IN RE AIRADIGM COMMUNICATIONS, INC

ref453 F.3d 225, 233 (4th Cir. 2006); In re AutoStyle Plastics, Inc., 269 F.3d 726, 748 (6th Cir. 2001); In re Hedged-Invs. Assocs., Inc., 380 F.3d 1292, 1298 (10th Cir. 2004); but see In re Pac. Express, Inc., 69 B.R. 112, 115 (9th Cir.BAP 1986). Invariably citing the seminal case of Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939), these cases reason that bankruptcy courts should look to the substance rather than the form of transactions. Likewise, these cases reason that courts have equitable authority to properly characterize a transaction because the term "claim" is a Bankruptcy Code term of art (see 11 U.S.C. § 101(5)), and allowed claims in bankruptcy receive better treatment than equity interests. E.g., In re Insilco Techs., Inc., 480 F.3d 212, 218 n. 10 (3d Cir. 2007) ("[E]quity holders receive nothing unless all creditors are paid in full.").

This Court has acknowledged that recharacterization is distinct from equitable subordination but has never definitively stated whether we recognize a cause of action for recharacterization. See Matter of Lifschultz Fast Freight, 132 F.3d 339, 345 n. 3 (7th Cir. 1997).

Critically for our purposes, actions for recharacterization differ from actions for equitable subordination pursuant to Section 510(c) of the Bankruptcy Code. In an equitable subordination action, the analysis focuses on the behavior of a creditor, knocking down the status of a claim where a creditor engages in inequitable conduct. See In re Kreisler, 546 F.3d 863, 865 (7th Cir. 2008) ("Equitable subordination is generally appropriate only if a creditor is guilty of misconduct that causes injury to the interests of other creditors."); Matter of Lifschultz Fast Freight, 132 F.3d 339, 344 (7th Cir. 1997) (equitable subordination allows the bankruptcy court to root out ill-gotten gains). In contrast, recharacterization focuses on the underlying substance of the disputed transaction — that is, whether the filed claim satisfies the Bankruptcy Code's definition of "claim." Hedged-Invs., 380 F.3d at 1297; Dornier Aviation, 453 F.3d at 232; cf. also United Airlines, Inc. v. HSBC Bank USA, N.A., 416 F.3d 609, 612 (7th Cir. 2005) ("It is unlikely that the [Bankruptcy] Code makes big economic effects turn on the parties' choice of language rather than the substance of their transaction * * *."). In other words, recharacterization is a definitional attack.

Determining whether a claim should be recharacterized as an interest thus comes logically prior to determining whether a claim should be subordinated: equitable subordination presumes that the claim is in fact a "claim" within the meaning of the Code. Recharacterization occurs when one has mislabeled a transaction. SubMicron Sys., 432 F.3d at 454 (explaining that recharacterization is focused on whether "a debt actually exists"). As one bankruptcy court judge explained, "Determining the equitable subordination issue prior to determining whether the advance is a loan or a capital contribution is similar to taking the cart before the horse." Diasonics, Inc. v. Ingalls, 121 B.R. 626, 630 (Bkrtcy.N.D.Fla. 1990). Less colloquially, when a claim is equitably subordinated, a court disregards a party's formal rights; when a claim is recharacterized, a court determines what those formal rights are in the first instance.

With that broader understanding of re-characterization actions, it becomes evident why the FCC is barred by the Stipulation from seeking to have Claim 14 recharacterized as an equity interest. The Stipulation acknowledges ad nauseum that TDS had claims that would be allowed in the 2006 bankruptcy. The caption of the Stipulation reads "STIPULATION OF CLAIMS OF THE FEDERAL COMMUNICATIONS COMMISSION AND TELEPHONE DATA SYSTEMS, INC." And with respect to the Claim 14 Loans, the parties agreed that "the claims of TDS arising" from the loans "shall be allowed in the 2006 bankruptcy" (emphasis added). The language makes the case similar to In re Insilco Techs., Inc., 480 F.3d 212 (3d Cir. 2007). That case concerned a Chapter 11 liquidation in which the creditors' committee moved to have a trustee appointed. There was a dispute, but the motion was resolved through a settlement agreement. The settlement agreement specified that the "Senior Lenders' * * * claims against the Debtors * * * are fully and finally allowed" in an amount that was. spelled out in the agreement. Insilco., 480 F.3d at 216.

In rejecting an effort to have the claims recharacterized as equity, the Third Circuit noted that in bankruptcy law, the terms "claim" and "allowed" are terms of art. A claim is a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. § 101(5)(A). The term is broadly defined, so as to include legal rights. E.g., Fogel v. Zell, 221 F.3d 955, 960 (7th Cir. 2000); McClellan v. Cantrell, 217 F.3d 890, 895 (7th Cir. 2000) (claim based on fraud). When a claim is "allowed," that means that it is accepted as valid. See 11 U.S.C. § 502(a); Fed.R.Bankr.P. 3001(f) (properly filed and executed proof of claim is prima facie evidence that a claim is valid); Adair v. Sherman, 230 F.3d 890, 894 (7th Cir. 2000).

Given die specialized meanings of the terms involved, the Insilco Court reasoned that the settlement agreement by its terms precluded an action for recharacterization. Because a recharacterization action implicates the validity of the underlying claim, a claim could not be deemed both valid (allowed) and not a claim at all: "[L]oans cannot be both allowable claims and equity investments; * * * the latter (an interest) is not a claim at all. By agreeing that the [disputed loans] are * * * allowable claims, [the parties] necessarily agreed that the [disputed loans] were true loans." Insilco, 480 F.3d at 218.

Although Insilco involved a settlement that the bankruptcy court approved as part of a consent order and reorganization plan, its reasoning is equally apt here. A contrary result would ignore the fact that claims and interests are separate animals in bankruptcy law. As one noted commentator has observed, the definitional provisions are "[t]he heart of any code" (Douglas G. Baird et al., BANKRUPTCY: CASES, PROBLEMS, AND MATERIALS 31 (Rev. 3d ed. 2001)), and the parties cannot claim ignorance of building-block terms. As in Insilco, the parties agreed that the "claims" would be "allowed." There is simply no way that a claim could be "allowed" as a claim if it were, in fact, an equity interest. Moreover, Paragraph 2 of the Stipulation does Insilco one better by referring to TDS's advances of funds as "loans." Attempting to call the loans equity is too much for any plausible construction of the Stipulation to bear.

Thus, even if the Stipulation had included a broad reservation of rights, we would not accept the FCC's argument on the only issue that the FCC preserved for appeal — recharacterization. Accordingly, the judgment of the district court with respect to Claim 14 is affirmed.

B. Claim 15

Claim 15 stands on different footing with respect to the Stipulation. Although the Stipulation pro-rides that the claim of TDS as assignee of OEDA "shall be allowed in the 2006 Bankruptcy case," the 2000 Plan provides two different treatments for the claim. Critically, the parties do not define OEDA's claim separate and distinct from its treatment under the 2000 Plan. E.g., TDS Br. at 44 (implicitly agreeing with the district court's conclusion that the Stipulation transferred "the 2000 Plan rights"); id. at 48-49 (discussing whether the Primary Plan or Back-up Plan applied to Claim 15). We conclude both that the bankruptcy court did not abuse its discretion in interpreting the 2000 Plan and that TDS is judicially estopped to make the argument that it advances with respect to Claim 15.

Before OEDA assigned its rights to TDS, OEDA contended that the Primary Plan applied and that it was therefore entitled to $49 million. OEDA asked the bankruptcy court to order TDS to fund the Reinstatement Loan, which under the 2000 Plan would have paid the claim in the amount of $49 million. The bankruptcy court denied OEDA's motion and concluded that the Back-up Transfer Date occurred on November 14, 2002. Under Section 10.7 of the 2000 Plan, the Back-up Transfer Date triggered the $2 million payment in the Back-up Plan: "On the Back-up Transfer Date * * * [TDS] shall pay OEDA $2 million in full satisfaction of its secured claims."

In 2004, TDS filed a declaratory judgment action against OEDA. TDS took the position that OEDA was entitled only to $2 million under the 2000 Plan. See Loose Pleadings, Vol. V, Ex. 7; see also App. 221 (settlement agreement). As part of the settlement of that action, OEDA assigned to TDS whatever rights it had against Airadigm. TDS filed Claim 15. Subsequently, the bankruptcy court sustained the FCC's objection and disallowed the claim; the bankruptcy court reasoned that the Back-up Plan applied to the OEDA claim. The Back-up Plan applied because the "Back-up Transfer Date" had been reached. Section 10.7 of the 2000 Plan provided that, on the Back-Up Transfer Date, OEDA was entitled to $2 million from TDS. Therefore, TDS (as the assignee of OEDA's rights) had only a right of payment from itself, rather than a claim for $49 million.

The parties dispute whether the assignment was valid, a question which we need not reach.

As the bankruptcy court noted, the actual proof of claim was filed for $40 million plus interest. App. 81, 89.

1. The Bankruptcy Court Did Not Abuse its Discretion

The plain language of the 2000 Plan provides that OEDA was entitled only to $2 million, meaning, as the FCC put it, that TDS stepped into satisfied shoes. In re Doctors Hosp. of Hyde Park, Inc., 337 F.3d 951, 956-57 (7th Cir. 2003) (assignor can give only that which he has). Section 10.7 of the 2000 Plan, which is titled "Payment to OEDA," provides that "[o]n the Back-up Transfer Date * * * [TDS] shall pay OEDA $2 million in full satisfaction of its secured claims." As the bankruptcy court succinctly laid out, the Back-up Transfer Date is defined as the tenth business day after the Funding Termination Date. 2000 Plan § 2.5. The Funding Termination Date is defined as the date when TDS's obligation to fund the "Working Capital Loan" terminated. That date was extendable at TDS's option. 2000 Plan § 6.7.

Moreover, under the literal terms of the 2000 Plan, the Primary Plan could not govern, because claims were to be paid only when the licenses were reinstated — something which, because of NextWave, never actually took place. And because it never took place, TDS never had the obligation to fund the loans that would have paid OEDA's claims. TDS's analysis accounts only for the general purpose of the plan — one option if Airadigm had the licenses and another option if it did not — without discussing the fact that the contingencies in the 2000 Plan were not just linked to whether Airadigm had the licenses, but also to whether Airadigm had the financing to pay the claims at issue.

To be sure, the conundrum presents thorny questions of interpretation, but we do not think that the bankruptcy court abused its discretion in interpreting the plan. Instead of pointing out how the bankruptcy court abused its discretion, TDS offered only its own conclusory assertions to the effect that the FCC's Claim, which was allowed, had to be treated the same as the OEDA claim. But TDS has not shown how, as a matter of plan interpretation, all creditors had to be subject either to Primary Plan treatment or Backup Plan treatment. In light of the labyrinthine nature of the 2000 Plan, TDS's conclusion is hardly self-evident. Therefore, we reverse the judgment of the district court and direct it to enter judgment consistent with the bankruptcy court's treatment of the claim.

2. TDS is Judicially Estopped to Argue that Claim 15 Should be Allowed

Independent of the foregoing, we also note that TDS is not entitled to judgment on. Claim 15 because it is judicially estopped to argue that it is entitled to the $49 million claim. See Matter of Cassidy, 892 F.2d 637, 641-42 (7th Cir. 1990).

Judicial estoppel is an equitable concept that prevents parties from playing "fast and loose" with the courts by prevailing twice on opposing theories. Butler v. Vill. of Round Lake Police Dep't, 585 F.3d 1020, 1022 (7th Cir. 2009). The doctrine is "invoked by a court at its discretion." New Hampshire v. Maine, 532 U.S. 742, 750, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) (quoting Russell v. Rolfs, 893 F.2d 1033, 1037 (9th Cir. 1990)). The doctrine's purpose is to protect the integrity of the judicial process. Johnson v. ExxonMobil Corp., 426 F.3d 887, 891 (7th Cir. 2005). Put a bit colorfully, judicial estoppel "protects] the courts from being manipulated by chameleonic litigants who seek to prevail, twice, on opposite theories." Levinson v. United States, 969 F.2d 260, 264 (7th Cir. 1992). Without judicial estoppel, parties' inconsistent litigating positions could undermine the integrity of the judiciary by "creating] the perception that either the first or the second court was misled * * *." Moses v. Howard Univ. Hosp., 606 F.3d 789, 792 (D.C. Cir. 2010) (quoting Maine, 532 U.S. at 750, 121 S.Ct. 1808).

The FCC did raise the issue of judicial estoppel in its opening brief (FCC Br. at 46 47), although the doctrine can be raised by courts sua sponte because judicial estoppel concerns the integrity of the judicial system independent of the interests of the parties. Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 530 (5th Cir. 2000).

Although the Supreme Court has emphasized that there is no formula for judicial estoppel, it has identified at least three pertinent factors for courts to examine: (1) whether the party's later position was "clearly inconsistent" with its earlier position; (2) whether the party against whom estoppel is asserted in a later proceeding has succeeded in persuading the court in the earlier proceeding; and (3) whether the party "seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped." Maine, 532 U.S. at 750-51, 121 S.Ct. 1808 (collecting cases and repeating that no rigid formula applies to the analysis); see also Thore v. Howe, 466 F.3d 173, 181 (1st Cir. 2006) ("The contours of the judicial estoppel doctrine are not sharply defined * * *."); Moses, 606 F.3d at 792 (party may not change positions "simply because his interests have changed").

Judicial estoppel does not come into play only when a party attempts to retreat in a second case from an argument on which it prevailed in a separate earlier case. It also "prevents a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail in another phase." Pegram v. Herdrich, 530 U.S. 211, 227 n. 8, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000) (citing Rissetto v. Plumbers Steamfitters Local m, 94 F.3d 597, 605 (9th Cir. 1996)); see also Al's Serv. Ctr. v. BP Prods. N. Am., Inc., 599 F.3d 720, 728 (7th Cir. 2010) (reasoning that, even with regard to two separate suits, success at an early stage of the earlier litigation would be no bar to the application of the doctrine in subsequent litigation); Cont'l Ill. Corp. v. Comm'r, 998 F.2d 513, 518 (7th Cir. 1993) (although the doctrine is normally raised in successive suits "it is not so limited"); Charles Alan Wright, Arthur R. Miller Edward H. Cooper, 18B FEDERAL PRACTICE AND PROCEDURE § 4477, at 552 (2d ed. 2002) (theories of judicial estoppel draw from the fact of inconsistency rather than the fact of adjudication). Likewise, there is no requirement that the parties be the same for judicial estoppel to apply. What matters for purposes of judicial estoppel is whether, in reaching its earlier decision, the court relied on the representation of the one against whom estoppel is asserted. Rederford v. U.S. Airways, Inc., 589 F.3d 30, 38 (1st Cir. 2009); Lowery v. Stovall, 92 F.3d 219, 223 n. 3 (4th Cir. 1996) (judicial estoppel does not have a mutuality requirement because the doctrine "is designed to protect the integrity of the courts rather than any interest of the litigants").

In this case, TDS successfully argued before the bankruptcy court that the Back-up Plan controlled with respect to the $49 million claim at issue. Before OEDA assigned its claim to TDS, OEDA filed a motion with the bankruptcy court which asked the court to interpret the 2000 Plan and force TDS to make the Reinstatement Loan and fund OEDA's claim. TDS opposed OEDA's motion, arguing that the Back-up Plan controlled with respect to OEDA. TDS's argument then was nearly identical to the description of the bankruptcy judge's ruling on Claim 15 that we set out above. Compare App. 251 (TDS's position with respect to OEDA's motion), with App. 84 (bankruptcy court's decision with respect to Claim 15). The bankruptcy court denied OEDA's motion on the merits, based on "the briefs and supporting papers of the parties," as well as oral argument (which was basically a repeat of TDS's position in its brief). As part of that ruling, the bankruptcy court determined that the Back-up Transfer Date occurred on November 14, 2002. App. 219. Because the Back-up Transfer Date occurred, TDS did not have to fund the Reinstatement Loan that would have paid OEDA's $49 million claim. The result of denying OEDA's motion was a savings of $47 million for TDS.

Application of judicial estoppel seems particularly appropriate in the setting of this case, in which the parties were assisting the bankruptcy court in interpreting the meaning of the 2000 Plan. In light of the numerous interpretive difficulties caused by the NextWave decision, the bankruptcy court was faced with no small task. If we accepted TDS's argument on appeal, it would give the impression that, rather than helping the bankruptcy court to interpret the plan, TDS hoodwinked that court. TDS's position is diametrically opposed to the position that it took before the bankruptcy court. Moreover, TDS would receive an "unfair advantage" ( Maine, 532 U.S. at 751, 121 S.Ct. 1808), because if OEDA had a $49 million claim under the Primary Plan, then TDS would have been obligated to pay it. Now that the bankruptcy is closed, not only would TDS be entitled to the value of the claim, it would be relieved from the burden of paying for the claim. Its inconsistent litigation position would yield a king's ransom.

Finally, we see in TDS's brief no "reasonable justification" for the change in its litigating position. Thore, 466 F.3d at 185; see also Johnson Serv. Co. v. Transamerica Ins. Co., 485 F.2d 164, 175 (5th Cir. 1973) (reasoning that estoppel is appropriate for "cold manipulation and not an unthinking or confused blunder"). Based on our review of the matter, we conclude that the successful contention made by TDS when it disputed OEDA's right to payment cannot "exist side by side" ( Cleveland v. Policy Mgmt. Sys. Corp., 526 U.S. 795, 803, 119 S.Ct. 1597, 143 L.Ed.2d 966 (1999) (SSDI and ADA claims that mutually exclusive)) with its current position. Therefore, TDS was not entitled to change positions based on the "exigencies of the moment" ( Maine, 532 U.S. at 750, 121 S.Ct. 1808 (quoting United States v. McCaskey, 9 F.3d 368, 378 (5th Cir. 1993))), and even if the bankruptcy court had abused its discretion, TDS would not be entitled to relief.

C. Claim 16

Finally, we affirm the judgment of the district court with respect to Claim 16. As with Claim 15, the Stipulation does not answer the question of whether the Backup Plan or the Primary Plan was intended to govern. The FCC argues that the value of the claim is zero because under the Back-up Plan, Ericsson was not entitled to payment and its liens would have been extinguished. We conclude that even if the Back-up Plan applied, the 2000 Plan did not extinguish the liens, and the liens may give rise to a claim in a subsequent bankruptcy.

The default rule is that a lien is extinguished as part of a plan of reorganization unless the plan says otherwise. 11 U.S.C. § 1141(c) (property dealt with by a plan is "free and clear of all claims and interest of creditors"); Matter of Penrod, 50 F.3d 459, 462-63 (7th Cir. 1995). Section 5.2 of the 2000 Plan specifically retained Ericsson's liens:

If Ericsson fails to receive payment with respect to any of the Reinstated Licenses, Ericsson shall retain its Liens on such Reinstated Licenses and the proceeds thereof to secure payment of the unpaid portion of its [claim]. Ericsson shall retain its Liens on any Licenses that are terminated and not reinstated and the related proceeds thereof.

The Back-up Plan provided that no payments would be made "on account of Claims against the Debtor," except as specified in the Back-up Plan, but did not purport to extinguish Ericsson's liens on licenses that were not reinstated. That feature makes the treatment of Ericsson different from the treatment of OEDA: as we have already observed, OEDA's Backup treatment stated that the payment was in full satisfaction of its secured claim. 2000 Plan § 10.7. We presume that the difference in the language of the plan is purposeful. LaSalle Nat'l Trust, N.A. v. ECM Motor Co., 76 F.3d 140, 144 (7th Cir. 1996) (contract interpretation should give effect to each term). That means that, at first blush, TDS retains the liens.

The FCC's attempted trump card is to argue that NextWave means that the licenses were neither "Reinstated" nor "terminated and not reinstated." We are not persuaded.

Principles of contract law apply to interpreting a plan of reorganization: "A confirmed plan of reorganization is in effect a contract between the parties and the terms of the plan describe their rights and obligations." Ernst Young LLP v. Baker O'Neal Holdings, Inc., 304 F.3d 753, 755 (7th Cir. 2002). And the primary purpose of contract interpretation is to give effect to the objective intent, of the parties. Solowicz v. Forward Geneva Nat'l, LLC, 323 Wis.2d 556, 780 N.W.2d 111, 124 (2010). "By intent we * * * mean * * * the scope and purpose of the document as manifest by the language used." Id. (brackets omitted). The language in Section 5.2 that we quoted above was designed to ensure that Ericsson retained its liens regardless of what happened with Airadigm's petition to have the licenses reinstated. Everyone, including the FCC, thought that Airadigm did not have the licenses when the 2000 Plan was drafted. Therefore, and in light of the manifest purpose of the 2000 Plan as revealed through the undisputed circumstances surrounding its adoption ( cf. Ehlinger v. Hauser, 313 Wis.2d 718, 758 N.W.2d 476, 486 (2008)), we find no ambiguity as to the status of the Ericsson liens. The FCC has pointed us to no evidence that any of the parties contemplated any other treatment than to preserve the liens. "We will not bend the language of a contract to create an ambiguity when none exists, but neither will we follow a literal interpretation when [to do so] would lead to an unreasonable or absurd result." Chi. Bd. of Options Exch. v. Conn. Gen. Life Ins. Co., 713 F.2d 254, 258 (7th Cir. 1983) (citation omitted).

As a last ditch effort, the FCC points out that even if Ericsson retained the liens, a lien is not a right to payment. Not true. The term "claim" is defined broadly in the Bankruptcy Code. And under Johnson v. Home State Bank, a right that is purely in rem may give rise to a "right to payment." 501 U.S. 78, 84-S6, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) ("[W]e must infer that Congress fully expected that an obligation enforceable only against a debtor's property would be a `claim' under § 101(5) of the Code."). In Johnson, the Court ruled that a mortgage lien, which survived an individual debtor's discharge of personal liability in a Chapter 7 bankruptcy case, gave rise to a claim subject to inclusion in the debtor's subsequent Chapter 13 reorganization plan. Thus, the FCC's argument that TDS does not have a claim in the 2006 bankruptcy because there was no obligation to make payments on the Ericsson claim under the 2000 Plan's Back-up Plan (FCC Br. at 53) is unavailing. TDS had a claim as defined by the Bankruptcy Code in the 2006 bankruptcy because it had an in rem right that survived the 2000 Plan. That is a key lesson — or at least a lesson that follows naturally — from Johnson. Under the 2000 Plan, Ericsson was going to get paid or keep its liens. TDS, as the assignee of Ericsson's claim, took the same right.

Therefore, the judgment of the district court is affirmed with respect to Claim 16.

IV. Conclusion

For the reasons set forth above, the judgment of the district court is AFFIRMED in part and REVERSED in part. The district court's judgment is affirmed, except as to the treatment of Claim 15. As to that claim, the district court is directed to enter judgment consistent with the bankruptcy court's treatment of the claim.