FCC Terminates MCLM Hearing, Misses CII Spectrum Opportunity
Monday, February 13, 2017 | Comments
In December, the FCC issued an order on reconsideration and a memorandum opinion and order that contemplates assigning Automated Maritime Telecommunications System (AMTS) spectrum held by Maritime Communications/Land Mobile (MCLM) to Choctaw Holdings. This is welcome news for the critical infrastructure industries (CII) entities that have been attempting in good faith to acquire MCLM’s spectrum for years.

However, it also represents a missed opportunity for the FCC to provide much-needed spectrum to CII entities because it took the FCC more than five years to resolve an investigation into whether MCLM was qualified to be an FCC licensee. The delay and uncertainty surrounding the proceeding led several CII firms to relinquish claims to MCLM’s spectrum and search — with varying degrees of success — for alternative spectrum to support critical tasks.

The FCC Hearing
MCLM acquired the AMTS spectrum at 217/219 MHz from the FCC at auction in 2005. AMTS spectrum is licensed on an area-wide basis, and MCLM’s spectrum covered more than a dozen states.

From the time MCLM purchased its AMTS spectrum through 2010, MCLM entered into agreements with at least 12 CII companies to sell portions of its AMTS licenses in limited geographic areas. The companies included seven electric utilities that planned to use the spectrum for smart grid and other applications, four oil and gas companies that wanted the spectrum for automated pipeline control systems, and one commuter railroad that planned to use the spectrum for positive train control (PTC).

In 2011, the FCC issued a hearing designation order (HDO) that initiated an enforcement proceeding to investigate improprieties allegedly committed by MCLM during the auction. The HDO did not allege that any of the CII entities violated FCC rules.

The case was designated for a hearing before the FCC’s administrative law judge to determine whether MCLM’s AMTS licenses should be canceled or revoked. All of the pending applications to assign frequencies from MCLM to the CII companies were swept into the hearing proceeding. However, the railroad was permitted to demonstrate why its application should be removed from the hearing proceeding, and the FCC removed it.

The electric utilities and oil and gas companies were left to fend for themselves. These entities supported the railroad’s application for PTC but filed a petition for reconsideration arguing that their applications should also be granted without requiring the companies to fully participate in the FCC’s hearing proceeding to adjudicate MCLM’s alleged misdeeds. The commission denied that request in 2014 and required the electric utilities and oil and gas companies to remain in the hearing proceeding.

Bankruptcies and Second Thursday
On Aug. 1, 2011, MCLM filed a voluntary petition for bankruptcy with the U.S. Bankruptcy Court for the Northern District of Mississippi. On Jan. 11, 2013, the bankruptcy court confirmed MCLM’s plan of reorganization, which called for MCLM to assign all of its licenses to Choctaw and for Choctaw to prosecute the pending assignment applications to the critical infrastructure entities. Under the plan, proceeds from all spectrum sales would be used to repay MCLM’s creditors.

Ten days later, MCLM and Choctaw filed an application with the FCC to assign MCLM’s licenses to Choctaw. That application included a request for Second Thursday relief, which would allow the FCC to assign MCLM’s licenses to Choctaw in spite of the pending hearing proceeding if the FCC determined that the alleged wrongdoers — MCLM’s principals Donald and Sandra DePriest — would not benefit from the spectrum assignment.

As background, the Second Thursday doctrine creates an exception to the FCC’s general policy that prohibits a license from being transferred to a third party if there are concerns related to the licensee’s qualifications to be an FCC licensee. Under the FCC precedent, a license may be assigned to a third party notwithstanding concerns about the licensee’s qualifications if the licensee is in bankruptcy, the assignment will benefit innocent creditors of the licensee, and the individuals charged with misconduct will have no part in the proposed operations and will derive only a minor benefit, which is outweighed by other equitable considerations in favor of those innocent creditors.

In 2014, the FCC denied the MCLM and Choctaw request because it determined that Donald DePriest would benefit if MCLM’s spectrum was assigned to Choctaw and MCLM’s creditors were repaid. Donald DePriest had personally guaranteed loans to MCLM. The FCC believed that if it approved the assignment of MCLM’s licenses to Choctaw, MCLM’s debts would eventually be repaid in full, and Donald DePriest would derive a personal benefit by having an estimated $8 million in personal loan guarantees to MCLM’s creditors extinguished.

Shortly thereafter, involuntary personal bankruptcy proceedings were initiated against Donald DePriest. That proceeding culminated in the bankruptcy court entering an order discharging all of Donald DePriest’s liability on the personal guarantees he made to MCLM’s lenders. The bankruptcy proceeding also opened the door for the FCC to assign MCLM’s spectrum to Choctaw and — eventually — to the CII entities that had sought to acquire spectrum from MCLM.

MCLM and Choctaw submitted a pleading urging the FCC to reconsider its decision to deny the parties Second Thursday relief. The companies argued that Donald DePriest no longer stood to benefit from the assignment because his personal loan guarantees had been discharged in bankruptcy.

Finally Providing CII Entities with Spectrum
The FCC finally agreed with MCLM and Choctaw and, on Dec. 15, 2016, released an order on reconsideration and a memorandum opinion and order granting the Second Thursday request and approving the assignment of MCLM’s licenses to Choctaw.

The FCC terminated the hearing proceeding, more than five years after it started. But the FCC still needed to resolve several pending pleadings related to MCLM’s licenses and the ongoing hearing.

Since the original auction in 2005, Warren Havens and his associated entities, also parties to the hearing proceeding, filed several pleadings with the FCC alleging that MCLM lacked the basic character qualifications to be an FCC licensee, that its licenses should be subject to revocation, and that any application to assign MCLM spectrum to a third party should be denied. On Jan. 6, 2017, the FCC released an order denying all of the Havens pleadings.

Next Steps
The FCC is expected to approve the application to assign MCLM’s AMTS spectrum to Choctaw in the next few months. The FCC will then reissue MCLM’s licenses to Choctaw.

Once that happens, the FCC has instructed the CII entities to amend the pending applications substituting Choctaw for MCLM. The FCC will evaluate the individual assignment applications from Choctaw to the various CII entities, and the FCC is expected to grant the applications, finally providing CII companies with much-needed spectrum.

We finally appear to be arriving at a happy ending, but the process was far from easy. A dozen CII entities endured significant turbulence and doubt to get here, and many are not in a position to celebrate.

One by one, most of those 12 entities gradually withdrew from the hearing proceeding and forfeited their claim to the AMTS spectrum they sought to acquire from MCLM. For various reasons, these entities lost their willingness to tolerate the regulatory delay and uncertainty. Only a handful of CII firms remained in the hearing proceeding for the duration, and these few entities are the only ones that will benefit from the FCC’s Second Thursday approval.

That’s the real shame here. The FCC implemented policies to encourage entities to acquire spectrum on the secondary market. Several CII entities followed this directive, entering into contracts to acquire AMTS spectrum from an FCC licensee, MCLM. These entities did nothing wrong, yet they were thrust into a costly and time-consuming hearing proceeding that created significant uncertainty about whether they would ever acquire this critical spectrum. Many of these entities — after considering all reasonable options — withdrew from the hearing proceeding, forfeited their claim to MCLM’s spectrum, and attempted to cobble together alternative spectrum to support mission-critical and public-safety tasks.

The FCC missed a terrific opportunity to embrace and support CII firms while simultaneously and separately promoting providing regulatory certainty and much-needed spectrum to public-safety entities. Instead, the FCC’s actions in this proceeding did little to encourage future participation by CII entities on the secondary market. And that’s a missed opportunity.

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Wesley K. Wright, a partner at the law firm of Keller and Heckman, represents electric utilities, oil and gas companies, and railroads before the FCC, including one critical infrastructure company that has remained in the pending hearing proceeding involving MCLM. The views expressed are Wright’s alone and don’t necessarily reflect those of Keller and Heckman or its clients. Email comments to wright@khlaw.com.

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