An uncertainty for the broadcast lending world was by removed by a decision of the US Court of Appeals issued last week. In 2010, a US District Court considering the bankruptcy of Tracy Broadcasting Corporation ruled that a security interest in the proceeds of the sale of a broadcast license could not be enforceable after a bankruptcy action had commenced unless the sale agreement had been signed prior to the bankruptcy – a situation that almost never occurs. As the FCC forbids taking a security interest directly in an FCC license, the practice of lenders for over 20 years, based on past precedent of the Commission, is to secure their loans by a security interest in the proceeds of the sale of the license. When the Tracy case was decided by the District Court, many lenders expressed their concern as to whether that long-standing precedent was still valid. We wrote about the Tracy decision and how it had been rejected by other courts as its reasoning was inconsistent with the prior FCC precedent.
Last week’s decision of Court of Appeals directly overturned the District Court decision. The Appeals Court looked at the District Court decision, and the economic reality of the situation, and determined that a security interest in the proceeds of the sale was indeed enforceable after bankruptcy, even if the sale agreement did not come into being until after the bankruptcy petition had already been filed. The District Court had looked at certain provisions in the bankruptcy code providing that a creditor could not acquire a security interest in property or rights that arose after the bankruptcy proceeding had commenced. The District Court reasoned that an interest in the proceeds of the sale of a license could only arise after a sale agreement was signed and approved by the FCC. Thus, if the sale and FCC approval did not occur until after the bankruptcy, the rights to the proceeds did not arise until after the bankruptcy, and thus there could be no security interest in the proceeds of that sale. The Court of Appeals rejected that reasoning.
The Court of Appeals looked at prior FCC precedent, and determined that, while a creditor could not take a security interest directly in the FCC license itself (i.e. the rights to the operate a station on a particular frequency), the FCC did not prohibit a creditor from taking a security interest in the economic value of a station. A security interest in the license itself would allow the creditor to foreclose on a license, bypassing the required FCC approval process. But the rights to make money from the license are clearly property interests, the Court reasoned, as the sale of these economic rights allow a broadcaster to make money from selling a station. Under the District Court’s reasoning, the Court of Appeals concluded, if there were no property interests in the economic value of the station’s operations until the FCC approved the sale of a station, a licensee would never have a binding contract to sell the station until after the FCC approved the sale – as the licensee would have no property right to sell until that time. Clearly, such a result is absurd.
The Court found that the private rights and interests in the value created by the licensee’s use of the airwaves are permissible under FCC policies. These rights in the economic value of the license exits even before a sales agreement is signed, and can be the subject of a security agreement under FCC policy. The Court reasoned that the security agreements might better be worded to specifically state that the interests are in the economic interests in the stations (including proceeds of a sale), but that the language that the security interest was in the proceeds was clear enough to convey the rights claimed by the creditors in this case. As these rights exist before the bankruptcy whether or not any sale agreement exists, the filing of the bankruptcy does not change the rights that the creditor has to these economic interests.
The Court also looked at the FCC intent in adopting these policies. Finding that the FCC wants to encourage economic investment in the broadcast industry, it found the FCC’s logic that a security interest in the proceeds of a station license is permissible made sense, and was within the Commission’s discretion as the expert agency charged with interpreting the Communications Act.
This decision is important one for all broadcasters as it assures lenders that their security interests in fact give them rights that they can enforce in the event that the economic fortunes of a borrower-licensee do not turn out the way that everyone expects when they first enter into the loan. Financing for broadcast acquisitions has been hard to come by in recent years, and a decision upholding the District Court decision could have made not only lender financing difficult, but also sales where the Seller holds a promissory note, an increasingly popular form of station sale in the last few years. This Court decision looked at the reality of the business process – and provides a very welcome decision for the broadcast industry.