SR-501-002 (2)
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California
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CA:RMM:llm091/hpc
Council Meeting 9-23-86
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Santa Monica,
STAFF REPORT
TO:
Mayor and City Council
FROM:
city Attorney
SUBJECT:
Recommendation Regarding Termination of the City's
Community Antenna Television system Franchise with
Theta Cable and Group W Cable for Noncompliance with
Its Terms and Denial of the Request for Approval of
Franchise Transfer From Group W Cable to Century
Southwest Communications
I. INTRODUCTION
Theta Cable of California (Theta) is the grantee of a
non-exclusive franchise to provide cable television services in
Santa Monica.
Since 1982, when Theta transferred its franchise
interests to Group W Cable, Inc. (Group W)I formerly a subsidiary
of Westinghouse Broadcasting and Cable, Inc., without receiving
Council approval I Group W has been operating the city's cable
system. Resolution of the issue of whether Theta's merger with
Westinghouse constituted a material breach of the franchise and
what remedy should lie has been held in abeyance by mutual
agreement pending the city's negotiations with Group W, which
were
to
occur
following
citizen
input
from the Cable
Communications Task Force.
In the interim, the Cable Communications Policy Act of 1984
was enacted by congress. In accordance with its terms I Group W
sent the city a letter invoking the renewal procedures specified
by the Cable Act in June, 1985.
Subsequently, however, an
important development has occurred.
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On June 191 1986, Westinghouse announced that it had
"completed the sale of its cable television business" to a
consortium of cable television operators (the consortium),
consisting of American Television & Communications Corporation
(ATC) i Comcast corporation; Tele-Communications, Inc. (Tel) i
Daniels & Associates, Inc. (Daniels); and Century Southwest
Communications Corporation (Century). The City has been informed
by letter that Century has been designated as the operator of the
Santa Monica system. Although Group W did not seek city approval
of the stock transfer to the consortium, it has requested City
approval of the ultimate transfer of its franchise to Century.
The City Attorney's office has concluded that the occurrence
of the stock transfer without prior city approval as required by
Section 7(d) of Ordinance No. 734 (CCS) constitutes a breach of
the franchise agreement. The city Attorney I s office has also
concluded that the earlier merger of Teleprompter and
Westinghouse constituted a breach of the franchise agreement.
Furthermore, the operation and management of the Santa Monica
cable system by century without city approval of either the stock
transfer or the ultimate transfer constitute a breach of the
franchise agreement. Finally, Group Wls failure to provide
requested information sufficient to allay city concerns about
Century I s financial and operating capabilities and commitments
leads to the conclusion that the city should deny approval of the
ultimate transfer request. The appropriate remedies include
termination of the franchise, rejection of Group WIs request for
approval of the ul timate asset transfer to Century, or
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non-renewal of Group Wls franchise agreement under section
626(C) (1) (A) of the Cable Policy Act of 1984.
The city Attorney's office recommends that the City council
determine whether Theta's and/or Group WI s noncompliance with
Section 7(d) of the Ordinance constitutes grounds for forfeiture
of the franchise agreement. If the Council so determines, it is
recommended that the attached resolution terminating Group W's
Cable franchise and denying approval of the ultimate transfer of
Group W's franchise interests to Century be adopted.
II. BACKGROUND
Ordinance Number 734 (CCS) was enacted on March 14, 1967,
providing for the granting of Cable Television (CATV) franchises
in Santa Monica. A non-exclusive franchise was awarded to Theta
on October 24, 1967. (Ordinance Number 756). Its ten-year term
was renewed on December 13, 1977. (Ordinance Number 1074.) The
City'S cable franchise with Theta Cable will expire in January,
1988.
A. Theta's Transfer to Westinqhouse.
At the time of the original franchise agreement in 1967,
Theta was jointly owned by Hughes Aircraft Company and
Teleprompter Corporation. Subsequent to the 1977 franchise
renewal, Teleprompter acquired Hughes' interest in Theta.
In mid-1981, Westinghouse Broadcasting company, lnc.1 began
acquiring control of Teleprompter and its subsidiaries I including
Theta. This acquisition caused Teleprompter to file two
applications with the FCC pursuant to 47 U.S.C. section 310(d)
(formerly Section 310(b)) and 47 C.F.R. Section 78.22, requiring
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consent by the FCC to any transfer, assignment or disposition in
any manner of a station license, or "transfer of control of any
corporation holding such permit or license."
Westinghouse's takeover of Teleprompter was a three-step
process. At first, approximately one-third of Teleprompter's
outstanding stock ownership was transferred to Westinghouse.
However, control remained with the then existing Teleprompter
Board of Directors by virtue of a blind trust arrangement. This
situation was to last until the FCC formally approved a transfer
of control. At that point, the second stage was to involve the
transfer of operating control through acquisition by Westinghouse
of the remaining Teleprompter stock. Theta was then a
wholly-owned subsidiary of Westinghouse. The final step in the
corporate reorganization involved the merger of Teleprompter and
Westinghouse.
Theta never requested city Council approval for the two
earlier take-overs. By letter on January 19, 1981, Theta
announced that the Teleprompter acquisition of the Hughes stock
had been concluded. A February 5, 1981, letter announced the
planned acquisition and merger between Teleprompter and
Westinghouse. On October 16, 1981, Theta informed the City that
the merger had been "consummated." Finally, on February 3, 1982,
the city was again notified of the westinghouse acquisition. At
this time, Theta requested approval of the already completed
reorganization and submitted a draft ordinance to this effect.
In a staff report presented to the Council on June 11 1982,
the city Attorney's Office advised the Council that the
acquisition of Teleprompter corporation and its subsidiary, Theta
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Cable of Californial by westinghouse Broadcasting Company,
constituted a transfer or assignment of the franchise with the
City under Ordinance Number 734 (CCS), section 7 (d) . The City
Attorney's office further concluded that Theta Cablel as
franchisee (grantee), had breached the terms of its franchise
with the City by failure to obtain consent of the City Council
prior to the transfer. At that time, the Council was advised
that appropriate remedies included termination of franchise or
rejection of Theta's request for approval of the merger.
Resolution of the issue of whether Theta's merger with
Westinghouse without prior City approval constituted a material
breach of the franchise agreement and what remedy should lie has
been held in abeyance by mutual agreement pending the City's
negotiations with Group W which were to occur following citizen
input from the Cable Communications Task Force, which was
appointed in Fall, 1982. The Task Force presented its
recommendations to the Council in June, 1984.
B. status of Franchise Renewal.
In the interim, the Cable communications Policy Act of 1984
(Cable Act) was enacted by Congress. In April, 1985, the City
Attorney presented a staff report to the Council explaining the
impacts of the new federal law on the Task Force recommendations
and on the city's options. In accordance with the its terms,
Group W sent the City a letter formally invoking the renewal
procedures specified by the Cable Act in June, 1985. Since that
time, however, several important developments have occurred.
Al though Group W initiated renewal proceedings wi th the ci ty ,
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since its unauthorized transfer of ownership, its goal has become
obtaining transfer approval so that the city negotiates a renewal
franchise agreement with Century instead of Group W.
c. Sale of Westinqhouse's (Group W's) Cable Interests.
In December, 1985, Westinghouse, the owner of Group W,
entered into an agreement to sell its cable division to a
consortium of cable operators. A form letter circulated by Group
W at that time stated that it was undetermined which of the
members of the consortium was designated to take over the Santa
Monica cable system. Shortly thereafter, however, Group W
confirmed rumors that Century Southwest Cablel Inc. was to take
over ownership and operation of Santa Monica's cable system.
Westinghouse structured the sale of its cable division to
take place in two stages. First, the transfer of all stock to
the consortium was to take place some time in 1986. Second, the
asset transfer is to take place in 1987. Westinghouse has taken
the position that although cities with which it has existing
cable franchises are entitled to prior approval of the asset
transfer, only certain cities have the right to approve the stock
transfer, depending on the language of their franchise
agreements.
Santa Monica's cable franchise ordinance states that it
shall not be "sold, transferred, leasedl assigned or disposed of
without the prior consent of the council," whereas some
other cities' franchises prohibit "transfer of control" of the
franchise. Group W apparently contends that a transfer of stock
does not constitute a transfer of the franchise necessitating
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approval because Group W Cable continues to exist, albeit in name
only, until the second stage of the transfer takes place, i.e.,
the ultimate asset transfer to Century. Therefore I Group W
contends that Santa Monica does not have the right to approve a
stock transfer. Group W takes this posi tion despite the fact
that the stockholders of Group W have changed, and control over
decision-making, operation and management has been transferred in
its entirety from Westinghouse to the consortium. Group W,
however, appears to have conceded that a transfer of stock does
consti tute a "transfer of control" and has sought approval from
those cities whose franchises contain language specifying
approval in that instance.
Although Group W maintains the position that Santa Monica
does not have the right to approve the stock transfer, the city
has consistently taken the position that the franchise agreement
requires Council approval of Group Wls stock transfer. Group W
has I however, conceded that once the assets of the corporation
itself are transferred to Century, that will constitute a change
falling within the terms of Santa Monica's franchise ordinance.
Consistent with that position, on February 27, 19861 Group W
requested approval of the ultimate transfer of its franchise
interests to Century Southwest Cable, one of the members of the
consortium. In response, the City Manager sent a letter to
Group W requesting specific information about Century's financial
status and operating performance which would enable the City to
properly evaluate the proposed transfer.
After receiving an unsatisfactory response to this request
for information, the city Manager sent a follow-up letter to
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Group W on May 29, 1986, reiterating the City's request for
specific information. century and Group W were also informed
that transfer of Group Wls stock or assets without City approval
would constitute a breach of the franchise agreement, and that
any actions by Century to take over operation or management of
the city I s cable system prior to the Council's approval of a
transfer of ownership, would constitute a breach of the franchise
agreement as well.
The city did not receive a response to the fallaw-up request
for information until August 15, 1986, despite Group W's plea
that the City act expeditiously on the requested transfer
approval. The response remains inadequate to meet the City's
needs. Meanwhile , despite the lack of approval of the stock
transfer by santa Monica and a number of other Southern
California cities, on June 19, 1986, Westinghouse announced the
completion of lithe sale of its cable television business," i. e. ,
the stock transfer to the consortium. Furthermore, shortly
thereafter, as confirmed by the consortium's August 15
submission, the consortium entered into a management contract
with Century to operate and manage the Santa Monica cable system
for the consortium, precisely the situation which the City had
warned Group W would constitute a breach of franchise.
D. Group Wls Failure to Provide Requested Information.
Beyond Group WI s and Century I s blatant disregard of the
requirements set forth in the city I s franchise agreement, they
have refused to cooperate in providing the requested information
enabling the city to evaluate the proposed transfer. Despite two
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rather lengthy and detailed written requests for information from
the City Manager, key documentation regarding century's financing
and its projections for operation of Santa Monica's cable system
have not been submitted. The following summarizes the inadequacy
of the most recent submission by Bill Koplovitz on behalf of the
consortium (which, by virtue of the stock transfer I is now Group
W) .
1. Proposed ownership and Management Structure.
Group W submits an organizational chart showing essentially
that the consortium now forms the Board of Directors of Group W
Cable, which has entered into management agreements with each of
the consortium members to manage certain (unenumerated) systems.
An additional organizational chart shows that Century manages 34
previously owned systems as well as 8 (again, unenumerated) newly
acquired Group W systems. This second organizational chart
constitutes the management structure that will exist once Century
takes ownership. A third organizational chart delineates the
management structure of the Santa Monica cable system, presumably
as of now. Brief descriptions of local personnel are attached.
The City actually requested "documentation of the management
structure of all cable systems currently owned and operated by
Century Southwest, Inc., including a description of national I
regional and local organizations and personnel..." What we have
received responds partially to this request, although it provides
essentially no information about the management structure of
Century's previously owned 34 systems nor about the other local
Group W systems being purchased by Century.
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The response confirms the fact that Century is currently
operating and managing the Santa Monica cable system pursuant to
a management agreement with the consortium. In his May 51 1986
letter to Leonard Tow, the City Manager expressly informed
Century and Group W that this very action would be considered a
breach and would cause denial of the requested transfer approval.
2. Proposed Financinq.
In response to the City's request for documentation of
lender commitments, information about terms and conditions of
financing commitments, and proof of Century t s ability to meet
such commitments, Group W has provided a clipping from the Wall
street Journal which reports that Century has signed a long-term
revolving credit agreement for $390 million with six banks led by
citibank.
In addition, information was requested regarding Century's
commi tments to other newly purchased Group W systems. We have
received information about the characteristics of various
franchises per our request. However, certain key information
about which we are concerned has been evaded. Specifically, we
are concerned with what amounts of money Century will have to
spend in other cities. However, we have been told only that as
to certain citiesl rebuilds will be occurring on renewal, and as
to others I Century plans to seek reductions in the franchise
terms. The City is interested in knowing the specifics of the
reductions and the specifics of rebuild plans insofar as they
affect amounts of money that will be available to rebuild our
system and insofar as they provide us with information about what
Century will or will not finance in Santa Monica's rebuild.
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Also, according to Group WI s submission, either customer
service provisions are virtually non-existent in all systems
purchased from Group W or we have not been provided with the
actual provisions.
3. cable Experience.
with regard to consumer service provisions, the response is
a general one essentially stating that Century is in compliance
with all standards everywhere. The City is not provided with
documentation of what the consumer standards are nor with any
records from any Century-operated system. (As to some of the
information submitted, in order to assess its meaning, other
cities will have to be contacted and asked a series of questions
about Century's performance.)
4. Consumer Complaint History.
Again, essentially nothing is submitted but someone's word
that Century keeps "detailed logs" at each system and responds
promptly to customer inquiries and repair calls, but there is no
"formal system" established. No documentation whatsoever is
submitted to verify this statement. The City Manager's May 29
letter explicitly requested documentation of Century's
performance and stated that Century's previous response had been
inadequate.
5. Litiqation History.
Copies of the pleadings in each of the cases involving
Century and affiliates and franchising authorities were
requested. The City has been provided with copies of the
complaints in six cases, two of which are pending. In the other
four casesl we received a copy of a settlement agreement and/or a
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stipulated judgment. The pending cases raise allegations of
anti-trust violations I civil Rights Act violations I First
Amendment violations, etc. and are filed in federal court.
century's various lawsuits challenge the RFP process, the
cities' rights to require cable operators to obtain franchises I
public access requirements, etc.
We were informed that if we were interested in the entire
pleadings, we "may obtain them from the court directly."
6. Prolected Operational Plans and Financial Results
for the city of Santa Monica's Cable System.
The response states that Century is prepared, upon consent
to transfer and a 15 year franchise term extension, to provide
the City with a 450 MHZ system that is two-way capable. It also
makes some other general statements about working with the city
to develop PEG access programming and customer service standards.
Most importantly, they state that no new financial
projections have been completed yet. They estimate preliminarily
that $75 million will be spent for the upgrade and rebuild in the
Los Angeles Basin systems which includes approximately $10 to $13
million earmarked for Santa Monica. They attach Group W's income
projectionsl but state that "Century has not prepared these
materials and therefore cannot comment on them. II This renders
the projections virtually meaningless as a response, since
Century has carefully preserved its rights not to stand behind
them.
The response states that Century will be capitalized with
$100 million in equity and approximately $100 million
indebtedness which, it is claimed, is more conservative than debt
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to equity ratios of telephone and power utilities serving Santa
Monica. This differs from the initial claims that Century would
be financed at a debt to equity ratio of 12 to 1, but in any
case, no documentation is submitted which would enable the City
to perform or contract with a financial analyst to perform the
necessary financial analysis.
In summary I Group Withe consortium/Century have consistently
failed to provide us with necessary financial information and
important consumer service records and history which would enable
the City to determine whether it should approve the transfer of
the cable system to Century.
7. status of other cities with Group W Cable
Franchises.
A number of other Southern California cities have franchise
agreements with Group W, including Beverly Hillsl County of Los
Angeles, city of Los Angeles, El Monte, El Segundo, Gardena,
Hawthorne I Lawndale, Southgate, Torrance, and West Hollywood.
Of these cities, El Monte, Gardena, Southgate, and West Hollywood
have approved the transfer. The other cities have not approved
the stock transfer from Group W to Century. Those cities have
also met with refusal on Group W' s part to provide necessary
information pertaining to Century financing and operations,
despite repeated good faith requests. Despite lack of
information, the Board of Telecommunications Commissioners for
the City of Los Angeles has approved the transfer to the
consortium and ultimately to Century, conditioned on seeing
evidence of "adequate financing and a financial plan that is
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acceptable to the city Attorney and the [Telecommunications]
Department" by September 15, 1986.
The cities of Lawndale I Hawthorne and Torrance have filed
lawsuits against Group W seeking to invalidate the stock
transfer. The City of EI Segundo has met with no response to its
offers to purchase the cable system from Group W or requests for
information and has filed a lawsuit as well. EI Segundo will
have its motion for preliminary injunction heard on September 29,
1986 in federal court.
III. ANALYSIS
A. statutory and contractual Framework.
The most closely analogous statutory framework to the City'S
right to approve the transfer or assignment of its cable
franchise can be found in the federal scheme regulating the
transfer of station licenses. section 310 of the Communications
Act of 1934 (47 u.s.c. section 310) requires FCC consent for the
transfer of station licenses. Additionally, there exists an
elaborate regulatory framework for the initial granting of
station licenses.
[W]e bear in mind the critical importance
of the disclosure provision of Section
310 (b) and congress I continuing interest
in insuring a high standard of broadcast
service. Instead of relying on direct
control of programming, which would raise
the spector of censorship and
constitutional doubts, the regulatory
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scheme
emphasizes
a
review
of
the
character and qualifications of those who
seek to operate or control licensed
facilities. Congress has required full
disclosure of matters affecting the
character qualifications of applicants for
licenses and has provided for a
comparative test of their qualifications
and program plans. Thus the Commiss ion
grants a license to the most highly
qualified applicant. L.B. Wilson, Inc. v.
F.C.C., 397 F.2d 717, 719 (D.C. Cir.
1968) .
Once granted, a license becomes a valuable commodity which,
without further controls, might simply be transferred to "one who
is willing to pay the most money for the license." rd.
Consequently, an applicant for transfer of a license is treated
as if the transferee were making an application for a new
license. citizens Committee v. F.C.C., 436 F.2d 263 (D.C. Cir.
1970) .
Thus, control over license transfers is seen as a
necessary component of the overall licensing scheme.
The franchise agreement provided by the City of Santa
Monica pursuant to Ordinance Number 734 (CCS) is no less
comprehensive than the la\\T which governs transfer of station
licenses. Section 7(d) states in full:
Any such franchise shall be a privilege to
be held in personal trust by the original
grantee. It cannot in any event be sold,
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transferred, leased, assigned or disposed
of, in whole or in part, either by forced
or involuntary sale, or by voluntary sale,
mergerl consolidation or otherwise,
without the prior consent of the council
expressed by resolution, and then only
under such conditions as may therein be
prescribed. Any such transfer or
assignment shall be made only by an
instrument in writing, a duly executed
copy of which shall be filed in the office
of the City Manager within thirty (30)
days after any such transfer or
assignment. The said consent of the
Council may not be arbitrarily refused;
provided, however, the proposed assignee
must show financial responsibility and
must agree to comply with all provisions
of this Ordinance; and provided, further,
that no such consent shall be required for
a transfer in trust, mortgage or other
hypothecation as a whole, to secure an
indebtedness.
section 20 of the Ordinance requires a franchise applicant
to disclose:
The name and address of the applicant. If
the applicant is a partnership, the name
and address of each partner shall also be
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set forth.
corporation,
If
the
the applicant
application shall
and addresses of
is
a
state the
names
also
its
directors, main offices, major
stockholders and associates, and the names
and addresses of parent and subsidiary
companies.
Section 20 also requires comprehensive statements as to the
physical characteristics of the proposed CATV systems; rates and
charges; collateral agreements respecting the CATV System;
financial statements; and other information relevant to the
quality of service and integrity of the applicant.
The FCC licensing scheme is concerned with many of the same
factors. See 47 use Section 308(b). As the court stressed in L.
B. wilson v. F.e.C., 397 F.2d 717 (D.C. Cir. 1968), "the
regulatory scheme emphasizes a review of the character and
qualification" of applicants. Id. at 719.
It thus appears that the purpose of the federal and local
licensing regulations are similar. The license or franchise is
IIpersonal" to the grantee based on its credentials and
application. The fact that Theta and Group W were required,
pursuant to 47 V.S.C. Section 310(d), to inform and seek the
consent of the FCC regarding assignment of the license or
transfer of corporate control, suggests that a similar procedure
is necessary under Ordinance Number 734 (CCS) , section 7 (d) .
Although the language of the federal and local regulations is not
identical, it is reasonable to conclude that the drafters of
Section 7(d) had in mind the same type of corporate transaction
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which would require FCC consent. Clearly, the purpose of both
regulatory frameworks is to facilitate supervision over the
grantee at all stages.
The passage of the Cable Communications Policy Act by
Congress in 1984 did not affect the previously existing FCC
licensing scheme nor does it contain any provisions concerning
the transfer of ownership of cable systems from one operator to
another unless the new owner is a municipality itselfl in which
case certain rules apply. (47 U.S.C. 547).
B. Does Section 7 (d) Include Theta/Teleprompter's Merger
with westinqhouse and/or the stock Transfer from Westinghouse to
the Consortium?
Theta advised the City in 19B1 that it read section 7 (d)
not to include -the type of corporate transactions it had
undertaken since 1977. In fact, the FCC determined that the
initial acquisition by Westinghouse of 29.9% of Teleprompter
stock did not constitute a transfer of control. See In re
Westinghouse Broadcasting Co., 84 F.C.C.2d 938 (1981). This was
because these shares were put in a blind trust. Id. However,
later stages of the ultimate Westinghouse-Teleprompter merger did
constitute transfer of control, approval of which was granted.
In re Teleprompter, corporation (FCC 81-351): filed Aug. II,
1981}.
Section 7 (d) does not specifically use the terms
"acquisition" or "stock transfer" as actions which trigger the
consent requirements, although "merger" is a stated
Group W therefore takes the position that section 7 (d)
ground.
of the
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Ordinance does not include the stock transfer that took place
from Westinghouse to the consortium on June 19, 1986 since
section 7 (d) does not specify acquisition or stock transfer as
actions which trigger the consent requirements.
Group W (and Theta before it) apparently relies on the
principle announced in Ser-Bye Corp. v. C. P. & G Markets, 78
Cal. App. 2d 915, 179 P.2d 342 (1947). In that casel a lease
agreement contained an anti-transfer clause which forbade
mortgage, encumbrance I assignment or sublease of the leasehold
estate without consent of the lessor. The corporate tenant
transferred its shares of stock to a new stockholder who then
sought possession. The court ruled for the tenantl stating:
Had the parties to the lease intended that
the sale and transfer by one or more
stockholders in the lessee corporation to
other persons of one or more of their
shares of stock herein was to be deemed to
be an assignment or attempted assignment
of the lease itself, such fact should have
been expressed in the lease in clear and
unequivocal language. 179 P.2d at 345.
The Ser-Bye doctrine has been recently reaffirmed in
Richardson v. LaRancherita, 98 Cal. App. 3d 73, 159 Cal. Rptr.
285 (l979), despite criticism of the rule by Professor witkin. 3
B. Witkin, Summary of California Law', 2171-72 (8th ed. 1973).
Richardson involved a similar lease clause with the added feature
that the court upheld an award of damages against the lessor on
an intentional tort theory. The lessor had indicated it did not
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want to "kill the deal," referring to the lessee's stock
transfer. Rather, the lessor "only wanted to renegotiate the
lease on [more favorable] terms." Id. at 77, 159 Cal. Rptr. at
287.
Both of the above cases involved standard commercial leases
with clauses restricting assignment of the lease. In Ser-Bye,the
court reasoned that the anti-transfer clause related only to the
lease itself and there was no intent to supervise control of the
corporate ownership.
In contrast, the anti-transfer provision of the City's
franchise agreement evidences an intent to achieve full
disclosure regarding the actual control of the franchisee.
viewed as a whole, the franchise arrangement seems to emcompass
all forms of transfer. Most notable is the first sentence of
section 7 (d) : "Any such franchise shall be a privilege to be
held in personal trust by the original grantee." Furthermore,
the privilege "cannot in any event be sold, transferred, leased,
assigned or disposed of, in ",hole or in part or by
voluntary sale, merger, consolidation or otherwise" without prior
consent of the Council. Sections 20(a) and 20(b) also indicate
the depth of concern the City has concerning corporate ownership
and control. It requires from the franchisee:
A statement setting forth all agreements
and understandings, whether written, oral
or implied, existing between the applicant
and any person, firm or corporation with
respect to the proposed franchise or the
proposed CATV operation. If a franchise
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is
granted
to
a
person,
firm
or
corporation posing as a front or as the
representative of another personl firm or
corporation, and such information is not
disclosed in the original application,
such franchise shall be deemed void and of
no force and effect whatsoever.
The franchisee must also submit extensive documentation
regarding financial responsibility. Ordinance Number 734 (CCS),
Sections 20(a) (7), 20(b) (5). In view of the requirements that
apply to the initial grantee of the Cityls cable franchise, it is
only logical that a transferee, i.e., the cable operator who will
stand in the shoes of the original grantee, should be subject to
the same requirements. Group W has never produced such
information pertaining to the consortium of buyers to whom it has
transferred its stock and control, nor has it produced such
information pertaining to Century.
It can fairly be said that in awarding a cable franchise
the City is highly concerned about corporate management,
ownership and control. Thus, the Ser-Bye doctrine seems
inapplicable.
Group Wls December 26, 1985 letter to cities with which it
has franchise agreements states: liThe [purchase] agreement
contemplates transfer of that stock sometime during 1986. until
that time, each Group W Cable system will continue to be operated
by Westinghouse "In its February 27, 1986 letter to the
Mayor and City Council, Group W stated that while Group W would
continue to own and operate Santa Monica I s cable system, the
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stock in Group W would be Q\'lned by the consortium rather than
westinghouse. "After the transfer of the stock, the buyers
intend to have Century Southwest Cable Television, Inc. have the
primary responsibility for the operation and management of the
cable system which serves our Santa Monica customers and your
constituents."
It would appear from these statements that Group W Cable
continues to exist in name only, until the asset transfer is
completed in 1987. The sale has apparently been structured this
way for tax reasons. Group W is no longer owned by Westinghouse.
At this time, the consortium of buyers to whom Group W has sold
its stock controls the cable operation. Furthermore, the
consortium has apparently given Century primary responsibility
for "operation and management" of the Santa Monica cable system,
pursuant to a management agreement. This state of affairs most
certainly constitutes a transfer or assignment within the scope
of Section 7(d).
In L.B. Wilson, Inc. v. F.C.C., 397 F.2d 717 (D.C. Cir
1968), stock transfers had resulted in changing de facto control
of a licensee. The court, per Chief Judge Bazelon, held that
this would constitute a violation of the statute. This is
precisely what has taken place herein.
The court in Lorain Journal Co. v. F.C,C.I 351 F.2d 824
(D.C. cir. 1965), focused on the changes in decision-making
authority resulting from a stock transfer.
In dealing with concepts like "controlll or
its transfer we are concerned with a
subject matter where useful perspective is
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gained from experience in business
operations and the affairs of the world at
large, and where particularly insightful
judgments may be provided by the agency
heads who have the benefit of the views of
the agency's technicians and examiners
without the requirement of according them
total deference. Id. at 828.
The court also drew from analogous statutes in holding that a
change in operative control constitutes a license transfer for
which FCC approval must be sought pursuant to section 310 (d) .
Id. at 829.
other cases have reached similar results.
See Burbank
Broadcasters, Inc., 5 Pike & Fisher Radio Regs. 1050b, 1054
(1949) (stock transfer \.,ras deemed to be transfer of control) ~
I\X,XL, 5 Pike & Fisher Radio Regs. 1206 (1949) (transfer among
general partners was unlawful); W'ashinqton star Communications
Inc., 54 F.C.C.2d 669 (1975) (transfer among corporate parents
approved by Commission); Elyria-Lorain Broadcasting Co., 6 pike &
Fisher Radio Regs. 2d 191 (1965) (gradual acquisition of de facto
control was governed by Section 310(b)).
The history of litigation concerning the reach of this
provision of the Communications Act shows great concern regarding
any maneuvers affecting ownership or control. Indeed,
Westinghouse corp. itself should be highly sensitive to
regulatory supervision in this area, dating back to at least
1940. In westinqhouse Electric & Manufacturing Co., 8 F.e.C. 195
(1940)1 the commission held that certain programming
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relationships with NBC constituted an unauthorized transfer of
control. If any company understands transfer requirements, it
should be Westinghouse.
There is no doubt that Westinghouse's stock transfer to the
consortium required FCC approval under section 310 (d). As was
the case when Theta transferred its ownership to westinghouse,
Westinghouse has in fact sought FCC approval of its transfer to
the consortium. It is quite clear to westinghouse in the context
of the FCC that a stock transfer represents a change in control
and thus a change in mmership. It is no different as to the
City nor is the Obligation to seek consent.
While Group W Cable continues to exist in the form of a
liquidating trust which will cease to exist in March, 1987, it is
no longer operated or controlled by Westinghouse. The stock in
Group W Cable is now wholly owned by the consortium. Century
allegedly has an agreement with the consortium authorizing it to
manage the Southern California systems it is due to take over
once Group W ceases to exist. This presumably includes the Santa
Monica system. Westinghouse's failure to seek Santa Monica
consent prior to entering into this arrangement has not been
adequately explained.
In conclusionl it appears that Section 7(d) does cover the
instant tranfer. Westinghouse's June 19, 1986 announcement that
it has "completed the sale of its cable television business"
without the prior consent of the city Council clearly violates
Section 7(d). Thus I it appears that Group W is in breach of its
franchise with the City.
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C. What Remedies Lie For Theta's and/or Group Wls Breach Of
Franchise?
The franchise arrangement is both a municipal ordinance and
a contract. Although the relationship between the city and its
franchisee is essentially contractual, the City acts in a
legislative capacity. Orange County Cable v. City of San
Clemente 59 Cal. App. 3d 165, 171, 130 Cal. Rptr. 429, 433
(1976) . Breach of contract may be grounds for damages or
rescission. With respect to the latter, unilateral rescission is
proper in California only for the grounds specified in civil Code
section 1689{b). They include the situation where one party has
materially failed to perform his promise. See 1 B. Witkin,
Summary of California La\y 689 (8th ed. 1973). It is not clear
whether Section 7(d) would be found to be material to performance
under the contract.
Notwithstanding, the City, acting in its legislative
capacity may set terms which are more stringent. "A legislative
act is said to be one which predetermines what the law shall be
for the regulation of future cases falling under its provisions
II City Council v. Superior Court, 179 Cal. App. 2d 3891 3
Cal. Rptr. 796 (1960). Most notable here is Section 51 Ordinance
Number 734 (CCS) which states:
Any such franchise granted hereunder may
be terminated prior to its date of
expiration by the Council in the event
that said council shall have found, after
thirty (30) days' notice of any proposed
termination and public hearing, that:
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(a) the grantee has failed to comply
with any provision of this ordinance, or
has, by act or omission, violated any term
or condition of any franchise or permit
issued hereunder
Thus, it appears that termination or cancellation of the
franchise is contemplated by the terms of the ordinance.
The powers exercised by the FCC in analogous situations
involving disclosure violations can be instructive. In
appropriate cases, license renewals have been rejected or
licenses revokedl although the latter remedy is seldom invoked.
In In re Superior Communications Co., 57 F.C.C.2d 772 (1976), the
Commission held:
The unauthorized transfer of control and
the misrepresentation are each alone
sufficient to warrant revocation and are
especially egregious in this case, since
the licensee had been a party to a
previous
proceeding
under
similar
9ircumstances. These repeated violations
of the Act and Rules of this Commission
demand that the captioned licenses be
revoked. (Emphasis added.)
In In re BHA Enterprises, 68 F.C.C.2d 475 (1978), the
Commission levied a fine but reversed the Hearing Examiner's
decision to revoke a station license for uauthorized transfer.
Al though the licensee had misrepresented certain matters, the
commission determined that transfer had not in fact occurred.
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If, however, the FCC had sustained this finding, it is possible
that the decision to revoke would also have been affirmed. 47
U.s.C. section 312 provides for revocation of a station license
for specified grounds including "willful or repeated violation
of, or willful or repeated failure to observe any provision of
this Chapter."
Al though the conduct of Theta and Group W here might not
result in license revocation (had they not sought the consent of
the FCC to transfer licenses), the provisions of Ordinance 734
are more stringent. Pursuant to Section Sea), termination of the
franchise may lie for failure to comply with Section 7(d).
Nevertheless, consent of the City Council could not be
arbitrarily withheld had Theta and/or Group W fully complied with
Section 7(d). If consent would clearly had been given, franchise
cancellation may be unwarranted. In Orange County Cable v. city
of San Clemente, 59 Cal. App. 3d 165, 130 Cal. Rptr. 429 (1976),
the court stated:
[WJhere a contract confers upon one party
a discretionary power affecting the rights
of the other, including the power to fix
rates, a duty arises upon the party with
the discretionary power to exercise it in
good faith. Id. at 172, 130 Cal. Rptr. at
434.
Although the city may not arbitrarily withhold consent,
consent was never requested either for the earlier acquisition of
operating control of Theta's system by westinghouse nor for
Westinghouse's stock transfer to the consortium. This does not
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evidence the good faith of Theta or Westinghouse. Nonetheless,
the city had valid concerns regarding the corporate
reorganization that took place in 1981 and it has valid concerns
at present.
The acquisition of control of Teleprompter by westinghouse
had ramifications beyond a simple corporate reorganization.
Because of the acquisition, Westinghouse had run up against FCC
cross-ownership rules. westinghouse had received certain
"Temporary Special Relief" from the FCC for a Waiver of 47 C.F.R.
section 76.501 (television cross-ownership). In re Westinqhouse
Broadcastinq Co., 84 F.C.C.2d 938 (1981). No similar requirement
exists in Santa Monica. However, the purpose of the
cross-ownership rule is to encourage competition and diversity
of programming. Several groups challenged the Westinghouse
take-over in the FCC proceedings on several grounds including
that the planned acquisition and merger were anti-competitive.
(See Oppositions of Society for Private and Commercial Earth
station (SPACE); National Black Media Corporation (NBMC);
National Citizen's Committee for Broadcasting (NCCB); Westec
Security Services; Cable News Network (CNN); and Pacific
Telatronics Inc. (PTI).) For present purposes it need only be
noted that several areas of concern emerged due to the
acquisition.
The FCC, after considering the objectors' arguments,
concluded that the take-over was in the public interest. In re
Teleprompter Corporation, 87 F.C.C.2d 531 (1981). However, no
public hearing was held and an appeal has been taken to the Court
of Appeal. The City sought to intervene in that appeal.
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The Commission has recognized that issues relevant to
franchises are best resolved at the local level. "We have long
recognized that local officials are in a better position to gauge
individual community needs and be aware of applicable local law."
In re Teleprompter Corp., Id. at 11. The Commission further
stated
[T)he abuses [of local monopoly] are more
appropriately brought before local
franchising authorities for resolution,
rather than before the Commission .
If Teleprompter is not fulfilling its
franchise agreements in some instances I it
is the responsibility of local franchising
authorities to resolve such difficulties.
Id. at 16-17.
Thus I the City Council might have concluded that approval
of the Westinghouse acquisition was not in the best interest of
Santa Monica consumers. Therefore, Theta I s breach of section
7 (d) may be viewed as material giving the City just cause to
terminate the franchise pursuant to Section 5(a).
The financial situation and operating history of any cable
operator are vi tal to the city I s abil i ty to obtain a decent
system that will meet its future cable needs. As already
expressed in a letter from the City Manager to Group W requesting
information about Century, the City is particularly concerned
about the substantial debt load which Century is apparently
incurring in order to acquire the cable systems currently owned
and operated by Group W. The City is concerned that the debt
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commitments which Century will be responsible for will render it
unable to meet the cable needs of the citizens of the City of
Santa Monica. Century's refusal to provide the city with all of
the information it has requested makes a serious evaluation of
its ability to meet the City's needs impossible.
The failure of Group W to seek City approval of the stock
transfer to the consortium (which ultimately would resul t in
transfer to Century) could have serious consequences to the city
in that the city could find itself with a franchisee not of its
own choosing which is incapable of meeting the needs of its
citizens. This is surely the very situation which Section 7(d)
was designed to prevent.
D. When Should Termination of the Franchise Become
Effective?
Should the Council decide to terminate the Theta/Group tv
cable franchisel the effective date of termination should be
December 13, 1987 or thereabouts.
Declaring the termination
effective December 13, 1987, thirty days prior to the expiration
date of the franchise specified under Ordinance No. 734 (CCS),
would serve the dual function of allowing the franchisee an
adequate amount of time to wind down its operations while also
allowing the city adequate time to seek and evaluate proposals
from potential cable operators, and to negotiate a new cable
franchise.
Furthermore, termination on December 13, 1987 or
thereabouts is consistent with the remedy that would be applied
by the FCC in analogous situationsl i.e., non-renewal of a
license.
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RECOMHENDATION
It is the City Attorney's recommendation that the City
Council adopt the attached resolutionl denying the requested
transfer to Century because of Group W' s consistent failure to
provide the City with adequate information to perform the
extensive financial and technical analysis necessary to ensure
the city of Century's financial capability to operate the City's
cable system and declaring the Theta/Group W cable franchise to
be terminated effective December 13, 1987, on each of the
following independent grounds:
1. The 1981 merger of Teleprompter with Westinghouse
without prior City approval constitutes a breach of Section 7(d)
of Ordinance No. 734 (CCS).
2. The 1986 stock transfer from westinghouse to the
consortium without seeking City approval constitutes a breach of
Section 7(d} of Ordinance No. 734 (CCS).
3. Century's operation and management of the Santa Monica
cable system pursuant to a management agreement with the
consortium/Group W constitutes a breach of section 7(d) of
Ordinance No. 734 (CCS).
Prepared by:
Robert M. Myers, City Attorney
Laurie Lieberman, Deputy City Attorney
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