EchoStar’s potential strategy to file for bankruptcy to combat a hostile Federal Communications Commission is being fully gamed out by the company as well as its creditors.

According to sources, the one decision creditors have honed in on while discussing strategy comes from the bankruptcy of FiberTower Network, a company that filed its Chapter 11 in July 2012 in Northern District of Texas, after facing a series of adverse economic events. This decision in part may explain the rush to potentially file before 14 June, a preliminary target date for a petition, as reported by 9fin.

In FiberTower, debtors were successful in preventing the FCC from canceling its spectrum licenses by moving the court to force the FCC to comply with bankruptcy’s automatic stay through an injunction motion.

The theory as 9fin understands it is that Echostar Chairman Ergen would hope that the bankruptcy court would do the same for EchoStar as it did for FiberTower, and that his hand would be even stronger by executing a voluntary petition prior to the old 14 June 2025 buildout deadline the FCC has been threatening it would revert back to — even though the FCC doesn’t have the quorum necessary to revoke his license prior to that date. The FCC under the Biden administration had granted Echostar an extension through 14 December 2026, but the current FCC opened up a notice and comment period to entertain a request to reconsider that extension. Ergen seems to have taken that as a certainty that the FCC under Chairman Brendan Carr is looking to revoke or dilute the value of his spectrum licenses and has taken drastic action to counter that eventuality.

FiberTower background

FiberTower was a company that provided spectrum leasing services. The company had a national spectrum portfolio of 24 GHz and 39 GHz wide-area spectrum licenses and would lease portions of this spectrum to various customers. Spectrum licenses are regulated by the FCC and “[e]ach licensee must make a showing of ‘substantial service’ within ten years of its license grant” as a condition precedent to license renewal.

In 2008, the FCC renewed the FiberTower spectrum licenses to dates ranging from 2017 to 2021, subject to the company making a “Substantial Service Showing” for each license. In April 2012, the company petitioned the FCC for either a waiver of the safe harbor rules, or for an additional three-year extension of the 1 June 2012 deadline. Still, on and before 1 June 2012, FiberTower filed individualized showings for each license with the FCC, arguing that although nearly all the licenses do not fall within the safe harbor, they nonetheless comply with the substantial service standard.

At that point, on 17 July 2012, FiberTower filed its Chapter 11 cases (see docket here).

In August 2012, FiberTower parties heard the FCC was likely to terminate a large portion of the licenses for failure to satisfy the safe harbor by 1 June, 2012, which would have the result of terminating the debtors’ cash collateral. The debtors’ cash collateral order provided that it would terminate if the FCC issued a ruling that: (1) either the debtors do not meet the substantial service conditions and/or (2) denies the request for an extension or waiver of the safe harbor construction rules.

The debtors then filed an adversary proceeding, in which they filed the motion to enforce the automatic stay, arguing that if the FCC terminated its licenses, that would force them to liquidate. The motion to enforce the automatic stay against the FCC requested that the court either: (1) determine that the automatic stay of section 362(a) of the bankruptcy code prevents certain actions by the FCC or (2) stay the FCC’s pursuant to section 105 of the bankruptcy code and permanently enjoining the actual termination of any license until debtors have exhausted all avenues of administrative and appellate review of the FCC’s actions, and a final, non-appealable order regarding the licenses’ status has been entered.

Legal analysis

Bankruptcy code section 541(a)(1) defines the estate to include “all legal or equitable interests of the debtor in property as of the commencement of the case,” save for exceptions not relevant here. Accordingly, even if the Debtors’ licenses terminated automatically on 1 June 2012 — before they filed for bankruptcy — the court believes that the following rights would still qualify as property of the estate:

1. “Debtors’ right to an official determination by Defendant of that fact,
2. Debtors’ right to seek reconsideration by the full Commission of any adverse decision vis-à-vis the Licenses, and
3. Debtors’ right to appeal any decision terminating the Licenses to the D.C. Circuit[.]”

Since these rights were covered as property of the estate, the court believed it had jurisdiction and authority to protect those rights in the licenses, including debtors’ right to seek review of their termination.

Although the debtors argued that if FCC terminated the licenses, its action would violate the automatic stay, the court found that it is questionable whether section 362(a)(1) applied because it only stays “the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor.”

Since the debtors requested an extension or waiver, the action was brought by the debtors, not against them. Additionally, section 362(b)(4) provides that filing for bankruptcy does not stay actions or proceedings by a governmental unit to enforce such governmental unit’s or organization’s police and regulatory power — and decisions regarding whether licenses should be terminated for non-compliance “lies within the heart of Defendant’s police and regulatory power.”

Still, a bankruptcy court may utilize section 105 to “enjoin actions that are excepted from the automatic stay . . . ‘in exceptional circumstances.’” Although FCC actions are exempted from the automatic stay, under section 105(a) the court can issue any “order, process, or judgment that is necessary or appropriate to carry out the provisions of the Code.” Here, the court found that an injunction barring FCC from cancelling and reauctioning the licenses until a final, non-appealable order adjudicating debtors’ rights with respect to the licenses was necessary to “protect the integrity of the bankrupt’s estate” and the reorganization process (emphasis 9fin’s).

Section 105 lays out a four-part test for an injunction:

1. Likelihood that the movant will prevail on the merits;
2. Irreparable injury;
3. Balance of the equities favoring the movant; and
4. A demonstration that the injunction would serve the public interest.

Success on the merits

When deciding the likelihood of the merits, the court must decide which case to apply this analysis to. Judge Michael Lynn found that in the case of FiberTower, probability of success related to the adversary proceeding, and not whether “’the Debtor[s] [are] likely to overturn’ Defendant’s ultimate termination of the Licenses on reconsideration by the full Commission or on appeal to the D.C. Circuit.” Since the debtors only requested the ability to litigate the right to retain their license to a conclusion, the court found it should act only to preserve this right from possible impairment. The court specifically noted that whether the debtors would ultimately succeed on appeal is irrelevant, the question is whether this court is authorized and likely to grant the requested relief of staying the FCC’s from redistributing the licenses in the interim.

The court believed the debtors had demonstrated that the bankruptcy court can enjoin a regulatory proceeding under the circumstances. Although “the Communications Act grants the authority to regulate spectrum licenses solely to the Commission,” the filing for bankruptcy by a holder of a license results in shared jurisdiction. Specifically, the FCC maintains its jurisdiction through regulatory authority, but the bankruptcy court receives jurisdiction through its control over property of the estate.

In this matter the court viewed its decision to restrain the FCC from disposing of the licenses before a final decision is made, as “ensur[ing] that Debtors do not wrongfully lose property of potentially substantial value to creditors, the protection of which is essential to the reorganization process.” The court believeed it is not usurping any powers of the FCC, since the FCC could ultimately terminate the licenses if it goes through the full adjudicatory process — the court would merely be delaying the effect of that termination until appellate review is complete. Accordingly, the court found it may enjoin the FCC from declaring the licenses terminated pending a final, non-appealable order.

As it related to EchoStar, assuming the court reaches the same conclusion that the question relates to the specific adversary preceding and not the underlying dispute, the court would likely have a similar analysis on this factor.

Irreparable Harm

As discussed above, if the FCC were to deem the debtors licenses as terminated, the debtors would lose access to cash collateral. The court found this danger was not “speculative, theoretical, or remote.” Additionally, the debtors argued that without cash collateral, it would be nearly impossible to reorganize and continue their business. Although the FCC argued that even if the licenses were terminated, they could later be reclaimed and returned if the FCC or DC Circuit would later reverse, the court found no evidence that this was plausible and the FCC could claw back the licenses at all — “let alone that it could do so expeditiously enough to not seriously disrupt or even destroy Debtors’ business by delay and uncertainty.” The court therefore found the debtors are likely to face irreparable harm.

Presumably, EchoStar would design its cash collateral or DIP financing to have the same contingency with the hopes of achieving the same result. Given that EchoStar likely has more liquidity than FiberTower did, it is possible the analysis might be slightly different, but even a likely-solvent debtor probably will still need cash collateral or DIP financing for the duration of a Chapter 11 case and accordingly, the analysis would likely be the same.

Balance of equities

The court sided with the debtors on this factor as well, explaining that the potential harm to the debtors if the court did not issue the injunction far outweighed any potential harm to the FCC related to injunctive relief issues. The debtors would lose their cash collateral, and potentially lose their entire business. Meanwhile, the FCC at worst potentially would lose part of its “regulatory turf.” The court found this “fear illusory,” and accordingly, found this factor in favor of the debtors.

Notably the court mentioned here it “is satisfied that Debtors filed chapter 11 not as a litigation tactic solely designed to delay the Commission, but rather for the legitimate purpose of addressing its very real debt problems” (emphasis 9fin’s). It is unclear whether a court would come to the same finding if EchoStar filed for bankruptcy.

The public interest

At the outset the court explained, this is not a determination regarding whether terminating or extending the licenses would serve the public interest. The question is whether granting a temporary stay which prohibits the FCC from redistributing the licenses prior to conclusion serves the public interest. “Courts have often held that injunctions that facilitate reorganizations serve the public interest.” Here, the debtors were unlikely to successfully reorganize unless injunctive relief is granted, and if the debtors liquidate, their employees, customers and others could be adversely affected. In contrast, any impact on the FCC would be extremely limited given the limited scope of the injunction. Accordingly, the court believed it was in the public interest to grant the injunction.

What happened next

Even after FiberTower emerged from bankruptcy, the bankruptcy proceeding remained pending, and the preliminary injunction order remained in effect as late as 2018. FiberTower ultimately appealed the FiberTower Reconsideration Order to the US Court of Appeals for the District of Columbia Circuit, who in April 2015 issued its decision, affirming in part and remanding in part the FCC’s decision. In its appeal, FiberTower argued that the FCC made a factual error when it concluded that the company had not constructed any of the 689 licenses — FiberTower asserted it constructed 28 of the 24 GHz licenses and at least 14 of the 39 GHz licenses at issue, and the court agreed. Accordingly, in August 2015, the bureau reinstated 42 licenses at issue to active status.

On 25 January 2017, AT&T and FiberTower entered into a stock purchase agreement, where AT&T acquired all outstanding stock of FiberTower, and FiberTower became a wholly-owned subsidiary of AT&T. On 13 February 2017, AT&T filed applications to transfer the control of FiberTower’s licenses to AT&T. On 24 January 2018, FiberTower and the FCC reached a settlement of various proceedings including the DC Circuit’s remand.

Under the terms of the settlement agreement, “FiberTower agreed to:

1. relinquish all of its 24 GHz licenses, including those that were among the 42 licenses addressed by the D.C. Circuit, and some of its 39 GHz licenses, a subset of which were also referred to by the court;
2. terminate the remand proceeding and a pending related bankruptcy proceeding; and
3. transfer to the United States Treasury payments totaling $27 million, conditioned on reinstatement of the remaining licenses and extension of the construction deadline for those licenses; and the closing of the transfer of control of FiberTower Corporation and FiberTower.”

Closing thoughts

With the exception of the “balance of equities” factor discussed above, it would appear the EchoStar could expect a nearly identical analysis and could probably secure an injunction against the FCC. Still, it is only one case. And though it cites to other cases, none are factually as similar.

There are a few questions that follow. First is whether Ergen and EchoStar feel confident relying on one case, even one as factually analogous. One main difference is the debtors in FiberTower filed because they were facing economic decline and had more liabilities than assets. That doesn’t seem to be the case for EchoStar, and it is certain a court would consider that difference in the analysis. Additionally, if a court decides differently, what is Plan B?

Another question is, this case seems to support the idea that even if the debtors’ licenses terminated prior to filing bankruptcy the right to appeal would still qualify as property of the estate and support an injunction. So the impetus to file before 14 June is less clearly necessary. Could this all be an expensive and risky bluff?