The 9th U.S. Circuit Court of Appeals ruled the trustee of bankrupt Magnacom Wireless L.L.C. is not entitled to proceeds from the reauction of the company’s cancelled wireless licenses, a legal victory for the Federal Communications Commission on the losing end of a 2003 Supreme Court decision that held bankruptcy code trumped the agency’s regulatory authority.
“We conclude that the FCC’s cancellation of Magnacom’s licenses extinguished Magnacom’s interest in those licenses and the underlying spectrum,” stated the 9th Circuit in affirming a lower court ruling. “Such cancellation did not result in any traceable proceeds, and did not constitute a lien-enforcement remedy. Therefore, Magnacom is not entitled to such proceeds.”
Magnacom paid nearly $48 million for 13 F-block personal communications services licenses won at a 1996 spectrum auction.
Though Magnacom’s circumstances are similar to the legal tug-of-war between the FCC and thenbankrupt NextWave Telecom Inc. over C- and F-block PCS licenses NextWave acquired in 1996 and 1997 auctions, the three-judge panel highlighted what they regarded as a crucial difference.
“NextWave is not applicable here, however, because Magnacom’s trustee does not challenge the FCC’s cancellation of licenses and does not seek relief based on [Section 525 of bankruptcy law],” wrote Judge Sandra Ikuta in the unanimous opinion. “Magnacom’s trustee did not object to the FCC’s motion for relief from the automatic stay to allow the FCC to cancel the licenses. Nor does the trustee now argue that the FCC’s cancellation of the licenses violated [Section 525] . Section 525 is not applicable when, as here, an entity does not challenge the cancellation of its license.”
Section 525 of bankruptcy code generally restricts the federal government from revoking a license of a debtor.
“We are seriously considering seeking [Supreme Court review], but have not yet made a decision,” said William Hohengarten, an outside lawyer for Magnacom who played a key role in Supreme Court litigation that resulted in the FCC returning billions of dollars worth of licenses to NextWave.
“We think the 9th Circuit’s decision directly conflicts with the D.C. Circuit’s decision in NextWave on the issue of whether license cancellation is equivalent to enforcement of a security interest,” Hohengarten added. He noted the Supreme Court did not consider that precise issue in its NextWave ruling, “but by affirming the D.C. Circuit on other grounds, it left the D.C. Circuit’s holding on this additional issue intact as circuit precedent, which the 9th Circuit expressly departed from.”
The legal predicaments of Magnacom, NextWave and others-where bankruptcy code collided with communications law-evolved during a time when the FCC was attempting to fulfill a 1993 congressional mandate to foster participation by women, minorities, small business and rural telephone companies in a cellular industry that was a duopoly until the mid-1990s. After a string of high-profile, auction-related bankruptcies and a 1995 Supreme Court ruling that curbed federal affirmative action, the FCC did away with preferences for women and minorities and eliminated installment payments for small business, which are referred to as “designated entities.” However, the FCC still offers bidding discounts up to 25% for DEs.
Indeed, the 3rd Circuit is expected to rule soon on a challenge to the FCC’s changes last year to DE qualifications and, potentially more significant, to the final results of Auction 66.