Urban Communicators Pcs Limited v. Gabriel Capital

• Decision Date: 12 September 2008
• Docket Number: No. 08 Civ. 947(RWS).,No. 08 Civ. 946.,No. 08 Civ. 502,,No. 08 Civ. 945.,08 Civ. 502,,08 Civ. 945.,08 Civ. 946.,08 Civ. 947(RWS).
• Citation: 394 B.R. 325
• Parties: URBAN COMMUNICATORS PCS LIMITED PARTNERSHIP, et al., Debtors, Appellants, v. GABRIEL CAPITAL, L.P., Cross-Appellant.
• Court: U.S. District Court — Southern District of New York

394 B.R. 325

URBAN COMMUNICATORS PCS LIMITED PARTNERSHIP, et al., Debtors, Appellants, v. GABRIEL CAPITAL, L.P., Cross-Appellant.

No. 08 Civ. 502,

No. 08 Civ. 945.

No. 08 Civ. 946.

No. 08 Civ. 947(RWS).

United States District Court, S.D. New York.

September 12, 2008.

COPYRIGHT MATERIAL OMITTED

Windels Marx Lane & Mittendorf, LLP, by: Charles E. Simpson, Esq., New York, NY, for Appellants.

Kasowitz, Benson, Torres & Friedman LLP, by: David M. Friedman, Esq., Robert M. Novick, Esq., New York, NY, for Appellee.

OPINION

SWEET, District Judge.

Two appeals have been taken from the Decision and Order on Gabriel Entitlement to Post-Petition Interest of Honorable Robert E. Gerber, United States Bankruptcy Judge, so ordered December 11, 2007 (the "Bankruptcy Court Order"): one by debtors Urban Communicators PCS Limited Partnership ("UC-LP"), Urban Comm-Mid-Atlantic, Inc. ("UC-MA") and debtors-in-possession Urban Comm-North Carolina, Inc. ("UC-NC"), (collectively, the "Debtors") and the other by Gabriel Capital L.P., a creditor of all three debtors ("Gabriel"). The first appeal, brought by the Debtors, challenges the Bankruptcy Court's determination that Gabriel is a secured creditor, which is affirmed. The second appeal, brought by Gabriel, challenges the Bankruptcy Court's determination of the appropriate rate of post-petition interest on Gabriel's claim, which is reversed. Both appeals have proceeded together, having been filed on January 18 and 29, 2008, respectively, and are related as will be apparent.

I. BACKGROUND

In 1993, Congress passed § 309(j) of the Federal Communications Act, which authorized the Federal Communications Commission (the "FCC") institute a new auction process for licensing blocks of the communication spectrum. With respect to the Personal Communications Services ("PCS") spectrum, the FCC divided this spectrum into six (6) blocks, A through F, with "C-Block" licenses designated for small business participation. Successful bidders were permitted to finance their license acquisitions on an installment basis.

In May, 1996, UC-LP was the successful bidder for the right to apply to the FCC for licenses to operate ten "C Block" PCS licenses (the "Licenses"). UC-LP, with the FCC's consent and approval, assigned its rights as the successful bidder to UC-NC, a wholly-owned indirect subsidiary of UC-LP. UC-NC's corporate purpose was to finance the acquisition of, build and operate a digital PCS system in the geographical areas where UC-NC was granted PCS licenses.

Under the auction terms, UC-NC was required to post a purchase deposit with the FCC equal to ten percent of the successful bid for the Licenses. UC-NC financed the purchase deposit, borrowing $8,000,000 from Gabriel as evidenced by a Note Purchase Agreement ("Note Purchase Agreement"), pursuant to which UC-NC sold to Gabriel a 15% Senior Note due August 12, 1997, in the principal amount of $8,000,000.

On or about August 12, 1996, UC-LP and UC-MA each entered into agreements with Gabriel (the "Guaranty Agreements") pursuant to which UC-LP and UC-MA guaranteed the due and punctual performance of all of UC-NC's obligations to Gabriel under the Note Purchase Agreement and related documents.

Also on August 12, 1996, each of the Debtors and Gabriel entered into a Security Agreement (collectively, the "Security Agreements"), pursuant to which each of the Debtors granted Gabriel, as collateral for the payment of all indebtedness and obligations under the Note Purchase Agreement, first liens and security interests in all of their tangible and intangible personal property, including any proceeds from the sale of the Licenses. The Security Agreement for each of the Debtors provides, however, that "to the extent the Holding Company may be prohibited from granting a security interest in the FCC Licenses pursuant to the Communications Act or the rules and regulations of the FCC this security interest shall not encumber the FCC Licenses as opposed to the proceeds that may be derived therefrom."

On August 12, 1996, UC-LP and Gabriel entered into a Holding Pledge Agreement (the "Holding Pledge Agreement"), through which UC-LP pledged, along with related property: (a) all of its right, title and interest in any equity interest in UC-MA, then existing or thereafter acquired; and (b) all of its right, title and interest to present and future payments and distributions relating to such pledged equity interest.

Additionally, on August 12, 1996, UC-MA and Gabriel entered into an Operating Pledge Agreement, under which UC-MA pledged, along with related property: (a) all of its right, title and interest in any equity interest in UC-NC, then existing or thereafter acquired; and (b) all of its right, title and interest to present and future payments and distributions relating to such pledged equity interests.

One year later, on August 12, 1997, the Debtors and Gabriel entered into an Amendatory Agreement, pursuant to which the Note Purchase Agreement was amended to provide that Gabriel would purchase from UC-NC an additional fifteen percent senior note due September 30, 1998, in the amount of $1,000,000 (the "New Note"), consolidated with the Senior Note, thereby increasing the aggregate principal amount of UC-NCs debt to Gabriel to $9 million. The Amendatory Agreement provides that the Senior Note and the New Note will bear interest in the amount of fifteen percent per annum in the absence of the occurrence of any event of default. The Amendatory Agreement further provides that in the event of a default, the principal amount and overdue interest "shall bear interest at a rate per annum equal to the rate of interest applicable to the note plus four percent (4%)."

Gabriel filed separate UCC-1 Financing Statements with the Secretaries of State of the States of Delaware and New York, respectively, on August 15, 1997 (the "Financing Statements"). In each instance, the description of the collateral in the Financing Statements provides in pertinent part: "to the extent the Holding Company may be prohibited from granting a security interest in the FCC Licenses pursuant to the Communications Act or the rules and regulations of the FCC this security interest shall not encumber the FCC Licenses as opposed to the proceeds that may be derived therefrom."

In September, 1996, the FCC announced that UC-NC had been conditionally granted the Licenses. On October 2, 1996, UC-NC received from the FCC security agreements and a series of promissory notes payable to the FCC (together, the "FCC Notes") with a total face amount of $67.2 million in accordance with 47 C.F.R. § 24.711(b)(3). This $67.2 million obligation represented the remaining ninety percent of the bid for the Licenses after application of UC-NC's initial ten percent purchase deposit. The FCC Notes had a term of ten years and carried an interest rate of six and one-half percent per annum. On or about December 17, 1996, UC-NC executed the FCC Notes and the security agreements which granted the FCC a first lien on and continuing security interest in all of UC-NC's rights and interest in the Licenses.

On April 5, 1998, the FCC issued an order requiring all holders of "C and F Block" licenses to make their second interest payment to the FCC on or before October 29, 1998. The FCC's order provided that if a purchaser did not make the required interest payment, its licenses would be automatically cancelled.

On October 28, 1998, the day before its second installment payment on the Licenses was due, in an effort to stay the FCC's automatic cancellation of its Licenses under 47 C.F.R. § 1.2110(g) (4)(iv), UC-NC filed its petition instituting a case under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). On October 29, 1998, the FCC automatically cancelled the Licenses and returned the spectrum subject thereto back to the public domain. On November 5, 1998, UC-MA and UC-LP filed their petitions for relief under chapter 11.

On the date of filing its petition, UC-NC's assets consisted solely of its rights with respect to the Licenses.

On February 17, 1999, UC-NC commenced an adversary proceeding in the Bankruptcy Court against the FCC to (i) void the FCC's automatic cancellation of the Licenses and (ii) avoid, rescind or reduce UC-NC's debt obligations to the FCC to the fair market value of the Licenses at the time the FCC Notes were executed on December 17, 1996.

On June 1, 1999, Gabriel had filed a secured proof of claim in each of the individual chapter 11 cases of UC-NC, UC-MA and UC-LP in the amount of $10,739,766.00, plus interest. Paragraph 6 of the Attachment to each of the proofs of claim provides for treatment of Gabriel's claim as an unsecured claim to the extent that the collateral security given by the Debtors is insufficient to satisfy the secured claim.

The adversary proceeding was placed on hold pending the outcome of (i) a petition to the Supreme Court for a writ of certiorari to the Court of Appeals for the Second Circuit by Nextwave Personal Communications, Inc. ("NextWave"), (ii) a petition to the Court of Appeals for the D.C. Circuit by Nextwave, UC-NC and others; (iii) a petition to the Supreme Court for a writ of certiorari to the D.C. Circuit by Nextwave; and (iv) upon issuance of the writ, the Supreme Court's decision in the Nextwave chapter 11 case.

In reliance on the Second Circuit's decision in the Nextwave case, and the Rules and Regulations of the FCC, the Wireless Telecommunications Bureau of the FCC issued a public notice on September 6, 2000 (the "Public Notice") announcing that an auction, to commence on December 12, 2000, would include the C and F Block Licenses previously held by UC-NC.

As a result of the FCC's announcement, on October 6, 2000, UC-NC filed a petition with the FCC for reconsideration of the Public Notice to re-auction UC-NC's Licenses as well as a notice of appeal and a ...