Pacific Quadra casting: New Support For Security Interests In Broadcast Licenses

For companies in the broadcasting, cellular communications and other media businesses, the licenses granted by the Federal Communications Commission (the "FCC") to use the airwaves often comprise their most valuable assets. But the availability of those valuable FCC licenses as good financing collateral has not always been clear. In years past, the FCC maintained a policy strictly prohibiting the assertion of any security interest in an FCC license. More recently, however, both the FCC and the lower courts have recognized the right of a secured lender to create and enforce a security interest in the sale proceeds of FCC licenses.

A recent decision of the Ninth Circuit Court of Appeals, MLQ Investors, L.P. v. Pacific Quadracasting, Inc.,¹ has squarely endorsed this. In addition, the Pacific Quadracasting court added certainty to the priority of lenders' security interests in the sale proceeds of FCC licenses by resolving when such security interests arise.

Evolution of FCC Anti-Security Interest Policy

Under the Communications Act of 1934,² as amended (the "Communications Act"), the FCC is given broad discretion to control the awarding and assignment of licenses to use the electromagnetic spectrum. The FCC is responsible for overseeing the Congressional policy underlying the Communications Act -- that the United States must maintain control over the public airwaves, and that in licensing the use of this limited resource the public interest must be protected. One aspect of this grant of discretion to the FCC was hostility toward the pledge of FCC licenses as collateral for broadcast licensees' financings. The FCC reasoned that such liens would endanger the independence of the broadcast licensee in exercising its public trust. Thus, prior to 1994, the FCC's declared position was that all such attempts to grant security interests in licenses were void as impermissible encroachments on the FCC's authority.³

The U.S. Court of Appeals for the Seventh Circuit adopted this position in 1993 in In re Tak Communications.⁴ In Tak Communications the court, relying on the FCC's historical anti-pledge policy, upheld the invalidation of the entire security interest of a secured creditor in a broadcast license in a bankruptcy case.⁵ The Tak Communications court did acknowledge that whether and to what extent to permit security interests in FCC licenses was an issue for determination by the FCC.⁶ At the time of the Tak Communications decision the FCC had indicated (as the Tak Communications court acknowledged) that it may reexamine its prohibition against liens on broadcast licenses. Nonetheless, because the FCC had not yet expressly abandoned that policy, the Tak Communications court preserved the historical prohibition on liens.

The Tide Turns -- Ridgley and Cheskey

Almost concurrently with the Tak Communications decision, new thinking emerged in the seminal bankruptcy court case, In re Ridgley Communications, Inc.⁷ The Ridgley court crafted a middle ground between absolute prohibition of security interests in FCC licenses and complete freedom to pledge FCC licenses, by focussing on the purpose of the anti-pledge policy. The court reasoned that an FCC license consisted of two sets of rights. First, a public right exists, involving issues of the ownership of the electromagnetic spectrum and regulatory approval of transferees of licenses -- a public right which is properly the subject of FCC control. Second, the court recognized a private commercial right of the licensee to claim proceeds from a sale of the license, in which the licensee has a property interest that can be subjected to a security interest. Accordingly, in the Ridgley case, the security interest held by a bank lender in the FCC license of its radio station borrower was respected to the extent of the proceeds of the sale of the FCC license. Two years after the Ridgley decision was announced the FCC, in its decision in In re Cheskey,⁸ itself adopted the reasoning of Ridgley.

The Pacific Quadracasting Case

The Ridgley decision and its following cases,⁹ and the Tak Communications decision remain conflicting Circuit Court level authority on the issue of security interests in FCC licenses.¹⁰ Indeed, because the Tak opinion was released shortly after Ridgley, the Tak court was able to react to the Ridgley analysis, and it expressly declined to follow it.

It was in this context that the Ninth Circuit in 1998 announced its decision in Pacific Quadracasting. In Pacific Quadracasting, the secured party was granted security interests under a security agreement in the debtor's FCC licenses "to the extent permitted by law", and the secured party perfected those security interests by filing financing statements. Thereafter, the debtor failed both to repay its loan to the secured party and to pay its taxes to the Internal Revenue Service. The IRS filed tax liens after the time the secured party had filed its financing statements. Upon the secured party's suit to recover its loans, a receiver was appointed to sell the FCC licenses and remit the proceeds to the secured party, which the receiver did. In the litigation that followed, the priority of secured party's security interests (and thus its entitlement to distribution of the proceeds ahead of the IRS) was attacked on two grounds: first, that the security interests violated the anti-pledge policy endorsed by Tak Communications, and second, that the security interests did not arise until the FCC licenses were in fact sold and the proceeds generated, and were thus junior to the IRS tax liens.¹¹

When Can Liens Attach to Licenses?

The Ninth Circuit promptly disposed of the first claim, by adopting the rationale of Ridgley and Cheskey and expressly repudiating the analysis of the Seventh Circuit in Tak Communications.¹² The Quadracasting case would be notable if it only went this far -- providing solid new Circuit Court level precedent contrary to the Tak case.

But no less significant is the Quadracasting court's handling of the IRS's second claim. The IRS asserted that under the FCC policy endorsed in Cheskey, the security interest in an FCC license is a limited one, restricted to the proceeds of the sale of the license, and that a security interest in the proceeds of an FCC license can only arise when those proceeds do. The Quadracasting court disagreed. The court interpreted Ridgley and Cheskey as recognizing that the FCC licensee has a present interest in the proceeds of any future sale of the license, and that a present security interest can attach to that contingent right to future proceeds. The distinction in time is critical because, if the licensee's interest in the proceeds of the sale of the license does not arise until the time when the license is in fact sold, there would be no property interest to which a security interest could attach until long after other creditors (such as the IRS in Pacific Quadracasting) could have perfected superior liens against the debtor's assets. The Pacific Quadracasting court concluded that to hold otherwise would render the secured party's lien in an FCC license devoid of value.¹³

Conclusion

The Pacific Quadracasting decision provides important new assurance to secured lenders to FCC licensees that their security interests in proceeds of FCC licenses will be enforced. With Pacific Quadracasting, the trend against the old FCC anti-security interest rule embodied in Tak Communications is clearer than ever.¹⁴ In addition, Pacific Quadracasting determined, favorably for secured lenders, that an FCC licensee has enough of a stake in the future proceeds of an FCC license to be able to pledge that stake at any time the licensee holds the license.¹⁵

Andrew C. Ambruoso, an associate with the Firm, assisted in the preparation of this article.

Endnotes

• 1
• 146 F.3d 746 (9th Cir. 1998).
• 2
• 47 U.S.C.A. 151 et seq. (West Supp. 1998).
• 3
• See In re Merkeley, 94 F.C.C. 2d 829 (1983); In re Bill Welch, 3 F.C.C.R. 6502 (1988).
• 4
• 985 F.2d 916 (7th Cir. 1993).
• 5
• Notably, the facts in Tak Communications arose in a context in which the FCC licenses had not been sold and the court was not considering the priorities of creditors in the distribution of proceeds of the license, and as discussed below the treatment of sale proceeds of FCC licenses has become a critical issue.
• 6
• Id., at 919.
• 7
• 139 B.R. 374 (Bankr. D. Md. 1992).
• 8
• In re Cheskey, 9 F.C.C.R. 986 (1994).
• 9
• See also, In re Beach Television Partners, 38 F.3d 535 (11th Cir. 1994); In re Atlantic Business and Community Development Corporation, 994 F.2d 1069 (3rd Cir. 1993).
• 10
• See Phoenix Leasing Inc. v. Sure Broadcasting, Inc., 1996 LEXIS 11400 (9th Cir. 1996) (favorably citing Cheskey in context of authority of district court to order sale of licenses subsequent to FCC approval).
• 11
• 146 F.3d at 746.
• 12
• Id., at 748.
• 13
• Id., at 749.
• 14
• Note, however, that Tak Communications has not been expressly overruled and remains good authority in the Seventh Circuit.
• 15
• Note that the conclusion of the Quadracasting court on this point implies a potential trap in drafting security documents for FCC license secured transactions. If a granting clause specifies the collateral as being the FCC license, clearly the grant reaches the intangible present right to proceeds of the sale of the license. It would not be as clear, however, were the granting clause only to specify the "proceeds of the sale of the FCC license". Under that formulation, the grant would arguably cover not the present property interest in the proceeds of the FCC license that the Quadracasting case described, but only the actual, later-arising proceeds. Care must be taken in the drafting of such security documents.