R54 TEAM 54 COUNSEL FOR THE RESPONDENT

Transcription

1 TEAM 54 COUNSEL FOR THE RESPONDENT

2 No In the Supreme Court of the United States Highway 61, Inc., Petitioner v. High Rocks, Inc., Respondent ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT BRIEF FOR THE RESPONDENT

3 Questions Presented 1. 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 363(f) of the Bankruptcy Code notwithstanding the protection that exists for lessees in 365(h) of the Bankruptcy Code? 2. Whether a bankruptcy court may approve a contested gift settlement involving a payment by a 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 of vii

4 TABLE OF CONTENTS Questions Presented....i Table of Contents......ii Table of Authorities.....iii-vi Opinions Below......vii Statement of Jurisdiction. vii Constitutional and Statutory Provisions......vii Statement of Facts..1-5 Summary of Argument..6-7 Standard of Review...7 Argument...8 I. The sale of the amphitheater free and clear of all interest is permitted under 11 U.S.C. 363(f) A. The Sale of the Amphitheatre Was Not a Rejection of the Lease, Therefore Highway s Leasehold Interests Are Not Subject to 365(h) Remedies B. The Bankruptcy Code Provides Protection for Leasehold Interests Such As Highway s in 363(e) C. The Statutory Construction of 11 U.S.C. 363(f) and 365(h) Does Not Limit or Supersede One Over the Other 1. Congress intended for the two sections to be applied separately 2. The court should read the two sections distinctly and separate since such a construction is possible and reasonable II. In the 363 sale, the gift payment is in the partys best interest, and is not subject to the Bankruptcy Code s absolute priority scheme. A. The Committee Settlement agreement serves the best interests of all parties, ii of vii

5 giving hope that all boats will be lifted through pursuit of litigation with Skyline Construction, Inc. 1. Fair and equitable 2. Serves a sound business reason 3. Serves a significant code related purpose and maximize the value of the estate 4. Best interests may favor disfavored creditors B. The $2 million are not part of the High Rocks estate, but a gift from one creditor to another C. The holding in Jevic does not apply to 363 sales and interim plan agreements, and a non-estate gift is not subject to Jevic fund distribution requirement. iii of vii

6 United States Supreme Court Cases TABLE OF AUTHORITIES Casimir Czyzewski, v. Jevic Holding Corp., et al, 137 S.Ct. 973 (2017) , 17, 25, 26 Connecticut Nat l Bank v Germain, 112 S.Ct (1992).. 12 Harry P. Begier, Jr., v. I.R.S., 110 S.Ct (1990)..24, 25 Hughes Aircraft Co., et al., v Stanley I. Jacobson et el., 119 S. Ct. 755 (1999)...11, 12 Pittsburg & Lake Erie R.R. Co., v. Railroad Labor Executives Ass n., 109 S.Ct (1998).. 13 Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v C. Gordon Anderson, 88 S. Ct (1968) , 18 RadLAX Gateway Hotel, LLC, v. Amalgamated Bank., 132 S. Ct (2012) United States v. Cartwright, 411 U.S. 546 (1973) Barnhill v. Johnson, 503 U.S. 393 (1992) United States Court of Appeals Case In re DBSD N. Am., Inc. Dish Network Corp. v. DBSD N. Am., Inc.,634 F.3d 79 (2nd Cir. 2011) In re ICL Holding Co., Inc., et al., 802 F.3d. 547 (3rd Cir. 2015)...17, 24, 25 In re Iridium Operating LLC, v. Official Comm. of Unsecured Creditors and JPMorgan Chase Bank, N.A,.478 F.3d 452 (2nd Cir. 2007).. 18, 19, 20, 21, 22, 23, 24. In re SPM Mfg. Corp Official, Unsecured Creditors Comm., v. Peter M. Stern, 984 F.2d 1305 (1st Cir. 1993)....17, 24, 25 iv of vii

7 In The Matter of Spanish Peaks Holdings II, LLC., v. CH SP Acquistitions, LLC., 872 F.3d 892 (9th Cir. 2017) , 9 Precision Indus., Inc., and CIRCO Leasing Co., LLC. v. Qualitech Steel SBQ, LLC.,327 F.3d 537 (7th Cir. 2003).. 8, 11, 12, 13, 14 United States Bankruptcy Court Cases Dishi & Sons v. Bay Condos, LLC, 510 B.R. 696 (S.D.N.Y. 2014) IDEA Boardwalk LLC v. POLO North Country Club Inc, 2017 WL In re Churchill Properties III, Ltd. P ship, 197 B.R. 283 (Bkrtcy.N.D. Ill. 1996)..14 In re Dewey & LeBoeuf LLP, 478 B.R. 627 (Bkrtcy. S. D. N. Y. 2012) , 19, 20 In re Fryar, 570 B.R. 602 (Bkrtcy.E.D.Tenn. 2017) , 18, 22, 23 In re Haskell L.P., 321 B.R. 1 (Bkrtcy.D.Mass. 2005)...10 In re On-Site Sourcing Inc., 412 B.R. 817 (Bkrtcy.E.D.Va. 2009).21, 22 In re: Crumbs Bake Shop, Inc, 522 B.R. 766 (Bkrtcy.D.N.J. 2014) In re: Revel AC, Inc. et al v. Revel Entertainment Group, LLC, 532 B.R. 216 (Bkrtcy.D.N.J. 2015)...9 In re Zota Petroleums, LLC, 482 B.R. 154 (Bkrtcy.E.D.Va. 2012) La Jolla Mortgage Fund v. Rancho El Cajon Assoc., Bkrtcy., 18 B.R. 283 (1982)..9 Federal Rules and Statutes U.S. CONST. Art. III.....6, 8, 36 v of vii

8 11 U.S.C , 7, 8, 10, 11, 12, 13, 14, 15, U.S.C , 9, 10, 11, 12, 13, 14, 15 U.S.C 1129(a)(7)(A)(ii) , 22 C.R.C.P Fed. R. Bankr. P , 15 Fed. R. Bankr. P 9019 (b) M.B.C.A Secondary Authorities 2002 Uniform Parentage Act...15 Auclair v. Auclair, 730 A.2d 1260, 1273 (Md. Ct. Spec. App. 1999), Best Interest Contract Prohibited Transaction Exemption, Practical Law Practice Note vi of vii

9 Opinions Below The decision of the Thirteenth Circuit Court of Appeals is reproduced in the record on appeal. The decisions of the United States District Court for the District of Moot and the United States Bankruptcy Court for the District of Moot are unreported. Statement of Jurisdiction The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. Constitutional and Statutory Provisions The relevant constitutional and statutory provisions in this case are: U.S. CONST. Art. III, 11 U.S.C. 363, 11 U.S.C. 365, 11 U.S.C 1129(a)(7)(A)(ii), Fed. R. Bankr. P. 8013, and Fed. R. Bankr. P 9019(a). These provisions are reproduced in Appendices A-F. vii of vii

10 Statement of Facts 1. High Rocks sought to develop a casino, resort and amphitheater. High Rocks, Inc., Debtor Respondent, (High Rocks) started a resort development approximately 25 miles outside the City of Rainier in the State of Moot. R. at 3. They wanted to build a 30 story, 400 room hotel, conference facilities, restaurants, and 7,000 seat amphitheater. 2. The original loan was funded by North Country Bank (North Country). High Rocks obtained initial funding through an $800 million loan from North County. R. at Skyline Construction (Skyline) served as the initial general contractor. After a competitive bidding process, Skyline was selected to construct High Rock s project. R. at 4. They were selected because they were the low bidder by a sizable amount. R. at 4. While Skyline had substantial experience generally in this type of project, they did not have experience with a project of this size. R. at 4. Skyline began construction in May R.at Skyline mismanaged the hotel and casino construction. Skyline tried to cut costs due to the low bid, and used improper plumbing products and cheap construction materials. R. at 4. The building had insufficient water pressure, and the plumbing had to be replaced. R. at Skyline had less trouble with the amphitheater. Skyline finished construction of much of the theater with fewer issues than the buildings. R. at 4. Their work included a covered stage, concession stands, restrooms, a ticket office and a VIP lounge. R.at 4. All that was left to finish was the seating, sound equipment and acoustical panels. R. at 4. Skyline agreed to finish this, and guaranteed it would be a world-class venue. R. at 4. 1

11 6. High Rocks terminated their contract with Skyline due to the mismanagement of th casino and hotel. As was allowed in the contract, in December 2015, High Rocks terminated their contract with Skyline due to the construction issues. R. at 4. Significant work remained with the hotel and casino. R. at 5. The amphitheater also still needed seats, sound equipment and acoustical panels installed. R. at The amphitheater had already been leased prior to construction beginning. Highway 61, Inc. Petitioner (Highway), consists of a group of investors who have experience in the live music industry and had leased the amphitheater. R. at 5. They signed a term-of-year lease that would last 30 years. R. at. 5. Highway would fully operate the music venue. R. at 5. Highway would pay High Rocks $400,000 per year plus additional funds from any sales through this lease agreement. R. at High Rocks hired a new contractor, Shelter from the Storm Builders, Inc. (Shelter). In January 2016, Shelter was hired to complete the balance of the project, but they did not have experience with music venues. R. at 5. They agreed High Rocks would hire another party to complete the amphitheater. R. at During this time, North Country sold the secured note to 4 th Street. Frustrated with the problems of the project, North Country substantially discounted and sold the High Rocks note to 4 th Street in February R. at 5. 4 th Street had experience in these types of projects and bought the note at a bargain rate. R. at th Street had a strategy of loan to own 1 when they purchased the note, but High Rocks tried to prevent this by filing for Chapter 11 protection. 4 th Street began 11 This is otherwise known as a 363 sale of the Bankruptcy Code. By acquiring the secured debt from North Country Bank, 4 th Street could eventually obtain the assets of High Rocks project through a forced foreclosure or bankruptcy sale. 2

12 foreclosure against High Rocks in June R. at 5. To try to stop the foreclosure, High Rocks filed for Chapter 11 bankruptcy protection in July R. at 5. They did not want to give up ownership at this point. R. at Highway offers to help finish the amphitheater. After bankruptcy protection had been filed, Highway approached High Rocks and said they had the experience to complete the amphitheater. R. at 6. The bankruptcy court gave approval, and Highway entered into a $2 million contract with High Rocks. R. at 6. However, due to a lack of funds High Rocks, with agreement from Highway, determined they would not pay Highway until the development opened. R. at Highway began construction. Between September 2016 and November 2016, Highway completed the remaining construction of the amphitheater. R. at 6. High Rocks, the Bankruptcy Committee, and Highway agreed the $2 million owed would be considered an administrative expense under 503(b)(1) of the Bankruptcy Code. R. at 6. Administrative expense classification would give Highway a higher priority in bankruptcy proceeding with High Rocks if High Rocks proceeded in the bankruptcy. R. at High Rocks runs out of cash and halted the Project. By December 2016, 4 th Street was imposing significant pressure on High Rocks. High Rocks did not have the funds to reorganize. R. at 6. High Rocks began 363(f)) Bankruptcy Code proceedings to sell all its assets free and clear of all liens, claims, encumbrances and interests. R. at 6. They also expressed that Highway s lease would not survive this sale. R. at Informal liability claims were asserted by the Bankruptcy Committee (Committee) against Skyline. The Committee believed the liability claims would be very valuable to 3

13 repay unsecured creditors. R. at 7. High Rocks did not have funds to pursue the claims against Skyline, so the Committee took the lead in this effort and created a litigation trust on the unsecured creditors behalf. R. at An auction to sell High Rocks s assets was held in January 2017 despite Committee objections. At the action, 4 th Street was the only qualified bidder but only bid an amount equal to High Rocks secured debt. R. at 7. Two objections followed the sale. R. at 7. First, the Committee objected based on two primary points: 1. They stated they had informal claims against 4 th Street and 2: This sale was more of a foreclosure than a sale. R. at 7. Since only secured liabilities were covered though the sale price, unsecured creditors would receive no reimbursement. R at Highway also objected because they did not want to lose their lease, and argued they had that right under 365(h) of the Bankruptcy Code. Highway wrote a letter expressing this desire. R at 7. If they were not allowed to keep the lease, they would consider this a rejection. R at However, 4 th Street wanted control of the amphitheater. They notified all parties that they wanted the amphitheater free and clear of any leases. R. at A settlement was reached with the Committee, High Rocks, and 4 th Street days before the sale hearing. 4 th Street would give as a gift, $2 million dollars to be used for litigation against Skyline as it was believed there were substantial funds available from their mismanagement of the project. R. at 8. The Committee would release all objections and claims to the sale if the $2 million was gifted. R. at 8. The sale was approved. R. at Highway continued their objections to the termination of their lease; the $2 million settlement went against the absolute priority rule. Highway believed 365(h) of the 4

14 Bankruptcy Code protected their interests in maintaining their lease. R. at 8. It was not in conflict of the free and clear provisions under 363(f). They also believed that they had a higher priority interest to collect on their administration fees for completing the amphitheater. R. at 8. The unsecured creditors should not receive the gift before Highway was paid in accordance to absolute priority structures. R. at The Bankruptcy Court and District Court approved both the sale to 4 th Street and settlement agreement. It was decided that 363(f) trumps 365(h), and the Highway lease does not survive a free and clear sale under 363(f). R. at 8. The absolute priority rule is also not implicated. R. at 9. The $2 million gift is not part of the sale or proceeds of the estate. R. at 9. These funds could help unsecured creditors obtain far more money in claims against Skyline. R. at The lower Courts held this settlement is in the best interest of all parties. R. at 9. 5

15 Summary of Argument I. A. When determining if leasehold interests are protected from free and clear sales of such interests, the courts look to the whether an actual rejection occurred prior to the sale. A rejection is a specific act that is required when a creditor seeks to retain its rights under 365(h) of the Bankruptcy Code. A sale under 363(f) is a purchase of assets free and clear of any and all interests, and is not the same as a rejection of such interests. B. When determining if adequate protection has been provided to leasehold interests, the courts analyze the specific circumstances of a case. A creditor may protect its interests by relying on distinct provisions of the Code that govern the circumstances of a sale of assets and interests. The finality of Chapter 11 sales requires a creditor to avail itself of the proper protection prior to the approval of the sale. C. When determining if there is a conflict between statutes, the court considers the language of a statute, and the congressional intent of the statute. The courts have followed the canon that the Code should be read harmoniously if such a construction is reasonable and possible. The leasehold interests can be sold without offending the Code s purpose to protect tenants. II. A. When determining if the settlement agreement should be upheld, the courts determine if the sale agreement is in the party s best interests. The Bankruptcy Code s priority scheme has allowed for gifts by a senior creditor to a junior creditor in a 363 sale if this is the case. Best interest is defined if it is fair and equitable, uses sound business judgment, and serves code-related purposes, which are all indications of best interests. The agreement between the secured creditor and the unsecured, junior creditors is in the party s best interests. 6

16 B. When determining if financial gifts are a violation of the absolute priority scheme, courts decide if the funds ever belonged to the Estate. Funds transferred between the senior secured creditor and the unsecured, junior creditors were never Estate assets. The non-estate funds are a gift and do not violate the absolute priority scheme. C. When determining if the Absolute Priority Rule must be imposed, courts consider if the case is at the end of structured dismissal of a Chapter 11 bankruptcy case. The agreement between the secured creditor and the unsecured, junior creditors is a 363 sale, and not the end of a structured settlement dismissal. The Absolute Priority Rule is not required in a 363 sale between a secured creditor and unsecured, junior creditors, especially as this midway through the settlement. Standard of Review A lower court s interpretation of the Bankruptcy Code may be reviewed de novo. Fed. R. Bankr. P The Supreme Court shall have appellate Jurisdiction, both as to Law and Fact. U.S. CONST. Art. III. In this case, the lower courts have correctly determined the Bankruptcy Code s statutory interpretation of a 363(f) sale as being free and clear of a lease agreement with Highway versus the protection offered in leases under 365(h). The lower courts also correctly determined that the settlement agreement between 4 th Street and unsecured creditors contains a gift. The gift is not subject to the recent ruling in Casimir Czyzewski, v. Jevic Holding Corp., et al, 137 S.Ct. 973 (2017) which implicated an absolute priority rule in a structured dismissal case. This review will affirm this is not a case of lease rejection, nor are best interests of creditors violated in this case. The de novo standard applies. 7

17 ARGUMENT I. The Sale of the Amphitheater Free and Clear of All Interests is Permitted Under 11 U.S.C. 363(f) Highway seeks to remain in possession of its leasehold interests (Lease) on the amphitheater despite the bankruptcy court s and the appeals court s decision to allow the sale of the Debtor s assets including the amphitheater free and clear of the Lease. Free and clear sales of leasehold interests are permissible under 11 U.S.C. 363(f). See 11 U.S.C. 363(f); Precision Indus., Inc. v. Qualitech Steel SBQ LLC, 327 F.3d 537 (7th Cir. 2003). A rejection is a specific act, and a litany of courts have held that specific provisions reign over general ones. The sale is not a specific rejection of the Lease, and therefore the Lease is not protected under 11 U.S.C. 365(h). A. The Sale of the Amphitheatre Was Not a Rejection of the Lease, So Highway s Leasehold Interests Are Not Subject to 365(h) Remedies Leasehold interests are not protected where there is no rejection of the lease. Where there is a sale, there is no rejection. Matter of Spanish Peaks Holdings II, LLC, C.A.9 (Mont.) 872 F.3d 892 (2017). Skyline did not specifically reject the Lease prior to selling its assets to High Rocks (who rejected the Lease after it made a successful bid). Highway is not entitled to retain its rights to the Lease under Section 365(h). While the bankruptcy code does not specifically define rejection, courts have adopted the universal understanding that it is an affirmative declaration that prior obligations will not be honored. Id at 892. In Spanish Peaks, the leaseholder of a restaurant objected to the sale of the property free and clear of its lease. Spanish Peaks, 872 F.3d at 896. The court distinguished the difference between a sale of real property, and a rejection of a lease by accepting the universally understood premise that a rejection is an affirmative declaration by the trustee that the estate 8

18 will not take on the obligations of a lease or contract made by the debtor A sale of property free and clear of a lease is not the same thing as the rejection contemplated in section 365. ID at 899. The court in Spanish Peaks ultimately concluded that [w]here there is a sale, but no rejection (or a rejection, but no sale), there is no conflict. Id. at 899. Alternatively, there are a handful of courts that consider free and clear sales as rejections of leases. IDEA Boardwalk, LLC v. Polo North Country Club, Inc., D.N.J. Slip Copy (Oct. 2017), In re Revel AC, Inc., Bkrtcy.D.N.J. 532 B.R. 216 (2015). In IDEA, the purchaser of a distressed casino and resort sought to void leases that the previous owners had agreed to. Id. The court in that case found that the rejection occurred prior to the sale, and therefore, tenants were protected under 365(h). Id at 6. The timing of the sale and/or rejection of the amphitheater in the present case mirrors that of the circumstances in Spanish Peaks. 4th Street successfully bid on the development on January 11th, 2017, and subsequently notified Highway of its intent to operate the amphitheater itself. Like in Spanish Peaks, The Debtor never rejected the lease prior to the sale to 4th Street. And unlike IDEA, the rejection did not occur prior to the sale. The specific act of rejection is required in order for Highway to invoke 365(h) protections of its leasehold rights. This court should uphold the Thirteenth Circuit s ruling that the sale of the amphitheater is free and clear of the Highway lease since there was no rejection of the lease. B. The Bankruptcy Code Provides Protection for Leasehold Interests Such As Highway s in 363(e) There is a clear intent by Congress to protect rights to real property, such as leaseholds. A creditor is entitled to receive what it bargained for, even if it does not receive its bargain in kind. La Jolla Mortg. Fund v. Rancho El Cajon Assoc., Bkrtcy.S.D.Cal. 18 B.R. 283 (1982). Section 363(e) provides measures for adversely affected interest rights, such as those at issue in the 9

19 Highway Lease. See 11 U.S.C. 363(e). Highway should not be allowed to salvage its formerly adequately protected rights under another section that provides for tenant remedies for leases sold in 363(f) sales. The bankruptcy code acts as a form of economic triage. The statutes contained therein serve to stabilize the damage, and maximize recovery. Chapter 11 reorganization plans are meant to benefit all parties. Dishi & Sons v. Bay Condos LLC, S.D.N.Y. 510 B.R. 696, 710 (2014). When a sale occurs under Section 363(f), Section 363(e) provides that adequate protection shall be granted to interests tied to real property, to include leasehold interests. In re Haskell L.P., Bkrtcy.D.Mass. 321 B.R. 1, 6 (2005). In Haskell, a hospital objected to a 363(f) sale of the property that it had leased to operate nursing homes, and sought to remain in possession of the property. The debtor contended that adequate protection, under Section 363(e), compelled the hospital to accept the debtor s monetary offer as an alternative to remaining in possession of the property. The court found that adequate protection had not been provided to the hospital, under the circumstances of that case. Id. at 10. (emphasis added). Courts have continuously relied upon the specific circumstances of a case when determining if protections under 365(h) supersede a sale under Section 363(f) when protection is available under Section 363(e). In re Zota Petroleums, LLC, Bkrtcy.E.D.Va. 482 B.R. 154 (2012). In Zota Petroleums, lessees of gas stations sought to retain possession of the properties in lieu of a free and clear sale of their leasehold interests. Id at 158. When analyzing whether 365(h) protections should be allowed in 363(f) free and clear sales, [the court] first examines the transactions among the parties. Id. Highway s lease is distinguishable from these cases because Highway did not seek the appropriate protections under the bankruptcy code. Unlike Haskell, where the debtor filed a 10

20 motion prior to the sale, Highway did not object to sale until 4th Street had notified all parties that it intended to operate the amphitheater itself. Additionally, unlike the sale in Zota Petroleum, the sale was only a sale not an assumption and assignment. In re Zota Petroleums, LLC, 482 B.R. 154, 163. The case law that supports the protection of tenants of leases all have one thing in common: the tenants were in possession of the property prior to the Chapter 11 sale. The bankruptcy code exists to benefit both creditors and debtors, but no one party is entitled to benefit above all others. Highway seeks to be the solitary beneficiary of the reorganization plan, however, the purpose of the bankruptcy code is to benefit all creditors while providing the debtor an opportunity to C. The Statutory Construction of 11 U.S.C. 363(f) and 365(h) Does Not Limit or Supersede One Over the Other This court should affirm the lower court s decision because the Bankruptcy code allows for the sale of the amphitheater free and clear of Highway s leasehold interests. This court has continuously found that when a conflict in a statute exists, as there is in this case, clarity should be sought through the language of the statute. Hughes Aircraft Co. v. Johnson, 525 S. Ct. 432 (1999). 1. Congress intended for the two sections to be applied separately Congress created 363(f) and 365(h) as individual provisions intentionally. Statutes proceed through a rigorous process of debate and consideration before being enacted by a legislature. As such, courts must presume that a legislature says what it means and means in a statute what it says there. Precision Indus., Inc. v. Qualitech Steel SBQ LLC, 327 F.3d 537, 544 (7th Cir. 2003). When examining statutory construction, the court s analysis must begin with the language of the statute. Hughes Aircraft Co. v. Johnson, 525 S. Ct. 432, 438. The Seventh 11

21 Circuit held that section 365(h) do[es] not supersede section 363(f) because if Congress had intended for that to be the case, Congress would have written such a rule into the statute, as it has with other provisions. Precision Indus., F.3d 537, 547. The decision in Precision clarified previous court rulings that found that a statute s language holds supreme, and it established a three-part test to determine whether a conflict in statutory construction exists. A statute s language has always been the alpha and the omega of judicial interpretation. Connecticut Nat. Bank v. Germain, U.S. Conn., 503 U.S. 249, 254 (1992). (Thomas, C., concurring). ( judicial inquiry begins and ends with what [one section] does say and what [another section] does not say ). 2. The court should read the two sections distinctly and separate since such a construction is possible and reasonable Individual provisions of a statute are meant to be read harmoniously with other provisions when such a construction does not offend the reasonable and appropriate. Congress enacted Section 363(f) to allow for sales of real property free and clear of all interests so that a purchaser of a distressed debtor s assets to include leases and leasehold interests on real property could confidently make a financial bid without burdensome contracts that the debtor may have previously made. See 11 U.S.C. 363(f). Alternatively, Congress enacted Section 365(h) to protect lessees from rejection of valid agreements, and included the remedies for such an action. See 11 U.S.C. 365(h). Congress wrote the statutes with specific language so the court avoids the unwelcome result of reading a limitation into [a statute] that the legislature itself did not inscribe onto the statute. Precision Indus., 327 F.3d 537, 548. Although Congress has expressed concern that unaware/innocent tenants may suffer inequitable harm under certain bankruptcy reorganization plans, the Bankruptcy Code offers 12

22 protection for specific transactions that may jeopardize a tenant s lease. Unless there is ambiguousness, a statute should be construed according to its literal construction. Barnhill v. Johnson, U.S.N.M. 503 U.S. 393, 401 (1992). The courts are not permitted to pick and choose among congressional enactments. Pittsburgh & Lake Erie R. Co. v. Railway Labor Executives Ass n, U.S.Pa. 491 U.S. 490, 510 (1989). If two statutes can be read independently, it is the duty of the courts to do so. Id. In Precision, a former steel mill supplier sought to retain its rights to remain in possession of the warehouse that it had leased from the mill. In finding that Section 363(f) and Section 365(h) were not in conflict and could be read separately, the 7th Circuit applied a threepart analysis to the language of Sections 365(h) and 363(f). Precision Indus., F.3d 537, 547. The first factor is a lack of a cross-reference between the two sections that indicates one is subordinate to the other, but there are other sections that do contain such a cross reference to both Section 363(f) and Section 365(h) individually. ID. Congress could have installed such a cross-reference between 363(f) and 365(h), but chose to omit such a provision. Id. It is the obligation of the court to read only what is in a statute, as that is what congress intended. Id at 544. The second factor is the plain language of Section 365(h). Id at 547. The use of the specific term rejects as the means of terminating a lease, limits the scope of 365(h) protections and remedies. Id. A rejection of an executory contract functions as a specific type of event, and nothing in the language of 365(h) suggests that it applies to any and all events that threaten the lessee s possessory rights. Id. (emphasis added). The third and final factor is the language and purpose of 363(f). Id. It protects the interests that are specifically affected by the sale of real property. Id. Leases and leasehold are deemed an interest in real property, and therefore they 13

23 are afforded the necessary protections that underlie purpose of the section, which is to adequately protect adversely affected rights to property. Id at 548. The Thirteenth Circuit s dissenting opinion points to the premise that the specific governs over the general, which was established in In re Churchill Properties III, Ltd. Partnership. The issue in Churchill involved a tenant of an apartment building that was being sold free and clear of his lease (allowing for immediate eviction). Bkrtcy.N.D.III. 197 B.R. 283 (1996). In examining the apparent conflict of the two sections, the bankruptcy court stated that [a]n accepted principle of statutory construction is that the specific prevails over the general. Id at 288. Applying that premise, the court found that Section 365(h) was specific in the protection afforded to the lessee after rejection of the lease. Id at 287. (emphasis added). A 363(f) free and clear sale could not extinguish a non-debtor lessee s rights under 365(h). Id. The notion that Section 365(h) provisions related to specific events whereas 363(f) commented only on the general has been the rule used in other bankruptcy courts. In re Crumbs Bake Shop, Inc., Bkrtcy.D.N.J. 522 B.R. 766 (2014). In In re Crumbs Bake Shop, licensees of a trademark objected to the free and clear sale of their contract as part of the trademark owner s bankruptcy restructuring. The court reiterated the maxim that the appropriate way to construe a statute is to conclude that the specific governs over the general. Id at 777. The Crumbs decision extends the Churchill court s analysis of the intent of Congress to protect the rights of tenants. Id at 778. To the court in Crumbs, allowing sales of real property free and clear of interests under 363(f) would allow the debtor to achieve under 363 what it was proscribed from doing under 365(h), namely, stripping the lessee of its rights to possession. Id. Sections 363(f) and 365(h) can and should be read together harmoniously. The intent of Congress in enacting 363(f) was to allow for sales of real property unencumbered of any 14

24 interests. Conversely, Congress enacted 365(h) to protect the rights of those persons who have an interest in the property, including leasehold interests. Section 365(h) refers to a specific act a rejection of an executory contract as the means to trigger protection of those rights. However, a rejection does not encompass all manners in which a contract can be terminated (i.e. consent, buy-out). Furthermore, the Supreme Court has held that the general/specific canon is not an absolute rule. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012). (emphasis added). Even if this court applies the general/specific rule, a rejection is a specific occurrence of the general termination. Because Congress intended the two sections to be read separately and cohesively, and the language of Section 365(h) refers to the specific act of rejecting a lease, the Thirteenth Circuit Court s decision should be upheld. II. In the 363 sale, the gift payment is in the partys best interests, and is not subject to the Bankruptcy Code s priority scheme. Best interest is not a term limited to bankruptcy courts. Best interest is used in child custody and parental termination hearings, and describes the ultimate duty of a guardian ad lidem (a court appointed representative of children and incapacitated individuals who may not be otherwise represented). 2 Best interests in these matters does not always guarantee that the child s wishes will be granted, but the courts will decide what is in the best interest of all the individuals involved. 3 The guardian will express to the court the child's preferences. However, when the guardian's best interest recommendation differs from the child's views, the guardian must advocate for the child's well-being, their best interest. 4 2 C.R.C.P Uniform Parentage Act 4 Auclair v. Auclair, 730 A.2d 1260, 1273 (Md. Ct. Spec. App. 1999), abrogated by Fox v. Wills, 890 A.2d 726 (Md. 2006) 15

25 Another example of best interest is in retirement plans and contract representation. Best interest contract exemptions (BICE), allow investment advice fiduciaries (for example, brokerdealers and insurance agents) to receive what would constitute prohibited compensation when certain conditions are met. 5 Advising fiduciaries may receive payment if they apply a best interest standard to the advice given. This does not mean that the advisors must determine the single best investment but only that reasonable care is given. 6 Corporations use the best interest standard as well. Corporate directors must act in the best interest of their company or they may be accused of breach a duty of loyalty to the corporation when they do not. 7 However, this does not mean that the best interest is without risk or negligence. To promote business expansion and opportunities, best interest may mean that losses occur. 8 The old saying, no risk, no gain, allows best interests to have flexibility in corporate law. The same holds true for bankruptcy cases. To meet the best interests of parties, creating a chance for all parties to receive reparation, the court establishes the lowest point of reasonableness in which the term best interest may apply. In re Dewey & LeBoeuf LLP, 478 B.R. 627 (Bkrtcy. S. D. N. Y. 2012). Best interest may mean losses occur, parties may not receive all that they desire in reparation, and reasonable care may not be the individual best outcome for all parties. Best interest may also include pursuing litigation against other creditors using gift funds given from another creditor. 9 5 Best Interest Contract Prohibited Transaction Exemption, Practical Law Practice Note Id. 7 MBCA The decision if a board acts in the best interest of a corporation can come down to a good faith basis even if the decision is not successful. 9 Id. 16

26 Gifts from creditor to creditor have played a key role in bankruptcy law. Historically, courts have allowed gifts to be given (when it was never a part of the estate) if it is in the best interests of unsecured creditors. See In re ICL Holding 802 F.3d. 547 (3rd Cir. 2015). Creditors may do what they wish with their funds, and that includes gifts to other creditors. See In re SPM Mfg. Corp Official, Unsecured Creditors Committee, v. Peter M. Stern, 984 F.2d 1305 (1st Cir. 1993). A gift may be used to pursue litigation against another creditor. ICL, 802 F.3d. at 552. Finally, and importantly, best interest gifts are not held captive to the absolute priority rule that was required in a structured settlement dismissal in Casimir Czyzewski, v. Jevic Holding Corp., et al, 137 S.Ct. 973, 975 (2017.) The absolute priority rule to does not extend to gifts in a 363 sale of assets. Jevic, 137 S.Ct. at 975. A. The Committee Settlement agreement serves the best interests of all parties, giving hope that all boats will be lifted through pursuit of litigation with Skyline Construction, Inc. The Committee settlement agreement of a $2 million gift for future litigation is in the best interests of all parties because it is fair and equitable, uses sound business judgment, maximizes the value of the estate, and serves code-related purposes. In re Fryar, 570 B.R. 602, 603 (Bkrtcy.E.D.Tenn. 2017) When determining if a settlement agreement should be upheld, courts long ago decided the ubiquitous standard was to assess if the sale agreement is in the best interest of all parties. Protective Commit. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 88 S. Ct. 1157, pc (1968). Fifty years later, courts returned to best interests in, Fryar. 570 B.R. at 603. The Court described characteristics of a best interest bankruptcy settlement agreement: Any deviation in Code s priority scheme must prove fair and equitable, serves a significant code 17

27 related purpose and maximize the value of the estate, and demonstrate that even disfavored creditors would be better off. These characteristics individually serve as guidance in this case. 1. Fair and equitable The $2 million-dollar gift offered by 4 th Street is fair and equitable to all parties. The first standard of best interests, the standard of fair and equitable, has been used since the early days of bankruptcy proceedings. See e.g. In re DBSD N. Am., Inc., 634 F.3d 79, 94 (2d Cir. 2011). Fair and equitable was described in the Bankruptcy Act: Bankruptcy judge in determining whether proposed compromise forming part of corporate reorganization plan is fair and equitable should form educated estimate of complexity, expense and likely duration of litigation, possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to full and fair assessment of wisdom of proposed compromise. Bankr.Act, 174, 221(2), 11 U.S.C.A. 574, 621(2). 10 In In re Iridium Operating LLC, v. Official Committee of Unsecured Creditors and JPMorgan Chase Bank, N.A., 478 F.3d 452, 457 (2nd Cir. 2007), corporate giant, Motorola created a subsidiary, Iridium Inc. Iridium, 478 F.3d at 457. Motorola made substantial bad economic decisions that put Iridium in a Chapter 11 bankruptcy scenario. Id. at 458. Lenders wanted to use their assets gained through a bankruptcy proceeding to fund a litigation suit against Motorola. Id. The Court properly justified the settlement saying it was a proper business judgment. Id. at 467. It cleared way for a reorganization plan, and it allowed for litigation funds for suit against Motorola who had contributed significantly to the bankruptcy. Id. To reach this conclusion, the Court used a seven-step test in its fair and equitable determination Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 88 S. Ct. 1157, 1157, 20 L. Ed. 2d 1 (1968) 11 Id. 18

28 Now called the Iridium test, 12 the Court performed a step-by-step review to examine the facts of the case: a.) the possibility of the litigations success and the settlement s future benefits, b.) the likelihood of complex and protracted litigation c.) the paramount interests of the creditors, d.) whether other parties in interest support the settlement e.) the competency of the counsel and judges, f.) the nature and breadth of releases required g) the extent that this settlement has been done at arms-length. Id. at 455. Applying this test, the court held that when a plan is presented for court approval apart from a reorganization plan, the priority rule under 11 U.S.C should be followed. Id. at 465. However, if there are minor aspects that do not comply, those aspects must be clearly articulated as to the reasons that the settlement had a deviation. Id. In Dewey, a law firm sought plan approval for a partnership contribution plan in a Chapter 11 settlement. 478 B.R. at 635. This served to reach an agreement that would save money, time, and litigation expenses. Id. These were determinations of what was fair and reasonable. Id. It was established that the lowest point in the range of is if the consideration level of the settlement was fair and equitable. Id. This would put it in the best interests of creditors and estate. Id. To reach the point of the lowest range of reasonableness, or fair and equitable, application of the seven-step Iridium factors test was applied. Id. Ultimately, after considering each of the facts of the case, the court held that the Iridium test was met. The settlement provided for quicker distribution to creditors was well above the lowest point of reasonableness. Id. at 645. Like in Dewey and Iridium, our case clearly demonstrates use of the settlement gift reaches beyond the lowest point of reasonableness, and is fair and equitable. It passes the Iridium factor test: 12 Id. 19

29 1) The poor workmanship of Skyline Construction, Inc. and the cost associated is easily traceable. Recovery amount for lower-priority creditors, including Highway s claims, would be great. All creditors would stand a very high chance of collecting from the pursuit of litigation that the $2 million gift would yield. 2) This litigation would not be too complex, and should not be too protracted. The litigation would be geared toward one party, Skyline, and blame is not arguable. 3) All creditors could see their boats lifted by a far higher amount than the $2 million litigation gift. 4) All parties support the opportunity to pursue litigation against Skyline except for Highway. Highway believes they are entitled to the $2 million gift. They are not. The $2 million was never part of the estate and thus, Highway would receive nothing if the gift is not given, and the litigation does not occur. 5) Both the Bankruptcy and the Appellate Court have reviewed this case and determined the $2 million is, in fact, a gift and should be used for pursuit of litigation against Skyline 6) The only release required for this litigation to move forward is that Highway approve of the action. 7) The definition to determine the value of any asset is the worth of what a willing, informed seller and a willing, informed buyer are willing to pay in an open and disinterested market. 13 In this case, an auction was held and no other bidder than 4 th Street put claim to the value of High Rocks assets equal to the amount of 4 th Street note (R at 7). This was an open market transaction that determined there is no more value in the estate, other than what was bid. 13 The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. United States v. Cartwright, 411 U.S. 546, 551 (1973; In re On-Site Sourcing, Inc., 412 B.R. 817, 827 (Bkrtcy.E.D.Va. 2009). 20

30 This transaction is at arms-length. Since the entire value of the estate went to the secured creditor for the full amount of their note, no funds are available for any other creditor than the current owner, 4 th Street. If more value was available in the estate assets, other buyers would have come forward in the auction. 14 No creditor, including Highway 21, will gain anything if 4 th Street s gift is turned down, and the litigation is not pursued. Applying the Iridium factors test solidifies that this settlement is fair and equitable, and all arguments have been met for a deviation from the priority scheme which is in the best interest of all parties. 2. Provides a sound business reason. The second standard in best interest criteria is that the agreement provides a sound business reason. In In re On-Site Sourcing, Inc., the Court ruled that payment decisions must have a good business reason for a deviation from the priority scheme, justifying one creditor over another. 412 B.R. 817, 818 (Bkrtcy.E.D.Va. 2009). The Debtor wanted an expedited 363 sale and negotiated pre-petition sales agreements with the purchaser. Id. at 822. They negotiated to pay $132,000 to unsecured creditors as consideration of a quick settlement. Id. The proposed settlement had many provisions usually rejected by the courts. Id. at 820. The Court ruled that the portions of the settlement did not serve a sound business purpose. Id. at 828. The fiduciaries that control the debtor must truly be disinterested for there to be sound business judgment. Id. This was not the case. Id. at 829. The On-Site settlement contained estate funds that did belong to mid-priority creditors, and the made the parties highly interested in the results. Id. In Iridium, Lenders wanted to use their assets gained through a bankruptcy proceeding to fund a litigation suit against Motorola, the parent company, who had caused much of the 14 Id. 21

31 financial problems.478 F.3d 452 at 457. The courts ruled this is a sound business purpose and affirmed that the Estate would gain significant more recovery from the action if they could help fund litigation against Motorola. Id. at 467. Unlike the holding in On-Site, the 4 th Street agreement is not to create an expedited settlement nor is the decision to give the gift coming from an interested party. 4 th Street is not changed by the outcome of the litigation. There are no formal allegations against 4 th Street by the unsecured creditors. It has sound business judgment. Litigation against Skyline would still need to follow, and Highway is not being skipped in payment by these funds there are no estate funds to be distributed. Like Iridium, who funded litigation against Motorola, the $2 million-dollar gift will be used to go after the entity, Skyline, who substantially caused the bankruptcy. This will serve a significant business purpose to return funds to most or all creditors if successful 3. Serves a significant code related purpose and maximize the value of the estate Best interests include a significant code related purpose and maximizes the value of the estate. Fryar, 570 B.R. at 604. A significant code related purpose addresses the best interest of creditors test whether the outcome will benefit one creditor over another, or whether all creditors will see that their boats are lifted when the financial tide rises a maximization of assets. 1129(a)(7)(A)(ii). 15 Returning to the settlement agreement in Iridium, where funds were given to pursue litigation against another party, presents a similar scenario to our case. 4 th Street proposes to gift $2 million to unsecured creditors to pursue litigation against a primary entity who caused the financial woes, Skyline Construction. Notwithstanding that the $2 million dollars was never a 15 See Michael H. Weiss, Credit Bidding and the Best Interests of Creditors Test, 34 Cal. Bankr. J. 1 (2017) 22

32 part of the estate and not subject to the absolute priority rule, these funds can be used to pursue much higher levels of financial reimbursement. Skyline, the party who caused the problem due to their shoddy construction can be vigorously pursued with the $2 million war chest. Without pursuing this litigation, no party, including Highway, will receive any funds. This is clearly a stated business purpose that provides relief to a primary code-related purpose, to provide fairness and equitable remedy to all creditors. It maximizes the value to all creditors remaining in the bankruptcy. 4. Best interests may favor disfavored creditors. Finally, a best interest indication is whether even disfavored creditors will be better off if the plan settlement is approved. In In re Fryar, the Debtor wanted to sell interests to the other shareholder of two of the companies they owned. 570 B.R. 602 (Bkrtcy.E.D.Tenn. 2017) The court ruled that while the plan served a sufficient business purpose, the plan would not work because other creditors would be harmed or disfavored. Id. at 610 The parties must show how a settlement makes disfavored creditors better off. Id. Like Fryer, the plan in this case serves a sound business purpose. But unlike Fryer, other creditors are not harmed by this plan. To restate the already discussed proposition, the $2 million litigation fund gift would not go to Highway if this plan is dismissed. Ironically, the way that most harm can occur to the other creditors is if the plan is refused. To avoid disfavor of most of the creditors, best interests may only be satisfied through approval of the $2 million gift. In applying the Iridium factor test to our case, it has been proven, step-by-step, that the Committee settlement agreement of a $2 million fund for future litigation is in the best interests of all parties. It is fair and equitable, uses sound business judgment, maximizes the value of the 23

33 estate, and serves code-related purposes. The Bankruptcy and Appellate Court rulings must be affirmed. B. The $2 million are not part of the High Rocks estate, but a gift from one creditor to another. Courts resolve cases when there are funds remaining in an estate. The bankruptcy court s hierarchy payment structure only becomes an issue when distributing estate property. In re ICL Holding Co., Inc., et al. 802 F.3d. 547, 549 (3rd Cir. 2015). The $2 million gift is not estate property. In Harry P. Begier, Jr., v. Internal Revenue Service, funds that had been collected from employees to pay employee taxes had been paid to the IRS. 110 S.Ct (1990). The Trustee tried to get the funds returned to the estate. Begier,110 S.Ct. at The Court ruled that the funds were never part of the estate, and thus should not be returned. Id. at In ICL Holding, a long-term care facility participated in 363 sale. 802 F.3d. at 550. A credit bid offered partial value of assets. Id. Funds were escrowed to assist unsecured creditors. Id. at 555. Funds went directly from creditor to creditor and did not pass through the estate. Id. The proceeds were not from the assets of the estate. Once the sale closed, there was no more estate property. Id. at 556. The Court held the funds were never part of the estate, and would not become part of the estate even in a pass-through. Id. In In re SPM Mfg. Corp Official, Unsecured Creditors Committee, v. Peter M. Stern, a Bank had $9 million in secured debt owed to it and when all assets when sold for $5 million, the Bank had a valid claim to all assets. 984 F.2d 1305 (1st Cir. 1993). The Bank wanted to give unsecured creditors funds to pursue further litigation against another party. SPM Mfg, 984 F.2d at The Court held that an under-secured lender may share gift proceeds to an unsecured 24