IN THE OCTOBER TERM, 2017 IN RE HIGH ROCKS, INC., DEBTOR, HIGHWAY 61, INC., PETITIONER HIGH ROCKS, INC., RESPONDENT.

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1 No IN THE OCTOBER TERM, 2017 IN RE HIGH ROCKS, INC., DEBTOR, HIGHWAY 61, INC., PETITIONER V. HIGH ROCKS, INC., RESPONDENT. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT BRIEF FOR RESPONDENT TEAM R56 COUNSEL FOR RESPONDENT ORAL ARGUMENT REQUESTED

2 QUESTIONS PRESENTED FOR REVIEW 1. Whether a debtor in bankruptcy court may sell real property under a section 363(f) free and clear sale thereby extinguishing an unrejected leasehold interest in such property held by an objecting lessee. 2. Whether Czyzewski v. Jevic Holing Corp., which held there are rare circumstances to violate the section 507 absolute priority, cannot be extended to a lien creditor s gift involving a payment by section 363 purchaser in connection with the acquisition of the debtor s assets. i

3 TABLE OF CONTENTS QUESTIONS PRESENTED FOR REVIEW...i TABLE OF CONTENTS...ii TABLE OF AUTHORITITES...iv OPINIONS AND ORDERS BELOW...vi JURISDICTIONAL STATEMENT...vi CONSTITUTIONAL AND STATUTORY PROVISSIONS...vi STATEMENT OF FACTS...1 SUMMARY OF ARGUMENT...3 ARGUMENT...4 I. SECTION 363(F) OF THE BANKRUPTCY CODE PERMITS THE SALE OF REAL PROPERTY FREE AND CLEAR OF A LEASEHOLD INTEREST AND SECTION 365(H) IS IRRELEVANT WHEN A LEASE HAS NOT BEEN REJECTED BY THE DEBTOR PRIOR TO THE SECTION 363(F) SALE...4 A. The lower courts approval of the uncontested section 363(f) free and clear sale was correct because at least one of the required conditions had been satisfied Courts have consistently been wrong for using section 365(h) as a basis for upholding approved section 363(f) free and clear sales when there has been no leasehold rejection because this statute only pertains to actual rejections Today courts are more likely to hold that an approved section 363(f) free and clear sale extinguishes unrejected leaseholds and is not subject to section 365(h) because the express language of the statute only pertains to rejected leaseholds...7 B. The leasehold interest was not rejected by the debtor prior to the section 363(f) free and clear sale therefore section 365(h) is not relevant to the analysis...7 Highway is incorrect in arguing that a de facto rejection is the same as the actual rejection called for in section 365(h) because they should have filed a section 363(e) motion asking for adequate protection...9 ii

4 C. As a matter of public policy, creditors receive more value from the estate when section 363(f) and section 365(h) are viewed independently and not in conflict with one another...11 II. THE BANKRUPTCY COURT MAY APPROVE A CONTESTED GIFT SETTLEMENT, INVOLVING A SECTION 363 SALE, THAT DISTRIBUTED FUNDS OUTSIDE OF THE ABSOLUTE PRIORITY SCHEME WHEN THE SETTLEMENT PROCEEDS ARE NOT PROPERTY OF THE ESTATE...15 A. 4th Street s $2 million dollar payment was a gift and not property of the estate, thus the absolute priority rule does not arise for payments outside of the plan th Street made a voluntary gift of $2 million to the Committee of Unsecured Creditors The gift made by 4th Street is not property of the estate because it was not given to High Rocks...19 B. Even if the Court views 4th Street s payment as something other than a gift, it does not invoke the absolute priority rules because it could be seen as an interim distribution, not a chapter 11 plan confirmation The absolute priority rule protects higher level creditors, but does not apply to interim distributions Courts are given discretion as to approve agreements that deviate from the absolute priority rules...24 C. Lower court was acting within its discretion to approve the Committee Settlement and the debtor should not be penalized for Highway s failure to seek adequate protection...25 CONCLUSION...28 APPENDIX A...I APPENDIX B...II APPENDIX C...IV APPENDIX D...V APPENDIX E...IX APPENDIX F...X iii

5 United States Supreme Court Cases: TABLE OF AUTHORITIES Caminetti v. United States, 242 U.S. 470 (1917)...13 Czyzewski v. Jevic Holing Corp., U.S., 137 S. Ct. 973 (2017)...19, 20, 24, 26, 27 Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 544 U.S. 33 (2008)...14 Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1 (2000)...10 Lamie v. United States Trustee, 540 U.S. 526 (2004)...10 North Pacific Railroad Co. v. Boyd, 228 U.S. 482 (1913)...24 United States v. Ron Pair Enters., Inc., 489 U.S. 235 (1989)...10 United States Court Of Appeals Cases: Dish Network Corp. v. DBSD N. Am. Inc. (In re DBSD N. Am. Inc.), 634 F.3d 79 (2d Cir. 2010)...16, 17, 18, 21, 25 Eastover Bank for Sav. v. Sowashee Venture (In re Austin Dev. Co.), 19 F.3d 1077 (5th Cir. 1994)...7 In re Armstrong World Industries, Inc., 432 F.3d 507 (3d Cir. 2005)...17, 18, 19 In re Chrysler, LLC, 576 F.3d 108 (2d Cir. 2009)...14 In re ICL Holdings Co., Inc., 802 F.3d 547 (3d Cir. 2015)...16, 19, 20, 21, 22, 23 In re Lionel Corp., 722 F.2d 1063 (2d Cir.1983)...14 iv

6 In re New Concept Housing, Inc., 951 F.2d 932 (8th Cir. 1991)...16 In re Pedlow, 209 F. 841, 842 (2d Cir.1913)...14 In re W.T. Grant Co., 699 F.2d 599 (2d Cir. 1983)...26 Motorola, Inc. v. Official Comm. Of Unsecured Creditors (In re Iridium Operating, LLC), 478 F.3d 452 (2d Cir. 2007)...16, 17, 25 Official Comm. Of Unsecured Creditors v. Stern (In re SPM Mfg. Corp.), 984 F.2d 1305 (1st Cir. 1993)...17, 18, 20, 21, 22 Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions, LLC (In re Spanish Peaks Holdings, II, LLC), 862 F.3d 1148 (9th Cir. 2017)...7, 8, 9, 10 Keach v. U.S. Tr. Co., 419 F.3d 626 (7th Cir. 2005)...4 Precision Indus. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003)...7, 8, 9, 12 United States Bankruptcy Court Cases In re Apex Oil Co., 92 B.R. 847 (Bankr. E.D. Mo. 1988)...26 In re Dalen, 259 B.R. 586 (Bankr. W.D. Mich 2001)...26 In re DBSD N. Am., Inc., 419 B.R. 179 (Bankr. S.D.N.Y. 2009)...24 In re Dewey & LeBoeuf, 478 B.R. 627 (Bankr. S.D.N.Y. 2012)...27 In re TSIC, 393 B.R. 71 (Bankr. D. Del. 2008)...22 In re World Health Alternatives, Inc., 344 B.R. 291 (Bankr. D. Del. 2006)...18, 19, 20 v

7 Dishi & Sons v. Bay Condos LLC, 510 B.R. 696 (S.D.N.Y. 2014)...9 Miracle-Ear, Inc. v. M.D. Consultants, Inc., 338 B.R. 15 (N.D. Ohio 2006)...23 Morgon Olson L.L.C. v. Frederico (In re Grumman Olson Indus.), 467 B.R. 694, 703 (S.D.N.Y. 2012)...14 Suter v. Goedert, 396 B.R. 535 (D. Nev. Oct. 16, 2008)...25 Statutory Provisions: 11 U.S.C. 363(e)...Passim 11 U.S.C. 363(f)...Passim 11 U.S.C. 365(h)...Passim 11 U.S.C. 503(b)(1) U.S.C. 541(a)(6) U.S.C. 1129(a)(7)(A)(ii)...24, U.S.C. 1129(b)(2)(B)(ii)...16, 23, 24 Fed. R. Bankr. P. 9019(a)...16, 25 Secondary Authorities Collier on Bankruptcy P vi

8 OPINIONS AND ORDERS BELOW Following a bench trial, the United States Bankruptcy Court for the District of Moot accepted Respondent s argument and approved the proposed sale to 4th Street. (R. 8). The court held that any rights Highway may have had under 365(h) were trumped by 363(f). (R. 8-9). The United States District Court of Moot affirmed. (R. 9). The United States Court of Appeals for the Thirteenth Circuit affirmed the decision of the District Court, holding that settlement was in the best interests of all parties. (R. at 9). The court concluded the absolute priority rule was not implicated by the committee settlement. (R. at 9). JURISDICTIONAL STATEMENT The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. CONSTUTIONAL AND STATUTORY PROVISIONS The following statutory provisions pertain to the facts of this case and are set forth, in relevant part, in Appendices A-F: 11 U.S.C. 363(e); 11 U.S.C. 363(f); 11 U.S.C. 365(h); 11 U.S.C. 503(b)(1)(A); 11 U.S.C. 541(a)(6); 11 U.S.C. 1129(a)(7)(A)(ii); 11 U.S.C. 1129(b)(2)(B)(ii); and Fed. R. Bankr. P. 9019(a). vii

9 STATEMENT OF FACTS Debtor High Rocks, Inc. ( High Rocks ) is a development consisting of a casino and resort which includes a 30-story 400 room hotel tower, restaurants, conference facilities, and a 7,000 seat outdoor amphitheater. (R. 3-4). High Rocks is located in the State of Moot, approximately 25 miles outside of the City of Ranier. (R. 3). To finance the development project, High Rocks took out an $800 million secured loan from North Country Bank. (R. 4). Before construction began, High Rocks entered into an agreement with Highway 61, Inc. ( Highway ) for the lease of the amphitheater ( Highway Lease ). (R. 5). The lease terms stated: that upon completion of the amphitheater, Highway would be in charge of managing, marketing, and operating the music venue. (R. 5). Additionally, Highway would pay High Rocks rent of $400,000 per year in addition to a percentage of ticket sale. (R. 5). Construction began May of 2014 with Skyline Construction ( Skyline) acting as the general contractor for the development. (R. 4). From the onset of construction, there were significant obstacles with the hotel casino and hotel. (R. 4). The amphitheater construction was completed as to the covered stage, concession stands, restrooms, ticket office and VIP lounge. (R. 4). High Rocks terminated its contract with Skyline in December 2015 due to the ongoing construction problems it faced with the casino and hotel. (R. 4). Shelter from the Storm Builders, Inc. ( Shelter ) replaced Skyline in January 2015 to finish the hotel and casino construction. (R. 5). In February 2016, North Country Bank sold their note to 4th Street, at a discount. (R. 5). In an attempt to collect on their loan to own strategy, in June th Street commenced a foreclosure action against High Rocks. (R. 5). In response, High Rocks filed a voluntary Chapter 11 bankruptcy proceeding the following month in July (R. 5). 1

10 Post-bankruptcy petition, Highway approached High Rocks and offered to perform the remaining work needed to install the seats, the sound equipment, and the acoustical panels in the amphitheater in exchange for payment of $2 million. (R. 6). The bankruptcy court approved the contract. (R. 6). Since High Rocks was short on cash, payment was deferred until the development would be opened to the public. (R. 6). In the meantime, the Committee, Highway and High Rocks agreed that Highway was entitled to a $2 million administrative expense for their work under section 503(b)(1). (R. 6). That post-petition administrative claim has yet to be paid. However, in late December 2016, High Rocks continued cash flow issues prohibited making reorganization possible. (R. 6). So, High Rocks without accepting or rejecting the Highway Lease filed a motion to sell substantially all of its assets under section 363(f) free and clear of all liens, claims, encumbrances and interests. (R. 6). The motion expressly stated that the winning bidder of the sale would receive their interest free and clear of Highway s leasehold interest. (R. 7). There was an auction sale held on January 11, 2017 of High Rocks assets. (R. 7). 4th Street was the only qualified bidder to make an offer, as such they notified all parties of its intention to operate the amphitheater itself, now that they had acquired the development free and clear of Highway s leasehold interest. (R. 7). Highway objected to the sale claiming that section 365(h) allowed it to remain in possession regardless of the free and clear nature of the sale. (R. 7-8). Highway failed to seek adequate protection for it s post-petition claim. The Committee also objected to the sale but reached a settlement ( Committee Settlement ) prior to the sale hearing. (R. 8). The Committee Settlement provided that in exchange for withdrawing 2

11 its objection, 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. (R. 8). The bankruptcy court approved the sale despite Highway s renewed objection and the newly asserted claims stating that the $2 million settlement proceeds violated the absolute priority rule in bankruptcy. (R. 8). The court held that whatever rights Highway may have had under section 365(h) were trumped by section 363(f) and that the absolute priority rule was not implicated. (R. 8-9). SUMMARY OF ARGUMENT High Rocks section 363(f) free and clear sale extinguished Highway s leasehold interest because both High Rocks and Highway stipulated that at least one of the statutory conditions set forth were satisfied. Section 363 makes clear that free and clear sales like the one at bar are permissible if at least one of five elements of the statute are met. Although the Code provides for exceptions, under section 363(e) and section 365(h), none are applicable here. Therefore, this Court should enforce the Code as written and uphold Congresses express intent. Lessee s dealing with unrejected leases subject to section 363(f) free and clear sales may protect themselves in the future by timely filing a section 363(e) motion asking for adequate protections. Arguments suggesting that unrejected leasehold interests subject to section 363(f) free and clear sales are de facto rejections and afforded protection under section 365(h) are not correct because the express language of the statute tells us so. This Court should look no further than the section 363(f) free and clear sale because nothing more is needed. The Committee Settlement was a gift from 4th Street s own money and was never part of High Rock s bankruptcy estate. The $2 million gift from 4th Street to a trust for the Committee is not subject to the section 1129 absolute priority rules because it was a gift of non- 3

12 estate property. Alternatively, even if not viewed as a gift, it would at best be an interim distribution and not a final plan distribution subject to priority rules. Therefore, this Court should enforce the Code as written and refuse to upset the legislative intent by judicially creating exceptions. It is clear that High Rocks should not be penalized for Highway s failure to seek adequate protection by making an agreement prior to completing the amphitheater work and for their failure to file a section 363(e) motion rather than a section 365(h) which doesn t apply under the circumstances. ARGUMENT As neither party challenges the lower court s findings of fact, the only issues before this Court are conclusions of law. (R. 13). Conclusions of law are subject to de novo review. Keach v. U.S. Tr. Co., 419 F.3d 626, 634 (7th Cir. 2005). I. SECTION 363(F) OF THE BANKRUPTCY CODE PERMITS THE SALE OF REAL PROPERTY FREE AND CLEAR OF A LEASEHOLD INTEREST AND SECTION 365(H) IS IRRELEVANT WHEN A LEASEHOLD HAS NOT BEEN REJECTED BY THE DEBTOR PRIOR TO THE SECTION 363(F) SALE. This Court should affirm the decision of the Thirteenth Circuit Court of Appeals holding section 363(f) free and clear sales trumped section 365(h) when at least one of the statutory conditions set forth in section 363(f) are satisfied. (R. 10). Additionally, this Court should find Highway s section 365(h) defense irrelevant with respect to the section 363(f) sale because their leasehold was never rejected. The plain language and meaning of section 365(h) only pertains to rejected leases and does not justify a judicial rewrite to include anything further. Even if Petitioner s argument holds true that their leasehold was de facto rejected, this is still not the equivalent to the rejection Congress expressly called for in section 365. Congress is the policy maker rather than the courts and a decision in favor of reading section 363(f) and section 365(h) 4

13 independently of one-another, based on their plain meaning, will clear up the circuit split that consider section 365(h) and section 363(f) in conflict with one another. In our case, the section 363(f) free and clear sale extinguished Highway s leasehold interest because the parties stipulated that one or more of the required elements of section 363(f) had been satisfied. (R. 9). In situations where the debtor has not rejected the leasehold interest prior to a section 363(f) sale and the lessee is concerned that the section 363(f) sale will extinguish their leasehold interest they must file a section 363(e) motion asking for adequate protection. See 11 U.S.C. 363(e). Absent this motion Highway has no other clear defense. Our case was correctly decided by the lower courts because there was no rejection of the leasehold by the debtor prior to the section 363(f) sale and Highway failed to file a section 363(e) motion asking for adequate protection. (R. 11). A. The lower courts approval of the uncontested section 363(f) free and clear sale was correct because at least one of the required conditions had been satisfied. The section 363(f) free and clear sale extinguished Highway s leasehold interest because at least one of the required conditions had been satisfied. Section 363(f) authorizes the trustee (or debtor-in-possession) to "sell property [of the estate]... free and clear of any interest in such property of an entity other than the estate," provided that one of five conditions is met: (1) applicable nonbankruptcy law permits sale of such property free and clear of such interest; (2) such entity consents; (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) such interest is in bona fide dispute; or (5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest. 5

14 11 U.S.C. 363(f). Since High Rocks and Highway both stipulated that one or more of those requirements had been satisfied the lower courts were correct in approving the section 363(f) sale. (R. 9). However, historically even when the bankruptcy court had approved a section 363(f) free and clear sale the likelihood was that courts would uphold the sales and provided lessee s protections under section 365(h) despite the fact that no rejection of the leasehold had taken place. 1. Courts have consistently been wrong for using section 365(h) as a basis for upholding approved section 363(f) free and clear sales when there has been no leasehold rejection because this statute only pertains to actual rejections. Courts have incorrectly upheld approved section 363(f) sales in order to provided lessee s protections under section 365(h), finding that the rights of a non-debtor lessee in commercial property were preserved by special protections under section 365 giving lessee s protections [i]f the trustee rejects an unexpired lease of real property under which the debtor is the lessor. 11 U.S.C. 365(h). This may seem reasonable but courts were extending section 365(h) protections to lessee s despite the fact that the debtor s never rejected the non-debtor s leasehold interest. In such a case, the section 363(f) sale should not have been disallowed unless an actual rejection occurred thereby giving rise to protections under section 365(h). It is possible courts were expanding section 365 because they saw it as a lessee s last resort to protect their leasehold prior to a section 363(f) free and clear sale but this view is incorrect. Congress, under section 363(e), had already expressly provided an avenue for lessee s to seek statutory protection in situations where a debtor chose not to reject a leasehold interest prior to a section 363(f) sale: Section 363(e) Notwithstanding any other provision of this section, at any time, on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest. 6

15 11 U.S.C. 363(e). It is unnecessary for the courts to read more into section 365(h) than Congress intended. Lessee s already have an avenue to seek adequate protection in section 363(e) when a leasehold interest is not rejected prior to a section 363(f) sale. 2. Today courts are more likely to hold that an approved section 363(f) free and clear sale extinguishes unrejected leaseholds and is not subject to section 365(h) because the express language of the statute only pertains to rejected leaseholds. Courts that recognize section 363(f) and section 365(h) are independent of one-another and unambiguous understand that Congress is the policy maker, not the courts. Fortunately, today the courts are leaning toward this minority view with a recent ruling by the United States Court of Appeals for the Ninth Circuit that echoed the opinion of Precision Industries v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003), holding that the rights of a lessee in a debtor s real property may be extinguished in connection with a section 363 asset sale. Pinnacle Restaurant at Big Sky, LLC v. CH SP Acquisitions, LLC (In re Spanish Peaks Holdings, II, LLC), 862 F.3d 1148 (9th Cir. 2017). B. The leasehold interest was not rejected by the debtor prior to the section 363(f) free and clear sale therefore section 365(h) is irrelevant to the analysis. High Rocks did not reject the lease prior to the section 363(f) free and clear sale therefore section 365(h) is irrelevant because that section of the Code only deals with trustee rejections of leasehold interests. The controlling language of section 365(h) states that it is only applicable [i]f the trustee rejects an unexpired lease of real property under which the debtor is the lessor and 11 U.S.C. 365(h). In Eastover Bank for Sav. v. Sowashee Venture (In re Austin Dev. Co.), 19 F.3d 1077 (5th Cir. 1994), the court noted that a "rejection" is undefined by the Code but is universally understood as an affirmative declaration by the trustee that the estate will not take on the obligations of a lease or contract made by the debtor. In re Austin Dev. Co., 19 F.3d at The Spanish Peaks court goes on to say a sale of property free and clear of a 7

16 lease may be an effective rejection of the lease in some everyday sense, but it is not the same thing as the "rejection" contemplated by section 365. Spanish Peaks Holding, II, 862 F.3d at In Qualitech, the court granted the owner and operator of a steel mill a section 363(f) free and clear sale of a leasehold interest because the lessee did not object to the section 363 sale nor did they request adequate protection under section 363(e). Qualitech, 327 F.3d at 541. The court concluded section 363 permitted the sale to occur free and clear of a lessee's possessory interest--provided that the lessee (upon request) was granted adequate protection for its interest. Id. at 548. The court further found where the property was not sold, and the debtor remained in possession thereof but chose to reject the lease, section 365(h) came into play and the lessee retained the right to possess the property. Id. at 549. The court reasoned both provisions could be given full effect without coming into conflict with one another and without disregarding the rights of lessees. Similarly, in our case because Highway failed to request adequate protection, the section 363 free and clear sale should be permitted. In Spanish Peaks, a recent case deciding whether a Chapter 7 Trustee s sale of real property under section 363(f) was free and clear of unexpired leases to the property found that section 363(f) sales which did not include a formal, statutory rejection of the tenant s lease rights could proceed free and clear and extinguish the leasehold interest without issue. Spanish Peaks Holding, II, 862 F.3d at Thus resulting in the new buyer receiving a property free and clear of the prior tenant s lease rights, including any right of possession. The court reasoned [i]n sum, section 363 governs the sale of estate property, while section 365 governs the formal rejection of a lease. Where there is a sale, but no rejection (or a rejection, but no sale), there is no 8

17 conflict. Id. Therefore, section 365(h) was not applicable because there was no rejection and the free and clear sale was granted under section 363(f). In our case, just like in Spanish Peaks and Qualitech, section 363(f) is the controlling statute and not in conflict with section 365(h) because the debtor did not reject the leasehold prior to the section 363(f) free and clear sale. In order for Highway to invoke a section 365(h) defense High Rocks would have first needed to reject the leasehold interest. Since a section 363(f) motion was filed and there was no rejection of the leasehold, section 363(f) should be controlling and read in isolation of section 365(h). Therefore, there is no conflict with section 365(h) and the free and clear sale is able to stand alone and in isolation of section 365(h). Highway is incorrect in arguing that a de facto rejection is the same as the actual rejection called for in section 365(h) because they should have filed a section 363(e) motion asking for adequate protection. The section 363(f) free and clear sale was not a de facto rejection of Highway s leasehold interest but alternatively even if the court determines otherwise, Section 365(h) is not the correct avenue for protections because this section does not pertain to de facto rejections. Highway missed any chance for recourse by filing the wrong motion and not requesting adequate protection under section 363(e) when they received timely notice of the impending section 363(f) free and clear sale. (R. 14). Section 363(e) provides, at any time, on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest. See 11 U.S.C. 363(e). Congress understood the potentially harmful consequences for lessees under section 363(f) free and clear sales and provided statutory protections for such leasehold rejections and de facto rejection arguments under section 363(e). 9

18 Dishi & Sons v. Bay Condos LLC, 510 B.R. 696 (S.D.N.Y.2014) contains facts similar to ours where a debtor looked to sell real estate free and clear of a leasehold interest. The Dishi court merely granted a lessee continued possession as adequate protection because they asked for it under a section 363(e) motion. Dishi & Sons v. Bay Condos LLC, 510 B.R. at Similarly, in Qualitech, another case where a debtor looked to sell property free and clear of a leasehold interest, the Ninth Circuit found that where there was a sale but no rejection (or a rejection, but no sale), there was no conflict between the section 363(f) and section 365(h). In re Spanish Peaks, 862 F.3d at Meaning that when a sale is consummated under section 363 and the leasehold was not rejected, as in our case, this would not be a de facto lease rejection. The only way to get relief under section 365(h) would be if the debtor actually rejects the lease. Highway is not entitled to relief under section 365(h) because the section 363(f) free and clear sale was not a de facto rejection of Highway s leasehold interest. Furthermore, a de facto rejection is not the same as the formal, statutory rejection called for in section 365(h). Alternatively, if the court views this as a de facto rejection Highway is still not entitled to relief because they filed a section 365(h) motion rather than the appropriate 363(e) motion. Nowhere in section 365(h) does the statute reference de facto rejections. The Supreme Court has stated that: "when the statute's language is plain, the sole function of the courts - at least where the disposition required by the text is not absurd - is to enforce it according to its terms. Lamie v. United States Trustee, 540 U.S. 526, 534, (2004), quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, (2000) (in turn quoting United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, (1989)). If Highway truly believed the section 363(f) sale was a de facto rejection they should have filed a timely 363(e) motion. Therefore, because High Rocks never rejected the leasehold prior to the section 363(f) sale there is no basis for reinterpreting the 10

19 unambiguous plain language of the statute. By considering a de facto rejection the equivalent to the actual rejection that Congress expressly provided for in the statute would be outside of the Congressional intent and inappropriate. Since Highway failed to file a section 363(e) motion they now pray the court will expand the unambiguous language of section 365(h) to include situations where a debtor does not reject the leasehold interest prior to a section 363(f) sale. Highway argues the section 363 free and clear sale was the functional equivalent of a rejection (de facto rejection) of such lease (R. 8). Although the express language of section 365(h) only pertains to rejections this de facto argument has been known to work as the circuit are split. This de facto rejection argument is void of fact and not sufficient to invoke a section 365(h) analysis because section 365(h) is specific and only comes into play when the trustee rejects an unexpired lease of real property under which the debtor is the lessor; there is no basis for the inclusion of de facto rejections within section 365(h). See 365(h). In our case, the debtor in possession neither accepted nor rejected the leasehold interest prior to the section 363(f) sale and Highway did not file a 363(e) motion asking for adequate protections. C. As a matter of public policy, creditors receive more value from the estate when section 363(f) and section 365(h) are viewed independently and not in conflict with one another. When courts view section 363(f) and section 365(h) in conflict with one-another and allow section 365(h) to trump they are essentially giving lessee s undue power and influence in the bankruptcy process. This power is derived from the lessee being able to delay and thwart asset sales by staying in possession of their leasehold regardless of the business decisions made by the debtor in bankruptcy. This inability of the debtor to sell the assets free and clear reduces the value of the estate realizable to creditors because potential buyers find more value from an 11

20 asset sale being free and clear of encumbrances otherwise they would stipulate as a condition of the transaction inclusion of the current leaseholds that are of issue. In Qualitech, the court noted that the section 363(f) sale reserved for the purchaser the debtor s right to assume and assign executory contracts pursuant to section 365. Qualitech, 327 F.3d at 541. This being the case, an asset sale that allows the new owner the ability to continue existing lease obligations or extinguish them will surely garner a higher sale price in the open market because these options are only additive to the transaction and thus will allow creditors to recoup more of their losses. Moreover, if these rights can be reserved for the purchaser it makes no sense for the debtor to make decisions that will affect the new buyer if these rights are all preserved post section 363 sale. Giving lessee s expanded rights beyond those express in section 365(h) harms creditors interests and is opposite the bankruptcy act s goal of maximizing creditor returns in bankruptcy. Qualitech, 327 F.3d at 548. Lessee s gain to much influence and power in the bankruptcy process when courts interpret section 365(h) to trump section 363(f) and allow lessee s to stay in possession through the de facto rejection argument. This view allows the lessee to stay in possession regardless of what decision the Debtor makes. For example, if the debtor rejects the leasehold the lessee can stay in possession under the statutory protections of section 365(h), but if the debtor does not reject the leasehold prior to a section 363(f) free and clear sale the lessee still can stay in possession by filing a section 365(h) motion claiming a de facto rejection. This heads I win, tails you lose scenario hardly makes sense and cannot be what Congress intended. The express language of section 365(h) states what is to occur when the lease is rejected. Hence, when the lease is not rejected a section 363(e) motion is the appropriate response, not a section 365(h). 12

21 This is a short way of saying what is the purpose of 363(e) if it does not need to be invoked to provide protections? If Congress had intended for 365(h) to encompass situations where leaseholds where not rejected prior to a 363(f) free and clear sale they would have expressly provided for this relief within the language of the statute. Absent the express language pertaining to unrejected leases the directive is clear that they should not be considered. The U.S. Supreme Court in Caminetti v. U.S., 242 U.S. 470 (1917) outlined:"...the meaning of the statute must, in the first instance, be sought in the language in which the act is framed, and if that is plain,... the sole function of the courts is to enforce it according to its terms." Section 365(h) could not be more pointed in that this statute should be used [i]f the trustee rejects an unexpired lease of real property under which the debtor is the lessor See 11 U.S.C. 365(h). There is no reference to de facto rejection or unrejected unexpired leases of real property and courts interpreting it as such are bestowing their own biases on an unambiguous statute. Moreover, Congress has already expressly provided a relief for unrejected lease situations in section 363(e). Section 363(e) allows at any time, on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest. See 11 U.S.C. 363(e). It seems unlikely that Congress would specifically provide statutory safeguards for such a situation under section 363(e) and then intend section 365(h) to include de facto rejected or unrejected leaseholds without expressly accounting for it within the language of the statute. Allowing unrejected leasehold interests the same statutory protections as those afforded to rejected leaseholds in section 365(h) is yielding them too much power and influence over the 13

22 bankruptcy process. In our case, a quick sale of the assets is in the best interest of creditors. High Rocks hotel, casino and amphitheater are not up and running, thus no revenue is being generated. The project needs to be quickly completed in order to prevent further monetary losses. The fact that no bidders materialized other than the credit bid from 4th Street (the secured creditor), who sees value in having the asset free and clear of the leasehold interest, indicates that if the leasehold interest is not extinguished through the section 363 sale the price would need to be further discounted in order to entice other potential buyers. More importantly, in our case High Rocks is still not receiving the full value of their claim by acquiring the property free and clear of the leasehold. Therefore, if the section 363(f) sale is further delayed it is likely that the property will suffer additional diminished value and the value to creditors will be lessened. The court of In re Chrysler, LLC, 576 F.3d 108 (2d Cir. 2009) stated [t]ypically, courts have approved 363(b) sales to preserve wasting asset[s] and there are times when it is more advantageous for the debtor to begin to sell as many assets as quickly as possible in order to insure that the assets do not lose value. Id. at ; Fla. Dep t of Revenue v. Piccadilly Cafeterias, Inc., 544 U.S. 33 (2008) (Breyer, J., dissenting); see also In re Pedlow, 209 F. 841, 842 (2d Cir.1913) (upholding sale of a bankrupt s stock of handkerchiefs because the sale price was above the appraised value and Christmas sales had commenced and... the sale of handkerchiefs depreciates greatly after the holidays.); Morgon Olson L.L.C. v. Frederico (In re Grumman Olson Indus.), 467 B.R. 694, 703 (S.D.N.Y. 2012)(Although the Chrysler decision was later vacated as moot by instruction of the Supreme Court, courts have continued to apply the broad definition of free and clear of section 363 sales.) The Chrysler court also discussed the melting ice cube theory of section 363(b). A theory based on an asset being like an ice cube and the longer one waits to rectify a bankruptcy the more the asset will shrink and dissolve like 14

23 an ice cube sitting in the sun. The analysis looked at the the decision from In re Lionel Corp, 722 F.2d 1063 (2d Cir.1983), that recognized, the text of section 363(b) requires no emergency to justify approval just a good business opportunity [is] presently available, which might soon disappear, quick action may be justified in order to increase (or maintain) the value of an asset to the estate, by means of a lease or sale of the assets. Id. at By their nature, section 363 sales are meant to be quick and efficient. If section 363(e) is not needed when a leasehold is not rejected there would be no need for this provision. Also, if the court allows leaseholds to determine acceptance or rejection of their leasehold interest it would be in direct conflict with section 363 and contrary to the purpose of the bankruptcy act. II. THE BANKRUPTCY COURT MAY APPROVE A CONTESTED GIFT SETTLEMENT, INVOLVING A SECTION 363 SALE, THAT DISTRIBUTED FUNDS OUTSIDE OF THE ABSOLUTE PRIORITY SCHEME WHEN THE SETTLEMENT PROCEEDS ARE NOT PROPERTY OF THE ESTATE. This Court should affirm the decision of the Thirteenth Circuit Court of Appeals holding 4th Street s $2 million payment was a permissible settlement agreement with the Committee and is not subject to the absolute priority rules that are present with Chapter 11 reorganizations. (R. 19). The payment made by 4th Street is not a settlement agreement under a Chapter 11 reorganization since it is not a final plan. (R. 8, 16). The money that is being provided by 4th Street was funded with it s own funds for the purpose of providing for a litigation trust for the benefit of the unsecured creditors so they could pursue their claims against Skyline. (R. 8). The money paid by 4th Street was never part of the estate because 4th Street used its own funds that were never comingled with Highway s nor was it paid in exchange for estate property. High Rocks recognizes that while the priority rules usually would follow that a secured creditor must be paid prior to an unsecured lower priority creditor, per section 1129 of the 15

24 bankruptcy code, that refers to final plans and estate assets. The payment in question is not property of the estate so it is not subject to the priority rules. The plain language of section 1129(b)(2)(B)(ii) focuses entirely on who receives property under the plan of reorganization. In re DBSD N.A., Inc., 634 F.2d 79, (2d Cir. 2011). Section 1129(b)(2)(B)(ii) does not reference chapter 7 liquidation plans nor sales pursuant to section 363. Id. Our case involves 4th Street s settlement with the Committee and involved a transfer of 4th Street s own funds pursuant to a section 363 sale. As a result, the settlement was not made under the plan of reorganization. Settlements made outside of reorganization plan do not necessarily implicate the section 1129 priority rules. Motorola, Inc. v. Official Comm. Of Unsecured Creditors (In re Iridium Operating, LLC), 478 F.3d 452 (2d Cir. 2007). Moreover, circuit courts have consistently granted bankruptcy court s the discretion in approving plans involving property outside of the estate. In re ICL Holding Co., Inc., 802 F.3d 547, 555 (3d Cir. 2015). The bankruptcy courts have the authority to approve a compromise or settlement, but trustees are not required seek such approval. See Fed. R. Bankr. P. 9019(a). The Code does not require that interim settlements be presented to the court for approval. However, once a bankruptcy court approves settlement, it will not be set aside unless there has been an abuse of discretion or plain error. In re New Concept Housing, Inc., 951 F.2d 932 (8th Cir. 1991) A. 4th Street s $2 million payment was a gift and not property of the estate, thus the absolute priority rule does not arise for payments outside of the plan. 1. 4th Street made a voluntary gift of $2 million to the Committee of Unsecured Creditors. As part of settlement negotiations with the Committee of Unsecured Creditors (hereinafter Committee ), 4th Street made a voluntary payment of $2 million of their own assets for the benefit of a trust for the interest of the Committee so they could pursue their claims 16

25 against Skyline. (R. 8). Early on, the Committee took on the active lead role investigating Skyline s alleged mismanagement of the construction development. (R. 7). This was due to High Rock s limited financial resources. (R. 7). The money went directly from 4th Street into a trust and never was given to High Rocks. It was a gift from 4th Street and they did not receive anything of value in exchange for their generosity. The court in Official Comm. Of Unsecured Creditors v. Stern (In re SPM Mfg. Corp.), 984 F. 2d 1305 (1st Cir. 1993) revolutionized the concept of gift distributions. The court stated that it was acceptable for a secured creditor to gift its own money to a lower tiered priority creditor in the litigation settlement process, even if superior lien creditors did not receive anything. Id. at The SPM court reasoned that the secured creditors were giving away their own assets, thus there was not a violation of the absolute priority rule. While SPM is supportive of the position that gifts can be made from one class to another, it is important to recognize that SPM involved a chapter 7 liquidation rather than a chapter 11 pre-plan settlement or interim distribution. The SPM court did not provide instructions as to gifting to subordinate classes or under-secured creditors. Similar to SPM, the Second Circuit failed to determine whether gifting could occur in the instance of a chapter 11 settlement. In re Iridium Operating, LLC, 478 F.3d 452. The court stated that we need not decide if SPM could ever apply to chapter 11 settlements, because it is clear that the [secured creditor] did not actually have a perfected interest in the cash on hand. Id. at 461. The Third Circuit upheld the prohibition of gifting in the decision of In re Armstrong World Indus., Inc., 432 F.3d 507 (3d Cir. 2005). This case should not be the standard applied in our case because Armstrong disallowed gifts from a senior class to a junior class when there was a present intervening class. That is not the situation with High Rocks and Highway. Armstrong 17

26 also claimed that general unsecured creditors could not gift to shareholders. Again, this case does not mirror the facts present with 4th Street s payment to the trust because our case does not include shareholders. Here it should be viewed as a gift from 4th Street. In DBSD, the court held: that it would permit such gifting "at least where, as here, the gift comes from secured creditors, there is no doubt as to their secured creditor status, where there are understandable reasons for the gift, where there are no ulterior, improper ends... and where the complaining creditor would get no more if the gift had not been made." In re DBSD N. Am., Inc., 634 F.3d at 87. The gifting doctrine holds out that when a gift is made by a secured creditor, and there are no ulterior or improper ends, and the complaining creditor would get no more if the gift had not been made, then the gift is permissible. Id. This is circumstance here. 4th Street made a gift, with no ulterior motive other than to keep the case moving along, and with or without said gift, Highway would not receive any of the funds, as the funds were not available for estate distribution. The United States Bankruptcy Court for Delaware in In Re World Health Alternative, Inc., cited Armstrong and SPM finding favorably in its approval of a settlement in very similar circumstances as the case we have before the Court. In re World Health Alternatives, Inc., 344 B.R. 291 (Bankr. D. Del. 2006). World Health also involved a settlement made by a secured creditor to an unsecured creditor in exchange for withdrawing an objection to a section 363 sale. The World Health court held that the absolute priority rule of section 1129 did not apply the settlement for two reasons: 1) because the absolute priority rule does not apply to settlements made outside of plan of reorganization; and 2) because the settlement did not involve property subject to the absolute priority rule because the court found that the settlement was a carve out, and not property of the bankruptcy estate. 18

27 Similarly, here, as in Armstrong and World Health, 4th Street s settlement was made in connection with a section 363 sale, and not under a plan of reorganization. Accordingly, the absolute priority rule of section 1129 does not apply. Here, the absolute priority rule is not implicated because 4th Street s settlement was made in connection with a section 363 sale, and therefore the settlement does not arise in the context of a plan of reorganization. In re World Health Alternatives, Inc., 344 B.R. 291 (Bankr. D. Del. 2006). 4th Street s voluntary payment to the trust for the benefit of the Committee must be viewed as a gift outside of the estate property because 4th Street has nothing to gain besides the expediency of this case. 4th Street is the only party that is suffering an immediate harm (loss of $2 million dollars), rather if time did not matter 4th Street could have waited until High Rocks was forced to convert to a chapter 7 liquidation whereby 4th Street would be the only creditor to receive proceeds. 2. The gift made by 4th Street is not property of the estate because it was not given to High Rocks. The Bankruptcy Code defines property of the estate as proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case. 11 U.S.C. 541(a)(6). Simply defined as proceeds of or from the property of the estate. In re ICL Holdings Co., Inc., 802 F.3d 547, 555 (3d Cir. 2015). This would likely extend to escrowed funds or settlement monies as being proceeds from property of the estate. In the present action, the money from 4th Street to the trust for the benefit of the Committee, does not fall into any of the above categories. The funds that 4th Street provided to the Committee never came into High Rock s possession. While Highway argues that the court in Czyzewski v. Jevic Holing Corp., U.S., 137 S. Ct. 973 (2017) should be followed, it does not mirror the situation we are presented with. In Jevic the court was dealing with a non-consensual structured dismissal of a chapter 11 case 19

28 that results in a deviation of the absolute priority rules. Highway wants to extend the court s reasoning that such deviation is prohibited as to other types of non-consensual priority-skipping settlement, such as the one with 4th Street and the Committee. That would be inappropriate as the Jevic court showed there was room for deviation when (i) the settlement was not part of a final disposition, and (ii) where the settlement served a significant bankruptcy related purpose. See Jevic, 137 S. Ct. at The court in Jevic, however, stopped short of holding that all settlements, including settlements made outside a plan of reorganization, must conform with the rule. This is because the absolute priority rule does not apply to settlements made outside a plan of reorganization. In re SPM Mfg. Corp. 984 F.2d 1305 (1st Cir. 1993), In re ICL Holdings Co., Inc., 802 F.3d 547 (3d Cir. 2015), In re World Health Alternatives, Inc., 344 B.R. 291 (Bankr. D. Del. 2006). Here, the Committee Settlement is not an end of case disposition as the Skyline litigation still remains outstanding. Also, the bankruptcy related purpose is that it moves the case along, and allows 4th Street the ability to try recoup their losses by finishing construction and opening for business. One of the first appellate cases to approve payments between secured and unsecured creditors was In re SPM Mfg. Corp. where the First Circuit reversed a lower court s decision to reject a secured creditor from sharing proceeds from a foreclosure sale pursuant to an agreement with a committee of unsecured creditors. 984 F.2d at In that case, Citizens, a secured creditor with a perfected security interest in the majority of the debtor s assets, and the Unsecured Creditor s Committee appointed by the court signed an agreement to cooperate in proposing a reorganization plan and to share the proceeds from the debtor s successful reorganization or liquidation. When SPM could not be successfully reorganized SPM s assets were sold for $5 million pursuant to section 363(b) and the court granted Citizens motion for 20

29 relief from the Automatic stay. Citizens and the Committee then filed a joint motion to distribute the entire amount of the proceeds to Citizens pursuant to its security interest. The joint motion announced that the proceeds would be distributed according to Citizen s agreement with the Committee. The Debtor objected to the objected to the motion on the basis that it violated the priority scheme of distribution. In re SPM Mfg. Corp. 984 F.2d 1305 (1st Cir. 1993). The bankruptcy court held that sharing provision of the agreement violated the priority requirements of the code and ordered the portion due to the Committee be distributed to the Chapter 7 trustee for distribution to the other creditors. Citizens and the Committee appealed, and the district court affirmed the bankruptcy court s order and the Committee appealed to the First Circuit. The First Circuit reversed the lower court and held that the distribution did not violate the bankruptcy code s distribution scheme because the Code provisions governing priorities of creditors apply only to distributions of property of the estate. In re SPM Mfg. Corp., 984 F.3d 1305 (1st Cir. 2010) (citing In re DBSD N. Am., Inc., 419 B.R. 179, 211 (Bankr. S.D.N.Y. 2009). The court found that Citizens had a valid lien on all of the debtor s asset, that the assets were sold for $5 million, and that Citizen s allowed claim equaled that amount, thus, the entire 5 million was Citizen s property. In re SPM Mfg. Corp., 984 F.2d at The Court noted that [w]hile the debtor and trustee are not allowed to pay non-priority creditors ahead of priority creditors they are generally free to do whatever they wish with the bankruptcy dividends they receive, including share them with other creditors. In re SPM Mfg. Corp., 984 F.2d at The Third Circuit in In re ICL Holding Co., 802 F.3d 547 (3d Cir. 2015) also upheld a bankruptcy court s approval of a settlement because it provided for a the distribution of nonestate property. The facts of that case were nearly identical to the facts of the case bar. In re ICL 21