TerreStar asks court to re-characterize parent claim as equity

By Caroline Salls

Pittsburgh, June 17 - TerreStar Networks Inc.'s official committee of unsecured creditors is asking the U.S. Bankruptcy Court for the Southern District of New York to re-characterize parent company TerreStar Corp.'s $56.88 million claim as an equity contribution, according to a Friday court filing.

The committee said TerreStar Corp. is trying to label $50 million in funding it provided to TerreStar Networks about a year before the unit filed for bankruptcy as a loan to secure higher priority and a larger recovery.

Specifically, the committee said the parent company advanced five $10 million notes to TerreStar Networks without taking a security interest in any of its assets, despite a going concern warning and TerreStar Networks' "negative book value, history of unprofitability and dismal economic outlook."

"Then, in an attempt to subvert the priority scheme set forth in the Bankruptcy Code, [TerreStar Corp.] camouflaged its equity contribution as an intercompany loan," the committee said in the motion.

The committee said the bankruptcy court has the power "to look beyond the form of a transaction and determine its true substance in order to carry out the Bankruptcy Code's priority scheme for the distribution of a debtor's assets."

As a result, the creditor group said the court can "re-characterize what is ostensibly debt as equity."

If the claim is re-characterized as equity, the committee said TerreStar Networks' unsecured creditors would stand to recover more because their claims won't be diluted by those of the parent company.

A hearing is scheduled for July 18.

Based in Reston, Va., TerreStar is a holding company with subsidiaries that operate satellite-based digital mobile communications systems. The company filed for bankruptcy on Oct. 19, 2010. The Chapter 11 case number is 10-15446.

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