By Nick Brown
NEW YORK (Reuters) - With its money running out and a crucial court battle unresolved, the fight over bankrupt wireless venture LightSquared is going down to the wire.
The bankruptcy case has become a tug of war between LightSquared's biggest shareholder, Phil Falcone's Harbinger Capital Partners, and its largest creditor, Dish Network Corp Chairman Charles Ergen.
Last year, LightSquared filed a lawsuit accusing Ergen of amassing its debt illegally so that Dish could take control of the company and its valuable spectrum.
Earlier this month, LightSquared offered to drop the lawsuit if Ergen agreed to be repaid with a secured note rather than cash, a proposal to which Ergen has objected.
With neither side looking like they are willing to budge, LightSquared's future could hang on the outcome of its lawsuit against Ergen - an all-or-nothing scenario that brings big risks for both sides.
LightSquared went bankrupt in 2012 after the Federal Communications Commission revoked its license based on complaints that its proposed wireless network could interfere with GPS systems.
After the bankruptcy, Ergen acquired about $1 billion of LightSquared's senior debt, giving him a controlling stake of a roughly $1.8 billion tranche.
LightSquared alleged Ergen made the purchases on Dish's behalf, contravening provisions barring competitors like the satellite television broadcaster from owning LightSquared's debt.
In court, Ergen has argued the purchases were strictly personal.
A Dish unit did make a $2.2 billion offer for LightSquared last year, but dropped the bid in January.
On February 14, LightSquared proposed a restructuring plan that would pay off most lenders in cash, while allowing Harbinger to retain some equity.
But Ergen would miss out on the cash payment, instead receiving a $1.1 billion secured note and a release from the lawsuit.
If Ergen does not support the plan, LightSquared said it will push on with its lawsuit.
In court papers on Friday, Ergen objected, calling LightSquared's bankruptcy plan an "ultimatum" and saying it unfeasible even if LightSquared wins the lawsuit.
Letting the lawsuit play out is risky for both sides.
If Ergen loses, he could see his $1 billion stake reduced or even lost. And, according to LightSquared, other lenders could also sue Ergen, saying they were duped into supporting Dish's $2.2 billion bid last year.
Lawyers for Ergen declined to comment beyond his objection.
For its part, LightSquared is up against a ticking clock, with a $33 million bankruptcy loan maturing on April 15 and its money set to run out as early as the end of March.
If it loses, it would have to scramble to finance a new restructuring plan that would pay off Ergen, or face liquidation.
Neither LightSquared nor Harbinger responded to requests for comment.
Compounding that challenge are regulatory difficulties, which could chill potential investors.
Although the restructuring plan is not contingent on LightSquared gaining FCC approval for its wireless license, LightSquared will eventually need its blessing to operate.
"The wild card of regulatory approval makes the viability of (LightSquared) less certain," said Jonathan Lipson, a bankruptcy expert and professor at Temple University's Beasley School of Law.
The sides could still avoid an all-or-nothing court battle and strike a compromise. But this seems unlikely.
In his objection on Friday, Ergen said he is not interested in negotiating until LightSquared takes its current plan off the table.
"There is no point in proposing an alternative while the (current) plan is on file," Ergen's lawyers wrote. "There is no incentive to negotiate."
Adding to the uncertainty for both sides is a lack of clear definition over when a claim such as Ergen's can be subordinated.
Under case law, the so-called equitable subordination provision allows a bankruptcy judge to subordinate the claims of creditors who engaged in misconduct that harmed the bankrupt entity or its creditors.
"This is a hard claim to bring and prove," said Lipson. It is "problematic because it leaves so much to judicial discretion".
LightSquared must show not only that Ergen bought its debt on Dish's behalf, but that LightSquared was harmed as a result.
Whether it is permissible to tie how much Ergen can recover to his support of the plan is also a murky question, Lipson said.
It is not unheard of to include so-called "trap doors" that punish dissenters with less favorable payouts, Lipson said, but that tactic could raise concerns over whether it is in "good faith".
Ergen's objection is set for a hearing on Monday before Judge Shelley Chapman in the U.S. Bankruptcy Court in New York. If Chapman allows the plan to stand, LightSquared will then lobby creditors for support ahead of a final approval hearing on March 17.
The lawsuit against Ergen, meanwhile, will proceed with post-trial briefs ahead of closing arguments on March 12.
(Reporting by Nick Brown; Editing by Eddie Evans and Sophie Hares)