How do you secure a loan to an FCC broadcast licensee? This was the issue discussed by a case released by the Commission last week – addressing the FCC’s policies prohibiting a station creditor from foreclosing on a broadcast license and also restricting the sale of a “bare license.” While this case involved an action for collection by a judgment creditor, it is instructive as to how any broadcast creditor, including a lender to a broadcast licensee, should act to secure loans or other financial obligations of a broadcaster, and how the creditor can exercise its rights in the event of a default. It is also instructive as to how to proceed to enforce a loan obligation to any FCC licensee - in the broadcast services or in the other services regulated by the FCC. As the FCC has a long-standing policy prohibiting a lender from taking a security interest directly in an FCC license, lenders need to pay careful attention in documenting loans and in enforcing security agreements upon defaults to make sure that their interests are protected.
Lenders cannot foreclose directly on a license when a broadcaster defaults on its obligations, as the FCC has made clear that a license is not a property right that can be used for security. The FCC has said that a license is not subject to “mortgage, security interest, or lien, pledge, attachment, seizure, or similar property right.” As the license cannot be attached, to get at the value of the license if there is a default and the debtor won’t cooperate in a voluntary foreclosure, the Lender has to go to court and have a receiver or trustee appointed to oversee the assets of the debtor. An involuntary transfer to a trustee or receiver pursuant to a court order can be approved by the FCC expeditiously on a “short form” (Form 316 in the broadcast services) transfer application. Once appointed, the trustee can sell the sell the station (pursuant to FCC approval on a subsequent "long-form" application) and distribute the proceeds to the creditors. In the case decided last week, the actions of the local court that was attempting to enforce the rights of the creditor gave the Commission pause.
In the case, the creditor did it pretty much right – though an errant Court order gave the debtor a legitimate argument that there were problems. Initially, when the creditor went to court to enforce his judgment, the Court issued “an attachment order”, attaching all assets of the station and ordering that they be sold by the local sheriff. In testimony at the hearing before the order was issued, the principal of the debtor testified that the only asset of the company was the station’s license. Nevertheless, an order purporting to “attach” all of the station assets, specifically including the license, was issued. When the FCC went to review this transaction, the Commission was troubled that the Court order attached the license, as it implied that the license was a chattel that could be repossessed just like any piece of equipment. Thus, the FCC determined that the Court's attachment order violated Federal policy, and could not be enforced.
However, the Court also issued a second order when the debtor refused to participate or cooperate with the sheriff’s sale. The second order appointed a trustee to "marshall" the assets and to sell them for the benefit of creditors. The transfer of control was approved by the FCC on a Form 316 application, and the trustee sold the station and its license to the highest bidder (also pursuant to FCC approval), with the proceeds being paid to the lender. As this second order did things the right way, the FCC permitted the transaction to go forward.
There was one other significant issue that was addressed by the case. The FCC has had a historical policy of not permitting the sale of a “bare license’, one which is not associated with any other property or rights associated with the station. As the sale in this case was by the trustee and included essentially nothing but the license, the former licensee argued that it was a sale of a bare license and should not be permitted. The Commission denied the objection, finding both that the station public file and other associated documents were sufficient to overcome the determination that this was the sale of a bare license, and that, because the Buyer had purchased other station assets in other transactions sufficient to operate the station, the Buyer had all of the assets necessary to operate the station. Other recent decisions on the "bare license" issue have gone much the same way, suggesting that this policy really has no little current applicability, as almost any buyer of a license is going to either buy some physical records associated with a station, or have some equipment necessary to operate the station within a short period of time. It would seem that only where a Buyer was trying to literally buy the license, and to hold it without operating the station for some period of time, will this old policy have any continued applicability.
This case helps to outline how a creditor of an FCC licensee should proceed in the event of a default. However, there are other more basic question in play, including ones dealing with the documents that secure a creditors interest in an FCC license and how those interests are protected in a bankruptcy proceeding. Look for Part 2 of this post later this week - discussing recent bankruptcy court cases that tackle some difficult questions in this area.