LightSquared to proceed to trial over Ergen trades

Bankrupt wireless communications firm Lightsquared Inc plans to go to trial with its lenders over whether Dish Network chairman Charles Ergen's acquisition of big chunks of its loan debt violated an agreement pertaining to how LightSquared can restructure.

The trial, announced on Wednesday by LightSquared and its lenders after the sides said they could not resolve the dispute consensually, escalates a battle between Ergen and Phil Falcone, head of LightSquared owner Harbinger Capital, over control of the company.

The dispute centers on a February agreement between LightSquared and an informal committee of some of its lenders governing certain aspects of LightSquared's restructuring. Key provisions of the deal have been kept private by the parties.

According to court papers filed in the U.S. Bankruptcy Court in Manhattan, the deal hinged on the lender committee being LightSquared's largest creditor constituency, which ceased to be the case once Ergen began buying up large chunks of the debt, thus voiding the deal, LightSquared has argued.

Ergen has countered that no breach occurred because he eventually joined the committee.

A trial on the issue is tentatively set for August after sides could not resolve the matter consensually, the parties said on Wednesday in the Manhattan bankruptcy court.

Because portions of the deal are redacted, it is unclear exactly how a potential breach would affect LightSquared's bankruptcy. One effect it would have, according to the terms of the deal, would be to allow LightSquared to raise additional financing at its operating company that could rank ahead of claims held by Ergen.

LightSquared is already in the process of trying to raise financing that would allow it to exit bankruptcy on its own, but an Ergen-controlled vehicle has offered $2 billion in cash to buy its assets.

Falcone and Ergen each covet the valuable wireless spectrum owned by LightSquared.

According to court filings, Ergen began buying LightSquared operating company loans in April 2012 at close to 50 cents on the dollar, a month before the company filed for bankruptcy, and held $356 million of loans at the end of last year.

Since the beginning of this year, Ergen has acquired another $657 million of loans, making him the largest single lender to the company. A number of the loan trades took several months to settle, leading to uncertainty over how much of the loans the original lending group actually held over the last several months.

According to Reuters' calculations based on the market value of the loans, Ergen's loan investments have so far cost $858 million.

The February agreement gives LightSquared the exclusive right to propose a bankruptcy exit plan through July 15, after which creditors like Ergen can begin pushing competing plans. In that scenario, Ergen's $2 billion sale offer would not necessarily need Falcone's cooperation if it had the backing of a majority of other creditors.

Even during its exclusivity period, LightSquared must achieve at least some cooperation with creditors, because any plan put forth by LightSquared would either need to be backed by the majority of its lenders or fully repay those lenders.

So far, the relationship has been lukewarm, as both sides have levied attacks in court papers and tension has built. Ergen's purchase offer, now weeks old, remains on the table, while LightSquared continues to work with Jefferies in hopes of raising financing for an independent exit.

(Reporting by Billy Cheung; Writing by Nick Brown; editing by Andrew Hay)