Team P1. Team P1 Counsel for Petitioner

Transcription

1 Team P1 Counsel for Petitioner

2 Docket No IN THE Supreme Court of the United States OCTOBER TERM, 2017 IN RE HIGH ROCKS, INC., Debtor, HIGHWAY 61, INC., Petitioner, V. HIGH ROCKS, INC., Respondent. On Writ of Certiorari from the United States Court of Appeals for the Thirteenth Circuit BRIEF FOR PETITIONER Team P1 Counsel for Petitioner Oral Argument Requested

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

4 TABLE OF CONTENTS QUESTIONS PRESENTED... i TABLE OF AUTHORITIES... iv OPINIONS BELOW... viii STATEMENT OF JURISDICTION... viii STATUTORY PROVISIONS INVOLVED... viii STATEMENT OF FACTS... 1 SUMMARY OF THE ARGUMENT... 2 STANDARD OF REVIEW... 4 ARGUMENT... 5 I. THE MOOT CIRCUIT COURT INCORRECTLY DETERMINED THAT A SECTION 363(f) FREE AND CLEAR SALE ELIMINATES A LESSEE S POSSESSION RIGHTS GUARANTEED BY SECTION 365(h) A. The Language, Structure, And Context Of Sections 363(f) And 365(h) Confirm That Section 363(f) Sales Do Not Eviscerate Lessee Protections Under 365(h) It is ambiguous which section controls when a debtor-lessor seeks to sell property free and clear of a lessee s interest under section 363(f) and the lessee seeks to retain possession under 365(h) Where sections 365(h) and 363(f) are ambiguous in that they conflict in their operation, this Court should examine the legislative history and congressional intent in determining their proper application The more specific language within section 365(h) should govern the more general provisions within section 363(f) B. A Free And Clear Sale Motion Is A Constructive Rejection Of The Lease Triggering A Lessee s 365(h) Protections C. The Moot Circuit Opinion Needlessly Eliminates Section 365(h) Thereby Frustrating Legitimate Policies and Purposes Of Chapter 11 Reorganizations D. The Seventh and Ninth Circuit Decisions Regarding Sales Free and Clear of Leaseholder Interests Are Erroneous and Distinguishable From the Case At Hand Qualitech and Spanish Peaks were wrongly decided ii

5 2. Regardless of the adequacy of the Seventh and Ninth Circuit opinions, Qualitech and Spanish Peaks are distinguishable from the present case II. THE MOOT CIRCUIT ERRED IN APPROVING THE UNSECURED CREDITOR COMMITTEE SETTLEMENT AS THE SETTLEMENT PAYMENT VIOLATES THE ABSOLUTE PRIORITY RULE OF SECTION 1129(b)(2)(B)(ii) A. Jevic Evinces A Broad Prohibition On All Non-Consensual, Priority-Skipping Final Distributions B. Priority Skipping Settlement Payments Must Comply With The Absolute Priority Rule to Ensure Final Distributions Adhere To The Priority Scheme Envisioned By The Code C. Applying The Absolute Priority Rule To Pre-Plan Settlement Agreements Achieves Its Intended Goals And Retains The Rule s Effectiveness CONCLUSION APPENDIX A... I APPENDIX B... II APPENDIX C... III APPENDIX D... V APPENDIX E... VI APPENDIX F... VII APPENDIX G... VIII APPENDIX H... IX iii

6 TABLE OF AUTHORITIES Supreme Court Cases Ali v. Federal Bureau of Prisons, 552 U.S. 214 (2008)... 6 Chickasaw Nation v. U.S., 534 U.S. 84 (2001)... 6 Connecticut Nat. Bank v. Germain, 503 U.S. 249 (1992) Corley v. U.S., 556 U.S. 303 (2009)... 8 Kelly v. Robinson, 479 U.S. 36 (1986)... 7, 15 King v. Burwell, 135 S. Ct (2015)... 7 Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992)... 11, 17 Norwest Bank v. Ahlers, 485 U.S. 197 (1988) Offical Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. 2003) RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012)... 7, 11 Robinson v. Shell Oil Co., 519 U.S. 337 (1997)... 7 Shapiro v. U.S., 335 U.S. 1 (1948)... 9 U.S. v. Dickerson, 310 U.S. 554 (1940)... 6 iv

7 U.S. v. Menasche, 348 U.S. 528 (1955)... 6 U.S. v. Pub. Utilities Comm'n of Cal., 345 U.S. 295 (1953)... 9 United Sav. Ass n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365 (1988)... 7, 8, 18 United States v. Whiting Pools, Inc., 462 U.S. 198 (1983) Varity Corp. v. Howe, 516 U.S. 489 (1996) Yates v. U.S., 135 S. Ct (2015)... 6 Appellate Court Cases In re Armstrong World Industries, Inc., 432 F.3d 507 (3d Cir. 2005) In re Connolly N. Am., LLC, 802 F.3d 810 (6th Cir. 2015)... 4 In re Lavigne, 114 F.3d 379 (2d Cir.1997) In re SPM Mfg. Corp., 984 F.2d 1305 (1st Cir. 1993) Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007)... 22, 28 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)... 10, 12, 13, 15, 17, 20 Precision Indus. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003)... 10, 13, 17, 18, 19 Razavi v. Commissioner of Internal Revenue, 74 F.3d 125 (6th Cir. 1996)... 4 v

8 Texas v. Soileau (In re Soileau), 488 F.3d 302 (5th Cir. 2007)... 4 United States v. AWECO, Inc. (In re AWECO, Inc.), 725 F.2d 293 (5th Cir. 1984)... 4, 26 Bankruptcy Court Cases Bd. of Trs. of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164 (3d Cir. 2002) Dishi & Sons v. Bay Condos LLC, 510 B.R. 696 (Bankr. S.D.N.Y. 2014)... 8, 10, 11, 12, 13, 14, 19 IDEA Boardwalk, LLC v. Revel Entm t Grp. (In re Revel AC, Inc.), 532 B.R. 216 (Bankr. D.N.J. 2015)... 13, 15, 19 In re Churchill Props. III, L.P., 197 B.R. 283 (Bankr. N.D. Ill. 1996)... 8, 10, 18 In re Constellation, No (Bankr. D. Del. argued May 16, 2017) In re Crumbs Bake Shop, Inc., 522 B.R. 766 (Bankr. D.N.J. 2014)... 9 In re Fryar, 570 B.R. 602 (Bankr. E.D. Tenn. 2017) In re Haskell L.P., 321 B.R. 1 (Bankr. D. Mass. 2005)... 5 In re ICL Holding Co.,Inc., 802 F.3d 547 (3d Cir. 2015) In re Lee Road Partners, Ltd., 155 B.R. 55 (Bankr. E.D.N.Y. 1993) In re LHD Realty Corp., 20 B.R. 717 (Bankr. S.D. Ind. 1982)... 9 In re Taylor, 198 B.R. 142 (Bankr. D.S.C. 1996)... 5, 9, 10, 12, 15, 17, 18 In re Zota Petroleums, LLC, 482 B.R. 154 (Bankr. E.D. Va. 2012)... 11, 13, 15, 19 vi

9 Bankruptcy Appellate Panel Cases First Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468 (6th Cir. BAP 1998)... 4 Other Sources S.Rep. No (1978)... 9 Sally McDonald Henry, Chapter 11 Zombies, 50 Ind. L. Rev. 579 (2017) vii

10 OPINIONS BELOW The United States Bankruptcy Court for the District of Moot approved a settlement agreement between the Official Committee of Unsecured Creditors and 4th Street Partners, Inc. (R. at 8). The bankruptcy court also approved a sale of real property to 4th Street Partners, Inc. (R. at 8). Both the settlement and sale were approved over Highway 61, Inc. s objections. (R. at 7-8). Acknowledging the novel and complex issues Highway raised, the bankruptcy court stayed the sale until an appeal could be brought. (R. at 8). Highway then appealed to the United States District Court for the District of Moot. (R. at 9). The district court affirmed the bankruptcy court s ruling. (R. at 9). This Court granted Highway s petition for writ of certiorari. STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VII. STATUTORY PROVISIONS INVOLVED The relevant statutory provisions involved in this case are listed below and reproduced in Appendices A through H. 11 U.S.C. 363, 365, 1107, 1129, 349, 541, 361 (2012). Fed. R. Bankr. P viii

11 STATEMENT OF FACTS A Rocky Start. In May of 2014, High Rocks, Inc. ( Debtor ) began development of a casino and a resort, which included a thirty-story hotel tower and large outdoor amphitheater. (R. at 3-4). Debtor hired Skyline Construction, Inc. ( Skyline ) as the general contractor. (R. at 4). Debtor encountered several problems with the hotel s construction due to Skyline s mismanagement. (R. at 4). The Debtor chose to terminate its contract with Skyline before construction of the amphitheater was complete. (R. at 4). Highway 61, Inc. ( Highway ) entered into a thirty-year lease with Debtor, which also tasked Highway with management and operation of the amphitheater. (R. at 5). Frustrated with repeated delays in the development process, North Country Bank sold its $800 million note to 4th Street Partners, Inc. ( 4th Street ). (R. at 5). Pursuing a loan to own strategy, 4th Street initiated a foreclosure action. (R. at 5). The Debtor then filed a chapter 11 petition in order to halt 4th Street s foreclosure. (R. at 5). Post Petition Help. After filing the chapter 11 petition, Highway approached Debtor and agreed to finish construction of the amphitheater for a $2 million payment to be made when the development opened to the public. (R. at 6). Construction issues did not end with the bankruptcy petition, however, and Debtor resorted to a sale of substantially all of its assets under section 363(f) of the Bankruptcy Code. (R. at 6). 4th Street was the only qualified bidder who appeared at the sale auction. (R. at 7). As such, 4th street was declared the winner, having credit bid the entire amount of its debt. (R. at 7). Highway To The Danger Zone. Highway objected to the sale pursuant to its protections under section 365(h), seeking to remain in possession of the property. (R. at 8). The Official Committee of Unsecured Creditors ( Committee ) also objected to the sale, claiming it had informally alleged causes of action against 4th Street, and because the sale was a veiled 1

12 foreclosure. (R. at 7). Prior to the sale hearing, Debtor, the Committee, and 4th Street entered into a pre-plan settlement ( Committee Settlement ) proposing to place $2 million into an unsecured creditors trust in exchange for the Committee removing its objection to the sale and settling its claims against 4th Street. (R. at 8). The Committee Settlement provided payments for junior unsecured creditors, yet allotted nothing to Highway for its authorized priority administrative expense. (R. at 8). Procedure. Highway renewed its original objection under section 365(h) of the Bankruptcy Code at the sale hearing, and also asserted that the Committee Settlement improperly distributed funds in violation of the absolute priority rule. (R. at 8). Despite noting that Highway raised a novel issue, the bankruptcy court approved both the sale and the Committee Settlement over Highway s objections. (R. at 8-9). Highway then appealed to the district court. 1 (R. at 9). The district court affirmed the order of the bankruptcy court. (R. at 9). The Thirteenth Circuit then affirmed the decisions of both the bankruptcy court and the district court. (R. at 3). This appeal followed. SUMMARY OF THE ARGUMENT The Thirteenth Circuit Court of Appeals erred in affirming the Moot District Court s approval of the sale and Committee Settlement. At all instances in this bankruptcy proceeding, Highway s expected rights as a third-party lessee have been ignored and unprotected. Despite the clear Code protections for lessees, the courts below have allowed Highway, an innocent lessee, to be taken advantage of. Instead of adhering to the strictures of the Code and recognizing codified lessee protections, each court has imposed significant burdens on Highway. 1 We assume that the Thirteenth Circuit is a non-bankruptcy Appellate Panel circuit, or that Highway intentionally chose to file their appeal in the district court. 2 Property of the estate includes all legal or equitable interests of the debtor in property as of the commencement of 2

13 The courts below have overly protected Debtor through every step of this process, and have allowed Debtor to conveniently avoid creditor and lessee protections provided by both state law and the Bankruptcy Code. Unfortunately for Highway, it was not only a lessee, but also a post-petition creditor who attempted to help Debtor in its time of need. Instead of acknowledging Highway s extraordinary assistance in light of Debtor s voluntary bankruptcy, each court has rendered Highway s administrative priority claim meaningless. Highway has been punished for being a reasonable creditor and relying on courts to uphold its authorized administrative priority claim. Not only did the lower courts allow the priority-violating distribution to Highway s sole detriment, they did so in an instance where the Debtor is taking advantage of the benefits of a chapter 11 reorganization where no reorganization will result. In both of Highway s roles as a lessee and as a creditor, the Bankruptcy Code has failed them. Section 365(h) lessee protections should apply regardless of how a debtor chooses to frame its rejection of an underlying lease. Where there is an ambiguity in applying both provisions, section 365(h) s lessee protections override a debtor-lessor s 363(f) free and clear sale rights because Congress intended to provide robust lessee protections, and because the specific provisions in 365(h) necessarily control over the general language in 363(f). Additionally, the factual impact of a 363(f) sale is tantamount to a rejection and thus, the same lessee protections should apply. Not only is it logical to determine that 365(h) protections apply in the context of 363(f) sales, a majority of courts have concluded that 365(h) s express protections should not be disregarded in the event of a free and clear sale. Pre-plan settlement agreements should comply with the strictures of the absolute priority rule. Jevic should be read to preclude all non-consensual, priority-violating final distributions. 3

14 At a minimum, Jevic precludes such distributions that do not serve a significant bankruptcy purpose, such as the Committee Settlement at issue. Additionally, even if the absolute priority rule does not mandate that pre-plan settlements adhere to the Code s priority scheme, whether or not a settlement adheres to the rule is often the most important factor to its approval. Examining settlements in this manner helps ensure that the parties involved are not entering settlement agreements simply to avoid the Code s distribution scheme, and gives meaning to the absolute priority rule. STANDARD OF REVIEW A bankruptcy court s factual findings are reviewed for clear error, and legal conclusions are reviewed de novo. In re Connolly N. Am., LLC, 802 F.3d 810, 814 (6th Cir. 2015). A bankruptcy court s decision to approve a settlement compromise will be reviewed for an abuse of discretion. United States v. AWECO, Inc. (In re AWECO, Inc.), 725 F.2d 293, 297 (5th Cir. 1984). Lower court decisions are subject to de novo review when the issue presented is a question of law rather than a question of fact. Texas v. Soileau (In re Soileau), 488 F.3d 302, 305 (5th Cir. 2007). Because this appeal relates solely to conclusions of law regarding the proper applications of section 365(h) and the absolute priority rule, the appropriate standard of review is de novo, a completely non-deferential standard. A review utilizing the de novo standard requires a court to review questions of law independent from the bankruptcy court s determination. First Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468, 469 (6th Cir. BAP 1998). Thus, the Court reviews the issue as if it were trying the case for the first time. Razavi v. Commissioner of Internal Revenue, 74 F.3d 125, 127 (6th Cir. 1996). 4

15 ARGUMENT I. THE MOOT CIRCUIT COURT INCORRECTLY DETERMINED THAT A SECTION 363(f) FREE AND CLEAR SALE ELIMINATES A LESSEE S POSSESSION RIGHTS GUARANTEED BY SECTION 365(h). The Moot Circuit below incorrectly held that section 363(f) exclusively governs free and clear sales, and therefore extinguished valid and important lessee protections provided by section 365(h). Section 363(f) of the Bankruptcy Code authorizes a trustee or debtor-in-possession to sell estate property free and clear of a non-debtor s interest U.S.C. 363(f)(5) (2012). Nonetheless, the trustee or debtor-in-possession may sell property of the estate free and clear of any third party interests only if one of five subsections is met. 3 While not expressly defined in the Code, courts interpret the interests contemplated by Section 363(f) to include a lessor s possessory interests. See In re Haskell L.P., 321 B.R. 1, 6 (Bankr. D. Mass. 2005) (compiling cases concluding interests encompasses leaseholds for purposes of Section 363(f)). At the same time, however, Section 365(h) affords tenants of debtor-lessors special protections if the debtor rejects an unexpired lease. In re Haskell L.P., 321 B.R. at 7 (citing 11 U.S.C. 365(h)). If a debtor-lessor rejects a lease, the lessee may choose to retain their leasehold interests or treat the rejection as a breach. 11 U.S.C. 365(h)(1)(A)(ii)(2012); In re Taylor, 198 B.R. 142, 164 (Bankr. D.S.C. 1996). The question remains as to whether these special protections apply when a debtor-lessor attempts to disguise a rejection as a free and clear sale under section 363(f). 2 Property of the estate includes all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. 541 (2012). A trustee or debtor-in-possession is authorized use or sell estate property after a hearing regarding the property. Id. In reorganizations, a debtor-in-possession may continue to operate the entity during the bankruptcy proceeding while maintaining obligations and rights a trustee would typically possess. 11 U.S.C (2012); NLRB. v. Bildisco & Bildisco, 465 U.S. 513, 517 (1984). 3 Highway stipulated that one or more of the elements of 363(f) was met. (R. at 9). The language of section 363(f) makes clear that it can be utilized only if one of the elements is present for the court to approve the proposed sale. 11 U.S.C. 363(f) (2012). Upon review and despite stipulation, none of the 363(f) elements are present. Consequently, the court improperly approved the 363(f) sale because none of the requisite elements were present. 5

16 The Moot Circuit avoided fully resolving this issue, and held that sections 365(h) and 363(f) apply to distinct and separate events. (R. at 12). This ignores the ultimate ambiguity and conflict between the two provisions. Resolving the conflict between the two sections requires a review of legislative intent and the provisions purposes within the larger scheme of the Code. Applying the appropriate statutory construction principles, and comprehensively reviewing the two provisions, it is clear that 365(h) should be given force in every instance where a debtorlessor attempts to modify a leasehold interest. A. The Language, Structure, And Context Of Sections 363(f) And 365(h) Confirm That Section 363(f) Sales Do Not Eviscerate Lessee Protections Under 365(h). This Court should find a conflict and ambiguity between sections 363(f) and 365(h), and should therefore review congressional intent and apply canons of statutory construction to conclude that 365(h) s protections apply to 363(f) sales. Statutory interpretation begins with reviewing the language of the statute itself, and understanding its role in the comprehensive statutory scheme. Yates v. U.S., 135 S. Ct. 1074, (2015). Where it is still unclear how a statute operates, canons of statutory construction aid in determining the intended meaning behind statutory text. Chickasaw Nation v. U.S., 534 U.S. 84, 94 (2001). Courts should review every relevant aid to construction in determining the proper application of conflicting and ambiguous provisions. U.S. v. Dickerson, 310 U.S. 554, 562 (1940). In reviewing statutory text, the judiciary has a duty to preserve the effectiveness of every section to avoid rendering any provision meaningless. U.S. v. Menasche, 348 U.S. 528, 539 (1955). Courts should construe statutes to ensure all provisions are interpreted in a consistent and coherent manner within the Bankruptcy Code. Ali v. Federal Bureau of Prisons, 552 U.S. 214, 222 (2008). Where an ambiguity exists in applying 365(h) and 363(f), this Court should determine that 365(h) 6

17 protections apply to 363(f) free and clear sales because Congress intended to provide robust lessee protections, and canons of statutory construction mandate that specific provisions govern general provisions. 1. It is ambiguous which section controls when a debtor-lessor seeks to sell property free and clear of a lessee s interest under section 363(f) and the lessee seeks to retain possession under 365(h). Sections 363(f) and 365(h) are ambiguous in their applications. In construing a statute, the text is only the starting point of the analysis. Kelly v. Robinson, 479 U.S. 36, (1986). Interpreting statutes requires a review of the entirety of each provision in light of their object[s] and polic[ies]. Id. (citations omitted). Because the Court s duty is to construe statutes, not isolated provisions, this Court should read the words in their context and with a view to their place in the overall statutory scheme. King v. Burwell, 135 S. Ct. 2480, 2489 (2015) (citations omitted). A statute s ambiguity is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole. Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997). Claiming 363(f) and 365(h) are unambiguous ignores practical realities by reading each provision independently, contravening the fundamental principle that the Code should be read in a holistic manner. United Sav. Ass n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371 (1988) (recognizing statutory provisions cannot be interpreted in a vacuum). The Bankruptcy Code should be read as a consistent, coherent set of rules with a common scheme. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 645 (2012). Although 363(f) and 365(h) appear straightforward when read in isolation, contemporaneous application of the provisions results in an ambiguity because the express protections offered by 365(h) must be ignored to allow a debtor to sell free and clear of third-party interests. In such circumstances, the 7

18 two provisions intrinsically conflict because each section inconsistently provides an interest that would override the other. (R. at 21); see RadLAX Gateway Hotel, LLC, 566 U.S. at 645; In re Churchill Props. III, L.P., 197 B.R. 283, (Bankr. N.D. Ill. 1996) (recognizing section 365(h) allows a lessee to maintain their leasehold interests, yet section 363(f) offers a debtor the conflicting ability to terminate such interests using a free and clear sale). As such, when properly reading the Code in a holistic manner, there is an inherent conflict between 363(f) and 365(h). Timbers of Inwood Forest Assocs., Ltd. 484 U.S. at 371. Sections 365(h) and 363(f) should be read to ensure that 365(h) s protections are not rendered meaningless. Statutes should be interpreted so that no provision is rendered superfluous and that substantive effect is given to all provisions. Corley v. U.S., 556 U.S. 303, 314 (2009) (citations omitted). Interpreting the Code to mandate that 365(h) s protections are inapplicable in 363(f) free and clear sales renders 365(h) s protections meaningless. Debtors will be incentivized to use 363(f) to effectively reject leases instead of properly using section 365 to avoid triggering a lessee s 365(h) s protections. In re Churchill Props. III, L.P., 197 B.R. at Rendering one section of the Bankruptcy Code superfluous creates a practical nullity and a theoretical absurdity. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. at 375. Allowing debtors to use 363(f) to sell property free and clear of lessees interests would render 365(h) nugatory, creating an absurd result and nullifying section 365(h). Timbers of Inwood Forest Assocs., Ltd., 484 U.S. at 375; Dishi & Sons v. Bay Condos LLC, 510 B.R. 696, 703 (Bankr. S.D.N.Y. 2014) (citations omitted). 8

19 2. Where sections 365(h) and 363(f) are ambiguous, this Court should examine the legislative history and congressional intent in determining their proper application. Where a textual analysis does not resolve an ambiguity between two provisions of the Code, the judiciary may properly use the legislative history to reach a conclusion. U.S. v. Pub. Utilities Comm'n of Cal., 345 U.S. 295, 315 (1953). The objects and policies of 363(f) and 365(h) clarify that 365(h) should govern when a debtor-lessor seeks to sell property free and clear of a lessee s interest. It is not only appropriate, but warranted, to examine legislative history where statutes are ambiguous in their application or meaning. Shapiro v. U.S., 335 U.S. 1, 31 (1948) (reasoning ambiguous statutes should be interpreted in a way that effectuates rather than frustrates the major purpose of the legislative draftsman ). Reviewing the legislative history of section 365(h) aids in resolving the ambiguity between the two provisions. In enacting section 365(h), Congress intended to mandate that lessees cannot have their rights stripped away if a debtor rejects its obligation as a lessor in bankruptcy. In re Crumbs Bake Shop, Inc., 522 B.R. 766, 778 (Bankr. D.N.J. 2014) (citation omitted); see S.Rep. No , at 60 (1978) ( A tenant will not be deprived of his estate for the term for which he bargained. ). The legislative history evinces congressional intent to protect a tenant s estate from the consequences of the landlord filing for bankruptcy. In re Taylor, 198 B.R. at 165; see In re LHD Realty Corp., 20 B.R. 717, 719 (Bankr. S.D. Ind. 1982) (seeking to ensure that a debtor does not terminate the lease completely so as to divest the lessee of his estate in the property ) (citations omitted). In enacting section 365(h), Congress intended to prevent any modification of lessees interests during the bargained-for term, and to prevent forcible evictions in all possible instances. In re Taylor, 198 B.R. at (citations omitted). A majority of courts have used this legislative history to conclude that section 365(h) s 9

20 protections prevail over a debtor-lessor s section 363(f) sale rights. In re Haskell L.P., 321 B.R. at 9; In re Churchill Props. III, L.P., 197 B.R. at ; In re Taylor, 198 B.R. at But see Pinnacle Rest. at Big Sky, LLC, v. CH SP Acquisitions, LLC (In re Spanish Peaks Holdings II, LLC) 862 F.3d 1148, 1157 (9th Cir. 2017); Precision Indus. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003). Allowing a debtor to utilize section 363(f) to bypass a lessee s statutory protections directly contradicts the intent and purpose of section 365(h). In re Taylor, 198 B.R. at 165. The statutes are ambiguous and conflict in their application where a debtor-lessor seeks to sell property free and clear of a leasehold interest, and the lessee seeks to remain in possession under section 365(h). In In re Haskell, the court concluded that granting a debtor-lessor s free and clear sale motion would eviscerate section 365(h) s protections. 321 B.R. at 9. In other words, the [d]ebtor would be doing indirectly what it could not do directly, namely dispossessing the lessee. Id. Allowing a debtor-lessor to utilize section 363(f) to thwart the effectiveness of section 365(h) s specific protections negates Congress s purpose in enacting section 365(h): to protect a lessee s interests from being altered due to a debtor s pending bankruptcy. In re Taylor, 198 B.R. at 165. Interpreting section 363(f) sales to override section 365(h) s protections is contrary to congressional intent because such a reading results in the effective repeal of [section] 365(h), allowing a lessor to evade its protections simply by selling property free and clear without a formal rejection of the lease. Dishi & Sons, 510 B.R. at 704; In re Taylor, 198 B.R. at 165. As such, congressional intent clarifies that section 365(h) protections cannot be subordinated to other sections of the Code. In re Taylor, 198 B.R. at 164 (citations omitted). The Moot Circuit holding below contravenes the clear congressional purpose to protect lessee s interests from any modification as a result of a debtor-lessor s pending bankruptcy. The 10

21 Moot Circuit determined that Debtor could sell estate property, free and clear of Highway s interest and without the protections specifically granted to Highway under section 365(h). (R. at 8-9). Dispossessing Highway from the property is not only a modification, but a termination of its leasehold interest the very thing Congress sought to prevent. Thus, the Moot Circuit paves the way for debtor-lessors to reject leases through section 363(f) free and clear sales and dispossess lessees despite section 365(h) s protections. Affirming the Moot Circuit would ignore Congress s intent and undermine the purposes of a specific provision within the Bankruptcy Code. 3. The more specific language within section 365(h) should govern the more general provisions within section 363(f). Sections 365(h) and 363(f) conflict because a section 363(f) free and clear sale operates as a de facto rejection, calling into question which provision prevails. In re Zota Petroleums, LLC, 482 B.R. 154, 159 (Bankr. E.D. Va. 2012). Where two provisions conflict, the Bankruptcy Code must be interpreted using principles of statutory construction. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 649 (2012). Canons of construction help courts ascertain the correct interpretation of the legislation s content. Connecticut Nat. Bank v. Germain, 503 U.S. 249, (1992). A basic underpinning of statutory interpretation is that more specific language governs general provisions. Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384 (1992) ( [I]t is a commonplace of statutory construction that the specific governs the general. ); Dishi & Sons, 510 B.R. at 702. This canon of statutory construction acts as a warning against applying a general provision when doing so would undermine limitations created by a more specific provision. Varity Corp. v. Howe, 516 U.S. 489, 511 (1996). 11

22 Section 365(h) is a specific provision, explicitly governing instances where debtors are also lessors maintaining unexpired leases. In re Taylor, 198 B.R. at 165. The language of 365(h) is precise, and clearly defines a lessee s protections in their leasehold interests. Conversely, section 363(f) does not encompass any specific areas, interests, or rights, and only governs sales free and clear of general interests. It would make little sense for section 363(f), a general and broad provision, to control over section 365(h), a specific provision providing enumerated protections for a particular interest. Dishi & Sons, 510 B.R. at 702 (reasoning that because [section] 365(h) specifically addresses the rights of non-debtor lessees in bankruptcy, it should govern over the general provisions of [section] 363(f) ); In re Churchill Properties III, L.P., 197 B.R. at 288. Thus, where section 365(h) enumerates specific rights and obligations of the lessor and lessee, and section 363(f) provides only a general ability to conduct free and clear sales, the specific language of section 365(h) must prevail over the more general language in section 363(f). In re Taylor, 198 B.R. at 165. B. A Free And Clear Sale Motion Is A Constructive Rejection Of The Lease That Triggers A Lessee s Section 365(h) Protections. A majority of courts have concluded that section 365(h) s protections apply when a debtor-lessor seeks to sell property free and clear of a lessee s leasehold interest. See In re Spanish Peaks Holdings II, LLC, 872 F.3d at 898; see also In re Haskell, L.P., 321 B.R. at 8-9; In re Taylor, 198 B.R. at ; In re LHD Realty Corp., 20 B.R. at 719. Not only is this due to canons of statutory construction, but also because allowing a debtor to conduct a free and clear sale over a lessee s leasehold interest factually operates the same as a rejection. In re Taylor, 198 B.R. at (noting clear intent of section 365(h) to protect lessees is undercut by allowing sales free and clear of a lessee s interest); cf. In re Spanish Peaks Holdings II, LLC,

23 F.3d at 899 (admitting that, factually, sale of property free and clear of a lease may be an effective rejection of the lease in some everyday sense, but refusing to recognize free and clear sales as tantamount to section 365(h) rejections). A lessee s section 365(h) protections should apply in all instances where a debtor seeks to terminate a lessee s leasehold interest, including free and clear sales under section 363(f). Free and clear sales under section 363(f) are constructive rejections of the underlying lease because the outcomes of such sales are factually the same as rejections under section A rejection has been defined as a bankruptcy estate's election to decline a contract or lease asset. It is a decision not to assume, not to obligate the estate on the contract or lease. Dishi & Sons, 510 B.R. at 701 (quoting In re Lavigne, 114 F.3d 379, 387 (2d Cir.1997)); see In re Spanish Peaks Holdings II, LLC, 872 F.3d at 899 (defining rejection 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 ). As articulated by the Seventh and Ninth Circuit Courts of Appeals, a free and clear sale is not an assumption. See In re Spanish Peaks Holdings II, LLC, 872 F.3d at 899 (identifying effect of failing to accept or reject an unexpired lease within a certain period of time is deemed a rejection); Qualitech Steel SBQ, LLC, 327 F.3d at 547 (determining a free and clear sale under section 363(f) is not an assumption as defined under section 365). Further, conducting free and clear sales is not the same as doing nothing, because it is an affirmative decision to sell property free and clear of a leasehold interest. Thus, because a free and clear sale constitutes neither an assumption nor inaction, electing to sell property free and clear of a lessee s interest can only be described as an affirmative decision not to assume, and therefore 4 The only difference occurs when rejections and free and clear sales are treated as separate events. Where courts treat section 363(f) sales as separate and distinct from section 365 rejections, lessees lose enumerated Code protections. See In re Zota Petroleums, LLC, 482 B.R. 154, (Bankr. E.D. Va. 2012); e.g., IDEA Boardwalk, LLC v. Revel Entm t Grp. (In re Revel AC, Inc.), 532 B.R. 216, 228 (Bankr. D.N.J. 2015); In re Haskell L.P., 321 B.R. at

24 equates to a rejection. Dishi & Sons, 510 B.R. at 701. Because free and clear sales can only be defined as decisions by a debtor-lessor not to obligate itself on the lease which is fundamentally equivalent to a rejection such decisions should be treated the same as section 365 rejections and invoke a lessee s section 365(h) protections. Debtor decided to conduct a free and clear sale under section 363(f), thereby making the affirmative decision not to assume Highway s lease. (R. at 6). Consequently, Debtor s election should be treated as a rejection that triggers the protections of section 365(h). In Dishi & Sons, the court defined a rejection as a decision not to obligate the estate on the... lease. 510 B.R. at 701 (citations omitted). Deciding to conduct a free and clear sale effectively severs a lessee s interests and operates as a decision by the debtor not to obligate itself on the lease. 11 U.S.C 363. Thus, the factual impact of the free and clear sale on both Debtor and Highway is the same as if Debtor rejected the lease: Debtor is no longer obligated to perform under the terms of the lease, and Debtor divests Highway of its leasehold interests. Debtor made the affirmative decision not to obligate itself on the Highway lease by electing to sell free and clear of Highway s interest, and therefore effectively rejected the lease. Lessees should not lose statutorily provided protections just because debtors seek to circumvent the Code by disguising rejections as free and clear sales. See In re Churchill Properties III, L.P., 197 B.R. at 288. By conducting a section 363(f) sale, Debtor effectively rejected Highway s unexpired lease and therefore, Highway is entitled to its 365(h) protections. C. The Moot Circuit Opinion Needlessly Eliminates Section 365(h) And Frustrates Legitimate Policies And Purposes Of Chapter 11 Reorganizations. Inherent within the Bankruptcy Code is a policy and purpose to protect innocent lessees from having their interests modified by a debtor s bankruptcy proceeding. In re Churchill 14

25 Properties III, L.P., 197 B.R. at 288. When interpreting the Bankruptcy Code, courts should not be concerned with a single word or sentence. Kelly, 479 U.S. at 43. Instead, provisions should be interpreted holistically in light of a law s object[s] and polic[ies]. Id. (citations omitted). Thus, it is necessary to consider the clear policy goals underlying section 365(h) when interpreting whether these protections apply to free and clear sales under section 363(f). The legislative history of section 365(h) evidences a strong policy goal to protect lessees interests. See In re Taylor, 198 B.R. at 165; S. Rep. No , at 5846 (1978). Allowing debtors to sell property free and clear of a leasehold interest under section 363(f) would effectively provide a debtor-lessor with means of dispossessing the lessee, a result which would appear to be in contravention of congressional intent. In re Taylor, 198 B.R. at 166; see In re Spanish Peaks Holdings II, LLC, 862 F.3d at (recognizing congressional intent to protect lessees is subservient to other purposes and interests, but failing to identify those purposes or interests); In re Churchill Properties III, L.P., 197 B.R. at 288 (noting legislative history demands that [t]he lessee's interest in a leasehold cannot be modified or changed because of a pending bankruptcy ); In re Zota Petroleums, LLC, 482 B.R. at (relying on Senate Report to conclude that section 365 mandate[s] that lessees cannot have their rights stripped away if a debtor rejects its obligation as a lessor in bankruptcy ); In re Revel AC, Inc., 532 B.R. at 228 (concluding that Haskell s reasoning that debtors cannot sell free and clear of a lessee s interest under section 363(f) and allow debtors to achieve what it could not under section 365(h) aligns with congressional intent). It is thus a clear policy goal of the Code in general, and section 365(h) in particular, to ensure that lessees obtain the full benefit of their bargain by guaranteeing a debtor s bankruptcy does not alter a lessee s interests under the lease. See In re Churchill Properties III, L.P., 197 B.R. at

26 Allowing Debtor to avoid its lease obligations to Highway by selling the property free and clear of Highway s interest substantially devalues lessee protections. There is no question that a key purpose of the Code is to protect lessee rights through section 365(h). Instead of focusing on the purpose of this provision, the Moot Circuit elevates form over substance by determining that Debtor s free and clear sale was not a rejection solely because a rejection is a specific process governed by section 365, requiring court approval, which did not occur here. (R. at 12 n.8). The majority errs in this conclusion for two reasons. First, it ignores the fact that rejecting the lease under section 365, and selling property free and clear of a lessee s interest under section 363(f), result in the same factual outcome: the lessee s interest in the leasehold is essentially terminated because of a pending bankruptcy. In re Churchill Properties III L.P., 197 B.R. at 288. While a lessee s interests are protected under section 365(h) if this result is obtained through a formal rejection, the Moot Circuit eliminates such protections if the same result is reached through a section 363(f) sale. Through this formalistic approach, the Moot Circuit ignores a policy inherent within the Code to ensure that a debtor-lessor s bankruptcy does not modify a leaseholder s interests. Second, the Moot Circuit allowed Debtor to displace Highway through a section 363(f) sale, something it is forbidden from doing under section 365(h). The Moot Circuit thus incentivizes debtors to frame rejections as free and clear sales in order to circumvent a lessee s protections under section 365(h). In determining debtor-lessors can manipulate section 363(f) to displace lessees, the Moot Circuit renders section 365(h) meaningless, and contravenes the clear policy goal of preventing a debtor s bankruptcy from terminating a lessee s interests. 16

27 D. The Seventh And Ninth Circuits, In Reviewing Factually Distinguishable Cases From The Case At Hand, Erroneously Decided That Lessee Protections Do Not Apply To Free And Clear Sales. The Seventh and Ninth Circuit Courts of Appeals wrongly decided that sections 363(f) and 365(h) are not in conflict and improperly ignored Congressional intent. Both the Seventh and Ninth Circuits follow the minority approach, viewing sections 363(f) and 365(h) as reconcilable in that section 365(h) only applies to situations where leases are truly rejected, which a section 363(f) sale does not accomplish. (R. at 11); see In re Spanish Peaks Holdings II, LLC, 872 F.3d at ; Qualitech Steel SBQ, LLC, 327 F.3d at These decisions directly contravene the majority approach, which dictates that section 365(h) s protections apply in the context of section 363(f) sales. E.g., In re Taylor, 198 B.R. at The majority approach correctly considers the conflicting nature of sections 363(f) and 365(h), and properly adheres to Congress s intent in enacting the provisions. Consequently, the Seventh and Ninth Circuits incorrectly determined that section 363(f) controls over section 365(h) by conveniently avoiding the conflict between the two provisions and ignoring congressional intent. 1. Qualitech and Spanish Peaks were wrongly decided. This Court should not follow the Seventh and Ninth Circuit s flawed reasoning in adopting the minority view regarding a debtor-lessor s rights to sell property free and clear of a lessee s interest. First, both the Seventh and Ninth Circuits failed to recognize the inherent conflict between sections 365(h) and 363(f). By ignoring this conflict, the courts erroneously fail to recognize that specific provisions must prevail over general provisions. See Morales, 504 U.S. at While both opinions rely on the fact that the two sections do not conflict to avoid applying this principle, such reasoning ignores the practical reality that section 363(f) sales are equivalent to rejections. See In re Spanish Peaks Holdings II, LLC, 872 F.3d at 899; 17

28 Qualitech Steel SBQ, LLC, 327 F.3d at (reasoning sections 363(f) and 365(h) do not conflict). Thus, where a free and clear sale is effectively the same as a rejection, there is conflict between sections 363(f) and 365(h) because each section appears to mandate an outcome that the other overrides. In re Churchill Props. III, L.P., 197 B.R. at 286 (recognizing the two provisions substantively conflict when applied together because each provision seems to provide an exclusive right that when invoked would override the interest of the other ). Where there is a potential for [substantive] conflict when applying sections 363(f) and 365(h), the Seventh and Ninth Circuits should have applied the canon of statutory construction that specific provisions apply over general ones. Id. at 288. (citations omitted) ( When there is potential for conflict, specific provisions should prevail over the more general. ) (emphasis added); Timbers of Inwood Forest Assocs., Ltd., 484 U.S. at 371 (reasoning courts should read Code provisions to produce a substantive effect that is compatible with the rest of the law ). By failing to recognize the potential for conflict between the two sections, the Seventh and Ninth Circuits mistakenly failed to apply the appropriate principles of statutory construction, and thus rendered incorrect opinions. Second, both Qualitech and Spanish Peaks serve to seriously undermine Congress s purpose in enacting sections 363(f) and 365(h). In re Taylor, 198 B.R. at 166 (relying on congressional intent to forbid debtors from dispossessing lessees under section 363(f)); In re Lee Road Partners, Ltd., 155 B.R. 55, (Bankr. E.D.N.Y. 1993) (determining Code s intent to not... deprive [a] lessee of his estate for the term for which he bargained ). Congress intended to embed within the Code the idea that the lessee s leasehold estate cannot be diminished, changed or modified due to bankruptcy s intervention. In re Lee Road Partners, Ltd., 155 B.R. at 61 ( In short, [section] 365(h) seeks to prevent forcible evictions whenever possible. ); In re 18

29 Revel AC, Inc., 532 B.R. at 228; In re Zota Petroleums, LLC, 482 B.R. at In concluding that section 363(f) allows debtors to displace tenants through free and clear sales, the Seventh and Ninth Circuits undermine Congress s, and therefore the Code s, intent to ensure lessees retain their rights even in the event of a debtor-lessor s bankruptcy. This Court should not follow the minority approach and should instead clarify that section 363(f) sales do not allow debtors to abrogate section 365(h) s expressly enumerated lessee protections. 2. Regardless of the adequacy of the Seventh and Ninth Circuit opinions, Qualitech and Spanish Peaks are distinguishable from the present case. Even if this Court were to determine Spanish Peaks and Qualitech are correctly decided, these cases are distinguishable from the case at hand. In Qualitech, the lessee neither objected to the sale, nor requested adequate protection. Qualitech Steel SBQ, LLC, 327 F.3d at 548. The Seventh Circuit concluded that because section 363(f) controls over section 365(h), and the lessee did not object to the sale motion or request adequate protection, the lessee could be divested of its possessory interest. Id. In the present case, however, Highway timely objected to the sale and requested to remain in possession under section 365(h), which effectively operated as a request for adequate protection. (R. at 7-8, 22 n.12). While there is no doubt that Highway objected to the sale, the Moot Circuit below incorrectly determined that Highway did not request adequate protection. (R. at 14). Adequate protection includes cash payments, additional or replacement liens, or such other relief... as will result in the realization by such entity of the indubitable equivalent of such entity s interest in such property. 11 U.S.C. 361(3) (2012). In the context of lessees interests, the indubitable equivalent should include continued possession. See Dishi & Sons, 510 B.R. at While a request for adequate protection is usually done through motion, the Code does not demand such a request be made in this way. See 11 U.S.C. 19

30 363(e) (2012) (recognizing adequate protection must be granted upon request, but failing to specify what constitutes a request ). Highway thus requested adequate protection by objecting to the sale and demanding continued possession per section 365(h). (R. 7-8). Claiming Highway did not request adequate protection simply because it did not bring a separate motion elevates form over substance, and ignores Highway s specific request to remain in possession, which is a form of adequate protection. See Dishi & Sons, 510 B.R. at (recognizing maintaining possession likely a form adequate protection for lessees). Thus, Qualitech and the case at hand are distinguishable because Highway both objected to the sale and requested adequate protection, making Qualitech s reasoning inapplicable. Spanish Peaks is distinguishable from the facts of this case for similar reasons. Although the lessees in Spanish Peaks objected to the sale, they did not request adequate protection until long after the sale took place, waiting until they appealed the matter to the district court. In re Spanish Peaks Holdings II, LLC, 872 F.3d at 896. Conversely, Highway requested adequate protection by objecting to the sale and demanding continued possession immediately upon the sale of the property. (R. at 7-8). Further, the Spanish Peaks court relied upon the idea that, in some circumstances, protecting the rights of lessees reduces the value of the estate, and therefore undermines the goal of maximizing creditor recovery. In re Spanish Peaks Holdings II, LLC, 872 F.3d at (recognizing property may demand lower price when encumbered by a lease). This is not one of those circumstances. 4th Street purchased the property in a credit bid, using no more than the full amount it was owed. (R. at 7). Therefore, the sale did not result in any cash that could be distributed to other creditors. (R. at 7). Nonetheless, the Committee, through their settlement with 4th Street, received cash distributions that it likely would not have received in any other circumstance. (R. at 8). The only creditor whose recovery amount 20

31 possibly could have been diminished by protecting Highway s rights under the lease was Highway itself. 5 Allowing Debtor to sell property free and clear of Highway s interests does not maximize creditor recovery. If Highway's interests remained, 4th Street still would have been the only bidder, and would have had no reason to bid more than its full credit amount. Thus, regardless of whether or not Highway retains its interests, there is no excess cash to distribute to creditors. Consequently, Spanish Peaks s reasoning that protecting the rights of lessees undermines maximizing creditor recovery is inapplicable to the case at hand because there is no creditor recovery to be had. Even if the Seventh and Ninth Circuits correctly decided that section 363(f) controls over section 365(h), this Court should not follow their underlying reasoning because the facts of the present case are distinguishable from the facts in Spanish Peaks and Qualitech. II. THE MOOT CIRCUIT ERRED IN APPROVING THE UNSECURED CREDITOR COMMITTEE SETTLEMENT AS THE SETTLEMENT PAYMENT VIOLATES THE ABSOLUTE PRIORITY RULE OF SECTION 1129(b)(2)(B)(ii). The Committee Settlement violates the absolute priority rule in bypassing Highway s administrative expense claim to go directly and entirely to the unsecured creditors trust. (R. at 28). In this instance, as Moot Circuit Judge Petty notes, Highway is being punished for, not protected by, its willingness to support the Debtor post-petition by relying on its allowed administrative expense. (R. at 27). The settlement s structure evidences clear intent to circumvent the priority scheme that would otherwise apply in conversion or dismissal. To ensure that the priority strictures of the Code are complied with to the fullest extent, pre-plan settlement agreements should adhere to the absolute priority rule. 5 It is unclear from the record whether or not there are any creditors other than those specifically mentioned therein. For purposes of this argument, Highway assumes that all of Debtor s creditors were specifically referenced in the record. 21