Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-04-01274/USCOURTS-caDC-04-01274-0/pdf.json

Parties Involved:
Federal Communications Commission
Appellee
Kidd Communications
Appellant
Paradise Broadcasting, Inc.
Intervenor

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 16, 2005 Decided October 25, 2005

No. 04-1274

KIDD COMMUNICATIONS,

APPELLANT

v.

FEDERAL COMMUNICATIONS COMMISSION,

APPELLEE

PARADISE BROADCASTING, INC.,

INTERVENOR

______

Appeal of an Order of the

Federal Communications Commission

Dan J. Alpert argued the cause and filed the briefs for

appellant. 

Pamela L. Smith, Counsel, Federal Communications

Commission, argued the cause for appellee. With her on the

brief were Austin C. Schlick, Acting General Counsel at the time

the brief was filed, and Daniel M. Armstrong, Associate General

Counsel.

Erwin G. Krasnow was on the brief for intervenor.

USCA Case #04-1274 Document #927120 Filed: 10/25/2005 Page 1 of 12
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Before: GARLAND, Circuit Judge, and SILBERMAN and

WILLIAMS, Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge

SILBERMAN.

SILBERMAN, Senior Circuit Judge: 

Kidd Communications appeals an FCC decision approving

a transfer of Kidd’s radio station license to Paradise

Broadcasting, Inc., from whom Kidd originally purchased the

station. The transfer was effected in two steps pursuant to a

California state court order: first an involuntary assignment from

Kidd to a trustee, and then the trustee’s voluntary assignment to

Paradise. Kidd challenges the Commission’s decision as

inconsistent with both an FCC regulation prohibiting a seller

from retaining a reversionary interest in a station license and the

Commission’s general policy prohibiting a license holder from

granting a security interest in a broadcast license, as opposed to

in a station’s physical assets. We think the FCC has

inadequately explained why these related policies do not apply

and failed to reconcile them with its competing policy of

accommodating state court decisions. We therefore vacate and

remand.

I

In 1995, Kidd acquired radio station KTHO(AM) in South

Lake Tahoe, California from Paradise, with Commission

approval. In connection with the transaction, Kidd executed a

promissory note providing for monthly payments to Paradise

and pledging to Paradise “all of the station assets, including but

not limited to broadcasting and office equipment, goodwill, and

receivables,” but specifically excluding “any FCC licenses.”

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Soon thereafter, Kidd defaulted on the note, and Paradise sued

Kidd in Orange County, California Superior Court. Kidd and

Paradise settled the litigation by drafting a new promissory note,

which was executed on July 15, 1997 and “supercede[d],

replace[d], and [was] in lieu of the promissory note” executed in

November 1995. The new note provided that “[i]n the event of

a default which is not cured, both parties agree to act reasonably

and in good faith to effect an orderly turnover of the station to

Paradise.” (Emphasis added). 

Kidd again defaulted on its obligations to Paradise, who

then initiated foreclosure proceedings under the July 1997 note.

Following extensive litigation, a public auction of the station’s

real property was held, and Paradise was the successful bidder.

Even though Paradise thereby acquired legal title to the station’s

land, transmission facilities, and towers, Kidd refused to

surrender the property. Paradise then initiated an unlawful

detainer action against Kidd in El Dorado County, California

Superior Court. 

While the unlawful detainer suit was pending, Paradise

brought another action against Kidd in Orange County,

California Superior Court, this time for breach of contract and

specific performance under the new note. Paradise sought to

recover the station’s personal property, such as station

equipment and furnishings, and to enforce Kidd’s obligation

under the new note “to act reasonably and in good faith to effect

an orderly turnover of the station.” 

Paradise ultimately succeeded in both suits. Upon winning

in the unlawful detainer action on October 16, 2000, Paradise

took possession of the station’s real property, and shortly

thereafter the station went silent. Three months later, Paradise

received a tentative decision in its favor in the Orange County

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contract suit. The court found Kidd in default on the note and

awarded possession of the station’s personal property to

Paradise. The court refused, however, to order Kidd to execute

an application requesting that the FCC assign the station’s

license to Paradise because the note made no specific mention

of the radio license. Paradise moved the court to reopen the

proceedings on that issue, and the Orange County court issued

a second decision, this time ordering Kidd to execute an

application seeking transfer of the station’s license to Paradise.

The court noted that there had been conflicting testimony

regarding the parties’ intent under both the first and second

notes, but concluded that the term “station” in the second note

was at all times understood by the parties to “mean[] a going

concern including the FCC license.” (Emphasis added). When

Kidd refused to execute the assignment application, the court

appointed its clerk to act as trustee and execute the application

on Kidd’s behalf.

Kidd objected to the application to transfer the license to

Paradise and argued that the assignment was predicated upon an

impermissible reversionary interest in the station’s license, in

violation of 47 C.F.R. § 73.1150. In relevant part, that section

provides:

(a) In transferring a broadcast station, the licensee

may retain no right of reversion of the license, no right

to reassignment of the license in the future, and may

not reserve the right to use the facilities of the station

for any period whatsoever.

(b) No license, renewal of license, assignment of

license or transfer of control of a corporate licensee

will be granted or authorized if there is a contract,

arrangement or understanding, express or implied,

pursuant to which, as consideration or partial

consideration for the assignment or transfer, such

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rights, as stated in paragraph (a) of this section, are

retained.

47 C.F.R. § 73.1150. 

The Commission’s Mass Media Bureau rejected Kidd’s

argument and granted the trustee’s application. Observing that

the Commission “must reach a fair accommodation between [its]

licensing jurisdiction [and] the power of state and local courts to

adjudicate contract disputes,” the Bureau concluded that the

language in the second promissory note neither created “a

mortgage or vested interest for [Paradise] in the KTHO(AM)

license,” nor “provide[d] for an automatic or irrevocable

reversion in the event of default.” 

Kidd then sought full Commission review of the Bureau’s

decision, continuing to maintain principally that the assignment

gave effect to an impermissible reversionary interest under 47

C.F.R. § 73.1150. Kidd claimed that the interest created by the

second note was indistinguishable from those invalidated under

§ 73.1150 (or its predecessor) in In re Application of Radio

KDAN, Inc., 11 F.C.C.2d 934, recon. denied, 13 R.R.2d 100

(1968), aff’d on procedural grounds sub nom. Hansen v. FCC,

413 F.2d 374 (D.C. Cir. 1969), and In re Applications of Kirk

Merkley, Receiver, 94 F.C.C.2d 829 (1983), recon. denied, 56

R.R.2d 413 (1984), aff’d sub nom. Merkely v. FCC, 776 F.2d

365 (D.C. Cir. 1985), and Kidd objected to the Bureau’s

decision ostensibly limiting § 73.1150 to situations where a right

of reversion was “automatic” or “irrevocable.” 

The Commission denied Kidd’s application for review,

though its reasoning differed from that of the Bureau. See In re

Applications of Kidd Communications, 19 F.C.C.R. 13,584

(2004). The Commission began its discussion by observing that

§ 73.1150, on its face, “applies exclusively to contracts executed

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According to the Commission, had the station not resumed

operations by October 18, 2001, twelve months after going silent, its

license would have expired by operation of law. Kidd, 19 F.C.C.R. at

13,590 & n.45; see also 47 U.S.C. § 312(g); 47 C.F.R. § 73.1740(c).

At oral argument, however, the FCC conceded that Kidd could have

applied for a waiver of this provision. See 47 U.S.C. § 312(g).

in conjunction with the transfer of a station,” and not to

contracts executed in conjunction with the settlement of

litigation two years after such a transfer. See id. at 13,586–87.

It noted that the predecessors to § 73.1150 were adopted as a

response to sellers’ reserving programming time on transferred

stations as part of the consideration for the stations’ sale — a

practice clearly not at issue here. See id. at 13,587. The

Commission then explained that the past applications of §

73.1150 were factually distinguishable from Kidd’s case, as

Radio KDAN and Merkley both “involved contracts executed in

connection with the assignment of license or transfer of control

of a station.” Id. at 13,588. Finally, the Commission stressed

that allowing transfer of the station to Paradise was consistent

with the Commission’s policies of accommodating state court

decisions on matters of contract law and serving the public

interest by returning the station to broadcast operations. The

FCC observed that it had a “long-standing policy to

accommodate [state] court decrees unless a public interest

determination under the [Communications] Act compel[led] a

different result,” id. at 13,589, and that in this case,

accommodation was in the public’s best interest because “Kidd

never indicated to the Commission that it would have been able

to return the station to the air prior to forfeiture of the license,”

id. at 13,590.1

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2

Paradise, as intervenor, urges the court to affirm the

Commission’s decision because transfer of the station license to Kidd

would amount to the assignment of a “bare license” — that is, a

broadcast license divorced from any physical assets — against FCC

policy.

Kidd argues on appeal that the Commission’s opinion “was

arbitrary and capricious, and contrary to Commission precedent

and its policy against allowing the issuance of either security

interests or reversionary interests.” As below, Kidd asserts that

the plain language, history, and prior applications of § 73.1150

support reversal of the Commission’s actions.2 

II

The Commission argues that it is entitled to deference in

interpreting its regulation, which is certainly reasonably read as

referring to a prohibition of the retention of reversionary

interests at the time of transfer. Under governing law, the

Commission is entitled to significant deference in interpreting

its own regulation — perhaps even more than an agency gets in

interpreting a statute under Chevron. See Paralyzed Veterans of

Am. v. D.C. Arena L.P., 117 F.3d 579, 584 (D.C. Cir. 1997);

Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945);

but see generally John F. Manning, Constitutional Structure and

Judicial Deference to Agency Interpretations of Agency Rules,

96 Colum. L. Rev. 612 (1996). So if that were all there was to

this case, the FCC would easily prevail. But there is more.

The Commission did not dispute the California court’s

determination that the second promissory note created a security

interest in both the station’s physical assets and in the FCC

license itself. This is problematic for the Commission, because

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The Commission attempted to draw a distinction between

reversionary interests acquired at the time of transfer and lateracquired interests — reversionary or otherwise — by observing that,

“under current Commission rules, a former licensee would not be

prohibited from entering into various contractual arrangements

subsequent to the sale of the station, such as an option to purchase the

station at a future time, or a time brokerage agreement.” Kidd, 19

F.C.C.R. at 13,587 n.27. Neither an option agreement, nor a time

brokerage agreement, is a security interest, and, in any event, the

Commission went on to undermine its distinction by confirming that

control-related considerations are present even in the context of these

lesser agreements. See id. (“In the event such arrangements could vest

control in a party other than the current licensee, a petitioner or

complainant may raise these concerns in the context of, inter alia, the

assignment application, the station's license renewal application, or a

formal complaint to the Commission's Enforcement Bureau.”). 

in discussing § 73.1150, and in applying that regulation in prior

cases, the Commission has consistently described the underlying

policies behind the regulation in terms applicable to any security

interest in a broadcast license.

Indeed, the Commission explained in this case that the

predecessors to § 73.1150 were promulgated to ensure that “a

station licensee is fully responsible for the conduct of the station

and its operation in the public interest, and that such

responsibility cannot be delegated by contract or otherwise.”

Kidd, 19 F.C.C.R. at 13,587. The Commission’s control-based

rationale is not uniquely applicable to reversionary interests

acquired at the time of a station’s transfer; logically it applies to

the prohibition of a subsequently acquired reversionary interest

or any type of security interest in a broadcast license.3

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The FCC’s prior decisions seem to acknowledge this point.

In Radio KDAN, which did involve the Commission’s

disapproval of a seller’s effort to retain a reversionary interest in

a broadcast license, the Commission stated broadly that “[t]he

extraordinary notion that a station license issued by this

Commission is a mortgageable chattel in the ordinary

commercial sense is untenable.” Radio KDAN, 11 F.C.C.2d at

934 n.1. Then in Merkley, the Commission, rejecting a Utah

state court’s effort to enforce a reversionary provision in a

buyer’s contract, said that the reversionary interest was

unenforceable because “no right of reversion can attach to a

broadcast station license, and the license, as distinguished from

a station’s physical assets, is not subject to a mortgage, security

interest, or lien.” Merkley, 56 R.R.2d at 416. The Commission

added that:

a Commission license is not an owned asset or property

right. A security interest in the assets of the broadcast

station does not effect a transfer or assignment of the

broadcast license. Further, creditors must not equate

the license with the buildings and the equipment to

which the licensee has acquired title. Credit cannot be

extended in reliance upon the license as an asset from

which the licensee's obligations may be satisfied.

Id. (citations omitted). 

An administrative agency can, of course, make legal-policy

through rulemaking or by adjudication. See SEC v. Chenery

Corp., 332 U.S. 194, 202–03 (1947). When an agency does so

by adjudication, because it is a policymaking institution unlike

a court, its dicta can represent an articulation of its policy, to

which it must adhere or adequately explain deviations. Thus,

even were the Commission’s discussions of the

nonmortgageable nature of a broadcast license dicta, they still

presumably would reflect Commission policy. Cf. Goodman v.

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4

That is not to say that the Commission’s discussions of its policy

that underlies the rule constitute an authoritative interpretation of §

73.1150 that would prevent the Commission from giving it another

interpretation without notice and comment. See Paralyzed Veterans,

117 F.3d at 587–88.

FCC, 182 F.3d 987, 994 (D.C. Cir. 1999) (“[T]he nature of

adjudication is that similarly situated non-parties may be

affected by the policy or precedent applied, or even merely

announced in dicta, to those before the tribunal.”). In these

instances, however, the Commission’s discussions of its policy

were more than dicta because they actually articulated reasons

for the rule.4

The Commission suggested that its deviation from its policy

was in order to accommodate the California court. We note that

in Merkley, it did not defer to the Utah court, but in any event

the Commission is not obliged to accommodate a state court’s

decision that is contrary to Commission policy. See Kidd, 19

F.C.C.R. at 13,589; see also Radio Station WOW, Inc. v.

Johnson, 326 U.S. 120, 132 (1945). The FCC relied on a case

involving two Puerto Rico radio stations, in which it

accommodated a local court order directing a transfer of the

station licenses based on “equity,” see In re: Applications of

Arecibo Radio Corp., 101 F.C.C.2d 545, 546–47 (1985); but that

case did not involve any security interest in the licenses and thus

did not implicate the policies at issue here. The Commission

also stated that accommodation of the California court’s

decision was appropriate because that court, like the court in

Arecibo, addressed only the contractual issues and left the public

interest determinations to the Commission. Kidd, 19 F.C.C.R.

at 13,589–90. This seems to beg the question, since the FCC’s

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articulation of the public interest includes its policy against

security interests in station licenses.

Finally, the Commission contended that the assignment to

Paradise served the public interest by allowing the station to

resume operations in a timely fashion and by reuniting the

station’s license with its broadcast facilities. See id. at 13,590.

This explanation is similarly inadequate. The FCC has never

indicated that this consideration could override its policy against

security interests, and if it did, it would create quite a loophole.

Commission approval of a license transfer would automatically

follow state-court foreclosure on a station’s physical assets, and

a station license and its physical assets would become

inseparable.

To be sure, state courts faced with contract disputes

involving conflicting claims to broadcast stations realize that the

physical assets are worthless without the licenses, and so are

inclined to fashion remedial orders that treat the two as a bundle.

That understandable inclination, however, runs afoul of the

Commission’s insistence that a broadcast license be treated

distinctly — its transfer depends on the Commission’s

determination of the public interest. Indeed, the

Communications Act supports this distinction. The Act allows

for the licensing of radio frequencies merely “to provide for the

use of such channels, but not the ownership thereof.” 47 U.S.C.

§ 301. Station licenses vest limited rights in licensees, see id. §§

304, 309(h)(1), and assignment rights are limited, see id. §§

309(h)(2), 310(d). Under § 310(d), “[n]o . . . station license, or

any rights thereunder, shall be transferred, assigned, or disposed

of in any manner, . . . to any person except upon application to

the Commission.” 

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We recognize that the Commission may see itself in an

awkward position, but that does not excuse its failure to explain

adequately how it will reconcile state commercial and contract

interests with its federal policies. 

* * *

Accordingly, we vacate the Commission’s decision and

remand to the Commission for further proceedings.

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