The absence of a few forms on file has embarrassed Uncle Sam–and could cost taxpayers hundreds of millions of dollars. Already it’s fodder for the group of financial-ly troubled entrepreneurs who borrowed $9 billion from the FCC last year to buy a slew of wireless-phone licenses. They messed up in a big way by assuming they’d be able to tap Wall Street for money to build their proposed PCS wireless networks. When the Street hit the silk, they hit the skids and now pray for a bailout. Lately they’ve been helped by the fact that the Feds screwed up some small but crucial paperwork–namely, filing the documents that say these broadcast licenses are mortgaged. The entrepreneurs have been telling each other that this article will nuke the FCC for them.
To understand what’s going on, flash back to May 1996. That’s when the FCC proudly announced that it had raised $10.2 billionfor us taxpayers by selling licenses to theso-called C block of the radio spectrum. For those not into walkie-talkies, these are frequencies reserved for wireless phones. Entrepreneurs, not established phone companies, bought the licenses in an auction set up to give them an edge. Treasury wouldbe enriched; the new players would force down the price of wireless-phone service; the FCC and Congress would be heroes.To make this work, the FCC offered cheap money: the C blockers could buy licenses with only 10 percent down, the rest to be covered by cheap loans.
Those were the stars. Now (oops), thepit. Most of the new wireless wanna-bes couldn’t get the Wall Street financing they’d counted on. A major reason: at a subsequent auction, established phone companies paid far less for licenses than the C blockers had, which made bankers skittish. Suddenly, the cheap debt turned from a milestone into a millstone–dragging the companies so far underwater they need a submarine.
Now they think they’ve found one, complete with torpedoes. After Pocket Communications, the No. 2 company, filed for bankruptcy this spring, one of its lawyers discovered that the FCC had never filed the Uniform Commercial Code forms on which lenders record their claims to assets used as collateral. Why the FCC didn’t get the borrowers to sign the forms, known as UCC-1s, isn’t known. But the consequences are potentially huge. Filing a UCC-1 is what lawyers call ““perfecting your security interest’’: it puts you ahead of other creditors if the borrower goes broke.
After Pocket told the FCC it hadn’t perfected its claim, the commission sent UCC-1s to other borrowers, many of whom have refused to sign. J. Ronald Trost of Sidley& Austin, a prominent bankruptcy lawyer representing the FCC, claims the agency has perfected its claim a different way, and argues that the absence of UCC-1s doesn’t matter. ““The position of the FCC . . . is very strong because of the size of its claims and the merits of its legal position so that whether or not the UCC filings are timely is largely irrelevant,’’ he said.
Well, maybe. Says Elizabeth Warren, a Harvard Law School professor and bankruptcy expert: ““If the FCC failed to record its interest [in the licenses], the FCC is a general unsecured creditor, just like everyone else, and will have to stand in line.’’ That means, at least theoretically, that the FCC might have to share with other creditors in a bankruptcy, rather than getting first crack.
Did the FCC mess up? ““Big time,’’ Warren told my colleague Michael Hirsh. FCC chairman Reed Hundt counters by saying that he spoke out as long ago as December, months before the UCC-1 problem surfaced, on the need to renegotiate the C block debt. ““The problem has never been our exposure in bankruptcy litigation,’’ he said. Rather, ““we can’t have the value of these licenses waste away during the bankruptcy process, which would make a sane man crazy.''
If strict capitalism prevailed, the C blockers would lose their $1.2 billion down payment along with their licenses, which the FCC would reauction. But this is Washington. The C blockers will probably get back some or all of their down payment in return for giving back the licenses. Logic suggests that the FCC’s filing problem will induce the agency to offer a better settlement than it otherwise would.
The larger point: having the FCC auction off licenses was a good idea. Turning it into a lender was not. Details are important. The FCC has fumbled badly. The sad factis that folks who backed the C blockers will lose much more money than the Feds will. That’s the pits.
