Using ' 552(a) to Invalidate a Lender's Security Interest in Proceeds of an FCC License

Spectrum argued that: 1) if the bank did not have a security interest in the FCC license, it could not claim one in the license's proceeds; and, in the alternative, 2) even if the bank could obtain a security interest in the license, such interest would not attach until the debtor had the right to receive value for the license ' since any sale of the license would occur post-petition, ' 552(a) of the Bankruptcy Code would prevent the bank from acquiring an interest in the post-petition proceeds of the license.

In opposition, the bank argued that the FCC license may be bifurcated into public rights (defined as the power to determine who may become the licensee and the duration of the license) and private rights (defined as the licensee's interest in proceeds from an FCC-approved transfer of the license), and that the licensee could grant a security interest in its private rights. Moreover, the bank argued, the security interest in the private rights attached prepetition, when the security interest in general intangibles was granted, allowing the bank to recover post-petition proceeds under Bankruptcy Code ' 552(b). A similar approach was adopted in In re Media Properties, Inc., 311 B.R. 244 (Bankr. W.D. Wis. 2004). In that case, the court divided the FCC license into public and private rights, allowing for the prepetition attachment of a security interest in the private rights granted by the license. By taking this approach, Media Properties avoided application of ' 552(a) by providing an avenue for the security interest to attach to the underlying broadcast license prepetition.

The Ruling

In reaching its holding, the Tracy Broadcasting court acknowledged the inconsistent holdings that preceded its decision. Some courts (including the Sixth and Seventh Circuits) have flatly held that no security interest may be granted in any aspect of an FCC license, while others (including the Ninth Circuit) have adopted the bank's position, that a security interest may be granted in the private rights granted by a license. It should be noted that only Media Properties dealt with the issue addressed here ' the effects of ' 552 on a security interest in the proceeds of a broadcast license.

Based on its study of case law on this point, the court “presume[d] that it is possible, at least in the absence of a bankruptcy, for a debtor to grant a security interest in its right to receive proceeds upon an FCC-approved transfer of its license.” But the court rejected Media Properties, noting that “[t]he [d]ebtor's right to receive value for a transfer of its [l]icense did not exist prior to the filing of its Chapter 11 case because any such 'right' was too remote and was subject to two contingencies.” According to the court, a security interest in the proceeds of an FCC license cannot attach until there is both a sale agreement and approval of the agreement by the FCC. In this case, neither of these contingencies had been satisfied prepetition. Thus, “the [d]ebtor did not have a sufficient property interest in this contingency in order to transfer a security interest in it to the [b]ank.” If such a sale occurred after bankruptcy, Bankruptcy Code ' 552(a) would prevent the bank's security agreement from attaching to the sale proceeds.

The Appeal

The Tracy Broadcasting decision is currently on appeal to the district court. The parties' positions have not changed ' the bank maintains that Tracy acquired the right to sell the license (and grant a security interest in any proceeds resulting from such a sale) when Tracy obtained the license. While briefs have been filed, oral arguments have not yet been heard and no decision has been reached.

Terrestar Networks

Another case, In re Terrestar Networks, Inc. et al., pending before a bankruptcy court in the Southern District of New York, involves similar issues. In Terrestar, unsecured creditors have challenged Terrestar's grant of security interests in FCC broadcast licenses to its senior noteholders. In their summary judgment motions, the creditors argue that: 1) pre-petition liens on FCC licenses are invalid because there is no underlying property right in an FCC license; and 2) relying directly on Tracy Broadcasting, there can be no prepetition lien in proceeds of the licenses because no proceeds were available for attachment before the petition date. A hearing on the motions for summary judgment is scheduled for April 21, 2011.

Conclusion

Tracy Broadcasting Corp. is significant as it suggests, despite the existence of contrary authority in other Circuits, that the proceeds from the sale of an FCC license may be given as security for a loan, even if the FCC license itself may not be pledged. It is also the first case to hold that Bankruptcy Code ' 552(a) prevents attachment of the proceeds of an FCC license unless a transfer is substantially completed before the petition date, undercutting those bankruptcy cases that have approved such an interest but not considered the effect of ' 552(a).

Although not the first case to consider the issue, Terrestar is another significant case to follow as any decision will issue from the Southern District of New York, a district often looked to for banking law precedent in the bankruptcy context. Moreover, a second court's approval of Tracy Broadcasting's ' 552 analysis would reinforce Tracy's application of ' 552(a) to security interests in the proceeds of broadcast licenses, creating a solid line of authority to follow in future cases. But should Terrestar reject Tracy, the stage would be set for further appeals of both cases. Thus the final outcome in Tracy and Terrestar may provide new and important considerations for lenders when extending credit to broadcast entities.

Thomas F. Blakemore is a partner and Gregory A. Martin is an associate in Winston & Strawn LLP's restructuring and insolvency group. They may be reached at [email protected] and [email protected], respectively.

Recently, a Colorado bankruptcy court considered the effects of Bankruptcy Code ' 552(a) on a lender's security interest in the proceeds of an FCC broadcast license. The court held that a prepetition security interest would not extend to proceeds received from a post-petition transfer of the debtor's FCC license because the debtor did not have an attachable, prepetition property interest in the proceeds. Because a security interest does not extend to the underlying broadcast license, no interest in the proceeds of the license may arise until the FCC approves an agreement to sell the license. As no such sale was contemplated prepetition, ' 552(a) prevented the lender's security interest from attaching the proceeds of a post-petition sale.

The Case

In Spectrum Scan LLC v. Valley Bank and Trust Co. (In re Tracy Broadcasting Corp.), 438 B.R. 323 (D. Colo. 2010), the debtor operated an FM radio station under a license issued by the FCC. Before filing for bankruptcy, the debtor granted a security interest in its general intangibles and related proceeds to its lender. Spectrum Scan, an FM radio station and unsecured creditor, filed an adversary complaint seeking determination of whether the lender's security interest in the debtor's general intangibles and proceeds extended to any proceeds realized from a sale of the debtor's FCC broadcast license. Neither Spectrum nor the lender argued that the bank held a security interest in the FCC license itself. The sole issue was whether the bank's interest in general intangibles extended to proceeds realized on the license in a post-petition sale.

Spectrum argued that: 1) if the bank did not have a security interest in the FCC license, it could not claim one in the license's proceeds; and, in the alternative, 2) even if the bank could obtain a security interest in the license, such interest would not attach until the debtor had the right to receive value for the license ' since any sale of the license would occur post-petition, ' 552(a) of the Bankruptcy Code would prevent the bank from acquiring an interest in the post-petition proceeds of the license.

In opposition, the bank argued that the FCC license may be bifurcated into public rights (defined as the power to determine who may become the licensee and the duration of the license) and private rights (defined as the licensee's interest in proceeds from an FCC-approved transfer of the license), and that the licensee could grant a security interest in its private rights. Moreover, the bank argued, the security interest in the private rights attached prepetition, when the security interest in general intangibles was granted, allowing the bank to recover post-petition proceeds under Bankruptcy Code ' 552(b). A similar approach was adopted in In re Media Properties, Inc., 311 B.R. 244 (Bankr. W.D. Wis. 2004). In that case, the court divided the FCC license into public and private rights, allowing for the prepetition attachment of a security interest in the private rights granted by the license. By taking this approach, Media Properties avoided application of ' 552(a) by providing an avenue for the security interest to attach to the underlying broadcast license prepetition.

The Ruling

In reaching its holding, the Tracy Broadcasting court acknowledged the inconsistent holdings that preceded its decision. Some courts (including the Sixth and Seventh Circuits) have flatly held that no security interest may be granted in any aspect of an FCC license, while others (including the Ninth Circuit) have adopted the bank's position, that a security interest may be granted in the private rights granted by a license. It should be noted that only Media Properties dealt with the issue addressed here ' the effects of ' 552 on a security interest in the proceeds of a broadcast license.

Based on its study of case law on this point, the court “presume[d] that it is possible, at least in the absence of a bankruptcy, for a debtor to grant a security interest in its right to receive proceeds upon an FCC-approved transfer of its license.” But the court rejected Media Properties, noting that “[t]he [d]ebtor's right to receive value for a transfer of its [l]icense did not exist prior to the filing of its Chapter 11 case because any such 'right' was too remote and was subject to two contingencies.” According to the court, a security interest in the proceeds of an FCC license cannot attach until there is both a sale agreement and approval of the agreement by the FCC. In this case, neither of these contingencies had been satisfied prepetition. Thus, “the [d]ebtor did not have a sufficient property interest in this contingency in order to transfer a security interest in it to the [b]ank.” If such a sale occurred after bankruptcy, Bankruptcy Code ' 552(a) would prevent the bank's security agreement from attaching to the sale proceeds.

The Appeal

The Tracy Broadcasting decision is currently on appeal to the district court. The parties' positions have not changed ' the bank maintains that Tracy acquired the right to sell the license (and grant a security interest in any proceeds resulting from such a sale) when Tracy obtained the license. While briefs have been filed, oral arguments have not yet been heard and no decision has been reached.

Terrestar Networks

Another case, In re Terrestar Networks, Inc. et al., pending before a bankruptcy court in the Southern District of New York, involves similar issues. In Terrestar, unsecured creditors have challenged Terrestar's grant of security interests in FCC broadcast licenses to its senior noteholders. In their summary judgment motions, the creditors argue that: 1) pre-petition liens on FCC licenses are invalid because there is no underlying property right in an FCC license; and 2) relying directly on Tracy Broadcasting, there can be no prepetition lien in proceeds of the licenses because no proceeds were available for attachment before the petition date. A hearing on the motions for summary judgment is scheduled for April 21, 2011.

Conclusion

Tracy Broadcasting Corp. is significant as it suggests, despite the existence of contrary authority in other Circuits, that the proceeds from the sale of an FCC license may be given as security for a loan, even if the FCC license itself may not be pledged. It is also the first case to hold that Bankruptcy Code ' 552(a) prevents attachment of the proceeds of an FCC license unless a transfer is substantially completed before the petition date, undercutting those bankruptcy cases that have approved such an interest but not considered the effect of ' 552(a).

Although not the first case to consider the issue, Terrestar is another significant case to follow as any decision will issue from the Southern District of New York, a district often looked to for banking law precedent in the bankruptcy context. Moreover, a second court's approval of Tracy Broadcasting's ' 552 analysis would reinforce Tracy's application of ' 552(a) to security interests in the proceeds of broadcast licenses, creating a solid line of authority to follow in future cases. But should Terrestar reject Tracy, the stage would be set for further appeals of both cases. Thus the final outcome in Tracy and Terrestar may provide new and important considerations for lenders when extending credit to broadcast entities.

Thomas F. Blakemore is a partner and Gregory A. Martin is an associate in Winston & Strawn LLP's restructuring and insolvency group. They may be reached at [email protected] and [email protected], respectively.