High Court Rebukes FCC in NextWave

In a Jan. 27, 2003, ruling, the U.S. Supreme Court dealt a blow to the Federal
Communications Commission (FCC) in its long-running effort to revoke broadcast
spectrum licenses from bankrupt NextWave Personal Communications Inc. In an 8-1
decision in the case, <i>Federal Communications Commission v. NextWave Personal
Communications Inc.,</i><small>^{<a href="#2" name="2a">2</a>}</small> the Court held that
the FCC could not revoke the licenses even though NextWave failed to pay for
them, in light of a Bankruptcy Code provision restricting government agency
authority in bankruptcy cases.

</p><p>Writing for the
majority, Justice Scalia rejected all of the FCC's arguments in favor of
revocation and based the Court's ruling principally upon a "plain
reading" of §525 of the Code, which prohibits revocation of
licenses based on the licensee's failure to pay a debt that is
dischargeable in bankruptcy.

</p><p>The
ruling may also serve as a reminder to the FCC and other governmental
regulators that they may not use their regulatory authority to improve their
position as a secured creditor by revoking licenses that are collateral for
their secured claim.

</p><h3>Background</h3>

<p>In
1994, the FCC began awarding spectrum licenses for broadband personal
communications services through a competitive bidding process in accordance
with the Communications Act of 1934. The process involved multiple-round
auctions designating certain blocks of spectrum (so-called "C" and "F"
blocks) to small businesses. NextWave was awarded 63 C-Block licenses for a bid
of $4.74 billion. NextWave made a down payment, then executed promissory notes
and security agreements pledging its rights in the licenses to secure its obligation
to pay the balance of the purchase price.

</p><p>Like
many other successful bidders, NextWave was unable to obtain financing
sufficient to fund its operations and sought relief from the FCC to restructure
its obligation under the promissory notes. The FCC granted a moratorium on
payments, proposed options under which licensees could surrender all or some of
their licenses in exchange for full or partial forgiveness of the debt, and set
a deadline for licensees to choose a restructuring option and a later deadline
to resume making payments. As the first deadline approached, NextWave sought
extensions that the FCC denied, and on June 8, 1998, NextWave commenced a
voluntary chapter 11 case.

</p><h3>Events in the Bankruptcy Case</h3>

<p>Initially,
NextWave sought to avoid its obligation to the FCC by claiming that its
indebtedness for the licenses was a "fraudulent transfer" since the
value of the licenses had decreased from $4.74 billion at the time of the
auction to less than $1 billion by the time the FCC had actually delivered the
licenses to NextWave. Although the bankruptcy court ruled in favor of NextWave,
the appeals court for the Second Circuit reversed that decision on the ground
that NextWave's obligation attached at the time of the auction and not at
the time of delivery.

</p><p>NextWave
then proposed a chapter 11 reorganization plan that provided for a lump-sum
payment in full of all its outstanding obligations to the FCC. The FCC objected
to the plan, arguing that under FCC regulations, the licenses were cancelled
automatically when NextWave missed its first payment deadline in October 1998.
The FCC simultaneously announced that the licenses held by NextWave were
available for re-auction.

</p><p>NextWave
sought emergency relief in the bankruptcy court to prevent the cancellation and
auction of the licenses. The court granted NextWave's request and
declared the FCC's actions to be null and void and in violation of
various Code provisions. The Second Circuit Court of Appeals again reversed the
bankruptcy court and held that the bankruptcy court did not have jurisdiction
over FCC regulatory actions and that such jurisdiction resides exclusively in
the appeals courts. NextWave then sought reconsideration of the automatic
cancellation from the FCC itself. After the FCC denied NextWave's
request, NextWave appealed to the District of Columbia Circuit Court. The D.C.
Circuit ruled in favor of NextWave, holding that the FCC's automatic
cancellation violated §525 of the Code. The Supreme Court granted the
FCC's request to review the appeals court's decision.

</p><blockquote><blockquote>
<hr>
<big><i><center>
Before the Court's ruling, the ultimate status of spectrum licenses held by
bankrupt companies was uncertain...

</center></i></big>
<hr>
</blockquote></blockquote>

<h3>The Supreme Court Ruling</h3>

<p>The Supreme
Court framed the issue in the context of the Administrative Procedures Act,
which "requires federal courts to set aside federal agency action that is
'not in accordance with law.'" Syllabus Opinion at 6. The
Court focused on Code §525, which was quoted in relevant part as follows:

</p><blockquote>
A governmental unit may
not revoke a license to a person that is a debtor under [the Bankruptcy Code]
solely because such debtor has not paid a debt that is dischargeable in a case
under [the Bankruptcy Code].
</blockquote>

Noting that the FCC is a
governmental unit that has revoked a license, and that NextWave is a debtor
under the Code, the Court addressed each of the FCC's arguments for
upholding the validity and enforceability of the automatic cancellation notwithstanding
§525.

<p>In
sum, the FCC argued that (1) it did not revoke NextWave's license
"solely because" of nonpayment, (2) NextWave's obligations
are not "debts" that are "dischargeable" within the
meaning of the Code, and (3) the circuit court's interpretation of
§525 brings that statute into conflict with the Communications Act.

</p><h3>Regulatory Motive</h3>

<p>To support
its first argument, the FCC contended that NextWave's nonpayment was not
the sole reason for canceling the licenses. It also had a "valid
regulatory motive" for doing so—<i>i.e.,</i> to assure that its licensees have the financial wherewithal to fulfill
the public service the license permits them to perform. The Court found this
argument to be irrelevant, stating that when a statute such as §525 refers
to the failure to pay a debt as the sole cause of cancellation, "it
cannot reasonably be understood to include...the governmental unit's <i>motive</i> in effecting the cancellation." Syllabus
Opinion at 7. To do so, the Court said, "would deprive §525 of all
force." <i>Id.</i>

</p><blockquote>
It is hard to imagine a
situation in which a governmental unit would not have some further motive
behind the cancellation—assuring the financial solvency of the licensed
entity or even (quite simply) making itself financially whole. Section 525
means nothing more or less than that the failure to pay a dischargeable debt
must alone be the proximate cause of the cancellation—the act or event
that triggers the agency's decision to cancel, whatever the
agency's ultimate motive in pulling the trigger may be.
</blockquote>

<i>Id.</i> at 7-8 (citations omitted).

<h3>Regulatory Obligations</h3>

<p>The
FCC then argued that (a) NextWave's license obligations are not
"debts that are dischargeable in bankruptcy" within the meaning of
§525 and (b) bankruptcy courts do not have jurisdiction to "alter or
modify regulatory obligations." Syllabus Opinion at 8-9.

</p><p>To
support the first part of its argument—that NextWave's obligations
are not debts—the FCC characterized NextWave's payments as a
condition to the licenses rather than an obligation. The Court rejected the
argument, noting that under the Bankruptcy Code, a "debt" means
liability on a claim and a "claim" is a right to payment under
"the broadest available definition." Syllabus Opinion at 9.
Regardless of any regulatory objectives, the Court continued, "a debt is
a debt, even when the obligation to pay it is also a regulatory
condition." <i>Id.</i>

</p><p>The
FCC also argued that NextWave's obligation to pay is not
"dischargeable" in bankruptcy because the bankruptcy court does not
have jurisdictional authority to "alter or modify regulatory
obligations." In response, the Court drew a sharp distinction between
discharging a debt and preventing a governmental agency from violating
§525. Syllabus Opinion at 9-10. While noting that the Code has very
limited exceptions to discharge, the Court fairly dismissed the argument by
describing the circuit court's action as "not seek[ing] to modify
or discharge the debt, but merely prevent[ing] the FCC from violating §525
by canceling the licenses because of failure to pay debts dischargeable by
bankruptcy courts." <i>Id.</i>

</p><h3>Conflict Between the Relevant Statutes</h3>

<p>The
FCC's final argument was that the circuit court's interpretation of
Code §525 was in direct conflict with the Communications Act since it
obstructs the functioning of the auction provisions of that statute. The Court,
however, found that "nothing in those provisions demands that
cancellation be the sanction for failure to make agreed-upon periodic
payments." Syllabus Opinion at 10. Noting that the Communications Act
does not even address whether licensees must pay the full price of a bid at the
time of the auction or periodically over time, the Court characterized the
FCC's position as

</p><p>nothing more than a
policy preference on the FCC's part for (1) selling licenses on credit
and (2) canceling licenses rather than asserting security interests in licenses
when there is a default. Such administrative preferences cannot be the basis
for denying [NextWave] rights provided by the plain terms of [§525]. <i>Id.</i>

</p><p>The
Court found that the two statutes were not in conflict and concluded that
"since §525 circumscribes the Commission's permissible action,
the revocation of NextWave's licenses is not in accordance with
law." Syllabus Opinion at 11.

</p><h3>Dissenting Opinion</h3>

<p>Justice
Breyer wrote a sole dissenting opinion. The dissent acknowledges the plain
meaning of §525, but states that "[i]t is dangerous...in any actual
case of interpretive difficulty to rely exclusively on the literal meaning of a
statute's words divorced from consideration of the statute's
purpose." Dissenting Opinion at 3. The dissent takes the position that in
instances where a governmental agency's actions cannot threaten the
bankruptcy-related concerns that underlie §525, a literal reading of the
statute is at odds with its basic objectives and the agency's action
"falls outside the statute's scope." Dissenting Opinion at
2-3.

</p><p>Applying
this reasoning to <i>NextWave,</i> the dissent
concludes that in enacting §525, "Congress did not want <i>always</i> to prohibit the government from enforcing a sales
contract through repossession. Nor did it intend an interpretation so broad
that it would threaten unnecessarily to deprive the American public of the full
value of public assets that it owns."

</p><h3>Conclusion</h3>

<p>Before
the Court's ruling, the ultimate status of spectrum licenses held by
bankrupt companies was uncertain, particularly given the history of appeals and
reversals in the lower courts. It was practically impossible for companies like
NextWave to implement a reorganization plan since the success of a plan would
depend largely on the ability to use or resell the licenses. The ruling clears
the way for NextWave to complete its reorganization and exit bankruptcy.
NextWave has already paid the FCC more than $500 million and has obtained
funding commitments for a reorganization plan that it says will allow it to pay
all of its debts in full—including its obligations to the FCC.

</p><p>Following
the ruling, the FCC issued a brief statement acknowledging that the
Court's decision brings "much needed certainty" to this area
of the law and committed to "faithfully implement the Court's
mandate." Both parties expressed relief at having the matter finally
resolved and being able to put the licenses to use as quickly as possible.

</p><p>More
broadly, the <i>NextWave</i> decision clarifies
that §525 prohibits governmental agencies from revoking licenses and
taking certain other actions affecting the interests of companies in
bankruptcy. It also admonishes governmental agencies to comply with all laws,
not just legislation they are charged with enforcing, even when other laws
appear to conflict with such legislation.

</p><p>While
few would argue that the Court did not reach the correct result in view of
§525's clear reference to licenses issued by the government, Justice
Breyer's dissent reminds us that strict adherence to "plain
meaning" can, and often does, conflict with public policy. In <i>NextWave,</i> however, where the debtor's ability to
successfully reorganize is dependent on its ability to keep its spectrum
licenses, preventing termination is consistent with the bankruptcy policies of
giving the debtor a fresh start, maximizing value for creditors and avoiding
the liquidation of a potentially viable business.

</p><hr>
<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} John Thompson assisted in the
preparation of this article. <a href="#1a">Return to article</a>

</p><p>^{<small><a name="2">2</a></small>} No. 01-653 (Jan. 27, 2003).
References to the Court's opinion are to the syllabus and are cited as
"Syllabus Opinion at __." References to the dissenting opinion are
cited as "Dissenting Opinion at __." <a href="#2a">Return to article</a>