DENVER, Colorado, United States-A ruling from a U.S. federal bankruptcy court may have set a dangerous precedent for the Federal Communications Commission (FCC) and further muddied the waters for C-block PCS (Personal Communications Services) licensees.
In a lengthy late-April ruling, Federal Bankruptcy Judge Steven Felsenthal revalued 14 C-block licenses belonging to subsidiaries of General Wireless Inc. (GWI)-which filed for bankruptcy protection last fall-to US$166 million. As of late 1997, GWI was the 18th largest PCS licensee in the United States, based on population of the license areas received. The company never completed building out its network due to financial problems.
GWI’s subsidiaries originally bid US$1.06 billion for all 14 licenses at auction and owed the FCC US$954 million in note obligations. After applying the US$106 million in payments already made to the FCC, GWI’s remaining obligation is US$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 27 January 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 US$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 auction 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.
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.
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.”
Hyundai Electronics America is GWI’s largest creditor-aside from the U.S. government-with an outstanding loan to the company for US$49.3 million.
