In re Fort Wayne Telsat, Inc.

• Decision Date: 16 December 2011
• Docket Number: No. 11–2112.,11–2112.
• Citation: 665 F.3d 816,54 Communications Reg. (P&F) 594,66 Collier Bankr.Cas.2d 988,55 Bankr.Ct.Dec. 211
• Parties: In re FORT WAYNE TELSAT, INC., Debtor–Appellee.Appeal of JAS Partners, Ltd.
• Court: U.S. Court of Appeals — Seventh Circuit

54 Communications Reg. (P&F) 594

55 Bankr.Ct.Dec. 211

66 Collier Bankr.Cas.2d 988

665 F.3d 816

In re FORT WAYNE TELSAT, INC., Debtor–Appellee.Appeal of JAS Partners, Ltd.

No. 11–2112.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 17, 2011.Decided Nov. 23, 2011.Rehearing Denied Dec. 16, 2011.

R. David Boyer, II (argued), Attorney, Boyer & Boyer, Fort Wayne, IN, for Debtor.

Robert L. Nicholson (argued), Attorney, Carson Boxberger LLP, Fort Wayne, IN, for Appellant.

Jeremy N. Gayed (argued), Attorney, Barrett & McNagny, Fort Wayne, IN, for Defendants–Appellees.R. David Boyer, II, Boyer & Boyer, Fort Wayne, IN, for Trustee–Appellee.

Before BAUER, POSNER, and WOOD, Circuit Judges.

POSNER, Circuit Judge.

This appeal requires us to explore the duty of a trustee in bankruptcy to prosecute uncertain claims for the recovery from third parties of assets allegedly owned by the bankrupt estate.

Indiana University had what is called an “Instructional Television Fixed Service” license, which had been issued by the Federal Communications Commission and authorized the university to broadcast on specified frequencies. Licenses of ITFS frequencies are available only to not-for-profit entities, such as the university, and mainly enable the licensee to broadcast educational materials to high schools and branch campuses within a 35–mile radius of the licensee's transmitter. See 47 C.F.R. § 74.903(a)(5) (2003). (The ITFS program has been replaced by EBS—the “Educational Broadband Service,” § 27.1200 et seq.—but it appears to be similar. See § 27.1214(a)(1), (d).) But a licensee who doesn't use all the frequencies that it's authorized to use can lease the unused ones to a for-profit entity.

Enter the parties. The debtor (that is, the bankrupt), Fort Wayne Telsat, was a television broadcaster in Indiana. Its principal unsecured creditor was (and is) the appellant, JAS Partners, Ltd., which was owed 85 percent of the total amount owed to the unsecured creditors. JAS's general partner, James A. Simon, is the debtor's founder and president. It is unclear just what JAS Partners does besides “funneling funds from other corporate entities to Mr. and Mrs. Simon for their personal use under the guise of loans to avoid tax consequences.” United States v. Simon, No. 3:10–CR–00056(01)RM, 2011 WL 924264, at *2–3 (N.D.Ind. Mar. 14, 2011). Both the debtor and JAS are for-profit enterprises.

The university had agreed to transfer its license to another not-for-profit broadcaster, the Fort Wayne Public Broadcasting Service (which the parties call PBS). The FCC was contemplating “use it or lose it” regulations that would divest ITFS licensees of their licenses if they broadcast less than a specified amount of educational programming, and the university didn't think it could satisfy the new requirement and preferred to assign its license to PBS for nothing than lose it to the FCC. In anticipation of the assignment, PBS had agreed to lease to the debtor a substantial portion of the broadcasting rights conferred by the license. (Later PBS “quitclaimed” its rights under the license to the debtor.) Such a lease would be an asset of the debtor, and would thus increase the amount of money that JAS could expect to receive as the debtor's principal unsecured creditor.

The university denied that it had transferred its license to PBS. But believing that the transfer had gone through or would go through, the debtor modified broadcasting equipment at a cost of $350,000. The trustee in bankruptcy filed a claim against the university contending that it had promised PBS the license, that the debtor had reasonably relied on the promise in making the equipment modifications, and that the doctrine of promissory estoppel entitled the debtor to damages of $116,000—the trustee's estimate of the unrecoverable costs incurred by the debtor to make the equipment modifications relating to the anticipated license.

The debtor was not a promisee, that is, was not a party to the yet-to-be performed contract between the university and PBS to transfer the license. But PBS's contingent lease to the debtor had made the debtor an intended third-party beneficiary of that contract, a relationship that can support a claim of promissory estoppel. First Nat'l Bank of Logansport v. Logan Mfg. Co., 577 N.E.2d 949, 954 (Ind.1991); Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 129 S.Ct. 1896, 1902, 173 L.Ed.2d 832 (2009); Vidimos, Inc. v. Laser Lab Ltd., 99 F.3d 217, 222 (7th Cir.1996) (Indiana law); Restatement (Second) of Contracts § 90, comment c (1981). Anyway, though promissory estoppel is mainly a doctrine of contract law that allows reasonable reliance to be substituted for the normal requirement that to be enforceable a promise be in exchange for consideration (though the consideration could consist just of a reciprocal promise), it is sometimes applied to promises that would not be enforceable under contract-law principles even if they were supported by consideration. Garwood Packaging, Inc. v. Allen & Co., 378 F.3d 698, 702–04 (7th Cir.2004) (Indiana law).

Whether the trustee's promissory estoppel claim was strong or weak, the university settled it for $100,000. But the trustee did not obtain as part of the settlement (or even seek) the assignment of the license to the debtor. He had concluded that although PBS had quitclaimed its interest in the license to the debtor (or as much of the interest as the law permitted it to quitclaim), the quitclaim had conveyed nothing because the university's license had never actually been assigned to PBS.

Because, if the bankruptcy court approved the settlement, the debtor's estate would have insufficient assets to pay the unsecured creditors, JAS asked the court to reject it. See Fed. R. Bankr.P. 2002(a)(3), 9019(a); Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424–25, 434, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968); National Surety Co. v. Coriell, 289 U.S. 426, 436–37, 53 S.Ct. 678, 77 L.Ed. 1300 (1933) (Brandeis, J.); In re Doctors Hospital of Hyde Park, Inc., 474 F.3d 421, 425–26 (7th Cir.2007). It argued that the trustee had failed to use due care to maximize the assets of the debtor's estate; he had not adequately investigated the possibility of obtaining the license, which JAS estimates to be worth $4.1 million, as that was the amount the university had been offered earlier for it.

That's much too high an estimate of the value that the license would have to the debtor. To acquire any rights under the license, the debtor first would have had to find a nonprofit entity to be the licensee, would have had to secure the FCC's approval of the assignment of the license to PBS (a protracted process if the university resisted), and would have been entitled only to use so much of the licensed frequency band as the licensee did not use. And $4.1 million was a price that had been offered for the license as a part of a package of licenses, and bundles of such licenses are more valuable than the sum of the prices of the licenses if sold separately. Moreover, it was a price that had been offered to the university months before the settlement, and during the interval the prices of such licenses had plummeted, having spiked earlier only because of a contemplated merger among ITFS licensees each seeking to enlarge its broadcasting rights as a way of gaining leverage in merger negotiations.

In the face of these considerations, the trustee estimated the value of the license to the debtor to be only $600,000, and that was a reasonable estimate. It is not a negligible amount of money and so he considered pressing the theory that PBS was the real owner of the license and so could assign rights encompassed by it. But after investigating, and receiving a certificate from the FCC stating that the license was owned by the university, he decided to abandon the theory. JAS opposed abandonment but the bankruptcy judge conducted a hearing and concluded that the trustee had acted prudently in settling the debtor's entire claim against the university for $100,000. The district judge agreed, precipitating JAS's appeal to us.

JAS contends that if only the trustee had spent a mere $20,000 on pretrial discovery, he would have learned that, despite the certificate from the FCC, PBS did have a valid claim to the license after all and that the license really was worth $4.1 million to JAS (this we know is not true), and he could have sued the university for that amount (or asked for specific performance—an order that the university transfer the license to PBS for the benefit of JAS) and had he done so would have obtained a favorable judgment.

Rather than taking the circuitous route of challenging the settlement, JAS could at the outset have asked the trustee to assign the debtor's rights against the university to JAS and the other unsecured creditors rather than litigating them himself. An FCC license is an assignable asset of a debtor's estate, Midtown Chiropractic v. Illinois Farmers Ins. Co., 847 N.E.2d 942, 944–45 (Ind.2006); In re Tak Communications, Inc., 985 F.2d 916, 918 (7th Cir.1993), provided the FCC consents to the assignment. 47 U.S.C. § 310(d); In re Central Arkansas Broadcasting Co., 68 F.3d 213, 214–15 (8th Cir.1995) (per curiam). But this route was blocked by the settlement, which by operation of the doctrine of res judicata would have precluded any claim by JAS or the other unsecured creditors against the university that arose out of the dispute over the license, since an assignee of a claim (which would have been JAS) is in privity with the assignor (the debtor, represented by the trustee). Taylor v. Sturgell, 553 U.S. 880, 894 and n. 8, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008); Perry v. Globe Auto Recycling, Inc., 227 F.3d 950, 953 (7th Cir.2000); Restatement (Second) of Judgments § 55(1) (1982). So JAS had to proceed as it did—had to try to get the settlement set aside on the...