No IN THE. October Term, 2017 HIGHWAY 61, INC., On Writ of Certiorari to the United States Court of Appeals for the Thirteenth Circuit

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1 No IN THE October Term, 2017 IN RE HIGH ROCKS, INC., Debtor, HIGHWAY 61, INC., v. Petitioner, HIGH ROCKS, INC, Respondent. On Writ of Certiorari to the United States Court of Appeals for the Thirteenth Circuit BRIEF FOR RESPONDENT R14 Counsel for Respondent

2 QUESTIONS PRESENTED I. Under section 363(f) and section 365(h), can property be sold free and clear of a leasehold interest where there is no formal assumption or rejection by the leaseholder? II. Can a bankruptcy court approve a contested gift settlement where the gift proceeds are not property of the estate under section 541 and serve a significant bankruptcy related purpose? i

3 Table of Contents Questions Presented... i Table of Authorities... iv Opinions Below... vi Statement of Jurisdiction... vi Statutes Involved... vi Statement of Facts...1 Standard of Review...3 Summary of the Argument...3 Argument...5 I. THE THIRTEENTH CIRCUIT COURT OF APPEALS PROPERLY CONCLUDED THAT THE AMPHITHEATER SHOULD BE SOLD FREE AND CLEAR OF HIGHWAY S LEASEHOLD INTEREST....5 A. Because the Debtor in Possession did not reject the lease, lessee protection under Section 365(h) is not an issue....6 B. Even if both statutes are read together and applied to the case at issue, statutory interpretation favors a reading harmonizing both sections to permit the 363 sale free and clear of Highway s leasehold interest C. Highway failed to exercise its rights to prevent the loss of its leasehold interest II. THE THIRTEENTH CIRCUIT COURT OF APPEALS PROPERLY HELD THAT THE COMMITTEE SETTLEMENT DOES NOT IMPLICATE THE ABSOLUTE PRIORITY RULE A. 4 th Street s distribution of $2million to the litigation trust fund was not a distribution of property of the estate and therefore the absolute priority rule does not apply to the distribution B. Even if this Court holds that 4 th Street s distribution to the litigation trust fund is a distribution of property of the estate, then the distribution is still ii

4 permissible given that it is not a structured dismissal and has significant bankruptcy-related justifications i. Jevic only applies to structured dismissals and High Rocks, Inc. s case is not a structured dismissal ii. Approving the Committee Settlement furthers significant bankruptcy policy goals Conclusion...33 Appendix A (Selected Sections from Title 11 of the U.S. Code)... I Appendix B (Selected Federal Rules of Bankruptcy Procedure)... VII iii

5 Table of Authorities United States Supreme Court Cases American Tobacco Co. v. Patterson, 456 U.S. 63 (1982)...10 Czyzewski v. Jevic Holding Corp, 137 S.Ct. 973 (2017).... passim Holloway v. U.S., 526 U.S. 1 (1999)...11 Hughes Aircraft Co. v. Jacobsen, 525 U.S. 432 (1999)...10 Keene Corp. v. United States, 508 U.S. 200 (1993)...13 Morton v. Mancari, 417 U.S. 535 (1974)...11 N.L.R.B. v. Blidisco & Blidisco, 465 U.S. 513 (1984)...13 Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968)...17, 25 Sebelius v. Cloer, 569 U.S. 369 (2013)...10, 24 Walters v. Metropolitan Educ. Enters., Inc., 519 U.S. 202 (1997)...10 Watt v. Alaska, 451 U.S. 259 (1981)...11 United States Court of Appeals Cases Eastover Bank for Sav. v. Sowashee Venture (In re Austin Dev. Co.), 19 F.3d 1077 (5th Cir. 1994)....7 ICL Holding Co., Inc., 802 F.3d 547 (3d Cir. 2015).... passim In re Martin, 761 F.2d 472 (8th Cir. 1985)...14, 15 In re Murel Holding Corp., 75 F.2d 941 (2d Cir. 1935)...14, 15 In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir. 2003)...5 Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007)... passim Official Comm. of Unsecured Creditors v. Stern (In re SPM Mfg. Corp.), 984 F.2d 1305 (1st Cir. 1993)...18, 19, 21, 22 Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions, LLC (In re Spanish Peaks Holdings II, LLC), 862 F.3d 892 (9th Cir. 2017)...6, 9, 10, 14 Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003)...12 United States District Court Cases In re Downtown Athletic Club of New York City, Inc., 2000 WL (S.D. N.Y. 2000)...9 Dishi & Sons v. Bay Condos, LLC, 510 B.R. 696 (S.D. N.Y. 2014)...8, 9, 10, 14, 15 United States Bankruptcy Court Cases In re Biolitec, Inc., 528 B.R. 261 (Bankr. D.N.J. 2014)...29 In re Caesars Entm't Operating Co., Inc., 561 B.R. 441 (Bankr. N.D. Ill. 2016)...24, 25 In re Haskell L.P., 321 B.R. 1 (Bankr. D. Mass. 2005)...9, 16 In re MMH Automotive Group, LLC, 385 B.R. 347 (Bankr. S.D. Fla. 2008)...7, 11 In re Northeast Chick Services, Inc., 43 B.R. 326 (Bankr. D. Mass. 1984)...14 In re R.J. Dooley Realty, Inc., 2010 WL (Bankr. S.D. N.Y. 2010)...9 In re Samaritan Alliance, LLC, 2007 WL (Bankr. E.D. Ky. 2007)...9 In re TSIC, Inc., 393 B.R. 71 (Bankr. D. Del. 2008)...19 In re U.S. Flow Corp., 332 B.R. 792 (Bankr. W.D. Mich. 2005)...19 iv

6 In re White Glove, Inc., No DWS, 1998 WL (Bankr. E.D. Pa. Oct. 14, 1998)...19 In re Zota Petroleums,LLC, 482 B.R. 154 (Bankr. E.D. Va. 2012)...9, 16 La Jolla Mortg. Fund v. Rancho El Cajon Assoc., 18 B.R. 283 (Bankr. S.D. Ca. 1982)..14 Unsecured Creditors Committee v. Jones Truck Lines, Inc., 156 B.R. 608 (Bankr. W.D. Ark. 1992)...14 United States Statutes 11 U.S.C. 363 (2012)... passim 11 U.S.C. 365 (2012)... passim 11 U.S.C. 541 (2012)...3, 4, 12, U.S.C (2012)...17, 25 Fed. R. Bankr. P , 25, 30 Secondary Sources Michael St. Patrick Baxter, Section 363 Sales Free and Clear of Interests: Why the Seventh Circuit Erred in Precision Industries v. Qualitech Steel, 59 BUS. LAW. 475, 477 (2004).16 v

7 OPINIONS BELOW The decisions and orders for the U.S. Bankruptcy Court for the District of Moot are unreported and therefore unavailable. The decisions for the U.S. District Court for the District of Moot and the U.S. Court of Appeals for the Thirteenth Circuit are also unreported. The opinion for the Thirteenth Circuit is set forth in Case No , dated July 14, 2017, and is incorporated in the record on appeal (hereinafter, R. ). STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. STATUTES INVOLVED The constitutional and statutory provisions listed below are relevant to determine the present case, statutes are reproduced in Appendices A and B. 11 U.S.C. 363, 365, 541, 1129 (2012); Fed. R. Bankr. P vi

8 STATEMENT OF FACTS I. Facts This case concerns the battle to fund an American business. High Rocks, Inc. ( High Rocks ) is a casino and resort development outside of the City of Rainier in the State of Moot. R at 3. Encompassing a hotel, conference facilities, restaurants and a 7,000-seat amphitheater, High Rocks sought to be the premier resort facility in the area. R at 3-4. For the amphitheater, High Rocks entered into a lease agreement with Highway 61, Inc. ( Highway ), a local group of investors with music experience. R at 5. The lease spanned a term of thirty years, with expectations that Highway would manage and market the venue. Id. Unfortunately, High Rocks succumbed to poor construction and management. After a competitive bidding process, Skyline Construction ( Skyline ), as the lowest bidder, was chosen as general contractor. R at 4. Construction on the hotel began in May 2014, however development was anything but expeditious. Id. Numerous issues arose, alleged to be due to Skyline s lack of competent oversight and repeated construction failures. Id. Construction on the amphitheater was less problematic; Skyline successfully completed construction of the amphitheater and agreed to install seating and sound equipment to make the amphitheater have unparalleled acoustics. Id. In December 2015, High Rocks sought to terminate the contract with Skyline due to the repeated failures in construction on hotel tower and casino. R at 4. In January 2016, High Rocks hired a new contractor, Shelter from the Storm ( Shelter ). R at 5. Shelter agreed to complete the hotel and casino, but lacked experience in amphitheater construction, so the parties searched for another contractor for the amphitheater construction. Id. The original financier of the development, North Country, became frustrated by repeated delays and sold the note to 4th Street Partners, Inc. 1

9 ( 4th Street ) at a subsequent discount. Id. 4 th Street commenced foreclosure on High Rocks in June Id. To thwart the foreclosure action, High Rocks filed Chapter 11 in July Id. In conjunction with bankruptcy proceedings, Highway agreed to finish the amphitheater in exchange for $2 million. R. at 7. The amphitheater was completed in November Id. Because the hotel and casino remained unfinished, High Rocks, the Committee, and Highway determined Highway was entitled to an administrative expense claim for the $2 million consistent with section 503(b)(1). Id. But the Debtor s problems did not end there. Due to the repeated delays on the hotel and casino construction, the Debtor halted all construction by December Id. After the suspension of the construction, the debtor filed a motion to initiate a section 363 sale. The sale provided that the winner of the sale would be free and clear of all liens, claims, encumbrances and interests including Highway s leasehold interest. R. at 6-7. The auction took place on January 11, 2017, and 4 th Street won by credit bid. R. at 7. The Committee objected, stating that the sale was a veiled foreclosure that would leave no money in the estate for unsecured creditors or the pursuit of the claims against Skyline. Id. Highway also objected, seeking to remain in possession of the amphitheater, notwithstanding the free and clear nature of the sale, pursuant to section 365(h) of the Bankruptcy Code. R at 7-8. Before the sale took place, High Rocks, the Committee, and 4 th Street reached a settlement ( the Committee Settlement ). R. at 8. The sale provided that in exchange for the withdrawal of the Committee s objection and granting 4th Street a release of any and all claims against it, 4th Street would gift $2 million of its own money to the trust for the express purpose of funding the unsecured creditors trust s claims against Skyline. Id. Highway objected, stating that this violated the absolute priority rule. Id. II. Procedural History 2

10 The bankruptcy court approved the Committee Settlement and the sale to 4th Street in a bench opinion. Id. The court held that section 363(f) trumped whatever rights Highway may have under Section 365(h). R. at 8-9. The Court also concluded that the absolute priority rule was not implicated in the sale. R. at 9. The settlement was in the best interest of the bankruptcy estate, and would allow the claims against Skyline to be pursued. Id. Highway appealed to the district court, which affirmed the ruling of the bankruptcy court. Id. STANDARD OF REVIEW The facts set forth are not disputed, and the issue for the court is a dispute of law. Thus, the proper standard of review is de novo. Factual determinations of the Bankruptcy court are subject to the clearly erroneous standard of review. See Bankruptcy Rule The Bankruptcy Court's conclusions of law, however, are subject to a de novo standard of review. U.S. v. United States Gypsum Co., 68 S.Ct. 525, (1948). SUMMARY OF THE ARGUMENT Using statutory interpretation, the Thirteenth Circuit properly concluded that the amphitheater could be sold free and clear of Highway s leasehold interest. This Court should affirm the Thirteenth Circuit s holding because under the plain meaning interpretation of the bankruptcy code Highway s lease is not subject to protections under 365(h). The plain language of sections 363(f) and 365(h) show that the sections apply to separate events, and do not need to be interpreted in tandem. Section 363(f) applies to the sale free and clear of the leasehold, while section 365(h) is implicated only when there is a specific rejection of a lease. Here, the Highway lease was not explicitly rejected, therefore not subject to the protections of section 365(h). Had Congress wanted the protections of section 365(h) to apply to leasehold interests such as this, it could have provided for it. For example, Section 363(d) and 365(a) explicitly reference on another, 3

11 showing clear intent for the provisions to be subject to one another. However, sections 363(f) and 365(h) contain no such reference, and should not be interpreted to do so. Similarly, Highway did not use the protection afforded to it in section 363. Section 363(e) affords a party adequate protection when requested. Adequate protection seeks to ensure that the creditor gets the value for which he bargained. Highway, however, did not file for adequate protection at any time throughout the case, nor does the record indicate that Highway made any mention of adequately protecting its leasehold interest prior to its objection to the sale. If Highway wanted its interests protected, it should have used the protections provided by the code. The Thirteenth Circuit also correctly determined that the absolute priority rule is not implicated in this case, contrary to Highway s objection. 4th Street agreed to distribute $2 million to the litigation trust fund for the sole benefit of the unsecured creditors and their litigation pursuit against Skyline. 4th Street s distribution to the litigation trust fund was not consideration for the assets purchased in the 363 sale. The distribution did not involve assets of the estate under to section 541, and the distribution was to unsecured creditors rather than the equity holders of the debtor. Lastly, the distribution was not contemporaneously made with a separate distribution from the estate to 4th Street. Therefore, the distribution was not property of the estate and 4 th Street s distribution does not invoke the absolute priority rule. While the Thirteenth Circuit dissent argues that Jevic, should apply, this reliance is misplaced. The settlement in Jevic took place in a structured dismissal; the end of the bankruptcy proceedings. The settlement with 4 th Street took place at the beginning of the proceedings, while the extent and value of the bankruptcy estate was still being determined. The Skyline litigation has yet to be pursued, which will significantly increase the value of the estate. Since the Jevic Court specifically limited its holding to structured dismissals, High Rocks, Inc. s case is beyond the 4

12 purview of the Jevic decision. Further, in this instance, the settlement is necessary to fund the estate, as claims against Skyline need to be pursued for the benefit of the unsecured creditors. Therefore, while the court should hold that this is not a violation of the absolute priority rule, even if it is, the settlement serves a significant, if not crucial, bankruptcy related purpose and thus should be allowed. ARGUMENT I. THE THIRTEENTH CIRCUIT PROPERLY CONCLUDED THAT THE AMPITHEATER SHOULD BE SOLD FREE AND CLEAR OF HIGHWAY S LEASEHOLD INTEREST. Section 363(f) of the Bankruptcy Code empowers the trustee to sell property free and clear of any interest in property of the estate. 11 U.S.C. 363(f). The Code does not define interest. However, courts interpret the term broadly. See, e.g., In re Trans World Airlines, Inc., 322 F.3d 283, 290 (3d Cir. 2003) (holding that an employment discrimination claim is a property interest under 363(f)). Further, it is well-settled that Congress use of the word any calls for broad interpretation of the term or category it modifies. U.S. v. Gonzales, 520 U.S. 1, 6 (1997). The trustee may sell the property free and clear so long as one of five conditions is met. 363(f)(1-5). In this case, the parties stipulate that this requirement is satisfied. Thus, the trustee (or, in this case, the Debtor in Possession), is entitled to sell property free and clear of any interest that may attach to estate property. In the present case, one such interest in estate property is Highway s leasehold interest in an outdoor amphitheater. Because the interest in property at issue is a leasehold, Highway asks this Court to reconcile the Debtor in Possession s right to sell the property free and clear of the leasehold with a remedial provision in the Code protecting lessees of rejected leases. 11 U.S.C. 365(h). First, because the Debtor in Possession did not reject the lease, lessee protection under Section 365(h) is not 5

13 implicated. Alternatively, even if this Court finds that section 365(h) does apply, the plain language of 363(f) read in tandem with 265(h) shows no conflicting provisions thus allowing for the sale free and clear of Highway s leasehold interests. Finally, Highway did not properly protect their interests under the section 363(e) provided by the code and thus cannot be protected due to their shortcomings. A. Because the Debtor in Possession did not reject the lease, lessee protection under Section 365(h) is not at issue. Section 365(a) permits the trustee to assume or reject any executory contract or unexpired lease of the debtor, subject to the court s approval. 11 U.S.C. 365(a). If the trustee rejects an unexpired lease, section 365(h) provides the lessee with recourse. The lessee of a rejected unexpired lease may retain its possessory rights for the remainder of the lease s term or make a claim against the estate for breach of the lease. 365(h)(1)(A)-(B). Recently, the Ninth Circuit articulated the requirements for receiving protection under section 365(h). In Matter of Spanish Peaks, a holding company leased restaurant space on an expansive resort development. Matter of Spanish Peaks Holdings II, LLC, 872 F.3d 892, (9th Cir. 2017). After significant financial difficulty, the holding company filed for Chapter 7 protection. Id. at 895. The trustee planned to liquidate substantially all of the assets by selling the property free and clear of all liens. Id. The trustee moved the court to authorize and approve the sale. Two companies with unexpired leaseholds in the property objected to the sale. They objected on the grounds that their leasehold interests were not articulated by the trustee as encumbrances that would survive the sale. Citing section 365(h), the companies claimed that they had the right to retain possession of the property notwithstanding the sale. Id. After a hearing, the court authorized the sale without ruling on the companies objection. Id. After the auction, the bankruptcy court considered the objection at the approval hearing. The 6

14 successful bidder noted that its bid was contingent on receiving property free and clear of the leases. The court approved the sale and held that it was free and clear of any interests. Id. at 896. After requesting clarification from the court and not receiving it, the trustee moved the court to determine whether the property was free of the leases. At that time, the court held that the sale was free and clear of the leases primarily because state foreclosure law would have eliminated them. Id. The companies appealed. On appeal, the Ninth Circuit closely examined the requirements for protection under section 365(h). Id. at 899. It held that 365(h) was not implicated in the absence of a formal rejection of the unexpired lease. Id. The court reasoned that the concept of rejection, though undefined in the Code, is universally understood as an affirmative declaration by the trustee. Id. (citing Eastover Bank for Sav. v. Sowashee Venture (In re Austin Dev. Co.), 19 F.3d 1077, 1082 (5th Cir. 1994)). The court noted that a sale of property free and clear of the underlying lease can be an effective rejection of the lease in some everyday sense but that it is distinguishable from rejection as is meant by section 365. Id. Rather, 365 protection pertains only to the event of a formal rejection of a lease. Id. Moreover, the court noted that there are some circumstances in which rejection occurs without trustee action. Id. (citing 11 U.S.C. 365(d)(1) (failure to assume or reject residential lease within sixty days in liquidation bankruptcy deemed rejected), 365(d)(4)(A) (failure to assume or reject nonresidential lease within 120 days yields rejection if the debtor is the lessee)); see also In re MMH Automotive Group, LLC, 385 B.R. 347, (Bankr. S.D. Fla. 2008) ( There is no deemed rejection of a non-residential lease when the debtor is the lessor. ). However, where those circumstances are not present, the court found that a formal, affirmative rejection is required. Id. 7

15 In a footnote, the Ninth Circuit referenced a case from the Southern District of New York. Id. at fn. 6. In Dishi & Sons v. Bay Condos, LLC, an owner of two commercial condominium units filed a voluntary Chapter 11 petition. 510 B.R. 696, 699 (S.D. N.Y. 2014). The plan proposed to assume one unexpired lease and to reject all others. Id. After a successful bidding process, the bankruptcy court approved the sale and confirmed the plan. Id. at 700. However, at that time, a lessee with an unexpired lease asserted its right to maintain possession under section 365(h). Id. Interestingly, the lessee was the holder of one of the leases the plan intended to reject if not timely assumed. Even though the debtor rejected this lease, the bankruptcy court held that the lessee could maintain possession either by 365(h) or by 363(e) as a form of adequate protection. Id. The Southern District of New York noted that at least in some cases, 363(f) appears to authorize the sale of a debtor-lessor s property free and clear of leasehold interest, leaving the lessee s sole recourse as adequate protection granted by the court. Id. at 701. The court noted that prior case law did not involve a lease that was rejected. Id. at 704. In other words, courts could find that sections 363(f) and 365(h) do not overlap where there is neither assumption nor rejection to trigger 365(h) protection. Id. However, where there is a rejection of the lease, the court found that section 365(h) s protections apply to the lessee. Id. However, the court noted that the lessee s rights are not unavoidable. Id. at 708. Rather, the court must assess whether there is any basis for a sale free and clear of [the lessee s] rights under 363(f). Id. The Ninth Circuit noted the Dishi & Sons case to affirm that it is possible for a trustee to formally, directly reject a lease in a way that triggers the section 363(f) protections. Spanish Peaks, 872 F.3d at fn. 6. The court further noted that such a case does produce an interaction between the two sections, as did the Southern District of New York. Id. However, the Ninth Circuit noted that 8

16 it [had] no occasion to address the interplay between sections 363 and 365 without a formal rejection of a lease. Id. The Dishi & Sons rejected lease does not stand alone. Notably, a substantial amount of the case law upholding leasehold interests through section 365(h) protection involves cases with rejected leases. See In re Zota Petroleums,LLC, 482 B.R. 154, 163 (Bankr. E.D. Va. 2012) (dual transaction labeled assumption and assignment that rejected a lease triggered section 365(h) protection); In re Haskell L.P., 321 B.R. 1, 5 (Bankr. D. Mass. 2005) (debtor filed a motion to reject an executory contract, and the motion was granted prior to the sale motion); In re Samaritan Alliance, LLC, 2007 WL at *2 (Bankr. E.D. Ky. 2007) (Sublease rejected by the debtor prior to sale). Further, a substantial number of courts have been persuaded by the lack of rejection or assumption to find that section 365(h) is not implicated merely because a section 363 sale eliminates a leasehold. See In re R.J. Dooley Realty, Inc., 2010 WL at *7 (Bankr. S.D. N.Y. 2010) (single-asset real estate case with no rejection and only a section 363 sale did not implicate 365(h)); In re Downtown Athletic Club of New York City, Inc., 2000 WL at *5 (S.D. N.Y. 2000) (finding that section 365(h) applies when a debtor-lessor remains in possession of its property and rejects a lease, not when the debtor-lessor sells property subject to an interest free and clear pursuant to Section 363. ). Highway never expressly rejected the lease thus the protections of 365(h) should not apply to Highway s leasehold interests. In July of 2016, the Debtor filed this chapter 11 case. R. 5. Shortly after the petition date, Highway approached the Debtor to discuss the amphitheater. R. 6. In that conversation, Highway asserted its expertise to finish the amphitheater. Id. The Debtor and Highway entered into an agreement to finish the project. Id. Later, the sale motion expressly stated that the sale was free and clear of Highway s leasehold interest. R. 7. Only after the sale did 9

17 Highway object to assert its leasehold interest and claim possessory relief. Id. Like Spanish Peaks, which, as discussed above, required a formal assumption or rejection for protection under 365(h), there is no rejection in the case at bar. Id. Highway never made any mention of assumption or rejection of their leasehold interest. Further, unlike Dishi & Sons, this case does not offer a plan with language referring to assumption, rejection, or assumed rejection after a proscribed time period. Thus, there is no mention by Highway in the record that would show a formal assumption or rejection of the leasehold. Therefore, because there is no formal assumption or rejection, this Court should find that Highway is not subject to protections under 365(h). B. Even if both statutes are read together and applied to the case at issue, statutory interpretation favors a reading harmonizing both sections to permit the 363 sale free and clear of Highway s leasehold interest. When interpreting statutes, the Court must first begin with the statutory language. Hughes Aircraft Co. v. Jacobsen, 525 U.S. 432, 438 (1999). Unless a statute specifically defines a word or the statutory context requires a different definition, statutory terms take their ordinary, common meaning. Walters v. Metropolitan Educ. Enters., Inc., 519 U.S. 202, 207 (1997). When statutory language is plain, the Court s sole function is to enforce the statute. Sebelius v. Cloer, 569 U.S. 369, 381 (2013). The Court must presume that the legislature means what it says based on the text. American Tobacco Co. v. Patterson, 456 U.S. 63, 68 (1982). Legislative history is only relevant where the statutory text is unclear. Gonzales, 520 U.S. at 6. When interpreting statutes, this Court considers the placement and purpose of the words within the broader statutory scheme. Holloway v. U.S., 526 U.S. 1, 8 (1999). Further, when considering two statutes in tandem, the Court must regard each as effective if the two are capable of co-existence. Morton v. Mancari, 417 U.S. 535, 551 (1974). So long as the Court can preserve the sense and purpose of each statute, the statutes must be read together. Watt v. Alaska, 451 U.S. 259, 267 (1981). 10

18 When read in tandem, section 363(f) and section 365(h) do not conflict because the sections apply to entirely separate events. In re MMH Automotive Group, LLC., 385 B.R. 347, 351. In In re MMH Automotive Group, a real property buyer filed an adversary proceeding to determine that an unrecorded billboard lease was extinguished upon sale of the property under section B.R. at 351. The court, trying to reconcile sections 363 and 365, held that the property could be sold free and clear of the leasehold interest. Id. at 367. It specifically reasoned that, for purposes of statutory interpretation, 365(h) is limited by what Congress said and did not say. Id. at 366. The court noted that no part of section 365(h) prohibits a debtor/landlord from selling property in which there is a tenant in possession by a lease assumed or rejected. Id. Further, section 365(h) does not address a debtor s sale of property subject to a lease, at all. Id. The court posited that had Congress wished for the protections of section 365(h) to apply without limitation even when the property subject to the lease is sold it could have done so. Id. The court that omission telling. Id. Additionally, had Congress intended 365(h) to override the debtor s right to sell the property, it could have expressly provided that limitation. Id. As a result, the court found the two statutes not in conflict, for much the same reason that the Ninth Circuit viewed 363(f) and 365(h) as covering entirely separate events. Keeping this clean, simple interpretation of 365(h) gives fair reading to what Congress wrote and promotes the goal of keeping the events of rejected unexpired leases and sales free and clear of interests severable. Alternatively, this Court must construe sections 363(f) and 365(h) in such a way as to avoid conflicts between them if such a construction is possible and reasonable. Precision Industries, Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 544 (7th Cir. 2003). In Precision Industries, Inc. v. Qualitech Steel SBQ, LLC, the Seventh Circuit was asked to reconcile the two Code provisions. Id. 540 (7th Cir. 2003). There, the debtors owned a steel mill. Prior to bankruptcy, one of the 11

19 debtors entered into an agreement with Precision. Under the agreement, Precision would build and operate a supply warehouse at the steel mill for a period of ten years. After filing a chapter 11 petition, senior prepetition lenders credit bid substantially all of the debtors assets at auction. After the notice hearing, the bankruptcy court approved the sale. Despite having sufficient notice, Precision did not object to the Sale Order. The Sale Order clearly stated that the debtor was to convey its assets to the lenders free and clear of all liens, claims, encumbrances, and interests except for several specifically enumerated liens. Id. at 541. After a dispute over trespass, wrongful eviction, and breach of contract, the bankruptcy court was asked to determine whether Precision had a possessory interest in the warehouse. The bankruptcy court held that it was bound by the plain language of the Sale Order that the assets were acquired free and clear of the leasehold. Id. at 542. The Seventh Circuit reviewed to determine whether sections 363 and 365 were truly in conflict. The court started its inquiry with the statutory language. Id. at After a commitment to give the statutory words definitions established by plain meaning, the court sought to construe the two provisions in a way as to avoid conflict. Id. at 544. The court noted that it was bound to construe the statutes together so long as that construction was possible and reasonable. Id. The court first examined section 363 and found it to generally provide for the use, sale, or lease of property belonging to the bankruptcy estate. Id. It noted the trustee s stated power to sell property free and clear of any interest in the property. Id. The court provided that any interest should be interpreted broadly so as to include leaseholds. Id. at 545. Moreover, in further exploring the leasehold interest, the court noted that the possessory interest is not simply a right connected to the property but a limited right to the property itself. Id. Therefore, because Precision s possessory interest in the warehouse was any 12

20 interest within the meaning of 363(f), the court found that the statute on its face authorized the sale of [the debtor s] property free and clear of that interest. Id. at 646. Congress knows how to cross reference between 363 and 365 and the absence of cross referencing in these two sections suggest that Congress did not intend that one would limit the other. Section 365 generally allows the trustee to reject executory contracts for the purpose of relieving the debtor of burdensome contractual obligations. Id. (citing N.L.R.B. v. Blidisco & Blidisco, 465 U.S. 513, 528 (1984)). However, Congress built in a balancing mechanism to protect rights of lessees. Id. While on the surface these two competing interests would suggest that the sections conflict, that the statutory provisions themselves do not suggest that one supersedes or limits the other. Id. at 547. For example, sections 363 and 365 cross reference one another through 363(d) and 365(a) Therefore, Congress clearly recognized and intended that some of the provisions would be subject to one another. Id. However, there is no specific cross reference in either 363(f) or 365(h). The absence of cross reference between 363(f) and 365(h) indicates that Congress had no intention that one would limit the other. Id. (citing Keene Corp. v. United States, 508 U.S. 200, 208 (1993)). Further, section 365(h)(1)(A) states in plain language that its scope is limited. Id. The court noted that the subsection applies only where the trustee rejects an unexpired lease of real property. Id. First, section 365(a) provides that a trustee may assume or reject an unexpired lease. 11 U.S.C. 365(a) (2012). This means the trustee has the following options: assume, reject, or take no action. Of those three options, 365(h) protects lessees in only one case the case where the trustee rejects an unexpired lease. Id. at 365(h). The conditional words may and if limit lessees to a particular scenario not at issue in this case. See id, In the absence of such rejection, there is nothing in the statute suggesting that the possessory interest protection applies any time the interest is at 13

21 risk. Id; see also Spanish Peaks, 872 F.3d at 899 (reasoning that the intent to protect lessees under 365 is not absolute and it exists alongside other purposes). Therefore, this Court should hold that under a plain language reading of section 363(f) and 365(h) the two sections do not limit each other and would permit the sale of High Rocks free and clear of Highway s leasehold interest. C. Highway failed to exercise its rights to prevent the loss of its leasehold interest. Pursuant to section 363(e), a bankruptcy court must provide adequate protection for an interest a sale will terminate if the interest s holder so requests. 11 U.S.C. 363(e); see also Spanish Peaks, 872 F.3d at 899. A party may request adequate protection at any time prior to the court s order declaring use of the property. See In re Northeast Chick Services, Inc., 43 B.R. 326, (Bankr. D. Mass. 1984). Adequate protection ensures that the creditor gets the value for which he bargained. In re Martin, 761 F.2d 472, 474 (8th Cir. 1985); see also La Jolla Mortg. Fund v. Rancho El Cajon Assoc., 18 B.R. 283, 286 (Bankr. S.D. Ca. 1982); Unsecured Creditors Committee v. Jones Truck Lines, Inc., 156 B.R. 608, 610 (Bankr. W.D. Ark. 1992). Adequate protection is intended to be a flexible standard. Jones Truck Lines, 156 B.R. at 610. Courts should determine awarded adequate protection liberally to permit maximum flexibility in adequate protection proposals. In re Martin, 761 F.2d at 474. Further, Judge Learned Hand explained in In re Murel Holding Corp. that adequate protection must be completely compensatory. In re Murel Holding Corp., 75 F.2d 941, 942 (2d Cir. 1935). A potential form of adequate protection could include continued possession. Dishi & Sons, 510 B.R. at In July of 2016, Highway had notice that its lease interest could be at stake due to the bankruptcy filing. R. 5. At any time, Highway could ask the court for adequate protection under section 363(e) to protect its interests. After doing so, the court would have been required to provide for Highway in some form. Highway, however, did not file for adequate protection at any time throughout the case, nor does the record indicate that Highway made any mention of adequately 14

22 protecting its leasehold interest prior to its objection to the sale. R Now, Highway has likely waived its right to adequate protection. The dissent from the Thirteenth Circuit unnecessarily expresses concern that adequate protection is not enough to protect the lessee s interest if section 365(h) is read to exist independently and thus, not to limit the broad section 363(f) sale power. R. 22. The dissent s concern, based on the theory that possession as a form of adequate protection is untested, is misplaced. Id. While possession may not have yet been awarded as adequate protection, the possibility is preserved through the purpose of adequate protection, which is to compensate the party seeking it. Murel Holding Corp., 75 F.2d at 942. The possibility is also preserved through the flexibility and case-by-case discretion that courts are awarded when making adequate protection determinations. Martin, 761 F.2d at 474. Finally, the possibility is expressly recognized in Dishi & Sons. 510 B.R. at ; R. 22 fn. 12. The case at issue cannot serve as an example working toward possession as granted adequate protection because Highway simply did not ask. Additionally, bankruptcy courts and legal scholars have expressed the erroneous concern that permitting a debtor to sell property free and clear of an unexpired lease allows a debtor to do indirectly what it could not do directly Haskell, 321 B.R. at 9; see also Zota Petroleums, 482 B.R. at 161; Michael St. Patrick Baxter, Section 363 Sales Free and Clear of Interests: Why the Seventh Circuit Erred in Precision Industries v. Qualitech Steel, 59 BUS. LAW. 475, 477 (2004). However, this concern is misplaced, as it ignores adequate protection entirely. In order for a debtor to successfully sell the property circumventing section 365(h) protections, the debtor must not assume or reject the unexpired lease. However, this is not the only necessary step. The lessee must also not move the court to compel assumption or rejection. Most importantly, if the lessee has requested adequate protection from the court, and the court grants it, this serves as a major check 15

23 on a debtor s ability to use a section 363(f) sale to work around the lessee s protections under section 365(h). Here, Highway did not move the court to compel assumption or rejection of its unexpired lease. It seems that the lease likely would have been rejected had the court compelled it, at which time Highway would have received the full section 365(h) protections it desires. Alternatively, Highway could have made assumption or rejection of its unexpired lease a condition to its advancement of $2 million to the debtor. R. 6. Because Highway did not ask for adequate protection; attempt to compel assumption or rejection; or bargain with the Debtor for assumption or rejection, Highway is regrettably left without recourse. While this is an unfortunate result, it is not a harsh result. This Court does not bear the burden of representing Highway s interests, especially after Highway consistently failed to protect its leasehold. Further, this Court does not bear the burden of legislation to construe a Code section to provide expansive protection for a party that has simply failed to protect itself. II. THE THIRTEENTH CIRCUIT COURT OF APPEALS PROPERLY HELD THAT THE COMMITTEE SETTLEMENT DOES NOT IMPLICATE THE ABSOLUTE PRIOIRTY RULE. In a Chapter 11 Bankruptcy, the bankruptcy court shall confirm the plan [for reorganization]... if the plan does not discriminate unfairly, and is fair and equitable. 11 U.S.C. 1129(b)(1) (2012). For a plan to be fair and equitable, a holder of any junior interest to another creditor must not receive any property of the estate before any senior interest holder. 11 U.S.C (b)(2)(c) (2012). This is known as the absolute priority rule. Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 441 (1968) (known as TMT Trailer Ferry). Rule 9019 of the Federal Rules of Bankruptcy Procedure provides that on motion... the court may approve a compromise or settlement. Fed. R. Bankr. P Therefore, a settlement cannot render a plan for reorganization unfair or inequitable. TMT Trailer Ferry,

24 U.S. at 424 (holding that it is a duty of a bankruptcy court to determine that a proposed compromise forming part of a reorganization plan is fair and equitable ). However, there are specific situations where a settlement must not meet the absolute priority rule. These are exclusions rather than exceptions to the absolute priority rule. First, settlements that do not involve property of the estate do not have to meet the absolute priority rule. In re ICL Holding Co., Inc., 802 F.3d 547, 555 (3d Cir. 2015). Second, settlements that are not part of a reorganization plan do not necessarily have to meet the absolute priority rule. In re Iridium Operating LLC, 478 F.3d 452, 463 (2d Cir. 2007). Lastly, settlements that are not part of a reorganization plan, that are entered early in the bankruptcy case, and that serve significant bankruptcy related purposes do not have to meet the absolute priority rule. See Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 979, (2017) (specifically limiting its holding to Chapter 11 dismissals and cases where there are no significant offsetting bankruptcy-related justification[s] ). A. 4th Street s distribution of $2 million to the litigation trust fund was not a distribution of property of the estate and therefore the absolute priority rule does not apply to the distribution. 541(a) of the Bankruptcy Code defines property of the estate. 11 U.S.C. 541(a) (2012). This provision provides seven different categories of property of the estate. All of these categories relate directly to interests held by the debtor or held on behalf of the debtor. It is true, as this Court has established, that Congress intended for property of the estate to have a broad scope. See United States v. Whiting Pools, Inc., 462 U.S. 198, 204 (1983) (noting that the House and Senate reports for the adoption of the Bankruptcy Code indicate a desire for 541(a) to have a broad scope). However, the context of 541(a) is benched in terms of all legal or equitable interests of the debtor in property. See 11 U.S.C. 541(a)(1) (emphasis added). 541(a)(6) provides that proceeds... or profits from property of the estate are property of the estate. 11 U.S.C. 541(a)(6) 17

25 (2012). Also, 531(a)(7) provides that [a]ny interest in property that the estate acquires after the commencement of the case is property of the estate. 11 U.S.C. 541(a)(7). In other words, the only way that property of a third party could be considered property of the estate is if the debtor or estate had some legal interest, possessory or expectancy, in the property. Therefore, property of the estate was never intended to have so broad of a scope to include property of a third party in which the debtor never had an interest. See In re O'Dowd, 233 F.3d 197, 202 (3d Cir. 2000) (holding the estate encompasses everything that the debtor owns upon filing a petition, as well as any derivative rights, such as property interests the estate acquires after the case commences ) (emphasis added). In certain circumstances, creditors and third parties have full property rights with their property provided that the debtor and estate have no interest in the specific property. In re SPM Mfg. Corp., 984 F.2d 1305, 1313 (1st Cir. 1993) ( While the debtor and the trustee are not allowed to pay nonpriority creditors ahead of priority creditors,... creditors are generally free to do whatever they wish with the bankruptcy dividends they receive, including to share them with other creditors. ); In re ICL Holding Co., Inc., 802 F.3d at 556 ( Funds were not proceeds from a secured creditor s liens, do not belong to the estate, and will not become part of the estate even if the Court does not approve the Settlement. ); In re TSIC, Inc., 393 B.R. 71, 77 (Bankr. D. Del. 2008) (holding that it is permissible for a party other than a debtor to use its funds to pay general unsecured creditors before higher priority creditors); In re U.S. Flow Corp., 332 B.R. 792, 798 (Bankr. W.D. Mich. 2005) (holding that carve-out funds for professionals working on the bankruptcy case are not property the estate and therefore are not recoverable by the estate and the funds can be used by the professionals as they wish); In re White Glove, Inc., No DWS, 1998 WL , at *7 (Bankr. E.D. Pa. Oct. 14, 1998) (holding that a secured creditor could 18

26 carve out of the distribution part of its claim and distribute part of that claim to other secured creditors because nothing in the Code prohibits it from voluntarily paying [its] monies ). In In re SPM Mfg. Corp., a first priority creditor bank and an unsecured creditors committee entered into an agreement where they would work together to develop a new plan of reorganization for the debtor since the current plan was failing. In re SPM Mfg. Corp., 984 F.2d at As a part of the agreement, the bank and the committee agreed to share whatever proceeds they received from the estate as a result of the bankruptcy case. Id. at In this particular case, the bank s first priority claim encompassed all of the assets of the debtor, which meant that no other creditor, secured or unsecured, would receive a distribution from the estate. Id. at The Trustee and the debtor objected to the agreement to share proceeds on grounds that this sharing of proceeds to unsecured creditors violated the absolute priority rule. Id. at The Trustee and the debtor argued that the unsecured creditors were circumventing the priority scheme, which they argued was forbidden by the Bankruptcy Code. Id. at However, the First Circuit held that once the distribution was made to the first priority creditor, that distribution became property of the creditor. Id. Further, the bankruptcy court has no authority to control how [the first priority creditor] disposes of the proceeds once it receives them. Id. Nothing in the Code forbade the bank from sharing its proceeds with the unsecured creditors. Id. Therefore, the First Circuit approved the agreement and allowed the sharing of proceeds to the unsecured creditors. Id. at Where settlement funds were not used as consideration for the assets bought at the 363 sale and therefore not property of the estate, settlement agreements have been approved. See In re ICL Holding Co., Inc., 802 F.3d at 556. Similar to High Rocks, Inc. s case, In re ICL Holding Co., Inc. involved a group representing the secured lenders settling with an unsecured creditors committee in order for a 363 sale to take place. See In re ICL Holding Co., Inc., 802 F.3d at

27 Originally, the committee objected to the sale on grounds that the sale was a veiled foreclosure. Id. As a part of the settlement, the committee agreed to remove its objection in exchange for the secured lenders group depositing $3.5 million in a trust whose sole beneficiaries would be the unsecured creditors. Id. The government then objected to the settlement because it argued that the settlement went against the Bankruptcy Code s priority scheme. Id. at 552. The government alleged that the deposit to the trust by the secured lenders group was giving property of the estate to the unsecured creditors before higher priority creditors received anything. Id. The Third Circuit disagreed and held that the money that the secured lenders group used to fund the trust was never a part of the estate. Id. at 555. This money was also not paid at the direction of the debtor. Id. The court felt that the key analysis in determining whether settlement funds are considered property of the estate was whether the funds were used as consideration for the assets bought at the 363 sale. Id. at 556. In In re ICL Holding Co., Inc., the court found that the funds were not used in this way and approved the settlement. Id. However, for situations where estate property is used for settlement agreements, the Third Circuit has invalidated those agreements. See, e.g., In re Armstrong World Indus., Inc., 432 F.3d 507 (3d Cir. 2005). In In re Armstrong World Indus., Inc., a reorganization plan provided for the distribution of warrants to purchase new stock in the debtor company to same priority creditors if one class of creditors rejected the reorganization plan. Id. at 509. The Third Circuit held that this case was distinguishable from In re SPM Mfg. Corp. in that here the distribution of the warrants to the other creditors was automatic. Id. at 514. This automatic distribution meant that the warrants were a part of the estate. Id. The substance and form of the distribution was one of distribution of property of the estate. Id. This was inherently different than In re SPM Mfg. Corp. where a distribution was first made to the creditor who then shared the distribution with the unsecured 20

28 creditors. The Third Circuit held that the distribution in In re Armstrong World Indus., Inc. violated the absolute priority rule and the plan was held invalid. Id. at 518. For the Third Circuit, whether property used for a distribution is property of the estate is a factor in determining compliance with the absolute priority rule. In High Rocks, Inc. s case, the analysis is clear. 4th Street agreed to distribute $2 million to the litigation trust fund for the sole benefit of the unsecured creditors in exchange for the Committee removing its objection to the sale. R. at 8. 4th Street and the Committee made this agreement after the sale but before sale hearing date. Id. By credit bidding, 4 th Street only receives the assets as a form of proceeds from the sale and its claim is satisfied considering that the bid for the exact amount of its secured claim. Conceptually, 4th Street receives the proceeds from the sale without having given any money to the estate - similar to a balance sheet adjustment. Two possibilities occurred prior to this hearing date: (1) the sale proceeds were distributed to 4th Street or (2) the sale proceeds were held by the estate until the sale was approved at the sale hearing. In either possibility, there is the same result 4th Street had every right to give its money to whomever it wished. If 4th Street did receive the proceeds from the sale prior to the sale hearing, since money is fungible, 4th Street would be using part of the sale proceeds to fund the litigation trust. If this is case, then it is very similar to In re SPM Mfg. Co. Like the agreement in In re SPM Mfg. Co. where the bank agreed to share part of its distribution with the unsecured creditors, in effect, this is exactly what 4th Street is agreeing to do. Here, the Committee stipulates that the claims against Skyline, that the litigation trust holds, are very valuable. If these claims are pursued then it would result in a meaningful distribution to the unsecured creditors. If the trust fund is not funded, then the claims cannot be pursued and the unsecured creditors would not receive anything for the Skyline 21