COURT EYES BALANCE BETWEEN BANKRUPTCY CODE, COMMUNICATIONS LAW

But Judge Merrick Garland said 2nd U.S. Appeals Court, N.Y., overturned U.S. Bankruptcy Court, White Plains, N.Y., ruling that had put $1 billion valuation on NextWave licenses, compared with $4.7 billion that bankrupt carrier bid originally. If 2nd Circuit is saying bankruptcy court has no authority to discharge debt, “you have essentially painted yourself into a corner,” Garland told Olson. Second Circuit has ruled twice in NextWave case, including Dec. 1999 decision that overturned bankruptcy court’s valuation. Ruling last May held FCC was acting as regulator and not debtor when it cancelled carrier’s licenses for missed payment. Arguments moved to D.C. Circuit when U.S. Supreme Court declined to grant NextWave appeal of 2nd Circuit’s ruling.

Judges focused on extent to which FCC must balance obligations under Communications Act with Sec. 525 of U.S. Bankruptcy Code. Latter bars agencies from revoking licenses “solely” because license holder has entered bankruptcy or “has not paid a debt that is dischargeable.” Judges also probed which issues 2nd Circuit already had decided on merits in overturning Bankruptcy Court opinion and which ones were left to D.C. Circuit. Olson, who is President Bush’s nominee for Solicitor Gen. and argued his election case before Supreme Court, said Sec. 525 was “clear on its face” that a govt. agency could not cancel license for failure to discharge debt. Second Circuit was “absolutely silent” on that issue, he said. “We're getting a little circular here,” Garland said. “The 2nd Circuit seems to have held that the Bankruptcy Court cannot discharge a debt until the FCC acts. How can we regard this as a debt discharge under this title?”

While inclination of panel on such issues was hard to read from questioning, other judges appeared somewhat more sympathetic to NextWave’s argument on Sec. 525 point. Sentelle said provision appeared to be “pretty plain” in saying “that an agency can’t revoke a license” solely based on factors such as debt not being dischargeable. “Would you concede any flexibility that another statute outside of the Communications Act could be so absolute that no matter how inconsistent it was with the goals of the Communications Act, the Commission must abide” by it, Sentelle asked Armstrong. “What is it about Sec. 525 that keeps it from being in that category? It seems pretty absolute.” FCC doesn’t believe Sec. 525 falls into that category, Armstrong responded. “Insofar as the government is trying to collect $4.7 billion from NextWave, we do not contend we are dealing with a dischargeable debt,” he said.

Olson disputed FCC position that cancellation of NextWave’s licenses was move that was “simply protecting the interests of the auction process.” FCC rejected “fully funded” plan in which NextWave offered to pay for licenses, which would have immediately put them into use, he said. Olson contended that when FCC cancelled NextWave’s licenses for nonpayment, agency ignored bankruptcy laws outright rather than attempting to balance them against regulatory obligations. Garland asked whether NextWave’s arguments would remain same on company’s earlier proposal to pay $1 billion for licenses rather than $4.7 billion. In case of larger payment, Garland asked whether that meant “if we strip that away from your argument, you lose?” Olson disagreed, saying “it was a situation where the FCC decided that no bankruptcy laws applied and there was no attempt to balance these things.”

“The 2nd Circuit never doubted the Bankruptcy Court’s jurisdiction to determine whether bankruptcy code provisions apply,” FCC’s Armstrong said. “They simply disagreed with the Bankruptcy Court’s decision.” He said 2nd Circuit, in May ruling, directed Bankruptcy Court to deny NextWave motion to enforce automatic stay on its licenses. While 2nd Circuit concluded Bankruptcy Court had overreached in applying Sec. 309(j) of Communications Act, Appeals Court “never doubted” its jurisdiction under bankruptcy code but “simply disagreed with the Bankruptcy Court’s decision,” Armstrong said.

“Assume for a minute that I'm not overwhelmed by that argument,” Tatel said. “Assume that I read the 2nd Circuit as saying what is wrong is that you have a Bankruptcy Court attacking collaterally the regulatory jurisdiction of the Commission. What do I do with a regulatory exception that doesn’t apply to a lien?” He referred to May ruling by 2nd Circuit on automatic stay provisions in Sec. 362 of Bankruptcy Code. Those subsections provide regulatory exception, leading 2nd Circuit to find that FCC cancellation decision was regulatory, overturning Bankruptcy Court’s conclusion that Commission was trying to protect its pecuniary interests. (FCC allowed C-block bidders in 1996 auction to make installment payments for licenses, including security agreements that covered lien provisions). NextWave has argued that Bankruptcy Code’s automatic stay language barred cancellation of licenses while company reorganized. One question that emerged in oral argument was how regulatory exception applies to liens, addressed in short footnote by 2nd Circuit. Tatel said footnote appeared to say that liens weren’t covered by regulatory exception and “the 2nd Circuit said we are not deciding the question, which leaves it to us.” Armstrong said, however, that 2nd Circuit already had decided that issue in Dec. 1999.

D.C. Circuit’s proceedings in NextWave’s case have been closely watched, particularly because carrier’s licenses constituted largest part of C- and F-block licenses that FCC auctioned in Jan. to generate nearly $17 billion. Ultimate court decision has implications for auction, results of which are contingent on court’s not ruling in favor of NextWave. D.C. Circuit earlier this year declined to grant NextWave request to stay auction until it ruled on case, but agreed to hear it on expedited basis.

Of 3 judges, Garland appeared most attentive during questioning to first ruling of 2nd Circuit, said Christopher Wright, former FCC gen. counsel who is going into private practice next month. Speaking with reporters after close of session, he pointed to arguments made by intervening wireless companies that have sided with FCC. Arguing for intervenors, attorney Richard Taranto told court that 2nd Circuit clearly decided that debt wasn’t dischargeable. Also speaking with reporters, Olson declined to speculate on outcome of case. In argument, he said “FCC is taking the position that sometimes it’s a creditor, sometimes it’s a regulator.”