Connecticut Lawyer Becomes Bankruptcy's Wireless Wizard With Billion-Dollar Wins
Thomas Scheffey
The Connecticut Law Tribune
July 16, 2001
With two stunning wins in less than 10 days, G. Eric Brunstad Jr., a Hartford, Conn., bankruptcy advocate, helped win over $12 billion in national wireless licensing for companies in New York and Texas.
The decisions were a victory for bankruptcy law principles and a harsh blow to the FCC.
Adopting the arguments advanced by Brunstad's team, the U.S. Circuit Court of Appeals for the D.C. Circuit concluded that the FCC had no right to cancel and resell wireless spectrum licenses purchased by NextWave Personal Communications, of Hawthorne, N.Y.
The licenses can be used for third-generation or "3G" wireless service. The technology goes well beyond just phone calls, promising high-speed wireless Internet access, hand-held tools for e-commerce, music and customized local information.
As Brunstad explained in interviews with The Law Tribune, NextWave bought its licenses in 1996 for $4.7 billion, putting down $470 million -- the 10 percent the FCC required small companies to do.
Subsequently, the FCC flooded the market with some 1500 more licenses, and the value of the NextWave licenses dropped. Unable to raise enough funds to pay its license costs, it sought Chapter 11 reorganization in 1998.
Then, when the company missed a payment, the FCC invoked a clause in the two-page licenses, which said they could be cancelled for late payment.
On the strength of the contract language, and despite ongoing court appeals by NextWave, the FCC reauctioned the licenses in January to Verizon Wireless, AT&T, Cingular and other companies in the largest such auction in history. The bidders paid nearly $16 billion -- for spectrum rights NextWave owned all along and which the FCC had no right to sell, according to the federal circuit panel ruling June 22.
NextWave may now be rich indeed. If, to settle, the big bidders paid NextWave the second auction price, it would have a gain of approximately $11.1 billion.
But the company says it prefers to lease out its bandwidth, not sell it.
While its position looks strong now, two years ago it seemed doomed. In a crushing decision, a three-judge panel of the 2nd U.S. Circuit Court of Appeals held the FCC could strip the company of the licenses and follow its regulatory dictates, not those of bankruptcy court.
Enter Brunstad, of the Hartford offices of Bingham Dana, brought in at this low point as special bankruptcy counsel. (The counsel of record for NextWave was Theodore B. Olson, then of Washington's Gibson, Dunn & Crutcher, who is currently solicitor general.)
A new split in federal authority was about to be created, NextWave argued in impassioned pleas to the U.S. Supreme Court and the 2nd Circuit. Neither court ordered a rehearing, but on jurisdictional grounds, the 2nd Circuit deferred to the D.C. Circuit, which regularly handles FCC issues. There the case grew into an epic clash of technology, surging markets and feuds between Congress and the FCC.
In the eyes of bankruptcy law, Brunstad argued, the FCC was the same as any creditor offering time payments. It could not simply repossess and resell property of a business moving forward under Chapter 11 protection.
Federal lawmakers joined the case. With an amicus curiae brief supporting NextWave's claim, Sen. Charles E. Schumer, D-N.Y., Robert G. Torricelli, D-NJ and three U.S. representatives contended that the FCC's acts were invalid and would be destructive of Congress' purpose in setting up Chapter 11. An exception for federal agencies would ruin the recovery purpose of bankruptcy, they argued.
The lawmakers contended the legislative history of Bankruptcy Code Chapter 525(a) makes it clear that reorganization in bankruptcy "is simply not possible if creditors, including governmental agencies, remain free to plunder a debtor's assets simply because their claims remain unpaid."
Despite those pleas in December 2000, the FCC auctioned 216 of the NextWave licenses the next month for a total of $15.85 million.
Now, Federal Circuit Judge David S. Tatel has ruled that by canceling and reselling the licenses, the FCC was acting more as a creditor than a regulator. He said it had no directive from Congress to get into the credit business, and should not be able to escape the effects of bankruptcy law. He was joined by judges David B. Sentelle and Merrick B. Garland.
ANOTHER $894 MILLION
Brunstad is also bankruptcy counsel in the case of GWI PCS 1 Inc., a Dallas spectrum license holder that bought $1.06 billion in licenses for the Atlanta area, Northern California, and Miami. Like NextWave, it was caught in a credit bind when the FCC flooded the market with new spectrum sales. A bankruptcy judge reduced the value of the licenses to $166 million to reflect its market value.
GWI opposed the government's appeal to the U.S. Supreme Court to get paid the full $1.06 billion. Brunstad argued that the bankruptcy court's reorganization plan made the issue "equitably moot." Under the equitable mootness doctrine, creditors are entitled to rely on the terms of a reorganization plan. Otherwise, he said, no one would lend to or invest in a company emerging from bankruptcy. The U.S. Supreme Court denied certiorari June 29, ending the government challenge.
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