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.
Continue Reading Court of Appeals Overturns Case Questioning Lending Practice of Taking Security Interest in Proceeds of the Sale of an FCC License