SprintPCS Facing Lawsuit over Affiliate Bankruptcy

The Official Committee of Unsecured Creditors of iPCS Inc. has asked the Court overseeing the iPCS bankruptcy case for permission to sue Sprint for causing iPCS's failure to satisfy its current debts and future obligations to its creditors. iPCS owes more than US$430 million to its bondholders, banks and trade creditors.

iPCS is the Sprint PCS affiliate that owns and operates the Sprint PCS network in four Midwestern states and serves more than 230,000 customers. However, the petition may hold significant implications for Sprint PCS's relationship with its nine other affiliates, which, like iPCS, may be effectively dominated and controlled by Sprint PCS.

The Official Committee authorized the lawsuit, and the filing states that the Committee "has been examining the Debtors' relationship with (Sprint PCS) and whether claims exist against Sprint PCS for causing iPCS's failure to satisfy its current outstanding debts and future obligations." The filing states that iPCS "is simply an agent and/or alter ego corporation operating on behalf of Sprint PCS. The Committee and its professionals believe that a meritorious claim for repayment of all amounts due to iPCS's creditors exists against Sprint PCS stemming from Sprint PCS's domination and control over iPCS and iPCS's business activities."

The filing states that "Sprint PCS ... has effectively transformed iPCS into a mere arm or department of Sprint PCS's own wireless communications business, while at the same time ensuring that all of the financial risk for 'building out' and operating the Sprint PCS network in iPCS's territories remains with iPCS and, more particularly, iPCS's creditors."

Not surprisingly, the filing continues, "Sprint PCS has completely misused its domination and control over iPCS. Sprint PCS has knowingly taken numerous actions -- including, among other things, abusing its contractual relationship with iPCS, refusing to timely pay iPCS sums due to iPCS, and engaging in self-dealing transactions which have benefited Sprint PCS on terms wholly unfavorable to iPCS -- that have caused substantial financial harm to iPCS and its creditors, resulting in iPCS's inability to satisfy its outstanding debts which total in the hundreds of millions of dollars. On February 23, 2003, as a direct result of these and other abuses by Sprint PCS, iPCS, Inc., iPCS Wireless, Inc. and iPCS Equipment, Inc. filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code."

The filing states: "Because Sprint PCS so dominates and controls iPCS, the Committee believes that Sprint PCS should be found liable for the damages that the creditors have already sustained as a result of Sprint's wrongful acts and for iPCS's future obligations as they become due. Sprint's actions have cost iPCS's creditors hundreds of millions of dollars."

In short, the complaint makes clear that Sprint's scheme was, in effect, to use other people's money to build out its PCS network without incurring debt or other costs on the Sprint balance sheet. Its actions have contributed to iPCS's severe financial condition and the breach of iPCS's creditor agreements. It is possible that Sprint PCS has acted the same way toward all of its affiliates, causing their creditors and shareholders damages and irreparable harm.

The proposed action asks the Court to find that Sprint PCS's assets be made available to iPCS's bankruptcy estate for the repayment of iPCS's creditors.

The Official Committee of Unsecured Creditors represents the interests of all unsecured creditors in the iPCS Chapter 11 case."

Posted to the site on 6th May 2003