Supreme Court of the United States

Transcription

1 Team R. 40 No In The Supreme Court of the United States October Term, 2017 IN RE HIGH ROCKS, INC., DEBTOR, HIGHWAY 61, INC., PETITIONER, V. HIGH ROCKS, INC., RESPONDENT. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT BRIEF FOR RESPONDENT Team Number R. 40 Counsel for Respondent

2 QUESTIONS PRESENTED I. Whether a bankruptcy court may give effect to 363(f) of the bankruptcy code approving a sale of real property free and clear of leaseholds interests in the limited instances in which 363(f) and 365(h) are both implicated. II. Whether a bankruptcy court may approve a gift settlement involving a payment by a 363 purchaser when the gift is an interim settlement not comprised of estate funds, and the settlement distributes proceeds with its own prioritization scheme. i

3 TABLE OF CONTENTS QUESTIONS PRESENTED... i TABLE OF CONTENTS... ii TABLE OF AUTHORITIES... iv OPINIONS BELOW... vii STATEMENT OF JURISDICTION... viii STATUTORY PROVISIONS... ix STATEMENT OF THE CASE... 1 A. The Building and Filing of Bankruptcy of the High Rocks Development... 1 B. The 363(f) Free and Clear Sale... 2 C. 4th Street s Gift in the Interim Committee Settlement... 3 D. The Bankruptcy Court Decision... 3 SUMMARY OF THE ARGUMENT... 4 ARGUMENT... 5 I. A BANKRUPTCY COURT MAY GIVE EFFECT TO 363(F) OF THE BANKRUPTCY CODE BY APPROVING A SALE OF REAL PROPERTY FREE AND CLEAR OF LEASEHOLDS INTERESTS A. The Court should look no further than the clear plain language of 363(f) and 365(h) B. Sections 363(f) and 365(h) are textually different, apply in different circumstances, and do not create a conflict even in the limited circumstances in which both statutes are implicated C. Section 363 provides adequate protection for Highway II. A BANKRUPTCY COURT MAY APPROVE GIFT SETTLEMENT INVOLVING A PAYMENT BY A 363 PURCHASER WHEN THE GIFT IS AN INTERIM SETTLEMENT NOT COMPRISED OF ESTATE FUNDS, AND THE SETTLEMENT DISTRIBUTES PROCEEDS WITH ITS OWN PRIORITIZATION SCHEME A. The absolute priority rule is not implicated by interim distributions of settlement proceeds that serve a bankruptcy related purpose B. The Committee Settlement constitutes a valid gift because the funds are not estate property, the Committee did not receive the gift under a plan, and the Committee did not receive the gift on account of a junior claim or interest th Street s gift was nonestate property because it was composed of 4th Street s funds and not High Rocks s funds ii

4 2. The Committee did not receive the gift under the plan because the gift arose as part of a separate settlement agreement The Committee did not receive the gift in exchange for or because of a junior claim or interest CONCLUSION APPENDIX... A-1 iii

5 TABLE OF AUTHORITIES Supreme Court Cases Bank of Am. Nat'l Trust and Sav. Ass n v. 203 N. LaSalle St. P ship, 526 U.S. 434 (1999)... 15, 26, 27 City of Chicago v. Envtl. Def. Fund, 511 U.S. 328 (1994)... 9 Conn. Nat l Bank v. Germain, 503 U.S. 249 (1992)... 6, 7 Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017)... 15, 16, 17 Hartford Underwriters Ins. Co. v. Union Planters Banks, 530 U.S. 1 (2000)... 6 Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999)... 7 In re Cowart v. Nicklos Drilling Co., 505 U.S. 469 (1992)... 7 Keene Corp. v. United States, 508 U.S. 200 (1993)... 9 Morton v. Mancari, 417 U.S. 535 (1974)... 7 Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968)... 15, 16 RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012) Rubin v. United States, 449 U.S. 424 (1981)... 7 Toibb v. Radloff, 501 U.S. 157 (1991)... 7, 11 United Sav. Ass n of Tex.v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988)... 9 United States v. Ron Pair Enters., 489 U.S. 235 (1989)... 6 Watt v. Alaska, 451 U.S. 259 (1981)... 7 iv

6 U.S. Court of Appeals Cases Dish Network Corp. v. Ad Hoc Comm. Of Senior Noteholders (In re DBSD N. Am., Inc.), 634 F.3d 79 (2d Cir. 2011)... 22, 25, 28 Eastover Bank for Sav. v. Sowashee Venture (In re Austin Dev. Co.), 19 F.3d 1077 (5th Cir. 1994)... 8 Healthco Int l, Inc. v. Brandt (In re Healthoco), 136 F.3d 45 (1st Cir. 1998) In re Armstrong World Indus., 432 F.3d 507 (3d Cir. 2005)... 17, 22, 23, 25, 28 In re Doctors Hosp. of Hyde Park, Inc., 474 F.3d 421 (7th Cir. 2007) In re ICL Holding Co., 802 F.3d 547 (3d Cir. 2015) In re PWS Holding Corp., 228 F.3d 224 (3d Cir. 2000) Mediofactoring v. McDermott (In re Connolly N. Am., LLC), 802 F.3d 810 (6th Cir. 2015)... 6, 7 Motorola, Inc. v. Official Comm. of Unsecured Creditors & JP Morgan Chase Bank, N.A. (In re Iridium Operating LLC), 478 F.3d 453 (2d Cir. 2007)... 15, 16, 17, 18 Myers v. Martin (In re Martin), 91 F.3d 389 (3d Cir. 1996)... 15, 16 Official Comm. of Unsecured Creditors of Bond v. White Plains Joint Venture (In re Bond), 16 F.3d 408 (4th Cir. 1994) Official Comm. Of Unsecured Creditors v. Stern (In re SPM Mfg. Corp.), 984 F.2d 1305 (1st Cir. 1993) Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions (In re Spanish Peaks Holdings II, LLC), 872 F.3d 892 (9th Cir. 2017)... 6, 7, 8, 10, 11, 12, 13, 14 Precision Indus. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003)... 6, 7, 8, 9, 11, 12 Revel AC, Inc. v. IDEA Boardwalk LLC, 802 F.3d 558 (3d Cir. 2015)... 12, 13 Texas v. Soileau (In re Soileau), 488 F.3d 302 (5th Cir. 2007)... 6, 14 v

7 U.S. v. AWECO, Inc. (In re AWECO), 725 F.2d 293 (5th Cir. 1984)... 15, 16, 18 U.S. Bankrupcty Court Cases In re Churchill Props., 197 B.R. 283 (Bankr. N.D. Ill. 1996) In re Dewey & LeBoeuf LLP, 478 B.R. 627 (Bankr. S.D.N.Y. 2012) In re Fryar, 570 B.R. 602 (Bankr. E.D. Tenn. 2017)... 19, 20 In re Genesis Health Ventures, Inc., 266 B.R. 591 (Bankr. D. Del. 2001) In re Haskell, L.P., 321 B.R. 1 (Bankr. D. Mass. 2005) In re MCorp. Fin., Inc., 160 B.R. 941 (Bankr. S.D. Tex. 1993) In re Taylor, 198 B.R. 142 (Bankr. D.S.C. 1996) In re TSIC, 393 B.R. 71 (Bankr. D. Del. 2008) In re World Health Alternatives, Inc., 344 B.R. 281 (Bankr. D. Del. 2006)... 22, 23, 24, 25, 26 Office of the U.S. Trustee v. Short Bark Indus. (In re Short Bark Indus.), No , 2017 U.S. Dist. Lexis (Bankr. D. Del. Sept. 11, 2017) Statutes & Rules 11 U.S.C. 1129(b)(2)(B)(ii) (2012)... 14, 26, U.S.C. 363(e) (2012)... 11, 12, U.S.C. 363(f) (2012)... 5, 6, 7, 8, 9, 10, 11, 12, U.S.C. 365(h) (2012)... 5, 6, 7, 8, 9, 10, 11, 12, U.S.C. 541(a)(6) (2012) Fed. R. Bankr. P. 9019(a) vi

8 OPINIONS BELOW In July 2016, High Rocks, Inc. ( High Rocks ) commenced a voluntary chapter 11 bankruptcy case in the United States Bankruptcy Court in the District of Moot. R. at 5. In December 2016, High Rocks made a motion in the Bankruptcy Court to sell all assets free and clear pursuant to 363(f) of the Bankruptcy Code. Id. at 6. On January 11, 2017, the High Rocks s assets were auctioned off and 4th Street was the successful bidder. Id. at 7. The Committee of Unsecured Creditors ( Committee ) and Highway 61, Inc., ( Highway ), the leaseholder in the property, objected to the sale. Id. The Committee reached a settlement ( The Committee Settlement ) with High Rocks and 4th Street and Highway objected to this Settlement, in addition to the the sale. Id. at 8. The Bankruptcy Court approved the sale to 4th Street in a bench opinion and stayed the closing of the sale to allow for an appeal. R. at 7 8 n.8. The Court found that 363(f) trumped rights under 365(h) and that the absolute priority rule was not implicated by the Committee Settlement. Id. at 8, 9. The District Court affirmed the ruling of the Bankruptcy Court. Id. at 9. On July 14, 2017, the Thirteenth Circuit Court of Appeals affirmed the decision of both the Bankruptcy Court and the District Court. Id. at 20. Highway appealed to the Supreme Court. Id. at 9. vii

9 STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. viii

10 STATUTORY PROVISIONS The relevant provisions are listed below and reproduced in the Appendix. 11 U.S.C. 363(e) (2012) 11 U.S.C. 363(f) (2012) 11 U.S.C. 365(h) (2012) 11 U.S.C. 541(a)(6) (2012) 11 U.S.C. 1129(b)(2)(B) (2012) Fed. R. of Bankr. P. 9019(a) ix

11 STATEMENT OF THE CASE This appeal presents two legal issues. The first is whether a bankruptcy court can approve a sale free and clear of a leasehold interest under 363(f). The second is whether a gift of settlement funds implicates the absolute priority rule. A. The Building and Filing of Bankruptcy of the High Rocks Development High Rocks, Inc. ( High Rocks ) is a casino and resort development that consists of a hotel, conference facilities, restaurants, and an outdoor amphitheater built into the surrounding mountains. R. at 3 4. In May of 2014, after a competitive bidding period, High Rocks hired Skyline Construction, Inc., ( Skyline ), as the general contractor for its development. Id. at 4. Unfortunately, Skyline s construction was problematic due to the use of cheap construction materials. Id. Skyline created significant obstacles from the outset. Id. Skyline repeatedly attempted to cut costs by using cheap construction materials and improper pluming materials in the hotel. Id. Skyline s error caused insufficient water pressure in much of the building and High Rocks had to replace most of the plumbing in the hotel. R. at 4. Due to the ongoing problems with construction, High Rocks exercised its right to terminate the construction contract with Skyline in December Id. In January 2016, High Rocks hired a new contractor, Shelter From the Storm Builders, Inc. ( Shelter ), to finish construction on the hotel and casino. Id. at 5. Due to the delays, North Country Bank ( North Country ), the secured lender that financed a large part of the development, became frustrated and sold its note. Id. at th Street acquired the note as part of a loan to own strategy and commenced foreclosure against the debtor in June Id. at 5. Instead of foreclosure, in July of 2016, High Rocks elected to commence a voluntary chapter 11 bankruptcy case. R. at

12 After the commencement of the bankruptcy petition, Highway, the holder of a lease for the amphitheater, approached High Rocks and offered to complete the construction of the amphitheater. R. at 6. The Bankruptcy Court approved a post-petition contract between the two parties wherein Highway finished construction of the amphitheater in exchange for a deferred payment of two million dollars. Id. at 6. Highway completed construction by November of 2016, and High Rocks, the Committee, and Highway stipulated that Highway was entitled to an administrative expense of two million dollars. Id. at 3, 6. B. The 363(f) Free and Clear Sale After repeated attempts to finish the development, High Rocks ran out of cash. Id. at 6. In December 2016, it filed a motion to sell its assets free and clear of all liens, claims, encumbrances and interests under 363(f) of the Bankruptcy Code. Id. at 6. The motion expressly provided that the sale of property would be free and clear of Highway s leasehold interest. R. at 7. The auction sale took place on January 11, 2017, but 4th Street was the only qualified bidder who appeared and successfully credit bid the full amount of its secured debt. Id. at 7. The Committee objected to the sale on the basis that they had informally alleged various lender liability claims against 4th Street, challenging the validity and extent of its claims and liens, prior to the sale. Id. at 7. Highway also objected to the sale on the basis that it was entitled to remain in possession of the amphitheater under its lease pursuant to 365(h) of the Bankruptcy Code. Id. at 7 8. Simultaneously, Highway sent a letter to High Rocks, electing to retain its possessory rights to the property. Id. at 8. Prior to the sale, the Committee also began investigating the claims against Skyline related to its mismanagement of the construction project. R. at 8. The claims against Skyline were assigned to a litigation trust whose sole beneficiaries are the unsecured creditors. Id. at 8. The Committee 2

13 believes that the claims against Skyline are very valuable and, if successful, will result in a meaningful distribution to unsecured creditors. R. at 8. C. 4th Street s Gift in the Interim Committee Settlement High Rocks, the Committee, and 4th Street reached a settlement with the Committee. Id. at 8. The Committee Settlement provided that the Committee would withdraw its objection to the sale and release any and all claims against 4th Street in exchange for a two million dollar gift of 4th Street s own money to the litigation trust for the express purpose of funding the claims against Skyline. Id. at 8. At the sale hearing, Highway objected to the Committee Settlement, arguing the two million dollars was not being distributed in accordance with the absolute priority rule. Id. at 8. Highway further objected to the sale of the property under 365(h) of the Bankruptcy Code. Id. at 8. D. The Bankruptcy Court Decision The Bankruptcy Court sided with High Rocks and held that 363(f) prevailed over Highway s rights under 365(h) and that the Committee Settlement did not implicate the absolute priority rule. R. at 8 9. The Court found that the Committee Settlement was in the best interests of all parties, because it would allow the Committee to pursue the very valuable claims against Skyline. Id. at 9. Highway appealed to the District Court, which affirmed the Bankruptcy Court s findings and held that 363(f) dictated Highway s rights and the Committee Settlement did not implicate the absolute priority rule. Id. at 9. Highway appealed again, and the Court of Appeals affirmed. Id. at 20. This appeal followed. 3

14 SUMMARY OF THE ARGUMENT This Court may approve the sale of real property free and clear of leasehold interests pursuant to 363(f) of the Bankruptcy Code. This does not implicate 365(h), because 365(h) and 363(f) operate in different spheres, and may be read without conflict when both are implicated. Based on the first canon of statutory construction, the Court should look no further than the plain language in determining the meaning of 363(f) and 365(h). The Court should effectuate the language that Congress enacted, and where that language is clear, should not look to the legislative history. Here, the statutes are textually different and are triggered by the occurrence of different events. Section 363(f) is triggered by the sale of property, whereas 365(h) is where the debtor remains in possession of the property and rejects the lease. This interpretation provides protection for lessees under 363(e) and is the approach taken by circuit courts that have addressed the matter. This reading allows the provisions to each have effect while allowing for leasehold protection, and maximizing creditor return. Thus, this Court may approve the sale of real property free and clear of a leasehold interest pursuant to 363(f). The Court may approve the Committee Settlement because the settlement is fair and equitable. The Committee Settlement does not implicate the absolute priority rule because the settlement is an interim distribution of settlement proceeds that serves the significant bankruptcy related purposes of avoiding costly litigation and providing the Committee with an opportunity to receive payment. Furthermore, the settlement is a gift of funds by a secured creditor that does not implicate the absolute priority rule. The settlement falls under the gifting doctrine because the funds are not estate property, the Committee did not receive the gift under the plan, and the Committee did not receive the gift on account of a junior claim or interest. Thus, this Court may 4

15 approve the Committee Settlement, because it is a permissible settlement that does not implicate the absolute priority rule. ARGUMENT I. A BANKRUPTCY COURT MAY GIVE EFFECT TO 363(F) OF THE BANKRUPTCY CODE BY APPROVING A SALE OF REAL PROPERTY FREE AND CLEAR OF LEASEHOLDS INTERESTS. Bankruptcy courts may approve the sale of real property free and clear of leasehold interests pursuant to 363(f) of the Bankruptcy Code. The Code explicitly states that the court may approve a sale free and clear of any interest. 11 U.S.C. 363(f) (2012) (emphasis added). Bankruptcy courts have the authority to approve sales free and clear irrespective of 365(h), which only applies in instances of the rejection of an unexpired lease. Based on the plain language of the statues, this Court should look no further than the statutory language to give effect to the language Congress chose. Sections 363(f) and 365(h) rarely operate in the same spheres, and in the limited circumstances in which they do, both statutes may be effective without conflict. Section 363(f) of the Bankruptcy Code allows bankruptcy courts to approve the sale of property free and clear of any interest in such property if one of five conditions are met. 11 U.S.C. 363(f) (emphasis added). Those five conditions are when (1) nonbankrupcty law permits the sale; (2) such entity consents; (3) the price the property is sold at is greater than the aggregate value of the lien interest; (4) there is a bona fide dispute; or (5) the entity could be compelled to accept money in satisfaction of the interest. 11 U.S.C. 363(f). The parties conceded that at least one or more of the conditions in 363(f) are met. R. at 9 n.6. Section 365(h) applies where the trustee rejects an unexpired lease of real property under which the debtor is the lessor. 11 U.S.C. 365(h) (2012). The lessee under 365(h) can then sue the estate for breach of the lease or retain those rights which are enforceable outside bankruptcy. 11 U.S.C. 365(h); Pinnacle Rest. at Big 5

16 Sky, LLC v. CH SP Acquisitions (In re Spanish Peaks Holdings II, LLC), 872 F.3d 892, 898 (9th Cir. 2017). Based on the plain meaning of the language, 363(f) and 365(h) are not in conflict, and the bankruptcy court has the authority to approve a sale free and clear of leasehold interests. Upon a de novo review of the legal issues in this case, and a review of the finding of facts for clear error, this Court should find that the Bankruptcy Court, the District Court, and the Thirteenth Circuit properly found that the Bankruptcy Court had the authority to approve a sale free and clear of leasehold interests pursuant to 363(f). Mediofactoring v. McDermott (In re Connolly N. Am., LLC), 802 F.3d 810, 814 (6th Cir. 2015) (internal quotations omitted) ( Bankruptcy courts are thus specialized court[s] of equity.... And although their equitable powers are not unlimited, their decisions are unimpeachable so long as these powers are exercised within the confines of the Bankruptcy Code. ); Texas v. Soileau (In re Soileau), 488 F.3d 302, 305 (5th Cir. 2007); R. at 8. A. The Court should look no further than the clear plain language of 363(f) and 365(h). In reviewing a dispute between 363(f) and 365(h), the inquiry must begin with the language of the statute itself. In re Connolly N. Am., LLC, 802 F.3d at 815 (quoting United States v. Ron Pair Enters., 489 U.S. 235, 241 (1989)). Where the language of the statute is clear and the plain meaning provides an answer, the court need not look further. Id. (citing Hartford Underwriters Ins. Co. v. Union Planters Banks, 530 U.S. 1, 6 (2000)). Courts should interpret the statutes with their ordinary, common meaning unless they are specifically defined by the statute or the statutory context requires a different definition. Precision Indus. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 544 (7th Cir. 2003). Where the language is clear, judicial inquiry is complete. Conn. Nat l Bank v. Germain, 503 U.S. 249, 254 (1992) (quoting Rubin v. United 6

17 States, 449 U.S. 424, 430 (1981)); Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438 (1999) (citing In re Cowart v. Nicklos Drilling Co., 505 U.S. 469, 475 (1992)). Where the language in the statute is clear and direct, the language must prevail because Congress says in a statute what it means and means in a statute what it says. In re Connolly N. Am., LLC, 802 F.3d at 815 (internal citations omitted); Conn. Nat l. Bank, 503 U.S. at (... [I]n interpreting a statute a court should always turn first to one, cardinal canon before all others. We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there. ). The Court may only look at the legislative history of a statute where the language is unclear. Toibb v. Radloff, 501 U.S. 157, 162 (1991). When the language is clear, no legislative history is necessary. Id. It is the obligation of the courts to construe the two statutes as complementary, avoiding conflicts if possible. Precision Indus., 327 F.3d at 544 (quoting Morton v. Mancari, 417 U.S. 535, 551 (1974)) ( [W]e are not at liberty to pick and choose among congressional enactments, and when two statutes are capable of coexistence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective. ). Sections 363(f) and 365(h) frequently operate in isolation. In re Spanish Peaks Holdings II, LLC, 872 F.3d at 898. In the limited circumstances in which both statutes are triggered, the court must read the statutes to give effect to each if [it] can do so while reserving their real sense and purpose. Id. at 899 (quoting Watt v. Alaska, 451 U.S. 259, 267 (1981)). Sections 363(f) and 365(h) can easily be read to give effect to each other because they do not propose an either-or proposition. Id.; see Conn. Nat l. Bank, 503 U.S. at 253. The proper approach in the case of 363(f) and 365(h) is the approach taken by all of the circuit courts that have addressed the matter. Both the Seventh and the Ninth Circuit reached 7

18 the correct conclusion based on the statutory text. By analyzing the statues under the primary canon of statutory interpretation, the plain language of the statute, the statutory provisions themselves do not suggest that one supersedes or limits the other. In re Spanish Peaks Holdings II, LLC, 872 F.3d at 898 (quoting Precision Indus., 327 F.3d at 547). In this case, because 363(f) and 365(h) are capable of co-existence, the effect of one does not render the other superfluous. It is the duty of the courts to construe them that way. Looking no further than the statutory language, there is no conflict between 363(f) and 365(h), and no conflict between the sale to 4th Street and Highway s leasehold interest. B. Sections 363(f) and 365(h) are textually different, apply in different circumstances, and do not create a conflict even in the limited circumstances in which both statutes are implicated. Based on the application of the plain language canon of statutory construction, the statutes refer to the occurrence of different events. A 365(h) rejection of a lease is different from a sale under 363(f). Section 363(f) discusses the right to sell property free and clear of any interest only if one of five conditions is met. 11 U.S.C. 363(f). Section 365(h) is more limited in scope and focuses only on the occurrence of a specific event, the rejection of a lease. 11 U.S.C. 365(h). A rejection, such as the rejection of a lease, is universally understood as an affirmative declaration by the trustee that the estate will not take on the obligations of the lease or contract made by the debtor. In re Spanish Peaks Holding II, LLC, 872 F.3d at 899 (citing Eastover Bank for Sav. v. Sowashee Venture (In re Austin Dev. Co.), 19 F.3d 1077, 1982 (5th Cir. 1994)). This is materially different from the sale of property under 363(f). While a sale of property may create the same result as a rejection of a lease, the lessee no longer has the property, it is not materially the same as a rejection of a lease. Id. ( In sum, section 363 governs the sale of estate property, while section 365 governs the formal rejection of a lease. Where there is a sale, but no rejection (or a rejection, 8

19 but no sale), there is no conflict. ). Section 363(f) involves the debtor selling property, whereas 365(h) discusses the debtor retaining possession of the property. Compare 11 U.S.C. 363(f), with 11 U.S.C. 365(h). There is no indication in the plain language of the statutes that Congress intended the statutes to supersede or limit each other. 11 U.S.C. 363(f); 11 U.S.C. 365(h). Both 363 and 365 include references to other provisions in the bankruptcy code that should limit conduct. 11 U.S.C. 363; 11 U.S.C The drafters indicated in the plain language where certain subdivisions should be limited by other parts of the Code, yet did not include language limiting 363(f) by 365(h). 11 U.S.C. 363(f); 11 U.S.C. 365(h). The statutes were not enacted in a vacuum, and at no point did Congress choose to include a provision in 363(f) indicating it was limited by 365(h). Section 363 authorizes the sale of estate property free and clear of any interest, not any interest except a lessee s possessory interest. Precision Indus., 327 F.3d at 548 (internal quotations omitted). Congress s omission can be read as intentional because it is generally presumed that Congress acts intentionally and purposely when it includes particular language in one section of a statute but omits it in another. City of Chicago v. Envtl. Def. Fund, 511 U.S. 328, 338 (1994) (quoting Keene Corp. v. United States, 508 U.S. 200, 208 (1993)). Congress would not have intended something so radically different than the words it chose for the statute and would have included a specific provision limiting sales free and clear if it wanted to do so. See United Sav. Ass n of Tex.v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 380 (1988). To limit 363(f) by 365(h) would seriously limit the powers of the bankruptcy courts to approve sales and prevent the ability to pay creditors. 9

20 In this case, High Rocks did not declare a rejection of the lease. While both statutes were implicated by the occurrence of the sale of property that had a leasehold interest, the triggering event was the sale to 4th Street, not a rejection by High Rocks. R. at 6 7. Because Congress did not limit the power of bankruptcy courts and explicitly states here that courts have the power to approve sales free and clear of any interest, the Bankruptcy Court had the power to approve the sale to 4th Street free and clear of Highway s leasehold interest. Beyond the plain language of the statutes, some bankruptcy courts have focused on the canon that the specific prevails over the general in order to find that 365(h) prevails over 363(f). In re Spanish Peaks Holdings II, LLC, 872 F.3d at 898 (citing In re Churchill Props., 197 B.R. 283, 286 (N.D. Ill. 1996); In re Haskell, L.P., 321 B.R. 1, 8 9 (D. Mass. 2005); In re Taylor, 198 B.R. 142, (D.S.C. 1996)). In doing so, the courts ignore the fact that [o]f course the general/specific canon is not an absolute rule, but is merely a strong indication of statutory meaning that can be overcome by textual indications that point in the other direction. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, (2012). To use the statutory canon of the specific and general as an absolute rule ignores the canon of statutory construction that directs the court to look to the plain meaning first. The plain meaning here indicates that Congress clearly intended 363(f) to apply for the sale of property, and 365(h) to apply in the context of lease rejection, providing remedies for the lessees in each situation. Here, Congress s choice to be specific was just that, a choice, and one that clearly limited the scope of 365(h) to rejections. The specific and general canon of statutory construction applies when one portion is more specific as to the general rule of the same topic, and that is not the case here. Section 363(f) is implicated where there is the sale of property, and 365(h) applies where 10

21 the debtor remains in possession of the property. These are two different circumstances and the courts should effectuate the choices of Congress in each circumstance. Furthermore, in reaching these conclusions, the bankruptcy courts have erroneously relied on the legislative history, which the first clear canon of statutory construction states is not appropriate where the plain language of the statute is clear. Toibb, 501 U.S. at 162. Additionally, in focusing on the congressional intent, the courts failed to acknowledge the intent of Congress in effectuating the rest of the Bankruptcy Code, specifically 363(f). Congress did not intend 365(h) to exist in a vacuum, and 363(f) allows for the bankruptcy court to maximize creditor recovery, a core purpose of the Code. In re Spanish Peaks Holdings II, LLC, 872 F.3d at (citing Precision Indus., 327 F.3d at 548). To allow 365(h) to control would be to grant lessees the indiscriminate power to stop trustees from selling debtor property. This does not support the goals of reorganization and equity. C. Section 363 provides adequate protection for Highway. To allow the bankruptcy court to give effect to the language in 363(f) would not leave lessees without protection. Section 363(f) is not utilized by bankruptcy courts indiscriminately, allowing for free and clear sales on a whim. Congress was very clear in limiting the power in 363(f) to when one of five situations is present. 11 U.S.C. 363(f)(1) (5); Precision Indus., 27 F.3d at 545. The parties have conceded that at least one of these conditions are met, indicating this is the proper circumstance for the bankruptcy court to approve a sale free and clear of any interest. Section 363(e) provides for adequate protection of lessees when the property is sold free and clear of any interest. There is no need to go outside 363 for protection. Where the petitioner attempts to seek protection under 365(h), they seek protection under the wrong provision. As explained above, 365(h), based on the clear language of the text, is for the limited scope of the 11

22 rejection of a lease by the debtor. In cases under 363(f) where the debtor sells the property in question, the lessees may seek protection under 363(e). Allegations that if the court were to find that 363(f) controls over 365(h) would leave lessees completely unprotected are unfounded. Adequate protection for lessees is included in the contexts of sales in 363(e). See In re Spanish Peaks Holdings II, LLC, 872 F.3d at 898. Therefore, the proper reading of both statues based on the statutory text to give effect to the words Congress chose to use leads to the conclusion that both provisions may be given full effect without coming into conflict with one another and without disregarding the rights of lessees. Id. at 899. Section 363(e) states in relevant part that... on request of an entity that has an interest in property... leased, or proposed to be used, sold, or leased, by the trustee, the court... shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest U.S.C. 363(e) (2012). The lessee bears the burden of requesting adequate protection under 363(e). Precision Indus., 327 F.3d at 548. This protection does not demand that the lessee maintain possession of the property. Id. Courts have found that damages can be an adequate substitute for continued possession. Revel AC, Inc. v. IDEA Boardwalk LLC, 802 F.3d 558, 565 n.8 (3d Cir. 2015) (internal citations omitted). The circumstances may reveal that damages are in fact more appropriate than possession as a way to protect the lessee. Id. (internal citations omitted) (recognizing that the district court found it to be more than arguable that seeking damages as an unsecured creditor would be more adequate than possession in the context of a failed casino-hotel). The specific circumstances of this bankruptcy proceeding lead to the conclusion that the sale should be held free and clear. In In re Spanish Peaks Holdings II, LLC, the bankruptcy court applied a case-by-case, fact-intensive, totality of the circumstances, approach to determine that 12

23 a sale free and clear was appropriate. 872 F.3d at 896. Where a lessee fails to request adequate protection and fails to provide evidence of the economic harm they would suffer, the totality of the circumstances indicate that the bankruptcy court was correct to approve the sale free and clear of any interest. The lessee may proceed as an unsecured creditor and recovery is not foreclosed by the determination. The lessee was not in occupancy of the property in question at the time of the bankruptcy proceedings and the record is void of any indications that they would suffer a catastrophic loss. Here, the lower court found that Highway did not properly request protection and therefore was not entitled to a remedy. R. at 14; See, e.g., In re Spanish Peaks Holdings II, LLC, 872 F.3d at 895 (finding that even though the lessee objected to the sale and argued that the Code entitled them to retain possession, they did not properly request adequate possession and at no time provided any evidence that they would suffer any economic harm if their possessory interests [we]re terminated. ). Even if Highway had requested adequate protection, possession would not be appropriate protection in this case. Highway has yet to take physical possession of the property, did not demonstrate to the court economic harm, and only the amphitheater portion of the development is complete. Thus, it would be just as adequate to allow it to seek damages as an unsecured creditor. 1 See Revel AC, Inc., 802 F.3d at 565 n.8 (internal citations omitted) (recognizing that the district court found it to be more than arguable that seeking damages as an unsecured creditor would be more adequate than possession in the context of a failed casino-hotel). In the limited instances in which the statutes operate in the same sphere and the property is sold free and clear of any interest, lessees may then seek protection under 363(e). Any concern regarding the effectiveness of 365(h) is misplaced as these statutes rarely operate in the same 1 As an unsecured creditor, Highway could seek damages for the work it completed in regards to finishing the amphitheater. 13

24 instance. In re Spanish Peaks Holdings II, LLC, 872 F.3d at 898. Furthermore, to hold that 365(h) means that a bankruptcy court cannot approve a sale of property that contains a leasehold interest would be to seriously limit the powers of the bankruptcy court granted by Congress in 363(f). In re Spanish Peaks Holdings II, LLC, 872 F.3d at 898. This limitation would circumscribe the power granted by Congress in the statutory language. Based on their plain language, 363(f) and 365(h) can coexist in the limited circumstances in which they interact based on the plain language of the statutes. Based on the canons of statutory construction, this Court should affirm the decision of the Thirteenth Circuit and find that 363(f) and 365(h) do not create a conflict in statutory language and approve the sale free and clear of Highway s interest. II. A BANKRUPTCY COURT MAY APPROVE GIFT SETTLEMENT INVOLVING A PAYMENT BY A 363 PURCHASER WHEN THE GIFT IS AN INTERIM SETTLEMENT NOT COMPRISED OF ESTATE FUNDS, AND THE SETTLEMENT DISTRIBUTES PROCEEDS WITH ITS OWN PRIORITIZATION SCHEME. The Court may approve the Committee Settlement because it is fair and equitable, and does not implicate the absolute priority rule. The application of the absolute priority rule is a question of law, requiring de novo review. In re Soileau, 488 F.3d at 305. Upon review, this Court should affirm the judgment of the Thirteenth Circuit. Section 1129(b)(2)(B)(ii) of the Bankruptcy Code provides that a chapter 11 reorganization plan is fair and equitable, with respect to a class of unsecured claims, if the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property. 11 U.S.C. 1129(b)(2)(B)(ii) (2012). Courts have interpreted this statute, known as the absolute priority rule, to mean that if a debtor cannot make full payment of the claims in the class, the reorganization plan can satisfy the fair and equitable standard by providing for no distribution or retention of property by anyone whose claim 14

25 or interest is junior to the dissenting impaired class. Bank of Am. Nat l Trust and Sav. Ass n v. 203 N. LaSalle St. P ship, 526 U.S. 434, 449 (1999). Although the express terms of the statute only reference reorganization plans, this Court has ruled that settlements presented for approval as part of a plan of reorganization must also conform to the absolute priority rule. Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968). This Court held in Czyzewski v. Jevic Holding Corp., that a bankruptcy court could not approve a non-consensual structured dismissal of a chapter 11 case that ends the case by distributing settlement proceeds in a manner that deviates from the absolute priority rule. 137 S. Ct. 973, 979 (2017). Not all settlements, however, implicate the absolute priority rule. When a settlement is presented for court approval apart from a reorganization plan, the absolute priority rule is not necessarily implicated. Motorola, Inc. v. Official Comm. of Unsecured Creditors & JP Morgan Chase Bank, N.A. (In re Iridium Operating LLC), 478 F.3d 453, (2d Cir. 2007). Most circuits agree that the fairness and equity of a pre-plan settlement does not turn on absolute priority distribution. See Healthco Int l, Inc. v. Brandt (In re Healthoco), 136 F.3d 45, 50 (1st Cir. 1998); In re Iridium, 478 F.3d at 464; Myers v. Martin (In re Martin), 91 F.3d 389, 393 (3d Cir. 1996); Official Comm. of Unsecured Creditors of Bond v. White Plains Joint Venture (In re Bond), 16 F.3d 408 (4th Cir. 1994); In re Doctors Hosp. of Hyde Park, Inc., 474 F.3d 421, 426 (7th Cir. 2007). One dissenting circuit, the Fifth Circuit, rigidly applies the absolute priority rule to settlements at any stage of the bankruptcy proceedings. U.S. v. AWECO, Inc. (In re AWECO), 725 F.2d 293, 298 (5th Cir. 1984). The Second Circuit, on the other hand, recognizes the dynamicity of pre-plan settlements. A bankruptcy court may approve early interim settlements that 15

26 serve significant Bankruptcy Code-related purposes, regardless of priority, so long as other fairness and equity factors weigh in favor of approval. In re Iridium, 478 F.3d at 464. The courts have interpreted fairness and equity under Federal Rule of Bankruptcy Fed. R. Bankr. P. 9019(a) (giving bankruptcy courts the authority to approve a settlement apart from a reorganization plan). This Court found that a judge makes an informed and independent judgment of fairness and equity of a pre-plan settlement when he or she has all facts necessary to make an opinion on the probability of success if the claim is litigated. TMT Trailer Ferry, 390 U.S. at 424. The judge should consider a variety of factors, including the complexity, expense, and likely duration of litigation, the possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise. Id. The circuit courts weigh similar factors. See In re Iridium, 478 F.3d at ; In re Martin, 91 F.3d at 393; In re AWECO, Inc., 725 F.2d at 298. When these factors weigh in favor of a settlement, that settlement does not implicate the absolute priority rule. First, the absolute priority rule does not apply to interim distributions of settlement proceeds that serve a significant bankruptcy related purpose. This Court s opinion in Jevic gave an approving nod to the Second Circuit s approach of authorizing interim distributions, regardless of priority, when other factors weigh heavily in favor of the settlement. Jevic, 137 S. Ct. at (citing In re Iridium, 478 F.3d at ). The Second Circuit decision disfavors the rigidity of the Fifth Circuit, and finds that so long as the parties can justify their method of distribution, and the court can articulate their reasons for approval, the distribution is permissible. In re Iridium, 478 F.3d at While the Jevic case was distinguished from the facts of Iridium, this Court provided an avenue for interim settlements for which the priority scheme does not apply. Jevic, 137 S. Ct. at The settlement must be an early interim settlement. It must promote Code- 16

27 related purposes, such as maximizing the value of the debtor s estate by providing funding for future litigation that will benefit the debtor and all creditors. Id. Second, the Committee Settlement does not implicate the absolute priority rule because it falls within the gifting doctrine. The Committee Settlement qualifies as a valid gift because it is not composed of estate property, the Committee did not receive the gift under a reorganization plan, and the Committee did not receive the gift on account of a junior claim or interest. See In re Armstrong World Indus., 432 F.3d 507, 514 (3d Cir. 2005). Therefore, the absolute priority rule is not implicated and the Court may authorize the Committee Settlement. A. The absolute priority rule is not implicated by interim distributions of settlement proceeds that serve a bankruptcy related purpose. This Court in Jevic provided an avenue for interim settlements for which the priority scheme does not apply, where (1) the settlement is entered early in the case; and (2) where the settlement serves a significant bankruptcy related purpose. 137 S. Ct. at 982. This Court held that a bankruptcy court cannot end a chapter 11 case by distributing settlement proceeds in a manner that, without consent, deviates from the absolute priority rule. Id. However, this Court approvingly noted that circuit courts have authorized early interim distributions that are not subject to the priority scheme where bankruptcy purposes are served. Id. at 985. This Court favors distributions that serve Code-related objectives enabling a successful reorganization, such as first-day wage orders, critical vendor payments, and roll-up debtor-in-possession financings. Id. The bankruptcy objectives make even disfavored creditors better off. Id. The Jevic opinion cites to the Second Circuit, which determined that in early interim settlements where settlement factors weigh heavily in favor of approval, the absolute priority rule is not implicated. Id. (citing In re Iridium, 478 F.3d at 464 (approving an early settlement proposed to fund the debtor s litigation)). The Second Circuit acknowledges that the priority scheme is 17

28 typically a dispositive factor in determining fairness and equity of a final settlement. In re Iridium, 478 F.3d at 464. However, the Iridium court recognized that a rigid application of the absolute priority rule at any stage of reorganization does not accommodate the dynamic status of some pre-plan bankruptcy settlements. Id. Thus, in early settlements, where the nature and extent of the estate and the claims against it are not yet fully resolved, it is far too restrictive to stringently employ the priority scheme. Id. The court found that a settlement early in the bankruptcy process could serve a greater bankruptcy purpose when the ordinary priority scheme is rearranged. Id. The court may endorse an early interim settlement if the parties justify their own prioritization scheme, and the court articulates its reason for approval. Id. at 465. The Second Circuit approach favored by this Court in Jevic contrasts with the rigidity of the Fifth Circuit. The Fifth Circuit s minority approach holds that the absolute priority rule should also apply to pre-plan settlements. In re AWECO, 725 F.2d at 298 (rejecting a settlement that sought to resolve litigation involving the debtor and a junior unsecured creditor). This inflexible application prevents distributions that could otherwise benefit the position of the estate and its creditors. In re Iridium, 478 F.3d at 464. Furthermore, an inflexible priority scheme application at the expense of the parties is a divergence from the view that bankruptcy courts should favor settlements and compromises that would minimize costly litigation and further parties interests in expediting the administration of the estate. In re Dewey & LeBoeuf LLP, 478 B.R. 627, 640 (S.D.N.Y. 2012). Bankruptcy courts post-jevic have found that even final settlements that support reorganization do not implicate the priority scheme. For example, a court approved a final debtorin-possession financing that paid general unsecured creditors but not the unsecured creditors with unpaid administrative or priority claims. Office of the U.S. Trustee v. Short Bark Indus. (In re Short 18

29 Bark Indus.), No , 2017 U.S. Dist. Lexis , at * 1 (Bankr. D. Del. Sept. 11, 2017). The debtors alleged that payment to the general unsecured creditors would allow continued operation of their business, increasing sale value, continue employment for over five hundred employees, and stop the litigation that continued to deplete the estate s resources. Id. at The debtor further alleged that the continued profits and reservation of resources would provide them with means to distribute to other creditors where this was otherwise not possible. Id. at 17. The Short Bark court utilized the Jevic decision, noting the importance of Iridium, and approved the settlement without regard to priority. Id. at 17. The settlement, the court said, met significant bankruptcy purposes by enabling the debtors to continue business and giving all creditors a greater assurance of receiving distributions. Id. Other courts post-jevic have denied settlements that propose an alternative priority of distributions when the settlement serves no Bankruptcy Code-related purposes. In re Fryar, 570 B.R. 602 (E.D. Tenn. 2017) (holding that parties who seek approval of settlements that do not implicate the absolute priority rule must prove not only that the settlement is fair and equitable, but also that reprioritization serves a significant Bankruptcy Code-related purpose). The court noted that the proposed settlement was not part of a first day order to ensure the debtor s survival to get to a plan, but rather the case was filed after a prior chapter 11 case for the same property was dismissed for failure to propose a plan. Id. Here, being an interim settlement occurring early in the bankruptcy process and serving bankruptcy purposes, the Committee Settlement does not implicate the absolute priority rule. The settlement is not an end-of-case settlement, but rather, occurred early in the proceedings. Neither the Committee nor High Rocks have had the opportunity to pursue the Committee s investigations of Skyline s construction mismanagement. R. at 7. The Committee s research indicates that the 19

30 claims against Skyline are very valuable, and the success of the claims would result in a meaningful distribution to unsecured creditors in the litigation trust. Id. at 7. The lower court articulated that this was the justification for the approval of the settlement. Id. at Like In re Short Bark, the distribution to other creditors, including Highway, is not possible without the approval of the settlement. The potential damages they could receive from litigation against Skyline gives assurance to the unsecured creditors that they will receive a distribution where they had no previous indication of receiving such monies. The settling of these debts with unsecured creditors is not the end-of-case settlement, nor does it indicate a complete sale model of reorganization. The debtors in Fryar indicated an inability to propose a reorganization plan. In re Fryar, 570 B.R. at 602. The settlement in Fryar was a second attempt at a case that was previously dismissed for failure to propose a plan. When asked by the court, the debtors alleged that the assets would be liquidated to fund the payments of unsecured creditors. Id. Here, this is High Rock s first attempt to bring a settlement, and while plans for reorganization are uncertain, the court has not determined High Rock is incapable of reorganization. Furthermore, unlike in Fryar, if this Settlement is approved, successful litigation against Skyline would fund payments to unsecured creditors like Highway. As an interim distribution serving a significant bankruptcy objective, the Committee Settlement does not implicate the absolute priority rule, and remains consistent with this Court s opinion in Jevic. Additionally, the Settlement meets the fairness and equity requirements set forth by the Code. Highway does not allege that the bankruptcy court erred in concluding that the balance of the TMT Trailer Ferry factors favor approval of the Committee Settlement. R. at 15. The Committee Settlement benefits High Rocks s estate by avoiding costly, time-consuming, 20

31 complex, and uncertain litigation with 4th Street. R. at 15. On the other hand, the Committee Settlement provides definitive, concrete, and immediate benefit to the estate and its creditors by preserving resources to pursue likely successful litigation against Skyline. Skyline cut corners by using cheap construction materials, leading to reconstruction of several aspects of the hotel. Id. at 4. Skyline had yet to complete their contractual obligations, forcing High Rocks to find multiple new contractors to finish the development. Id. at 5. Thus, the outcome of any litigation against Skyline will likely be successful. Id. Therefore, the Committee Settlement does not implicate the absolute priority rule. It is fair and equitable, and an interim settlement early in the bankruptcy proceedings that serves a significant Code-related purpose. B. The Committee Settlement constitutes a valid gift because the funds are not estate property, the Committee did not receive the gift under a plan, and the Committee did not receive the gift on account of a junior claim or interest. The Committee Settlement does not implicate the absolute priority rule because the funds fall within the gifting doctrine. Under the doctrine, senior creditors may distribute their proceeds from the bankruptcy estate with junior creditors or shareholders, bypassing an intermediate class that remains unpaid in full, without offending the absolute priority rule. The gifting doctrine originated in Official Comm. Of Unsecured Creditors v. Stern (In re SPM Mfg. Corp.), where the First Circuit held that senior secured creditors are allowed to share bankruptcy proceeds with junior unsecured creditors while bypassing priority tax creditors in a chapter 7 liquidation. See 984 F.2d 1305 (1st Cir. 1993). The gifting doctrine is continually expanding. The bankruptcy courts broadened the doctrine by holding that senior unsecured bondholders may allocate part of their claim to fund a settlement with the Federal Deposit Insurance Corporation over the objection of junior 21