon infonnation and belief, on February 7, 2008, TSN issued $150 millionaggregate pril1l:ipal amount of 6.5/tl Exchangeable Notes. As of the Petition Date, approximately$178.7 Million was olltstanding with respect to the 6.5(Yo Exchangeable Notes and there wereapproximately ten holders of'rccord of the 6.5% Exchangeable Notes. U.S. Bank was the originalindenture trustee under the indenture for the 6.5% Exchangeable Notes. On October 28, 2010,Deutsche Bank National Trus t Company replaced U.S. Bank as the indenture trustee for the 6.5%Exchangeable Notes. Upon in formation and belief: at all relevant times, Harbinger held at least 33%of the issued and outstanding 6 . 5 ~ ; ' ) Exchangeable Notes.

The Purchase Money Credit Facility

36. Upon information and belief, on or about February 5, 2008, TSN entered into the$100 million PMCA among TSN (as borrower), U.S. Bank (as collateral agent), and Harbinger andEchoStar (as the original lenders).

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37. Upon information and bclicf, as of thc Pctition Datc and at all rclevant times,including at the time of the August 2010 Advance, Harbinger was a 50% lender under the PMCA.

38. Upon information and belief, the sole purpose and permitted use ofthe PMCAwas toprovide funding that was needed for TSN to satisfy its contractual obligations with respect to thevarious milestone payments that were owed by TSN to Space Systcms/Loral ("SS/L"), thecontracting satellite manufacturer under the contract fbr the construction ofthc ground space satellitereferred to as TerreStar-2 ("TS-2").

39. Upon information and belief: pursuant to the terms ofthe PMCA, monies were to beadvanced only as required to fund SS/L s construction ofTS-2. TSN's obligations under the PMCAwere secured by a first lien on all of TSN's rights in TS-2, along with TSN's interest in rawmaterials, work-in-process, construction agreement, insurancc, books and records and all proceedsrelatcd thcreto (collectivcly, the "TS-2 Relatcd Assets").

40. Upon information and bclief, as ofthe Petition Date, approximate ly $85.9 Million inprincipal and accrued interest was outstanding under the PMCA.

41. Upon inf'tmnation and belief, subsequent to the Petition Date, Harbinger sold all of tsinterests in the PMCA.

The Debtors' Need for Capital and the Disguised August 2010 Advance

42. Upon information and belief, TSN's capitalization at the time of the August 2010Advance was inadequate as it was insufficient to support TSN 's ongoing business activities, and theDebtors knew as carly as April 20 I 0 that they (collectively) and TSN (in particular) would run out of

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liquidity in the third or fourth quar ter 01'20 IO. Upon infonnation and belief, TSN knew that withoutobtaining additional funding it would be unable to pay its obligations as they came due.

43. Upon information and be lief, by Apri I 2010 the Debtors commenced restructuringdiscussions with key constituents including, among others, Harbinger -- because the Debtorsrecognized that TSN would likely have insufficient capital to cover its funding needs for the thirdand fourth quarters of 20 1O.

44. Upon information and belief, during the spring of2010 (and thereafter) Harbingerwould not permit the Debtors to downstream funds from TSC to TSN to support TSN's liquidityneeds.

45. Upon information and belief, during the spring of2010 (and thereafter), Harbingerwas unwilling to place additional funds of its own at risk to support TSN, unless it could find a wayto advance the needed funds on a secured basis such that the secured nature of the advance wouldappear safe from challenge ifTSN filed for bankruptcy. The existing PMCA was the only vehicleavailable to accomplish this. but its terms expressly limited the uses to which funds advanced underits security interest could be used by TSN.

46. Upon information and belief, on or about August 25,2010,1 Iarbinger consummatedthe August 20 I 0 Advance which consisted of an additional $5 million "loaned" by Harbinger toTSN under the PMCA.

47. Upon information and belief, in connection with (and to lacilitate) the August 2010Advance, Harbinger executed a Waiver and Forbearance Agreement (datcd August 25, 2010) bywhich certain provisions of the PMCA were waived so that thc August 2010 Advance could to be

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made without triggering a default under the PMCA. Specifically, Harbinger waived the requirementthat all borrowings under the PMCA were to be used solely for the milestone payments owed byTSN to SS/L pursuant to the TS-2 construction contract. Additionally, Harbinger agreed to forbearfrom exercising certain of its rights and remedies with respect to various defaults (or events ofdefault) that had already occulTed (and were continuing) under the PMCA, or were expected to occurunder the PMCA, the 15% Senior Secured P a i d ~ i n - K i n d Notes Indenture, and/or the 6.5%Exchangeable Notes Indenture as a result of the August 201 0 Advance or TSN's usc of the proceedsthereof.

48. Upon infom1ation and belief, although the stated purpose of the August 20lOAdvance was to reimburse TSN for a portion ofthe aggregate amount ofpayments made by TSN inconnection with the construction of TS-2 at various times during the 180 days immediatelyproceeding the making of the August 20 I 0 Advance, TSN, in fact, already had funds set aside andavailable for this limited purpose. Accordingly, TSN intended to, and in tact did, usc the proceeds ofthe August 20 I 0 Advance for other purposes (wholly unrelated to the construction of TS-2),including meeting other obligations that TSN would not have been able to pay without these funds.

49. Upon infom1ation and belief, at the time of the August 2010 Advance, Harbingercould not have reasonably expected that TSN would be able to repay in the ordinary course (and forthe foreseeable future) any additional funds borrowed by TSN from Ilarbinger.

50. Upon infom1ation and belief. at the time of the August 20 I 0 Advance, the Debtorsgenerally, and 'IBN in particular, were unable to satisfy their debts as they became due.

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FIRST CLAIM FOR RELIEF - RE-CHARACTERIZATION

5 L The Committee repeats and rea lIeges the allegations contained in paragraphs "1"

through "50" above as if more fully set forth herein.52. Upon information and belief, at all relevant times, Harbinger was an insider of the

Debtors.

53. Upon information and belief, at the time of the August 2010 Advance, TSN wasundercapital ized.

54. Upon information and belief, Harbinger refused to contribute its own funds to TSNand refused to allow TSC to make necessary equity contributions to TSN, insisting instead that anyfurther funding be styled as a "secured" loan under the PMCA (which required the amendment ofthePMCA as accomplished pursuant to the Waiver and Forbearance Agreement).

55. Considering the totality of thc circumstances, it is clear that the $5 million August2010 Advance was in reality a "dressed up" equity investment by Harbinger in TSN.

56. Given the myriad of relationships that Harbinger had with the Debtors in general (andwith TSN and TSC in particular), including, without limitation, its common stock holdings, itsprefcrred stock holdings, the two directorships that it held on the TSN and TSC Boards ofDirectors(out of six board scats at the time of the August 20 I 0 Advance), various significant lending

relationships and various contractual arrangements, the negotiation and execution ofthe Waiver andForbearance Agreement and the funding orthc August 20) 0 Advance in accordance therewith werenot "arms length" transactions.

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57. Upon information and belief, the Debtors would not have been able to obtain thenecessary funding from any non-insider third-party lender.

5R. The Debtors' unsecured creditors have been injured by the actions of Harbinger, asthe unencumbered value of the Debtors' estates has been diminished by the addition of$5 million ofadditional secured debt. As a direct consequence thereof, the general unsecured creditors will likelyreceive a diminished distribution from any sale or plan of reorganization.

59. Ilarbinger engaged in inequitable conduct in refusing, upon infonnation and belief, topermit TSC to make necessary capital contributions into its subsidiary TSN, and by insisting insteadthat additional funding for TSN be accomplished only on a secured basis via the PMCA (asfacilitated by the Waiver and Forbearance Agreement).

60. Upon infom1ation and b e l i e j ~ Harbinger's actions injured the Debtors and theirgeneral unsecured creditors. As a result ofthe Defendants' inequitable conduct, general unsecuredcreditors (including, but not I mitcd to, the general unsecured creditors of TSN in particular) arelikely to collect a smaller percentage of their debts than they would if the $5 million of "secureddebt" that arose as a result of the August 20) 0 Advance is re-characterized as an equity contribution.

61. By reason of the foregoing. the $5 million August 2010 Advance by Harbinger,together with all interest accrued and accruing thereon. should be re-characterized as what it reallywas equity.

SECOND CLAIM FOR RELIEF - EQUITABLE SUBORDINATION

62. Upon information and belief: the Committee repeats and realleges the allegationscontained in paragraphs" I" through "61" above as if more fully sd forth herein.

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63. Upon information and b c l i e t ~ at all relevant times, Harbinger was an insider of theDebtors.

64. Given the myriad ofrdationships the Ilarbinger had with the Debtors in general (andwith TSN and TSC in particular), including, without limitation, its common stock holdings, itspreferred stock holdings, the two directorships that it held on TSN's and TSC's Boards ofDirectors(out of six board scats at the time of the August 2010 Advance), various significant lendingrelationships and various contractual arrangements, the negotiation and execution ofthe Waiver andForbearance Agreement, and thc funding ofAugust 2010 Advance in accordance therewith were not"arms length" transactions.

65. Upon infomlation and belief, at the time of the August 2010 Advance, TSN wasundercapitalized and insolvent.

66. I Iarbinger engaged in inequitable conduct in refusing, upon information and belief, topermit TSC to make necessary capital contributions into its subsidiary TSN, and by insisting insteadthat additional funding for TSN be accomplished only on a secured basis via the PMCA (asfacilitated by the Waiver and Forbearance Agreement).

67. Upon inlhrmation and belief, Harbinger saddled TSN with additional secured debtwhen lIarbinger could and should have contributed additional capital to TSN, or permittedadditional capital to be contributed to TSN by TSC instead.

68. Upon information and belieC Harbinger engaged in a self-interested transaction byinsisting that August 2010 Advam:e be accomplished via the secured PMCA.

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69. Upon information and belief: Harbinger 's actions were detrimental to the Debtors ingeneral (and TSN in particular) and their (and its) general unsecured creditors. The conduct ofHarbinger was not only unfair to the general unsecured creditors, but was egregious andoverreaching.

70. Upon information and belief, the misconduct of Harbinger, as described above,caused injury to the general unsecured creditors of the Debtors in general, and to the generalunsecured creditors ofTSN in particular, by increasing by $5 million the amount ofsecured debt thatmust be satisfied from the assets securing the PMCA. Upon information and belief, the value oftheofthc Debtors' interest in TS-2 and the TS-2 Related Assets above the amount outstanding under thePMCA is unencumbered and should have been available to the general unsecured creditors for theDebtors in general, and TSN in particular. 7

71. Upon infomlation and belief, the misconduct of Harbinger conferred an unfairadvantage by increasing the amount of its secured debt rather than providing the additional equi ty

infusion.72. Upon information and b e l i e t ~ the remedy of equitable subordination IS not

inconsistent with provisions of bankruptcy law.

73. Upon information and belief, as a result ofthe inequitable conduct ofHarbinger, thegeneral unsecured creditors ofthe Debtors in gcneral (and ofTSN in particular) arc likely to collect amaterially smaller percentage of the obligations owed to them than they would if the $5 million of

The Committee has commem:ed an adversary proceeding that is currently pending and alleges that the holdersofthe 15% Senior Secured Notes do not have a valid lien on, among other things, the Debtors' interest in TS-2 and theTS-2 Related Assets. 5'"e Amended Compla in//o Avoid AIIQ;ed Unper/i:cled Lien or, AlrernUlively. /or DeclaratoryRelief; Adv. Pro. No. 11-0 126X-Sll/.. Dm:kct No.4 (February I, 2011 ).

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"secured debt" that resulted from the August 20 I ) Advance is subordinated to the claims of theDebtors' general unsecured creditors, including the general unsecured creditors ofTSN.

74. By reason ofthe foregoing, and in particular the inequitable conduct ofHarbinger, the$5 million August 2010 Advance by Harbinger, together with all interest accrued and accruingthereon, should be subordinated to the claims ofthe Debtors' general unsecured creditors, includingthe general unsecured creditors ofTSN.

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WHEREFORE, the Committcc respectfully rcquests that this Court entcr an order:(a) rc-characteri;.ing the $5 million August 20 I 0 Advancc by Ilarbinger (together with all

interest accrued thereon) from secured debt to equity, or (in the alternative)(b) subordinating the $5 million August 2010 Advance by Harbinger (together with all

interest accrued thereon) to the claims of all general unsecured creditors ofthe Debtors (and ofTSNin particular);

together with such other, further andlor di ffercnt relief as the Court may deem just andpropcr.

Dated: New York, New YorkJUly 13,2011Respectfully submitted,

OTTERBOURG, STEINDLER,HOUSTON & ROSEN, P.e.

By: ls i DavidM. PosnerScott L. HazanDavid M. PosnerStanley 1.. Lane, Jr.Members urthe Firm230 Park AvenueNew York, NY 10169Telephonc: (212) 661-9100Facsimile: (212) 682-6104

Counsel to the Official CommitteeOJ' Unsecured Creditors

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Harbinger Complaint by Unsecured Creditors

Documents

Transcript of Harbinger Complaint by Unsecured Creditors