On October 16, 2012, the US Court of Appeals for the Tenth Circuit held in an adversary proceeding brought by Spectrum Scan LLC in In re Tracy Broadcasting Corp. that a licensee of a federal broadcasting license can grant a security interest in its right to the proceeds of a future sale of the license before it files for bankruptcy. The Tenth Circuit also held that a security interest in this right attaches when the licensee enters into a security agreement, regardless of whether a sale is contemplated at that time. This decision reversed the judgments of the lower courts, reassuring lenders and ending a split in authority among courts on this issue (for more on other decisions on this issue, see Legal Update, SDNY Bankruptcy Court Confirms Validity of Liens on Economic Value of FCC Licenses in TerreStar Networks).

The Tenth Circuit was asked to decide:

Tracy Broadcasting, a Nebraska corporation, operated a radio station under a license issued by the Federal Communications Commission (FCC). In 2008, Tracy Broadcasting executed a promissory note with Valley Bank & Trust Company, secured by various assets, including Tracy Broadcasting's general intangibles and their proceeds.

In 2009, Spectrum Scan obtained a judgment against Tracy Broadcasting. Tracy Broadcasting filed a petition under Chapter 11 seven months later, with Valley Bank and Spectrum Scan as its two primary creditors. Its most valuable asset was the broadcasting license. Spectrum Scan brought an adversary action against Valley Bank to determine the extent of Valley Bank's security interest in the proceeds of the sale of the license. The US Bankruptcy Court for the District of Colorado held that Valley Bank had no priority in the proceeds of the sale of the license because Tracy Broadcasting lacked a sufficient prepetition property interest. The US District Court for the District of Colorado affirmed.

The Tenth Circuit reversed the judgments of the lower courts, finding that:

Section 310 of the Federal Communications Act (FCA) prohibits the transfer or assignment of an FCC license or any rights under that license without FCC permission. Section 552(b) of the Bankruptcy Code prohibits liens on property (such as proceeds) acquired after the petition date unless the property was proceeds of property acquired by Tracy Broadcasting prepetition and the security agreement extended to the property acquired prepetition and to the proceeds of that property.

The Bankruptcy Court reasoned that because of Section 310 of the FCA, the only security interest in the FCC license that Tracy Broadcasting could convey was a right to receive proceeds from an FCC-approved transfer of the license. However, this right did not exist prepetition because it was too remote and subject to two contingencies, an agreement to transfer the license and FCC approval of the transfer. Neither contingency had occurred prepetition and therefore that property interest did not exist prepetition for Tracy Broadcasting to have granted a security interest in it to Valley Bank.

The Tenth Circuit disagreed with this reasoning. It first looked to the FCC view of Section 310 and the purpose of the FCA. The FCC is concerned with preventing a lienholder from foreclosing on a lien and obtaining the licensee's rights without FCC approval and so the licensee cannot grant a security interest in the license itself. The FCC has said, though, a security interest in the proceeds from an FCC-approved sale does not violate FCC policy because this does not interfere with its ability to regulate the airwaves and the licensees. The FCC also recognizes that permitting a security interest in the proceeds improves the licensees' access to capital because the license is usually a licensee's most valuable asset.

The Tenth Circuit reasoned that if the security interest could not attach before the proceeds existed, then the secured party would have no greater priority over other creditors if the licensee sold the license postpetition. The security interest would therefore have little value to the creditor and not increase the licensee's access to capital. According to the Tenth Circuit, the right to receive proceeds exists at the time the security agreement is signed, even if the proceeds themselves do not yet exist. Therefore, Tracy Broadcasting could grant a security interest in this right to receive the sale proceeds even though it could not grant a security interest in the license itself.

The Tenth Circuit next looked to Nebraska law to determine whether Valley Bank had a property interest that attached when the security agreement was executed. If it did, then the exception in section 552(b) of the Bankruptcy Code would apply and Valley Bank would have a security interest in the proceeds from a future sale of the license. Under Section 9-203 of Nevada's Uniform Commercial Code (UCC):

The Bankruptcy Court held that the licensee's rights to the proceeds of a sale before it had entered into any purchase agreement was not a sufficient interest to constitute rights in the collateral.

The Tenth Circuit held that this reasoning did not reflect commercial reality and would prevent a licensee from using its best asset to obtain capital. In addition, Nebraska revised Section 9-408 of the UCC in 2000 to override state licensing laws that would prevent the creation, attachment or perfection of a security interest in a state-issued license. However, Section 9-408(d) of the UCC strictly limits the secured party's rights so that it cannot assign rights in the license if the assignment is barred by non-UCC law. According to the Tenth Circuit, section 9-408 leads to a lien which is essentially the same as the type of lien approved by the FCC. It viewed this UCC revision as support for its findings under Nebraska law. The Tenth Circuit found that even though a sale is not "in the offing," the licensee's right to proceeds from a sale of an FCC license is not too speculative to support attachment of a security interest in that right.

The Tenth Circuit reversed the judgment of the District Court and remanded the matter to the Bankruptcy Court for further proceedings consistent with its opinion.

This decision on whether a creditor may have a security interest in a licensee's right to the proceeds from a future sale of FCC licenses brings this case into line with other courts. It should reassure lenders that they may hold a lien on the economic value of FCC licenses, though not the license itself, and that this lien will retain its value in a bankruptcy case.

For more information on security interests, see Practice Notes, Security: Overview and UCC Creation, Perfection and Priority of Security Interests.