FCC's Motion to Stay the Mandate Pending the Filing of a Petition for a Writ of Certiorari.
NextWave Personal Communications v. FCC.
Date: August 6, 2001.
Source: FCC.

IN THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT

MOTION TO STAY THE MANDATE PENDING THE FILING OF A PETITION FOR A WRIT OF CERTIORARI

Pursuant to F.R.A.P. 41(d)(2) and Local Rule 41(a)(2), the Federal Communications Commission respectfully asks the Court to stay issuance of the mandate in this case pending the government's filing of a petition for a writ of certiorari in the Supreme Court. The mandate would ordinarily issue on August 13, 2001. The Acting Solicitor General authorized the FCC on August 6, 2001, to file a petition. As discussed below, the petition would present substantial questions and there is good cause for a stay.

BACKGROUND

NextWave was the winning bidder at three FCC auctions of wireless telecommunications licenses. It participated in the auction as a small business, which entitled it to pay the FCC for its licenses in installments over time. Shortly before the first installment payment on the $4.74 billion bid came due, NextWave filed for bankruptcy protection under Chapter 11 of the Bankruptcy Act. NextWave did not make its payment. The licenses themselves and the FCC's rules implementing the licensing program stated that in the event of payment default the licenses would cancel automatically.

The bankruptcy court found that the payment requirement and automatic cancellation rule fulfilled no regulatory purpose, but served only to protect the FCC's pecuniary interests as NextWave's creditor. As such, the court found that it had a basis for adjusting NextWave's financial obligations. In re Nextwave Personal Communications, Inc., 235 B.R. 263, 269-271 (Bankr. S.D.N.Y. 1998). The Second Circuit reversed. In re Nextwave Personal Communications, Inc., 200 F.3d 43 (1999). It held that the regulations governing payment, including the automatic cancellation rule for non-payment, "have primarily a regulatory purpose: to ensure that spectrum licenses end up in the hands of those most likely to further congressionally defined objectives." Id. at 54. The bankruptcy court had no basis "to mandate that [NextWave] be allowed to keep its license[s] despite it failure to meet the conditions to which [they are] subject." Id. at 54, 55.

The FCC then allowed the licenses to cancel despite NextWave's offer to make payment belatedly, but in full. Acting on NextWave's motion challenging the cancellation, the bankruptcy court found that the requirement of timely payment, unlike the requirement of full payment, served no regulatory purpose, and the FCC was thus prohibited from allowing the licenses to cancel. In re Nextwave Personal Communications, Inc., 244 B.R. 253 (Bankr. S.D.N.Y. 2000). The Second Circuit issued a writ of mandamus ordering the bankruptcy court to deny NextWave's motion. In re Federal Communications Commission, 217 F.3d 125 (2000). "Because the timing of NextWave's payment obligation -- like the amount of it -- was a subject of FCC regulation, and therefore within our NextWave mandate, the bankruptcy court's decision violated that mandate." Id. at 138.

NextWave then challenged the FCC's regulatory actions in this Court, which held that despite the automatic cancellation provision, "section 525 [of the Bankruptcy Code, 11 U.S.C. § 525,] prevents the Commission . . . from canceling the licenses of winning bidders who fail to make timely installment payments while in Chapter 11" bankruptcy proceedings. Slip Op. at 39. In the meantime, the FCC had conducted another auction for licenses for the spectrum previously licensed to NextWave. The participants in that auction collectively bid about $16 billion for the licenses.

DISCUSSION

Under F.R.A.P. and Circuit Rule 41, a stay of the mandate should ordinarily be granted pending the filing of a petition for a writ of certiorari if the petition would present a substantial question and there is good cause for a stay. Both criteria are satisfied here.

A. THIS CASE PRESENTS SUBSTANTIAL QUESTIONS

Worthiness Of Further Review.

This case is a serious potential candidate for review by the Supreme Court (as demonstrated by the Solicitor General's having authorized a cert. petition). Congress has mandated that the FCC use auctions to allocate scarce spectrum licenses in most instances where more than one person applies for a license. 47 U.S.C. § 309(j)(1). By doing so, Congress has chosen auctions as the principal mechanism for managing allocation of the electromagnetic spectrum, an extremely important and valuable national resource. The only way in which the FCC may fulfill that policy objective is through a workable, robust auction mechanism with reliability and integrity. The decision interferes with the use of auctions as a practical method of spectrum allocation.

Although the Court had before it the case of a single licensee, its holding has far broader potential consequences. Under § 525, the government "may not deny, revoke, suspend, or refuse to renew a license . . . [to] a person that is . . . a bankrupt or debtor under the Bankruptcy Act . . . solely because such bankrupt or debtor . . . has not paid a debt that is dischargeable in the case under this title." 11 U.S.C. § 525. The Court held that the statute prohibited the FCC from canceling NextWave's licenses. A subsequent court could conclude that this Court's interpretation logically means that the statute also forbids the Commission to deny a license for failure by a bankrupt to pay.

The deny clause gives this case implications that may go far beyond the specific licensing dispute before the Court. There is an unavoidable lag between the close of an auction and the winner's payment of its bid. If an auction winner declared bankruptcy immediately after submitting the winning bid and refused to pay the bid price, the FCC could be forbidden from denying the license. If the bankruptcy court were later to reduce the debt, the bidder could keep its license for less than its bid -- and potentially for less than other, more financially responsible persons had bid -- a result that directly undermines the market-driven underpinnings of the auction regime. Even the possibility that a bidder will not ultimately be held to its bid subverts the process and turns bankruptcy into an auction strategy. If the FCC is unable to recover the licenses, spectrum lies fallow during the possibly lengthy bankruptcy proceedings, further eroding the ultimate goal of making services available to the public quickly.

Currently, hundreds of licensees hold licenses under installment payment plans, and the FCC continues to allocate spectrum by auction. It is vital that bankruptcy not be used to game the system, as a safe harbor to negotiate with the FCC over the price, or to warehouse spectrum pending the outcome of bankruptcy proceedings. Because the integrity of the auction process is at stake here, the case is worthy of review by the Supreme Court.

2. Substantial Legal Issues.

This case also presents substantial legal issues. Section 525 forbids the government from revoking a license "solely because" a bankrupt "has not paid a debt that is dischargeable in the case under this title." The Court found both that the debt at issue here was dischargeable within the meaning of the statute and that the FCC's sole reason for canceling the licenses was the nonpayment of such a debt. Both of those conclusions raise questions appropriate for further review.

a. The Second Circuit held that NextWave's full and timely payment obligation was a regulatory condition on the licenses and that the underlying debt could not be discharged by the bankruptcy court unless the licenses were returned to the FCC. E.g., 200 F.3d at 59 n.15. This Court came to an opposite result; it held that § 525 prohibited the FCC from enforcing the full and timely payment condition that the FCC had placed on the licenses. The Court distinguished the Second Circuit's prior finding on the theory that the statute does not refer "to the bankruptcy court's power to modify or discharge a payment obligation," but that its "plain language . . . refers to a payment obligation that can be modified or discharged under the Bankruptcy Code." The Court found that the Second Circuit "never decided that a court of competent jurisdiction (such as this one) could not modify or discharge it under section 525." Slip op. at 33-34 (emphasis in original).

There is considerable tension between the Second Circuit's opinion and this Court's holding, and the conflict should be resolved by the Supreme Court. The Second Circuit's earlier holding precluded a later finding of discharge-abil-ity while the licenses are still held by the licensee. Moreover, § 525 refers to dischargeability "in the case under this title," which refers to the bankruptcy case pending in a district court or bankruptcy court. See, e.g., 11 U.S.C. § 301 ("A voluntary case under a chapter of this title is commenced by the filing with the bankruptcy court of a petition . . ."). The Court appears to have found the authority to discharge a debt in § 525 itself; it is a substantial question whether that statute furnishes authority to alter or discharge a debt.

The ruling on the "solely because" clause of § 525 also raises substantial questions. The licenses canceled because of NextWave's failure to satisfy the full and timely payment conditions on its licenses. That default had dual consequences: most importantly it had the regulatory consequence of demonstrating that the public interest no longer would be served by NextWave's holding the licenses; as a subsidiary matter, it affected the FCC's interests as a creditor of NextWave. As the Second Circuit held, "NextWave's inability to follow through on its financial undertakings had more than financial implications. It indicated that . . . NextWave was not the applicant most likely to use the Licenses efficiently." 200 F.3d at 54. This Court held that § 525 nevertheless prohibited the FCC from protecting its primary regulatory interest because the trigger for the action -- the failure to pay money -- also related to a creditor interest.

That ruling adopts a reading of "solely because" that is not in our view compelled by the statutory text. Congress's use of the term "solely" to modify "because" suggests that, as long as the creditor interest is not the sole interest being served -- that is, where the license cancellation serves a clear regulatory objective inherent in the license and apart from the mere payment of money -- there is at least a substantial question whether the cancellation can properly be characterized as "solely" because of non-payment of a debt. That is particularly so in light of the legislative history supporting our view.

B. GOOD CAUSE EXISTS FOR A STAY

Issuance of the mandate will likely have significant adverse consequences for the government and will likely result in the unnecessary expenditure of governmental, judicial, and private party resources. NextWave's bankruptcy proceeding is still pending before the bankruptcy court in New York. NextWave has recently argued to the FCC that that the licenses re-vest in it by operation of law upon issuance of the mandate. NextWave will likely make the same claim to the bankruptcy court when it files a reorganization plan. The bankruptcy court might then schedule NextWave's plan to take effect before the Supreme Court has an opportunity to decide this matter. In the Second Circuit, once property has been disbursed pursuant to a confirmed bankruptcy plan of reorganization, equitable considerations may render moot any pending appeal from the underlying bankruptcy case. See, e.g., In re Chateaugay Corp., 10 F.3d 944, 952-53 (2d Cir. 1993); In re Chateaugay Corp., 988 F.2d 322, 325-26 (2d Cir. 1993). The Fifth Circuit recently declared moot the FCC's appeal of a licensee's plan in those very circumstances. In Re GWI PCS 1, Inc., 230 F.3d 788 (5th Cir. 2000), cert. denied, __ U.S. __ (June 29, 2001). If it were to happen here at any point before the Supreme Court finishes its review of the matter, the government could again find itself unable to challenge the plan, thus making the licenses NextWave's permanently and eliminating the government's ability to secure Supreme Court review.

That outcome would have significant prejudicial effects on the government. It would as a practical matter remove the government's ability to ask the Supreme Court to review this matter. It would violate what the Commission views as substantial public policy interests in ensuring that auction participants pay their bid prices in full and on time, and would result in spectrum licenses being held by a party that has failed to fulfill license conditions. It would eliminate the government's opportunity to collect the significant additional value of the licenses at issue. Even if the government were able to secure a stay of the implementation of the reorganization plan from the Second Circuit, substantial judicial, administrative and private party resources would have been wasted in the meantime.

Resources would also be wasted if the Commission were to conduct further proceedings in accordance with the mandate and the case were subsequently reversed. Aside from whatever procedures the Court envisioned in its remand order, the winners of Auction 35, the Commission's re-auction of licenses to use the spectrum previously licensed to NextWave, have asked the FCC to investigate NextWave's fitness to hold the licenses. That request -- potentially time-consuming and complex -- would have to be resolved were NextWave to get the licenses back. If the Supreme Court reversed and NextWave lost the licenses, agency resources spent on the matter would have been for naught.

Issuance of the mandate could also interfere with the results of Auction 35. The winners of that auction have paid the FCC downpayments of around $3 billion, and they are anxiously awaiting the outcome of this matter to implement their business plans. If the Commission were required to reinstate NextWave's licenses as a result of the mandate, the fate of Auction 35 is placed in considerable doubt: winning bidders might demand their money back and insist that the Commission can no longer require them to adhere to their original promise to pay for their licenses in full upon issuance. Moreover, the uncertainty caused by bouncing licenses -- now held by NextWave, now by someone else, now back to NextWave, now reversed -- will have a deleterious effect on the industry and on the business plans of particular bidders. Preservation of the status quo by staying issuance of the mandate until the Supreme Court decides the matter is by far the better course and is ample good cause under Rule 41.

CONCLUSION

For the foregoing reasons, the FCC respectfully requests that the Court stay issuance of the mandate pending the Supreme Court's consideration of a petition for a writ of certiorari. We ask that if the Court denies the motion, it leave sufficient time before issuing the mandate for the government to ask the Supreme Court for similar relief.

Respectfully Submitted,

John A. Rogovin
Deputy General Counsel

Daniel M. Armstrong
Associate General Counsel

Joel Marcus
Counsel

Federal Communications Commission
Washington, D.C. 20554
(202) 418-1740

August 6, 2001