Mayer Brown's



2001 Term, Number 11 / March 4, 2002

Today the Supreme Court granted certiorari in and consolidated two cases of potential interest to the business community. Amicus briefs in support of the petitioners are due on Thursday, April 18, 2002, and amicus briefs in support of the respondent are due on Monday, May 20, 2002. Any questions about these cases should be directed to Eileen Penner (202-263-3242) or Miriam Nemetz (202-263-3253) in our Washington office.

Bankruptcy Code — Communications Act — Cancellation of Spectrum License for Failure to Make Timely Payments. Section 525(a) of the Bankruptcy Code, 11 U.S.C. 525(a), provides that a "governmental unit" may not revoke a license or other similar grant to a bankrupt "solely because" the bankrupt "has not paid a debt that is dischargeable" in a bankruptcy. In Federal Communications Comm'n v. NextWave Pers. Communications Inc., No. 01-653, and Arctic Slope Reg'l Corp. v. NextWave Pers. Communications Inc., No. 01-657, the Supreme Court granted certiorari to determine whether Section 525(a) of the Bankruptcy Code takes precedence over Federal Communication Commission ("FCC") rules on spectrum license auctions, which provide that spectrum licenses obtained at auction are automatically cancelled upon the winning bidder's failure to make timely payments to fulfill its bid.

In 1995, a group of former telecommunications executives formed NextWave Personal Communications Inc. and NextWave Power Partners Inc. (collectively "NextWave") for the purpose of bidding on spectrum licenses and operating a personal communications service. At spectrum license auctions in May and June 1996, NextWave bid $4.74 billion in total, winning 63 licenses. NextWave deposited $474 million as a down payment, and filed applications for the licenses. On January 3, 1997, the FCC granted NextWave its licenses, took a security interest in each, and filed financing statements to perfect its claims. Each license stated that it was "conditioned upon the full and timely payment of all monies due" and that failure to comply with the obligation would "result in the automatic cancellation" of the license. 

On June 8, 1998, NextWave filed for Chapter 11 bankruptcy protection, and made no further payments on its licenses. Instead, NextWave alleged in bankruptcy court that its $4.74 billion license obligation was avoidable under § 544(a) of the Bankruptcy Code, 11 U.S.C.§ 544(a), as a "fraudulent conveyance." According to NextWave, the company had not received reasonably equivalent value for incurring the obligation because, by the time the FCC actually conveyed the licenses in 1997, the licenses' value had declined to less than $1 billion. See NextWave Pers. Communications Inc. v. FCC, 235 B.R. 263, 269 (Bankr. S.D.N.Y. 1999) ("NextWave I"); see also 235 B.R. 277, 290 (Bankr. S.D.N.Y. 1999) ("NextWave III").

The bankruptcy court agreed with NextWave, holding that NextWave's bid exceeded the licenses' fair market value at the time of their conveyance, NextWave III, 235 B.R. at 304, and that NextWave could keep its licenses for $1.023 billion – less than one-quarter the amount it originally bid for them. 235 B.R. 305, 312-14 (Bankr. S.D.N.Y. 1999) ("NextWave IV"), aff'd, 241 B.R. 311, 321 (S.D.N.Y. 1999). 

The Second Circuit reversed. 200 F.3d 43, 52 (2d Cir. 1999). According to the Second Circuit, the licenses – although allocated through competitive bidding – remained subject to the FCC's regulation and reclamation. Id. at 54. Thus, when the bankruptcy court held that NextWave could retain its license for $1.023 billion, the court abrogated the FCC's licensing authority. Ibid. 

After the Second Circuit's decision, NextWave petitioned the FCC to reconsider its automatic cancellation, and offered a single lump sum payment to satisfy its entire $4.3 billion outstanding obligation, including interest and late fees. The FCC denied NextWave's petition, stating that NextWave's licenses had automatically been cancelled when the company missed its first payment. Simultaneously, the FCC re-auctioned NextWave's spectrum licenses, noting that the licenses were available under the regulations' automatic cancellation provisions. 

The D.C. Circuit reversed the FCC's automatic cancellation of the licenses. 254 F.3d 130, 155 (D.C. Cir. 2001). According to the court, the FCC violated Bankruptcy Code § 525(a) by revoking NextWave's licenses "solely because" NextWave failed to pay a dischargeable debt while under the protection of the bankruptcy laws. 254 F.3d at 149. According to the court, § 525(a) "prohibits governmental units, for whatever reason, from canceling licenses for failure to pay a dischargeable debt." Id. at 150 (emphasis in original). Thus, FCC regulations could not displace federal bankruptcy law.

These cases are significant to all businesses that purchase licenses from federal regulatory agencies because the rulings will clarify the relationship between agency regulations and the federal bankruptcy laws.

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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