A ruling from a federal bankruptcy court in Dallas may have set a dangerous precedent for the Federal Communications Commission and further muddied the waters for C-block personal communications services licensees.
In a lengthy bench ruling April 24, Federal Bankruptcy Judge Steven Felsenthal revalued 14 C-block licenses belonging to subsidiaries of General Wireless Inc.-which filed for Chapter 11 bankruptcy protection last fall-to $166 million.
The company’s subsidiaries originally bid $1.06 billion for all 14 licenses at auction and owed the FCC $954 million in note obligations. After applying the $106 million in payments already made to the FCC, GWI’s remaining obligation is $60 million.
The court determined that as the bottom fell out of the C-block market after the auctions ended in May 1996, the value of the licenses changed when GWI received its licenses Jan. 27, 1997. Though the court concluded the FCC conducted the C-block auction fairly, GWI’s subsidiaries did not receive reasonably equivalent value for the price it was required to pay for the licenses, the court said.
“Despite efforts to raise capital in the public and private markets to support the purchase price of the licenses at $1.06 billion, the markets rejected that price,” said Judge Felsenthal.
FCC Chairman William Kennard has urged the Justice Department to appeal the decision.
“The value of the license is the price that you raise your hand to bid at auction. Not the price a judge later decides,” said Kennard. “The silver lining in the decision is that the court found that the C-block auction was conducted fairly. The judge agreed with our view that the auction produced a bid price reflecting fair market value. This finding should be helpful on appeal.”
Ari Fitzgerald, legal adviser to Chairman Kennard, said the ruling is troubling for the FCC’s auctions’ process. “There’s always a time lag between auctions and licensing,” he said. Future bidders essentially could decide they paid too much for their licenses and head for bankruptcy court to reduce the amount they owe, he said.
“We believe we have strong grounds to win this on appeal. We think the judge misconstrued some of our rules,” said Fitzgerald.
While the FCC argued GWI’s claim would impede the Communications Act, the court said a bankruptcy fraudulent conveyance claim did not coincide with regulations in the Communications Act since the issue involves a creditor/debtor relationship. And the court went further to express its belief that its ruling will actually aid the FCC in fulfilling the Communications Act mandate to quickly deploy licenses and increase competition.
Kennard has been pushing Congress to clarify that FCC licenses should not be mixed up in bankruptcy, but has failed to get legislation passed. The FCC still stresses that bankruptcy is not sure outcome.
Whether the bankruptcy court’s ruling will entice other C-block players to enter into bankruptcy is unclear. It’s unlikely other C-block operators could file a claim similar to GWI’s. Those seeking a federal constructive fraudulent cause of action are required to file within a year of receiving their licenses. However, some state laws allow companies to file within four years.
Bankruptcy lawyers say the ruling could set the tone for how C-block licensees will be treated in bankruptcy court, said Mark Tauber, head of the communications group at Piper & Marbury L.L.P., law firm in Washington, D.C., which represents several C-block operators. The favorable ruling-combined with other uncertainties surrounding the FCC’s four financial-restructuring options it is offering to C-block licensees-is creating confusion for many C-block operators, said Tauber.
“I have heard from many different licensees that are asking how they will make an election on June 8 without having the law settled. It certainly won’t be settled by June 8,” he said.
C-block licensees must choose by June 8 one of four options that require licensees to either resume payments, disaggregate half of their spectrum, return licenses for debt forgiveness or make full payments for some of their licenses while returning others.
“Many C-block licensees are concerned that the Justice Department hasn’t said it will go along with the forgiveness of debt … Only the Justice Department can forgive debt.” said Tauber. “An operator could turn back some licenses and receive forgiveness on June 8, but still doesn’t know whether the Justice Department will allow that to happen.”
Kennard said earlier this month the FCC planned to address unresolved issues surrounding the reconsideration order by next month, which “would ensure adoption of the rules well in advance of the election date and would therefore allow C-block licensees to make business decisions with full knowledge of the governing rules.” The FCC has said the Justice Department plans to play a significant role in the restructuring process.
Omnipoint Corp. already has opted to return portions of its spectrum. NextWave Telecom Inc., which analysts have speculated may seek amnesty for many of its licenses, said it is studying the GWI ruling.
The ruling now paves the way for GWI to push its reorganization plan through the court. GWI could be offering service before many C-block licensees that choose an FCC refinancing option.
“The judge has said he would like us to get a plan confirmed in early July,” said Dennis Spickler, vice president and chief financial officer with GWI. “We need to go and get financing in place.”
“Our creditors and equity investors have been very supportive during this litigation, and we expect they will continue their commitment to enable the company to emerge from Chapter 11,” said President and Chief Executive Officer Roger Linquist.
Hyundai Electronics America in San Jose, Calif., is GWI’s largest creditor (aside from the U.S. government) with an outstanding loan to the company for $49.3 million.
GWI is likely to drop a second claim against the FCC that charges the commission with securing its right as first creditor only after the C-block market began to fall. GWI is seeking to classify the FCC as an unsecured creditor. The claim is set for trial in June, but slows down GWI’s reorganization process. RCR revealed last September that the FCC may have neglected to file the necessary forms on a state-by-state basis that perfect the FCC’s first claim on a license should a C-block carrier file for bankruptcy.
