NextWave Litigation Raises Broad Questions Regarding Rights Of FCC Licenses vis-à-vis Creditors
December 5, 2000
George Wheeler - Washington
Recent litigation surrounding the status of Personal Communications Service (PCS) licenses issued to NextWave Telecom, Inc. may have significant repercussions for creditors of the roughly 3,000 entities that have acquired their licenses in past FCC spectrum auctions through the FCC’s now-defunct installment payment program. These licensees, who owe approximately $9 billion to the U.S. Treasury, include not only the holders of valuable PCS licenses, but also licensees in other services such as the multipoint distribution service (MDS). At issue is a jurisdictional battle between the federal bankruptcy courts, which have exclusive jurisdiction over all matters arising under the Bankruptcy Code, and the FCC, which has the statutory authority to regulate interstate communications. This dispute ultimately may be decided by the Supreme Court, and is better understood with a brief explanation of the events that have occurred so far.
NextWave held, and claims to still hold, 90 C and F block PCS licenses that are scheduled to be re-auctioned by the FCC beginning on December 12, 2000. NextWave was the high bidder for these licenses in PCS auctions that closed on May 6 and July 16, 1996. Due to concerns about NextWave’s allegedly impermissible level of foreign ownership, the FCC did not grant NextWave’s licenses until February 1997, some five months after most other successful C block bidders were awarded their licenses. As an express condition of its licenses, NextWave executed promissory notes worth approximately $4.3 billion.
In July 1999, a federal bankruptcy court in New York reduced NextWave’s debt to the FCC by roughly $3.3 billion after finding that the value of the licenses had dropped sharply in the interval between the close of the auction and the grant of the licenses. The Second Court of Appeals reversed this decision in a December 1999, opinion and held that the bankruptcy court lacked the authority to interfere with the FCC’s licensing authority. However, after NextWave offered in January 2000, to pay the FCC the full present value of its promissory notes, the bankruptcy court determined that timely payment was not a condition of the licenses and issued an order prohibiting the FCC from auctioning the NextWave licenses. The Second Circuit reversed this decision in May 2000. The Supreme Court recently declined to review the Second Circuit’s December ruling; however, NextWave has also petitioned the Court for review of the May 2000, decision of the Second Circuit. NextWave has also petitioned the Court for rehearing of its earlier petition, based on the apparent conflict between the Second Circuit ruling and the result reached in GWI PCS (described below).
Separately, NextWave petitioned the FCC for reconsideration of the public notice that set the NextWave licenses for auction, and appealed the public notice to the U.S. Court of Appeals for the D.C. Circuit. The court appeal was dismissed as premature, because the appeal was filed after a bureau order but before action by the full Commission. The FCC dismissed NextWave’s petition for reconsideration on September 6, 2000. On September 19, NextWave petitioned the FCC for a stay of the auction pending judicial review. NextWave also filed a petition with the D.C. Circuit on September 26, for a stay of the FCC’s auction.
On October 5, 2000, the FCC announced that the C and F block PCS auction that had been scheduled to begin on July 26, and was later postponed until November 29, will begin on December 12. The FCC has stated that the reason for this further delay is to provide additional time between the effective date of the new rules the Commission adopted on August 23, and the start of the auction. While the FCC remains firm in its commitment to re-auction this spectrum as soon as possible, the legal status of the NextWave licenses remains unclear.
The October 20, decision of the Fifth Circuit in GWI PCS 1 Inc. et al. v. FCC further underscores the uncertainty of the NextWave licenses. The Fifth Circuit, on facts strikingly similar to those in NextWave, upheld a district court’s affirmance of a bankruptcy court order by which the bankruptcy court avoided roughly 90% of the debt owed by a C block licensee to the FCC and enjoined the FCC from revoking the licenses in question. This decision creates a conflict between circuits that may require resolution by the Supreme Court.
The implications of the struggle between the FCC and the bankruptcy court reach beyond the immediate uncertainties of potential PCS bidders regarding the "title" of the licenses for which they wish to bid. If the view espoused by the FCC and upheld by the Second Circuit ultimately prevails, then licensees who seek bankruptcy protection and fail to make the required payments will be unable to protect their licenses from automatic forfeiture. Creditors of such entities must be made aware of this risk, particularly with respect to startup ventures that may not have any significant assets apart from their licenses. On the other hand, if NextWave ultimately succeeds in persuading the Supreme Court that the bankruptcy court has the power to overrule the FCC with respect to the validity or value of FCC-issued licenses, this could encourage licensees that feel they have overpaid for their licenses to file for bankruptcy, thereby reducing their debt to the FCC. This scenario also could create significant risks for creditors of such licensees.
If you have any questions about the NextWave litigation or how it could affect your business, please contact us.