Advisories
D.C. Circuit Remands Case Questioning FCC Policies on Security and Reversionary Interests in FCC Licenses
11.04.05
The Federal Communications Commission (“Commission” or “FCC”) has longstanding policies prohibiting sellers from retaining reversionary interests in FCC licenses, and forbidding licensees from granting security interests in FCC licenses. Both policies stem from the principle that FCC licenses do not constitute property that may be bought and sold at will. Rather, they are authorizations to operate in the public interest that require Commission approval prior to transfer. However, the Commission recognizes that the value of an FCC licensed station far exceeds the value of the physical assets alone, since the FCC license is an integral part of what makes those assets valuable. Accordingly, creditors and other third parties generally have little interest in acquiring the assets of a station without the related FCC license.
Although the Commission does not allow security interests in FCC licenses, the Commission has allowed creditors (whether they are sellers providing financing to buyers or third party lenders) to acquire a security interest in the proceeds of the sale of a defaulted buyer’s station. The creditor must observe a two-step process to realize its value. First, the creditor must foreclose on the debt, following which a court will generally order an auction of the station’s assets. Then, the creditor (or other successful bidder in the sale) must request FCC consent to have the relevant license transferred to it. Until FCC consent is obtained, control of the station must remain with the defaulted licensee or a court appointed trustee. While the distinction between a security interest in an FCC license and a security interest in the proceeds of a sale of an FCC licensed station is subtle, this distinction has allowed financing sellers and third party lenders to protect the value of their outstanding loans.
Last week, however, in the case of Kidd Communications v. FCC, the U.S. Court of Appeals for the D.C. Circuit vacated an FCC decision approving the assignment of an FCC license back to the seller following a defaulted buyer’s challenge to the process. The court found that the Commission did not adequately explain how this process did not give seller a reversionary or security interest in the FCC license. The Commission argued to no avail that its prohibition against reversionary interests meant only that the seller could not retain an “automatic” or “irrevocable” interest in the license, since any assignment back to the seller would be subject to FCC approval. Although the court gave lip service to the Commission’s discretion, it held that a state court’s order to transfer the license back to the seller pursuant to a defaulted promissory note essentially meant that the promissory note created an impermissible security interest in the FCC license. The court relied heavily on the language of the promissory note which created a security interest in the “station.” The court deemed that word to include both the station’s physical assets as well as the FCC license itself. In addition, the fact that the creditor in this case was the seller of the station allowed the court to further bolster its opinion with reference to the Commission’s rules prohibiting reversionary interests. The perplexing holding of this case serves as a warning that creditors (whether sellers or third party lenders) must carefully structure their documents to insure a sale of the license and to thereby recognize the full value of their interest in the relevant station in the event of a licensee buyer’s default.
The court remanded this case for further Commission action. In connection with the remand, the Commission may review and possibly modify its policies against reversionary and security interests in FCC licenses, bowing to the reality that the value of station assets lies not so much in the physical assets but in the associated FCC license. We will keep you informed about the court’s and the Commission’s further actions. In the meantime, we would be glad to consult with you regarding the structure of any security interests.
Although the Commission does not allow security interests in FCC licenses, the Commission has allowed creditors (whether they are sellers providing financing to buyers or third party lenders) to acquire a security interest in the proceeds of the sale of a defaulted buyer’s station. The creditor must observe a two-step process to realize its value. First, the creditor must foreclose on the debt, following which a court will generally order an auction of the station’s assets. Then, the creditor (or other successful bidder in the sale) must request FCC consent to have the relevant license transferred to it. Until FCC consent is obtained, control of the station must remain with the defaulted licensee or a court appointed trustee. While the distinction between a security interest in an FCC license and a security interest in the proceeds of a sale of an FCC licensed station is subtle, this distinction has allowed financing sellers and third party lenders to protect the value of their outstanding loans.
Last week, however, in the case of Kidd Communications v. FCC, the U.S. Court of Appeals for the D.C. Circuit vacated an FCC decision approving the assignment of an FCC license back to the seller following a defaulted buyer’s challenge to the process. The court found that the Commission did not adequately explain how this process did not give seller a reversionary or security interest in the FCC license. The Commission argued to no avail that its prohibition against reversionary interests meant only that the seller could not retain an “automatic” or “irrevocable” interest in the license, since any assignment back to the seller would be subject to FCC approval. Although the court gave lip service to the Commission’s discretion, it held that a state court’s order to transfer the license back to the seller pursuant to a defaulted promissory note essentially meant that the promissory note created an impermissible security interest in the FCC license. The court relied heavily on the language of the promissory note which created a security interest in the “station.” The court deemed that word to include both the station’s physical assets as well as the FCC license itself. In addition, the fact that the creditor in this case was the seller of the station allowed the court to further bolster its opinion with reference to the Commission’s rules prohibiting reversionary interests. The perplexing holding of this case serves as a warning that creditors (whether sellers or third party lenders) must carefully structure their documents to insure a sale of the license and to thereby recognize the full value of their interest in the relevant station in the event of a licensee buyer’s default.
The court remanded this case for further Commission action. In connection with the remand, the Commission may review and possibly modify its policies against reversionary and security interests in FCC licenses, bowing to the reality that the value of station assets lies not so much in the physical assets but in the associated FCC license. We will keep you informed about the court’s and the Commission’s further actions. In the meantime, we would be glad to consult with you regarding the structure of any security interests.