Litigation Coverage: Court Denies DISH/EchoStar Motion to Dismiss DBS Notes Trustee’s Breach of Indenture, Fraudulent Transfer Claims Related to 2024 Restructuring Transactions

Relevant Document:
Opinion

Today U.S. District Judge Jessica G.L. Clarke issued an opinion denying DISH DBS’ renewed motion to dismiss DBS notes trustee U.S. Bank Trust’s second amended complaint alleging that DBS breached the indentures and transferred assets for no consideration through a series of reorganizations and intercompany transactions in 2024. According to Judge Clarke, the breach of contract claims “turn largely on factual disputes” that cannot be resolved at the pleading stage.

Judge Clarke also denies the company’s motion to dismiss the trustee’s actual and constructive fraudulent transfer claims, except the trustee’s claims related to the company’s September 2024 transactions. The judge dismisses those claims without prejudice because the trustee cannot allege that those transactions already injured noteholders and relies on speculation as to future potential fraudulent transfers.

U.S. Bank (as trustee for holders of DISH DBS’ 5.75% senior secured notes and 7.75% senior notes) filed its initial complaint in April 2024 in New York State Supreme Court, claiming that DISH and EchoStar Chairman Charlie Ergen orchestrated a “series of brazen transactions” through which DISH Network and DBS transferred billions of dollars to EchoStar for no value and then offered the “stolen property” back to those entities’ creditors in exchange for “steep discounts on their claims.”

The original complaint focused on a series of transactions in January 2024 whereby DISH Network transferred unencumbered wireless spectrum licenses, part of a $4.7 billion intercompany receivable owed by DISH Network to DBS, approximately three million DISH TV subscribers and Sling TV to either new parent EchoStar or unrestricted subsidiaries, placing those assets out of the noteholders’ reach.

The case was removed to the Southern District of New York. In July 2024 the trustee filed an amended complaint, adding allegations that DBS transferred approximately $976 million to DISH Network through non-ordinary course advances in the fourth quarter of 2023 and the first quarter of 2024 without receiving any value in return.

On Jan. 22, the trustee filed the second amended complaint, which adds allegations regarding the September 2024 transfers. Through the September 2024 transactions, the trustee maintains, the unrestricted subsidiary that received DISH TV subscribers in January 2024 incurred $2.3 billion in new debt secured by the assets fraudulently transferred to it by DBS. According to the trustee, proceeds from the loans will be passed to DISH Network without adequate consideration for DBS.

In today’s opinion, Judge Clarke first finds that the trustee adequately pleads that the January 2024 asset transfers and advances from DBS to DISH Network breached section 4.07 of the DBS indentures, which prohibit DBS “from transferring assets to entities that are not bound to repay the DBS notes,” including unrestricted subsidiaries.

The defendants argued that the January 2024 asset transfers are protected by a builder basket that allowed DBS to make restricted payments as long as it maintained an 8:1 debt to cash flow ratio. The defendants also pointed to an officer’s certificate of compliance with section 4.07. The trustee countered that the certificate made several erroneous assumptions and DBS did not in fact have an 8:1 debt to cash flow ratio after the transactions.

According to Judge Clarke, the parties’ arguments about the compliance certificate and proper calculation of the debt to cash flow ratio involve legal or factual disputes that cannot be resolved on the pleadings. “The proper interpretation of a contractual provision cannot be decided on a motion to dismiss so long as both parties offer reasonable interpretations,” the judge points out.

The trustee “alleged that proper calculations under the Indenture provisions result in an excessive ratio” and “alleged six reasons why the Officers’ Certificate wrongfully shows otherwise,” Judge Clarke explains. “Nothing more is required” to state a claim that the January 2024 transfers breached section 4.07, according to the judge.

Judge Clarke finds that the trustee also adequately pleaded that the advances from DBS to DISH Network breached section 4.07. The defendants argued that the advances were “ordinary course transactions.” At the pleading stage, the judge credits the trustee’s allegations that “DBS failed to provide any disclosure to creditors regarding the nature of the Advances or how, if ever, they might be repaid,” “the Advances were made while DBS was likely insolvent” and “the Advances bear a below-market, non-cash interest rate and an August 2028 maturity, which does not reflect fair value for DBS’s cash.”

Second, Judge Clarke finds that the trustee sufficiently states a claim that the transfer of the DISH TV intercompany claim breached section 5.01 of the indentures, which prohibit DBS from transferring “all or substantially all of its properties or assets.” According to the judge, the defendants’ section 5.01 arguments – including their contention that the intercompany loan transaction only involved 63% of DBS assets – raise factual issues not appropriate for resolution at the pleading stage.

Third, Judge Clarke holds that the trustee adequately pleads its actual and constructive fraudulent transfer claims with respect to the January 2024 transfers and the advances. The trustee’s “iteration of factual allegations sufficiently alleges” that the January 2024 transfers “were between insiders owned by Ergen, that the transfers were substantially all of DBS’s assets, that these transfers were made for no consideration, that these transfers were made while DBS held substantial debt, and that DBS became insolvent after the transfers were made,” the judge points out.

The trustee also sufficiently alleges that “DBS did not disclose sufficient information about the Advances,” DBS did not receive reasonably equivalent value for the advances and DBS was insolvent at the time of the advances, according to Judge Clarke. The judge highlights “the initial eight-month concealment” of the advances’ details as relevant to Ergen’s alleged “systematic and fraudulent attempt to siphon all available cash from DBS.”

“While Defendants may ultimately have legitimate defenses against these allegations, the arguments they put forth in their motion are meant for consideration on summary judgment or at trial,” Judge Clarke notes.

Finally, Judge Clarke dismisses without prejudice the trustee’s fraudulent transfer claims to avoid the September 2024 transactions. The trustee alleges that the proceeds of the September 2024 loans “went to repay DBS’s debt and that the proceeds will be passed along to DISH Network in another asset transfer,” but the trustee “makes no argument for how the repayment of debt can be fraudulent” and “cannot state a legal claim based on speculation of what will or will not happen.”