WHITE PLAINS, N.Y.-NextWave Personal Communications Inc. may find its bid to keep its C-block personal communications services licenses more challenging as the case goes to appeals court.
“I don’t see how a debtor can have its cake and eat it too,” Judge Charles L. Brieant said July 14 during a hearing on whether NextWave should keep or return its C-block licenses.
The judge, who reserved decision, added, “This is a very complex case and has a lot of interesting issues.”
The Federal Communications Commission brought its appeal of a recent bankruptcy court ruling in NextWave’s favor before Judge Brieant of the U.S. District Court for the Southern District of New York.
“The point I don’t understand is what was the court’s rationale in not voiding the entire transaction,” he said. “If everyone went back and unscrambled the eggs, it would be like a debtor bidding at the foreclosure sale of his own assets.”
In May, Judge Adlai S. Hardin Jr. of the U.S. Bankruptcy Court for the Southern District of New York ruled NextWave is entitled to keep its 56 C-block personal communications services licenses. He also reduced to $1.023 billion from $4.744 billion the amount NextWave owes the government for those licenses.
“Getting the licenses back is of primary importance to the government or, in essence, foreclosing on the licenses,” said Daniel L. Alter, lead counsel in the appeal by the FCC, which is represented by the U.S. Attorney’s Office for the Southern District of New York.
In reducing NextWave’s payment due for the C-block licenses it won in competitive bidding in May 1996, Judge Hardin agreed with NextWave’s contention their value had declined substantially by February 1997 when it received them from the FCC.
The FCC’s position is that radio-frequency licenses are a “scarce natural resource in very high demand,” Alter said.
However, NextWave’s lead attorney, Deborah Schrier-Rape of Andrews & Kurth L.L.P., Dallas, contended the FCC created a glut of RF spectrum, unanticipated by C-block auction bidders, including NextWave. That surplus resulted from the federal agency’s decision to depart from prior practice and auction D- and F-block frequencies simultaneously with the C-block auction, she said.
“Isn’t the fact that the licenses are worth less now simply fortuitous? I’d say `So what? That’s part of life’s vicissitudes’,” Judge Brieant said.
“What if I bought a gold mine and suddenly find that the Bank of England decided to dump all its gold on the market?”
Alter argued the FCC rules governing the C-block auction obligated winners to the agreed-upon price as soon as the bidding closed and to giving up their winning status otherwise.
“You can’t find something in the rules that isn’t there. It seems to me anything as Draconian as that should be put in plain English so the bidders would know beforehand,” Judge Brieant said.
Alter also contended that at least part of the delay in awarding NextWave its licenses was the result of legal challenges by two unsuccessful C-block bidders of NextWave’s foreign-ownership status in excess of the 25 percent federal law permits. The FCC agreed NextWave was over the cap because the foreign source of debt financing convertible into NextWave equity at a later date actually comprised an equity ownership stake by a foreign entity. NextWave has yet to comply fully with a capital restructuring that the FCC ordered, Alter said.
“I find this to be trivial nonsense about the foreign ownership and whether to convert stock into a debenture,” Judge Brieant said.
Judge Hardin’s original decision, which was part of a bankruptcy restructuring for NextWave, relied on California bankruptcy law because NextWave was based in that state before moving its headquarters to Hawthorne, N.Y.
Alter argued that, as a federal agency, the FCC is more than simply a creditor of a bankrupt company, and that FCC regulations should prevail over state bankruptcy laws.
“The bankruptcy code also is national … [It] incorporates by reference all applicable law, whether state or federal. That puts you (the FCC) under bankruptcy court jurisdiction,” Judge Brieant said.
“Every day, debtors come before us because they want to beat the (Internal Revenue Service) tax collector.”
Schrier-Rape contended, however, that the bankruptcy code mandates that “all problems going forward are the buyer’s problem only if the deal is closed.”
The bankruptcy code “doesn’t give rescission as an alternative” in a situation like NextWave’s, in which there was an obligation to buy the licenses, but the deal wasn’t completed because it hadn’t received them, she said.
“It does seem on its face that [NextWave] contracted for a unique asset at a public auction and now doesn’t want to pay the agreed price. [It’s] not avoiding a fraudulent transaction. [It’s] simply renegotiating with the help of the bankruptcy court,” Judge Brieant said.
Alter had argued earlier that FCC rules governing the auction and payments for the winning bids were designed to prevent players with “funny money” from entering the competition. The judge said he doesn’t believe NextWave entered the auction with the intent of later getting the courts to reduce its winning bid price.
“Still, the issue that stands out is you see a debtor that seems to get away with something if these orders are affirmed,” Brieant said.
Schrier-Rape countered that Judge Hardin’s ruling obligates NextWave to pay $9 per covered population equivalent, an amount comparable to the average paid by winners of the D- and F-block auctions. NextWave’s court-ordered payment also is triple the $3 per pop that winners of the C-block re-auction paid on average, she said.
