BALTIMORE-At the end of a day-long hearing last Thursday, a bankruptcy judge made sure everyone, including himself, could go home happy.
DCR PCS Inc., the subsidiary of Pocket Communications Inc., was able to make its provisional election effective; the federal government can get the ball rolling on a March re-auction of C-block personal communications services licenses; the Debtors in Possession lenders were able to obtain a preliminary injunction against DCR’s election; and Judge E. Stephen Derby retained authority over the Pocket bankruptcy case.
The Federal Communications Commission and the Department of Justice Oct. 22 told DCR that as of Oct. 30, its election would be effective and the government was taking back its licenses, with the exception of the 12 licenses DCR chose to keep.
By making the DCR election effective, the government also would relieve DCR of $1.3 billion of federal debt. It is expected DCR will sell the 12 remaining licenses at private auction to pay off bankruptcy administrative debt, the DiP Lenders and Pocket. Pocket is also in bankruptcy litigation, but last week’s hearing did not involve the Pocket case.
In June, Derby allowed DCR to participate in the PCS C-block election, which allowed C-block licensees to choose from a variety of options to restructure their debt to the federal government. Because the government was still in negotiations with the DiP lenders at that time, Derby also ordered the election would be considered provisional until the FCC’s general counsel decided otherwise. The Oct. 22 DOJ letter signaled the end of the provisional election, but Derby’s action was necessary to make it effective.
The Oct. 22 letter set the stage for courtroom dramatics where attorneys for the DiP lenders accused the FCC of negotiating in bad faith-a charge refuted by Lloyd Randolph, a Justice Department attorney representing the FCC.
For his part, Derby had to decide whether the FCC could indeed take back the licenses and put them up for re-auction or whether he, as the bankruptcy judge, would remain in control of DCR’s assets. “I am trying to reconcile two bodies of law. Communications law where the FCC is supreme, and bankruptcy law where I am supreme,” he said.
By issuing a preliminary injunction and forbidding the FCC from alienating the terminated licenses until Nov. 16, Derby declared himself supreme.
Under the order, the FCC still will be able to put out for comment proposed procedures for the March C-block re-auction, which will include the DCR licenses. Kathleen O’Brien Ham, deputy chief of the FCC’s Wireless Telecommunications Bureau, told Derby this notice will be released Tuesday. The notice also is expected to set the minimum bids for the re-auction at 10 percent of the winning bids from the original auction. Those wishing to lower those opening bids can submit evidence supporting their lower bids in their comments on the proposed rules and bids, Ham said.
Derby’s quandary over the supremacy of communications vs. bankruptcy law has been a theme in all of the C-block bankruptcy cases. The FCC consistently has claimed-and lost in the General Wireless Inc. case-it could terminate and take back licenses if an auction winner defaulted on payments. The licensees, Pocket, GWI, and NextWave Telecom Inc., all have said licenses are part of the bankruptcy estate.
To prevent another GWI result, the FCC attempted-and nearly succeeded-to have Congress clarify that licenses are not property and cannot be viewed as assets in bankruptcy litigation. Since this has been a high-profile FCC legislative wish, the debate is expected to continue when the 106th Congress convenes next year.
The GWI case revolved around an argument of fraudulent conveyance where GWI claimed the delay between the end of the auction and the time the licenses actually were issued significantly devalued the licenses. The bankruptcy judge in that case agreed, reducing the value of the licenses to about 16 cents on the dollar.
The “fraudulent conveyance” argument also had been raised in the Pocket case at least 18 months ago but not pursued while negotiations continued to allow the DiP lenders to build out at least some of the licenses. These negotiations fell apart Oct. 14 when the DiP lenders offered to pay the FCC an all-cash offer that reportedly followed the GWI formula.
The DiP lenders were prepared to go forward with the fraudulent conveyance claim last week but due to a procedural error were unable to do so.
By making effective the election, Derby apparently removed from the fraudulent conveyance proceeding the creditors’ committee, which included all of the creditors except the DiP lenders to which DCR owes money. The fight over the fraudulent conveyance will be fought between the DiP lenders and the federal government. This round is set to begin Nov. 13 in Derby’s courtroom.
