Second Circuit Opinion: ///////////be forewarned; it is unexpurgated.
part one-------
In Re: NEXTWAVE PERSONAL COMMUNICATIONS, INC., Debtor.
FEDERAL COMMUNICATIONS COMMISSION, Appellant, - v -
NEXTWAVE PERSONAL COMMUNICATIONS, INC., Appellee.
Docket No. 99-5063
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
1999 U.S. App. LEXIS 33444
November 1, 1999, Argued
December 22, 1999, Decided
PRIOR HISTORY: [*1] Appeal from a judgment of the United States District Court for the Southern District of New York (Charles L. Brieant, Judge) affirming five decisions and orders of the United States Bankruptcy Court for the Southern District of New York (Adlai S. Hardin, Bankruptcy Judge) rendered in the adversary proceeding of NextWave Personal Communications, Inc. against the Federal Communications Commission. The district and bankruptcy courts exceeded their jurisdiction by in effect intervening in the allocation of radio spectrum licenses and misconstrued the nature of the Appellee's financial obligations under the Federal Communications Commission's spectrum auction rules. Accordingly, we reverse the judgment of the district court affirming the orders of the bankruptcy court and remand for further proceedings consistent with this opinion, if any are necessary.
DISPOSITION: Reversed and remanded.
COUNSEL: DANIEL S. ALTER, Assistant United States Attorney, New York, NY (Mary Jo White, United States Attorney for the Southern District of New York and Gideon A. Schor, Assistant United States Attorney, Of Counsel), for Appellant.
DEBORAH L. SCHRIER-RAPE, Andrews & Kurth L.L.P., Dallas, TX (Gregory H. Bevel, [*2] Michelle V. Larson and James P. Muenker, Of Counsel), for Appellee.
David M. Friedman, Kasowitz, Benson, Torres & Friedman L.L.P., New York, NY, for amicus curiae Official Committee of Unsecured Creditors.
Anthony A. Dean, Windels, Marx, Davies & Ives, New York, NY (Charles E. Simpson, Of Counsel), for amicus curiae Urban Comm-North Carolina, Inc.
JUDGES: Before: McLAUGHLIN, JACOBS and SACK, Circuit Judges.
OPINION:
PER CURIAM:
The Federal Communications Commission (the "FCC") appeals from an order of the United States District Court for the Southern District of New York (Charles L. Brieant, Judge), NextWave Personal Communications, Inc. v. FCC (In re NextWave Personal Communications, Inc.), No. 99 Civ. 4439 (CLB) (S.D.N.Y. July 27, 1999), affirming five decisions and orders of the United States Bankruptcy Court for the Southern District of New York (Adlai S. Hardin, Bankruptcy Judge). On November 24, 1999, we issued an order reversing the judgment of the district court and remanding the case for further proceedings, with an opinion to follow. This is that opinion.
In pertinent part, the decisions and orders of the bankruptcy court, affirmed by the district court judgment [*3] from which the FCC appeals, held that the FCC's grant to NextWave Personal Communications, Inc. ("NextWave") of sixty-three radio spectrum licenses for which NextWave had been the high bidder at the FCC's 1995-96 "C-block" auction (the "Licenses") was a constructively fraudulent conveyance for purposes of 11 U.S.C. § 544 (" § 544"). See NextWave IV.A, 235 B.R. at 304. The bankruptcy court therefore avoided $3.7 billion of NextWave's $4.74 billion obligation to the FCC, allowing NextWave to keep the Licenses while it reorganized in bankruptcy. See NextWave IV.B, 235 B.R. 305. We hold that the bankruptcy court had no authority thus to interfere with the FCC's system for allocating spectrum licenses, and that in any event it wrongly concluded that the Licences were fraudulently conveyed by failing to defer to the FCC's interpretation of its own regulations when determining the point at which NextWave's obligations were incurred for § 544 purposes. We therefore reverse the judgment of the district court affirming the orders of the bankruptcy court and remand the case to the bankruptcy court for further proceedings consistent with this [*4] opinion, if any are necessary.
BACKGROUND
In 1993 Congress passed several amendments to the Federal Communications Act (the "FCA"), one of which added § 309(j). See Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, § 6002(a), 107 Stat. 312, 387 (1993). Section 309(j) authorized the FCC to conduct competitive bidding auctions for radio spectrum licenses. The FCC was instructed to ensure that as part of its auction plan certain blocks of spectrum would be reserved for qualified entities, including small businesses, and that deferred payment plans on favorable terms would be available to them. See 47 U.S.C. § 309(j)(3)(B), (j)(4)(D). Pursuant to these instructions, the FCC reserved a block of 493 licenses known as the "C-block licenses" for the use of qualified entities providing "personal communications services," an emerging form of wireless communications technology.
On May 6 and July 16, 1996, the FCC concluded two sets of C-block auctions, which produced some ninety successful bidders. NextWave, a startup company established to take advantage of the opportunities created by § 309(j), was the high bidder for sixty-three C-block licenses. Its [*5] aggregate winning bids amounted to $4.74 billion.
Pursuant to the FCC regulations issued under § 309(j), winning bidders that were "small businesses" were required to pay only ten percent of their winning bids in cash; the remaining ninety percent could be paid in installments over a ten-year period at below market interest rates. 47 C.F.R. § 24.711(b)(3). NextWave made the required five percent down payment on the Licenses when it was announced as the high bidder on them in the summer of 1996, and subsequently deposited another five percent with the FCC on January 9, 1997, immediately after its application for the Licenses was conditionally approved.
The four-month gap between those two dates resulted from the FCC's auction rules under which a winning bid did not automatically trigger the grant of the license or licenses in question. A winning bidder was required to submit a "long form" application, and the grant of a winning bidder's licenses was conditioned upon that bidder's ability to demonstrate through its application that it was in compliance with FCC regulations and statutory requirements. While over ninety percent of the winning bidders at the C-block auctions were [*6] granted their licenses on September 17, 1996, NextWave's ownership structure, specifically its allegedly impermissibly high percentage of foreign ownership, was challenged. The Licenses were conditionally granted to NextWave on January 3, 1997, after NextWave submitted to the FCC a plan to bring its capital structure into compliance with FCC regulations. On February 14, 1997, the FCC granted NextWave the Licenses conditioned upon NextWave issuing a series of promissory notes for the balance of its payments. On February 19, 1997, NextWave executed these promissary notes (the "Notes"), backdated to January 3. The Notes aggregated $4.27 billion, representing the remaining ninety percent of the bid price. By the time the Notes were executed, however, the market value of the Licenses, as later determined by the bankruptcy court, see NextWave IV.A, 235 B.R. at 303, had fallen to less than a quarter of the amount that NextWave had bid for them.
The C-block auctions were part of a series of auctions the FCC conducted to allocate spectrum for new technological uses. Prior to the C-block auctions, it had conducted the A- and B- block auctions, and in June 1996 it announced that [*7] it would conduct the D-, E- and F-block auctions starting on August 26, 1996. The winning bids at the A-, B-, D-, E- and F-block auctions were sharply lower than the winning bids at the C-block auctions when measured in dollars per MHz-Pop, a generally accepted industry measurement standard.
Since they were obligated to pay what turned out to be much higher prices for their licenses than other licensees, most of the winning C-block bidders, including NextWave, had difficulty securing the financing necessary for them to meet their financial commitments. They thus faced the prospect of an early default on their installment payments to the FCC.
The winning C-block bidders therefore petitioned the FCC for relief. In response, the FCC suspended the C-block installment payments and initiated an elaborate administrative process looking toward a restructuring of the C-block licensees' obligations.
On October 16, 1997, at the culmination of this process, the FCC issued a restructuring order, In the Matter of Amendment of the Commission's Rules Regarding Installment Payment Financing for Personal Communications Services (PCS) Licensees, Second Report and Order, FCC 97-342, 12 F.C.C.R. 16436 (Oct. 16, 1997), 1997 WL 643811 [*8] (F.C.C.) (the "Restructuring Order"), which offered troubled C-block license holders three mutually exclusive restructuring options, ranging from amnesty -- return of the licenses in exchange for forgiveness of debt obligations -- to a plan that allowed bidders to keep as many of their licenses as they could pay for by converting seventy percent of their down payment into a prepayment of the full bid price of a smaller number of licenses. The FCC decided that it would be contrary to the public interest to forgive a portion of the obligations, thereby allowing bidders to keep their licenses at a significantly reduced price, because the C-block auction had been designed to ensure that licenses were allocated to users who could demonstrate, through their ability to pay the highest price, that they possessed the most highly valued use for the licenses. Id. at PP 5, 19.
In response to the oppositions, petitions and replies that it received after the release of the Restructuring Order, the FCC issued a reconsideration order on March 24, 1998. See In the Matter of Amendment of the Commission's Rules Regarding Installment Payment Financing for Personal Communications Services (PCS) Licenses, Order on Reconsideration of the Second Report and Order, F.C.C. 98-46, 13 F.C.C.R. 8345 (Mar. 24, 1998), 1998 WL 130176 [*9] (F.C.C.) (the "Reconsideration Order"). The Reconsideration Order offered licensees slightly more flexibility in their decision-making process than the Restructuring Order, but otherwise left the Restructuring Order's framework intact. In response to still further petitions from C-block licensees, the FCC conducted yet more proceedings and issued a second reconsideration order, In the Matter of Amendment of the Commission's Rules Regarding Installment Payment Financing for Personal Communications Services (PCS) Licenses, Second Order on Reconsideration of the Second Report and Order, F.C.C. 99-66, 14 F.C.C.R. 6571 (Apr. 5, 1999), 1999 WL 183822 (F.C.C.) (the "Second Reconsideration Order"), which essentially reaffirmed the determinations the FCC had made in its previous two orders.
NextWave actively participated in the administrative process that led to the promulgation of these orders, but it remained dissatisfied with the results. On May 29, 1998, NextWave filed a petition with the Court of Appeals for the District of Columbia Circuit asking for review of the orders. On June 8, 1998 -- the deadline for selecting from the menu of restructuring options provided by the [*10] orders -- it asked both the FCC and the Court of Appeals for a stay of those orders so that it would have more time to consider its options. The FCC and the Court of Appeals each denied NextWave's request. See NextWave Telecom Inc. v. FCC, No. 98-1255 (D.C. Cir. June 5, 1998); In the Matter of Petition of NextWave Telecom, Inc. for a Stay of the June 8, 1998, Personal Communications Services C Block Election Date, FCC 98-104, 13 F.C.C.R. 11880 (June 1, 1998), 1998 WL 278735 (F.C.C.). The same day, NextWave filed a Chapter 11 petition and instituted an adversary proceeding against the FCC that sought to avoid the company's obligations resulting from its acquisition of the Licenses. See NextWave I, 235 B.R. at 267.
NextWave asserted two claims in the adversary proceeding. First, it argued that the transaction in which it acquired the Licenses was a fraudulent conveyance subject to avoidance under § 544 of the Bankruptcy Code (the "Code"). Second, it sought equitable subordination of the FCC's claim based on the FCC's "inequitable, unconscionable and unfair conduct" in auctioning the D-, E- and F-block licenses before approving NextWave's application for the [*11] C-block Licenses. The FCC moved to dismiss both claims.
The bankruptcy court dismissed the second claim for lack of subject matter jurisdiction, see NextWave I, 235 B.R. at 271; NextWave has not appealed from that order. Only the first claim is therefore before us. The FCC argued below that the bankruptcy court also lacked subject matter jurisdiction over this claim because jurisdiction over actions brought against the FCC in its regulatory capacity lies exclusively in the federal courts of appeals pursuant to 28 U.S.C. § 2342 and 47 U.S.C. § 402. The FCC also argued that the FCA preempted state fraudulent conveyance law. The bankruptcy court rejected these arguments, holding that for purposes of the fraudulent conveyance claim, the FCC was acting in its capacity as creditor rather than as regulator. See NextWave I, 235 B.R. at 269-71. The court therefore concluded that it had jurisdiction over the claim, and further found that the FCA did not conflict with or preempt its application of fraudulent conveyance law under § 544.
Section 544(b) of the Code allows the avoidance of "any transfer of an interest of [*12] the debtor in property or any obligation incurred by the debtor that is voidable under applicable law." Applicable law includes various state fraudulent conveyance statutes, many based on the Uniform Fraudulent Transfer Act. See Sender v. Simon, 84 F.3d 1299, 1304 (10th Cir. 1996). In analyzing a fraudulent conveyance claim under the act, courts determine whether the debtor was engaged or about to engage in a transaction for which the remaining assets of the debtor were unreasonably small in relation to the size of the transaction. If so, and if the consideration provided by the debtor for the allegedly fraudulent transfer was not reasonably equivalent to what the debtor received in return on the effective date of the transfer, then the transfer is deemed constructively fraudulent and can be avoided. See NextWave IV.A, 235 B.R. at 287-89. In NextWave's case, if there is a § 544 claim at all, its resolution turns on when NextWave's obligations to pay arose. If that is deemed to be the close of the C-block bidding, then the transfer could not be constructively fraudulent because NextWave paid exactly the market price for the Licenses as of that date, as determined [*13] by its own bid. See NextWave IV.A, 235 B.R. at 297 n.9. However, if the effective date is deemed to be January 3, the date on which the Licenses were conditionally granted, or February 19, 1997, the date on which they were finally granted in return for the executed Notes, then the obligation when it arose was for an amount far greater than what the bankruptcy court deemed to be the market price of the Licenses.
Hoping to resolve this issue quickly, the FCC moved for summary judgment on the question of when NextWave's $4.74 billion obligation was incurred. Despite the FCC's argument that under its regulations the entire obligation became due at the close of the C-block auction, the bankruptcy court found that the effective date of NextWave's obligations for the purposes of § 544(b) was January 3, 1997. See NextWave II, 235 B.R. at 276. The court acknowledged that 47 C.F.R. § 1.2104 subjected a winning bidder to a penalty upon default based on the difference between its bid and the high bid on reauction of the licenses, but held that "nothing in this calculation explicitly or implicitly binds the winning bidder to the full amount of its bid." Id. at 275. [*14]
The FCC then moved to dismiss the complaint on the ground that the avoidance claim challenged a contractual relationship with the United States entered into pursuant to a national regulatory scheme, and that federal common law, rather than state fraudulent conveyance law, therefore was the "applicable law" under § 544. In an oral decision, NextWave III, tr. at 50-51, the bankruptcy court refused to create new federal common law to govern the situation, reasoning that fraudulent conveyance law did not abrogate the explicit terms or purposes of the regulatory scheme under § 309(j). See id., tr. at 53-54.
The parties then proceeded to trial. The bankruptcy court concluded under California law that NextWave's obligations were incurred on February 19, 1997; that on that date the Licenses were worth $1,023,211,000; and that all obligations above that amount were constructively fraudulent and therefore avoided. Since NextWave had already paid $474,364,806, or ten percent of its original high bid, to the FCC as a down payment, the remaining obligation was reduced to $548,846,194. See NextWave IV.A, 235 B.R. at 304; NextWave IV.B, 235 B.R. at 306. The avoidance [*15] remedy allowed NextWave to keep the Licenses while obligating it to pay less than one-quarter of the amount it had bid for them.
The FCC appealed to the district court, which affirmed for substantially the reasons stated by the bankruptcy court. NextWave Personal Communications, Inc. v. FCC (In re NextWave Personal Communications, Inc.), No. 99 Civ. 4439 (CLB) (S.D.N.Y. July 27, 1999). This appeal, which we have heard on an expedited basis, followed. |
