PROW Management: Legal, Regulatory and Bankruptcy Issues

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PROW Management Legal, Regulatory and Bankruptcy
Issues

• Nicholas P. Miller
• February 10, 2003
• Madison, WI

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Program

• Local Governments Property Rights in
  Rights-of-Way
• Federal 96 Telecommunications Act impact on
• Efforts to Change the Rules
• Preserving the Value of Rights-of-Way
• Valuation of Rights-of-Way
• Bankruptcies and facility abandonment
• What you need to do.

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I. PROW Is Real Estate
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Local Government Interests in PROW

• PROW is not a free good
• Allocate for highest and best use.
• Property Rights
• Planning and Managing an Essential Infrastructure

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The Law of Local Governments Property Rights
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What is a Franchise?

• A Grant of a Special Privilege
• A License to Use PROW
• Revocable
• Personal (does not travel with estate)
• burdens the real estate
• Not a Privilege to Offer a Service
• Broad Confusion Between These Two

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Federal Law -- Yields to State Law

• 5th Amendment US Constitution
• Federal Law May NOT Preempt State Property Law
• Cities have same rights as citizens
• 47 USC Sec. 253(c)
• 47 USC Sec. 332(c)(7)

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Federal Law Reserves for Local Government

• Property Rights
• Right to Charge Rent
• Right to Manage Behavior in ROW
• Right to zone and site antennas and towers

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State Property Law Controls

• Same Principles as other Property Rights
• Must Hold a Right to Burden the Property (Right
  to Use) from the Owner
• Estate in Fee/Lease/Easement/ Franchise/or
  License (Explicit or Implicit) Required

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State can Trump Local Government

• Usual Rule Cities are Creatures of State and
  State Can Pull Back
• property
• police power authority
• Local Government May Have Independent Right of
  Ownership

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II. Efforts to Change the Rules
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Unfunded Mandates-- Transfer Costs From Companies
to Taxpayers

• Accelerated deterioration of infrastructure
• External costs imposed on others
• Dallas and Southfield floods
• Abandoned bankrupt facilities
• DC road disruption
• Force Local Govts to Pay Costs of Facility
  Relocation

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Local Governments Position

• Government Property
• normal state property law controls right to use
• local governments own or control right to use
• local governments can set terms and price of use
• Exception
• prior State grant of property to company
• recent State preemption of local governments

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TeleComm Companies Response

• Telecomm Regulation in the Guise of Property
  Rights
• State PUCs, not Locals, Retain Authority to
  Regulate--253(b)
• Local regulation preempted--253(a).
• Compensation limited to regulatory (impact)
  fees.

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Fundamental PROW Dispute

• Is franchise a regulatory relationship?
• Is franchise a property interest?

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Leading Cases Determined by Answer to This
Question

• Dearborn Cablevision of Boston right to occupy
  PROW is property interest, subject to state
  property law.
• Auburn Prince Georges II Chattanooga PROW
  occupancy is a regulatory interest, subject to
  state and federal regulatory exclusion.
• Coral Springs If govt action prohibits, OK if
  related to property interests

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Supreme Court

• St. Louis v. Western Union Tel., 148 U.S. 92,
  98-99, 13 S. Ct. 485, 487-88 (1893).
• Public utilities use is an "absolute, permanent
  and exclusive appropriation.
• Who would question the right of the city to
  charge for the use of the ground thus occupied,
  or call such charge a tax, or anything else
  except rental?

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The Legislative Threat

• Unfettered Tcom PROW entry
• Free (or nearly free) occupation of PROW
• Preemption cable modem franchises
• State and federal legislatures.
• Michigan
• 4 Congressional broadband bills

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Section 253 History as a target

• Local Government Wins
• Federal legislation 1996
• FCC action 1997
• Federal Appellate Courts 6 of 7
• 1st 2d 4th 5th 6th 9th 11th
• E.g, White Plains (2d)

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Industry Forum Shopping

• Industry shifted battle to state level
• Michigan legislation
• Florida legislation
• NARUC study committee
• Now Back at FCC/NTIA

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Section 253 in the States

• Legislatures
• 21 States have acted
• 10 permit gross revenue charges
• PUCs
• Challenging local government as 3rd tier of
  regulations.
• Eg Minn/Md/Mich/Oreg

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Back to the Federal Level

• FCC has changed since 2000
• Wireless Networks Dkt
• Oct 16, 2002 Forum
• LSGAC/IROWWG discussions
• Cable Modem NPRM
• NTIA
• Open docket
• Call for best practice communities

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FCC Cable Modem NPRM Tentatively Concludes

• No ISP rights to demand access to cable modem
  networks.
• Cable franchises authorize use of PROW for cable
  modem services.
• No additional permission required to provide
  cable modem service.
• Cable Modem Service falls outside cable franchise
  fee.

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PROW in Congress
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Many Bills in Last Congress--None Favorable

• McCAIN BILL, S. 2863
• A "regulatory free zone" for residential
  broadband services and limits rights-of-way fees
  to costs.
• BREAUX-NICKLES, S. 2430
• Regulation must be equal or none for all
  broadband providers, i.e. cable modem, ISDN or
  satellite
• TAUZIN-DINGELL, H.R. 1542
• local governments can regulate cable, cannot
  regulate broadband
• LIEBERMAN, S. 2582
• Administration should articulate a broadband
  policy, including local rights-of-way management.

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Cubin--the Stalking Horse

• H.R. 3258, the Reasonable Right-of-Way Fees Act
  of 2002.
• Introduced by Rep. Cubin (R-Wy).
• Applies to federal lands
• Overturns traditional federal standards for
  compensation from best use to least use.

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III. Valuation of PROW
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Methodology

• There are numerous appraisal methods
• Book Value
• Replacement Value
• Willing Buyer/Willing Seller Value
• Income-Based Method
• Comparable Transactions Valuation

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BEA Value of Pavement

• Bureau of Economic Analysis (BEA)
• present value of the total capital improvements
  in streets and highways
• 1,423,833,000,000.
• Not land acquisition costs.

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TeleCommUnity Valuation

• Book value method of appraisal, i.e., the value
  of the land plus the value of improvements
• 4,676,039,947,040
• Over 7 trillion dollars, when multiplied by
  corridor enhancement factor

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NOAA Valuation Per Mile

• NOAA stated, Forrights of way greater than 5
  miles in length, price levels rose from 8,026
  per mile in 1987 to 11,880 per mile in 1993 to
  100,042 in 1997.
• NOAA developed a linear trend, which places the
  value of right-of-way today approaching 120,000
  per mile per year.
• Value of PROW as high as 10,984,611,600,000

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IV. Bankruptcy
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• WHAT HAPPENS WHEN A TELECOM OR CABLE COMPANY GOES
  BANKRUPT?
• HOW DOES IT IMPACT LOCAL GOVERNMENTS?

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Chapter 11 or Chapter 7?

• Chapter 11 is for reorganization
• Purpose is to reorganize the company and pay
  creditors over time
• In Chapter 11, the company usually continues to
  operate the business
• Chapter 7 is where company is liquidated
• Independent Chapter 7 trustee appointed by the
  bankruptcy court
• Trustee shuts down business and liquidates
  debtors assets
• Most companies more likely to file under Chapter
  11
• At least initially, debtor will usually continue
  to operate its business

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Where Will Debtor Likely File?

• Headquarters
• Major presence (New York increasingly popular)
• State of Incorporation (Delaware)

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Filing Notice of Appearance

• Request for Notice With Bankruptcy Court
• Allows municipality to closely monitor case
• Will receive notice of any significant motion or
  proceeding that might affect municipalitys
  interest
• May be inundated with paperwork
• Alternative is to monitor case docket
  electronically

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Proof of Claim

• For debts owed before the bankruptcy filing
• Debtor required to provide proof of claim form
  and notice of the bankruptcy filing
• Deadline for filing a proof of claim is set by
  the bankruptcy court
• Typically deadline is several months after
  commencement of case

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Automatic Stay - 11 U.S.C. 362

• 362(a) Filing of bankruptcy petition operates as
  a stay, applicable to all entities, of
• (1) commencement or continuation, including the
  issuance or employment of a process, of a
  judicial, administrative, or other action or
  proceeding against the debtor that was or could
  have been commenced before the commencement of
  the case under this title, or to recover a claim
  against the debtor that arose before the
  commencement of the case under this title
• (2) the enforcement, against the debtor or
  against property of the estate, of a judgment
  obtained before the commencement of the case
  under this title
• (3) any act to obtain possession of property of
  the estate or of property from the estate or to
  exercise control over property of the estate
• (4) any act to create, perfect, or enforce any
  lien against property of the estate

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Automatic Stay - 11 U.S.C. 362

• (5) any act to create, perfect, or enforce
  against property of the debtor any lien to the
  extent that such lien secures a claim that arose
  before the commencement of the case under this
  title
• (6) any act to collect, assess, or recover a
  claim against the debtor that arose before the
  commencement of the case under this title
• Generally prevents any entity from filing a
  lawsuit, attempting to collect a debt, filing a
  lien against the debtors property, enforce a
  judgment or take any action to control property
  of the bankruptcy estate
• Municipality should not take any action to
  attempt to collect franchise or license fees,
  penalties or any other monies due, or to enforce
  a judgment, file a lien or exercise control over
  debtors property

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Exception 362(b)(4) "Regulatory Power
Exception"

• Filing of petition does not operate as a stay
  "under paragraph (1), (2), (3) or (6) of
  subsection (a) of this section, of the
  commencement or continuation of an action or
  proceeding by a government unit . . . to enforce
  such governmental unit's or organization's police
  and regulatory power, including the enforcement
  of a judgment other than a money judgment,
  obtained in an action or proceeding by the
  governmental unit to enforce such governmental
  unit's or organization's police or regulatory
  power."
• Municipalities are generally exempt from the
  automatic stay to the extent they are acting to
  exercise their police or regulatory power
• Regulatory power exception does not apply to
  362(a)(4) and (5) and does not allow for
  enforcement of money judgment
• Municipality can enforce construction
  requirements or standards, performance or
  customer service standards, build-out or upgrade
  requirements or PEG requirements
• Provided that municipality is acting to protect
  the public health, safety and welfare and is not
  trying to collect a debt or advance its financial
  interests

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Section 525 Protection Against Discriminatory
Treatment

• 11 U.S.C. 525
• governmental unit may not deny, revoke, suspend
  or refuse to renew a license, permit, charter,
  franchise, or other similar grant to . . .
  discriminate with respect to such a grant
  against, . . . a person that is or has been a
  debtor under this title or a bankrupt . . .
  solely because such bankrupt or debtor is or has
  been a debtor under this title or a bankrupt . .
  . or has not paid a debt that is dischargeable in
  the case under this title . . .
• NextWave Decision U.S. Court of Appeals for the
  D.C. Circuit held that FCC could not terminate
  spectrum licenses as a result of non-payment
• On appeal before U.S. Supreme Court decision
  expected any day
• Comes into play with Adelphia

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Payment of Franchise Fees

• Any fees not paid before the bankruptcy filing
  would be an unsecured claim
• Municipality cannot take any steps to collect
• Franchise fees due after the bankruptcy would
  likely qualify as administrative priority claim,
  entitled to priority status over unsecured
  creditors
• Actual, necessary cost of preserving the estate
  under 11 U.S.C. 503(b)
• Municipality can request that the bankruptcy
  court order payment of post-petition fees
• Debtor would be required to pay all franchise
  fees due if it assumes franchise agreement,
  including fees due before the bankruptcy case
• As a practical matter, franchise fees will likely
  be paid even if they are not paid during the
  early stages of the bankruptcy franchise,
  license, row fees generally being paid by
  bankrupt telecoms and Adelphia

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Property of the Estate

• Bankruptcy Estate created upon filing bankruptcy
  petition
• Estate comprised of property that vests in estate
  - 11 U.S.C. 541, including
• All legal or equitable interests of the debtor in
  any property as of the commencement of case
• Proceeds, product, rents or profits from property
  of estate
• Includes fiber, equipment, facilities
• Includes intellectual property, intellectual
  property licenses

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What Happens to Estate?

• Debtor can keep property, use to reorganize
• Debtor can sell or lease property in bankruptcy
• 11 U.S.C 363
• Notice and hearing
• Must provide adequate protection to any entity
  that has interest in property
• Can sell free and clear of liens
• Trustee can sell in Chapter 7 liquidation
• Debtor or trustee can abandon property
• 11 U.S.C. 554 - Allows debtor to abandon
  property
• Burdensom to estate, inconsequential value
• Unless risk to public safety - Midlantic case

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Selling the Franchise in Bankruptcy

• Can Debtor Sell a Franchise over your objection?
• Franchise Agreement constitutes executory
  contract
• Bankruptcy Code generally allows assignment of
  executory contract over objection of other
  party to contract
• Exception to this rule for contracts that are
  personal in nature, where the identity of the
  parties is material to the contract, or where
  other applicable law excuses a party from
  having to accept performance by another party
• Examples of personal service contracts artist,
  professional ballplayer, architect, contractor,
  membership in a private club
• What other applicable law excuses a party from
  having to accept performance?
• Patent license, contract with the United States
  Government

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Selling the Franchise in Bankruptcy

• Municipalities can argue that franchises are
  personal in nature and cannot be assigned without
  consent of franchising authority
• Provisions in Cable Ordinance that prohibit
  assignment may be deemed to be applicable law
• Government franchises may not be assignable
  without consent of government entity under
  applicable law
• Uncertain outcome

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Municipal Takeover of Cable System

• Depends in part on whether terms of franchise
  agreement and cable ordinance allow
• Cannot takeover system unless franchise is
  revoked or otherwise terminates
• Municipality cannot revoke franchise solely
  because of bankruptcy
• May be able to revoke franchise if other material
  defaults under franchise agreement or cable
  ordinance
• If Debtor rejects franchise, municipality may be
  able to take over

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Compliance with State Laws

• 28 U.S.C. Section 959(b)
• Debtor must manage and operate property according
  to requirements of valid state laws
• Example environmental laws Midlantic National
  Bank case
• Pecuniary claims less likely to be upheld than
  regulatory laws

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• CASE STUDY

The Metricom Bankruptcy RECAPTURING
TELECOMMUNICATIONS FACILITIES ABANDONED IN THE
PUBLIC RIGHTS-OF-WAY.
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WHO WAS METRICOM?

• Ricochet Service
• High Speed Internet Access
• Mobile, wireless modems
• Radio antennas placed on light and utility poles
• Poletop agreements with cities, utilities
• Wired Access Points - placed on roofs of
  buildings
• Right-of-way agreements with local governments

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METRICOM CASE STUDY

• Metricom Bankruptcy - Chapter 11
• Liquidation
• Attempted to sell all assets - no buyers
• Sold in pieces
• Rejected poletop, right-of-way/franchise
  agreements
• Abandoned poletop radios, WAPS

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METRICOM CASE STUDY

• Equipment left to municipalities, private
  landlords (subject to liens)
• 11 U.S.C. 554 - Allows debtor to abandon
  property
• Burdensome to estate, inconsequential value
• Unless risk to public safety - Midlantic case
• Metricom determined value of equipment less than
  cost of removal
• Metricom sold intellectual property to Aerie
  Networks

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METRICOM CASE STUDY

• Opportunity for cities
• Internal communication system
• Mobile transmission, effective for emergency
  transmission of data, traffic and parking
  enforcement, meter reading, etc.
• Commercial partnership
• Cities negotiate with Aerie Networks
• Strong bargaining position

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METRICOM CASE STUDY

• Denver
• Commercial Service in operation
• 1000 modems, free service to City
• Additional Opportunities
• Telecommunications companies
• Cable

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Questions

• Street Law
• www.millervaneaton.com

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Contact Information
Nicholas Miller nmiller_at_millervaneaton.com Miller
Van Eaton, P.L.L.C. Suite 1000 1155 Connecticut
Avenue, N.W. Washington, D.C. 20036 - 4301 phone
(202) 785 - 0600 fax (202) 785 -
1234 www.millervaneaton.com