NEW YORK-The U.S. Court of Appeals for the Second Circuit heard oral arguments Nov. 1 in the government’s appeal of decisions that had affirmed key aspects of the bankruptcy reorganization of C-block carrier NextWave Telecom Inc., Hawthorne, N.Y.
The three-judge Circuit Court panel comprised Judges Dennis Jacobs, Joseph McLaughlin and Robert Sack. They reserved decision in the case, which must be resolved before NextWave’s Chapter 11 reorganization confirmation and consummation hearing can be held. That had been scheduled to occur Sept. 8 before the U.S. Bankruptcy Court for the Southern District of New York in White Plains.
NextWave said Aug. 31 that, in votes cast “by every class of creditors and equity interest holders … over 99 percent were acceptances” of its bankruptcy reorganization plan. Nextel Communications Inc., which is hoping to buy NextWave licenses, reportedly has offered more than $6 billion for the permits, which NextWave has rejected.
NextWave’s strategy is to serve as a carrier’s carrier, offering fixed wireless local loop service first for telephony and high-speed Internet access. Later, it intends to provide third-generation Code Division Multiple Access mobile voice and data services.
Represented by the U.S. Attorney’s Office in New York, the Federal Communications Commission did not object to an earlier decision by the bankruptcy court to lower NextWave’s C-block bid obligation to about $1 billion from $4.7 billion. That decision has already been upheld on one lower court appeal.
Instead, the commission contests the bankruptcy court’s jurisdiction over it. The FCC has said it is not a typical creditor, but a federal agency with status that supersedes the purview of federal and state bankruptcy laws and the tribunals that adjudicate them.
“The bankruptcy court’s jurisdiction in an adversary proceeding with respect to remedy of financial issues is consistent with the bankruptcy code,” said Daniel S. Alter, an assistant U.S. Attorney.
“The exercise of remedial powers to change the fundamental conditions of the (radio-frequency) licenses is outside the bankruptcy court’s jurisdiction.”
Saying the bankruptcy court had intervened improperly “as a sixth FCC commissioner,” Alter asked the Second Circuit panel to allow the federal agency to retain NextWave’s RF licenses and determine where they go next.
“This is not a regulatory case. It is a bankruptcy case,” said Deborah Schrier-Rape, an attorney with the Dallas law firm of Andrews & Kurth L.L.P., which is representing NextWave.
“The FCC acknowledged it is a (typical) creditor … There is no place anywhere that the FCC is excepted (from this status) … Every year, the FCC has asked Congress to change the law.”
A major disagreement between parties in the case stems from the delay between the close of the auction and the time the FCC turned over the licenses to winning bidders.
“The dispute is over when the obligation arose. Why not assume it arose when the original bid was made?” Judge Jacobs asked. “If you make a down payment and get the licenses and later default, aren’t you still subject to penalty obligations?”
Schrier-Rape responded that the obligations incurred at the close of the auction did not require “a purchase price obligation.”
As the high bidder, NextWave received from the FCC the right to apply for the licenses in question, “and if it failed to comply with certain conditions, it had to pay a penalty,” she said.
The company met its FCC obligation to make a $500 million down payment, and it never defaulted, Schrier-Rape added.
Had the FCC turned over the licenses when the bidding closed instead of waiting for months until their value declined, “this would not have happened,” she said. In that scenario, NextWave would have been obligated to pay what it bid originally.
Alter, however, argued that once the auction closed, the high bidder “must proceed and be successful.
“If not, it will be liable for the difference between its high bid and the amount the FCC receives from the re-auction of those licenses.”
Judge Sack concurred with Alter on the point of FCC jurisdiction over the allocation of RF spectrum.
“It is important to recognize that radio frequency is a public trust under the auspices of the FCC to administer,” he said.
However, Judge Jacobs took issue with the wisdom of the C-block auctions themselves.
“You could argue it was extremely stupid policy for the government to auction spectrum to small businesses. If [NextWave] prevails and the same system is used by the government again, wouldn’t it be the obvious thing to do for under-capitalized companies to bid no matter what the price?” he said.
“Weren’t people vetted beforehand? I couldn’t just come in and bid $2 billion, could I? … Does this seem a sensible regulatory objective of Congress?”
Confronted with 225 C-block bidders, the FCC was unable to pre-approve each bidder “for economic viability and regulatory compliance,” Alter said. Instead it relied on “short-form applications representing compliance with regulations and post-application review of challenges to applications.”
Apparently learning from the C-block auctions, the FCC “runs cash-only auctions today,” Schrier-Rape said.
“There is no evidence on the record anywhere of (C-block) overbidding. The government agreed our client bid in good faith.”
Debts, even to the federal government, can be restructured, she added.
