U.S. v. GWI PCS 1 Inc.

• Decision Date: 20 October 2000
• Docket Number: No. 99-11294,99-11294
• Parties: (5th Cir. 2000) IN THE MATTER OF: GWI PCS 1 INC; GWI PCS 2 INC; GWI PCS 3 INC; GWI PCS 4 INC; GWI PCS 5 INC; GWI PCS 6 INC; GWI PCS 7 INC; GWI PCS 8 INC; GWI PCS 9 INC; GWI PCS 10 INC; GWI PCS 11 INC; GWI PCS 12 INC; GWI PCS 13 INC; GWI PCS 14 INC; GENERAL WIRELESS INC; GWI PCS INC, Debtors, UNITED STATES OF AMERICA, on behalf of FEDERAL COMMUNICATIONS COMMISSION, Appellant, v. IN THE MATTER OF: GWI PCS 1 INC; GWI PCS 2 INC; GWI PCS 3 INC; GWI PCS 4 INC; GWI PCS 5 INC; GWI PCS 6 INC; GWI PCS 7 INC; GWI PCS 8 INC; GWI PCS 9 INC; GWI PCS 10 INC; GWI PCS 11 INC; GWI PCS 12 INC; GWI PCS 13 INC; GWI PCS 14 INC; GENERAL WIRELESS INC; GWI PCS INC, Appellees
• Court: U.S. Court of Appeals — Fifth Circuit

Page 788

230 F.3d 788 (5th Cir. 2000)

IN THE MATTER OF: GWI PCS 1 INC; GWI PCS 2 INC; GWI PCS 3 INC; GWI PCS 4 INC; GWI PCS 5 INC; GWI PCS 6 INC; GWI PCS 7 INC; GWI PCS 8 INC; GWI PCS 9 INC; GWI PCS 10 INC; GWI PCS 11 INC; GWI PCS 12 INC; GWI PCS 13 INC; GWI PCS 14 INC; GENERAL WIRELESS INC; GWI PCS INC, Debtors,

UNITED STATES OF AMERICA, on behalf of FEDERAL COMMUNICATIONS COMMISSION, Appellant, v. IN THE MATTER OF: GWI PCS 1 INC; GWI PCS 2 INC; GWI PCS 3 INC; GWI PCS 4 INC; GWI PCS 5 INC; GWI PCS 6 INC; GWI PCS 7 INC; GWI PCS 8 INC; GWI PCS 9 INC; GWI PCS 10 INC; GWI PCS 11 INC; GWI PCS 12 INC; GWI PCS 13 INC; GWI PCS 14 INC; GENERAL WIRELESS INC; GWI PCS INC, Appellees.

No. 99-11294

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

October 20, 2000

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Appeal from the United States District Court for the Northern District of Texas

Before GARWOOD, WIENER, and DeMOSS, Circuit Judges.

GARWOOD, Circuit Judge:

The Federal Communications Commission (FCC), on behalf of the United States, appeals from the district court's judgment affirming a bankruptcy reorganization plan for debtors General Wireless, Inc. (GWI), GWI PCS, Inc. (GWI PCS), and GWI PCS 1, GWI PCS 2, GWI PCS 3, GWI PCS 4, GWI PCS 5, GWI PCS 6, GWI PCS 7, GWI PCS 8, GWI PCS 9, GWI PCS 10, GWI PCS 11, GWI PCS 12, GWI PCS 13, GWI PCS 14 (the subsidiary debtors), (collectively, the Debtors). The reorganization plan included an order that the subsidiary debtor's and GWI PCS's obligation to pay $954 million to the FCC, evidenced by promissory notes signed by the subsidiary debtors, as part of GWI PCS's winning bids for fourteen radio-spectrum licenses at an FCC auction, was a constructive fraudulent transfer under 11 U.S.C. § 548. The bankruptcy court therefore avoided approximately $894 million of the $954 obligation to the FCC and allowed the subsidiary debtors to retain the licenses. The FCC now appeals the avoidance judgment, arguing that its appeal of the avoidance judgment is not equitably moot and that the bankruptcy court improperly assumed the FCC's regulatory authority and erred in avoiding $894 million of the obligation to the FCC. We affirm.

Facts and Proceedings Below

In 1993, Congress passed several amendments to the Federal Communications Act (FCA), including section 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 sell electromagnetic licenses for personal communications services (PCS) to private companies by auction. Section 309(j) also required the FCC to design auctions that "ensure that small businesses, rural telephone companies, and businesses owned by members of minority groups and women are given the opportunity to participate in the provision of spectrum-based services." 47 U.S.C. § 309(j)(4)(D); see 47 U.S.C. § 309(j)(3)(B). To further this directive, the FCC reserved the C and F-blocks of the electromagnetic spectrum¹ for auction to small, entrepreneurial companies referred to as "designated entities." See 47 C.F.R. § 24.709 (1995).

The C-block auction began in December 1995 and ended on May 6, 1996. On December 18, 1995, GWI made the initial payment of approximately $53 million to qualify GWI PCS, a subsidiary of GWI, to bid at the C-block auction.² At the conclusion of the C-block auction, GWI PCS was the high bidder for fourteen PCS licenses, covering areas in Southern Florida, Northern California, and Atlanta, Georgia. See In re Applications of GWI PCS, Inc., 12 F.C.C.R. 6441 ¶ 2, 1997 WL 159931 (Jan. 27, 1997). GWI PCS's winning bids were each approximately five percent higher than the next-highest bid and totaled approximately $1.06 billion.³ On May 22, 1996, GWI PCS filed license application forms for the fourteen licenses. See 47 C.F.R. § 24.707 (1995)⁴. On May 31, 1996, the FCC released a public notice accepting GWI PCS's applications for the licenses and setting July 1, 1996 as the cut-off date for parties in interest to file objections, pursuant to 47 C.F.R. § 24.830 (1995), to GWI PCS receiving the licenses. See In re Applications of GWI PCS, Inc., 12 F.C.C.R. 6441 ¶ 2, 1997 WL 159931 (Jan. 27, 1997). Two parties did object, contending that GWI PCS had violated the foreign ownership restrictions, see 47 U.S.C. § 310(b), 47 C.F.R. § 24.804(b) (1995), and the rules against collusive bidding, see 47 C.F.R. § 1.2105(c) (1995)⁵. See In re Applications of GWI PCS, Inc., 12 F.C.C.R. 6441 ¶ 4, 1997 WL 159931 (Jan. 27, 1997). After investigating the bases for the objections, the FCC concluded that GWI PCS did not exceed the foreign ownership limitations and that there was insufficient evidence to find that GWI PCS had violated the FCC's rules prohibiting collusion in the bidding process. See id. ¶ 5.

On January 27, 1997, the FCC approved the granting of the fourteen licenses for which GWI PCS was the high bidder. See Wireless Telecommunications Bureau Announces Grant of Broadband Personal Communications Services Entrepreneurs' C Block Licenses to GWI PCS Inc., 12 F.C.C.R. 1215, 1997 WL 28957 (Jan. 27, 1997). At GWI's request, each license was conditionally transferred to one of the fourteen subsidiary debtors.⁶ See id. at n 1. On February 3, 1997, GWI paid the second half of the down-payment, $53 million, for the licenses on behalf of the subsidiary debtors. On March 10, 1997, the fourteen subsidiary debtors executed notes to the FCC for amounts totaling approximately $954 million-the sum of the winning bids for the fourteen licenses less the ten percent in down-payments made by GWI. The notes were sent to the FCC by Federal Express on March 13, 1997 and were received by the FCC on March 14, 1997.

In early 1997, a significant number of C-block licensees, experiencing difficulties in securing financing and facing the prospect of early default on their installment payments to the FCC, petitioned the FCC for relief from their licenses' installment payments.⁷ In February 1997, the FCC suspended the C-block installment payments and commenced rule-making proceedings to address the problems faced by C-block licensees. Following six months of administrative proceedings, the FCC issued an order on October 16, 1997, the Restructuring Order, that provided C-block licensees with several options to ease their financial difficulties, including allowing a licensee to return all or portions of a license to the FCC in exchange for significant debt reduction. See In re Amendment of the Commission's Rules Regarding Installment Payment Financing for Personal Communications Services (PCS) Licenses, 12 F.C.C.R. 16436, 1997 WL 643811 (Sept. 25, 1997). The FCC, however, expressly rejected proposals that would have allowed licensees to retain their licenses without paying their winning bids in full, because, in the FCC's view, the C-block auction had been designed to ensure that the licenses were to be 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. See id. ¶ 5. In response to numerous requests for reconsideration of the Restructuring Order, the FCC altered the Restructuring Order slightly in March 1998 to allow licensees greater flexibility in making their decisions regarding the options provided in the Restructuring Order; however, the basic framework of the Restructuring Order was retained. See In re Amendment of the Commission's Rules Regarding Installment Payment Financing for Personal Communications Services (PCS) Licenses, 13 F.C.C.R. 8345, 1998 WL 130176 (Mar. 23, 1998).

The subsidiary debtors did not elect to pursue one of the options for relief presented by the FCC in the Restructuring Order. Instead, on October 20, 1997, the subsidiary debtors filed voluntary bankruptcy petitions under chapter 11 in the Northern District of Texas. On October 29, 1997, the subsidiary debtors initiated an adversary proceeding against the FCC, in part to avoid their payment obligations under the promissory notes executed in March 1997 on the basis that those obligations constituted constructive fraudulent transfers for which the subsidiary debtors had received less than reasonably equivalent value, i.e., the licenses were worth less than the notes, and had become insolvent as a result. On January 26, 1998, GWI and GWI PCS also filed for bankruptcy protection, and their chapter 11 cases were consolidated with those of the fourteen subsidiary debtors. In an amended complaint, GWI and GWI PCS joined the adversary proceeding against the FCC, seeking to avoid any obligation that they may have incurred to pay the balance of the bid price to the FCC. The FCC defended against the Debtors' attempt to avoid the obligations by arguing, inter alia, that the value of the licenses received by the Debtors should be measured as of the date the C-block auction closed, May 8, 1996, and that the sixteen GWI entities should be collapsed and treated as a single entity. In addition, the FCC maintained that, if the bankruptcy court allowed the subsidiary debtors to retain the licenses without paying the bid price, the FCC's regulatory authority will be effectively usurped through the bankruptcy proceeding and the terms of license ownership as set forth in FCC regulations will be improperly altered through bankruptcy.

After conducting a trial on the adversary proceeding from April 13, 1998 through April 17, 1998, the bankruptcy court in a bench ruling on April 24, 1998 granted the relief sought by the Debtors. The bankruptcy court found that, although the value of the fourteen C-block licenses on the date the auction closed, May 8, 1996, was $1.06 billion, the licenses' value had declined to $166 million by January 27, 1997,⁸ the date the FCC conditionally granted the licenses to the subsidiary debtors who then became obligated to pay the remaining balance of GWI PCS's bids.⁹ In addition, the...