In the

United States Court of Appeals

For the Seventh Circuit ____________

Nos. 07-2212, 07-2430 & 07-2529

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.

____________

ARGUED NOVEMBER 6, 2007—DECIDED MARCH 12, 2008

____________

Before FLAUM, KANNE, ROVNER, Circuit Judges.

FLAUM, Circuit Judge. 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
2 Nos. 07-2212, 07-2430 & 07-2529

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.
Nos. 07-2212, 07-2430 & 07-2529 3

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 interest in
4 Nos. 07-2212, 07-2430 & 07-2529

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.
Nos. 07-2212, 07-2430 & 07-2529 5

 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
6 Nos. 07-2212, 07-2430 & 07-2529

1 Airadigm could elect to surrender some or all of its licenses

back to the FCC. The value of these surrendered licenses would

then be subtracted from the secured amount. For present

purposes, we assume that Airadigm will not make that election.

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 million1

 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.
Nos. 07-2212, 07-2430 & 07-2529 7

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-
8 Nos. 07-2212, 07-2430 & 07-2529

out the limitation on liability ultimately contained in the

plan. The court held that the release was reasonable given

both TDS’s centrality to the reorganization and the potential for liability should TDS engage in “willful misconduct.”

Both parties appealed to the district court, who affirmed

the bankruptcy court’s decisions in relevant respects.

Notably, for the first time before the district court, the

FCC challenged the rate at which the securities or

annuities would pay out should the FCC make the

§ 1111(b) election. The FCC wanted a higher interest rate

to move the secured $33 million up to $64.2 million at a

quicker pace, theoretically compensating the FCC for the

risk that Airadigm would not ultimately pay over the

accrued amounts. The district court held that the FCC had

waived this claim by not presenting it before the bankruptcy court. In the alternative, the court reasoned that

the full-payment option complied with the terms of the

bankruptcy code and rejected the claim. This appeal

followed.

II. Discussion

In their respective appeals, the parties raise two issues

each. Airadigm first argues that the bankruptcy and district courts erred in holding that the FCC’s security interests in the C- and F-block licenses were not extinguished

by the 2000 reorganization plan. In addition, Airadigm

argues that the courts below erred in holding that

Airadigm could not avoid the FCC’s interests in the

licenses under 11 U.S.C. § 544(a)(1), the “strong-arm”

provision of the bankruptcy code. In its cross-appeal, the

FCC challenges its treatment as an undersecured creditor
Nos. 07-2212, 07-2430 & 07-2529 9

in the 2006 reorganization plan. Finally, the FCC argues

that the 2006 reorganization plan’s provision limiting TDS’s

liability to “willful misconduct” does not comport with the

bankruptcy code. The following sections discuss each in

turn.

A. FCC’s Interests in the Licenses Following the 2000

Reorganization

The 2000 reorganization proceeded under the assumption

that the FCC had validly cancelled Airadigm’s licenses

after it declared bankruptcy in 1999, and thus the plan

made no mention of the status of the FCC’s security

interests following the reorganization. But the NextWave

decision proved this assumption wrong. The anti-discrimination provision of the bankruptcy code, 11 U.S.C. § 525(a),

prohibits the FCC from cancelling PCS licenses just because a license-holder has entered bankruptcy. Now

the parties dispute the effect of the 2000 reorganization

plan’s silence in light of NextWave. Both the bankruptcy

court and the district court held that the silence did not

extinguish the FCC’s continuing interests—decisions

involving mixed questions of fact and law that we review de novo. Mungo v. Taylor, 355 F.3d 969, 974 (7th Cir.

2004). For the reasons set out below, we affirm.

Under some circumstances, a reorganization plan’s

silence regarding a creditor’s continuing secured interest

in the debtor’s property can result in the elimination of the

creditor’s lien. Section 1141(c) of the bankruptcy code

provides that “after confirmation of a plan, the property

dealt with by the plan is free and clear of all claims and

interests of creditors. . . .” 11 U.S.C. § 1141(c). As applied to

liens and security interests, this means that “unless the
10 Nos. 07-2212, 07-2430 & 07-2529

plan of reorganization, or the order confirming the plan,

says that a lien is preserved, it is extinguished by the

confirmation.” In re Penrod, 50 F.3d 459, 463 (7th Cir. 1995).

This “default rule” applies provided that the creditor

“participated in the reorganization” and, as required by

§ 1141(c) and at issue here, the property was “dealt with

by the plan.” Id. In other words, if a secured creditor

participates in the debtor’s bankruptcy and the ultimate

plan does not preserve the creditor’s interest, the interest is gone.

We first articulated this rule in In re Penrod. The Penrods

were a family of hog farmers who had given security

interests in their hogs to Mutual Guaranty Corporation

in exchange for a $150,000 loan. The Penrods soon filed

for bankruptcy, and Mutual Guaranty then filed a proof

of claim. The resulting reorganization plan provided

that the Penrods would pay back the remainder of the

$150,000 loan in full plus interest. But the plan said nothing about Mutual Guaranty’s original liens. When the

Penrods sold their hogs for slaughter after the reorganization, Mutual Guaranty sought to enforce its liens in the

proceeds of the sale, as it could have done under the

original security agreement. This Court, applying the

rule stated above, held that Mutual Guaranty’s security

interests in the hogs were gone, replaced by the payment

schedule. The absence of an express provision in the plan

gave rise to the presumption that Mutual Guaranty had,

in effect, “give[n] up [its] preexisting liens” in exchange

for the stream of payments. 50 F.3d at 463.

Neither party denies that the FCC “participated in the

[2000] reorganization” or that the security interests in the

licenses would otherwise constitute “interests of creditors”

under § 1141(c). But the parties do dispute whether the
Nos. 07-2212, 07-2430 & 07-2529 11

2000 reorganization plan “dealt with” the licenses so as to

pull them within the ambit of § 1141(c)’s “default rule.”

Airadigm points to the provisions in the 2000 plan that

set out the various payment options should the FCC ever

reinstate the licenses. For example, if the FCC had reinstated the licenses by February 2001, TDS would pay

the FCC’s claim in full. Or, barring that, if the FCC reinstated the licenses by June 2002, TDS had the option of

paying the claims, but was not required to do so. These

contingencies should suffice, in Airadigm’s view, to

show that the plan “dealt with” the licenses. Because the

plan did not expressly preserve the FCC’s continuing

interests, Penrod applies, and the FCC’s secured interests

in the licenses would be gone, relegating it to the heap of

unsecured creditors. The FCC, on the other hand, argues

that the bankruptcy court was correct in holding that a

plan cannot “deal[ ] with” a security interest in a license

if everyone erroneously believed that the licenses were

validly cancelled. We agree.

The 2000 reorganization plan’s silence regarding the

FCC’s security interests did not extinguish its continuing

interests in the licenses. A chapter-11 reorganization

“modifies the capital structure of a bankrupt enterprise.”

Penrod, 50 F.3d at 462. In reorganizing the bankrupt

entity, a secured creditor’s interests in the debtor’s property can be “dealt with” in a variety of ways: through

modification, impairment, exchange, or even elimination.

See, e.g., 11 U.S.C. § 1129(b)(2)(A)(I) (permitting secured

creditors to retain the liens); 11 U.S.C. § 1129(b)(2)(A)(i)(II)

(permitting approval of plan that exchanges the liens for

“deferred cash payments”); 11 U.S.C. § 1129(b)(2)(A)(iii)

(permitting exchanging the liens for “indubitable equivalent” of the value of creditor’s secured claim); 11 U.S.C.
12 Nos. 07-2212, 07-2430 & 07-2529

§ 1126(d) (permitting impairment of some interests if twothirds of other creditors in class approve). Among other

things, these powers facilitate the reorganization. See In re

Regional Bldg. Systems, Inc., 254 F.3d 528, 532 (4th Cir. 2001).

A creditor wants to get something for its secured interest,

and these provisions allow the creditor to do so, such as

an interest in the reorganized business. The debtor also

emerges from bankruptcy with property cleansed of all

hidden liens, ensuring that future businesses will transact

with the reorganized entity without fear that an unanticipated creditor will emerge with a superior interest in

purchased property. Penrod, 50 F.3d at 463; In re Regional

Bldg. Systems, Inc., 254 F.3d at 533.

Penrod recognizes the practical reality that if it appears

that a creditor has received some sort of payment or

otherwise had its interest in property affected during

the reorganization, the parties did not also agree to allow

the creditor to keep its lien after the reorganization unless

the plan specifically says so. Section 1141(c) and the default rule announced in Penrod ensure that a potential

creditor can look to a reorganization plan to determine

the extent of any other creditor’s continuing interest in

property after the reorganization. Penrod, 50 F.3d at 463.

If the property is “dealt with” by the plan, the property

is “free and clear of all claims and interests of creditors.”

11 U.S.C. § 1141(c).

But for the plan to “deal[ ] with” property for purposes

of § 1141(c), the plan itself must give some indication

that it has compensated the creditor for or otherwise

impliedly affected its interest. In other words, there must

be some evidence that the powers to affect the creditor’s

interest contained in the bankruptcy code—to exchange,

extinguish, impair or otherwise impact the interest—have
Nos. 07-2212, 07-2430 & 07-2529 13

in some way been exercised—whether expressly or impliedly. In Penrod, the plan clearly “dealt with” the bank’s

liens in the hogs. Mutual Guaranty was entitled to a full

payment plus interest for the rest of the amount owed

by the Penrods after the reorganization, and Mutual

Guaranty only participated in the bankruptcy because of

its interest in the hogs. The inference was that the payments contained in the plan compensated Mutual Guaranty

for its contingent property right in the hogs and thus

extinguished that interest after reorganization. See generally

In re Regional Bldg. Sys., Inc., 254 F.3d at 530-33.

Not so here. Everyone, including the bankruptcy court,

the creditor, and the debtor, assumed that the FCC had

validly cancelled the licenses. The plan thus only

affected or mentioned the licenses to the extent that the

FCC would eventually reinstate Airadigm’s interests in

the licenses, an event that never came to pass. The plan

itself referred to PCS licenses as the “Reinstated Licenses”

throughout, defining them as those “Licenses as to

which the FCC grants by Final Order the relief requested

by the Debtor in the Petition for Reinstatement.” To the

extent that the FCC would receive any future payment

from Airadigm for “Allowed claims,” it would only occur

“[o]n the Reinstatement Payment Date,” meaning the

“third Business Day after the” FCC reinstated the licenses.

Finally, the plan set out contingencies should the FCC

reinstate the licenses before June 2002, but made no

provision for anything after this date. A potential creditor

transacting with Airadigm after June 2002 could not

look to the plan to determine any other creditor’s potential interests in the licenses because the plan did not

purport to affect the licenses in any way if the FCC did not

reinstate them before June 2002. As a result, the 2000 plan
14 Nos. 07-2212, 07-2430 & 07-2529

did not “deal[ ] with” the licenses in the event that the

FCC did not reinstate them, and this Court’s rule from

Penrod does not control.

B. Applicability of the “Strong Arm” Provision to the

FCC’s Interests

Airadigm also appeals the lower courts’ conclusions

that the FCC’s liens could not be avoided under § 544(a)

of the bankruptcy code, a decision regarding a mixed

question of law and fact that we review de novo. Mungo,

355 F.3d at 974. Airadigm, as the debtor-in-possession,

has the “rights and powers of . . . a creditor that extends

credit to the debtor at the time of the commencement of

the case, and that obtains, at such time and with respect

to such credit, a judicial lien” on the property in question.

11 U.S.C. § 544(a)(1). This “strong arm” power functions

much like a foreclosure. If at the time of Airadigm’s filing some hypothetical unsecured creditor could have

obtained a judicial lien superior to the interest of the party

bringing a secured claim in the bankruptcy proceeding,

the estate can avoid the interest. See In re Leonard, 125

F.3d 543, 545 (7th Cir. 1997). But unlike a regular foreclosure, the property simply becomes the estate’s free of the

secured lien. Here, if some hypothetical creditor could have

obtained an interest superior to the FCC’s at the time of

Airadigm’s filing, the FCC will become an unsecured

creditor with respect to the licenses.

To resolve the question, we must look to the rules

governing the FCC’s interests in the licenses. For although

the “strong arm” power comes from federal bankruptcy

law, the rules governing the perfection of security interests do not. In the mine-run case—for example one con-
Nos. 07-2212, 07-2430 & 07-2529 15

cerning a private creditor’s interest in a tractor or some

type of inventory—state law governs. But when the

property in question falls outside of state commercial codes

by virtue of the federal interest or the nature of the property, federal law provides the rule of decision. Grogan v.

Garner, 498 U.S. 279, 283-84 & n. 9 (1991). In such instances,

if a federal statute speaks to the issue directly, the court

will look no further. See United States v. Kimbell Foods, Inc.,

440 U.S. 715, 726 (1979). Barring that, courts can either

adopt state law as the rule of decision, see, e.g., Kimbell

Foods, Inc., 440 U.S. at 729; see also Powers v. U.S. Postal Svce.,

671 F.3d 1041, 1043 (7th Cir. 1982), or craft a federal rule of

common law. See, e.g., Clearfield Trust Co. v. United States,

318 U.S. 363, 366 (1943). The issues before us are whether

state or federal law governs the perfection of the FCC’s

interests in the licenses and, if the latter, what federal law

demands.

Airadigm argues on appeal that Wisconsin law

should govern the perfection of the FCC’s interests in the

licenses. After the 1996 auction, the FCC executed fifteen

security agreements, and Airadigm signed fifteen promissory notes for the amounts owed. Initially, the FCC

filed financing statements in Wisconsin to perfect its

interests in the licenses. But financing statements lapse

after five years, and the FCC didn’t renew them when

the time came in June and July 2002, waiting until

June 2006 to file a continuation statement. See WIS. STAT.

§ 409.515(1), (3) (2003). Due to this lapse, if Wisconsin law

(or more generally the UCC) governs, the FCC’s interests

would be unperfected—and thus avoidable—due to this

failure to renew.

But neither the UCC nor Wisconsin law decides the

issue, as federal statutory and regulatory law prevent a

hypothetical lien creditor from obtaining a superior inter-
16 Nos. 07-2212, 07-2430 & 07-2529

est in an FCC license for purposes of the bankruptcy code.

The liens held by the FCC are unlike liens held by the

federal government as part of other federal lending programs, where the lien secures the loan by attaching to

property that is otherwise defined by state law. See, e.g.,

United States v. Kimbell Foods, Inc., 440 U.S. 715, 737 (1979).

Instead, the property itself—the license—is a creature of

federal law. Accordingly, federal law also defines the

FCC’s retained interest in that license. Cf. id. at 734-35

(contrasting federal interest in tax liens with its interest

in consensual liens). And as defined by federal law, the

FCC does not have to perfect its interest in a spectrum

license because federal law prevents another creditor

from holding a superior interest.

The licenses created by the Communications Act, as

amended in 1993, “maintain the control of the United States

over all the” invisible spectrum. 47 U.S.C. § 301. The

licenses give permission “for the use of such channels,

but not the ownership thereof,” and “no such license

shall be construed to create any right, beyond the terms,

conditions, and periods of the license.” Id. Although these

licenses provide license-holders the right to exclude, they

are not freely transferable as no license “or any rights

thereunder, shall be transferred, assigned, or disposed

of in any manner, voluntarily or involuntarily, directly

or indirectly, . . . except upon application to the Commission.” 47 U.S.C. § 310(d). Even then, the Commission

will only approve the transfer “upon finding . . . that the

public interest, convenience, and necessity will be served

thereby.” Id.

The rules governing the auctions themselves also preserve the FCC’s interests in the licenses. In 1993, Congress gave the FCC the authority to “grant [a] license or
Nos. 07-2212, 07-2430 & 07-2529 17

permit to a qualified applicant through a system of competitive bidding” that would “recover[ ] for the public . . .

a portion of the value of the public spectrum resource

made available for commercial use.” 47 U.S.C. § 309(j)(1),

(j)(3)(C). In so doing, the Commission was required to

“consider alternative payment schedules and methods of

calculation, including . . . guaranteed installment payments.” Id. at 309(j)(4)(a). Pursuant to this authority,

and after a notice-and-comment period, see In re Implementation of Section 309(j) of the Communications Act, 9 F.C.C.R.

5532 (1994), the FCC crafted regulations governing the

auction and the installment plan. These regulations conditioned a successful bidder’s use of the licenses “upon the

full and timely performance of the licensee’s payment

obligations under the installment plan.” 47 C.F.R.

§ 1.2110(g)(4). And finally, the very “terms of the . . .

license[s]”—which 47 U.S.C. § 301 provided would define

any “right” in them—stated that they were “conditioned

upon the full and timely payment of all monies due

pursuant to” the regulations and the security agreements.

These statutory and regulatory provisions indicate that

federal law precludes a private party from obtaining a

superior interest to the FCC. Generally, when a liencreditor forecloses on a lien, the affected property is

sold, and the lien-creditor recovers its debt from the

proceeds of the sale. In terms of priority, a lien-creditor

receives payment prior to any secured creditor whose

interest is unperfected. See, e.g., U.C.C. § 9-317(a)(2). In

other words, the unperfected secured creditor—in this case,

the FCC—will not get paid anything unless there is money

left over after superior creditors recover from the proceeds

of the sale. 3-28 DEBTOR-CREDITOR LAW § 28.03.

But if the forced sale of the PCS licenses were to occur
18 Nos. 07-2212, 07-2430 & 07-2529

with the FCC as merely an unperfected secured creditor,

the sale would conflict with the statutes and regulations

covering the FCC’s licensing scheme. This conflict gives

rise to a negative inference—controlling in this case—that

federal law does not allow private creditors to obtain an

interest in PCS licenses superior to the FCC’s. In the first

place, a judicially enforced sale would mean that a

“transfer” of the licenses occurred without an “application to the Commission and upon finding by the Commission that the public interest, convenience, and necessity will be served thereby.” 47 U.S.C. § 310(d); see also

FCC v. WOKO, Inc., 329 U.S. 223, 229 (1946).

In addition, if the lien-holder were to be paid before the

FCC, this would conflict with 47 U.S.C. § 301 and 47 C.F.R.

§ 1.2110(g)(4). Section 301 provides for the “use” of licenses

subject to the “terms, conditions, and periods of the

license.” And the “terms . . . of the license[s]” require

that the licensee make “full and timely payment of all

monies due.” The FCC’s regulations, crafted after Congressional authorization and a notice-and-comment period,

similarly predicate the auction-winner’s use of the licenses on “the full and timely performance of the licensee’s

payment obligations under the installment plan.” 47 C.F.R.

§ 1.2110(g)(4). Pursuant to Congress’s command to “recover . . . a portion of the value of the public spectrum

resource,” the FCC made full payment a regulatory condition on the use of the invisible spectrum when implementing the installment plan. Subordinating its interests

to that of a private lien-creditor would conflict with the

FCC’s statutory and regulatory authority.

As a result, under federal non-bankruptcy law the rights

afforded to a hypothetical lien creditor at the time of

Airadigm’s filing could not have been superior to the
Nos. 07-2212, 07-2430 & 07-2529 19

2 A previous decision of this Court, In re Tak Communications,

985 F.2d 916 (7th Cir. 1993), held that a “creditor may [not]

hold a security interest in [a] license.” This decision reflected

the FCC’s stated policy at the time, see In re Tak, 985 F.2d at 918-

19; In re Twelve Seventy, Inc., 1 F.C.C.2d 965, 967 (1965), and

ended with the proviso that any change in this policy was “a

matter for the FCC rather than the courts to decide.” In re Tak,

985 F.2d at 919. A subsequent decision coming from within the

FCC then expressly disagreed with In re Tak. The Chief of the

Mobile Services Division held that, despite the FCC’s general

“policy against a licensee giving a security interest in a license,”

a “security interest in the proceeds of the sale of a license does

not violate Commission policy.” In re Cheskey, 9 F.C.C.R. 986, 987

& n.8 (Mobile Serv. Div. 1994). Other circuits have found this

statement persuasive. See, e.g., MLQ Investors, L.P. v. Pacific

Quadracasting, Inc., 146 F.3d 746, 748-49 (9th Cir. 1998); In re

Beach Television Partners, 38 F.3d 535, 537 (11th Cir. 1994). But the

FCC has not argued before this Court that this decision is

entitled to Chevron deference, which would have meant that

the FCC effectively overruled In re Tak. See Nat’l Cable & Telecommunications Inc. v. Brand X Internet Svces., 545 U.S. 967, 982-84

(2005) (“A court’s prior judicial construction of a statute

trumps an agency construction otherwise entitled to Chevron

deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute

and thus leaves no room for agency discretion.”). Nor is Chevron

deference likely given that the Commission subsequently

(continued...)

FCC’s interests in the licenses. Accordingly, the lower

courts were correct to conclude that Airadigm cannot

avoid the FCC’s interests in the licenses under 11 U.S.C.

§ 544(a). We conclude by noting that we do not decide

whether a private party can in fact take an interest in the

proceeds of PCS licenses.2

 This decision is unnecessary
20 Nos. 07-2212, 07-2430 & 07-2529

2 (...continued)

declined to adopt this policy in affirming the Chief’s order in

Cheskey. See In re Cheskey, 13 F.C.C.R. 10656, 10659-60 (1998)

(expressly declining to reach issue); 47 U.S.C. §§ 154(i) (powers

of Commission), 155(c)(1)-(6) (powers, unused in Cheskey, to

delegate authority to an employee of the FCC). Accordingly,

because the answer to this question is not necessary for our

decision and because “it is [not] clear that a private party

can take and enforce a security interest in an FCC license,”

NextWave, 537 U.S. at 307, it is for a future case (or the FCC)

to readdress the matter if necessary.

because, regardless what interest a license-holder can

give a creditor in these licenses, it could not be superior

to the FCC’s for purposes of 11 U.S.C. § 544(a).

C. FCC’s Treatment as an Undersecured Creditor

In its cross-appeal, the FCC challenges its treatment as

an undersecured creditor. Airadigm still owes the FCC

$64.2 million for the licenses it purchased. But if the

licenses had been sold at the time of Airadigm’s 2006

reorganization, the going rate was only $33 million. So the

bankruptcy court treated the FCC as an undersecured

creditor in the 2006 reorganization plan. 11 U.S.C. § 506(a).

The plan, tracking the bankruptcy code, gave the FCC two

options. It could either receive immediate payment for

the entirety of its $33 million secured claim and treat

the remaining $31.2 million as unsecured. Id. Or it could

opt to treat the entire allowed $64.2 million claim as

secured and receive a deferred stream of payments

from Airadigm over a number of years. See 11 U.S.C.

§§ 1111(b)(1), (b)(2), 1129(b)(2)(A)(i)(II). To finance this

stream of payments, Airadigm would purchase
Nos. 07-2212, 07-2430 & 07-2529 21

$33 million of government-backed securities or annuities and would then use the interest from this principal

to pay the FCC over a term of years. In the alternative,

Airadigm could choose to pay the FCC from the proceeds

of the sale of the licenses. Should the FCC opt to treat the

whole claim as secured, it would retain its liens in the

licenses until it receives full payment, at which point

the liens would expire. See 11 U.S.C. § 1129(b)(2)(A)(i)(I);

see generally 7-1111 COLLIER ON BANKRUPTCY P.1111.03

(15th ed. 2007).

The FCC raises two objections related to the plan’s

provisions should it make the so-called § 1111(b) election.

The first need not detain us because it is waived. The

FCC argued for the first time in its appeal to the district

court that it was entitled to a higher interest rate on the

$33 million worth of securities. In short, the FCC claimed

that there is a risk that Airadigm will abscond with the

principal and accrued interest, and it wants the $64.2

million to accrue at a higher interest rate to compensate

for this risk. For this Court to entertain the merits of this

claim, which are questionable in this context, the FCC

must have raised it before the bankruptcy court so as to

preserve it for appeal. See In re Rimsat, Ltd., 212 F.3d 1039,

1048 (7th Cir. 2000). The FCC concedes that it didn’t,

so the claim is waived.

The FCC’s second claim is that the bankruptcy court did

not properly preserve the liens securing its claim in the

licenses because it did not keep the FCC’s due-on-sale

rights in the plan of reorganization. To approve of a plan

over the objection of a secured creditor, the bankruptcy

plan must “retain the liens securing [a secured creditor’s]

claims.” 11 U.S.C. § 1129(b)(2)(A)(i)(I). The FCC’s regulations provide that a licensee who obtained its licenses
22 Nos. 07-2212, 07-2430 & 07-2529

3 In the event that the bankruptcy code conflicted with the

statutes governing the FCC, a different situation—one not

presented here—would arise. See United States v. Energy Resources Co., Inc., 495 U.S. 545, 550-51 (1990).

under the installment plan must pay back the full amount

if it seeks to transfer the licenses to an entity that

wouldn’t otherwise qualify for the installment plan. 47

C.F.R. § 1.2111(c)(1). Because, in the FCC’s estimation, the

2006 plan does not preserve the due-on-sale provision,

it does not “retain the liens” and the plan cannot be

“crammed down” over its objection. The district court

disagreed with the FCC, a decision involving statutory

interpretation that we review de novo. In re Till, 301

F.3d 583, 586 (7th Cir. 2002), rev’d in part on other grounds,

541 U.S. 465 (2004).

The issue before the Court is what to make of the FCC’s

regulations for purposes of the bankruptcy code. As the

Supreme Court’s decision in NextWave makes clear, the

FCC participates in a debtor’s bankruptcy as a creditor

subject to the terms of the bankruptcy code. 537 U.S.

293, 302-03 (2003). Unlike most creditors, the FCC is a

creature of federal statutory law and a source of regulatory

laws. These laws can come into conflict or at least create

tension with the bankruptcy code. In the event that the FCC

has issued regulations that conflict with the requirements

of the bankruptcy code, NextWave commands that the

former give way.3

 For example, even though FCC regulations state that when a license-holder is in “default, its

license shall automatically cancel,” 47 C.F.R. § 1.2110(g)(iv),

the bankruptcy code prevents the FCC from cancelling a

license “solely because such . . . debtor . . . has not paid a

debt that is dischargeable in the case under this title.” 11
Nos. 07-2212, 07-2430 & 07-2529 23

U.S.C. § 525(a); see also NextWave, 537 U.S. at 302. The

bankruptcy code governs due to the time-honored rule of

legislative supremacy. See, e.g., Butner v. United States, 440

U.S. 48 (1979) (superseded in part by Pub. L. 103-394); see

also Diersen v. Chicago Car Exchange, 110 F.3d 481, 486 (7th

Cir. 1997).

Things are somewhat more complicated, however,

where the FCC’s regulations do not conflict with the

bankruptcy code, but instead contain substantive obligations with which the bankruptcy court must contend.

In this case, the FCC’s regulations provide that “[i]f a

licensee that utilizes installment financing under this

section seeks to assign or transfer control of its license to

an entity not meeting the eligibility standards for installment payments, the licensee must make full payment of

the remaining unpaid principal.” 47 C.F.R. § 1.2111(c)(1).

On the one hand, a bankruptcy court cannot nullify the

effect of a duly enacted regulation as part of the plan unless

the regulation conflicts with the bankruptcy code

or otherwise falls within the ambit of the powers conferred upon the court. Cf. generally Midlantic Nat. Bank v.

New Jersey Dept. of Environmental Protection, 474 U.S. 494

(1986). In providing the debtor with a “fresh start,” the

bankruptcy court could not bolster the reorganization

with a prospective freedom from all regulation. See, e.g.,

Ohio v. Kovacs, 469 U.S. 274, 284-85 (1985). Conversely,

the bankruptcy court has broad powers under the code

to modify terms of payment for a “claim.” NextWave,

537 U.S. at 302. This power obtains with no less sweep

when the terms of payment are contained in federal

regulations. Id. (“[W]here Congress has intended to

provide regulatory exceptions to provisions of the Bankruptcy Code, it has done so clearly and expressly,
24 Nos. 07-2212, 07-2430 & 07-2529

rather than by a device so subtle as denominating a motive a cause.”).

In these circumstances and for purposes of the cramdown

provision, the bankruptcy court must first ensure that the

plan complies with the bankruptcy code and, second,

ensure that, if the plan affects the FCC’s regulations, it has

done so pursuant to a specific power that Congress has

conferred upon the bankruptcy court. In light of this

framework, we affirm. The due-on-sale provisions contained in the FCC’s regulations do not constitute part of its

lien that the bankruptcy court had to “retain” in order to

approve the plan pursuant to § 1129. The bankruptcy code

defines a “lien” as a “charge against or interest in property

to secure payment of a debt or performance of an obligation.” 11 U.S.C. § 101(37). The due-on-sale provision

contained in the federal regulation is not a “charge against

or interest in property” but is instead a regulation regarding the terms of payment for the debt. A creditor can take

a lien in exchange for a loan and require payment over any

period of time, subject to nearly any rate of interest and

with prepayment penalties or acceleration clauses. And a

creditor can use a due-on-sale provision to prevent thirdparty assumption of desirable financial or lending conditions governing a secured interest. See generally 6-51

DEBTOR-CREDITOR LAW § 51.09. This is what the FCC has

done with the regulation at issue. Such regulatory terms do

not affect or attend the FCC’s underlying lien so that the

bankruptcy court must “retain” them in a plan, but are

instead simple terms of payment.

In addition, the bankruptcy plan does not purport to

affect the FCC’s powers to regulate outside of bankruptcy,

including through the due-on-sale provision. Accordingly,

there is no question that this provision falls within
Nos. 07-2212, 07-2430 & 07-2529 25

the power of the bankruptcy court. The plan provides

that “[w]hen the [FCC] has received the payments required [by the plan] . . . then the . . . Claim will be satisfied

in full, and such holder will have no further right or

interest in or to [sic] such securities or annuity contracts,

which will then become the exclusive property of the

Reorganized Debtor.” These “payments” can be made

“either from the proceeds of such securities or annuity

contracts, the proceeds of a sale of the corresponding

License or Partial License, direct payment by the Reorganized Debtor, or any assignee, designee or successor of

the Reorganized Debtor, or otherwise.” The plan does

not require the FCC to approve of a particular sale to

repay the amounts owed. Nor does it affect the FCC’s

regulatory powers should Airadigm decide to sell the

licenses to a party that would not qualify for installment payments. It merely states that should Airadigm

sell the licenses such that the FCC “has received the

payments required” by the plan, then the FCC will not

have any continuing interest in the underlying “securities

or annuity contracts” that would otherwise provide the

stream of payments. Because the plan “retain[ed] the

liens” and did not otherwise affect the FCC’s regulatory

authority, the bankruptcy court did not err by omitting

reference to the due-on-sale provisions in the 2006 reorganization plan.

D. Release of TDS from Liability

Finally, the FCC challenges the fact that the 2006 plan

releases TDS from all liability “in connection with” the

reorganization except for willful misconduct. The plan,

as is relevant, states “[e]xcept as expressly provided . . .

[TDS shall not] have or incur any liability to . . . any holder
26 Nos. 07-2212, 07-2430 & 07-2529

of any Claim . . . for any act or omission arising out of or

in connection with the Case, the confirmation of this

Plan, the consummation of this Plan, or the administration of this Plan or property to be distributed under this

Plan, except for willful misconduct.” The FCC argues that

this violates the bankruptcy code and was therefore

improper. For the reasons set out below, we disagree.

The question whether a bankruptcy court can release

a non-debtor from creditor liability over the objections

of the creditor is one of first impression in this circuit. See

In re Specialty Equipment, Co., 3 F.3d 1043, 1046-47 (7th

Cir. 1993) (approving of consensual non-debtor releases);

see also Union Carbide Corp. v. Newboles, 686 F.2d 593,

595 (7th Cir. 1982) (holding under previous version of

bankruptcy code that such releases are improper). And

the circuits that have addressed the matter have set out

a variety of approaches. Some have held that a non-consensual release of liability violates the bankruptcy code and

is thus beyond the power of the bankruptcy court. See

In re Lowenschuss, 67 F.3d 1394, 1401 (9th Cir. 1995); In re

Western Real Estate, 922 F.2d 592, 600 (10th Cir. 1990).

Others permit the releases but have splintered on the

governing standard. See, e.g., Deutsche Bank AG v.

Metromedia Fiber Network, Inc., 416 F.3d 136, 142 (2d Cir.

2005) (permitting release if it is “important” to reorganization); Gillman v. Continental Airlines (In re Continental

Airlines), 203 F.3d 203, 214 (3d Cir. 2000); In re A.H. Robins,

Co., 880 F.2d 694, 701-02 (4th Cir. 1989); In re Dow Corning

Corp., 280 F.3d 648, 658 (6th Cir. 2002) (setting out a sevenfactor balancing test).

The nub of the circuits’ disagreement concerns two

interrelated questions, one of which we have already

resolved and another that we answer here. The first is
Nos. 07-2212, 07-2430 & 07-2529 27

whether § 524(e) of the bankruptcy code bars a bankruptcy court from releasing non-debtors from liability to

a creditor without the creditor’s consent. See, e.g.,

Lowenschuss, 67 F.3d at 1401 (yes); Deutsche Bank AG,

416 F.3d at 142 (no). Section 524(e) provides that the

“discharge of a debt of the debtor does not affect the

liability of another entity on, or the property of any other

entity for, such debt.” 11 U.S.C. § 524(e). The natural

reading of this provision does not foreclose a third-party

release from a creditor’s claims. Specialty Equipment,

3 F.2d at 1047. Section 524(e) is a saving clause; it limits

the operation of other parts of the bankruptcy code and

preserves rights that might otherwise be construed as

lost after the reorganization. Id.; see also In re Hunter,

970 F.2d 299, 311 (7th Cir. 1992). Thus, for example, because

of § 524, a creditor can still seek to collect a debt from a codebtor who did not participate in the reorganization—even

if that debt was discharged as to the debtor in the plan.

Compare 11 U.S.C. § 524(a)(2) with 11 U.S.C. § 524(e). Or a

third party could proceed against the debtor’s insurer or

guarantor for liabilities incurred by the debtor even if the

debtor cannot be held liable. See In re Shondel, 950 F.2d

1301, 1306-07 (7th Cir. 1991); see also In re Hendrix, 986 F.2d

195, 197 (7th Cir. 1993).

In any event, § 524(e) does not purport to limit the

bankruptcy court’s powers to release a non-debtor from

a creditor’s claims. If Congress meant to include such a

limit, it would have used the mandatory terms “shall” or

“will” rather than the definitional term “does.” And it

would have omitted the prepositional phrase “on, or . . .

for, such debt,” ensuring that the “discharge of a debt of

the debtor shall not affect the liability of another entity”—whether related to a debt or not. See 11 U.S.C. § 34
28 Nos. 07-2212, 07-2430 & 07-2529

4 This Court had previously held that all non-debtor releases

were prohibited under the prior version of the bankruptcy

code. Union Carbide Corp. v. Newboles, 686 F.2d 593 (7th Cir.

1982). The language before these 1979 modifications—the 1982

case applied the pre-amendment version of the code—quite

explicitly answered the question at issue here. It provided that

“[t]he liability of a person who is a co-debtor with, or guarantor

or in any manner a surety for, a bankrupt shall not be altered

by the discharge of such bankrupt.” 11 U.S.C. § 34 (repealed

Oct. 1, 1979). Given Congress’s elimination of the statutory

language that formerly decided the issue, Union Carbide is

no longer controlling on this point of law.

(repealed Oct. 1, 1979) (“The liability of a person who is

a co-debtor with, or guarantor or in any manner a

surety for, a bankrupt shall not be altered by the discharge of such bankrupt.”) (prior version of § 524(e)).

Also, where Congress has limited the powers of the

bankruptcy court, it has done so clearly—for example, by

expressly limiting the court’s power, see 11 U.S.C. § 105(b)

(“[A] court may not appoint a receiver in a case under

this title”), or by creating requirements for plan confirmation, see, e.g., 11 U.S.C. § 1129(a) (“The court shall confirm a plan only if the following requirements are

met . . . .”). As a result, for the reasons set out in Specialty

Equipment, § 524(e) does not bar a non-consensual thirdparty release from liability.4

The second related question dividing the circuits is

whether Congress affirmatively gave the bankruptcy

court the power to release third parties from a creditor’s

claims without the creditor’s consent, even if § 524(e)

does not expressly preclude the releases. A bankruptcy

court “appl[ies] the principles and rules of equity jurisprudence,” Pepper v. Litton, 308 U.S. 295, 304 (1939), and its
Nos. 07-2212, 07-2430 & 07-2529 29

equitable powers are traditionally broad, United States v.

Energy Resources Co., Inc., 495 U.S. 545, 549 (1990). Section

105(a) codifies this understanding of the bankruptcy court’s

powers by giving it the authority to effect any “necessary

or appropriate” order to carry out the provisions of the

bankruptcy code. Id. at 549; 11 U.S.C. § 105(a). And a

bankruptcy court is also able to exercise these broad

equitable powers within the plans of reorganization

themselves. Section 1123(b)(6) permits a court to “include

any other appropriate provision not inconsistent with

the applicable provisions of this title.” 11 U.S.C.

§ 1123(b)(6). In light of these provisions, we hold that

this “residual authority” permits the bankruptcy court

to release third parties from liability to participating creditors if the release is “appropriate” and not inconsistent

with any provision of the bankruptcy code.

In this case, the bankruptcy court did not exceed its

authority in granting the limitation on TDS’s liability.

Ultimately, whether a release is “appropriate” for the

reorganization is fact intensive and depends on the nature

of the reorganization. Given the facts of this case, we

are satisfied that the release was necessary for the reorganization and appropriately tailored. First, the limitation

itself is narrow: it applies only to claims “arising out of

or in connection with” the reorganization itself and does

not include “willful misconduct.” See Deutsche Bank, 416

F.2d at 142 (noting that “potential for abuse is heightened

when releases afford blanket immunity”). This is not

“blanket immunity” for all times, all transgressions, and

all omissions. Nor does the immunity affect matters

beyond the jurisdiction of the bankruptcy court or unrelated to the reorganization itself. See 28 U.S.C. § 157(b); Cf.

In re Johns-Manville Corp., 2008 U.S. App. LEXIS 3228 (2d
30 Nos. 07-2212, 07-2430 & 07-2529

Cir. Feb. 16, 2008). Thus, should TDS have recklessly

committed some wrong during the 2000 or 2006 proceedings, it would still be liable to the FCC or any other third

party. Second, the limitation is subject to the other provisions of the plan, including one that expressly preserves

the FCC’s regulatory powers with respect to the licenses.

Therefore, TDS cannot use this limitation as a way of

skirting the FCC’s regulations regarding the use, possession, or transfer of the licenses. Third, the bankruptcy

court found “adequate” evidence that TDS required this

limitation before it would provide the requisite financing,

which was itself essential to the reorganization. See Deutsche Bank, 416 F.3d at 143. Airadigm owes TDS $188,264,000

for its secured claims, and it owes the FCC another

$33 million in secured claims for the licenses. As the

bankruptcy court found, without TDS’s involvement,

Airadigm would be on the hook for over $221 million in

debt—an amount that some other would-be financier

would not likely pay considering Airadigm’s financial

situation. Absent TDS’s involvement, the reorganization

simply would not have occurred. Given how narrow

the limitation is and how essential TDS was for the reorganization, the release is “appropriate” and thus within

the bankruptcy court’s powers.

III. Conclusion

For the foregoing reasons, we AFFIRM the district court’s

decision affirming the bankruptcy court.

USCA-02-C-0072—3-12-08