Seventh Circuit Affirms Settlement Finding Trustee Engaged in Sufficient Discovery to Properly Evaluate Value of Claim
Adrienne Woods | Bloomberg Law
The United States Court of Appeals for the Seventh Circuit upheld the approval of a settlement, finding that the bankruptcy trustee (“Trustee”) had engaged in sufficient discovery and no greater benefit would likely result from further discovery or litigation.
The Instructional Television Fixed Service License
Fort Wayne Telsat, Inc. (“Debtor”) was a television broadcaster in Indiana. JAS Partners, Ltd. (“JAS”) was Debtor’s largest unsecured creditor. JAS’s general partner, James A. Simon, was founder and president of the Debtor. Both Debtor and JAS are for-profit entities.
Indiana University (“IU”) held an Instructional Television Fixed Service (ITFS) license (the “License”) authorizing it to broadcast on specified frequencies. ITFS licenses generally are issued only to not-for-profit entities, but holders of such licenses are permitted to lease unused frequencies to for-profit entities. IU leased its unused frequencies to Debtor.
Subsequently, IU agreed to transfer the License to the not-for-profit Fort Wayne Public Broadcasting Service (“PBS”), at no cost (the “Agreement”), because IU did not believe it could comply with new regulations the FCC was contemplating whereby ITFS license holders who broadcast less than a specified minimum of educational programs would lose their ITFS licenses. PBS, in turn, agreed to lease (the “Proposed Lease”) broadcasting rights under the License to Debtor. While the Proposed Lease would have been an estate asset, Debtor was not a party to the Agreement.
In anticipation of the transfer, PBS obtained FCC permission to modify certain broadcasting equipment, the $350,000 cost for which Debtor paid due to the Proposed Lease. At some later time, PBS quitclaimed its rights under the License to Debtor. Ultimately, however, IU never transferred the License to PBS.
The Complaint Against IU and the Settlement
Trustee filed a complaint (the “Complaint”) against IU, alleging that Debtor reasonably relied upon the Agreement in financing the modification of the equipment and sought $116,000 in damages under the doctrine of promissory estoppel – the amount Trustee estimated otherwise unrecoverable by Debtor. Under the doctrine of promissory estoppel, reasonable reliance may be substituted for the requirement that to be enforceable, a promise must be in exchange for consideration. Garwood Packaging, Inc. v. Allen & Co., 378 F.3d 698, 702-04 (7th Cir. 2004).
The parties agreed to settle the Complaint for $100,000 (the “Settlement”). Trustee did not seek assignment of the License to Debtor, having concluded that, although PBS quitclaimed its interest in the License to Debtor, PBS had no interest because the License was never transferred to PBS.
JAS objected to the Settlement, arguing that Trustee failed to use due care to maximize the value of the estate and inadequately investigated the possibility of obtaining the License for the estate. The Settlement was authorized by the bankruptcy court and affirmed on appeal to the district court. JAS appealed.
The Settlement Was Reasonable
The Seventh Circuit first rejected JAS’s $4.1 million valuation of the License as artificially inflated, noting that (i) Debtor, as a for-profit entity, would need to find a nonprofit entity to be the licensee and then obtain FCC approval to have the License assigned; and (ii) even after obtaining FCC approval, Debtor would still only be entitled to use that portion of the broadcast frequency the licensee did not use. The court further noted that the $4.1 million offer for the License, on which JAS’ valuation is based, was made as part of a bundle of other licenses, thus making it more valuable, and also that the market price for such licenses had plummeted significantly since the offer had been made. The Court also noted that Trustee had initially valued the License at $600,000, but, after confirming with the FCC that PBS did not own the License and therefore could not be forced to assign rights in it, Trustee reduced his initial valuation significantly.
JAS next argued that, had Trustee engaged in sufficient pretrial discovery, he would have learned that PBS had a valid claim to the License and could have (i) sued IU for the $4.1 million JAS alleged the License was worth, or (ii) asked for specific performance to transfer the License to PBS, resulting in Debtor obtaining PBS’s rights under the quitclaim.
Noting first that it already dispensed with JAS’s inflated valuation, the Court stated that determining the reasonableness of a settlement requires the court to compare the amount of the settlement to the “net expected gain” from litigation. The Court explained that the “net expected gain” is the amount expected to result from a favorable judgment offset by the probability of a favorable judgment, reduced by the costs of litigation. In evaluating the reasonableness of the Settlement, the Court observed that Trustee estimated the gain from litigation to be nothing, since the FCC already certified that PBS did not own the License. Accordingly, the Court found that Trustee’s decision not to engage in further discovery or pursue litigation was reasonable. The Court also noted that Trustee’s estimate of his promissory estoppel claim was only $35,000, and he obtained nearly three times that amount through the Settlement.
JAS argued that, in the alternative, Debtor acquired PBS’s rights to the License through PBS’s issuance of the quitclaim and Debtor could therefore compel IU to transfer the License. However, the Court rejected this argument, noting that (i) while PBS executed a quitclaim substituting Debtor for PBS, the FCC still needed to approve the assignment of a broadcast license, and (ii) the transfer to Debtor could not be approved because Debtor was a for-profit organization and such transfer would not be in the “public interest” as required by law. 47 U.S.C. § 310(d).
Concluding that Trustee’s $600,000 estimate of the value of the License was reasonable and that the net expected gain was unlikely to exceed the Settlement, the Court determined the Settlement to fair and reasonable.
The Circuit Court Affirms the Settlement
Accordingly, the Seventh Circuit affirmed the lower courts’ rulings finding Trustee’s settlement of Debtor’s claims to be reasonable.
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
©2011 Bloomberg Finance L.P. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of Bloomberg Finance L.P.