2nd Cir. Opinion 3rd part:
III. Constructive Fraud
While we reverse the district court's affirmance of the bankruptcy court orders issued in the adversary proceeding, and hold that these courts lacked jurisdiction to employ remedies that abrogate the FCC's licensing authority, we recognize that NextWave will remain a debtor in bankruptcy. If the Licenses are returned to the FCC, the bankruptcy court may resolve resulting financial claims that the FCC has against NextWave as it would the claims of any government agency seeking to recover a regulatory penalty or an obligation on a debt. In light of these possible further proceedings, there remains for us the question of the nature of NextWave's obligation, which the bankruptcy court decided, see NextWave IV.A, 235 B.R. at 287-91, and which may on remand have substantial effect on the determination of the FCC's rights as creditor. We hold, contrary to the rulings by the bankruptcy and district courts, that NextWave became obligated to the FCC for the full amount of its winning bids at the close of the C-block auction, and that the transaction in which the Licenses were issued was therefore not constructively fraudulent.
Under the avoidance [*33] provisions of the Code, a transfer or obligation is or is deemed to be a fraudulent conveyance -- and therefore avoidable -- if the debtor "received less than a reasonably equivalent value in exchange for such transfer or obligation." 11 U.S.C. §§ 544, 548(a)(2)(A) (1993 & Supp. 1999). It is uncontested that the question of reasonably equivalent value is determined by the "value of the consideration exchanged between the parties at the time of the conveyance or incurrence of debt which is challenged." NextWave IV.A, 235 B.R. at 290 (citing In re Best Products Co., 168 B.R. 35, 54 (Bankr. S.D.N.Y. 1994)) (emphasis added).
The date on which the payment obligation arose is therefore crucial to whether this obligation is avoidable. If NextWave incurred the obligation at the close of the auctions, then the value of the Licenses would by definition be $4.74 billion, since "the fair market values of the C block licenses were equivalent to the bids accepted by the FCC at the close of the auction and reauction." NextWave IV.A, 235 B.R. at 297 n.9 (noting NextWave's concession of this point). And if the fair market value was $4.74 [*34] billion, then there was no constructive fraud. On the other hand, if the obligation first arose on or about the date on which the Licenses were conditionally granted (following the fall-off in auction prices at the D-, E- and F-block auctions), then the $4.74 billion bid exceeded the fair market value as measured by the subsequent auction prices.
The bankruptcy court held that NextWave's payment obligation did not arise until the conditional grant of the Licenses on January 3, 1997. The court placed great weight on the idea that an obligation evidenced by a writing arises when the writing is delivered:
Generally an obligation is incurred when a debtor becomes legally obligated to pay. In re Emerald Oil Co., 695 F.2d 833, 837 (5th Cir. 1983); Barash v. Public Finance Corp., 658 F.2d 504, 511 (7th Cir. 1981); see also In re G. Survivor Corp., 217 B.R. 433, 440 (Bankr. S.D.N.Y. 1998). While the Bankruptcy Code is silent on the question of when a debt or obligation is "incurred," courts have not questioned that an "obligation" to pay principal indebtedness under a promissory note is "incurred" on the date the note is executed and delivered. [*35] E.g., In re Iowa Premium Service., 695 F.2d 1109, 1111-12 (8th Cir. 1982); In re Smith-Douglass, Inc., 842 F.2d 729, 730 (4th Cir. 1988); In re Pippin, 46 B.R. 281, 283-84 (Bankr. W.D. La. 1984) (holding that, for preference purposes, debtor becomes legally obligated to pay under installment payment contract when contract is executed). The California [Uniform Fraudulent Transfer Act] provides that "an obligation is incurred . . . if evidenced by a writing, when the writing executed by the obligor is delivered to, or for the benefit of, the obligee." Cal. Civ. Code § 3439.06(e)(2) [(1997)].
NextWave IV.A, 235 B.R. at 289 (ellipsis and second set of brackets in original).
The obligation to pay the Notes attached upon their delivery, as the writing rule confirms, but that observation begs the crucial question: When did NextWave take on the obligation to pay $4.74 billion for what it bid at auction? And that question suggests another: What did NextWave bid $4.74 billion to get?
We conclude that NextWave bid $4.74 billion for the right -- excluding other bidders -- to be the qualified licensee of the Licenses, and [*36] became obligated to assure payment of $4.74 billion for the Licenses either by cash and credit on delivery or by submitting to liability for the shortfall if NextWave -- which knew the rules for qualification -- failed to qualify.
Our ruling is based on the FCC's interpretation of its own regulations, to which courts owe deference, but to which the courts below refused deference on grounds we conclude are invalid. The FCC's interpretation is supported, in turn, by the auction law principle that an obligation attaches when the seller no longer can reject the bidder's offer as a matter of discretion.
A. FCC Regulations
The FCC's rules establish the close of the auction as the time of obligation. The FCC's formal interpretation of its own regulations, albeit issued after the auction, provides that the binding obligation to pay the full bid price attaches to the winning bidder "upon acceptance of the high bid." In re Applications for Assignment of Broadband Personal Communications Services Licenses, FCC 98-301 (Dec. 23, 1998), 1998 WL 889489 (F.C.C.) P 1. Other FCC publications clarify that the "acceptance of the high bid" occurs at the close of the auction: "Under [*37] the Commission's rules, [the winning bidder] became obligated for its winning bid amounts when the auction closed." Public Notice, Auction of C, D, E, and F Block Broadband PCS Licenses, DA-98-2604 (Dec. 23, 1998), 1998 WL 892962 (F.C.C.) at 4.
The FCC's interpretation enjoys a presumption of correctness: "We must give substantial deference to an agency's interpretation of its own regulations." Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512, 129 L. Ed. 2d 405, 114 S. Ct. 2381 (1994); accord New York v. Shalala, 119 F.3d 175, 182 (2d Cir. 1997). It is not this Court's task to choose which among several competing interpretations best serves the stated regulatory purpose; "the agency's interpretation must be given controlling weight unless it is plainly erroneous or inconsistent with the regulation." Thomas Jefferson Univ., 512 U.S. at 512 (internal quotation marks omitted); accord New York v. Shalala, 119 F.3d at 182. This Court defers to the agency's interpretation unless a different reading is compelled by the plain meaning of the regulation or some other indicia of the agency's intent at the time of promulgation. [*38] See Thomas Jefferson Univ., 512 U.S. at 512. Deference is especially appropriate where "the regulation concerns 'a complex and highly technical regulatory program.'" Id. (quoting Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 697, 115 L. Ed. 2d 604, 111 S. Ct. 2524 (1991)).
In this case, the FCC interprets its regulation to mean that NextWave's obligation attached upon the close of the auction, and nothing justifies a departure from that interpretation. At the close of the auction NextWave became obligated, if qualified, to pay the $4.74 billion bid price or, if unqualified, to pay a prescribed penalty. The FCC's penalty rules provide that default between the close of the auction and the grant of the Licenses exposes the winning bidder to liability for the amount it bid less the winning bid upon re-auction of the Licenses. See 47 C.F.R. § 1.2104(g)(1)-(2). This "penalty" is the functional analog of expectation damages; that is, the FCC must mitigate its harm by a re-auction, but the original winning bidder is liable for any shortfall between the subsequent winning bid and its own. So although labeled a "penalty," this remedy is fully consistent with the [*39] notion that the winning bidder becomes liable for full price of the winning bid upon the close of the auction.
The bankruptcy court, however, held that it owed no deference to the FCC's regulations or the Commission's interpretation thereof because (a) the FCC appears in bankruptcy court as a creditor rather than as a regulator, and so is due no more deference than other creditor; and (b) the deference ordinarily afforded the FCC's reading of its rules and the statute it administers is inappropriate (or at least not equally compelled) in this case by reason of the self-serving nature of the FCC's post hoc interpretation.
(a) The FCC's Creditor Status. The bankruptcy court treated the FCC as a creditor like any other, and thus refused to allow the FCC to construe its contractual rights (after the fact) in a way that would be binding in the bankruptcy proceeding:
The FCC's own regulations are entitled to no more nor less weight in the context of bankruptcy proceedings than the contractual notes, mortgages and similar documents required by other creditors in commercial transactions. . . . Stated simply, the FCC's regulations, to the extent that they establish and govern the rights [*40] and obligations of the FCC and the licensee in their capacities as creditor and debtor, are subject to modification under the Bankruptcy Code, just like the contractual rights and obligations of an ordinary creditor vis a vis its debtor.
NextWave V, 235 B.R. at 317 (emphasis added). This reasoning insufficiently accommodates the dual role that the FCC plays in this proceeding. See supra Part II. In granting licenses by auction, the FCC acts as creditor and regulator both. We need not decide what happens at each point of overlap, but the regulatory function is not ended by the bankruptcy of a licensee or license claimant, and as the function persists it must perforce be carried out.
True, the FCC's regulatory interpretation in this case favors the interests of the federal fisc over those of other NextWave creditors: It prevents the bankruptcy court from extinguishing approximately $3.7 billion of debt owed for the Licenses. It does not follow, however, that the FCC's regulatory interpretation is proffered by the FCC as creditor only and not as regulator in whole or part. The FCC's interpretation, which was rejected below as self-serving because it advances [*41] the FCC's interest as creditor, also advances important regulatory purposes See supra Part II; Second Order P 5; Restructuring Order P 19.
The bankruptcy court's denial of deference to the FCC was premised on the understanding that the FCC was acting solely as a creditor in this action. Because the FCC was acting in part as a regulator as well as a creditor, we have no occasion to decide here whether the bankruptcy courts owe deference to the regulatory interpretations of agencies acting strictly as creditors. It is possible that in future proceedings the FCC may stand in a strict debtor/creditor relationship to NextWave. But since we do not know what steps the FCC will take vis-a-vis the obligations owed to it by NextWave, any issues created by the FCC's attempts to collect on those obligations are not yet ripe. Cf. Mountain Solutions, Ltd. v. FCC, 1999 WL 1082874 (D.C. Cir.) at * 10 (holding that a request for injunctive relief, made by a bidder at a spectrum auction, was not ripe when the actual order imposing default penalties had not yet issued). We limit ourselves here to finding that NextWave's obligations were incurred at the close of auction and that the transaction [*42] in which they were incurred was therefore not constructively fraudulent. Where the regulatory agency acts as both regulator and creditor, we owe deference to its interpretation of its regulations.
(b) The FCC's Self-Interest. The courts below emphasized and relied on the self-serving nature of the FCC's interpretation and a perceived lack of connection between its interpretation and the original legislative purpose of the auction regime. We have already noted that the FCC's interpretation, though financially advantageous to the federal government, also furthers regulatory goals. The financial benefits of the FCC's post hoc interpretation do not extinguish the courts' duty to give deference.
The level of judicial deference depends in part on whether an agency interpretation is consistent or in conflict with the goals of the regulation as stated when it was adopted. See Thomas Jefferson Univ., 512 U.S. at 512. As counsel for NextWave agreed at oral argument before us, one congressional goal in authorizing the FCC to conduct auctions was to achieve fair and efficient allocation of spectrum licenses. See Committee Report at 253, reprinted in 1993 U.S.C.C.A.N. at 580; Second [*43] Order P 73. The auction mechanism can do so only if the bids constitute a reliable index of the bidders' commitments to exploit and make the most of the license at issue. And this goal is served only if the high bid entails the obligation to make good the amount bid, either by a qualified bidder's payment on delivery or by payment of any shortfall (upon re-auction) by a bidder who fails to qualify. If the transaction can be adjusted in bankruptcy proceedings so that the high bidder takes the license without paying the amount of the high bid, the auction as a mechanism for determining valuation is impaired. The FCC's insistence on full payment is consistent with the goals of the auction.
B. Auction Law
The parties and the bankruptcy court make several arguments based on the principles of auction law. We do not think it is necessary to rely on or to appear to create a federal common law of auctions in order to resolve this appeal. We think that the principles of auction law are useful nonetheless, at least insofar as they confirm and reinforce the rationality of the FCC's interpretation of its regulations.
The bankruptcy court held that NextWave gained nothing at the close [*44] of the auction except the right to apply for the Licenses, relying upon the following colloquy with counsel for the FCC:
THE COURT: Wait a second. You're asking for words, namely, "reasonably equivalent value" and that raises a question or value for what? And equivalent to what?
[FCC]: To what they got.
THE COURT: What did they get?
[FCC]: What they got was the right to apply for these licenses that were essential to their business. And without those licenses, they would have no business.
NextWave II, 235 B.R. at 274. In summary of the court's reasoning below (which summary may not do the analysis full justice): Delivery of the Licenses, notwithstanding the auction and NextWave's high bid, remained contingent upon the FCC's determination sometime later that NextWave's application should be granted; the auction was therefore of the kind conducted with a reserve; like such reserve auctions, the high bidder's obligation to pay did not arise when the hammer fell; the reserve in this case was not lifted until at least such time as the FCC decided to deliver the Licenses; and NextWave's obligation to pay the amount of the high bid therefore did not arise [*45] until the date on which the Licenses were delivered and the Notes delivered in exchange. We disagree. The close of the auction established the FCC's obligation to grant NextWave the Licenses if the company fulfilled statutory eligibility requirements, and NextWave became liable at that time for full payment on the Licenses at the stated price.
As in contract law more generally, a sale by auction is valid only upon offer and acceptance. See Blossom v. Railroad Co., 70 U.S. (3 Wall) 196, 206, 18 L. Ed. 43 (1865); 7 Am. Jur. 2d Auctions and Auctioneering § 20 (1997). As a baseline rule, the close of the auction -- traditionally the drop of the hammer -- signals acceptance of an offer and forms an enforceable contract. See 7 Am. Jur. 2d Auctions and Auctioneering § 34; 7A C.J.S. Auctions and Auctioneers §§ 8, 12 (1980). A bidder has a right to withdraw the bid at any time before its acceptance. See Blossom, 70 U.S. at 206; 7 Am. Jur. 2d Auctions and Auctioneering § 33; 7A C.J.S. Auctions and Auctioneers § 13. The timing of acceptance, and therefore of the creation of a contractual obligation, is different if the auction sale is conducted "with reserve": "Where [*46] the seller reserves the right to refuse to accept any bid made, a binding sale is not consummated between the seller and the bidder until the seller accepts the bid." 7 Am. Jur. 2d Auctions and Auctioneering § 20; see also Blossom, 70 U.S. at 206; 7A C.J.S. Auctions and Auctioneers § 11.
If by virtue of the required statutory approval, the FCC's spectrum-allocation process became an "auction with reserve," then (under the principles of auction law) NextWave's obligation to pay would not have arisen until the FCC approved the grant of the Licenses to NextWave, after the drop in market value reflected in (or precipitated by) the auction of the D-, E- and F-blocks. The finding of constructive fraud rests on that analysis. On the other hand, if the obligation to pay or make good the winning bid arose when the winning bid was announced, before the drop in market value, then the obligation NextWave seeks to avoid cannot be characterized as a constructive fraud.
We conclude that the obligations NextWave seeks to avoid arose no later than the announcement of the winning bid, even though the resulting contract had more terms than would be common at the auction of a saleable [*47] thing by a private seller. By conducting the auction, the FCC offered to deliver the Licenses to the qualified high bidder. By bidding, NextWave represented that it was qualified to receive the Licenses. By making the high bid, NextWave (a) assumed an obligation to pay a down-payment promptly, (b) assumed an obligation to pay in the future the amount of its bid upon receipt of the Licenses and (c) assumed the risk that it might prove unqualified, by binding itself in that event to pay the amount of any shortfall in a re-auction of the same Licenses.
The requisite statutory approval by the FCC was not a "reserve" that (until lifted) prevented any enforceable obligation on the part of the high bidder. Auctions with reserve stand or fall as a matter of the seller's discretion, usually on the basis of the pecuniary sufficiency of the bids. See 7 Am. Jur. 2d Auctions and Auctioneering § 23 (defining the phrase "without reserve" in terms of the seller's right to "withdraw[] the property from sale if he is not pleased with the bids"); see also Drew v. John Deere Co., 19 A.D.2d 308, 241 N.Y.S.2d 267, 269-70 (App. Div. 1963); 7 Am. Jur. 2d Auctions and Auctioneering § 21 ("In [*48] an auction with a reserve, the auctioneer may withdraw the items for auction at any time until he announces completion of the sale." (emphasis added)).
The nature of the statutory approval requirement in this case is neither discretionary nor economic. The FCC's act of naming NextWave the winning bidder obligated the FCC to deliver the Licenses to NextWave, at the price determined by NextWave's winning bid, if NextWave fit certain noneconomic qualifying criteria. See In the Matter of the Implementation of Section 309(j) of the Communications Act--Competitive Bidding, Fifth Report and Order, FCC 94-178, 9 F.C.C.R. 5532 (July 15, 1994), 1994 WL 372170 (F.C.C.) P 81 ("If the Commission denies all petitions to deny, and is otherwise satisfied that the applicant is qualified, the license(s) will be granted to the auction winner."); 47 C.F.R. § 1.2108(d)(1) ("If the Commission determines that . . . an applicant is qualified . . . it will grant the application."). NextWave cites Mobile Communications Commission v. FCC, 316 U.S. App. D.C. 220, 77 F.3d 1399 (D.C. Cir. 1995), as demonstrating that the FCC has no obligation to grant the license at the bid-upon price. [*49] MCC v. FCC, however, dealt not with the FCC's decision that a bid price was insufficient but with the FCC's determination that the licensee was ineligible for a "pioneer's preference" and thus had to pay for its license. See id. at 1408-09. The case is inapposite.
NextWave knew about the statutory criteria for approval before the bidding began. See 47 C.F.R. § 310(b)(4) (1991); 47 C.F.R. §§ 24.709, 24.712, 24.720 (1996). In the event, the only obstacle to closing encountered by NextWave was its own non-compliance with the foreign ownership requirements. NextWave's willingness to bid notwithstanding the undisputed fact that non-compliance would prevent delivery of the Licenses and compel NextWave to insure the government against a lower high bid at re-auction demonstrates that NextWave assumed the risk of its own non-compliance.
True, there appears to be an element of discretion in the FCC's decision to grant the Licenses conditionally, pending NextWave's compliance with statutory requirements. However, that conditional grant was temporary, see In re Applications of NextWave Personal Communications, Inc. for various C-Block broadband PCS Licenses, DA 97-328 (Feb. 14, 1997), at 2, [*50] and the FCC had no power to waive the statutory requirements permanently. Moreover, it was a temporary discretionary approval; the FCC had no authority to reject NextWave's bid as a matter of discretion.
Thus the FCC was obligated to deliver the Licenses at the agreed-upon price if NextWave could demonstrate that it met certain statutory and regulatory eligibility requirements, and NextWave assumed the risk of its failure to do so. The FCC was bound, and so was NextWave. After acceptance of the offer, "as a rule, the seller has no right to accept a higher bid, nor may the buyer withdraw his bid." 7 Am. Jur. 2d Auctions and Auctioneering § 20 (1997); see also Blossom, 70 U.S. at 206.
The FCC's dual role in the licensing process -- as offeror in the auction and as regulator thereafter -- confers on the FCC prerogatives that are not enjoyed by the ordinary seller. The FCC thus retains the authority to reject a high bid for regulatory purposes. But NextWave knew, at the time of the auction, that the winning bidder would look to the FCC both as creditor and as regulator. If NextWave objected to the conditions imposed by the FCC or to the FCC's dual role in the transaction, [*51] NextWave could have refrained from participating in the auction.
The point is well illustrated in United States v. Weisbrod, 202 F.2d 629, 633 (7th Cir. 1953). In a surplus auction conducted near the end of World War II, the federal government reserved a unilateral right to withdraw from sale certain chemicals and drugs, even after accepting the winning bid. See id. at 630. When the government sued the winning bidder for default, the bidder defended on the ground that the contract was defective for failure of mutuality. See id. at 631. The Seventh Circuit affirmed the finding of liability for breach, see id. at 633, on the ground that a condition made known to the buyer -- even the unilateral right of the seller to withdraw from the contract -- did not abrogate the buyer's obligation to perform. See id. at 632-33. "If one does not wish to bid . . . with the conditions attached, his alternative is to make no bid." Id. at 633.
CONCLUSION
We hold that the bankruptcy and district courts had no power to interfere with the FCC's system for allocating spectrum licenses and that, in any event, the courts erred [*52] in determining that NextWave's payment obligation was constructively fraudulent. We therefore reverse the judgment of the district court affirming the five orders of the bankruptcy court and remand for further proceedings consistent with this opinion, if any are necessary. The mandate shall issue forthwith.
P
|
