Restructuring

Contributed by Abigail Lerner
Recently, the United States Court of Appeals for the Tenth Circuit was called upon to consider the ways in which the Federal Communications Act, the Bankruptcy Code, and Nebraska state law interact to determine whether a creditor with a security interest in the general intangibles of a federally licensed broadcasting company has priority over unsecured creditors in the proceeds of the sale of the company’s broadcasting license after the company files for chapter 11 protection.  Reversing the bankruptcy court and the district court, the Tenth Circuit, in Valley Bank and Trust Co. v. Spectrum Scan, LLC (In re Tracy Broadcasting Corp.) answered the question in the affirmative.
Tracy Broadcasting, a Nebraska corporation that operated an FM radio station under a license issued by the Federal Communications Commission, commenced a chapter 11 case in 2009.  Prepetition, Tracy Broadcasting obtained a $1,596,100 loan from Valley Bank & Trust Company.  The loan was secured by various assets, including Tracy Broadcasting’s general intangibles and their proceeds.  Also prior to the chapter 11 filing but after Tracy Broadcasting obtained the loan, Spectrum Scan obtained a judgment against Tracy Broadcasting in the amount of $1,400,000.  Seven months later, Tracy Broadcasting filed its chapter 11 case.
Tracy Broadcasting’s two primary creditors in its chapter 11 case were Valley Bank and Spectrum Scan.  Tracy Broadcasting’s most valuable asset was its broadcasting license, which it estimated to be worth $950,000.  Just months into the chapter 11 case, prior to an agreement for sale or transfer of the broadcasting license, Spectrum Scan commenced an adversary proceeding to determine the extent of Valley Bank’s security interest.  The Colorado bankruptcy court ruled that Valley Bank had no security interest in the proceeds of the sale of Tracy Broadcasting’s license, and the District Court affirmed.
The Tenth Circuit undertook a two step analysis to determine whether Valley Bank’s security interest extended to the proceeds of its FCC license.  First, the Tenth Circuit determined what, if any, interest Tracy Broadcasting could convey in its broadcast license before it filed bankruptcy.  Second, the Tenth Circuit considered whether a security interest in the right to the proceeds of a sale of a license is a property interest that can attach before a sale of the license is contemplated.
Before addressing the first issue, the Tenth Circuit examined the bankruptcy court’s rulings, adopted by the district court, regarding the provisions of the Bankruptcy Code that govern the validity of liens placed on a debtor’s property prior to its bankruptcy case.  While section 552(a) of the Bankruptcy Code generally cuts off prepetition security interests in property of the debtor acquired after the commencement of its bankruptcy case, section 552(b)(1) of the Bankruptcy Code permits a prepetition lien to extend to after acquired property if the after acquired property constitutes proceeds of the prepetition collateral, and the prepetition security agreement and applicable nonbankrupty law provide for a lien on such proceeds.  The Colorado bankruptcy court ruled that the exception found in section 552(b)(1) could not apply to Valley Bank’s purported lien because Tracy Broadcasting itself lacked a sufficient prepetition property interest in the FCC broadcasting license to pledge it, and any proceeds derived from its sale, to Valley Bank.  According to the bankruptcy court, Tracy Broadcasting’s right to convey the proceeds of a sale of its broadcast license was too remote because the right was subject to two contingencies:  first, an agreement with a third party to transfer the license and second, FCC approval of the transfer.  Because neither the first nor the second contingency had occurred prior to Tracy Broadcasting’s chapter 11 case, the bankruptcy court reasoned, Tracy Broadcasting did not have a sufficient property interest in the proceeds to transfer a security interest in them to Valley Bank.
To determine what, if any, interest Tracy Broadcasting could convey in its broadcast license prior to the commencement of its case, the Tenth Circuit looked to the Federal Communications Act and the FCC’s position regarding the rights of license holders to convey security interests in their licenses.  While it would violate FCC policy for a licensee to grant a lien that would allow the lienholder to obtain the license upon the debtor’s default without FCC approval, giving a security interest in the proceeds of the sale of a license would not, the Tenth Circuit found, raise the same concerns.  Indeed, the Tenth Circuit recognized that the FCC emphasized that permitting such security interests would improve a licensee’s access to capital, and nothing in the FCA prohibits a licensee from making money from its license regardless of whether a prospective purchaser of such license was in sight.  Accordingly, the Tenth Circuit concluded that “the holder of an FCC license has the right to the proceeds of a sale of that license and may grant a security interest in that right and in the proceeds of that right (that is, the proceeds of a future sale).”
Having concluded that Tracy Broadcasting held a sufficient property interest in the broadcast license to convey a security interest in its right to the proceeds of the sale of the license, the Tenth Circuit turned to the second issue at hand – whether such a security interest is a property interest that can attach before a sale of the license is contemplated.  Recognizing that, under the Bankruptcy Code, property rights are ordinarily a matter of state law, the Tenth Circuit looked to the law of Nebraska – the state in which Tracy Broadcasting was incorporated – to address this issue.
According to the Tenth Circuit, Nebraska law recognizes the attachment of an interest in the right to proceeds of a sale of an FCC license when the licensee enters into the security agreement.  Nebraska is no different from other states as “courts have uniformly recognized that an FCC license is a general intangible and that a lien on such an intangible may be perfected prepetition before any proceeds or other consideration is generated and prior to any transfer, sale, or other disposition of the license.”  In re TerreStar Networks, Inc..  Indeed, the Tenth Circuit found nothing in the Nebraska Uniform Commercial Code or its commentary that hinted at the possibility that a security interest in the right to proceeds of a license sale would not attach before there is a contract for the sale.  This, the Tenth Circuit concluded, was in line with the FCC’s view that the right to grant liens on the proceeds of the sale of a license is a means to improve licensees’ access to capital.  If the security interest could not attach before there was a contract for sale of the license, the Tenth Circuit reasoned, “the interest would have little value, particularly when the sale results from financial problems of the licensee, the very circumstance for which a creditor desires protection.”  Accordingly, the Tenth Circuit saw “no policy reason to prevent the attachment of a security interest in the right of the licensee (the right to proceeds of the license’s sale) that may well be the licensee’s best tool to obtain capital.”  Accordingly, the Tenth Circuit reversed the judgment of the district court with direction to remand the matter to the bankruptcy court for further proceedings consistent with the ruling.
The Tenth Circuit is not the only court to rule that a lender may obtain a valid lien on the economic value of a broadcast license.  For example, the issue was addressed at least 20 years ago by the Bankruptcy Court for the District of Maryland in In re Ridgely Communications, Inc. where the court held that the perfection of a creditor’s private right on the economic value of a license did not disrupt the FCC’s public right to regulate the license.  Other courts, such as the Bankruptcy Court for the Southern District of New York in In re TerreStar Networks, Inc. and In re Ion Media Networks, Inc., have followed suit.  These rulings, along with the Tenth Circuit’s recent ruling in Tracy Broadcasting, may provide some certainty to lenders about the validity of security interests in the proceeds of a broadcast license.  Perhaps this will, as the FCC posits, increase a licensee’s access to capital.