U.C.C. Article 9 Security Interests in FCC Licenses

Where the debtor is radio or television station, often the most valuable collateral will be the station's FCC broadcast license. But FCC licenses pose special problems for secured parties because of the federal restrictions on assignments and transfers of them. In a recent case, the Tenth Circuit Court of Appeals held that the secured creditor had a properly attached security interest in the proceeds from the sale of the debtor's FCC license.

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In setting up a secured transaction under Article 9 of the Uniform Commercial Code, the creditor will carefully choose the collateral to maximize its recovery if the debtor defaults. Where the debtor is radio or television station, often the most valuable collateral will be the station's Federal Communications Commission ("FCC") broadcast license. But FCC licenses pose special problems for secured parties because of the federal restrictions on assignments and transfers of them. In a recent case, the Tenth Circuit Court of Appeals reversed two lower court decisions and held that the secured creditor had a properly attached security interest in the proceeds from the sale of the debtor's FCC license. Valley Bank & Trust Company v. Spectrum Scan, LLC (In re Tracy Broadcasting Corporation), No. 11-1453, 2012 U.S. App. LEXIS 21505 (10th Cir. Oct. 16, 2012) (hereafter Tracy Broadcasting). In reaching its decision, the court carefully scrutinized the effect of Federal Communication Act ("FCA") on the validity of the state law security interest.

In Tracy Broadcasting, the debtor Tracy operated an FM radio station in Wyoming under an FCC license. 2012 U.S. App. LEXIS 21505, at *2. In December 2007, the debtor borrowed $1.6 million from the Bank and gave the creditor a security interest in various assets, including its general intangibles (such as a government license) and their proceeds. In January 2009, Spectrum Scan obtained a judgment against Tracy in the amount of $1.4 million. In August 2009, Tracy filed a Chapter 11 bankruptcy petition and listed assets of $1.2 million and liabilities of $3 million. Tracy's main creditors were the Bank (the secured party) and Spectrum Scan (an unsecured judgment creditor). Spectrum Scan challenged the validity of the Bank's security interest in the proceeds from the sale of Tracy's FCC license. The bankruptcy court and the federal district court both ruled that the Bank's security interest in the proceeds was invalid because the proceeds were generated post petition and the Bank's interest in the prepetition license was unenforceable under the Federal Communications Act. 2012 U.S. App. LEXIS 21505, at *3-4. The Bank appealed.

In reviewing the district court's decision de novo, the Tenth Circuit Court of Appeals explored the complex relationship among federal bankruptcy law, the Federal Communications Act, and Article 9 of the Uniform Commercial Code. The court began by noting that under the Bankruptcy Code, the secured creditor may not assert a security interest in property acquired by the debtor after the bankruptcy petition has been filed unless that property is proceeds of property acquired prepetition. Tracy Broadcasting, 2012 U.S. App. LEXIS 21505, at *3 (citing 11 U.S.C. § 552 (b)(1) (2005)). The bankruptcy court had found that Tracy had insufficient prepetition property rights in its FCC license because the FCA forbids liens on FCC licenses. The Court of Appeals, however, observed that although the FCA prohibits security interests in FCC licenses, it does allow such interests in the proceeds of the sale of the license. 2012 U.S. App. LEXIS 21505, at *7-8 (citing 47 U.S.C. § 310; In re Walter O'Cheskey, 9 FCC Rcd. 986, 987 at 8, 9 (Mobile Servs. Div. 1994)).

Lexis.com subscribers can access enhanced versions of the opinions and annotated versions of the statutes cited in this article:

Valley Bank & Trust Company v. Spectrum Scan, LLC (In re Tracy Broadcasting Corporation), No. 11-1453, 2012 U.S. App. LEXIS 21505 (10th Cir. Oct. 16, 2012)

11 U.S.C. § 552

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