In the Supreme Court of the United States

Transcription

1 Docket No In the Supreme Court of the United States OCTOBER TERM, 2017 IN RE HIGH ROCKS, INC., DEBTOR, HIGHWAY 61, INC., Petitioner, -against- HIGH ROCKS, INC., Respondent. On Writ of Certiorari to the United States Court of Appeals for the Thirteenth Circuit BRIEF FOR PETITIONER Team #P37 Attorneys for Petitioner

2 QUESTIONS PRESENTED 1. Whether a bankruptcy court may approve a sale of real property free and clear of an objecting lessee s leasehold interest in property, pursuant to section 363(f) of the Bankruptcy Code when there are protections for lessees in section 365(h) of the Bankruptcy Code? 2. Whether a bankruptcy court may approve a contested gift settlement involving a payment by a section 363 purchaser in exchange for approval related with the acquisition of the debtor s assets when the distribution of the settlement proceeds violate the Bankruptcy Code s priority scheme? i

3 Table of Contents Pages Table of Contents... ii Table of Authorities... iii Question Presented... i Statement of Jurisdiction... v Statement of Facts... 1 I. Statement of the Facts... 1 II. Procedural History... 2 Summary of Arguments... 4 Argument... 5 I. THE THIRTEETH CIRCUIT ERRED IN APPROVING THE 363(F) PROPOSED SALE OF HIGH ROCKS ESTATE FREE AND CLEAR BECAUSE HIGHWAY 61, INC. HAS A LEASEHOLD INTEREST IN THE AMPHITHEATRE THAT INVOKES PROTECTION UNDER 365(h)... 5 A. The Simultaneous Invocation of Both 363(f) and 365(h) Creates a Conflict In Protected Rights Congress Provided To Debtors and Lessees That Should Be Reconciled By The Court Giving Effect To Congressional Intent To Protect Highway 61, Inc. s Right to Possess The Amphitheater In Accordance To The Negotiated Term of The 30 Year Leasehold There is a conflict of interests between both 363(f) and 365(h) that must be reconciled by the Supreme Court The Supreme Court Should Give Effect To Congressional Intent To Protect Highway 61, Inc. s Right To Possess The Amphitheater by Ensuring the Specific Protections Congress Provided Under 365(h) Prevails Over The General Protection of 363(f)... 9 II. THE COMMITTEE SETTLEMENT GIFT IS IMPERMISSIBLE BECAUSE IT RESTRAINS HIGHWAY 61, INC S CLAIM TO A STIPULATED ADMINISTATIVE EXPENSE IN VIOLATION OF THE BANKRUPTCY CODE S PRIORITY SYSTEM AND FAILS TO SERVE A LEGITIMATE BANKRUPTCY-RELATED PURPOSE A. The Committee Settlement Defies the Purpose and Intent of the Bankruptcy Code The Committee Settlement should not be approved because it defies the fair and equitable nature of the Priority System applicable to the Bankruptcy Code s Operation The funds placed in the Committee Settlement constitute property of the Bankruptcy Estate and not a gift B. The Approval of the Committee Settlement Was Improper Because the Settlement Fails to Serve a Legitimate Bankruptcy-Related Purpose ii

4 1. The Committee Settlement is a final distribution because it terminates the possibility of recovery for Highway 61, Inc The Committee Settlement does not serve a legitimate bankruptcy code related objective Conclusion iii

5 Table of Authorities CASES Pages Supreme Court Cases Czyzewski v. Jevic, 137 S.Ct. 973 (2017)... passim Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988) TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968)... 12,19,20,22 RadLAX Gateway Hotel, LLC v Amalgamated Bank... 10, 12 Whitman v. American Trucking Associations, 531 U.S. 457 (2001) Federal Cases Geberegeorgis v. Gammarino, 310 B.R. 61 (B.A.P. 6th Cir. 2004) In re Anderson, 377 B.R. 865 (B.A.P. 6th Cir. 2007) In re Biolitec, Inc., 528 B.R. 261 (Bankr. D.N.J. 2014)... passim In re Churchill Props., 197 B.R. 283 (Bankr. N.D. Ill. 1996)... 8, 9, 10, 12 In re DBSD North America, Inc., 634 F.3d 79 (2d. Cir. 2011) In re Fletcher, 245 B.R. 592 (N.D. Oh. 2006) In re Fryar, 570 B.R. 602 (Bankr. E.D. Tenn. 2017)... 15, 19 In re Grabill Corp., 121 B.R. 983 (Bankr. N.D. Ill. 1990) In re Haskell, L.P., 321 B.R. 1, 8-9 (Bankr. D. Mass. 2005)... 8, 12 In re ICL Holding Co., Inc., 802 F.3d 547 (3d Cir. 2015)... 16, 19 In re Jevic Holding Corp., 787 F.3d 173 (3d. Cir. 2015) In re LHD Realty Corp., 20 B.R. 717 (Bankr. S.D. Ind , 12 In re Nguyen-Gassaway, 408 B.R. 869 (Bankr. S.D. Tex. 2009) In re On-Site Sourcing, Inc., 412 B.R. 817 (Bankr. E.D. Va. 2009)... 14, 17, 18, 23 In re of Spanish Peaks Holdings II, LLC), 862 F3d 892 (9th Cir. 2017)... 7, 8, 9, 12 In re SPM Mfg. Corp., 984 F.2d 1305 (1st Cir. 1993) , 18 In re Taylor, 198 B.R. 142 (Bankr. D.S.C. 1996) In re Zota Petroleums, LLC, 482 BR 154 (Bankr. E.D. Va. 2012) In the Matter of AWECO, INC., 725 F.2d 293 (5th Cir. 1984)... 22, 23 Pinnacle Rest. at Big Sky, LLC v CH SP Acquisitions (In re Spanish Peaks Holdings II, LLC), 872 F3d 892 (9th Cir 2017)... 8, 9, 11, 12 iv

6 STATUTES Pages 11 U.S.C. 349(b) U.S.C. 363(f)... passim 11 U.S.C. 365(h)... passim 11 U.S. C. 503(b)(1) U.S.C. 1129(a)(7)... passim H.R. Rep. No , p. 33 (1994) OTHER SOURCES Larry M. Eig, Statutory Interpretation: General Principles and Recent Trends, Congressional Research Service, , (Dec. 19, 2011)... 6 Sally McDonald Henry, Chapter 11 Zombies, 50 Ind. L. Rev. 579 (2017) Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 Stan. L. Rev. 69 (1991) The Implications of the Third Circuit s Armstrong Decision on Creative Corporate Restructuring: Will Strict Construction of the Absolute Priority Rule Make Chapter 11 Consensus Less Likely, 55 Am. U.L. Rev (2006) Why the 7th Circuit Erred in Precision Industries v. Qualitech Steel, 59 Bus. Law 475 (2004) v

7 Jurisdiction Statement The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. vi

8 Statement of the Case I. Statement of the Facts Highway 61, Inc. ("Highway"), a group of local investors with experience in the live music industry, and High Rocks, Inc. ("High Rocks"), a development located about 25 miles outside of Rainier, Moot, entered into a 30-year leasehold agreement to lease High Rocks soonto-be constructed 7,000-seat outdoor amphitheater, prior to the start of construction of High Rocks' complex consisting of a casino, resort, 400-room hotel tower, conference facilities, restaurant, and amphitheater. R. at 5. The leasehold agreement signed by both parties, gave Highway exclusive rights to manage, market, and operate music events in the amphitheater for $400,000 per year, plus commission on ticket and concession sales. Id. High Rocks initially contracted Skyline Construction, Inc. ("Skyline") to construct the complex, but when Skyline repeatedly missed deadlines, installed substandard construction material, and improperly used plumbing materials, High Rocks terminated Skyline's building contract in December In January 2016, High Rocks hired Shelter From the Storm Builders, Inc. ("Shelter") to complete the development of the hotel and casino. Id. Due to Shelter s limited expertise in constructing the amphitheaters, the amphitheater was earmarked to be completed by another contractor, which High Rocks would find. Id. "Frustrated by the repeated [construction] delays," North Country Bank ("North County"), the mortgage holder on High Rocks' development, "sold its note in February 2016 at a sizable discount to 4th Street [Partners, Inc. ("4 th Street")]." Id. 4th Street, under a "loan to own" investment strategy, acquired High Rocks mortgage note and commenced foreclosure on High Rocks in June Id. To avert foreclosure, High Rocks filed a petition for relief under Chapter 11 Bankruptcy in July R. at 5. 1

9 At the first hearing, High Rocks stated that the construction of the casino/resort was nearly complete and expressed its plan to open these venues in "a matter of months." R. at 6. Soon after the petition date, Highway approached High Rocks and offered to complete construction of the amphitheater, which consisted of installing seats, sound equipment, and acoustic panels. Id. The bankruptcy court approved this arrangement, and High Rocks and Highway entered into an agreement for Highway to complete the amphitheater construction in consideration of $2 million Id. When the construction of the casino and resort were still incomplete after Highway completed the amphitheater, High Rocks, the Committee, and Highway agreed that the $2 million owed to Highway for completing the amphitheater construction would be paid as an administrative expense under Bankruptcy Code ("Code") 503(b)(1). Id. No one objected to this arrangement and the bankruptcy court granted a final order for this arrangement. II. Procedural History After the completion of the amphitheater in November 2016, the Debtor, the Committee, and Highway stipulated that for its services, Highway would be paid in the form of a stipulated administrative expense in the amount of $2 million pursuant to section 503(b)(1) of the Bankruptcy Code. Id. The Debtor, however, continued to have financing issues due to delayed construction on the hotel and casino building. Id. Under great pressure from 4th Street, the Debtor filed a motion to sell all of its assets free and clear of all liens, claims, encumbrances and interest, and particularly free of Highway s leasehold interest, under 363(f) of the Code. R. at Before the sale could occur, the Committee alleged liability claims against 4th Street and challenged the validity and extent of its claims and liens. R. at 7. Due to lack of resources, the Debtor assigned the claims early in the case as part of a separate settlement not at issue here. 2

10 The auction took place on January 11, 2017; 4th Street, as the sole, qualified bidder at the sale, submitted a credit bid in the full amount of its secured debt. Id. Two objections against the sale were filed: one from the Committee, noting that the sale was a veiled foreclosure; and, another from Highway, who asserted its right to remain in possession of the amphitheater under its lease pursuant to 365(h) of the Bankruptcy Code. R. at 8. Highway also informed the Debtor of its election to retain possessory rights of the property. Id. Only days before the sale hearing, the Debtor, the Committee, and 4th Street announced that they had come to a resolution with the creation of a Committee Settlement. Id. Per the Settlement, 4th Street was to gift $2 million to a trust created for the express purpose of funding the unsecured creditors trust s claims against Skyline in exchange for the withdrawal of the Committee s objection to the sale, as well as a release of all claims against 4th Street. Id. At the sale hearing, Highway renewed its objection to the sale due to the improper termination of their leasehold interest in the amphitheater, contrary to 365(h). Id. Additionally, Highway newly asserted that the Committee Settlement could not be approved because the distribution of the trust funds violated the absolute priority rule, providing payment to unsecured creditors before high-priority creditors. Id. The bankruptcy court approved the Committee Settlement, as well as the sale to 4th Street, holding that 363(f) superseded the rights of Highway under 365(h) of the Bankruptcy Court. Id. As to the Settlement, the court found that the priority rule did not apply to the funds in the Settlement, noting that the agreement was in the best interests of all parties in that [it] would allow the unsecured creditors trust to pursue very valuable claims against Skyline. R. at 9. Highway appealed to the district court, subsequently affirming the ruling of the bankruptcy court. Id. Highway subsequently appealed to the United States Court of Appeals for the 3

11 Thirteenth Circuit, who agreed with the conclusions of the lower courts, and affirmed on both issues. Summary of the Argument The lower courts erroneously approved the sale of the Debtor, High Rocks, because Highway possesses a leasehold interest in the amphitheater that warrants protection pursuant to 363(h) of the Code. Furthermore, because the proposed sale of Debtor prompted the simultaneous invocation of 363(f) and 365(h), the bankruptcy court should have reconciled this conflict of interests before approving the sale. A bankruptcy court should give effect to the Congressional intent evident in the language of 365(h) and balance the interests of the lessee s leasehold right to possess the debtor s property with those of the estate prior to the approval of a sale. In addition, the bankruptcy court erroneously approved the Committee Settlement because the Settlement violates the absolute priority rule of bankruptcy law and defies the Code s consistent adherence to the rule. Specifically, the Settlement masked the funds, that belonged to the estate, as a gift to the Committee, thus making an end-run around the priority system enacted by the Code. Moreover, the bankruptcy court failed to adhere to fair and equitable standards established by this Court and respected across the nation. Argument I. THE THIRTEETH CIRCUIT ERRED IN APPROVING THE 363(F) PROPOSED SALE OF HIGH ROCKS ESTATE FREE AND CLEAR BECAUSE HIGHWAY 61, INC. HAS A LEASEHOLD INTEREST IN THE AMPHITHEATRE THAT INVOKES PROTECTION UNDER 365(h). 4

12 Section 365 (h) was enacted by Congress with a dual purpose of allowing a debtor to assume or reject unexpired leases (executory contracts) in accordance to whether these agreements benefit the debtor s estate and to provide lessees with the right to keep possession of the debtor s property for the terms that the debtor-lessor and lessee agreed. 11 U.S.C. 365(h). However, when debtor-lessors invoke 363(f) to sell their property free and clear of the lessee s leasehold possessory right, a conflict arises between these interests. Under 365(h), Congress intended to protect lessees who want to possess debtor-lessor s property for the duration of their unexpired lease (executory contract). In re Taylor, 198 B.R. 142, 166 (Bankr. D.S.C. 1996). Congress amended 365(h) at various times to ensure this protection. A couple of circuit courts, like the Thirteenth Circuit, hold a minority view that there is no conflict between 363(f) and 365(h), finding that 363(f) allows extinguishing of 365(h) interests. But the majority of courts hold that there is a conflict between 363(f) and 365(h) that must be resolved in favor of congressional intent to protect lessees leasehold interest in the debtorlessor s property. The majority view gives effect to congressional intent to protect the lessee s leasehold interest, contrary to the Thirteenth Circuit s upholding of the trial court s approval of a 363(f) sale above the objection of Highway s whose leasehold interest is protected under 365(h). A. The Simultaneous Invocation of Both 363(f) and 365(h) Creates a Conflict In Protected Rights Congress Provided To Debtors and Lessees That Should Be Reconciled By The Court Giving Effect To Congressional Intent To Protect Highway 61, Inc. s Right to Possess The Amphitheater In Accordance To The Negotiated Term of The 30 Year Leasehold. When 363(f) is invoked alone, in the absence of a lessee with leasehold interest in the debtor-lessor s property, a debtor can sell his property free and clear of interest. 11 U.S.C. 363(f). However, when 365(h) is invoked, a dueling interest arises between the debtor s right to sell his property, with court approval, and the lessee s bargains right to possess the debtor- 5

13 lessor s property for the duration of the terms bargained for. Congress intended for a lessee with an unexpired term (or executory contract) to have the right to satisfy the terms in years of the leasehold interest the debtor-lessor and the lessee agreed to. Yet, the conflict between the debtor and lessee s interest have not been resolved. This court should resolve this conflict by abiding by congressional intent to protect the lessee s leasehold interests. 1. There is a conflict of interests between both 363(f) and 365(h) that must be reconciled by the Supreme Court. In analyzing a statute s text, the Court is guided by the basic principle that a statute should be read as a harmonious whole, with its separate parts being interpreted within their broader statutory context. Larry M. Eig, Statutory Interpretation: General Principles and Recent Trends, Congressional Research Service, , (Dec. 19, 2011), retrieved from Jan. 15, [T]he cardinal rule of construction is that the whole statute should be drawn upon as necessary, with its various parts being interpreted within their broader statutory context in a manner that furthers statutory purposes. Id. Congress intended conflicts in interest between 11 U.S.C. 365(h) and 11 U.S.C. 363(f) to be reconciled in favor of protecting lessee's leasehold interest under 365(h), thereby precluding a 363(f) "free and clear" sale of High Rock's complex, and protecting Highway's leasehold right to manage, market, and operate events in the amphitheater for the agreed lease term of 30 years. Under 363(f) and 365(h), Congress provided rights to both debtors and lessees. Section 363(f) authorizes debtors, under limited situations, to sell their property free and clear of any interest, with court approval, when seeking to reorganize or liquidate their companies under Chapter 11 bankruptcy reorganization. Section 365(h) provides lessees with an option to retain their leasehold interest in debtor-lessor s property when they have an unexpired 6

14 lease (or executory contract). These rights, when invoked simultaneously, trigger a conflict in interests. The conflict between 363(f) free and clear sales and 365(h) leasehold possessory interest arise as a result of the debtor s interest to make his property appealing for sale (such that new buyers want to acquire unencumbered property), and the interest of the lessee, who bargained for possessory interest in the debtor-lessor s property and has an unexpired lease (or executory contract) that entitles the lessee to use the property for the agreed upon terms. The competing interests that results when both 363(f) and 365(h) are invoked simultaneously creates a conflict that has not been resolved. Relying on a plain text reading of both provisions, the Thirteenth Circuit followed the Seventh Circuit in determining that there was no conflict between 363(f) and 365(h) because each provision address different events. R. at 12. The minority view, held by the Seventh, Ninth and Thirteenth Circuits, rejects the argument that lessee protection under 365(h) should trump a 363(f) free and clear sale of debtor s property. Instead, the minority view holds that 363(f) free and clear sales supersede 365(h) leasehold interest because 363(f) confers a right to sell property free and clear of any interest, including leasehold interests. In re Spanish Peaks Holdings II, LLC, 872 F.3d 892, 898 (9th Cir. 2017) citing Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 547 (7th Cir. 2003). The majority view, held by bankruptcy courts but no circuit court, determine that 363(f) and 365(h) conflict when they are invoked simultaneously because "each provision seems to provide an exclusive right that when invoked would override the interest of the other." In re Spanish Peaks Holdings II, LLC, 872 F.3d at 898 citing In re Churchill Props., 197 B.R. 283, 7

15 286 (Bankr. N.D. Ill. 1996); see also In re Haskell, L.P., 321 B.R. 1, 8-9 (Bankr. D. Mass. 2005); In re Taylor, 198 B.R. at ; cf. In re LHD Realty Corp., 20 B.R. 717, 719 (Bankr. S.D. Ind. 1982). The majority view looks beyond the plain text of the statute since there is a conflict between with the readings of 363(f), together with 365(h). Looking at the legislative history to determine the intent of Congress, the majority view determined that "the legislative history [of] 365 evinces a clear intent on the part of Congress to protect a tenant's estate when the landlord files bankruptcy," In re Spanish Peaks Holdings II, LLC, 872 F.3d at 898 citing In re Taylor, 198 B.R. at 165 (citing S. Rep. No , at 60 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5846). The majority view believes that to hold otherwise would make 365(h) "nugatory, if the property could be sold free and clear of he leasehold under section 363. In re Spanish Peaks Holdings II, LLC, 872 F.3d at 898 citing In re Churchill Props., 197 B.R. at 288. Using the canon of statutory construction that the specific prevails over the general the majority courts hold that 363(f) trumps 365(h). Id. Likewise, both the Seventh and Ninth Circuits rendered a plain text reading of 363(f) and 365(h), finding that the provisions were distinct. See Qualitech Steel SBQ, LLC, 327 F.3d at 537 (determining that 363(f) trumps leasehold interests protected under 365(h) because, for example, "both provisions [ 3 63(f) and 365(h) can] be given full effect without coming into conflict with one another and without disregarding the rights of lessees."); see also In re of Spanish Peaks Holdings II, LLC, 862 F.3d at 898 ("Section 365(h)... focuses on [rejection of an executory contract] a specific type of event "that "says nothing at all about sales of estate property, which are the province of 363."). The Thirteenth Circuit s determination that there was no conflict between 363(f) and 365(h) was erroneous. To hold the view that these two statutory provisions can be treated as 8

16 unrelated events that never the twain shall meet" causes the dueling interests created by the invocation of both provisions to have countervailing effect where each interest competes against the other. In re Churchill Props. III, Ltd. Pshp., 197 B.R. at 283 ("difficulty arises when [ 363(f) and 365(h)] must be applied together because each provision seems to provide an exclusive right that when invoked would override the interest of the other."). The Ninth Circuit, while taking the view that 363(f) trumped 365(h), did not come to the same conclusion as the Seventh and Thirteenth Circuits. Instead, the Ninth Circuit acknowledged that Congress provided lessees protection under 365(h), but noted that sometimes, these protections would conflict with other purposes. In re Spanish Peaks Holdings II, LLC, 872 F.3d at 900. Where, as here, two statutory provisions in the Bankruptcy Code invoke dueling interest, the court should give effect to the specific provision over the general. 2. The Supreme Court Should Give Effect To Congressional Intent To Protect Highway 61, Inc. s Right To Possess The Amphitheater by Ensuring the Specific Protections Congress Provided Under 365(h) Prevails Over The General Protection of 363(f). "It is a commonplace of statutory construction that the specific governs the general" when the Court is interpreting a statute that Congress has "enacted a comprehensive scheme and has deliberately targeted specific problems with specific solutions." RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 645 (2012). "When there is potential for conflict, specific provisions should prevail over the more general" unless context dictates otherwise. In re Churchill Props., 197 B.R. at 288. Highway is entitled to stop the sale of High Rock's complex, and in particular, the amphitheater, because under 365(h) Congress provided Highway with specific protection of its-leasehold interest in High Rock's amphitheater that prevails over the general provisions of 9

17 363(f) sales. The reading of the statutory provisions 363(f), and 3 65(h), concurrently present conflicting interests that require resolution. Additionally, because the Bankruptcy Code is a comprehensive scheme of federal regulations enacted by Congress to provide guidance and resolution on bankruptcy matters, the court s giving effect to the specific provision of 365(h) over the general provisions of 363(f) is appropriate. See In re Old Carco LLC, 406 B.R. 180 (Bankr. S.D.N.Y. 2009) ("[The Bankruptcy Code] has frequently been recognized by the courts to be 'a chief purpose of the bankruptcy laws."); see also RadLAX Gateway Hotel, 566 U.S. at 645 ("The general/specific canon is perhaps most frequently applied to statutes in which a general permission or prohibition is contradicted by a specific prohibition or permission.") Congress enacted 365(h) to balance the lessee's leasehold right to possess the debtor's property while releasing the debtor from many, if not all, of the obligations the debtor agreed to under the lease agreement. In re Taylor, 198 B.R. at ("With the enactment of 365(h) Congress sought to effectively preserve the expectations of parties to real estate transactions by codifying the balance between the competing interests of the debtor-lessor and the lessee. Congress intended to prevent the divestiture of the lessee's estate prior to the expiration of the bargained-for term when the debtor-lessor rejects a lease..."). The manner in which Congress amended 365(h) to expand protection to the lessees with unexpired leases (executory contracts) demonstrates congressional intent to unequivocally protect lessee leasehold interest. 1 Id. (concluding that it was Congress intent that lessees "cannot have their rights stripped away if a 1 Michael St. Patrick Baxter, Section 363 Sales Free and Clear of Interests: Why the 7th Circuit Erred in Precision Industries v. Qualitech Steel, 59 Bus/ Law 475 (2004) citing Precision at 547 ( [T]he legislative history of Code reveals that Congress has consistently sought to strengthen lessee rights when they were threatened by narrow court interpretations. ), page 10. Congress initially enacted 365(h) avoid[ing] the narrow construction of [the term] estate which some courts had applied to limit lessee rights. Id. In 1984 Congress expanded lessee rights under 365(h) to include the right to remain in possession of the leasehold...under any lease. Id., citing 11 U.S.C. 365(h)(1). In 1994 Congress again amended 365(h) to expand lessees rights to retain leasehold interest without requiring physical possession of debtor-lessors property. 11 U.S.C. 365(h). Id. 10

18 debtor rejects its obligation as a lessor in bankruptcy."); see also In re Zota Petroleums, LLC, 482 B.R. 154, 163 (Bankr. E.D. Va. 2012) ( The rights of the tenant may not be extinguished by a 363 sale; to hold to the contrary would give open license to debtors to dispossess tenants by utilizing the 363 sale mechanism. ). However, the Thirteenth Circuit, following the Seventh and Ninth Circuits, took the minority approach by rejecting the argument that the specific lessee protection under 365(h) should trump the general right to sale free and clear of any interest under 363(f). The minority approach, as articulated in Spanish Peak Holdings, is of the view that 363(f) sales superseded 365(h) lessee leasehold interest. In re Spanish Peaks Holdings II, LLC, 872 F.3d at 898 (noting that the Seventh Circuit was the first Circuit that addressed the issue by determining that the reading of 363(f) and 365(h) was unambiguous and reaching the conclusion that both "the[se] statutory provisions themselves do not suggest that one supersedes or limits the other."); see also Qualitech Steel SBQ, LLC, 327 F.3d 537 at 547. However, the decision to read these provisions as unambiguous was in error because conflicting interests invoked by these provisions require an analysis of congressional intent through legislative history. See In re Churchill Props. III, Ltd. Pshp., 197 B.R. at 283 ("The legislative history to Section 365(h), the predecessor to Section 365(h)(1)(A)(ii), is illustrative of Congress' intent. Congress sought to protect both the rights of the lessor and the lessee so as to preserve expectations in real estate transactions. ) In re Spanish Peaks Holdings II, LLC, 872 F3d at 898 (finding that when 363(f) and 365(h) rights are invoked simultaneously, "each provision seems to provide an exclusive right that when invoked would override the interest of the other."). Several bankruptcy courts from other jurisdictions follow the majority rule. See In re Churchill Props., 197 B.R. at 286; see also In re Haskell, L.P., 321 B.R. 1, 8-9 (Bankr. D. Mass. 2005); In re Taylor, 198 B.R. at ; In re LHD Realty 11

19 Corp., 20 B.R. 717, 719 (Bankr. S.D. Ind. 1982). These courts hold that 365(h) trumps 363(f) under the canon of statutory construction, finding that "the specific prevails over the general." This approach is consistent with congressional intent and consistent with the statutory approach this Court has instructed lower courts to follow. RadLAX Gateway Hotel, 566 US at 649 "Where there is, in the same statute, a particular enactment, and also a general one, which, in its most comprehensive sense, would include what is embraced in the former, the particular enactment must be operative, and the general enactment must be taken to affect only such cases within its general language as are not within the provisions of the particular enactment. This rule applies wherever an act contains general provisions and also special ones upon a subject, which, standing alone, the general provisions would include." Id. Thus, a court may not approve a 363(f) sale of debtor s estate when an objecting lessee has 363(h) protected leasehold interest in the debtor's property because 363(h) specific rights prevail over 363(f) sales and precludes such 363(f) sales. II. THE COMMITTEE SETTLEMENT GIFT IS IMPERMISSIBLE BECAUSE IT RESTRAINS HIGHWAY 61, INC S CLAIM TO A STIPULATED ADMINISTATIVE EXPENSE IN VIOLATION OF THE BANKRUPTCY CODE S PRIORITY SYSTEM AND FAILS TO SERVE A LEGITIMATE BANKRUPTCY-RELATED PURPOSE. In a Chapter 11 proceeding, three possible outcomes can occur: (1) confirmation of a court approved plan that may keep the business going while helping creditors by providing for payments; (2) conversion of the case to Chapter 7 for liquidation of the business and distribution of its assets; or (3) the dismissal of the Chapter 11 case. Czyzewski v. Jevic, 137 S.Ct. 973, 975 (2017). A dismissal of a Chapter 11 case can additionally result in the creation of a structured dismissal, with special conditions attached. 11 U.S.C. 349(b). 12

20 In the Bankruptcy Code ( Code ), there is a system of priority that determines the order of the distribution of assets or funds. 11 U.S.C The Supreme Court found that pursuant to the Code s Priority Rule, secured creditors are highest on the priority list for they must receive the proceeds of the collateral that secures their debts, special creditors, such as those who hold certain claims for taxes or wages come next in a listed order, followed by low-priority creditors, including unsecured creditors, and then equity holders, who receive nothing until all previously listed creditors have been paid in full. Jevic, 137 S. Ct. at 979. A. The Committee Settlement Defies the Purpose and Intent of the Bankruptcy Code. The priority system is paramount to the operation of the Code. Id. at 984. In Jevic, the Court noted that the Code is deigned to enforce the distribution of the debtor s assets in an orderly manner in accordance with established principles rather than on the basis of the inside influence or economic leverage of a particular creditor. Id. citing H.R. Rep. No , p. 33 (1994). This system of priority controls both Chapter 7 and Chapter 11 bankruptcy distributions. Id. at 979. In the present matter, both the bankruptcy court and the Thirteenth Circuit sought to approve a settlement that defies the priority rule, which was established to promote fair and equitable rulings in bankruptcy procedures. However, Bankruptcy Courts have acknowledged that this deviation is proscribed by the Code itself because it violates the protections Chapter 11 seeks to provide for creditors, particularly administrative expenses and priority creditors. In re On-Site Sourcing, Inc., 412 B.R. 817, 828 (E.D. Va. 2009). 1. The Committee Settlement Should Not Be Approved Because It Defies the Fair and Equitable Nature of the Priority System Applicable to the Bankruptcy Code s Operation. 13

21 The priority system is a long-standing foundation crucial to the integrity of the Code. Strict adhesion to the system is required to ensure the predictability and objectivity of claims in order to promote a fair standard for all parties and creditors involved. Jevic, 137 S.Ct.793. While compromise is favored in bankruptcy because it contributes to minimizing litigation-related costs, and courts are authorized under Rule 9010 of the Federal Rules of Bankruptcy Procedure to approve such compromises or settlements, bankruptcy courts across the country have been clear to establish that a settlement that does not follow the priority system cannot not be approved without the affected creditor s consent. 11 U.S.C. 1129(a)(7); see also Jevic, 137 S.Ct. at 977. In order to encourage compromise between parties, bankruptcy courts have found that in Chapter 11 cases parties can, with the consent of affected parties impose a different ordering of distributions than that set forth in the Bankruptcy Code s priority scheme. Jevic, 137 S.Ct. at 979. As a result, courts should be reluctant to approve a nonconsensual structured dismissal of a Chapter 11 case where distributions violate the priority system. Further, courts have uniformly bound themselves to approve settlements which meet a fair and equitable standard. TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968) (holding that in determining whether a compromise is fair and equitable, a bankruptcy judge should form an educated estimate of complexity, expense, and the 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 a proposed compromise). Furthermore, courts have proposed additional factors to consider when assessing whether a compromise is fair and equitable, bankruptcy courts considers such factors as the probability of success on the merits, the complexity and expense of litigation, and reasonable views of creditors. In re Fryar, 570 B.R. 602, 608 (E.D. TN 2017). 14

22 While Petitioner Highway does not raise an issue with the application of the fair and equitable factors in this case, it should be noted that the Bankruptcy Code requires that fairness should control both the bankruptcy plan and compromise, including aspects of reorganizations. Id. at 424; see also In re Biolitec, Inc., 528 B.R. 261 (D. NJ 2014) (maintaining that a proposed settlement is fair and equitable as long as senior interests are entitled to full priority over junior interests). Thus, every bankruptcy judge should consider any factors uniquely presented in a proposed compromise which may contribute to a lack of fairness in its analysis. There must be some meaningful consideration of all relevant factors because mere boiler plate approval phased in appropriate language but unsupported by evaluation of facts or analysis of law is insufficient. Id. at The funds placed in the Committee Settlement constitute property of the Bankruptcy Estate and not a gift. In the present case, the Thirteenth Circuit s conclusion that the Settlement consists of a gift, therefore exempting it from the rule of priority is erroneous in this context because the funds transferred do not constitute a gift as traditionally recognized by bankruptcy courts. See In re Nguyen-Gassaway, 408 B.R. 869 (S.D. TX 2009) (holding that a gift is a transfer of property made voluntarily and gratuitously, without any consideration); See also In re Fletcher, 245 B.R. 592 (N.D. OH 2006); See also In re Grabill Corp., 121 B.R. 983 (N.D. IL 1990); See also In re Bell & Beckwith, 44 B.R. 656 (N.D. OH 1984). Here, the Thirteenth Circuit upheld the Bankruptcy Court s determination that the Committee Settlement ( Settlement ) was an exception to the overarching rule of priority on the Bankruptcy Code. The former relied on the Third Circuit s opinion in In re ICL Holding Co. to incorrectly classify the Settlement funds as a gift because it deemed the funds to be the property of 4th Street, and not property within the 15

23 estate. R. at 29 citing In re ICL Holding Co., Inc., 802 F.3d 547 (3d Cir. 2015) (holding that the absolute priority rule applies only to the property of the estate). However, 4th Street provided $2 million dollars in alleged gift funds in exchange for the withdrawal of the Committee s objection to the sale and the granting to 4th Street of a release of any and all claims against it. R. at 8. Here, however, the funds compromised an ordinary carve-out, an arrangement under which secured creditors permit the use of a portion of their collateral [that is, estate property] to pay administrative costs, such as attorney s fees because the funds were provided for the express purpose of funding the unsecured creditors trust s claims against Skyline Construction, Inc. ( Skyline ) Id. at 557 citing The Implications of the Third Circuit s Armstrong Decision on Creative Corporate Restructuring: Will Strict Construction of the Absolute Priority Rule Make Chapter 11 Consensus Less Likely, 55 Am. U.L. Rev. 1345, (2006); R. at 8. Hence, the sole purpose of the Settlement gift is to pay administrative costs, making it property of the estate. See In re On-Site Sourcing, Inc., 412 B.R. 817 (finding that the classification of a payment as a gift is insufficient to approve payment to unsecured creditors when they are to be paid before administrative and priority claims). Additionally, the Settlement compromised consideration in the same transaction for the purchase of all of the Debtor s assets because the funds were used by 4th Street to entice the Committee to allow the sale to proceed. R. at 3. The bankruptcy court relied on antiquated case law to establish that such a gift by a secured party can permissibly bypass a non-consenting senior creditor for a junior creditor without implicating the absolute priority rule. Relying on In re SPM Mfg. Corp., the court noted that there is no express prohibition of secured creditors sharing their proceeds with unsecured creditors, even at the expense of other secured parties, 16

24 because a bankruptcy court may accept a settlement that does not comply with the priority rule in minor respects. R. at 18 citing In re SPM Mfg. Corp., 984 F.2d 1305 (1993). However, the present settlement is distinguishable from In re SPM because the agreement considered in SPM was one made between a secured creditor and an unsecured creditor, both of whom were to receive proceeds from the sale of an organization, with the former agreeing to share a portion of its proceeds. The court there determined that a bankruptcy judge could not order the secured creditor to distribute its proceeds in a manner that adheres to the priority rule. Id. at Further, in that case, the court noted that no creditor objected to the agreement between the two creditors during the reorganization hearings. Id. at Unlike the In re SPM Mfg. Corp., agreement, the Settlement in the present case was entered into by the secured creditor/purchaser and an unsecured creditor with the intention to entice the latter to drop its opposition to the formers acquisition of all of the assets of the Debtor. R. at 8. These proceeds, are still proceeds from the sale and are not changed by the fact that the property is sold subject to an encumbrance [because] the proceeds are also subject to the encumbrance and nonetheless remain property of the estate, subject to the jurisdiction of the court. In re On-Site Sourcing, Inc., 412 B.R at 825. The conclusion of the lower courts improperly allowed 4th Street and the Committee to bypass the priority rule, which is inconsistent with the Bankruptcy Code. Moreover, this Court has been clear in its explanation that upon filing at Chapter 11 petition, an estate is created compromising all property of the Debtor. Jevic, 137 S. Ct. at 977; See also In re DBSD North America, Inc., 634 F.3d 79 (2d. Cir. 2011) (holding that the term property, as used in the section of the Bankruptcy Code setting forth the absolute priority rule, is meant to be interpreted broadly). In the present case, Debtor filed a voluntary Chapter 11 17

25 action in July 2016 in order to halt foreclosure proceedings by 4th Street. R. at 5. The postpetition contract entered into between Debtor and Highway for the completion of the amphitheater was created shortly after the first day of bankruptcy hearings in order to pursue the viable completion of the project in general, with no party objecting to the entitled administrative expense stipulated via a final court order. R. at 6. At time of filing, Debtor had terminated its contract with Skyline, and was aware of the prospect of viable litigation against Skyline. Due to a lack of resources to fund such necessary investigation and litigation, Debtor assigned the claims early in the case. R. at 7. Thus, the Settlement represented an agreement between the Committee and the Purchaser to fund potentially viable claims that were contemplated at the time of filing, and should have been deemed part of the bankruptcy estate. Lastly, since the Settlement was made in connection with the acquisition of Debtor s assets, those funds do not remain the property of the purchaser, and therefore, should be considered property of the estate. In In re ICL, the funds escrowed were to be used for the general benefit of the unsecured creditors to pay legal and accounting fees and pick up the tab for the company s wind-down costs, and the unused funds were to be returned to the lenders. In re ICL Holding Co., 802 F.3d at 550. The entirety of the $5 million was to remain with the committee as collateral to allow the procession of the sale to occur. Id. The First Circuit recognized that since this conditional return of the escrowed funds could ultimately be returned to the purchaser, they remained the purchaser s property throughout. Id. Here, however, the record makes no mention of any condition attached to the $2 million Settlement; thus, the Settlement funds did not remain the personal property of 4th Street. B. The Approval of the Committee Settlement Was Improper Because the Settlement Fails to Serve a Legitimate Bankruptcy-Related Purpose. 18

26 Even if this Court determines that the Settlement funds constituted a gift not subject to the priority rule, there must still be a determination of fairness and equity of a proposed settlement by the bankruptcy court prior to approval. TMT Trailer Ferry, Inc., 390 U.S. 414; In re ICL Holding Co., Inc., 802 F.3d 547 (1st Cir. 2015); In re Biolitec, 528 B.R. 261; In re Fryar, 570 B.R. 602 (E.D. TN 2017). That is, even if this Court determines that the priority-violating Settlement comprised a gift and not property of the estate, the Court should ascertain that the Settlement is both fair and that it serves legitimate bankruptcy-related purposes before approval. Conjointly, the proponent of settlement bears burden of proving its reasonableness. In re Biolitec, Inc., 528 B.R. at 266. The Thirteenth Circuit incongruously interpreted Jevic to implicitly create a narrow exception to the priority system for two rare occasions: (1) early settlements entered into prior to final disposition; and (2) where the settlement serves a significant bankruptcy related purpose. R. at 16. This interpretation not only misrepresents the narrow holding of Jevic, but also fails to thoroughly examine the general notion of equity imposed by bankruptcy law, thereby approving a settlement without proper consideration of the fairness of the settlement to an objecting, priority creditor. Jevic, 137 S. Ct. at 986; TMT Trailer Ferry, 390 U.S. at 424 (holding that every important determination in corporate reorganization proceedings must receive the informed, independent judgment of bankruptcy court). Moreover, the Thirteenth Circuit interpretation fails to consider the notion that courts are bound to choose only between reasonable available interpretations of statute text, and unilaterally expands a holding of this Court without explanation. Whitman v. American Trucking Associations, 531 U.S. 457 (2001). 1. The Committee Settlement is a Final Distribution Because It Terminates the Possibility of Recovery for Highway. 19

27 The Jevic holding implies that there is a possibility that bankruptcy courts may impose a different order of priority to certain Chapter 11 distributions when the affected parties consent. Jevic, 137 S. Ct. at 979. When an affected party does not provide consent, the Court was clear: Can a bankruptcy court approve a structured dismissal that provides for distributions that do not follow ordinary priority rules without the affected creditors consent? Our simple answer to this complicated question is no. Id. at 983 (noting there may be no deviation against the objections of affected parties because both Chapter 7 and Chapter 11 plans are governed by priority). Despite the clear rejection of a contrary application of the basic underpinning of bankruptcy law, the Thirteenth Circuit interpreted Jevic to implicitly create a narrow exception to non-final distributions. R. at 16. Respondents argue that the Settlement ought to escape priority rules under the interpretation of the Thirteenth Circuit because it is not a final disposition but rather a settlement that occurred early in the case, thusly falling within the alleged exception. R. at 16. However, the Settlement does serve as a final disposition for Highway because it closes all avenues of recovery. An order is final if it concludes a particular adversarial matter within the larger case and should be deemed reviewable in a bankruptcy setting. Geberegeorgis v. Gammarino, 310 B.R. 61, 63 (6th Cir. BAP 2004). Under ordinary circumstances, a disapproval of a settlement is not considered a final order and is consequently not appealable as a right. In re Anderson, 377 B.R. 865, 868 (6th Cir. 2007). Conversely, however, an approval of a settlement should be considered a final, and appealable, order when it terminates any possibility of recover for an objecting, priority creditor. In re Biolitec, 528 B.R Here, the Settlement denied Highway the right to pursue its priority claims and concluded its participation in a larger case, leaving 20

28 Highway without an adequate, alternative remedy. As Judge Petty s cognizant dissent in the Thirteenth Circuit opinion contemplated, the Settlement was not an integral step toward confirmation of a plan or even an interim distribution under the Code, but is instead the final step in a case already devoid of any life. R. at 30 referencing Sally McDonald Henry, Chapter 11 Zombies, 50 Ind. L. Rev. 579 (2017). Highway acknowledges that this is a situation where a multitude of avenues of compromise are lacking. However, the pressure to quickly resolve the matter is simply insufficient to establish the basis for the hasty approval of the Settlement by the bankruptcy court. The Fifth Circuit, while sympathizing with the need for expedition in bankruptcy cases, noted that this urgency is not a justification for abandoning property standards. In the Matter of AWECO, INC., 725 F.2d 293 (1984) citing TMT Trailer Ferry, 390 U.S. at 424. The Fifth Circuit underscored the notion that equitable considerations should be preeminent in the exercise of bankruptcy jurisdiction. AWECO, 725 F.2d at 300. Rightfully, the Thirteenth Circuit noted that the situation is less than ideal. R. at 17. This exacting task requires that careful consideration of the bankruptcy court prior to approval. 2. The Committee Settlement does not serve a legitimate bankruptcy code related objective. To serve as guidance in the determination of Code related objectives, courts have considered various factors in their decisions. Most recently, in Jevic, this Court crystallized the five factors to be considered in analyzing of distributions that violate the priority rule: (1) whether a distribution is final or is attached to a final disposition; (2) whether it preserves the debtor as a going concern; (3) whether it makes disfavored creditors better off; (4) whether it 21

29 restores the status quo ante; and (5) whether it protects reliance interests. Jevic, 137 S. Ct. at In addition, the Jevic court expressly concluded that Congress did not authorize a rare case exception to the priority rule, thus, the Court cannot alter the balance struck by the statute even in rare cases. Jevic, 137 S. Ct. at 987 citing Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 207 (1988). Through its approval of the Settlement, the bankruptcy court failed to implicate the second and fourth Jevic factors. Through the Settlement, Debtor was allowed to sell all of its assets to 4th Street after being significantly pressured by same to do so, simultaneously failing to preserve Debtor or restore the status quo ante. R. at 6. Further, the bankruptcy court s analysis was improper because it failed to contemplate any alternative to the settlement necessary to protect any reliance interests. The Skyline litigation claims were independently and solely investigated by the Committee, who deemed the claims to be potentially very valuable, providing an inexplicable basis for the bankruptcy court s emphasis on such mission and subsequent approval of the Settlement. R. at 7. As such, the lower courts simply took the Committee at its word and did not investigate the claims. This failure to meaningfully consider whether the Committee s claims violated the fair and equitable standard was an abuse of the discretion that bankruptcy courts have to approve such settlements. See AWECO, 724 F.2d at 298 (finding that if a court approves a settlement absent reasonable assurances that it accords with the fair and equitable standard, that court has abused its discretion). Such a decision cannot occur absent sufficient factual background, particularly when there is an objection from an objecting senior creditor. Id. at 299. [I]n approving compromises as part of a reorganization plan, courts must act independently, out of its own initiative, for the benefit of all creditors, and such obligation prevails even when creditors are silent. Id. 22