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, Federal Communications Commission v. NextWave Personal Communications Inc.,² 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.

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.

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.

Background

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.

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.

Events in the Bankruptcy Case

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.

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.

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.

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Before the Court's ruling, the ultimate status of spectrum licenses held by bankrupt companies was uncertain...

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The Supreme Court Ruling

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:

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].

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.

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.

Regulatory Motive

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.e., 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 motive in effecting the cancellation." Syllabus Opinion at 7. To do so, the Court said, "would deprive §525 of all force." Id.

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.

Id. at 7-8 (citations omitted).

Regulatory Obligations

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.

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." Id.

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." Id.

Conflict Between the Relevant Statutes

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

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]. Id.

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.

Dissenting Opinion

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.

Applying this reasoning to NextWave, the dissent concludes that in enacting §525, "Congress did not want always 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."

Conclusion

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.

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.

More broadly, the NextWave 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.

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 NextWave, 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.

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Footnotes

¹ John Thompson assisted in the preparation of this article. Return to article

² 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 __." Return to article