Supreme Court of the United States

Transcription

1 No IN THE Supreme Court of the United States OCTOBER TERM, 2017 IN RE HIGH ROCKS, INC., DEBTOR, HIGHWAY 61., PETITIONER V. HIGH ROCKS, INC., RESPONDENT. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT BRIEF FOR THE RESPONDENT Team R26 Counsel for the Respondent Oral Argument Requested

2 QUESTIONS PRESENTED I. Whether the bankruptcy court correctly approved 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 protections for lessees in section 365(h) of the Bankruptcy Code? II. Whether the bankruptcy court correctly approved a contested gift settlement involving 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

3 TABLE OF CONTENTS Questions Presented..i Table of Contents...ii Table of Authorities..iv-vi Opinions Below...vii Statement of Jurisdiction vii Statement of Statutory Provisions.vii Statement of Facts.1 Summary of Argument 4 Arguments and Citation of Authority 5 I. HIGH ROCKS FREE AND CLEAR SALE OF ITS ASSETS UNDER OF SECTION 363(f) OF THE BANKRUPTCY CODE DOES IMPLICATE AND THUS DOES NOT CONFLICT WITH LESSEE PROTECTIONS IN SECTION 365(h) OF THE BANKRUPTCY CODE. 5 A. The plain meaning and lack of cross-references specifically between sections 363(f) and 365(h) show a lack of conflict because each statute was intended to apply in distinct circumstances and per Congress s intent to balance lessees rights against those of creditors and debtors. 6 B. The 363 sale of the High Rocks amphitheater to 4th Street did not terminate Highway 61 s interest in the amphitheater lease because the lease was not rejected...9 i. High Rocks did not reject the amphitheater lease...10 ii. 365(h)(1) only applies to cases where a lease has actually been rejected. 11 C. Sales of leases free and clear of any liens or encumbrances, under section 363, does not eviscerate a landlord s protections under the Bankruptcy Code...12 i. 363(f) requires the satisfaction of one of at least five statutory requirements before the sale of property free and clear. 13 ii

4 ii. 363(e) empowers a landlord, upon request of the court, to seek adequate protection of its interest when his lease is sold free and clear...15 II. THE BANKRUTPCY COURT CORRECTLY APPROVED THE SETTLEMENT BECAUSE COURTS MAY APPROVE A SETTLEMENT THAT POSSIBLY VIOLATES THE PRIORITY RULE AS LONG AS IT MEETS THE FAIR AND EQUITABLE THRESHOLD. 17 A. The court correctly determined the Committee Settlement was a fair and equitable settlement under the Bankruptcy Code and common law. 18 i. Rule 9019 of the Federal Rules of Bankruptcy Procedure authorize bankruptcy courts to approve settlements that are fair and equitable 19 ii. A bankruptcy court may approve a settlement that violates the absolute priority rule if the parties to the settlement approve and the court articulates its reasoning for approving the settlement B. The Bankruptcy Court correctly determined the approval of the committee settlement did not violate the absolute priority rule...23 i. The absolute priority rule only applies to distributions of property of the estate in the context of a plan confirmation under Chapter 11 of the Bankruptcy Code. 24 ii. Even if the absolute priority rule applies to such settlements, 4th Street s gift was its own money and not property of the estate...26 C. The Court correctly held that Jevic is not a bright line rule but rather, allows for rare cases of non-consensual priority-skipping settlements such as the Committee Settlement in this case. 28 i. The Committee Settlement occurred early on in the bankruptcy case and not at its final disposition ii. The Committee Settlement served a significant bankruptcy related purpose by allowing creditors to pursue legal claims of substantial value in order to increase the potential for more asset distribution to the betterment of all creditors...30 Conclusion 32 Appendix A I iii

5 Appendix B.VI CASES Adelphia Recovery Trust v. HSBC Bank USA (In re Adelphia Recovery Trust), 634 F.3d 678 (2nd Cir. 2011)... 21, 22 Canzano v. Ragosa (In re Colarusso), 382 F.3d 51 (1st Cir. 2004)... 22, 23 Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972) Conn. Nat'l Bank v. Germain, 503 U.S. 249 (1992) Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510 (1941) Czyzewski v. Jevic Holding Corp. (In re Jevic), 137 S. Ct. 973 (2017)... 25, 28, 29, 30 Dishi & Sons v. Bay Condos LLC, 510 B.R. 696, (2014)... 14, 15, 18 Eastover Bank for Sav. v. Sowashee Venture (In re Austin Dev. Co., 19 F.3d 1077 (5th Cir. 1994)... 16, 17 Group of Institutional Investors v. Chicago, M., S. P. & P. R. Co., 318 U.S. 523 (1943) In re Chicago Rapid Transit Co., 196 F.2d 484 (C. A. 7th Cir. 1952) In re DBSD N. Am., Inc., 634 F.3d 79 (2nd Cir. 2010)... 26, 27 In re Dewey & LeBoeuf LLP, 478 B.R. 627 (Bankr. S.D.N.Y. 2012)... 29, 30 In re Fryar, 570 B.R. 602 (Bankr. E.D. Tenn. 2017) In re Haddad, 572 B.R. 661 (E.D. Mich. 2017) In re LCI Holding Co., 802 F.3d 547 (3rd Cir. 2015) In re Martin, 91 F.3d In re Pullman Constr. Indus., 107 B.R. 909 (N.D. Ill. 1989)... 24, 25, 30 In re Zota Petroleums, LLC, 482 B.R. 154 (2012) Koepp v. Holland, 593 Fed. Appx. 20, (2nd Cir. 2014) La Jolla Mortg. Fund v. Rancho El Cajon Associates, 18 B.R Macarthur Co. v. Johns-Manville Corp., iv

6 837 F.2d Morgan Olson, LLC v. Frederico (In re Grumman Olson Indus.), 445 B.R. 243 (Bankr. S.D.N.Y. 2011) Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2nd Cir. 2007)... 26, 27, 28, 29 Official Comm. of Unsecured Creditors v. CIT Grp./Bus. Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3rd Cir. 2015)... 30, 31, 34 Olson v. Anderson (In re Anderson), 377 B.R. 865 (B.A.P. 6th Cir. 2007) Perrin v. United States, 444 U.S. 37 (1979) Precision Industries decision. See Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions (In re Spanish Peaks Holdings II, LLC), 872 F.3d 892 (9th 2017)... Passim Protective Committee for Indep. Stockholders of TMT Trailer Ferry v. Anderson, 390 U.S. 414 (1968)... 26, 27, 28, 29 Qualitech Steel SBQ, LLC, 327 F.3d 537 (2003)... 12, 14, 18, 19 R. at 4). Skyline also agreed to construct a, 30 story, Razavi v. Commissioner of Internal Revenue, 74 F. 3d 125 (6th Cir. 1996) S. Motor Co. v. Carter-Pritchett-Hodges, Inc. (In re MMH Auto. Group, LLC), 385 B.R. 347 (2008) Thirteenth Circuit below. ASM Capital, LP v. Ames Dep t Stores, Inc., (In re Ames), 582 F.3d 422 (2d Cir. 2009) United States v. Gonzales, 520 U.S. 1 (1997) United States v. Nordic Vill. Inc., 503 U.S. 30 (1992) Watt v. Alaska, 451 U.S. 259 (1981)... 14, 17 Whitman v. Am. Trucking Assns., 531 U.S. 457 (2001) STATUTES 11 U.S.C. 365(d)(2) U.S.C. 365 (2016)... 12, 14, 17, U.S.C. 541(a)(1) USCS USCS USCS 552(b) USCS USCS 18a(a) USCS 18a(b) v

7 15 USCS 18a(e)(2) USCS 18a(g)(2) Passim 363(b) (e)... 11, 19, (f)... Passim 363(l) (a) (h)... Passim 365(h)(1) (h)(1)(A)... 12, (b)(1) (a) (f)(2) RULES Fed. R. Bankr. P , 25, 26 Fed. R. Bankr. P. 9019(a)... 26, 27 OTHER AUTHORITIES Downtown Ath. Club of N.Y. City, 2000 U.S. Dist. LEXIS 7917Downtown Ath. Club of N.Y. City, 2000 U.S. Dist. LEXIS or The Sale of Real Property Free And Clear of a Lease: Making Sense of Section 363(f) and 365(h) of the Bankruptcy Code, 24 Am. Bankr. Inst. L. Rev. 279 (2016) United States Tr. v. Ste Bri Enters., 2017 U.S. Dist. LEXIS United States Tr. v. Ste Bri Enters., 2017 U.S. Dist. LEXIS vi

8 OPINIONS BELOW The decision and order of the U.S. Bankruptcy Court for the District of Mood and of the U.S. District Court for the District of Moot are unreported and are therefore unavailable. The decision for the U.S. Court of Appeals for the Thirteenth Circuit is also unreported. This opinion is set forth in the Decision of the U.S. Court of Appeals for the Thirteenth Circuit in Case No , dated July 14, 2017, and is incorporated in the record on appeal (hereinafter R. ). STATEMENT OF JURISDICTION The formal statement of jurisdiction has been waived pursuant to competition rule VIII. STATUTORY PROVISIONS The statutory provisions listed below are relevant to the present case and are produced in Appendices A and B. 11 U.S.C. 363, 365, 541; Fed. R. Bankr. P vii

9 STATEMENT OF FACTS This case involves a creditor-lessee attempting to thwart the sale and subsequent equitable settlement of a resort development it invested in. High Rocks, Inc. ( High Rocks ) began the development of a casino and resort outside of the City of Rainier in the State of Moot in May of (R. at 3-4). The development was financed in large part, by an $800 million secured loan from North Country Bank ( North Country ). (R. at 4). High Rocks selected Skyline Construction, Inc. ( Skyline ) to serve as general contractor for the development because it had substantial experience in building hotel/resort properties and entertainment venues. (R. at 4). Skyline also agreed to construct a 30 story, 400-room hotel tower, conference facilities, restaurants, and a 7,000-seat outdoor amphitheater. (R. at 4). However, from the start, construction faced significant obstacles, which both the Debtor and the Committee agree are due to Skyline s mismanagement. (R. at 4). For example, Skyline repeatedly attempted to cut costs by using cheap construction materials. (R. at 4). Most notably, Skyline used improper plumbing materials in the hotel tower, causing there to be insufficient water pressure in most of that building. (R. at 4) As a result, the plumbing needed to be replaced. (R. at 4). Skyline did successfully complete construction of the amphitheater s covered stage, concession stands, restrooms, ticket office, and VIP Lounge. (R. at 4). However, in due to the ongoing problems associated with construction, High Rocks exercised its right to terminate the contract with Skyline before further issues arose. (R. at 4). At the time the contract was terminated, significant work remained on the hotel and casino and Skyline had failed to install the amphitheater s seats, sound equipment, and the specialized acoustical panels. (R. at 4-5). Prior to the commencement of construction, High Rocks entered into an agreement to lease the amphitheater to Highway 61, Inc. ( Highway ). (R. at 5). The lease agreement 1

10 ( Highway Lease ) between High Rocks and Highway had a term of thirty years. (R. at 5). The Highway Lease contemplated tha Highway would manage, market, and operate the music venue for $400,000 per year plus a portion of ticket and concession sales. (R. at 5). In January of 2015, High Rocks hired a new general contractor to complete the hotel and casino, but the contractor did not have the expertise to complete the amphitheater. (R. at 5). Frustrated, in February of 2016, North Country sold its note to 4 th Street, an entity which owns and operates numerous resort and entertainment properties. (R. at 5). 4 th Street acknowledges that it acquired the debt as part of a loan to own strategy and, in furtherance of that strategy, commenced a foreclosure action in June (R. at 5). In order to halt the foreclosure, High Rocks commenced this voluntary chapter 11 bankruptcy case in the United States Bankruptcy Court for the District of Moot in July (R. at 5). Soon after, Highway approached the High Rocks and offered to install the amphitheater s seats, sound equipment, and acoustical panels. (R. at 6). With the bankruptcy court s approval, High Rock and Highway entered into a post-petition contract under which Highway agreed to finish the amphitheater in exchange for a $2 million deferred payment until after the development opened to the public. (R. at 6). Highway completed the installation of the amphitheater s seats, sound equipment, and acoustical panels by November of (R. at 6). Because the hotel tower and casino were still unfinished, High Rock, the Committee, and Highway, stipulated under section 503(b)(1) of the Bankruptcy Code that Highway was entitled to an administrative expense for $2 million. (R. at 6). No parties objected and it was allowed pursuant to a final order of the bankruptcy court. (R. at 6). Regardless, High Rock s problems continued as the hotel and casino project was again delayed. (R. at 6). In late December of 2016, due significant pressure from 4 th Street, financial 2

11 troubles, and sufficient cash flow to fund a plan of reorganization, High Rock ceased construction and filed a motion to sell substantially all of its assets free and clear of all liens, claims, encumbrances and interests pursuant to section 363(f) of the Bankruptcy Code. (R. at 6). The motion expressly provided that, at the election of the winning bidder, the sale would be free and clear of Highway s leasehold interest. (R. at 7). Prior to the auction sale, the Committee alleged lender liability claims against 4 th Street, challenging the validity and extents of its claims and liens. (R. at 7). The Committee also investigated and determined High Rock has various very valuable claims against Skyline. (R. at 7). Due to High Rock s insufficient resources to investigate or pursue said claims against Skyline, the claims were assigned as part of an unrelated settlement to a litigation trust, naming the unsecured creditors as the sole beneficiaries. (R. at 7). If successful, the claims would result in a meaningful distribution to the unsecured creditors. (R. at 7). On January 11, 2017, 4 th Street was the only qualified bidder at the auction and successfully credit bid the full amount of its secured debt. (R. at 7). 4 th Street notified all parties of its intention to operate the amphitheater itself, free of Highway s leasehold. (R. at 7). Two objections were filed. (R. at 7). The Committee objected due it the informal allegations against 4 th street. (R. at 7). Highway also objected asserting it was entitled to remain in possession of the amphitheater under its lease, despite the free and clear nature of the sale, pursuant to section 365(h) of the Bankruptcy Code. (R. at 7-8). Along with the sale objection, Highway wrote a letter electing to retain its possessory rights in the property claiming the sale of the amphitheater was the functional equivalent of a rejection of the lease. (R. at 8). Days before sale hearing, High Rock, the Committee, and 4 th Street reached a settlement of the Committee s objection (the Committee Settlement ). (R. at 8). The Committee 3

12 Settlement stipulated that in exchange for the withdrawal of the Committee s objection and a release of all claims against 4 th Street, 4 th Street would gift $2 million of its own money for the express purpose of funding the unsecured creditors trust s claims against Skyline. (R. at 8). At the sale hearing, on top of Highway s previous objections, it asserted a new objection; claiming that the Committee Settlement should not be approved because the funds in the settlement proceeds were not distributed in accordance with the absolute priority rule. (R. at 8). Nonetheless, the bankruptcy court approved the Committee Settlement, the sale to 4 th Street, and concluded that the absolute priority rule was not implicated. (R. at 9). The court found that the settlement was in the best interest of all parties. (R. at 9). Lastly, the court held that section 363(f) trumped whatever rights Highway may have had in the property. (R. at 8). Highway appealed to the district court, and that court affirmed the rulings of the bankruptcy court. (R. at 9). Highway appealed to the Thirteenth Circuit Court of Appeals. (R. at 9). The Thirteenth Circuit affirmed the district court s rulings stating that sectioned 363(f) authorized the sale of the amphitheater free and clear of the Highway Lease. (R. at 9). Additionally, the Thirteenth Circuit held that the Committee Settlement was a permissible settlement that does not implicate the absolute priority rule. (R. at 14). SUMMARY OF THE ARGUMENT The Thirteenth Circuit correctly held that a debtor may sell real property free and clear of any interests in such property pursuant to section 363(f) of the Bankruptcy Code subject to lessees protections under section 363(e), which affords lessees an opportunity to affirmatively and adequately protect his or her interest in the property. It also correctly held that the bankruptcy court s approval of a settlement was fair and equitable to all parties. Under section 363(f) of the Bankruptcy Code, a debtor may sell property... free and clear of any interest in 4

13 such property as long as one of five statutory requirements are met and providing the lease is not rejected under section 365(h). This affords the debtor the chance to remedy his or her debts while adequately protecting the interests of the lessees. The settlement was the most adequate option available as it gives the greatest potential benefit to the Debtor and its creditors. Lower courts have approved interim distributions that violate the absolute priority rule where the distribution, in violation of the priority scheme, furthers a significant Code-related objective. The Settlement acts to preserver the debtor while also providing an avenue to ensure the most disfavored creditors are better off. Additionally, the settlement occurred early on in the bankruptcy case, allowing adequate time for the other creditors to substantiate their claims. Lastly, the Settlement should be approved because it does not violate the absolute priority and confirmation plan rules. The funds from the settlement were a gift from 4 th Street in return for High Rock s dismissal of potential claims. This money was not a part of the estate at the onset of the bankruptcy proceeding and was not a proceed of the estate either. As such, Highway never had an interest in those funds. ARGUMENTS AND CITATION OF AUTHORITY De novo review is required for questions of law regarding the decisions of Thirteenth Circuit below. ASM Capital, LP v. Ames Dep t Stores, Inc., (In re Ames), 582 F.3d 422, 426 (2d Cir. 2009). Under a de novo standard of review, the reviewing court decides an issue as if the court were the original trial court in the matter. Razavi v. Commissioner of Internal Revenue, 74 F. 3d 125, 127 (6th Cir. 1996). I. HIGH ROCKS FREE AND CLEAR SALE OF ITS ASSETS UNDER OF SECTION 363(f) OF THE BANKRUPTCY CODE DOES IMPLICATE AND THUS DOES NOT CONFLICT WITH LESSEE PROTECTIONS IN SECTION 365(h) OF 5

14 THE BANKRUPTCY CODE. The sale of substantially all of the assets of High Rocks should continue free and clear of any interests in such property notwithstanding Highway 61 s claim that such a sale implicates and thus conflicts with additional lessee protections under section 365(h)(1)(A) of the Bankruptcy Code. 11 U.S.C. 365 (2016). By its express terms, such protections are only triggered when the debtor is the lessor and expressly rejects an unexpired lease of real property. Id. Only when these two provisions are satisfied can the non-debtor party exercise the option to retain its possessory leasehold interest. Id. Thus, in such circumstances, sections 363(f) and 365(h) do not conflict. Until recently, the Precision Industries decision was the only appellate case directly addressing this issue. Qualitech Steel SBQ, LLC, 327 F.3d 537 (2003). However, in recent years, courts have embraced Precision Industries decision. See Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions (In re Spanish Peaks Holdings II, LLC), 872 F.3d 892 (9th 2017); In re Downtown Ath. Club of N.Y. City, 2000 U.S. Dist. LEXIS 7917; S. Motor Co. v. Carter- Pritchett-Hodges, Inc. (In re MMH Auto. Group, LLC), 385 B.R. 347 (2008). A. The plain meaning and lack of cross-references specifically between sections 363(f) and 365(h) show a lack of conflict because each statute was intended to apply in distinct circumstances and per Congress s intent to balance lessees rights against those of creditors and debtors. Statutory conflict only occurs where one statute prohibits a specific activity while another statute sanctions and regulates it. Anthony Asebedo, The Sale of Real Property Free And Clear of a Lease: Making Sense of Section 363(f) and 365(h) of the Bankruptcy Code, 24 Am. Bankr. Inst. L. Rev. 279, 342 (2016). However, sections 363(f) and 365(h) apply to distinct sets of circumstances. For instance, the text of section 363(f) confers a right to sell property free and clear of any interest, without excepting from that authority leases entitled to the protections of section F.3d at 898. However, in the same section, section 363(l) is the sole provision 6

15 which is subjected to section 365(h). 11 U.S.C. 363 (2016). The lack of cross-reference between sections 363(f) and 365(h) is an indication that Congress did intend for both provisions to live in harmony with the other. Asebedo, 24 Am. Bankr. Inst. L. Rev. at 342. Second, the plain language of both sections reveal that they apply in different circumstances. When interpreting statutes, the language itself must be referenced and courts must presume that a legislature says in a statute what it means and means in a statute what it says there. Conn. Nat'l Bank v. Germain, 503 U.S. 249, (1992). Courts must start by examining the language itself to divine meaning of the words in their ordinary, contemporary, and common meaning. Id.; Perrin v. United States, 444 U.S. 37, 42 (1979). The plain language of section 363(f) applies only to sales of real property. 11 U.S.C The statute also confers a right to sell property free and clear of any interest. Pinnacle, 872 F.3d at 898. Moreover, [r]ead naturally, the word any has an expansive meaning, that is, one or some indiscriminately of whatever kind. United States v. Gonzales, 520 U.S. 1, 5 (1997) (quoting Webster's Third New International Dictionary 97 (1976)). There is no express limit on the word that any modifies, indicating that 363(f) sales are indeed free of any and all interests, including leasehold interests. On the other hand, section 365(h)(1)(A) suggests a narrower scope that limits its lessee protections only in instances where the trustee rejects an unexpired lease of real property under which the debtor is the lessor. 11 U.S.C Therefore, only in the event of a rejection of an unexpired lease will the lessee protections be triggered. Id. See In re Zota Petroleums, LLC, 482 B.R. 154 (2012) (section 365 provisions applied where the sublease had been rejected prior to the sale). The scope of section 365 is not sufficiently broad to apply to any and all events that threaten the lessee s possessory rights, most notably section 363 sales. 327 F.3d at

16 Both the Seventh and Ninth Circuit Courts have addressed this issue holding that the statutory provisions themselves do not suggest that one supersedes or limits the other. 872 F.3d at 898 (quoting Precision, 327 F.3d at 547.)). In Pinnacle, the court read the statute to give effect to each... while preserving their sense and purpose. 872 F.3d at 899 (quoting Watt v. Alaska, 451 U.S. 259, 267 (1981)). The court agreed with the Seventh Circuit that section 363(f) and 365(h) did not conflict stating that [w]here there is a sale, but no rejection (or a rejection, but no sale), there is no conflict. Id.; See Dishi & Sons v. Bay Condos LLC, 510 B.R. 696, (2014). In Pinnacle, Spanish Peaks, a 5,700-acre resort entered into a lease with Spanish Pinnacle and Opticom. Id. at 895. When Spanish Peaks began taking on operational losses and could no longer afford its loan payments, it filed for bankruptcy and moved to sell all of its assets free and clear of any and all liens, claims, encumbrances and interests. Id. Both lessees did not request adequate protection for their leasehold interests prior to the sale. Id. After Spanish Peaks moved the bankruptcy court for an order authorizing and approving a sale, both lessees objected. However, the court authorized the sale and an auction occurred. Id. The lessees renewed their objections but the bankruptcy still held the sale free and clear of the leases. Id. at 896. Upon appeal, lessees sought protection under section 365(h) arguing that it trumped section 363(f). The court focused on the statutory language of the statutes, agreeing with the Seventh Circuit that the sections in fact did not conflict because section 365(h) only applied to cases in which the lease in question had been rejected prior to the sale. Id. at 899. Since, no rejection occurred, the court reasoned that according to the plain text of the statute and a lack of cross-references subjecting 363(f) to 365(h), no lessee protections were triggered and the sale was affirmed. Id. 8

17 In the case at hand, our client, High Rocks, also entered into a lease with Highway 61, similar to the parties in Pinnacle. Upon encountering negligent handiwork by one of its contractors and pressure from its creditors, High Rocks was required to declare bankruptcy and moved to sell all of its assets. As in Pinnacle, where both lessees objected to the sale, Highway 61 also did not request adequate protection for its leasehold interest prior to the sale hearing. Also, similar to Pinnacle, the bankruptcy court approved the sale and held that section 363(f) trumped Highway 61 s rights. On appeal, Highway 61, like the lessees in Pinnacle, attempted to claim section 365(h) protections but the court below rightfully looked at the statutory language, declining to read a conflict where between the statutes where none existed. It also found that because no rejection prior to the sale had been issued, section 365(h) was not implicated all. Therefore, there is no conflict between the provisions and the sale should move forward free and clear of any interests, as is consistent with case law in the Seventh, Ninth Circuits, and numerous courts below. B. The 363 sale of the High Rocks amphitheater to 4th Street did not terminate Highway 61 s interest in the amphitheater lease because the lease was not rejected. Highway 61 s lease of the amphitheater did not terminate upon the 363 sale to 4th Street because the amphitheater lease was not rejected. Under section 365(a), a trustee may [] reject any [] unexpired lease of the debtor. 11 U.S.C. 365(a). This duty to reject must be made within 60 days of the bankruptcy filing which in turn causes a breach of contract to occur. 1 However, 365(h) only applies when a rejection has occurred, which did not happen in this case U.S.C. 365(d)(2); See Eastover Bank for Sav. v. Sowashee Venture (In re Austin Dev. Co.), 19 F.3d 1077 (5th Cir. 1994) ( at any time before the confirmation of a plan but the court, on the request of any party to such contract or lease, may order the trustee to determine within a specified period of time whether to assume or reject such contract or lease. ) 2 Here, the Highway Lease was neither assumed nor rejected by the Debtor prior to the proposed sale of its assets to 4th Street. R

18 The Thirteenth Circuit s ruling should be affirmed because the 363 sale to 4th Street did not implicate a rejection of the amphitheater lease under section 365(h). First, the amphitheater lease was not rejected by High Rocks or the bankruptcy trustee. The amphitheater was sold appropriately according to the provisions of section 363(f). Second, a lease subject to section 365(h) can only be rejected if the lease was actually rejected. No affirmation or confirmation of rejection was made by High Rocks, therefore, no rejection actually occurred. i. High Rocks did not reject the amphitheater lease. The lease executed between High Rocks and Highway 61 was not rejected by High Rocks because to do so would require High Rocks to affirmatively reject the lease. To better understand why High Rocks did not reject the amphitheater lease, as posited by Highway 61, a brief look at statutory construction can shed some light on the on how a rejection of a lease works. When reading bankruptcy statutes, courts must "read the statutes to give effect to each if [one] can do so while preserving [ones] sense and purpose." Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions, LLC (In re Spanish Peaks Holding, LLC), 872 F.3d 892, 899 (9th Cir. 2017) (quoting Watt v. Alaska, 451 U.S. 259, 267 (1981)). Though rejection is not defined in the Bankruptcy Code, courts have universally interpreted rejection as an affirmative declaration by the trustee [or debtor] that the estate will not take on the obligations of a lease or contract made by the debtor. Id. Hence, a rejection can only apply when a lease has been truly rejected. See Eastover, 19 F.3d at 1082 (5 th Cir. 1994) ( Throughout 365, rejection refers to the debtor's decision not to assume a burdensome lease or executory contract. ). In Eastover, a debtor who owned a long-term ground lease filed for Chapter 11 bankruptcy. Id. at During the bankruptcy proceedings, the debtor neglected to assume or reject the lease within the 60 days period mandated by 365(d)(2). Id. Though the lower courts 10

19 deemed the lease rejected and therefore terminated the lease, the Fifth Circuit reversed their decision because the rejection of the lease didn t terminate the lease as defined in the Bankruptcy Code. Id. Instead, the Court of Appeals determined that the lease was actually rejected per section 365 but held that the rejection only amounted a breach of contract. Id. at In making its ruling, the Fifth Circuit noted that the debtor s inaction directly implicated the time requirements of 365. Id. The case in chief, here, is distinguishable from Eastover. First, High Rocks did not affirmatively reject the lease and did not fail to act timely in determining whether to reject the Highway Lease like the debtor in Eastover. Moreover, as stated below, the Highway Lease was not subject to 365 because the 363(f) sale complied with the requirements of that code. Second, the Thirteenth Circuit found that High Rocks did not affirmatively reject the Highway Lease. Taken together, it is clear that High Rocks did not reject the Highway Lease so 365(h) fails to apply in this case. ii. 365(h)(1) only applies to cases where a lease has actually been rejected. A lease can only be rejected under section 365(h)(1) if the lease in question has truly been rejected. The purpose of assumption and rejection, under 365(h) is to avoid burdening the estate with such contracts by allowing it to decide which contracts to assume. Dishi & Sons v. Bay Condos LLC, 510 B.R. 696, 705 (5th Cir. 2014). To effectuate a rejection, the debtor or trustee must comply with the provisions of 365(h) which courts have found to only occur when a lease is actually rejected. Precision Indus. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 548 (7th Cir. 2003). In Precision, the debtor, Qualitech, filed a Chapter 11 bankruptcy after accruing a large amount of debt. 327 F.3d at 540. Prior to the bankruptcy filing, Qualitech entered into a to build 11

20 a supply warehouse and a lease agreement for that property with two companies (collectively referred to as Precision ). Id. A sale of substantially all of the debtor s assets at a 363 sale occurred with no objections by Precision. Id. at 541. The sale closed without Qualitech assuming the Precision Lease. Id. The effect of this failure to assume or reject the Precision Lease resulted in the lease being deemed de facto rejected. Id. After going from district court back to the bankruptcy court, the Seventh Circuit was left to decide if Precision had possessory rights under 365(h) by way of the execution of a 363(f) sale. Id. at 543. In ruling against Precision, the court held that [w]here the debtor remains in possession thereof but chooses to reject the lease, section 365(h) comes into play and the lessee retains the right to possess the property. Id. at 548 (emphasis added). Unlike the case in Qualitech, where there was an actual rejection of the lease per the debtor s act of failing to timely assume the lease, here, High Rocks did not fail to assume or reject the lease because 365(h) only applies when a debtor chooses to reject a lease or is implicated by the time restrictions of 365(d)(2). In Qualitech, the bankruptcy court determined the lease was actually rejected where, here, in this case the Thirteenth Circuit found that no such rejection took place. The judicial determination made by the Thirteenth Circuit should be upheld because no lease was rejected and 365(h) only comes into play when a affirmative rejection has occurred. C. Sales of leases free and clear of any liens or encumbrances, under section 363, does not eviscerate a landlord s protections under the Bankruptcy Code. Under section 363 of the Bankruptcy Code, a sale of property free and clear of all encumbrances does not terminate a landlord s protection because there are built-in safeguards to protect the interest of an adversely affected party by a 363 sale. First, section 363(f) requires that 12

21 one of five requirements be satisfied in order for a sale free and clear. 11 U.S.C. 363(f). Secondly, section 363(e) provides on request of an entity that has an interest in property sold by the trustee [or] the court, with or without a hearing, shall prohibit or condition such sale as is necessary to provide adequate protection of such interest. 11 U.S.C. 363(e). This Court should affirm the Court of Appeals because the 363 sale of High Rocks amphitheater did not terminate Highway 61 s protections under the Bankruptcy Code. First, section 363(f) stipulates that a sale of property free and clear of any liens or encumbrances must satisfy one of five requirements, one of which was stipulated to by the parties in dispute in this case. Second, section 363(e) stipulates that a bankruptcy trustee or court must ensure that sale of property under 363(f) provides adequate protection for the parties in interest. For the foregoing reasons, High Rocks 363(f) sale satisfied the requirements for a free and clear sale and Highway 61 could have requested the bankruptcy court to provide adequate protection for Highway s lease interest. i. 363(f) requires the satisfaction of one of at least five statutory requirements before the sale of property free and clear. To satisfy the section 363(f) of the Bankruptcy Code in a sale of property free and clear, one of five requirements must be met. Section 363(f) specifies that to proceed with a sale of property free and clear of any interest in such property of an entity other than the estate the Trustee (or Debtor-in-Possession) must satisfy one of the following requirements: (1) any applicable nonbankruptcy law permits sale of such property free and clear of any interest; (2) such entity consents; (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) such interest is in bona fide 13

22 dispute; and (4) such entity could be compelled to accept a money satisfaction of such interest. 11 U.S.C. 363(f). By satisfying one of the five requirements, property of the estate can be sold free and clear so that the Debtor avoids any fear of an estate creditor attempting to reassert its security claim. See Morgan Olson, LLC v. Frederico (In re Grumman Olson Indus.), 445 B.R. 243, 249 (Bankr. S.D.N.Y. 2011) ( By its terms, 363(f) cleanses the transferred assets of any attendant liabilities, and allows the buyer to acquire them without fear that an estate creditor can enforce its claim against those assets. ). Though specified in section 363(b), there is a general requirement of 363 to include the creditor s right to notice and an opportunity to be heard before proceeding with a sale. 11 U.S.C. 363(b); Koepp v. Holland, 593 Fed. Appx. 20, (2nd Cir. 2014) ( Bankruptcy courts cannot extinguish the interests of parties who lacked notice of or did not participate in the proceedings. ). Further, bankruptcy courts have the power to approve sales that meet the any one of the five requirements of 363(f). See Macarthur Co. v. Johns-Manville Corp., 837 F.2d 89, ( The Bankruptcy Court having jurisdiction to order the sale of the Bankrupt's property had jurisdiction to enjoin a lien-holder from attempting to assert his lien against property in the hands of a purchaser who has acquired from the Bankruptcy Court a title free and clear of liens and encumbrances. ); See also, Adelphia Recovery Trust v. HSBC Bank USA (In re Adelphia Recovery Trust), 634 F.3d 678, (2nd Cir. 2011) ( As the bankruptcy court made clear, if the Banks then invoked 363(f)(2) and withheld consent for the sale, it would have delayed approval of the sale until ownership of the lien rights were resolved. ) In Adelphia, a debtor-in-possession attempted to object to a 363 sale claiming a fraudulent conveyance occurred by three creditor banks. 634 F.3d at 682. The bankruptcy court 14

23 had to determine whether the debtor-in-possession was barred from bringing its objection because it had participated in and facilitated a sale of the assets of a different debtor-inpossession, to which it was a creditor, while remaining silent about the possibility that it would bring fraudulent conveyance claims with respect to its prior take-outs of loans secured by those assets. Id. In affirming the lower court s decision, the Second Circuit Court of Appeals determined the bankruptcy court properly barred the debtor-in-possessions from objecting to the sale because it failed to bring a proper 363(f)(2) objection. Id. at Here, in this case, as noted by the Thirteenth Circuit, the parties have stipulated that one or more of the requirements of section 363(f) have been satisfied. Moreover, Highway 61 had ample notice and an opportunity to be heard prior to the sale. In fact, 4th Street was the only creditor that showed up to the sale. To allow Highway 61 s objection to the sale stand, would be to ignore the Bankruptcy Code and its tenets of judicial deference. Highway 61 had an opportunity to participate in the sale but failed to show up. Similar to Adelphia, where the 363(f) requirements were satisfied, here, the bankruptcy court approved the sale because at least one of the 363(f) requirements were satisfied and the parties, including Highway 61, stipulated to that fact. ii. 363(e) empowers a landlord, upon request of the court, to seek adequate protection of its interest when his lease is sold free and clear. If Highway 61 wanted to properly apply for relief from the 363 sale, it should have exercised its power to seek adequate protection from the sale pursuant to section 363(e). In order to protect its interest, a landlord, subject to a 363(f) sale, must use the remedy s provided by the Code. See Adelphia at Adequate protection under section 363(e) provides broad protections for creditor s who hold an interest in property subject to a, free and clear, 363(f) sale. See United States v. Nordic Vill. Inc., 503 U.S. 30 n.13 (1992); See also, La Jolla Mortg. Fund v. 15

24 Rancho El Cajon Associates, 18 B.R. 283, 286 ( the purpose of the provision is to ensure that the creditor with a secured claim receive in value essentially what he bargained for. ). This protection can only be afforded if the objector uses the statutory provisions of 363 to object to a claim. See Canzano v. Ragosa (In re Colarusso), 382 F.3d 51, 61 (1st Cir. 2004) ( [the claimants] failure[d] to assert her claim because she had notice through the sale motion, the sale notice, and the purchase and sale agreement that the property was being sold free and clear of all liens, claims, and encumbrances pursuant to 363(f). ). In Canzano v. Ragosa (In re Colarusso), 382 F.3d 51, 61 (1st Cir. 2004) a claimant who objected to the debtor s 363 sale of property of the estate couldn t challenge the sale because she did not follow the proper procedures for nullifying the sale pursuant to 363. Id. at 53. The claimant argued that the sale should be vacated because she obtained the subject property by way of adverse possession. Id. at 54. In affirming the lower court, the 1st Circuit Court of Appeals held that Ragosa cannot now challenge the bankruptcy court's power to sell the land pursuant to 363(f) because she did not follow the correct procedures to do so. Id. at 61. The appellate court continued by stating [a]fter the sale, Ragosa did not appeal the sale order or obtain a stay of the sale Without the stay, this court has no power to fashion a remedy because we cannot undo the sale, even if we were to find that the authorization was erroneous. Id. Similar to Ragosa, the present case deals with a lessee, Highway 61, failing to follow bankruptcy procedures by seeking adequate protection from the court. In Ragosa the appellate court found that Ragosa s failure to appeal the sale order was fatal to the claimant. Here, by not availing itself of protections afforded in 363(e), the Thirteenth Circuit correctly found that this failure prevented Highway 61 from seeking relief. Highway 61 could have requested the court to 16

25 provide protection of its interest but instead failed to show up to the 363 sale and didn t seek remedies available to it under section 363. In summary, section 363(f) of the Bankruptcy Code does not implicate and, thus, does not conflict with the protections afforded a lessee under section 365(h). A sale of property free and clear under section 363(f) trumps any rights a lessee has under section 365(h) because Congress intended for each provision to apply to distinctly different situations. Section 365(h) only applies to a rejection or assumption of a lease when a lessor affirmatively chooses to reject or assume a lease. High Rocks did not affirmatively reject the Highway Lease. As such, the sale was free and clear without any derogation of a lessee s rights under section 365(h). II. THE BANKRUTPCY COURT CORRECTLY APPROVED THE SETTLEMENT BECAUSE COURTS MAY APPROVE A SETTLEMENT THAT POSSIBLY VIOLATES THE PRIORITY RULE AS LONG AS IT MEETS THE FAIR AND EQUITABLE THRESHOLD. The Bankruptcy Court s ruling and the Thirteenth Circuit s affirmation were proper because the Committee Settlement provided the most fair and equitable solution to all parties. The Settlement provides the greatest potential benefit to the Debtor and its creditors. In such cases, lower courts have approved interim distributions that violate the absolute priority rule where the distribution, in violation of the priority scheme, furthers a significant Code-related objective. The Settlement is significantly related the objectives of the code as it acts to preserver the debtor while also providing an avenue to ensure the most disfavored creditors are better off. Additionally, the settlement occurred early on in the bankruptcy case, allowing adequate time for the other creditors to substantiate their claims. Lastly, the Settlement should be approved because it does not violate absolute priority and confirmation plan rules. The funds from the settlement were a gift from 4 th Street in return for High Rock s dismissal of potential claims. This money was not a part of the estate at the onset of the bankruptcy proceeding and were not a proceed of 17

26 the estate either. As such, Highway never had an interest in those funds. This Court should affirm the lower court because the Settlement was related to a significant Code-related purpose of making all creditors in the case better off while not violating the absolute priority rule. A. The court correctly determined the Committee Settlement was a fair and equitable settlement under the Bankruptcy Code and common law. The Thirteenth Circuit s affirmation of the lower court s decision was proper because the bankruptcy court approved a settlement that was fair and equitable to all parties. For a settlement to be fair and equitable it must not discriminate unfairly in favor of any class of creditors." See Group of Institutional Investors v. Chicago, M., S. P. & P. R. Co., 318 U.S. 523 (1943); See also In re Pullman Constr. Indus., 107 B.R. 909, 939 (N.D. Ill. 1989) ( A plan which does not meet the standards set forth in 1129(b)(2) cannot be fair and equitable. However, technical compliance with all the requirements in 1129(b)(2) does not assure that the plan is fair and equitable. ). Consideration of state law and all the relevant facts and circumstances pertaining to the settlement affords the bankruptcy court the power to determine the fairness and equitability of a settlement. Id.; See Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510 (1941) ( So long as they receive full compensatory treatment and so long as each group shares in the securities of the whole enterprise on an equitable basis, the requirements of fair and equitable are satisfied. ). In approving the Committee Settlement, the bankruptcy court considered the Debtor s financial situation and the potential recovery of money from the Skyline litigation. By assessing the present conditions of the Debtor and the likelihood of a successful lawsuit, the court weighed all relevant facts and circumstances in approving the settlement. In doing so, the bankruptcy court did not approve distribution of property of the estate to a junior creditor over a senior creditor. See Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972) (Douglas, J., 18

27 dissenting) (stating that the absolute priority rule, as part of the fair and equitable doctrine, was designed to protect senior classes of creditors against the claim that junior interests were improperly permitted to participate in a plan or were too liberally treated therein."). Rather the settlement provided for the potential to recoup substantial assets that could be recovered for the Debtor s estate and all creditors. This Court should affirm the lower courts decision because the bankruptcy court was within it s authority to authorize the Committee Settlement. First, Federal Rules of Bankruptcy Rule 9019 delegates a bankruptcy court to approve compromises and settlements upon a notice and hearing. Second, a bankruptcy court may approve a settlement that violates the absolute priority rule if the court articulates its reasoning for approving the settlement and the interested parties justify the settlement. i. Rule 9019 of the Federal Rules of Bankruptcy Procedure authorize bankruptcy courts to approve settlements that are fair and equitable. The Bankruptcy Court approved the Committee Settlement within the boundaries of its authority because the settlement is fair and equitable. Fed. R. Bankr. P. 9019(a) codifies a bankruptcy court s authority to approve a compromise or settlement. Olson v. Anderson (In re Anderson), 377 B.R. 865, 870 (B.A.P. 6th Cir. 2007); Fed. R. Bankr. P. 9019(a). Nonetheless, there is no set guideline for how bankruptcy courts should approve settlements. Generally, courts look to whether the settlement meets a fair and equitable threshold as set forth in TMT Trailer Ferry. Olson, 377 B.R. at 870 (citing Protective Committee for Indep. Stockholders of TMT Trailer Ferry v. Anderson, 390 U.S. 414 (1968)). The Olsen court emphasized that many Rule 9019 opinions have relied on TMT Trailer Ferry both for the substantive requirement that a settlement represent a fair compromise of disputed issues, and for the requirement that such settlement be preceded by adequate inquiry." Id. (internal citations omitted). 19

28 Despite the guidelines set forth in TMT Trailer Ferry, the absence of bright-line rules has led several courts to use a variety of factors in determining what is fair and equitable. 3 Regardless, in general, when a bankruptcy court contemplates approving a settlement its focus should be on preventing any parties from using the settlement to subvert the priority scheme. Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452, 465 (2nd Cir. 2007) ( The court must be certain that parties to a settlement have not employed a settlement as a means to avoid the priority strictures of the Bankruptcy Code. ). In the present case, Highway does not contend that the Bankruptcy Court incorrectly balanced the parties interests under TMT Trailer Ferry or Rule 9019(a). After careful deliberation, the bankruptcy court determined that approving the Committee Settlement would be fair and equitable because it provides a substantial benefit to the estate and its creditors. Pursuant to Rule 9019(a), the Bankruptcy Court believed this the Committee Settlement to be the most equitable outcome. The legislature created this right under Rule 9019(a) as way to allow courts to deviate from general bankruptcy rules in situations the court believes would create the most equitable outcome. As such, there is no evidence the Bankruptcy Court overstepped its bounds in approving a settlement. Rule 9019(a) specifically authorizes courts to approve settlements it determines to be fair and equitable. Therefore, the Court of Appeals correctly held that the Bankruptcy Court did not violate the the Bankruptcy Code or Bankruptcy Procedures in accepting a settlement it believed to be fair and equitable. 3 See In re LCI Holding Co., 802 F.3d 547, 551 (3rd Cir. 2015) ( The test requires a court to weigh: (1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors." citing In re Martin, 91 F.3d at 393) (internal citations omitted); See Protective Committee for Indep. Stockholders of TMT Trailer Ferry v. Anderson, 390 U.S. 414 (1968) (identifying multiple factors for the courts to consider when assessing the fairness and equitability of the settlement). 20