WASHINGTON, Oct. 8 (UPI) -- The Supreme Court heard argument Tuesday on whether the government can take back a wireless license from a successful bidder when the bidder goes bankrupt and can't pay.
The case involves NextWave Personal Communications, but it will affect a handful of bankrupt entities that have similarly failed to make payments of billions of dollars to the government.
The case pits the U.S. Bankruptcy Code against the Federal Communication Commission's rules for authorized spectrum auctions, which appear to be mutually exclusive.
The government controls channels of radio transmission and leases them out for limited periods of time. Congress authorized the FCC to award licenses for particular transmission bandwidths in 1993.
In 1995, NextWave Personal Communications was formed to participate in the FCC's "C-Block" license auctions. NextWave was declared the high bidder for 63 licenses after it submitted bids totaling $4.74 billion.
A separate but related entity, NextWave Power Partners, was formed to participate in the commission's "F-Block" license auctions in 1997 and was declared the winner for 27 such licenses after submitting bids totaling about $123 million.
Each license was granted on the condition that "full and timely payment of all monies due" would be made, according to FCC rules.
After winning the auctions, however, NextWave and a number of other entities petitioned the FCC to restructure their payments, citing the high cost of their own bids.
The commission refused, saying it would be unfair to other bidders, but gave C-Block licensees until July 1998 to resume payments. F-Block licensees were given until October 1998.
Instead of making the payments, both NextWave entities filed for bankruptcy reorganization in Manhattan under Chapter 11 of the Bankruptcy Code. Going further, NextWave filed suit in bankruptcy court to avoid making the payments, saying they were "constructively fraudulent" given the actual value of the licenses -- C Block licenses lost value due to the unexpected auction of a huge chunk of F Block licenses. NextWave asked that $3.72 billion of its $4.75 billion debt be canceled.
The U.S. Bankruptcy Court obliged, ruling that NextWave was responsible for $1.023 billion of the debt and said it could still keep the licenses. A federal judge agreed, but a federal appeals court reversed.
At that point, NextWave offered in a letter to the FCC to pay the discounted price on the licenses in one lump sum, rather than make payments on the larger figure.
The FCC responded by issuing a public notice that the licenses would be re-auctioned.
While the court action went out, the re-auction occurred in January 2001, generating a potential $15.85 billion for the government. The re-auction bids were accepted on the condition that the FCC win the court battle.
Three of the biggest winners in the re-auction, Arctic Slope Regional Corp., Council Tree Communications LLC and VoiceStream Wireless Corp., then intervened in the case.
After the case took several trips up and down the appeals court ladder, a federal appeals court in Washington finally reversed the FCC's decision in June 2001, and sent the case back to the commission for a rehearing. The appeals court said its reading of the Bankruptcy Code prohibited the FCC from re-auctioning the licenses.
The FCC then asked the Supreme Court for review, contending that NextWave's missed payments are not "debts," but regulatory conditions of the licenses, and as such are beyond the reach of the bankruptcy court.
In the Supreme Court Tuesday, much of the argument centered on what was going on when the FCC attempted to revoke the licenses.
Speaking for the FCC, Paul Clement of the U.S. Solicitor General's Office told the justices that the FCC's motivation was not economic.
"The FCC views the failure to make a timely payment is a proxy for failure to (advance) the public interest," he said.
But Clement had to answer skeptical questions from several court members, including Chief Justice William Rehnquist, about FCC regulatory language that says there is an "automatic" revocation when payment is not made on time.
Clement said the revocation was not really automatic because the FCC could extend the payments.
Speaking for Arctic Slope and the other successful bidders in the re-auction, Washington attorney Jonathan Franklin supported Clement's arguments.
But speaking for NextWave, fellow Washington attorney Donald Verrilli argued that the revocations were purely an automatic economic decision, and well within the reach of the bankruptcy court.
Verrilli was supported by Harvard professor Laurence Tribe, who spoke as a friend of the court for NextWave Communications Inc., a NextWave Personal Communications creditor.
A decision in the case should come within the next several months.
(No. 01-653, FCC vs. NextWave)