Already reeling from a 1990 bankruptcy court decision involving an Oklahoma City television station, lenders to broadcasting companies were dealt another blow recently by the Wisconsin Bankruptcy Court overseeing the Tak Communications, Inc., bankruptcy. These lenders had been hoping that the Wisconsin court would disapprove of the Federal Communications Commission (FCC) policy against encumbering broadcasting licenses, which created the havoc in the Oklahoma case, but the court made no attempt at questioning the FCC view. Now, with their hopes pinned on a direct appeal to the FCC that may take years to be resolved, these lenders must reckon with the implications of the Oklahoma decision.
In an opinion that has prompted communication industry lenders to re-examine the loan-to-value ratios of existing secured credits and to rethink the credit requirements for new loans, the bankruptcy court in In re Oklahoma City Broadcasting Company (1) ruled that, because the FCC does not recognize liens against the broadcasting licenses it issues, (2) a lender with a blanket lien on a television station's assets was not entitled to have its secured claim in the station's bankruptcy valued at the going-concern value of the station.
In that case, the secured lender, which was owed $3-3.5 million by the station that had gone into bankruptcy, had obtained a buyer for the station's assets. The buyer was willing to pay $3 million to the lender for all the station's assets in which the lender had a security interest, that is, the station's assets exclusive of the license, if the lender would first obtain relief from the automatic stay in bankruptcy and foreclose on its lien. The lender sought relief from the stay, but the court did not consider the motion before a plan of reorganization was filed.
Once the plan was filed, the court conducted a special hearing to determine the value of the lender's collateral. To be confirmable, a plan must pay a secured creditor the value of its collateral. The court held that the value of the debtor's property subject to the lender's security interest, that is, all the nation's assets except the license, was less than $2 million. Despite the fact that the proposed plan called for the continued operation of the station and the fact that the bank's prospective buyer was willing to pay $3 million for the assets, the court's valuation was based on the liquidation value of the hard assets, receivables, and various contract rights. The court's rationale was that the FCC does not recognize security interests in broadcasting licenses, and without a license, a station is not a going concern.
The nonrecognition of security interests in broadcasting licenses has long been an acknowledged part of the business of lending in the broadcasting industry. The Oklahama City Broadcasting opinions is the first published decision addressing a question that has been put in hypothetical form to many bank counselors: How does the FCC policy prohibiting liens against licenses affect the secured lender in the event of bankruptcy?
With the Oklahoma City Broadcasting case as the only published opinion, there can be only one answer to that question: The secured lender's position in bankruptcy is severly undermined. A principal purpose of collateral security is to provide the lender the benefit of a borrower's assets at work, including in bankruptcy, as a source of repayment. The liquidation of assets is a secondary, indeed a last-resort, function of collateral. The FCC policy, as applied by the court in Oklahoma City Broadcasting, effectively takes from the lender the ability to be paid from the assets at work, at least in a bankruptcy setting, and it therefore may erase the primary benefit to be obtained by the taking of collateral from an FCC-licensed borrower.
CHALLENGES TO THE
Perhaps the only up side of the Oklahoma City Broadcasting case was that it presented such a doomsday scenario for lenders that it could be cited as an argument agains the FCC's clenchfisted view of licenses. …