May 21, 2019

Tenth Circuit: In Bankruptcy Case, Debtor Permitted to Grant Security Interest to Creditor in Economic Value of Broadcasting License, Regardless of When Sale of License is Contemplated

The Tenth Circuit Court of Appeals issued its opinion in In re Tracy Broadcasting Corporation on Monday, October 16, 2012.

Tracy Broadcasting filed for bankruptcy under Chapter 11. Its primary creditors were Valley Bank and Spectrum Scan, which was unsecured. The most valuable asset was Tracy’s broadcasting license. The schedules stated that the “proceeds” of the license were secured to Valley Bank. Spectrum Scan brought an action to determine the extent of Valley Bank’s security interest. The bankruptcy court ruled that Valley Bank had no priority in the proceeds of the sale of the license. According to the bankruptcy court, Tracy Broadcasting lacked a sufficient prepetition property interest in the license because the Federal Communications Act (FCA) barred its transfer without FCC permission. The United States District Court for the District of Colorado affirmed.

The Tenth Circuit’s analysis on appeal involved two steps. First, it determined what, if any, interest Tracy Broadcasting could convey in its license before it filed its bankruptcy petition. The Tenth Circuit concluded that Tracy Broadcasting could grant a security interest in its right to the proceeds of the sale of the license. Under the FCA, a licensee has no ownership rights in a radio channel or frequency; the use of the channel is within the regulatory power of the FCC. But the FCA does not prohibit a licensee from making money from its license—say, when a licensee sells a license (albeit only with FCC approval) and realizes a profit because of the value of listener loyalty to the frequency. Accordingly, the Court held that federal law permitted Tracy Broadcasting to grant a security interest in the economic value of its license to Valley Bank.

Second, The Tenth Circuit determined whether such a security interest is a property interest that can attach before a sale of the license is contemplated.  Under the Bankruptcy Code, property-rights issues of this sort are a matter of state law. The Tenth Circuit held that Nebraska law recognizes that a security interest in the proceeds of a license sale attaches when the licensee enters into the security agreement, regardless of whether a sale is contemplated at that time. REVERSED.

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