DBSD Bankruptcy Plan Hits Appeals Court Snag

The 2nd U.S. Circuit Court of Appeals issued a stay on the consummation of DBSD’s bankruptcy reorganization plan Tuesday, preventing the company from emerging from bankruptcy as planned. If the court rules against the bankruptcy plan, approved by the Southern District of New York, DBSD may have to start the reorganization planning all over again, said an executive familiar with the case. Both Sprint Nextel’s and Dish Network’s motions for stays were granted by the court and neither company was required to post bond. The court didn’t offer any more information on the decision.

The stay follows last week’s order from the FCC International Bureau approving a license transfer to allow the DBSD reorganization to proceed (CD Oct 1 p2). The order didn’t take effect for seven days specifically to allow the appeals court time to decide if a stay is necessary. Adding to DBSD’s woes, on the same day the full FCC clarified several rules on broadcast auxiliary spectrum relocation fees last week that could mean a $120 million debt to Sprint. DBSD declined to comment.

Sprint asked for a stay of the plan based on a violation of the absolute priority rule, which prioritizes debt holders in bankruptcy cases, stipulating available funds to go toward repaying secured debt, then unsecured debt and finally equity holders. DBSD didn’t have enough funds to pay back the secured creditors, who decided to gift some funds back to DBSD, which violated the rule, according to Sprint, an unsecured creditor. Sprint said it supports the decision and “intends to continue to pursue collection of outstanding debts for 2 GHz band-clearing aggressively and to the full extent permitted by law."

Dish Network appealed for different reasons. A Dish subsidiary, which held all of the debt in one of the senior classes, said DBSD’s plan for reorganization wasn’t feasible, based on DBSD’s available operating capital and business plan. Dish also said the bankruptcy court ignored its vote against the plan during the proceeding.

The next step and how long it will take for DBSD to come out of bankruptcy will depend on how and on which claims the 2nd Circuit rules on, said a lawyer familiar with the litigation. If the court says loan terms need to be revised, for instance, that could be changed relatively easily, whereas a determination that the entire plan isn’t feasible would take longer for the lower court to get through.