On October 11, 2012, in In re Fibertower Network Services Corp., the US Bankruptcy Court for the Northern District of Texas issued a memorandum opinion for its September 27, 2012 Order that granted a temporary injunction to Fibertower Network Service Corporation (Fibertower) and enjoined the FCC from terminating its spectrum licenses until a final non-appealable order regarding the status of the licenses had been entered.

Fibertower Network Service Corporation is a backhaul and multi-band spectrum service provider that filed for Chapter 11. Fibertower's assets include wide-area spectrum licenses, portions of which it leases to customers. The licenses were originally issued by the FCC to Fibertower in 1998. Because the licenses are regulated by the FCC, to renew a license, each licensee must make a showing of "substantial service" within ten years of its license grant. The FCC regulations identify safe harbors which if complied with ensure that licensees have satisfied the substantial service standard. The regulations also include procedures for contesting and appealing a decision by the FCC to terminate a license. In 2008, the FCC renewed the licenses, subject to Fibertower making a substantial service showing for each license.

In 2008, the FCC granted Fibertower's request to extend the deadline for a substantial service showing until June 1, 2012. In April 2012, Fibertower petitioned the FCC for either a waiver of the safe harbor rules or an additional three-year extension of the June 1, 2012 deadline. At the time, a majority of Fibertower's licenses did not satisfy the safe harbor requirements. Fibertower asserted that while it possessed the resources to comply with the safe harbor requirements, it did not comply because compliance would be costly and served no business purpose. By June 1, 2012, Fibertower filed individualized showings for each license with the FCC, arguing that while most licenses did not fall within the safe harbor, they still complied with the substantial service standard.

On August 21, 2012, the Court entered a Cash Collateral Order and Plan Support Agreement which provided that Fibertower's authority to use cash collateral would terminate within five business days if the FCC either:

On August 20, 2012, Fibertower learned that the FCC was planning to terminate a large portion of the licenses for failure to satisfy the safe harbor requirements. The planned termination of the licenses would result in the elimination of Fibertower's financing in Chapter 11 as set out in the Cash Collateral Order and Plan Support Agreement.

Because the termination of the licenses would completely derail Fibertower's reorganization and force it to liquidate, Fibertower filed an adversary proceeding and motion seeking either:

The FCC argued the motion and stressed its need to preserve its congressionally mandated authority to regulate the telecommunications industry. The FCC also maintained that the licenses may have already terminated automatically as of the June 1, 2012 deadline by virtue of Fibertower's failure to satisfy the safe harbor or substantial service standard.

The Court clarified that, regardless of whether the licenses terminated on June 1, 2012, Fibertower still retained an interest in the licenses, and that interest is included as property of the bankruptcy estate. Either the licenses themselves or the interest that Fibertower retained in the licenses due to its right to appeal or seek reconsideration of any decision terminating the licenses, qualify as property of the estate for bankruptcy purposes. This gives the Court proper jurisdiction and authority to protect Fibertower's rights in the licenses.

Fibertower asserted that the FCC's termination of the licenses would violate the automatic stay of section 362(a) of the Bankruptcy Code. The filing of a Chapter 11 petition operates as a stay and in particular, section 362(a)(1) stays the "commencement or continuation … of a judicial, administrative or other action or proceeding against the debtor". Section 362(a)(3) stays "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate".

The Court rejected this argument and pointed out that Fibertower incorrectly relied on section 362(a)(1) which stays actions or proceedings against the debtor. The action at issue (the April 2012 petition to the FCC) was an action brought by the debtor, not against the debtor, and therefore section 362(a)(1) did not apply.

The Court also said that even assuming section 362(a)(3) would stay the termination of the licenses, section 362(b)(4) provides that a bankruptcy filing does not stay a governmental unit from enforcing its police or regulatory powers. While governmental actions brought for predominantly pecuniary purposes are not excepted from the automatic stay, the FCC's decisions regarding whether the licenses should be terminated for non-compliance with the safe harbor requirements is clearly an exercise of the FCC's regulatory power and therefore is exempt from the automatic stay under section 362(b)(4).

Despite this, the Court granted an injunction under section 105 of the Bankruptcy Code barring the FCC from cancelling and re-auctioning the licenses until a final, non-appealable order has been issued. Section 105 allows a court to enjoin actions that are exempted from the automatic stay in exceptional circumstances. To grant injunctive relief, a four-part test must be satisfied, with the movant having to prove:

The Court held that the first element was satisfied by Fibertower's showing that this Court was authorized and likely to grant the requested relief in this action (meaning the request to issue an injunction to enjoin the FCC from terminating the licenses before its orders become final and non-appealable, rather than challenging the FCC's decision to terminate the licenses). Fibertower demonstrated that other courts have:

Fibertower also made a showing of irreparable harm by showing that if the FCC terminated the licenses, it would lose access to cash collateral under the Cash Collateral Order and Plan Support Agreement. Without that financing, it would be nearly impossible for it to reorganize and continue its business. It would also be extremely difficult to claw back any licenses that were redistributed by the FCC, further hampering Fibertower's ability to do business. The Court held the consequence of Fibertower potentially losing its business if the licenses were terminated outweighs any harm that a temporary stay may cause the FCC.

The Court also pointed out that injunctions that lead to reorganizations generally serve the public interest. In this case specifically, the public interest would be served by providing Fibertower with a chance to successfully reorganize and protect its employees and customers.

The Court therefore granted an injunction enjoining the FCC from terminating the licenses if Fibertower holds an interest in the licenses, which will automatically terminate once a final, non-appealable decision has been entered.

While giving deference to the FCC's regulatory functions, the Court exercised its power to enjoin the FCC from acting in its regulatory capacity by redistributing the licenses before its orders are final and non-appealable to protect the property of the bankruptcy estate. The Court granted the injunction to protect Fibertower's interests and allow it to reorganize. This case is a reminder of the strong emphasis that bankruptcy courts place on facilitating reorganizations and the ways in which they will ensure protection of debtors' interests in a Chapter 11 reorganization.

This case is also of interest to financing attorneys because the Court considered the fact that the debtor could not reorganize or operate its business without the FCC licenses to be exceptional enough to warrant injunctive relief to prevent the FCC from exercising its regulatory powers before all challenges and appeals of the FCC decision had been finally decided.