Secured creditors of borrowers holding Federal Communications Commission ("FCC") broadcasting licenses, as well as such borrowers seeking credit, will be reassured by a recent decision of the United States Court of Appeals for the Tenth Circuit, In re: Tracy Broadcasting Corporation, released October 16, 2012. The Tenth Circuit has joined other courts in upholding the priority of a creditor’s security interest over that of unsecured creditors in the post-bankruptcy sale proceeds of an FCC broadcasting license. The decision reversed the decisions of lower courts and held that "a security interest in the proceeds of a license attaches when the licensee enters into the security agreement, regardless of whether a sale [of the license] is contemplated at that time."

In 2008, Tracy Broadcasting (the "Debtor") issued a promissory note in favor of Valley Bank & Trust Company (the "Secured Creditor") and secured such obligations with various assets, including its general intangibles and the proceeds of such collateral. In 2009, the Debtor filed a Chapter 11 petition in the U.S. Bankruptcy Court for the District of Colorado. An unsecured creditor of the Debtor brought an adversary action to determine the extent of the Secured Creditor’s security interest in the proceeds of the sale of the Debtor’s license.

Both the Bankruptcy Court and the U.S. District Court for the District of Colorado ruled that the Secured Creditor did not have priority in the proceeds of the sale of the Debtor’s license, as no agreement for sale or transfer of the license was pending at the time of the Debtor’s bankruptcy filing, and the Bankruptcy Code generally rejects liens on property acquired by a debtor after the filing of a bankruptcy petition. Additionally, any transfer of the license was subject to FCC approval, as the Federal Communications Act ("FCA") prohibits transfer or assignment of FCC licenses or any rights thereunder without FCC permission. This led the two courts to agree that any right the Debtor had to receive value for the transfer of its license did not exist before its bankruptcy filing, because any such "’right’ was too remote and was subject to two contingencies" – the existence of an agreement to transfer the license, and approval of the transfer by the FCC.

The Tenth’s Circuit Court’s decision was supported by three legal principles: first, FCC policy permitting security interests in broadcast licenses, second, the Bankruptcy Code’s treatment of security interests on property acquired pre-petition and post-petition, and third, Nebraska state property law, as embodied in the Nebraska UCC.

Although the FCC prohibits a lienholder from foreclosing on broadcast license that would enable a lienholder to foreclose on its lien and obtain the licensee’s broadcast rights without FCC approval, its policy permits a security interest to be granted in the proceeds of a sale of such license. The FCC views the right to grant liens on the proceeds of the sale of a license as a means to improve licensees’ access to capital; if such a lien could not attach before proceeds existed, it would have little value to a secured creditor and would not effectively increase this access to capital. Because a lien on the proceeds does not interfere with FCC regulation of the licensee, a security interest can be created in the proceeds of an assignment of a license to an FCC-approved third party.

Section 522 of the Bankruptcy Code cuts off liens attaching to property acquired by a debtor after the commencement of a bankruptcy case, but if a security interest encompasses the proceeds of property owned by the debtor before the commencement of the case, then the lien will extend to the proceeds if such property is sold post-petition. State law governs the recognition of property interests in bankruptcy proceedings unless a federal interest requires otherwise. Therefore, whether the Debtor had sufficient rights in the collateral to support the pre-petition attachment of a security interest came down to a question of Nebraska state law (UCC law).

The Nebraska UCC was revised in 2000 to recognize and enforce the attachment of security interests in state-issued licenses similar to FCC licenses. UCC Section 9-408(c) overrides state licensing laws that would bar the creation, attachment and perfection of security interests in state-issued licenses, the transfer of which would be subject to government approval. Official comments to this section state that "[b]y making available previously unavailable property as collateral, this section should enable debtors to obtain additional credit. . . . [A] secured party may ascribe value to the collateral to which its security interest has attached, even if this section precludes the secured party from enforcing the security interest," and that "[t]his section could have a substantial effect if the assignor enters bankruptcy . . . [as] Bankruptcy Code section 552 invalidates security interests in property acquired after a bankruptcy petition is filed, except to the extent that the postpetition property constitutes proceeds of prepetition collateral." Cmts. 7 and 8 to Neb. UCC 9-408.

The Tenth Circuit Court applied the reasoning behind UCC 9-408 to federally-issued licenses, concluding that a "security interest in the proceeds of the sale of [an FCC] license" should be more precisely characterized as a security interest "in the licensee’s right to the proceeds of a license sale and in the proceeds of that right (which are simply the sale proceeds)." (Emphasis added.) Because under Nebraska UCC law, a security interest in the licensee’s right to the proceeds of the license sale attaches at the time the licensee acquires the license, regardless of whether there is a prospective purchaser in sight, the court held that a security interest in the proceeds of that right (that is, the proceeds of a future sale) may attach before any FCC-approved transfer agreement exists. The court explained "[i]f the security interest were only in the sale proceeds, it could not attach before those proceeds existed, but a security interest in the right to receive proceeds from any future sale can attach as soon as the licensee acquires the license." Accordingly, the Bankruptcy Code did not prohibit the Secured Creditor’s lien from attaching to the proceeds of the license transfer, since the interest had attached to the rights of the Debtor to receive such proceeds before the bankruptcy petition was filed.

This decision ends a split in authority and aligns with an earlier decision of the U.S. Bankruptcy Court for the Southern District of New York in In re: TerreStar Networks, Inc. Both of these decisions hold that even though a lien may not be granted in an FCC license itself, a valid security interest may attach to the economic value of that license. These decisions support the industry practice of secured creditors in obtaining security interests in all of their debtors’ general intangibles, which include the right of a licensee to the proceeds from the sale of its license, and the proceeds of that right (the proceeds of the sale itself).