Part 2, June 22 decision on remedy, NextWave: This bankruptcy decision was appealed to the federal judge who affirmed it. I believe this is the decision that the FCC has appealed. If I recall, the FCC is appealing, at least in part, on the ground that the bankruptcy judge does not have the power under the Bankruptcy Code and that the FCC's interpretation of the FCC controls, that the FCC Act controls. The judge discusses this somewhat in this decision. It is also discussed in another decision denying the FCC's motion to dismiss the fraudulent conveyance claims of NextWave.
Conclusions on Remedy
While NPCI urges the Court to apply Section 544 as written, the FCC urges the Court to use "remedial flexibility." Since Section 544(b) is clear on its face and under the case law, the Court will apply the statute as written, mindful of the Supreme Court admonition that statutes should be enforced as written. See United States v. Ron Pair Enterprises, Inc., 489 U.S. at 240-42 and Patterson v. Shumate, 504 U.S. at 759.
The statutory remedy is avoidance of the entire obligation upon a finding of fraudulent [**16] conveyance. See In re Acequia, Inc., 34 F.3d at 809-10 ("[a] transaction that is voidable . . . may be avoided in its entirety"). However, the FCC may enforce NPCI's obligation to the extent it provided value to the debtor's estate. Stated differently, only the Fraudulently Incurred Obligation will be avoided.
The purported "remedy" urged upon the Court by the FCC in this fraudulent conveyance proceeding exhibits "remedial flexibility" to such an extent that it barely merits discussion. In the face of a statute of Congress intended to rectify inequities among creditors and facilitate reorganization of debtors, and despite this Court's [*311] finding of fact after trial that NPCI's indebtedness to the FCC was roughly five times the value of the C block licenses when conveyed, the FCC has proposed as a "remedy" that it should reclaim the licenses and, at the same time, retain all or a substantial portion of the $473 million paid by NPCI for the licenses and retain a claim in NPCI's bankruptcy for the $3.7 billion Fraudulently Incurred Obligation subordinated only to existing unsecured debt. Such a decree would reduce the value conveyed by the FCC to NPCI from $1.023 billion [**17] to zero ($0.00) while allowing the FCC to retain up to $473 million of the debtor's money and a subordinated claim for $3.7 billion. It would render NPCI hopelessly insolvent and result in prompt conversion to Chapter 7 and liquidation of this debtor.
The utter irrationality of the FCC's proposed remedy is manifest from the fact that, if the FCC reclaims the licenses, every dollar of cash and every dollar of allowed claim retained by the FCC would itself automatically become a fraudulent conveyance, since the licenses constituted the FCC's only contribution to NPCI in exchange for its cash and debt obligation. In other words, the FCC asks the Court not to rectify but to compound the constructive fraudulent conveyance already adjudicated by ordering the debtor to return the entire value received from the FCC while allowing the FCC to retain much of what the debtor paid for that value.
The remedy proposed by NPCI and adopted by this Court is intuitively fair and equitable to both the government and the debtor's estate and implements both the letter and the spirit of the Federal and state statutes and the case law governing debtor-creditor relations. The FCC will retain an obligation [**18] for the full value of the consideration which it conveyed to the debtor. The avoidance remedy fully comports with the "benefit of the estate" standard of Section 550(a) in that the debtor's estate will be relieved of that portion of its financial obligation to the FCC for which it received no value and will be able to proceed promptly with a viable plan of reorganization, having access to the public financial markets which was precluded by reason of the $3.7 billion Fraudulently Incurred Obligation not backed by any asset value.
Although eschewed by the FCC, a more rational alternative to the avoidance remedy proposed by the debtor would be traditional rescission, which would achieve the FCC's purported primary objective of cancellation and return of the 63 C block licenses for reauction while returning the cash deposits to NPCI and cancelling all debt to the FCC. But avoidance, not rescission, is the remedy mandated by the Bankruptcy Code. Moreover, the "benefit of the estate" test and the overarching policy of the bankruptcy laws favoring reorganization both weigh heavily in favor of the avoidance remedy, since the likelihood of a successful reorganization of NPCI appears to be [**19] high with the 63 C block licenses, and virtually nil without them.
The avoidance remedy is also far more consonant with the statutory objectives expressed in Section 309(j) of the Federal Communications Act than rescission. Under Section 309(j) the FCC was charged with achieving four clearly expressed objectives: (1) the development and rapid deployment of new wireless technology for the benefit of the public without administrative or judicial delays; (2) promotion of economic opportunity and competition by disseminating licenses among a wide variety of applicants including entrepreneurial, small businesses; (3) recovery for the public of a portion of the value of radio spectrum; and (4) the efficient and intensive use of spectrum. 47 U.S.C. § 309(j)(3). Each of these statutory policy objectives is advanced by the avoidance remedy and inhibited by rescission.
First, rescission and cancellation of NPCI's 63 C block licenses would result in lengthy and indeterminate delay in the deployment and use of those licenses. [*312] Even if there were no appeal from this Decision by either party, there can be no assurance when or whether the FCC would reauction the licenses, [**20] and it is unlikely that any reauction would be commenced in less than eight or nine months, judging from the 1999 reauction. Any reauction could be expected to take three to four months, as in the case of past auctions, and the license approval process for the successful bidder(s) could be expected to take up to five months particularly in the event of a third-party challenge, as in the case of NextWave. Thus, a delay of twelve to eighteen months or possibly substantially more would be the likely result of rescission, which is significant in the highly competitive and rapidly moving wireless telecommunications industry.
Second, NPCI and its NextWave affiliates are not only qualified under Section 309(j) as entrepreneurial designated entities to hold C and F block licenses, but as the largest holder of PCS spectrum in the C/D/E/F blocks NextWave undoubtedly would constitute the only potential candidate to compete with the major players such as AT&T, Sprint and NextTel which the FCC's trial expert, Dr. Salant, viewed as a prime objective of the C block auction. If NPCI's 63 C block licenses were cancelled and reauctioned, there can be no assurance that NextWave or any single bidder [**21] would succeed in winning all or most of the 63 licenses, or that the FCC would award the licenses to NextWave if it were the successful bidder. Moreover, NextWave's "carrier's carrier" business strategy could provide potential access to PCS spectrum for a variety of resellers of wireless services and thereby "promote . . . economic opportunity and competition by disseminating licenses among a wide variety of applicants including small businesses." 47 U.S.C. § 309(j)(3).
Third, although Section 309(j) charges the FCC only "to recover a portion of the value of the licenses for the public" (emphasis supplied), the avoidance remedy will recover for the public fisc $1.023 billion, which exceeds the full value of the 63 C block licenses ($908 million) as of February 1997. It would appear that this far exceeds the present fair market value of the 63 C block licenses, judging by the values achieved in the 1999 reauction of predominantly C block licenses.
Finally, the avoidance remedy will promote the prompt, efficient and intensive use of PCS spectrum. Less than ten percent of the original C block licenses are currently in use. NPCI represents that it has conducted [**22] extensive site planning and/or radio frequency design in many of the markets covered by its C block licenses and has successfully installed PCS network equipment in trial systems in San Diego, San Antonio, Washington, D.C. and Las Vegas. As purportedly the only wireless provider dedicated to the wholesale "carrier's carrier" strategy, NPCI asserts that it will create competitive opportunities that do not exist in the wireless marketplace today, and may not exist in the event of rescission and reauction.
As to the FCC's subordination and "benefit to creditors" argument, In re Best Products, Inc., 168 B.R. 35, 57 (Bankr. S.D.N.Y.), aff'd, 68 F.3d 26 (2d Cir. 1995) and In re Crowthers McCall Pattern, Inc., 120 B.R. 279, 288 (Bankr. S.D.N.Y. 1990), cited in support of the FCC's contention that the $3.7 billion Fraudulently Incurred Obligation should be merely subordinated to existing unsecured creditors, rather than avoided, are conceptually inapposite. Both cases involved proceedings seeking to confirm reorganization plans and, in that context, approval of settlements of putative but unasserted fraudulent transfer claims against lenders [**23] arising out of leveraged buy-out ("LBO") transactions involving the debtor. Regarding remedy, one court recognized that "one of the murkiest areas of fraudulent transfer law as applied to LBOs is what remedy to apply when the plaintiff prevails." Best Products, 168 B.R. at 57. In both Best Products and Crowthers McCall the lenders in question [*313] made loans to the respective debtors and took back promissory notes in precisely the amount of the consideration furnished by the lenders to the debtors, i.e., the loans. The fraudulent transfer theory which might have been asserted against these lenders, and which was compromised in the context of the reorganization plans, was that the loans in question were merely steps in a series of transactions in connection with the LBOs by which the new shareholders, in effect, appropriated the loan proceeds to acquire the debtors' equity for their own personal benefit, thereby depriving the debtors and the debtors' other creditors of the economic benefits of the loans. The inherently "inside" nature of these LBO transactions generates a split of interest within the "estate" between the acquiring equity interest and their lender-funders [**24] versus the debtor's existing or "old" creditors. In such a context, it is not surprising that both courts would have employed language to the effect that the fraudulent transfer remedy, if any, should benefit the debtors' creditors, but that the indebtedness should be enforced vis-a-vis the debtors' equity shareholders who derived benefit to the extent of the money actually advanced by the lenders. In such a circumstance, the appropriate remedy might well be subordination, which would benefit the creditors harmed by the improper LBO diversion of the debtors' assets while leaving the lenders with a claim superior to the shareholders for the fair value of the loans which they extended to the debtors. n2
n2 It should be emphasized that the language relied upon by the FCC in the Best Products and Crowthers McCall decisions did not constitute holdings by the respective bankruptcy courts determining remedies in litigated fraudulent conveyance claims. The courts in both cases were merely discussing the hurdles which the debtors might face in the context of approving settlements of possible fraudulent transfer claims which were not, in fact, litigated.
[**25]
The constructive fraudulent conveyance claim involved in this adversary proceeding bears no resemblance to the putative fraudulent transfer claims which were the subject of Best Products and Crowthers McCall. The debts owing to the lenders in those cases which might have been subordinated, rather than avoided altogether, in the LBO context were supported dollar-for-dollar by loans actually advanced to and received by the debtors. To avoid those debt obligations would deprive the lenders of consideration actually given and resulted in a windfall for the shareholders who allegedly were the real beneficiaries of the loan proceeds. By contrast, neither NPCI nor its shareholders or creditors received any consideration from the FCC in respect of the $3.7 billion Fraudulently Incurred Obligation, and to enforce that Obligation even as subordinated debt would constitute a windfall for the FCC. Moreover, the settlements of the putative fraudulent transfer claims against the lenders in Best Products and Crowthers McCall were approved in the context of seeking to approve those debtors' reorganization plans. By contrast, in this case to allow $3.7 billion as a subordinated claim [**26] would preclude NPCI's access to public funding and thereby undermine any practical likelihood of NPCI's success as a reorganized debtor.
Finally, Judge (now Chief Judge) Brozman's decision in Best Products expressly recognizes the appropriateness of the remedy fashioned in this decision in a case such as this involving avoidance of an obligation for which the debtor received no consideration. Judge Brozman noted:
On the other hand, if the underlying fraudulent transfer statute (such as DCL § 273) provides for the avoidance as fraudulent of an obligation incurred, it could be argued fairly persuasively that so much of the obligation which the debtor incurred as was not supported by consideration to the debtor, ought be avoidable. (emphasis in original)
Best Products at 59, citing In re Candor Diamond Corp., 76 B.R. 342 (Bankr. S.D.N.Y. 1987).
[*314] Nor can the FCC take comfort from the citation and quotation of In re Vintero Corp., 735 F.2d 740, 742 (2d Cir.) ("To the extent that [a debtor's] other creditors . . . are not affected adversely by enforcement of [an avoidable] security interest, there is no reason why such interest [**27] should not be enforced"), cert. denied, 469 U.S. 1087, 83 L. Ed. 2d 702, 105 S. Ct. 592 (1984). There can be no question that the debtor and its shareholders and its creditors would be affected adversely by any enforcement of the $3.7 billion Fraudulently Incurred Obligation in exchange for which the FCC provided no consideration to the debtor.
Finally, the FCC's arguments based upon Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494, 88 L. Ed. 2d 859, 106 S. Ct. 755 (1986), NLRB v. Bildisco & Bildisco, 465 U.S. 513, 79 L. Ed. 2d 482, 104 S. Ct. 1188 (1984), In re D.H. Overmyer Telecasting Co., 35 B.R. 400 (Bankr. N.D.Ohio 1983) and In re Nitec Paper Corp., 43 B.R. 492 (S.D.N.Y. 1984) to the effect that bankruptcy proceedings cannot be used to override the regulatory authority of administrative agencies have been fully dealt with in this Court's December 7, 1998 decision on the FCC's motion to dismiss for lack of subject matter jurisdiction and June 16, 1999 decision denying the FCC's motion to lift the automatic stay. Reference is made to those decisions. [**28] Suffice it here to say that the issues before this Court in this adversary proceeding concern solely the debtor-creditor relationship between the FCC and NPCI. Nothing in the Federal Communications Act or elsewhere in the law exempts the FCC from the operation of the Bankruptcy Code in its capacity as a creditor. Nothing in this Court's May 12 Decision or in this Decision on Remedy implicates the FCC's regulatory jurisdiction.
NPCI is entitled to judgment in accordance with this Decision.
Dated: White Plains, NY
June 22, 1999
/S/ Adlai S. Hardin, Jr.
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