20-22437-rdd doc 427 filed 07/21/20 entered 07/21/20 15:13 ... · serrano v. gulf chem. corp., ltd....

Filed Under Temporary Seal — Subject to the Protective Order by and among the Debtors and Debtors-in-Possession of OneWeb Global

Limited, et al., SoftBank Group Corp., Airbus Group Proj B.V., Banco Azteca, S.A. Institucion de Banca Multiple, Qualcomm and the Official

Committee of Unsecured Creditors of OneWeb Global Limited, et al.

ny-1958519

GARY S. LEE DAVID J. FIOCCOLA TODD M. GOREN DAVID R. FERTIG MARK ALEXANDER LIGHTNER ADAM J. HUNT MORRISON & FOERSTER LLP 250 West 55th Street New York, New York 10019-9601 212.468.8000

Counsel for Debtor Softbank Group Corp.

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

In re

OneWeb Global Limited, et al.,

Debtors.1

Chapter 11

Case No. 20-22437 (RDD)

(Jointly Administered)

SOFTBANK GROUP CORP.’S OBJECTION TO THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS’ (I) MOTION FOR ORDER GRANTING COMMITTEE

DERIVATIVE STANDING TO PURSUE, AND IF APPROPRIATE, SETTLE CLAIMS FOR RECHARACTERIZATION AND EQUITABLE SUBORDINATION AGAINST

CERTAIN PURPORTED SECURED CREDITORS, AND (II) OBJECTION TO SUCH CREDITORS’ CLAIMS

1 The debtors in these cases (the “Debtors”), along with the last four digits of each Debtor’s federal tax identification number, if any, are: OneWeb Global Limited (N/A); OneWeb Holdings LLC (5429); OneWeb Communications Limited (9487); WorldVu Satellites Limited (7802); WorldVu Development LLC (9067); WorldVu JV Holdings LLC (N/A); 1021823 B.C. LTD (8609); Network Access Associates Limited (8566); OneWeb Limited (8662); WorldVu South Africa (Pty) Ltd. (1867); OneWeb Chile SpA (2336); WorldVu Australia Pty Ltd. (5436); WorldVu Unipessoal Lda. (2455); OneWeb Norway AS (0209); OneWeb ApS (9191); OneWeb Network Access Holdings Limited (8580); OneWeb G.K. (1396); OneWeb Ltd (8661); and WorldVu Mexico S. DE R. L. DE C.V. (1234). The Debtors’ headquarters is located at 195 Wood Lane, West Works Building, 3rd Floor, London, W12 7FQ, UK.

20-22437-rdd Doc 427 Filed 07/21/20 Entered 07/21/20 15:13:27 Main Document Pg 1 of 48

TABLE OF CONTENTS

Page

i ny-1958519

PRELIMINARY STATEMENT ................................................................................................... 1

FACTUAL BACKGROUND ........................................................................................................ 3

A. Equity Investments Predating the Debt Investments ............................................. 3

B. The Original NPA .................................................................................................. 4

C. The Amended and Restated NPA .......................................................................... 8

LEGAL STANDARDS ................................................................................................................. 9

ARGUMENT ............................................................................................................................... 11

I. THE COMMITTEE HAS FAILED TO ALLEGE A COLORABLE CLAIM FOR RECHARACTERIZATION BECAUSE THE NOTES WERE CLEARLY DEBT INSTRUMENTS.............................................................................................................. 13

i. Because the Debt Instruments Were “Promissory Notes” Issues Pursuant to “Note Purchase Agreements,” They Evidence Indebtedness and Weigh Against Recharacterization .............................. 13

ii. The Notes Explicitly Contain a Fixed Maturity Date and Schedule of Payments, Which are the Hallmarks of Debt and Weigh Against Recharacterization .................................................................................... 16

iii. The Notes Contain a Fixed Rate of Interest and Interest Payments—Quintessential Debt Features That Weigh Against Recharacterization .................................................................................... 17

iv. Because the Lenders’ Source of Repayment Was Not Solely Dependent on the Debtors’ Success and There Was Sufficient Collateral, This Factor Does Not Weigh in Favor of Recharacterization .................................................................................... 19

v. The Inadequacy of Capitalization Alone Cannot Justify Recharacterization .................................................................................... 20

vi. Because There is no “Exact Correlation” Between the Historical Equity Interests of the Lenders and Their Respective Note Purchases, the Identity of Interest Between the Creditors Stockholders Factor Weighs Against Recharacterization ........................ 22

vii. Because the Lenders’ Loans Were Secured, This Factor Weighs Against Recharacterization ...................................................................... 24

viii. The Inability to Obtain Financing From Outside Lending Institutions is Insufficient to Support Recharacterization ........................ 26


TABLE OF CONTENTS (continued)

Page

ii ny-1958519

ix. Because the Notes Were Never Subordinated to Other Creditors, This Factor Cannot Support Recharacterization ...................................... 28

x. The Notes Were Used to Fund Capital Expenses for a Startup, Which Does Not Support Recharacterization .......................................... 29

xi. The Absence of a Sinking Fund is Irrelevant Where, as Here, The Loans Were Secured by Liens on Virtually All of the Debtors’ Assets ....................................................................................................... 29

II. THE COMMITTEE HAS FAILED TO ALLEGE A COLORABLE CLAIM FOR THE “EXTREME REMEDY” OF EQUITABLE SUBORDINATION ......................... 30

i. The Committee Has Failed to Allege the Lenders are All Insiders that Collectively Exercised the Requisite Control Over the Debtors ...... 32

ii. The Committee Has Failed to Allege Inequitable Conduct ..................... 34

III. THE DEBTORS DID NOT UNJUSTIFIABLY REFUSE TO BRING THE MERITLESS CLAIMS THE COMMITTEE SEEKS TO PURSUE HERE WITH LITTLE BENEFIT—AND GREAT EXPENSE—TO THE ESTATE ........................... 37

CONCLUSION ............................................................................................................................ 40


TABLE OF AUTHORITIES

Page

iii ny-1958519

Cases

Adelphia Comm’cns. Corp. v. Bank of Am., N.A. (In re Adelphia Comm’cns. Corp.), 365 B.R. 24 (Bankr. S.D.N.Y. 2007) ...........................................................................27, 28, 38

Ashcroft v. Iqbal, 556 U.S. 662 (2009) .................................................................................................................10

In re: Aéropostale, Inc., 555 B.R. 369 (Bankr. S.D.N.Y. 2016) ............................................................................. passim

In re Alternate Fuels, Inc., 507 B.R. 324 (B.A.P. 10th Cir. 2014), rev’d on other grounds, 789 F.3d 1139 (10th Cir. 2015) ................................................................................................................ passim

In re America’s Hobby Ctr., Inc., 223 B.R.275 (Bankr. S.D.N.Y. 1998) ......................................................................................38

In re Applied Theory Corp., 493 F.3d 82 (2d Cir.2007)........................................................................................................38

In re AtlanticRancher, Inc., 279 B.R. 411 (Bankr. D. Mass. 2002) .....................................................................................22

In re AutoStyle Plastics, Inc., 269 F.3d 726 (6th Cir. 2001) ........................................................................................... passim

In re BH S & B Holdings LLC, 420 B.R. 112 (Bankr. S.D.N.Y. 2009), aff’d as modified, 807 F. Supp. 2d 199 (S.D.N.Y. 2011) ............................................................................................................... passim

In re Broadstripe, LLC, 444 B.R. 51 (Bankr. D. Del. 2010) ....................................................................................23, 29

In re Cold Harbor Assocs., L.P., 204 B.R. 904 (Bankr. E.D. Va. 1997) ................................................................................14, 15

In re Daewoo Motor Am., Inc., 471 B.R. 721 (C.D. Cal. 2012), aff’d, 554 F. App’x 638 (9th Cir. 2014)................................17

In re Dornier Aviation (N. Am.), Inc., 453 F.3d 225 (4th Cir. 2006) .............................................................................................12, 28


TABLE OF AUTHORITIES (continued)

Page

iv ny-1958519

In re Emerald Casino, Inc., No. 02 B 22977, 2015 WL 1843271 (N.D. Ill. Apr. 21, 2015)..............................12, 15, 19, 21

In re Enron Corp., 379 B.R. 425 (S.D.N.Y. 2007) ...........................................................................................11, 31

In re Epic Capital Corp., 290 B.R. 514 (Bankr. D. Del. 2003) ........................................................................................32

In re Fid. Bond & Mortg. Co., 340 B.R. 266 (Bankr. E.D. Pa. 2006), aff’d sub nom. Fid. Bond & Mortg. Co. v. Brand, 371 B.R. 708 (E.D. Pa. 2007) ..................................................................................15

In re Franklin Equip. Co., 418 B.R. 176 (Bankr. E.D. Va. 2009) ......................................................................................17

In re Hedged-Invs. Assocs., Inc., 380 F.3d 1292 (10th Cir. 2004) ...............................................................................................32

In re Hyperion Enters., Inc., 158 B.R. 555 (D.R.I. 1993) ......................................................................................................22

In re Kalisch, 413 B.R. 115 (Bankr. S.D.N.Y.2008) ......................................................................................15

In re KDI Holdings, Inc., 277 B.R. 493 (Bankr. S.D.N.Y. 1999) .....................................................................................10

In re Le Café Crème Ltd., 244 B.R. 221 (Bankr. S.D.N.Y. 2000) .....................................................................................36

In re Licking River Mining LLC, 603 BR 356 (Bankr. E.D. Ky. 2019)........................................................................................20

In re Lyondell Chem. Co., 544 B.R. 75 (Bankr. S.D.N.Y. 2016) ............................................................................... passim

In re MIG, Inc., No. 09-12118 (KG), 2009 WL 8662897 (Bankr. D. Del. Dec. 18, 2009) ...............................11

In re Moll Indus., Inc., 454 B.R. 574 (Bankr. D. Del. 2011) ........................................................................................26



Page

v ny-1958519

In re Mr. R’s Prepared Foods Inc., 251 B.R. 24 (Bankr. D. Conn. 2000) .......................................................................................36

In re Murray Metallurgical Coal Holdings, LLC, 614 B.R. 819 (Bankr. S.D. Ohio 2020) .................................................................. passim

In re Nutri/Sys. of Fla. Assocs., 178 B.R. 645 (E.D. Pa. 1995) ............................................................................................13, 32

In re Optical Techs, 252 BR 531 (M.D. Fla. 2000); aff’d 246 F.3d 1332 (11th Cir. 2001) .....................................33

In re Optim Energy, LLC, 527 B.R. 169 (Bankr. D. .Del. 2015) .......................................................................................32

In re Pers. Commc’n Devices, LLC, 528 B.R. 229 (Bankr. E.D.N.Y. 2015) .....................................................................................18

In re Radnor Holdings, Corp., 353 B.R. 820 (Bankr. D. Del. 2006) ..................................................................................31, 33

In re Rockville Orthopedic Assocs., P.C., 377 B.R. 438 (Bankr. D. Conn. 2007) ...............................................................................12, 22

In re Sabine Oil & Gas Corp., 547 B.R. 503 (Bankr. S.D.N.Y.), aff’d, 562 B.R. 211 (S.D.N.Y. 2016) ......................... passim

In re SubMicron Sys. Corp., 432 F.3d 448 (3d Cir.2006)................................................................................................26, 32

In re Sunbeam Corp., 284 B.R. 355 (Bankr. S.D.N.Y. 2002) .....................................................................................38

In re Va. Broadband LLC, 521 B.R. 539 (Bankr. W.D. Va. 2014) ....................................................................................20

In re Winstar Communs, 348 B.R. 234 (Bankr. D. Del. 2005) ........................................................................................33

In re Worldwide Wholesale Lumber, Inc., 378 B.R. 120 (Bankr. D.S.C. 2007) .........................................................................................12

Kham & Nate’s Shoes No. 2, Inc. v. First Bank of Whiting,



Page

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908 F.2d 1351 (7th Cir. 1990) .................................................................................................36

Matter of Herby’s Food’s, Inc., 2 F.3d 128 (5th Cir. 1993) .......................................................................................................36

Matter of Lifschultz Fast Freight, 132 F.3d 339 (7th Cir. 1997) .................................................................................32, 34, 35, 37

Matter of Yoga Smoga, Inc., No. 16-13159-MEW, 2016 WL 8943849 (Bankr. S.D.N.Y. Dec. 20, 2016) ..........................28

Official Comm. of Unsecured Creditors of HH Liquidation, LLC v. Comvest Grp. Holdings, LLC (In re HH Liquidation, LLC), 590 B.R. 211 (Bankr. D. Del. 2018) ..................................................................................18, 29

Seaver v. Ashenfelter (In re MSP Aviation, LLC ), 531 B.R. 795 (Bankr.D. Minn.2015) .......................................................................................20

Serrano v. Gulf Chem. Corp., Ltd. (In re Caribbean Petrol. LP), 322 B.R. 726 (D. Del. 2005) ....................................................................................................33

Stinnett’s Pontiac Serv., Inc. v. Comm’r of Internal Revenue Serv., 730 F.2d 634 (11th Cir. 1984) .................................................................................................16


1 ny-1958519

PRELIMINARY STATEMENT

1. The Committee seeks derivative standing to assert the “unusual” and “extreme”

remedies of recharacterization and equitable subordination based wholly on conclusory and

speculative factual assertions and an entirely incorrect reading of the law. Stripped to its bare

essentials, the Committee believes it can assert these extraordinary claims merely that because

(i) Debtors were purportedly an undercapitalized startup; and (ii) the Lenders—which included

SoftBank, a Mexican financial institution, a semiconductor company, and a European aerospace

company—operated together as a single “insider” given their combined and historical equity

holdings. None of this satisfies the Committee’s burden to demonstrate colorable claims.

2. First, the Committee has not met its burden to demonstrate that the loans made by

the Lenders to the Debtors, by their plain terms, could somehow be recharacterized as equity.

Under the eleven factor test pursuant to which courts in this District evaluate recharacterization

claims—the so-called AutoStyle factors—five weigh heavily against recharacterization and the

remainder are neutral at best (and do not weigh in favor of recharacterization). Here, the

Committee fails to meet its burden that the loans were anything but traditional debt instruments in

form and substance, none of which have any indication of equity. To the contrary, the Secured

Promissory Notes contained a fixed maturity date, a rate of interest that was appropriate in light of

the commensurate risk, and a traditional security package over all of the Debtors’ assets.

3. The Committee conveniently ignores the plain terms of the Secured Promissory

Notes, and instead mistakenly claims that the alleged fact that the Debtors were undercapitalized

and that several purchasers of the Secured Promissory Notes were previously equity holders of the

Debtors means that recharacterization is appropriate. The Committee is wrong on the law and

facts because courts have refused to recharacterize bridge financings as equity where, as here,

certain equity holders provided additional capital as debt in order to maintain business operations


2 ny-1958519

and to effectuate a business plan developed long before the Debtors incurred the debt itself. And

there is no basis for the Committee to argue that the express terms of the Secured Promissory Notes

have any indicia of equity. To the contrary, calling the additional debt provided by the Lenders

equity would have a substantial chilling effect on the ability of startups to raise debt capital. This

is particularly true where a startup requires significant capital expenditures like here where the

Debtors’ business plan was to construct, launch, and service nearly 900 low-earth orbit satellites.

Indeed, the loans at issue here were designed to provide critical bridge loans to the Debtors so that

it could attract additional financing and move towards commercial viability. As other courts have

held, there is simply nothing problematic about the type of bridge loan at issue here, which should

be encouraged and not questioned.

4. Second, the Committee fails to cite evidence that any Lender, individually or

collectively, acted inequitably or wrongfully by agreeing to provide additional debt capital at a

time when Debtors required and sought it as part of their business judgment. The Committee

conducted an extensive investigation and received tens of thousands of pages of documents from

the Lenders. Yet the Motion is devoid of any allegation of wrongdoing or inequitable conduct.

Instead, the Committee falls back on the same argument—that Debtors were undercapitalized and

that the Lenders were insiders at the time they provided additional debt financing—to justify the

extreme remedy of equitable subordination. Merely providing a bridge loan by one or more equity

holders in order to keep a company on course, and to avoid a financial meltdown, cannot as a

matter of law constitute inequitable conduct. And, in this case, there is no evidence that any Lender

acted with an intent to benefit itself as an equity holder at the expense of any creditor.

5. Third, the Committee’s argument that it should be granted derivative standing

because the Debtors refused to bring the same claims conjured by the Committee is a red herring.


3 ny-1958519

As set forth in the Debtor’s brief in opposition to the Motion, the Debtors did not unjustifiably

refuse to bring claims against the Lenders. The Debtors determined that any claims against the

Lenders did not merit pursuing, and in fact, they were baseless. In fact, after the Lenders engaged

in months of costly discovery at great expense, the Committee barely cites any discovery that the

Lenders produced and instead relies solely on the loan documents themselves. As set forth in the

Debtors’ brief—which SoftBank joins in full—the Plan provides for a going-concern sale that will

benefit all creditors and efficiently resolve these Chapter 11 Proceedings. The costs of litigating

the Committee’s proposed claims would far outweigh the benefits of confirming the Plan and

proceeding to a going-concern sale. Unlike the Committee’s proposed litigation, the Plan ensures

a benefit to all creditors and an efficient resolution of these Chapter 11 proceedings

6. Accordingly, as set forth below and in the Debtors’ opposition to the Motion,

SoftBank respectfully requests that the Court deny the relief sought by the Committee.

FACTUAL BACKGROUND

7. As set forth in the Debtors’ opposition to the Motion, the Debtors are a startup

company and, up until the petition date, was in the business of constructing, launching, and

servicing low-earth orbit satellites that will touch every corner of the globe. Like many startups,

the Debtors have historically required significant capital investments from investors at all parts of

the capital structure in order to reach commercial viability.

A. Equity Investments Predating the Debt Investments

8. The Debtors were formed in 2015. That same year, the Debtors raised


4 ny-1958519

B. The Original NPA

9.

2 See Exhibit 2 to the Official Committee of Unsecured Creditors’ (I) Motion for Order Granting Committee Derivative Standing to Pursue and, if Appropriate, Settle Claims for Recharacterization and Equitable Subordination Against Certain Purported Secured Creditors, and (II) Objection to Such Creditors’ Claims [Dkt. No. 402], (hereinafter “Committee’s Mot.”); see Exhibit 12 to the Committee’s Motion, the 2018 Note Purchase Agreement (“Original NPA”), Exhibit D Section 14.

3 See generally Exhibit 12 to the Committee’s Mot. the Original NPA.

4 Id. at Exhibits D, E.


7 ny-1958519

14.

15.

14 Share Purchase Agreement (Attached hereto as Exhibit A), at Sections 1.1, 2.1.

15 Id. Section 1.1.

16 Id. Section 2.1.


9 ny-1958519

19.

LEGAL STANDARDS

20. The burden to demonstrate that the Committee is entitled to derivative standing

rests solely on the Committee. See In re Sabine Oil & Gas Corp., 547 B.R. 503, 514–15 (Bankr.

21 See, e.g., SoftBank Senior Secured Promissory Note, March 18, 2019, Sections 4(d), (e).

22 See Exhibit 13 to the Committee’s Mot., the A&R NPA, Sections 3-4.

23 See id. Sections 2.4 and 2.5

24 See id. Section 9(b).

25 Id. Section 2.1, see also, e.g., SoftBank Senior Secured Promissory Note, March 18, 2019, Sections 3–4.

26 See, e.g. SoftBank Senior Secured Promissory Note, March 18, 2019 ( (attached hereto as Exhibit B).


10 ny-1958519

S.D.N.Y.), aff’d, 562 B.R. 211 (S.D.N.Y. 2016) (citing In re STN Enterprises, 779 F.2d 901, 905

(2d Cir. 1985)). In order to obtain derivative standing, the Committee must meet a two-part test:

(i) the Committee must present colorable claims and (ii) the Committee must show that the debtors

unjustifiably refused to pursue the claims at issue. Id.

21. First, the Committee must demonstrate the existence of a colorable claim. This

determination is akin to that undertaken by a court when it assesses a motion to dismiss for failure

to state a claim—meaning that a colorable claim is one that is plausible. See In re KDI Holdings,

Inc., 277 B.R. 493, 508 (Bankr. S.D.N.Y. 1999) (“In determining whether there is a colorable

claim, the Court must engage in an inquiry that is “‘much the same as that undertaken when a

defendant moves to dismiss a complaint for failure to state a claim.’”) (Citation omitted.) In re

Sabine Oil & Gas Corp., 547 B.R. at 515. Therefore, this Court must look beyond the complaint

itself to at least some minimal evidentiary basis for the allegations. See Ashcroft v. Iqbal, 556 U.S.

662, 679 (2009) (“Determining whether a complaint states a plausible claim for relief will, as the

Court of Appeals observed, be a context-specific task that requires the reviewing court to draw on

its judicial experience and common sense.”). And as with any motion to dismiss for failure to state

a claim, conclusory allegations and legal conclusions are not given consideration. Id. at 678–79.

22. Second, the Court must look beyond the mere plausibility of the Committee’s

allegations. Even “[i]f a committee presents a colorable claim or claims for relief that on

appropriate proof would support a recovery, the bankruptcy court’s threshold inquiry has not

concluded.” In re Sabine Oil & Gas Corp., 547 B.R. at 516. The Committee must show that the

debtors unjustifiably refused to pursue the claims at issue. Id. Here, courts may review the facts

presented to determine whether the proposed litigation would be a sensible application of the

estate’s resources and whether the Committee’s claims have factual support. Id. at 515.


11 ny-1958519

23. Importantly, this analysis requires courts to consider “the likely benefit to the estate,

which encompasses the likelihood of success of the proposed litigation.” In re MIG, Inc., No. 09-

12118 (KG), 2009 WL 8662897, at *2 (Bankr. D. Del. Dec. 18, 2009) (citing In re STN Enters.,

779 F.2d 901, 905-06 (2d. Cir. 1985)). Standing should be denied “where the proposed litigation

would delay resolution of [the] reorganization proceeding by impeding approval of the pending

plan of reorganization.” In re Sabine Oil & Gas Corp., 547 B.R. at 516–17 (internal quotation

marks and citation omitted). In this sense, the role of this Court is to protect the estate. See id. at

516; see also In re Murray Metallurgical Coal Holdings, LLC, 614 B.R. 819, 837 (Bankr. S.D.

Ohio 2020) (denying derivative standing and noting in particular that “[t]he role of the court as

gatekeeper is to protect the estate and to ensure that the proposed litigation reasonably can be

expected to be a sensible expenditure of estate resources . . . [that] will not impair reorganization”).

Indeed, “[a]lthough a court is not required to conduct a mini-trial,” it “should assure itself that

there is a sufficient likelihood of success to justify the anticipated delay and expense to the

bankruptcy estate that the initiation and continuation of litigation will likely produce.” In re MIG,

Inc., 2009 WL 8662897 at *2.

ARGUMENT

24. The Committee’s motion is meritless: it has not, and cannot, carry its burden to

allege either a colorable claim for recharacterization or equitable subordination, which are often

referred to as “unusual,” “drastic,” and “extreme” remedies. See, e.g., In re Alternate Fuels, Inc.,

507 B.R. 324, 327 (B.A.P. 10th Cir. 2014), rev’d on other grounds, 789 F.3d 1139 (10th Cir. 2015)

(“recharacterization is an unusual remedy”); see also In re Enron Corp., 379 B.R. 425, 443

(S.D.N.Y. 2007) (“At bottom, equitable subordination is a drastic and unusual remedy.”).

25. On the merits, the Committee’s recharacterization claim is not colorable under the

eleven factor test originally furnished by the Sixth Circuit in In re AutoStyle Plastics, Inc., 269


12 ny-1958519

F.3d 726 (6th Cir. 2001), because none of the factors weigh in favor of the Committee’s position

and many weigh heavily against recharacterization. The party seeking to reclassify a debt as an

equity contribution needs to demonstrate that the intent of the parties at the time they entered into

the transaction was to enter into an investment relationship, not a lending relationship. In re

Worldwide Wholesale Lumber, Inc., 378 B.R. 120, 124 (Bankr. D.S.C. 2007) (citing In re

SubMicron Sys. Corp., 432 F.3d 448, 455–56 (3d Cir.2006)).

26. Importantly, court have roundly rejected a lender’s “insider status” and the

purported undercapitalization of debtors as insufficient to justify the drastic relief of

recharacterization. See In re Rockville Orthopedic Assocs., P.C., 377 B.R. 438, 442–43 (Bankr.

D. Conn. 2007) (noting as “compelling and instructive” the Fourth Circuit’s interpretation of

recharacterization in In re Dornier Aviation, (N. Am.), Inc., 453 F.3d 225, 234 (4th Cir. 2006),

which states that “it [is] important to note that a claimant’s insider status and a debtor’s

undercapitalization alone will normally be insufficient to support the recharacterization of a claim.

In many cases, an insider will be the only party willing to make a loan to a struggling business,

and recharacterization should not be used to discourage good-faith loans”). The Committee’s

inability to direct the Court to specific evidence meeting the factors under AutoStyle is also fatal.

In re Emerald Casino, Inc., No. 02 B 22977, 2015 WL 1843271, at *13 (N.D. Ill. Apr. 21, 2015)

(“To succeed on [a] recharacterization claim . . . the [claimant] must . . . present specific evidence

that the particular transactions [claimant] challenges were intended as capital contributions.”).

27. Finally, the equitable subordination claim is not colorable because the Committee

has failed to allege any inequitable conduct. The Committee’s sole reliance on the Defendants’

purported “insider” status and the Debtors’ purported undercapitalization is without merit because

the overwhelming weight of authority has held that such allegations—even if true—are insufficient


13 ny-1958519

to state a colorable claim for the extreme remedy of equitable subordination. See, e.g., Alternate

Fuels, 789 F.3d at 1155 (undercapitalization “is not in itself inequitable conduct”); AutoStyle, 269

F.3d at 747 (“Undercapitalization alone is insufficient to justify the subordination of insider

claims.”); In re Nutri/Sys. of Fla. Assocs., 178 B.R. 645, 657 (E.D. Pa. 1995) (“[i]nsider status

alone . . . is insufficient to warrant subordination.”).

I. THE COMMITTEE HAS FAILED TO ALLEGE A COLORABLE CLAIM FOR RECHARACTERIZATION BECAUSE THE NOTES WERE CLEARLY DEBT INSTRUMENTS.

28. As the Committee concedes, the Notes issued under the Original and A&R NPAs

were, by their terms, debt investments with fixed maturity dates, rates of interest, and repayment

schedules tied to successfully raising project financing or a sale. As courts routinely recognize,

these undisputed facts weigh heavily against recharacterization. By contrast, the Committee’s own

cases demonstrate that, in the rare instances where courts grant recharacterization, the facts are

entirely different than as alleged by the Committee. Moreover, courts generally do not place equal

weight on the eleven AutoStyle factors and courts have often recognized that many of the factors

on which the Committee relies are entitled to less weight. Each of the AutoStyle factors is

discussed in turn.

i. Because the Debt Instruments Were “Promissory Notes” Issues Pursuant to “Note Purchase Agreements,” They Evidence Indebtedness and Weigh Against Recharacterization.

29. As the Committee concedes, the labels given to the debt instruments weigh against

recharacterization because the principal instruments documenting and evidencing transactions

objectively show the existence of a debt.27 Here, the principal instruments documenting and

evidencing the loans under the Original NPA and A&R NPA were “promissory notes” (or “Notes”)

27 Committee’s Mot. ¶ 102.


14 ny-1958519

issued pursuant to a “Note Purchase Agreement.” This is clearly “indicative of a bona fide

indebtedness.” In re BH S & B Holdings LLC, 420 B.R. 112, 158 (Bankr. S.D.N.Y. 2009), aff’d

as modified, 807 F. Supp. 2d 199 (S.D.N.Y. 2011) (internal citations omitted).

30. When faced with this inconvenient fact, the Committee urges the Court to simply

“disregard” this factor.28 Yet, how the parties labeled the instrument is the best evidence of what

the parties actually intended, which is why courts are bound to consider this factor. In re Cold

Harbor Assocs., L.P., 204 B.R. 904, 916 (Bankr. E.D. Va. 1997). And even if not dispositive, it

weighs heavily against recharacterization. See In re BH S & B Holdings LLC, 420 B.R. at 158; In

re Lyondell Chem. Co., 544 B.R. 75, 94–95 (Bankr. S.D.N.Y. 2016) (holding that the names the

parties gave to the relevant instruments was probative and weighed “very heavily” against

recharacterization, where the advance was made pursuant to a “Revolver Agreement” that the

parties themselves referred to the Revolver as a “credit facility” or “credit line.”).

31. The Committee raises issues about certain conversion features in the instruments in

an attempt to argue that the instruments were debt. But the mere fact that

in no way minimizes the significance or

weight to be given to the names of the instruments themselves. In fact,



16 ny-1958519

the Lenders intended to the Notes to be equity or that the Lenders never expected to be repaid.

Rather, the Original NPA and A&R NPA were specifically designed to ensure repayment in a

variety of circumstances based on the expectation that these loans would ultimately be repaid or

converted upon additional project financing investments or a sale.

ii. The Notes Explicitly Contain a Fixed Maturity Date and Schedule of Payments, Which are the Hallmarks of Debt and Weigh Against Recharacterization.

35. There is no dispute here that the Notes contain fixed maturity dates:

.30 The

existence of a maturity is simply enough to satisfy this factor. In re BH S & B Holdings LLC, 420

B.R. at 158–59 (stating that “the Committee [could not] plead facts showing that this factor weighs

in favor of recharacterization” where the relevant loan contained a fixed maturity date.); Stinnett’s

Pontiac Serv., Inc. v. Comm’r of Internal Revenue Serv., 730 F.2d 634, 638 (11th Cir. 1984) (“the

presence of a definite maturity date and a definite obligation to repay is, a highly significant feature

of a debtor-creditor relationship.”) (internal citations omitted).

36. The Committee urges that the maturity dates were merely “illusory” because the

, and because the

Debtors were still in “startup” mode.31 But these assertions do not support an inference that the

Notes were intended to be equity and they ignore the economic reality of the transactions.

37. First, the fact that a loan is not paid at maturity does not prove that the lender

intended to provide equity at the time of the making of the loan. See In re Franklin Equip. Co.,

30 See Committee’s Mot. ¶¶ 19, 38, 89.

31 Committee’s Mot. ¶¶ 19, 38, 89.


17 ny-1958519

418 B.R. 176, 195 (Bankr. E.D. Va. 2009) (reasoning that “[i]t can hardly be argued that

forbearance in the face of financial stress by itself supports a finding of recharacterization.”)

(internal citations omitted); In re Daewoo Motor Am., Inc., 471 B.R. 721, 738 (C.D. Cal. 2012),

aff’d, 554 F. App’x 638 (9th Cir. 2014) (finding that the lender’s inability to ultimately collect any

“extension interest” did not weigh in favor of recharacterization because the forbearance “appears

to have been nothing more than a practical recognition of the economic reality facing the parties

at the time—[the borrower] was struggling to pay its bills, let alone interest on its bills.”).

38. Second, the fact that the Debtors were still in a developmental stage and had no

customers or revenue does not support the Committee’s position. By their very nature, startup

companies in developmental stages fundamentally rely on both debt instruments and equity

investments to grow and become viable. And the unique nature of the Debtors’ business, based

on the capital-intensive construction, launch, and maintenance of hundreds of satellites

underscores the need for substantial financing for the project. The Committee’s position that the

absence of customers or revenue is evidence of an equity investment is belied by the robust project

financing market that routinely provides debt to pre-revenue companies and would have troubling

policy implications for all pre-revenue companies, which rely on both debt and equity financing

to become viable.

iii. The Notes Contain a Fixed Rate of Interest and Interest Payments—Quintessential Debt Features That Weigh Against Recharacterization.

39. “The presence of both a fixed maturity date and a fixed rate of interest weighs

against recharacterization.” In re Daewoo Motor Am., Inc., 471 B.R. at 738 (affirming that “these

factors weigh strongly against recharacterization”). It is undisputed that the Notes issued under

the Original NPA and A&R NPA contained fixed rates of interest. This is sufficient to satisfy this

factor and weighs against recharacterization. See In re Sabine Oil & Gas Corp., 547 B.R. at 567–


18 ny-1958519

68 (finding that the purported debt “carried a fixed interest rate,” which “militate[s] against [the

Committee’s] argument” and holding that the recharacterization claim was “frivolous”); In re

Lyondell Chem. Co., 544 B.R. 75, 96 (Bankr. S.D.N.Y. 2016) (finding that inclusion of fixed

interest rate and the repayment of interest at fixed dates weighed “heavily against a finding of

recharacterization”); In re Pers. Commc’n Devices, LLC, 528 B.R. 229, 239 (Bankr. E.D.N.Y.

2015) (holding that “[p]laintiff has not made out a plausible claim to recharacterize” where “loan

documents had a fixed rate of interest and interest payments”); In re BH S & B Holdings LLC, 420

B.R. at 159 (holding that “[t]he Committee cannot plead facts showing that this factor weighs in

favor of recharacterization” where “[t]he loan had a fixed interest rate”).

40. The Committee turns this factor on its head and argues that a deferral of any interest

payments until the notes become due (e.g., PIK interest) weighs in favor of recharacterization.32

The Committee cites no case to support this position, and courts have rejected similar arguments,

including where the loans included PIK interest. See In re Murray Metallurgical Coal Holdings,

LLC, 614 B.R. at 829 (“The Take-Back Credit Agreement has a fixed rate of interest of 8% per

annum, which is indicative of debt. The option to pay interest in the form of PIK interest for the

first two years does not alter this conclusion” because “deferral of interest payments does not by

itself mean that the parties converted a debt transaction to equity since the defendants still expected

to be repaid.”) (citing cases); see also Official Comm. of Unsecured Creditors of HH Liquidation,

LLC v. Comvest Grp. Holdings, LLC (In re HH Liquidation, LLC), 590 B.R. 211, 292 (Bankr. D.

Del. 2018) (holding that although loans included PIK interest “this factor favors the treatment of

the [] Loan as debt because there was a fixed rate of interest accruing over time”).



19 ny-1958519

iv. Because the Lenders’ Source of Repayment Was Not Solely Dependent on the Debtors’ Success and There Was Sufficient Collateral, This Factor Does Not Weigh in Favor of Recharacterization.

41. Where repayment of the facility is not solely dependent on the success of the

debtors’ business, the transaction has the appearance of a loan, rather than equity, for purposes of

recharacterization. See In re: Aéropostale, Inc., 555 B.R. 369, 421 (Bankr. S.D.N.Y. 2016); In re

Lyondell Chem. Co., 544 B.R. at 96. Here, under the plain terms of the Original NPA and A&R

NPA, repayment was not tied to the Debtors’ success of generating revenues and signing up

customers; rather, it was tied to securing additional project financing. See e.g. In re Emerald

Casino, Inc., 2015 WL 1843271, at *12 (holding that the fact that the loans were risky did not

automatically transform the transactions into capital contributions). This is so because the Original

NPA and A&R NPA were designed to attract additional investors with the goal of getting the

Debtors closer towards commercial viability. The source of repayment, in other words, was never

tied to signing up customers, as the Committee urges. Rather,

consistent with the nature

of a bridge loan. Likewise, under the A&R NPA,

.

42. Regardless of the assertions made by the Committee, “the question [under this

factor] is whether the lender has any reasonable expectation of payment if the business fails. . . .”

In re Lyondell Chem. Co., 544 B.R. at 96 (citations omitted). This factor weighs against

recharacterization “if a default occurs [and] there is a reasonable expectation of repayment out of

something other than earnings.” Id. As argued more fully below, see infra Section I.vii, it is

undisputed that the Notes are secured by a lien on substantially all of the Debtors’ assets, and

repayment was not solely dependent on the “success” of their businesses because the Debtors were


20 ny-1958519

not yet operating a business. Instead, the Notes were secured by valuable assets (primarily

equipment and spectrum) and not earnings. Courts have held that such “all asset” liens evidence

that repayment is not solely dependent on the success of the debtors’ business. See In re:

Aéropostale, Inc., 555 B.R. at 421 (holding that the fact that the debt facility was fully secured by

a blanket lien on substantially all of the Debtors’ assets meant that repayment of the facility was

not solely dependent on the success of the Debtors’ business); In re AutoStyle Plastics, Inc., 269

F.3d 726 at 751 (lien on all of the debtors’ assets weighed against recharacterization); see also

Seaver v. Ashenfelter (In re MSP Aviation, LLC ), 531 B.R. 795, 807 (Bankr.D. Minn.2015)

(“[W]hen the creditor has secured the transaction with a lien, courts will generally find in favor of

a loan.”); In re Murray Metallurgical Coal Holdings, LLC, 614 B.R. at 829 (same). The

Committee does not cite any cases to the contrary and this factor weighs against recharacterization.

v. The Inadequacy of Capitalization Alone Cannot Justify Recharacterization.

43. The key premise and theme of the Committee’s argument is that the Debtors were

“severely undercapitalized at all relevant times,” including

.”33

44. But the Committee’s argument ignores the ample legal authority establishing that

inadequacy of capitalization alone cannot justify recharacterization, especially where, as here, the

company is in a distressed situation. See In re Licking River Mining LLC, 603 BR 356, 358 (Bankr.

E.D. Ky. 2019); In re Va. Broadband LLC, 521 B.R. 539, 573 (Bankr. W.D. Va. 2014) (“[I]f courts

recharacterized debt each time an insider made a loan to as struggling company, no insider (or

perhaps any creditor) would lend financial assistance to a distressed company for fear of punitive

33 Committee’s Mot. ¶¶ 25 –27.


21 ny-1958519

action by a bankruptcy court. For these reasons, the Court does not place substantial weight on

the deteriorating financial situation at the time the financial assistance was rendered.”); see also In

re Murray Mettallurgy, 614 B.R. at 830 (denying creditors’ committee standing to prosecute a

recharacterization claim noting that, even if the debtor had been “undercapitalized from its

inception . . . courts have afforded this factor little weight in distressed lending contexts”); In re

Emerald Casino Inc., 2015 WL 1843271, at *11 (“The court . . . is unwilling to assume that every

transaction between insiders and [the debtor] that occurred while [the debtor] was struggling

financially and was undercapitalized must be deemed a capital investment.”).

45. Tellingly, despite its primary reliance on the undercapitalization factor, the

Committee concedes that “courts have been reluctant to ‘put too much emphasis on th[is]

factor.’”34 The Committee thus has no choice to argue that the concerns informing the governing

legal precedent—namely the policy concerns about “penaliz[ing] [lenders] for lending to a

distressed company”—are “not implicated here.” Committee’s Mot. ¶ 62. But the Committee

offers no compelling reason why that is so. Its only argument is that because the Debtors remain

in a start-up phase, the Debtor “never really was a business at all.” Thus, according to the

Committee, and the Lenders’ investments could not have been meant to “fund OneWeb’s

turnaround” but were merely intended to “move [the Company] toward operational status.”

Committee’s Mot. ¶ 62. But this argument fails for a number of reasons.

46. First, it ignores the Committee’s own argument acknowledging the liquidity crisis

the Debtors faced and the dire financial straits in which they found themselves in 2018 and 2019.

There was a need to secure additional financing for the project, and the Notes were specifically

designed to attract those additional investments.



22 ny-1958519

47. Second, the Committee’s argument effectively seeks to create new law to the effect

that loans to start-up companies must always be equity rather than debt—a proposition that finds

no support in the law and has troubling policy implications. See In re Alternate Fuels, Inc., 789

F.3d at 1152–53 (refusing to recharacterize a shareholder’s loan because courts have “been careful

not to discourage owners from trying to salvage a business by requiring all contributions to be

made in the form of equity capital” as “owners may often be the only party willing to make a loan

to a struggling business” and “placing too heavy an emphasis on undercapitalization . . . would

create an unhealthy deterrent effect, causing business owners to fear that, should their rescue

efforts fail, a court will give disproportionate weight to the poor capital condition of their failing

companies and thus too quickly refuse to treat their cash infusions as loans”); see also In re

Rockville Orthopedic Assocs., P.C., 377 B.R. at 442-43 (finding the following “compelling and

instructive”: “In many cases, an insider will be the only party willing to make a loan to a struggling

business, and recharacterization should not be used to discourage good-faith loans.”); In re

AtlanticRancher, Inc., 279 B.R. 411, 434 (Bankr. D. Mass. 2002) (recognizing that a prior district

court, In re Hyperion Enters., Inc., 158 B.R. 555, 561 (D.R.I. 1993), “specifically rejected the

notion that undercapitalization alone justifies recharacterization of debt to equity”); In re BH S &

B Holdings, 420 B.R. at 159 (“Courts should not put too much emphasis on this factor, in any

event, because all companies in bankruptcy are in some sense undercapitalized.”).

vi. Because There is no “Exact Correlation” Between the Historical Equity Interests of the Lenders and Their Respective Note Purchases, the Identity of Interest Between the Creditors Stockholders Factor Weighs Against Recharacterization.

48. “Under the AutoStyle analysis, the key to the ‘identity of creditors and shareholders’

factor is proportionality.” In re Broadstripe, LLC, 444 B.R. 51, 98 (Bankr. D. Del. 2010)

(emphasis added). Where there is “an exact correlation between the ownership interests of the


24 ny-1958519

evaluated in this manner, the correlation between equity ownership and debt is “more pronounced”

and “almost exact.”37 But the Committee’s comparison—which fails to show the “exact

correlation” required to weigh heavily in favor of recharacterization—improperly skews the

analysis, and the AutoStyle analysis bars any such attempt. In AutoStyle, the court found that

because “[n]ot all of AutoStyle’s shareholders were participants in CIT’s credit facility[,]” “the

defendants’ participation interests did not exactly correlate to their ownership interests in

AutoStyle,” which weighs against recharacterization. See In re AutoStyle Plastics, Inc., 269 F.3d

at 751–52. Further, the AutoStyle court observed that “[t]he defendants, in a sense, were making

a loan to the other AutoStyle shareholders who did not have participation interests in CIT’s credit

facility” and held that “[a]s a result, this factor weighs slightly toward debt.” Id. at 751. The same

is true here.

51. The Lenders, who did not consist of the entire shareholder group, made loans in

amounts that did not “exactly correlate” (or even roughly correlate) with their ownership interests

(indeed, for most of the Lenders, there was no correlation at all). Instead, they were, as the

Autostyle court observed, “in a sense” making loans to the other 30% of the shareholders who did

not participate in the debt financing. These facts all confirm that the Notes were debt and weigh

against recharacterization.

vii. Because the Lenders’ Loans Were Secured, This Factor Weighs Against Recharacterization.

52. As the Committee admits, and as its own cases demonstrate, “courts have

recognized that the presence of a security interest is indicative of debt.38 See, e.g., In re AutoStyle,

269 F.3d at 752 (presence of lien on AutoStyle’s assets “cuts in favor of a loan”); In re:


38 Committee’s Mot. at ¶ 39.


25 ny-1958519

Aéropostale, Inc., 555 B.R. at 421 (“lien on substantially all of the Debtors’ assets” weighs against

recharacterization). Some courts have even gone further and have stated that “the presence of a

security for the loan is a strong indication of indebtedness.” In re BH S & B Holdings LLC, 420

B.R. at 158 (emphasis added).

53. There is no dispute that the Notes

. According to the Committee’s own allegations, this collateral is substantial;

.39 As with any construction or bridge loan, the Lenders’ expected the

value of the security would increase as the project moved towards completion. In this case, as the

Debtors built and launched more satellites and deployed additional spectrum, the Lenders

reasonably expected that the value of their collateral would naturally increase as well.

54. That the Lenders spent substantial time, money, and effort to structure a complex

bridge loan that was secured and perfected by assets all over the world in multiple jurisdictions is

plainly inconsistent with an intention to make an equity investment. In re Lyondell Chem. Co.,

544 B.R. at 103 (“the ultimate exercise [of recharacterization] is to ascertain the intent of the

parties”). Tellingly, the Motion is silent on this point. Instead, the Committee argues that the

security “should not be a factor in favor debt if the enterprise has no revenues and the value of the

ostensible collateral is a mere fraction of the amount of the purported debt.”40 But that ignores the

fact that, according to the Committee’s own allegations,

. And even if the

, the law does

39 Committee’s Mot. at ¶ 97.

40 Committee’s Mot. ¶¶ 96–98.


26 ny-1958519

not consider that to be indicative of equity. In fact, even a complete lack of security is insufficient

to support recharacterization, particularly where a loan is extended by existing lenders to a

distressed company—as the Lenders have done here. See In re Lyondell, 544 B.R. at 98 (“the fact

that [advances] were made without security cannot be regarded as a ‘strong indication’ that loans

documented as such were really ‘capital contributions rather than loans.’”); In re SubMicron Sys.

Corp., 432 F.3d 448, 457 (3d Cir. 2006) (“when existing lenders make loans to a distressed

company, [] traditional factors that lenders consider (such as . . . collateral . . .) do not apply as

they would when lending to a financially healthy company.”); In re Moll Indus., Inc., 454 B.R.

574, 584 (Bankr. D. Del. 2011) (“debt should not be recharacterized simply because the

preexisting lenders extend additional loans to distressed borrowers, even where there is no

additional collateral to support the new loans”).

viii. The Inability to Obtain Financing From Outside Lending Institutions is Insufficient to Support Recharacterization.

55. “[D]ifficulty in finding outside lending is a common characteristic of distressed

companies.” In re Murray Metallurgical, 614 B.R. at 830. Indeed, courts universally recognize

that “[e]xisting lenders are often the only source of funding when a debtor faces distress,” In re

Moll, 454 B.R. at 584, and the “inability to obtain alternative financing is insufficient to support

recharacterization.” Id. See also In re SubMicron Sys. Corp., 432 F.3d at 457 (recognizing that

“when existing lenders make loans to a distressed company, they are trying to protect their existing

loans and traditional factors that lenders consider . . . do not apply as they would when lending to

a healthy company”).

56. Despite repeated holdings and statements by courts on this issue, the Committee

argues that the Debtors’ failure to secure project financing from certain and

traditional bank lenders is evidence that the advances made by the Lenders were capital


27 ny-1958519

contributions rather than loans. But this argument is precisely the type of bright–line drawing that

courts on this issue have avoided. The case law is clear that courts should be “‘careful not to

discourage owners from trying to salvage a business’ by requiring ‘all contributions to be made in

the form of equity capital,’” because “owners may often be ‘the only party willing to make a loan

to a struggling business.’” In re Alternate Fuels, Inc., 789 F.3d at 1153 (citing In re Dornier

Aviation (N. Am.), Inc., 453 F.3d 225, 234 (4th Cir. 2006) (“in many cases, an insider will be the

only party willing to make a loan to a struggling business and recharacterization should not be

used to discourage good-faith loans”)). “[N]eedlessly punishing their efforts is neither ‘desirable

as social policy’ nor required by our precedent.” Id.

57. Instead, the Committee urges the Court to reach a different conclusion because the

Lenders already had an equity investment in the Debtors. According to the Committee, this means

all the Lenders were not “existing lenders” who were trying to protect existing loans, but were

instead existing equity holders trying to protect their existing investments. Even assuming that

were true—and it is not, —it is

a distinction without a difference and does not render the policies driving the courts’ caution any

less applicable. The Committee cites no cases mandating recharacterization based on this factor,41

and the Committee concedes that courts have held that it is perfectly permissible for an existing

shareholder to make loans to a distressed company without risk of recharacterization. See

Lyondell, 544 B.R. at 99. That is exactly what happened here and this factor does not weigh in

41 Committee’s Mot. ¶ 67. Judge Gerber’s statement in Adelphia, which the Committee quotes, that “the paradigmatic situation for recharacterization [is] where the same individuals or entities (or affiliates of such) control both the transferor and the transferee.” Adelphia Comm’cns. Corp. v. Bank of Am., N.A. (In re Adelphia Comm’cns. Corp.), 365 B.R. 24, 74 (Bankr. S.D.N.Y. 2007). That type of control is not present here. As another one of the Committee’s cases demonstrates, control exists where the transferor is a parent to a wholly owned subsidiary transferee. See, e.g., In re Dornier Aviation (N. Am.), Inc., 453 F.3d 225, 229-30, 236 (4th Cir. 2006) (wholly owned subsidiary failed to pay invoices due to parent for parts, but parent never collected on the outstanding invoices and agreed that they did not have to be paid back).


28 ny-1958519

favor of recharacterization.

ix. Because the Notes Were Never Subordinated to Other Creditors, This Factor Cannot Support Recharacterization.

58. As the Committee concedes,

, let alone all of them, which is what courts

have required in analyzing this factor. Instead, the Committee’s sole allegation is that the Lenders

agreed that they would be willing, at some point in the future,

. But no

such subordination ever actually occurred, and any speculation about what might have happened

in some alterative scenario falls far short of alleging a colorable claims.

. See Matter of

Yoga Smoga, Inc., No. 16-13159-MEW, 2016 WL 8943849, at *16 (Bankr. S.D.N.Y. Dec. 20,

2016) (“the job of the Court is to determine what the arrangement is, and not what the debtor

wishes it could be turned into”).

59. In any event,

hardly

indicates that the Lenders viewed or treated their investments as equity contributions rather than

loans. First,

(the ninth

Autostyle factor potentially can support recharacterization only when the loan in question is

subordinated to “all other creditors”). See In re Broadstripe, LLC, 444 B.R. at 101

(“Subordination of advances to claims of all other creditors indicates that the advances were capital

contributions, not loans.”); see also In re HH Liquidation, LLC, 590 B.R. 211, 295 (Bankr. D. Del.

2018) (“the factor does not look at whether the [relevant] Loan is subordinated to the senior,


29 ny-1958519

secured creditor. It looks at whether the [relevant] Loan is subordinated to ‘all other creditors.’”).

.

But even if it had, the Lenders’

conditional agreement was, in effect, no different from a typical inter-creditor agreement where

existing lenders agree to subordinate their claims to a new-money investor. It is hardly

unsurprising that the Lenders wanted to signal their openness to new investment that could help

the Debtors complete construction. Accordingly, this factor does not weigh in favor of

recharacterization and is irrelevant to the analysis.

x. The Notes Were Used to Fund Capital Expenses for a Startup, Which Does Not Support Recharacterization.

60. As the Committee implicitly recognizes, the “operating expenses” of a start-up like

the Debtors are primarily “capital expenditures” because their operations largely consist of

acquisitions and development. As the Committee notes,

of the Company’s budgeted expenses over the five-year period between 2018 and 2023 were

projected to consist of Capital Expenditures. The fact that the “vast majority” of the proceeds from

the Notes were used by the Debtors to fund capital expenditures is not surprising and hardly

indicative of an intent to contribute equity rather than debt. Instead, bridge loans are designed to

enable a company in its nascent developmental stages to secure project financing. The court should

reject the Committee’s argument and find that this factor does not weigh in favor of

recharacterization.

xi. The Absence of a Sinking Fund is Irrelevant Where, as Here, The Loans Were Secured by Liens on Virtually All of the Debtors’ Assets.

61. The absence of a sinking fund from which to repay the Lenders is irrelevant where,


30 ny-1958519

as here, the loans were secured by liens on the Debtors’ assets. See Murray Metallurgircal Coal,

614 B.R. at 832 (fact that the prepetition funded debt was secured by collateral “obviated any need

for a sinking fund”) (quoting AutoStyle, 269 F.3d at 753); In re: Aéropostale, Inc., 555 B.R. at

422–23 (lack of sinking fund irrelevant to analysis where debt was secured by liens over debtors’

assets). In any event, the analytical value of sinking funds is limited given that it is not “in any

way the norm” or “in this day even common” in bona loan transactions. In re Lyondell Chem. Co.,

544 B.R. at 101. The Committee’s sole attack here is that the security provided for the loans was

inadequate, but as outlined above, that argument is baseless. Moreover, the Lenders’ loans in this

case were to fund a development/construction project for which revenue is not made until it

transitions into commercial operation. As a result, and like any development and construction

project that is being financed by debt, there is no “sinking fund.”

62. Accordingly, this factor cannot support recharacterization.

* * *

63. In sum, and as stated in Metallurigcal Coal, the Committee “is unable demonstrate

a single factor that weighs heavily [if at all] toward recharacterizing the [the Lenders’] loans as

equity,” and the Autostyle factors instead confirm unequivocally that there is no colorable claim

for recharacterization.

II. THE COMMITTEE HAS FAILED TO ALLEGE A COLORABLE CLAIM FOR THE “EXTREME REMEDY” OF EQUITABLE SUBORDINATION.

64. In support of its request to pursue equitable subordination claims—and place the

Lenders’ secured loans at or below other creditors—the Committee alleges only that the Lenders

were “insiders” who made secured loans to an “undercapitalized” entity in an effort to keep it


31 ny-1958519

afloat.42 But the law is clear that equitable subordination is an “extraordinary remedy that is to be

used sparingly,” and the courts routinely reject similar allegations as insufficient for the relief

sought here. See, e.g., In re: Aéropostale, Inc., 555 B.R. at 397; In re Enron Corp., 379 B.R. at

443 (S.D.N.Y. 2007) (“At bottom, equitable subordination is a drastic and unusual remedy. As a

result, it is important to apply [it] narrowly.”); In re Radnor Holdings, Corp., 353 B.R. 820, 840

(Bankr. D. Del. 2006) (equitable subordination a “drastic” and “unusual” remedy).

65. In order to plead a colorable claim for equitable subordination, a creditor must plead

facts sufficient to show that: (1) the Lenders engaged in inequitable conduct; (2) the inequitable

conduct caused injury to the Debtors’ creditors or conferred an unfair advantage to the Lenders;

and (3) equitable subordination of the claim is not inconsistent with the provisions of the

Bankruptcy Code. In re Sabine Oil & Gas Corp., 547 B.R. at 564. The Committee, however, fails

to allege inequitable conduct (much less harm resulting from it) and cannot satisfy its burden based

on allegations the Debtors were undercapitalized and that all of the Lenders were “insiders” that

collectively exercised control over the Debtors.

66. “Courts recognize three general categories of behavior that may constitute

inequitable conduct[:] 1) fraud, illegality, or breach of fiduciary duties; 2) undercapitalization; and

3) claimant’s use of the debtors as a mere instrumentality or alter ego.” In re Epic Capital Corp.,

290 B.R. 514, 524 (Bankr. D. Del. 2003) (emphasis added). Undercapitalization “is not in itself

inequitable conduct,” Alternate Fuels, 789 F.3d at 1155, and, by itself, undercapitalization “is

insufficient to justify equitable subordination of [insider claims].” Matter of Lifschultz Fast

Freight, 132 F.3d 339, 345 (7th Cir. 1997); see also AutoStyle, 269 F.3d at 747

(“Undercapitalization alone is insufficient to justify the subordination of insider claims.”).

42 See Committee’s Mot. at ¶ 111.


32 ny-1958519

Similarly, “[i]nsider status alone . . . is insufficient to warrant subordination,” In re Nutri/Sys. of

Fla. Assocs., 178 B.R. at 657, and obtaining a security interest—without more—will also not

suffice. See In re Optim Energy, LLC, 527 B.R. 169, 177 (Bankr. D. .Del. 2015). Critically,

“evidence of deception about the debtors’ financial condition or other misconduct” is required.

Matter of Lifschultz, 132 F.3d at 349.

67. Finally, the equitable subordination doctrine is “remedial, not penal,” and “should

be applied only to the extent necessary to offset specific harm that creditors have suffered on

account of the inequitable conduct.” In re SubMicron, 432 F.3d at 462 (emphasis added). “The

critical inquiry,” therefore, “is whether there has been inequitable conduct on the part of the party

whose debt is sought to be subordinated.” In re Hedged-Invs. Assocs., Inc., 380 F.3d 1292, 1300

(10th Cir. 2004). The Committee does not, and cannot, plead any inequitable conduct.

i. The Committee Has Failed to Allege the Lenders are All Insiders that Collectively Exercised the Requisite Control Over the Debtors.

68. The Committee claims to have met its burden in establishing a colorable claim for

equitable subordination because it has asserted conclusory allegations that the Lenders are

“insiders.”43 Specifically, the only bases offered for the Lenders’ supposed “insider” status are:

(a)

.44

But, even if true, neither allegation, alone or in combination, is sufficient to confer “insider” status

on the Lenders.

69. First, merely having a seat on the Company’s board and/or access to company

reports or financial information does not make one an “insider.” See In re Radnor Holdings, 353


44 Id.


33 ny-1958519

B.R. at 840–841 (“Evidence that TCP monitored the Company’s business and attended Board

Meetings is insufficient; the Committee failed to prove that TCP exercised ‘day-to-day control’

over Radnor’s business affairs and dictated Radnor’s business . . . [A]ccess to performance reports

and other financial information from the Company is insufficient to establish insider status.”).

Insider status requires “day-to-day control, rather than some monitoring or exertion of influence

regarding financial transactions in which the creditor has a direct stake,” which has not been

alleged here. In re Winstar Communs, 348 B.R. 234, 279 (Bankr. D. Del. 2005); see also In re

Optical Techs, 252 BR 531, 539 (M.D. Fla. 2000); aff’d 246 F.3d 1332 (11th Cir. 2001) (“to be

determined a person in control, the person must control the company so as to dictate corporate

policy and disposition of corporate assets without limits”). Nor does the mere fact that

evidence the type of

control necessary to support and equitable subordination claim. see also Serrano v. Gulf Chem.

Corp., Ltd. (In re Caribbean Petrol. LP), 322 B.R. 726, 728 (D. Del. 2005) (holding that,

regardless of the bankruptcy code’s definition of “insider” because “[t]here is no indication that

defendant has any control over any of the debtors or vice versa . . . defendant is not an “affiliate”

and, thus, not an “Insider.”). Regardless, none of the other Lenders meet the statutory definition

and none of them, either individually or collectively, exercised day-to-day control over the

Debtors. Put simply, the Committee does not, and cannot, plead any such control as equity holders.

The Lenders were, in their capacity as equity investors, a diverse group with their own interests,

none of which could unilaterally dictate the Debtors’ business and financial decisions.

70. Second, lumping all of the Lenders together and arguing that they “collectively”

cannot salvage the Committee’s claims. The Committee offers

no factual support for the notion that the Lenders acted in unison as equity holders, rather than


35 ny-1958519

72. Unable to meet this burden, the Committee relies instead on conclusory allegations

that the Lenders “engaged in unfair, self-serving transactions with the Debtors that were not at

arm’s length and were designed to manipulate the Company’s cash position.”47 But the Committee

does not, and cannot, plead any facts indicating how or why the transactions were “unfair,” “self-

serving,” or “not at arm’s-length.” Nor are there any factual allegations supporting the

Committee’s claim that “[t]he only purpose of these purported ‘loans’ was to support the Investor

Defendants’ parochial interests at the expense of the Company’s other creditors and of them to

obtain priority in the event of a bankruptcy filing.”48

73. Indeed, the facts show just the opposite.

74. The Original NPA and A&R NPA were aligned with the interest of each of the

Debtors’ creditors. They were intended to provide the Debtors with an infusion of additional

working capital in the hope that the Debtors would be able to attract additional outside financing

and successfully pursue a business plan by continuing to build- of their network.,. Moreover, that

the Lenders accepted terms deemed inadequate by the Committee only proves that the Lenders

received no unfair advantage from the deal. The Lenders took on increased risk to support a prior

investment and the law finds no fault in that. See In re Mr. R’s Prepared Foods Inc., 251 B.R. 24,

30 (Bankr. D. Conn. 2000) (initial investor was not “unfairly benefited” by subsequent loan; “[t]o

the contrary, [he] supplied the debtor with $500,000 cash in return for two notes secured by not

more than $136,000 worth of assets.”).

75. The Committee relies on only one case to support its equitable subordination claim,

but the facts are easily distinguishable. There, in In re Le Café Crème Ltd., 244 B.R. 221, 235

47 Committee’s Mot. at 111.

48 Id.


36 ny-1958519

(Bankr. S.D.N.Y. 2000), two of the three shareholders in an insolvent restaurant loaned over

$200,000 to the restaurant, which was then used to buyback the shareholders’ stock, even though

the stock itself was near-worthless, id. at 226, and while the restaurant “routinely paid suppliers

with checks which were returned for insufficient funds,” id. at 236, 239. The court subordinated

these loans after determining that these transactions amounted to “actual fraud.” Id. (emphasis

added). Far from supporting the Committee’s position, In Re Le Café Crème illustrates the

required “inequitable conduct” that the Committee has failed to plead.

76. Furthermore, In re Le Café crème Ltd., reinforces the principle that “[e]quitable

subordination usually is a response to efforts by corporate insiders to convert their equity interests

into secured debt in anticipation of bankruptcy.” Kham & Nate’s Shoes No. 2, Inc. v. First Bank

of Whiting, 908 F.2d 1351, 1356 (7th Cir. 1990); see also Matter of Herby’s Food’s, Inc., 2 F.3d

128, 132, 134 (5th Cir. 1993) (insiders “tardily perfected” secured loans to improve the Debtors

books and “encourage[e] outside creditors to increase their credit exposure” and the insiders an

advantaged in the priority scheme). Where, as here, loans are made to provide a struggling entity

with working capital through a bridge loan courts encourage—not condemn—the transaction.

77. A good example of this can be found in Matter of Lifschultz Fast Freight where

insiders made a secured loan of over $800,000 to the debtor company to provide it with working

capital. 132 F.3d 339, 342 (7th Cir. 1997). After the company nevertheless entered bankruptcy,

the trustee sought to have the loan equitably subordinated. Id. at 341. The Seventh Circuit rejected

the trustee’s claims and explained that there is “no reason to treat an insider’s loan to a company

more poorly than that of a third party’s” and that to “hold otherwise would ‘discourage those most

interested in a corporation from attempting to salvage it through an infusion of capital.’” Id at 347

(quoting Matter of Mobile Steel Co., 563 F.2d 692, 701 (5th Cir. 1977).) The same is true here.


37 ny-1958519

The Original NPA and A&R NPA were intended to provide critical financing—that benefit all

creditors—and will not justify equitable subordination.

III. THE DEBTORS DID NOT UNJUSTIFIABLY REFUSE TO BRING THE MERITLESS CLAIMS THE COMMITTEE SEEKS TO PURSUE HERE WITH LITTLE BENEFIT—AND GREAT EXPENSE—TO THE ESTATE.

78. As detailed in the Debtor’s Opposition to the Motion—which the Lenders join in

full—even if the Committee could demonstrate that its asserted claims are “colorable,” the Debtors

did not unjustifiably refuse to bring claims for recharacterization and equitable subordination.

79. In considering whether a debtor unjustifiably refused to pursue a claim, the Court

must consider whether the requested relief will benefit the reorganization as a whole. See In re

Sabine, 547 BR at 516 (“In order to decide whether the debtor unjustifiably failed to bring suit so

as to give the creditors’ committee standing to bring an action, the court must also examine, on

affidavit and other submission, by evidentiary hearing or otherwise, whether an action asserting

such claim(s) is likely to benefit the reorganization estate.”) (quoting STN, 779 F.2d at 905). That

is, the Court must ensure that the claims for which standing is sought will benefit “the entire

estate,” rather than just confer private benefits upon committees or individual creditors. In re

Sabine, 547 BR at 517; In re Applied Theory Corp., 493 F.3d 82, 86 (2d Cir.2007) (“Requiring

bankruptcy court approval conditioned upon the litigation’s effect on the estate helps prevent

committees and individual creditors from pursuing adversary proceedings that may provide them

with private benefits but result in a net loss to the entire estate.”).

80. Accordingly, the Court must weigh the “probability of success and financial

recovery,” as well as the anticipated costs of litigation, in a cost-benefit analysis to determine

whether the prosecution of the claims is likely to benefit the debtor’s estate. In re America’s Hobby

Ctr., Inc., 223 B.R.275, 282 (Bankr. S.D.N.Y. 1998). And the Court must assure itself (i) “that

there is a sufficient likelihood of success to justify the anticipated delay and expense to the


38 ny-1958519

bankruptcy estate that initiation and continuation of litigation will likely produce,” Adelphia, 330

B.R. at 374 (quoting STN, 779 F.2d at 905–06)); (ii) that the claims, if proven, will provide a basis

for recovery; and (iii) that the proposed litigation will not be a “hopeless fling.” Adelphia, 330

B.R. at 386.

81. Similarly, the Court must be convinced that pursuit of the claims at issue would not

delay or otherwise impair reorganization. In re Sabine, 547 BR at 516 (“the role of the court as

gatekeeper is to protect the estate and to ensure that the proposed litigation ‘reasonably can be

expected to be a sensible expenditure of estate resources . . . [that] will not impair

reorganization.’”). Where the proposed litigation would “delay resolution of [the] reorganization

proceeding by impeding approval of the pending plan of reorganization,” courts should deny

standing. Id. See also In re Sunbeam Corp., 284 B.R. 355, 375 (Bankr. S.D.N.Y. 2002) (denying

standing to committee after finding that committee failed to demonstrate that prosecution of the

actions would be “necessary and beneficial” to the resolution of the bankruptcy proceedings).

82. Here, for the reasons set forth above and in the Debtors’ Opposition, the Committee

fails to demonstrate any likelihood of success on its claims, and it certainly has not provided

justification for the enormous expenditure of time and resources necessary to pursue the “unusual”

and “extreme” relief of recharacterization and equitable subordination. While the Committee

urges that pursuit of its proposed claims, if successful, would benefit “the Debtors’ unsecured

creditors greatly,” it completely fails to address—let alone submit any evidence—how pursuit of

those claims would impact the Company’s reorganization and the estate as a whole. The reality is

that pursuit of the Committee’s proposed claims could derail the Debtors’ Plan of reorganization,

the pending sale, delay the Company’s efforts to exit Chapter 11, and waste millions of dollars in

professional fees.


39 ny-1958519

83. Under the current plan construct, the amendment to the DIP facility previously

approved by the Court, the Plan Sponsor agreed to assume $45 million of new-money

commitments under the prior DIP facility and to advance an incremental $65 million of additional

new money to ensure that the Debtors’ estates remain administratively solvent through the closing

of the sale.49 Upon confirmation of this plan of reorganization, this $110 million of new money

will be converted into equity in the reorganized Debtors. The Plan Sponsor will also provide up

to $850 million of go-forward funding to capitalize the reorganized Debtors to pay cure costs

associated with all assumed executory contracts and to satisfy up to $25.9 million in administrative

expense and priority claims through a plan of reorganization. It is anticipated that: (i) a substantial

number of executory contracts will be assumed (with hundreds of millions of dollars used to cure

defaults); (ii) all existing employees will be retained by the reorganized Debtors with existing

compensation and benefits assumed; (iii) additional employees that were previously terminated

may be rehired; and (iv) numerous vendor and supplier relationships will be preserved.50

84. Furthermore, as the Committee itself recognizes, each of the prepetition secured

noteholders has clear interests in the success of the reorganized company.51 This includes partners

or suppliers in the manufacturing of satellites used in the Debtors’ constellation (Airbus,

Qualcomm); major players in the wireless telecommunications space (SoftBank, Banco Azteca,

and affiliates); and a valuable future market for the company’s satellite internet offerings

49 See Declaration of Adam Preiss [Dkt. No. 371], ¶¶ 15–16.

50 Tr. of Hr’g., Jul. 10, 2020, at 87–88 (proffered testimony of OneWeb CFO Thomas Whayne on rippling impacts across the supply chain in the event OneWeb could not continue as a going concern); Id., at 23:24–24:8 (counsel to the Debtors explaining positive impact of bid on business, including assumption of contracts and retention of employees); Preiss Decl., ¶¶ 11–17 (describing the Plan Sponsor’s bid and certain benefits thereof to the estate); PSA Term Sheet, at 8 (describing retention of employees and existing compensation & benefits); cf. Id., at 6 (all executory contracts shall be deemed assumed unless Debtors provide specific notice of intent to the contrary).



40 ny-1958519

(Government of Rwanda). The continued participation of these stakeholders in the go-forward

enterprise is thus a critical feature of the proposed reorganization plan.52 In addition, the Plan

Sponsor has a valid interest in ensuring that its co-owners of the reorganized company are

reputable firms that have already cleared all necessary regulatory hurdles for investment in and

ownership of a satellite business and its required assets.

85. By contrast, as further explained in the Debtors’ Opposition, the Committee’s

pursuit of its claims could lead to termination of the Plan Support Agreement or drive up

administrative expenses above the $25.9 million threshold. If the Plan Support Agreement were

to be terminated, the $100 million of new money from the Plan Sponsor—in addition to the $120

million already funded by the prepetition secured parties under the prior DIP facility—will instead

become immediately due and owing. This will effectively eliminate any possibility of recovery to

administrative creditors and counterparties, to say nothing of general unsecured creditors.53 In

other words, the proposed litigation could significantly impair the Debtors’ reorganization and

would undoubtedly be a waste of estate resources. The Committee, however, has failed to provide

any evidence that litigation will lead to a better outcome for the constituents of the Committee, let

alone the entire estate or the organization as a whole.

CONCLUSION

86. For the reasons set forth above and in the Debtors’ Opposition, SoftBank

respectfully request that the Court deny the Committee’s standing motion and end a fruitless,

expensive, sideshow that is holding up Plan confirmation.

52 See Tr. of Hr’g., Jul. 10, 2020, at 67:9–13 (the Court acknowledging the validity of the Plan Sponsor’s professed concerns over the identity of equity holders in reorganized OneWeb).

53 See Plan Support Agreement, Exh. A (the “PSA Term Sheet”) [Dkt. No. 400-1].


41 ny-1958519

Dated: New York, New York July 21, 2020

MORRISON & FOERSTER LLP

By: /s/ Gary S. Lee Gary S. Lee David J. Fioccola Todd M. Goren David R. Fertig Mark Alexander Lightner Adam J. Hunt 250 West 55th Street New York, NY 10019 212.468.8000

Counsel for Debtor Softbank Group Corp.


EXHIBIT A FILED UNDER SEAL

20-22437-rdd Doc 427-1 Filed 07/21/20 Entered 07/21/20 15:13:27 Exhibits A -F Pg 1 of 6

20-22437-rdd doc 427 filed 07/21/20 entered 07/21/20 15:13 ... · serrano v. gulf chem. corp., ltd....

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