Opinion ID: 770900
Heading Depth: 2
Heading Rank: 4

Heading: Application of Equitable Mootness to the FCC's Arguments

Text: 29 As all three factors weigh in favor of the district court's dismissal of part of the FCC's appeal, we hold that the district court properly granted the Debtors' motion to dismiss. Having concluded that equitable mootness applies, we now turn to what it applies to. As the FCC properly concedes that its challenge to the authority of the bankruptcy court to permit the subsidiary debtors to retain the licenses and the subsidiary debtors and GWI PCS to avoid $894 million of the subsidiary debtors' and GWI PCS's obligation to pay the full bid price for the licenses, does not amount to a contention that the bankruptcy court actually lacked jurisdiction, as such, to enter any portion or portions of the complained of orders, 29 we hold thischallenge is equitably moot. Although the bankruptcy court possibly erred in permitting avoidance and enjoining the FCC from revoking the subsidiary debtors' licenses for failing to remit the full bid price, thereby taking onto itself a quasi-regulatory function held by the FCC, the FCC's challenge on this point and request that the avoidance judgment, in its entirety, and the enjoinment order, be reversed are barred by equitable mootness. 30 The Second Circuit's decision, In re NextWave Personal Communications, Inc., 200 F.3d 43 (2d Cir. 1999) (per curiam), cert. denied, No. 99-1980 (U.S. Oct. 10, 2000), although casting doubt on the merits of the bankruptcy court's assuming a quasi-regulatory role, does not dissuade us from ruling that the FCC's challenge on this issue is equitably moot. NextWave Personal Communications, Inc. (NextWave), like GWI PCS, was the high bidder for C-block licenses at the FCC's 1995-96 C-block auction. See id. at 46. Similar to nearly all winning bidders for C-block licenses, NextWave experienced financial difficulties and on June 8, 1998 filed a Chapter 11 petition and instituted an adversary proceeding against the FCC that sought to avoid the company's obligations resulting from its acquisition of the Licenses. Id. at 48. The bankruptcy court granted NextWave's relief in the adversary proceeding, finding that the transaction in which it had acquired the licenses was a fraudulent transfer subject to avoidance. See id. at 50. Accordingly, the bankruptcy court reduced NextWave's obligation to the FCC from $4.74 billion to $1.02 billion. 30 See id. The Second Circuit reversed the bankruptcy court's avoidance judgment, concluding that the bankruptcy court improperly exercised the FCC's radio-licensing function. Id. at 55. In contrast to the present case where the district court dismissed this claim by the FCC as equitably moot, the district court in NextWave had affirmed [the avoidance judgment] for substantially the reasons stated by the bankruptcy court. Id. at 50 (citing In re NextWave Personal Communications, Inc., 241 B.R. 311 (S.D.N.Y. 1999)). The district court in NextWave did not find the FCC's appeal to be equitably moot, nor did the Second Circuit consider that issue. In fact, the FCC had successfully obtained a stay in NextWave and NextWave did not have a confirmed reorganization plan to consummate. Accordingly, mootness was not at issue. Therefore, although the Second Circuit's decision supports the FCC's substantive merits argument, it does notprevent the FCC's challenge on this issue from being equitably moot. 31 31 The reorganization order, however, preserved certain challenges to the valuation of the licenses and the amount of a the FCC's claim against the Debtors. In light of the results of the March 1999 reauction of C-block licenses, see supra note 18, the remedy now available to the FCC is necessarily limited to an unsecured claim for any amount the FCC's claim is determined on appeal to be in excess of the average winning bid at the March 1999 C-block reauction, see supra notes 17 and 18. At oral argument, counsel for the Debtors conceded that the reorganization plan preserved two grounds for the FCC to appeal: (1) the valuation of the licenses as of January 27, 1997; and (2) when the subsidiary debtors' and GWI PCS's obligation to the FCC arose. These challenges can not result in the revocation of the licenses, but rather only in the recoupment of more money by the FCC as an unsecured claim. We now turn to the FCC's contention that the bankruptcy court erred in avoiding $894 million of the subsidiary debtors'and GWI PCS's obligation to the FCC, keeping in mind that the avoidance judgment cannot now be vacated and the only remedy available to the FCC is an unsecured claim (payable only out of the $18 million Unsecured Creditors' Fund, see notes 17 and 18, supra). II The Avoidance Judgment 32 The bankruptcy court avoided approximately $894 million of the subsidiary debtors' and GWI PCS's obligation to the FCC as a constructive fraudulent transfer under 11 U.S.C. § 548(a)(2) (1996) 32 . The elements of a claim of constructive fraud under section 548(a)(2) are that: (1) the debtor transferred an interest in property; (2) the transfer of that interest occurred within one year prior to the filing of the bankruptcy petition; (3) the debtor was insolvent on the date of the transfer or became insolvent as a result thereof; and (4) the debtor received less than reasonably equivalent value in exchange for such transfer. See In re McConnell, 934 F.2d 662, 664 (5th Cir. 1991); see also In re XYZ Options, Inc., 154 F.3d 1262, 1275 (11th Cir. 1998); Butler v. Lomas and Nettleton Co., 862 F.2d 1015, 1017 (3d Cir. 1988); cf. Burroughs v. Fields, 546 F.2d 215, 218 (7th Cir. 1976) (interpreting 11 U.S.C. § 107, the predecessor to 11 U.S.C. § 548). The FCC does not appeal the bankruptcy court's valuation of the licenses as of January 27, 1997, or March 14, 1997, nor does the FCC contend that the subsidiary debtors or GWI PCS were solvent as of January 27, 1997 or March 14, 1997. Therefore, any such arguments have been waived. However, the FCC does contest the bankruptcy court's decision to choose January 27, 1997 (or March 14, 1997) as the appropriate date for the avoidance inquiry. The Debtors bear the burden of establishing the date the transfer occurred. See In re McConnell, 934 F.2d at 665 n.1; In re Morris Communications NC, Inc., 914 F.2d 458, 466 (4th Cir. 1990). The bankruptcy court's determination on this issue involves a mixed question of law and fact, which we review de novo (although findings of historic facts are accepted unless clearly erroneous). See In re Southmark Corp., 62 F.3d 104, 106 (5th Cir. 1995) (citing Barnhill v. Johnson, 112 S.Ct. 1386, 1389 (1992)). 33 The date on which the payment obligation arose is crucial to whether this obligation is avoidable. First, if the subsidiary debtors and GWI PCS incurred the obligation at the close of the auction, May8, 1996, then the value of the fourteen licenses would be $1.06 billion. And if the fair market value were $1.06 billion, then the consummation of the notes would not be a constructive fraudulent transfer. On the other hand, if their obligation first arose on or about the date on which the licenses were conditionally granted, January 27, 1997, or on March 14, 1997, then the $954 million obligation represented by the notes substantially exceeded the fair market value of the licenses. Second, if the obligation arose on May 8, 1996, then it would not have been incurred within one year of the filing of the Debtors' bankruptcy petitions and would therefore not have been avoidable. In support of its position that the obligation arose on the date the C-block auction closed, the FCC relies on the following: (1) its own interpretation of its regulations; (2) auction law principles; and (3) the Second Circuit's NextWave decision, which relies on (1) and (2). In response, the subsidiary debtors and GWI PCS assert that the FCC's interpretation does not warrant deference and that the bankruptcy court correctly fixed January 27, 1997 as the appropriate date, because the FCC's own regulations provide that the licenses were not transferred and the full bid price incurred until January 27, 1997. We conclude that the bankruptcy court did not err in evaluating the transfer as of January 27, 1997. 34 We first address the FCC's argument that this Court should defer to the FCC's formal interpretation that under its regulations the binding obligation to pay the full bid price attaches upon the acceptance of the high bid. In re Applications for Assignment of Broadband Personal Communications Servs. Licenses, 14 F.C.C.R. 1126 ¶ 1, 1998 WL 889489 (Dec. 23, 1998); see In re C.H. PCS, Inc., 14 F.C.C.R. 4131 ¶ 3, 1999 WL 24950 (Jan. 22, 1999) ([U]nder the Commission's rules, a winning bidder is obligated to pay the full amount of its winning bid . . ..). Accordingly, under this interpretation, the obligation was incurred, in the present case, on May 8, 1996. In NextWave, the Second Circuit afforded this interpretation considerable deference in ruling that NextWave's obligation arose at the close of the C-block auction, despite NextWave's contention that the FCC's status as a creditor and its self-interest precluded the court's deferring to the FCC's interpretation. See In re NextWave, 200 F.3d at 57 (Our ruling is based on the FCC's interpretation of its own regulations, to which courts owe deference . . ..); id. at 59 (The financial benefits of the FCC's post hoc interpretation do not extinguish the courts' duty to give deference.). 35 We respectfully disagree with the Second Circuit's conclusion that courts should defer to the FCC's interpretation in this matter. The FCC did not announce its interpretation until December 23, 1998-nearly two years after C-block licensees began experiencing financial difficulties and after the Debtors had filed bankruptcy petitions, brought an adversary proceeding against the FCC, and obtained a judgment in the adversary proceeding on June 4, 1998. 33 Moreover, in a separate statement issued with the December 23, 1998 order, FCC Chairman William Kennard wrote that some of the[] issues [addressed in this order] only emerge[d] as a result of the lessons learned during litigation. In re Applications for Assignment of Broadband Personal Communications Servs. Licenses, Statement of Chairman William Kennard, 14 F.C.C.R. 1126, 1998 WL 889489 (Dec. 23, 1998). In fact, paragraph one of the December 23, 1998 order, which contains the interpretation the FCC argues that this Court should defer to, states that the newly adopted procedures for transferring licenses was made in light of a recent bankruptcycourt decision and arguments raised in other pending bankruptcy proceedings. Id. ¶ 1 (footnote omitted). This bankruptcy decision and proceedings, as noted in the margin of the order, were those of the lower courts in this dispute between the Debtors and the FCC. See id. ¶ 1 n.3 (containing the following citation: See, e.g., In re GWI PCS 1, Inc., et al., Case Nos. 39739676 through 39739689 (Bankr. N.D. Tex.); GWI PCS 1, Inc. v. FCC, Adv. No. 397-3492 (Bankr. N.D. Tex.) (appeal pending)). In circumstances such as these, where an agency's interpretation occurs at such a time and in such as manner as to provide a convenient litigation position for the agency, we have declined to defer to the interpretation. See Waste Control Specialists v. United States Dept. of Energy, 141 F.3d 564, 567 (5th Cir. 1998) (We will not give deference to [the Department of Energy]'s interpretation . . ., because it had not enunciated its interpretation prior to the litigation.) (footnote and citations omitted); United States v. Food, 2,998 Cases, 64 F.3d 984, 987 n.5 (5th Cir. 1995) (Because it appears that the FDA interpreted § 334 and § 381 at such a time and in such a manner so as to provide a convenient litigation position for this suit, we disagree and conclude that the FDA's position is not controlling.) (citation omitted); Irving Indep. Sch. Dist. v. Packard Properties, 970 F.2d 58, 64 (5th Cir. 1992) (Discounting the FDIC interpretation is appropriate for another important reason. The FDIC's Legal Memorandum was issued during pending litigation.); see also Bowen v. Georgetown Univ. Hosp., 109 S.Ct. 468, 474 (1988) (Deference to what appears to be nothing more than an agency's convenient litigating position would be entirely inappropriate.); Nordell v. Heckler, 749 F.2d 47, 48 (D.C. Cir. 1984) (To carry much weight, however, the [agency] interpretation must be publicly articulated some time prior to the agency's embroilment in litigation over the disputed provision.). Accordingly, we do notafford the FCC's December 1998 interpretation deference in determining the appropriate date on which the subsidiary debtors' and GWI PCS's obligation to the FCC arose. 36 We now consider the FCC's argument that auction law supports its position that the transfer must be evaluated at the date the C-block auction closed-May 8, 1996. General principles of auction law provide a baseline rule that the close of an auction-the fall of the hammer-signals acceptance of the offer and creates a binding contract between the seller and the high bidder. See Blossom v. Railroad Co., 70 U.S. (3 Wall.) 196, 206 (1865) ([A]s soon as the hammer is struck down . . . the bargain is considered as concluded, and the seller has no right afterwards to accept a higher bid nor the buyer to withdraw from the contract.) (footnote and citations omitted); Lawrence Paper Co. v. Rosen & Co., 939 F.2d 376, 378-79 (6th Cir. 1991) ('The contract becomes complete only when the bid is accepted, this being ordinarily denoted by the fall of a hammer.') (quoting 7 Am. Jur. 2d Auctions & Auctioneers § 16 (1980 & Supp. 1991)); Bottorff v. Ault, 374 F.2d 832, 835 (7th Cir. 1967) (The sales here were at auction. They were completed when the hammer fell or when the auctioneer said 'sold.') (citation omitted); United States v. Conrad, 619 F. Supp. 1319, 1321 (M.D. Fla. 1985) (It has long been settled that a bid constitutes an offer and the fall of the hammer signifies acceptance.). This postulate of auction law, however, merely provides a baseline, which, in the context of the FCC's auction of the electromagnetic spectrum, has been modified by the FCC's regulations. In NextWave, the Second Circuit agreed with the FCC's interpretation of the bidding regulations, concluding that at the close of a C-block auction a winning bidder became obligated, if qualified, to pay the . . . bid price or, if unqualified, to pay a prescribed penalty. In re NextWave, 200 F.3d at 58. The Second Circuit then reasoned that, [b]y making the high bid, NextWave (a) assumedan obligation to pay a down-payment promptly, (b) assumed an obligation to pay in the future the amount of its bid upon receipt of the Licenses and (c) assumed the risk that it might prove unqualified, by binding itself in that event to pay the amount of any shortfall in a re-auction of the same Licenses. Id. at 61. Thus, the Second Circuit determined that NextWave became obligated to pay the FCC the full bid price at the close of the auction. We respectfully disagree with the Second Circuit's conclusion in this respect. 37 Neither the FCA nor FCC regulations states that the high bidder for a C-block license becomes obligated for the full amount of the bid at the close of the auction. Instead, 47 C.F.R. § 24.704 provides as follows: 38 (a) When the Commission conducts a simultaneous multiple round auction pursuant to § 24.702(a)(1), the Commission will impose penalties on bidders who withdraw high bids during the course of an auction, who default on payments due after an auction closes, or who are disqualified. 39 (1) Bid withdrawal prior to close of auction. A bidder who withdraws a high bid during the course of an auction will be subject to a penalty equal to the difference between the amount bid and the amount of the winning bid the next time the license is offered by the Commission. No withdrawal penalty would be assessed if the subsequent winning bid exceeds the withdrawn bid. This penalty amount will be deducted from any upfront payments or down payments that the withdrawing bidder was [sic] deposited with the Commission. 40 (2) Default or disqualification after close of auction. If a high bidder defaults or is disqualified after the close of such an auction, the defaulting bidder will be subject to the penalty in paragraph (a)(1) of this section plus an additional penalty equal to three (3) percent of the subsequent winning bid. If the subsequent winning bid exceeds the defaulting bidder's bid amount, the 3 percent penalty will be calculated based on the defaulting bidder's bid amount. These amounts will be deducted from any upfront payments or down payments that the defaulting or disqualified bidder has deposited with the Commission. 47 C.F.R. § 24.704(a) (1995). 34 41 This penalty provision does not obligate the winning bidder to pay the full amount of the bid. Accordingly, by making the winning bids on the fourteen licenses, GWI PCS only obligated itself to pay a penalty in the event of default or disqualification, not the full amount of the winning bids. 35 There has been no default respecting the fourteen licenses for which GWI PCS was the high bidder. No penalty therefore has been assessed or can be calculated. 36 42 After the close of the auction on May 8, 1996, GWI PCS was merely entitled to apply for the licenses. To be sure, GWI PCS held a contingent right to the fourteen licenses; however, the FCC's January 27, 1997 order makes clear that the transfer of the licenses was not complete until the execution of the notes and the payment of the remaining portion of the down-payment. See Wireless Telecommunications Bureau Announces Grant of Broadband Personal Communications Services Entrepreneurs' C Block Licenses to GWI PCS Inc., 12 F.C.C.R. 1215, 1997 WL 28957 (Jan. 27, 1997) (GWI PCS will receive its individual BTA licenses following payment for each license of the final down payment and execution and return of the note and security agreement.); id. ([T]he Bureau . . . granted GWI PCS's applications, conditioned on timely payment of its remaining down payment obligation.). 37 GWI PCS's applications remained subject to objection by the public (and in fact were objected to) and could have been rejected by the FCC-a decision affording the FCC some level of discretion. See 47 C.F.R. § 24.832(a) (1995) (Applications for an instrument of authorization will be granted if, upon examination of the application and upon consideration of such other matters as it may officially notice, the Commission finds that the grant will serve the public interest, convenience and necessity.) (emphasis added); 47 C.F.R. § 24.804(a) (1995) (Authorizations will be granted upon proper application if: (1) The applicant is qualified under all applicable laws and Commission regulations, policies and decisions; (2) There are frequencies available to provide satisfactory service; and (3) The public interest, convenience or necessity would be served by a grant.) (emphasis added); see also 47 C.F.R. § 1.2108(d)(1) (1995) (If the Commission determines that: (1) an applicant is qualified and there is no substantial and material issue of fact concerning that determination, it will grant the application.); In re Implementation of Section 309(j) of the Communications Act-Competitive Bidding, Fifth Report and Order, 9 F.C.C.R. 5532 ¶ 81, 1994 WL 372170 (July 15, 1994) (If the Commission denies all petitions to deny, and is otherwise satisfied that the applicant is qualified, the license(s) will be granted to the auction winner.). 38 In addition, it is undisputed that while the applications were pending, GWI PCS could not and did not use the licenses. See 47 C.F.R. § 24.803 (1995) (No person shall use or operate any device for the transmission of energy or communications by radio in the services authorized by this part except as provided in this part.). Only after the applications were approved andthe promissory notes had been signed, could the fruits of the licenses be utilized. 39 Accordingly, the C-block auction was not a typical auction. Under the C-block auction rules, the winning bidder is not entitled to the license until after receiving subsequent FCC approval and does not become obligated for the full bid price until the notes securing the full bid price are thereafter signed. 43 The transfer of subsidiary debtors' fourteen licenses and the concurrent obligation to pay the remaining bid price, $954 million, did not arise until the subsidiary debtors executed the promissory notes for the remainder of the bid price on January 27, 1996. See In re Southmark Corp., 62 F.3d at 106 (A debtor incurs a debt when he becomes legally obligated to pay it.) (citing Sherman v. First City Bank (In re United Sciences of Am.), 893 F.2d 720, 724 (5th Cir. 1990); In re Emerald Oil Co., 695 F.2d 833, 837 (5th Cir. 1983)). Therefore, we conclude that the bankruptcy court properly determined January 27, 1997 as the appropriate date to evaluate the avoidance motion. With respect to this issue, the FCC's challenge fails, and we affirm the avoidance of the approximately $894 million of the obligation of the subsidiary debtors (and of any such obligation of GWI PCS) to the FCC.