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Creditor Has Priority in Proceeds of Sale Of License After Company Files Chapter 11

Friday, December 21, 2012
Valley Bank and Trust Co. v. Spectrum Scan LLC (In re Tracy Broadcasting Corp.), 10th Cir., No. 11-1453, 10/16/12

  • Key Development: The U.S. Court of Appeals for the Tenth Circuit concludes that a creditor with a security interest in the general intangibles and their proceeds of a federally licensed broadcasting company has priority over unsecured creditors in the proceeds of the sale of the license after the company files for bankruptcy.

  • Key Takeaway: Federal law permits a licensee to grant a security interest in the economic value of its license, and 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.


By Diane Davis

A creditor with a security interest in the general intangibles and their proceeds of a federally licensed broadcasting company has priority over unsecured creditors in the proceeds of the sale of the license after the company files for bankruptcy, the U.S. Court of Appeals for the Tenth Circuit held Oct. 16 (Valley Bank and Trust Co. v. Spectrum Scan LLC (In re Tracy Broadcasting Corp.), 10th Cir., No. 11-1453, 10/16/12).

Reversing the judgment of the district court, with instructions to remand the case to the bankruptcy court, Judge Harris L. Hartz concluded that federal law permits a licensee to grant a security interest in the economic value of its license.

Nebraska law, the court said, 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. If a licensee's right to the proceeds of a sale of a license is a property interest, it is a general intangible under Nebraska law, the court said. General intangible, the court explained, means any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letter of credit, money, and oil, gas, or other minerals before extraction. The term also includes payment intangibles and software, the court said.

 

Chapter 11 Filing
Debtor Tracy Broadcasting is a Nebraska corporation that operates an FM radio station in Wyoming under a license issued by the Federal Communications Commission. On May 5, 2008, the debtor executed a promissory note for a $1.5 million loan from creditor Valley Bank & Trust Company. The note was secured by an agreement that granted Valley Bank a security interest in various assets, including the debtor's general intangibles and their proceeds.

In 2009, Spectrum Scan LLC obtained a $1.4 million judgment in Nebraska federal court against the debtor. Seven months later, the debtor filed for Chapter 11 protection in Colorado, listing assets of $1,223,242, and liabilities of $3,045,417. The debtor listed two primary creditors, including Valley Bank, and Spectrum Scan, which was unsecured. The most valuable asset listed was the broadcasting license, with an estimated worth of $950,000. According to the debtor's schedules, the “proceeds” of the license are “secured to Valley Bank.” No agreement for sale or transfer of the license was pending at the time.

Spectrum Scan brought an adversary action to determine the extent of Valley Bank's security interest.

 

No Priority Interest in Sale of Proceeds
The bankruptcy court held that Valley Bank had no priority in the proceeds of the sale of the debtor's license. According to the bankruptcy court, property acquired by the debtor after it filed for Chapter 11 (such as proceeds of the sale of its FCC license) would not be subject to Valley Bank's lien unless the property was proceeds of property acquired by the debtor before filing and the security agreement “extend[ed] to [the] property … acquired before [filing] and to proceeds … of such property,” citing Bankruptcy Code Section 552(b)1). The debtor lacked a sufficient prepetition property interest in the license for Section 552(b)(1) to apply, the bankruptcy court said.

The court relied on the provision of the Federal Communications Act (FCA) barring the transfer or assignment of an FCC license, “or any rights thereunder,” without FCC permission, citing 47 U.S.C. § 310(d). The bankruptcy court reasoned that because of this provision, the only security interest in the license that the debtor could convey was a “right to receive proceeds upon an FCC-approved transfer of its license.” That right, however, “did not exist prior to the filing of its Chapter 11 case because any such 'right' was too remote and was subject to two contingencies: an agreement to transfer the license and FCC approval of the transfer,” the court said.

Because neither of those contingencies had occurred before the debtor filed for Chapter 11, the debtor did not have sufficient property interest in this contingency in order to transfer a security interest to Valley Bank, the court said. “If such an agreement to transfer the License occurred and was approved by the FCC post-petition, [Valley Bank's] security agreement could attach to any fruits of such transfer, but for § 552(a)'s prohibition on security,” the court said.

The district court affirmed the bankruptcy court's decision and adopted its reasoning.

 

State Law Controls
On appeal, the appellate court first determined what, if any, interest the debtor could convey in its broadcast license before it filed its Chapter 11 petition. The court concluded that despite the FCA restrictions on license transfers, the debtor could grant a security interest in its right to the proceeds of the sale of the license. The court then looked to 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 are ordinarily a matter of state law, the appeals court noted. The parties agreed that Nebraska law controls in this case. Nebraska law, the court said, recognizes that a security interest in the right to proceeds from the sale of a license whose transfer is subject to government approval attaches when the licensee enters into the security agreement, regardless of whether a sale is contemplated at that time.

 

FCC Licenseholder's Right to Proceeds of Sale
According to the court, the FCC has consistently declared that a licensee cannot give a private party a lien on its license that would enable the lienholder to foreclose on the lien and obtain the licensee's rights without FCC approval. The reason for this policy, the court explained, is that the Commission's statutory mandate requires it to approve the qualifications of every applicant for a license, citing 47 U.S.C. § 310(d). A security interest in the proceeds of the sale of the license does not violate the Commission's policy, the court noted. Courts and commentators refer to the licensee's present interest in the right to proceeds of a future sale of the license as a private right or interest, or an economic right, the court said.

The court found that it is reasonable to construe § 310(d) as permitting the assignment of an interest in a license conditional on FCC approval of the sale. Thus, the court concluded that the holder of an FCC license has the right to the proceeds of a sale of that license and may grant a security interest in that right and in the proceeds of that right.

 

Nebraska Law
The appeals court rejected the bankruptcy court's analysis of Section 552(a), and its conclusion that the debtor's interest in the proceeds of the future sale of the license was too speculative to constitute property before the debtor filed for Chapter 11 protection. Whether the debtor had sufficient rights in the collateral to support the attachment of a security interest in those rights is a question of Nebraska property law, the court concluded, citing Butner v. United States, 440 U.S. 48 (1979).

Nebraska law recognizes the attachment of an interest in the right to proceeds of a sale of an FCC license when the licensee enters into a security agreement, the court noted. Under Neb. Rev. St. U.C.C. § 9-102(42), if a licensee's right to the proceeds of a sale of a license is a property interest, it is a general intangible under Nebraska law, the court said.

Looking at the “commercial realities,” the court noted that the FCC views the right to grant liens on the proceeds of the sale of a license as a means to improve licensees' access to capital. If the security interest could not attach before there was a contract for the sale of the license, the interest would have little value, particularly when the sale results from financial problems of the licensee, the court noted. “We can see no policy reason to prevent the attachment of a security interest in the right of the licensee (the right to proceeds of the license's sale) that may well be the licensee's best tool to obtain capital,” the court said. According to the court, it is not a right too speculative to be an article of commerce.

The court noted that its conclusion is strongly “buttressed by a 2000 revision to the Nebraska U.C.C. specifically designed to recognize and enforce such security interests. Codified as Neb. Rev. St. U.C.C. § 9-408, the court noted that while it does not specifically address licenses issued by the federal government, it overrides state licensing laws that would bar the creation, attachment, and perfection of security interests in state-issued licenses that are identical to the security interest claimed by Valley Bank. It also implicitly recognizes that propriety of creation, attachment, and perfection of such security interests in federal licenses when no federal law is violated, the court noted. Further, comment 7 to § 9-408 “makes undeniable that the intent of the provision is to accomplish what Valley Bank seeks in this bankruptcy proceeding,” the court noted. According to the court, §9-408 and its comments speak directly to and support the issue of whether the licensee's rights in the sale proceeds is too speculative to support attachment of a security interest in that right when no license sale is in the offing.

Judges Michael R. Murphy and Timothy M. Tymkovich joined the opinion.

Donald D. Allen, Devi C. Yorty, and James T. Markus, of Markus Williams Young & Zimmermann LLC, Denver, argued for the appellant Valley Bank and Trust Company. Christian Onsager, J. Brian Fletcher, and Andrew D. Johnson of Onsager, Staelin & Guyerson LLC, Denver; and John H. Bernstein, and Jeremy D. Peck of Kutak Rock LLP, Denver; and David M. Cantor of Seiller Waterman LLC, Louisville, Ky., argued for appellees Spectrum Scan LLC and Chapter 11 Trustee Joli A. Lofstedt.

By Diane Davis

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