F.C.C. V. NextWave Personal Communications, Inc - Court of Appeals Reverses Decision

Federal Communications Commission ("FCC") v. NextWave Personal Communications, Inc. (the "Debtor"), Docket No. 99-5063, 1999 U.S. App. LEXIS 33444, 1999 WL 1267039 (2d Cir. Dec. 22, 1999).

In Federal Communications Commission ("FCC") v. NextWave Personal Communications, Inc. (the "Debtor"), Docket No. 99-5063, 1999 U.S. App. LEXIS 33444, 1999 WL 1267039 (2d Cir. Dec. 22, 1999), the United States Court of Appeals for the Second Circuit reversed the decisions of the Bankruptcy Court and the District Court for the Southern District of New York (discussed below) which had held that the Debtor's $4.74 billion obligation to the FCC in connection with the Debtor's purchase of 63 "C-Block" radio spectrum licenses was voidable as a constructive fraudulent transfer. In reversing the lower courts' decisions, the Second Circuit relied on FCC regulations, to which it stated the lower courts had failed to give proper deference, and on generally-accepted auction law. The Second Circuit held that the Debtor's attempt to retain the licenses at a reduced price through its bankruptcy proceeding constituted an impermissible collateral attack on the "Restructuring Orders" issued by the FCC and that, in any event, no constructive fraudulent transfer had occurred.

The Second Circuit held that the FCC has exclusive regulatory authority to license access to the radio spectrum in accordance with the goals and priorities expressed by Congress. The auction process had not resulted in the sale of anything to NextWave, but was merely the regulatory procedure employed by the FCC for making its licensing decision. Therefore, the lower courts lacked jurisdiction to change the terms and conditions on which the licenses had been granted by adjusting the price established by the competitive bidding process which had been intended to allocate the licenses to the highest bidder. The Debtor had attempted to retain the licenses without complying with the terms on which they were granted. The Second Circuit held that the Bankruptcy Court had no authority to interfere with the FCC's system for allocation of the C-block licenses by changing the terms and conditions of the license.

Recognizing that, even if the Debtor returned all of the C-block licenses to the FCC, the FCC would remain a creditor of the Debtor, the Second Circuit then ruled on the FCC's rights as a creditor and held that the transaction in which the licenses were issued was not constructively fraudulent. In our commentary on the lower court decisions, noted below, we had pointed out certain fallacies in the bankruptcy court's analysis of the effect of the auction. The Second Circuit noted those same problems and reversed.

Although the Debtor's winning bid at the auction had been subject to approval of the Debtor's application to the FCC, the Second Circuit held that the application process did not grant the FCC discretion in granting or denying the license, but required the FCC to grant the licenses to the Debtor upon satisfaction of certain non-economic criteria. The possible negative outcome of the application process did not relieve the Debtor of its obligations as high bidder at the auction to pay either the full purchase price or the prescribed penalty to the FCC if the licenses were denied. The Second Circuit found that the Debtor became obligated to the FCC for the full purchase price of the licenses upon the FCC's acceptance of the Debtor's bid at the close of the auction, not later when the Debtor's license application was finally approved. As a result, the Second Circuit held that the Debtor's obligation to the FCC was incurred at a time when that obligation was exactly equal to the market value of the licenses, as established by the auction. Therefore, no fraudulent transfer had occurred because the Debtor received reasonably equivalent value for its purchase of the C-block licenses. The result reached by the Second Circuit is consistent with the Supreme Court's decision in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), in which the Court held that the auction price determined through a judicially-conducted foreclosure sale was determinative of "reasonable equivalent value" for purposes of a subsequent fraudulent transfer analysis.