Recently, a Colorado bankruptcy court considered for the first time the effects of Bankruptcy Code Section 552 on a lender’s security interest in the proceeds of an FCC broadcast license. The court held that a prepetition security interest would not extend to proceeds received from a post-petition transfer of the debtor’s FCC license because the debtor did not have an attachable, prepetition property interest in the proceeds. Such an interest does not arise until the FCC approves an agreement to sell the license. Because no such sale was contemplated prepetition, Section 552(a) prevented the lender from attaching the proceeds of a post-petition sale.

In Spectrum Scan LLC v. Valley Bank and Trust Co. (In re Tracy Broadcasting Corp.), 438 B.R. 323 (D. Colo. 2010), the debtor operated an FM radio station under a license issued by the FCC. Before filing for bankruptcy, the debtor pledged its general intangibles and related proceeds to its lender. Spectrum Scan, an FM radio station and unsecured creditor, filed an adversary complaint seeking determination of whether the lender’s security interest in the debtor’s general intangibles and proceeds extended to any proceeds realized from a sale of the debtor’s FCC broadcast license. Neither Spectrum nor the lender argued that the bank held a security interest in the FCC license itself. The sole issue was whether the bank’s interest in general intangibles extended to proceeds realized on the license in a post-petition sale.

Spectrum argued that: (1) if the bank did not have a security interest in the FCC license, it could not claim one in the license’s proceeds; and, in the alternative, (2) even if the bank could obtain a security interest in the license, such interest would not attach until the debtor had the right to receive value for the license – since any sale of the license would occur post-petition, Section 552(a) of the Bankruptcy Code would prevent the bank from acquiring an interest in the post-petition proceeds of the license.

In opposition, the bank argued that the FCC license may be bifurcated into public rights (defined as the power to determine who may become the licensee and the duration of the license) and private rights (defined as the licensee’s interest in proceeds from an FCC-approved transfer of the license) and that the licensee could grant a security interest in its private rights. Moreover, the bank argued, the security interest in the private rights attached prepetition, when the security interest in general intangibles was granted, allowing the bank to recover post-petition proceeds under Bankruptcy Code Section 552(b).

In reaching its holding, the court acknowledged the inconsistent holdings that preceded its decision. Some courts (including the 6th and 7th Circuits) have flatly held that no security interest could be granted in any aspect of an FCC license, while others (including the 9th Circuit) adopted the bank’s position, that a security interest could be granted in the private rights granted by a license. It should be noted that none of these prior cases dealt specifically with the issue addressed here – the effects of Section 552 on a security interest in the proceeds of a broadcast license.

Based on its study of case law on this point, the court “presume[d] that it is possible, at least in the absence of a bankruptcy, for a debtor to grant a security interest in its right to receive proceeds upon an FCC-approved transfer of its license.” But in the bankruptcy context, the court noted, “[t]he [d]ebtor’s right to receive value for a transfer of its [l]icense did not exist prior to the filing of its Chapter 11 case because any such ‘right’ was too remote and was subject to two contingencies.” According to the court, a security interest in the proceeds of an FCC license cannot attach until there is both a sale agreement and approval of the agreement by the FCC. In this case, neither of these contingencies had been satisfied prepetition. Thus, “the [d]ebtor did not have a sufficient property interest in this contingency in order to transfer a security interest in it to the [b]ank.” If such a sale occurred after bankruptcy, Bankruptcy Code Section 552(a) would prevent the bank’s security agreement from attaching to the sale proceeds.

Tracy Broadcasting Corp. is significant as it is the first case to consider the effect of Bankruptcy Code Section 552 on the validity of a pledge of the proceeds of an FCC license, undercutting those bankruptcy cases that have approved such an interest but not considered the effect of Section 552. Thus this case presents an important issue that lenders should consider in making credit decisions for loans to broadcast entities.