Motorola, Inc., dodged a potentially devastating decision in an adversary bankruptcy proceeding brought by a company it had helped to create. On August 31 a bankruptcy court judge in New York struck down key claims by unsecured creditors of that company, Iridium Operating LLC, which alleged that Motorola contributed to the failure of its satellite phone venture eight years ago. But Motorola remains liable for three other claims that were not dismissed.
Schaumburg, Illinois-based Motorola helped fund and develop Iridium, but spun the unit off in 1993, retaining a minority interest. The newly independent company then negotiated a contract with Motorola. Under the deal, Iridium paid Motorola roughly $3.45 billion in exchange for Motorola's pledge to launch satellites that would enable Iridium's phone system to function.
The system was activated in November 1998 but was plagued by technical glitches. A significant business-subscriber base never materialized, and in 1999 Iridium filed for Chapter 11 bankruptcy protection in New York. (Iridium's successor company, Iridium Satellite LLC, bought the satellite system from the failed company for $25 million in 2000; it had no claim in this case.)
In 2001 the unsecured creditors committee brought the current case against Motorola seeking the return of the $3.45 billion that Iridium paid the cellphone giant. To persuade bankruptcy court judge James Peck that Motorola should have to pay back the money, the committee's lawyers had to prove that Iridium was already insolvent at the time it was making payments to Motorola. They argued that the satellite system developed by Motorola was never designed to generate the billions of dollars in revenue required to push Iridium into the black. They also noted that the system was marketed to business travelers, but the satellite signal was too often blocked by buildings, hills, and vehicles to appeal to that subscriber base.
Lawyers for Motorola argued that Iridium's business plan was sound. They contended that the system consistently worked in large swaths of territory , even if it was not always reliable around office buildings. They also argued that at the time of its deal with Motorola, Iridium was solvent, able to raise cash through both equity and debt coverings. After a 50-day trial, Judge Peck agreed, saying that "despite diligent effort," creditors had failed to prove that Iridium was destined for demise when it paid Motorola.
The judge did not dismiss the creditors' breach of contract, breach of fiduciary duty, and equitable subordination claims. He set a tentative November 26 trial date for those remaining claims; lawyers on both sides say that he is pushing for a settlement. The eight-year Iridium bankruptcy will effectively conclude once the adversary proceeding is resolved.
FOR PLAINTIFF STATUTORY COMMITTEE OF UNSECURED CREDITORS (NEW YORK)
Weil Gotshal & Manges: Scott Atlas, Greg Danilow, Diane Harvey, Robert Sugarman, Michael Walsh, and associate Ashish Ghandi. (All are in New York except Atlas, who is in Houston.) The firm was retained by an ad hoc committee of unsecured creditors.
FOR DEFENDANT MOTOROLA, INC. (SCHAUMBURG, ILLINOIS)
In-house: Vice president-litigation Kathleen Massey.
Kirkland & Ellis: John Amberg, Amy Andrews, Karen Fine, Garrett Johnson, Stacey Pagonis, Anne Sidrys, and associates Kristen Allen and Alison Aubry Richards. (All are in Chicago; Fine has since left the firm.) Motorola is a longtime client of the firm.
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