Appendix — FCC v. NextWave Personal Communications Inc.
Supreme Court brief2003
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KN „ 8
01 658 x 192M
No
—
In the Supreme Court of the United States
FEDERAL COMMUNICATIONS COMMISSION, PETITIONER
Vv.
NEXTWAVE PERSONAL COMMUNICATIONS INC. AND
NEXTWAVE POWER PARTNERS INC.
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
APPENDIX TO
PETITION FOR A WRIT OF CERTIORARI
(VOLUME II)
PAUL D. CLEMENT
Acting Solicitor General
Counsel of Record
LAWRENCE G. WALLACE
JOHN A. ROGOVIN Deputy Solicitor General
my General Counsel JEFFREY A. LAMKEN
DANIEL M. ARMSTRONG Assistant to the Solicitor
JOEL MARCUS General
Counsel N 9
Federal Communications WILLIAM KAN a =
C oe JACOB M. LEWIS
Yommission
Attorneys
Washington, D.C. 20507
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217
TABLE OF CONTENTS
(Volume I)
Page
Appendix A (Opinion of the D.C. Circuit, 254 F.3d
ERR ea ae na la
Appendix B (Reconsideration Order of the
Federal Communications Commission, 15 FCC
Red 17,500 (Sept. 6, 2000)) .. . . . . . . . . 52a
Appendix C (Public Notice of the Federal Com-
munications Commission, 15 FCC Red 693
v 96a
Appendix D (Opinion of the Second Cireuit on
Mandamus, 217 F.3d 125 (May 25, 2000)) ............... 102a
Appendix E (Opinion of the Bankruptcy Court,
244 B. R. 253 (S. D. N. V. Jan. 31, 2000)) . . . . . 134a
Appendix F (Opinion of the Second Cireuit,
200 F. 3d 43 (Dec. 22, 1999)) . .. .. . . . . . 213a
Appendix G (Opinion of the District Court, 241 B.R.
311 (S.D.N.Y. July 27, 1999)) .. . . . . . .. 254a
(Volume II)
Appendix H (Opinion of the Bankruptey Court,
235 B. R. 305 (S. D. N. V. June 22, 1999)) . . . . 273a
Appendix I (Opinion of the Bankruptcy Court,
235 B. R. 314 (S. D. N. V. June 16, 1999)) . . 293a
Appendix J (Opinion of the Bankruptcy Court,
235 B. R. 277 (S.D.N.Y. May 12, 1999)) . . 301a
Appendix K (Opinion of the Bankruptcy Court,
235 B. R. 272 (S. D. N. V. Feb. 16, 1999)) . . 359a
Appendix L (Opinion of the Bankruptcy Court,
235 B. R. 263 (S. D. N. V. Dec. 7, 1998)) . . 269a
Appendix M (Radio Station Authorization
(FCC issued Jan. 3, 1997) . . . . . . . .. . e, 387a
(I)
II
Table of Contents Continued
Appendix N (Installment Payment Plan Note
E
Appendix O (Security Agreement Between Next-
Wave Personal Communications, Ine. and the
Federal Communications Commission (dated
2280.
Appendix P (Statutory and Regulatory Provision):
en
11 U.S.C. 525 (2000) —
e
Zn
e
e .
47 CPR. 10.
273a
APPENDIX H
UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
Bankruptcy No. 98 B 21529(ASH)
Adversary No. 98-5178A
IN RE NEXTWAVE PERSONAL COMMUNICATIONS,
INC., ET AL., DEBTORS
NEXTWAVE PERSONAL COMMUNICATIONS, INC.,
PLAINTIFF
Vv.
FEDERAL COMMUNICATIONS COMMISSION, DEFENDANT
June 22, 1999
DECISION ON REMEDY
ADLAIS. HARDIN, IR., Bankruptcy Judge.
On May 12, 1999 this Court issued its decision (the
“May 12 Decision”) after trial on the merits of the
constructive fraudulent conveyance claim asserted by
plaintiff-debtor NextWave Personal Communications,
Inc. (“NPCI”) against defendant Federal Communica-
tions Commission (“FCC”). The Court left open the
question of remedy and sought further illumination of
the parties’ positions in light of the ruling on the merits.
To avoid unnecessary repetition, this Decision on
Remedy shall be deemed a supplement to and a part of
274a
the May 12 Decision. Having ruled on the issue at the
May 26 hearing on remedy and signed an order and
judgment granting the remedy sought by NPCI, the
purpose of this Decision is to set forth the grounds for
the ruling.
Positions of the Parties
NPCI
NPCI’s position is based upon the words of the
statute. Section 544 of the Bankruptcy Code, upon
which the claim is based, states that “(t]he trustee may
avoid . . . any obligation incurred by the debtor that is
voidable under applicable law. . . .” NPCI points out
that, unlike other provisions of the Bankruptcy Code
(e.g., Sections 106(a)(2), (3), 305(a), 1109(b)), which pro-
vide that the “court may” or a “party in interest may”
do thus and so, the election to avoid a constructively
fraudulent transfer is specifically delegated to “the
trustee.” As debtor-in-possession with all the rights of
a trustee under Section 1107, NPCI has requested and
states that it is entitled to the avoidance remedy
provided by the statute. In addition, NPCI argues that
the avoidance remedy is consistent with the objectives
of both the Bankruptcy Code and Section 309(j) of the
Federal Communications Act. Referring to the over-
arching bankruptcy policy favoring reorganization,
NPCI stresses that avoidance of the obligation is vital
to NPCI’s reorganization.
The literal terms of Section 544 (as well as Section
548 and California Civil Code § 3439.07) appear to call
for avoidance of the entire obligation where the sta-
tutory criteria for avoidance are met. Recognizing that
avoidance of the entire obligation would be inappropri-
275a
ate in many cases, particularly where a constructively
fraudulent transaction is at issue and the claim is not
based upon any element of bad faith on the part of the
obligee, NPCI asserts that the FCC should be entitled
to a claim in the amount of $1,023,211,000 representing
the value conferred as found in the May 12 Decision.
NPCI has already paid $474,364,806, leaving a balance
due of $548,846,194 to be paid in accordance with the
installment provisions of the FCC regulations.
As a practical matter this remedy results in avoid-
ance of the $3,720,437,000 portion (the “Fraudulently
Incurred Obligation”) of NPCI’s total bids for its 63 C
block licenses which exceeded the combined value of
those licenses and the 3% Payment.
FCC
In its Supplemental Memorandum of Law Regarding
Remedy, the FCC observes that this case arises at the
intersection of the Bankruptcy Code and the Federal
Communications Act, and that this Court must give
effect to both statutes if possible. To this end, the FCC
asserts that:
[The Court must honor two essential principles:
(1) as between debtor [Next Wave] and the FCC, the
entire $4.74 billion C block payment obligation
remains valid and is only partially avoidable to the
extent necessary to benefit NextWave’s bona fide
creditors; and (2) NextWave cannot retain its 63 C
block licenses without satisfying its auction bids in
full.
276a
FCC Memo on Remedy at 2. To accomplish these objec-
tives, the FCC concludes its Memorandum on Remedy
by asserting that the Court should:
. . . (1) order Next Wave to surrender its 63 C block
licenses to the FCC; (2) allow the FCC to retain all
of NextWave’s down payments in partial satisfac-
tion of its unavoidable claim, or, in the alternative,
to retain $142,309,000 in down payments, direct that
the remaining $332,055,806 in down payments be
paid to NextWave’s estate, and permit the FCC to
file an unsecured claim against Next Wave's estate
for any deficiency in its recovery of $1,023,211,000;
and (3) subordinate the FCC’s claim for the
Fraudulently Incurred Obligation] to the general
unsecured claims.
Id. at 13.
Unsure of the meaning and purpose of the FCC's
remedial objectives, the Court requested clarification of
its position at the May 26 hearing. In explaining its
primary objective, the FCC acknowledged or stated
among other things:
Money is not the end goal. Money is not
the objective. (5/26/99 Tr. At 30)
The objective is Ja] fair and efficient alloca-
tion of the limited resource of radio spec-
trum.” (Id. at 31)
The bid amount, as I said, is what ties the
whole process back to the statute and brings it
to the heart of the regulatory purpose of con-
gress in adopting a competitive bidding sys-
277a
tem to allocate the limited resources spec-
trum. It is the bid amount which drives the
industry from the prospective [sic] of allo-
cation spectrum. .. . And the FCC. . has
determined that the bid price is paramount to
achieve those ends.“ (Id. at 31-32)
Still uncertain of the FCC's primary objective and
theory of remedy, the Court asked whether the FCC
would seek rescission (i.e., return to the FCC of the 63
licenses and return to NPCI of the $473 million of
deposits) as an alternative if the remedy proposed by
the FCC were rejected. The FCC responded that its
paramount interest is in getting the licenses back, but
stressed to the Court that rescission is “not what we
seek” (id. at 29).
In short, the FCC wants to recover the 63 licenses
keep the $473 million of deposits or, in the alternative,
keep the $142,309,000 3% Payment and an unsubordi-
nated “deficiency claim” (i.e., $1,023,211,000 less
$142,309,000 less whatever the FCC may receive from
its resale of the licenses) and, in addition, retain an
allowed claim in NPCI’s Chapter 11 case for the entire
$3.7 billion Fraudulently Incurred Obligation subordi-
nated to existing, but not future, unsecured creditors
and, of course, senior to equity both old and new. Not
surprisingly, the FCC cites to no case law supporting
this astonishing and novel remedy for constructive
fraudulent conveyance, and for the reasons discussed
below the Court sees no reason to grant it.
Governing Legal Authorities
This Court’s fashioning of a remedy is guided by the
canon that statutory interpretation begins with the
278a
language of the statute itself. Landreth Timber Co. v.
Landreth, 471 U.S. 681, 685, 105 S. Ct. 2297, 85 L. Ed. 2d
692 (1985). See also United States v. Ron Pair
Enterprises, Inc., 489 U.S. 235, 240-42, 109 S. Ct. 1026,
103 L.Ed.2d 290 (1989) (a statutory provision that is
clear on its face should be given full force and effect);
Central Trust Co. v. Official Creditors’ of Geiger Enter-
prises, Inc., 454 U.S. 354, 359-60, 102 S. Ct. 695, 70
L.Ed.2d 542 (quoting Caminetti v. United States, 242
U.S. 470, 485, 37 S. Ct. 192, 61 L.Ed. 442 (1917)) (Hilt is
elementary that the meaning of a statute must, in the
first instance, be sought in the language in which the
act is framed, and if that is plain . . the sole function
of the courts is to enforce it according to its terms”).
Section 544(b) of the Bankruptcy Code provides:
“The trustee may avoid . . . any obligation incurred
by the debtor that is voidable under applicable
law. .” Section 544(b) incorporates non-bankruptcy
law to supplement the trustee’s avoiding powers under
the Bankruptcy Code. The avoidance powers are in-
tended to promote equitable distribution among credi-
tors by bringing improperly transferred property back
into the debtor’s estate. In re Best Products Co., Inc.,
168 B. R. 35, 57 (Bankr. S.D.N.Y. 1994) (Af jraudulent
transfer laws are intended to promote payment to
creditors”). Specifically, Section 544(b) allows the
trustee or debtor-in-possession in a case under Chapter
11 to invoke the rights of an existing unsecured creditor
to set aside a transaction that is voidable under applica-
ble state law.
An essential element in the exercise of the avoidance
powers in Section 544 et seq. of the Bankruptcy Code is
that the remedy be “for the benefit of the estate.”
279a
11 U.S.C. § 550(a), emphasis supplied. Section 550
thereby places an equitable restraint on the exercise of
avoiding powers. The “estate” comprises all interests,
including all creditors and equity. Thus, it might be
inappropriate to use the avoiding powers if the benefit
accrued only to the equity or to only one creditor or one
class of creditors. Under the “benefit of the estate”
standard, “what matters is whether creditors will
receive ‘some benefit from the recovery of the [chal-
lenged transfers]. In re Kennedy Inn Associates, 221
B. R. 704, 715 (Bankr. S.D.N.Y. 1998) quoting from In re
Centennial Industries, Inc., 12 B.R. 99, 102 (Bankr.
S.D.N.Y. 1981). See also In re Glanz, 205 B.R. 750, 758
(proper standard is “that recovery by [the debtor] will
increase [the debtor’s] assets and improve its financial
health to the extent that the likelihood is improved of
its being able to satisfy its obligations to its creditors
under [a] Plan”).
Recovery of the avoided transfer is appropriate even
if the benefit to the estate is indirect. 5 Collier on
Bankruptcy 1 550.02(2], p. 550-7 (15th ed. 1998). The
term “estate” is broader than the term “creditors,” In
re Trans World Airlines, Inc., 163 B.R. 964, 972 (Bankr.
D. Del. 1994), and benefit has been interpreted broadly
to include an indirect benefit such as an increase in the
probability of a successful reorganization. See, In re
Tennessee Wheel & Rubber Co. (Tennessee Wheel &
Rubber Co. v. Captron Corp. Air Fleet), 64 B.R. 721,
725-26 (Bankr. M.D. Tenn. 1986), aff'd, 75 B.R. 1 (M.D.
Tenn. 1987); In re Sweetwater, 884 F.2d 1323, 1326-7
(10th Cir. 1989) (the Tenth Circuit found that if the
estate representative appointed pursuant to section
1123(b)(3)(B) realized more cash from the fund’s assets
than the allowed amount of administrative claims, the
280a
remainder would go to the reorganized debtor, which
would then be in a better position to meet its financial
commitments, if any, under the plan); Jn re Acequia,
Inc., 34 F.3d 800, 811-12 (9th Cir. 1994) (allowing
recovery of fraudulent transfers even though unsecured
creditors have been paid in full when recovery would
aid continuing performance of post confirmation obli-
gations and reimburse the bankruptcy estate for
fraudulent conveyance litigation costs); In re Trans
World Airlines, Inc., 163 B.R. at 973 (“basic purpose of
recovery pursuant to § 550(a) is to enlarge the estate
for the benefit of creditors . . . whether any of it is
distributed is a function of the conduct of the case and
the negotiations of the plan of reorganization”); In re
Centennial Industries, Inc., 12 B.R. at 102 (recovery
sufficient so long as unsecured creditors received some
benefit from the recovery of the preferences, even if it
was not an increase in the amount they would receive).
Section 544(b)’s avoidance remedy fosters the overall
bankruptcy policy favoring reorganization. In re
Chateaugay Corp., 201 B. R. 48, 72 (Bankr. S. D. N. V.
1996), aff'd in part, 213 B. R. 633 (S. D. N. V. 1997)
(Aplublie policy, as evidenced by chapter 11 of the
Bankruptcy Code, strongly favors the reorganization
and rehabilitation of troubled companies and concomi-
tant preservation of jobs and going concern values”); I
re Paris Indus., Corp., 106 B.R. 339, 341 (Bankr. D. Me.
1989) (“The Bankruptcy Code embodies a governmental
policy favoring reorganization and a fresh start”);
NLRB v. Bildisco & Bildisco, 465 U.S. 513, 527, 528,
104 S. Ct. 1188, 79 L.Ed.2d 482 (1984) (“policy of Chap-
ter 11 is to permit successful rehabilitation of debtors
. . fundamental purpose of reorganization is to
prevent a debtor from going into liquidation”).
281a
Contrary to the FCC’s position that avoidance be
limited to the extent of the claims of existing creditors,
it is well settled that once an obligation is deemed
voidable the entire transfer is avoided to the extent
necessary to benefit the estate, without regard to the
size of the claims of the existing creditors whose rights
and powers the debtor-in-possession is asserting. See 5
Collier on Bankruptcy 4 544.09[5], p. 544-21 (15th ed.
1998) (discussing Moore v. Bay, 284 U.S. 4, 52 S. Ct. 3,
76 L.Ed. 133 (1931)). Under Section 544(b) “if the
transfer is avoidable at all by any creditor, it is avoid-
able in full for all creditors regardless of the dollar
amount of the prevailing claim.” In re Acequia, Inc., 34
F. 3d at 810 (quoting Abramson v. Boedeker, 379 F.2d
741, 748 n.16 (5th Cir.), cert. denied, 389 U.S. 1006, 88 S.
Ct. 563, 19 L.Ed.2d 602 (1967)). See also, In re Theisen,
45 B. R. 122, 126-27 (Bankr. D. Minn. 1984) (HOlnce
avoidability is determined under state law, the transfer
is entirely avoidable by a trustee in bankruptcy regard-
less of the amount of the creditor’s claim relied upon by
the trustee,” discussing Moore v. Bay doctrine).
In this case, the appropriate remedy is avoidance of
the entire obligation and reinstatement of the obli-
gation to the extent of value given. While the literal
terms of the applicable statutes (Section 544(b) of the
Bankruptcy Code, which incorporates Cal. Civ. Code
§ 3439.04) and the case law provide for avoidance of the
entire obligation, both bodies of law also offer protec-
tion to a good faith obligee. Section 548(c) of the Bank-
ruptcy Code provides in pertinent part:
to the extent that a[n]. . . obligation . . . is void-
able under section 544 . . . aln] obligee ofsuch . . .
obligation that takes for value and in good faith. . .
282a
may enforce any obligation incurred . . . to the
extent that such . . . obligee gave value to the
debtor in exchange for such . . . obligation.
11 U.S.C. § 548(c). California’s Uniform Fraudulent
Transfer Act contains a similar provision.“ Cal. Civ.
Code § 3439.08(d) stat es:
Notwithstanding voidability of . . . an obligation.
. . . agood faith . . . obligee is entitled, to the
extent of value given the debtor for the. . . obli-
gation, to. . enforcement of any obligation in-
curred.
Thus, when an obligation is avoided under Section
544(b) of the Bankruptcy Code, both statutes entitle the
obligee to enforce the obligation to the extent of value
given the debtor. Recognizing yet another canon of
statutory construction, namely “that where a statute
expressly provides a particular remedy or remedies, a
court must be chary of reading others into it,” the
proper remedy lies in Section 548(c) of the Bankruptcy
Code. See In re Granite Partners, L. P., 208 B. R. 332,
341 (Bankr. S.D.N.Y. 1997) (discussing restriction of
remedial provisions of securities laws as interpretive
analogies to Bankruptcy Code Section 510(b), citing
Touche Ross & Co. v. Redington, 442 U.S. 560, 574, 99
S. Ct. 2479, 61 L.Ed.2d 82 (1979) and quoting Trans-
america Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11,
19, 100 S. Ct. 242, 62 L.Ed.2d 146 (1979)); see also
Patterson v. Shumate, 504 U.S. 753, 759, 112 S. Ct.
2242, 119 L.Ed.2d 519 (1992) (statute must be enforced
! The legislative committee comment to Cal. Civ. Code
§ 3439.08(d) acknowledges that the statute was adapted from
Section 548(c) of the Bankruptcy Code.
283a
according to its terms) and U.S. v. Ron Pair Enter-
prises, Inc., 489 U.S. 235, 242, 109 S. Ct. 1026, 103
L.Ed.2d 290 (1989) (plain meaning of statute governs
unless demonstrably at odds with drafters’ intent).
Accordingly, the FCC has a valid claim that is enforce-
able to the extent of value given the debtor, less the
sum already paid by the debtor.
The case law is consistent with the remedy expressed
on the face of Section 548(c). See, In re Telesphere
Communications, Inc., 179 B.R. 544, 559 (Bankr. N.D.
III. 1994) (lenders entitled to enforce their obligation to
the extent of value given [the debtor] ); In re Wes Dor,
Inc., 996 F. 2d 237, 243 (10th Cir. 1993) (finding trans-
feree liable for amount of transfer minus value ex-
tended to the debtor); Covey v. Commercial Nat Bank
of Peoria, 960 F.2d 657, 662 (7th Cir. 1992) (avoiding
subsidiary’s guarantee of parent’s debt in excess of
value given to the subsidiary).
Conclusions on Remedy
While NPCI urges the Court to apply Section 544 as
written, the FCC urges the Court to use “remedial
flexibility.” Since Section 544(b) is clear on its face and
under the case law, the Court will apply the statute as
written, mindful of the Supreme Court admonition that
statutes should be enforced as written. See United
States v. Ron Pair Enterprises, Inc., 489 U.S. at 240-
42, 109 S. Ct. 1026 and Patterson v. Shumate, 504 U.S.
at 759, 112 S. Ct. 2242.
The statutory remedy is avoidance of the entire
obligation upon a finding of fraudulent conveyance. See
In re Acequia, Inc., 34 F.3d at 809-10 (“{a] transaction
that is voidable . . may be avoided in its entirety”).
284a
However, the FCC may enforce NPCI’s obligation to
the extent it provided value to the debtor’s estate.
Stated differently, only the Fraudulently Incurred
Obligation will be avoided.
The purported “remedy” urged upon the Court by
the FCC in this fraudulent conveyance proceeding
exhibits “remedial flexibility” to such an extent that it
barely merits discussion. In the face of a statute of
Congress intended to rectify inequities among creditors
and facilitate reorganization of debtors, and despite this
Court’s finding of fact after trial that NPCI’s indebted-
ness to the FCC was roughly five times the value of the
C block licenses when conveyed, the FCC has proposed
as a “remedy” that it should reclaim the licenses and, at
the same time, retain all or a substantial portion of the
$473 million paid by NPCI for the licenses and retain a
claim in NPCI’s bankruptcy for the $3.7 billion Fraudu-
lently Incurred Obligation subordinated only to exist-
ing unsecured debt. Such a decree would reduce the
value conveyed by the FCC to NPCI from $1.023 billion
to zero ($0.00) while allowing the FCC to retain up to
$473 million of the debtor’s money and a subordinated
claim for $3.7 billion. It would render NPCI hopelessly
insolvent and result in prompt conversion to Chapter 7
and liquidation of this debtor.
The utter irrationality of the FCC’s proposed remedy
is manifest from the fact that, if the FCC reclaims the
licenses, every dollar of cash and every dollar of allowed
claim retained by the FCC would itself automatically
become a fraudulent conveyance, since the licenses
constituted the FCC’s only contribution to NPCI in
exchange for its cash and debt obligation. In other
words, the FCC asks the Court not to rectify but to
285a
compound the constructive fraudulent conveyance
already adjudicated by ordering the debtor to return
the entire value received from the FCC while allowing
the FCC to retain much of what the debtor paid for that
value.
The remedy proposed by NPCI and adopted by this
Court is intuitively fair and equitable to both the
government and the debtor’s estate and implements
both the letter and the spirit of the Federal and state
statutes and the case law governing debtor-creditor
relations. The FCC will retain an obligation for the full
value of the consideration which it conveyed to the
debtor. The avoidance remedy fully comports with the
“benefit of the estate” standard of Section 550(a) in that
the debtor’s estate will be relieved of that portion of its
financial obligation to the FCC for which it received no
value and will be able to proceed promptly with a viable
plan of reorganization, having access to the public finan-
cial markets which was precluded by reason of the $3.7
billion Fraudulently Incurred Obligation not backed by
any asset value.
Although eschewed by the FCC, a more rational
alternative to the avoidance reinedy proposed by the
debtor would be traditional rescission, which would
achieve the FCC’s purported primary objective of can-
cellation and return of the 63 C block licenses for reauc-
tion while returning the cash deposits to NPCI and
cancelling all debt to the FCC. But avoidance, not
rescission, is the remedy mandated by the Bankruptcy
Code. Moreover, the “benefit of the estate” test and
the overarching policy of the bankruptcy laws favoring
reorganization both weigh heavily in favor of the
avoidance remedy, since the likelihood of a successful
286a
reorganization of NPCI appears to be high with the 63
C block licenses, and virtually nil without them.
The avoidance remedy is also far more consonant
with the statutory objectives expressed in Section
309(j) of the Federal Communications Act than rescis-
sion. Under Section 309(j) the FCC was charged with
achieving four clearly expressed objectives: (1) the
development and rapid deployment of new wireless
technology for the benefit of the public without admin-
istrative or judicial delays; (2) promotion of economic
opportunity and competition by disseminating licenses
among a wide variety of applicants including entrepre-
neurial, small businesses; (3) recovery for the public of a
portion of the value of radio spectrum; and (4) the
efficient and intensive use of spectrum. 47 U.S.C.
§ 309(j (3). Each of these statutory policy objectives is
advanced by the avoidance remedy and inhibited by
rescission.
First, rescission and cancellation of NPCI’s 63 C
block licenses would result in lengthy and indeter-
minate delay in the deployment and use of those li-
censes. Even if there were no appeal from this Decision
by either party, there can be no assurance when or
whether the FCC would reauction the licenses, and it is
unlikely that any reauction would be commenced in less
than eight or nine months, judging from the 1999
reauction. Any reauction could be expected to take
three to four months, as in the case of past auctions, and
the license approval process for the successful bidder(s)
could be expected to take up to five months particularly
in the event of a third-party challenge, as in the case of
NextWave. Thus, a delay of twelve to eighteen months
or possibly substantially more would be the likely result
287a
of rescission, which is significant in the highly competi-
tive and rapidly moving wireless telecommunications
industry.
Second, NPCI and its Next Wave affiliates are not
only qualified under Section 3090) as entrepreneurial
designated entities to hold C and F block licenses, but
as the largest holder of PCS spectrum in the C/D/E/F
blocks NextWave undoubtedly would constitute the
only potential candidate to compete with the major
players such as AT & T, Sprint and NextTel which the
FCC’s trial expert, Dr. Salant, viewed as a prime
objective of the C block auction. If NPCI’s 63 C block
licenses were cancelled and reauctioned, there can be
no assurance that NextWave or any single bidder
would succeed in winning all or most of the 63 licenses,
or that the FCC would award the licenses to NextWave
if it were the successful bidder. Moreover, Next Wave's
“carrier’s carrier” business strategy could provide po-
tential access to PCS spectrum for a variety of resellers
of wireless services and thereby “promot(e]
economic opportunity and competition by disseminating
licenses among a wide variety of applicants including
small businesses.” 47 U.S.C. § 309()(3).
Third, although Section 309(j) charges the FCC only
“to recover a portion of the value of the licenses for the
public” (emphasis supplied), the avoidance remedy will
recover for the public fise $1.023 billion, which exceeds
the full value of the 63 C block licenses ($908 million) as
of February 1997. It would appear that this far exceeds
the present fair market value of the 63 C block licenses,
judging by the values achieved in the 1999 reauction of
predominantly C block licenses.
288a
Finally, the avoidance remedy will promote, the
prompt, efficient and intensive use of PCS spectrum.
Less than ten percent of the original C block licenses
are currently in use. NPCI represents that it has con-
ducted extensive site planning and/or radio frequency
design in many of the markets covered by its C block
licenses and has successfully installed PCS network
equipment in trial systems in San Diego, San Antonio,
Washington, D.C. and Las Vegas. As purportedly the
only wireless provider dedicated to the wholesale
“carrier’s carrier” strategy, NPCI asserts that it will
create competitive opportunities that do not exist in the
wireless marketplace today, and may not exist in the
event of rescission and reauction.
As to the FCC’s subordination and “benefit to
creditors” argument, Jn re Best Products, Inc., 168 B.R.
35, 57 (Bankr. S.D.N.Y.), aff'd, 68 F.3d 26 (2d Cir. 1995)
and In re Crowthers McCall Pattern, Inc., 120 B.R. 279,
288 (Bankr. S.D.N.Y. 1990), cited in support of the
FCC’s contention that the $3.7 billion Fraudulently
Incurred Obligation should be merely subordinated to
existing unsecured creditors, rather than avoided, are
conceptually inapposite. Both cases involved proceed-
ings seeking to confirm reorganization plans and, in
that context, approval of settlements of putative but
unasserted fraudulent transfer claims against lenders
arising out of leveraged buy-out (“LBO”) transactions
involving the debtor. Regarding remedy, one court
recognized that ſo]jne of the murkiest areas of fraudu-
lent transfer law as applied to LBOs is what remedy to
apply when the plaintiff prevails.” Best Products, 168
B.R. at 57. In both Best Products and Crowthers
McCall the lenders in question made loans to the
respective debtors and took back promissory notes in
289a
precisely the amount of the consideration furnished by
the lenders to the debtors, i.e., the loans. The fraudu-
lent transfer theory which might have been asserted
against these lenders, and which was compromised in
the context of the reorganization plans, was that the
loans in question were merely steps in a series of
transactions in connection with the LBOs by which the
new shareholders, in effect, appropriated the loan
proceeds to acquire the debtors’ equity for their own
personal benefit, thereby depriving the debtors and the
debtors’ other creditors of the economic benefits of the
loans. The inherently “inside” nature of these LBO
transactions generates a split of interest within the
“estate” between the acquiring equity interest and
their lender-funders versus the debtor’s existing or
“old” creditors. In such a context, it is not surprising
that both courts would have employed language to the
effect that the fraudulent transfer remedy, if any,
should benefit the debtors’ creditors, but that the
indebtedness should be enforced vis-a-vis the debtors’
equity shareholders who derived benefit to the extent
of the money actually advanced by the lenders. In such
a circumstance, the appropriate remedy might well be
subordination, which would benefit the creditors
harmed by the improper LBO diversion of the debtors’
assets while leaving the lenders with a claim superior to
the shareholders for the fair value of the loans which
they extended to the debtors.”
2 It should be emphasized that the language relied upon by the
FCC in the Best Products and Crowthers McCall decisions did not
constitute holdings by the respective bankruptcy courts deter-
mining remedies in litigated fraudulent conveyance claims. The
courts in both cases were merely discussing the hurdles which the
debtors might face in the context of approving settlements of
290a
The constructive fraudulent conveyance claim in-
volved in this adversary proceeding bears no resem-
blance to the putative fraudulent transfer claims which
were the subject of Best Products and Crowthers
McCall. The debts owing to the lenders in those cases
which might have been subordinated, rather than
avoided altogether, in the LBO context were supported
dollar-for-dollar by loans actually advanced to and
received by the debtors. To avoid those debt obliga-
tions would deprive the lenders of consideration actu-
ally given and resulted in a windfall for the share-
holders who allegedly were the real beneficiaries of the
loan proceeds. By contrast, neither NPCI nor its
shareholders or creditors received any consideration
from the FCC in respect of the $3.7 billion Fraudulently
Incurred Obligation, and to enforce that Obligation
even as subordinated debt would constitute a windfall
for the FCC. Moreover, the settlements of the putative
fraudulent transfer claims against the lenders in Best
Products and Crowthers McCall were approved in the
context of seeking to approve those debtors’ reorganiz-
ation plans. By contrast, in this case to allow $3.7
billion as a subordinated claim would preclude NPCI’s
access to public funding and thereby undermine any
practical likelihood of NPCI’s success as a reorganized
debtor.
Finally, Judge (now Chief Judge) Brozman’s decision
in Best Products expressly recognizes the appropriate-
ness of the remedy fashioned in this decision in a case
such as this involving avoidance of an obligation for
possible fraudulent transfer claims which were not, in fact, liti-
gated.
29la
which the debtor received no consideration. Judge
Brozman noted:
On the other hand, if the underlying fraudulent
transfer statute (such as DCL § 273) provides for
the avoidance as fraudulent of an obligation in-
curred, it could be argued fairly persuasively that so
much of the obligation which the debtor incurred as
was not supported by consideration to the debtor,
ought be avoidable. (emphasis in original)
Best Products at 59, citing In re Candor Diamond
Corp., 76 B. R. 342 (Bankr. S.D.N.Y. 1987).
Nor can the FCC take comfort from the citation and
quotation on Jn re Vintero Corp., 735 F.2d 740, 742 (2d
Cir.) (“To the extent that [a debtor’s] other creditors
. are affected adversely by enforcement of [an
avoidable] security interest, there is no reason why
such interest should not be enforced”), cert., denied, 469
U.S. 1087, 105 S. Ct. 592, 83 L.Ed.2d 702 (1984). There
can be no question that that the debtor and its share-
holders and its creditors would be affected adversely by
y any enforcement of the $3.7 billion Fraudulently
Incurred Obligation in exchange for which the FCC
provided no consideration to the debtor.
Finally, the FCC’s arguments based upon Midlantic
National Bank v. New Jersey Department of Environ-
mental Protection, 474 U.S. 494, 106 S. Ct. 755, 88
L.Ed.2d 859 (1986), NLRB v. Bildisco & Bildisco, 465
U.S. 513, 104 S. Ct. 1188, 79 L.Ed.2d 482 (1984), In re
D.H. Overmyer Telecasting Co., 35 B.R. 400 (Bankr.
N. D. Ohio 1983) and In re Nitec Paper Corp., 43 B. R.
492 (S.D.N.Y. 1984) to the effect that bankruptcy pro-
ceedings cannot be used to override the regulatory
292a
authority of administrative agencies have been fully
dealt with in this Court’s December 7, 1998 decision on
the FCC’s motion to dismiss for lack of subject matter
jurisdiction and June 16, 1999 decision denying the
FCC’s motion to lift the automatic stay. Reference is
made to those decisions. Suffice it here to say that the
issues before this Court in this adversary proceeding
concern solely the debtor-creditor relationship between
the FCC and NPCI. Nothing in the Federal Commu-
nications Act or elsewhere in the law exempts the FCC
from the operation of the Bankruptcy Code in its
capacity as a creditor. Nothing in this Court’s May 12
Decision or in this Decision on Remedy implicates the
FCC’s regulatory jurisdiction.
NPCI is entitled to judgment in accordance with
this Decision.
293a
APPENDIX I
UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
Bankruptcy No. 98 B 21529(ASH)
IN RE NEXTWAVE PERSONAL COMMUNICATIONS, INC.,
ET AL., DEBTORS
June 16, 1999
DECISION DENYING MOTION TO LIFT THE
AUTOMATIC STAY
ADLAIS. HARDIN, JR., Bankruptcy Judge.
Following this Court’s decision dated May 12, 1999
(the “May 12 Decision”) sustaining the constructive
fraudulent conveyance claim of debtor NextWave
Personal Communications, Inc. (“NPCI”), the Federal
Communications Commission (“FCC”) has moved to lift
the automatic stay under 11 U.S.C. § 362(d)(1) for
“cause.” The alleged “cause” is that, by reason of the
May 12 Decision, NPCI will not be paying the full
amounts of its winning bids in the C block auction for 63
spectrum licenses awarded to it by the FCC.
For the reasons stated below, the motion is denied.’
The Court has jurisdiction of the debtor’s Chapter 11 case and
this contested matter by reason of 28 U.S.C. §§ 1334(a) and 157(a)
and the standing order of reference dated July 10, 1984 signed by
294a
In addition to the May 12 Decision, of particular
relevance to this motion is this Court’s Revised Deci-
sion on Motion to Dismiss dated December 7, 1998 (the
“December 7 Decision”), which granted in part and
denied in part the FCC’s motion to dismiss for lack of
subject matter jurisdiction NPCI’s adversary proceed-
ing against the FCC. To avoid unnecessary repetition in
this decision, familiarity with the December 7 Decision
and the May 12 Decision is assumed.
NPCI’s winning bids for the 63 spectrum licenses in
the C block auction and reauction ending May and July
1996 totaled $4.7 billion, an average of $1.53 per
MHz/Pop. The C block licenses were not awarded to
NPCI until January 1997. The FCC’s auction of D, E
and F block licenses commenced in September 1996 and
concluded in mid-January 1997. The average price bid
per MHz/Pop for D, E and F block licenses was $0.33.
The prices bid in the D/E/F block auction and other
factors’ undermined the public perception of the value
of the C block licenses and made it impossible for the
winning C block licensees to raise any money in the
public market necessary to build out their wireless
systems as required under the FCC license regulations.
See 47 C.F.R. § 24.203.
NPCI filed its Chapter 11 petition on June 8, 1998
and, the same day, filed its adversary proceeding
against the FCC seeking, inter alia, to declare voidable
its $4.7 billion bid obligation as a constructive fraudu-
lent conveyance under 11 U.S.C. § 544. In the May 12
Decision this Court sustained the constructive fraudu-
Acting Chief Judge Robert J. Ward. This is a core proceeding
under 11 U.S.C. § 157(b)(2).
2 See May 12 Decision at footnote 11.
295a
lent conveyance claim based upon findings that the
total value received by NPCI in exchange for its pay-
ment obligation to the FCC was $1.023 billion. As a
consequence of the May 12 Decision and the Court’s
Decision on Remedy, the NPCI’s payment obligation to
the FCC will be reduced from $4.7 billion to $1.023
billion.
The FCC’s motion to lift the automatic stay is based
upon (i) the fact that NPCI will not be paying the full
$4.7 billion that it bid for its 63 C block licenses and
(ii) the FCC’s own regulations.
The FCC’s regulations conditioned the grant of C
block licenses upon the licensee’s “full and timely
payment of the winning bid.” 47 C. F. R. S 24.708(a); see
also 47 C. F. R. § 1.2109(a) (1996) (same). In circum-
stances where the regulations permit certain desig-
nated entities such as NPCI to pay the full amount of
their high bids in installments over the term of their
licenses, 47 C.F.R. § 1.2110(e) (1996), a license “granted
to an eligible entity that elects installment payments
shall be conditioned upon the full and timely perform-
ance of the licensee’s payment obligations under the
installment plan.” 47 C.F.R. § 1.2110(e)(4) (1996). In
the event of default by the licensee, “the license will
automatically cancel and the Commission will initiate
debt collection procedures.” 47 C. F. R. & 1.2110(e)(4)(iii)
(1996).
Asserting that the requirement that a licensee pay
its winning bids in full “is the keystone of the FCC’s
spectrum auction program” (FCC Memo at 2), the FCC
This assertion may be viewed with some skepticism in view of
the FCC’s oft-repeated acknowledgement that revenue generation
296a
argues in substance that the provision in the regula-
tions for automatic cancellation of NPCI’s licenses upon
default in NPCI’s payment obligation constitutes
“cause” under Section 362(b)(1) of the Bankruptcy Code
for relief from the automatic stay to permit the FCC, in
effect, to reclaim the “cancelled” licenses and otherwise
pursue its remedy under its regulations.
The issue thus raised is closely related to the issues
raised in the FCC’s initial motion to dismiss for lack of
subject matter jurisdiction. For this reason. the
analysis in the December 7 Decision largely disposes of
the FCC’s contentions on this motion. To summarize
that Decision, Section 309(j) of the Federal Communi-
cations Act (“FCA”) provides the statutory authority
for the FCC’s spectrum auction program, including the
authorization to grant special financing incentives to
designated entities through deferred payment in in-
stallments. In so doing, Congress authorized the FCC
not only to act in its capacity as a regulator of spectrum
licenses, but also to become a creditor of licensees
qualifying as designated entities. However, nothing in
Section 309(j) or elsewhere in the FCA granted the
FCC, acting in its capacity as a creditor, any rights,
privileges or obligations superior to or different from
the rights, privileges and obligations of other creditors.
More specifically, nothing in the FCA or elsewhere
granted the FCC acting as a creditor any exemption
from the provisions of the Bankruptcy Code, and Con-
gress has declined to grant any such exemption despite
the FCC’s attempts to lobby for such an exemption.
for the Federal government is not the primary objective of Section
309(j) of the FCA and the FCC’s auction regulations.
297a
With this perspective, the FCC’s contentions on this
motion may be easily resolved. Like any other creditor,
the FCC is subject to the avoidance powers provided in
Sections 544 and 548 of the Bankruptcy Code. As
would be the case with any other creditor in similar cir-
cumstances, for the reasons set forth in the May 12
Decision NPCI’s aggregate bid obligation to the FCC of
$4.7 billion was subject to avoidance to the extent of
$3.7 billion. As a consequence, NPCI’s “payment obli-
gations” to the FCC have been reduced from $4.7 billion
to $1.023 billion, of which some $473 million has already
been paid. The balance will have to be paid by NPCI
under the installment plan authorized by Congress and
implemented by the FCC regulations. Of course, if
NPCI were to default in the future in its payment
obligation on the balance, its spectrum licenses would
then be subject to automatic cancellation under
47 C. F. R. § 1.2110(e)(4)(iii). But for the present NPCI
is not in default. Unless and until NPCI defaults in “the
full and timely performance of [its] licensee’s payment
obligations under the installment plan,” there is no
default and, therefore, no “cause” to lift the automatic
stay under 11 U.S.C. § 362(d)(1).
The FCC argues that its regulations condition grant
of the licenses upon “full and timely payment of the
winning bid amount” (emphasis supplied), citing to the
language in Section 24.708(a) of 47 C.F.R. NPCI
retorts that the automatic cancellation provision in
Section 1.2110(e)(4)(iii) refers to default in the “fall and
timely performance of the licensee’s payment obliga-
tions” (emphasis supplied). But the difference in word-
ing between “winning bid amount” and “payment obli-
gations” is immaterial. Whatever the verbiage, the
substance of the matter is that the FCC’s right to
298a
payment as a creditor is subject to avoidance under the
relevant Bankruptcy Code provisions just like the right
to payment of any other creditor.
Nor is it material that the FCC has provided in its
regulation that the grant of the licenses is conditioned
upon full payment of either the licensee’s “winning bid
amount” or “payment obligations,” or that the regula-
tions provide for automatic cancellation of the licenses
upon default. Aside from the fact that there has been
no default by NPCI, the FCC’s own regulations are
entitled to no more nor less weight in the context of
bankruptcy proceedings than the contractual notes,
mortgages and similar documents required by other
creditors in commercial transactions. Creditors’ rights
under their contracting documents are frequently sub-
ject to modification under provisions of the Bankruptcy
Code such as the avoidance powers in Sections 544 and
548. Stated simply, the FCC’s regulations, to the extent
that they establish and govern the rights and obliga-
tions of the FCC and the licensee in their capacities as
creditor and debtor, are subject to modification under
the Bankruptcy Code, just like the contractual rights
and obligations of an ordinary creditor vis a vis its
debtor. As stated in the December 7 Decision:
The basic defect in the FCC’s argument is that
Congress did not confer upon the FCC the power to
determine unilaterally its own rights as a creditor in
competition with and to the detriment of other
creditors. . . . Nothing in Section 3090 or else-
where in the FCA even suggests that Congress
intended to empower the FCC to promulgate orders
[or regulations] which have nothing to do with its
regulatory functions and which are designed solely
299a
to enhance the FCC’s position as a creditor to the
detriment of rights provided under the Bankruptcy
Code for the benefit of other creditors and the
debtor.
The cases relied upon by the FCC do not support its
position. For the contention that “([t]hese regulatory
conditions upon the Licenses remain fully enforceable
by the FCC even though NextWave is in bankruptcy”
(FCC Memo at 2) the FCC cites In re Farmers Mar-
kets, Inc., 792 F.2d 1400, 1403 (9th Cir. 1986), where the
Ninth Circuit said “the estate takes the license subject
to the restrictions imposed on the debtor by its
transferor.” To the same effect the FCC cites In re
Bay Ridge Inn, 94 F.2d 555 (2d Cir. 1938). As pointed
out in NPCI’s opposing memorandum, both Farmers
Markets and Bay Ridge concern sale or transfer of
liquor licenses from one party to another, with direct
implication of the governmental regulatory power.
Similarly, the case of In re Gull Air, Inc., 890 F.2d 1255
(1st Cir. 1989) concerns the FAA’s power under regula-
tions respecting the use of airport slots not being used
by the debtor airline and having nothing to do with any
debtor-creditor relationship. By contrast, the regula-
tions relied upon by the FCC in this case are concerned
solely with the debtor-creditor relationship between
the parties and do not implicate the FCC’s regulatory
jurisdiction.
To summarize, the FCC is subject to the provisions
of the Bankruptcy Code in its capacity as a creditor.
NPCI’s payment obligations to the FCC in respect of
its winning bids on C block licenses have been modified
in accordance with the avoidance provisions of Section
544 of the Bankruptcy Code. The modification of the
300a
FCC’s rights as a creditor in accordance with the Bank-
ruptey Code does not constitute a default by NPCI, and
NPCI is not in default in respect of its modified
payment obligations. Accordingly, there is no “cause”
to lift the automatic stay under Section 362(d)(1), and
the FCC’s motion must be denied.
30la
APPENDIX J
UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
WHITE PLAINS DIVISION
Bankruptcy No. 98 B 21529 ASH)
Adversary No. 98-5178A
IN RE NEXTWAVE PERSONAL COMMUNICATIONS,
INC., ET AL., DEBTORS
NEXTWAVE PERSONAL COMMUNICATIONS, INC.,
PLAINTIFF
V.
FEDERAL COMMUNICATIONS COMMISSION, DEFENDANT
May 12, 1999
DECISION ON CONSTRUCTIVE FRAUDULENT
CONVEYANCE CLAIM
ADLAIS. HARDIN, JR., Bankruptcy Judge.
In January 1997 defendant Federal Communications
Commission (“FCC”) awarded to plaintiff-debtor Next-
Wave Personal Communications, Inc. (“Debtor” or
“NPCI”) 63 C block licenses for radio spectrum for
personal communications service (“PCS”) based on
NPCI’s winning bids aggregating $4.7 billion in the C
block auction and reauction ending in May and July
302a
1996. Concluding subsequently that the value of its C
block licenses had been less than $1 billion in February
1997 when it executed notes to the FCC for 90% of its
bid obligation, NPCI commenced this adversary pro-
ceeding in June 1998 seeking, inter alia, a deter-
mination that its deposits and promissory notes aggre-
gating $4.7 billion (the Transfers“) constituted con-
structively fraudulently conveyances subject to avoid-
ance under 11 U.S.C. § 544.
On the facts and the law, I conclude that the Trans-
fers are subject to avoidance under Section 544 in the
measure calculated at the foot of this decision.
Jurisdiction
This Court has jurisdiction over this adversary pro-
ceeding under 28 U.S.C. §§ 1334(a) and 157(a) and the
“Standing Order of Referral of Cases to Bankruptcy
Judges” of the United States District Court for the
Southern District of New York, dated July 10, 1984
(Ward, Acting C.J.). This is a core proceeding under 28
U.S.C. § 157(b)(2)(H). |
Procedural Background
On June 8, 1998 NPCI and certain of its affiliates filed
petitions under Chapter 11 of the Bankruptcy Code,
and on the same date NPCI filed this adversary pro-
ceeding. On July 13, 1998 the FCC moved simultane-
ously to withdraw the reference and to dismiss the
adversary proceeding for lack of subject matter juris-
diction. The District Court denied the motion to with-
draw the reference on November 9, 1998. This Court
scheduled a hearing on the motion to dismiss and on
December 7, 1998 issued a decision denying the motion
303a
with respect to the constructive fraudulent conveyance
claim and granting the motion to the extent of
dismissing the debtor’s other claim against the FCC.
On January 26, 1999 the FCC made a motion for
partial summary judgment with the object of deter-
mining whether the C block licenses should be valued
as of the May and July 1996 dates of conclusion of the
auction and reauction, or in January/February 1997
when the FCC awarded the C block licenses to NPCI
and NPCI issued its promissory notes for $4.2 billion.
On February 16, 1999 the Court issued its decision
determining that the C block licenses should be valued
as of January/February 1997 when the licenses were
awarded and the debtor completed the Transfers.
On March 24, 1999 the FCC filed a motion for judg-
ment on the pleadings asserting, in substance, that the
controlling Federal law does not recognize constructive
fraud liability in connection with financial transactions
that are open to public scrutiny. On April 2, 1999 the
Court denied the FCC’s motion in an oral ruling and
held a final pretrial conference.
The case was tried in seven lengthy trial days com-
mencing April 19 and concluding April 27. The adver-
sary process and the Court benefitted by exceptionally
able counsel and witnesses on both sides.
Findings and Conclusions
The following are the Court’s findings of fact and
conclusions of law pursuant to Federal Rule of Civil
Procedure 52 made applicable in this proceeding by
Bankruptcy Rule 7052.
304a
Facts
Allocation and Auction of Radio Spectrum
Wireless telecommunications (telephony) involve the
transmission of voice and data between points using
radio frequency spectrum as the transport medium.
The first cellular telephone systems, developed by Bell
Laboratories in the 1960s, derived their name from the
small geographic areas, called “cells,” into which the
service region was subdivided. Each cell was sup-
ported by a single transmitter/receiver called a base
station, which was connected to the public switched
telephone network via a mobile services switching
center using traditional lines or microwave link. Cellu-
lar systems utilized analog technology, although cellular
operators are switching to digital.
In 1981 the Federal government, through the FCC,
began the process of establishing commercial wireless
networks in the United States by designating two
cellular licensees within each metropolitan statistical
area (“MSA”). These licenses were for frequency
located in assigned portions or bandwidths designated
in megaherz (“MHz”) of the radio spectrum. By 1989
cellular service was operational in every MSA, and the
same year the FCC auctioned additional licenses for
each rural statistical area (“RSA”). In the early 1990s
the government decided to end the cellular duopoly
controlling wireless services in the MSAs and RSAs by
establishing new licenses that could be used to compete
with the incumbent cellular carriers. Specifically, spec-
trum bandwidth was set aside for PCS.
Prior to Congress’ enactment of Section 309(j) of the
Federal Communications Act (“FCA”), the House Com-
305a
mittee on Energy and Commerce (the “Committee”)
recognized that the radio frequency spectrum is a
“precious but limited resource [that] has become vitally
important to our economic success and social well
being.” See H.R. Rep. No. 103-11 at 247-48 (1993),
reprinted in 1993 U.S.C.C.A.N. 378, 574-75. Noting
that the congested state of the radio frequency spec-
trum limited the ability to accommodate new spectrum-
dependent technologies and that existing procedures
for issuing radio spectrum licenses by lottery and
comparative hearings had resulted in regulatory ineffi-
ciencies and permitted licensees to exploit a national
resource unjustly, the Committee concluded
that a carefully designed system to obtain competi-
tive bids from competing qualified applicants can
speed delivery of services, promote efficient and
intensive use of the electromagnetic spectrum,
prevent unjust enrichment, and produce revenues to
compensate the public for the use of the public
airwaves.
Id. at 580.
In Section 309(j) of the FCA Congress authorized the
FCC to issue radio spectrum licenses for PCS to
various categories of qualified applicants through a
system of competitive bidding. 47 U.S.C. § 3099 (1),
(2). Among the categories of applicants, the FCC was
directed by the statute to designate portions or
“blocks” of the radio spectrum for auction to small,
emerging businesses and to establish flexible, deferred
license payment plans at below market interest rates to
enable such enterprises to participate and compete in
the communications industry. 47 U.S.C. § 309( )(3)(B)
and (4)(D).
306a
Consistent with this Congressional mandate, the
FCC divided spectrum to be used for PCS into “blocks”
designated as the A/B/C/D/E/F blocks and promulgated
detailed regulations for public auction of all six blocks.
The regulations were adopted with the advice and
counsel of knowledgeable experts in the private sector
after public hearings and were well designed to ensure
that all participants had access to maximum relevant
information and opportunity to bid. There are four
principal differences among the six blocks—geographic
area covered, amount of spectrum per license, eligibility
to participate in the auction and timing of the auction.
The A and B block licenses are allocated geographi-
cally to 51 Major Trading Areas (“MTAs”) throughout
the United States and its territories based on the Rand-
McNally Commercial Atlas & Marketing Guide (the
“Guide”). The C, D, E and F block licenses are allo-
cated geographically to 493 Basic Trading Areas
(“BTAs”) throughout the United States and its territo-
ries based on the Guide. Thus, every MTA incorporates
within its borders a cluster of BTAs. Each MTA and
BTA is covered by a single license for each block.
Hence, the FCC auctioned 51 licenses in each of the A
block and B block auctions and 493 licenses in each of
the C, D, E and F block auctions.
Each A and B block license is for thirty MHz of spec-
trum. The C block licenses also consist of thirty MHz of
spectrum. Each D, E and F block license covers ten
MHz of spectrum.
The C block and F block auctions were open only to
entrepreneurs or small businesses including start-up
companies, firms owned by minorities or women, and
rural telephone companies, sometimes referred to as
307a
“Designated Entities.” Consistent with the mandate of
Section 309(j), recognizing that such entrepreneurial
and modestly capitalized enterprises would be incapa-
ble of competing with large, established and well-
financed companies either in the auction process or the
marketplace, Designated Entities received material
financial benefits as well as the exclusive right to bid in
the C and F block auctions. Respecting the C block,
“small businesses” received a 25% bidding credit and
the right to pay 90% of their high bid obligation to the
FCC (net of the credit) over a ten-year license period,
with payment of interest only for the first six years and
quarterly installment payments of interest and princi-
pal in the last four years. With respect to F block,
“small businesses” received a 15% bidding credit, and
“very small businesses” received a 25% bidding credit,
and the right to pay 80% of their high bid obligations to
the FCC (net of the credit) over a ten-year period, with
payment of interest only for the first two years and
quarterly installment payments of interest and princi-
pal in the last eight years. The interest rate payable by
C and F block licensees was the rate on 10-year U.S.
Treasury Notes at the time of the license issuance.
All of the auctions were conducted in a simultaneous,
multiple round, license-by-license, open bid format. The
A/B block auction was conducted simultaneously
between December 5, 1994 and March 13, 1995. All of
the A/B block licenses, with the exception of certain
licenses granted pursuant to pioneer preference grants,
were conditionally granted on June 23, 1995. The FCC
did not conduct any other broad band PCS spectrum
auction prior to the A/B block auctions. There were
thirty qualified bidders in the A/B block auction. The
102 licenses issued in these auctions (51 A block; 51 B
308a
block) were awarded to bidders who paid an aggregate
sum of $7.7 billion for all 102 licenses.
The first C block auction was conducted between
December 19, 1995 and May 6, 1996. There were 255
qualified bidders competing for 493 licenses. The
regulations prohibited any participant from being
declared high bidder of more than 98 (i. e., 20%) of the C
block licenses. 47 C. F. R. Ch. I, S 24.710(a).' From July
3 to July 16, 1996 the FCC reauctioned certain C block
licenses that had become available when the previous
high bidders defaulted. Competition in the C block
auction, particularly for licenses for BTAs having
higher population densities (referred to as “Pops,” or
population expressed in 000’s, as 2,400 Pops for
2,400,000 of population), was intense and drove prices to
extraordinarily high levels in comparison to the prior
A/B block auction and the subsequent D/E/F block
auction. The aggregate net high bids totaled $10.071
billion in the initial C block auction and $904.6 million in
the July 1996 reauction.
Although the FCC had issued a release in August
1995 stating that D/E/F block licenses would be
auctioned in the last quarter of 1996, it appears that
participants in the marketplace did not anticipate that
the D/E/F blocks would be auctioned immediately after
the C block auction and before the C block licenses had
been awarded and necessary financing to “build out”
the C block licenses obtained. Nevertheless, in August
1996 the FCC scheduled the D/E/F block auction, which
took place from August 26, 1996 through January 14,
The same limitation applied to the F block auction. The regu-
lation prohibited indirect violation of the 20% limitation by the use
of affiliates. Id. at § 24.710(b).
309a
1997. Like the prior PCS auctions, the D/E/F block
auction was conducted simultaneously in open bid,
multiple round format. Fourteen hundred seventy-nine
licenses were at issue in the D/E/F block auction, 493
for each block. There were 153 qualified bidders.
Although the D/E/F block auction did not formally close
until January 14, 1997, over 80% of the bidding was
completed by October 30, 1996, and it was clear by early
November that the prices paid for the D/E/F block
licenses would be a fraction of those paid in the C block
auction. The aggregate high bids, net of bidding
credits, for the 1,493 D, E and F block licenses totaled
$2.5 billion.
As a consequence of the three PCS auctions, the
largest PCS licensees are Sprint PCS and AT & T
Wireless PCS, with combinations of A, B, D and E
block licenses covering 99% and 93% of total U.S. Pops.
The third largest holder of PCS spectrum is NextWave
(through its subsidiaries) with 61% of Pops covered,
followed by OmniPoint PCS Entrepreneurs (36%),
Western Wireless (23%) and PrimeCo PCS (23%), all
holding combinations of 30 MHz and 10 MHz licenses in
the C and D/E/F blocks.
In addition to the numerous categories of spectrum
other than PCS utilized for wireless telephony, wireless
operators employ a variety of technologies. The origi-
nal analog systems have been largely replaced by
digital standards, principally time division multiple
access (“TDMA”), global system for mobile communica-
tions (“GSM”), frequency division multiple access
(“FDMA”) and code division multiple access (“CDMA”).
Third generation wireless technology (3G) is the next
wireless technology for future applications. AirTouch,
310a
Sprint, PCS, Bell Atlantic and PrimeCo (PCS) have all
deployed CDMA, forming a nationwide footprint among
the cellular and PCS operators. NextWave utilizes
CDMA technology.
Although the market for wireless communication has
expanded enormously in the 1990s, so has competition
and the number of wireless operators, resulting in a
dramatic reduction in average revenue per user
(“ARPU”). Monthly ARPU declined from $96.83 at
year-end 1987 to $47.70 by the end of 1996.
The three separate auctions conducted for the A/B
blocks, the C block and the D/E/F blocks produced radi-
cally different financial consequences. The six auctions
involved different quanta of geography and population
(MTAs for the A and B blocks; BTAs for the C, D, E
and F blocks) and spectrum (30 MHz for the A, B and C
blocks; 10 MHz for the D, E and F blocks). Neverthe-
less, prices for PCS licenses may be compared, inter
alia, by stating the prices in terms of Price per Pop or
Price per MHz-Pop. The A/B block licenses were
auctioned for an average price of $0.52 per MHz-Pop
(all prices here expressed net of bidding credits). For C
block, the average price for the main auction ending
May 6, 1996 was $1.33 per MHz-Pop, and for the July
reauction the average price was $1.94 per MHz-Pop.
The D/E/F block licenses were auctioned for an average
price of $0.33 per MHz-Pop. NPCI bid an average of
$1.53 per MHz-Pop for its 63 C block licenses.
Cellular and PCS operators are not the only ones
utilizing radio spectrum for wireless telephone com-
munications. One such system is enhanced specialized
mobile radio (“ESMR”). The primary operator utilizing
ESMR to construct a nationwide wireless network is
3lla
Nextel Communications (“Nextel”). The FCC auctioned
ESMR licenses in the 800 MHz frequencies in 1997.
The FCC also auctioned licenses for wireless communi-
cations services WCS“) in 1997, and thereafter the
FCC auctioned spectrum for local multipoint distribu-
tion service (“LMDS”), which can be used for a variety
of services, including wireless telephony and data.
Before turning to the particular facts in this case, it is
important to highlight a distinguishing feature of the
spectrum auctions. In the traditional auction the
declaration of the winning bidder fixes the winner’s
right to and obligation to pay for the thing auctioned.
There is little gap in time between the “fall of the
hammer” and the exchange of payment for title to the
thing auctioned. Not so in a spectrum auction. The
FCC’s acceptance of a high bid for a license in a
particular BTA did not entitle the winner to the license,
but only to the exclusive right to file a long form
application seeking FCC approval for the license. Such
approval was by no means assured and was subject to
challenge by competing bidders or others. The
approval process might take months to complete, and
did in the case of the C block auction.
During the gap period between the conclusion of the
C block auction and reauction in May and July 1996 and
the approval of NPCI’s application in January 1997
there was a profound change in the value of spectrum
as perceived by participants in the PCS market and the
financial community on which the participants were
dependent. This change in perception of value is the
genesis of this controversy.
312a
NextWave Participation in the C/D/E/F Block
Auction
NPCI is a wholly-owned subsidiary of NextWave
Telecom Inc. (“NTI”), a corporation organized and
existing under the laws of the State of Delaware with
its principal place of business in San Diego, California,
and a place of business in Hawthorne, New York.
Among NTI’s direct and indirect subsidiaries which
filed a Chapter 11 petition on June 8, 1998 was Next-
Wave Power Partners Inc. (“NPPI"). NTI filed for
relief under Chapter 11 on December 23, 1998. NTI and
its affiliates which have filed in this Court are collec-
tively referred to as “NextWave”. NextWave was or-
ganized in May 1995 to take advantage of the oppor-
tunities in the relatively young but burgeoning wireless
telephony industry provided by Section 309(j) of the
FCA for small businesses qualified to participate in the
C and F block auctions.
C Block Auction
At the conclusion of the C block auction on May 6,
1996 the FCC announced that it had received high bids
for the 493 C block licenses and designated approxi-
mately 90 high bidders. NPCI was declared the high
bidder on 56 licenses. On July 3, 1996 the FCC com-
menced the 1996 reauction for eighteen C block licenses
that became available when previously-declared high
bidders failed to tender their required earnest money
deposits. At the close of the reauetion on July 12, NPCI
was high bidder on seven additional licenses, bringing
its total C block licenses to 63.
313a
The FCC regulations required prospective bidders to
deposit funds with the FCC in advance of the auctions
to establish their eligibility to bid (“upfront payments”).
The regulations further required winning bidders to
make an additional deposit with the FCC to bring their
total earnest money deposit to 5% of their total bid
obligation. NPCI complied with these requirements,
and as of July 23, 1996 NPCI had deposited with the
FCC upfront payments and post-auction and reauction
— — 8237, 182,402 (the “Pre-License
ay ments“), representing 5% of NPCI’s total bids o
$4,743,648,000. NPCI duly filed long-form —
for all 63 C block licenses for which it was declared high
bidder. Objections to NPCI’s applications were filed by
several different entities. The objections were over-
come, and on January 3, 1997 the FCC announced that
NPCI would receive its 63 C block licenses, conditioned
on compliance with its financial obligations to the FCC.
As required, on January 9, 1997 NPCI made an addi-
tional deposit with the FCC bringing its total cash
deposits to $474,364,806, or 10% of the total bid price.
. On February 14, 1997 the FCC granted NPCI’s
licenses conditioned upon NPCI executing a series of
promissory notes dated as January 3, 1997 payable to
the FCC in a total face amount of $4,269,283,223 (the
„ On February 19, 1997 NPCI signed the
otes and accompanying security ; 3
delivered them to the F. cc —ꝛ
D/E/F Block Auction
N PCI’s affiliate NPPI was the high bidder on 32 10
MHz licenses in the D/E/F block auction which con-
cluded in mid-January 1997. On April 28 and June 27,
3l4a
1997 the FCC announced the conditional grants to
NPPI of 25 D/E /F block licenses and seven D/E/F block
licenses, respectively.
NextWave’s Efforts to Obtain Public Financing
Like other Designated Entities eligible for the C and
F block auctions, NextWave’s fledgling capitalization
and lack of operating income made resort to the public
capital markets essential to fund the high capital cost to
build out its PCS system so as to make use of its spec-
trum licenses. As stated in its Registration Statement
filed with the Securities and Exchange Commission
(the “SEC”) on February 3, 1997 (p. F-7):
The Company is a development stage enterprise
which has incurred net losses since its inception. In
order to implement its business plan, significant
capital will be required to (i) meet the Company’s
obligations to the FCC, (ii) build out the PCS
network infrastructure necessary to provide service
and (iii) cover its operational expenses.
NextWave anticipated that it would require approxi-
mately $700 million in public financing to implement its
business plan. Half of this amount was proposed to be
raised by an initial public offering of equity securities
and half by a high yield debt offering. Merrill Lynch
was initially retained as lead investment banker for the
equity and debt offerings. Additional underwriters for
the equity offering included Lehman Brothers, Bear
Stearns, Prudential Securities and ING Barings. Addi-
tional underwriters for the high yield debt offering
included CIB Wood Gundy, Bear Stearns, Lehman
Brothers, Prudential Securities and ING Barings. In
October 1996 Smith Barney became the lead invest-
315a
— banker for the equity offering and CIB Wood
— became the lead investment banker for the debt
offering, the other underwriters remaining the same.
* at the trial demonstrated conclusively
that, despite the best efforts of NextWave and its
—— bankers, it was impossible to obtain the
= — . to build out Next Wave's PCS
ucture and implement its busi
8 ness plan.
—— — did obtain loans aggregating vom
rom two prospective equipment s i
wo suppliers
pursuant to preexisting contractual — —
equity or deb ˖ a
— ebt financing could be obtained in the public
NextWave was not the only C block licens
— publie capital markets closed. — na
illion — public financing was sought by C block licen-
— - 4 — award of their licenses. Not one dollar of
— ; . ion was raised in the public market. To this
— — y three years after the 1996 auction and
: ction, less than 10% of the C block licenses awarded
y the FCC have been placed in service.
The marketplace reaction to th
e C block deb
— did not go unnoticed by the FCC. In .
e FCC received several requests from C block licen-
3 genes ;
pes — roe 1 in support of its initial motion to
—— a. — e Court takes judicial notice of those docu-
public record annexed to the FCC's motion to dismiss
upon which th itation i ,
ü e factual recitation in the FCC's Memorandum was
316a
sees for relief from their installment payments that
described a range of difficulties in accessing the capital
markets. The FCC Wireless Telecommunications Bu-
reau also received several proposals from C block
licensees regarding alternative financing r
as well as a petition for rulemaking regarding C bloc!
installment payments. In response to these requests,
effective March 31, 1997 the FCC suspended the C
block installment payments indefinitely and initiated an
elaborate administrative process for restructuring C
block license obligations.
On June 2, 1997 the FCC issued a public notice
seeking comment on these restructuring proposals and
inviting additional ones. The FCC received over 160
filings in response.
On June 30, 1997 the FCC conducted a public forum
in Washington, D.C. to discuss issues regarding C block
installment payments. Both before and after the public
forum the FCC received numerous comments, reply
comments and ex parte letters and presentations which
provided the Agency with a wide range of restructur-
ing proposals from C block licensees, financial institu-
tions, investors, equipment vendors and other inter-
ested parties. The FCC established a task force to
evaluate all these proposals and to recommend an
appropriate course of action.
On October 16, 1997, after more than SIX months of
effort, the FCC rendered its — —— —
cial relief for C block licensees and issu
— Order which provided distressed C block
licensees with four distinct, mutually-exclusive options.
In response to the Restructuring Order, the FCC
received 37 petitions for reconsideration, seventeen
317a
oppositions to these petitions, sixteen replies and 38 ex
parte filings. Several petitioners claimed that the
options set forth in the Restructuring Order did “not
provide commercially viable alternatives for financially
troubled licensees” and “fell short of meaningful relief.”
The FCC issued its Reconsideration Order on March
24, 1998. Upon review of the administrative record, the
FCC decided that “a radical departure from the [Re-
structuring Order was] not warranted.” Accordingly,
the FCC left intact the “basic framework” of the
Restructuring Order, modifying it only slightly in the
Reconsideration Order “to allow licensees to be more
flexible in making their elections for licenses in differ-
ent geographic areas, to use more of the downpayments
already on deposit, and to be more flexible in the use of
those downpayments.”
The 1999 Reauction of C, E and F Block Licenses
In the spring of 1999 the FCC conducted a reauction
of 347 licenses from the C, E and F blocks, including 206
30 MHz C block licenses, 133 15 MHz C block licenses
(the 15 MHz C block licenses presumably resulted from
a licensee electing the disaggregation alternative under
the FCC’s Restructuring Orders), 6 10 MHz E block
licenses and two 10 MHz F block licenses. The auction
began on March 23 and concluded after 78 rounds of
bidding on April 15, 1999. There were 76 qualified
bidders.
Three hundred two licenses were bid in by 57 bid-
ders, leaving 45 licenses unsold. The aggregate of net
bids for all 302 licenses was $342,840,945, equating to a
little less than $0.20 per MHz-Pop.
318a
Discussion
Constructive Fraudulent Conveyance Law
A. Statutory Framework
Section 544(b)(1) of the Bankruptcy Code provides:
. . . the trustee may avoid any transfer of an
interest of the debtor in property or any obligation
incurred by the debtor that is voidable under
applicable law by a creditor holding an unsecured
claim that is allowable under section 502 of this title
or that is not allowable only under section 502(e) of
this title.
11 U.S.C. § 544(b).
i i lent
Section 544 incorporates the Uniform Fraudu
Transfer Act (“UFTA”), as codified by the State of
California, which provides, in pertinent part:
A transfer made or an obligation incurred by a
debtor is fraudulent as to a creditor, whether the
creditor’s claim arose before or after the transfer
was made or the obligation was incurred, if the
debtor made the transfer or incurred the obligation
as follows:
* * *®
(b) without receiving reasonably equivalent
value in exchange for the transfer or obligation,
and the debtor:
(1) was engaged or was about to engage in a
business or transaction for which the remaining
319a
assets of the debtor were unreasonably small in
relation to the business or transaction; or
(2) intended to incur, or believed or reason-
ably should have believed that he or she would
incur, debts beyond his or her ability to pay as
they became due.
Cal.Civ.Code § 3439.04 (West 1997). The UFTA, which
has been adopted by 33 states and is the successor to
the Uniform Fraudulent Conveyance Act (“UFCA”),
resembles the provisions of 11 U.S.C. § 548 more closely
than did the UFCA. 5 Collier on Bankruptcy
1 548.01[3)], p. 548-8 (15th ed. 1979).
Section 548 of the Bankruptcy Code provides:
(a)(1) The trustee may avoid any transfer of an
interest of the debtor in property, or any obligation
incurred by the debtor, that was made or incurred
on or within one year before the date of the filing of
the petition, if the debtor voluntarily or involun-
tarily—
(A) made such transfer or incurred such obli-
gation with actual intent to hinder, delay, or
defraud any entity to which the debtor was or
became, on or after the date that such transfer
was made or such obligation was incurred,
indebted; or
(B)(i) received less than a reasonably equivalent
value in exchange for such transfer or obligation;
and
(ii) (1) was insolvent on the date that such
transfer was made or such obligation was
320a
incurred, or became insolvent as a result of
such transfer or obligation;
(Il) was engaged in business or a trans-
action, or was about to engage in business or
a transaction for which any property re-
maining with the debtor was an unreasonably
small capital; or
(III) intended to incur, or believed that
the debtor would incur, debts that would be
beyond the debtor’s ability to pay such debts
as such debts matured.
11 U.S.C. § 548(a).
In considering the appropriate choice of law, the
fraudulent transfer provisions of California, New York’
or the District of Columbia“ may be applicable. The
Court accepts NPCI’s unopposed position that the
fraudulent conveyance statutes in each of these states
New York’s Debtor and Creditor Law § 273 provides:
Every conveyance made and every obligation incurred by a
person who is or will be thereby rendered insolvent is fraudu-
lent as to creditors without regard to his actual intent if the
conveyance is made or the obligation is incurred without a fair
consideration.
4 District of Columbia Code (1981) § 28-3105 provides:
(a) A transfer made, or obligation incurred, by a debtor is
fraudulent as to a creditor whose claim arose before the
transfer was made or the obligation was incurred if the debtor
made the transfer or incurred the obligation without receiving
a reasonably equivalent value in exchange for the transfer or
obligation and the debtor was insolvent at that time or the
debtor became insolvent as a result of the transfer or obli-
gation.
32la
are, in all material respects, the same with a minor
exception in the case of New York. To explain, both
California and the District of Columbia have incorpo-
rated the UFTA. New York continues to apply the
UFCA, which requires the exchange of “fair considera-
tion” rather than “reasonably equivalent value.” N.Y.
Debt. & Cred. Law § 273 (McKinney 1990). Fair consid-
eration is defined in § 272 of the New York Debtor and
Creditor Law to incorporate the concept of “good
faith.” See In re Checkmate Stereo & Electronics, Ltd.,
9 B.R. 585, 591 (Bankr. E.D.N.Y. 1981). Courts within
this district have repeatedly held that the elements
needed to prevail on a fraudulent conveyance action are
essentially the same under New York’s Fraudulent
Conveyance Act and 11 U.S.C. § 548. See, e. g., In re
Ames Dept. Stores, Inc., 161 B.R. 87, 89 n.1 (Bankr.
S.D.N.Y. 1993); In re Curtina Int'l, Inc., 23 B. R. 969,
973-74 (Bankr. S.D.N.Y. 1982). The California, New
York and District of Columbia fraudulent conveyance
statutes are also in all material respects the same as the
fraudulent conveyance provisions provided in 11 U.S.C.
§ 548. Because Section 548 of the Bankruptcy Code and
the UFTA “are of common ancestry,” both courts and
commentators have concluded that “[c]ases under one
are . . . authoritative under the other.” Interpool Ltd.
v. Patterson, 890 F. Supp. 259, 268 n.8 (S.D.N.Y. 1995);
see also, In re United Energy Corp,, 944 F.2d 589, 593-
94 (9th Cir. 1991); 5 Lawrence P. King, Collier on
Bankruptcy, J 548.01[4] (1999) (“Cases decided under
the UFCA and UFTA are considered to be persuasive
authority for similar issues arising under section 548 of
the Code”). Accordingly, as the parties appear to con-
cede, a choice of law analysis is unnecessary in the
instant case since the fundamental legal principles
would not change under any possible choice of law.
322a
B. General Purpose
Section 544 promotes the central bankruptcy policy
of equitable distribution amongst all creditors. See In
re Giordano, 188 B.R. 84, 88 (D. R. I. 1995); In re 375
Park Avenue Assocs., Inc., 182 B.R. 690, 695 (Bankr.
S.D.N.Y. 1995); In re AP Industries, 117 B.R. 789, 800
(Bankr. S.D.N.Y. 1990) (citing Cumberland Oil Corp. v.
Thropp, 791 F.2d 1037, 1042 (2d Cir. 1986), cert. denied,
479 U.S. 950, 107 S. Ct. 436, 93 L.Ed.2d 385 (1986)).
Further, Section 544 advances the goal that a debtor's
prepetition transfers should not deprive creditors of
property from which their claims can be satisfied. In re
Stoecker, 131 B.R. 979, 984 (Bankr. N.D. Ill. 1991)
(citing H. Rep. No. 595, 95th Cong., Ist Sess. 375 (1977);
S. Rep. No. 989, 95th Cong., 2d Sess. 89-90 (1978),
reprinted in 1978 U.S.C.C.A.N. 5787).
C. Elements of Recovery
As set forth above, in order to prevail on its Section
544 claim, NPCI must demonstrate that it: (1) incurred
an obligation (2) at a time when it was engaged or was
about to engage in a business or transaction for which
the remaining assets of NPCI were unreasonably small
in relation to the business or transaction, or intended to
incur, or believed or reasonably should have believed
that it would incur, debts beyond its ability to pay as
they became due (3) for which it did not receive
reasonably equivalent value.
(1) Incurrence of Obligation
Generally an obligation is incurred when a debtor
becomes legally obligated to pay. In re Emerald Oil
Co., 695 F.2d 833, 837 (5th Cir.1983); Barash v. Public
323a
Finance Corp., 658 F.2d 504, 511 (7th Cir. 1981); see
also In re G. Survivor Corp., 217 B.R. 433, 440 (Bankr.
S.D.N.Y. 1998). While the Bankruptcy Code is silent on
the question of when a debt or obligation is “incurred,”
courts have not questioned that an “obligation” to pay
principal indebtedness under a promissory note is “in-
curred” on the date the note is executed and delivered.
E. g., In re lowa Premium Service., 695 F.2d 1109, 1111-
12 (8th Cir. 1982); In re Smith-Douglass, Inc., 842 F.2d
729, 730 (4th Cir. 1988); In re Pippin, 46 B. R. 281, 283-
84 (Bankr. W.D. La. 1984) (holding that, for preference
purposes, debtor becomes legally obligated to pay
under installment payment contract when contract is
executed). The California UFTA provides that “{aJn
obligation is incurred . . . if evidenced by a writing,
when the writing executed by the obligor is delivered
to, or for the benefit of, the obligee.” Cal. Civ. Code
§ 3439.06(e)(2). A statutory provision that is clear and
unequivocal on its face should be given full force and
effect. See United States v. Ron Pair Enterprises, Inc.,
489 U.S. 235, 240-41, 242, 109 S. Ct. 1026, 103 L.Ed.2d
290 (1989).
Subject to section II.A., below, the issue has been
addressed in the FCC’s motion for partial summary
judgment. In resolving that motion this Court held that
the transfer of licenses for dollars and Notes occurred
in the time frame January 3 to February 19, 1997.
There is no dispute that the Notes were signed and
delivered February 19, 1997, although dated as of
January 3, 1997.
(2) Insolvency
Insolvency is a question of fact. In re Roblin Indus.,
Inc., 78 F.3d 30, 35 (2d Cir. 1996). Under Section
324a
3439.04 of the California Civil Code, NPCI needs only
to prove that its remaining assets were unreasonably
small in relation to the $4.7 billion transaction in which
it was about to engage or that upon incurrence of the
obligation, the debtor’s debts were beyond its rea-
sonable ability to repay. See, e.g., Patterson v. Missler,
238 Cal. App. 2d 759, 48 Cal. Rptr. 215, 217 (1965). A
transfer may be avoided where the debtor does not
receive reasonably equivalent value in exchange for a
transfer and the debtor was either “insolvent at the
time of the transfer or was engaged in business with
unreasonably small capital.” See United Energy, 944
F.2d at 594. As the term “unreasonably” is relative, it
requires judicial consideration of the overall state of
affairs surrounding the corporation and the transfer in
question. In re Suburban Motor Freight, 124 B. R. 984,
999 (Bankr. S.D. Ohio); Barrett v. Continental Illinois
Nat. Bank & Trust, 882 F.2d 1, 4 (1st Cir. 1989), cert.
denied, 494 U.S. 1028, 110 S. Ct. 1476, 108 L.Ed.2d 613
(1990). To determine the existence of “unreasonably
small assets,” courts on a case-by-case basis have used a
“balance sheet approach” weighing the raw financial
data of the balance sheet of the debtor against the
nature of the entity and its need for capital over time.
Barrett, 882 F.2d at 4. Another approach to the “unrea-
sonably small assets” test is a focus on the debtor's
future ability to generate cash and pay its debts as they
come due. See Moody v. Security Pacific Business
Credit, Inc., 971 F.2d 1056, 1073 (3d Cir. 1992); see also
In re Vadnais Lumber Supply, Inc., 100 B.R. 127, 137
(Bankr. D. Mass. 1989).
This element of a Section 544 cause of action has been
resolved by the parties by stipulation. In Section V of
the Joint Pretrial Order, it has been stipulated that
325a
NPCI has and had creditors holding unsecured claims
allowable under Section 502 of the Bankruptcy Code
which claims arose both before and after NPCI’s
obligation to the FCC was incurred; that when NPCI’s
obligation to the FCC was incurred, NPCI was engaged
or was about to engage in a business or transaction for
which its remaining assets were unreasonably small in
relation to the business or transaction; and that both
NPCI and NextWave (as defined above) were insolvent
on January 3 and February 14 and 19, 1997, and that
NPCI was insolvent on June 8, 1998.
(3) Exchange of Reasonably Equivalent Value
The parties agree that the primary analysis of the
fraudulent conveyance claim focuses upon the value of
the consideration exchanged between the parties at the
time of the conveyance or incurrence of debt which is
challenged. See In re Best Products Co., 168 B.R. 35, 54
(Bankr. S.D.N.Y. 1994); see also In re Fairchild
Aircraft Corp., 6 F.3d 1119, 1126 & n.8 (5th Cir. 1993);
In re Morris Communications NC, Inc., 914 F.2d 458,
466 (4th Cir. 1990). Essentially, the Court must deter-
mine whether NPCI received reasonably equivalent
value by exchanging $474 million in cash and $4.27
billion in promissory notes for 63 C block licenses. See
Rubin v. Manufacturers Hanover Trust Co., 661 F.2d
979, 993 (2d Cir. 1981); In re Curtina Int'l, Inc., 23 B. R.
at 974; Whitehouse v. Six Corporation, 40 Cal. App. 4th
527, 48 Cal. Rptr. 2d 600, 604 (1995). In other words,
the analysis should be directed at what NPCI sur-
rendered and what NPCI received. In re United
Energy Corp., 944 F.2d at 594-95.
Reasonable equivalency is a “measurement test,”
wherein “all aspects of the transaction must be exam-
326a
ined to calculate the value of all the benefits and
burdens to the debtor, direct or indirect.” In re
Suburban Motor Freight, 124 B.R. at 997; Rubin v.
Manufacturers Hanover Trust Co., 661 F.2d 979 (2d
Cir. 1981); In re Vadnais Lumber Supply, Inc., 100 B. R.
at 136. “There is no precise formula to ascertain what
constitutes reasonably equivalent value; the court as
the trier of facts must determine this issue under all of
the facts and circumstances of the case.” Jn re Curtina
Int“, Inc., 23 B. R. at 974; see also Interpool Ltd. v.
Patterson, 890 F. Supp. at 268 (“the Court must con-
sider the facts and circumstances of each case in order
to determine whether reasonably equivalent value was
given”); In re Joing v. O & P Partnership, 82 B.R. 495,
499 (D. Minn. 1988); In re Henry-Luqueer Props., Inc.,
145 B.R. 771, 775 (Bankr. E.D.N.Y. 1992).
It has been said that “the debtor need not collect a
dollar-for-dollar equivalent to receive reasonably
equivalent value.” In re Fairchild Aircraft Corp., 6
F.3d at 1125-26. Instead, “(t]he touchstone is whether
the transaction conferred realizable commercial value
on the debtor reasonably equivalent to the realizable
commercial value of the assets transferred.” Mellon
Bank, N.A. v. Metro Communications, Inc., 945 F.2d
635, 647 (3d Cir. 1991), cert. denied, 503 U.S. 937, 112 S.
Ct. 1476, 117 L.Ed.2d 620 (1992).
The three basic approaches to valuation are:
(1) replacement cost approach, (2) the market compari-
son approach and (3) the income stream analysis. See
In re Executive House Associates, 99 B.R. 266, 278
(Bankr. E.D. Pa. 1989).
327a
Valuation was the issue tried in this case. The
Court’s analysis, findings and conclusion are set forth in
section III, below.
II. Preliminary Issues
A. Transfer Date of Pre-License Payments
The FCC argues as a matter of law that the Pre-
License Payments totaling $237,182,402° equating to 5%
of NPCI’s C block bids, which had been fully paid to the
FCC by July 23, 1996, must be deemed a completed and
irrevocable transfer as of that date for fraudulent con-
veyance purposes. The FCC asserts that Next Wave
cannot seriously dispute that it received something of
reasonably equivalent value in exchange for” the Pre-
License Payments, which constituted a “5% opportu-
nity cost for obtaining the 63 C block licenses for which
Next Wave had bid $4.74 billion.“
In this Court's view, the issue thus raised turns on
whether the Pre-License Payments were final and
irrevocable by July 23, 1996. If the Pre-License
5 It will be recalled that the 8237, 182, 402 was comprised of two
pre-auction upfront payments totaling approximately $86 million
and two post-auction cash payments totaling approximately
$151,000.
® In its decision on the FCC’s motion for partial summary judg-
ment, this Court held that the “transfers” as there defined (i. e., the
5% deposit paid in by July 23, 1996, the additional 5% deposit paid
in January 1997 and the Notes) constituted transfers made or
obligations incurred in the January/February 1997 time frame and
were to be valued as of those dates. The FCC did not argue in the
motion for partial summary judgment that the Pre-License Pay-
ments alone should be deemed completed transfers as of July 1996,
and the Court did not decide the issue now presented.
328a
Payments were not subject to repayment to NPCI
irrespective of the grant or denial of the licenses in
early 1997, one would have to conclude that this 5%
deposit was indeed a completed transfer for fraudulent
conveyance purposes. As such, it would be in the
nature of an “opportunity cost” or a “ticket of admis-
sion” to the FCC approval process and its value should
be judged as of the date of payment.
On the other hand, if NPCI were entitled to recover
the Pre-License Payments in whole or in part depend-
ing on the award or denial of the licenses, then to that
extent the transfer could not be said to take place for
fraudulent conveyance purposes until the award or
denial of the licenses. The answer is to be found in the
FCC regulations.
Before the auction process begins, FCC regulations
require upfront payments as a condition to eligibility
for bidding. 47 C.F.R. §§ 1.2106(a) and (c), 24.706(a) (All
auction participants are “required to submit upfront
payments in accordance with § 1.2106 . . .”),
24.711(a)(1). Any upfront payments must be credited
toward any downpayments “required for licenses on
which the bidder is the high bidder.” 47 C.F.R.
§ 1.2106(d). If the upfront deposit exceeds “the
required deposit of a winning bidder,” the balance may
be refunded “after determining that no bid withdrawal
penalties are owed by that bidder.” Id.
A clear distinction is made between bidders and the
high bidder. Section 1.2106 requires the FCC to credit
the upfront payment to the winning bidder’s required
deposit, subsuming it into the required deposit. The
regulation is silent as to upfront payments of unsuccess-
ful bidders, but it is uncontested that the amounts are
329a
nded to them. Since the upfront payments must be
hded to unsuccessful bidders, they cannot be con-
— an irrevocable admission tieket.“ This is not
the case, however, for the post- auction downpayment.
Once the auetion eloses, the FCC must declare a high
bidder. 47 C. F. R. § 1.2107 (a). Upon being declared the
high bidder for a particular license, the bidder must
promptly deposit enough money to bring its total
deposit up to the 5% level and submit its “long form”
application. 47 C. F. R. §§ 1.2107(b), 24.711(a)(2). The
deposit is held:
. until the high bidder has been awarded the
license and has paid the remaining balance due on
the license or authorization, in which case it will not
be returned, or until the winning bidder is found
unqualified to be a licensee or has defaulted, in
which case it will be returned, less applicable pay-
ments.
47 C.F.R. § 1.2107(b), emphasis supplied. This pro-
vision makes clear that the 5% deposit, i.e. the Pre-
License Payments, will be returned “less applicable
payments,” referring to the penalty provisions in
Sections 1.2104(g)(2) and 24.704(a)(2).
These provisions impose penalties in the event of
“default or disqualification after close of auction.” The
minimum possible penalty is 3% of the defaulting
bidder’s high bid. 47 C.F.R. §§ 1.2104(g)(2) and
24.704(a)(2).. One might argue that some ambiguity
The penalties under these sections might far exceed 3% of the
defaulting bidder's bid, but in no event would the penalty be less
than 3%.
. 330a
exists regarding the applicability of these penalties
because the provisions refer only to withdrawal, default
or disqualification, while other sections of the regula-
tions refer to “License grant, denial, default and dis-
qualification,” 47 C.F.R. §§ 1.2109 and 24.708, suggest-
ing that no penalties might be mandated in the event of
a “denial” of license as opposed to “disqualification.”
However, Section 1.2109 resolves the ambiguity in
subsection (e), which states:
A winning bidder who is found unqualified to be a
licensee, fails to remit the balance of its winning bid
in a timely manner, or defaults or is disqualified for
any reason after having made the required down-
payment, will be deemed to have defaulted and will
be liable for the payment set forth in § 1.2104(g)(2).
Id., emphasis supplied. Thus the FCC’s denial of a high
bidder’s license application, for any reason, will trigger
at least the 3% penalty.
Taking these regulatory provisions as a whole, once a
bidder has been declared high bidder, it must place at
least the 3% of its bid at risk irrevocably. Win or lose in
the approval process, the regulations provide for no set
of circumstances in which this 3% minimum may be
returned to the high bidder.
The FCC is therefore correct to the extent that 3% of
a bidder’s total bid, or three-fifths of its downpayment,
was in substance and effect an “admission ticket” to the
regulatory process. No guarantee that the bidder
would ultimately qualify and receive a grant of license
existed, but the regulations comprehend to a certainty
that a high bidder will never recover at least the 3%
33la
portion of its 5% downpayment whether by dint of
default or disqualification.
Accordingly, $142,309,000 (the “3% Payment”),
equating to 3% of NPCI’s total C block bids of $4.74
billion or three-fifths of the Pre-License Payments, was
irrevocably paid by NPCI to the FCC by July 23, 1996
and would not be repaid to NPCI irrespective of the
outcome of the approval process. The consideration
received by NPCI in exchange for the irrevocable 3%
Payment was the exclusive right to proceed with the
approval process by filing a long form application for
the 63 C block licenses on which it was high bidder.
That consideration constituted reasonably equivalent
value for the 3% Payment as a matter of fact and law.
B. Satisfaction of Antecedent Debt as Reasonably
Equivalent Value
Little need be said of the FCC’s argument that the
debtor’s $474 million of cash downpayments and $4.27
billion of Notes satisfied an “antecedent debt.” The
argument seems to be, in essence, that when the debtor
made its required license payments by delivering the
Notes, and thereby did not default, it “satisfied” the
potential penalty obligation it might have incurred if it
had defaulted. Thus, the FCC asks the Court to find
that NPCI’s $4.7 billion of cash transfers and Notes
payable to the FCC was “reasonably equivalent” in
value to the penalties for which NPCI might have been
liable to the FCC if NPCI had defaulted.
The argument fails because it is based on something
that did not happen. The fact is that there was no
antecedent debt. No penalty was ever calculated. No
penalty was ever applicable. NPCI did not default and
332a
its application was not denied. Analysis of legal rights
and obligations under the Bankruptcy Code will be de-
termined upon facts, not hypothetical default obliga-
tions never quantified or incurred.
Of course, satisfaction of a genuine antecedent debt
may indeed constitute “value” for a prepetition pay-
ment or other transfer. See, 11 U.S.C. § 548(d)(2)(A); In
re United Energy Corp., 944 F.2d 589 (9th Cir. 1991).
In this case, however, the “value” received by NPCI for
its $4.7 billion was 63 C block licenses, not satisfaction
of a fictitious antecedent debt.
Ill. Valuation of the C Block Licenses
A. Statement of the Issue
The parties agree on the issue that determines the
outcome of the debtor’s constructive fraudulent convey-
ance claim. As stated by NPCI:
[The trial of this Adversary Proceeding requires
one straight-forward determination by this Court
hat was the value of NPCI’s C Block licenses in
February 1997? (NPCI Trial Memorandum at 2)
As stated by the FCC:
The only issue for this Court to resolve at trial is
whether the cash transfers made, and payment
obligations incurred, by plaintiff-debtor . . . during
the C block auction and licensing process were rea-
sonably equivalent in value to the radio spectrum
rights that Next Wave acquired from [the FCC).
(FCC Trial Memorandum at 1)
The parties agree that:
Furthermore, the proper analysis focuses solely on
the value of the consideration exchanged between
the parties “at the time of the conveyance or
incurrence of debt which is challenged.” [citations
omitted] (FCC Trial Memorandum at 4; NPCI’s
Response at 2)
Nevertheless, highly competent experts for the
parties presented radically disparate conclusions on the
issue. Their divergence reflects the different methodol-
ogy and different concept of “value” employed by each
side. The task of the Court is to determine which
— 4 most faithfully accords with the statute and
case law.
B. Methodology
As noted above, there are three generally-accepted
methods of valuing property (i) the replacement cost
approach, (2) the market comparison approach, and
(3) income stream or discounted cash flow analysis.
Replacement cost measures the value of an asset by the
cost to construct or replace it with another of like
utility, taking into account depreciation in the asset to
be valued. The market approach measures the value of
an asset through analysis of recent market transactions
involving comparable property. The income approach
measures the value of an asset by the present value of
its future earnings using discounted cash flow (“DCF”)
analysis. For purposes of this case, the replacement
cost approach is subsumed into the market approach
because the cost to replace spectrum licenses can only
be determined by the cost of similar licenses auctioned
by the FCC. As stated by the Bankruptcy Court in a
334a
similar litigation between a C block licensee and the
FCC, GWI PSCI Inc., et al. v. Federal Communi-
cations Commission (In re GWI PSCI Inc., et al.),
Adversary No. 397-3492: “The market or comparable
approach and the cost approach for these assets is
basically the same. Comparables are based on auctions
by the FCC. The only way to replace these licenses is
by purchase at an FCC auction.” (Transcript of April
24, 1998 at 13)
(1) Market Comparable Technique
The necessary predicates for employing the market
comparable method of valuation are the existence of
arm’s length, marketplace transactions within a rea-
sonably pro nate time frame involving the same or
basically comparable assets. The assets involved in the
transactions to be compared need not be identical to the
property to be valued. The test is whether the proper-
ties to be compared are sufficiently similar in nature
and interchangeable in function that any differences can
rationally be reflected by appropriate adjustments.
NPCI’s expert, Anthony P. Kern, employed the mar-
ket comparable approach to value the C block licenses.
Mr. Kern issued two reports, one valuing the assets as
of January 13, 1997, the date the FCC announced the
award of C block licenses to NPCI, the other valuing as
of February 19, the date on which NPCI complied with
For example, virtually every parcel of real estate differs from
other parcels in some respects and, indeed, real property is fre-
quently characterized as “unique” on a piece-by-piece basis. Yet
the market comparable technique is traditionally accepted as the
proper method of valuing real estate in most cases, using adjust-
ments to reconcile differences between specific parcels.
335a
its purchase price obligations by executing the Notes
and delivering them to the FCC. Mr. Kern also issued a
supplementary report (collectively with the January 13
and February 19 reports, the “Kern Report”) correct-
ing a calculation omission. It is NPCI’s legal position
that February 19 is the proper valuation date, although
Mr. Kern’s valuation for February 19 is higher than
that for January 13.
Mr. Kern examined for potential comparability the A
and B block licenses auctioned in early 1995, the D/E/F
block licenses auctioned during the last quarter of 1996
and a number of PCS license transactions subsequent to
these auctions. For reasons articulated in his report,
Mr. Kern rejected the A/B block auctions and the
subsequent PCS license transactions as comparables.
Mr. Kern selected the D, E and F block auction
prices as appropriate comparables for his analysis.
. After applying adjustments which he deemed appropri-
ate to account for material differences between the C
block licenses, on the one hand, and the D, E and F
block licenses on the other, Mr. Kern arrived at a
reconciled fair market value per Pop for the C block
licenses of $7.82, equating to a fair market value for
NPCI’s C block licenses of $810,358,264, rounded to
$810.4 million.
(2) Discounted Cash Flow Analysis
Discounted cash flow analysis is a long-recognized
and widely-used method of predicting or projecting
value. If neither replacement cost nor comparative
market can be utilized, DCF analysis may be the only
practical way to evaluate property.
336a
As employed by investment bankers and economists,
DCF analysis entails the creation of a computer model
incorporating on a line-by-line basis assumptions and
projections of the myriad components of the overall
market, market penetration an: sales, revenues, costs,
and the asset base and capitalization which support
them, projected out over all relevant market conditions
expected to prevail in a finite time period, in this case
ten years. DCF analysis is widely if not universally
used in the business and financial world as a tool to
assist management in making decisions whether to
invest in or dispose of businesses or major assets. It is
generally not used as a tool for determining fair market
value, particularly when that determination can be
made using either replacement cost or market com-
parables. DCF analysis is obviously more reliable if the
assumptions and line item components are based on
actual, historical performance figures or contractual
rights and obligations.
The FCC’s expert, Dr. David J. Salant, prepared and
relied upon a DCF model as the basis for his conclusion
of value in his report (the “Salant Report”). Dr.
Salant’s valuation of NPCI C block licenses using a
DCF model is presented in Part IV at pages 42-47 of
‘the Salant Report, and the “Details on the Discounted
Cash Flow Valuation of Next Wave’s C Block Licenses”
is to be found in Exhibit F to the Report. The entire
remainder of the Salant Report and Exhibits is devoted
to rebuttal addressed to the Kern Report. As stated by
Dr. Salant:
A good DCF model requires the analyst to think
through, document and quantify each and every
revenue, cost, multiple and discount rate. While the
337a
DCF approach may require the analyst to make
“hundreds of assumptions,” the discipline of the
DCF approach in the hands of a knowledgeable
practitioner means that those assumptions are
logically consistent and reasonable. Indeed, one of
the major advantages of the DCF approach is that
another analyst can explicitly test the sensitivities
of his or her result to changes in the assumptions.
(Salant Report 43)
Dr. Salant continued:
Any DCF analysis is subject to second-guessing
because of the assumptions needed to complete the
calculations. This DCF analysis has two main pur-
poses: (1) to derive license values from a consistent
and conservative set of assumptions based on our
considerable experience in valuing PCS and cellular
licenses, and (2) to compute a confidence interval,
consisting of an extremely cautious lower bound and
a moderately optimistic upper bound about how
much a reasonable bidder/license buyer might be
willing to pay for the licenses that NextWave won.
The end result of our DCF analysis is a tool that
allows us to perform a carefully considered estimate
of the value of the licenses.
We use the DCF to compute the maximum amount a
very prudent firm would be willing to pay for the
licenses. . . .
No DCF analysis is perfect, and one can always
debate the underlying assumptions. . . . Besides
our Own experience, our analysis uses industry
sources and NextWave documents to form projec-
338a
tions of key variables such as penetration and
average revenue per user. (Salant Report 44-45)
Under the heading “Summary Description of the DCF
Model,” Dr. Salant stated: N
The DCF model calculates revenues based upon
information about wireless market penetration, PCS
market penetration, minutes of use, retail revenue
per user and wholesale revenue per user. Capital
expenditures include cell site build-out and switch-
ing costs. Operating expenses include network
related, marketing and billing expenses. For the
base case we apply a 16% cost of capital, which is
consistent with that used by NextWave in many of
their DCF runs. (Salant Report 45)
In preparing his DCF analysis, Dr. Salant did not
undertake to prepare and document the “hundreds of
assumptions” customarily required for a DCF analysis
in the business and financial world. Exhibit F to the
Salant Report, entitled “Details on the Discounted Cash
Flow Valuation” consists of a bar chart backed up by
three sheets. The first sheet entitled “Free Cash Flow”
contains the following line items: EBITDA, Taxes, FCC
License Payment, Capital Expenditures, Change in
Working Capital, and a resulting bottom line entitled
Unlevered Free Cash Flow. The second sheet entitled
“Equipment Costs” contains two categories, Non Re-
curring Costs (BTS Cost, Carrier Cost, Switch Cost and
Switch Capacity Per Subscriber) and monthly Recur-
ring Costs (BTS Site Cost, Carrier Cost, Switching
Cost). The third sheet entitled “Key Baseline Values”
contains eleven line items (Total Population, Covered
Pops, PCS Company Subscribers, Basic Minutes Per
User, PCS Average Revenue Per User, Data Service
339a
Percentage of PCS Service Revenue, Capital Expendi-
tures per Pop, Operating Expense per Pop, # BTS,
# Carriers and # BSCs), and sets forth three additional
assumptions, Number of Competitors at 6, Cost of
Capital at 16% and Terminal Value Multiplier at 9. All
line item projections on all three sheets are extended
ten years from 1997 through 2006.
Once the DCF model has been created, its production
of a number for value is a mathematical computation by
the computer. The computation obviously will change
to reflect any change in the assumptions in the model.
Dr. Salant’s DCF model produced a “retail base case”
value of approximately $2.5 billion as reflected on the
bar chart in Exhibit F to his Report. Dr. Salant rea-
soned, however, that Next Wave's strategy was to
become a “carrier’s carrier” and to market its PCS ser-
vices to other providers, such as OmniPoint (with which
NextWave had a marketing contract), which would in
turn sell to the retail market. To reflect the value of
this strategy inherent in NextWave’s C block licenses
Dr. Salant calculated the “wholesale base case” in the
second column of the bar chart by simply eliminating
from the model all costs associated with the retail part
of the business. The DCF model then calculated a
wholesale base case value at $31.46 per Pop, equating to
approximately $3.3 billion as the value of the 110 Pops
covered by NPCI’s 63 C block licenses. The remaining
four bars on the chart escalating to just over $8 billion
showed calculations produced by the model using four
modified assumptions (viz., reduced build-out costs, five
wireless competitors instead of six, increased data
revenues, lower cost of capital).
340a
(3) The Meaning of Value
The parties’ experts differed profoundly not only on
their conclusions as to value but on the very meaning of
the “value” which each sought to quantify.
Mr. Kern sought to determine “fair market value,”
which he defined as “the amount at which the subject
assets would change hands between a willing buyer and
willing seller, in an arm’s length transaction, in which
both buyer and seller have reasonable knowledge of the
relevant facts, and neither is under compulsion to
complete the transaction.” (Kern Report 1, 42) Central
to Mr. Kern’s conclusion is the premise that the spec-
trum auctions conducted by the FCC met the criteria
embodied in the quoted definition of fair market value
and that the prices bid at those auctions constituted the
fair market values of the licenses sold as of the
respective dates of the auctions. Thus, it was Mr.
Kern’s view that the D/E/F block auction which con-
cluded in mid-January 1997 established the fair market
value of those licenses at that time.“ On the further
premise that the C block licenses were functionally the
same assets as the D/E/F block licenses, assuming
various adjustments to account for differences between
the various licenses, Mr. Kern concluded that the value
per Pop of the C block licenses was equal to the price
per Pop of the D/E/F block licenses after adjusting that
price to reflect the differences between those licenses
and the C block licenses.
® Consistent with this premise, the debtor concedes that the
fair market values of the C block licenses were equivalent to the
bids accepted by the FCC at the close of the auction and the
reauction in May and July 1996, as of those dates.
34la
By contrast, Dr. Salant does not recognize the con-
cept of fair market value as defined by Mr. Kern, and he
testified that “fair market value” is not a term used by
economists such as he. Price, whether established in a
public auction or in a private, arm’s length negotiation,
is not the same as value, as Dr. Salant conceives of
value. “{I}t is well-established that auction prices, espe-
cially in complex procedures, can and do depart from
any notion of value.“ (Salant Report 5) Dr. Salant
describes what he perceives as “the fundamental differ-
ence between value and price” (id. at 7, emphasis in
original). Dr. Salant states: “We use the DCF to com-
pute the maximum amount a very prudent firm would
be willing to pay for the licenses” (id. at 44, emphasis
supplied), and in his testimony Dr. Salant repeatedly
described “value” as a measure of “willingness to
pay.” Explaining the difference between value and
price in the context of an auction, Dr. Salant observed
that frequently the winning bidder will pay far less
than the bidder’s true valuation of the asset depending
upon the level of competition presented by competing
bidders. Indeed, it would appear that a buyer would
never intelligently pay the full “value” which he
ascribed to property in his DCF model, since one would
never pay now the full value which the model would
predict could only be earned over a span of years if all
of the assumptions built into the model proved to be
correct. Thus, the “value” produced by a DCF model is
what a prudent buyer ought to be willing to pay for an
asset based upon the assumptions embodied in the
model, without regard to actual prices in the market-
place for similar property.
342a
C. Conclusions on Methodology
The FCC’s expert witnesses challenged the market
comparable analysis relied upon by the debtor on two
basic grounds, one focusing on the perceived non-
comparability of the auctions and the other on alleged
non-comparability of the licenses. '
First, the FCC argued that the C block auction
represented a different business opportunity than the
D/E/F block auction and, consequently, that the C block
auction attracted far more competition and hence gen-
erated higher prices. The theory of the FCC experts
was that the C block auction was the last opportunity
for an operator to establish a “national footprint” with
30 MHz of spectrum to compete with the major players
such as AT & T, Sprint and Nextel, and that the D/E/F
block auction was intended merely as a means for
“incumbents” to “fill in the gaps” in their 30 MHz
systems.
One might debate this theory” if it were relevant,
but it is not. There is no dispute that the C block
10 Although the C block auction obviously did present a
“different business opportunity” from the D/E/F block auction, it is
questionable whether either the experts who devised the PCS
auction process or the participants viewed the C block auction as
an opportunity for the development of a truly national footprint to
compete with the nationwide coverage of the major wireless
operators such as AT & T, Sprint and Nextel. The C block auction
was open only to entrepreneurial, small businesses and rural tele-
phone companies with very limited capital resources. Moreover,
the FCC regulations precluded any C block bidder from acquiring
more than 98 licenses, 20% of the 493 licenses auctioned, thus
precluding the acquisition of a truly national footprint. The most
successful C block bidder, NPCI, acquired only 56 licenses in the
343a
auction, in which 255 qualified bidders competed for 493
BTA licenses, was far more competitive than the D/E/F
block auction, in which 153 qualified bidders competed
for 1,479 BTA licenses, and that the prices bid for the C
block licenses were exponentially higher than the prices
bid for the D/E/F block licenses on a comparative MHz-
Pop basis. The difference in the nature and
competitiveness of the two auctions may explain why
the C block bid prices were higher than the D/E/F
block prices, but why is not the issue. The issue before
the Court is whether the C block licenses were
sufficiently comparable to the D/E/F block licenses that
the prices bid in the D/E/F block auction reflected a
revaluation of the C block licenses as perceived in the
marketplace. ‘
initial auction and an additional seven licenses in the reauction. By
contrast, AT & T, Sprint and Nextel all covered virtually the en-
tire nation through a combination of cellular, PCS, ESMR and
other spectrum.
Many reasons for the radical decline in the perceived value of
PCS spectrum were suggested at trial, including the difference in
business opportunity emphasized by the FCC experts, the proposi-
tion that the C block bidders simply misjudged the market and
grossly overbid in a frenzy of speculation, the sharp decline in the
stock market prices of other companies in the wireless telecom-
munications business during the latter half of 1996 (the stock of
Omni Point, described by a witness as the “poster child” of public
wire’ zs operators, lost three-quarters of its value from May 1996
to April 1997) and the widespread concern or belief that the FCC
had determined to remove the scarcity factor from the value of
PCS and other wireless spectrum by flooding the market with
spectrum through the D/E/F block auction and the auctions in 1997
for ESMR, WCS and LMDS spectrum, all of which were an-
nounced in the latter half of 1996. Undoubtedly all of these factors
contributed to the decline in the perceived value of spectrum for
wireless telecommunications.
344a
On this issue it was Dr. Salant’s view that the C block
prices might have been just as high if that auction had
been held in early 1997. He stated:
Indeed, there is little reason to believe that had the
C block auction been run, say over two or three
months ending in January or February of 1997, with
the same sets of idlers and the same initial
eligibilities, that prices would have been much
different. (Salant Report 30)
The evidence refuted that supposition. Of course,
there was no auction for C block licenses in early 1997,
but there was a market to test the value of those
licenses—the market for public financing. If the mar-
ket had indeed perceived the value of the C block li-
censes in January/February 1997 to be what the auction
winners bid in May and July 1996, there is no reason to
doubt that NextWave and the other C block licensees
would have succeeded in raising the $1.6 billion of debt
and equity they needed in the public market. The trial
testimony on this issue of the NextWave representa-
tives and their independent investment bankers was
entirely credible. That evidence demonstrated that by
January 1997 the market did not believe in the values
bid in the C block auction. In meetings with the invest-
ment banking community, these witnesses found that
the primary obstacle to funding NextWave’s capital
requirements was the perception based on the D/E/F
block auction that the cost of the C block licenses was
grossly excessive and that NextWave could not com-
pete with that cost structure and debt burden. Despite
the best efforts of these witnesses and others to
convince the financial markets that C block licenses
were different from and far more valuable than D, E
345a
and F block licenses (using many of the same argu-
ments advanced by the FCC at trial), they failed to do
so, and no C block licensee could obtain any public
funding.
Thus, lack of comparability of the two auctions may
explain why the C block bid prices were higher than the
D/E/F block prices, but it does not answer the question
whether the D/E/F block auction and other factors such
as mentioned in footnote 11 undermined the market
value of the C block licenses. The fact is that the
market’s perception of the value of PCS licenses had
changed by 1997. The FCC’s 1999 reauction of C, E and
F block licenses (predominantly C block licenses)
demonstrated that the market value of this spectrum
has declined even further.
The FCC challenged the comparability of the C block
licenses and the D/E/F block licenses in only one
respect—capacity. The FCC’s experts presented a
plethora of data designed to show the differences in
capacity of a 30 MHz C block license and a 10 MHz
D/E/F block license. They demonstrated that 10 MHz
of spectrum is divisible into three usable channels,
while 30 MHz can support eleven channels. With the
sustained and rapid growth in mobile telephone owner-
ship and usage and the likely advent in the coming
years of “local loop service” and wireless data transmis-
sion,” capacity provided by 10 MHz will become insuf-
2 Local loop service” refers to customer usage of wireless
mobile telephones in virtual replacement of traditional stationary
telephones in the home and office. The experts do not anticipate
that local loop wireless service will supplant traditional fixed point
telephones unless and until monthly rates for wireless usage are
brought down to levels competitive with high volume usage (say,
346a
ficient to service demand. The debtor’s witnesses
countered by pointing to the sufficiency of 10 MHz for
operations in even the most populous markets even
today, more than two years after the February 1997
valuation date, and the virtual certainty that a con-
tinuation of market adjustments” and technological
improvements and innovations“ to increase 10 MHz
capacity, known to the market in late 1996 and early
1997, will substantially accommodate all but the most
radical increases in demand that might be expected six,
seven or eight years in the future. Any capital costs to
be incurred five or more years in the future to imple-
1,000 minutes or more per month) on fixed point telephones. With
existing technology, wireless transmission of data uses a great deal
of spectrum capacity. But, there is little demand for wireless
transmission of data today, and the evidence at trial would not
support any finding as to the likelihood of a material increase in
demand for wireless data transmission within the next five years.
i Since capacity planning must be geared to maximum demand
on a telephone system, the quantification of peak demand is an
essential factor in capacity. The FCC’s experts quantified peak
demand at 12 1/2% in calculating when 10 MHz capacity might be
exhausted in the future. The debtor's witnesses countered by
pointing out that the 12 1/2% figure was predicated on historic
mobile telephone usage during commuting hours, primarily at the
end of the day, when most mobile phones were car phones. The
advent of small, highly portable mobile phones has not only in-
creased overall wireless telephone usage, it has also spread that
usage over the entire day and weekends, thereby decreasing the
peak demand factor to 8 1/2% despite the increase in overall
wireless usage.
14 Such technological improvements include the greater efficien-
cies resulting from the various digital technologies (the most
efficient of which appears to be CDMA), which raay be replaced by
even greater efficiency of 3G technology; utilization of eight kilobit
EVRC vocoders in place of 13K vocoders; utilization of six sector
in place of three sector antennae.
347a
ment technological innovations to increase 10 MHz
capacity must be weighed against the immediate and
ongoing capital cost of carrying, or “warehousing,” 30
MHz of capacity more than two-thirds of which is not
needed now and which may become technologically
obsolete before it is ever put to use.
Considering all of the evidence, I conclude as a
matter of fact and law that the C block licenses were
substantially comparable to the D/E/F block licenses in
February 1997 for purposes of determining the value of
the former based upon the auction prices of the latter.
The D/E/F block auction determined the fair market
value of those licenses as of the time of the auction. The
D/E/F block auction concluded precisely at that point in
time when the C block licenses are to be valued. The C
block licenses are functionally identical to and inter-
changeable with the D/E/F block licenses in every
respect, save only capacity. All 493 licenses in each of
the C, D, E and F blocks covered precisely the same
geography and population in the same BTAs. With
respect to capacity, the undisputed evidence showed
that even at the time of trial in April 1999 no PCS
operator is using more than 10 MHz of spectrum in
even the most densely populated BTA; indeed, no PCS
operator is using more than two of the three channels
available in 10 MHz in any BTA. Knowledgeable
participants in the PCS market and their financiers
knew in February 1997 that demand might exceed 10
MHz capacity in the most populous BTAs at some point
in the perhaps distant (five years or more) future, and
they also knew that technology existed even then which
might expand 10 MHz capacity to meet any reasonably
projected demand. These findings do not mean that
there was no difference between 10 MHz and 30 MHz of
348a
spectrum; they do mean that the C block licenses and
the D/E/F block licenses were comparable for market
valuation purposes, subject to appropriate adjustment
for the capacity difference between 30 MHz and 10
MHz which might or might not become material at
some point in the future depending upon market condi-
tions, which might increase demand beyond 10 MHz
capacity, and technological advances, which might
expand 10 MHz capacity to meet demand.
Accordingly, I conclude that Mr. Kern’s market com-
parable analysis is an appropriate method of deter-
mining the value of C block licenses in February 1997,
subject to appropriate adjustments, discussed below.
The market comparable method of valuation satisfies
two key legal requirements. First, valuation by refer-
ence to actual market prices in a public auction open to
every potential purchaser in the marketplace and
conducted under FCC regulations designed to provide
every bidder with maximum possible competitive infor-
mation establishes “fair market value” of the property
auctioned as a matter of law. Keener v. Exxon Co.,
USA, 32 F.3d 127, 132 (4th Cir. 1994), cert. denied, 513
U.S. 1154, 115 S. Ct. 1108, 130 L.Ed.2d 1074 (1995) (bid
price equated to fair market value). The Keener court
explained:
[Flair market value is, by necessity, best set by the
market itself. An actual price, agreed to by a willing
buyer and willing seller, is the most accurate gauge
of the value the market places on a good. Until such
an exchange occurs, the market value of an item is
necessarily speculative.
349a
Id. (citing Amerada Hess Corp. v. Commissioner of
Internal Revenue, 517 F.2d 75, 83 (3d Cir. 1975)).
“(WJhen a third party makes an offer in cash, or its
equivalent, for an item, a ‘court can justifiably infer that
the amount of an arms’ length offer represents the
value of the [asset].” Id. at 132 n.5 (citing Ellis v. Mobil
Oil, 969 F.2d 784, 786 (9th Cir. 1992)). Fair market
value is the price which a willing buyer would pay a
willing seller in an arm’s length transaction, where both
the buyer and seller have reasonable knowledge of the
relevant facts and neither is under compulsion to com-
plete the transaction. See BFP v. Resolution Trust
Corp., 511 U.S. 531, 548, 114 S. Ct. 1757, 128 L.Ed.2d
556 (1994); In re Grigonis, 208 B.R. 950, 955 (Bankr. D.
Mont. 1997). See also, In re Prince Gardner, Inc., 220
B.R. 63, 66 (Bankr. E.D. Mo. 1998) (citing BFP, 511
U.S. at 548, 114 S. Ct. 1757 (“{iJn the vast majority of
asset transfers other than real estate foreclosure sales,
the Bankruptcy Courts can determine worth and rea-
sonably equivalent value by referring to the common-
law notion of fair market value”)); see also Barber v.
Golden Seed Co., Inc., 129 F.3d 382, 387 (7th Cir. 1997);
In re R.M.L. (Mellon Bank v. Official Committee of
Unsecured Creditors), 92 F.3d 139, 149 (3d Cir. 1996);
In re Ozark Restaurant Equipment Co., Inc., 850 F. 2d
342, 345 (8th Cir. 1988); In re Colonial Realty, 226 B.R.
513, 523 (Bankr. D. Conn. 1998); In re O’Neill, 204 B. R.
881, 887 (Bankr. E.D. Pa. 1997) (reasonably equivalent
value means fair market value outside foreclosure
context); In re Grigonis, 208 B. R. at 955. Fair market
value, as defined by Mr. Kern in his Report and as
established in the D/E/F block auction, is the legal stan-
dard for determining value in a proceeding to deter-
mine whether there has been a constructive fraudulent
conveyance. Morris Communications, 914 F.2d at 469
350a
(quoting United States v. 100 Acres, 468 F.2d 1261, 1265
(9th Cir. 1972)) (The method of ‘comparable sales’ in
the relevant time frame is ‘more appropriate than any
other method in determining market value of the
property.“); El Paso Natural Gas Co. v. Federal
Energy Regulatory Comm’n, 96 F.3d 1460, 1464 (D.C.
Cir. 1996) (“evidence of contemporaneous sales of com-
parable properties is generally the preferred method of
valuation”); In re Martin-Trigona, 760 F.2d 1334, 1345
(2d Cir. 1985); Cowen v. Guidry, 274 F. Supp. 22, 24
(E. D. La. 1967) (there is no justification for using
income approach to fair market value where compar-
able sales are available); In re General Industries, I ne.,
79 B. R. 124, 128 (Bankr. D. Mass. 1987) (under the eir-
cumstances at issue the court found the “market data
method is the most practical method approach to valua-
tion”); In re Thompson, 18 B.R. 67, 70 (Bankr. E.D.
Tenn. 1982) (“It is generally recognized that com-
parable sales in the vicinity of the subject property
produce the best guides to determine fair market
value”).
Second, the market comparable method comports
with the requirement that value be determined in
bankruptcy proceedings by an objective standard. Jn re
Independent Clearing House Company, 77 B.R. 843,
859 (D. Utah 1987); In re Taubman, 160 B.R. 964, 986
(Bankr. S.D. Ohio 1993); In re Morton Shoe Companies,
Inc., 24 B.R. 1003, 1009 (Bankr. D. Mass. 1982); In re
Richardson, 23 B. R. 434, 444 (Bankr. D. Utah 1982); Jn
re Checkmate Stereo and Electronics, Ltd., 9 B.R. 585,
591 (Bankr. E. D. N. V. 1981), aff'd, 21 B.R. 402
(E.D.N.Y. 1982).
35la
The same conclusions cannot be reached with respect
to the DCF method of valuation relied upon the FCC.
The DCF method suffers from four fundamental defects
for purposes of valuing the C block licenses in this
proceeding.
First, the income method of analysis values an
enterprise as a totality; it does not value any particular
element of property within the enterprise. A PCS
license by itself cannot generate any income. Only an
enterprise can generate income, and the enterprise
consists of congeries of assets, management, a business
plan, production and service employees and financing,
and the enterprise exists in the context of a market-
place consisting of customers, competitors and regula-
tors. Every element just mentioned has associated
with it a number for every point in time, and all of those
numbers must be included in the DCF model to
calculate a value. The value so determined is the value
of the enterprise, not any particular asset within it.
Second, in a case such as this the constituent ele-
ments incorporated in a DCF model for the mathemati-
cal calculation of value are not objectively ascertainable
facts in the real world, as are comparable sales and
market prices. Every single line item in Dr. Salant’s
DCF model is an assumption utilized to calculate a
projection, from which is mathematically extrapolated a
net present value. The gap in reliability between objec-
tively verifiable facts used in the market comparable
methodology and the assumptions used in this kind of
DCF analysis is compounded in the case of a start-up
enterprise such as NextWave, where there is no record
of historical performance on which to base assumptions
for future projections. See, Langham, Langston &
352a
Burnett v. Blanchard, 246 F.2d 529, 532 (5th Cir. 1957)
(valuation of a company as a going concern is inap-
propriate when the business is wholly inoperative or on
its deathbed); In re Fred D. Jones Co., 268 F. 818 (7th
Cir. 1920), cert. dismissed, Heldman v. Central Trust
Co. of Illinois, 257 U.S. 664, 42 S. Ct. 45, 66 L.Ed. 424
(1921); In re Art Shirt Lid., Inc., 93 B. R. 333, 341 (E. D.
Pa. 1988) (to treat a wholly inoperative or defunet
company “as a going concern would be misleading and
would, in fact, fictionalize the company’s true financial
condition”); In re Bellanca Aircraft Corp., 56 B.R. 339,
387 (Bankr. D. Minn. 1985). The problem is exacer-
bated with the DCF analysis relied upon by the FCC in
this case. The textual description of Dr. Salant’s DCF
model at pages 42-46 of the Salant Report and in the
three remarkably spare spreadsheets comprising Ex-
hibit F to that Report are by no means self-explana-
tory, intuitively comprehensible or objectively verifi-
able by the trier of fact. We know only that the DCF
model was created by Dr. Salant and his assistants and,
as to the sources of their assumptions, the statement:
“Besides our own experience, our analysis used indus-
try sources and NextWave documents to form projec-
tions of key variables such as penetration and average
revenue per user.” (Salant Report 44-45)”
15 The reason for concern as to the reliability of a valuation pre-
dicated entirely on unverifiable, subjective assumptions is readily
illustrated. For example, a variation of 1% in the presumed
weighted average cost of capital (WACC) results in a $500 million
change in the value calculated by Dr. Salant’s DCF model.
Changing the assumption of wireless competitors from six to five
increases Dr. Salant’s calculation of value by $1.5 billion. The
modification of the retail base case” value of $2.5 billion to pro-
duce the “wholesale base case” of $3.3 billion (relied upon by the
FCC as the value of NPCI’s 63 C block licenses) by the simple
353a
Third, whatever uncertainties one may have with
regard to the assumptions built into the DCF model by
Dr. Salant and his associates, there can be no uncer-
tainty that one key assumption of the model conflicted
with reality. The model assumed the existence of
financing to build out the necessary infrastructure to
conduct a PCS wireless business using C block licenses.
In the real world, however, not a single C block licensee
was able to obtain financing to build out its system,
precisely because of the financial community’s concern
as to the value of the C block licenses. This single fact
undermines the utility of the model. It is not an answer
to say that the model is designed to demonstrate a
hypothetical value, because the law requires a deter-
mination of fair market value, not hypothetical value.
Finally, as acknowledged by Dr. Salant his DCF
methodology is not designed to produce a calculation of
“fair market value” as defined by appraisers and the
courts. Dr. Salant disclaimed fair market value as a
concept employed by economists and as an objective of
DCF analysis. Dr. Salant’s concept of value is some-
thing quite independent of the price which a fully
informed seller and buyer would accept and pay in an
arm’s length, unconstrained transaction. DCF analysis
is undoubtedly an essential tool for economists and
financial analysts to assess risk in a proposed transac-
tion or strategy by calculating the differences in value
produced by manipulating the assumptions built into
the model. But such “values” are hypothetical and can-
not be used to supplant the market comparable method
expedient of deleting from the model all costs associated with
retail appears to implicate the anomalous result of a negative value
of $800,000 associated with the retail side of the business.
354a
to determine current “fair market value” in circum-
stances, such as presented here, where market value
can be determined by reference to the prices paid in
actual, contemporaneous transactions involving com-
parable properties.“
For the foregoing reasons, I must reject the DCF
methodology relied upon by the FCC."
D. Conclusions on Value
This Court’s decision on the FCC motion for partial
summary judgment left open the question whether the
C block licenses should be valued with an effective date
as of January 3, 1997, the date on which the FCC issued
its ruling conditionally awarding the C block licenses to
NPCI, or February 19, 1997, the date on which NPCI
executed and delivered the Notes to the FCC. I
conclude as a matter of law that February 19 is the
appropriate date for valuation, because it was not until
NPCI complied with its purchase price obligation by
16 In other circumstances the income method of valuation may
be preferred, such as where there are no truly comparable trans-
actions and income is objectively verifiable as a basis to determine
present value based on highly reliable projection of future net
income.
17 Mr. Kern’s reasons for rejecting the income approach to
valuation were concisely stated in his Report at page 43:
The income approach was considered but not utilized because
of the uncertainty in projecting typical build-out costs, sub-
scriber growth, operational expenses, changes in ARPU [aver-
age revenue per user], effects of competing technologies and
numerous other factors necessary for a start- up company in a
developing industry. Additionally, the income approach
assumes a fully financed company holding the licenses and an
operating network generating cashflow.
355a
delivering the Notes that the transfer occurred and the
obligation was incurred.
As noted above, the Kern Report valued NPCI’s 63 C
block licenses at $810,400,000 based on the prices bid at
the D/E/F block auction after giving effect to certain
adjustments to the latter prices to reflect differences
between the respective licenses. The FCC experts took
exception to these adjustments in several respects,
each of which will be considered.
Competition Adjustment. The FCC argued that
there should be a “competition” adjustment because of
the ‘act that the C block auction was more competitive
than the D/E/F block auction (far more bidders, having
submitted far higher upfront payments, competing for
one-third the number of licenses). The argument must
be rejected for two reasons. First, as explained above
the market comparable approach looks got to the com-
parability of sales events but to the comparability of the
things being sold. Thus, there is no need to make
adjustment to reflect differences between the auctions.
Second, it is self-evident that the difference in com-
petitiveness between the two auctions is fully reflected
in the differences in the prices bid—indeed, the bid
differential is precisely the consequence of the greater
competitiveness of the C block auction.
30 MHz/10 MHz Multiple. Although 10 MHz provides
sufficient capacity presently and, in many or most
BTAs, for the indefinite future, there is little doubt that
30 MHz capacity may have significant economic value in
years to come in high population BTAs, for which NPCI
holds eleven C block licenses. This would suggest an
adjustment of 3 to 1 for the eleven high Pop licenses
and no adjustment (i. e., a 1 to 1 ratio) for the 52 licenses
356a
where 30 MHz appears unlikely to add value to a 10
MHz license. Technological arguments exist which may
justify a higher than 3 to 1 ratio (e.g., eleven channels
for 30 MHz versus three channels for 10 MHz suggests
a 3.67 to 1 ratio; “trunking factor” suggests a 4.5 to 1
ratio). However, applying even a 4.5 to 1 ratio to the
eleven high Pop licenses and a 1 to 1 ratio for the re-
maining 52 licenses produces a total value for all 63
licenses materially lower than $810.4 million. Consider-
ing all the factors bearing on the issue, I conclude that
there is no basis to select an adjustment different from
the 3 to 1 ratio which Mr. Kern applied to all 63 licenses.
Cost of Capital. C block licensees enjoyed significant
advantages in respect of financing their purchase price
obligations to the FCC, described above. F block licen-
sees enjoyed different financing advantages, also
described above, and D and E block licensees were
required to pay the FCC in full in cash for their
licenses. To adjust for the financing differentials Mr.
Kern used an interest rate of 11.75%, being the median
value of 1996 debt offerings of seven other PCS and
cellular operators. However, all seven of the issuers,
including Sprint and Western Wireless Corp., were
relatively well-established, operating companies.
Weighing the conflicting testimony of the experts and
other evidence, I conclude that 11.75% represented an
overly optimistic cost of money for a development stage
company such as NextWave in February 1997, and that
14% is a more reasonable adjustment to reflect the
financing advantages of the C block licenses compared
with the D, E and F block licenses.
Percentage of Favorable Financing Adjustment.
Although he concluded that an adjustment was neces-
357a
sary to reflect the favorable financing available to C
block licensees, Mr. Kern applied only 60% of that
adjustment, rather than 100% necessary to realize full
equalization, reasoning that a purchaser of C block
licenses in February 1997 probably would not be willing
to pay an amount sufficient to reflect 100% of the
financing differential. I agree with the FCC experts
that the financing adjustment should be taken at 100%
in order to fully reflect the value of the C block licenses
where that value is to be derived from a comparison
with the D, E and F block licenses.
Summary. Near the conclusion of the trial at the
Court’s request Mr. Kern recalculated the value of the
63 NPCI C block licenses in accordance with his market
comparable methodology but utilizing a variety of dif-
ferent assumptions on the disputed adjustments, dis-
cussed above (see Plaintiff’s Trial Exhibits 136, 143).
Using February 19 as the effective date for valuation
and applying the Court’s conclusions with respect to
the adjustments discussed immediately above (i e., a 3
to 1 ratio to reflect the MHz differential, a 14% cost of
capital and 100% of the favorable financing differential)
results in a calculation of $908,146,000 (see Exhibit 136
sheet 6, Exhibit 143 sheet 4). Accordingly, it is this
Court’s ruling that $908,146,000 was the fair market
value of NPCI’s 63 C block licenses as of February 19,
1997. By any standard this did not constitute rea-
sonably equivalent value for $4.6 billion of Transfers.
Under this ruling the $908,146,000 figure represents
the fair market value of 100% of the debtor’s C block
licenses. As such, it does not take account of the
Court’s ruling under section II.A., above, that the 3%
Payment of $142,309,000 constituted a fair exchange of
358a
value not subject to avoidance under Section 544. It is
necessary to give effect to both rulings in calculating
the total amount of NPCI’s $4.7 billion of Transfers that
is subject to avoidance under the statute. To this end
it is appropriate to take 97% of the $908,146,000 figure,
or $880,902,000, and add back the 3% Payment
of $142,309,000. The sum, $1,023,211,000, may be said
to constitute the fair market value of the entire
consideration received by NPCI in exchange for the
entire $4.7 billion of Transfers, for purposes of fraudu-
lent conveyance analysis. The result of subtracting
$1,023,211,000 from the $4,743,648,000 of total Transfers
is $3,720,437,000, representing that portion of the total
Transfers subject to avoidance under 11 U.S.C. S 544,
548 and 550.
The Court will conduct a further hearing to consider
the question of remedy at the parties’ earliest con-
venience.
359a
APPENDIX K
UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
Bankruptcy No. 98 B 21529(ASH)
Adversary No. 98-5178A
IN RE NEXTWAVE PERSONAL COMMUNICATIONS,
INC., ET AL., DEBTORS
NEXTWAVE PERSONAL COMMUNICATIONS, INC.,
PLAINTIFF
V.
FEDERAL COMMUNICATIONS COMMISSION, DEFENDANT
Feb. 16, 1999
DECISION ON PARTIAL SUMMARY
JUDGMENT MOTION
ADLAIS. HARDIN, JR., Bankruptcy Judge.
Nextwave Personal Communications, Inc. (“Next-
wave” or “debtor”) commenced this adversary proceed-
ing to set aside its aggregate $4.7 billion of transfers
and obligations to the Federal Communications Com-
mission (“FCC”) incurred in its acquisition of 63 broad-
band Personal Communication Services licenses (“C
Block licenses”) as a constructive fraudulent convey-
ance under 11 U.S.C. § 544(b). The FCC has moved for
partial summary judgment under Bankruptcy Rule
360a
7056(b) to determine the effective date of Nextwave’s
$4.74 billion of transfers and obligations for purposes of
Section 544(b). As set out below, I find that the
effective date of the debtor’s $4.74 billion of transfers
and obligations under Bankruptcy Code Section 544 is
January 3, 1997.
Jurisdiction
This Court has jurisdiction over this matter pursuant
to 28 U.S.C. §§ 1334(a) and 157(a) and the standing
order of reference of Acting Chief Judge Robert J :
Ward dated July 10, 1984. This adversary proceeding is
a core proceeding under 28 U.S.C. § 157(b)(2)(H).
Undisputed Facts
The following facts are undisputed by the parties.
The FCC conducted an auction of C Block licenses from
December 18, 1995 to May 6, 1996, and a reauction of C
Block licenses from July 3 to July 16, 1996. The debtor
participated in the bidding in both of these auctions and
was declared the high bidder on May 8, 1996 for 56 C
Block licenses and on July 23, 1996 for an additional 7
reauctioned C Block licenses, for a total of 63 C Block
licenses.
As part of the FCC’s auction process, bidders were
required to deposit “qualifying amounts” in order to
participate in the auction. The debtor deposited quali-
fying amounts of $79,225,000 on December 1, 1995 and
$6,984,244 on June 13, 1996. After the debtor was
declared the winning bidder on May 6, 1996 as to the 56
C Block licenses, it deposited an additional $130,834,333
on May 10, 1996 and further deposit of $20,138,825 on
July 23, 1996 when it was declared the winning bidder
361a
for the 7 C Block licenses. The debtor’s deposits at the
close of the bidding process totalled $237,182,402, or
approximately 5% of the $4.7 billion it bid for all 63 C
Block Licenses.
Following the close of the auction process, FCC
regulations required the debtor to submit applications
for approval of the issuance of the 63 C Block licenses.
The debtor submitted applications as to the 56 and 7 C
block licenses on May 22 and July 17, 1996, respectively.
While these applications were pending, two rival bid-
ders, Antigone Communications L. P. and PCS Devco,
Inc., petitioned the FCC to deny the debtor’s appli-
cations on various grounds. The FCC investigated the
matter and found that certain elements of Next Wave's
capital structure exceeded statutory foreign ownership
benchmarks. In response, the debtor filed a restructur-
ing plan with the FCC on December 30, 1996 to bring
its capital structure into compliance with FCC regu-
lations. On January 3, 1997, the FCC conditionally
granted licenses for all 63 C Block licenses, subject to
the debtor’s implementation of its proposed capital
restructuring plan.
Following the FCC’s January 3, 1997 license grant,
the debtor was required to deposit an additional 5% of
the total $4.74 billion bid price, or a further $237 million.
The debtor deposited this additional amount on January
9, 1997, raising its total deposits to $474 million. On
February 19, 1997 the debtor signed notes dated Jan-
uary 3, 1997 in the aggregate principal amount of $4.27
billion (the Notes“) for the balance of the $4.74 billion
it bid at auction.
362a
Discussion
The parties dispute the date on which the debtor
incurred its $4.74 billion obligation to the FCC. That
date is relevant for purposes of the debtor’s avoidance
claim under Bankruptcy Code Section 544(b), which
provides in pertinent part:
The trustee may avoid any transfer of an interest of
the debtor in property or any obligation incurred
by the debtor that is voidable under applicable law
11 U.S.C. § 544(b) (emphasis added). Because the FCC
has moved only for a determination of that date, this
decision is limited to a finding of fact and conclusion of
law as to that date and does not address any remaining
factual or legal issues regarding the debtor’s Section
544 claim.
The FCC argues that the debtor incurred its obli-
gations when “the hammer fell” at the C Block auctions
on May 8 and July 23, 1996. The debtor argues that it
did not incur the obligations at issue in this proceeding
until at least January 3, 1997, the date on which the
FCC conditionally granted the licenses and the effec-
tive date of the Notes.
The resolution of this motion must follow from iden-
tifying precisely which obligation the debtor seeks to
avoid. Stripped to its essential proposition, the debtor's
1 While it did not actually execute its Notes for the balance of
its bid until February 19, 1997, the debtor does not contest using
the effective date of the Notes, January 3, 1997. (Debtor's Memo-
randum at 8, note 2).
363a
Section 544 claim is that it did not receive reasonably
equivalent value in the C Block licenses it was granted
in return for its $4.74 billion obligations. To measure
the reasonable equivalence in value of the C Block
licenses and the obligations incurred therefor, one must
ask (i) when did the debtor receive the licenses and (ii)
—— did it 1 obligated to pay for them. These
questions are determined by the rules governi
auetion itself. See In re Wilson Freight Co. 3 R
971, 975 (Bankr. S. D. N. V. 1983) (announced terms of
auction binding upon participants). Those rules are
found in the FCC regulations governing the auction
process at 47 C.F.R. §§ 1.2101-1.2111, entitled “Subpart
Q, Competitive Bidding Process.”
With regard to question (i), both sides a
winning bidder neither received nor — —
receive the C Block licenses upon being declared the
winning bidder under the FCC regulations. The win-
ning bidder must apply to the FCC, complete the regu-
latory approval process and perhaps (as in this debtor’s
case) overcome objections. The winning bidder has no
legal right to receive or utilize the licenses bid upon
unless and until its application is approved by the FCC.
All the debtor received on May 8 and July 23, 1996
when it was declared high bidder was the exclusive
os to apply for — 63 licenses. As stated by the
s counsel at a hearing in this Co
1999 (Tr. at 15) 1 —
THE COURT: Wait a second. Vou're asking for
words, namely, “reasonably equivalent value” and
that raises a question of value for what? And
equivalent to what?
MS. SCHWARTZ: To what they got.
364a
THE COURT: What did they get?
MS. SCHWARTZ: What they got was the right to
apply for these licenses that were essential to their
business. And without those licenses, they would
have no business.
Thus, the debtor did not become entitled to receive the
63 C Block licenses until at the earliest the January 3,
1996 decision of the FCC granting the debtor’s appli-
cations.
Under FCC regulations, once bidding has ended the
FCC must notify the high bidder and declare bidding
closed. 47 C.F.R. § 1.2107(a). Within five days of the
notification, the winning bidder who is a “qualified
designated entity” (as is the debtor) must bring its total
deposits up to 10% of its bid as a downpayment.
47 C.F.R. § 1.2107(b). Significantly, once the downpay-
ment is tendered, the FCC holds the downpayment:
until the high bidder has been awarded the license
and has paid the remaining balance due on the
license, in which case it will not be returned, or until
the winning bidder is found unqualified to be 4
licensee or has defaulted, in which case it will be
returned, less applicable penalties. a
Id. In other words, one of three events must occur
after the winning bidder tenders the downpayment but
before award of the license: either the winning bidder
pays the balance of the bid, in which ease the down-
payment is applied toward the license, or the winning
bidder defaults, or the winning bidder is disqualified.
Significantly, if the winning bidder defaults or is
disqualified, although penalties may be assessed under
365a
Section 1.2104, the downpayment must be returned net
of any penalties.”
Nor is the obligation on the full amount of the bid
fixed upon tender of the downpayment. A winning
bidder who timely submits its downpayment must also
submit a “long-form” application for license approval in
its respective areas of service. 47 C.F.R. § 1.2107(c). If
the bidder fails to timely submit its application, it is
deemed to have defaulted and is subject to Section
1.2104 penalties. Jd. The bidder’s default subjects it to
applicable penalties to be subtracted from the down-
payment, but does not leave the bidder liable on the full
amount of the bid.
These provisions make it clear that the debtor was
not legally bound on the full amount of its winning bid
upon being declared the high bidder. At the “fall of the
hammer“ the debtor did incur a potential liability in the
event that it either defaulted or was disqualified
(neither of which occurred in this case), but under the
FCC regulations that potential liability was quite dif-
ferent from the amount of the winning bid.
The potential default liability incurred at the fall of
the hammer consisted of penalties calculated on the
basis of the difference between the winning bid and the
winning bid at any subsequent reauction if any, plus
applicable percentage penalties. See 47 C.F.R. § 1.2104.
Nothing in this calculation explicitly or implicitly binds
2 It appears that one party in the bidding process, BDCPS,
Inc., in fact failed to timely submit its downpayment, thereby
defaulting, and was assessed a penalty in accordance with Section
1.2104, but there is no indication that the full amount of its high bid
was assessed. (Exhibit J to debtor’s Memorandum in Opposition).
366a
the winning bidder to the full amount of its bid. Indeed,
the express requirement that the downpayment be
refunded less any penalties in the event of default or
disqualification negates any implied liability for the full
amount of the bid. The penalty obligations upon default
or disqualification are entirely separate from—and
mutually exclusive of—the obligations the bidder would
incur upon granting of the license and tender of the
balance of the bid. Whether the debtor might have
been liable for any of these penalty amounts is not at
issue.
Having determined that the debtor’s liability for the
full amount cf the obligation did not attach upon its
being declared the high bidder, nor upon tender of the
downpayment or even submission of the license ap-
proval application, the issue remains as to when the full
liability did attach.
The auction rules provide that the grant of a license
is expressly conditioned upon payment of the balance of
the obligation. Section 1.2109(a) provides:
Unless otherwise specified in these rules, auction
winners are required to pay the balance of their
winning bids in a lump sum within five (5) business
days following award of the license. Grant of the
license will be conditioned on full and timely pay-
ment of the winning bid.
47 C.F.R. § 1.2109(a) (emphasis supplied). If the
bidder fails to satisfy Section 1.2109(a), the license
application is deemed dismissed, the bidder is liable for
Section 1.2104 penalties against the downpayment, and
the FCC may either reauction the license or offer it to
the next highest bidder. 47 C.F.R. § 1.2109(b). Simi-
367a
larly, any bidder who is found unqualified, defaults in
timely remitting the balance of the bid or is disqualified
becomes liable for Section 1.2104 penalties, after which
the FCC may conduct a new auction. Jd. Taking these
sections together, had the debtor failed to tender the
balance or otherwise defaulted, it would have been
liable only for the Section 1.2104 penalties against its
downpayment. Thus the earliest date at which the
debtor could have been liable for the full amount of its
bid obligations is the date it complied with Section
1.2109(a) by paying the balance of its cash obligations
and issuing the Notes. The debtor complied with
Section 1.2109(a) effective at the earliest on January 3,
1996 by tendering the balance of its bids in cash and the
Notes. It thereby became liable for the full amount of
its bid obligations by reason of its Notes.
To summarize, under the FCC regulations it is clear
that the debtor incurred a contingent liability for
default by entering into the bidding process and by
being declared the high bidder. However the
contingent default obligations that the debtor might
have incurred by participating in the bidding process
(which were never actually incurred by the debtor)
were quite different from the debtor’s obligations for
the full amount of its bids, which only became fixed
upon its tender in cash and the Notes of the balance due
on the C Block licenses granted on January 3, 1997.
That obligation, not the contingent penalty obligations,
is the subject of the debtor’s Section 544 avoidance
action.
It is apparent that the FCC’s position on this motion
is incongruent both with its own regulations and with
the debtor’s claim in this adversary proceeding. The
368a
constructive fraudulent conveyance claim asserts that
the aggregate consideration given by the debtor
effective January 3, 1997 for the 63 licenses (i. e., the
cash transfers totalling $474 million and the Notes
totalling $4.26 billion) was not reasonably equivalent to
‘he value of the licenses granted on January 3, 1997. In
arguing that May 8 and July 23, 1996 are the debtor's
liability dates for valuation purposes, the FCC focuses
not on the actual $4.7 billion purchase price which
became effective January 3, 1997, but on the debtor’s
contingent exposure to default penalties which were
never incurred and never could be incurred if the
licenses were granted. Moreover, the property to be
valued—the licenses—was not granted in May and June
1996, but on January 3, 1997.
For the foregoing reasons, I find as a matter of fact
and law that the date upon which the debtor incurred
its obligations to the FCC for purposes of Bankruptcy
Code Section 544(b) is January 3, 1997.“
Counsel of the NextWave and the FCC are directed
to confer and jointly prepare an order, agreed as to
form, consistent with this decision, without prejudice to
the FCC’s right to appeal.
3 The January 3, 1997 date is based upon the date of the FCC’s
decision granting the licenses and constitutes the earliest effective
date of the debtor’s obligations for purposes of this adversary
proceeding under Section 544. This ruling is without prejudice to
the right of either party to argue that a later date should be
determinative if the difference is material.
369a
APPENDIX L
UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
Bankruptcy No. 98 B 21529(ASH)
Adversary No. 98-5178A
IN RE NEXTWAVE PERSONAL COMMUNICATIONS,
INC., ET AL., DEBTORS
NEXTWAVE PERSONAL COMMUNICATIONS, INC.,
PLAINTIFF
D.
FEDERAL COMMUNICATIONS COMMISSION, DEFENDANT
Dec. 7, 1998
REVISED DECISION ON MOTION TO DISMISS
ADLAIS. HARDIN, JR., Bankruptcy J udge.
: Defendant Federal Communications Commission
(“FCC”) has moved to dismiss this adversary pro-
ceeding for lack of subject matter jurisdiction.’
The First Amended Complaint of plaintiff-debtor
NextWave Personal Communications, Inc. (“Next-
The District Court denied the FCC’s companion motion to
withdraw the reference, remanding th ti ismi
at tg g the motion to dismiss to this
370a
Wave“ or the “debtor”) contains two causes of action.
The first alleges that NextWave’s transfers to the FCC
of deposits and secured promissory notes aggregating
$4.7 billion in exchange for conditional grants of 63 C
block lines on January 3, 1997 were constructive
fraudulent conveyances subject to avoidance under 11
U.S.C. § 544. The second cause of action alleges that,
by reason of the FCC’s de facto control over NextWave
and its “inequitable, unconscionable and unfair conduct”
from the time of the C block auctions through the condi-
tional grant of licenses on January 3, 1997
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