DBSD North America, which had planned to offer a combined satellite-terrestrial wireless network, had its bankruptcy plan rejected by the U.S. Court of Appeals for the Second Circuit. The court said the plan violated accepted law and was sent back to the lower court for further proceedings.

The restructuring plan was originally approved in October by the U.S. Bankruptcy Court for the Southern District of New York. Sprint, a creditor that claims it is owed some $211 million, and DISH Networks both appealed.

Without issuing an opinion - which would clarify the case's effect, or lack thereof, on future bankruptcies - the court ruled 2-1 that the restructuring plan proposed by DBSD violated the principle of absolute priority. Absolute priority means that if a certain class of creditors is not paid in full when a court-imposed restructuring is ordered, then the shareholders can't retain their stock.

DBSD filed for chapter 11 bankruptcy protection in May 2009. Before it filed, the company had about $790 million in debt. A first lien loan made up $40 million and a set of second lien secured notes made up $740 million.

The noteholders agreed to exchange the notes for equity in a reorganized DBSD.  The Plan proposed to provide the senior debt holders with a new note that extended the maturity from one to four years, provided payment in kind interest, and liens on all of reorganized DBSD's operating assets.

Some of the second lien debt was secured by auction rate securities owned by DBSD. Those would be used to fund the company's operations while it sought a way out of bankruptcy.  

The original first lien lenders sold their debt at par value to DISH Networks, a competitor, which then voted to reject the Plan. 

Other groups of creditors also objected to the restructuring plan, saying that other financing was available. But DBSD contends that getting additional financing was going to be difficult, if not impossible.

In its reversal of the plan, the Second Circuit said one problem was that DISH is a competitor and it is not clear whether it was acting as a creditor or as a competitor that wanted to gain control of DBSD's business. Therefore the lower court was right to deny DISH's objections. Sprint, on the other hand, has standing to object to the plan and therefore can make its case before the bankruptcy court.

For its part, DBSD says in its filings that if the reorganization plan is not approved the company will run out of money. DBSD said it only has $12 million left in cash, and that its value as a going concern is much greater than in liquidation.

The Second Circuit did not immediately issue an opinion, a move that some lawyers interviewed said was usually done in cases where there was some urgency to getting an order signed.