Kidd Communications v. Federal Communications Commission

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.
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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
 5

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
 6

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

1
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).
 7

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

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.
 8

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

3
The Commission attempted to draw a distinction between
reversionary interests acquired at the time of transfer and later-
acquired 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.”).
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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.
 10

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

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.
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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.