In re: Nextwave Personal Communications

Decision Date25 May 2000
Docket Number99-5063,ed2
PartiesIn Re: NEXTWAVE PERSONAL COMMUNICATIONS, INC., Debtor. FEDERAL COMMUNICATIONS COMMISSION, Appellant, v NEXTWAVE PERSONAL COMMUNICATIONS, INC., Appellee
CourtU.S. Court of Appeals — Second Circuit

In Re: NEXTWAVE PERSONAL COMMUNICATIONS, INC., Debtor.

FEDERAL COMMUNICATIONS COMMISSION, Appellant,
v
NEXTWAVE PERSONAL COMMUNICATIONS, INC., Appellee.

Docket No. 99-5063

August Term, 1999

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

(Argued November 1, 1999 Decided December 22, 1999)

DANIEL S. ALTER, Assistant United States Attorney, New York, NY (Mary Jo White, United States Attorney for the Southern District of New York and Gideon A. Schor, Assistant United States Attorney, Of Counsel), for Appellant.

DEBORAH L. SCHRIER-RAPE, Andrews & Kurth L.L.P., Dallas, TX (Gregory H. Bevel, Michelle V. Larson and James P. Muenker, Of Counsel), for Appellee.

David M. Friedman, Kasowitz, Benson, Torres & Friedman L.L.P., New York, NY, for amicus curiae Official Committee of Unsecured Creditors.

Anthony A. Dean, Windels, Marx, Davies &Ives, New York, NY (Charles E. Simpson, Of Counsel), for amicus curiae Urban Comm-North Carolina, Inc.

Before: McLAUGHLIN, JACOBS and SACK, Circuit Judges.

Appeal from a judgment of the United States District Court for the Southern District of New York (Charles L. Brieant, Judge) affirming five decisions and orders of the United States Bankruptcy Court for the Southern District of New York (Adlai S. Hardin, Bankruptcy Judge) rendered in the adversary proceeding of NextWave Personal Communications, Inc. against the Federal Communications Commission. The district and bankruptcy courts exceeded their jurisdiction by in effect intervening in the allocation of radio spectrum licenses and misconstrued the nature of the Appellee's financial obligations under the Federal Communications Commission's spectrum auction rules. Accordingly, we reverse the judgment of the district court affirming the orders of the bankruptcy court and remand for further proceedings consistent with this opinion, if any are necessary.

PER CURIAM:

The Federal Communications Commission (the "FCC") appeals from an order of the United States District Court for the Southern District of New York (Charles L. Brieant, Judge), NextWave Personal Communications, Inc. v. FCC (In re NextWave Personal Communications, Inc.), No. 99 Civ. 4439 (CLB) (S.D.N.Y. July 27, 1999), affirming five decisions and orders of the United States Bankruptcy Court for the Southern District of New York (Adlai S. Hardin, Bankruptcy Judge).(FN1) On November 24, 1999, we issued an order reversing the judgment of the district court and remanding the case for further proceedings, with an opinion to follow. This is that opinion.

In pertinent part, the decisions and orders of the bankruptcy court, affirmed by the district court judgment from which the FCC appeals, held that the FCC's grant to NextWave Personal Communications, Inc. ("NextWave") of sixty-three radio spectrum licenses for which NextWave had been the high bidder at the FCC's 1995-96 "C-block" auction (the "Licenses") was a constructively fraudulent conveyance for purposes of 11U.S.C. §544 ("§544"). See NextWave IV.A, 235 B.R. at 304. The bankruptcy court therefore avoided $3.7 billion of NextWave's $4.74 billion obligation to the FCC, allowing NextWave to keep the Licenses while it reorganized in bankruptcy. See NextWave IV.B, 235 B.R. 305. We hold that the bankruptcy court had no authority thus to interfere with the FCC's system for allocating spectrum licenses, and that in any event it wrongly concluded that the Licences were fraudulently conveyed by failing to defer to the FCC's interpretation of its own regulations when determining the point at which NextWave's obligations were incurred for §544 purposes. We therefore reverse the judgment of the district court affirming the orders of the bankruptcy court and remand the case to the bankruptcy court for further proceedings consistent with this opinion, if any are necessary.

BACKGROUND

In 1993 Congress passed several amendments to the Federal Communications Act (the "FCA"), one of which added §309(j). See Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103 66, §6002(a), 107 Stat. 312, 387 (1993). Section 309(j) authorized the FCC to conduct competitive bidding auctions for radio spectrum licenses. The FCC was instructed to ensure that as part of its auction plan certain blocks of spectrum would be reserved for qualified entities, including small businesses, and that deferred payment plans on favorable terms would be available to them. See 47 U.S.C. §309(j)(3)(B), (j)(4)(D). Pursuant to these instructions, the FCC reserved a block of 493 licenses known as the "C-block licenses" for the use of qualified entities providing "personal communications services," an emerging form of wireless communications technology.

On May 6 and July 16, 1996, the FCC concluded two sets of C-block auctions, which produced some ninety successful bidders.(FN2) NextWave, a startup company established to take advantage of the opportunities created by § 309(j), was the high bidder for sixty-three C-block licenses. Its aggregate winning bids amounted to $4.74 billion.

Pursuant to the FCC regulations issued under §309(j), winning bidders that were "small businesses" were required to pay only ten percent of their winning bids in cash; the remaining ninety percent could be paid in installments over a ten-year period at below market interest rates. 47 C.F.R. §24.711(b)(3). NextWave made the required five percent down payment on the Licenses when it was announced as the high bidder on them in the summer of 1996,(FN3) and subsequently deposited another five percent with the FCC on January 9, 1997, immediately after its application for the Licenses was conditionally approved.

The four-month gap between those two dates resulted from the FCC's auction rules under which a winning bid did not automatically trigger the grant of the license or licenses in question. A winning bidder was required to submit a "long form" application, and the grant of a winning bidder's licenses was conditioned upon that bidder's ability to demonstrate through its application that it was in compliance with FCC regulations and statutory requirements. While over ninety percent of the winning bidders at the C-block auctions were granted their licenses on September 17, 1996, NextWave's ownership structure, specifically its allegedly impermissibly high percentage of foreign ownership, was challenged. The Licenses were conditionally granted to NextWave on January 3, 1997, after NextWave submitted to the FCC a plan to bring its capital structure into compliance with FCC regulations. On February 14, 1997, the FCC granted NextWave the Licenses conditioned upon NextWave issuing a series of promissory notes for the balance of its payments. On February 19, 1997, NextWave executed these promissary notes (the "Notes"), backdated to January 3. The Notes aggregated $4.27 billion, representing the remaining ninety percent of the bid price. By the time the Notes were executed, however, the market value of the Licenses, as later determined by the bankruptcy court, see NextWave IV.A, 235 B.R. at 303, had fallen to less than a quarter of the amount that NextWave had bid for them.

The C-block auctions were part of a series of auctions the FCC conducted to allocate spectrum for new technological uses. Prior to the C-block auctions, it had conducted the A- and B-block auctions, and in June 1996 it announced that it would conduct the D-, E- and F-block auctions starting on August 26, 1996. The winning bids at the A-, B-, D-, E- and F-block auctions were sharply lower than the winning bids at the C-block auctions when measured in dollars per MHz-Pop, a generally accepted industry measurement standard.(FN4)

Since they were obligated to pay what turned out to be much higher prices for their licenses than other licensees, most of the winning C-block bidders, including NextWave, had difficulty securing the financing necessary for them to meet their financial commitments. They thus faced the prospect of an early default on their installment payments to the FCC.

The winning C-block bidders therefore petitioned the FCC for relief. In response, the FCC suspended the C-block installment payments and initiated an elaborate administrative process looking toward a restructuring of the C-block licensees' obligations.

On October 16, 1997, at the culmination of this process, the FCC issued a restructuring order, In the Matter of Amendment of the Commission's Rules Regarding Installment Payment Financing for Personal Communications Services (PCS) Licensees, Second Report and Order, FCC 97-342, 12 F.C.C.R. 16436 (Oct. 16, 1997), 1997 WL 643811 (F.C.C.) (the "Restructuring Order"), which offered troubled C-block license holders three mutually exclusive restructuring options, ranging from amnesty -- return of the licenses in exchange for forgiveness of debt obligations --to a plan that allowed bidders to keep as many of their licenses as they could pay for by converting seventy percent of their down payment into a prepayment of the full bid price of a smaller number of licenses. The FCC decided that it would be contrary to the public interest to forgive a portion of the obligations, thereby allowing bidders to keep their licenses at a significantly reduced price, because the C-block auction had been designed to ensure that licenses were allocated to users who could demonstrate, through their ability to pay the highest price, that they possessed the most highly valued use for the licenses. Id. at ¶¶5, 19.

In response to the oppositions, petitions and replies that it received after the release of the Restructuring Order, the FCC issued a reconsideration order on March 24, 1998. See In the Matter of Amendment of the Commission's Rules Regarding Installment Payment Financing for Personal Communications Services (PCS) Licenses, Order on Reconsideration of the Second Report and Order, F.C.C. 98-46, 13 F.C.C.R. 8345 (Mar. 24, 1998), 1998 WL 130176 (F.C.C.) (the "Reconsideration Order"). The...

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