Supreme Court of the United States

Transcription

1 Team P. 19 No IN THE Supreme Court of the United States OCTOBER TERM, 2017 IN RE HIGH ROCKS, INC., HIGHWAY 61, INC., v. Debtor, Petitioner, HIGH ROCKS, INC., Respondent. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT BRIEF FOR PETITIONER Team P.19 Counsel for the Petitioner

2 QUESTIONS PRESENTED I. Under the Bankruptcy Code, can a lessor sell under section 363(f) free and clear of a leasehold, when section 365(h) s protections preserve a lessee s possessory right? II. Under the Bankruptcy Code, can a bankruptcy court approve a contested priorityviolating settlement in connection with a section 363 sale when the settlement proceeds are given in exchange for a release of estate claims? i

3 TABLE OF CONTENTS QUESTIONS PRESENTED... i TABLE OF AUTHORITIES... iv OPINIONS BELOW... ix STATEMENT OF JURISDICTION... ix STATUTORY PROVISIONS... ix STATEMENT OF THE CASE... 1 I. STATEMENT OF THE FACTS... 1 II. PROCEDURAL HISTORY... 4 SUMMARY OF ARGUMENTS... 5 STANDARD OF REVIEW... 7 ARGUMENT... 7 I. The Debtor s Free and Clear Sale Cannot Extinguish Highway s Leasehold A. Section 363(f) Cannot Extinguish Highway s Leasehold Because a Leasehold Runs With The Land Highway is not required to request adequate protection under section 363(e) because that provision is applicable only to secured creditors Even if section 363(e) protects lessees, Highway s objection and notice to retain property functions as a request for adequate protection.. 10 B. Even If Interest Under Section 363(f) Encompasses A Leasehold, The Specific Protections For Lessees Under Section 365(h) Govern Section 365(h) supersedes a debtor s general power to sell free and clear because Congress promulgated specific protections under the provision A free and clear sale under section 363(f) functions as a de facto rejection under 365(h) The Code s legislative history establishes that Congress sought to preserve a leasehold II. The Committee Settlement Violates The Code s Priority Scheme A. The Committee Settlement Is Not A Gift, But Rather A Priority-Skipping Distribution Of Estate Assets ii

4 B. No Authority Permits Bankruptcy Courts To Approve Contested Settlements That Distribute Estate Funds In Violation Of the Code s Priority Scheme Section 363(b) does not authorize contested priority-skipping distributions of estate value Federal Rule Of Bankruptcy Procedure 9019 does not authorize a contested priority-skipping settlements Congress intended to prohibit contested priority-skipping distributions A bankruptcy court cannot rely on its equitable powers to sanction what the Code prohibits C. This Court Already Renounced A Rare Case Exception In Jevic D. Even If A Rare Case Exception Exists, The Committee Settlement Does Not Advance A Significant Code-Related Objective And Is Issued In Connection With A Final Disposition Involving Estate Assets This Settlement is impermissible because it does not advance any significant Code-related objective The Committee Settlement is distinct from any pre-jevic cases authorizing priority-skipping distributions CONCLUSION iii

5 TABLE OF AUTHORITIES CASES UNITED STATES SUPREME COURT CASES Connecticut Nat l Bank v. Germain, 503 U.S. 249 (1992) Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017)... passim D. Ginsberg & Sons v. Popkin, 285 U.S. 204 (1932)... 12, 25 Hamdan v. Rumsfeld, 548 U.S. 557 (2006) Hanna v. Plumer, 380 U.S. 460 (1965) Harrison v. N. Tr. Co., 317 U.S. 476 (1943) Kucana v. Holder, 558 U.S. 233 (2010) Lamie v. United States Trustee, 540 U.S. 526 (2004) Law v. Siegel, 134 S. Ct (2014)... 24, 26 Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992)... 12, 25 Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988)... 24, 25, 26 Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968) RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012)... 7, 12 Salve Regina Coll. v. Russell, 499 U.S. 225 (1991)... 7 iv

6 Segal v. Rochelle, 382 U.S. 375 (1966) Smith v. United States, 508 U.S. 223 (1993) United States v. CF&I Fabricators of Utah., 518 U.S. 213 (1996) United States v. DiFrancesco, 449 U.S. 117 (1980) United States v. Noland, 517 U.S. 535 (1996) UNITED STATES COURT OF APPEALS CASES Cf. Chbat v. Tleel (In re Tleel), 876 F.2d 769 (9th Cir. 1989) Contrarian Funds LLC v. Artex Int l. (In re WestPoint Stevens, Inc.), 600 F.3d 231 (2d Cir. 2010) Harvis, Trien, & Beck, PC. v. Fed. Home Loan Mortg. Corp. (In re Blackwood Assoc s., L.P.), 153 F.3d 61 (2d Cir. 1998) In re Chrysler LLC, 576 F.3d 108 (2nd Cir. 2009)... 20, 26 In re Continental Air Lines, Inc., 780 F.2d 1223 (5th Cir. 1986) In re Healthco Intern., Inc., 136 F.3d 45 (1st Cir. 1998) In re ICL Holding Co., Inc., 802 F.3d 547 (3d Cir. 2015)... 26, 27 In re Kmart Corp., 359 F.3d 866 (7th Cir. 2004) In re Lionel Corp, 722 F.2d 1063 (2nd Cir. 1983) In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir. 2003)... 8 v

7 Lisk v. Lumber One Wood Preserving, LLC, 792 F.3d 1331 (11th Cir. 2015) Matter of Spanish Peaks Holdings II, LLC, 872 F.3d 892 (9th Cir. 2017)... 14, 15 Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007)... 7, 29 Official Committee Ex Rel. Cybergenics v. Chinery, 330 F.3d 548 (3d Cir. 2003) Official Unsecured Creditors Committee v. Stern (In re SPM Manufacturing Corp.), 984 F.2d 1305 (1st Cir. 1993) Pension Benefit Guar. Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935 (5th Cir. 1983) Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003)... 7, 11, 14, 15 Texas v. Soileau (In re Soileau), 488 F.3d 302 (5th Cir. 2007);... 7 United States v. AWECO, Inc. (In re AWECO, Inc.), 725 F.2d 293 (5th Cir. 1984) UNITED STATES DISTRICT COURT CASES In re Lee Rd. Partners, Ltd., 155 B.R. 55 (Bankr. E.D.N.Y. 1993), aff'd, 169 B.R. 507 (E.D.N.Y. 1994)... 8 Silverman v. Ankari (In re Oyster Bay Cove, Ltd.), 196 B.R. 251 (E.D.N.Y. 1996)... 8, 9 UNITED STATES BANKRUPTCY COURT CASES BMO Harris Bank v. Vista Mkt. Grp., Ltd. (In re Vista Mktg. Grp., Ltd.), 548 B.R. 502 (Bankr. N.D. Ill. 2016) In re Churchill Props. III, Ltd. P'ship, 197 B.R. 283 (Bankr. N.D. Ill. 1996)... 12, 13, 16 In re Haskell L.P., 321 B.R. 1 (Bankr. D. Mass. 2005).... 7, 8, 11, 16 In re Sweetwater, vi

8 40 B.R. 733 (Bankr. D. Utah 1984), aff'd, 57 B.R. 743 (D. Utah 1985)... 9, 10 In re Taylor, 198 B.R. 142 (Bankr. D.S.C. 1996)... 8, 14, 16 Sina v. W. Coast Investors, LLC (In re Ginn-La St. Lucie Ltd., LLLP), 2011 WL (Bankr. S.D. Fla. Jan. 18, 2011)... 8, 9 STATUTES 11 U.S.C. 105(a) (2012) U.S.C. 363(e) (2012) U.S.C. 363(f) (2012) U.S.C. 365(h) (2012)... 7, 10, U.S.C. 365(h)(1)(A)(i) (2012) U.S.C. 507(a)(2) (2012) U.S.C. 510(a) (2012) U.S.C. 510(b) (2012) U.S.C. 510(c) (2012) U.S.C. 1129(b)(2) (2012) U.S.C (2012) RULES FED. R. BANKR. P SECONDARY SOURCES 4 Collier on Bankruptcy Black s Law Dictionary (10th ed. 2014) Jason Brege, An Efficiency Model of Section 363(b) Sales, 92 Va. L. Rev. 1639, 1640 (2006).. 27 Michael St. Patrick Baxter, Section 363 Sales Free and Clear of Interests: Why the Seventh Circuit Erred in Precision Industries v. Qualitech Steel, 59 BUS. LAW. 475, (2004)... 10, 11, 14, 17 vii

9 Rudzik, A Priority Is a Priority Except When It Isn t, 34 Am. Bankr. Inst. J. 16, 79 (2015) Samuel Williston, Repudiation of Contracts, 14 HARV. L. REV. 317 (1901) LEGISLATIVE HISTORY Bankruptcy Reform Act of 1994, Section-by-Section Analysis, 140 CONG. REC. H (Oct. 4, 1994) H.R. Rep. No , p. 33 (1994) H.R. REP. No , at (1977), reprinted in 1978 U.S.C.C.A.N. 5963, S. REP. No , 95th Cong., 2d Sess. (1978), reprinted in 1978 U.S.C.C.A.N. 5787, viii

10 OPINIONS BELOW The Bankruptcy Court for the District of Moot issued an opinion approving both a contested settlement of estate property and a contested section 363(b) sale of estate assets. (R. at 8 9). Because the objections to the sale raised difficult and novel issues, the court stayed the closing of the sale, pending appellate review of its decision. R. at 8. On appeal, the District Court affirmed the Bankruptcy Court s order. R. at 3. In a split decision, the United States Court of Appeals for the Thirteenth Circuit affirmed the district court s opinion. R. at 20. The Thirteenth Circuit held that a free and clear sale under section 363(f) can extinguish a leasehold, notwithstanding section 365(h). STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. STATUTORY PROVISIONS The relevant statutory provisions involved in this case are listed below and are reproduced in Appendices A through H. ix

11 STATEMENT OF THE CASE I. STATEMENT OF FACTS Highway 61, Inc. ( Highway ) is an investment group in the live-music industry. (R. at 3). In May 2014, Highway contracted to lease an amphitheater in High Rocks, Inc. s (the Debtor ) new development. (R. at 5). Highway agreed to annual payments of $400,000 and a percentage of sales for the exclusive right to operate, manage, and market the property for thirty years. (R. at 5). The Debtor funded the project through an 800-million-dollar loan from North Country Bank ( North Country ). (R. at 4). The project would feature a casino, hotel-resort, and amphitheater. (R. at 3 4). The construction plans detailed a 30-floor hotel with conference facilities, restaurants, and hundreds of rooms. (R. at 4). The plans also included a 7,000-seat amphitheater with concession stands, ticket offices, state-of-the-art sound equipment, and specialized acoustical panels. (R. at 4). Construction was problematic. (R. at 4). The project was repeatedly delayed because Skyline Construction, Inc. ( Skyline ), the general contractor, used cheap materials to cut costs. (R. at 4). Skyline had no experience with projects of this size. (R. at 4). The Debtor still hired Skyline because Skyline s bid was significantly below-market. (R. at 4). Over a year-and-a-half later, the project was still incomplete: Skyline had not finished the casino, the resort, or the amphitheater. (R. at 5). Nearly all of the resort s plumbing remained unfinished. (R. at 4). Nor were the amphitheater s seating, sound equipment, and specialized panels installed. (R. at 4). Due to the delays, North Country sold its note at a significant discount to 4th Street Partners, Inc. ( 4th Street ). (R. at 5). Because 4th Street operated resort and entertainment properties, employed a loan-to-own strategy. (R. at 5). 1

12 Delays also caused the Debtor to fire Skyline and hire a new contractor, Shelter From The Storm ( Shelter ). (R. at 5). Shelter was unable to install the amphitheater s seating, sound equipment, and acoustical panels. (R. at 5). Accordingly, Shelter and the Debtor agreed that another contractor would complete the amphitheater. (R. at 6). No one was hired. (R. at 6). In July 2016, 4th Street initiated a foreclosure, causing the Debtor to file for Chapter 11 under the Bankruptcy Code (the Code ). (R. at 5). At the first-day hearing, the Debtor announced the hotel s construction was near complete, and the casino-resort would open in just a few months. (R. at 6). Highway then offered to complete the amphitheater in exchange for a deferred payment of two million dollars. (R. at 6). The Debtor agreed. (R. at 6). 1 In just three months, Highway completed the amphitheater. (R. at 6). Highway installed all of the seats, the sound equipment, and the acoustical panels. (R. at 6). Because the casino-resort was still incomplete, Highway agreed to convert its post-petition claim into a two-million-dollar administrative expense. (R. at 6). Nevertheless, delays continued. (R. at 6). These construction delays caused 4th Street to pressure the Debtor for repayment. (R. at 6). By December 2016, the Debtor ceased construction and moved to sell its assets free and clear of all liens, claims, encumbrances and interests, including Highway s leasehold. (R. at 6). Prior to the sale, the Creditors Committee informally alleged three claims: (1) lender liability claims against 4th Street; (2) a challenge to the validity of 4th Street s liens and claims; and (3) claims against Skyline for the project s mismanagement. (R. at 7). Due to limited resources, the Debtor assigned the Skyline claims agreement to a pre-confirmation trust ( Committee Trust ) 1 The Bankruptcy Court approved the post-petition contract between the Debtor and Highway. (R. at 6). 2

13 for the sole benefit of the unsecured creditors. (R. at 7). 2 The Creditors Committee stated it believes the Skyline claims are very valuable. (R. at 7). 4th Street was the only qualified bidder at the auction and credit bid the full amount of its secured debt for the assets. (R. at 7). Further, 4th Street s promised to pay cash for the assets if its liens were later invalidated. (R. at 7 n.4). 4th Street then notified all parties that it was acquiring the development free and clear of Highway leasehold interest, and thus intended to operate the amphitheater itself. (R. at 7). Both Highway and the Creditors Committee objected to the sale. (R. at 7). Highway asserted that it was entitled to possession of the amphitheater under section 365(h). (R. at 8). Highway then notified the Debtor that the sale of the amphitheater free and clear of Highway s leasehold tantamount to rejection of its lease. Subsequently, Highway elected to retain possession of the amphitheater pursuant to section 365(h). (R. at 8). The Creditors Committee also reasserted the lender liability claims against 4th Street and argued that the sale was a veiled foreclosure, leaving the estate no money to pursue its claims against Skyline. (R. at 7). Days before the sale, 4th Street, the Debtor, and the Creditors Committee entered into a settlement (the Settlement or Committee Settlement ). (R. at 8). 4th Street paid two million dollars to fund the Committee Trust s claims against Skyline. (R. at 8). In exchange, the Creditors Committee withdrew its objections and released the estate s claims against 4th Street. (R. at 8). Highway received nothing under the Settlement and its administrative expense claim remains unpaid. (R. at 8). 2 No party objected to the assignment of the Skyline claims to the unsecured creditor s trust in the bankruptcy court, and the propriety of such assignment is not before this Court. (R. at 7). 3

14 II. PROCEDURAL HISTORY Highway objected to the sale, claiming that section 365(h) protects its leasehold. (R. at 8). Highway also objected to the Settlement, arguing that the Settlement violates the Code s priority scheme. (R. at 8). Nevertheless, the Bankruptcy Court approved the Settlement and the sale to 4th Street in a bench opinion. (R. at 7). The Bankruptcy Court ruled that section 363(f) superseded Highway s rights under section 365(h). (R. at 8 9). The Bankruptcy Court further determined that the absolute priority rule was not implicated because the Settlement was a gift. (R. at 9). The court also reasoned that the Settlement was in the best interests of all parties because it would allow the Creditors Committee to pursue the Skyline claims. (R. at 8 9). The Bankruptcy Court stayed closing of the sale pending its appeal. (R. at 8). Highway appealed to the District Court of Moot, which affirmed the Bankruptcy Court s order. (R. at 8). Highway then appealed to the Thirteenth Circuit, raising two questions of law. (R. at 9). First, Highway challenged whether a bankruptcy court can approve a contested sale under section 363(f) free and clear of a leasehold, notwithstanding section 365(h). (R. at 20). Second, Highway challenged whether a bankruptcy court can approve a contested priority-skipping gift settlement in connection with a section 363 sale, where the settlement distributes estate assets. (R. at 25). The Thirteenth Circuit affirmed the district court s opinion. (R. at 9, 14). The Thirteenth Circuit held that, in isolation, sections 363(f) and 365(h) function without tension because section 363(f) concerns sales, while 365(h) concerns rejection. (R. at 11). The court also held that the Settlement was permissible because it did not involve property of the estate. (R. at 19). This appeal follows. 4

15 SUMMARY OF ARGUMENTS Free and Clear Sales. A bankruptcy court may not approve a contested sale of real property free and clear of Highway s leasehold, notwithstanding section 363(e) s protections. Interests under section 363(f) does not encompass Highway s leasehold because the right runs with the land. Even if interests under section 363(f) encompasses a leasehold, the Code must be read as a comprehensive scheme. Section 365(h) gives lessees specific protections, limiting section 363(f) s general authority to sell assets free and clear. The Code s legislative history further establishes that section 365(h) s protections supersede section 363(f). Bankruptcy intervention cannot divest a leasehold because Congress enacted section 365(h) to prevent forcible evictions in all possible instances. Therefore, a debtor cannot circumvent section 365(h) s protections for lessees under section 363(f) s general authority to sell free and clear. Allowing free and clear sales to by-pass section 365(h) s broad protections provides debtors a blue print to manipulate the Code. Indeed, the Thirteenth Circuit s interpretation weaponizes section 363(f). Debtors will reject leases under the guise of a free and clear sale, without triggering a lessee s right to possession. Nevertheless, a debtor cannot indirectly accomplish that which it cannot do directly: extinguish a leasehold. Priority-Skipping Settlements. This Court should reverse the Thirteenth Circuit because a bankruptcy court has no authority to approve contested settlements that violate the Bankruptcy Code s detailed priority scheme. This Court reaffirmed in Czyzewski v. Jevic Holding Corp. that bankruptcy courts cannot approve contested priority-violating distributions absent express authorization from Congress. No authority in the Code or elsewhere allows a bankruptcy court to approve contested priority-violating settlements in connection with section 363 sales. 5

16 The Committee Settlement must follow the Code s priority scheme because it distributes funds of the estate, unlike a true gift settlement. The estate claims that the settlement extinguished were supposed to be for the benefit of all creditors, including Highway. Yet Highway received nothing. No authorization exists for the approval of priority-skipping settlements in either section 363(b) of the Code or the Rule of Bankruptcy Procedure for claim settlements. Both of those provisions set forth only procedures to generate estate value. That value, however, must be distributed according to the Code s detailed priority scheme. In fact, Congress deliberately excluded settlements as a means to skip priority. Under section 510 of the Code, Congress authorized priority-skipping in three situations: (1) where the parties have contracted to do so prior to bankruptcy; (2) where there is a purchase of securities; and (3) where principles of equitable subordination make it fair to skip over a claimant. Subordinations in any other context are impermissible. As this Court already recognized, allowing for judicially-created rare case exceptions to the priority scheme would undermine the Code s integrity. Such a rule would encourage lower priority creditors to pressure the debtor into paying those objectors before senior creditors. Even if rare case exceptions to the priority scheme survived this Court s Jevic holding, the Committee settlement is still impermissible. For one, the Committee Settlement functions as a final distribution akin to a structured dismissal, which this Court has already struck down. Further, the Committee Settlement does not advance any significant Code-related objective. 6

17 STANDARD OF REVIEW Whether section 365(h) s protections preclude a sale free and clear of a leasehold is a question of law and, thus, reviewed de novo. See, e.g., Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 548 (7th Cir. 2003) ( This is, of course, a question of law, making our review of the district court's decision de novo. ). Whether a bankruptcy court has authority to approve contested priority-skipping settlements involving property of the estate is also a question of law. Thus, it is review de novo. See Texas v. Soileau (In re Soileau), 488 F.3d 302, 305 (5th Cir. 2007); Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452, 461 n.13 (2d Cir. 2007). De novo review requires an independent determination of the issues. Salve Regina Coll. v. Russell, 499 U.S. 225, 238 (1991). ARGUMENT I. THE DEBTOR S FREE AND CLEAR SALE CANNOT EXTINGUISH HIGHWAY S LEASEHOLD. This Court should reverse the Thirteenth Circuit for two reasons: First, the Codes does not authorize the Debtor to sell the project free and clear of Highway s leasehold; second, the Thirteenth Circuit s decision subjects the Code to manipulation. The Thirteenth Circuit incorrectly held that 363(f) and 365(h) should be read in isolation. (R. at 11). Statutory construction, however, is a holistic endeavor. See RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 645 (2012) Notwithstanding a debtor s authority to sell free and clear under section 363(f), section 365(h) preserves a leasehold. See 11 U.S.C. 363(f) (2012); see 11 U.S.C. 365(h) (2012); see also In re Haskell L.P., 321 B.R. 1, 6 7 (Bankr. D. Mass. 2005). 7

18 In fact, a majority of courts hold that section 365(h) limits section 363(f) because a leasehold cannot be diminished, changed or modified due to bankruptcy's intervention. In re Lee Rd. Partners, Ltd., 155 B.R. 55, 61 (Bankr. E.D.N.Y. 1993), aff'd, 169 B.R. 507 (E.D.N.Y. 1994). Congress promulgated section 365(h) to prevent forcible evictions in all possible instances. In re Taylor, 198 B.R. 142, (Bankr. D.S.C. 1996). Allowing sales under section 363(f) to circumvent section 365(h) s protections permits a party to do indirectly what it could not do directly. Haskell L.P., 321 B.R. at 9. A. Section 363(f) Cannot Extinguish Highway s Leasehold Because a Leasehold Runs With The Land. An interest under section 363(f) does not include a leasehold. See Silverman v. Ankari (In re Oyster Bay Cove, Ltd.), 196 B.R. 251, 255 (E.D.N.Y. 1996). The Thirteenth Circuit s interpretation, that section 363(f) 3 extinguishes Highway s possessory right, fails to consider a key distinction: monetary interests against property are distinct from rights that run with land. See, e.g., Oyster Bay Cove, Ltd., 196 B.R. at 255. Only monetary interests against properties, like a lien, can be sold free and clear. See Sina v. W. Coast Investors, LLC (In re Ginn-La St. Lucie Ltd., LLLP), 2011 WL , at *5 (Bankr. S.D. Fla. Jan. 18, 2011). The distinction concerns how the interest relates to the land. See Oyster Bay Cove, Ltd. 196 B.R. at 255 (distinguishing between personal and real covenants). For example, a lien is an interest against a property because it secures a personal obligation between two contracting parties. Id. 4 A right that runs with the land, however, is a right for the benefit of another parcel. See id. For example, a real covenant requiring a country-club membership in a development directly benefits 3 The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate. 11 U.S.C. 363(f) (2012). 4 This also includes any monetary interest such as a tort claim. See, e.g., In re Trans World Airlines, Inc., 322 F.3d 283, 288 (3d Cir. 2003). 8

19 the community because a country club community will enhance the property value. In re Ginn-La St. Lucie Ltd., LLLP, 2011 WL , at *5. Highway s leasehold survives a free and clear sale because the interest functions as a real covenant that runs with the land. See Oyster Bay Cove, 196 B.R. at 255. Like a restrictive real covenant, the lease dictates how Highway can use the land. (R. at 7). Specifically, the lease gives Highway the exclusive right to manage, use, and operate the music venue. (R. at 7). In turn, customers attending the amphitheater are more likely to spend money at the resort and casino, benefitting the entire property. Therefore, since a free and clear sale cannot extinguish a right that runs with the land, requesting adequate protection under section 363(e) is unnecessary. See 11 U.S.C. 363(e) (2012). 1. Highway is not required to request adequate protection under section 363(e) because that provision is applicable only to secured creditors. Only a secured creditor must request adequate protection under section 363(e). See, e.g., In re Sweetwater, 40 B.R. 733, 735 (Bankr. D. Utah 1984), aff'd, 57 B.R. 743 (D. Utah 1985) ( Section 363(e) was intended to protect the collateral of secured creditors. ) (emphasis added). Although the Code does not define adequate protection, 5 Section 363(e) s legislative history instructs that the provision is not intended to protect an unsecured creditor s leasehold. H.R. REP. No , at (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6143 ( The bill as written is a significant boon to secured lenders. ). In fact, Congress enacted section 363(e) to protect secured creditors. Id. (discussing that section 363(e) is protection that secured creditors do not have today ) (emphasis added). 5 See In re Sweetwater, 40 B.R. 733, 735 (Bankr. D. Utah 1984), aff'd, 57 B.R. 743 (D. Utah 1985) (explaining that adequate protection is not defined in the Code). 9

20 Any other interpretation would allow unsecured creditors to violate the Code s priority scheme. Under the Thirteenth Circuit s interpretation, for example, Highway s leasehold would function like a secured interest, attach to sale proceeds, and skip other priority creditors. Michael St. Patrick Baxter, Section 363 Sales Free and Clear of Interests: Why the Seventh Circuit Erred in Precision Industries v. Qualitech Steel, 59 BUS. LAW. 475, (2004). But, Congress never intended to put unsecured and secured creditors on an equal footing. See Sweetwater, 40 B.R. at 743 ( The structure of the [] Code provide[s] different treatment for different rights and interests. ). Although a secured creditor s interest can attach to sale proceeds, a leasehold cannot: a lessee is only entitled to pro-rata distributions. See 11 U.S.C. 365(h) (2012) (explaining that a lessee is only entitled to possession or a pro-rata distribution upon rejection). 2. Even if section 363(e) protects lessees, Highway s objection and notice to retain property functions as a request for adequate protection. Even if Highway was required to request adequate protection, Highway s objection and notice suffice. A party cannot forfeit its protections under section 363(e) without showing more than an ambiguous waiver. Contrarian Funds LLC v. Artex Int l. (In re WestPoint Stevens, Inc.), 600 F.3d 231, 261 (2d Cir. 2010); see also Harvis, Trien, & Beck, PC. v. Fed. Home Loan Mortg. Corp. (In re Blackwood Assoc s., L.P.), 153 F.3d 61, 68 (2d Cir. 1998) (finding that the secured creditor did not waive its rights to adequate protection where the stipulation was not so clear as to constitute a waiver of this right ). Only where creditors fail to object or request adequate protection, [do] they risk waiving their right to such protection. BMO Harris Bank v. Vista Mkt. Grp., Ltd. (In re Vista Mktg. Grp., Ltd.), 548 B.R. 502, 522 (Bankr. N.D. Ill. 2016). For example, in Precision Indus., Inc. v. Qualitech, the court held the free and clear sale extinguished the lessee s interest, in part, because the lessee neither objected to sale nor sought adequate protection under 10

21 section 363(e). Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 548 (7th Cir. 2003). In contrast, Highway never manifested a clear waiver of adequate protection. Highway twice objected to the sale: both after the initial auction and at the sale hearing. (R. at 7 8). Further, Highway notified the Debtor of its intent to retain possession of the amphitheater under section 365(h). (R. at 8). The objections and notification informed the Debtor, 4th Street, the creditors, and the Bankruptcy Court about Highway s intention to retain possession of the amphitheater. Such action cannot constitute an unambiguous waiver; rather, it functions as a request for adequate protection. Highway is entitled to retain possession of the amphitheater as adequate protection because the leasehold does not secure a monetary obligation. Any asset could secure a monetary obligation because the collateral protects a monetary interest. Baxter, supra at 493. Highway s leasehold, however, secures possession of the collateral: the right to manage, operate, and market the amphitheater. (R. at 5). Therefore, only possession of the amphitheater can adequately protect Highway s leasehold. In any event, possession is the only means of adequate protection because no proceeds are available. See, e.g., Haskell L.P., 321 B.R. at 10 (explaining that where no proceeds are available adequate protection can only be achieved through continued possession of the leased premises ). Here, the free and clear sale did not produce any proceeds because 4th Street credit bid the entirety of its debt. (R. at 7). Moreover, the estate no longer possesses any assets. (R. at 7). Therefore, possession is the only means by which Highway could obtain adequate protection. 11

22 B. Even If Interest Under Section 363(f) Encompasses A Leasehold, The Specific Protections For Lessees Under Section 365(h) Govern. This Court should reverse the Thirteenth Circuit because individual provisions of the Code cannot be read in isolation. See (R. at 11) (reading sections 363(f) and 365(h) in isolation to conclude that they function without tension ). As this Court has recognized, statutory construction is a holistic endeavor [where]... [a] provision... is often clarified by the remainder of the statutory scheme. See Smith v. United States, 508 U.S. 223, 234 (1993). Even where a court must interpret separate sections, the provisions must be read as part of a comprehensive scheme because every provision must be given an independent effect. See RadLAX Gateway Hotel, 566 U.S. at Section 365(h) supersedes a debtor s general power to sell free and clear because Congress promulgated specific protections under the provision. Section 365(h) s protections limits the Debtor s general authority to sell free and clear under section 365(h). In re Churchill Props. III, Ltd. P'ship, 197 B.R. 283, 288 (Bankr. N.D. Ill. 1996). (R. at 11). It is commonplace in statutory construction that the specific governs the general because the Code s provisions cannot be read in isolation. Morales v. Trans World Airlines, Inc., 504 U.S. 374, (1992). A general provision shall not govern a matter specifically dealt with in another part of the same enactment because a court must give independent effect to every word in a statute. See D. Ginsberg & Sons v. Popkin, 285 U.S. 204, 208 (1932). In D. Ginsberg & Sons v. Popkin, a creditor argued that former section 2(15) under the Bankruptcy Act superseded former section 9(b) because section 2(15) empowered a district judge to issue orders regarding arrests for officers of bankrupt corporations. Id. at This Court held that section 9(b) governed because the arrests under section 2(15) would erode section 9(b) s specific protections. Id. at

23 So too here. Allowing 363(f) to override 365(h) s protections would run counter to longstanding precedent. Indeed, the Code is not intended to read in a vacuum. Churchill Props. 197 B.R. at 288. When read together, section 365(h) controls because Congress promulgated specific rights upon rejection: (1) terminate the lease and file a pre-petition claim for damages, or (2) continue possession while paying rent and related charges. 11 U.S.C. 365(h) (2012). High Rocks cannot circumvent section 365(h) s protections through section 363(f) s general language. The result eviscerates section 365(h) s protections. 10 Churchill Props. III, 197 B.R. at 288 ( [T]he application of Section 365(1)(A)(ii) as it relates to non-debtor lessees would be nugatory. ). Section 363(f) would operate as vehicle for lessors to indirectly accomplish that which it could not directly: extinguish a leasehold. 2. A free and clear sale under section 363(f) functions as a de facto rejection under 365(h). Highway s notice to retain possession of the amphitheater preserves Highway s leasehold. Highway notified the Debtor that the sale of the amphitheater free and clear of the Highway Lease was the functional equivalent of a rejection of such lease. (R. at 8). Highway then exercised its rights under 365(h) and elected to remain in possession of the amphitheater. (R. at 8). Yet, the Thirteenth Circuit held that High Rocks sold the amphitheater free and clear of Highway s leasehold because High Rocks never formally rejected the lease. (R. at 10 11). Two reasons underlie why this is incorrect. 10 Indeed, the American Bankruptcy Institute suggests that section 365(h) s protections must limit the general authority to sell free and clear. See ABI to Study the Reform of Chapter 11: Final Report and Recommendations, 23 AM. BANKR. INST. L. REV. 1, 155 (2015) ( the trustee should be permitted to sell the debtor's assets free and clear of... unexpired leases only to the extent such contracts and leases are rejected in accordance with section 365 or section 1113). 13

24 First, a seller must assume or reject a lease before selling the underlying property. Taylor, 198 B.R. at 167 (holding that section 365 is a necessary and intermediate step before a sale can occur). High Rocks neither rejected nor assumed the lease agreement. (R. at 7). Therefore, High Rocks cannot sell the amphitheater free and clear of Highway s leasehold. Second, even if rejection can follow a sale in certain instances, High Rocks free and clear sale is a de facto rejection. See Baxter, supra at 501 (explaining that a sale free and clear was itself sufficient to constitute a rejection of the lease. ). Where a sale purports to extinguish obligations under a lease, the sale functions as rejection under section 365(h). Cf. Chbat v. Tleel (In re Tleel), 876 F.2d 769, (9th Cir. 1989) (stating that the bankruptcy court's order permitting the sale of property was effectively a court-authorized assumption of an executory contract despite that the contract was never formally assumed). High Rocks sale functions as rejection under section 365(h) because the sale motion provided the sale would be free and clear of Highway s leasehold interest. (R. at 7); see 11 U.S.C. 365(h)(1)(A)(i) (2012) ( [I]f the rejection by the trustee amounts to such a breach. ). Further, 4th Street notified all parties that it intended to operate the amphitheater itself... free and clear of Highway s leasehold interest. (R. at 7). The agreement would no longer obligate the Debtor to lease the amphitheater to Highway. Section 363(f) would strip the rights for which Highway bargained: managing, marketing, and operating the Amphitheatre, while allowing 4th Street to manage the premise. See (R. at 7). The Thirteenth Circuit, however, relied on Qualitech and Spanish Peaks to hold that Highway s sale did not function as rejection. See Qualitech, 327 F.3d at 547 ( [T]he effect of the sale might be understood as the equivalent of a repudiation of Precision's lease. ); Matter of Spanish Peaks Holdings II, LLC, 872 F.3d 892, 899 (9th Cir. 2017). ( rejection is universally understood as an affirmative declaration. ). 14

25 Both arguments, however, fail because Qualitech and Spanish Peaks ignore a sale s underlying effect. Qualitech s distinction between repudiation and rejection only focuses on the context in which section 363(f) and 365(h) arise. See Qualitech, 327 F.3d at 547. Although sections 363(f) and 365(h) concern sales and rejection respectively, the provisions effectuate the same outcome; 11 a lessor is relieved of its obligations. Spanish Peaks reasoning is also inapposite for the same reason. See Spanish Peaks, 872 F.3d at 897. Although a debtor typically effectuates rejection through an affirmative act, a free and clear sale accomplishes rejection under the guise of section 363(f). Indeed, Qualitech and Spanish Peak s distinction contravenes this Court s long-standing policy against form over substance. See United States v. DiFrancesco, 449 U.S. 117, 142 (1980) ( The exaltation of form over substance is to be avoided. ). Regardless of its form, rejection entitles a lessee to possession under section 365(h). 3. The Code s legislative history establishes that Congress sought to preserve a leasehold. This Court should reconcile the effects of sections 365(h) and 363(f) with Congress intent. See Harrison v. N. Tr. Co., 317 U.S. 476, 479 (1943) (stating that there is no rule of law forbidding resort to explanatory legislative history no matter how clear the words may appear on superficial examination ). Even if ambiguity must precede an analysis of legislative history, sections 365(h) and 363(f) fulfill that requirement for two reasons. First, section 365(5) preserves a leasehold, notwithstanding section 363(f) s authority to sell and clear of any interest. See Churchil, 197 B.R. at 286 ( Each provision... provide[s] an exclusive right that when invoked would override the 11 see Samuel Williston, Repudiation of Contracts, 14 HARV. L. REV. 317 (1901) ( [R]epudiation... indicate[s] that he is not going to perform his contract in the future. ). 15

26 interest of the other. ). Second, interest under section 363(f) is ambiguous because interest is not defined in the Code and courts disagree about its meaning. Haskell L.P., 321 B.R. at 7 ( The Bankruptcy Code does not provide a definition of such interest. ). Section 365(h)'s legislative history shows that Congress sought to protect lessees. See Taylor, 198 B.R. at 165 (concluding that section 365(h) s legislative history demonstrates that Congress intended preserve a leasehold). Section 365(h) s predecessor, Bankruptcy Act s 70(b), codified a general premise: Rejection did not terminate the lease and, thus, protected a lease who relied on the term. Id. at 166. Although Congress intended to preserve a leasehold, the provision bred confusion because 70(b) did not provide for a lessee s right of possession. Id. The 1984 and 1994 amendments, however, enhanced a lessee s protection because the enactments codified a lessee s right to possession upon rejection. Id. The language underscored a congressional mandate: a tenant will not be deprived of his estate under the terms for which he bargained. S. REP. No , 95th Cong., 2d Sess. (1978), reprinted in 1978 U.S.C.C.A.N. 5787, Indeed, the 1994 Section-by-Section analysis clarified that section 365(h) protects lessees from bankruptcy intervention. Bankruptcy Reform Act of 1994, Section-by-Section Analysis, 140 CONG. REC. H (Oct. 4, 1994) ( [L]essees cannot have their rights stripped away. ). Nevertheless, the Thirteenth Circuit determined that section 363(f) supersedes section 365(h) (R. at 13). Allowing a debtor to circumvent 365(h) s protections and extinguish a leasehold through a sale will weaponinze section 363(f). For example, assume prior to bankruptcy, a debtor and lessee enter into a ground lease under which the lessee borrows capital to make substantial improvements to the land. The financer loans substantial capital based upon the possessory right 16

27 and, thus, secures the underlying leasehold. Under the Thirteenth Circuit s holding, a debtor could extinguish the financer and lessee s interests under the guise of section 363(f). Financers would be disincentivized to issue new loans in connection with a ground lease because leaseholds could no longer serve as a viable security interest under the Code. Baxter, supra at 497. Section 363(f) would indirectly divest a financer s collateral, notwithstanding section 365(h) s broad protections. Id. In turn, financers would restrict the flow of capital to reduce risk exposure. Thus, the result would ultimately chill the real estate industry Id. II. THE COMMITTEE SETTLEMENT VIOLATES THE CODE S PRIORITY SCHEME. Highway contributed two million dollars worth of work to the High Rocks project, relying on the Code s provisions that give these expenses priority over all creditors pre-petition claims. 11 U.S.C. 507(a)(2), 1129(b)(2). The month after Highway completed its work, 4th Street, the Debtor, and the Creditors Committee entered into a settlement that paid Highway nothing. Despite the Code s priority requirements, the settlement paid unsecured creditors two million dollars for withdrawing their objections to the sale and releasing the estate s claims against 4th Street. The Settlement left the estate with no value to satisfy Highway s administrative claim. (R. at 7). Four reasons outline why the Thirteenth Circuit s approval of the Committee Settlement was improper. First, the Committee Settlement is not a permissible gift settlement because 4th Street gave the Unsecured Creditors Committee two million dollars in exchange for waiving valuable estate claims. Second, no authority exists in the Code, or elsewhere, to deviate from Congress priority scheme. Third, No purported rare case exception permits priority-skipping settlements. Fourth, even if such a rare case exception exists after Jevic, the Committee Settlement functions as a final distribution that advances no significant Code-related objectives. 17

28 A. The Committee Settlement Is Not A Gift, But Rather A Priority-Skipping Distribution Of Estate Assets. The Committee Settlement is a gift in name only: In exchange for 4th Street s payment to the Committee, 4th Street received a release of the estate s claims against it. The estate, however, received nothing in return. The Thirteenth Circuit s decision, therefore, rests on the mistaken premise that the Committee Settlement does not need to follow the Code s priority requirements. Unlike the Committee Settlement, a permissible gift settlement distributes no estate property. See Official Unsecured Creditors Committee v. Stern (In re SPM Manufacturing Corp.), 984 F.2d 1305, 1312 (1st Cir. 1993) (holding that a gift settlement was permissible because the gift would occur after distribution of estate property, having no effect whatever on the bankruptcy distributions to other creditors ) (emphasis in original). In SPM, the genesis of the gifting doctrine, the court affirmed a priority-skipping gift where the estate s entire value was owed to an undersecured creditor, whose lien was unchallenged. Id. at Because the Code s priority scheme does not apply until all secured creditors are paid, the lienholder was free to share that money with junior creditors. Id. In contrast, the value of 4th Street s lien was challenged below. R. at 7 8. Therefore, the settlement was, in substance, not a gift, but a liquidation of the claims against 4th Street. See Black s Law Dictionary (10th ed. 2014) (defining a gift as the voluntary transfer of property to another without compensation ). Property of the estate, including potential claims, is held in trust for the benefit of all creditors. Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 981 (2017) (recognizing that proceeds from a suit that creditors brought on the estate s behalf would belong not to the unsecured creditors, but to the bankruptcy estate ). Accordingly, the proceeds of the Committee Settlement should have been property of the estate, for subsequent distribution in accordance with priority. 18

29 Nevertheless, the Thirteenth Circuit approved the Committee Settlement because it helped individual parties: (1) the Settlement allowed the Debtor to avoid costly, time-consuming, complex and uncertain litigation with 4th Street ; and (2) the Settlement allowed the Creditors Committee to fund its claims against a third party. (R. at 15). These benefits to individuals, however, do not change the fact that the claims against 4th Street are property of the estate. This is true whether or not those claims are legally complex. See Segal v. Rochelle, 382 U.S. 375, 379 (1966) (noting the bankruptcy estate s interest in a legal claim is not outside its reach because it is novel ). This is true whether or not the estate has filed formal charges. See Official Committee Ex Rel. Cybergenics v. Chinery, 330 F.3d 548 (3d Cir. 2003). This is true whether or not the claims are uncertain and expensive. See Jevic, 137 S. Ct. at 983 (stating that just because a lawsuit might prove fruitless... does not eliminate the value of the claim, and that even if the estate had no money to pursue the claim, there is no reason to believe the claim could not be pursued with counsel obtained on a contingency basis ). Highway, an administrative claim holder, had the right to benefit from the Settlement of estate claims. Instead, Highway like the Petitioners in Jevic was excluded from the proceeds, while subordinate creditors were paid. B. No Authority Permits Bankruptcy Courts To Approve Contested Settlements That Distribute Estate Funds In Violation Of the Code s Priority Scheme. As this Court recently reaffirmed, [t]he Code s priority system constitutes a basic underpinning of business bankruptcy law. Jevic, 137 S. Ct. at 983. The priority system ordinarily determines the order in which the bankruptcy court will distribute assets of the estate. Id. at 979. This Court made clear that, to allow a contested priority-skipping distribution, Congress must give an affirmative indication of intent to provide a specific backdoor means. Id. at 984. Given the priority system s importance to Chapter 11, courts should expect more than simple statutory 19

30 silence if, and when, Congress were to intend a major departure. Id. After this Court locked the backdoor method to circumventing the Code s priority scheme in Jevic, the Debtor and select creditors now attempt to enter through the side door. See In re Chrysler LLC, 576 F.3d 108, 115 (2nd Cir. 2009) (referring to section 363(b) as a side door method of concluding a Chapter 11 bankruptcy). Yet, the Code forbids priority-skipping settlements arising from section 363 sales because no authority expressly allows it. Id. at 978 (stating that the relevant inquiry is whether a bankruptcy court has the legal power to order this priority-skipping kind of distribution scheme ) (emphasis added). Similarly, neither the Federal Rules of Bankruptcy Procedure nor bankruptcy courts equitable powers expressly authorize priority-skipping settlements. The Thirteenth Circuit also reasoned that bankruptcy courts can approve priority-skipping settlements because Rule 9019 offers no guidance as to the criteria to be used in evaluating a settlement. R. at 15. In other words, the court found the statutory silence in Rule 9019 empowers courts to approve priority-skipping settlements. That is not so. Given the importance of the absolute priority rule to chapter 11 proceedings, courts should expect more than simple statutory silence if, and when, Congress were to intend a major departure. Chrysler, 576 F.3d at Section 363(b) does not authorize contested priority-skipping distributions of estate value. Nothing in Section 363(b) authorizes out-of-order distributions of estate value. The provision empowers a trustee to use, sell, or lease estate assets outside of the ordinary course of business. Any proceeds resulting from section 363 sales, however, must be distributed according to the Code s priority scheme. Chrysler, 576 F.3d at 118 (approving a section 363 sale 20

31 because it was done with proper solicitude for the priority between creditors and the sale in no way upset that priority ). Indeed, lower courts have consistently rejected section 363 sale that would undermine the Code s priority structure. See Pension Benefit Guar. Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, (5th Cir. 1983) (reasoning that section 363(b) does not authorize a sale and settlement dictating distribution of proceeds contrary to the Code s absolute priority rule); In re Continental Air Lines, Inc., 780 F.2d 1223, (5th Cir. 1986) (stating that section 363(b) does not permit an end run around the protection granted creditors in Chapter 11 ); In re Lionel Corp, 722 F.2d 1063, (2nd Cir. 1983) (clarifying that section 363(b) does not grant[] the bankruptcy judge carte blanche to swallow[] up Chapter 11 s safeguards ). This Court s favorable citation to these cases in reaching its holding in Jevic evinces that priority-skipping distributions in connection with section 363 sales are prohibited. See Jevic, 137 S. Ct. at 986 (comparing distributions made in connection with a structured dismissal settlement to a sub rosa plan in connection with a section 363 sale). The Committee Settlement is unauthorized because it functions like a sub rosa plan: It attempts to sidestep Chapter 11 s requirements by making priority-skipping distributions under the guise of a 363 sale. See Braniff Airways, 700 F.2d at 940 (prohibiting an attempt to short circuit the requirements of Chapter 11 through distributions made in connection with a section 363 sale). 2. Federal Rule Of Bankruptcy Procedure 9019 does not authorize a contested priority-skipping settlements. The power to approve settlements under Federal Rule of Bankruptcy Procedure 9019 cannot authorize a bankruptcy court to distribute estate value in a manner contrary to bankruptcy law. See FED. R. BANKR. P Rule 9019(a) states a court may, after notice and a hearing, 21