Disqualified Lenders: The Lightsquared Controversy Over The Acquisition Of Its Debt By The Executive Chairman Of Its Competitors Illustrates The Importance Of Careful Drafting To Avoid Costly Pitfalls And Unintended Risks

In recent years, borrowers of leveraged loans have sought to include "Disqualified Lender" provisions in their credit agreements. About two-thirds of recent credit agreements contained such provisions.1 The goal is to prevent competitors and other "unfriendlies" from infiltrating the borrower's senior-most piece of the capital structure and to prevent them from having access to confidential information or becoming a source of mischief in the event of a necessary amendment, workout, restructuring or bankruptcy. This goal can be accomplished by carefully and unambiguously drafting the credit agreement to expressly provide that:

Transfers may only be made to Eligible Assignees (defined in the credit agreement to expressly exclude Disqualified Lenders); The definition of Disqualified Lenders includes (x) a list of entities identified by the borrower at the time of commitment or closing and, in some cases, updated with additional entities identified by the borrower during the term of the loan and (y) "Affiliates" of any entity identified and listed under clause (x); and Any purported assignment or grant of participation interest to such a Disqualified Lender is rendered null and void. The absence of sufficiently broad and unambiguous "Disqualified Lender" provisions is fertile ground for materially divergent interpretations of the credit agreement that can lead to costly and unintended risks for all parties concerned. The beleaguered (and much in the news) wireless technology company LightSquared LP ("LightSquared") and its majority owner, Harbinger Capital ("Harbinger"), which is controlled by Mr. Philip Falcone, find themselves locked in contentious and expensive litigation against their competitors Charlie Ergen, DISH Network Corporation ("DISH") and EchoStar Corporation ("EchoStar"). Mr. Ergen is the Executive Chairman of the board of directors and majority owner of DISH and EchoStar. At the heart of the controversy is the acquisition of over $1 billion of LightSquared's senior secured loans by Mr. Ergen's wholly-owned investment vehicle. These purchases, which have made Mr. Ergen the largest creditor of LightSquared and a driving force in its pending restructuring, have been challenged by Harbinger and LightSquared as being impermissible transfers under the terms of the credit agreement. The case is scheduled to move to a full trial in January 2014. If LightSquared and Harbinger prevail, Mr. Ergen's stake of over $1 billion in LightSquared debt may be disallowed or subordinated, and he, Dish and EchoStar may be liable for damages. Regardless of the final resolution of this controversy, it is safe to assume that none of the parties desired to find themselves enmeshed in this costly and protracted situation.

LightSquared Files For Bankruptcy Protection

LightSquared LP, a Delaware limited partnership, is a provider of communications and broadband services. For several years, LightSquared was engaged in efforts to develop a next-generation ancillary terrestrial network ("ATC Network") that would employ both satellite service and ground-based antennas to provide nationwide state-of-the-art "4G-LTE" (Fourth Generation -Long Term Evolution) broadband mobile services. In 2010, the Federal Communications Commission ("FCC") approved the ATC Network and imposed certain build-out requirements on LightSquared. Harbinger invested billions of dollars in LightSquared in connection with this FCC approval and indirectly owns more than 82% of the equity of LightSquared.

In order to raise the funds necessary to accomplish the ATC Network build-out, LightSquared entered into a credit agreement, dated as of October 10, 2010 (the "Credit Agreement"), with UBS AG, Stamford Branch as administrative agent (the "Administrative Agent"), and entities that were, or would serve as, "Lenders" under the Credit Agreement.

In February 2012, in response to allegations from GPS manufacturers and the US military that LightSquared's proposed use of its spectrum would cause interference with GPS devices, the FCC issued a formal notice proposing to suspend indefinitely LightSquared's plan to build out the ATC Network. As a result, LightSquared was unable to proceed with the build-out of its ATC Network and it sought to reach a forbearance agreement with its creditors that would allow it to pursue a resolution with the FCC. When those negotiations were unsuccessful, on May 14, 2012, LightSquared filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (In re LightSquared Inc. et al., Case No. 12-12080 (SCC) Jointly Administered (collectively, the "LightSquared Bankruptcy Case"). The LightSquared Bankruptcy Case is pending before the Honorable Shelley C. Chapman in the United States Bankruptcy Court for the Southern District of New York. LightSquared continues to operate its businesses and manage its properties as debtors-in-possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code.

Harbinger's and LightSquared's Adversary Proceedings Against Charlie Ergen, DISH, EchoStar and SPSO

In August 2013, Harbinger commenced adversary proceedings in the LightSquared Bankruptcy Case against Charlie Ergen, DISH, EchoStar, SP Special Opportunities, LLC ("SPSO"),2 the wholly-owned investment vehicle used by Mr...