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Harbinger Capital Partners LLC v. Ergen

United States District Court, D. Colorado

April 28, 2015


For Harbinger Capital Partners LLC, HGW U.S. Holding Company LP, Blue Line DZM Corp., Harbinger Capital Partners SP, Inc., Plaintiffs: Jason M. Lynch, LEAD ATTORNEY, Daniel M. Reilly, Reilly Pozner, L.L.P., Denver, CO; Christine A. Montenegro, Marc E. Kasowitz, Michael Joseph Bowe, Paul J. Burgo, Kasowitz, Benson, Torres & Friedman, LLP-New York, New York, NY.

For Charles W. Ergen, SP Special Opportunities LLC, Special Opportunties Holdings LLC, Defendants: John V. McDermott, LEAD ATTORNEY, Brownstein Hyatt Farber Schreck, LLP-Denver, Denver, CO; Hugh Q. Gottschalk, Kenneth Edward Stalzer, LaMar Fredrick Jost, Wheeler Trigg O'Donnell, LLP, Denver, CO.

For DISH Network Corporation, L-Band Acquisition LLC, Defendants: John V. McDermott, LEAD ATTORNEY, Brownstein Hyatt Farber Schreck, LLP-Denver, Denver, CO; Brian Thomas Frawley, Brian D. Glueckstein, Sullivan & Cromwell, LLP-New York, New York, NY; Michael D. Hoke, Brownstein Hyatt Farber Schreck, LLP-Denver, Denver, CO.

For Sound Point Capital Management LP, Stephen Ketchum, Defendants: John V. McDermott, LEAD ATTORNEY, Brownstein Hyatt Farber Schreck, LLP-Denver, Denver, CO; Andrew J. Frackman, Charles E. Bachman, O'Melveny & Myers, LLP-New York, New York, NY; Dana Brent Baggs, Kenneth Kent Skogg, Lowe, Fell & Skogg, LLC, Denver, CO.


William J. Martí nez, United States District Judge.

Plaintiffs Harbinger Capital Partners LLC, HGW U.S. Holding Company LP, Blue Line DZM Corp., and Harbinger Capital Partners SP, Inc. (collectively, " Harbinger" ) invested heavily in a company named LightSquared, which was building a nationwide wireless broadband network. (ECF No. 1 ¶ 4.) Harbinger brings suit against the following individuals and entities, to whom the Court will refer collectively as " Defendants" : Charles W. Ergen (" Ergen" ), DISH Network Corporation (" DISH" ), L-Band Acquisition LLC (" LBAC" ), SP Special Opportunities LLC (" SPSO" ), Sound Point Capital Management LP (" Sound Point" ), and Stephen Ketchum (" Ketchum" ). Harbinger claims that Defendants engaged in wire fraud, mail fraud, and other unlawful acts to disrupt Harbinger's control of LightSquared during LightSquared's proceedings in the U.S. Bankruptcy Court for the Southern District of New York (" Bankruptcy Court" ). ( See generally ECF No. 1.) Harbinger therefore asserts a civil cause of action under the Racketeer Influenced and Corrupt Organizations Act (" RICO" ), 18 U.S.C. § 1962, and various related claims. ( Id. )

Before the Court is Defendants' Motion to Dismiss the Complaint (" Motion" ). (ECF No. 39.) For the reasons stated below, the Court agrees with Defendants that this lawsuit violates the prohibitions on claim-splitting and collateral attacks, and the Motion is therefore granted.


Defendants bring their Motion largely under Federal Rule of Civil Procedure 12(b)(6). Under Rule 12(b)(6), a party may move to dismiss a claim in a complaint for " failure to state a claim upon which relief can be granted." The Rule 12(b)(6) standard requires the Court to " assume the truth of the plaintiff's well-pleaded factual allegations and view them in the light most favorable to the plaintiff." Ridge at Red Hawk, LLC v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007). In ruling on such a motion, the dispositive inquiry is " whether the complaint contains 'enough facts to state a claim to relief that is plausible on its face.'" Id. (quoting Bell A. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Granting a motion to dismiss " is a harsh remedy which must be cautiously studied, not only to effectuate the spirit of the liberal rules of pleading but also to protect the interests of justice." Dias v. City & Cnty. of Denver, 567 F.3d 1169, 1178 (10th Cir. 2009) (internal quotation marks omitted). " Thus, 'a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely.'" Id. (quoting Twombly, 550 U.S. at 556).

In this case, both parties have extensively referred to, quoted from, or attached various filings and orders from the Bankruptcy Court. The Court may consider these materials without converting the motion to dismiss to one for summary judgment. See Pace v. Swerdlow, 519 F.3d 1067, 1072-73 (10th Cir. 2008) (district court properly took judicial notice of other courts' records); Tal v. Hogan, 453 F.3d 1244, 1264 n.24 (10th Cir. 2006) (district court may take judicial notice of " facts which are a matter of public record" without converting a Rule 12(b)(6) motion into a summary judgment motion).


This dispute already has a long history in the Bankruptcy Court, much of which is set forth in detail in the Bankruptcy Court's published orders: In re LightSquared Inc., 504 B.R. 321 (Bankr. S.D.N.Y. 2013) (" LightSquared I " ); In re LightSquared Inc., 511 B.R. 253 (Bankr. S.D.N.Y. 2014) (" LightSquared II " ); and In re LightSquared Inc., 513 B.R. 56 (Bankr. S.D.N.Y. 2014) (" LightSquared III " ). The following facts appear sufficient to resolve the Motion.

A. Harbinger and LightSquared

Harbinger owns about 82% of LightSquared, which is in the business of building a new nationwide broadband wireless network. (ECF No. 1 ¶ ¶ 44-45.) LightSquared and its shareholders (including Harbinger) are parties to a Stockholders' Agreement that grants " expansive rights" to Harbinger in light of Harbinger's significant investment. ( Id. ¶ ¶ 46-48.) Harbinger claims that its contractual rights to " control LightSquared have a value independent of, and incremental to, the value of Harbinger's equity interests." ( Id. ¶ 48.)

LightSquared ran into difficulties and consequently filed for bankruptcy in May 2012. ( Id. ¶ ¶ 50-51.) LightSquared's predicament had by this time caught the attention of Ergen, majority owner of DISH and chairman of its board, who had long been hoping to put DISH into the wireless broadband business and who therefore coveted the radio frequency spectrum licensed to LightSquared. ( Id. ¶ ¶ 22, 53.) Under Ergen's direction, DISH had gone after other bankrupt or distressed companies' spectrum. ( Id. ¶ 54.) In one instance, DISH acquired spectrum (that of a company named DBSD) through bankruptcy court machinations that the Second Circuit eventually found impermissible. See In re DBSD N. Am., Inc., 634 F.3d 79, 104-05 (2d Cir. 2011). Harbinger claims that Ergen hatched another unlawful scheme to obtain a similar result through LightSquared's bankruptcy proceedings. (ECF No. 1 ¶ 68.)

The details of this scheme are mostly irrelevant for present purposes. The short of it is that Ergen wanted DISH to purchase a substantial portion of LightSquared's outstanding debt, thus permitting DISH to exert significant influence in the bankruptcy proceedings. ( Id. ¶ ¶ 5-7.) Ergen learned, however, that LightSquared and its lenders were parties to a " Credit Agreement," contractually prohibiting lenders from selling debt to individuals or to competing businesses. ( Id. ¶ 65.) DISH was considered a competitor, meaning that neither DISH nor Ergen personally (who possesses significant personal wealth) could purchase LightSquared's debt. ( Id. ¶ ¶ 65-67.) Ergen therefore enlisted Ketchum, an outside banker and friend, to have Ketchum's investment firm, Sound Point, set up SPSO and its sole member, SO Holdings. ( Id. ¶ ¶ 22, 69-70.) Ergen himself was the sole member of SO Holdings. ( Id. ¶ 22.) SPSO then began purchasing large blocks of LightSquared debt, paying nearly $800 million and eventually becoming LightSquared's largest creditor. ( Id. ¶ 71.)

Ergen, through SPSO, allegedly used these debt purchases to disrupt LightSquared's ability to negotiate a reorganization plan with its creditors. For example, SPSO would sometimes contract to buy LightSquared debt but would then delay closing those trades, making it difficult for LightSquared to determine the identity of its actual creditors--and therefore difficult to determine with whom it needed to negotiate. ( Id. ¶ ¶ 117, 140, 144-47.) However, perhaps most disruptive was a $2 billion bid for LightSquared's spectrum made in May 2013. ( Id. ¶ 87.) This bid did not come through SPSO, but rather through LBAC, another entity Ergen formed to pursue LightSquared's spectrum. ( Id. ¶ ¶ 24, 96.)[1]

LBAC's $2 billion bid (nominally confidential but somehow leaked to the press) apparently gave LightSquared's creditors pause, given the opportunity to cash out rather than allow LightSquared to reorganize. ( Id. ¶ ¶ 96-97, 116.) Ergen added to the pressure by having SPSO join the " Ad Hoc Secured Group," which was " an ad hoc group of lenders collectively possessing a majority of [LightSquared's debt]." ( Id. ¶ ¶ 10, 117.) SPSO convinced the Ad Hoc Secured Group to support the LBAC bid rather than continue reorganization discussions. ( Id. ¶ 119.)

B. The Special Committee Order

Ergen's alleged scheme came to partial fruition in September 2013. At that point, " the Bankruptcy Court held a series of hearings related to whether Harbinger should be able to dictate decisions related to LightSquared during the reorganization proceedings and assessment of the [LBAC bid]." ( Id. ¶ 123.) Allegedly " based on [Defendants'] misrepresentations that the [LBAC bid] was adequate," the Bankruptcy Court concluded that Harbinger was conflicted in its consideration of the bid ( i.e., conflicted between its desire to protect its equity and its duty to make the best decision for LightSquared). The Bankruptcy Court therefore ordered the LightSquared board of directors to form a special independent committee to handle " all actions and decisions on behalf of LightSquared related to the [reorganization] plan process, an auction, or a sale" (" Special Committee Order" ). ( Id. ¶ ¶ 124-25.) This committee was fully formed by September 27, 2013. ( Id. ¶ 125.) At that point,

Harbinger was stripped of its contractual rights under the Stockholders' Agreement, including its rights to appoint and remove the majority of directors, appoint committee members, chair committees, and dictate key management decisions. Practically speaking, Harbinger lost the ability to participate in all material decisions related to LightSquared necessary to protect its investment.

( Id. ¶ 129.)

C. The Adversary Proceeding Complaint

On September 30, 2013, Harbinger filed with the Bankruptcy Court an Adversary Proceeding Complaint (actually an amended complaint, although that is irrelevant here) against the same Defendants sued in this lawsuit, plus EchoStar Corporation (" EchoStar" ), which Ergen also controls. ( See ECF No. 39-3.) The Adversary Proceeding Complaint alleged the foregoing course of events in much greater detail and sought " redress for Defendants' fraud and other tortious conduct aimed at misappropriating Harbinger's control over and investment in LightSquared, and destroying Harbinger's contractual rights and business opportunities relating to that investment." ( Id. ¶ 1.) Under this rubric, Harbinger asserted causes of action for:

o " equitable disallowance" of SPSO's claim, i.e., invalidation of SPSO's ability to recover the value of any debt it purchased, given that Ergen, among other things, intentionally evaded the debt-buying restrictions through a front company;
o fraud, based on misrepresentation or intentional concealment of SPSO's ownership;
o aiding and abetting fraud, based on the same theory;
o tortious interference with prospective economic advantage, based on the notion that Defendants disrupted ...

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