NEW ORLEANS-As a New Orleans appeals court heard arguments on whether Metro PCS can keep its 14 personal communications services licenses, other developments in the continuing saga of the C-block auction further confused what ultimately will happen to certain C-block spectrum and the value of that spectrum.
The U.S. Court of Appeals for the Fifth Circuit heard oral argument last Thursday over whether Metro PCS (formerly General Wireless Inc.) could retain its 14 licenses by paying $166 million instead of $1.06 billion-the amount it originally bid in a 1996 Federal Communications Commission auction.
Meanwhile, a number of other developments happened on legal, congressional and regulatory fronts.
On the legislative front, a powerful legislator said he questioned FCC Chairman William Kennard on the agency’s decision to cancel bankrupt operator NextWave Telecom Inc.’s licenses rather than accept NextWave’s offer to pay its full bid amount. And the House and the Senate prepared for upcoming hearings on spectrum management.
On the regulatory front, Nextel Communications Inc. asked the FCC to change its designated-entity rules and to create one mega license to be given to the highest bidder in a May 31 auction.
On the legal front, one bankruptcy judge said the FCC couldn’t cancel NextWave’s licenses. And another court sided with the FCC regarding a dispute over two PCS licenses in Hawaii.
Metro oral argument
The federal government told the Fifth Circuit that a Dec. 22 opinion of the U.S. Court of Appeals for the Second Circuit shows that “the bankruptcy court had no power to permit GWI to retain 14 licenses without paying the full amount,” said Jacob M. Lewis, appellate attorney in the civil division of the Department of Justice. The Justice Department represents the FCC in court.
The Second Circuit’s decision said the bankruptcy court in the NextWave case could not lower the value of the licenses because the licenses were subject to communications law rather than bankruptcy law.
Metro disagreed, saying the FCC wore two hats in the C-block situation. It was a regulatory body when it granted the licenses and a creditor when it allowed C-block bidders to pay for their licenses with installment payments.
“Granting the licenses was a regulatory function and collecting the money was not,” said Deborah L. Schrier-Rape, outside counsel for both Metro and NextWave.
During testimony Thursday, the Fifth Circuit seemed to question the central theme of the government’s claims in all of the bankruptcy proceedings-that it would destroy the integrity of the FCC’s auction process to allow bidders to pay a different amount than what they bid at auction.
Judge Will Garwood said losing bidders probably were glad they had not won the licenses, when DOJ attorney Lewis urged the court to “take it from the perspective” of the losing bidder.
“That bidder says to himself, `there but for the grace of God go I,’ ” Garwood said.
Judge Jacques L. Weiner Jr. said “there was no evidence that this was a nefarious plot” or that anyone was gaming the process by deciding beforehand they would bid up the price and then go into bankruptcy.
Lewis countered that the bankruptcy safety net skewed the whole process. “This has a direct impact on who gets the licenses, which is a regulatory question,” Lewis said.
Garwood also questioned whether the FCC could successfully cancel Metro’s licenses if the Fifth Circuit agreed with the bankruptcy court’s valuation.
“The actual debt is only $60 million. You can still take the licenses for nonpayment of the $900 million?” Garwood asked. He later continued on this line, noting that the government had filed a claim in bankruptcy court.
“You filed a claim in this bankruptcy. Are you saying the bankruptcy court doesn’t have jurisdiction? … [that] it does not have jurisdiction to write your claim down? … [that the government is] not accepting the $60 million and yanking [Metro’s] licenses and wouldn’t the [U.S. Court of Appeals for the D.C. Circuit] be bound to our determination that they paid the full amount and to return the licenses because they paid the full amount? … You want to get something you are not owed,” Garwood said.
Weiner found it interesting that even if the FCC had not awarded the licenses to Metro that Metro would have been liable for its bid amount.
Using the FCC-acting-as-creditor theme, Schrier-Rape said that if, instead of using the installment payment system, Metro had obtained a loan to pay off the FCC from a private lender (she chose Chase Manhattan Bank) then the FCC would not be attempting to cancel Metro’s licenses because they would have gotten their money.
“Doesn’t the government even care if we don’t pay Chase? No. What the government is saying is that we don’t care if you pay unless it is us you are paying,” Schrier-Rape said.
A decision from the Fifth Circuit is expected soon.
Other legal action
The FCC plans to appeal a Jan. 31 decision by Bankruptcy Judge Adlai S. Hardin Jr. that said the FCC cannot cancel and re-auction NextWave’s 90 PCS licenses.
“There exists a host of protections, not only for the benefit of the debtors, but for the benefit of all constituent parties, including the FCC, designed to ensure the rational, systematic and equitable reorganization of this estate. Self-help repossession by ambush is not one of them-it is repugnant to the very essence of the Bankruptcy Code,” said Judge Hardin.
“We are reviewing the decision and expect to file an appeal shortly,” said an FCC spokeswoman.
NextWave understandably was pleased with Hardin’s ruling.
“NextWave is pleased by the Bankruptcy Court’s decision because it takes us a giant step closer to putting our licenses to full and active use … The decision is also a victory for all regulated businesses throughout the nation, large and small, because it protects shareholders and creditors from government agencies who would attempt to circumvent the law,” said Allen Salmasi, NextWave chairman and chief executive officer.
The FCC announced Jan. 12 it was canceling NextWave’s C- and F-block licenses and would re-auction them July 26. It later said the licenses actually were canceled in late 1998 or early 1999. The FCC based its actions on the Second Circuit opinion.
The government is expected this week to appeal this decision to the district court.
On Friday, NextWave asked the Second Circuit to rehear its case.
“The FCC’s inexplicable decision to refuse NextWave’s recent offer has forced the company to file this rehearing petition. The company would prefer to devote its energies and resources to putting its spectrum licenses into immediate and productive use. Nevertheless, our fiduciary duty to our creditors and shareholders requires us to protect their interests-in this instance, by proceeding with further litigation,” said NextWave.
NextWave also asked that the entire Second Circuit review the case if the panel-which made the Dec. 22 decision-refuses to amend its opinion.
Regardless of the outcome of the Metro PCS and NextWave cases, the government seemed to be at the end of the road on another bankruptcy when yet another appeals court said it made the right decision in dismissing a complaint from Gloria Borland.
Borland had charged the FCC could not re-auction two Hawaii C-block licenses because she owns a 5-percent interest in them.
On Capitol Hill
Rep. Thomas Bliley (R-Va.), chairman of the House Commerce Committee, told reporters last Thursday that Kennard believes the FCC can make more money from re-auctioning the NextWave licenses than even the $4.3 billion NextWave said it was willing to pay on Jan. 11.
Bliley said the chairman of Global Crossing told him he had met with Kennard about the NextWave offer, but had been turned down. Global Crossing is a major NextWave investor. “So I called the chairman and I said, `It seems to me that’s the simplest solutio
n to the whole thing.’ [Kennard answered] `We understand it’ll be in court, but we think we’re going to get a lot more money re-auctioning it,” Bliley said.
The FCC was not immediately available for comment.
Nextel asks for bulk-bidding
In a move that could benefit Nextel, the enhanced specialized mobile radio operator last week asked the FCC to get rid of rules that set aside the C- and F-block licenses for small businesses and to hold an auction that would allow one company to bid on a portion of all of the licenses at once.
SBC Communications Inc. previously asked the FCC to waive designated-entity rules for the re-auction and now Nextel has upped the ante.
In Nextel’s “bulk-bidding” proposal, the FCC would split NextWave’s 63 C-block licenses into two blocks-one of 20 megahertz and one of 10 megahertz.
The 20-megahertz blocks would be combined together and added to the remaining 15-megahertz licenses the FCC is re-auctioning to create one mega-license. This license would be auctioned to the highest bidder on May 31 and the money would be deposited into the treasury by Sept. 30. The opening bid would be set at $2 billion.
The 10-megahertz blocks would be auctioned on July 26 and would remain restricted to DEs.
Nextel’s bulk-bidding proposal could be attractive to Capitol Hill, which is said to be looking for money to fund emergency expenditures during the current fiscal year.
The FCC has put the Nextel proposal out for comment. The comment cycle ends Feb. 22.
Washington Bureau Chief Jeffrey Silva contributed to this report.