In the Supreme Court of the United States of America

Transcription

1 NO In the Supreme Court of the United States of America OCTOBER TERM, 2017 IN RE HIGH ROCKS, INC., DEBTOR, HIGHWAY 61, INC., Petitioner, V. HIGH ROCKS, INC., Respondent. ON WRIT OF CERTIORARI FROM THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT BRIEF FOR RESPONDENT COUNSEL FOR RESPONDENT TEAM R38 DATED JANUARY 22, 2018

2 QUESTIONS PRESENTED I. Why a bankruptcy court may approve a sale of real property free and clear of a leasehold interest in such property held by an objecting lessee pursuant to 363(f) of the Bankruptcy Code notwithstanding the protection that exists for lessees in 365(h) of the Bankruptcy Code. II. Why a bankruptcy court may approve a gift settlement of proceeds that does not conform with the Bankruptcy Code s absolute priority scheme if the gift consists of non-estate assets, does not result in a final disposition, and furthers the policy goals of the Code. i

3 TABLE OF CONTENTS QUESTIONS PRESENTED... i TABLE OF AUTHORITIES... ii OPINIONS BELOW... viii STATEMENT OF JURISDICTION... viii STATUTORY PROVISIONS... viii STATEMENT OF THE CASE SUMMARY OF THE ARGUMENT...3 STANDARD OF REVIEW...4 ARGUMENT...5 I. A BANKRUPTCY COURT MAY APPROVE A SALE OF REAL PROPERTY FREE AND CLEAR OF A LEASEHOLD INTEREST IN SUCH PROPERTY HELD BY AN OBJECTING LESSEE PURSUANT TO 363(f) NOTWITHSTANDING THE PROTECTIONS THAT EXIST FOR LESSEES IN 365(h) OF THE BANKRUPTCY CODE...5 A. The Bankruptcy Code provisions of 363(f) and 365(h) should be read in harmony according to the canons of construction...5 B. Section 363 authorizes the sale free and clear of the Respondent s leasehold because interests is broadly defined and Congress did not proscribe leasehold interests from this power 8 1. Section 363(f) authorizes such sale because interests is broadly defined Congress did not intend 365 to limit a trustee s power of sale under C. Section 365 does not limit a trustee s power of sale because 365 expressly applies to formal rejection of a lease where the debtor lessor retains possession of the property and 365 is only applicable to the extent that such rights are enforceable under applicable nonbankruptcy law Section 365 does not apply where the debtor lessor does not retain possession of the property and affirmatively rejects the lease but rather sells real property subject to a lease 13 ii

4 2. Even if this court finds the trustee s failure to either assume or reject the lease amounted to de facto rejection, 365(h) is only applicable to the extent that such rights are enforceable under applicable nonbankruptcy law. 15 II. A BANKRUPTCY COURT MAY APPROVE A GIFT SETTLEMENT OF PROCEEDS THAT DOES NOT CONFORM WITH THE BANKRUPTCY CODE S ABSOLUTE PRIORITY SCHEME IF THE GIFT CONSISTS OF NON-ESTATE ASSETS, DOES NOT RESULT IN A FINAL DISPOSITION, AND FURTHERS THE POLICY GOALS OF THE CODE.. 18 A. As a gift settlement of non-estate assets, the absolute priority rule does not govern the instant case.19 B. This Court s decision in Jevic is not applicable to the instant case because this gift settlement does not result in a final disposition and furthers the policy goals of the Bankruptcy Code. 23 CONCLUSION 31 APPENDICES Appendix A... A Appendix B... B Appendix C... C Appendix D... D Appendix E... E iii

5 TABLE OF AUTHORITIES UNITED STATES SUPREME COURT CASES Butner v. United States, 440 U.S. 48 (1979).15 City of Chicago v. Env tl Def. Fund, 511 U.S. 200 (1993).6 Connecticut Nat'l Bank v. Germain, 503 U.S. 249 (1992).9 Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017)..passim Ex Parte Christy, 44 U.S. 292 (1842).17 Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957).6 Hamilton v. Lanning, 560 U.S. 505 (2010)...15 Keene Corp. v. United States, 508 U.S. 200 (1993).9 Morton v. Mancari, 417 U.S. 535 (1974)...6 N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513 (1984)...12 Nobelman v. Am. Sav. Bank, 508 U.S. 324 (1993)...16 Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968) 22, 24 Rubin v. United States, 449 U.S. 424 (1981).9 Russello v. United States, 464 U.S. 16 (1983)...9 iv

6 Toibb v. Radloff, 501 U.S. 157 (1991)...25 Watt v. Alaska, 451 U.S. 259 (1981)...6 UNITED STATES CIRCUIT COURTS OF APPEAL CASES Canter v. Ramsey (In re Hotel Governor Clinton), 96 F.2d 50 (2d Cir. 1938)...15 Capital Factors, Inc. v. Kmart Corp. (In re Kmart Corp.), 359 F.3d 866 (7th Cir. 2007)...25 In re ICL Holding Co., Inc. 802 F.3d 547, 555 (3d Cir. 2015)...19 Medical Malpractice Ins. Ass n v. Hirsch (In re Lavigne), 114 F.3d 379 (2d Cir. 1997)..12 Metropolitan Life Ins. Co. v. Murel Holding Corp. (In re Murel Holding Corp.), 75 F.2d 941 (2d Cir. 1935) 10 Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007)..19, 23, 25 Morning Mist Holding, Ltd. v. Krys (In re Fairfield Sentry, Ltd.), 714 F.3d 127 (2d Cir. 2013) 4 Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. 2015)..25 Official Comm. of Unsecured Creditors v. Stern (In re SPM Mfg, Corp), 984 F.2d 1305 (1st Cir. 1993)..19, 21 Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions (In re Spanish Peaks Holdings II, LLC), 872 F.3d 892 (9th Cir. 2017).4, 7, 14 Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003)..passim v

7 UNITED STATES DISTRICT COURT CASES Cheslock-Bakker & Assocs., Inc. v. Kremer (In re Downtown Athletic Club of New York City, Inc.), 44 Collier Bankr. Cas. 2d 342 (S.D.N.Y. 2000)...8, 13 Dishi & Sons v. Bay Condos LLC, 510 B.R. 696 (S.D.N.Y. 2014)...9, 10, 12, 13 UNITED STATES BANKRUPTCY COURT CASES Gary Hill, Jr. v. MKBS Holdings, LLC (In re Hill), 307 B.R. 821 (Bankr. W.D. Pa. 2004)...13 Hewlett v. Ng (In re Ng), 2007 WL (Bankr. N.D. Cal. Dec. 13, 2007)..13 In re Stein, 281 B.R. 845 (Bankr. S.D.N.Y. 2002)...14 In re Fryar, 2017 WL (Bankr. E.D. Tenn. Apr. 25, 2017)... 24, 27, 28 In re Taylor, 198 B.R. 142, 162 (Bankr. D. S.C. 1996)...8 Jacobs v. Terpitz (In re Dewey & LeBoeuf LLP) 478 B.R. 627 (Bankr. S.D.N.Y. 2012)...23 La Jolla Mtg. Fund v. Rancho El Cajon Assocs., 18 B.R. 283 (Bankr. S.D. Cal. 1982).10 STATUTORY PROVISIONS 11 U.S.C U.S.C. 363(e).9, U.S.C. 363(f)...5, U.S.C. 363(f)(1).7, 8, U.S.C. 365(d)(1) U.S.C. 365(d)(4)(A)...13 vi

8 11 U.S.C. 365(h).5, U.S.C U.S.C. 1129(b).18, 19 LEGISLATIVE HISTORY H.R. REP. NO. 595, 95TH CONG. 1ST SESS. 345 (1977)..11 SECONDARY SOURCES Collier P (16th ed. 2017)..9 Kevin M. Judisak, et. al., Bankruptcy Law The Standard for Rejecting Collective Bargaining Agreements in Bankruptcy: Labor Discovers It Ain t Necessarily So, 63 NOTRE DAME L. REV., 79 (1988) Larry M. Eig, U.S. CONGRESSIONAL RESEARCH SERVICE. STATUTORY INTERPRETATION: GENERAL PRINCIPLES AND RECENT TRENDS, 1, 42 (RL97589) Maria Brouwer, Reorganization in US and European Bankruptcy Law, 22 EUR. J. LAW ECON. 5 (2006) Grant S. Nelson & Dale A. Whitman, Real Estate Finance Law 7.13 (3d ed. 1994). 15 vii

9 OPINIONS BELOW The bankruptcy judge for the District of Moot approved both the Committee Settlement and the sale of High Rocks to 4th Street. R. at 8. In its approval of the sale, the bankruptcy court found 365(f) trumps Highway s asserted rights under 365(h) of the Bankruptcy Code. R. at 8 9. In its approval of the Committee Settlement, the court found that the absolute priority rule was not applicable. R. at 9. In doing so, however, the judge recognized the novelty of Highway s objections and stayed the sale s closing in order for Highway to file the instant appeal. R. at 8. On appeal to the United States District Court for the District of Moot, the district court affirmed the bankruptcy court s ruling. R. at 9. On appeal from the district court to the Thirteenth Circuit Court of Appeals, the court once again affirmed the approval of both the sale and the settlement. R. at 3. The Supreme Court of the United States granted Highway 61 s petition for a writ of certiorari, giving rise to the instant action. R. at 1. STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. STATUTORY PROVISIONS INVOLVED The relevant statutory provisions involved in this case are listed below and are reproduced in Appendices A through E. 11 U.S.C U.S.C 363(e) 11 U.S.C 363(f) 11 U.S.C. 365(h) 11 U.S.C. 1129(b)(2)(C) viii

10 STATEMENT OF THE CASE In May 2014, High Rocks, Inc. ( High Rocks ), the debtor in this case, broke ground to develop a resort on a parcel of land located outside the City of Rainier in the State of Moot. R. at 4. This development, High Rocks, consists of a casino, a 30-story hotel, and a 7,000-seat outdoor amphitheater. R. at 4. High Rocks leased the amphitheater to Highway 61, Inc. ( Petitioner ) to operate the venue in exchange for a fixed fee of $400,000 per year and a share of the revenue ( Highway lease ). R. at 5. To fund this construction, High Rocks financed the $800 million project with a secured loan in favor of North Country Bank ( North Country ). R. at 4. Although it had never attempted such a project in the past, Skyline Construction Inc. ( Skyline ), as the lowest bidder, was chosen as the main contractor. R. at 4. During initial construction, problems arose in the hotel tower and casino building from Skyline s alleged use of inadequate construction materials. R. at 4. This caused enormous complications to the completion of the resort properties including, among other defects, requiring most of the plumbing to be replaced. R. at 4. Despite these hindrances, Skyline constructed the majority of the amphitheater, but before it could finish installing seating, sound equipment and special acoustic panels, High Rocks terminated its contract with Skyline due to its mismanagement. R. at 4. In January 2016, High Rocks hired a new contractor to resume construction of the hotel tower and casino, but not the amphitheater due to its lack of experience. R. at 5. Instead, Highway would install the remaining seats, sound system, and acoustic panels for $2 million to expedite the amphitheater s opening in November R. at 6. In February 2016, North Country sold its note at an undisclosed discount to 4th Street, a company with an established record of owning and operating similar resorts and entertainment properties. R. at 5. In June 2016, 4th Street commenced 1

11 a foreclosure action on the property as part of its plan to establish full ownership, which prompted High Rocks to initiate this chapter 11 bankruptcy case in Moot in July R. at 5. At the first hearings, High Rocks announced its intent to open in a few months as construction progressed. R. at 6. The postpetition contract for Highway s completion of the amphitheater was approved by the bankruptcy court without objection. R. at 6. Unfortunately, High Rocks continued to face complications with the facilities and was forced to halt construction when it ran out of cash in December R. at 6. With no remaining funds to reorganize, High Rocks filed a motion to sell its assets free and clear of any encumbrances under 363(f) of the Bankruptcy Code, including the leasehold interest held by Highway. R. at 6 7. Before the sale, the Official Committee of Unsecured Creditors ( Committee ) alerted 4th Street of its various lender liability claims against it, as well as against Skyline, for its mismanagement of the development. R. at 7. No qualified bidders other than 4th Street came forward for the auction of the High Rocks facility on January 11, R. at 7. When 4th Street was named the winner for its credit bid in the full amount of its secured debt, it gave notice to all interested parties that it would oversee the management of the amphitheater on its own. R. at 7. Before the hearing, 4th Street, High Rocks, and the Committee reached a $2 million gift settlement agreement in exchange for the Committee s withdrawal of its objection to the sale ( Committee Settlement ). R. at 8. This gift was intended to fund the Committee s claims against Skyline. R. at 8. Highway filed an objection under 365(h) of the Bankruptcy Code and claimed the general provisions of 365(h) allowed it to maintain its lease. R. at 7. Highway also sent a letter to inform a letter to inform High Rocks it wished to retain its leasehold interest. R. at 8. At the hearing, Highway again claimed its leasehold interest was protected under 365(h) and raised an additional objection that the Settlement did not comply with the absolute priority rule. R. at 8. 2

12 The bankruptcy court found the Committee Settlement did not implicate the absolute priority rule and that it was in all parties best interest that to enable the Committee to litigate their claims against Skyline. R. at 9. Furthermore, the court held 363(f) supersedes Highway s rights to keep the Lease under 365(h). R. at 8 9. Nonetheless, the court found that Highway s objections raised a novel issue and stayed the closing of the sale so Highway could file this appeal. R. at 8. The Thirteenth Circuit affirmed the district court s approval of both the sale to 4th Street free and clear of Highway s leasehold under 363(f) and the Committee Settlement. R. at 20. SUMMARY OF THE ARGUMENT The perceived conflict between 363(f) and 365(h) may be quelled by a plain reading of these two sections in distinct circumstances. Section 365 does not offer lessees protection against every conceivable threat to their possessory interests, but rather focuses on a specific event the rejection of a lease by the trustee or debtor-in-possession and spells out the rights of parties affected by such event. Therefore, the Petitioner s interest in the leasehold is an interest 363 can eliminate because the Highway Lease was not rejected prior to the sale. Additionally, this Court should find that nonbankruptcy law determines the rights of the parties in the instant case because this interpretation preserves the Petitioner s bargained for prepetition property rights without enhancing them on the inference that Congress intended a different section to apply as absolute. Congress had the opportunity to change the language of 365, specifically the effect of a 363 sale on a lease, but abstained from doing so, even at the time of the 1994 amendments. Hence, this Court should not limit High Rocks ability to sell its property free and clear of the Respondent s leasehold interest pursuant to 363(f) notwithstanding the protections given to lessees under 365(h). 3

13 While the absolute priority rule was recently extended to settlements by this Court, rather than just chapter 11 reorganization plans, this priority scheme was not and cannot be intended to include the distribution of a gift of non-estate assets as a matter of policy. When a settlement is nonconsensual, it can be approved by a court if it is fair and equitable or if it furthers the Bankruptcy Code s legitimate policy goals. As a gift of 4th Street s personal money, the Committee Settlement is a distribution of non-estate assets, and therefore is not subject to the absolute priority rule. While it is undisputed the Petitioner does not consent to the Committee Settlement, consent is unnecessary for a gift of unrelated non-estate property. This Settlement consists of 4th Street s separate and individual non-estate property, to which the Petitioner has no legal right. Additionally, it is uncontested that the Committee Settlement is fair and equitable pursuant to the TMT Trailer Ferry factors and upon approval of this gift, additional burdens and unnecessary expenses will be saved by all parties by avoiding undue delay in the proceedings. Therefore, this Court should not further extend Jevic to bar a noncreditor from gifting its own property to nonpriority creditors to prevent burden and delay of bankruptcy proceedings. STANDARD OF REVIEW The review of a bankruptcy court s decision on questions of statutory interpretation, such as whether leases survive the sale of estate property free and clear of interests, are reviewed by this Court de novo. Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions (In re Spanish Peaks Holdings II, LLC), 872 F.3d 892, 897 (9th Cir. 2017). The review of the merits of a bankruptcy court s legal conclusions, such as the extent to which the absolute priority rule should be applied, are also reviewed de novo. Morning Mist Holding Ltd. v. Krys (In re Fairfield Sentry, Ltd.), 714 F.3d 127, 132 (2d Cir. 2013). 4

14 ARGUMENT I. A BANKRUPTCY COURT MAY APPROVE A SALE OF REAL PROPERTY FREE AND CLEAR OF A LEASEHOLD INTEREST IN SUCH PROPERTY HELD BY AN OBJECTING LESSEE PURSUANT TO 363(f) NOTWITHSTANDING THE PROTECTIONS THAT EXISTS FOR LESSEES IN 365(h) OF THE BANKRUPTCY CODE. The Bankruptcy Code is a complex statutory scheme that provides for the comprehensive financial resolution of an enterprise or person that has financially failed. By application of its many provisions, the Bankruptcy Code attempts to balance the often-conflicting goal of maximizing a debtor s opportunity to make a fresh start, and in a chapter 11 bankruptcy, reorganize, with the value of the debtor s estate for equitable distribution to creditors. As with any extensive enactment, one provision may appear in conflict with another provision of the same law, not only textually but with respect to its purpose. Sections 363 and 365 are two such provisions. Section 363 provides a trustee or debtor-in-possession the authorization to sell estate property free and clear of any interest. 11 U.S.C. 363(f). Whereas, 365(h) purports to protect lessees from rejection of their lease by a debtor lessor. 11 U.S.C. 365(h). As such, this discussion will begin by analyzing these provisions of the Bankruptcy Code and how they may be read in harmony. The second part will then discuss why the plain meaning and intentional neglect by Congress in amending the statutory text justifies the result in this case. Lastly, the final section will discuss why, absent affirmative rejection and retention of the property, the sale in the case at bar was not limited by 365. A. The Bankruptcy Code provisions of 363(f) and 365(h) should be read in harmony according to the canons of construction. Where language of a statute is plain, the sole role of the courts is to enforce it in accordance with its terms. Larry M. Eig, U.S. CONGRESSIONAL RESEARCH SERVICE. STATUTORY INTERPRETATION: GENERAL PRINCIPLES AND RECENT TRENDS, 1, 42 (RL97589; Dec. 19, 2011). 5

15 This principle is known as the plain meaning doctrine, which requires a court to presume that Congress acts intentionally and purposely when it includes particular language in a statute. See City of Chicago v. Environmental Defense Fund, 511 U.S. 200, 208 (1993). Consequently, when presented with two allegedly conflicting provisions, this Court has the obligation to give effect to each if [it] can do so while preserving their sense and purpose. Watt v. Alaska, 451 U.S. 259, 267 (1981); Morton v. Mancari, 417 U.S. 535, 551 (1974) ( [W]hen two statutes are capable of coexistence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective. ). Therefore, this Court may read 363(f) to apply to the instant case notwithstanding 365(h) s legislative intent because such inquiry is irrelevant where the language of 363 is plain and unambiguous. Courts who fall in line with the majority view not only rely on the perceived conflict between these provisions, but also the canon of construction that however inclusive may be the general language of a statute, it will not be held to apply to a matter specifically dealt with in another part of the same enactment. Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222, 228 (1957). However, the majority s approach fails to acknowledge the underlying principle of the maxims of statutory construction namely, that such a canon is only elicited where the provisions cannot be read to avoid conflict. Here, a plain reading of the statutory text allows this Court to read both provisions as to give effect and purpose to each. The Seventh Circuit first decided the issue before this Court, and held that 365 does not limit a trustee or debtor-in-possession s ability to sell a debtor s real property free and clear of a tenant s lease under 363(f). Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 541 (7th Cir. 2003). The court began its analysis like all statutory interpretation cases by looking at the statutory language. Id. at The court concluded the provisions themselves did not suggest that one superseded the other. Id. at 547. Further, the court concluded that the plain 6

16 language of 365 limited its applicability to circumstances where there was rejection of a lease. Id. Lastly, the court concluded that the provisions of 363 themselves provided a mechanism to protect the rights of parties affected by such a sale. Id. at The Ninth Circuit recently reviewed this issue and also held 365 was inapplicable as related to the specific facts at issue there. Matter of Spanish Peaks Holdings II, LLC, 872 F.3d 892, (9th Cir. 2017). The Ninth Circuit addressed possible concerns that an effort to harmonize these two statutes would amount to an effective repeal of 365(h). Id. First, the court reasoned the language of 363(e) provided mandatory protection, but only upon request. Id. The court noted that the holders of the leasehold interest did not ask for adequate protection until after the sale had occurred. Id. at 900. Second, the court reasoned the language of 363 authorized free and clear sales but only in certain circumstances where such action was justified. Id. Although, the lease holders did not dispute that at least one of the provisions of 363(f) were met, the court took specific interest in subsection (f)(1), which authorizes a sale if applicable nonbankruptcy law permits sale of such property free and clear of such interest. Id. (citing 11 U.S.C. 363(f)). This Court has the obligation and ability to construe these two provisions in such a way as to avoid conflicts between them in accordance with the plain meaning doctrine. The Seventh and Ninth Circuits recognized this principal and reasoned it was not only equitable, but correct to interpret and reconcile 363(f) and 365(h) in such a way as to avoid reading a restraint into 363 that Congress itself did not carve. Section 365(h) distinctly applies where a debtor lessor remains in possession of its property and rejects a lease, and is inapplicable where the debtor lessor sells property subject to an interest, such as a leasehold, free and clear of that interest pursuant to 363. Accordingly, in order to preserve the sense and purpose of a 363 sale, this Court should read the two allegedly conflicting statutes in such a way so as to give its intended effect to each. 7

17 B. Section 363 authorizes the sale free and clear of the Respondent s leasehold because the word interests is broadly defined and Congress did not proscribe leasehold interest from this power. Section 363(f) authorizes a trustee or debtor-in-possession to sell property of the estate free and clear of any interest in such property. 11 U.S.C. 363(f). Although the term interest, as it applies in 363(f) is not defined within the Code, the Petitioner s interest in the leasehold of the amphitheater is an interest that 363 can eliminate. See Qualitech, 321 F.3d at Additionally, because Congress did not limit a trustee s power of sale in either 363(f) or 365(h), this Court should not inscribe such an exception, thereby expanding a party s prepetition property rights. Accordingly, this section will first discuss why the express wording of 363 applies to the sale of real property free and clear of a leasehold interest, and second, why a plain reading of both provisions justifies the result in the case at bar. 1. Section 363(f) authorizes such sale because interests is broadly defined. Bankruptcy courts and district courts have reached differing views on 363 and its effect on leases. [insert string cite maybe] Nonetheless, all courts have agreed on at least one aspect of 363 the term interest as used in 363(f), although not defined anywhere in the Bankruptcy Code, involves obligations connected to, or aris[ing] from the property being sold, which includes leasehold interests. See Cheslock-Bakker & Assocs., Inc. v. Kremer (In re Downtown Athletic Club of New York City, Inc.), 44 Collier Bankr. Cas. 2d 342, 348 (S.D.N.Y. June 9, 2000) (holding that under the expansive interpretation of interest, possessory rights of a lessee fall within the scope of 363(f)); In re Taylor, 198 B.R. 142, 162 (Bankr. D. S.C. 1996) ( a leasehold is a type of interest that fits within the plain text of the... statute ). Even courts holding for the Petitioner s position do not dispute that the term interests applies to leaseholds, and thus, the Petitioner s lease was appropriately eliminated pursuant to a 363 sale. 8

18 2. Congress did not intend 365 to limit a trustee s power of sale under 363. Congress did not intend for the protections of 365(h) to limit the rights of a trustee or debtor-in-possession under 363(f). This Court has repeatedly instructed that courts must presume that a legislature say in a statute what it means and mean in a statute what it says there. See Connecticut Nat'l Bank v. Germain, 503 U.S. 249, (1992) (quoting Rubin v. United States, 449 U.S. 424, 430 (1981)). Looking at the overall statutory structure and the lack of cross references between 365(h) and 363(f), the statutory provisions themselves do not suggest that one supersedes or limits the other. Qualitech, 327 F.3d at In fact, nothing in 365(h) precludes the trustee from terminating a lessee s rights if so empowered under another provision of the Bankruptcy Code. Dishi & Sons v. Bay Condos LLC, 510 B.R. 696, 698 (S.D.N.Y. 2014). Where Congress includes particular language in one section of a statute but omits it in another..., it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion. Keene Corp. v. United States, 508 U.S. 200, 208 (1993) (quoting Russello v. United States, 464 U.S. 16, 23 (1983)). Section 363(e) requires a court, on request of a party in interest, to condition a sale so as to provide adequate protection to an interest in property that is sold under U.S.C. 363(e); see also Collier P (16th Ed. 2017). Accordingly, this Court should not allow the Petitioner to carve out an exception to a 363 sale that Congress itself did not inscribe, specifically, where the Petitioner has slept on the rights provided to them pursuant to the applicable section of the Bankruptcy Code, specifically adequate protection. Because a leasehold qualifies as an interest in property for purposes of 363(f), a lessee of property being sold pursuant to subsection (f) would have the right to affirmatively insist that its interest be protected. Precision Indus. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, (7th Cir. 2003). Though the invocation of adequate protection does not necessarily guarantee a 9

19 lessee s continued possession of the property, it does demand in the alternative, that the lessee be compensated for the value of its leasehold. See In re Murel Holding Corp., 75 F.2d 941, 942 (2d Cir. 1935); La Jolla Mtg. Fund v. Rancho El Cajon Assocs., 18 B.R. 283, 286 (Bankr. S.D. Cal. 1982). Section 361 defines such protection as (1) periodic cash payments, (2) additional or replacement liens, and (3) such relief as will result in the realization by such entity of the indubitable equivalent of such entity's interest. 11 U.S.C. 361; Dishi & Sons, 510 B.R. at 698. In Dishi & Sons v. Bay Condos LLC, Bay Condos LLC, the Debtor, filed for chapter 11 bankruptcy providing in the plan that the unexpired lease to the laundromat was to be assumed, but all other nonresidential unexpired leases not assumed would be deemed rejected under the plan, including a lease to TGM. 510 B.R. 696, 704 (S.D.N.Y. 2014). Dishi & Sons successfully bid on the property at auction upon the court s approval. Id. At the conclusion of a noticed hearing, the bankruptcy court entered an order approving the sale. Id. Before an order was entered, however, TGM submitted a letter to the court asserting its right to retain possession of the unit for the duration of its lease under 365(h), and, alternatively, as adequate protection under 363(e). Id. at 700. Consequently, the court held that where estate property under lease is to be sold, 363 permits the sale to occur free and clear of a lessee's possessory interest, provided however, that the lessee is granted adequate protection for its interest upon request. Id. Because TGM submitted a letter to the court asserting its right to retain its appurtenant rights, and alternatively asserted its rights under 363(e) as adequate protection, the court reasoned that TGM was entitled to continued possession. Id. The Dishi & Sons case is distinct from the case at bar in two respects: first, the lessee in Dishi appropriately submitted its request to the court, and second, the lessee in Dishi asserted its rights under the specific provision of 363(e). The Petitioner in the present case did neither and, 10

20 accordingly, slept on its rights by failing to formally petition the bankruptcy court as provided in the provision specifically applicable to the facts of this case. When Congress intended to subordinate or condition 363, it did so expressly. For example, 363(l) is explicitly subordinate to 365 and 363(d) is explicitly subordinate to various subsections of 362. As between 363 and 365, however, no such cross-reference exists and Congress provided no such limitation in the plain language of either statute. As the court in Dishi & Sons recognized, when the protections of 365(e) are invoked, the bankruptcy court is obligated to condition the sale as necessary to protect that interest. In the instant case, for reasons unknown to the lower courts, the Petitioner never asserted its rights for adequate protection of its leasehold interest. Though the result of 363 may seem harsh to lessees, the legislature has two built in safeguards first, such sale is only authorized if one of the five conditions of 363(f) are met and second, the holder of an affected interest may seek adequate protection through 363(e). Here, even if this Court were to find an obligation to provide adequate protection by way of the letter submitted to High Rocks, Inc., the Petitioner still has the burden of proof on the validity, priority, and extent of such an interest. 11 U.S.C. 363(e)(1). The most common form of adequate protection is to have the lien or other interest attach to the proceeds of the sale. H.R. REP. NO. 595, 95TH CONG. 1ST SESS. 345 (1977). Because the sale of real property was sold credit bid equaling the value of the property, there were no cash proceeds realized from the sale. Correspondingly, even if this Court granted the Petitioner adequate protection, the Petitioner would appropriately receive nothing because the Highway Lease is subordinate to 4th Street s prior lien against the property. See 11 U.S.C. 363(f)(1). The right to credit bid its claim is an important protection for 4th Street when its collateral is being liquidated in a bankruptcy sale like in the present issue before this Court. This outcome, although unfortunate for the Petitioner, is a 11

21 matter of facts and circumstances. For example, if 4th Street would have been a junior lien holder instead, the Petitioner could likely meet their burden of proof for adequate protection because they would have priority. Under the current facts presented to this Court, however, the Petitioner s prepetition bankruptcy rights should not be enhanced on the inference that Congress intended a different section to apply as absolute. Congress had the opportunity to change the language of 365, specifically the effect of a 363 sale on a lease, but abstained from doing so, even at the time of the 1994 amendments. Hence, this Court should not limit High Rocks ability to sell its property free and clear of the Petitioner s leasehold interest pursuant to 363(f) notwithstanding the protections given to lessees under 365(h). C. Section 365 does not limit a trustee s power of sale because 365 expressly applies to formal rejection of a lease where the debtor lessor retains possession of the property and 365 is only applicable to the extent that such rights are enforceable under applicable nonbankruptcy law. Section 365(h) preserves a lessees rights where the trustee has formally rejected the lease. 11 U.S.C. 365(h). Consequently, 365(h) is inapplicable because the Highway Lease was not rejected prior to the sale. From the perspective of the estate, the power of rejection given to a trustee, or alternatively a debtor-in-possession, is an election to decline a contract or lease asset; it is a decision not to obligate the estate to an unprofitable agreement. See N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984); Dishi & Sons, 510 B.R. at 698. It is a choice not to assume or obligate the estate on a contract or lease as the price of obtaining the continuing benefits of the non-debtor party's performance." Medical Malpractice Ins. Ass n v. Hirsch (In re Lavigne), 114 F.3d 379, 387 (2d Cir. 1997). But rejection is not termination. Qualitech, 327 F.3d at 547 (construing the failure of the trustee to timely assume the lease as a repudiation rather than a rejection that would have triggered 365(h)). Like many provisions of the Bankruptcy Code, these statutes co-exist with other purposes such as protecting lessees, but also maximizing a creditor s 12

22 recovery. Admittedly, High Rocks agrees that 365 embodies a congressional intent to protect lessees, but nothing in either 363 or 365 make that intention absolute. An evaluation of the statutory language of 365 shows its applicability is not only specific, but narrow. Accordingly, this part will first discuss why the express wording of 365 is limited in scope and does not apply to the facts of the instant case, and second, why even if this Court agrees with the Petitioner that in effect the sale would rise to de facto rejection, the wording of 365 justifies a sale free and clear in the instant case. 1. Section 365 does not apply where the debtor lessor does not retain possession of the property and affirmatively rejects the lease but rather sells real property subject to a lease. A 363(f) sale made without any formal assumption or rejection of the lease extinguishes a lessee's rights under 365(h). See, e.g., Hewlett v. Ng (In re Ng), 2007 WL , *1 (Bankr. N.D. Cal. Dec. 13, 2007); Gary Hill, Jr. v. MKBS Holdings, LLC (In re Hill), 307 B.R. 821, (Bankr. W.D. Pa. 2004). Although in some circumstances, a trustee s failure to act is deemed a rejection, 1 Congress itself did not provide for that outcome within 363 as it applies to the circumstances before this Court a nonresidential lease where the debtor is the lessor and such lease is not rejected prior to the sale. This is distinct from circumstances where a trustee explicitly rejects a lease by the time of the sale with the intentions to retain the property but not obligate the estate. Consequently, if there is no timely rejection, 363(f) permits a free and clear sale because 365(h) is irrelevant. Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, (7th Cir. 2003). 2 1 See 11 U.S.C. 365(d)(1) (stating that failure to assume or reject residential lease within sixty days in liquidation bankruptcy is deemed a rejection); see also 11 U.S.C. 365(d)(4)(A) (stating that failure to assume or reject nonresidential lease within 120 days deemed a rejection if the debtor is the lessee). 2 See also Dishi & Sons v. Bay Condos LLC, 510 B.R. 696, 698 (S.D.N.Y. 2014) (providing that nothing in the express terms of 365(h) suggests that it applies to any and all events that threaten a lessee s possessory rights); In re 13

23 While undefined within the enactment of the Bankruptcy Code, a rejection is understood as an affirmative declaration by the trustee that the estate will not take on the obligations of the lease.... In re Spanish Peaks Holdings II, LLC, 872 F.3d 892, 894 (9th Cir. 2017). The Ninth Circuit, in determining that 365 was not triggered, reasoned that although a sale of property free and clear of a lease may be an effective rejection of the lease in an everyday sense, it is not the same rejection contemplated by 365. Id. (emphasis added). In Spanish Peaks Holdings, the debtor owned a resort in Big Sky, Montana, secured by a mortgage later assigned to Spanish Peaks Holdings in the amount of $122 million. Id. Spanish Peaks Holdings later leased restaurant space, known as the Pinnacle lease, and a parcel of commercial real estate, known as the Opticom lease. Id. During the bankruptcy proceedings, the trustee moved the bankruptcy court for an order authorizing a sale pursuant to 363 without mention of the Pinnacle or Opticom leases. Id. at 895. Both companies objected to the sale, later renewing their objections, and arguing the Code allowed them to retain possession of the property notwithstanding the sale. Id. The bankruptcy court entered an order approving the sale without addressing the objections; the debtor s biggest creditor, the holder of the secured mortgage, was the successful bidder. Id. at 896. After agreeing with the Seventh Circuit s rationale that 365 does not limit 363, the court reasoned that 365 was not implicated where the trustee did not reject the leases. Id. Thus, the court held that 363(f)(1) authorized the sale of property free and clear of the Pinnacle and Opticom leases. Id. at 901. A nonresidential lease where the debtor lessor does not retain the property or reject such lease prior to the sale does not trigger the language of 365. This is distinct from circumstances where a trustee explicitly rejects a lease with the intentions to retain the property but not be Downtown Athletic Club of New York City, Inc., 44 Collier Bankr. Cas. 2d 342 (S.D.N.Y. 2000); In re Stein, 281 B.R. 845, 851 (Bankr. S.D.N.Y.) ( [T]he trustee is not seeking to assume or reject the lease...; he is attempting to sell property of the estate under 363(b). ). 14

24 obligated by a lease s corresponding obligations. Similar to Spanish Peaks Holdings, the sale order in the case at bar made no mention of the Highway Lease but rather conditioned the sale as free and clear pursuant to 363(f). Although it may seem unfortunate that, although the Petitioner did object to the sale, as did the lessee in Spanish Peaks Holdings, the result is justified by a plain reading of the statutory text. The Seventh and Ninth Circuits, the only circuit courts of appeal who have interpreted these same provisions, held 365 inapplicable absent formal rejection of the lease. As the lower courts found in the instant case, there was no rejection of the Highway Lease to trigger the protections 365(h) offers lessees. Consequently, this Court should find 365 inapplicable to the Petitioner s case because the lease was not rejected prior to the approved sale. 2. Even if this court finds the trustee s failure to either assume or reject the release amounted to de facto rejection, 365(h) is only applicable to the extent that such rights are enforceable under applicable nonbankruptcy law. Even if this Court fell in line with the Seventh Circuit s analysis, which recognized that the failure to assume either a lease or contract before a sale in effect amounts to de facto rejection, 365 is only applicable to the extent that the holder s interest is enforceable under nonbankruptcy law. Qualitech, 327 F.3d at 541;11 U.S.C. 365(f). As this Court acknowledged, Congress left the determination of property rights in the assets of a bankruptcy estate to state law. Butner v. United States, 440 U.S. 48, 55 (1979). Although a lease creates an interest in land, this interest is not absolute it is subject to prior mortgages and encumbrances. See Canter v. Ramsey (In re Hotel Governor Clinton), 96 F.2d 50 (2d Cir. 1938); cert. denied. 305 U.S. 613 (1938). If a lease is executed after the grant of a prior mortgage, judicial foreclosure of the mortgage will extinguish the lease such that a foreclosure sale is free and clear of the lessee's interest in the property, as long as the lessee is joined as a defendant in the foreclosure action. See generally Grant S. Nelson & Dale A. Whitman, Real Estate Finance Law 7.13 (3d ed. 1994). Here, even if this Court finds 15

25 the lease was rejected, any rights the Petitioner has in the property were subordinate to 4th Street s interest, irrespective of the bankruptcy. The Bankruptcy Code should not be read to erode past bankruptcy practice absent a clear indication that Congress intended such a departure. See Hamilton v. Lanning, 560 U.S. 505, 517 (2010). In fact, this Court has long recognized that applying state law to determine property rights in bankruptcy furthers the fundamental purpose of the bankruptcy process as a predictable and orderly debt-collection mechanism based on a party s bargained for position. See generally, Nobelman v. Am. Sav. Bank, 508 U.S. 324, 329 (1993). Accordingly, this Court should not enhance the Petitioner s bargained for position by invoking a provision of the Bankruptcy Code that is inapplicable to the circumstances before this Court. When presented with facts similar to the case at hand, the Seventh Circuit, without addressing which condition of 363(f) applied, authorized the sale, and held that 365 did not limit this sale power. Qualitech, 327 F. 3d at 546. In Qualitech, the debtor, owned and operated a steel mill in Pittsboro, Indiana, and had entered into lease and supply agreements with Precision. Id. at 538. The debtor filed a chapter 11 bankruptcy petition and substantially all of the debtor s assets were sold at auction for a credit bid of $180 million to a group of senior prepetition lenders that held the primary mortgage on the Pittsboro property. Id. At the conclusion of the sale hearing, the bankruptcy court entered an order approving the sale, and Precision, which had notice of the hearing, did not object to the order. Id. That order directed Qualitech to convey its assets to the prepetition lenders free and clear of all liens, claims, encumbrances, and interests. Id. The court reasoned that Precision neither objected to the sale nor sought the protection available under 363(e). Id. Accordingly, the court concluded its possessory interest was extinguished by the sale. Id. at

26 Given the priority of the Highway Lease, the sale of High Rocks was justified by the Petitioner s failure to seek the relief provided within 363, but also a plain reading of the statutory text. In both provisions before this Court, Congress intention was unambiguous as evidenced by the clear verbiage to implicate nonbankruptcy law, which allows, or at least limits any action. First, is the authorization found within 363 for a sale free and clear if applicable nonbankruptcy law permits sale of such property free and clear of such interest. Second, is the limitation found within 365 for protection of a lessee whose unexpired lease was rejected, but only to the extent that such rights are enforceable under applicable nonbankruptcy law. The free and clear sale doctrine was first established by this Court under the Bankruptcy Act of 1841, where the power was described as a judicially-created foreclosure sale conducted for the purpose of reducing estate assets to cash for distribution to creditors. See Ex Parte Christy, 44 U.S. 292, 312 (1842). Similar to Qualitech, where the court did not discuss what condition of 363(f) was accomplished to authorize the sale, the lower court s opinion is silent as to whether subsection (f)(1) was the condition met for authorizing the sale. Nonetheless, the result in Qualitech and the case at bar are justified under nonbankruptcy law, specifically foreclosure law. The mortgage lien has priority and the Petitioner is aware of the foreseeable outcome that the senior mortgage could be called into question under bankruptcy. Thus, the Petitioner has notice of the risk it takes as junior interest holder. Namely, that when a lease is subordinate to a mortgage securing an interest in the property, then the tenant has no interest in such proceeds and the lease would be terminated upon foreclosure sale. If the facts in the case at bar had been such that the Highway Lease had priority over 4th Street s interest by way of the mortgage, state foreclosure law would require any sale to be subject to the Highway Lease. Unfortunately for the Petitioner, however, 365(h) preserves certain tenant 17

27 rights but it was not intended to enhance them. The sale in the instant case was achieved by credit bid by 4th Street, the senior prepetition lender by assignment from North Country Bank. Similar to Qualitech, where the highest bidder was the prepetition lender, this is an important distinction because for intents and purposes, and as recognized by the lower court, a foreclosure action has occurred. This is not prohibited by the Bankruptcy Code and, as acknowledged by this Court, is exactly how a free and clear sale should operate. This Court should hold that nonbankruptcy law determines the rights of the parties in the instant case because this interpretation preserves the parties bargained for prepetition property rights in order of their respective priorities against High Rocks real property, and also because the statutory text of both 363 and 365 invoke its application. II. A BANKRUPTCY COURT MAY APPROVE A GIFT SETTLEMENT OF PROCEEDS THAT DOES NOT CONFORM WITH THE BANKRUPTCY CODE S ABSOLUTE PRIORITY SCHEME IF THE GIFT CONSISTS OF NON-ESTATE ASSETS, DOES NOT RESULT IN A FINAL DISPOSITION, AND FURTHERS THE POLICY GOALS OF THE CODE. Section 1129(b) of the Bankruptcy Code establishes the absolute priority rule, which determines creditor hierarchy for bankruptcy proceedings. 11 U.S.C. 1129(b); see also 11 U.S.C In Czyzewski v. Jevic Holding Corp., this Court held 1129(b) is less flexible than previously interpreted by courts, however, in doing so, limited its holding to structured dismissals resulting in the transfer of estate property or a final disposition. 137 S.Ct. 973, 983 (2017). Absent approval of this gift settlement from 4th Street s personal assets, which are separate and individual from the estate assets at issue, the Committee will likely be unable to pursue its claims against the original contractor, Skyline. R. at 17. Without the opportunity to pursue additional litigation, there is little to no likelihood of recourse for any involved parties, which is detrimental to not only High Rocks as the debtor, but also 4th Street and the Committee as creditors, and the Petitioner as an 18

28 involved party. R. at 17. This Court should approve the Committee Settlement because 1129(b) and Jevic are inapplicable and pursuant to these authorities, the absolute priority rule is not binding on the parties in the instant case. A. As a gift settlement of non-estate assets, the absolute priority rule does not apply to the instant case. The absolute priority rule is a creditor hierarchy scheme applied to reorganization plans and settlements for chapter 11 bankruptcy proceedings. 11 U.S.C. 1129(b); Czyzewski v. Jevic Holding Corp., 137 S.Ct. 973 (2017). Gift settlements consisting of non-estate property continue to be excepted from the absolute priority rule. In re ICL Holding Co., Inc., 802 F.3d 547, 555 (3d Cir. 2015). While under this rule, administrative liens qualify a creditor as a senior lienholder who takes priority over junior creditors, traditionally, under chapter 11, courts have supported flexibility in interpreting Congressional intent under this section. See, e.g., Official Comm. of Unsecured Creditors v. Stern (In re SPM Mfg. Corp.), 984 F.2d 1305, 1313 (1st Cir. 1993); Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452, (2d Cir. 2007). However, the absolute priority rule is not absolute at all and is merely one factor in considering a settlement s permissibility. Id at 464. The absolute priority rule traditionally does not apply to bankruptcy proceedings in which the settlement consists entirely of non-estate assets. In re SPM, 984 F.2d at 1305; In re ICL Holding Co., 802 F.3d 547, 555 (3d Cir. 2015) see also, Jevic, 137 S.Ct. at 983. The First Circuit has long permitted secured creditors to gift their own money to unsecured creditors without being subject to the absolute priority rule. In re SPM, 984 F.2d at There, where previously distributed estate assets were contested pursuant to the absolute priority rule, once the money was no longer part of the estate, the bankruptcy court no longer had jurisdiction over the proceeds. Id. The court even acknowledged that it is routine practice for nonpriority 19

29 creditors to receive payment from third parties for their claims without interference by the bankruptcy court, justifying the practice by pointing to the fact that it prevents creditors from being tied up in extensive litigation over the claims and saves the proceedings from unnecessary delay. Id. at While this Court s decision in Jevic has limited the application of the absolute priority rule, this limitation does not apply to settlements of non-estate property. See Jevic, 137 S.Ct. at 978. The record is clear that the gift settlement of $2 million from 4th Street to the Committee is the only viable option available to permit the Committee to pursue further litigation against Skyline for the breach of contract stemming from its faulty work as the general contractor of the High Rocks entertainment facility. The Bankruptcy Code emphasizes the interests of reorganization when a company files for chapter 11 bankruptcy and disfavors conversion to chapter 7 bankruptcy proceedings. See Kevin M. Judisak, et. al., Bankruptcy Law The Standard for Rejecting Collective Bargaining Agreements in Bankruptcy: Labor Discovers It Ain t Necessarily So, 63 NOTRE DAME L. REV., 79 (1988). The foundational policy implemented by the Bankruptcy Code with regard to reorganization attempts contrasts with the majority of other countries' bankruptcy principles one reason why the United States has a greater rate of success for reorganization of a company involved in chapter 11 bankruptcy proceedings. See Maria Brouwer, Reorganization in US and European Bankruptcy Law, 22 EUR. J. LAW ECON. 5 (2006). Although the likelihood of reorganization for High Rocks does not seem promising at the current time, the Bankruptcy Code favors settlements, such as the Committee Settlement in the instant case, over the alternative chapter 7 conversion because of its saved expense. Further, settlements of non-estate assets have rarely been subject to the absolute priority, and even in light of this Court s recent decision in Jevic, the absolute priority rule is still 20