TerreStar Creditors Sue Bond Trustee

A group of TerreStar Networks creditors has sued one of the banks acting as trustee for $500 million of the company's bonds, claiming that the bank has no claim on one of the satellites.

TerreStar provides a combination mobile satellite and terrestrial phone and data service. The company has two satellites, one of which is in orbit while the other is almost complete, but has not been launched. The company filed for bankruptcy in October. Since then it has worked out a plan to emerge, probably through finding a buyer.

The suit, filed in the U.S. Bankruptcy Court for the Southern District of New York, says that U.S. Bank N.A., which acted as the indenture trustee for $500 million in bonds issued by TerreStar in 2007, has no claim on the TerreStar-2 satellite, which has not yet been launched.

The plaintiffs are the official committee of unsecured creditors, a group of seven entities that own a large portion of TerreStar's unsecured debt. They say that TerreStar's second satellite, financed by $100 million credit line harbinger Capital Partners and EchoStar Corporation, is excluded from the property U.S. Bank has any liens on.

In addition, the creditors say U.S. Bank terminated its liens on the satellite in 2008 in a filing with the Securities and Exchange Commission.

U.S. Bank has not yet filed an answer to the suit.

This is not the only issue that has to be fought out in court for the company to emerge free and clear from chapter 11. Sprint Nextel has two claims against TerreStar; one is for the money owed -- about $100 million -- to Sprint for clearing out the spectrum TerreStar is licensed to use. That claim is still being litigated.