In a significant victory for lenders and other secured creditors, the 11th Circuit Court of Appeals recently reaffirmed the rights of creditors to get a security interest in the proceeds from the sale in bankruptcy of broadcast licenses.
The decision in In re Beach Television Partners follows a developing line of precedent from lower courts, and it conflicts with the position taken by at least one other federal court of appeals. It therefore sets up an opportunity for the Supreme Court to settle this disagreement among the courts.
What's more, it gives secured creditors more comfort that they can lend money to broadcast entities while obtaining a security interest in the entire broadcasting operation.
Generally, the Uniform Commercial Code permits a lender to obtain a security interest in virtually all intangible assets of a borrower. In the last 10 years, several courts held or implied that the secured lender could not take a security interest in a broadcast license, because, they said the Federal Communications Commission does not give licenseholders a property interest in the license or permit liens on broadcast licenses.
The harsh implications of this reasoning culminated in 1993 in the decision of the United States Court of Appeals for the Seventh Circuit in a case called In re Tak Communications Inc.
A broadcaster owed a group of lenders $175 million, with the loan secured by the company's 11 broadcast licenses and their proceeds. The court held that despite the intention to grant a security interest, the lenders in fact did not have a lien on the licenses or their proceeds.
Notably, the FCC did not participate in this case or file a statement of its position.
At about the same time the Tak decision was rendered by the Seventh Circuit, however, other courts in which broadcaster bankruptcies were occurring took a different approach. For example, in a case called In re Ridgely Communications, the bankruptcy court decided that a secured creditor could obtain a lien on the license itself. In addition, the FCC weighed in with its own statement of position in a proceeding called In re Cheskey, in which it said that a "security interest in the proceeds of the sale of a license does not violate Commission policy."
The FCC and the public generally, however, have no particular interest in the disposition of the proceeds resulting from the transfer of that license.
These conflicting approaches were brought to a head in the Beach Television Partners decision.
Orix Credit Alliance Inc. financed the company's business. After the company went into bankruptcy, the bankruptcy trustee sold the company's two broadcast licenses. Orix demanded the sale proceeds, but the trustee successfully resisted before the bankruptcy and district courts.
The appeals court for federal cases in Florida, Georgia, Mississippi, and Alabama concluded, however, that Orix was entitled to the proceeds. It reasoned that the security agreement, by its terms, granted the security interest in the proceeds. It found nothing in the FCC's policies that required invalidation of this security interest.
The court put particular weight on the FCC's position in the Cheskey case, which had just been released - a position that found no conflict with FCC-approved sale of a broadcast license. It rejected the Tak decision and similar cases on the grounds that they misread FCC policy and failed to recognize a distinction between the license and the proceeds of a license transfer.
The Beach Television decision is a substantial victory for the lending community and will benefit broadcasters as well. If courts follow Beach Television, the decision means that lenders will have the first claim to the proceeds, inside or outside of bankruptcy, from the sale of the broadcast license on which they have perfected a security interest.
In the context of chapter 11 plans for broadcast debtors, moreover, the lenders will be able to demand distributions having a present value equal to or exceeding the liquidation value of the licenses.
The decision will benefit broadcasters, because it will make it easier for them to get traditional financing, rather than having to rely on venture capital.
To be sure, the liquidation value of the broadcast license itself may not be easily discernible, or it may be subject to rapid change. Moreover, the Seventh Circuit's Tak decision is still binding precedent in Illinois, Indiana, and Wisconsin bankruptcy courts, and other federal courts have not spoken on the subject.
Tak, however, relied on a perception on FCC policy that the FCC has subsequently renounced. That fact should persuade other courts to reject Tak and uphold the right of lenders to the proceeds of boradcast licenses.