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In Re: Fort Wayne Telsat

November 23, 2011

IN RE: FORT WAYNE TELSAT, INC., DEBTOR-APPELLEE. APPEAL OF: JAS PARTNERS, LTD.


Appeal from the United States District Court for the Northern District of Indiana, Fort Wayne Division. No. 1:10-cv-00303-TLS--Theresa L. Springmann, Judge.

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

ARGUED OCTOBER 17, 2011

Before BAUER, POSNER, and WOOD, Circuit Judges.

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 autho- rized 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 (The ITFS program has been replaced by EBS--the "Educational Broadband Service," §§ 27.1200 et seq.--but it appears to be similar.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 appel- lant, 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 minimum 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 unre- coverable costs incurred by the debtor to make the equip- ment 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, 129 S. Ct. 1896, 1902 (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 ex- change 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 sup- ported 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 uni- versity's license had never actually been assigned to PBS.

Because, if the bankruptcy court approved the settle- ment, 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 (1968); National Surety Co. v. Coriell, 289 U.S. 426, 436-37 (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 ...


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