No October Term In the. Supreme Court of the United States. HIGHWAY 61, INC., Petitioner, HIGH ROCKS, INC., Respondent.

Transcription

1 No October Term 2017 In the Supreme Court of the United States HIGHWAY 61, INC., Petitioner, v. HIGH ROCKS, INC., Respondent. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT BRIEF OF PETITIONER HIGHWAY 61, INC. Team P55 Counsel for the Petitioner

2 QUESTIONS PRESENTED (1) Whether a bankruptcy court may approve a sale of real property free and clear of a leasehold interest held by an objecting lessee pursuant to Section 363(f) of the Bankruptcy Code despite the protection that exists for lessees in Section 365(h)? (2) Whether a bankruptcy court may approve a contested gift settlement involving a payment by a Section 363 purchaser in connection with the acquisition of the debtor s assets when the settlement proceeds are not distributed in accordance with the Bankruptcy Code s priority scheme? i

3 TABLE OF CONTENTS QUESTIONS PRESENTED....i STATEMENT OF FACTS..1 STATEMENT OF JURISDICTION....4 STANDARD OF REVIEW.4 OPINIONS BELOW....5 SUMMARY OF THE ARGUMENT..5 DISCUSSION 10 I. THE THIRTEENTH CIRCUIT ERRED IN UTILIZING THE MINORITY VIEW, WHICH ALLOWS THE PROTECTIONS CONGRESS GRANTED TO LESSEES IN SECTION 365(h) TO BE ELIMINATED BY A SECTION 363(f) SALE A. Sales Free and Clear of All Leasehold Interests Pursuant to 363(f) Conflict with Lessees Protections Under 365(h) Because They Both Involve Rejecting the Lease...11 B. Section 365 Trumps Section 363 Under the Canon of Statutory Construction That a Specific Provision Governs Over a General One.. 15 C. Congress Intended for Section 365 to Trump Section D. Section 363 Does Not Provide Adequate Protection of the Lessee s Interest II. THIS COURT SHOULD UPHOLD LONGSTANDING PRECEDENT THAT DISALLOWS DEVIATIONS FROM THE PRIORITY RULE, AND HOLD THAT 4TH STREET S GIFT IS STILL SUBJECT TO THE PRIORITY RULE BECAUSE IT IS PROPERTY OF THE ESTATE A. This Court Does Not Allow Deviations From the Priority Rule...24 B. Even if There is a Rare Case Exception, The Exception is Not Applicable in This Case i. The Deviation Does Not Serve a Significant Bankruptcy Related Purpose...28 ii. The Settlement Deviations are Unwarranted Because the Settlement is a Final Distribution...30 C. The Deviation Contemplated in Iridium is Inapplicable Because the Settlement Did Not Involve a Pre-Plan Settlement and Because 4th Street Did Not Provide the Bankruptcy Court with Specific and Credible Grounds to Justify the Deviation...31 D. The Settlement is Subject to the Priority Rule Because it is Property of the Estate..32 CONCLUSION ii

4 TABLE OF AUTHORITIES U.S. Supreme Court Cases Bank of Am. Nat'l Tr. & Sav. Ass'n v. 203 N. Lasalle St. P'ship, 526 U.S. 434 (1999).21 Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017).22, 23, 25, 26, 27, 29, 30 Law v. Siegel, 134 S. Ct. 1188, 1198 (2014)...22 Milavetz, Gallop & Milavetz, P.A. v. U.S., 559 U.S. 229 (2010) 18, 19 Morton v. Mancari, 417 U.S. 535 (1974)..19 Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 2017 (1988)..22, 25 Protective Comm. for Indep. Stockholders of TMT Trailer Ferry v. Anderson, 390 U.S. 414 (1968) 25 U.S. v. Embassy Rest., Inc., 359 U.S. 29, 32 (1959).. 23, 27, 28 Other Federal Cases IDEA Boardwalk, LLC v. Polo N. Country Club, Inc., 2017 WL , at *6 (D. N.J. Oct. 31, 2017)...15 In re LCI Holding Co., 802 F.3d 547 (3d Cir. 2015).34 Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007) 32, 33 Official Comm. of Unsecured Creditors v. CIT Grp./Bus. Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015)..30 Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions, LLC (In re Spanish Peaks Holdings II, LLC), 872 F.3d 892 (9th Cir. 2017)...12, 14, 22 Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 377 F.3d 537 (7th Cir. 2003)...12, 14, 15, 17, 19, 20 Bankruptcy Court Cases Dishi & Sons v. Bay Condos LLC, 510 B.R. 696 (S.D.N.Y. 2014)..13, 14, 21 IDEA Boardwalk, LLC v. Revel Entm t Grp., LLC (In re Revel AC, Inc.), 532 B.R. 216 (Bankr. D. N.J. 2015) In re Buffet Partners, L.P., 2014 Bankr. LEXIS 3204, 2014 WL (Bankr. N.D. Tex. July 23, In re Churchill Props. III, L.P., 187 B.R. 283 (Bankr. N.D. Ill. 1996) 12, 13, 16 In re Crumbs Bake Shop, Inc., 522 B.R. 766 (Bankr. D. NJ. 2014)...12, 16, 17, 19 In re Fryar, 570 B.R. 602 (Bankr. E.D. Tenn. 2017)...30 In re Haskell L.P., 321 B.R. 1 (Bankr. D. Mass. 2005) 12, 13, 22 In re LHD Realty Corp., 20 B.R. 717 (Bankr. S. D. Ind. 1982)...19 In re On-Site Sourcing, Inc., 412 B.R. 817 (Bankr. E.D. Va. 2009) 26, 28, 32, 34, 35 In re R.J. Dooley Realty, Inc., 2010 WL (Bankr. S.D.N.Y. May 21, 2010)...22 In re Taylor, 198 B.R. 142 (Bankr. D. S.C. 1996) 12 In re Zota Petroleums, LLC, 482 B.R. 154 (Bankr. E.D. Va. 2012) 12, 17, 21 Statutes 11 U.S.C. 103(a)...26, U.S.C.S. 349(b) U.S.C. 363(e) iii

5 TABLE OF AUTHORITIES (continued) 11 U.S.C. 363(f) U.S.C. 365(h) U.S.C. 503(b)(1)(A)(i) U.S.C. 507(a)(1) U.S.C. 541(a)(6) U.S.C. 1129(b)(2)(B) Journal Articles Daniel J. Ferretti, Comment, Eviction without Rejection The Tenant s Bankruptcy Dilemma: Bankruptcy Code Sections 363(f) and 365(h)(1)(A) and the Divergent Interpretations of Precision Industries, Inc. v. Qualitech Steel SBQ, LLC and In re Haskell, 39 CUM. L. REV. 707 (2009) , 19 Elizabeth Warren, A Theory of Absolute Priority, 1991 Ann. Survey Am. L. 9, 30 (1991)..23 Michael St. Patrick Baxter, Section 363 Sales and Clear of Interests: Why the Seventh Circuit Erred in Precision Industries v. Qualitech Steel, 59 BUS. LAW. 475 (2004) , 19 Robert M. Zinman, Precision in Statutory Drafting: the Qualitech Quagmire and the Sad History of 365(h) of the Bankruptcy Code, 38 J. MARSHALL L. REV. 97, (2004)..18, 19 Treatises BLACK S LAW DICTIONARY 1418 (9th ed. 2009) H.R. REP. NO (1994) iv

6 OPINIONS BELOW The decision and Order of the United States District Court for the District of Moot is unreported and set out in the Record. R. at 9. The opinion of the United States Court of Appeals for the Thirteenth Circuit is also unreported and provided in the Record. R. at STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. STANDARD OF REVIEW This Court reviews a bankruptcy court s decision directly, and not the district court s review of the bankruptcy court s decision. Mediofactoring v. McDermott (In re Connolly N. Am., LLC), 802 F.3d 810, 814 (6th Cir. 2015). The facts set forth herein are not disputed by the parties. Rather, the issues involve questions of law. Thus, this Court s review is de novo. Texas v. Soileau (In re Soileau), 488 F.3d 302, 305 (5th Cir. 2007). Under de novo standard of review, the reviewing court decides an issue as if the court were the original trial court in the matter. Razavi v. Commissioner of Internal Revenue, 74 F.3d 125, 127 (6th Cir. 1996). v

7 STATEMENT OF FACTS High Rocks ( Debtor ) is a development company that was in the process of building a casino and resort. R. at 3-4. The Debtor s property consists of the casino and resort, a nearly completed 30-story, 400-room hotel tower, conference facilities, restaurants, and a 7,000-seat outdoor amphitheater. R. at 4. The development was largely financed by an $800 million secured loan from North Country Bank ( North Country ). R. at 4. Skyline Construction, Inc. ( Skyline ) was selected to serve as the general contractor for the development after submitting the lowest bid in a competitive bidding process. R. at 4. Skyline began construction in May of 2014, but faced a number of problems from the beginning, allegedly due to Skyline s mismanagement. R. at 4. Skyline was able, however, to complete much of the construction of the amphitheater, including a stage, concession stands, restrooms, a ticket office, and a VIP lounge. R. at 4. Skyline did not install seating, sound equipment, or specialized acoustic panels. R. at 4. The Debtor terminated its contract with Skyline due to the ongoing construction problems in December of R. at 4. Before the commencement of construction, Highway 61, Inc. ( Petitioner or Highway ) and the Debtor entered into a 30-year lease agreement ( Highway Lease ) where it was contemplated that Highway would manage, market, and operate the amphitheater. R. at 5. The rent that Highway would pay was $400,000 per year plus a percentage of ticket and concession sales. R. at 5. Shortly after the termination of the contract, Skyline was replaced by Shelter From the Storm Builders, Inc. ( Shelter ) to complete the remainder of the construction. R. at 5. Due to Shelter s lack of experience necessary to complete the amphitheater, Shelter and the Debtor agreed that the Debtor would find another contractor to finish the amphitheater. R. at 5. 1

8 After repeated delays, North Country sold its note at a sizable discount to 4th Street. 4th Street concedes that it purchased the note to further its loan to own strategy. R. at 5. This investment strategy involves an investor who acquires secured debt from a distressed company to obtain control of, and later acquire, the assets of the company, either through a foreclosure sale or, in bankruptcy, through a Section 363 sale. R. at n.2. Accordingly, in June of 2016, 4th Street commenced a foreclosure action against the Debtor. R. at 5. In response to the foreclosure action, the Debtor voluntarily filed for Chapter 11 bankruptcy in July of R. at 5. After the filing, Highway offered to install the seats, sound equipment, and acoustic panels that were still needed for completion of the amphitheater. R. at 6. The Bankruptcy Court approved a post-petition contract between Highway and the Debtor, under which Highway would finish the amphitheater in exchange for a payment of $2 million. R. at 6. Because the Debtor had limited funds, Highway agreed to defer the payment until the development opened to the public. R. at 6. Highway completed construction of the amphitheater by November of R. at 6. Since the rest of the development had not been completed, the Debtor, the Official Committee of Unsecured Creditors ( the Committee ), and Highway agreed that Highway was entitled to a $2 million administrative expense under section 503(b)(1) of the Bankruptcy Code ( the Code ). R. at 6. No parties objected, and the Bankruptcy Court issued a final order allowing the administrative expense. R. at 6. The Debtor halted construction in late December 2016 and filed a motion to sell substantially all of its assets free and clear of all liens, claims, encumbrances, and interests pursuant to section 363(f) of the Code. R. at 6. The Debtor did so because it was running out of cash, faced significant pressure from 4th Street, and lacked sufficient cash flow to fund a plan of reorganization. R. at 6. The sale motion expressly stated that, at the election of the winning bidder, 2

9 the sale would be free and clear of Highway s leasehold interest. R. at 6-7. The Committee alleged lender liability claims against 4th Street, challenged the validity and extent of its claims and liens, and also began investigating claims related to Skyline s alleged mismanagement of the construction project. R. at 7. The Skyline claims were assigned as part of an unrelated settlement to a litigation trust, of which unsecured creditors are the sole beneficiaries. R. at 7. On January 11, 2017, the Debtor s assets went up for auction. There were no other qualified bidders present except for 4th Street. R. at 7. 4th Street bid the full amount of its secured debt, and was named the successful bidder. R. at 7. 4th Street notified the parties that it planned on operating the amphitheater itself, and thus it would acquire the development free and clear of Highway s leasehold interest. R. at 7. There were two objections to the proposed sale. R. at 7. The Committee objected based on certain claims it had against 4th Street, and argued that the sale was merely a veiled foreclosure that would leave nothing for unsecured creditors or the pursuit of the Skyline claims. R. at 7. Highway s objection asserted that it retained rights to possess the amphitheater under its lease, despite the sale being free and clear of interests, under Section 365(h) of the Code. R. at 7. Highway also sent a letter to the Debtor choosing to retain its interest in the property pursuant to Section 365(h), and reiterated that the sale of the amphitheater free and clear of the Highway Lease effectively rejected the lease. R. at 8. Prior to the sale hearing, the Debtor, the Committee, and 4th Street reached an agreement regarding the Committee s objection ( Settlement ). R. at 8. The Settlement provided that, in exchange for the Committee withdrawing its objection to the sale and releasing 4th Street of any claims against it, 4th Street would provide $2 million to the trust in order to fund the unsecured 3

10 creditors trust s litigation against Skyline. R. at 8. Highway renewed its objection to the sale at the sale hearing based on its leasehold interest being improperly terminated contrary to its rights pursuant section 365(h) of the Code. R. at 8. Highway asserted an additional objection arguing that the Settlement could not be approved because of deviations of the priority rule, which requires that claims of a higher priority be paid in full before distributions to unsecured creditors. R. at 8. Notwithstanding Highway s objections, the Bankruptcy Court approved the Settlement and the sale in a bench opinion holding that 363(f) trumped whatever rights Highway may have pursuant Section 363(h) of the Code. R. at 8-9. The Bankruptcy Court also held that the priority rule was not implicated because the Settlement was in the best interests of all parties in that the additional funds provided by 4th Street would permit the trust to pursue the Skyline litigation. R. at 9. Highway appealed to the district court, which affirmed, and appeal was again affirmed by the Thirteenth Circuit. R. at 20. Highway submitted a writ of certiorari, and this appeal followed. R. at 2. SUMMARY OF THE ARGUMENT The decision of the Thirteenth Circuit is incorrect, and improperly violates Highway s statutorily protected rights in its leasehold interest. This Court, therefore, should adopt the reasoning implemented by a majority of circuits holding that leasehold rights under Section 365(h) cannot be eviscerated by a sale free and clear of interests under Section 363(f). Section 363(f) permits a debtor to sell property free and clear of any interests on the property. Section 365(h) provides protections for lessees, and states that if a debtor rejects a leasehold interest, then the lessee has the option of continuing possession of the interest until the term of the contract is up. A 4

11 majority of courts that address the interplay between Section 363(f) and Section 365(h) correctly find that the two provisions do conflict when they overlap, and hold that lessee rights under 365(h) trump sales pursuant to Section 363(f). The majority approach correctly finds that Sections 365(h) and 363(f) conflict when they overlap because a sale free and clear of a leasehold interest is the functional equivalent of the rejection of a lease contemplated under Section 365. To hold otherwise would allow debtors to void the rights that Congress granted lessees under 365(h) by instead pursuing a sale free and clear of that interest. Furthermore, because the two statutes conflict, the majority approach applies the canon of statutory construction which states that specific statutory provisions prevail over the general. Section 363(f) is a more general provision that deals with sales free and clear of all types of interests. Section 365(h), however, is a specific provision that deals only with leasehold interests and lessee rights. Thus, the correct way to interpret the two sections is to find that Section 365(h) is more specific than Section 363(f). The majority approach is also correct in finding that Congress intended for Section 365 to trump Section 363. When enacting Section 365, and subsequently amending it, Congress expressly stated that it intended to strengthen lessee rights. However, the lower court s holding would have the effect of completely eliminating those rights whenever a debtor sells an estate free and clear of a leasehold interest. This is contrary to Congress s express intent when enacting Section 365, and thus the lower court s decision must be reversed. A majority of bankruptcy courts also correctly find that the only way to afford lessees adequate protection is by enforcing the rights that were granted to lessees under Section 365. The lower court incorrectly found that Section 363(e) is sufficient to ensure that lessees receive adequate protection. However, courts that have followed the minority approach have not given 5

12 lessees the same protections that they are given under 365(h). Rather, the minority approach violates lessee rights by either not affording them adequate protection at all, or by issuing a cash payment that does not conform to what the lease was actually worth. The Thirteenth Circuit endorses the approach taken by only a handful of courts, which mistakenly interprets the statutes to deal with two distinct events, and finds that 365(h) rights are limited by Section 363(f) sales. The minority view has been heavily criticized by bankruptcy courts and scholars alike. Not only does the minority go against what Congress expressly intended when enacting Section 365, but it also renders Section 365 superfluous. Under the minority approach, debtors can get rid of unfavorable leases, and avoid their obligations under Section 365, simply by utilizing Section 363(f). This leaves good faith lessees with no recourse to have their rights enforced, and strips away the protections that Congress granted them. Highway s current predicament highlights exactly what Congress was hoping to prevent when enacting Section 365. Highway contracted with the Debtor for a 30-year lease of the amphitheater, where Highway would manage, market, and operate a music venue. In preparation for the lease, Highway agreed to install seats, sound equipment, and acoustic panels for $2 million as an administrative expense. When Highway sent a letter to the Debtor, requesting that he assume the contract under the new deal, Highway received no response. Instead, the Debtor effectively rejected Highway s leasehold interest, yet was able to avoid his obligations under Section 365(h) by pursuing a Section 363(f) sale. Now, Highway is left with nothing; its leasehold interest has been rejected through a sale free and clear of the interest, and the lower court s holding leaves Highway with no other way to receive its end of the bargain. Highway now asks this Court to correct this injustice by adopting the majority approach. Under the majority approach, debtors will not be able to evade 365(h) by pursuing a 363(f) sale. 6

13 This protects lessees, while also still protecting debtors by continuing to give debtors the option of rejecting a leasehold interest that they no longer want to be obligated to. This Court should also reverse the Thirteenth Circuit s decision to authorize a settlement that runs afoul of the priority rule and follow this Court s longstanding precedent of disallowing deviations from the priority rule. The instant case does not fit within the exceptions provided by the Code or precedent. This Court in Jevic expressly held that Congress did not authorize rare case exceptions from the priority rule. Bankruptcy law requires that secured lenders are given top priority when an estate is being restructured. This priority rule is a cornerstone of bankruptcy practice, and ensures that lenders who are given top priority receive distributions ahead of lower priority holders. In Jevic, this Court reversed the bankruptcy court s decision to allow deviations to the priority rule. There, this Court stated that bankruptcy courts do not have the power to authorize distribution schemes that deviate from the priority rule. This is a proper interpretation of the Code because the priority rule provides incentive to secured lenders by ensuring them that they will have top priority in case of bankruptcy. If bankruptcy courts are allowed to authorize deviations and classify Chapter 11 proceedings as rare cases, then secured creditors would be stripped of their incentive to lend. This would violate the heart of the Code fundamental fairness. For these reasons, Congress does not give power to the bankruptcy courts to authorize deviations from the priority rule in Chapter 11 proceedings. Jevic did not provide for express exceptions in cases where the settlement is not the end of case settlement, or where the settlement serves a significant bankruptcy related purpose. Even if Jevic did, the exception would be inapplicable to the instant case. Significant bankruptcy related purposes may be established by showing that the proposed structured dismissal preserves the 7

14 debtor as a going concern, or helps restore the status quo, amongst other things. Here, the Debtor is not being preserved as a going concern because it is attempting to be liquidated. Further, the status quo is not restored because Highway will lose its leasehold interest, and will have no means to pay its administrative fees. Further, the Thirteenth Circuit erred because this Settlement is a final distribution of the case. If this Settlement is authorized, it will leave Highway with no other litigation to pursue and will effectively end the case. The Thirteenth Circuit mischaracterizes this as just the beginning because there will be a subsequent Skyline litigation. However, the two cases must be detached from another and furthermore, because Chapter 11 proceedings are community actions, the case ends when Highway s case ends. The Thirteenth Circuit s holding should also be reversed because the funds that 4th Street provided into the trust are property of the Estate. The funds will benefit all parties, and the Estate will be able to pursue the Skyline litigation. Case law has held that funds become property of the Estate when the funds make it into the Estate, or if the funds are provided in the direction of the Estate. The Thirteenth Circuit attempted to alternatively argue that the Settlement was not subject to the priority rule because the $2 million was a gift. However, 4th Street s $2 million must be classified as property of the estate because the funds will be exclusively used for the Skyline litigation. This shows that the funds are pointed at the Estate s direction. Surprisingly, the Thirteenth Circuit concedes this when it states that the express purpose of the funds was for the Estate to pursue the Skyline litigation the funds will ultimately become part of the Estate once available. Even if the additional funds constituted a gift, they were part of the purchase price. This Court must not allow deviations from the priority rule; funds that are part of the purchase price, 8

15 even gifts, are subject to the priority rule, and strict adherence to the rule is required. The lower courts classified 4th Street s $2 million in additional consideration as a gift. What they failed to find was that even though the additional consideration is classified as a gift, the funds are subject to the priority rule regardless of classification because the additional funds were part of the purchase price. Here, there can be no alternative other than finding that the additional funds were part of the purchase price because when the buyer and seller are pressured in any respect, or are under any compulsion to buy or sell, the additional consideration must be looked at as a portion of the purchase price. It is uncontested that the Debtor only had one qualified bidder, 4th Street. It is also uncontested that 4th Street was pressured to quickly make the sale free and clear in furtherance of its loan to own strategy. When pressure amounts to any compulsion to buy or sell additional consideration must adhere to the priority rule. The Thirteenth Circuit attempted to circumvent the priority rule by classifying the funds as a gift, merely based on the fact that the funds are provided by 4th Street s own money and also by being silent on the pressures both buyer and seller experienced. Not only is this unpersuasive and deceitful, it effectively allows purchasers to deviate from Congress s clear direction and the essence of the priority rule by simply categorizing property of the Estate as gifts, or by being silent on purchase prices. This goes against the heart of the Code fundamental fairness. DISCUSSION 1 I. THE THIRTEENTH CIRCUIT ERRED IN UTILIZING THE MINORITY VIEW, WHICH ALLOWS THE PROTECTIONS CONGRESS GRANTED TO LESSEES IN SECTION 365(h) TO BE ELIMINATED BY A SECTION 363(f) SALE. This Court should reverse the Thirteenth Circuit s decision to adopt the minority approach because the decision eviscerated Highway s leasehold rights under Section 365(h). The approach 1 Unless otherwise indicated, all internal citations are omitted, and all emphasis is added. 9

16 followed by a majority of bankruptcy courts is the correct approach to adopt because it ensures that lessees are afforded the protections that Congress granted them under Section 365(h). The majority approach correctly finds that Section 363 and 365 conflict when they overlap, and thus there needs to be additional interpretation of statutory construction and a closer look at the legislative history of the provisions for clarification. See In re Haskell L.P., 321 B.R. 1, 9 (Bankr. D. Mass. 2005); see also In re Churchill Props. III, L.P., 187 B.R. 283 (Bankr. N.D. Ill. 1996); see also In re Taylor, 198 B.R. (Bankr. D. S.C. 1996); see also In re Zota Petroleums, LLC, 482 B.R. 154 (Bankr. E.D. Va. 2012); see also In re Crumbs Bake Shop, Inc., 522 B.R. 766 (Bankr. D. NJ. 2014). The purpose of Section 365(h) is to protect lessees from debtors who attempt to avoid their obligations to a leasehold contract when filing for bankruptcy. See H.R. REP. NO , at 45 (1994). Section 365 protects good faith lessees by ensuring that they receive the deal that they bargained for. See In re Crumbs Bake Shop, 522 B.R. at 778. The majority approach is the correct approach to follow because it reinforces the rights that Congress granted lessees under Section 365 in cases where a debtor sells an estate free and clear of a leasehold interest. Only a handful of courts hold that Section 365(h) protections are not applicable to Section 363(f) sales. See Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 377 F.3d 537, 543 (7th Cir. 2003); see also Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions, LLC (In re Spanish Peaks Holdings II, LLC), 872 F.3d 892, 899 (9th Cir. 2017). This minority view incorrectly permits debtors to get rid of leasehold interests that they no longer want to be obliged to simply by petitioning for a Section 363(f) sale. This approach eliminates lessee rights, leaving good faith lessees with no recourse when their leasehold interests are discarded by a 363(f) sale. See In re Haskell, 321 B.R. at 9. The majority approach ensures that Section 363(f) is not used to discard lessees rights under Section 365(h). 10

17 A. Sales Free and Clear of All Leasehold Interests Pursuant to 363(f) Conflict with Lessees Protections under 365(h) Because They Both Involve Rejecting the Lease. Because sales free and clear of all leasehold interests under 363(f) and rejections under 365(a) both involve rejecting the lessee s leasehold interest, Sections 363(f) and 365(h) conflict. The majority approach correctly recognizes that Sections 363(f) and 365(h) conflict when they overlap. See In re Churchill Props. III, 197 B.R. at 286. The majority of bankruptcy courts that have addressed the issue of reconciling sections 363 and 365 correctly recognize that, when both sections are applied together, they conflict because each provision seems to provide an exclusive right that when invoked would override the interest of the other. In re Churchill Props. III, 197 B.R. at 286. Although Sections 363(f) and 365(h) can be harmonized when read in isolation, the Bankruptcy Code is not meant to be read in a vacuum. In re Churchill Props. III, 197 B.R. at 288. In Haskell, the court considered the issue of whether a debtor can sell its assets free and clear of any encumbrances pursuant to 363(f) despite the protections afforded to lessees under 365(h). In re Haskell, 321 B.R. at 5; see 11 U.S.C. 365(h); see also 11 U.S.C. 363(f). The court held that the sale could not be approved because, if the court granted the sale motion, the provisions of 365(h) would be eviscerated. Id. at 9. The court further stated that, if the debtor were able to make the sale under 363(f), it would be doing indirectly what it could not do directly, namely, dispossessing [the lessee s leasehold interest]. Id.; see also In re Churchill Props. III, 197 B.R. at 288 (denying approval of the sale free and clear of lessees interests because, if it were to approve of the sale and disregard the lessees protections under 365(h), then the application of Section 365(h)(1)(A)(ii) as it relates to non-debtor lessees would be nugatory. ). In cases where a debtor moves to sell under 363(f), a trustee s only options are to assume or reject the lease under 365(h); either way, the lessee will have the choice to stay in possession. 11

18 Dishi & Sons v. Bay Condos LLC, 510 B.R. 696, 702 (S.D.N.Y. 2014). Haskell further indicated that a sale pursuant to 363(f) is a rejection of the lease that is sufficient to confer the protections laid out in 365(h). See In re Haskell, 321 B.R. at 9 ( If the Court were to grant the Debtor's Sale Motion, the provisions of 365(h) would be eviscerated. ). Moreover, scholars have articulated that assuming a contract requires some affirmative action by the trustee, while rejection does not require any affirmative action: rejection is not the revocation or repudiation or cancellation of a contract or lease, nor does it affect contract or lease liabilities. It is simply a bankruptcy estate's decision not to assume, because the contract or lease does not represent a favorable or appropriate investment of the estate's resources...simply put, the election to assume or reject is the election to assume or not assume; rejection is the name for the latter alternative. Michael T. Andrew, Executory Contracts in Bankruptcy: Understanding Rejection, 59 U. COLO. L. REV. 845, (1988). Thus, under this viewpoint, rejection can occur whenever a bankruptcy estate does not decide to assume an interest, even if the trustee has not filed a motion to reject the interest. See id. The true question when determining if a lease has been rejected, then, is whether the lease will be performed. If the performance of the lease has been rendered impossible, say by a sale free and clear of the leasehold interest, then the result is a rejection. See Michael St. Patrick Baxter, Section 363 Sales and Clear of Interests: Why the Seventh Circuit Erred in Precision Industries v. Qualitech Steel, 59 BUS. LAW. 475, 487 (2004). When following the minority approach, courts have failed to meaningfully show the difference between selling a property free and clear of leasehold interests and rejecting a lease. In Qualitech, the court considered whether a sale motion pursuant to 363(f), and absent a motion to reject under 365(a), prevails over the protections under 365(h). See Qualitech, 377 F.3d at 543. The Qualitech court ultimately concluded that the two statutes applied to two different circumstances, and thus were not in conflict. Id. at 547. However, the Qualitech court contradicted 12

19 itself by conceding that if the sale order operated to extinguish Precision s right to possess the property then the effect of the sale might be understood as the equivalent of a repudiation of Precision s lease. Id. Furthermore, in Spanish Peaks Holdings II, the court applied the minority view, but also contradicted itself by conceding that a 363(f) sale was an effective rejection of the leasehold interest. In re Spanish Peaks Holdings II, LLC, 872 F.3d at 899. Yet, the court proceeded to state that this rejection is not the same as the rejection contemplated by 365, and gave no explanation as to why those two types of rejections were different. Id. This Court is urged to adopt the majority approach because there is no meaningful difference between rejecting a lease under 365(a) and rejecting a lease through a 363(f) sale, as is evident in the instant case and many others. While the Qualitech court attempts to make some distinction between the rejection of a lease under 365(a) and the repudiation of a lease under a 363(f) sale, this distinction is meritless because, in a practical sense, those two words mean the same thing. See Qualitech, 377 F.3d at 543. In fact, the word repudiate is defined as to reject. BLACK S LAW DICTIONARY 1418 (9th ed. 2009). Subsequent courts that have followed the Qualitech faulty line of reasoning have premised their decision on the same faulty argument. See In re Spanish Peaks Holdings, LLC, 872 F.3d at 899. The Qualitech courts have avoided any further interpretation of Sections 363 and 365 by holding from the outset that they do not involve the same type of rejection, yet have failed to provide concrete reasoning for future courts to apply. See R. at 22 (Petty, J., dissenting). Qualitech s incorrect reasoning can be seen more clearly in cases where there are competing requests to sell an estate free and clear of interests under Section 363(f), and to reject a leasehold interest under Section 365(a). See IDEA Boardwalk, LLC v. Revel Entm t Grp., LLC (In re Revel AC, Inc.), 532 B.R. 216, (Bankr. D. N.J. 2015); see also IDEA Boardwalk, 13

20 LLC v. Polo N. Country Club, Inc., 2017 WL , at *6 (D. N.J. Oct. 31, 2017) (involving a motion to sell under 363(f) and a motion to reject under 365(a)). Both courts in the In Revel AC, Inc. case and the IDEA Boardwalk case adopted the majority approach to address competing motions to sell free and clear of all interests and to reject a lease under 365. Id. While this case does not involve competing requests for a 363(f) sale and for a rejection under 365(a), the reasoning provided in the Haskell cases is informative. Prior to the final order of the sale in the instant case, Highway sent a letter to the Debtor choosing to keep its possessory rights in the estate as allowed for under Section 365(h). R. at 8. Highway also stated in the letter that selling the amphitheater free and clear constituted a rejection of the lease. R. at 8. Yet, the Debtor never responded to the letter, and never filed a motion to reject under 365(a). Instead, the Debtor pursued a sale free and clear of all interests, including Highway s leasehold interest. R. at 7. The effect is the same as in Haskell cases, even though there was no motion to reject the lease filed by the Debtor. Thus, in Highway s case, a sale free and clear of its interest is no different than a rejection of its interest; they both result in Highway s lease being terminated. B. Section 365 Trumps Section 363 Under the Canon of Statutory Construction That a Specific Provision Governs Over a General One. The statutory principle that the more specific provision trumps the more general provision must govern because Section 363 and Section 365 conflict. Section 363(f) does not supersede section 365(h) because 363 is more general than 365, and [i]t is well established that the appropriate way to construe a statute is to conclude that the specific governs over the general. In re Crumbs Bake Shop, Inc., 522 B.R. at 777. When there are two conflicting provisions within a statute, the appropriate canon of statutory construction to follow is the specific prevails over the general. In re Crumbs Bake Shop, Inc., 522 B.R. at 777. Section 363(f) is a more general provision that deals with sales free and 14

21 clear of all types of interests. See In re Churchill Props. III, 197 B.R. at 288. Section 365(h), however, is clear and specific in providing for certain rights and remedies available to the lessee after rejection of its lease. Id. (refusing to approve a 363(f) sale based on the principle of the specific prevailing over the general). The minority view incorrectly follows two canons of statutory construction: courts should afford statutes their plain meaning, and courts should interpret provisions in a way that avoids conflict between them. In re Zota Petroleums, LLC, 482 B.R. at 160 (citing Qualitech, 327 F.3d at 544). Under the first canon, courts have misinterpreted 365(h) to allow for 363(f) sales because nothing in 365 prohibits a 363(f) sale. Id. The minority view then uses the second canon to force the two sections to be reconciled. See Qualitech, 327 F.3d at 547 (concluding that 363(f) applies when a property is being sold, while 365(h) applies when a property is not being sold, and the lessor rejects the lease). In this case, Sections 363(f) and 365(h) conflict because the Debtor is selling his property free and clear of Highway s leasehold interest, which is an effective rejection of the lease. Thus, the only appropriate canon of statutory construction to follow would be that of the majority view, which is that the specific prevails over the general. Although Qualitech attempted to reconcile the two statutes, this case shows that the two provisions cannot always work in harmony. When a 363(f) sale involves leasehold interests that are being eliminated, the sale necessarily implicates 365(h). Thus, whenever a leasehold interest is involved, section 365 must apply. Here, Highway s leasehold interest is being stripped away by the 363(f) sale. Thus, Section 363 and Section 365 are in conflict. Because the two provisions conflict, Section 365 (the specific provision) must prevail over Section 363 (the general provision) under the majority s approach. 15

22 C. Congress Intended for Section 365 to Trump Section 363. Section 365 s legislative history shows that it is meant to trump Section 363. Congress has reiterated the significance of section 365 in protecting lessee s rights, and intended for the section to give lessees what they bargained for. See In re Crumbs Bake Shop, 522 B.R. at 778. Prior congressional reports that remark on amendments to Section 365 consistently emphasize the significance of protecting lessees rights when a debtor intends to reject their lease. See id. A 1978 Senate Report stated that, under the provisions of Section 365, the tenant will not be deprived of his estate for the term for which he bargained. See id. (citing S.Rep.No , at 60). However, the 1978 Senate Report did not qualify the circumstances where a statute does not protect a tenant s interest. See Daniel J. Ferretti, Comment, Eviction without Rejection The Tenant s Bankruptcy Dilemma: Bankruptcy Code Sections 363(f) and 365(h)(1)(A) and the Divergent Interpretations of Precision Industries, Inc. v. Qualitech Steel SBQ, LLC and In re Haskell, 39 Cum. L. Rev. 707, 715 (2009). Thus, Congress apparently intends to protect the possessory rights of a lessee in all circumstances when a trustee rejects his interest. Id. The events leading up to the 1994 amendments are also indicative of Congress s intent when amending Section 365(h). In 1994, leasehold mortgage lending and leasehold financing came to an abrupt halt when lower courts began interpreting 365(h) to only protect tenants possessory interests for the balance of the term, and thus did not protect holders of ground leases or other rights of tenants. Robert M. Zinman, Precision in Statutory Drafting: the Qualitech Quagmire and the Sad History of 365(h) of the Bankruptcy Code, 38 J. MARSHALL L. REV. 97, (2004). To combat this halt in leasehold lending and financing, Congress worked with a group of bankruptcy professionals to draft amendments to Section 365. Id. at 99. After those amendments, leasehold lending and financing resumed. Id. Commentators suggest that the 16

23 Qualitech decision would have the effect of reducing development in areas that follow the minority view, because lessees and lenders would be dissuaded from developing land subject to long-term leases. Ferretti, supra, at The 1994 amendments to the Code solidified Congress s intention to protect lessees rights. In re Crumbs Bake Shop, 522 B.R. at 778. The House Report on the 1994 amendments states: This section clarifies section 365 of the Bankruptcy Code to mandate that lessees cannot have their rights stripped away if a debtor rejects its obligations as a lessor in bankruptcy. Ferretti, supra, at 715 (citing H.R. REP. NO , at 45 (1994), as reprinted in 1994 U.S.C.C.A.N. 3340, 3354). The report then articulates the rights that are included in the section, which are: The amount and timing of payment of rent or other amounts payable by the lessee, the right to use, possess, quiet enjoyment, sublet and assign. In re Crumbs Bake Shop, 522 B.R. at 778 (citations omitted). When enacting Section 365(h), Congress intended to afford the debtor the benefit of rejecting an undesirable lease while at the same time protecting the property rights of the lessee. In re LHD Realty Corp., 20 B.R. 717, 719 (Bankr. S. D. Ind. 1982) (citations omitted). The subsequent modifications to Section 365, which were the result of troublesome interpretations, were meant to strengthen lessee protections. Zinman, supra, at 102. Lessee protections are especially significant where a lease is deemed unprofitable to the debtor, such as the case in Qualitech or Haskell, and the debtor attempts to use a mechanism such as a sale free and clear of the leasehold interest in order to evade Section 365(h). Ferretti, supra, at 740; see also Qualitech, 377 F.3d at 541 (involving a 363(f) sale that disposed of a lease that was part of a service contract); see also In re Haskell, 321 B.R. at 3-4 (involving a 99-year ground lease). This would give the debtor an advantage because, rather than having to give the tenant the option to 17

24 complete the term, they would only have to incur the adequate protection payment. Baxter, supra, at 497. The minority approach, as well as the Thirteenth Circuit, inappropriately avoids discussing the legislative history by concluding that Section 363 and Section 365(h) can be harmonized. See Qualitech, 377 F.3d at 544; see also R. at 12. In Qualitech, the court cites to Supreme Court authority that states that courts cannot pick and choose among congressional enactments, and when two statutes are capable of co-existence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective. Qualitech, 377 F.3d at 544 (citing Morton v. Mancari, 417 U.S. 535, 551 (1974)); but see Milavetz, Gallop & Milavetz, P.A. v. U.S., 559 U.S. 229, 254 (2010) (Scalia, J., concurring in part) (stating that legislative history should be used when the text of a statute is ambiguous). However, the Qualitech court ignores Congress s explicit intent to protect the rights of lessees in cases where their leasehold interests are being discarded by a debtor-lessor in bankruptcy. This Court should not continue the pattern of ignoring explicit congressional intent for the sake of attempting to harmonize two provisions of a statute. The instant case is representative of those cases that Congress specifically intended to prevent from occurring by amending Section 365. Prior to the completion of construction of the Debtor s amphitheater, Highway entered into a lease agreement with the Debtor for a term of thirty years. R. at 5. The lease contemplated that, once the amphitheater was completed, Highway would manage, market, and operate the venue for the duration of the lease. R. at 5. Furthermore, after the Debtor filed for Chapter 11 bankruptcy, Highway offered to install the seats, sound equipment, and acoustic panels in the amphitheater in order to complete its construction. R. at 6. Highway allowed the Debtor to defer the payment of $2 million until the amphitheater opened to the public, 18

25 because Highway knew that the Debtor had limited funds. R. at 6. Yet, despite this generosity, Highway was met with a sale that extinguished its leasehold interest without any sort of recourse to turn to. Now, Highway is left without a leasehold interest, and the upgrades Highway made to the property will be lost. Furthermore, 4th Street intends to take those upgrades that Highway added and use them to its own benefit when operating the amphitheater itself. This is precisely the kind of situation that Congress hoped to avoid when creating and modifying Section 365. Highway is losing the lease it bargained for at the outset of the amphitheater s construction. By petitioning for a sale free and clear of Highway s leasehold interest, the Debtor is effectively avoiding its obligations under 365(h), while also stripping away the rights that Highway should have had when the contract was breached. Thus, the Thirteenth Circuit s decision has dire consequences, not only for Highway, but for all lessees, and the decision must be reversed. D. Section 363 Does Not Provide Adequate Protection of the Lessee s Interests. Section 365 must prevail over Section 363 because Section 363 does not adequately protect the lessee s interests. In cases that involve conflicts between Sections 363 and 365, a majority of courts have refused to grant a 363(f) sale motion because it would eliminate the protections of 365(h), and the only way to adequately protect the lessee was by enforcing 365(h). See In re Zota Petroleums, LLC, 482 B.R. at 161. Section 363 contains a provision that allows entities with an interest in property proposed to be sold to request that a court prohibit or condition the sale as is necessary to provide adequate protection of such interest. 11 U.S.C. 363(e). This protection could involve a cash payment, additional lien, or any other relief that would result in the entity receiving the equivalent of their interest in the property. 11 U.S.C Therefore, in cases where a sale free and clear of leasehold interests is authorized, the lessee s only recourse would be to 19

26 request adequate protection, which may or may not amount to continued possession. Dishi & Sons, 510 B.R. at 701. Furthermore, courts have recognized that 363(e) focuses on protecting the entity whose interest is being jeopardized, not the creditors or the purchasers. Id. at 711. The Haskell line of cases correctly state that the protections provided under Section 363(e) are not enough to eliminate the protections of 365(h). See In re Haskell, 321 B.R. at 9-10 (finding that the lessee is incapable of calculating losses based on the record, and thus adequate protection could only be achieved through the lessee s continued possession of the leased premises). Courts have yet to definitively state that a lessee is entitled to keep possession of leased property as a form of adequate protection. See Dishi & Sons, 510 B.R. at (stating that adequate protection may, but may not always, take form of continued possession). Courts that have followed the minority approach have nonetheless refused to give adequate protection to the lessee. See In re R.J. Dooley Realty, Inc., 2010 WL , 7-8 (Bankr. S.D.N.Y. May 21, 2010) (following the minority approach but refusing to award the lessee adequate protection under 363(e)); see also In re Spanish Peaks Holdings II, LLC, 872 F.3d at 899 (following the minority approach but declining to decide on a form of adequate protection to award the lessee). Section 363(e) does not provide adequate protection for Highway in this case. Highway s lease agreement gave Highway rights to manage, market, and operate the amphitheater for a term of thirty years. R. at 5. However, the amphitheater never actually opened to the public. Because continued possession is not a settled form of adequate protection, it is likely that a request for adequate protection would either be declined, or would simply result in a cash payment. Similar to the case in Haskell, it is impossible to determine exactly how much Highway is losing as a result of the termination of the lease. It is unclear whether the amphitheater would have been successful, or the number of sales it could have expected. Because the amphitheater never opened to the public, 20

27 there are not any numbers to base any estimates on. Thus, even if the court approved a cash payment, this certainly would not result in the equivalent to what Highway would have received had the lease been assumed. The adequate protection requirement of 363(e) is simply not sufficient to warrant overriding the protections that are provided to Highway under 365(h). This Court should reverse the Thirteenth Circuit s decision because the majority approach reflects a better interpretation of Sections 365(h) and 363(f). The majority approach protects lessee rights granted under Section 365(h), which Congress intended for lessees to have in all cases where a leasehold interest is being rejected. Because the sale free and clear of Highway s leasehold interest is equivalent to a rejection of its interest, Section 365(h) applies. II. THIS COURT SHOULD UPHOLD LONGSTANDING PRECEDENT THAT DISALLOWS DEVIATIONS FROM THE PRIORITY RULE, AND HOLD THAT 4TH STREET S GIFT IS STILL SUBJECT TO THE PRIORITY RULE BECAUSE IT IS PROPERTY OF THE ESTATE. This Court should uphold its longstanding precedent of following congressional intent as articulated in the plain language of the Code, and prevent deviations from the priority rule. If this Court goes against its longstanding precedent and allows the Settlement in its present form, it will lead to serious consequences: fundamental unfairness to good faith creditors and weakening the bankruptcy process itself. U.S. v. Embassy Restaurant, Inc., 359 U.S. 29, 32 (1959) (changes in bargaining power); Warren, A Theory of Absolute Priority, 1991 Ann. Survey Am. L. 9, 30 (possibility of collusion); Bank of Am. Nat. Trust and Sav. Ass n. v. 203 N. LaSalle St. P ship, 526 U.S. 434, 444 (1999) (unfair advantages). Jevic, 137 S. Ct. at (deviations go against the essence of bankruptcy law). In order to ensure fundamental fairness, this Court has consistently held that Congress has not authorized a rare case exception unless all parties consent to the deviation, or if the deviation is contemplated early in the case (i.e. during the pre-plan or interim stage). Further, bankruptcy courts do not have the power to authorize deviations that do not fit 21