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In re Airadigm Communications

March 12, 2008

IN RE: AIRADIGM COMMUNICATIONS, INC., DEBTOR.
AIRADIGM COMMUNICATIONS, INC., APPELLANT, CROSS-APPELLEE,
v.
FEDERAL COMMUNICATIONS COMMISSION, APPELLEE, CROSS-APPELLANT.



Appeal from the United States District Court for the Western District of Wisconsin. Nos. 07-C-0073-S, 06-C-0747-S-John C. Shabaz, Judge.

The opinion of the court was delivered by: Flaum, Circuit Judge.

ARGUED NOVEMBER 6, 2007

Before FLAUM, KANNE, ROVNER, Circuit Judges.

Debtor-appellant, Airadigm Communications, Inc. is a cellular-service provider. In 1996, it successfully bid for fifteen personal communications services ("PCS") licenses as part of an FCC auction and opted to pay off the licenses under an installment plan set up by the FCC. For Airadigm, however, the airwaves were too turbulent, and by 1999 it had filed for chapter-11 bankruptcy. Almost immediately, the FCC cancelled Airadigm's PCS licenses and filed a proof of claim in bankruptcy court for the remaining amounts owed under the installment plan. The ensuing reorganization proceeded under the assumption that the licenses were gone, having been validly cancelled. And although the ultimate reorganization plan set out several contingencies in the event the FCC reinstated the licenses-which it never did-it provided little else regarding the licenses' status after the reorganization. In 2003, the Supreme Court decided NextWave Personal Communications, Inc. v. FCC, 537 U.S. 293 (2003), and held that the FCC could not cancel a debtor's PCS licenses just because it had filed for bankruptcy. The FCC conceded a few months later that it had been wrong to terminate Airadigm's licenses and reinstated them as though they had never been cancelled.

Airadigm filed a second chapter-11 petition in May 2006 to tie up the loose ends from the fairly significant legal developments that had come about since its first reorganization. As part of its second filing, Airadigm commenced this adversary proceeding against the FCC, seeking to eliminate the FCC's continuing interest in the licenses based on the 2000 reorganization plan. The bankruptcy court held that the 2000 plan had not affected the FCC's interests in the licenses and subsequently ratified a second plan with the FCC as a partially secured creditor. Both parties appealed-the FCC objected to its treatment under the plan; Airadigm objected to the FCC's continuing interests in the licenses. The district court affirmed the bankruptcy court in all relevant respects, and, for the reasons set out below, so do we.

I. Background

Section 309(j) of the Communications Act of 1934, as amended in 1993, authorizes the FCC to award licenses to use the electromagnetic spectrum "through a system of competitive bidding," that is, an auction. 47 U.S.C. § 309(j)(1) (2006). Congress recognized that an auction had several advantages over the available alternatives, such as the "development and rapid deployment of new technologies," 47 U.S.C. § 309(j)(3)(A) (2006), and the "recovery for the public . . . a portion of the value of the public spectrum resource," 47 U.S.C. § 309(j)(3)(C). Despite these benefits, a market-based design could concentrate ownership of licenses in the hands of those relatively few businesses that could afford the up-front cost. As a result, the Communications Act directs the FCC to structure the auction to "avoid the excessive concentration of licenses," 47 U.S.C. § 309(j)(3)(B), specifically by "consider[ing] alternative payment schedules . . ., including . . . guaranteed installment payments." 47 U.S.C. § 309(j)(4).

Against this legislative backdrop, the FCC adopted rules to auction off portions of the spectrum used for personal communications services ("PCS"), that segment used for a number of forms of wireless communication. In re Implementation of Section 309(j) of the Communications Act, 9 F.C.C.R. 5532 (1994). The FCC specified two of the six frequency blocks being auctioned-Blocks C and F- for smaller businesses who, being unable to afford the lump sum, could pay for their licenses in installments. 47 C.F.R. § 24.709 (2007). To ensure payment, the FCC made payment-in-full a condition precedent to obtaining a license, 47 C.F.R. § 1.2110(g)(4)(iv), and executed a promissory note and security agreement to secure its interestin each license, id. § 1.2110(g)(3). If the successful bidder fell into default, "its license [would] automatically cancel, and it [would] be subject to debt collection procedures." Id.

In 1996, the FCC conducted the auction. Airadigm was the highest bidder for fifteen licenses-thirteen of which were "C-block" and two of which "F-block" segments covering Michigan, Iowa, and Wisconsin-and agreed to pay off what it had bid in quarterly installments, plus interest, over a ten-year period. Airadigm paid 10% of the purchase price, signed fifteen promissory notes recognizing its debt to the FCC, and executed fifteen security agreements. The licenses themselves stated that they were conditioned on the "full and timely payment of all monies due pursuant to [FCC regulations] and the terms of the Commission's installment plan." The FCC then sought to perfect its interests in the licenses by, among other things, filing UCC financing statements with the office of the Wisconsin Secretary of State.

Airadigm soon met financial problems and could not meet its obligations to the FCC. In 1999, it filed a petition for reorganization in the Western District of Wisconsin. The FCC allowed Airadigm to continue using its portion of the spectrum but cancelled Airadigm's licenses and filed a proof of claim in the bankruptcy court for $64.2 million, Airadigm's remaining balance. In its proof of claim, the FCC stated that, because it had cancelled the licenses, it was an unsecured creditor. Hedging a bit, the FCC also said that if it did not actually have the authority to cancel the licenses, its debt was instead secured by the licenses themselves, attaching proof of its security interests to its claim. The FCC otherwise participated in Airadigm's bankruptcy, filing a notice of appearance and ultimately objecting to its treatment as an unsecured creditor under the plan.

The 2000 reorganization proceeded under the assumption that the FCC had properly cancelled the licenses. The plan provided that the FCC had an allowed claim of $64.2 million and laid out several contingencies should the FCC reinstate the licenses. The reorganization hinged on financing by a third party, Telephone and Data Systems ("TDS"). Should the FCC reinstate the licenses by February 2001, TDS would pay the FCC's claim in full. If the FCC did not reinstate the licenses by February 2001, but did so by June 2002, TDS had the option of paying off the claim, but was not obligated to do so. But if the FCC never reinstated the licenses or "fail[ed] to act . . . in a timely manner," the plan provided that TDS would obtain all of Airadigm's assets except the licenses. The plan was otherwise silent as to the FCC's exact interests in the licenses and what would happen if the FCC reinstated them after June 2002. And the plan didn't expressly preserve the FCC's security interest in the licenses, instead stating that the plan "shall not enjoin or in any way purport to limit, restrict, affect or interfere with action initiated by the FCC in the full exercise of its regulatory rights, powers and duties with respect to the Licenses."

The FCC never reinstated the licenses and maintained its position that it had validly cancelled them after Airadigm's 1999 bankruptcy. In 2003, the Supreme Court held otherwise in FCC v. NextWave Personal Communications, Inc., 537 U.S. 293 (2003). In nearly identical circumstances, the FCC had cancelled NextWave's C- and F-block licenses after it had filed for bankruptcy. The Court held that this action violated the bankruptcy code and set aside the FCC's decision. After its own bankruptcy in 1999, Airadigm had filed a petition before the FCC seeking to reinstate its cancelled licenses. On August 8, 2003, the FCC denied this petition as moot, reasoning that, in light of NextWave, its cancellation of the licenses had been "ineffective." In re Airadigm Communications, Inc., 18 F.C.C.R. 16296 (Aug. 8, 2003). Airadigm thus had its licenses back as though they had never been cancelled.

In light of this development, Airadigm filed a second petition for reorganization on May 8, 2006. As part of that reorganization, Airadigm filed the present adversary proceeding against the FCC, seeking to divest it of any continuing interests in the licenses. The bankruptcy court granted the FCC's motion for summary judgment and rejected Airadigm's claims.

Ultimately, on October 31, 2006, the bankruptcy court approved a second plan of reorganization, to which the FCC raised two general objections. The first went to the payment options under the plan. Even though Airadigm owed the FCC $64.2 million, the plan treated the FCC as a secured creditor for only $33 million-the then-current market value for the licenses. As a result, the FCC would have two options with respect to Airadigm's debt: It could take an immediate payout of $33 million*fn1 and lose its liens in the licenses; or it could treat its entire $64.2 million claim as secured and receive deferred payments totaling this greater amount over a number of years. Under the latter option (called a § 1111(b) election), the FCC would retain liens for the full $64.2 million and Airadigm would purchase and hold $33 million of government-backed securities or low-risk annuities.

Airadigm would use the interest or payments from these instruments to make deferred payments to the FCC over (at most) a thirty-year period. When the payments totaled $64.2 million, the liens would expire. If Airadigm sold the licenses before making full payment, the FCC would receive the proceeds of the sale and, if the sale amount was less than $64.2 million, retain its liens in the licenses.

The FCC argued in the bankruptcy court that this last provision did not square with the code. Specifically, the FCC argued that a "due on sale" provision set out in its regulations-stating that the full auction bill is due if Airadigm transfers the licenses to a third party that would not otherwise qualify for installment payments- was part of the lien it held in a license. The FCC wanted the full $64.2 million at the time of a sale to a non-qualifying third party, not the proceeds of the sale plus a continuing lien in the licenses. Thus, in the FCC's estimate, the plan's failure to preserve this provision meant that the FCC had not "retain[ed] its liens" as required by the bankruptcy code. The bankruptcy court disagreed, reasoning that due-on-sale provision was not part of the lien itself and was instead contractual and subject to modification in bankruptcy.

The FCC's second objection went to a provision that released the third-party financier, TDS, from liability for "any act or omission arising out of or in connection with the . . . confirmation of this Plan . . . except for willful misconduct." Airadigm owed TDS over $188 million in secured claims, debt that Airadigm would somehow have to finance if TDS were not involved in the reorganization. In the bankruptcy court's estimate, there was "adequate" proof that TDS would not go forward with- out the limitation on liability ultimately contained in the plan. The court held that the ...


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