Broadcast Creditors Beware – $11,000 Fine Imposed for FCC Reporting Shortcomings in an AM Foreclosure Action

The potential perils of foreclosing on a radio station were evident in a Consent Decree released by the FCC’s Media Bureau yesterday, agreeing to an $11,000 penalty to be paid to the FCC U.S. Treasury before a station could be sold by a receiver to help pay off the debts of an AM radio station owner. The fine was imposed both for an unauthorized transfer of control of the licensee of the station, and because of the failure of the receiver appointed by the Court to keep the FCC fully appraised of the status of the control of the licensee company while FCC approval for the receiver’s control of the station was still pending before the FCC. What this case really shows is that in any foreclosure on a broadcast station where there are competing creditors, an uncooperative debtor or anyone else who could possibly contest the process, anyone attempting to collect obligations owed by a broadcaster needs to proceed very carefully, keep the FCC fully informed of the entire process surrounding the exercise of the creditor’s rights, and be advised by an attorney or advisor very familiar with FCC process in addition to counsel in the local court proceedings. Plus, local counsel and FCC counsel need to work together at each stage of the process to make sure that the proper approvals are obtained from the FCC before the local court actions are implemented.

This case demonstrates, like a case we wrote about last week, the complicated interplay between the actions of local courts enforcing private actions and the FCC enforcing the Communications Act. In this case, the orders of the local courts and other authorities dealing with the receivership of station assets and the stock of the licensee company changed over time. The failure to keep the FCC appraised of those changes really led to the $11,000 fine. The receiver initially asked that he be approved to become the “assignee” of the station, as the court order appeared to indicate that he would receive the assets of the debtor’s estate. In the FCC’s eyes, an “assignment of license” is when the assets and license of a station change hands, so that a new licensee is now the operator of the station. Here, later action of the local court changed the nature of the action to one where the receiver, instead of getting the assets of the debtor, would instead be receiving its stock. Where the licensee remains the same, but a new owner takes control, as was the case here where the receiver took control of the stock of the licensee, the FCC deems that to be a “transfer of control.” That was significant to the FCC in this case.

The FCC was not informed of the fact that the local court had changed the appointment from an assignment to a transfer. Even though both an assignment and a transfer would be approved on exactly the same form, the FCC thought that the fact that the wrong box on the FCC Form 316 was checked and never updated was an issue. Subsequent actions compounded the FCC’s concerns, making that failure appear to be even more important, and providing yet another ground for the FCC to complain about the failure of the licensee to report material information. The subsequent action was the sale of the stock of the company being sold, at a sheriff’s sale, to the creditor. So, while the receiver remained in control, the stock of the licensee in fact had been transferred, which the FCC deemed to require additional approval (presumably, though it is not spelled out, as the trustee was initially acting on behalf of a corporate licensee owned by the creditor, and then later by the licensee as controlled by the debtor).

The initial assignment of license application to the receiver was approved before the FCC ever became aware of the subsequent local court actions, thus the receiver was named in Commission records as the licensee, when the creditor corporation should have been so listed. As all of these subsequent developments took place while appeals of the initial assignment application were pending, the FCC found that the receiver still had an obligation under Section 1.65 of its rules to update its application – as the FCC imposes a duty on applicants to keep their applications up to date and report any material changes as long as the application is still pending – even if the pendency is just based on an appeal. Here, when the FCC ultimately rescinded its approval of the assignment application, the receiver was not only forced to file a transfer of control application, but to file one reporting that he took control of a company whose shareholder had changed due to the sheriff’s sale. What this process ultimately cost, in addition to the $11,000 fine, was two years of time as these processes played out at the FCC.

While the FCC ultimately allowed the sale of the station to an unrelated third party to be completed, it did so with the seller having to pay the FCC an $11,000 penalty to allow the sale to happen. We’ve written before about other issues that can arise in resolving disputes over the foreclosure or other enforcement actions against broadcast licensees by commercial creditors (see, for instance, our articles here and here on enforcing a loan to a broadcaster, and our article here about security interests in FCC broadcast licenses). Enforcing an obligation against an FCC licensee is not like enforcing obligations against other businesses that enter into a commercial contract, as there is an entire extra layer of regulation and process – that of the FCC – that must be followed. So for any creditor of a broadcast licensee, this case makes clear that you need to proceed with caution!