Scott L.

llazan
David M. Posner
Stanley L. Lane, Jr.
OTTERBOURG, STEINDLER, J IOUSTON & ROSEN, P.C.
230 Park A venue
New York, New York 10169
Telephone: (212) 661-9100
Facsimile: (212) 682-6104
Counsel to the Official Committee
Of Unsecured Creditors
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
--------------------------------------------------------- x
In re:
TERRESTAR NETWORKS INC., et aI.,
Debtors.
---------------.. ---.-----.----------------------.-----------x
THE OFFICIAL COMMITTEE OF
UNSECURED CREDITORS OF
TERRESTAR NETWORKS INC. et aI.,
PlaintifT,
v.
U.S. BANK NATIONAL ASSOCIATION,
in its capacity as Collateral Agent under the
Purchase Money Credit Agreement.
HARBINGER CAPITAL PARTNERS, LLC.
HARBINGER eAPIT AL MANAGEMENT,
HARBINGER CAPITAL PARTNERS
MASTER FUND 1, LTD., HARBINGER
CAPITAL PARTNERS SPECIAL
SITUATIONS FUND, LP., CREDIT
DISTRESSED BLUE LINE MASTER FUND, :
LTD .. and their affiliates
MAs'r CREDIT OPPORTUNITIES I
MASTER FUND UMITPD and its aftiliatcs,
Chapter 11
Case No. 10-15446 (SHL)
(Jointly Administered)
Adv. Pro. No. 11- -SHL
COMPLAINT FOR
RECIIARACTERIZA TION
AND/OR
EQUITABLE SUBORDINATION
AND RELATED RELIEF
as successors to Harbinger,
COHANZICK BIGIl YIELD
INTERNATIONAL MASTER FUND, LTD.,
COHANZICK CREDIT OPPORTUNITIES
MASTER FUND LTD.,
COHANZICK ABSOLUTE RETURN
MASTER FUND LTD. and their affIliates,
as successors to Harbinger,
ULYSSES PARTNERS L.P. and its affiliates,
and,
RIVER PARK SHORT TERM IIICiH YIELD
FUND and its affiliates, as successors to
Harbinger.
Defendants.
--------------------------------------------------------- x
Plaintiff, the Official Committee of Unsecured Creditors (the "Committee") of TerreStar
Networks 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 Purchase
Money 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 Fund
Ltd., Cohanzick Absolute Retum Master Fund Ltd. and its affiliates, Ulysses Partners L.P. and its
affiliates and River Park Short Term 11igh Yield Fund and its affiliates (col1ectively, the "Successor
Defendants" 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 with
respect thereto, in connection with the Waiver and Forbearance Agreement (defined below). I In
support thereof, the Committee respectfully alleges as follows:
PRELIMINARY STATEMENT
At a time when the Debtors were severely undercapitalized, the Defendants provided an
additional $5 million (the "August 2010 Advance") to the Debtors that they styled as a further
secured "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 original
lenders. The reality, however, is that the $5 million actually constituted a fUl1her equity investment
in TSN by Harbinger. Although it is highly unlikely that any arms length lender would have
permitted further borrowings under similar circumstances, I {arbinger used its close relationships and
insider status with the Debtors to arrange for the additional funds they sought to invest in TSN to be
channeled 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 styled
as an additional loan) was funded at a time when I larbinger was one of the most significant holders
of the Debtors' stock and outstanding debt and Harbinger's investment was subject to substantial
risk 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"), which
also advanced $5 million or "principal" to the Debtors under the PMCA pursuant to the Waiver and Forbearance
Agreement. Accordingly. a total of'SI 0 mill ion of "principal" was advanced to the Debtors under the PMCA pursuant to
the Waiver and Forbearance Agreement in August 20 I 0 The Committee, however, is not asserting any causes ofaction
against EchoStar or its affiliates und the rl'liefrequcsted herein is not Il1tended to affect the claims or rights of EchoStar.
References to EchoStur in this Complaint arc included to p r o v i d ~ the complete picture of the facts and circumstances
relating to the $10 million advanced in August 20 I 0 under the PMCA thut support this Complaint as against Harbinger
and thc Successor Defendants.
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$5 million was provided, llarbinger was a substantial holder ofboth common and preferred stock of
TSN, and Ilarbinger also held common stock and two different series ofpretcrred stock in TerreStar
Corporation ("TSC") - the Debtors' ultimate parent corporation. Additionally, at all relevant times,
Harbinger was also a substantial holder of the Debtors' secured and unsecured outstanding debt
obligations.
2
Accordingly, the $5 million advance was made at a time when Harbinger dominated
the Debtors' capital structure and was well aware that the Debtors required additional capital to
continue operations. llarbinger used its insider position, however, to provide TSN with its needed
capital under the guise of secured debt financing.
Upon information and belief, due to the absence of available funds from other sources and
the unwillingness of Harbinger to contribute additional funds to TSN as a capital contribution or to
permit 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. In
furtherance thereoC Harbinger and EchoStar each executed a Waiver and Forbearance Agreement
that waived certain provisions contained in the PMCA that required funds advanced under the
PMCA to be used only for specified purposes. Harbinger and EehoStar each also agreed to forbear
from exercising rights and remedies with respect to certain defaults or events of default that either
already existed or might arise under the PMCA, the 15!rh Scnior Secured Notes Indenture (defined
below), 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% Senior
Exchangeable Notes each contained several restrictive covenants. including, but not limited to the j(lllowing: limitations
on incurrence ofadditlOrml indebtedness, limitations on liens, limitations on transactions with affiliates, and limitations
on 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 and
limitation on transactions with affiliates.
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advanced by EchoStar) was wholly insufficient to meet the Debtors' capital needs (and which the
Debtors intended with the full know ledge 0 f Harbinger to use for purposes entirely inconsistent with
the uses originally contemplated by the PMCA). In fact, as the Defendants were already
contemplating the likelihood that TSN might need to scek bankmptcy protection, their clear
intention was to misLise the PMCA as a shield for providing the funds needed to "buy time" for their
Chapter II plans to bc "sorted out". all while doing so in a way intended to minimize their additional
financial exposure at the expense of TSN's other existing creditors.
Accordingly, this last $5 million advanced by Harbinger to TSN under the PMCA should be
re-characterized to accurately reflect what it was an equity investment in TSN by Harbinger. In
the 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 their
unsccured cn.:ditors.
PROCEDURAL BACKGROUND
1. On October 19,2010 (the "Pctition Date"), the Debtors each filed a petition for relief
under 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-possession
pursuant to Bankruptcy Code sections 1107 and 1108. Those Chapter II cases were being jointly
administered for procedural purposes.
2. The following entities were the original debtors in the jointly administered
bankruptcy casc; TSN; TerreStar New York Inc.: Motient Communications Inc.; Motient Holdings
Inc.; Moticnt License Inc.; Motient Services Inc.; Motient Ventures Holding Inc.; MVH Holdings
Inc.; 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 Order
Directing Joint Administration of Related Chapter 11 Cases [Docket No. 445]. As a result of the
February 23, 20 II order, certain of the original Debtors' chapter II cases no longer arc jointly
administcred 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 the
Committee in the within chapter II cases [Docket No. 57]. The Committee is currently comprised
of 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 as
originally proposed), the Disclosure Statement (as amended) was approved by the Bankruptcy Court
at a hearing held on December 21, 20 I 0 I Docket No. 312].
5. A hearing to confirm the Plan was scheduled to be held on March 4, 20 II, but did not
go 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 that
contemplated potentially alternate final outcomes: (a) an intended sale of substantially all of the
Debtors' assets; and (b) a complex reorganization plan that would, among other things, resolve
numerous 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 procedures
for a sale of substantially all ofthe Debtors' assets [Docket No. 533] (the "Sale Motion"). On June
14,20 II, the Debtors filed a motion [Docket No. 617] (the "Stalking I forse Motion") with the Court
seeking entry of an order (i) authorizing the Debtors to entcr into a Stalking f forse Agreement with
the potential purchaser (the "Stalking Ilorse Bidder") and (ii) approving bid procedures and bid
protections in connection therewith (the "Amended Bid Procedures"). On June 22, 2011, the
Bankruptcy Court entered an order [Docket No. 645] (the "Stalking Horse Order"), among other
things, approving the bid protections and the Amended Bid Procedures and setting a new date for the
Sale Hearing. Pursuant to the Amended Bid Procedures, any bids tor the Assets were required to be
submitted by June 27, 2011 (the "Bid Deadline"). The Debtors did not receive any additional bids
prior to the Bid Deadline and the Auction scheduled to be held on June 30, 2011 was cancelled. On
June 28, 2011, the Debtors filed a notice announcing the Stalking Horse Bidder as the winning
bidder. A hearing to approve the Sale to the Stalking Horse Bidder is currently scheduled to be held
on 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. The
purpose ofsuch motion is to stop the accrual ofin1crest that continues in these chapter 11 cases and
which will ultimately reduce any recovery for the Debtors' general unsecured creditors (the PMCA
accrues interest at an estimated $3.4 to $3.5 million per quarter). However, since the Committee is
challenging a portion ofthe PMCA obligations in this Complaint, the relief requested in the Secured
7
Debt Pay-Down Motion is inappropriate absent a resolution of this dispute.
3
The outcome of this
litigation will also likely have a materially significant impact on the distributions available to general
unsecured creditors pursuant to any proposed plan ofliquidation. Therefore, this dispute should be
decided either prior to, or contemporaneously with, issues related to confirmation of any proposed
plan of liquidation. In all events, however, the resolution of these issues must be made prior to a
distribution 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 Plaintiff
herein.
9. Upon information and belief: Defendant U.S. Bank is a national banking association
chartered under thc laws ofthe United States of America and is an insured depository institution (as
defined in section 3 of the Federal Depository Insurance Act). U.S. Bank is named as a Defendant
solely 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 New
York based private investment firm (hedge fund sponsor) specializing in event/distressed strategies.
11. Upon information and belief: Defendant I Iarbinger Capital Management is an affiliate
of Harbinger Capital Partners, LLC.
The Secured Debt Pay-Down Motion seeks relief in the alternative that recognizes the outstanding litigation
with respect to the secured nature of the Debtors' 15% Senior Secured Paid-in-Kind Notes and proposes to pay sueh
notes on an unsecured basis. Similarly, the Committee believes that the Court may consider granting the Secured Debt
Pay-Down Motion with respect to the undisputed portion ofthe PMCA and refrain from granting the Secured Debt Pay-
Down Motion with respect to the $5 million August 20 I 0 Advance until the resolution of the dispute asserted in this
Complaint.
8
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 Master
Fund, Ltd. and their aftiliates arc investment funds of Harbinger Capital Partners, LLC.
13. Upon infonnation and belief, Defendants Mast Credit Opportunities I Master Fund
Limited and its affiliate Master Fund Limited and their affiliates, are successors to Harbinger's
interests under the PMCA, and are investment funds with offices located in Boston, MA.
14. Upon intonnation and belief, Defendants Cohanzick High Yield International Master
Fund, Ltd., Cohanzick Credit Opportunities Master Fund Ltd., Cohanzick Absolute Return Master
Fund 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 under
the PMCA. The Cohanzick Defendants are named as Defendants solely as successors to Harbinger's
interests under the PMCA.
15. Upon information and b e l i e f ~ Defendant Ulysses Partners L.P. is a privately owned
investment fund sponsor located in New York, New York and its affiliates that arc also Defendants
arc 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's
interests under the PMCA.
16. Upon information and belief, Defendants River Park Short Tenn High Yield Fund
and its affiliates (collectively, the "River Park Defendants") arc investment advisors with offices
located in New York, New York, and arc successors to Harbinger's interests under the PMCA. The
River Park Defendants arc named as Defendants solely as successors to Ilarbinger's interests under
the 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 the
chapter 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 securing
such Prepetition Obligations" pursuant to the final order (the "Final Order") of this Court approving
the Debtors' motion to obtain postpctition financing ('the "DIP Financing"). [Docket No. 181 at
para. 17J
20. Specifically, the Final Order provides that an adversary proceeding must be filed
within the specified challenge period:
unless (i) the Committee '" has duly filed an adversary proceeding ... (X)
challenging the validity, enforceability, priority or extent of the Prepetition
Obligations or the liens on the Prepetition Collateral securing such Prepetition
Obligations or (Y) otherwise asserting or prosecuting any A voidance Actions or any
other claims, counterclaims or causes of' action, objections, contests or defenses
(collectively, the "Claims and Defenses") against the Prcpetition Agent or any ofthe
other Prepetition Secured Parties or their respective agents, atTIliates, subsidiaries,
directors, officers, reprcsentatives, attorneys or advisors in connection with any
matter related to the Prepetition Obligations or the Prepetition Collateral, and (ii) an
order is entcred by a court of competent jurisdiction and becomes final and non-
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appealable in favor ofthe plaintiff sustaining any such challenge or claim in any such
duly filed adversary proceeding; provided that, as to the Debtors, all such Claims and
Defenses arc hereby irrevocably waived and relinquished as ofthe Petition Date. If
no such adversary proceeding is duly and timely filed in respect of the Prepetition
Obligations, (x) the Prepctition Obligations shall constitute allowed claims, not
subject to counterclaim, setoff: subordination, recharacterization, defense or
avoidance, for all purposes in the Cases and any subsequent chapter 7 case, (y) the
liens on the Prepetition Collateral securing the Prepetition Obligations, as the case
may be, shall be deemed to have been, as of the Petition Date, and to be, legal, valid,
binding, perfected and of the priority specified in paragraph 4(b), not subject to
defense, counterclaim, recharacterization, subordination or avoidance and (z) the
Prepetition Obligations, the Prepetition Agent and the Prepetition Secured Parties, as
the case may be, and the liens On the Prepetition Collateral granted to secure the
Prepetition Obligations shall not be subject to any other or further challenge by the
Committee (if any) or any other party-in-interest, and such Committee or party-in-
interest shall be enjoined th1l11 seeking to exercise the rights ofthe Debtors' estates,
including without limitation, any successor thereto (including, without limitation, any
estate representativC' or a chapter 7 or II trustee appointed or elected for any ofthe
Debtors) .... Nothing in this Final Order vests or confers on any Person (as defined in
the Bankruptcy Code) (other than the Committee lill any)1 as provided above),
standing or authority to pursue any cause of action belonging to the Debtors or their
estates, including without limitation, Claims and Defenses with respect to the
Prepetition Loan Docul1].9Jlts or by
(Emphasis added.)
STATEMENT OF FACTS
At all Relevant Times, Harbinger was an Insider of the Debtors
21. Upon information and belief, at all relevant times, Harbinger was an insider of the
Debtors. As disclosed in TSC's Form IO-K/A dated May 6, 2010 for the fiscal year ended
December 31,2009 CTSC 2009 Form IO-KlA"), Harbinger held approximately 47.78% of the
common stock of TSC as of April 28,2010. Similarly, as disclosed in the Declaration of Jeffrey
Epstein Pursuant to Local Bankruptcy Rule 1007-2 In Support ojFirst Day Plemi;ngs (the "Epstein
Declaration") [Docket No.3 J, I larbinger held approximately 47.78(% onhe common stock ofISe as
1 1
of the Petition Date.
4
l11erefore, upon infonnation and b c l i c i ~ Harbinger held in excess of20% of
the TSC's common stock at all relevant times and, specifically, at the time of the August 2010
Advance.
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 common
stock.
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 a
single share) pursuant to which it was given consent rights with respect to certain fundamental
corporate transactions by TSN. Harbinger also received the right to nominate up to two members of
TSN's Board of Directors.
5
24. Upon information and belief: at all relevant times, two members ofTSN's Board of
Directors were Ilarbinger designees whose principal allegiance was owed to IIarbingcr and not to
TSN.
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 three
specified funds: Credit Distressed Blue [.inc Master Fund. Ltd .. Ilarbinger Capital Partners Master Fund I, Ltd. and
Harbinger Capital Partners Special Situations Fund. tP.) bencfil;ially holds 25.9% ofthc common stock ofTSC. Upon
infonnation and belief, Harbinger has sold TSC common stock since the Petition Date. Notwithstanding any such
inconsistency, it is clear that Harbinger has beneficially held in excess of 20(Yo of the common stock of TSC at all
relevant 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 (also
represented by a single share) which provided Harbinger with consent rights with respect to certain fundamental
corporate transactions by TSC. Harbinger also received the right to nominate up to two members of TSC's Board of
Directors (which mirrored the composition ofTSN's Board of Directors),
12
25. Upon information and belief, the Debtors would not have granted Harbinger the
consent rights it received and/or thc right to designate two ofTSN' s Board members had Harbinger
not 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% Senior
Exchangeable Paid-in-Kind Notes (exchangeable for the common stock ofTSC at a conversion rate
of$5.57 per share) (the Exchangeable Notes"). Upon infonnation and llarbingernow
holds more than half of the 6.5!Yc) Exchangeable Notes.
29. Upon information and belief, Harbinger (a) has contractual lease rights to use
TerreStar 1.4 Holdings LLC's 1.4 GHz spectrum; (b) has purchased prepaid satellite minutes from
TSN; and (c) has entered into a series of exclusivity agreements with respect to entering a pooling
arrangement of the Debtors' and Harbingers' various spectrum licenses and satellite capacity.
30. Upon information and belief, through its myriad relationships with the Debtors and
TSC as set forth above, induding its common stock holdings, preferred stock holdings, its
designation rights by which it directly controlled two of the scats on TSN's Board of Directors, its
rights to nominate up to two members of TSC's Board of Directors, its consent rights, its various
lending relationships and its various contractual arrangements with both TSN and TSC, Harbinger at
13
all relevant times had a close relationship with the Debtors and TSC. Through these holdings and
close 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 its
interests under the PMCA.
32. Upon information and belief, as of December 1,2010, Harbinger's former interests in
the PMCA were held by the Successor Defendants (Mast Credit Opportunities I Master Fund
Limited and its affiliates, Cohanzick High Yield International Master Fund, Ltd., Cohanzick Credit
Opportunities 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 its
affiliates).
Harbinger Participated in Nearly
All ofthe Debtors' Prepetition Financings, including the PMCA
that 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 of
transactions 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 $100
million PMCA by and among TSN (as borrower), U.S. Bank (as collateral agent), and Harbinger and
EchoStar (as the original [enders); and Cd) the acquisition by TSC ofthe 1.4 GHz spectrum licenses
from 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 holds
with power to vote. 2 0 ' ~ ( ) or morc llfthe outstanding voting securities of the debtor): II U.S.c. ~ 101 (31 )(E) (stating that
an "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 under
the indenture for the 15% Senior Secured Notes. As of the Petition Date, approximately $943.9
Million was outstanding pursuant to the 15% Senior Secured Notes obligations. Upon infonnation
and belief, at all relevant times, Harbinger held a substantial portion of the 15
0
ft) Senior Secured
Notes.
6.5% Exchangeable Notes
35. Upon infonnation and belief, on February 7, 2008, TSN issued $150 million
aggregate 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 were
approximately ten holders of'rccord of the 6.5% Exchangeable Notes. U.S. Bank was the original
indenture trustee under the indenture for the 6.5% Exchangeable Notes. On October 28, 2010,
Deutsche Bank National Trust 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 and
EchoStar (as the original lenders).
15
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 PMCA was to
provide funding that was needed for TSN to satisfy its contractual obligations with respect to the
various milestone payments that were owed by TSN to Space Systcms/Loral ("SS/L"), the
contracting satellite manufacturer under the contract fbr the construction ofthc ground space satellite
referred to as TerreStar-2 ("TS-2").
39. Upon information and belief: pursuant to the terms ofthe PMCA, monies were to be
advanced only as required to fund SS/L 's construction ofTS-2. TSN's obligations under the PMCA
were secured by a first lien on all of TSN's rights in TS-2, along with TSN's interest in raw
materials, work-in-process, construction agreement, insurancc, books and records and all proceeds
relatcd thcreto (collectivcly, the "TS-2 Relatcd Assets").
40. Upon information and bclief, as ofthe Petition Date, approximately $85.9 Million in
principal and accrued interest was outstanding under the PMCA.
41. Upon inf'tmnation and belief, subsequent to the Petition Date, Harbinger sold all of its
interests 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 2010
Advance was inadequate as it was insufficient to support TSN 's ongoing business activities, and the
Debtors 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 quarter 01'20 I O. Upon infonnation and belief, TSN knew that without
obtaining 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 restructuring
discussions with key constituents including, among others, Harbinger -- because the Debtors
recognized that TSN would likely have insufficient capital to cover its funding needs for the third
and fourth quarters of 20 1 O.
44. Upon information and belief, during the spring of2010 (and thereafter) Harbinger
would not permit the Debtors to downstream funds from TSC to TSN to support TSN's liquidity
needs.
45. Upon information and belief, during the spring of2010 (and thereafter), Harbinger
was unwilling to place additional funds of its own at risk to support TSN, unless it could find a way
to advance the needed funds on a secured basis such that the secured nature of the advance would
appear safe from challenge ifTSN filed for bankruptcy. The existing PMCA was the only vehicle
available to accomplish this. but its terms expressly limited the uses to which funds advanced under
its security interest could be used by TSN.
46. Upon information and belief, on or about August 25,2010,1 Iarbinger consummated
the August 20 I 0 Advance which consisted of an additional $5 million "loaned" by Harbinger to
TSN under the PMCA.
47. Upon information and belief, in connection with (and to lacilitate) the August 2010
Advance, Harbinger executed a Waiver and Forbearance Agreement (datcd August 25, 2010) by
which certain provisions of the PMCA were waived so that thc August 2010 Advance could to be
17
made without triggering a default under the PMCA. Specifically, Harbinger waived the requirement
that all borrowings under the PMCA were to be used solely for the milestone payments owed by
TSN to SS/L pursuant to the TS-2 construction contract. Additionally, Harbinger agreed to forbear
from exercising certain of its rights and remedies with respect to various defaults (or events of
default) that had already occulTed (and were continuing) under the PMCA, or were expected to occur
under the PMCA, the 15% Senior Secured 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 proceeds
thereof.
48. Upon infom1ation and belief, although the stated purpose of the August 20lO
Advance was to reimburse TSN for a portion ofthe aggregate amount of payments made by TSN in
connection with the construction of TS-2 at various times during the 180 days immediately
proceeding the making of the August 20 I 0 Advance, TSN, in fact, already had funds set aside and
available for this limited purpose. Accordingly, TSN intended to, and in tact did, usc the proceeds of
the 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, Harbinger
could not have reasonably expected that TSN would be able to repay in the ordinary course (and for
the 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 Debtors
generally, 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 was
undercapital ized.
54. Upon information and belief, Harbinger refused to contribute its own funds to TSN
and refused to allow TSC to make necessary equity contributions to TSN, insisting instead that any
further funding be styled as a "secured" loan under the PMCA (which required the amendment ofthe
PMCA as accomplished pursuant to the Waiver and Forbearance Agreement).
55. Considering the totality of thc circumstances, it is clear that the $5 million August
2010 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 (and
with TSN and TSC in particular), including, without limitation, its common stock holdings, its
prefcrred stock holdings, the two directorships that it held on the TSN and TSC Boards of Directors
(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 and
Forbearance Agreement and the funding orthc August 20) 0 Advance in accordance therewith were
not "arms length" transactions.
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57. Upon information and belief, the Debtors would not have been able to obtain the
necessary funding from any non-insider third-party lender.
5R. The Debtors' unsecured creditors have been injured by the actions of Harbinger, as
the unencumbered value of the Debtors' estates has been diminished by the addition of$5 million of
additional secured debt. As a direct consequence thereof, the general unsecured creditors will likely
receive a diminished distribution from any sale or plan of reorganization.
59. Ilarbinger engaged in inequitable conduct in refusing, upon infonnation and belief, to
permit TSC to make necessary capital contributions into its subsidiary TSN, and by insisting instead
that additional funding for TSN be accomplished only on a secured basis via the PMCA (as
facilitated by the Waiver and Forbearance Agreement).
60. Upon infom1ation and b e l i e j ~ Harbinger's actions injured the Debtors and their
general unsecured creditors. As a result ofthe Defendants' inequitable conduct, general unsecured
creditors (including, but not I imitcd to, the general unsecured creditors of TSN in particular) are
likely to collect a smaller percentage of their debts than they would if the $5 million of "secured
debt" 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 really
was equity.
SECOND CLAIM FOR RELIEF - EQUITABLE SUBORDINATION
62. Upon information and belief: the Committee repeats and realleges the allegations
contained in paragraphs" I" through "61" above as if more fully sd forth herein.
2()
63. Upon information and b c l i e t ~ at all relevant times, Harbinger was an insider of the
Debtors.
64. Given the myriad ofrdationships the Ilarbinger had with the Debtors in general (and
with TSN and TSC in particular), including, without limitation, its common stock holdings, its
preferred stock holdings, the two directorships that it held on TSN's and TSC's Boards of Directors
(out of six board scats at the time of the August 2010 Advance), various significant lending
relationships and various contractual arrangements, the negotiation and execution ofthe Waiver and
Forbearance Agreement, and thc funding of August 2010 Advance in accordance therewith were not
"arms length" transactions.
65. Upon infomlation and belief, at the time of the August 2010 Advance, TSN was
undercapitalized and insolvent.
66. I Iarbinger engaged in inequitable conduct in refusing, upon information and belief, to
permit TSC to make necessary capital contributions into its subsidiary TSN, and by insisting instead
that additional funding for TSN be accomplished only on a secured basis via the PMCA (as
facilitated by the Waiver and Forbearance Agreement).
67. Upon inlhrmation and belief, Harbinger saddled TSN with additional secured debt
when lIarbinger could and should have contributed additional capital to TSN, or permitted
additional capital to be contributed to TSN by TSC instead.
68. Upon information and belieC Harbinger engaged in a self-interested transaction by
insisting that August 2010 Advam:e be accomplished via the secured PMC A.
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69. Upon information and belief: Harbinger's actions were detrimental to the Debtors in
general (and TSN in particular) and their (and its) general unsecured creditors. The conduct of
Harbinger was not only unfair to the general unsecured creditors, but was egregious and
overreaching.
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 general
unsecured creditors ofTSN in particular, by increasing by $5 million the amount of secured debt that
must be satisfied from the assets securing the PMCA. Upon information and belief, the value ofthe
ofthc Debtors' interest in TS-2 and the TS-2 Related Assets above the amount outstanding under the
PMCA is unencumbered and should have been available to the general unsecured creditors for the
Debtors in general, and TSN in particular.
7
71. Upon infomlation and belief, the misconduct of Harbinger conferred an unfair
advantage by increasing the amount of its secured debt rather than providing the additional equity
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 of Harbinger, the
general unsecured creditors ofthe Debtors in gcneral (and ofTSN in particular) arc likely to collect a
materially 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 holders
ofthe 15% Senior Secured Notes do not have a valid lien on, among other things, the Debtors' interest in TS-2 and the
TS-2 Related Assets. 5'"e Amended Complain//o Avoid AIIQ;ed Unper/i:cled Lien or, AlrernUlively./or Declaratory
Relief; Adv. Pro. No. 11-0 1 26X-Sll/.. Dm:kct No.4 (February I, 2011 ).
22
"secured debt" that resulted from the August 20 I () Advance is subordinated to the claims of the
Debtors' general unsecured creditors, including the general unsecured creditors ofTSN.
74. By reason ofthe foregoing, and in particular the inequitable conduct of Harbinger, the
$5 million August 2010 Advance by Harbinger, together with all interest accrued and accruing
thereon, should be subordinated to the claims ofthe Debtors' general unsecured creditors, including
the general unsecured creditors ofTSN.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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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 ofTSN
in particular);
together with such other, further andlor di ffercnt relief as the Court may deem just and
propcr.
Dated: New York, New York
JUly 13,2011
Respectfully submitted,
OTTERBOURG, STEINDLER,
HOUSTON & ROSEN, P.e.
By: lsi David M. Posner
Scott L. Hazan
David M. Posner
Stanley 1.. Lane, Jr.
Members urthe Firm
230 Park A venue
New York, NY 10169
Telephonc: (212) 661-9100
Facsimile: (212) 682-6104
Counsel to the Official Committee
OJ' Unsecured Creditors
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