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The Continuing Evolution of the Basis for Equitable Subordination

By Grant T. Stein

On June 10, 2014, the Bankruptcy Court for the Southern District of New York issued a 168-page post-trial opinion determining that it would equitably subordinate the claims of SP Special Opportunities LLC (SPSO) against LightSquared. LightSquared LP, et. al. v. SP Special Opportunities LLC, et. al., 511 B.R. 253 (Bankr. S.D. N.Y. 2014). The court reserved for later determination the amount to be equitably subordinated. Id. at 315, 361.

The court's opinion explained that SPSO, under the control of Charles Ergen, the founder, Board chair and controlling shareholder of Dish Network, had acquired $844 million of senior secured debt of LightSquared LP. 511 B.R. at 279, ”88, 89. Two hundred eighty seven million dollars of the face amount of the debt purchases occurred prior to the filing of the LightSquared bankruptcy cases on May 14, 2012, for a purchase price of $172 million. Id. at 274, '63. The purchases were made at a time when there were restrictions on the holders of LightSquared secured debt to preclude its competitors from holding that debt, and SPSO was aware of, and was created to, navigate those restrictions. Id. at 345-346.

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